LEHMAN BROTHERS FUNDS INC, 485APOS, 1994-09-08

LEHMAN BROTHERS FUNDS INC
485APOS, 1994-09-08

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<PAGE> 1

As filed with the Securities and Exchange Commission on September 8, 1994

Securities Act File No. 33-62312
Investment Company Act File No. 811-7706

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/

Pre-Effective Amendment No. ____
Post-Effective Amendment No. 3 /X/
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 5 /X/
------
Lehman Brothers Funds, Inc.
---------------------------
(Exact Name of Registrant as Specified in Charter)

200 Vesey Street
New York, N.Y. 10285
--------------------
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, including Area Code: (212) 640-0600

Clinton J. Kendrick
-------------------
Lehman Brothers Funds, Inc.
200 Vesey Street, New York, New York 10285
(Name and Address of Agent for Service)

<TABLE>
Copies to:
<S> <C>
Patricia L. Bickimer, Esq. Gary S. Schpero, Esq.
--------------------------
The Shareholder Services Group, Inc. Simpson Thacher & Bartlett
------------------------------------
Exchange Place 425 Lexington Avenue
--------------
Boston, Massachusetts 02109 New York, New York 10017
-----
(Name and Address of Agent for Service)
<FN>
*Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of the Registration Statement.
</TABLE>

It is proposed that this filing will become effective
(check appropriate box):

immediately upon filing pursuant to paragraph (b), or
___on ______________ pursuant to paragraph (b)

_X_ 60 days after filing pursuant to paragraph (a), or
---------------------------------------------------------
_____on_________pursuant to paragraph (a) of Rule 485

______________________________________________________________________________
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the Registrant
has registered an indefinite number of shares of Common Stock, $0.001 par value
per share, of all series and classes of the Registrant, then existing or
thereafter created, and will file a Rule 24f-2 Notice within 60 days after the
close of the Registrant's fiscal year.

<PAGE> 2

<TABLE>
LEHMAN BROTHERS FUNDS, INC.
Registration Statement on Form N-1A
CROSS REFERENCE SHEET
PURSUANT TO RULE 495(a)
under the Securities Act of 1933

<CAPTION>
Location
Form N-1A --------
Item in
---- --
No. Prospectus
--- ----------
<S> <C>
Item 1. Cover Page........................ Cover Page

Item 2. Synopsis.......................... Background and Expense
Information

Item 3. Condensed Financial
Information........................... Not Applicable

Item 4. General Description of
Registrant............................ Investment
Objective and Policies ;
Additional Information

Item 5. Management of the Fund............ Management of the Fund;
Additional Information

Item 5A. Management's Discussion
of Fund Performance.................... Not Applicable

Item 6. Capital Stock and Other
Securities............................. Dividends; Taxes; Additional
Information

Item 7. Purchase of Securities Valuation of Shares;
Being Offered.......................... Purchase of Shares;
Exchange Privilege

Item 8. Redemption or Repurchase Redemption of Shares

Item 9. Legal Proceedings........ Not Applicable
</TABLE>

<PAGE> 3

<TABLE>
<CAPTION>
N-1A
Item Statement of Additional
No. . Information
----- -----------------------
<S> <C>
Item 10. Cover Page............................ Cover Page

Item 11. Table of Contents..................... Table of Contents

Item 12. General Information and
History............................... Not Applicable

Item 13. Investment Objectives and
Policies.............................. Investment Objectives and
Policies

Item 14. Management of the Fund................ Management of the Funds

Item 15. Control Persons and Principal
Holders of Securities ................ Management of the Funds

Item 16. Investment Advisory and
Other Services ....................... Management of the Funds; Auditors

Item 17. Brokerage Allocation.................. Investment Objectives and
and Other Practices Policies; Additional Purchase
and Redemption Information

Item 18. Capital Stock and Other
Securities ........................... Investment Objectives and Policies

Item 19. Purchase, Redemption and
Pricing of Securities................. Additional Purchase and
Redemption Information

Item 20. Tax Status............................ Additional Information
Concerning Taxes

Item 21. Underwriters.......................... Additional Purchase and
Redemption Information

Item 22. Calculation of Performance Data....... Performance Data

Item 23. Financial Statements.................. Performance Data
</TABLE>

Part C
------

Information required to be included in Part C is set forth under
the appropriate Item, so numbered, in Part C of this Registration
Statement.

<PAGE> 4

PART A

LEHMAN BROTHERS FUNDS, INC.

PROSPECTUS

LEHMAN BROTHERS DAILY INCOME FUND
LEHMAN BROTHERS MUNICIPAL INCOME FUND

Incorporated by reference to Registrant's filing of definitive copies
under Rule 497(e) of the Securities Act of 1933, as amended (the "Securities
Act"), on March 23, 1994, and not affected by this filing.

<PAGE> 5

LEHMAN BROTHERS FUNDS, INC.

PROSPECTUS

LEHMAN SELECTED GROWTH STOCK PORTFOLIO

Incorporated by reference to Registrant's filing of definitive copies
under Rule 497(e) of the Securities Act on April 28, 1994, as supplemented by
Registrant's Filing of definitive copies under Rule 497(e) of the Securities
Act on May 2, 1994, and not affected by this filing.

<PAGE> 6

LEHMAN BROTHERS FUNDS, INC.

PROSPECTUS

LEHMAN MEXICAN GROWTH AND INCOME PORTFOLIO

Incorporated by reference to Post-Effective Amendment No. 2 to
the Company's Registration Statement on Form N1-A, filed on
January 14, 1994 and not affected by this filing.

<PAGE> 7

LEHMAN BROTHERS FUNDS, INC.

PROSPECTUS

LEHMAN LATIN AMERICA DOLLAR INCOME PORTFOLIO

Incorporated by reference to Post-Effective Amendment No. 2 to
the Company's Registration Statement on Form N1-A, filed on
January 14, 1994 and not affected by this filing

<PAGE> 8
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.

SUBJECT TO COMPLETION-DATED SEPTEMBER 8, 1994

PROSPECTUS

LEHMAN BROTHERS LARGE CAPITALIZATION U.S. EQUITY FUND

An Investment Portfolio of Lehman Brothers Funds, Inc.

______________, 1994

This Prospectus describes the LEHMAN BROTHERS LARGE CAPITALIZATION
U.S. EQUITY FUND (the "Fund"), a diversified portfolio of Lehman
Brothers Funds, Inc. (the "Company"), an open-end management
investment company. This Prospectus relates to the three classes of
shares of the Fund that are offered directly to individual investors
and a fourth class of shares that is offered only to participants in
the Lehman Brothers WRAP Program and similar programs, as described
herein.

LEHMAN BROTHERS INC. sponsors the Fund and acts as distributor of the
Fund's shares. LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT LIMITED serves
as the Fund's investment adviser.

The address of the Fund is 3 World Financial Center, New York, New
York 10285. Performance and other information regarding the Fund may
be obtained through a Lehman Brothers Investment Representative or by
calling 800-_________.

Shares of the Fund are being offered during an initial subscription
period scheduled to end on _______ __, 1994. Subsequent to such
date, the Fund will engage in a continuous offering of its shares.
See "Purchase of Shares."

This Prospectus briefly sets forth certain information about the Fund
that investors should know before investing. Investors are advised
to read this Prospectus and retain it for future reference.
Additional information about the Fund, contained in a Statement of
Additional Information dated ___________ __, 1994, as amended or
supplemented from time to time, has been filed with the Securities
and Exchange Commission and is available to investors without charge
by calling 800-_____________. The Statement of Additional Information
is incorporated in its entirety by reference into this Prospectus.

SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK, AND SUCH SHARES ARE NOT FEDERALLY INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE
CERTAIN INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 9

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the
Prospectus.

BENEFITS TO INVESTORS

The Fund offers investors several important benefits:

o a professionally managed portfolio of equity securities issued
by companies with large market capitalizations that have the
potential for long-term capital appreciation.

o investment liquidity through convenient purchase and
redemption procedures.

o a convenient way to invest without the administrative and
recordkeeping burdens normally associated with the direct
ownership of securities.

o automatic dividend reinvestment feature, plus exchange
privilege with the shares of certain other funds in the Lehman
Brothers Group of Funds.

INVESTMENT OBJECTIVE

VARIABLE PRICING SYSTEM

The Fund offers directly to individual investors three classes of shares: Class
A shares, Class B shares and Class C shares, which differ principally in terms
of the sales charges and rates of expense to which they are subject. See
"Variable Pricing System." A fourth class of shares, Class W shares, is offered
exclusively to participants in the Lehman Brothers WRAP Program ("WRAP"), an
investment advisory service that directly provides to investors asset
allocation recommendations with respect to the Fund and certain other funds in
the Lehman Brothers WRAP Program based on an evaluation of an investor's
investment objectives and risk tolerance, as well as to participants in other
investment advisory services offered by qualified registered investment
advisers. Each of the foregoing classes of the shares in the Fund is referred
to herein as a "Class." For investors not participating in WRAP or similar
programs, the decision as to which Class is most beneficial depends on the
amount and intended length of the investment. See "Variable Pricing System"
and "Purchase of Shares - Class W Shares."

CLASS A SHARES

Following the initial offering of shares described below, these shares will be
offered at net asset value per share plus a maximum initial sales charge of
4.75%. The Fund pays an annual service fee of .25% of the value of the average
daily net assets of this Class. See "Purchase of Shares."

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<PAGE> 10

CLASS B SHARES

Following the initial offering of shares described below, these shares will be
offered at net asset value per share subject to a maximum contingent deferred
sales charge ("CDSC") of 4.75% of redemption proceeds, declining gradually each
year after the date of purchase to zero. The Fund pays an annual service fee of
.25% and an annual distribution fee of .75% of the value of average daily net
assets of this Class. See "Purchase of Shares."

CLASS B CONVERSION FEATURE

Class B shares will convert automatically to Class A shares, based upon
relative net asset value, eight years after the date of original purchase. Upon
conversion, these shares will no longer be subject to an annual distribution
fee. See "Variable Pricing System - Class B Shares."

CLASS C SHARES

Following the initial offering of shares described below, these shares will be
offered at net asset value per share. The Fund pays an annual service fee of
.25% and an annual distribution fee of .75% of the value of average daily net
assets of this Class.

CLASS W SHARES

Following the initial offering of shares described below, these shares will be
offered at net asset value per share. These shares are subject to no sales
charges and bear no service or distribution fees, although participants in the
WRAP and similar programs pay fees based upon the aggregate value of their
investments in participating mutual funds, including the Fund. The operating
expenses borne by Class W shares, when combined with investment advisory fees
separately paid pursuant to WRAP or similar programs, involve greater aggregate
fees and expenses than other investment company shares which are purchased
without the benefit of asset allocation recommendations rendered by registered
investment advisers. See "Background and Expense Information" and "Purchase of
Shares - Class W Shares."

INITIAL OFFERING OF SHARES

During an initial subscription period, shares of each class of the Fund will be
offered at $10.00 per share subject, in the case of Class A shares and Class B
shares, to the sales charges described above. Lehman Brothers Inc. ("Lehman
Brothers"), the Fund's distributor, will solicit subscriptions for shares
during a period of time scheduled to end on ___________ __, 1994, subject to
extension as agreed by the Fund and Lehman Brothers. On the fifth business day
following termination of the subscription period, subscriptions for shares will
be payable and shares will be issued. Following termination of the subscription
period, the Fund will begin a continuous offering of shares. During the
continuous offering, shares of the Fund may be purchased at the next determined
net asset value per share, subject in the case of Class A shares and Class B
shares to the sales charges described above.

PURCHASE OF SHARES

Shares of the Fund may be purchased through a brokerage account maintained
through Lehman Brothers or through an Introducing Broker (as defined herein).
Direct purchases by certain retirement plans may be made through the Fund's
transfer agent, The Shareholder Services Group, Inc. ("TSSG"), a subsidiary of
First Data Corporation. See "Purchase of Shares."

-3-
<PAGE> 11

INVESTMENT MINIMUMS

Investors in Class A, B and C shares are subject to a minimum initial
investment requirement of $5,000 and a minimum subsequent investment
requirement of $1,000. However, for Individual Retirement Accounts ("IRAs") and
Self-Employed Retirement Plans, the minimum initial investment requirement is
$2,000 and the minimum subsequent investment requirement is $1,000 and for
certain qualified retirement plans, the minimum initial and subsequent
investment requirement is $500. Investors in Class C shares, in addition to
satisfying the foregoing minimum investment requirements, are subject to an
aggregate minimum initial investment requirement of $25,000 in Class C shares
of funds in the Lehman Brothers Group of Funds. Introducing Brokers may impose
higher minimum investment requirements than the foregoing requirements.
Investors in Class W shares through WRAP are subject to an overall minimum
investment requirement for participation in WRAP. See "Purchase of Shares."

SYSTEMATIC INVESTMENT PLAN

The Fund also offers shareholders a Systematic Investment Plan under which they
may authorize the automatic placement of a purchase order each month or quarter
for certain classes of Fund shares in an amount not less than $100. See
"Purchase of Shares."

REDEMPTION OF SHARES

The Fund redeems shares at their next determined net asset value in accordance
with the procedures described herein and subject, in the case of Class B
shares, to any applicable CDSC.

MANAGEMENT OF THE FUND

EXCHANGE PRIVILEGE

Shares of a Class may be exchanged for shares of the same class of certain
other funds in the Lehman Brothers Group of Funds. Certain exchanges may be
subject to a sales charge differential. See "Exchange Privilege."

DIVIDENDS AND DISTRIBUTIONS

The Fund's policy is to distribute its investment income and net realized
capital gains. Dividends will be declared and paid annually. Dividends and
distributions will be reinvested in additional shares of the same Class of the
Fund unless a shareholder requests otherwise. Shares acquired by dividend and
distribution reinvestments will not be subject to any sales charge or CDSC.
Class B shares acquired through dividend and distribution reinvestments will
become eligible for conversion to Class A shares on a pro-rata basis. See
"Dividends" and "Variable Pricing System."

RISK FACTORS AND SPECIAL CONSIDERATIONS

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<PAGE> 12

in which the Fund invests. In addition, the Fund may invest up to 15% of its
total assets in illiquid securities, invest up to 10% of its total assets in
American Depositary Receipts ("ADRs"), and engage in hedging and derivatives
transactions and certain other investment practices, which may entail certain
risks. For a more complete discussion of the risks associated with an
investment in the Fund, see "Investment Objective and Policies - Other
Investments and Investment Practices" and "Risk Factors and Special
Considerations."

WRAP participants should recognize that although Lehman Brothers intends to
recommend adjustments in the allocation of assets between the Fund and other
investment funds participating in WRAP based upon, among other things,
anticipated market trends, there can be no assurance that these recommendations
can be developed, transmitted and acted upon in a manner sufficiently timely to
avoid market shifts, which can be sudden and substantial. WRAP is a
nondiscretionary investment advisory service and all investment decisions rest
with the participant alone. Therefore, WRAP participants must act promptly upon
any recommended reallocation of assets among the participating investment funds
in order to implement Lehman Brothers' asset allocation recommendations.
Investors intending to purchase Fund shares through different investment
advisory services should evaluate carefully whether the service is ongoing and
continuous, as well as their investment advisers' ability to anticipate and
respond to market trends.

-5-
<PAGE> 13

BACKGROUND AND EXPENSE INFORMATION

The Fund offers multiple classes of shares, four of which are offered by this
Prospectus. Each share of the Fund accrues income in the same manner, but
certain expenses differ based upon the Class. See "Additional Information." The
following Expense Summary lists the costs and expenses that holders of Class A,
Class B, Class C and Class W shares can expect to incur as investors in the
Fund, based upon estimated expenses and average net assets for the current
fiscal year. The costs and expenses for Class W shares include fees for WRAP
(but not those for different advisory services).

<TABLE>
EXPENSE SUMMARY
<CAPTION>
Class A Class B Class C Class W
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum sales charge imposed on
purchases
(as a percentage of offering
price) . . . . . . . . . . . . . 4.75% -- -- --
Maximum CDSC
(as a percentage of redemption
proceeds) . . . . . . . . . . . . -- 4.75% -- --

MAXIMUM ANNUAL WRAP FEE
(as a percentage of the value of
Fund shares held on the last
calendar day of the previous
quarter) . . . . . . . . . . . . -- -- -- 1.50%

ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets)
Advisory Fees . . . . . . . . . . ____% ____% ____% ____%
Rule 12b-1 Fees* . . . . . . . . 0.25% 1.00% 1.00% --
Other Expenses - including
Administration Fees** . . . . . ____% ____% ____% ____%

Total Fund Operating Expenses . . ____% ____% ____% ____%
<FN>
- ------------------
* Upon conversion, Class B shares will no longer be subject to a distribution fee. Lehman
Brothers receives an annual 12b-1 service fee of .25% of the value of average daily net
assets of Class A shares, and receives an annual 12b-1 fee of 1.00% of the value of average
daily net assets of Class B and Class C shares, consisting of a .75% distribution fee and
a .25% service fee.

** The amount set forth for "Other Expenses" is based on estimates for the current fiscal year.

</TABLE>

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<PAGE> 14

The sales charge and CDSC set forth in the above table are the maximum charges
imposed on purchases or redemptions of Fund shares and investors may pay actual
charges of less than 4.75%, depending on the amount purchased and, in the case
of Class B shares, the length of time the shares are held and whether the
shares are held through the 401(k) Program. See "Purchase of Shares" and
"Redemption of Shares."

EXAMPLE

The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical $1,000 investment in the Fund assuming a 5% total return. The
example assumes payment by the Fund of operating expenses at the levels set
forth in the table above and, in the case of Class W shares, include the fees
for WRAP (but not those for different advisory services).

<TABLE>
<CAPTION>
1 year 3 years
-------------------------- ----------------------------
<S> <C> <C>
Class A shares* . . . . . . . . . . . . . . . . . $ $
Class B shares:
Assumes complete redemption at end of
each time period** . . . . . . . . . . . . . . $ $
Assumes no redemption . . . . . . . . . . . . . $ $
Class C shares . . . . . . . . . . . . . . . . . . $ $
Class W shares*** . . . . . . . . . . . . . . . . . $ $
<FN>
- ---------------
* Assumes deduction at the time of purchase of the maximum 4.75% sales charge.
** Assumes deduction at the time of redemption of the maximum CDSC applicable for that time period.
*** Assumes payment of the fees for WRAP (but not those for different advisory services).
</TABLE>

THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF ACTUAL EXPENSES AND
RATE OF RETURN, WHICH MAY BE GREATER OR LESSER THAN THOSE SHOWN. The foregoing
table has not been audited by the Fund's independent auditors.

Long-term holders of mutual fund shares which bear Rule 12b-1 fees, such as the
Class A, B and C shares, may pay more than the economic equivalent of the
maximum front-end sales charge permitted by rules of the National Association
of Securities Dealers, Inc.

VARIABLE PRICING SYSTEM

The Fund offers individual investors three methods of purchasing shares, thus
enabling investors to choose the Class that best suits their needs, given the
amount of purchase and intended length of investment. A fourth Class - Class W -
is offered only to participants in WRAP, an investment advisory service that
directly provides to investors asset allocation recommendations with respect to
the Fund and certain other funds in the Lehman Brothers Group of Funds based on
an evaluation of an investor's investment objectives and risk tolerance, as
well as to participants in other investment advisory services offered by
qualified registered investment advisers.

-7-
<PAGE> 15

Representatives and other persons for ongoing services provided to
shareholders. The sales charge is used to compensate Lehman Brothers for
expenses incurred in selling Class A shares. See "Purchase of Shares."

Class B Shares. Class B shares are sold subject to a maximum 4.75% CDSC, which
is assessed only if the shareholder redeems shares within the first five years
of investment. This results in 100% of the investor's assets being used to
acquire shares of the Fund. For the first year of this five-year time frame,
the applicable CDSC declines by .75%, and thereafter the applicable CDSC
declines by 1% per year; in year six, the applicable CDSC is reduced to 0%. See
"Purchase of Shares" and "Redemption of Shares."

Class B shares are subject to an annual service fee of .25% and an annual
distribution fee of .75% of the value of the Fund's average daily net assets
attributable to the Class. Like the service fee applicable to Class A shares,
the Class B service fee is used to compensate Lehman Brothers Investment
Representatives and other persons for ongoing services provided to
shareholders. Additionally, the distribution fee paid with respect to Class B
shares compensates Lehman Brothers for expenses incurred in selling those
shares, including expenses such as sales commissions, Lehman Brothers' branch
office overhead expenses and marketing costs associated with Class B shares,
such as preparation of sales literature, advertising and printing and
distributing prospectuses, statements of additional information and other
materials to prospective investors in Class B shares.

Eight years after the date of purchase, Class B shares will convert
automatically to Class A shares, based on the relative net asset values of
shares of each Class, and will no longer be subject to a distribution fee. In
addition, a certain portion of Class B shares that have been acquired through
the reinvestment of dividends and distributions ("Class B Dividend Shares")
will be converted at that time. That portion will be a percentage of the total
number of outstanding Class B Dividend Shares owned by the shareholder equal to
the ratio of the total number of Class B shares converting at the time to the
total number of outstanding Class B shares (other than Class B Dividend Shares)
owned by the shareholder. The conversion of Class B shares into Class A shares
is subject to the continuing availability of an opinion of counsel to the
effect that such conversions will not constitute taxable events for federal tax
purposes.

Class C Shares. Class C shares are subject to no sales charges at the time of
purchase or upon redemption. Class C shares are available only to investors who
invest a minimum of at least $25,000 in Class C shares of the funds in the
Lehman Brothers Group of Funds. Class C shares are subject to an annual service
fee of .25% and an annual distribution fee of .75% of the value of the Fund's
average daily net assets attributable to the Class. The service and
distribution fees applicable to Class C shares may be used for the same
purposes as the service and distribution fees applicable to Class B shares, as
described above.

Class W Shares. Class W shares sold to participants in the WRAP and similar
programs and are subject to no sales charges and bear no service or
distribution fees. As a result, Class W shares will have a lower expense ratio
and pay higher dividends than Class A shares and Class B shares. However,
participants in the WRAP and similar programs pay fees based upon the aggregate
value of their investments in participating mutual funds, including the Fund.
Under the WRAP, participation is subject to payment of a separate investment
advisory fee at a maximum annual rate of 1.50% of assets held in a WRAP
account, which may be subject to negotiation. Other investment advisory
services purchasing Class W shares on behalf of their clients may also
separately impose different investment advisory fees for different levels of
services as agreed upon with their clients. The operating expenses borne by
Class W shares, when combined with investment advisory fees separately paid
pursuant to WRAP or similar programs, involve greater aggregate fees and
expenses than other investment company shares which are purchased without the
benefit of asset allocation recommendations rendered by registered investment
advisers. See "Background and Expense Information" and "Purchase of Shares -
Class W Shares."

-8-
<PAGE> 16

General. For investors not participating in WRAP or similar programs, the
decision as to which of the foregoing Classes is most beneficial depends on the
amount and intended length of the investment. An investor making a large
investment, and thus qualifying for a reduced sales charge, might consider
Class A shares. An investor making a smaller investment might consider Class B
shares because 100% of the investor's assets are invested immediately. An
investor who is uncertain of the length of the investment might consider Class
C shares, because there is no initial or contingent deferred sales charge.
Investors should consult their Lehman Brothers Investment Representatives.
Class B and Class C shares are subject to distribution fees which will cause
Class B and Class C shares to have higher expense ratios and pay lower
dividends than Class A shares. There is no size limit on purchases of Class A
shares. The maximum purchase of Class B shares is $250,000. The maximum
purchase of Class C shares is $1,000,000. An Investment Representative may
receive different levels of compensation for selling different Classes.

INVESTMENT OBJECTIVE AND POLICIES

GENERAL

The Fund's investment objective is to seek long-term capital appreciation by
investing primarily in common stocks of U.S. companies that have market
capitalizations of at least $1 billion. Under normal market conditions, the
Fund will invest at least 80% of its assets in such securities. There can be no
assurance that the Fund will achieve its investment objective. For a discussion
of certain risks and considerations associated with an investment in the Fund,
see "Risk Factors and Special Considerations."

LBGAM will seek to spread the Fund's investments broadly among different
industries. The payment or non-payment of dividends will not be a significant
factor in LBGAM's selection of investments, and dividends do not play a
significant role in achieving the Fund's investment objective. In addition to
common stocks, the Fund's portfolio may also contain other equity securities,
including preferred stock, securities convertible into common or preferred
stock, rights and warrants to acquire such securities and American Depositary
Receipts. The equity securities of the companies in which the Fund invests
typically are traded on the New York Stock Exchange or the American Stock
Exchange or quoted through NASDAQ.

Common stock represents the residual ownership interest in the issuer after all
of its obligations and preferred stocks are satisfied. Common stocks fluctuate
in price in response to many factors, including historical and prospective
earnings of the issuer, the value of its assets, general economic conditions,
interest rates, investor perceptions and market liquidity.

TEMPORARY INVESTMENTS

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<PAGE> 17

agreements. To be eligible for investment under the circumstances described
above, such instruments must be denominated in U.S. dollars and must (other
than U.S. Government Securities) be issued by an issuer having a short-term
debt rating of A-1 or better by Standard & Poor's Ratings Group, a rating of
Prime-1 by Moody's Investors Service, Inc., a comparable rating from another
nationally recognized rating service or, if unrated, deemed to be of equivalent
quality by LBGAM.

OTHER INVESTMENTS AND INVESTMENT PRACTICES

Preferred Stock. Preferred stock has a preference over common stock in
liquidation and generally in dividends as well, but is subordinated to the
liabilities of the issuer in all respects. Preferred stock may or may not be
convertible into common stock. As a general rule, the market value of preferred
stock with a fixed dividend rate and no conversion element varies inversely
with interest rates and perceived credit risk. Because preferred stock is
junior to debt securities and other obligations of the issuer, deterioration in
the credit quality of the issuer will cause greater changes in the value of a
preferred stock than in a more senior debt security with similar stated yield
characteristics.

Convertible Securities. Convertible securities are fixed income securities that
may be converted into or exchanged for, at either a stated price or stated
rate, underlying shares of common stock. Convertible securities have general
characteristics similar to both fixed income and equity securities. Although to
a lesser extent than with fixed income securities generally, the market value
of convertible securities tends to decline as interest rates increase and,
conversely, tends to increase as interest rates decline. In addition, because
of the conversion feature, the market value of convertible securities tends to
vary with fluctuations in the market value of the underlying common stocks and
therefore also will react to variations in the general market for equity
securities. A unique feature of convertible securities is that as the market
price of the underlying common stock declines, convertible securities tend to
trade increasingly on a yield basis, and so may not experience market value
declines to the same extent as the underlying common stock. When the market
price of the underlying common stock increases, the prices of the convertible
securities tend to rise as a reflection of the value of the underlying common
stock. While no securities investments are without risk, investments in
convertible securities generally entail less risk than investments in common
stock of the same issuer.

Warrants. The Fund may invest up to 5% of its net assets (valued at the lower
of cost or market) in warrants for equity securities, which are securities
permitting, but not obligating, their holder to subscribe for other equity
securities. Warrants do not carry with them the right to dividends or voting
rights with respect to the securities that they entitle their holder to
purchase, and they do not represent any rights in the assets of the issuer. As
a result, an investment in warrants may be considered speculative. In
addition, the value of a warrant does not necessarily change with the value of
the underlying securities and a warrant ceases to have value if it is not
exercised prior to its expiration date. The Fund will not invest more than 2%
of the value of its net assets (valued as described above) in warrants which
are not listed on the New York or American Stock Exchanges.

American Depositary Receipts. The Fund may invest up to 10% of its assets in
ADRs. ADRs are receipts issued by U.S. banks or trust companies in respect of
securities of non-U.S. issuers held on deposit for use in the U.S. securities
markets. The Fund treats ADRs as interests in the underlying securities for
purpose of its investment policies. While ADRs may not necessarily be
denominated in the same currency as the securities into which they may be
converted, they entail certain risks associated with investments in foreign
securities. See "Risk Factors and Special Considerations." The Fund will limit
its investment in ADRs not sponsored by the issuer of the underlying securities
to no more than 5% of the value of its net assets (at the time of investment).
See the Statement of Additional Information for certain risks related to
unsponsored ADRs.

-10-
<PAGE> 18

Repurchase Agreements. The Fund may purchase instruments from financial
institutions, such as banks and broker-dealers, subject to the seller's
agreement to repurchase them at an agreed upon time and price ("repurchase
agreements"). The Fund would enter into repurchase agreements to generate
additional income. The seller under a repurchase agreement will be required to
maintain the value of the securities subject to the agreement at not less than
the repurchase price. Default by the seller would, however, expose the Fund to
possible loss because of adverse market action or delay in connection with the
disposition of the underlying obligations.

Illiquid Securities. The Fund will not invest more than 15% of the value of its
total assets in illiquid securities. Illiquid securities are securities which
may not be sold or disposed of in the ordinary course of business within seven
days at approximately the value at which the Fund has valued the investments,
and include securities with legal or contractual restrictions on resale, time
deposits, repurchase agreements having maturities longer than seven days and
securities that do not have readily available market quotations. In addition,
the Fund may invest in securities that are sold in private placement
transactions between their issuers and their purchasers and that are neither
listed on an exchange nor traded over-the-counter. These factors may have an
adverse effect on the Fund's ability to dispose of particular securities and
may limit the Fund's ability to obtain accurate market quotations for purposes
of valuing securities and calculating net asset value and to sell securities at
fair value. If any privately placed securities held by the Fund are required to
be registered under the securities laws of one or more jurisdictions before
being resold, the Fund may be required to bear the expenses of registration.
The Fund may also purchase securities that are not registered under the
Securities Act of 1933, as amended, but which can be sold to qualified
institutional buyers in accordance with Rule 144A under that Act ("Rule 144A
securities"). Rule 144A securities generally must be sold to other qualified
institutional buyers. The Fund may also invest in commercial obligations issued
in reliance on the so-called "private placement" exemption from registration
afforded by Section 4(2) of the Securities Act of 1933, as amended ("Section
4(2) paper"). Section 4(2) paper is restricted as to disposition under the
federal securities laws, and generally is sold to institutional investors such
as the Fund who agree that they are purchasing the paper for investment and not
with a view to public distribution. Any resale by the purchaser must be in an
exempt transaction. Section 4(2) paper normally is resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in the Section 4(2) paper, thus
providing liquidity. If a particular investment in Rule 144A securities,
Section 4(2) paper or private placement securities is not determined to be
liquid, that investment will be included within the 15% limitation on
investment in illiquid securities. The ability to sell Rule 144A securities to
qualified institutional buyers is a recent development and it is not possible
to predict how this market will mature. LBGAM will monitor the liquidity of
such restricted securities under the supervision of the Board of Directors. See
"Investment Objective and Policies - Additional Information on Portfolio
Instruments and Certain Investment Practices - Illiquid and Restricted
Securities" in the Statement of Additional Information.

Other Investment Funds. The Fund may invest in the securities of other
investment funds, to the extent permitted by the Investment Company Act of
1940, as amended (the "1940 Act"). Under the 1940 Act, the Fund may invest up
to 10% of its total assets in shares of other investment funds and up to 5% of
its total assets in any one investment fund, provided that the investment does
not represent more than 3% of the voting stock of the acquired investment
company. By investing in another investment fund, the Fund bears a ratable
share of the investment fund's expenses, as well as continuing to bear the
Fund's advisory and administrative fees with respect to the amount of the
investment. In addition, the Fund may, in the future, seek to achieve its
investment objective by investing all of its assets in a no-load, open-end
management investment company having the same investment objective and policies
and substantially the same investment restrictions as those applicable to the
Fund, as described below under "Investment Limitations."

-11-
<PAGE> 19

When-Issued and Delayed Delivery Securities. The Fund may purchase securities
on a "when-issued" or delayed delivery basis. When-issued and delayed delivery
securities are securities purchased for delivery beyond the normal settlement
date at a stated price. The Fund will generally not pay for such securities or
start earning income on them until they are received. Securities purchased on a
when-issued or delayed delivery basis are recorded as an asset and are subject
to changes in value based upon changes in the general level of interest rates.
The Fund expects that commitments to purchase when-issued or delayed delivery
securities will not exceed 25% of the value of its total assets absent unusual
market conditions. The Fund does not intend to purchase when-issued or delayed
delivery securities for speculative purposes but only in furtherance of its
investment objective. When the Fund purchases securities on a when-issued or
delayed delivery basis, it will set aside securities or cash with its custodian
equal to the payment that will be due.

Borrowing. The Fund may borrow only from banks or, subject to obtaining
exemptive relief from the Securities and Exchange Commission (the "SEC"), from
other funds advised by Lehman Brothers or its affiliates (as described below
under "Interfund Lending Program"), or by entering into reverse repurchase
agreements, in aggregate amounts not to exceed 33-1/3% of its total assets
(including the amount borrowed) less its liabilities (excluding the amount
borrowed), and only for temporary or emergency purposes. Bank borrowings may be
from U.S. or foreign banks and may be secured or unsecured. The Fund may also
borrow by entering into reverse repurchase agreements, pursuant to which it
would sell portfolio securities to financial institutions, such as banks and
broker-dealers, and agree to repurchase them at an agreed upon date and price.
The Fund would also consider entering into reverse repurchase agreements to
avoid otherwise selling securities during unfavorable market conditions to meet
redemptions. Reverse repurchase agreements involve the risk that the market
value of the portfolio securities sold by the Fund may decline below the price
of the securities the Fund is obligated to repurchase.

Loans of Portfolio Securities. The Fund may lend its portfolio securities
consistent with its investment policies, in order to generate additional
income. The Fund may lend portfolio securities against collateral, consisting
of cash or securities which are consistent with its permitted investments,
which is equal at all times to at least 100% of the value of the securities
loaned. There is no limitation on the amount of securities that may be loaned.
Such loans would involve risks of delay in receiving additional collateral or
in recovering the securities loaned or even loss of rights in the collateral
should the borrower of the securities fail financially. However, loans will be
made only to borrowers deemed by LBGAM to be of good standing and only when, in
the judgment of LBGAM, the income to be earned from the loans justifies the
attendant risks.

Interfund Lending Program. Subject to obtaining exemptive relief from the SEC,
the Fund may lend money to and, in the circumstances described under
"Borrowing" above, borrow money from, other funds advised by Lehman Brothers or
its affiliates. The Fund will only borrow through the program when costs are
equal to or lower than the costs for bank loans. The Fund anticipates that an
exemptive order permitting interfund loans, if obtained from the SEC, will
impose various conditions on the Fund, including limitations on the duration of
interfund loans and on the percentage of the Fund's assets that may be loaned
or borrowed through the program. Loans may be called on one day's notice and
the Fund may have to borrow from a bank at a higher interest rate if an
interfund loan is called or not renewed. Any delay in repayment to a lending
fund could result in a lost investment opportunity or additional borrowing
costs.

-12-
<PAGE> 20

unconditional right to acquire at no additional cost the identical security.
Short sales against the box are a form of hedging to offset potential declines
in long positions in similar securities.

Hedging and Derivatives. The Fund is authorized to use various hedging and
investment strategies described below to hedge market risks (such as broad or
specific market movements) or to seek to increase the Fund's income or gain.
Over time, techniques and instruments may change as new instruments and
strategies are developed or regulatory changes occur. Limitations on the
portion of the Fund's assets that may be used in connection with the investment
strategies described below appear in the Statement of Additional Information.

Subject to the constraints described above, the Fund may purchase and sell
stock index futures contracts; it may purchase and sell (or write) exchange
listed and over-the-counter put and call options on equity securities, futures
contracts, stock indices and other financial instruments; and it may enter into
equity swaps and related transactions and other similar transactions which may
be developed, to the extent LBGAM determines that they are consistent with the
Fund's investment objective and policies and applicable regulatory requirements
(collectively, these transactions are referred to in this Prospectus as
"Derivatives").

Derivatives may be used to attempt to protect against possible changes in the
market value of securities held in or to be purchased for the Fund's portfolio
resulting from securities markets fluctuations, to protect the Fund's
unrealized gains in the value of its portfolio securities, to facilitate the
sale of those securities for investment purposes, to establish a position in
the derivatives markets as a substitute for purchasing or selling particular
equity securities, or to seek to enhance the Fund's income or gain. The Fund
may use any or all types of Derivatives at any time; no particular strategy
will dictate the use of one type of transaction rather than another, as use of
any authorized Derivative will be a function of numerous variables, including
market conditions. The ability of the Fund to utilize Derivatives successfully
will depend on LBGAM's ability to predict pertinent market movements, which
cannot be assured. These skills are different from those needed to select
portfolio securities. The Fund is not a "commodity pool" (i.e., a pooled
investment vehicle which trades in commodity futures contracts and options
thereon and the operator of which is registered with the Commodity Futures
Trading Commission (the "CFTC")) and Derivatives involving futures contracts
and options on futures contracts will be purchased, sold or entered into only
for bona fide hedging purposes, provided that the Fund may enter into such
transactions for purposes other than bona fide hedging if, immediately
thereafter, the sum of the amount of its initial margin and premiums on open
contracts and options would not exceed 5% of the liquidation value of the
Fund's portfolio, and provided, further, that, in the case of an option that is
in-the-money, the in-the-money amount may be excluded in calculating the 5%
limitation. The use of Derivatives in certain circumstances will require that
the Fund segregate cash, liquid high grade debt obligations or other assets to
the extent the Fund's obligations are not otherwise "covered" through ownership
of the underlying security or financial instrument. See "Risk Factors and
Special Considerations."

A detailed discussion of Derivatives, including applicable requirements of the
CFTC, the requirement to segregate assets with respect to these transactions
and special risks associated with such strategies, appears in the Statement of
Additional Information.

The degree of the Fund's use of Derivatives may be limited by certain
provisions of the Internal Revenue Code of 1986, as amended (the "Code"). See
"Taxes."

-13-
<PAGE> 21

INVESTMENT LIMITATIONS

The investment limitations enumerated below are fundamental and may not be
changed by the Company's Board of Directors without the affirmative vote of the
holders of a majority of the Fund's outstanding shares. The Fund's investment
objectives and the other investment policies described herein may be changed by
the Board of Directors at any time. If there is a change in the investment
objectives of the Fund, shareholders of the Fund should consider whether the
Fund remains an appropriate investment in light of their then current financial
position and needs. (A complete list of Fund's investment limitations that
cannot be changed without a vote of shareholders is contained in the Statement
of Additional Information under "Investment Objective and Policies.") The
percentage limitations set forth below, as well as those contained elsewhere in
this Prospectus and the Statement of Additional Information, apply at the time
a transaction is effected, and a subsequent change in a percentage resulting
from market fluctuations or any other cause other than an action by the Fund
will not require the Fund to dispose of portfolio securities or to take other
action to satisfy the percentage limitation.

1. The Fund may not purchase the securities of any one issuer if as a
result more than 5% of the value of its total assets would be invested in the
securities of such issuer, except that up to 25% of the value of its total
assets may be invested without regard to this 5% limitation and provided that
there is no limitation with respect to investments in U.S. Government
Securities, and provided further, that the Fund may invest all or substantially
all of its assets in another registered investment company having the same
investment objective and policies and substantially the same investment
restrictions as those with respect to the Fund.

2. The Fund may not borrow money, except that the Fund may borrow money
from banks or from other funds advised by Lehman Brothers or its affiliates, or
enter into reverse repurchase agreements, in each case for temporary or
emergency purposes only (not for leveraging or investment), in aggregate
amounts not exceeding 33-1/3% of the value of its total assets at the time of
such borrowing. For purposes of the foregoing investment limitation, the term
"total assets" shall be calculated after giving effect to the net proceeds of
any borrowings and reduced by any liabilities and indebtedness other than such
borrowings. Additional investments will not be made by the Fund when borrowings
exceed 5% of total net assets, provided, however, that the Fund may increase
its interest in another registered investment company having the same
investment objective and policies and substantially the same investment
restrictions as those with respect to the Fund while such borrowings are
outstanding.

3. The Fund may not purchase any securities which would cause 25% or more
of the value of its total assets at the time of such purchase to be invested in
the securities of one or more issuers conducting their principal business
activities in the same industry; provided that there is no limitation with
respect to investments in U.S. Government Securities (other than those backed
only be the assets and revenues of non-governmental users), and provided
further, that the Fund may invest all or substantially all of its assets in
another registered investment company having the same investment objective and
policies and substantially the same investment restrictions as those with
respect to the Fund.

The Fund may, in the future, seek to achieve its investment objective by
investing all of its assets in a no-load, open-end management investment
company having the same investment objective and policies and substantially the
same investment restrictions as those applicable to the Fund. In such event,
the Fund's investment advisory agreement would be terminated and the
administrative services fees paid by the Fund would be reduced. Such investment
would be made only if the Company's Board of Directors believes that the
aggregate per share expenses of each class of the Fund and such other
investment company will be less than or approximately equal to the expenses
which each class of the Fund would

-14-
<PAGE> 22

incur if the Fund were to continue to retain the services of an investment
adviser for the Fund and the assets of the Fund were to continue to be invested
directly in portfolio securities.

RISK FACTORS AND SPECIAL CONSIDERATIONS

The value of the Fund's investments, and thus the net asset value of the Fund's
shares, can be expected to fluctuate in response to changes in market and
economic conditions, as well as the financial condition and prospects of
issuers in which the Fund invests. The Fund's investments in ADRs involve
certain considerations and risks associated with investing in securities of
non-U.S. issuers, including political and social uncertainties, the possible
imposition of foreign withholding taxes, the possible establishment of exchange
controls, the possible adverse effects of changes in the exchange rates of
foreign currencies, exposure to smaller, less liquid trading markets that are
subject to greater price volatility than U.S. markets, and higher brokerage and
other costs. Furthermore, there may be less publicly available information
about a non-U.S. issuer than about a U.S. issuer, and non-U.S.issuers may not
be subject to the same accounting standards as U.S. issuers.

Certain risks and special considerations of certain of the investment practices
in which the Fund may engage are described above under "Investment Objective
and Policies" and "Other Investments and Investment Practices."

Derivatives involve special risks, including possible default by the other
party to the transaction, illiquidity and, to the extent LBGAM's view as to
certain market movements is incorrect, the risk that the use of Derivatives
could result in greater losses than if it had not been used. Use of put and
call options could result in losses to the Fund, force the purchase or sale of
portfolio securities at inopportune times or for prices higher or lower than
current market values, or cause the Fund to hold a security it might otherwise
sell. The use of options and futures transactions entails certain special
risks. In particular, the variable degree of correlation between price
movements of futures contracts and price movements in the related portfolio
position of the Fund could create the possibility that losses on the Derivative
will be greater than gains in the value of the Fund's position. In addition,
futures and options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. The Fund might not be able to
close out certain positions without incurring substantial losses. To the extent
the Fund utilizes futures and options transactions for hedging, such
transactions should tend to minimize the risk of loss due to a decline in the
value of the hedged position and, at the same time, limit any potential gain to
the Fund that might result from an increase in value of the position. Finally,
the daily variation margin requirements for futures contracts create a greater
ongoing potential financial risk than would purchases of options, in which case
the exposure is limited to the cost of the initial premium and transaction
costs. Losses resulting from the use of Derivatives will reduce the Fund's net
asset value, and possibly income, and the losses may be greater than if
Derivatives had not been used. Additional information regarding the risks and
special considerations associated with Derivatives appears in the Statement of
Additional Information.

SPECIAL CONSIDERATIONS FOR WRAP PARTICIPANTS

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<PAGE> 23

Lehman Brothers' asset allocation recommendations. Investors intending to
purchase Fund shares through different investment advisory services should
evaluate carefully whether the service is ongoing and continuous, as well as
their investment advisers' ability to anticipate and respond to market trends.

PURCHASE OF SHARES

Purchases of each Class of shares must be made through a brokerage account
maintained through Lehman Brothers or a broker or dealer (each, an "Introducing
Broker") that (i) clears securities transactions through Lehman Brothers on a
fully disclosed basis or (ii) has entered into an agreement with Lehman
Brothers with respect to the sale of Fund shares. Direct purchases by certain
retirement plans may be made through the Fund's transfer agent, TSSG, a
subsidiary of First Data Corporation. When purchasing shares of the Fund,
investors must specify the Class to which the purchase relates. For a
discussion of the factors that should be considered in determining in which
Class to invest, see "Variable Pricing System - General." The Fund reserves the
right to reject any purchase order and to suspend the offering of shares for a
period of time.

Initial Offering. Shares of the Fund are being offered through Lehman Brothers,
the Fund's distributor, during a period scheduled to end on __________ __,
1994, subject to extension by agreement between the Fund and Lehman Brothers
(the "Subscription Period"). The price for shares of the Fund during the
Subscription Period will be $10.00 per share subject, in the case of Class A
shares and Class B shares, to the sales charges described below. On the fifth
business day following termination of the Subscription Period (the "Closing
Date"), subscriptions for shares will be payable and shares will be issued.
Following termination of the Subscription Period, the Fund will begin a
continuous offering of shares. Investors will not be required to pay for shares
offered during the Subscription Period until the Closing Date, and they may
revoke subscriptions until the termination of the Subscription Period.
Investors who make payment prior to the Closing Date may permit the payment to
be held in their brokerage accounts or may designate a temporary investment
(such as a money market fund in the Lehman Brothers Group of Funds) for such
payment until the Closing Date. The Fund and Lehman Brothers reserve the right
to withdraw, cancel or modify the initial offering of shares without notice and
to reject any purchase order.

Continuous Offering. Following termination of the Subscription Period, the Fund
will begin a continuous offering of its shares. During the continuous
offering, purchases will be effected at the public offering price next
determined after a purchase order is received by Lehman Brothers or an
Introducing Broker (the "Trade Date"). Payment is generally due to Lehman
Brothers or an Introducing Broker on the fifth business day after the Trade
Date (the "Settlement Date"). Investors who make payment prior to the
Settlement Date may permit the payment to be held in their brokerage accounts
or may designate a temporary investment (such as a money market fund in the
Lehman Brothers Group of Funds) for such payment until the Settlement Date.
Purchase orders received by Lehman Brothers or an Introducing Broker prior to
the close of regular trading on the New York Stock Exchange ("NYSE"), currently
4:00 p.m., New York time, on any day the Fund calculates its net asset value,
are priced according to the net asset value determined on that day. Purchase
orders received after the close of regular trading on the NYSE are priced as of
the time that the net asset value per share is next determined. See "Valuation
of Shares."

Systematic Investment Plan. The Fund offers investors in Class A, B and C
shares a Systematic Investment Plan under which they may authorize Lehman
Brothers or an Introducing Broker to place additional purchase orders each
month or quarter for shares of the Fund in an amount not less than $100. The
purchase price is paid automatically from cash held in the shareholder's Lehman
Brothers brokerage account or through the automatic redemption of the
shareholder's shares of a Lehman Brothers money market fund. For further
information regarding the Systematic Investment Plan, shareholders should
contact their Lehman Brothers Investment Representative.

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<PAGE> 24

Minimum Investments. The minimum initial investment in Class A, B and C shares
of the Fund is $5,000 and the minimum subsequent investment is $1,000, except
for purchases through (a) IRAs and Self-Employed Retirement Plans, for which
the minimum initial and subsequent investments are $2,000 and $1,000,
respectively, (b) retirement plans qualified under Section 403(b)(7) or Section
401(a) of the Code ("Qualified Retirement Plan"), for which the minimum and
subsequent investment is $500 and (c) the Fund's Systematic Investment Plan,
for which the minimum and subsequent investment is $100. For employees of
Lehman Brothers and its affiliates, the minimum initial investment is $1,000
and the minimum subsequent investment is $500. Investors in Class C shares, in
addition to satisfying the foregoing minimum investment requirements, are
subject to an aggregate minimum initial investment requirement of $25,000 in
Class C shares of funds in the Lehman Brothers Group of Funds. The Funds
reserve the right at any time to vary the initial and subsequent investment
minimums. Introducing Brokers may impose higher minimum investment requirements
than the foregoing requirements. Investors in Class W shares through WRAP are
subject to an overall minimum investment requirement for participation in WRAP.
Certificates for Fund shares are not issued unless expressly requested in
writing to the Fund's transfer agent, and are not issued for fractional shares.
It is considerably more complicated to redeem shares held in certificate form.

<TABLE>
CLASS A SHARES

The public offering price for Class A shares is the per share net asset value
of that Class ($10.00 during the Subscription Period) plus a sales charge,
which is imposed in accordance with the following schedule:

<CAPTION>
SALES CHARGE AS % OF SALES CHARGE AS %
AMOUNT OF INVESTMENT OFFERING PRICE OF NET ASSET VALUE

-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Less than $100,000 4.75% 4.99%
$100,000 but under $250,000 3.50% 3.63%
$250,000 but under $500,000 2.50% 2.56%
$500,000 but under $1,000,000 2.00% 2.04%
$1,000,000 or more* .00% .00%
<FN>
* No sales charge is imposed on purchases of $1 million or more; however, a CDSC of .75% is imposed for
the first year after purchase. The CDSC on Class A shares is payable to Lehman Brothers which compensates
Lehman Brothers Investment Representatives upon the sale of these shares. The CDSC is waived in the same
circumstances in which the CDSC applicable to Class B shares is waived. See "Redemption of Shares--Contingent
Deferred Sales Charge--Class B shares--Waivers of CDSC."
</TABLE>

REDUCED SALES CHARGES--CLASS A SHARES

Reduced sales charges are available to investors who are eligible to combine
their purchases of Class A shares to receive volume discounts. Investors
eligible to receive volume discounts include individuals and their immediate
families, tax-qualified employee benefit plans and trustees or other
professional fiduciaries (including a bank, or an investment adviser registered
with the SEC under the 1940 Act) purchasing shares for one or more trust
estates or fiduciary accounts even though more than one beneficiary is
involved. Reduced sales charges on Class A shares are also available under a
combined right of accumulation, under which an investor may combine the value
of Class A shares already held in the Fund and certain other funds in the
Lehman Brothers Group of Funds, along with the value of the Fund's Class A
shares being purchased, to qualify for a reduced sales charge. For example, if
an investor owns Class A shares of the Fund and certain other funds in the
Lehman Brothers Group of Funds that have an aggregate value of $74,000, and
makes an additional investment in Class A shares of the Fund of $27,000, the
sales charge applicable to the additional investment would be 4%, rather than
the 4.75% normally charged on a

-17-
<PAGE> 25

$27,000 purchase. Investors interested in further information regarding reduced
sales charges should contact their Lehman Brothers Investment Representatives.

Class A shares may be offered without any applicable sales charges to: (a)
employees of Lehman Brothers and its affiliates or an Introducing Broker,
including employee benefit plans for such employees and their immediate
families when orders on their behalf are placed by such employees; (b) accounts
managed by Lehman Brothers or its registered investment advisory affiliates;
(c) directors, trustees or general partners of any investment company for which
Lehman Brothers serves as distributor; (d) any other investment company in
connection with the combination of such company with the Fund by merger,
acquisition of assets or otherwise; (e) shareholders who have redeemed Class A
shares in the Fund (or Class A shares of another fund in the Lehman Brothers
Group of Funds that is sold with a maximum 4.75% sales charge) and who wish to
reinvest their redemption proceeds in the Fund, provided the reinvestment is
made within 30 days of the redemption; and (f) any client of a newly-employed
Lehman Brothers Investment Representative (for a period up to 90 days from the
commencement of the Investment Representative's employment with Lehman
Brothers), on the condition that the purchase is made with the proceeds of the
redemption of shares of a mutual fund which (i) was sponsored by the Investment
Representative's prior employer, (ii) was sold to a client by the Investment
Representative, and (iii) when purchased, such shares were sold with a sales
charge or, are subject to a change upon redemption.

CLASS B SHARES

The public offering price for Class B shares is the per share net asset value
of that Class ($10.00 during the Subscription Period). No initial sales charge
is imposed at the time of purchase. A CDSC is imposed, however, on certain
redemptions of Class B shares. See "Redemption of Shares" which describes the
CDSC in greater detail.

CLASS C SHARES

The public offering price for Class C shares is the per share net asset value
of that Class ($10.00 during the Subscription Period). No sales charge is
imposed at the time of purchase or redemption. Class C shares are available
only to investors who invest a minimum of at least $25,000 in Class C shares of
the funds in the Lehman Brothers Group of Funds. See "Variable Pricing System
- -- Class C Shares."

CLASS W SHARES

The public offering price for Class W shares is the per share net asset value
of that Class ($10.00 during the Subscription Period). Class W shares will be
offered, without the imposition of a sales charge, CDSC, service fee or
distribution fee, exclusively to participants in the Lehman Brothers WRAP
Program as well as participants in other investment advisory services offered
by qualified registered investment advisers. WRAP and different investment
advisory services are designed to relieve investors of the burden of devising
an asset allocation strategy to meet their individual needs as well as
selecting individual investments within each asset category among the myriad
choices available.

The operating expenses borne by Class W shares, when combined with investment
advisory fees separately paid pursuant to WRAP or similar programs, involve
greater aggregate fees and expenses than other investment company shares which
are purchased without the benefit of asset allocation recommendations rendered
by registered investment advisers. See "Background and Expense Information."

-18-
<PAGE> 26

"Portfolios") by identifying the investor's risk tolerances and investment
objectives through evaluation of a Request, an investor questionnaire;
identifying and recommending in writing an appropriate allocation of assets
among the Portfolios that conform to those tolerances and objectives in a
Recommendation; and providing on a periodic basis, at least quarterly, a
Review, which is a monitoring report to the investor containing an analysis and
evaluation of the investor's WRAP account and recommending any appropriate
changes in the allocation of assets among the Portfolios. Lehman Brothers will
not, however, have any investment discretion over the investor's WRAP account,
all investment decisions ultimately resting with the investor.

Under WRAP, Investment Representatives provide services to the investor by
assisting the investor in identifying his or her financial characteristics and
completing the investor questionnaire. Investment Representatives are also
responsible for reviewing the Recommendation and Reviews with the investor,
providing any interpretations of his or her own, monitoring identified changes
in the investor's financial characteristics and communicating these for
reevaluation, and implementing investment decisions.

Lehman Brothers is paid a quarterly fee at the maximum annual rate of 1.50% of
assets held in a WRAP account for the services comprising WRAP directly by each
advisory client participating in WRAP, either by redemption of Portfolio shares
or by separate payment. This fee may be reduced or waived at various levels of
assets, for participation by employees of Lehman Brothers and its affiliates
and for participation by certain IRAs, retirement plans for self-employed
individuals and employee benefit plans subject to the Employee Retirement
Income Security Act of 1974, as amended (collectively "Plans"). When the client
is a Plan, Lehman Brothers may provide different services than those described
above for different fees. Fees may be subject to negotiation and fees may
differ based upon a number of factors, including, but not limited to, the type
of account, the size of the account, the amount of WRAP assets and the number
and range of supplemental advisory services to be provided by Investment
Representatives. Investment Representatives receive a portion of any WRAP fee
paid in consideration of providing services to clients participating in WRAP.

No order for Class W shares by a participant in WRAP may be placed until the
participant has completed a Request, reviewed the analysis contained in the
Recommendation and executed an investment advisory agreement with Lehman
Brothers.

Other Advisory Programs. Class W shares of the Fund are also available for
purchase by certain registered investment advisers as a means of implementing
asset allocation recommendations based on an investor's investment objectives
and risk tolerances. In order to qualify to purchase Class W shares on behalf
of its clients the investment adviser must be approved by Lehman Brothers.
Investors purchasing shares through investment advisory programs other than
WRAP will bear different fees for different levels of services as agreed upon
with the investment advisors offering the programs.

LEHMAN BROTHERS 401(K) PROGRAM

Investors may be eligible to participate in the 401(k) Program, which is
generally designed to assist employers or plan sponsors in the creation and
operation of retirement plans under Section 401(a) of the Code. To the extent
applicable, the same terms and conditions are offered to all Participating
Plans in the 401(k) Program, which include both 401(k) plans and other types of
participant directed, tax-qualified employee benefit plans.

-19-
<PAGE> 27

at net asset value without a sales charge. In addition, Class B shares are
offered only to Participating Plans satisfying certain criteria with respect to
the amount of the initial investment and number of employees eligible to
participate in the Plan at that time. Class C Shares are available to all
Participating Plans.

The Class A and Class B shares acquired through the 401(k) Program are subject
to the same service and/or distribution fees as, but different sales charge and
CDSC schedules than, the Class A and Class B shares acquired by other
investors. The Class C shares acquired through the 401(k) Program are subject
to the same service and distribution fees as the Class C shares acquired by
other investors.

Once a Participating Plan has made an initial investment in the Fund, all of
its subsequent investments in the Fund must be in the same Class of shares,
except as otherwise described below.

<TABLE>
Class A Shares. The sales charges for Class A shares acquired by Participating
Plans are as follows:

<CAPTION>
SALES CHARGE AS % OF SALES CHARGE AS %
AMOUNT OF INVESTMENT OFFERING PRICE OF NET ASSET VALUE

--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Less than $100,000 4.75% 4.99%
$100,000 but under $250,000 3.50% 3.63%
$250,000 but under $500,000 2.50% 2.56%
$500,000 but under $750,000 2.00% 2.04%
$750,000 or more .00% .00%
</TABLE>

A Participating Plan will have a combined right of accumulation, under which,
to qualify for a reduced sales charge, it may combine the value of Class A
shares being purchased with the value of Class A shares already held in the
Fund and in any of the funds eligible for exchanges as indicated below under
"Exchange Privilege" that are sold with a sales charge.

Class A shares of the Fund may be offered without any sales charge to any
Participating Plan that: (a) purchases $750,000 or more of Class A shares of
certain funds in the Lehman Brothers Group of Funds under the combined right of
accumulation described above; (b) has 250 or more employees eligible to
participate in the Participating Plan at the time of initial investment in the
Fund; or (c) currently holds Class A shares in the Fund that were received as a
result of an exchange of Class B shares of the Fund as described below.

Class A Shares acquired through the 401(k) Program will not be subject to a
CDSC.

Class B Shares. Under the 401(k) Program, Class B shares are offered to
Participating Plans that: (a) purchase less than $250,000 of Class B shares of
certain funds in the Lehman Brothers Group of Funds that are sold subject to a
CDSC; and (b) that have less than 100 employees eligible to participate in the
Participating Plan at the time of initial investment in the Fund. Class B
shares acquired by such Plans will be subject to a CDSC of 3% of redemption
proceeds, if redeemed within eight years of the date the Participating Plan
first purchases Class B shares. No CDSC is imposed to the extent that the net
asset value of the Class B shares redeemed does not exceed (a) the current net
asset value of Class B shares purchased through reinvestment of dividends or
capital gains distributions, plus (b) the current net asset value of Class B
shares purchased more than eight years prior to the redemption, plus (c)
increases in the net asset value of the shareholder's Class B shares above the
purchase payments made during the preceding eight years. The CDSC applicable to
a Participating Plan depends on the number of years since the Participating
Plan first became a holder of Class B shares, unlike the CDSC applicable to
other Class

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<PAGE> 28

B shareholders, which depends on the number of years since those shareholders
made the purchase payment from which the amount is being redeemed.

The CDSC will be waived on redemptions of Class B shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of (a)
the retirement of an employee in the Participating Plan, (b) the termination of
employment of an employee in the Participating Plan, (c) the death or
disability of an employee in the Participating Plan, (d) the attainment of age
59 1/2 by an employee in the Participating Plan, (e) hardship of an employee in
the Participating Plan to the extent permitted under Section 401(k) of the
Code, or (f) redemptions of Class B shares in connection with a loan made by
the Participating Plan to an employee.

Eight years after the date a Participating Plan acquired its first Class B
share, it will be offered the opportunity to exchange all of its Class B shares
for Class A shares of the Fund. Such Plans will be notified of the pending
exchange in writing approximately 60 days before the eighth anniversary of the
purchase date and, unless the exchange has been rejected in writing, the
exchange will occur on or about the eighth anniversary date. Once the exchange
has occurred, a Participating Plan will not be eligible to acquire additional
Class B shares of the Fund but instead may acquire Class A shares of the Fund.
If the Participating Plan elects not to exchange all of its Class B shares at
that time, each Class B share held by the Participating Plan will have the same
conversion feature as Class B shares held by other investors. See "Variable
Pricing System - Class B Shares."

Participating Plans wishing to acquire shares of the Fund through the 401(k)
Program must purchase shares from the Fund's transfer agent. For further
information regarding the 401(k) Program, investors should contact their Lehman
Brothers Investment Representatives.

REDEMPTION OF SHARES

Shareholders may redeem their shares on any day the Fund calculates its net
asset value. See "Valuation of Shares." Redemption requests received in proper
form prior to the close of regular trading on the NYSE are priced at the net
asset value per share determined on that day. Redemption requests received
after the close of regular trading on the NYSE are priced at the net asset
value as next determined. The proceeds paid to a shareholder upon redemption
may be more or less than the amount invested depending upon a share's net asset
value at the time of redemption and the applicability of any CDSC. If a
shareholder holds shares in more than one Class, any request for redemption
must specify the Class being redeemed. In the event of a failure to specify
which Class, or if the investor owns fewer shares of the Class than specified,
the redemption request will be delayed until the Fund's transfer agent receives
further instructions from Lehman Brothers, or if the shareholder's account is
not with Lehman Brothers, from the shareholder directly.

The Fund normally transmits redemption proceeds for credit to the shareholder's
account at Lehman Brothers or the Introducing Broker at no charge (other than
any applicable CDSC) within seven days after receipt of a redemption request.
Generally, these funds will not be invested for the shareholder's benefit
without specific instruction, and Lehman Brothers or the Introducing Broker
will benefit from the use of temporarily uninvested funds. A shareholder who
pays for Fund shares by personal check will be credited with the proceeds of a
redemption of those shares only after the purchase check has been collected,
which may take up to 15 days or more. A shareholder who anticipates the need
for more immediate access to his or her investment should purchase shares with
federal funds, by bank wire or with a certified or cashier's check.

-21-
<PAGE> 29

A Fund account that is reduced by a shareholder to a value of $1,000 or less
($500 for IRAs, Self-Employed Retirement Plans and Qualified Retirement Plans)
may be subject to redemption by the Fund, but only after the shareholder has
been given at least 30 days in which to increase the account balance to more
than $1,000 ($500 for IRAs, Self-Employed Retirement Plans and Qualified
Retirement Plans). In addition, the Fund may redeem shares involuntarily or
suspend the right of redemption as permitted under the 1940 Act, or under
certain special circumstances described in the Statement of Additional
Information under "Additional Purchase and Redemption Information."

Fund shares may be redeemed in one of the following ways:

REDEMPTION THROUGH LEHMAN BROTHERS OR AN INTRODUCING BROKER

Redemption requests may be made through Lehman Brothers or an Introducing
Broker. A shareholder desiring to redeem shares represented by certificates
must also present such certificates to Lehman Brothers or an Introducing Broker
endorsed for transfer (or accompanied by an endorsed stock power), signed
exactly as the shares are registered. Redemption requests involving shares
represented by certificates will not be deemed received until such certificates
are received by the Fund's transfer agent in proper form. The Shareholder
Services Group, Inc. serves as the Fund's transfer agent and is located at One
Exchange Place, Boston, Massachusetts 02109.

REDEMPTION BY MAIL

Shares held by Lehman Brothers as custodian must be redeemed by submitting a
written request to a Lehman Brothers Investment Representative. All other
shares may be redeemed by submitting a written request for redemption to the
Fund's transfer agent:

Lehman Brothers Large Capitalization U.S. Equity Fund
Class A, B, C or W (please specify)
c/o The Shareholder Services Group, Inc.
P.O. Box _______
Boston, Massachusetts 02009

A written redemption request to the Fund's transfer agent or a Lehman Brothers
Investment Representative must (a) state the Class and number or dollar amount
of shares to be redeemed, (b) identify the shareholder's account number and (c)
be signed by each registered owner exactly as the shares are registered. If the
shares to be redeemed were issued in certificate form, the certificates must be
endorsed for transfer (or be accompanied by an endorsed stock power) and must
be submitted to the Fund's transfer agent together with the redemption request.
Any signature appearing on a redemption request must be guaranteed by a
domestic bank, a savings and loan institution, a domestic credit union, a
member bank of the Federal Reserve System or a member firm of a national
securities exchange. The Fund's transfer agent may require additional
supporting documents for redemptions made by corporations, executors,
administrators, trustees and guardians. A redemption request will not be deemed
to be properly received until the Fund's transfer agent receives all required
documents in proper form.

AUTOMATIC CASH WITHDRAWAL PLAN

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<PAGE> 30

and has an account value of at least $5,000. Any applicable CDSC will be
collected on amounts withdrawn. For further information regarding the automatic
cash withdrawal plan, shareholders should contact their Lehman Brothers
Investment Representatives.

CONTINGENT DEFERRED SALES CHARGE - CLASS B SHARES

A CDSC payable to Lehman Brothers is imposed on any redemption of Class B
shares, however effected, that causes the current value of a shareholder's
account to fall below the dollar amount of all payments by the shareholder for
the purchase of Class B shares ("purchase payments") during the preceding five
years, except in the case of purchases by Participating Plans, as described
above. See "Purchases of Shares - Lehman Brothers 401(k) Program." No charge
is imposed to the extent that the net asset value of the Class B shares
redeemed does not exceed (a) the current net asset value of Class B shares
purchased through reinvestment of dividends or capital gains distributions,
plus (b) the current net asset value of Class B shares purchased more than five
years prior to the redemption, plus (c) increases in the net asset value of the
shareholder's Class B shares above the purchase payments made during the
preceding two years.

In circumstances in which the CDSC is imposed, the amount of the charge will
depend on the number of years since the shareholder made the purchase payment
from which the amount is being redeemed, except in the case of purchases
through Participating Plans which are subject to a different CDSC. See
"Purchases of Shares - Lehman Brothers 401(k) Program." Solely for purposes of
determining the number of years since a purchase payment was made, all purchase
payments made during a month will be aggregated and deemed to have been made on
the last Friday of the preceding Lehman Brothers statement month. The following
table sets forth the rates of the CDSC for redemptions of Class B shares by
shareholders other than Participating Plans in the 401(k) Program:

<TABLE>
<CAPTION>
YEAR SINCE PURCHASE PAYMENTS WERE MADE CDSC
------------------------------------------------------------------------------------------------- --------------------------------
<S> <C>
First . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.75%
Second . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.00%
Third . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.00%
Fourth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.00%
Fifth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.00%
Sixth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.00%
Seventh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.00%
Eighth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.00%
</TABLE>

Class B shares will automatically convert to Class A shares eight years after
the date on which they were purchased and thereafter will no longer be subject
to any distribution fee. See "Variable Pricing System -Class B Shares."

The purchase payment from which a redemption of Class B shares is made is
assumed to be the earliest purchase payment from which a full redemption has
not already been effected. In the case of redemptions of shares of Class B
shares of other funds in the Lehman Brothers Group of Funds issued in exchange
for Class B shares of the Fund, the term "purchase payments" refers to the
purchase payments for the shares given in exchange. In the event of an exchange
of Class B shares of funds with differing CDSC schedules, the shares will be,
in all cases, subject to the higher CDSC schedule. See "Exchange Privilege."

Waivers of CDSC. The CDSC will be waived on: (a) exchanges (see "Exchange
Privilege"); (b) redemptions following the death or disability of the
shareholder; (c) redemptions of shares in

-23-
<PAGE> 31

connection with certain post-retirement distributions and withdrawals from
retirement plans or IRAs; (d) involuntary redemptions; (e) redemption proceeds
from other funds in the Lehman Brothers Group of Funds that are reinvested
within 30 days of the redemption; (f) redemptions of shares in connection with
a combination of any investment company with the Fund by merger, acquisition of
assets or otherwise; and (g) certain redemptions of shares of the Fund in
connection with lump-sum or other distributions made by a Participating Plan.
See "Purchase of Shares -Lehman Brothers 401(k) Program."

CLASS W SHARES AND WRAP

Each WRAP participant's investment advisory agreement with Lehman Brothers
relating to participation in WRAP provides that, absent separate payment by the
participant, fees charged by Lehman Brothers pursuant to that agreement may be
made through automatic redemption of a portion of the participant's account.
Termination of a WRAP account must be effected by a redemption order for the
participant's entire account of Class W shares and similar shares in other
participating investment funds.

EXCHANGE PRIVILEGE

Shares of the Fund may be exchanged for shares of the same class of certain
other funds in the Lehman Brothers Group of Funds which have different
investment objectives that may be of interest to shareholders. In exchanging
shares, a shareholder must meet the minimum initial investment requirement of
the other fund and the shares involved must be legally available for sale in
the state where the shareholder resides. Orders for exchanges will only be
accepted on days on which both funds determine their net asset value. To obtain
information regarding the availability of funds into which shares of the Fund
may be exchanged, investors should contact their Lehman Brothers Investment
Representatives.

Class A Exchanges. Class A shareholders of the funds in the Lehman Brothers
Group of Funds sold without a sales charge or with a maximum sales charge of
less than 4.75% will be subject to the appropriate "sales charge differential"
upon the exchange of their shares for Class A shares of the Fund or other funds
sold with a higher sales charge. The "sales charge differential" is limited to
a percentage rate no greater than the excess of the sales charge rate
applicable to purchases of shares of the mutual fund being acquired in the
exchange over the sales charge rate(s) actually paid on the mutual fund shares
relinquished in the exchange and on any predecessor of those shares. For
purposes of the exchange privilege, shares obtained through automatic
reinvestment of dividends, as described below, are treated as having paid the
same sales charges applicable to the shares on which the dividends were paid.
However, except in the case of the 401(k) Program, if no sales charge was
imposed upon the initial purchase of the shares, any shares obtained through
automatic reinvestment will be subject to a sales charge differential upon
exchange.

Class B Exchanges. Shareholders of the Fund who wish to exchange all or a
portion of their Class B shares for Class B shares of any of the funds referred
to above may do so without imposition of an exchange fee. In the event a Class
B shareholder wishes to exchange all or a portion of his or her shares for
shares in any of these funds imposing a CDSC higher than that imposed by the
Fund, the exchanged Class B shares will be subject to the higher applicable
CDSC. Upon an exchange, the new Class B shares will be deemed to have been
purchased on the same date as the Class B shares of the Fund that have been
exchanged.

Class C and W Exchanges. Class C and Class W shares of the Fund may be
exchanged for shares of the same class of the funds referred to above without
charge.

-24-
<PAGE> 32

Additional Information Regarding the Exchange Privilege. The exchange of shares
of one fund for shares of another fund is treated for federal income tax
purposes as a sale of the shares given in exchange by the shareholder.
Therefore, an exchanging shareholder may realize a taxable gain or loss in
connection with an exchange. Shareholders exercising the exchange privilege
must obtain and should review carefully a copy of the prospectus of the fund
into which the exchange is being made. For further information regarding the
exchange privilege or to obtain the current prospectuses for members of the
Lehman Brothers Group of Funds, investors should contact their Lehman Brothers
Investment Representatives. Lehman Brothers reserves the right to reject any
exchange request. The exchange privilege may be modified or terminated at any
time after notice to shareholders.

VALUATION OF SHARES

The net asset value per share of each class is calculated on each day, Monday
through Friday, except on days on which the NYSE is closed. Currently, the NYSE
is closed on New Year's Day, Presidents' Day, Good Friday, Memorial Day
(observed), Independence Day (observed), Labor Day, Thanksgiving Day and
Christmas Day.

MANAGEMENT OF THE FUND

The business and affairs of the Fund are managed under the direction of the
Company's Board of Directors. The Board of Directors approves all significant
agreements between the Company and the persons or companies that furnish
services to the Fund, including agreements with its distributors, investment
adviser, administrator, custodian and transfer agent. The day-to-day operations
of the Fund are delegated to the Fund's investment adviser and administrator.
One of the directors and all of the Company's officers are affiliated with
Lehman Brothers, The Shareholder Services Group, Inc. or one of their
affiliates. The Statement of Additional Information relating to the Fund
contains general background information regarding each director and executive
officer of the Company.

INVESTMENT ADVISER - LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT LIMITED

Lehman Brothers Global Asset Management Limited ("LBGAM") serves as investment
adviser to the Fund. LBGAM, together with other Lehman Brothers investment
advisory affiliates, had approximately $11 billion in assets under management
as of July 31, 1994. Subject to the supervision and direction of the Company's
Board of Directors, LBGAM manages the portfolio of the Fund in accordance with
the Fund's investment objective and policies, makes investment decisions for
the Fund and places orders to purchase and sell securities. As compensation for
the services of LBGAM as investment adviser to the Fund, LBGAM is paid a
monthly fee by the Fund at the annual rate of 0.___% of the value of the Fund's
average daily net assets.

-25-
<PAGE> 33

1970, is the Head of Global Equities for LBGAM and has primary responsibility
for all of LBGAM's equity portfolios and the formulation of LBGAM's global
strategy. Prior to joining LBGAM in 1992, Mr. Pennells was Head of
International Equities at Hill Samuel Investment Management, where he was also
a member of the Board of Directors' Management Committee. Mr. Pennells joined
Hill Samuel Asset Management in 1983.

LBGAM is located at Two Broadgate, London EC2M 7HA, England. LBGAM is a wholly
owned subsidiary of Lehman Brothers Holdings, Inc. ("Holdings").

ADMINISTRATOR - THE SHAREHOLDER SERVICES GROUP, INC.

The Shareholder Services Group, Inc. ("TSSG") serves as the Fund's
administrator. As administrator, TSSG calculates the net asset value of the
Fund's shares and generally assists in all aspects of the Fund's administration
and operation. As compensation for TSSG's services as administrator, the Fund
pays TSSG a monthly fee at the annual rate of ____% of the value of the Fund's
average daily net assets. TSSG is a wholly owned subsidiary of First Data
Corporation. TSSG is located at Exchange Place, 53 State Street, Boston,
Massachusetts 02109.

On May 6, 1994, TSSG acquired the third party mutual fund administration
business of The Boston Company Advisors, Inc., an indirect wholly-owned
subsidiary of Mellon Bank Corporation ("Mellon"). In connection with this
transaction, Mellon assigned to TSSG its agreement with Lehman Brothers such
that Lehman Brothers and its affiliates, consistent with their fiduciary duties
and assuming certain service quality standards are met, would recommend TSSG as
the provider of administration services to the Fund. This duty to recommend
expires on May 21, 2000. In addition, under the terms of the Stock Purchase
Agreement dated September 14, 1992 between Mellon and Lehman Brothers (then
named Shearson Lehman Brothers Inc.), Lehman Brothers agreed to recommend
Boston Safe Deposit and Trust Company ("Boston Safe"), an indirect wholly owned
subsidiary of Mellon, as custodian of mutual funds affiliated with Lehman
Brothers until May 21, 2000, to the extent consistent with its fiduciary duties
and other applicable law.

DISTRIBUTOR - LEHMAN BROTHERS

Lehman Brothers, located at 3 World Financial Center, New York, New York 10285,
is distributor of the Fund's shares. Lehman Brothers, a leading full service
investment firm serving U.S. and foreign securities and commodities markets,
meets the diverse financial needs of individuals, institutions and governments
around the world. Lehman Brothers is a wholly owned subsidiary of Holdings.
Lehman Brothers is paid an annual service fee with respect to Class A, Class B
and Class C shares of the Fund at the rate of .25% of the value of the average
daily net assets of the respective Class. Lehman Brothers is also paid an
annual distribution fee with respect to Class B and Class C shares at the rate
of .75% of the value of the average daily net assets attributable to those
shares. These fees are authorized pursuant to a services and distribution plan
(the "Plan") adopted by the Company with respect to the Fund's Class A, Class B
and Class C shares pursuant to Rule 12b-1 under the 1940 Act. The service fees
are used by Lehman Brothers to pay its Investment Representatives or
Introducing Brokers for servicing shareholder accounts and the distribution
fees are paid to Lehman Brothers to cover expenses primarily intended to result
in the sale of Class B or Class C shares, as the case may be. These expenses
include: costs of printing and distributing the Fund's Prospectus, Statement of
Additional Information and sales literature to prospective investors; an
allocation of overhead and other Lehman Brothers' branch office distribution-
related expenses; payments to and expenses of Lehman Brothers Financial
Consultants and other persons who provide support services in connection with
the distribution of the shares; and accruals for interest on the amount of the
foregoing expenses that exceed the amount of the distribution fee and the CDSC
received

-26-
<PAGE> 34

by the Distributor. Under the Plan, Lehman Brothers may retain all or a portion
of the distribution fee. The payments to Lehman Brothers Investment
Representatives and Introducing Brokers for selling shares of the Fund may
include a commission paid at the time of sale and a continuing fee based upon
the value of the average daily net assets of the Fund's shares sold that remain
invested in the Fund. The service fee is credited at the rate of .25% of the
value of the average daily net assets of the Class A, Class B or Class C shares
that remain invested in the Fund.

The Plan provides that Lehman Brothers may make payments to assist in the
distribution of each Class of the Fund's shares out of the other fees received
by it or its affiliates from the Fund, its past profits or any other sources
available to it. From time to time, Lehman Brothers may waive receipt of fees
under the Plan while retaining the ability to be paid under the Plan
thereafter. The fees payable to Lehman Brothers under the Plan and payments by
Lehman Brothers to its Investment Representatives or Introducing Brokers are
payable without regard to actual expenses incurred.

EXPENSES

The Fund's expenses include taxes, interest, fees and salaries of the directors
and officers who are not directors, officers or employees of the Fund's service
contractors, SEC fees, state securities qualification fees, costs of preparing
and printing prospectuses for regulatory purposes and for distribution to
shareholders, advisory and administration fees, charges of the custodian,
transfer agent and dividend disbursing agent, certain insurance premiums,
outside auditing and legal expenses, costs of shareholder reports and
shareholder meetings and any extraordinary expenses. The Fund also pays for
brokerage fees and commissions (if any) in connection with the purchase and
sale of portfolio securities. Fund expenses are allocated to a particular Class
based on either expenses identifiable to the Class or relative net assets of
the Class and other classes of Fund shares. LBGAM and TSSG have agreed to
reimburse the Fund to the extent required by applicable state law for certain
expenses that are described in the Statement of Additional Information relating
to the Fund. In addition, in order to maintain a competitive expense ratio
LBGAM and TSSG have agreed to reimburse the Fund for certain operating expenses
for a period of at least one year from the date of this Prospectus. See
"Background and Expense Information."

BANKING LAWS

Banking laws and regulations currently prohibit a bank holding company
registered under the federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, or controlling a
registered, open-end investment company engaged continuously in the issuance of
its shares and prohibit banks generally from issuing, underwriting, selling or
distributing securities such as Fund shares. Such banking laws and regulations
do not prohibit such a holding company or affiliate generally from providing
services to their customers who invest in such a company. Some Introducing
Brokers may be subject to such banking laws and regulations. In addition, state
securities laws on this issue may differ from the interpretation of federal law
expressed herein and banks and financial institutions may be required to
register as dealers pursuant to state law.

Should future legislative, judicial or administrative action prohibit or
restrict the activities of bank-related Introducing Brokers, the Fund might be
required to alter or discontinue its arrangements with such Introducing Brokers
and change its method of operations with respect to certain other Classes of
its shares. It is not anticipated, however, that any change in the Fund's
method of operations would affect its net asset value per share or result in a
financial loss to any customer.

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<PAGE> 35

DIVIDENDS

The Fund's policy is to distribute its investment income and net realized
capital gains. Dividends will be declared and paid annually. Unless a
shareholder instructs that dividends and capital gains distributions on shares
of any Class be paid in cash and credited to the shareholder's account at
Lehman Brothers, dividends and capital gains distributions will be reinvested
automatically in additional shares of that Class at net asset value, subject to
no sales charge or CDSC.

Dividends are determined in the same manner and are paid in the same amount for
each Fund share, except that certain expenses borne differ by Class. As a
result, the per share dividends on Class A shares will be higher than those on
Class B and Class C shares and lower than those on Class W shares. In addition,
the per share dividends on Class A and Class B shares will be lower than those
on other classes of the Fund's shares which are offered directly to
institutional investors. See "Additional Information."

Each shareholder or its authorized representative will receive an annual
statement designating the amount of any dividends and distributions made during
each year and their federal tax qualification.

TAXES

The Fund intends to qualify and elect to be treated as a regulated investment
company for federal income tax purposes under Subchapter M of the Code. If so
qualified, the Fund will not be subject to federal income taxes on its
investment company taxable income (as that term is defined in the Code,
determined without regard to the deduction for dividends paid) and net capital
gain (the excess of the Fund's net long-term capital gain over its net
short-term capital loss), if any, that it distributes to its shareholders in
each taxable year. To qualify as a regulated investment company, the Fund must,
among other things, distribute to its shareholders at least 90% of its net
investment company taxable income for such taxable year. However, the Fund
would be subject to corporate income tax at a rate of 35% on any undistributed
income or net capital gain. The Fund must also derive less than 30% of its
gross income in each taxable year from the sale or other disposition of certain
securities held for less than three months (the "30% limitation"). If in any
year the Fund should fail to qualify as a regulated investment company, the
Fund would be subject to federal income tax in the same manner as an ordinary
corporation, and distributions to shareholders would be taxable to such holders
as ordinary income to the extent of the earnings and profits of the Fund.
Distributions in excess of earnings and profits will be treated as a tax-free
return of capital, to the extent of a holder's basis in its shares, and any
excess, as a long- or short-term capital gain.

The Fund intends to distribute substantially all of its investment company
taxable income each year. Such distributions, whether paid in cash or
reinvested in additional shares, of net investment income will be taxable as
ordinary income. Federal income taxes for distributions to an IRA or a
qualified retirement plan are deferred under the Code. A portion of such
dividends may qualify for the dividends-received deduction generally available
for corporate shareholders under the Code. Distributions to shareholders of net
capital gain, whether paid in cash or reinvested in additional shares, that are
designated by the Fund as "capital gains dividends" will be taxable as
long-term capital gains, whether paid in cash or additional shares, regardless
of how long the shares have been held by such shareholders. Shareholders
receiving distributions from the Fund in the form of additional shares will be
treated for federal income tax purposes as receiving a distribution in an
amount equal to the fair market value of the additional shares on the date of
such a distribution.

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<PAGE> 36

shareholder sells or otherwise disposes of a share of the Fund before holding
it for more than six months, any loss on the sale or other disposition of such
share shall be treated as a long-term capital loss to the extent of any capital
gain dividends received by the shareholder with respect to such share. A loss
realized on a sale or exchange of shares may be disallowed if other shares are
acquired within a 61-day period beginning 30 days before and ending 30 days
after the date that the shares are disposed of.

Dividends and distributions by the Fund are generally taxable to the
shareholders at the time the dividend or distribution is made. Any dividend
declared by the Fund in October, November or December of any calendar year,
however, which is payable to shareholders of record on a specified date in such
a month and not paid on or before December 31 of such year will be treated as
received by the Shareholders as of December 31 of such year, provided that the
dividend is paid during January of the following year.

The Fund may engage in hedging involving forward contracts, options and futures
contracts. See "Investment Objective and Policies - Other Investments and
Investment Practices - Hedging and Derivatives." Such transactions will be
subject to special provisions of the Code that, among other things, may affect
the character of gains and losses realized by the Fund (that is, may affect
whether gains or losses are ordinary or capital), accelerate recognition of
income to the Fund and defer recognition of certain of the Fund's losses. These
rules could therefore affect the character, amount and timing of distributions
to shareholders. In addition, these provisions (1) will require the Fund to
"mark-to-market" certain types of positions in its portfolio (that is, treat
them as if they were closed out) and (2) may cause the Fund to recognize income
without receiving cash with which to pay dividends or make distributions in
amounts necessary to satisfy the distribution requirements for avoiding income
and excise taxes. The extent to which the Fund may be able to use such hedging
techniques and continue to qualify as a regulated investment company may be
limited by the 30% limitation discussed above. The Fund intends to monitor its
transactions, will make the appropriate tax elections and will make the
appropriate entries in its books and records when it acquires any forward
contracts, option, futures contract, or hedged investment in order to mitigate
the effect of these rules and prevent disqualification of the Fund as a
regulated investment company.

The Fund may be required to withhold federal income tax at a rate of 31%
("backup withholding") from dividends and redemption proceeds paid to
non-corporate shareholders. This tax may be withheld from dividends if (i) the
shareholder fails to furnish the Fund with the shareholder's correct taxpayer
identification number, (ii) the Internal Revenue Service ("IRS") notifies the
Fund that the shareholder has failed to report properly certain interest and
dividend income to the IRS and to respond to notices to that effect, or (iii)
when required to do so, the shareholder fails to certify that he or she is not
subject to backup withholding.

As noted above, shareholders, out of their own assets, will pay a WRAP advisory
fee. For most shareholders who are individuals, this fee will be treated as a
"miscellaneous itemized deduction" for federal income tax purposes. Under
current federal income tax law, an individual's miscellaneous itemized
deductions for any taxable year shall be allowed as a deduction only to the
extent that the aggregate of these deductions exceeds 2% of adjusted gross
income. Such deductions are also subject tot he general limitation on itemized
deductions for individuals having, in 1994, adjusted gross income in excess of
$111,800 ($55,900 for married individuals filing separately).

-29-
<PAGE> 37

is provided under applicable treaty law or the income is "effectively
connected" with a U.S. trade or business. Generally, subject to certain
exceptions, capital gain dividends paid to non-resident shareholders or foreign
entities will not be subject to U.S. tax. Non-resident shareholders are urged
to consult their own tax advisers concerning the applicability of the U.S.
withholding tax.

_________________________

The foregoing discussion is only a brief summary of the important federal tax
considerations generally affecting the Fund and its shareholders. As noted
above, IRAs receive special tax treatment. No attempt is made to present a
detailed explanation of the federal, state or local income tax treatment of the
Fund or its shareholders, and this discussion is not intended as a substitute
for careful tax planning. Accordingly, potential investors in the Fund should
consult their tax advisers with specific reference to their own tax situation.

THE FUND'S PERFORMANCE

From time to time, the "total return" for shares may be quoted in
advertisements or reports to shareholders. Total return is computed separately
for each Class of shares of the Fund. Total return figures show the average
percentage change in the value of an investment in the Fund from the beginning
date of the measuring period to the end of the measuring period. These figures
reflect changes in the price of the shares and assume that any income dividends
and/or capital gains distributions made by the Fund during the period were
reinvested in shares of the same class. Total return figures for Class A shares
include the maximum initial 4.75% sales charge, for Class B shares include any
applicable CDSC, and for Class W shares include the maximum fee for
participation in WRAP during the measuring period. These figures also take into
account the service and distribution fees, if any, payable with respect to each
Class of the Fund's shares.

Total return figures will be given for the recent one-, five- and ten-year
periods, or the life of the relevant Class of the Fund to the extent it has not
been in existence for any such periods, and may be given for other periods as
well, such as on a year-by-year basis. When considering average annual total
return figures for periods longer than one year, it is important to note that
the total return for any one year in the period might have been greater or less
than the average for the entire period. "Aggregate total return" figures may be
used for various periods, representing the cumulative change in value of an
investment in Fund shares for the specific period (again reflecting changes in
share prices and assuming reinvestment of dividends and distributions).
Aggregate total return may be calculated either with or without the effect of
the maximum 4.75% sales charge for the Class A shares, any applicable CDSC for
Class B shares or the maximum fee for participation in WRAP during the period
for Class W shares, and may be shown by means of schedules, charts or graphs
and may indicate subtotals of the various components of total return (that is,
change in the value of initial investment, income dividends and capital gains
distributions). Because of the differences in sales charges, distribution fees
and certain other expenses, the performance for each of the Classes will
differ.

In reports or other communications to shareholders or in advertising materials,
performance of Fund shares may be compared with that of other mutual funds or
classes of shares of other mutual funds, as listed in the rankings prepared by
Lipper Analytical Services, Inc. or similar independent services that monitor
the performance of mutual funds, or other industry or financial publications
such as Barron's, Business Week, CDA Investment Technologies, Inc., Changing
Times, Forbes, Fortune, Institutional Investor, Investors Daily, Money,
Morningstar Mutual Fund Values, The New York Times, USA Today and The Wall
Street Journal. Performance figures are based on historical earnings and are
not intended to indicate future performance. The Statement of Additional
Information contains a further description of the methods used

-30-
<PAGE> 38

to determine performance. Investors may call 800-_________________ or contact
their Lehman Brothers Investment Representatives to obtain current performance
figures.

ADDITIONAL INFORMATION

The Company was incorporated under the laws of the State of Maryland on May 5,
1993. The authorized capital stock of the Company consists of 10,000,000,000
shares having a par value of $.001 per share. The Company's Charter currently
authorizes the issuance of several series of shares, corresponding to shares of
the Fund and other investment portfolios of the Company. The Company's Board of
Directors may, in the future, authorize the issuance of additional series of
capital stock representing shares of additional investment portfolios or
additional classes of shares of the Fund or the Company's other investment
portfolios.

All shares of the Company have equal voting rights and will be voted in the
aggregate, and not by series or class, except where voting by series or class
is required by law or where the matter involved affects one series or class.
Under the corporate law of Maryland, the Company's state of incorporation, and
the Company's By-Laws (except as required under the 1940 Act), the Company is
not required and does not currently intend to hold annual meetings of
shareholders for the election of directors. Shareholders, however, do have the
right to call for a meeting to consider the removal of one or more of the
Company's directors if such a request is made, in writing, by the holders of at
least 10% of the Company's outstanding voting securities.

All shares of the Company, when issued, will be fully paid and nonassessable.

Boston Safe, an indirect wholly owned subsidiary of Mellon, is located at One
Boston Place, Boston, Massachusetts 02108, and serves as custodian of the
Fund's investments.

The Shareholder Services Group, Inc., a subsidiary of First Data Corporation,
is located at One Exchange Place, Boston, Massachusetts 02109, and serves as
the Fund's transfer agent.

-31-
<PAGE> 39

document to each shareholder to comply with legal requirements. Any shareholder
who does not want this consolidation to apply to his or her account should
contact his or her Lehman Brothers Investment Representative or the Fund's
transfer agent. Shareholders may direct inquiries regarding the Fund to their
Lehman Brothers Investment Representatives.

-32-
<PAGE> 40

LEHMAN BROTHERS LARGE CAPITALIZATION U.S. EQUITY FUND

Prospectus

________ __, 1994

No person has been authorized to give any information or to make any
representations not contained in this Prospectus, or in the Statement of
Additional Information incorporated herein by reference, in connection with the
offering made by this Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Fund
or its distributor. This Prospectus does not constitute an offering by the Fund
or by the distributor in any jurisdiction in which such offering may not
lawfully be made.

<TABLE>
TABLE OF CONTENTS

<S> <C>
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 2

Background and Expense Information . . . . . . . . . . . . . . . . . . . . . . .. 6

Variable Pricing System . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 7

Investment Objective and Policies . . . . . . . . . . . . . . . . . . . . . . . .. 9

Risk Factors and Special Considerations . . . . . . . . . . . . . . . . . . . . .. 15

Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 16

Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 21

Exchange Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 24

Valuation of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 25

Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 25

Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 28

Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 28

The Fund's Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 30

Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 31
</TABLE>
<PAGE> 41

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.

SUBJECT TO COMPLETION-DATED SEPTEMBER 8, 1994

PROSPECTUS

LEHMAN BROTHERS LARGE CAPITALIZATION U.S. EQUITY FUND

An Investment Portfolio of Lehman Brothers Funds, Inc.

________________, 1994

The shares described in this Prospectus represent interests in a class of
shares ("Premier Shares") of the LEHMAN BROTHERS LARGE CAPITALIZATION U.S.
EQUITY FUND (the "Fund"). The Fund is a diversified portfolio of Lehman
Brothers Funds, Inc. (the "Company"), an open-end management investment
company. Premier Shares may not be purchased by individuals directly, but
institutional investors may purchase shares for accounts maintained by
individuals.

LEHMAN BROTHERS INC. sponsors the Fund and acts as distributor of the Fund's
shares. LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT LIMITED serves as the Fund's
investment adviser.

The address of the Fund is 3 World Financial Center, New York, New York 10285.
Performance and other information regarding the Fund may be obtained by calling
800-_________.

Shares of the Fund are being offered during an initial subscription period
scheduled to end on _______ __, 1994. Subsequent to such date, the Fund will
engage in a continuous offering of its shares. See "Purchase, Redemption and
Exchange of Shares."

This Prospectus briefly sets forth certain information about the Fund that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about the
Fund, contained in a Statement of Additional Information dated ___________ __,
1994, as amended or supplemented from time to time, has been filed with the
Securities and Exchange Commission and is available to investors without charge
by calling 800-_________. The Statement of Additional Information is
incorporated in its entirety by reference into this Prospectus.

SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SUCH SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE CERTAIN INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

<PAGE> 42

PROSPECTUS SUMMARY

BENEFITS TO INVESTORS

The Fund offers investors several important benefits:

o a professionally managed portfolio of equity securities issued
by companies with large market capitalizations that have the
potential for long-term capital appreciation.

o investment liquidity through convenient purchase and
redemption procedures.

o a convenient way to invest without the administrative and
recordkeeping burdens normally associated with the direct
ownership of securities.

o automatic dividend reinvestment feature, plus exchange
privilege with the shares of certain other funds in the Lehman
Brothers Group of Funds.

INVESTMENT OBJECTIVE

PURCHASE OF SHARES

During an initial subscription period, Premier Shares of the Fund will be
offered at $10.00 per share. Lehman Brothers Inc. ("Lehman Brothers"), the
Fund's distributor, will solicit subscriptions for shares during a period of
time scheduled to end on _________ __, 1994, subject to extension as agreed by
the Fund and Lehman Brothers. On the fifth business day following termination
of the subscription period, subscriptions for shares will be payable and shares
will be issued. Following termination of the subscription period, the Fund will
begin a continuous offering of shares. During the continuous offering, Premier
Shares of the Fund may be purchased at the next determined net asset value per
share. Purchase orders for Premier Shares must be transmitted to Lehman
Brothers by telephone and payments must be received by the Fund's custodian in
immediately available federal funds. See "Purchase, Redemption and Exchange of
Shares."

INVESTMENT MINIMUMS

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<PAGE> 43

customers. To reach the minimum aggregate initial investment, purchases of
shares may be aggregated over a period of six months. There is no minimum
subsequent investment.

REDEMPTION OF SHARES

The Fund redeems shares at their next determined net asset value, in accordance
with the procedures described herein. To allow the Fund's investment adviser to
manage the Fund effectively, investors are strongly urged to initiate all
investments or redemptions of Fund shares as early in the day as possible and
to notify Lehman Brothers at least one day in advance of transactions in excess
of $5 million.

MANAGEMENT OF THE FUND

EXCHANGE PRIVILEGE

Premier Shares of the Fund may be exchanged for Premier Shares of certain other
funds in the Lehman Brothers Group of Funds. See "Exchange Privilege."

DIVIDENDS AND DISTRIBUTIONS

RISK FACTORS AND SPECIAL CONSIDERATIONS

There is no assurance that the Fund will achieve its investment objective. The
value of the Fund's investments, and thus the net asset value of the Fund's
shares, can be expected to fluctuate in response to changes in market and
economic conditions, as well as the financial condition and prospects of
issuers in which the Fund invests. In addition, the Fund may invest up to 15%
of its total assets in illiquid securities, invest up to 10% of its total
assets in American Depositary Receipts ("ADRs"), and engage in hedging and
derivatives transactions and certain other investment practices, which may
entail certain risks. For a more complete discussion of the risks associated
with an investment in the Fund, see "Investment Objective and Policies - Other
Investments and Investment Practices" and "Risk Factors and Special
Considerations."

-3-
<PAGE> 44

BACKGROUND AND EXPENSE INFORMATION

The Fund offers multiple classes of shares, only one of which, Premier Shares,
is offered by this Prospectus. Each share of the Fund accrues income in the
same manner, but certain expenses differ based upon the class. See "Additional
Information." The following Expense Summary lists the costs and expenses that
a holder of Premier Shares can expect to incur as an investor in the Fund,
based upon estimated expenses and average net assets for the current fiscal
year. Certain institutions also may charge their clients fees in connection
with investments in Premier Shares, which fees are not reflected in the table
below.

<TABLE>
EXPENSE SUMMARY

<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Advisory Fees . . . . . . . . . . . . . . . . . . . . . . . . . ____%
Rule 12b-1 Fees . . . . . . . . . . . . . . . . . . . . . . . none
Other Expenses - including Administration Fees* . . . . . . . . ____%

Total Fund Operating Expenses . . . . . . . . . . . . . . . . . ____%
<FN>
- -----------------
* The amount set forth for "Other Expenses" is based on estimates for the current fiscal year.
</TABLE>

<TABLE>
EXAMPLE

You would pay the following expenses on a $1,000 investment, assuming a 5% annual return:

<CAPTION>
1 year 3 years
----------------- -----------------
<S> <C>
$___ $___
</TABLE>

-4-
<PAGE> 45

INVESTMENT OBJECTIVE AND POLICIES

GENERAL

TEMPORARY INVESTMENTS

The short-term instruments in which the Fund may invest include obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
("U.S. Government Securities"); obligations issued or guaranteed by other
governments or one of their agencies or instrumentalities; obligations issued
or guaranteed by international organizations designed or supported by multiple
foreign government entities to promote economic reconstruction or development;
bank obligations, such as certificates of deposit, time deposits and bankers'
acceptances; corporate debt obligations, including commercial paper; and
repurchase agreements. To be eligible for investment under the circumstances
described above, such instruments must be denominated in U.S. dollars and must
(other than U.S. Government Securities) be issued by an issuer having a
short-term debt rating of A-1 or better by Standard & Poor's Ratings Group, a
rating of Prime-1 by Moody's Investors Service, Inc., a comparable rating from
another nationally recognized rating service or, if unrated, deemed to be of
equivalent quality by LBGAM.

-5-
<PAGE> 46

OTHER INVESTMENTS AND INVESTMENT PRACTICES

-6-
<PAGE> 47

("repurchase agreements"). The Fund would enter into repurchase agreements to
generate additional income. The seller under a repurchase agreement will be
required to maintain the value of the securities subject to the agreement at
not less than the repurchase price. Default by the seller would, however,
expose the Fund to possible loss because of adverse market action or delay in
connection with the disposition of the underlying obligations.

-7-
<PAGE> 48

-8-
<PAGE> 49

Short Sales. The Fund may make short sales of securities "against the box." A
short sale is a transaction in which the Fund sells a security it does not own
in anticipation that the market price of that security will decline. In a short
sale "against the box," at the time of sale, the Fund owns or has the immediate
and unconditional right to acquire at no additional cost the identical
security. Short sales against the box are a form of hedging to offset potential
declines in long positions in similar securities.

Hedging and Derivatives. The Fund is authorized to use various hedging and
investment strategies described below to hedge market risks (such as broad or
specific market movements) or to seek to increase the Fund's income or gain.
Over time, techniques and instruments may change as new instruments and
strategies are developed or regulatory changes occur. Limitations on the
portion of the Fund's assets that may be used in connection with the investment
strategies described below appear in the Statement of Additional Information.

-9-
<PAGE> 50

The degree of the Fund's use of Derivatives may be limited by certain
provisions of the Internal Revenue Code of 1986, as amended (the "Code"). See
"Taxes."

INVESTMENT LIMITATIONS

-10-
<PAGE> 51

and substantially the same investment restrictions as those applicable to the
Fund. In such event, the Fund's investment advisory agreement would be
terminated and the administrative services fees paid by the Fund would be
reduced. Such investment would be made only if the Company's Board of Directors
believes that the aggregate per share expenses of each class of the Fund and
such other investment company will be less than or approximately equal to the
expenses which each class of the Fund would incur if the Fund were to continue
to retain the services of an investment adviser for the Fund and the assets of
the Fund were to continue to be invested directly in portfolio securities.

RISK FACTORS AND SPECIAL CONSIDERATIONS

-11-
<PAGE> 52

PURCHASE, REDEMPTION AND EXCHANGE OF SHARES

PURCHASES IN THE INITIAL OFFERING

Shares of the Fund are being offered through Lehman Brothers, the Fund's
distributor, during a period scheduled to end on __________ __, 1994, subject
to extension by agreement between the Fund and Lehman Brothers (the
"Subscription Period"). The price for Premier Shares of the Fund during the
Subscription Period will be $10.00 per share. On the fifth business day
following termination of the Subscription Period (the "Closing Date"),
subscriptions for shares will be payable and shares will be issued. Following
termination of the Subscription Period, the Fund will begin a continuous
offering of shares. Investors will not be required to pay for shares offered
during the Subscription Period until the Closing Date, and they may revoke
subscriptions until the termination of the Subscription Period. Purchase orders
for Premier Shares placed during the Subscription Period must be transmitted to
Lehman Brothers by telephone before 4:00 p.m. on the last day of the
Subscription Period, and payment in respect of such orders must be received in
federal funds immediately available to the Fund's custodian before 3:00 p.m.,
Eastern time on the Closing Date, in each case in accordance with the
procedures described below under "Purchases in the Continuous Offering." The
Fund and Lehman Brothers reserve the right to withdraw, cancel or modify the
initial offering of shares without notice and to reject any purchase order.

PURCHASES IN THE CONTINUOUS OFFERING

Following termination of the Subscription Period, the Fund will begin a
continuous offering of its shares. During the continuous offering, Premier
Shares of the Fund may be purchased at the net asset value next determined
after the purchase order is received by Lehman Brothers. See "Valuation of
Shares."

Purchase orders for shares are accepted only on days on which Lehman Brothers
is open for business and must be transmitted to Lehman Brothers by telephone at
1-800-_________ before 4:00 p.m., Eastern time. Payment in federal funds
immediately available to the Fund's custodian, Boston Safe Deposit and Trust
Company ("Boston Safe"), generally must be received before 3:00 p.m., Eastern
time on the fifth business day following the order. The Fund reserves the right
to reject any purchase order and to suspend the offering of shares for a period
of time. (Payment for orders which are not received or accepted by Lehman
Brothers will be returned after prompt inquiry to the sending institution.) Any
person entitled to receive compensation for selling or servicing shares of the
Fund may receive different compensation for selling or servicing one class of
shares over another class.

ADDITIONAL PURCHASE INFORMATION

The minimum aggregate initial investment by an institution in the investment
portfolios that comprise the Lehman Brothers Group of Funds is $1 million (with
not less than $25,000 invested in any one investment portfolio); however,
broker-dealers and other institutional investors may set a higher minimum for
their customers. To reach the minimum aggregate initial investment, purchases
of shares may be aggregated over a period of six months. There is no minimum
subsequent investment.

-12-
<PAGE> 53

or pass through subaccounting fees as part of or in addition to normal trust or
agency account fees. They may also charge fees for other services provided
which may be related to the ownership of Fund shares. This Prospectus should,
therefore, be read together with any agreement between the customer and the
institution with regard to the services provided, the fees charged for those
services and any restrictions and limitations imposed.

REDEMPTION OF SHARES

Redemption orders must be transmitted to Lehman Brothers by telephone in the
manner described herein, on any day the Fund calculates its net asset value.
Premier Shares are redeemed at the net asset value per share next determined
after Lehman Brothers' receipt of the redemption order. The proceeds paid to a
shareholder upon redemption may be more or less than the amount invested
depending upon a share's net asset value at the time of redemption.

Subject to the foregoing, payment for redeemed Premier Shares for which a
redemption order is received by Lehman Brothers before 4:00 p.m., Eastern time,
on a day that the Fund calculates its net asset value is normally made in
federal funds wired to the redeeming shareholder within seven days after
receipt of the redemption order.

The Fund shall have the right to redeem involuntarily Premier Shares in any
account at their net asset value if the value of the account is less than
$10,000 after 60 days' prior written notice to the shareholder. Any such
redemption shall be effected at the net asset value per share next determined
after the redemption order is entered. If during the 60 day period the
shareholder increases the value of its account to $10,000 or more, no such
redemption shall take place. In addition, the Fund may redeem shares
involuntarily or suspend the right of redemption as permitted under the 1940
Act, or under certain special circumstances described in the Statement of
Additional Information under "Additional Purchase and Redemption Information."

The ability to give telephone instructions for the redemption (and purchase or
exchange) of Premier Shares is automatically established on a shareholder's
account. However, the Fund reserves the right to refuse a redemption order
transmitted by telephone if it is believed advisable to do so. Procedures for
redeeming Fund shares by telephone may be modified or terminated at any time by
the Fund or Lehman Brothers. In addition, neither the Fund, Lehman Brothers nor
the transfer agent will be responsible for the authenticity of telephone
instructions for the purchase, redemption or exchange of shares where the
instructions for the purchase, redemption or exchange of shares are reasonably
believed to be genuine. Accordingly, the investor will bear the risk of loss.
The Fund will attempt to confirm that telephone instructions are genuine and
will use such procedures as are considered reasonable, including the recording
of telephone instructions. To the extent that the Fund fails to use reasonable
procedures to verify the genuineness of telephone instructions, it or its
service providers may be liable for such instructions that prove to be
fraudulent or unauthorized.

To allow LBGAM to manage the Fund effectively, investors are strongly urged to
initiate all investments or redemptions of Fund shares as early in the day as
possible and to notify Lehman Brothers at least one day in advance of
transactions in excess of $5 million.

-13-
<PAGE> 54

EXCHANGE PRIVILEGE

Premier Shares of the Fund may be exchanged without charge for Premier Shares
of certain other funds in the Lehman Brothers Group of Funds which have
different investment objectives that may be of interest to shareholders. To use
the exchange privilege, exchange instructions must be given to Lehman Brothers
by telephone. See "Redemption of Shares" above. In exchanging shares, a
shareholder must meet the minimum initial investment requirement of the other
fund and the shares involved must be legally available for sale in the state
where the shareholder resides. Orders for exchanges will only be accepted on
days on which both funds determine their net asset value. To obtain information
regarding the availability of funds into which Premier Shares of the Fund may
be exchanged, investors should contact Lehman Brothers at 1-800-_____________.

The exchange of shares of one fund for shares of another fund is treated for
federal income tax purposes as a sale of the shares given in exchange by the
shareholder. Therefore, an exchanging shareholder may realize a taxable gain or
loss in connection with an exchange. Shareholders exercising the exchange
privilege must obtain and should review carefully a copy of the prospectus of
the fund into which the exchange is being made. Prospectuses may be obtained
from Lehman Brothers by calling 1-800-368-5556. Lehman Brothers reserves the
right to reject any exchange request. The exchange privilege may be modified or
terminated at any time after notice to shareholders.

OTHER MATTERS

Premier Shares of the Fund are sold and redeemed without charge by the Fund.
Institutional investors purchasing or holding Fund shares for their customer
accounts may charge customers fees for cash management and other services
provided in connection with their accounts. A customer should, therefore,
consider the terms of its account with an institution before purchasing Fund
shares. An institution purchasing or redeeming Fund shares on behalf of its
customers is responsible for transmitting orders to Lehman Brothers in
accordance with its customer agreements.

VALUATION OF SHARES

The net asset value per share of each class is calculated on each day, Monday
through Friday, except on days on which the New York Stock Exchange is closed.
Currently, the New York Stock Exchange is closed on New Year's Day, Presidents'
Day, Good Friday, Memorial Day (observed), Independence Day (observed), Labor
Day, Thanksgiving Day and Christmas Day.

-14-
<PAGE> 55

MANAGEMENT OF THE FUND

INVESTMENT ADVISER - LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT LIMITED

Mr. Robert Pennells, Managing Director - Equities of LBGAM, has primary
responsibility for the day-to-day management of the Fund's investment
portfolio. Mr. Pennells, who began his investment career in 1970, is the Head
of Global Equities for LBGAM and has primary responsibility for all of LBGAM's
equity portfolios and the formulation of LBGAM's global strategy. Prior to
joining LBGAM in 1992, Mr. Pennells was Head of International Equities at Hill
Samuel Investment Management, where he was also a member of the Board of
Directors' Management Committee. Mr. Pennells joined Hill Samuel Asset
Management in 1983.

LBGAM is located at Two Broadgate, London EC2M 7HA, England. LBGAM is a wholly
owned subsidiary of Lehman Brothers Holdings, Inc. ("Holdings").

ADMINISTRATOR - THE SHAREHOLDER SERVICES GROUP, INC.

-15-
<PAGE> 56

This duty to recommend expires on May 21, 2000. In addition, under the terms of
the Stock Purchase Agreement dated September 14, 1992 between Mellon and Lehman
Brothers (then named Shearson Lehman Brothers Inc.), Lehman Brothers agreed to
recommend Boston Safe, an indirect wholly owned subsidiary of Mellon, as
custodian of mutual funds affiliated with Lehman Brothers until May 21, 2000,
to the extent consistent with its fiduciary duties and other applicable law.

DISTRIBUTOR - LEHMAN BROTHERS

The Company has adopted a services and distribution plan (the "Plan") with
respect to Premier Shares of the Fund pursuant to Rule 12b-1 under the 1940
Act. The Plan does not provide for the payment by the Fund of any Rule 12b-1
fees for distribution or shareholder services for Premier Shares but provides
that Lehman Brothers may make payments to assist in the distribution of Premier
Shares out of the other fees received by it or its affiliates from the Fund,
its past profits or any other sources available to it.

EXPENSES

The Fund's expenses include taxes, interest, fees and salaries of the directors
and officers who are not directors, officers or employees of the Fund's service
contractors, SEC fees, state securities qualification fees, costs of preparing
and printing prospectuses for regulatory purposes and for distribution to
shareholders, advisory and administration fees, charges of the custodian,
transfer agent and dividend disbursing agent, certain insurance premiums,
outside auditing and legal expenses, costs of shareholder reports and
shareholder meetings and any extraordinary expenses. The Fund also pays for
brokerage fees and commissions (if any) in connection with the purchase and
sale of portfolio securities. Fund expenses are allocated to Premier Shares
based on either expenses identifiable to the Premier Shares or relative net
assets of the Premier Shares and other classes of Fund shares. LBGAM and TSSG
have agreed to reimburse the Fund to the extent required by applicable state
law for certain expenses that are described in the Statement of Additional
Information relating to the Fund. In addition, in order to maintain a
competitive expense ratio LBGAM and TSSG have agreed to reimburse the Fund for
certain operating expenses for a period of at least one year from the date of
this Prospectus. See "Background and Expense Information."

DIVIDENDS

The Fund's policy is to distribute its investment income and net realized
capital gains. Dividends will be declared and paid annually.

Dividends are determined in the same manner and are paid in the same amount for
each Fund share, except that certain expenses borne differ by class. As a
result, the per share dividends on Premier Shares will be higher than those on
Select Shares and certain other classes of the Fund's shares.

-16-
<PAGE> 57

Institutional holders of Premier Shares may elect to have their dividends
reinvested in additional full and fractional Premier Shares at the net asset
value of such shares on the payment date. Reinvested dividends receive the same
tax treatment as dividends paid in cash. Such election, or any revocation
thereof, must be made in writing to TSSG at P.O. Box ____, Providence, Rhode
Island 02940, and will become effective after its receipt by TSSG, with respect
to dividends paid.

Each shareholder or its authorized representative will receive an annual
statement designating the amount of any dividends and distributions made
during each year and their federal tax qualification.

TAXES

The Fund intends to distribute substantially all of its investment company
taxable income each year. Such distributions, whether paid in cash or
reinvested in additional shares, of net investment income will be taxable as
ordinary income. Federal income taxes for distributions to an Individual
Retirement Account ("IRA") or a qualified retirement plan are deferred under
the Code. A portion of such dividends may qualify for the dividends-received
deduction generally available for corporate shareholders under the Code.
Distributions to shareholders of net capital gain, whether paid in cash or
reinvested in additional shares, that are designated by the Fund as "capital
gains dividends" will be taxable as long-term capital gains, whether paid in
cash or additional shares, regardless of how long the shares have been held by
such shareholders. Shareholders receiving distributions from the Fund in the
form of additional shares will be treated for federal income tax purposes as
receiving a distribution in an amount equal to the fair market value of the
additional shares on the date of such a distribution.

Gain or loss, if any, recognized on the sale or other disposition of shares of
the Fund will be taxed as capital gain or loss if the shares are capital assets
in the shareholder's hands. Generally, a shareholder's gain or loss will be a
long-term gain or loss if the shares have been held for more than one year. If
a shareholder sells or otherwise disposes of a share of the Fund before holding
it for more than six months, any loss on the sale or other disposition of such
share shall be treated as a long-term capital loss to the extent of any capital
gain dividends received by the shareholder with respect to such share. A loss
realized

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<PAGE> 58

on a sale or exchange of shares may be disallowed if other shares are acquired
within a 61-day period beginning 30 days before and ending 30 days after the
date that the shares are disposed of.

Ordinary income dividends paid by the Fund to shareholders who are non-resident
aliens or foreign entities will be subject to a 30% withholding tax unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law or the income is "effectively connected" with a U.S.
trade or business. Generally, subject to certain exceptions, capital gain
dividends paid to non-resident shareholders or foreign entities will not be
subject to U.S. tax. Non-resident shareholders are urged to consult their own
tax advisers concerning the applicability of the U.S. withholding tax.

_________________________

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<PAGE> 59

THE FUND'S PERFORMANCE

From time to time, the "total return" for shares may be quoted in
advertisements or reports to shareholders. Total return is computed separately
for each class of shares. Total return figures show the average percentage
change in the value of an investment in the Fund from the beginning date of the
measuring period to the end of the measuring period. These figures reflect
changes in the price of the shares and assume that any income dividends and/or
capital gains distributions made by the Fund during the period were reinvested
in shares of the Fund. Total return figures include any applicable sales
charges, service fees and distribution fees payable with respect to a class.

Total return figures will be given for the recent one-, five- and ten-year
periods, or the life of the relevant class of the Fund to the extent it has not
been in existence for any such periods, and may be given for other periods as
well, such as on a year-by-year basis. When considering average annual total
return figures for periods longer than one year, it is important to note that
the total return for any one year in the period might have been greater or less
than the average for the entire period. "Aggregate total return" figures may be
used for various periods, representing the cumulative change in value of an
investment in Fund shares for the specific period (again reflecting changes in
share prices and assuming reinvestment of dividends and distributions).
Aggregate total return may be shown by means of schedules, charts or graphs and
may indicate subtotals of the various components of total return (that is,
change in the value of initial investment, income dividends and capital gains
distributions).

ADDITIONAL INFORMATION

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<PAGE> 60

investment portfolios or additional classes of shares of the Fund or the
Company's other investment portfolios.

The Company has received an order from the SEC permitting it, subject to
certain terms and conditions, to establish multiple classes of shares within
each series. The Fund currently offers six classes of shares: "Premier Shares,"
"Select Shares," and Class A, B, C and W Shares. This Prospectus relates only
to the Premier Shares. Shares of each class represent interests in the Fund in
proportion to each share's net asset value. Select Shares are sold to
institutional investors and bear Rule 12b-1 fees payable at an annual rate not
exceeding .25% of the average daily net asset value of the shares held by such
investors in return for certain administrative and shareholder services
provided by Lehman Brothers or those institutional investors. Class A, B and C
shares are offered directly to individual investors. Class A shares bear a
sales charge at the time of purchase while Class B shares are subject to a
contingent deferred sales charge at the time of redemption. Class A, B and C
shares are sold under a plan adopted pursuant to Rule 12b-1 and, in addition to
the Fund's other operating expenses, bear aggregate expenses pursuant to such
Plan at the annual rates not exceeding .25%, 1.00% and 1.00% of the respective
values of the net assets attributable to such classes. Class W shares bear no
sales charges, distribution or shareholder service fees and are offered only to
participants in the Lehman Brothers WRAP Program and similar programs.
Participants in the Lehman Brothers WRAP Program and similar programs pay fees
based upon the aggregate value of their investments in participating mutual
funds, including the Fund. Certain Fund expenses are allocated separately to
each class of shares based upon expenses identifiable by class.

All shares of the Company, when issued, will be fully paid and nonassessable.

Boston Safe, an indirect wholly owned subsidiary of Mellon, is located at One
Boston Place, Boston, Massachusetts 02108, and serves as custodian of the
Fund's investments.

The Shareholder Services Group, Inc., a subsidiary of First Data Corporation,
is located at One Exchange Place, Boston, Massachusetts 02109, and serves as
the Fund's transfer agent.

-20-
<PAGE> 61

LEHMAN BROTHERS LARGE CAPITALIZATION U.S. EQUITY FUND

Prospectus

________ __, 1994

<TABLE>
TABLE OF CONTENTS

<S> <C>
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Background and Expense Information . . . . . . . . . . . . . . . . . . . . . . . 4

Investment Objective and Policies . . . . . . . . . . . . . . . . . . . . . . . . 5

Risk Factors and Special Considerations . . . . . . . . . . . . . . . . . . . . . 11

Purchase, Redemption and Exchange of Shares . . . . . . . . . . . . . . . . . . . 12

Valuation of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

The Fund's Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>
<PAGE> 62

SUBJECT TO COMPLETION-DATED SEPTEMBER 8, 1994

PROSPECTUS

LEHMAN BROTHERS LARGE CAPITALIZATION U.S. EQUITY FUND

An Investment Portfolio of Lehman Brothers Funds, Inc.

________________, 1994

The shares described in this Prospectus represent interests in a class of
shares ("Select Shares") of the LEHMAN BROTHERS LARGE CAPITALIZATION U.S.
EQUITY FUND (the "Fund"). The Fund is a diversified portfolio of Lehman
Brothers Funds, Inc. (the "Company"), an open-end management investment
company. Select Shares may not be purchased by individuals directly, but
institutional investors may purchase shares for accounts maintained by
individuals.

LEHMAN BROTHERS INC. sponsors the Fund and acts as distributor of the Fund's
shares. LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT LIMITED serves as the Fund's
investment adviser.

The address of the Fund is 3 World Financial Center, New York, New York 10285.
Performance and other information regarding the Fund may be obtained by calling
800-_________.

Shares of the Fund are being offered during an initial subscription period
scheduled to end on _______ __, 1994. Subsequent to such date, the Fund will
engage in a continuous offering of its shares. See "Purchase, Redemption and
Exchange of Shares."

This Prospectus briefly sets forth certain information about the Fund that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about the
Fund, contained in a Statement of Additional Information dated ___________ __,
1994, as amended or supplemented from time to time, has been filed with the
Securities and Exchange Commission and is available to investors without charge
by calling 800-_________. The Statement of Additional Information is
incorporated in its entirety by reference into this Prospectus.

SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SUCH SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE CERTAIN INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

<PAGE> 63
PROSPECTUS SUMMARY

BENEFITS TO INVESTORS

The Fund offers investors several important benefits:

o a professionally managed portfolio of equity securities issued
by companies with large market capitalizations that have the
potential for long-term capital appreciation.

o investment liquidity through convenient purchase and
redemption procedures.

o a convenient way to invest without the administrative and
recordkeeping burdens normally associated with the direct
ownership of securities.

o automatic dividend reinvestment feature, plus exchange
privilege with the shares of certain other funds in the Lehman
Brothers Group of Funds.

INVESTMENT OBJECTIVE

PURCHASE OF SHARES

During an initial subscription period, Select Shares of the Fund will be
offered at $10.00 per share. Lehman Brothers Inc. ("Lehman Brothers"), the
Fund's distributor, will solicit subscriptions for shares during a period of
time scheduled to end on ________ __, 1994, subject to extension as agreed by
the Fund and Lehman Brothers. On the fifth business day following termination
of the subscription period, subscriptions for shares will be payable and shares
will be issued. Following the termination of the subscription period, the Fund
will begin a continuous offering of shares. During the continuous offering,
Select Shares of the Fund may be purchased at the next determined net asset
value per share. Purchase orders for Select Shares must be transmitted to
Lehman Brothers by telephone and payments must be received by the Fund's
custodian in immediately available federal funds. See "Purchase, Redemption and
Exchange of Shares."

INVESTMENT MINIMUMS

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<PAGE> 64
REDEMPTION OF SHARES

MANAGEMENT OF THE FUND

EXCHANGE PRIVILEGE

Select Shares of the Fund may be exchanged for Select Shares of certain other
funds in the Lehman Brothers Group of Funds. See "Exchange Privilege."

DIVIDENDS AND DISTRIBUTIONS

RISK FACTORS AND SPECIAL CONSIDERATIONS

-3-
<PAGE> 65
BACKGROUND AND EXPENSE INFORMATION

The Fund offers multiple classes of shares, only one of which, Select Shares,
is offered by this Prospectus. Each share of the Fund accrues income in the
same manner, but certain expenses differ based upon the class. See "Additional
Information." The following Expense Summary lists the costs and expenses that
a holder of Select Shares can expect to incur as an investor in the Fund, based
upon estimated expenses and average net assets for the current fiscal year.
Certain institutions also may charge their clients fees in connection with
investments in Select Shares, which fees are not reflected in the table below.

<TABLE>
EXPENSE SUMMARY

<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Advisory Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . ____%
Rule 12b-1 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.25%
Other Expenses - including Administration Fees* . . . . . . . . . . . ____%
Total Fund Operating Expenses . . . . . . . . . . . . . . . . . . . . ____%
<FN>
- ---------------
* The amount set forth for "Other Expenses" is based on estimates for the current fiscal year.
</TABLE>

<TABLE>
EXAMPLE

You would pay the following expenses on a $1,000 investment, assuming a 5% annual return:

<CAPTION>
1 year 3 years
------------------ ------------------
<S> <C>
$___ $___
</TABLE>

Long-term holders of mutual fund shares which bear Rule 12b-1 fees, such as the
Select Shares, may pay more than the economic equivalent of the maximum
front-end sales charge permitted by rules of the National Association of
Securities Dealers, Inc.

-4-
<PAGE> 66
INVESTMENT OBJECTIVE AND POLICIES

GENERAL

TEMPORARY INVESTMENTS

OTHER INVESTMENTS AND INVESTMENT PRACTICES

-5-
<PAGE> 67

risk. Because preferred stock is junior to debt securities and other
obligations of the issuer, deterioration in the credit quality of the issuer
will cause greater changes in the value of a preferred stock than in a more
senior debt security with similar stated yield characteristics.

-6-
<PAGE> 68
and include securities with legal or contractual restrictions on resale, time
deposits, repurchase agreements having maturities longer than seven days and
securities that do not have readily available market quotations. In addition,
the Fund may invest in securities that are sold in private placement
transactions between their issuers and their purchasers and that are neither
listed on an exchange nor traded over-the-counter. These factors may have an
adverse effect on the Fund's ability to dispose of particular securities and
may limit the Fund's ability to obtain accurate market quotations for purposes
of valuing securities and calculating net asset value and to sell securities at
fair value. If any privately placed securities held by the Fund are required to
be registered under the securities laws of one or more jurisdictions before
being resold, the Fund may be required to bear the expenses of registration.
The Fund may also purchase securities that are not registered under the
Securities Act of 1933, as amended, but which can be sold to qualified
institutional buyers in accordance with Rule 144A under that Act ("Rule 144A
securities"). Rule 144A securities generally must be sold to other qualified
institutional buyers. The Fund may also invest in commercial obligations issued
in reliance on the so-called "private placement" exemption from registration
afforded by Section 4(2) of the Securities Act of 1933, as amended ("Section
4(2) paper"). Section 4(2) paper is restricted as to disposition under the
federal securities laws, and generally is sold to institutional investors such
as the Fund who agree that they are purchasing the paper for investment and not
with a view to public distribution. Any resale by the purchaser must be in an
exempt transaction. Section 4(2) paper normally is resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in the Section 4(2) paper, thus
providing liquidity. If a particular investment in Rule 144A securities,
Section 4(2) paper or private placement securities is not determined to be
liquid, that investment will be included within the 15% limitation on
investment in illiquid securities. The ability to sell Rule 144A securities to
qualified institutional buyers is a recent development and it is not possible
to predict how this market will mature. LBGAM will monitor the liquidity of
such restricted securities under the supervision of the Board of Directors. See
"Investment Objective and Policies - Additional Information on Portfolio
Instruments and Certain Investment Practices - Illiquid and Restricted
Securities" in the Statement of Additional Information.

-7-
<PAGE> 69
Borrowing. The Fund may borrow only from banks or, subject to obtaining
exemptive relief from the Securities and Exchange Commission (the "SEC"), from
other funds advised by Lehman Brothers or its affiliates (as described below
under "Interfund Lending Program"), or by entering into reverse repurchase
agreements, in aggregate amounts not to exceed 33-1/3% of its total assets
(including the amount borrowed) less its liabilities (excluding the amount
borrowed), and only for temporary or emergency purposes. Bank borrowings may be
from U.S. or foreign banks and may be secured or unsecured. The Fund may also
borrow by entering into reverse repurchase agreements, pursuant to which it
would sell portfolio securities to financial institutions, such as banks and
broker-dealers, and agree to repurchase them at an agreed upon date and price.
The Fund would also consider entering into reverse repurchase agreements to
avoid otherwise selling securities during unfavorable market conditions to meet
redemptions. Reverse repurchase agreements involve the risk that the market
value of the portfolio securities sold by the Fund may decline below the price
of the securities the Fund is obligated to repurchase.

Hedging and Derivatives. The Fund is authorized to use various hedging and
investment strategies described below to hedge market risks (such as broad or
specific market movements) or to seek to increase the Fund's income or gain.
Over time, techniques and instruments may change as new instruments and
strategies are developed or regulatory changes occur. Limitations on the
portion of the Fund's assets that may be used in connection with the investment
strategies described below appear in the Statement of Additional Information.

-8-
<PAGE> 70
swaps and related transactions and other similar transactions which may be
developed, to the extent LBGAM determines that they are consistent with the
Fund's investment objective and policies and applicable regulatory requirements
(collectively, these transactions are referred to in this Prospectus as
"Derivatives").

The degree of the Fund's use of Derivatives may be limited by certain
provisions of the Internal Revenue Code of 1986, as amended (the "Code"). See
"Taxes."

INVESTMENT LIMITATIONS

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<PAGE> 71
1. The Fund may not purchase the securities of any one issuer if as a
result more than 5% of the value of its total assets would be invested in the
securities of such issuer, except that up to 25% of the value of its total
assets may be invested without regard to this 5% limitation and provided that
there is no limitation with respect to investments in U.S. Government
Securities, and provided further, that the Fund may invest all or substantially
all of its assets in another registered investment company having the same
investment objective and policies and substantially the same investment
restrictions as those with respect to the Fund.

RISK FACTORS AND SPECIAL CONSIDERATIONS

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<PAGE> 72
Certain risks and special considerations of certain of the investment practices
in which the Fund may engage are described above under "Investment Objective
and Policies" and "Other Investments and Investment Practices."

PURCHASE, REDEMPTION AND EXCHANGE OF SHARES

PURCHASES IN THE INITIAL OFFERING

Shares of the Fund are being offered through Lehman Brothers, the Fund's
distributor, during a period scheduled to end on __________ __, 1994, subject
to extension by agreement between the Fund and Lehman Brothers (the
"Subscription Period"). The price for Select Shares of the Fund during the
Subscription Period will be $10.00 per share. On the fifth business day
following termination of the Subscription Period (the "Closing Date"),
subscriptions for shares will be payable and shares will be issued. Following
termination of the Subscription Period, the Fund will begin a continuous
offering of shares. Investors will not be required to pay for shares offered
during the Subscription Period until the Closing Date, and they may revoke
subscriptions until the termination of the Subscription Period. Purchase orders
for Select Shares placed during the Subscription Period must be transmitted to
Lehman Brothers by telephone before 4:00 p.m. on the last day of the
Subscription Period, and payment in respect of such orders must be received in
federal funds immediately available to the Fund's custodian before 3:00 p.m.,
Eastern time on the Closing Date, in each case in accordance with the
procedures described below under "Purchases in the Continuous Offering." The
Fund and Lehman Brothers reserve the right to withdraw, cancel or modify the
initial offering of shares without notice and to reject any purchase order.

PURCHASES IN THE CONTINUOUS OFFERING

Following termination of the Subscription Period, the Fund will begin a
continuous offering of its shares. During the continuous offering, Select
Shares of the Fund may be purchased at the net asset value next determined
after the purchase order is received by Lehman Brothers. See "Valuation of
Shares."

-11-
<PAGE> 73
Purchase orders for shares are accepted only on days on which Lehman Brothers
is open for business and must be transmitted to Lehman Brothers by telephone at
1-800-_________ before 4:00 p.m., Eastern time. Payment in federal funds
immediately available to the Fund's custodian, Boston Safe Deposit and Trust
Company ("Boston Safe"), generally must be received before 3:00 p.m., Eastern
time on the fifth business day following the order. The Fund reserves the right
to reject any purchase order and to suspend the offering of shares for a period
of time. (Payment for orders which are not received or accepted by Lehman
Brothers will be returned after prompt inquiry to the sending institution.) Any
person entitled to receive compensation for selling or servicing shares of the
Fund may receive different compensation for selling or servicing one class of
shares over another class.

ADDITIONAL PURCHASE INFORMATION

Conflict of interest restrictions may apply to an institution's receipt of
compensation paid by the Fund in connection with the investment of fiduciary
funds in Select Shares. See "Management of the Fund - Service Organizations."
Institutions, including banks and investment advisers and other money managers
subject to the jurisdiction of the SEC, the Department of Labor or state
commissions, are urged to consult their legal advisors before investing
fiduciary funds in Select Shares. See "Management of the Fund - Banking Laws."

Subaccounting Services. Institutions are encouraged to open single master
accounts. However, certain institutions may wish to use the transfer agent's
subaccounting system to minimize their internal recordkeeping requirements. The
transfer agent charges a fee based on the level of subaccounting services
rendered. Institutions holding Fund shares in a fiduciary, agency, custodial or
similar capacity may charge or pass through subaccounting fees as part of or in
addition to normal trust or agency account fees. They may also charge fees for
other services provided which may be related to the ownership of Fund shares.
This Prospectus should, therefore, be read together with any agreement between
the customer and the institution with regard to the services provided, the fees
charged for those services and any restrictions and limitations imposed.

REDEMPTION OF SHARES

Redemption orders must be transmitted to Lehman Brothers by telephone in the
manner described herein, on any day the Fund calculates its net asset value.
Select Shares are redeemed at the net asset value per share next determined
after Lehman Brothers' receipt of the redemption order. The proceeds paid to a
shareholder upon redemption may be more or less than the amount invested
depending upon a share's net asset value at the time of redemption.

Subject to the foregoing, payment for redeemed Select Shares for which a
redemption order is received by Lehman Brothers before 4:00 p.m., Eastern time,
on a day that the Fund calculates its net asset value is normally made in
federal funds wired to the redeeming shareholder within seven days after
receipt of the redemption order.

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<PAGE> 74
such redemption shall be effected at the net asset value per share next
determined after the redemption order is entered. If during the 60 day period
the shareholder increases the value of its account to $10,000 or more, no such
redemption shall take place. In addition, the Fund may redeem shares
involuntarily or suspend the right of redemption as permitted under the 1940
Act, or under certain special circumstances described in the Statement of
Additional Information under "Additional Purchase and Redemption Information."

The ability to give telephone instructions for the redemption (and purchase or
exchange) of Select Shares is automatically established on a shareholder's
account. However, the Fund reserves the right to refuse a redemption order
transmitted by telephone if it is believed advisable to do so. Procedures for
redeeming Fund shares by telephone may be modified or terminated at any time by
the Fund or Lehman Brothers. In addition, neither the Fund, Lehman Brothers nor
the transfer agent will be responsible for the authenticity of telephone
instructions for the purchase, redemption or exchange of shares where the
instructions for the purchase, redemption or exchange of shares are reasonably
believed to be genuine. Accordingly, the investor will bear the risk of loss.
The Fund will attempt to confirm that telephone instructions are genuine and
will use such procedures as are considered reasonable, including the recording
of telephone instructions. To the extent that the Fund fails to use reasonable
procedures to verify the genuineness of telephone instructions, it or its
service providers may be liable for such instructions that prove to be
fraudulent or unauthorized.

EXCHANGE PRIVILEGE

Select Shares of the Fund may be exchanged without charge for Select Shares of
certain other funds in the Lehman Brothers Group of Funds which have different
investment objectives that may be of interest to shareholders. To use the
exchange privilege, exchange instructions must be given to Lehman Brothers by
telephone. See "Redemption of Shares" above. In exchanging shares, a
shareholder must meet the minimum initial investment requirement of the other
fund and the shares involved must be legally available for sale in the state
where the shareholder resides. Orders for exchanges will only be accepted on
days on which both funds determine their net asset value. To obtain information
regarding the availability of funds into which Select Shares of the Fund may be
exchanged, investors should contact Lehman Brothers at 1-800-_____________.

OTHER MATTERS

Select Shares of the Fund are sold and redeemed without charge by the Fund.
Institutional investors purchasing or holding Fund shares for their customer
accounts may charge customers fees for cash management and other services
provided in connection with their accounts. A customer should, therefore,
consider the terms of its account with an institution before purchasing Fund
shares. An institution

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purchasing or redeeming Fund shares on behalf of its customers is responsible
for transmitting orders to Lehman Brothers in accordance with its customer
agreements.

VALUATION OF SHARES

MANAGEMENT OF THE FUND

INVESTMENT ADVISER - LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT LIMITED

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LBGAM is located at Two Broadgate, London EC2M 7HA, England. LBGAM is a wholly
owned subsidiary of Lehman Brothers Holdings, Inc. ("Holdings").

ADMINISTRATOR - THE SHAREHOLDER SERVICES GROUP, INC.

On May 6, 1994, TSSG acquired the third party mutual fund administration
business of The Boston Company Advisors, Inc., an indirect wholly-owned
subsidiary of Mellon Bank Corporation ("Mellon"). In connection with this
transaction, Mellon assigned to TSSG its agreement with Lehman Brothers such
that Lehman Brothers and its affiliates, consistent with their fiduciary duties
and assuming certain service quality standards are met, would recommend TSSG as
the provider of administration services to the Fund. This duty to recommend
expires on May 21, 2000. In addition, under the terms of the Stock Purchase
Agreement dated September 14, 1992 between Mellon and Lehman Brothers (then
named Shearson Lehman Brothers Inc.), Lehman Brothers agreed to recommend
Boston Safe, an indirect wholly owned subsidiary of Mellon, as custodian of
mutual funds affiliated with Lehman Brothers until May 21, 2000, to the extent
consistent with its fiduciary duties and other applicable law.

DISTRIBUTOR - LEHMAN BROTHERS

SERVICE ORGANIZATIONS

Under a services and distribution plan (the "Plan") adopted pursuant to Rule
12b-1 under the 1940 Act, Select Shares bear fees ("Rule 12b-1 fees") payable
by the Fund at the aggregate rate of up to .25% (on an annualized basis) of the
average daily net asset value of such shares to Lehman Brothers for providing
certain services to the Fund and holders of Select Shares. Lehman Brothers may
retain all the payments made to it under the Plan or may enter into agreements
with and make payments of up to .25% to investors such as banks, savings and
loans associations and other financial institutions ("Service Organizations")
for the provision of a portion of such services. These services, which are
described more fully in the Statement of Additional Information under
"Management of the Fund - Service Organizations," include aggregating and
processing purchase and redemption requests from shareholders showing their
positions in shares; arranging for bank wires; responding to shareholder
inquiries relating to the services provided by Lehman Brothers or the Service
Organization and handling correspondence; and acting as shareholder of record
and nominee. The Plan also allows Lehman Brothers to use its own resources to
provide distribution services and shareholder services. Under the terms of the
agreements, Service Organizations are required to provide to their shareholders
a schedule of any fees that they may charge shareholders in connection with
their investments in Select Shares.

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<PAGE> 77
EXPENSES

The Fund's expenses include taxes, interest, fees and salaries of the directors
and officers who are not directors, officers or employees of the Fund's service
contractors, SEC fees, state securities qualification fees, costs of preparing
and printing prospectuses for regulatory purposes and for distribution to
shareholders, advisory and administration fees, charges of the custodian,
transfer agent and dividend disbursing agent, certain insurance premiums,
outside auditing and legal expenses, costs of shareholder reports and
shareholder meetings and any extraordinary expenses. The Fund also pays for
brokerage fees and commissions (if any) in connection with the purchase and
sale of portfolio securities. Fund expenses are allocated to Select Shares
based on either expenses identifiable to the Select Shares or relative net
assets of the Select Shares and other classes of Fund shares. LBGAM and TSSG
have agreed to reimburse the Fund to the extent required by applicable state
law for certain expenses that are described in the Statement of Additional
Information relating to the Fund. In addition, in order to maintain a
competitive expense ratio LBGAM and TSSG have agreed to reimburse the Fund for
certain operating expenses for a period of at least one year from the date of
this Prospectus. See "Background and Expense Information."

BANKING LAWS

Banking laws and regulations currently prohibit a bank holding company
registered under the federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, or controlling a
registered, open-end investment company engaged continuously in the issuance of
its shares and prohibit banks generally from issuing, underwriting, selling or
distributing securities such as Fund shares. Such banking laws and regulations
do not prohibit such a holding company or affiliate generally from acting as
investment adviser, transfer agent or custodian to such an investment company
or from purchasing shares of such a company for or upon the order of customers.
Some Service Organizations may be subject to such banking laws and regulations.
In addition, state securities laws on this issue may differ from the
interpretation of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.

Should future legislative, judicial or administrative action prohibit or
restrict the activities of bank Service Organizations, the Fund might be
required to alter or discontinue its arrangements with such Service
Organizations and change its method of operations with respect to certain other
classes of its shares. It is not anticipated, however, that any change in the
Fund's method of operations would affect its net asset value per share or
result in a financial loss to any customer.

DIVIDENDS

The Fund's policy is to distribute its investment income and net realized
capital gains. Dividends will be declared and paid annually.

Dividends are determined in the same manner and are paid in the same amount for
each Fund share, except that certain expenses borne differ by class. As a
result, the per share dividends on Select Shares will be lower than those on
Premier Shares and higher than those on certain other classes of the Fund's
shares.

Institutional holders of Select Shares may elect to have their dividends
reinvested in additional full and fractional Select Shares at the net asset
value of such shares on the payment date. Reinvested dividends receive the same
tax treatment as dividends paid in cash. Such election, or any revocation
thereof, must be made in writing to TSSG at P.O. Box ____, Providence, Rhode
Island 02940, and will become effective after its receipt by TSSG, with respect
to dividends paid.

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<PAGE> 78
Each shareholder or its authorized representative will receive an annual
statement designating the amount of any dividends and distributions made during
each year and their federal tax qualification.

TAXES

The Fund intends to distribute substantially all of its investment company
taxable income each year. Such distributions, whether paid in cash or
reinvested in additional shares, of net investment income will be taxable as
ordinary income. Federal income taxes for distributions to an Individual
Retirement Account ("IRA") or a qualified retirement plan are deferred under
the Code. A portion of such dividends may qualify for the dividends-received
deduction generally available for corporate shareholders under the Code.
Distributions to shareholders of net capital gain, whether paid in cash or
reinvested in additional shares, that are designated by the Fund as "capital
gains dividends" will be taxable as long-term capital gains, whether paid in
cash or additional shares, regardless of how long the shares have been held by
such shareholders. Shareholders receiving distributions from the Fund in the
form of additional shares will be treated for federal income tax purposes as
receiving a distribution in an amount equal to the fair market value of the
additional shares on the date of such a distribution.

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<PAGE> 79

_________________________

THE FUND'S PERFORMANCE

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<PAGE> 80
period to the end of the measuring period. These figures reflect changes in the
price of the shares and assume that any income dividends and/or capital gains
distributions made by the Fund during the period were reinvested in shares of
the Fund. Total return figures include any applicable sales charges, service
fees and distribution fees payable with respect to a class.

ADDITIONAL INFORMATION

The Company has received an order from the SEC permitting it, subject to
certain terms and conditions, to establish multiple classes of shares within
each series. The Fund currently offers six classes of shares: "Select Shares,"
"Premier Shares," and Class A, B, C and W Shares. This Prospectus relates only
to the Select Shares. Shares of each class represent interests in the Fund in
proportion to each share's net asset value. Premier Shares are sold to
institutions that have not entered into servicing or other agreements with the
Fund in connection with their investments and pay no Rule 12b-1 distribution or
shareholder service fees. Class A, B and C shares are offered directly to
individual investors. Class A shares bear a sales charge at the time of
purchase while Class B shares are subject to a contingent deferred sales charge
at the time of redemption. Class A, B and C shares are sold under a plan
adopted pursuant to Rule 12b-1 and, in addition to the Fund's other operating
expenses, bear aggregate expenses pursuant to such plans at annual rates not
exceeding .25%, 1.00% and 1.00% of the respective values of the net assets
attributable to such classes. Class W shares bear no sales charges,
distribution or shareholder service fees and are offered only to participants
in the Lehman Brothers WRAP Program and similar programs. Participants in the
Lehman Brothers WRAP Program and similar programs pay fees based upon the
aggregate value

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<PAGE> 81
of their investments in participating mutual funds, including the Fund. Certain
Fund expenses are allocated separately to each class of shares based upon
expenses identifiable by class.

All shares of the Company, when issued, will be fully paid and nonassessable.

Boston Safe, an indirect wholly owned subsidiary of Mellon, is located at One
Boston Place, Boston, Massachusetts 02108, and serves as custodian of the
Fund's investments.

The Shareholder Services Group, Inc., a subsidiary of First Data Corporation,
is located at One Exchange Place, Boston, Massachusetts 02109, and serves as
the Fund's transfer agent.

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<PAGE> 82
LEHMAN BROTHERS LARGE CAPITALIZATION U.S. EQUITY FUND

PROSPECTUS

________ __, 1994

<TABLE>
TABLE OF CONTENTS

<S> <C>
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Background and Expense Information . . . . . . . . . . . . . . . . . . . . . . . 4

Investment Objective and Policies . . . . . . . . . . . . . . . . . . . . . . . . 5

Risk Factors and Special Considerations . . . . . . . . . . . . . . . . . . . . . 10

Purchase, Redemption and Exchange of Shares . . . . . . . . . . . . . . . . . . . 11

Valuation of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

The Fund's Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>
<PAGE> 83

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.

SUBJECT TO COMPLETION-DATED SEPTEMBER 8, 1994

PROSPECTUS

LEHMAN BROTHERS HIGH-GRADE FIXED INCOME FUND

An Investment Portfolio of Lehman Brothers Funds, Inc.

______________, 1994

This Prospectus describes the LEHMAN BROTHERS HIGH-GRADE FIXED
INCOME FUND (the "Fund"), a diversified portfolio of Lehman Brothers
Funds, Inc. (the "Company"), an open-end management investment
company. This Prospectus relates to the three classes of shares of
the Fund that are offered directly to individual investors and a
fourth class of shares that is offered only to participants in the
Lehman Brothers WRAP Program and similar programs, as described
herein.

LEHMAN BROTHERS INC. sponsors the Fund and acts as distributor of
the Fund's shares. LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC.
serves as the Fund's investment adviser.

This Prospectus briefly sets forth certain information about the
Fund that investors should know before investing. Investors are
advised to read this Prospectus and retain it for future reference.
Additional information about the Fund, contained in a Statement of
Additional Information dated ___________ __, 1994, as amended or
supplemented from time to time, has been filed with the Securities
and Exchange Commission and is available to investors without charge
by calling 800-_____________. The Statement of Additional
Information is incorporated in its entirety by reference into this
Prospectus.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE> 84

PROSPECTUS SUMMARY

BENEFITS TO INVESTORS

The Fund offers investors several important benefits:

o a professionally managed portfolio of high-grade fixed income
securities having the potential for attaining a high level of
total return, consistent with the preservation of capital, and
secondarily, a high level of current income.

o investment liquidity through convenient purchase and
redemption procedures.

o a convenient way to invest without the administrative and
recordkeeping burdens normally associated with the direct
ownership of securities.

o automatic dividend reinvestment feature, plus exchange
privilege with the shares of certain other funds in the Lehman
Brothers Group of Funds.

INVESTMENT OBJECTIVE

The Fund's investment objective is to seek as high a level of total return,
consisting of current income and capital appreciation, as is consistent with
the preservation of capital. The Fund will seek to achieve its objective by
investing in a broad range of high-grade fixed income securities of government
and corporate issuers. Under normal market conditions, the Fund expects that at
least 75% of its total assets will be invested in high-grade debt obligations
which are rated, at the time of investment, at least in the category "A" by
Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Group
("S&P"), are comparably rated by another nationally recognized statistical
rating organization ("NRSRO"), or, if not rated, are of comparable quality as
determined by the Fund's investment adviser. Up to 25% of the Fund's total
assets may be invested in investment grade debt obligations which are rated, at
the time of investment, in the category "Baa" by Moody's or "BBB" by S&P, are
comparably rated by another NRSRO, or, if not rated, are of comparable quality
as determined by the Fund's investment adviser. The Fund invests only in those
fixed income securities that are denominated in U.S. dollars.

VARIABLE PRICING SYSTEM

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<PAGE> 85

which Class is most beneficial depends on the amount and intended length of the
investment. See "Variable Pricing System" and "Purchase of Shares - Class W
Shares."

CLASS A SHARES

CLASS B SHARES

CLASS B CONVERSION FEATURE

CLASS C SHARES

CLASS W SHARES

INITIAL OFFERING OF SHARES

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<PAGE> 86

shares of the Fund may be purchased at the next determined net asset value per
share, subject in the case of Class A shares and Class B shares to the sales
charges described above.

PURCHASE OF SHARES

INVESTMENT MINIMUMS

SYSTEMATIC INVESTMENT PLAN

REDEMPTION OF SHARES

The Fund redeems shares at their next determined net asset value in accordance
with the procedures described herein and subject, in the case of Class B
shares, to any applicable CDSC.

MANAGEMENT OF THE FUND

EXCHANGE PRIVILEGE

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<PAGE> 87

DIVIDENDS AND DISTRIBUTIONS

The Fund's policy is to distribute its investment income and net realized
capital gains. Dividends will be declared daily and paid monthly. Dividends and
distributions will be reinvested in additional shares of the same Class of the
Fund unless a shareholder requests otherwise. Shares acquired by dividend and
distribution reinvestments will not be subject to any sales charge or CDSC.
Class B shares acquired through dividend and distribution reinvestments will
become eligible for conversion to Class A shares on a pro-rata basis. See
"Dividends" and "Variable Pricing System."

RISK FACTORS AND SPECIAL CONSIDERATIONS

There is no assurance that the Fund will achieve its investment objective. The
Fund may invest in U.S. dollar-denominated obligations of government,
corporate, sovereign and supranational issuers that trade in U.S. or foreign
securities markets. Securities of non-U.S. issuers may involve certain
considerations and risks not typically associated with investing in securities
of U.S. companies or the U.S. government, including political and social
uncertainties, the possible imposition of foreign withholding taxes, exposure
to smaller, less liquid trading markets that are subject to greater price
volatility than U.S. markets, and higher brokerage and other costs.
Furthermore, there may be less publicly available information about a non-U.S.
issuer than about a U.S. issuer, and non-U.S. issuers may not be subject to
the same accounting standards as U.S. issuers.

Because the Fund will generally invest in fixed income securities, the net
asset value of the Fund's portfolio, and hence its shares, can be expected to
change as general levels of interest rates fluctuate. Interest rate risk can be
expected to be greater with respect to investments in fixed income securities
with longer maturities than investments in securities with shorter maturities.

In addition, the Fund may invest up to 15% of its total assets in illiquid
securities, and engage in hedging and derivatives transactions and certain
other investment practices, which may entail certain risks. For a more complete
discussion of the risks associated with an investment in the Fund, see
"Investment Objective and Policies - Other Investments and Investment
Practices" and "Risk Factors and Special Considerations."

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<PAGE> 88

BACKGROUND AND EXPENSE INFORMATION

The Fund offers multiple classes of shares, four of which are offered by this
Prospectus. Each share of the Fund accrues income in the same manner, but
certain expenses differ based upon the Class. See "Additional Information."
The following Expense Summary lists the costs and expenses that holders of
Class A, Class B, Class C and Class W shares can expect to incur as investors
in the Fund, based upon estimated expenses and average net assets for the
current fiscal year. The costs and expenses for Class W shares include fees for
WRAP (but not those for different advisory services).

MAXIMUM ANNUAL WRAP FEE
(as a percentage of the value of
Fund shares held on the last
calendar day of the previous
quarter) . . . . . . . . . . . . -- -- -- 1.50%

Total Fund Operating Expenses . . ____% ____% ____% ____%
<FN>
- -------------------

* Upon conversion, Class B shares will no longer be subject to a distribution fee. Lehman Brothers
receives an annual 12b-1 service fee of .25% of the value of average daily net assets of Class A shares,
and receives an annual 12b-1 fee of 1.00% of the value of average daily net assets of Class B and
Class C shares, consisting of a .75% distribution fee and a .25% service fee.

** The amount set forth for "Other Expenses" is based on estimates for the current fiscal year.
</TABLE>

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<PAGE> 89

whether the shares are held through the 401(k) Program. See "Purchase of
Shares" and "Redemption of Shares."

EXAMPLE

VARIABLE PRICING SYSTEM

Class A Shares. Class A shares are sold subject to a maximum initial sales
charge of 4.75% imposed at the time of purchase. The initial sales charge may
be reduced or waived for certain purchases. Class A shares are subject to an
annual service fee of .25% of the value of the Fund's average daily net assets
attributable to the Class. The annual service fee is used by Lehman Brothers to
compensate its Investment Representatives and other persons for ongoing
services provided to shareholders. The sales charge is used to compensate
Lehman Brothers for expenses incurred in selling Class A shares. See "Purchase
of Shares."

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<PAGE> 90

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<PAGE> 91

A shares. An investor making a smaller investment might consider Class B shares
because 100% of the investor's assets are invested immediately. An investor who
is uncertain of the length of the investment might consider Class C shares,
because there is no initial or contingent deferred sales charge. Investors
should consult their Lehman Brothers Investment Representatives. Class B and
Class C shares are subject to distribution fees which will cause Class B and
Class C shares to have higher expense ratios and pay lower dividends than Class
A shares. There is no size limit on purchases of Class A shares. The maximum
purchase of Class B shares is $250,000. The maximum purchase of Class C shares
is $1,000,000. An Investment Representative may receive different levels of
compensation for selling different Classes.

INVESTMENT OBJECTIVE AND POLICIES

GENERAL

The Fund's investment objective is to seek as high a level of total return,
consisting of current income and capital appreciation, as is consistent with
the preservation of capital. The Fund will seek to achieve its objective by
investing in a broad range of high-grade fixed income securities of government
and corporate issuers. Under normal market conditions, the Fund expects that at
least 75% of its total assets will be invested in high-grade debt obligations
which are rated, at the time of investment, at least in the category "A" by
Moody's or S&P, are comparably rated by another NRSRO, or, if not rated, are of
comparable quality as determined by the Fund's investment adviser. Up to 25% of
the Fund's total assets may be invested in investment grade debt obligations
which are rated, at the time of investment, in the category "Baa" by Moody's or
"BBB" by S&P, are comparably rated by another NRSRO, or, if not rated, are of
comparable quality as determined by the Fund's investment adviser. The Fund
invests only in those fixed income securities that are denominated in U.S.
dollars. There can be no assurance that the Fund will achieve its investment
objective. For a discussion of certain risks and considerations associated with
an investment in the Fund, see "Risk Factors and Special Considerations."

In pursuit of its objective, the Fund will invest in a broad range of debt
securities, including obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities ("U.S. Government Securities"); obligations
issued or guaranteed by other governments or one of their agencies or
instrumentalities; obligations issued or guaranteed by international
organizations designed or supported by multiple foreign government entities to
promote economic reconstruction or development; bank obligations, such as
certificates of deposit, time deposits and bankers' acceptances; corporate debt
obligations, including commercial paper; repurchase agreements and reverse
repurchase agreements; and mortgage- and asset-backed securities. The debt
securities in which the Fund invests may have interest rates which are fixed,
variable, floating or zero coupon.

Under normal interest rate conditions, the Fund's average portfolio duration
will be approximately three to seven years. Duration is an approximate measure
of the sensitivity of the value of a fixed income security to changes in
interest rates. In general, the percentage change in a fixed income security's
value in response to changes in interest rates is a function of that security's
duration multiplied by the percentage point change in interest rates. Maturity,
in contrast to duration, measures only the time until final payment is due on
an investment; it does not take into account the pattern of a security's cash
flow over time, including how cash flow is affected by prepayments, interest
payments, early redemption features and changes in interest rates.

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<PAGE> 92

U.S. GOVERNMENT SECURITIES

Securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities include U.S. Treasury securities, which differ in interest
rates, maturities and times of issuance. Treasury bills have initial maturities
of one year or less; Treasury notes have initial maturities of one to ten
years; and Treasury Bonds generally have initial maturities of greater than ten
years. Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, e.g., Government National Mortgage Association ("GNMA")
pass-through certificates, are supported by the full faith and credit of the
U.S. Treasury; others, such as those issued by the Federal National Mortgage
Association ("FNMA"), are supported by discretionary authority of the U.S.
Government to purchase certain obligations of the agency or instrumentality;
and others, such as those issued by the Student Loan Marketing Association, are
supported only by the credit of the agency or instrumentality. These securities
bear fixed, floating or variable rates of interest. While the U.S. Government
provides financial support to such U.S. Government-sponsored agencies or
instrumentalities, no assurance can be given that it will always do so, since
it is not so obligated by law. The Fund will invest in such securities only
when it is satisfied that the credit risk with respect to the issuer is
minimal.

CORPORATE DEBT SECURITIES

Corporate debt securities include corporate bonds, debentures, notes and other
similar corporate debt instruments, including convertible securities. The Fund
may also purchase corporate commercial paper. Corporate debt securities may be
acquired with warrants attached. Corporate income-producing securities may also
include forms of preferred or preference stock.

MORTGAGE-RELATED SECURITIES

Mortgage pass-through securities are securities representing interests in
"pools" of mortgage loans secured by residential or commercial real property in
which payments of both interest and principal on the securities are generally
made monthly, in effect "passing through" monthly payments made by the
individual borrowers on the mortgage loans which underlie the securities (net
of fees paid to the issuer or guarantor of the securities). Early repayment of
principal on some mortgage-related securities (arising from prepayments of
principal due to sale of the underlying property, refinancing, or foreclosure,
net of fees and costs which may be incurred) may expose the Fund to a lower
yield upon reinvestment of principal. Also, if a security subject to prepayment
has been purchased at a premium, in the event of prepayment the value of the
premium would be lost. Like other fixed income securities, when interest rates
rise, the value of a mortgage-related security generally will decline; however,
when interest rates are declining, the value of mortgage-related securities
with prepayment features may not increase as much as other fixed income
securities.

Payment of principal and interest on some mortgage pass-through securities (but
not the market value of the securities themselves) may be guaranteed by the
full faith and credit of the U.S. Government (in the case of securities
guaranteed by GNMA); or guaranteed by agencies or instrumentalities of the U.S.
Government (in the case of securities guaranteed by FNMA or FHLMC), which are
supported only by the discretionary authority of the U.S. Government to
purchase the agency's obligations). Mortgage-related securities created by
non-government issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and other
secondary market issuers) may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance and
letters of credit, which may be issued by government entities, private insurers
or the mortgage poolers. The Fund will not invest in stripped mortgage-related
securities.

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<PAGE> 93

Adjustable Rate Mortgage Securities ("ARMS"). ARMS are pass-through mortgage
securities with adjustable rather than fixed interest rates. The ARMS in which
the Fund invests are issued by GNMA, FNMA and Federal Home Loan Mortgage
Corporation ("FHLMC") and are actively traded. The underlying mortgages which
collateralize ARMS issued by GNMA are fully guaranteed by the Federal Housing
Administration ("FHA") or Veterans Administration ("VA"), while those
collateralizing ARMS issued by FHLMC or FNMA are typically conventional
residential mortgages conforming to strict underwriting size and maturity
constraints.

Unlike conventional bonds, ARMS pay back principal over the life of the ARMS
rather than at maturity. Thus, a holder of the ARMS, such as the Fund, would
receive monthly scheduled payments of principal and interest and may receive
unscheduled principal payments representing payments on the underlying
mortgages. At the time that a holder of the ARMS reinvests the payments and any
unscheduled prepayments of principal that it receives, the holder may receive a
rate of interest paid on the existing ARMS.

Not unlike other U.S. Government Securities, the market value of ARMS will
generally vary inversely with changes in market interest rates. Thus, the
market value of ARMS generally declines when interest rates rise and generally
rises when interest rates decline.

While ARMS generally entail less risk of a decline during periods of rapidly
rising rates, ARMS may also have less potential for capital appreciation than
other similar investments (e.g., investments with comparable maturities)
because, as interest rates decline, the likelihood increases that mortgages
will be prepaid. Furthermore, if ARMS are purchased at a premium, mortgage
foreclosures and unscheduled principal payments may result in some loss of a
holder's principal investment to the extent of the premium paid. Conversely, if
ARMS are purchased at a discount, both a scheduled payment of principal and an
unscheduled prepayment of principal would increase current and total returns
and would accelerate the recognition of income, which would be taxed as
ordinary income when distributed to shareholders.

Collateralized Mortgage Obligations ("CMOs"). The Fund may invest in CMOs,
which are bonds issued by single-purpose, stand-alone finance subsidiaries or
trusts of financial institutions, government agencies, investment banks or
companies related to the construction industry. Similar to a bond, interest and
prepaid principal on a CMO are paid, in most cases, semiannually. CMOs are
structured into multiple classes, with each class bearing a different stated
maturity. Monthly payments of principal, including prepayments, are first
returned to investors holding the shortest maturity class; investors holding
the longer maturity classes receive principal only after the first class has
been retired. CMOs purchased by the Fund may be:

(a) collateralized by pools of mortgages in which each mortgage is
guaranteed as to payment of principal and interest by an
agency or instrumentality of the U.S. government.

(b) collateralized by pools of mortgages in which payment of
principal and interest is guaranteed by the issuer and such
guarantee is collateralized by U.S. Government Securities;

(c) securities in which the proceeds of the issuance are invested
in mortgage securities and payment of the principal and
interest are supported by the credit of an agency or
instrumentality of the U.S. government; or

(d) collateralized by whole mortgage loans.

All CMOs purchased by the Fund will be investment grade, as rated by a NRSRO.

-11-
<PAGE> 94

Real Estate Mortgage Investment Conduits ("REMICs"). The Fund may also invest
in REMICs, which are offerings of multiple class real estate mortgage-backed
securities which qualify and elect treatment as such under provisions of the
Internal Revenue Code of 1986, as amended (the "Code"). Issuers of REMICs may
take several forms, such as trust, partnerships, corporations, associations or
a segregated pool of mortgages. Once REMIC status is elected and obtained, the
entity is not subject to federal income taxation. Instead, income is passed
through the entity and is taxed to the person or persons who hold interests in
the REMIC. A REMIC interest must consist of one or more classes of "regular
interests," some of which may offer adjustable rates (the type in which the
Fund primarily invests), and a single class of "residual interests." The Fund
will not invest in such "residual interests." To qualify as a REMIC,
substantially all of the assets of the entity must be in assets directly or
indirectly secured principally by real property.

Resets. Certain of the ARMS, CMOs and REMICs in which the Fund may invest have
interest rates that are readjusted or reset at intervals of one year or less to
an increment over some predetermined interest rate index. There are two main
categories of indices: those based on U.S. Treasury securities and those
derived from a calculated measure, such as a cost of funds index or a moving
average of mortgage rates. Commonly utilized indices include the one-year and
five-year Constant Maturity Treasury (CMT) rates, the three-month Treasury Bill
rate, the 180-day Treasury Bill rate, rates on longer-term Treasury securities,
the National Median Cost of Funds, COFI, the one-month or three-month London
Interbank Offered Rate, LIBOR, the prime rate of a specific bank, or commercial
paper rates. Some indices such as the one-year CMT rate, closely mirror changes
in market interest rate levels. Others tend to lag changes in market rate
levels and tend to be somewhat less volatile.

Caps and Floors. The underlying mortgages which collateralize certain of the
ARMS, CMOs, and REMICs in which the Fund may invest may have caps and floors
which limit the maximum amount by which the loan rate to the residential
borrower may change up or down: (1) per reset or adjustment interval and (2)
over the life of the loan. Some residential mortgage loans restrict periodic
adjustments by limiting changes in the borrower's monthly principal and
interest payments rather than limiting interest rate changes. These payment
caps may result in negative amortization.

The value of mortgage securities in which the Fund invests may be affected if
market interest rates rise or fall faster and farther than the allowable caps
or floors on the underlying residential mortgage loans. Additionally, even
though the interest rates on the underlying residential mortgages are
adjustable, amortization and prepayments may occur, thereby causing the
effective maturities of the mortgage securities in which the Fund invests to be
shorter than the maturities stated in the underlying mortgages.

TEMPORARY INVESTMENTS

The short-term instruments in which the Fund may invest include U.S. Government
Securities; obligations issued or guaranteed by other governments or one of
their agencies or instrumentalities; obligations issued or guaranteed by
international organizations designed or supported by multiple foreign
government entities to promote economic reconstruction or development; bank
obligations, such as certificates of deposit, time deposits and bankers'
acceptances; corporate debt obligations, including commercial paper; and
repurchase agreements. To be eligible for investment under the circumstances
described above, such instruments

-12-
<PAGE> 95

(other than U.S. Government Securities) must be issued by an issuer having a
short-term debt rating of A-1 or better by S&P, a rating of Prime-1 by Moody's,
a comparable rating from another NRSRO or, if unrated, deemed to be of
equivalent quality by LBGAM.

OTHER INVESTMENTS AND INVESTMENT PRACTICES

Warrants. The Fund may invest up to 5% of the value of its net assets (valued
at the lower of cost or market) in warrants, which are securities permitting,
but not obligating, their holder to subscribe for other securities. The Fund
may invest in warrants for equity securities that are acquired as units with
debt instruments and warrants for debt securities. Warrants do not carry with
them the right to dividends or voting rights with respect to the securities
that they entitle their holder to purchase, and they do not represent any
rights in the assets of the issuer. As a result, an investment in warrants may
be considered speculative. In addition, the value of a warrant does not
necessarily change with the value of the underlying securities and a warrant
ceases to have value if it is not exercised prior to its expiration date. The
Fund will not invest more than 2% of the value of its net assets (valued as
described above) in warrants which are not listed on the New York or American
Stock Exchanges. In connection with its investments in warrants, the Fund may
from time to time hold common or preferred stock received upon the exercise of
a warrant. The Fund has no intention of holding common or preferred stock and
will sell such securities as promptly as practicable and in a manner which it
believes will reduce the risk to the Fund of loss in connection with the sale.

Zero Coupon Securities and Pay-in-Kind Bonds. The Fund may invest in zero
coupon securities and pay-in-kind bonds. These investments involve special risk
considerations. Zero coupon securities are debt securities that pay no cash
income but are sold at substantial discounts from their value at maturity. When
a zero coupon security is held to maturity, its entire return, which consists
of the amortization of discount, comes from the difference between its purchase
price and its maturity value. This difference is known at the time of purchase,
so that investors holding zero coupon securities until maturity know at the
time of their investment what the expected return on their investment will be.
Certain zero coupon securities also are sold at substantial discounts from
their maturity value and provide for the commencement of regular interest
payments at a deferred date. The Fund also may purchase pay-in-kind bonds.
Pay-in-kind bonds pay all or a portion of their interest in the form of
additional debt or equity securities.

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<PAGE> 96

Zero coupon securities and pay-in-kind bonds tend to be subject to greater
price fluctuations in response to changes in interest rates than are ordinary
interest-paying debt securities with similar maturities. The value of zero
coupon securities appreciates more during periods of declining interest rates
and depreciates more during periods of rising interest rates than ordinary
interest-paying debt securities with similar maturities. Under current federal
income tax law, the Fund is required to accrue as income each year the value of
securities received in respect of pay-in-kind bonds and a portion of the
original issue discount with respect to zero coupon securities and other
securities issued at a discount to the stated redemption price. Accordingly,
the Fund may have to dispose of portfolio securities under disadvantageous
circumstances in order to generate current cash to satisfy certain distribution
requirements. See "Taxes."

Asset-Backed Securities. The Fund may purchase asset-backed securities.
Asset-backed securities represent defined interests in an underlying pool of
assets. Such securities may be issued as pass-through certificates, which
represent undivided fractional interests in the underlying pool of assets.
Alternatively, asset-backed securities may be issued as interests, generally in
the form of debt securities, in a special purpose entity organized solely for
the purpose of owning the underlying assets and issuing such securities. In the
latter case, such securities are secured by and payable from a stream of
payments generated by the underlying assets. The assets underlying asset-backed
securities are often a pool of assets similar to one another, such as motor
vehicle receivables or credit card receivables. Alternatively, the underlying
assets may be particular types of securities, various contractual rights to
receive payments and/or other types of assets. Asset-backed securities
frequently carry credit protection in the form of extra collateral, subordinate
certificates, cash reserve accounts, letters of credit or other enhancements.

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<PAGE> 97

"Investment Objective and Policies - Additional Information on Portfolio
Instruments and Certain Investment Practices - Illiquid and Restricted
Securities" in the Statement of Additional Information.

Structured Products. The Fund may invest in interests in entities organized and
operated solely for the purpose of restructuring the investment characteristics
of certain debt obligations. This type of restructuring involves the deposit
with or purchase by an entity, such as a corporation or trust, of specified
instruments (such as commercial bank loans) and the issuance by that entity of
one or more classes of securities ("structured products") backed by, or
representing interests in, the underlying instruments. The cash flow on the
underlying instruments may be apportioned among the newly issued structured
products to create securities with different investment characteristics such as
varying maturities, payment priorities and interest rate provisions, and the
extent of the payments made with respect to structured products is dependent on
the extent of the cash flow on the underlying instruments. The Fund may invest
in structured products which represent derived investment positions based on
relationships among different markets or asset classes.

The Fund may also invest in other types of structured products, including,
among others, inverse floaters, spread trades and notes linked by a formula to
the price of an underlying instrument. Inverse floaters have coupon rates that
vary inversely at a multiple of a designated floating rate (which typically is
determined by reference to an index rate, but may also be determined through a
dutch auction or a remarketing agent) (the "reference rate"). As an example,
inverse floaters may constitute a class of CMOs with a coupon rate that moves
inversely to a designated index, such as LIBOR (London Interbank Offered Rate)
or the Cost of Funds Index. Any rise in the reference rate of an inverse
floater (as a consequence of an increase in interest rates) causes a drop in
the coupon rate while any drop in the reference rate of an inverse floater
causes an increase in the coupon rate. A spread trade is an investment position
relating to a difference in the prices or interest rates of two securities
where the value of the investment position is determined by movements in the
difference between the prices or interest rates, as the case may be, of the
respective securities. When the Fund invests in notes linked to the price of an
underlying instrument, the price of the underlying security is determined by a
multiple (based on a formula) of the price of such underlying security. A
structured product may be considered to be leveraged to the extent its interest
rate varies by a magnitude that exceeds the magnitude of the change in the
index rate of interest. Because they are linked to their underlying markets or
securities, investments in structured products generally are subject to greater
volatility than an investment directly in the underlying market or security.
Total return on the structured product is derived by linking return to one or
more characteristics of the underlying instrument. Because certain structured
products of the type in which the Fund anticipates it will invest may involve
no credit enhancement, the credit risk of those structured products generally
would be equivalent to that of the underlying instruments. The Fund is
permitted to invest in a class of structured products that is either
subordinated or unsubordinated to the right of payment of another class.
Subordinated structured products typically have higher yields and present
greater risks than unsubordinated structured products. Although the Fund's
purchase of subordinated structured products would have a similar economic
effect to that of borrowing against the underlying securities, the purchase
will not be deemed to be leverage for purposes of the Fund's fundamental
investment limitation related to borrowing and leverage.

Certain issuers of structured products may be deemed to be "investment
companies" as defined in the Investment Company Act of 1940, as amended (the
"1940 Act"). As a result, the Fund's investment in these structured products
may be limited by the restrictions contained in the 1940 Act. See "Other
Investment Funds" below. Structured products are typically sold in private
placement transactions, and there currently is no active trading market for
structured products. As a result, certain structured products in which the Fund
invests may be deemed illiquid and subject to the 15% limitation described
above under "Illiquid Securities".

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<PAGE> 98

Other Investment Funds. The Fund may invest in the securities of other
investment funds to the extent permitted by the 1940 Act. Under the 1940 Act,
the Fund may invest up to 10% of its total assets in shares of other investment
funds and up to 5% of its total assets in any one investment fund, provided
that the investment does not represent more than 3% of the voting stock of the
acquired investment company. By investing in another investment fund, the Fund
bears a ratable share of the investment fund's expenses, as well as continuing
to bear the Fund's advisory and administrative fees with respect to the amount
of the investment. In addition, the Fund may, in the future, seek to achieve
its investment objective by investing all of its assets in a no-load, open-end
management investment company having the same investment objective and policies
and substantially the same investment restrictions as those applicable to the
Fund, as described below under "Investment Limitations."

Dollar Roll Transactions. In order to enhance portfolio returns and manage
prepayment risks, the Fund may engage in dollar roll transactions. In a dollar
roll transaction, the Fund sells a security to a financial institution, such as
a bank or broker/dealer, and simultaneously agrees to repurchase a
substantially similar (same type, coupon, and maturity) security from the
institution at a later date at an agreed upon price. The securities that are
repurchased will bear the same interest rate as those sold. During the period
between the sale and repurchase, the Fund will not be entitled to receive
interest and principal payments on the securities sold, although the purchase
price will be discounted to compensate for the foregone income. When the Fund
enters into a dollar roll transaction, liquid assets of the Fund, in a dollar
amount sufficient to make payment for the obligations to be repurchased, are
segregated at the trade date. These assets are marked to market daily and are
maintained until the transaction is settled.

When-Issued and Delayed Delivery Securities. The Fund may purchase securities
on a "when-issued" or delayed delivery basis. When-issued and delayed delivery
securities are securities purchased for delivery beyond the normal settlement
date at a stated price. The Fund will generally not pay for such securities or
start earning income on them until they are received. Securities purchased on a
when-issued or delayed delivery basis are recorded as an asset and are subject
to changes in value based upon changes in the general level of interest rates.
The Fund does not intend to purchase when-issued or delayed delivery securities
for speculative purposes but only in furtherance of its investment objective.
When the Fund purchases securities on a when-issued or delayed delivery basis,
it will set aside securities or cash with its custodian equal to the payment
that will be due.

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<PAGE> 99

Reverse repurchase agreements involve the risk that the market value of the
portfolio securities sold by the Fund may decline below the price of the
securities the Fund is obligated to repurchase.

Hedging and Derivatives. The Fund is authorized to use various hedging and
investment strategies described below to hedge market risks (such as broad or
specific market movements and interest rates or other factors relevant to the
Fund's investments, such as commodity prices or rates of inflation), to manage
the effective maturity or duration of debt instruments held by the Fund, or to
seek to increase the Fund's income or capital appreciation. Over time,
techniques and instruments may change as new instruments and strategies are
developed or regulatory changes occur. Limitations on the portion of the Fund's
assets that may be used in connection with the investment strategies described
below appear in the Statement of Additional Information.

Subject to the constraints described above, the Fund may purchase and sell
interest rate or futures contracts; it may purchase and sell (or write)
exchange listed and over-the-counter put and call options on debt securities,
futures contracts, fixed income indices and other financial instruments and it
may enter into interest rate transactions and related transactions and other
similar transactions which may be developed to the extent LBGAM determines that
they are consistent with the Fund's investment objective and policies and
applicable regulatory requirements (collectively, these transactions are
referred to in this Prospectus as "Derivatives"). The Fund's interest rate
transactions may take the form of swaps, caps, floors and collars.

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<PAGE> 100

the Fund's unrealized gains in the value of its portfolio securities, to
facilitate the sale of those securities for investment purposes, to manage the
effective maturity or duration of the Fund's portfolio, to establish a position
in the derivatives markets as a substitute for purchasing or selling particular
debt securities or to seek to enhance the Fund's income or capital
appreciation. The Fund may use any or all types of Derivatives at any time; no
particular strategy will dictate the use of one type of transaction rather than
another, as use of any authorized Derivative will be a function of numerous
variables, including market conditions. The ability of the Fund to utilize
Derivatives successfully will depend on LBGAM's ability to predict pertinent
market movements, which cannot be assured. These skills are different from
those needed to select portfolio securities. The Fund is not a "commodity pool"
(i.e., a pooled investment vehicle which trades in commodity futures contracts
and options thereon and the operator of which is registered with the Commodity
Futures Trading Commission (the "CFTC")) and Derivatives involving futures
contracts and options on futures contracts will be purchased, sold or entered
into only for bona fide hedging purposes, provided that the Fund may enter into
such transactions for purposes other than bona fide hedging if, immediately
thereafter, the sum of the amount of its initial margin and premiums on open
contracts and options would not exceed 5% of the liquidation value of the
Fund's portfolio, provided, further, that, in the case of an option that is
in-the-money, the in-the-money amount may be excluded in calculating the 5%
limitation. The use of Derivatives in certain circumstances will require that
the Fund segregate cash, liquid high-grade debt obligations or other assets to
the extent the Fund's obligations are not otherwise "covered" through ownership
of the underlying security or financial instrument. See "Risk Factors and
Special Considerations - Other Investments and Investment Practices."

The degree of the Fund's use of Derivatives may be limited by certain
provisions of the Code. See "Taxes."

INVESTMENT LIMITATIONS

The investment limitations enumerated below are fundamental and may not be
changed by the Company's Board of Directors without the affirmative vote of the
holders of a majority of the Fund's outstanding shares. The Fund's investment
objective and the other investment policies described herein may be changed by
the Board of Directors at any time. If there is a change in the investment
objective of the Fund, shareholders of the Fund should consider whether the
Fund remains an appropriate investment in light of their then current financial
position and needs. (A complete list of Fund's investment limitations that
cannot be changed without a vote of shareholders is contained in the Statement
of Additional Information under "Investment Objective and Policies.") The
percentage limitations set forth below, as well as those contained elsewhere in
this Prospectus and the Statement of Additional Information, apply at the time
a transaction is effected, and a subsequent change in a percentage resulting
from market fluctuations or any other cause other than an action by the Fund
will not require the Fund to dispose of portfolio securities or to take other
action to satisfy the percentage limitation.

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<PAGE> 101

3. The Fund may not purchase any securities which would cause 25% or more
of the value of its total assets at the time of such purchase to be invested in
the securities of one or more issuers conducting their principal business
activities in the same industry; provided that there is no limitation with
respect to investments in U.S. Government Securities, and provided further,
that the Fund may invest all or substantially all of its assets in another
registered investment company having the same investment objective and policies
and substantially the same investment restrictions as those with respect to the
Fund.

RISK FACTORS AND SPECIAL CONSIDERATIONS

CHANGES IN INTEREST RATES

Because the Fund will invest primarily in fixed income securities, the net
asset value of the Fund's portfolio, and hence its shares, can be expected to
change as general levels of interest rates fluctuate. Except to the extent that
values are affected independently by other factors such as developments
relating to a specific issuer, when interest rates decline, the value of a
fixed income portfolio can generally be expected to rise. Conversely, when
interest rates rise, the value of a fixed income portfolio can generally be
expected to decline. These fluctuations can be expected to be greater with
respect to investments in fixed income securities with longer maturities than
investments in securities with shorter maturities.

RISKS OF INVESTMENT IN FOREIGN SECURITIES

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<PAGE> 102

substantially less volume and may be smaller, less liquid and subject to
greater price volatility than U.S. markets. Delays or problems with settlement
in foreign markets could affect the liquidity of the Fund's foreign investments
and adversely affect performance. Investment in foreign securities also may
result in higher brokerage and other costs and the imposition of transfer taxes
or transaction charges. In addition, there may be less publicly available
information about a non-U.S. issuer than about a U.S. issuer, and non-U.S.
issuers may not be subject to the same accounting, auditing and financial
recordkeeping standards and requirements as U.S. issuers. Finally, in the event
of a default in any such foreign obligations, it may be more difficult for the
Fund to obtain or enforce a judgment against the issuers of such securities.

OTHER INVESTMENTS AND INVESTMENT PRACTICES

Structured products involve special risks, including substantial volatility in
their market values and potential illiquidity. In addition, Derivatives involve
special risks, including possible default by the other party to the
transaction, illiquidity and, to the extent LBGAM's view as to certain market
movements is incorrect, the risk that the use of Derivatives could result in
greater losses than if it had not been used. Use of put and call options could
result in losses to the Fund, force the purchase or sale of portfolio
securities at inopportune times or for prices higher or lower than current
market values, or cause the Fund to hold a security it might otherwise sell.
The use of options and futures transactions entails certain special risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund could create the possibility that losses on the Derivative will be greater
than gains in the value of the Fund's position. In addition, futures and
options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. The Fund might not be able to
close out certain positions without incurring substantial losses. To the extent
the Fund utilizes futures and options transactions for hedging, such
transactions should tend to minimize the risk of loss due to a decline in the
value of the hedged position and, at the same time, limit any potential gain to
the Fund that might result from an increase in value of the position. Finally,
the daily variation margin requirements for futures contracts create a greater
ongoing potential financial risk than would purchases of options, in which case
the exposure is limited to the cost of the initial premium and transaction
costs. Losses resulting from the use of Derivatives will reduce the Fund's net
asset value, and possibly income, and the losses may be greater than if
Derivatives had not been used. Additional information regarding the risks and
special considerations associated with Derivatives appears in the Statement of
Additional Information.

SPECIAL CONSIDERATIONS FOR WRAP PARTICIPANTS

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<PAGE> 103

PURCHASE OF SHARES

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<PAGE> 104

and $1,000, respectively, (b) retirement plans qualified under Section
403(b)(7) or Section 401(a) of the Code ("Qualified Retirement Plan"), for
which the minimum and subsequent investment is $500 and (c) the Fund's
Systematic Investment Plan, for which the minimum and subsequent investment is
$100. For employees of Lehman Brothers and its affiliates, the minimum initial
investment is $1,000 and the minimum subsequent investment is $500. Investors
in Class C shares, in addition to satisfying the foregoing minimum investment
requirements, are subject to an aggregate minimum initial investment
requirement of $25,000 in Class C shares of funds in the Lehman Brothers Group
of Funds. The Funds reserve the right at any time to vary the initial and
subsequent investment minimums. Introducing Brokers may impose higher minimum
investment requirements than the foregoing requirements. Investors in Class W
shares through WRAP are subject to an overall minimum investment requirement
for participation in WRAP. Certificates for Fund shares are not issued unless
expressly requested in writing to the Fund's transfer agent, and are not issued
for fractional shares. It is considerably more complicated to redeem shares
held in certificate form.

<TABLE>
CLASS A SHARES

<CAPTION>
SALES CHARGE AS % OF SALES CHARGE AS %
AMOUNT OF INVESTMENT OFFERING PRICE OF NET ASSET VALUE

- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Less than $100,000 4.75% 4.99%
$100,000 but under $250,000 3.50% 3.63%
$250,000 but under $500,000 2.50% 2.56%
$500,000 but under $1,000,000 2.00% 2.04%
$1,000,000 or more* .00% .00%
- -----------------------------------------------------------------------------------------------------------
<FN>
* No sales charge is imposed on purchases of $1 million or more; however, a CDSC of .75% is imposed for
the first year after purchase. The CDSC on Class A shares is payable to Lehman Brothers which compensates
Lehman Brothers Investment Representatives upon the sale of these shares. The CDSC is waived in the same
circumstances in which the CDSC applicable to Class B shares is waived. See "Redemption of Shares--
Contingent Deferred Sales Charge--Class B shares--Waivers of CDSC."

</TABLE>

REDUCED SALES CHARGES--CLASS A SHARES

Reduced sales charges are available to investors who are eligible to combine
their purchases of Class A shares to receive volume discounts. Investors
eligible to receive volume discounts include individuals and their immediate
families, tax-qualified employee benefit plans and trustees or other
professional fiduciaries (including a bank, or an investment adviser registered
with the SEC under the Investment Advisers Act of 1940, as amended) purchasing
shares for one or more trust estates or fiduciary accounts even though more
than one beneficiary is involved. Reduced sales charges on Class A shares are
also available under a combined right of accumulation, under which an investor
may combine the value of Class A shares already held in the Fund and certain
other funds in the Lehman Brothers Group of Funds, along with the value of the
Fund's Class A shares being purchased, to qualify for a reduced sales charge.
For example, if an investor owns Class A shares of the Fund and certain other
funds in the Lehman Brothers Group of Funds that have an aggregate value of
$74,000, and makes an additional investment in Class A shares of the Fund of
$27,000, the sales charge applicable to the additional investment would be 4%,
rather than the 4.75% normally charged on a $27,000 purchase. Investors
interested in further information regarding reduced sales charges should
contact their Lehman Brothers Investment Representatives.

-22-
<PAGE> 105

CLASS B SHARES

CLASS C SHARES

CLASS W SHARES

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<PAGE> 106

providing on a periodic basis, at least quarterly, a Review, which is a
monitoring report to the investor containing an analysis and evaluation of the
investor's WRAP account and recommending any appropriate changes in the
allocation of assets among the Portfolios. Lehman Brothers will not, however,
have any investment discretion over the investor's WRAP account, all investment
decisions ultimately resting with the investor.

LEHMAN BROTHERS 401(K) PROGRAM

The Fund offers to Participating Plans three classes of shares, Class A, Class
B and Class C shares, as investment alternatives under the 401(k) Program.
Class A shares are available to all Participating Plans and are the only
investment alternative for Participating Plans that are eligible to purchase
Class A shares at net asset value without a sales charge. In addition, Class B
shares are offered only to Participating Plans satisfying certain criteria with
respect to the amount of the initial investment and number of employees
eligible to participate in the Plan at that time. Class C Shares are available
to all Participating Plans.

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<PAGE> 107

Once a Participating Plan has made an initial investment in the Fund, all of
its subsequent investments in the Fund must be in the same Class of shares,
except as otherwise described below.

<TABLE>
Class A Shares. The sales charges for Class A shares acquired by Participating
Plans are as follows:

<CAPTION>
SALES CHARGE AS % OF SALES CHARGE AS %
AMOUNT OF INVESTMENT OFFERING PRICE OF NET ASSET VALUE

- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Less than $100,000 4.75% 4.99%
$100,000 but under $250,000 3.50% 3.63%
$250,000 but under $500,000 2.50% 2.56%
$500,000 but under $750,000 2.00% 2.04%
$750,000 or more .00% .00%
- --------------------------------------------------------------------------------------------------------------
</TABLE>

Class A Shares acquired through the 401(k) Program will not be subject to a
CDSC.

-25-
<PAGE> 108

REDEMPTION OF SHARES

-26-
<PAGE> 109

Plans). In addition, the Fund may redeem shares involuntarily or suspend the
right of redemption as permitted under the 1940 Act, or under certain special
circumstances described in the Statement of Additional Information under
"Additional Purchase and Redemption Information."

Fund shares may be redeemed in one of the following ways:

REDEMPTION THROUGH LEHMAN BROTHERS OR AN INTRODUCING BROKER

REDEMPTION BY MAIL

Lehman Brothers __________________ Fund
Class A, B, C or W (please specify)
c/o The Shareholder Services Group, Inc.
P.O. Box _______
Boston, Massachusetts 02009

AUTOMATIC CASH WITHDRAWAL PLAN

The Fund offers shareholders in Class A, B and C shares an automatic cash
withdrawal plan, under which shareholders who own shares of such classes of the
Fund with a value of at least $10,000 may elect to receive periodic cash
payments of at least $100 monthly. Retirement plan accounts are eligible for
automatic cash withdrawal plans only where the shareholder is eligible to
receive qualified distributions and has an account value of at least $5,000.
Any applicable CDSC will be collected on amounts withdrawn. For further
information regarding the automatic cash withdrawal plan, shareholders should
contact their Lehman Brothers Investment Representatives.

-27-
<PAGE> 110

CONTINGENT DEFERRED SALES CHARGE - CLASS B SHARES

<TABLE>
<CAPTION>
YEAR SINCE PURCHASE PAYMENTS WERE MADE CDSC
- ------------------------------------------------------------------------------------------------- --------------------------------
<S> <C>
First . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.75%
Second . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.00%
Third . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.00%
Fourth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.00%
Fifth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.00%
Sixth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.00%
Seventh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.00%
Eighth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.00%
</TABLE>

Waivers of CDSC. The CDSC will be waived on: (a) exchanges (see "Exchange
Privilege"); (b) redemptions following the death or disability of the
shareholder; (c) redemptions of shares in connection with certain
post-retirement distributions and withdrawals from retirement plans or IRAs;
(d) involuntary redemptions; (e) redemption proceeds from other funds in the
Lehman Brothers Group of Funds that are reinvested within 30 days of the
redemption; (f) redemptions of shares in connection with a combination of any
investment company with the Fund by merger, acquisition of assets or otherwise;

-28-
<PAGE> 111

and (g) certain redemptions of shares of the Fund in connection with lump-sum
or other distributions made by a Participating Plan. See "Purchase of Shares
- -Lehman Brothers 401(k) Program."

CLASS W SHARES AND WRAP

EXCHANGE PRIVILEGE

Class C and W Exchanges. Class C and Class W shares of the Fund may be
exchanged for shares of the same class of the funds referred to above without
charge.

-29-
<PAGE> 112

regarding the exchange privilege or to obtain the current prospectuses for
members of the Lehman Brothers Group of Funds, investors should contact their
Lehman Brothers Investment Representatives. Lehman Brothers reserves the right
to reject any exchange request. The exchange privilege may be modified or
terminated at any time after notice to shareholders.

VALUATION OF SHARES

MANAGEMENT OF THE FUND

INVESTMENT ADVISER - LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC.

Lehman Brothers Global Asset Management Inc. ("LBGAM") serves as investment
adviser to the Fund. LBGAM, together with other Lehman Brothers investment
advisory affiliates, had approximately $11 billion in assets under management
as of July 31, 1994. Subject to the supervision and direction of the Company's
Board of Directors, LBGAM manages the portfolio of the Fund in accordance with
the Fund's investment objective and policies, makes investment decisions for
the Fund and places orders to purchase and sell securities. As compensation
for the services of LBGAM as investment adviser to the Fund, LBGAM is paid a
monthly fee by the Fund at the annual rate of 0.___% of the value of the Fund's
average daily net assets.

Ms. Mary T. Coughlin, Senior Vice President of LBGAM, has primary
responsibility for the day-to-day management of the Fund's investment
portfolio. Ms. Coughlin, who began her investment career in 1982, is the
director of LBGAM's High-Grade Fixed Income group. Prior to joining LBGAM in
1994, Ms. Coughlin was a Senior Portfolio Manager and Strategist at Morgan
Stanley Asset Management ("MSAM") and co-managed the Global Fixed Income group.
Before joining MSAM in 1990, Ms. Coughlin was a Vice President at Continental
Asset Management where she was responsible for $6 billion in domestic fixed
income portfolios and global markets.

-30-
<PAGE> 113

LBGAM is located at 3 World Financial Center, New York, New York 10285. LBGAM
is a wholly owned subsidiary of Lehman Brothers Holdings, Inc. ("Holdings").

ADMINISTRATOR - THE SHAREHOLDER SERVICES GROUP, INC.

DISTRIBUTOR - LEHMAN BROTHERS

-31-
<PAGE> 114

EXPENSES

BANKING LAWS

DIVIDENDS

The Fund's policy is to distribute its investment income and net realized
capital gains. Dividends will be declared daily and paid monthly. Shares begin
accruing dividends on the business day following the day a purchase order is
priced and continue to accrue dividends up to and including the day that such
shares are redeemed. Unless a shareholder instructs that dividends and capital
gains distributions on shares of any Class be paid in cash and credited to the
shareholder's account at Lehman Brothers, dividends and capital gains
distributions will be reinvested automatically in additional shares of that
Class at net asset value, subject to no sales charge or CDSC.

-32-
<PAGE> 115

Each shareholder or its authorized representative will receive an annual
statement designating the amount of any dividends and distributions made during
each year and their federal tax qualification.

TAXES

The Fund intends to distribute substantially all of its investment company
taxable income each year. Such distributions, whether paid in cash or
reinvested in additional shares, of net investment income will be taxable as
ordinary income. Federal income taxes for distributions to an IRA or a
qualified retirement plan are deferred under the Code. A portion of such
dividends may qualify for the dividends-received deduction generally available
for corporate shareholders under the Code. Distributions to shareholders of net
capital gain that are designated by the Fund as "capital gains dividends,"
whether paid in cash or reinvested in additional shares, will be taxable as
long-term capital gains regardless of how long the shares have been held by
such shareholders. Shareholders receiving distributions from the Fund in the
form of additional shares will be treated for federal income tax purposes as
receiving a distribution in an amount equal to the fair market value of the
additional shares on the date of such a distribution.

-33-
<PAGE> 116

and not paid on or before December 31 of such year will be treated as received
by the Shareholders as of December 31 of such year, provided that the dividend
is paid during January of the following year.

_________________________

-34-
<PAGE> 117

THE FUND'S PERFORMANCE

From time to time, the "total return," "yield" and "effective yield" for shares
may be quoted in advertisements or reports to shareholders. Total return and
yield quotations are computed separately for each Class of shares of the Fund.
Total return figures show the average percentage change in the value of an
investment in the Fund from the beginning date of the measuring period to the
end of the measuring period. These figures reflect changes in the price of the
shares and assume that any income dividends and/or capital gains distributions
made by the Fund during the period were reinvested in shares of the same class.
Total return figures for Class A shares include the maximum initial 4.75% sales
charge, for Class B shares include any applicable CDSC, and for Class W shares
include the maximum fee for participation in WRAP during the measuring period.
These figures also take into account the service and distribution fees, if any,
payable with respect to each Class of the Fund's shares.

The Fund may make available information as to the Fund's yield and effective
yield over a thirty-day period, as calculated in accordance with the SEC's
prescribed formula. The effective yield assumes that the income earned by an
investment in the Fund is reinvested and will therefore be slightly higher than
the yield because of the compounding effect of this assumed reinvestment.

-35-
<PAGE> 118

ADDITIONAL INFORMATION

All shares of the Company, when issued, will be fully paid and nonassessable.

Boston Safe, an indirect wholly owned subsidiary of Mellon, is located at One
Boston Place, Boston, Massachusetts 02108, and serves as custodian of the
Fund's investments.

The Shareholder Services Group, Inc., a subsidiary of First Data Corporation,
is located at One Exchange Place, Boston, Massachusetts 02109, and serves as
the Fund's transfer agent.

The Fund sends shareholders a semi-annual and audited annual report, which
includes listings of investment securities held by the Fund at the end of the
period covered. In an effort to reduce the Fund's printing and mailing costs,
the Fund may consolidate the mailing of its semi-annual and annual reports by
household. This consolidation means that a household having multiple accounts
with the identical address of record would receive a single copy of each
report. In addition, the Fund may consolidate the mailing of its Prospectus so
that a shareholder having multiple accounts (e.g., individual, IRA and/or
Self-Employed Retirement Plan accounts) would receive a single Prospectus
annually. When the Fund's annual report is combined with the Prospectus into a
single document, the Fund will mail the combined document to each shareholder
to comply with legal requirements. Any shareholder who does not want this
consolidation to apply to his or her account should contact his or her Lehman
Brothers Investment

-36-
<PAGE> 119

Representative or the Fund's transfer agent. Shareholders may direct inquiries
regarding the Fund to their Lehman Brothers Investment Representatives.

-37-
<PAGE> 120

LEHMAN BROTHERS HIGH-GRADE FIXED INCOME FUND

Prospectus

________ __, 1994

<TABLE>
TABLE OF CONTENTS

<S> <C>
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Background and Expense Information . . . . . . . . . . . . . . . . . . . . . . . 6

Variable Pricing System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Investment Objective and Policies . . . . . . . . . . . . . . . . . . . . . . . . 9

Risk Factors and Special Considerations . . . . . . . . . . . . . . . . . . . . . 19

Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Exchange Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Valuation of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

The Fund's Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
</TABLE>
<PAGE> 121

SUBJECT TO COMPLETION-DATED SEPTEMBER 8, 1994

PROSPECTUS

LEHMAN BROTHERS HIGH-GRADE FIXED INCOME FUND

An Investment Portfolio of Lehman Brothers Funds, Inc.

________________, 1994

The shares described in this Prospectus represent interests in a class of
shares ("Premier Shares") of the LEHMAN BROTHERS HIGH-GRADE FIXED INCOME FUND
(the "Fund"). The Fund is a diversified portfolio of Lehman Brothers Funds,
Inc. (the "Company"), an open-end management investment company. Premier Shares
may not be purchased by individuals directly, but institutional investors may
purchase shares for accounts maintained by individuals.

LEHMAN BROTHERS INC. sponsors the Fund and acts as distributor of the Fund's
shares. LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC. serves as the Fund's
investment adviser.

The address of the Fund is 3 World Financial Center, New York, New York 10285.
Performance and other information regarding the Fund may be obtained by
calling 800-_________.

Shares of the Fund are being offered during an initial subscription period
scheduled to end on _______ __, 1994. Subsequent to such date, the Fund will
engage in a continuous offering of its shares. See "Purchase, Redemption and
Exchange of Shares."

This Prospectus briefly sets forth certain information about the Fund that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about the
Fund, contained in a Statement of Additional Information dated ___________
__, 1994, as amended or supplemented from time to time, has been filed with the
Securities and Exchange Commission and is available to investors without charge
by calling 800-_________. The Statement of Additional Information is
incorporated in its entirety by reference into this Prospectus.

SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SUCH SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE CERTAIN INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE> 122

PROSPECTUS SUMMARY

BENEFITS TO INVESTORS

The Fund offers investors several important benefits:

o investment liquidity through convenient purchase and
redemption procedures.

o a convenient way to invest without the administrative and
recordkeeping burdens normally associated with the direct
ownership of securities.

o automatic dividend reinvestment feature, plus exchange
privilege with the shares of certain other funds in the Lehman
Brothers Group of Funds.

INVESTMENT OBJECTIVE

PURCHASE OF SHARES

-2-
<PAGE> 123

received by the Fund's custodian in immediately available federal funds. See
"Purchase, Redemption and Exchange of Shares."

INVESTMENT MINIMUMS

REDEMPTION OF SHARES

MANAGEMENT OF THE FUND

EXCHANGE PRIVILEGE

Premier Shares of the Fund may be exchanged for Premier Shares of certain other
funds in the Lehman Brothers Group of Funds. See "Exchange Privilege."

DIVIDENDS AND DISTRIBUTIONS

RISK FACTORS AND SPECIAL CONSIDERATIONS

-3-
<PAGE> 124

Because the Fund will generally invest in fixed income securities, the net
asset value of the Fund's portfolio, and hence its shares, can be expected to
change as general levels of interest rates fluctuate. Interest rate risk can be
expected to be greater with respect to investments in fixed income securities
with longer maturities than investments in securities with shorter maturities.

-4-
<PAGE> 125

BACKGROUND AND EXPENSE INFORMATION

The Fund offers multiple classes of shares, only one of which, Premier Shares,
is offered by this Prospectus. Each share of the Fund accrues income in the
same manner, but certain expenses differ based upon the class. See "Additional
Information." The following Expense Summary lists the costs and expenses that a
holder of Premier Shares can expect to incur as an investor in the Fund, based
upon estimated expenses and average net assets for the current fiscal year.
Certain institutions also may charge their clients fees in connection with
investments in Premier Shares, which fees are not reflected in the table below.

<TABLE>
EXPENSE SUMMARY

<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Advisory Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . ____%
Rule 12b-1 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . none
Other Expenses - including Administration Fees* . . . . . . . . . . . ____%
Total Fund Operating Expenses . . . . . . . . . . . . . . . . . . . . ____%
<FN>
- ------------------
* The amount set forth for "Other Expenses" is based on estimates for the current fiscal year.
</TABLE>

<TABLE>
EXAMPLE

You would pay the following expenses on a $1,000 investment, assuming a 5% annual return:

<CAPTION>
1 year 3 years
------------------ ------------------
<S> <C>
$___ $___
</TABLE>

-5-
<PAGE> 126

INVESTMENT OBJECTIVE AND POLICIES

GENERAL

The Fund's investment objective is to seek as high a level of total return,
consisting of current income and capital appreciation, as is consistent with
the preservation of capital. The Fund will seek to achieve its objective by
investing in a broad range of high-grade fixed income securities of government
and corporate issuers. Under normal market conditions, the Fund expects that at
least 75% of its total assets will be invested in high-grade debt obligations
which are rated, at the time of investment, at least in the category "A" by
Moody's or S&P, are comparably rated by another NRSRO, or, if not rated, are of
comparable quality as determined by the Fund's investment adviser. Up to 25% of
the Fund's total assets may be invested in investment grade debt obligations
which are rated, at the time of investment, in the category "Baa" by Moody's or
"BBB" by S&P, are comparably rated by another NRSRO, or, if not rated, are of
comparable quality as determined by the Fund's investment adviser. The Fund
invests only in those fixed income securities that are denominated in U.S.
dollars. There can be no assurance that the Fund will achieve its investment
objective. For a discussion of certain risks and considerations associated with
an investment in the Fund, see "Risk Factors and Special Considerations."

U.S. GOVERNMENT SECURITIES

-6-
<PAGE> 127

supported by discretionary authority of the U.S. Government to purchase certain
obligations of the agency or instrumentality; and others, such as those issued
by the Student Loan Marketing Association, are supported only by the credit of
the agency or instrumentality. These securities bear fixed, floating or
variable rates of interest. While the U.S. Government provides financial
support to such U.S. Government-sponsored agencies or instrumentalities, no
assurance can be given that it will always do so, since it is not so obligated
by law. The Fund will invest in such securities only when it is satisfied that
the credit risk with respect to the issuer is minimal.

CORPORATE DEBT SECURITIES

MORTGAGE-RELATED SECURITIES

-7-
<PAGE> 128

issued by FHLMC or FNMA are typically conventional residential mortgages
conforming to strict underwriting size and maturity constraints.

(a) collateralized by pools of mortgages in which each mortgage is
guaranteed as to payment of principal and interest by an
agency or instrumentality of the U.S. government.

(b) collateralized by pools of mortgages in which payment of
principal and interest is guaranteed by the issuer and such
guarantee is collateralized by U.S. Government Securities;

(d) collateralized by whole mortgage loans.

All CMOs purchased by the Fund will be investment grade, as rated by a NRSRO.

-8-
<PAGE> 129

TEMPORARY INVESTMENTS

-9-
<PAGE> 130

to promote economic reconstruction or development; bank obligations, such as
certificates of deposit, time deposits and bankers' acceptances; corporate debt
obligations, including commercial paper; and repurchase agreements. To be
eligible for investment under the circumstances described above, such
instruments (other than U.S. Government Securities) must be issued by an issuer
having a short-term debt rating of A-1 or better by S&P, a rating of Prime-1 by
Moody's, a comparable rating from another NRSRO or, if unrated, deemed to be of
equivalent quality by LBGAM.

OTHER INVESTMENTS AND INVESTMENT PRACTICES

-10-
<PAGE> 131

comes from the difference between its purchase price and its maturity value.
This difference is known at the time of purchase, so that investors holding
zero coupon securities until maturity know at the time of their investment what
the expected return on their investment will be. Certain zero coupon securities
also are sold at substantial discounts from their maturity value and provide
for the commencement of regular interest payments at a deferred date. The Fund
also may purchase pay-in-kind bonds. Pay-in-kind bonds pay all or a portion of
their interest in the form of additional debt or equity securities.

-11-
<PAGE> 132

to institutional investors such as the Fund who agree that they are purchasing
the paper for investment and not with a view to public distribution. Any resale
by the purchaser must be in an exempt transaction. Section 4(2) paper normally
is resold to other institutional investors like the Fund through or with the
assistance of the issuer or investment dealers who make a market in the Section
4(2) paper, thus providing liquidity. If a particular investment in Rule 144A
securities, Section 4(2) paper or private placement securities is not
determined to be liquid, that investment will be included within the 15%
limitation on investment in illiquid securities. The ability to sell Rule 144A
securities to qualified institutional buyers is a recent development and it is
not possible to predict how this market will mature. LBGAM will monitor the
liquidity of such restricted securities under the supervision of the Board of
Directors. See "Investment Objective and Policies - Additional Information on
Portfolio Instruments and Certain Investment Practices - Illiquid and
Restricted Securities" in the Statement of Additional Information.

-12-
<PAGE> 133

the Fund's purchase of subordinated structured products would have a similar
economic effect to that of borrowing against the underlying securities, the
purchase will not be deemed to be leverage for purposes of the Fund's
fundamental investment limitation related to borrowing and leverage.

-13-
<PAGE> 134

general level of interest rates. The Fund does not intend to purchase
when-issued or delayed delivery securities for speculative purposes but only in
furtherance of its investment objective. When the Fund purchases securities on
a when-issued or delayed delivery basis, it will set aside securities or cash
with its custodian equal to the payment that will be due.

-14-
<PAGE> 135

other factors relevant to the Fund's investments, such as commodity prices or
rates of inflation), to manage the effective maturity or duration of debt
instruments held by the Fund, or to seek to increase the Fund's income or
capital appreciation. Over time, techniques and instruments may change as new
instruments and strategies are developed or regulatory changes occur.
Limitations on the portion of the Fund's assets that may be used in connection
with the investment strategies described below appear in the Statement of
Additional Information.

Derivatives may be used to attempt to protect against possible changes in the
market value of securities held in or to be purchased for the Fund's portfolio
resulting from securities markets fluctuations, to protect the Fund's
unrealized gains in the value of its portfolio securities, to facilitate the
sale of those securities for investment purposes, to manage the effective
maturity or duration of the Fund's portfolio, to establish a position in the
derivatives markets as a substitute for purchasing or selling particular debt
securities or to seek to enhance the Fund's income or capital appreciation. The
Fund may use any or all types of Derivatives at any time; no particular
strategy will dictate the use of one type of transaction rather than another,
as use of any authorized Derivative will be a function of numerous variables,
including market conditions. The ability of the Fund to utilize Derivatives
successfully will depend on LBGAM's ability to predict pertinent market
movements, which cannot be assured. These skills are different from those
needed to select portfolio securities. The Fund is not a "commodity pool"
(i.e., a pooled investment vehicle which trades in commodity futures contracts
and options thereon and the operator of which is registered with the Commodity
Futures Trading Commission (the "CFTC")) and Derivatives involving futures
contracts and options on futures contracts will be purchased, sold or entered
into only for bona fide hedging purposes, provided that the Fund may enter into
such transactions for purposes other than bona fide hedging if, immediately
thereafter, the sum of the amount of its initial margin and premiums on open
contracts and options would not exceed 5% of the liquidation value of the
Fund's portfolio, provided, further, that, in the case of an option that is
in-the-money, the in-the-money amount may be excluded in calculating the 5%
limitation. The use of Derivatives in certain circumstances will require that
the Fund segregate cash, liquid high-grade debt obligations or other assets to
the extent the Fund's obligations are not otherwise "covered" through ownership
of the underlying security or financial instrument. See "Risk Factors and
Special Considerations - Other Investments and Investment Practices."

The degree of the Fund's use of Derivatives may be limited by certain
provisions of the Code. See "Taxes."

-15-
<PAGE> 136

INVESTMENT LIMITATIONS

3. The Fund may not purchase any securities which would cause 25% or more
of the value of its total assets at the time of such purchase to be invested in
the securities of one or more issuers conducting their principal business
activities in the same industry; provided that there is no limitation with
respect to investments in U.S. Government Securities, and provided further,
that the Fund may invest all or substantially all of its assets in another
registered investment company having the same investment objective and policies
and substantially the same investment restrictions as those with respect to the
Fund.

-16-
<PAGE> 137

company will be less than or approximately equal to the expenses which each
class of the Fund would incur if the Fund were to continue to retain the
services of an investment adviser for the Fund and the assets of the Fund were
to continue to be invested directly in portfolio securities.

RISK FACTORS AND SPECIAL CONSIDERATIONS

CHANGES IN INTEREST RATES

RISKS OF INVESTMENT IN FOREIGN SECURITIES

The Fund may invest in obligations of foreign government and corporate issuers,
but all such obligations must be denominated in U.S. dollars. Securities of
non-U.S. issuers may trade in U.S. or foreign securities markets. Securities of
non-U.S. issuers may involve certain considerations and risks not typically
associated with investing in securities of U.S. companies or the U.S.
government, including uncertainties regarding future political and economic
developments, the possible imposition of foreign withholding taxes on interest
income payable on securities held by the Fund, the possible seizure or
nationalization of foreign assets and the possible establishment of foreign
government laws or restrictions that might adversely affect the payment of
interest on debt securities held by the Fund. Foreign securities markets may
have substantially less volume and may be smaller, less liquid and subject to
greater price volatility than U.S. markets. Delays or problems with settlement
in foreign markets could affect the liquidity of the Fund's foreign investments
and adversely affect performance. Investment in foreign securities also may
result in higher brokerage and other costs and the imposition of transfer taxes
or transaction charges. In addition, there may be less publicly available
information about a non-U.S. issuer than about a U.S. issuer, and non-U.S.
issuers may not be subject to the same accounting, auditing and financial
recordkeeping standards and requirements as U.S. issuers. Finally, in the event
of a default in any such foreign obligations, it may be more difficult for the
Fund to obtain or enforce a judgment against the issuers of such securities.

OTHER INVESTMENTS AND INVESTMENT PRACTICES

-17-
<PAGE> 138

to hold a security it might otherwise sell. The use of options and futures
transactions entails certain special risks. In particular, the variable degree
of correlation between price movements of futures contracts and price movements
in the related portfolio position of the Fund could create the possibility that
losses on the Derivative will be greater than gains in the value of the Fund's
position. In addition, futures and options markets could be illiquid in some
circumstances and certain over-the-counter options could have no markets. The
Fund might not be able to close out certain positions without incurring
substantial losses. To the extent the Fund utilizes futures and options
transactions for hedging, such transactions should tend to minimize the risk of
loss due to a decline in the value of the hedged position and, at the same
time, limit any potential gain to the Fund that might result from an increase
in value of the position. Finally, the daily variation margin requirements for
futures contracts create a greater ongoing potential financial risk than would
purchases of options, in which case the exposure is limited to the cost of the
initial premium and transaction costs. Losses resulting from the use of
Derivatives will reduce the Fund's net asset value, and possibly income, and
the losses may be greater than if Derivatives had not been used. Additional
information regarding the risks and special considerations associated with
Derivatives appears in the Statement of Additional Information.

PURCHASE, REDEMPTION AND EXCHANGE OF SHARES

PURCHASES IN THE INITIAL OFFERING

PURCHASES IN THE CONTINUOUS OFFERING

-18-
<PAGE> 139

Brothers will be returned after prompt inquiry to the sending institution.) Any
person entitled to receive compensation for selling or servicing shares of the
Fund may receive different compensation for selling or servicing one class of
shares over another class.

ADDITIONAL PURCHASE INFORMATION

REDEMPTION OF SHARES

-19-
<PAGE> 140

Fund shares by telephone may be modified or terminated at any time by the Fund
or Lehman Brothers. In addition, neither the Fund, Lehman Brothers nor the
transfer agent will be responsible for the authenticity of telephone
instructions for the purchase, redemption or exchange of shares where the
instructions for the purchase, redemption or exchange of shares are reasonably
believed to be genuine. Accordingly, the investor will bear the risk of loss.
The Fund will attempt to confirm that telephone instructions are genuine and
will use such procedures as are considered reasonable, including the recording
of telephone instructions. To the extent that the Fund fails to use reasonable
procedures to verify the genuineness of telephone instructions, it or its
service providers may be liable for such instructions that prove to be
fraudulent or unauthorized.

EXCHANGE PRIVILEGE

OTHER MATTERS

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<PAGE> 141

VALUATION OF SHARES

MANAGEMENT OF THE FUND

INVESTMENT ADVISER - LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC.

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<PAGE> 142

LBGAM is located at 3 World Financial Center, New York, New York 10285. LBGAM
is a wholly owned subsidiary of Lehman Brothers Holdings, Inc. ("Holdings").

ADMINISTRATOR - THE SHAREHOLDER SERVICES GROUP, INC.

On May 6, 1994, TSSG acquired the third party mutual fund administration
business of The Boston Company Advisors, Inc., an indirect wholly-owned
subsidiary of Mellon Bank Corporation ("Mellon"). In connection with this
transaction, Mellon assigned to TSSG its agreement with Lehman Brothers such
that Lehman Brothers and its affiliates, consistent with their fiduciary duties
and assuming certain service quality standards are met, would recommend TSSG as
the provider of administration services to the Fund. This duty to recommend
expires on May 21, 2000. In addition, under the terms of the Stock Purchase
Agreement dated September 14, 1992 between Mellon and Lehman Brothers (then
named Shearson Lehman Brothers Inc.), Lehman Brothers agreed to recommend
Boston Safe, an indirect wholly owned subsidiary of Mellon, as custodian of
mutual funds affiliated with Lehman Brothers until May 21, 2000, to the extent
consistent with its fiduciary duties and other applicable law.

DISTRIBUTOR - LEHMAN BROTHERS

EXPENSES

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<PAGE> 143

reimburse the Fund to the extent required by applicable state law for certain
expenses that are described in the Statement of Additional Information relating
to the Fund. In addition, in order to maintain a competitive expense ratio
LBGAM and TSSG have agreed to reimburse the Fund for certain operating expenses
for a period of at least one year from the date of this Prospectus. See
"Background and Expense Information."

DIVIDENDS

Each shareholder or its authorized representative will receive an annual
statement designating the amount of any dividends and distributions made
during each year and their federal tax qualification.

TAXES

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<PAGE> 144

taxable as ordinary income. Federal income taxes for distributions to an
Individual Retirement Account ("IRA") or a qualified retirement plan are
deferred under the Code. A portion of such dividends may qualify for the
dividends-received deduction generally available for corporate shareholders
under the Code. Distributions to shareholders of net capital gain that are
designated by the Fund as "capital gains dividends," whether paid in cash or
reinvested in additional shares, will be taxable as long-term capital gains
regardless of how long the shares have been held by such shareholders.
Shareholders receiving distributions from the Fund in the form of additional
shares will be treated for federal income tax purposes as receiving a
distribution in an amount equal to the fair market value of the additional
shares on the date of such a distribution.

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<PAGE> 145

dividends if (i) the shareholder fails to furnish the Fund with the
shareholder's correct taxpayer identification number, (ii) the Internal Revenue
Service ("IRS") notifies the Fund that the shareholder has failed to report
properly certain interest and dividend income to the IRS and to respond to
notices to that effect, or (iii) when required to do so, the shareholder fails
to certify that he or she is not subject to backup withholding.

_________________________

THE FUND'S PERFORMANCE

From time to time, the "total return," "yield" and "effective yield" for shares
may be quoted in advertisements or reports to shareholders. Total return and
yield quotations are computed separately for each class of shares. Total return
figures show the average percentage change in the value of an investment in the
Fund from the beginning date of the measuring period to the end of the
measuring period. These figures reflect changes in the price of the shares and
assume that any income dividends and/or capital gains distributions made by the
Fund during the period were reinvested in shares of the Fund. Total return
figures include any applicable sales charges, service fees and distribution
fees payable with respect to a class.

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<PAGE> 146

the income earned by an investment in the Fund is reinvested and will therefore
be slightly higher than the yield because of the compounding effect of this
assumed reinvestment.

ADDITIONAL INFORMATION

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<PAGE> 147

directors if such a request is made, in writing, by the holders of at least 10%
of the Company's outstanding voting securities.

All shares of the Company, when issued, will be fully paid and nonassessable.

Boston Safe, an indirect wholly owned subsidiary of Mellon, is located at One
Boston Place, Boston, Massachusetts 02108, and serves as custodian of the
Fund's investments.

The Shareholder Services Group, Inc., a subsidiary of First Data Corporation,
is located at One Exchange Place, Boston, Massachusetts 02109, and serves as
the Fund's transfer agent.

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<PAGE> 148

LEHMAN BROTHERS HIGH-GRADE FIXED INCOME FUND

Prospectus

________ __, 1994

<TABLE>
TABLE OF CONTENTS

<S> <C>
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Background and Expense Information . . . . . . . . . . . . . . . . . . . . . . . 5

Investment Objective and Policies . . . . . . . . . . . . . . . . . . . . . . . . 6

Risk Factors and Special Considerations . . . . . . . . . . . . . . . . . . . . . 17

Purchase, Redemption and Exchange of Shares . . . . . . . . . . . . . . . . . . . 18

Valuation of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

The Fund's Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
</TABLE>
<PAGE> 149
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.

SUBJECT TO COMPLETION-DATED SEPTEMBER 8, 1994

PROSPECTUS

LEHMAN BROTHERS HIGH-GRADE FIXED INCOME FUND

An Investment Portfolio of Lehman Brothers Funds, Inc.

________________, 1994

The shares described in this Prospectus represent interests in a class of
shares ("Select Shares") of the LEHMAN BROTHERS HIGH-GRADE FIXED INCOME FUND
(the "Fund"). The Fund is a diversified portfolio of Lehman Brothers Funds,
Inc. (the "Company"), an open-end management investment company. Select Shares
may not be purchased by individuals directly, but institutional investors may
purchase shares for accounts maintained by individuals.

LEHMAN BROTHERS INC. sponsors the Fund and acts as distributor of the Fund's
shares. LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC. serves as the Fund's
investment adviser.

The address of the Fund is 3 World Financial Center, New York, New York 10285.
Performance and other information regarding the Fund may be obtained by calling
800-_________.

Shares of the Fund are being offered during an initial subscription period
scheduled to end on _______ __, 1994. Subsequent to such date, the Fund will
engage in a continuous offering of its shares. See "Purchase, Redemption and
Exchange of Shares."

This Prospectus briefly sets forth certain information about the Fund that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about the
Fund, contained in a Statement of Additional Information dated ___________ __,
1994, as amended or supplemented from time to time, has been filed with the
Securities and Exchange Commission and is available to investors without charge
by calling 800-_________. The Statement of Additional Information is
incorporated in its entirety by reference into this Prospectus.

SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SUCH SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE CERTAIN INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

<PAGE> 150
PROSPECTUS SUMMARY

BENEFITS TO INVESTORS

The Fund offers investors several important benefits:

o investment liquidity through convenient purchase and
redemption procedures.

o a convenient way to invest without the administrative and
recordkeeping burdens normally associated with the direct
ownership of securities.

o automatic dividend reinvestment feature, plus exchange
privilege with the shares of certain other funds in the Lehman
Brothers Group of Funds.

INVESTMENT OBJECTIVE

PURCHASE OF SHARES

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<PAGE> 151
INVESTMENT MINIMUMS

REDEMPTION OF SHARES

MANAGEMENT OF THE FUND

EXCHANGE PRIVILEGE

Select Shares of the Fund may be exchanged for Select Shares of certain other
funds in the Lehman Brothers Group of Funds. See "Exchange Privilege."

DIVIDENDS AND DISTRIBUTIONS

RISK FACTORS AND SPECIAL CONSIDERATIONS

Because the Fund will generally invest in fixed income securities, the net
asset value of the Fund's portfolio, and hence its shares, can be expected to
change as general levels of interest rates fluctuate. Interest rate risk can be
expected to be greater with respect to investments in fixed income securities
with longer maturities than investments in securities with shorter maturities.

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<PAGE> 152
In addition, the Fund may invest up to 15% of its total assets in illiquid
securities, and engage in hedging and derivatives transactions and certain
other investment practices, which may entail certain risks. For a more complete
discussion of the risks associated with an investment in the Fund, see
"Investment Objective and Policies - Other Investments and Investment
Practices" and "Risk Factors and Special Considerations."

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<PAGE> 153
BACKGROUND AND EXPENSE INFORMATION

<TABLE>
EXPENSE SUMMARY

<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Advisory Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . ____%
Rule 12b-1 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . 0.25%
Other Expenses - including Administration Fees* . . . . . . . . . . ____%

Total Fund Operating Expenses . . . . . . . . . . . . . . . . . . . ____%
<FN>
- ------------------
* The amount set forth for "Other Expenses" is based on estimates for the current fiscal year.
</TABLE>

<TABLE>
EXAMPLE

You would pay the following expenses on a $1,000 investment, assuming a 5% annual return:

<CAPTION>
1 year 3 years
---------------- ----------------
<S> <C>
$___ $___
</TABLE>

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<PAGE> 154
INVESTMENT OBJECTIVE AND POLICIES

GENERAL

The Fund's investment objective is to seek as high a level of total return,
consisting of current income and capital appreciation, as is consistent with
the preservation of capital. The Fund will seek to achieve its objective by
investing in a broad range of high-grade fixed income securities of government
and corporate issuers. Under normal market conditions, the Fund expects that at
least 75% of its total assets will be invested in high-grade debt obligations
which are rated, at the time of investment, at least in the category "A" by
Moody's or S&P, are comparably rated by another NRSRO, or, if not rated, are of
comparable quality as determined by the Fund's investment adviser. Up to 25% of
the Fund's total assets may be invested in investment grade debt obligations
which are rated, at the time of investment, in the category "Baa" by Moody's or
"BBB" by S&P, are comparably rated by another NRSRO, or, if not rated, are of
comparable quality as determined by the Fund's investment adviser. The Fund
invests only in those fixed income securities that are denominated in U.S.
dollars. There can be no assurance that the Fund will achieve its investment
objective. For a discussion of certain risks and considerations associated with
an investment in the Fund, see "Risk Factors and Special Considerations."

U.S. GOVERNMENT SECURITIES

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<PAGE> 155

sponsored agencies or instrumentalities, no assurance can be given that it will
always do so, since it is not so obligated by law. The Fund will invest in such
securities only when it is satisfied that the credit risk with respect to the
issuer is minimal.

CORPORATE DEBT SECURITIES

MORTGAGE-RELATED SECURITIES

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<PAGE> 156
prepayments of principal that it receives, the holder may receive a rate of
interest paid on the existing ARMS.

(a) collateralized by pools of mortgages in which each mortgage is
guaranteed as to payment of principal and interest by an
agency or instrumentality of the U.S. government.

(b) collateralized by pools of mortgages in which payment of
principal and interest is guaranteed by the issuer and such
guarantee is collateralized by U.S. Government Securities;

(d) collateralized by whole mortgage loans.

All CMOs purchased by the Fund will be investment grade, as rated by a NRSRO.

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<PAGE> 157
Resets. Certain of the ARMS, CMOs and REMICs in which the Fund may invest have
interest rates that are readjusted or reset at intervals of one year or less to
an increment over some predetermined interest rate index. There are two main
categories of indices: those based on U.S. Treasury securities and those
derived from a calculated measure, such as a cost of funds index or a moving
average of mortgage rates. Commonly utilized indices include the one-year and
five-year Constant Maturity Treasury (CMT) rates, the three-month Treasury Bill
rate, the 180-day Treasury Bill rate, rates on longer-term Treasury securities,
the National Median Cost of Funds, COFI, the one-month or three-month London
Interbank Offered Rate, LIBOR, the prime rate of a specific bank, or commercial
paper rates. Some indices such as the one-year CMT rate, closely mirror changes
in market interest rate levels. Others tend to lag changes in market rate
levels and tend to be somewhat less volatile.

TEMPORARY INVESTMENTS

OTHER INVESTMENTS AND INVESTMENT PRACTICES

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<PAGE> 158
because of the conversion feature, the market value of convertible securities
tends to vary with fluctuations in the market value of the underlying common
stocks and therefore also will react to variations in the general market for
equity securities. A unique feature of convertible securities is that as the
market price of the underlying common stock declines, convertible securities
tend to trade increasingly on a yield basis, and so may not experience market
value declines to the same extent as the underlying common stock. When the
market price of the underlying common stock increases, the prices of the
convertible securities tend to rise as a reflection of the value of the
underlying common stock. While no securities investments are without risk,
investments in convertible securities generally entail less risk than
investments in common stock of the same issuer. In connection with its
purchases of convertible securities, the Fund may from time to time hold common
or preferred stock received upon the conversion or exchange of the security.
The Fund has no intention of holding common or preferred stock and will sell
such securities as promptly as practicable and in a manner which it believes
will reduce the risk to the Fund of loss in connection with the sale.

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<PAGE> 159
Asset-Backed Securities. The Fund may purchase asset-backed securities.
Asset-backed securities represent defined interests in an underlying pool of
assets. Such securities may be issued as pass-through certificates, which
represent undivided fractional interests in the underlying pool of assets.
Alternatively, asset-backed securities may be issued as interests, generally in
the form of debt securities, in a special purpose entity organized solely for
the purpose of owning the underlying assets and issuing such securities. In the
latter case, such securities are secured by and payable from a stream of
payments generated by the underlying assets. The assets underlying asset-backed
securities are often a pool of assets similar to one another, such as motor
vehicle receivables or credit card receivables. Alternatively, the underlying
assets may be particular types of securities, various contractual rights to
receive payments and/or other types of assets. Asset-backed securities
frequently carry credit protection in the form of extra collateral, subordinate
certificates, cash reserve accounts, letters of credit or other enhancements.

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<PAGE> 160
dependent on the extent of the cash flow on the underlying instruments. The
Fund may invest in structured products which represent derived investment
positions based on relationships among different markets or asset classes.

-12-
<PAGE> 161
the investment does not represent more than 3% of the voting stock of the
acquired investment company. By investing in another investment fund, the Fund
bears a ratable share of the investment fund's expenses, as well as continuing
to bear the Fund's advisory and administrative fees with respect to the amount
of the investment. In addition, the Fund may, in the future, seek to achieve
its investment objective by investing all of its assets in a no-load, open-end
management investment company having the same investment objective and policies
and substantially the same investment restrictions as those applicable to the
Fund, as described below under "Investment Limitations."

When-Issued and Delayed Delivery Securities. The Fund may purchase securities
on a "when-issued" or delayed delivery basis. When-issued and delayed delivery
securities are securities purchased for delivery beyond the normal settlement
date at a stated price. The Fund will generally not pay for such securities or
start earning income on them until they are received. Securities purchased on a
when-issued or delayed delivery basis are recorded as an asset and are subject
to changes in value based upon changes in the general level of interest rates.
The Fund does not intend to purchase when-issued or delayed delivery securities
for speculative purposes but only in furtherance of its investment objective.
When the Fund purchases securities on a when-issued or delayed delivery basis,
it will set aside securities or cash with its custodian equal to the payment
that will be due.

Borrowing. The Fund may borrow only from banks or, subject to obtaining
exemptive relief from the Securities and Exchange Commission ("SEC"), from
other funds advised by Lehman Brothers or its affiliates (as described below
under "Interfund Lending Program"), or by entering into reverse repurchase
agreements, in aggregate amounts not to exceed 33-1/3% of its total assets
(including the amount borrowed) less its liabilities (excluding the amount
borrowed), and only for temporary or emergency purposes. Bank borrowings may be
from U.S. or foreign banks and may be secured or unsecured. The Fund may also
borrow by entering into reverse repurchase agreements, pursuant to which it
would sell portfolio securities to financial institutions, such as banks and
broker-dealers, and agree to repurchase them at an agreed upon date and price.
The Fund would also consider entering into reverse repurchase agreements to
avoid otherwise selling securities during unfavorable market conditions to meet
redemptions. Reverse repurchase agreements involve the risk that the market
value of the portfolio securities sold by the Fund may decline below the price
of the securities the Fund is obligated to repurchase.

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<PAGE> 162
good standing and only when, in the judgment of LBGAM, the income to be earned
from the loans justifies the attendant risks.

Hedging and Derivatives. The Fund is authorized to use various hedging and
investment strategies described below to hedge market risks (such as broad or
specific market movements and interest rates or other factors relevant to the
Fund's investments, such as commodity prices or rates of inflation), to manage
the effective maturity or duration of debt instruments held by the Fund, or to
seek to increase the Fund's income or capital appreciation. Over time,
techniques and instruments may change as new instruments and strategies are
developed or regulatory changes occur. Limitations on the portion of the Fund's
assets that may be used in connection with the investment strategies described
below appear in the Statement of Additional Information.

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<PAGE> 163
with the Commodity Futures Trading Commission (the "CFTC")) and Derivatives
involving futures contracts and options on futures contracts will be purchased,
sold or entered into only for bona fide hedging purposes, provided that the
Fund may enter into such transactions for purposes other than bona fide hedging
if, immediately thereafter, the sum of the amount of its initial margin and
premiums on open contracts and options would not exceed 5% of the liquidation
value of the Fund's portfolio, provided, further, that, in the case of an
option that is in-the-money, the in-the-money amount may be excluded in
calculating the 5% limitation. The use of Derivatives in certain circumstances
will require that the Fund segregate cash, liquid high-grade debt obligations
or other assets to the extent the Fund's obligations are not otherwise
"covered" through ownership of the underlying security or financial instrument.
See "Risk Factors and Special Considerations - Other Investments and Investment
Practices."

The degree of the Fund's use of Derivatives may be limited by certain
provisions of the Code. See "Taxes."

INVESTMENT LIMITATIONS

2. The Fund may not borrow money, except that the Fund may borrow money
from banks or from other funds advised by Lehman Brothers Inc. or its
affiliates, or enter into reverse repurchase agreements, in each case for
temporary or emergency purposes only (not for leveraging or investment), in
aggregate amounts not exceeding 33-1/3% of the value of its total assets at the
time of such borrowing. For purposes of the foregoing investment limitation,
the term "total assets" shall be calculated after giving effect to the net
proceeds of any borrowings and reduced by any liabilities and indebtedness
other than such borrowings. Additional investments will not be made by the Fund
when borrowings exceed 5% of total net assets, provided, however, that the Fund
may increase its interest in another registered investment

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<PAGE> 164
company having the same investment objective and policies and substantially the
same investment restrictions as those with respect to the Fund while such
borrowings are outstanding.

3. The Fund may not purchase any securities which would cause 25% or more
of the value of its total assets at the time of such purchase to be invested in
the securities of one or more issuers conducting their principal business
activities in the same industry; provided that there is no limitation with
respect to investments in U.S. Government Securities, and provided further,
that the Fund may invest all or substantially all of its assets in another
registered investment company having the same investment objective and policies
and substantially the same investment restrictions as those with respect to the
Fund.

RISK FACTORS AND SPECIAL CONSIDERATIONS

CHANGES IN INTEREST RATES

RISKS OF INVESTMENT IN FOREIGN SECURITIES

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<PAGE> 165
OTHER INVESTMENTS AND INVESTMENT PRACTICES

PURCHASE, REDEMPTION AND EXCHANGE OF SHARES

PURCHASES IN THE INITIAL OFFERING

Shares of the Fund are being offered through Lehman Brothers, the Fund's
distributor, during a period scheduled to end on __________ __, 1994, subject
to extension by agreement between the Fund and Lehman Brothers (the
"Subscription Period"). The price for Select Shares of the Fund during the
Subscription Period will be $10.00 per share. On the fifth business day
following termination of the Subscription Period (the "Closing Date"),
subscriptions for shares will be payable and shares will be issued. Following
termination of the Subscription Period, the Fund will begin a continuous
offering of shares. Investors will not be required to pay for shares offered
during the Subscription Period until the Closing Date, and they may revoke
subscriptions until the termination of the Subscription Period. Purchase orders
for Premier Shares placed during the Subscription Period must be transmitted to
Lehman Brothers by telephone before 4:00 p.m. on the last day of the
Subscription Period, and payment in respect of such orders must be received in
federal funds immediately available to the Fund's custodian before 3:00 p.m.,
Eastern time on the Closing Date, in each case in accordance with the
procedures described below under "Purchases in the Continuous Offering." The
Fund and Lehman Brothers reserve the right to withdraw, cancel or modify the
initial offering of shares without notice and to reject any purchase order.

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<PAGE> 166
PURCHASES IN THE CONTINUOUS OFFERING

ADDITIONAL PURCHASE INFORMATION

REDEMPTION OF SHARES

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<PAGE> 167
Subject to the foregoing, payment for redeemed Select Shares for which a
redemption order is received by Lehman Brothers before 4:00 p.m., Eastern time,
on a day that the Fund calculates its net asset value is normally made in
federal funds wired to the redeeming shareholder within seven days after
receipt of the redemption order.

The Fund shall have the right to redeem involuntarily Select Shares in any
account at their net asset value if the value of the account is less than
$10,000 after 60 days' prior written notice to the shareholder. Any such
redemption shall be effected at the net asset value per share next determined
after the redemption order is entered. If during the 60 day period the
shareholder increases the value of its account to $10,000 or more, no such
redemption shall take place. In addition, the Fund may redeem shares
involuntarily or suspend the right of redemption as permitted under the 1940
Act, or under certain special circumstances described in the Statement of
Additional Information under "Additional Purchase and Redemption Information."

EXCHANGE PRIVILEGE

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<PAGE> 168
OTHER MATTERS

VALUATION OF SHARES

MANAGEMENT OF THE FUND

INVESTMENT ADVISER - LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC.

-20-
<PAGE> 169
Coughlin was a Senior Portfolio Manager and Strategist at Morgan Stanley Asset
Management ("MSAM") and co-managed the Global Fixed Income group. Before
joining MSAM in 1990, Ms. Coughlin was a Vice President at Continental Asset
Management where she was responsible for $6 billion in domestic fixed income
portfolios and global markets.

LBGAM is located at 3 World Financial Center, New York, New York 10285. LBGAM
is a wholly owned subsidiary of Lehman Brothers Holdings, Inc. ("Holdings").

ADMINISTRATOR - THE SHAREHOLDER SERVICES GROUP, INC.

On May 6, 1994, TSSG acquired the third party mutual fund administration
business of The Boston Company Advisors, Inc., an indirect wholly-owned
subsidiary of Mellon Bank Corporation ("Mellon"). In connection with this
transaction, Mellon assigned to TSSG its agreement with Lehman Brothers such
that Lehman Brothers and its affiliates, consistent with their fiduciary duties
and assuming certain service quality standards are met, would recommend TSSG as
the provider of administration services to the Fund. This duty to recommend
expires on May 21, 2000. In addition, under the terms of the Stock Purchase
Agreement dated September 14, 1992 between Mellon and Lehman Brothers (then
named Shearson Lehman Brothers Inc.), Lehman Brothers agreed to recommend
Boston Safe, an indirect wholly owned subsidiary of Mellon, as custodian of
mutual funds affiliated with Lehman Brothers until May 21, 2000, to the extent
consistent with its fiduciary duties and other applicable law.

DISTRIBUTOR - LEHMAN BROTHERS

SERVICE ORGANIZATIONS

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<PAGE> 170
Organizations are required to provide to their shareholders a schedule of any
fees that they may charge shareholders in connection with their investments in
Select Shares.

EXPENSES

The Fund's expenses include taxes, interest, fees and salaries of the directors
and officers who are not directors, officers or employees of the Fund's service
contractors, SEC fees, state securities qualification fees, costs of preparing
and printing prospectuses for regulatory purposes and for distribution to
shareholders, advisory and administration fees, charges of the custodian,
transfer agent and dividend disbursing agent, certain insurance premiums,
outside auditing and legal expenses, costs of shareholder reports and
shareholder meetings and any extraordinary expenses. The Fund also pays for
brokerage fees and commissions (if any) in connection with the purchase and
sale of portfolio securities. Fund expenses are allocated to Select Shares
based on either expenses identifiable to the Select Shares or relative net
assets of the Select Shares and other classes of Fund shares. LBGAM and TSSG
have agreed to reimburse the Fund to the extent required by applicable state
law for certain expenses that are described in the Statement of Additional
Information relating to the Fund. In addition, in order to maintain a
competitive expense ratio LBGAM and TSSG have agreed to reimburse the Fund for
certain operating expenses for a period of at least one year from the date of
this Prospectus. See "Background and Expense Information."

BANKING LAWS

Banking laws and regulations currently prohibit a bank holding company
registered under the federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, or controlling a
registered, open-end investment company engaged continuously in the issuance of
its shares and prohibit banks generally from issuing, underwriting, selling or
distributing securities such as Fund shares. Such banking laws and regulations
do not prohibit such a holding company or affiliate generally from acting as
investment adviser, transfer agent or custodian to such an investment company
or from purchasing shares of such a company for or upon the order of customers.
Some Service Organizations may be subject to such banking laws and regulations.
In addition, state securities laws on this issue may differ from the
interpretation of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.

DIVIDENDS

Dividends are determined in the same manner and are paid in the same amount for
each Fund share, except that certain expenses borne differ by class. As a
result, the per share dividends on Select Shares will be lower than those on
Premier Shares and higher than those on certain other classes of the Fund's
shares.

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<PAGE> 171
Institutional holders of Select Shares may elect to have their dividends
reinvested in additional full and fractional Select Shares at the net asset
value of such shares on the payment date. Reinvested dividends receive the same
tax treatment as dividends paid in cash. Such election, or any revocation
thereof, must be made in writing to TSSG at P.O. Box ____, Providence, Rhode
Island 02940, and will become effective after its receipt by TSSG, with respect
to dividends paid.

Each shareholder or its authorized representative will receive an annual
statement designating the amount of any dividends and distributions made
during each year and their federal tax qualification.

TAXES

The Fund intends to distribute substantially all of its investment company
taxable income each year. Such distributions, whether paid in cash or
reinvested in additional shares, of net investment income will be taxable as
ordinary income. Federal income taxes for distributions to an Individual
Retirement Account ("IRA") or a qualified retirement plan are deferred under
the Code. A portion of such dividends may qualify for the dividends-received
deduction generally available for corporate shareholders under the Code.
Distributions to shareholders of net capital gain that are designated by the
Fund as "capital gains dividends," whether paid in cash or reinvested in
additional shares, will be taxable as long-term capital gains regardless of how
long the shares have been held by such shareholders. Shareholders receiving
distributions from the Fund in the form of additional shares will be treated
for federal income tax purposes as receiving a distribution in an amount equal
to the fair market value of the additional shares on the date of such a
distribution.

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<PAGE> 172
Dividends and distributions by the Fund are generally taxable to the
shareholders at the time the dividend or distribution is made. Any dividend
declared by the Fund in October, November or December of any calendar year,
however, which is payable to shareholders of record on a specified date in such
a month and not paid on or before December 31 of such year will be treated as
received by the Shareholders as of December 31 of such year, provided that the
dividend is paid during January of the following year.

_________________________

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<PAGE> 173
THE FUND'S PERFORMANCE

From time to time, the "total return," "yield" and "effective yield" for shares
may be quoted in advertisements or reports to shareholders. Total return and
yield quotations are computed separately for each class of shares. Total return
figures show the average percentage change in the value of an investment in the
Fund from the beginning date of the measuring period to the end of the
measuring period. These figures reflect changes in the price of the shares and
assume that any income dividends and/or capital gains distributions made by the
Fund during the period were reinvested in shares of the Fund. Total return
figures include any applicable sales charges, service fees and distribution
fees payable with respect to a class.

ADDITIONAL INFORMATION

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<PAGE> 174
The Company has received an order from the SEC permitting it, subject to
certain terms and conditions, to establish multiple classes of shares within
each series. The Fund currently offers six classes of shares: "Select Shares,"
"Premier Shares," and Class A, B, C and W Shares. This Prospectus relates only
to the Select Shares. Shares of each class represent interests in the Fund in
proportion to each share's net asset value. Premier Shares are sold to
institutions that have not entered into servicing or other agreements with the
Fund in connection with their investments and pay no Rule 12b-1 distribution or
shareholder service fees. Class A, B and C shares are offered directly to
individual investors. Class A shares bear a sales charge at the time of
purchase while Class B shares are subject to a contingent deferred sales charge
at the time of redemption. Class A, B and C shares are sold under a plan
adopted pursuant to Rule 12b-1 and, in addition to the Fund's other operating
expenses, bear aggregate expenses pursuant to such plans at annual rates not
exceeding .25%, 1.00% and 1.00% of the respective values of the net assets
attributable to such classes. Class W shares bear no sales charges,
distribution or shareholder service fees and are offered only to participants
in the Lehman Brothers WRAP Program and similar programs. Participants in the
Lehman Brothers WRAP Program and similar programs pay fees based upon the
aggregate value of their investments in participating mutual funds, including
the Fund. Certain Fund expenses are allocated separately to each class of
shares based upon expenses identifiable by class.

All shares of the Company, when issued, will be fully paid and nonassessable.

Boston Safe, an indirect wholly owned subsidiary of Mellon, is located at One
Boston Place, Boston, Massachusetts 02108, and serves as custodian of the
Fund's investments.

The Shareholder Services Group, Inc., a subsidiary of First Data Corporation,
is located at One Exchange Place, Boston, Massachusetts 02109, and serves as
the Fund's transfer agent.

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<PAGE> 175
LEHMAN BROTHERS HIGH-GRADE FIXED INCOME FUND

Prospectus

________ __, 1994

TABLE OF CONTENTS

<TABLE>
<S> <C>
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Background and Expense Information . . . . . . . . . . . . . . . . . . . . . . . 5

Investment Objective and Policies . . . . . . . . . . . . . . . . . . . . . . . . 6

Risk Factors and Special Considerations . . . . . . . . . . . . . . . . . . . . . 16

Purchase, Redemption and Exchange of Shares . . . . . . . . . . . . . . . . . . . 17

Valuation of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

The Fund's Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
</TABLE>
<PAGE> 176

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.

SUBJECT TO COMPLETION-DATED SEPTEMBER 8, 1994

PROSPECTUS

LEHMAN BROTHERS MUNICIPAL BOND FUND

An Investment Portfolio of Lehman Brothers Funds, Inc.

______________, 1994

This Prospectus describes the LEHMAN BROTHERS MUNICIPAL BOND FUND (the
"Fund"), a diversified portfolio of Lehman Brothers Funds, Inc. (the
"Company"), an open-end management investment company. This Prospectus
relates to the three classes of shares of the Fund that are offered
directly to individual investors and a fourth class of shares that is
offered only to participants in the Lehman Brothers WRAP Program and
similar programs, as described herein.

The Fund's investment objective is to seek a high level of current
income that is exempt from regular federal income tax, consistent with
the preservation of capital. In seeking to achieve its objective, the
Fund will invest primarily in investment grade municipal obligations,
the interest on which is exempt from regular federal income tax. Under
normal market conditions, the Fund will invest substantially all of its
assets in investment grade municipal obligations. All or a portion of
the Fund's dividends may be a specific preference item for purposes of
the federal individual and corporate alternative minimum taxes.

LEHMAN BROTHERS INC. sponsors the Fund and acts as distributor of the
Fund's shares. LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC. serves as
the Fund's investment adviser.

The address of the Fund is 3 World Financial Center, New York, New York
10285. Performance and other information regarding the Fund may be
obtained through a Lehman Brothers Investment Representative or by
calling 800-_________.

Shares of the Fund are being offered during an initial subscription
period scheduled to end on _______ __, 1994. Subsequent to such date,
the Fund will engage in a continuous offering of its shares. See
"Purchase of Shares."

This Prospectus briefly sets forth certain information about the Fund
that investors should know before investing. Investors are advised to
read this Prospectus and retain it for future reference. Additional
information about the Fund, contained in a Statement of Additional
Information dated ___________ __, 1994, as amended or supplemented from
time to time, has been filed with the Securities and Exchange
Commission and is available to investors without charge by calling
800-_____________. The Statement of Additional Information is
incorporated in its entirety by reference into this Prospectus.

SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SUCH SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE CERTAIN INVESTMENT
RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 177

PROSPECTUS SUMMARY

BENEFITS TO INVESTORS

The Fund offers investors several important benefits:

o a professionally managed portfolio of investment grade
municipal obligations having the potential for producing a
high level of current income that is exempt from regular
federal income tax, consistent with the preservation of
capital.

o investment liquidity through convenient purchase and
redemption procedures.

o a convenient way to invest without the administrative and
recordkeeping burdens normally associated with the direct
ownership of securities.

o automatic dividend reinvestment feature, plus exchange
privilege with the shares of certain other funds in the Lehman
Brothers Group of Funds.

INVESTMENT OBJECTIVE

The Fund's investment objective is to seek a high level of current income that
is exempt from regular federal income tax, consistent with the preservation of
capital. In seeking to achieve its objective, the Fund will invest primarily in
investment grade municipal obligations, the interest on which is exempt from
regular federal income tax. Under normal market conditions, the Fund will
invest substantially all of its assets in investment grade municipal
obligations. All or a portion of the Fund's dividends may be a specific
preference item for purposes of the federal individual and corporate
alternative minimum taxes.

At least 80% of the municipal obligations in which the Fund invests will be
rated, at the time of investment, at least in the category "A" or the
equivalent by Moody's Investors Service, Inc. ("Moody's") or Standard and
Poor's Ratings Group ("S&P"), be comparably rated by another nationally
recognized statistical rating organization ("NRSRO"), or, if not rated, be of
comparable quality as determined by the Fund's investment adviser. In addition,
the Fund may invest up to 20% of its assets in municipal obligations that are
rated in the category "Baa" or the equivalent by Moody's, "BBB" or the
equivalent by S&P, are comparably rated by another NRSRO, or, if not rated, are
of comparable quality as determined by the Fund's investment adviser.

VARIABLE PRICING SYSTEM

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<PAGE> 178

qualified registered investment advisers. Each of the foregoing classes of the
shares in the Fund is referred to herein as a "Class." For investors not
participating in WRAP or similar programs, the decision as to which Class is
most beneficial depends on the amount and intended length of the investment.
See "Variable Pricing System" and "Purchase of Shares - Class W Shares."

CLASS A SHARES

CLASS B SHARES

CLASS B CONVERSION FEATURE

CLASS C SHARES

CLASS W SHARES

INITIAL OFFERING OF SHARES

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<PAGE> 179

subscription period, the Fund will begin a continuous offering of shares.
During the continuous offering, shares of the Fund may be purchased at the next
determined net asset value per share, subject in the case of Class A shares and
Class B shares to the sales charges described above.

PURCHASE OF SHARES

INVESTMENT MINIMUMS

SYSTEMATIC INVESTMENT PLAN

REDEMPTION OF SHARES

The Fund redeems shares at their next determined net asset value in accordance
with the procedures described herein and subject, in the case of Class B
shares, to any applicable CDSC.

MANAGEMENT OF THE FUND

EXCHANGE PRIVILEGE

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<PAGE> 180

DIVIDENDS AND DISTRIBUTIONS

RISK FACTORS AND SPECIAL CONSIDERATIONS

There is no assurance that the Fund will achieve its investment objective.
Because the Fund will generally invest in fixed income securities, the net
asset value of the Fund's portfolio, and hence its shares, can be expected to
change as general levels of interest rates fluctuate. Interest rate risk can be
expected to be greater with respect to investments in fixed income securities
with longer maturities than investments in securities with shorter maturities.

-5-
<PAGE> 181

BACKGROUND AND EXPENSE INFORMATION

The Fund offers multiple classes of shares, four of which are offered by this
Prospectus. Each share of the Fund accrues income in the same manner, but
certain expenses differ based upon the Class. See "Additional Information."
The following Expense Summary lists the costs and expenses that holders of
Class A, Class B, Class C and Class W shares can expect to incur as investors
in the Fund, based upon estimated expenses and average net assets for the
current fiscal year. The costs and expenses for Class W shares include fees for
WRAP (but not those for different advisory services).

MAXIMUM ANNUAL WRAP FEE
(as a percentage of the value of
Fund shares held on the last
calendar day of the previous
quarter) . . . . . . . . . . . . -- -- -- 1.50%

Total Fund Operating Expenses . . ____% ____% ____% ____%
<FN>
- -----------------
* Upon conversion, Class B shares will no longer be subject to a distribution fee. Lehman Brothers
receives an annual 12b-1 service fee of .25% of the value of average daily net assets of Class A
shares, and receives an annual 12b-1 fee of 1.00% of the value of average daily net assets of
Class B and Class C shares, consisting of a .75% distribution fee and a .25% service fee.

** The amount set forth for "Other Expenses" is based on estimates for the current fiscal year.
</TABLE>

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<PAGE> 182

whether the shares are held through the 401(k) Program. See "Purchase of
Shares" and "Redemption of Shares."

EXAMPLE

<TABLE>
<CAPTION>
1 year 3 years
-------------------------- ----------------------------
<S> <C> <C>
Class A shares* . . . . . . . . . . . . . . . . . $ $
Class B shares:
Assumes complete redemption at end of
each time period** . . . . . . . . . . . . . . $ $
Assumes no redemption . . . . . . . . . . . . . $ $
Class C shares . . . . . . . . . . . . . . . . . . $ $
Class W shares*** . . . . . . . . . . . . . . . . . $ $
<FN>
- ----------------
* Assumes deduction at the time of purchase of the maximum 4.75% sales charge.
** Assumes deduction at the time of redemption of the maximum CDSC applicable for that time period.
*** Assumes payment of the fees for WRAP (but not those for different advisory services).
</TABLE>

VARIABLE PRICING SYSTEM

-7-
<PAGE> 183

-8-
<PAGE> 184

INVESTMENT OBJECTIVE AND POLICIES

GENERAL

The Fund's investment objective is to seek a high level of current income that
is exempt from regular federal income tax, consistent with the preservation of
capital. In seeking to achieve its objective, the Fund will invest primarily in
investment grade municipal obligations, the interest on which is exempt from
regular federal income tax. Under normal market conditions, the Fund will
invest substantially all of its assets in investment grade municipal
obligations. All or a portion of the Fund's dividends may be a specific
preference item for purposes of the federal individual and corporate
alternative minimum taxes. There can be no assurance that the Fund will achieve
its investment objective. For a discussion of certain risks and considerations
associated with an investment in the Fund, see "Risk Factors and Special
Considerations."

At least 80% of the municipal obligations in which the Fund invests will be
rated, at the time of investment, at least in the category "A" or the
equivalent by Moody's or S&P, be comparably rated by another NRSRO, or, if not
rated, be of comparable quality as determined by the Fund's investment adviser.
In addition, the Fund may invest up to 20% of its assets in municipal
obligations that are rated in the category "Baa" or the equivalent by Moody's,
"BBB" or the equivalent by S&P, are comparably rated by another NRSRO, or, if
not rated, are of comparable quality as determined by the Fund's investment
adviser. Should an issue of municipal obligations cease to be rated or have its
rating reduced below the minimum rating required for purchase by the Fund
subsequent to purchase, LBGAM will determine whether it is in the best interest
of the Fund to continue to hold the obligation. A description of Moody's and
S&P ratings is contained in the Statement of Additional Information. Under
normal market conditions, the Fund's portfolio will have a dollar-weighted
average final maturity, measured at the time an investment is made, of between
15 and 25 years. There is no limit on the maturity of any individual security
held by the Fund.

In pursuing its investment objective, the Fund invests substantially all of its
assets in a portfolio of tax-exempt obligations issued by or on behalf of
states, territories and possessions of the United States, the District of
Columbia, and their respective authorities, agencies, instrumentalities and
political subdivisions, and tax-exempt derivative securities such as tender
option bonds, participations, beneficial interests in trusts and partnership
interests, the interest on which is exempt from regular federal income tax
(collectively "Municipal Obligations"). Except as described below, the Fund
will not knowingly purchase securities the interest on which is subject to
regular federal income tax. (See, however, "Taxes" below, concerning treatment
of dividends paid by the Fund for purposes of the federal alterative minimum
tax applicable to particular categories of investors.)

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<PAGE> 185

tax-exempt derivative securities are rendered by counsel to the respective
sponsors of such securities. The Fund and LBGAM will rely on such opinions and
will not review independently the underlying proceedings relating to the
issuance of Municipal Obligations, the creation of any tax-exempt derivative
securities or the bases for such opinions.

Except during temporary defensive periods, as described below under "Temporary
Investments," the Fund will invest substantially all, but in no event less than
80%, of its total assets in Municipal Obligations. The Fund may hold uninvested
cash reserves pending investment and during temporary defensive periods,
including when suitable tax-exempt obligations are unavailable. There is no
percentage limitation on the amount of assets which may be held uninvested.
Uninvested cash reserves will not earn income. In addition to or in lieu of
holding uninvested cash reserves under the aforementioned circumstances, the
Fund may elect to invest in high quality, short-term instruments of the types
described below under "Temporary Investments" and repurchase agreements with
respect to such instruments, the income from which is subject to federal income
tax. To the extent that the Fund deviates from its investment policies as a
result of the unavailability of suitable Municipal Obligations or for other
temporary defensive purposes, its investment objective of seeking income exempt
from regular federal income tax may not be achieved.

Municipal Obligations are classified as general obligation bonds, revenue bonds
and notes. General obligation bonds are secured by the issuer's pledge of its
faith, credit and taxing power for the payment of principal and interest.
Revenue bonds are payable from the revenue derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
or other specific revenue source, but not from the general taxing power.
Tax-exempt industrial development bonds, in most cases, are revenue bonds that
generally do not carry the pledge of the credit of the issuing municipality,
but generally are guaranteed by the corporate entity on whose behalf they are
issued. Notes are short-term instruments which are obligations of the issuing
municipalities or agencies and are sold in anticipation of a bond sale,
collection of taxes or receipt of other revenues. Municipal Obligations include
municipal lease/purchase agreements which are similar to installment purchase
contracts for property or equipment issued by municipalities. Municipal
Obligations bear fixed, floating or variable rates of interest, which are
determined in some instances by formulas under which the Municipal Obligation's
interest rate will change directly or inversely to changes in interest rates or
an index, or multiples thereof, in many cases subject to a maximum and a
minimum. Certain Municipal Obligations are subject to redemption at a date
earlier than their stated maturity pursuant to call options, which may be
separated from the related Municipal Obligation and purchased and sold
separately.

The Tax Reform Act of 1986 (the "Act") substantially revised provisions of
prior law affecting the issuance and use of proceeds of certain tax-exempt
obligations. A new definition of private activity bonds was applied to many
types of bonds, including those which were industrial development bonds under
prior law. Interest on private activity bonds is tax-exempt only if the bonds
fall within certain defined categories of qualified private activity bonds and
meet the requirements specified in those respective categories. The Act
generally did not change the tax treatment of bonds issued to finance
governmental operations. The changes generally apply to bonds issued after
August 15, 1986, with certain transitional rule exemptions. As used in this
Prospectus, the term "private activity bonds" also includes industrial
development revenue bonds issued pursuant to the Internal Revenue Code of 1986,
as amended (the "Code"). The portion of dividends paid by the Fund that is
attributable to interest on certain private activity bonds is an item of tax
preference for purposes of the federal individual and corporate alternative
minimum taxes.

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<PAGE> 186

by issuers located in the same state or are private activity bonds, the Fund
will be subject to the peculiar risks presented by the laws and economic
conditions relating to such states, projects and bonds to a greater extent than
it would be if its assets were not so concentrated.

TEMPORARY INVESTMENTS

For temporary defensive purposes, the Fund may vary from its investment
objective and may invest, without limit (except for the limitations described
under "Investment Objective and Policies - Investment Limitations"), in cash
and/or certain high quality short-term tax-exempt debt instruments that are
rated in one of the two highest ratings categories by Moody's, S&P or another
NRSRO or, if not rated, of comparable quality as determined by the Fund's
investment adviser. If short-term tax-exempt debt instruments are unavailable
or in LBGAM's judgment, do not afford sufficient protection against adverse
market conditions, the Fund may invest in taxable obligations, as described
below. The Fund may also at any time invest its assets in such instruments for
cash management purposes, pending investment in accordance with the Fund's
investment objective and policies and to meet operating expenses.

The taxable obligations in which the Fund may invest include obligations issued
or guaranteed by the United States Government, its agencies or
instrumentalities ("U.S. Government Securities"); bank obligations, such as
certificates of deposit, time deposits and bankers' acceptances; corporate debt
obligations, including commercial paper; and repurchase agreements. To be
eligible for investment under the circumstances described above, such
instruments (other than U.S. Government Securities) must be issued by an issuer
having a short-term debt rating of A-1 or better by S&P, a rating of Prime-1 by
Moody's, a comparable rating from another NRSRO or, if unrated, deemed to be of
equivalent quality by LBGAM.

OTHER INVESTMENTS AND INVESTMENT PRACTICES

Tender Option Bonds. The Fund may purchase tender option bonds. A tender option
bond is generally a long-term Municipal Obligation (generally held pursuant to
a custodial arrangement) bearing interest at a fixed rate substantially higher
than prevailing short-term tax-exempt rates, that has been coupled with the
agreement of a third party, such as a bank, broker-dealer or other financial
institution, pursuant to which such institution grants the security holders the
option, at periodic intervals, to tender their securities to the institution
and receive the face value thereof. As consideration for providing the option,
the financial institution receives periodic fees equal to the difference
between the Municipal Obligation's fixed coupon rate and the rate, as
determined by remarketing or similar agent at or near the commencement of such
period, that would cause the securities coupled with the tender option, to
trade at or near par on the date of such determination. Thus, after payment of
this fee, the security holder effectively holds a demand obligation that bears
interest at the prevailing short-term tax exempt rate. LBGAM will consider on
an ongoing basis the creditworthiness of the issuer of the underlying Municipal
Obligation, of any custodian and of the third party provider of the tender
option. In certain instances and for certain tender option bonds, the option
may be terminable in the event of a default in payment of principal or interest
on the underlying Municipal Obligation and for other reasons. Additionally, the
above description of Tender Option Bonds is meant only to provide an example of
one possible structure of such obligations, and the Fund may purchase tender
option bonds with different types of ownership, payment, credit and/or
liquidity arrangements.

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<PAGE> 187

custodian in exchange for two classes of custodial receipts. The two classes
have different characteristics, but, in each case, payments on the two classes
are based on payments received on the underlying Municipal Obligations. One
class has the characteristics of a typical auction rate security, where at
specified intervals its interest rate is adjusted, and ownership changes, based
on an auction mechanism. This class's interest rate generally is at a level
comparable to that of a Municipal Obligation of similar quality and having a
maturity equal to the period between interest rate adjustments. The second
class bears interest at a rate that exceeds the interest rate typically borne
by a security of comparable quality and maturity; this rate also is adjusted,
but in this case inversely to changes in the rate of interest of the first
class. If the interest rate on the first class exceeds the coupon rate of the
underlying Municipal Obligations, its interest rate will exceed the rate paid
on the second class. In no event will the aggregate interest paid with respect
to the two classes exceed the interest paid by the underlying Municipal
Obligations. The value of the second class and similar securities should be
expected to fluctuate more than the value of a Municipal Obligation of
comparable quality and maturity and their purchase by the Fund should increase
the volatility of its net asset value and, thus, its price per share. These
custodial receipts are sold in private placements. The Fund also may purchase
directly from issuers, and not in a private placement, Municipal Obligations
having characteristics similar to custodial receipts. These securities may be
issued as part of a multi-class offering and the interest rate on certain
classes may be subject to a cap or floor.

Municipal Leases and Certificates of Participation. The Fund may invest in
municipal leases and certificates of participation in municipal leases. A
municipal lease is an obligation in the form of a lease or installment purchase
which is issued by a state or local government to acquire equipment and
facilities. Income from such obligations is generally exempt from state and
local taxes in the state of issuance. Municipal leases frequently involve
special risks not normally associated with general obligation or revenue bonds.
Leases and installment purchase or conditional sale contracts (which normally
provide for title to the leased asset to pass eventually to the governmental
issuer) have evolved as a means for governmental issuers to acquire property
and equipment without meeting the constitutional and statutory requirements for
the issuance of debt. The debt issuance limitations are deemed to be
inapplicable because of the inclusion in many leases or contracts of
"non-appropriation" clauses that relieve the governmental issuer of any
obligation to make future payments under the lease or contract unless money is
appropriated for such purpose by the appropriate legislative body on a yearly
or other periodic basis. In addition, such leases or contracts may be subject
to the temporary abatement of payments in the event the issuer is prevented
from maintaining occupancy of the leased premises or utilizing the leased
equipment. Although the obligation may be secured by the leased equipment or
facilities, the disposition of the property in the event of nonappropriation or
foreclosure might prove difficult, time consuming and costly, and result in an
unsatisfactory or delayed recoupment of the Fund's original investment.

Certificates of participation represent undivided interests in municipal
leases, installment purchase agreements or other instruments. The certificates
are typically issued by a trust or other entity which has received an
assignment of the payments to be made by the state or political subdivision
under such leases or installment purchase agreements.

Certain municipal lease obligations and certificates of participation may be
deemed illiquid for the purpose of the Fund's 15% limitation on investments in
illiquid securities. Other Municipal Obligations and certificates of
participation acquired by the Fund may be determined by LBGAM, pursuant to
guidelines adopted by the Board of Directors of the Company, to be liquid
securities for the purpose of such limitation. In determining the liquidity of
municipal lease obligations and certificates of participation, LBGAM will
consider a variety of factors, including: (1) the willingness of dealers to
bid for the security; (2) the number of dealers willing to purchase or sell the
obligation and the number of other potential buyers; (3) the frequency of
trades or quotes for the obligation; and (4) the nature of marketplace trades.
In addition, the Investment Adviser will consider factors unique to particular
lease obligations and

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<PAGE> 188

certificates of participation affecting the marketability thereof. These
include the general creditworthiness of the issuer, the importance of the
property covered by the lease to the issuer and the likelihood that the
marketability of the obligation will be maintained throughout the time the
obligation is held by the Fund.

Other Participation Interests. The Fund may purchase participation certificates
issued by a bank, insurance company or other financial institution in
obligations owned by such institutions or affiliated organizations that may
otherwise be purchased by the Fund, and loan participation certificates. A
participation certificate gives the Fund an undivided interest in the
underlying obligations in the proportion that the Fund's interest bears to the
total principal amount of such obligations. Certain of such participation
certificates may carry a demand feature that would permit the holder to tender
them back to the issuer or to a third party prior to maturity. See "Floating
and Variable Rate Notes" below for additional information with respect to
demand instruments that may be purchased by the Fund. Loan participation
certificates are considered by the Fund to be "illiquid" for purposes of its
investment policy with respect to illiquid securities as set forth under
"Illiquid Securities" below.

Floating and Variable Rate Notes. The Fund may purchase variable or floating
rate notes, which are instruments that provide for adjustments in the interest
rate on certain reset dates or whenever a specified interest rate index
changes, respectively. Such notes might not be actively traded in a secondary
market but, in some cases, the Fund may be able to resell such notes in the
dealer market. Variable and floating rate notes typically are rated by credit
rating agencies, and their issuers must satisfy the same quality criteria as
set forth above. The Fund invests in variable or floating rate notes only when
LBGAM determines such notes to be creditworthy.

Certain of the floating or variable rate notes that may be purchased by the
Fund may carry a demand feature that would permit the holder to tender them
back to the issuer of the underlying instrument, or to a third party, at par
value prior to maturity. If a floating or variable rate demand note is not
actively traded in a secondary market, it may be difficult for the Fund to
dispose of the note if the issuer were to default on its payment obligation or
during periods that the Fund is not entitled to exercise its demand rights, and
the Fund could, for this or other reasons, suffer a loss to the extent of the
default.

Inverse Floating Rate Instruments. The Fund may invest in "leveraged" inverse
floating rate debt instruments ("inverse floaters"). The interest rate on an
inverse floater resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher degree of leverage inherent in inverse floaters is
associated with greater volatility in their market values. Accordingly, the
duration of an inverse floater may exceed its stated final maturity. Since the
market for these instruments is relatively new, the holder of an inverse
floater may have difficulty finding a ready purchaser.

-13-
<PAGE> 189

and include securities with legal or contractual restrictions on resale, time
deposits, repurchase agreements having maturities longer than seven days and
securities that do not have readily available market quotations. In addition,
the Fund may invest in securities that are sold in private placement
transactions between their issuers and their purchasers and that are neither
listed on an exchange nor traded over-the-counter. These factors may have an
adverse effect on the Fund's ability to dispose of particular securities and
may limit the Fund's ability to obtain accurate market quotations for purposes
of valuing securities and calculating net asset value and to sell securities at
fair value. If any privately placed securities held by the Fund are required to
be registered under the securities laws of one or more jurisdictions before
being resold, the Fund may be required to bear the expenses of registration.
The Fund may also purchase securities that are not registered under the
Securities Act of 1933, as amended, but which can be sold to qualified
institutional buyers in accordance with Rule 144A under that Act ("Rule 144A
securities"). Rule 144A securities generally must be sold to other qualified
institutional buyers. The Fund may also invest in commercial obligations issued
in reliance on the so-called "private placement" exemption from registration
afforded by Section 4(2) of the Securities Act of 1933, as amended ("Section
4(2) paper"). Section 4(2) paper is restricted as to disposition under the
federal securities laws, and generally is sold to institutional investors such
as the Fund who agree that they are purchasing the paper for investment and not
with a view to public distribution. Any resale by the purchaser must be in an
exempt transaction. Section 4(2) paper normally is resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in the Section 4(2) paper, thus
providing liquidity. If a particular investment in Rule 144A securities,
Section 4(2) paper or private placement securities is not determined to be
liquid, that investment will be included within the 15% limitation on
investment in illiquid securities. The ability to sell Rule 144A securities to
qualified institutional buyers is a recent development and it is not possible
to predict how this market will mature. LBGAM will monitor the liquidity of
such restricted securities under the supervision of the Board of Directors. See
"Investment Objective and Policies - Additional Information on Portfolio
Instruments and Certain Investment Practices - Illiquid and Restricted
Securities" in the Statement of Additional Information.

Asset-Backed Securities. The Fund may purchase asset-backed securities.
Asset-backed securities represent defined interests in an underlying pool of
assets. Such securities may be issued as pass-through certificates, which
represent undivided fractional interests in the underlying pool of assets.
Alternatively, asset-backed securities may be issued as interests, generally in
the form of debt securities, in a special purpose entity organized solely for
the purpose of owning the underlying assets and issuing such securities. In the
latter case, such securities are secured by and payable from a stream of
payments generated by the underlying assets. The assets underlying asset-backed
securities are often a pool of assets similar to one another, such as municipal
lease receivables. Alternatively, the underlying assets may be particular types
of securities, various contractual rights to receive payments and/or other
types of assets. Asset-backed securities frequently carry credit protection in
the form of extra collateral, subordinate certificates, cash reserve accounts,
letters of credit or other enhancements.

Other Investment Funds. The Fund may invest in the securities of other
investment funds to the extent permitted by the Investment Company Act of 1940,
as amended (the "1940 Act"). Under the 1940 Act, the Fund may invest up to 10%
of its total assets in shares of other investment funds and up to 5% of its
total assets in any one investment fund, provided that the investment does not
represent more than 3% of the voting stock of the acquired investment company.
By investing in another investment fund, the Fund bears a ratable share of the
investment fund's expenses, as well as continuing to bear the Fund's advisory
and administrative fees with respect to the amount of the investment. In
addition, the Fund may, in the future, seek to achieve its investment objective
by investing all of its assets in a no-load, open-end management investment
company having the same investment objective and policies and substantially the
same investment restrictions as those applicable to the Fund, as described
below under "Investment Limitations."

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<PAGE> 190

Stand-by Commitments. The Fund may enter into put transactions, including
transactions sometimes referred to as stand-by commitments, with respect to
securities held in its portfolio. In a put transaction, the Fund acquires the
right to sell a security at an agreed upon price within a specified period
prior to its maturity date, and a stand-by commitment entitles the Fund to
same-day settlement and to receive an exercise price equal to the amortized
cost of the underlying security plus accrued interest, if any, at the time of
exercise. In the event that the party obligated to purchase the underlying
security from the Fund defaults on its obligation to purchase the underlying
security, then the Fund might be unable to recover all or a portion of any loss
sustained from having to sell the security elsewhere. Acquisition of puts will
have the effect of increasing the cost of securities subject to the put and
thereby reducing the yields otherwise available from such securities.

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<PAGE> 191

permitting interfund loans, if obtained from the SEC, will impose various
conditions on the Fund, including limitations on the duration of interfund
loans and on the percentage of the Fund's assets that may be loaned or borrowed
through the program. Loans may be called on one day's notice and the Fund may
have to borrow from a bank at a higher interest rate if an interfund loan is
called or not renewed. Any delay in repayment to a lending fund could result in
a lost investment opportunity or additional borrowing costs.

Hedging and Derivatives. The Fund is authorized to use various hedging and
investment strategies described below to hedge market risks (such as broad or
specific market movements and interest rates), to manage the effective maturity
or duration of debt instruments held by the Fund, or to seek to increase the
Fund's income or gain. Over time, techniques and instruments may change as new
instruments and strategies are developed or regulatory changes occur.
Limitations on the portion of the Fund's assets that may be used in connection
with the investment strategies described below appear in the Statement of
Additional Information.

Subject to the constraints described above, the Fund may purchase and sell
interest rate futures contracts; it may purchase and sell (or write) exchange
listed and over-the-counter put and call options on debt securities, futures
contracts, fixed income indices and other financial instruments and it may
enter into interest rate transactions and other similar transactions which may
be developed to the extent LBGAM determines that they are consistent with the
Fund's investment objective and policies and applicable regulatory requirements
(collectively, these transactions are referred to in this Prospectus as
"Derivatives"). The Fund's interest rate transactions may take the form of
swaps, caps, floors and collars.

Derivatives may be used to attempt to protect against possible changes in the
market value of securities held in or to be purchased for the Fund's portfolio
resulting from securities markets fluctuations, to protect the Fund's
unrealized gains in the value of its portfolio securities, to facilitate the
sale of those securities for investment purposes, to manage the effective
maturity or duration of the Fund's portfolio, to establish a position in the
derivatives markets as a substitute for purchasing or selling particular debt
securities or to seek to enhance the Fund's income or gain. The Fund may use
any or all types of Derivatives at any time; no particular strategy will
dictate the use of one type of transaction rather than another, as use of any
authorized Derivative will be a function of numerous variables, including
market conditions. The ability of the Fund to utilize Derivatives successfully
will depend on LBGAM's ability to predict pertinent market movements, which
cannot be assured. These skills are different from those needed to select
portfolio securities. The Fund is not a "commodity pool" (i.e., a pooled
investment vehicle which trades in commodity futures contracts and options
thereon and the operator of which is registered with the Commodity Futures
Trading Commission (the "CFTC")) and Derivatives involving futures contracts
and options on futures contracts will be purchased, sold or entered into only
for bona fide hedging purposes, provided that the Fund may enter into such
transactions for purposes other than bona fide hedging if, immediately
thereafter, the sum of the amount of its initial margin and premiums on open
contracts and options would not exceed 5% of the liquidation value of the
Fund's portfolio, provided, further, that, in the case of an option that is
in-the-money, the in-the-money amount may be excluded in calculating the 5%
limitation. The use of Derivatives in certain circumstances will require that
the Fund segregate cash, liquid high grade debt obligations or other assets to
the extent the Fund's obligations are not otherwise

-16-
<PAGE> 192

"covered" through ownership of the underlying security, financial instrument or
currency. See "Risk Factors and Special Considerations - Other Investments and
Investment Practices."

The degree of the Fund's use of Derivatives may be limited by certain
provisions of the Code. See "Taxes."

INVESTMENT LIMITATIONS

3. The Fund may not purchase any securities which would cause 25% or more
of the value of its total assets at the time of such purchase to be invested in
the securities of one or more issuers conducting their principal business
activities in the same industry; provided that there is no limitation with
respect to investments in U.S. Government Securities or Municipal Obligations
(other than those backed only by the assets and revenues of non-governmental
users), and provided further, that the Fund may invest all or

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<PAGE> 193

substantially all of its assets in another registered investment company having
the same investment objective and policies and substantially the same
investment restrictions as those with respect to the Fund.

RISK FACTORS AND SPECIAL CONSIDERATIONS

CHANGES IN INTEREST RATES

Because the Fund will generally invest in fixed income securities, the net
asset value of the Fund's portfolio, and hence its shares, can be expected to
change as general levels of interest rates fluctuate. Except to the extent that
values are affected independently by other factors such as developments
relating to a specific issuer, when interest rates decline, the value of a
fixed income portfolio can generally be expected to rise. Conversely, when
interest rates rise, the value of a fixed income portfolio can generally be
expected to decline. These fluctuations can be expected to be greater with
respect to investments in fixed income securities with longer maturities than
investments in securities with shorter maturities.

OTHER INVESTMENTS AND INVESTMENT PRACTICES

Inverse floaters involve special risks, including substantial volatility in
their market values and potential illiquidity. Derivatives involve special
risks, including possible default by the other party to the transaction,
illiquidity and, to the extent LBGAM's view as to certain market movements is
incorrect, the risk that the use of Derivatives could result in greater losses
than if it had not been used. Use of put and call options could result in
losses to the Fund, force the purchase or sale of portfolio securities at
inopportune times or for prices higher or lower than current market values, or
cause the Fund to hold a security it might otherwise sell. The use of options
and futures transactions entails certain special risks. In particular, the
variable degree of correlation between price movements of futures contracts and
price movements in the related portfolio position of the Fund could create the
possibility that losses on the Derivative will be greater than gains in the
value of the Fund's position. In addition, futures and options markets could be
illiquid in some circumstances and certain over-the-counter options could have
no markets. The Fund might not be able to close out certain positions without
incurring substantial losses. To the extent the Fund utilizes futures and
options transactions for hedging, such transactions should tend to minimize the
risk of loss due to a decline in the value of the hedged position and, at the
same time, limit any potential gain to the Fund that might result from an
increase in value of the position. Finally, the daily variation margin
requirements for futures contracts create a greater ongoing potential financial
risk than would purchases of options, in which case the exposure is limited to
the cost of the initial premium and transaction costs. Losses resulting from
the use of Derivatives will reduce the Fund's net asset value, and possibly
income, and the losses may be greater than if Derivatives had not been used.
Additional information regarding the

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<PAGE> 194

risks and special considerations associated with Derivatives appears in the
Statement of Additional Information.

SPECIAL CONSIDERATIONS FOR WRAP PARTICIPANTS

PURCHASE OF SHARES

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<PAGE> 195

prior to the close of regular trading on the New York Stock Exchange ("NYSE"),
currently 4:00 p.m., New York time, on any day the Fund calculates its net
asset value, are priced according to the net asset value determined on that
day. Purchase orders received after the close of regular trading on the NYSE
are priced as of the time that the net asset value per share is next
determined. See "Valuation of Shares."

<TABLE>
CLASS A SHARES

<CAPTION>
SALES CHARGE AS % OF SALES CHARGE AS %
AMOUNT OF INVESTMENT OFFERING PRICE OF NET ASSET VALUE

-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Less than $100,000 4.75% 4.99%
$100,000 but under $250,000 3.50% 3.63%
$250,000 but under $500,000 2.50% 2.56%
$500,000 but under $1,000,000 2.00% 2.04%
$1,000,000 or more* .00% .00%
-----------------------------------------------------------------------------------------------------------
<FN>
* No sales charge is imposed on purchases of $1 million or more; however, a CDSC of .75% is imposed for
the first year after purchase. The CDSC on Class A shares is payable to Lehman Brothers which compensates
Lehman Brothers Investment Representatives upon the sale of these shares. The CDSC is waived in the same
circumstances in which the CDSC applicable to Class B shares is waived. See "Redemption of Shares--
Contingent Deferred Sales Charge--Class B shares--Waivers of CDSC."
</TABLE>

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<PAGE> 196

REDUCED SALES CHARGES--CLASS A SHARES

Reduced sales charges are available to investors who are eligible to combine
their purchases of Class A shares to receive volume discounts. Investors
eligible to receive volume discounts include individuals and their immediate
families, tax-qualified employee benefit plans and trustees or other
professional fiduciaries (including a bank, or an investment adviser registered
with the SEC under the Investment Advisers Act of 1940, as amended) purchasing
shares for one or more trust estates or fiduciary accounts even though more
than one beneficiary is involved. Reduced sales charges on Class A shares are
also available under a combined right of accumulation, under which an investor
may combine the value of Class A shares already held in the Fund and certain
other funds in the Lehman Brothers Group of Funds, along with the value of the
Fund's Class A shares being purchased, to qualify for a reduced sales charge.
For example, if an investor owns Class A shares of the Fund and certain other
funds in the Lehman Brothers Group of Funds that have an aggregate value of
$74,000, and makes an additional investment in Class A shares of the Fund of
$27,000, the sales charge applicable to the additional investment would be 4%,
rather than the 4.75% normally charged on a $27,000 purchase. Investors
interested in further information regarding reduced sales charges should
contact their Lehman Brothers Investment Representatives.

CLASS B SHARES

CLASS C SHARES

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<PAGE> 197

CLASS W SHARES

WRAP. Lehman Brothers, in its capacity as investment adviser to participants in
WRAP, provides advisory services in connection with investments among the Fund
and certain other investment funds (together, the "Portfolios") by identifying
the investor's risk tolerances and investment objectives through evaluation of
a Request, an investor questionnaire; identifying and recommending in writing
an appropriate allocation of assets among the Portfolios that conform to those
tolerances and objectives in a Recommendation; and providing on a periodic
basis, at least quarterly, a Review, which is a monitoring report to the
investor containing an analysis and evaluation of the investor's WRAP account
and recommending any appropriate changes in the allocation of assets among the
Portfolios. Lehman Brothers will not, however, have any investment discretion
over the investor's WRAP account, all investment decisions ultimately resting
with the investor.

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<PAGE> 198

LEHMAN BROTHERS 401(K) PROGRAM

Once a Participating Plan has made an initial investment in the Fund, all of
its subsequent investments in the Fund must be in the same Class of shares,
except as otherwise described below.

Class A Shares. The sales charges for Class A shares acquired by Participating
Plans are as follows:

<TABLE>
<CAPTION>
SALES CHARGE AS % OF SALES CHARGE AS %
AMOUNT OF INVESTMENT OFFERING PRICE OF NET ASSET VALUE

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<PAGE> 199

participate in the Participating Plan at the time of initial investment in the
Fund; or (c) currently holds Class A shares in the Fund that were received as a
result of an exchange of Class B shares of the Fund as described below.

Class A Shares acquired through the 401(k) Program will not be subject to a
CDSC.

REDEMPTION OF SHARES

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<PAGE> 200

share's net asset value at the time of redemption and the applicability of any
CDSC. If a shareholder holds shares in more than one Class, any request for
redemption must specify the Class being redeemed. In the event of a failure to
specify which Class, or if the investor owns fewer shares of the Class than
specified, the redemption request will be delayed until the Fund's transfer
agent receives further instructions from Lehman Brothers, or if the
shareholder's account is not with Lehman Brothers, from the shareholder
directly.

Fund shares may be redeemed in one of the following ways:

REDEMPTION THROUGH LEHMAN BROTHERS OR AN INTRODUCING BROKER

REDEMPTION BY MAIL

Lehman Brothers __________________ Fund
Class A, B, C or W (please specify)
c/o The Shareholder Services Group, Inc.
P.O. Box _______
Boston, Massachusetts 02009

-25-
<PAGE> 201

AUTOMATIC CASH WITHDRAWAL PLAN

CONTINGENT DEFERRED SALES CHARGE - CLASS B SHARES

-26-
<PAGE> 202

<TABLE>
<CAPTION>
YEAR SINCE PURCHASE PAYMENTS WERE MADE CDSC
- ------------------------------------------------------------------------------------------------- --------------------------------
<S> <C>
First . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.75%
Second . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.00%
Third . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.00%
Fourth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.00%
Fifth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.00%
Sixth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.00%
Seventh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.00%
Eighth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.00%
</TABLE>

CLASS W SHARES AND WRAP

EXCHANGE PRIVILEGE

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<PAGE> 203

Class C and W Exchanges. Class C and Class W shares of the Fund may be
exchanged for shares of the same class of the funds referred to above without
charge.

VALUATION OF SHARES

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<PAGE> 204

MANAGEMENT OF THE FUND

INVESTMENT ADVISER - LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC.

Mr. Nicholas Rabiecki, III, Senior Tax-Exempt Portfolio Manager of LBGAM, has
primary responsibility for the day-to-day management of the Fund's investment
portfolio. Mr. Rabiecki, who began his investment career in 1979, joined LBGAM
in 1993. Previously, Mr. Rabiecki was a Senior Fixed Income Portfolio Manager
at both Chase Manhattan Bank and Neuberger and Berman.

LBGAM is located at 3 World Financial Center, New York, New York 10285. LBGAM
is a wholly owned subsidiary of Lehman Brothers Holdings, Inc. ("Holdings").

ADMINISTRATOR - THE SHAREHOLDER SERVICES GROUP, INC.

-29-
<PAGE> 205

DISTRIBUTOR - LEHMAN BROTHERS

EXPENSES

-30-
<PAGE> 206

BANKING LAWS

DIVIDENDS

Each shareholder or its authorized representative will receive an annual
statement designating the amount of any dividends and distributions made during
each year and their federal tax qualification.

TAXES

The Fund intends to qualify and elect to be treated as a regulated investment
company for federal income tax purposes under Subchapter M of the Code. If so
qualified, the Fund will not be subject to federal income taxes on its
investment company taxable income (as that term is defined in the Code,
determined without regard to the deduction for dividends paid) and net capital
gain (the excess of the Fund's net long-term capital gain over its net
short-term capital loss), if any, that it distributes to its shareholders in
each taxable year. To qualify as a regulated investment company, the Fund must,
among other things, distribute to its shareholders at least 90% of its net
investment company taxable income for such taxable year, and at least 90% of
its net tax- exempt interest income for such taxable year. However, the Fund
would be subject to corporate income tax at a rate of 35% on any undistributed
income or net capital gain. The Fund must also derive less than 30% of its
gross income in each taxable year from the sale or other disposition of certain
securities held for less than three months (the "30% limitation"). If in any
year the Fund should

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<PAGE> 207

fail to qualify as a regulated investment company, the Fund would be subject to
federal income tax in the same manner as an ordinary corporation and
distributions to shareholders would be taxable to such holders as ordinary
income to the extent of the earnings and profits of the Fund. Distributions in
excess of earnings and profits will be treated as a tax-free return of capital,
to the extent of a holder's basis in its shares, and any excess, as a long- or
short-term capital gain.

The Fund intends to distribute substantially all of its investment company
taxable income each year. Such distributions, whether paid in cash or
reinvested in additional shares, will be taxable as ordinary income to Fund
shareholders who are not currently exempt from federal income taxes. Federal
income taxes for distributions to an IRA or a qualified retirement plan are
deferred under the Code. It is not anticipated that a significant portion of
the Fund's distributions will be eligible for the dividends received deduction
for corporations. Distributions to shareholders of net capital gain that are
designated by the Fund as "capital gain dividends," whether paid in cash or
reinvested in additional shares, will be taxable as long-term capital gains
regardless of how long the shares have been held by such shareholders. The Fund
does not expect to recognize significant net capital gains. Shareholders
receiving distributions from the Fund in the form of additional shares will be
treated for federal income tax purposes as receiving a distribution in an
amount equal to the fair market value of the additional shares on the date of
such a distribution.

Dividends and distributions by the Fund are generally taxable to the
shareholders at the time the dividend or distribution is made. Any dividend
declared in October, November or December of any year, however, that is payable
to shareholders of record on a specified date in such months will be deemed to
have been received by the shareholders and paid by the Fund on December 31 of
such year in the event such dividends are actually paid during January of the
following year.

Dividends paid by the Fund which are derived from exempt-interest income may be
treated by the Fund's shareholders as items of interest excludable form their
gross income under Section 103(a) of the Code, unless under the circumstances
applicable to the particular shareholder the exclusion would be disallowed.
(See the Statement of Additional Information under "Additional Information
Concerning Taxes.")

The Fund may hold without limit certain private activity bonds issued after
August 7, 1986. Shareholders must include, as an item of tax preference, the
portion of dividends paid by the Fund that is attributable to interest on such
bonds in their federal alternative minimum taxable income for purposes of
determining liability (if any) for the 26% or 28% alternative minimum tax
applicable to individuals and the 20% alternative minimum tax and the
environmental tax applicable to corporations. Corporate shareholders must also
take all exempt-interest dividends into account in determining certain
adjustments for federal alternative minimum tax and environmental tax purposes.
The environmental tax applicable to corporations is imposed at the rate of .12%
on the excess of the corporation's modified federal alternative minimum

-32-
<PAGE> 208

taxable income over $2,000,000. Shareholders receiving Social Security benefits
should note that all exempt-interest dividends will be taken into account in
determining the taxability of such benefits.

To the extent, if at all, dividends paid to shareholders by the Fund are
derived from taxable income or from long-term or short-term capital gains, such
dividends will not be exempt from federal income tax, and may also be subject
to state and local taxes. Under state or local law, the Fund's distributions of
net investment income may be taxable to investors as dividend income though a
substantial portion of such distributions may be derived from interest on
tax-exempt obligations which, if realized directly, would be exempt from such
income taxes.

As noted above, shareholders, out of their own assets, will pay a WRAP advisory
fee. For most shareholders who are individuals, this fee will be treated as a
"miscellaneous itemized deduction" for federal income tax purposes. Under
current federal income tax law, an individual's miscellaneous itemized
deductions for any taxable year shall be allowed as a deduction only to the
extent that the aggregate of these deductions exceeds 2% of adjusted gross
income. Such deductions are also subject to the general limitation on itemized
deductions for individuals having, in 1994, adjusted gross income in excess of
$111,800 ($55,900 for married individuals filing separately).

_________________________

The foregoing discussion is only a brief summary of some of the important
federal tax considerations generally affecting the Fund and its shareholders.
As noted above, IRAs receive special tax treatment. No attempt is made to
present a detailed explanation of the federal, state or local income tax
treatment of the Fund or its shareholders, and this discussion is not intended
as a substitute for careful tax planning. Accordingly, potential investors in
the Fund should consult their tax advisers with specific reference to their own
tax situation.

THE FUND'S PERFORMANCE

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<PAGE> 209

other periods as well, such as on a year-by-year basis. When considering
average annual total return figures for periods longer than one year, it is
important to note that the total return for any one year in the period might
have been greater or less than the average for the entire period. "Aggregate
total return" figures may be used for various periods, representing the
cumulative change in value of an investment in Fund shares for the specific
period (again reflecting changes in share prices and assuming reinvestment of
dividends and distributions). Aggregate total return may be calculated either
with or without the effect of the maximum 4.75% sales charge for the Class A
shares, any applicable CDSC for Class B shares or the maximum fee for
participation in WRAP during the period for Class W shares, and may be shown by
means of schedules, charts or graphs and may indicate subtotals of the various
components of total return (that is, change in the value of initial investment,
income dividends and capital gains distributions). Because of the differences
in sales charges, distribution fees and certain other expenses, the performance
for each of the Classes will differ.

The Fund may make available information as to the Fund's yield, effective yield
and tax-equivalent yield over a thirty-day period, as calculated in accordance
with the SEC's prescribed formula. The effective yield assumes that the income
earned by an investment in the Fund is reinvested and will therefore be
slightly higher than the yield because of the compounding effect of this
assumed reinvestment. The tax-equivalent yield is calculated by determining the
portion of yield which is tax-exempt and calculating the equivalent taxable
yield and adding to such amount any fully taxable yield.

ADDITIONAL INFORMATION

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<PAGE> 210

shareholder service fees. Certain Fund expenses, such as transfer agency
expenses, are allocated separately to each class of the Fund's shares based
upon expenses identifiable by class.

All shares of the Company, when issued, will be fully paid and nonassessable.

Boston Safe, an indirect wholly owned subsidiary of Mellon, is located at One
Boston Place, Boston, Massachusetts 02108, and serves as custodian of the
Fund's investments.

The Shareholder Services Group, Inc., a subsidiary of First Data Corporation,
is located at One Exchange Place, Boston, Massachusetts 02109, and serves as
the Fund's transfer agent.

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<PAGE> 211

LEHMAN BROTHERS MUNICIPAL BOND FUND

Prospectus

________ __, 1994

<TABLE>
TABLE OF CONTENTS

<S> <C>
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Background and Expense Information . . . . . . . . . . . . . . . . . . . . . . . . 6

Variable Pricing System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Investment Objective and Policies . . . . . . . . . . . . . . . . . . . . . . . . . 9

Risk Factors and Special Considerations . . . . . . . . . . . . . . . . . . . . . . 18

Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Exchange Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Valuation of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

The Fund's Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
</TABLE>
<PAGE> 212

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.

SUBJECT TO COMPLETION-DATED SEPTEMBER 8, 1994

PROSPECTUS

LEHMAN BROTHERS MUNICIPAL BOND FUND

An Investment Portfolio of Lehman Brothers Funds, Inc.

________________, 1994

The shares described in this Prospectus represent interests in a class of
shares ("Premier Shares") of the LEHMAN BROTHERS MUNICIPAL BOND FUND (the
"Fund"). The Fund is a diversified portfolio of Lehman Brothers Funds, Inc.
(the "Company"), an open-end management investment company. Premier Shares may
not be purchased by individuals directly, but institutional investors may
purchase shares for accounts maintained by individuals.

The Fund's investment objective is to seek a high level of current income that
is exempt from regular federal income tax, consistent with the preservation of
capital. In seeking to achieve its objective, the Fund will invest primarily in
investment grade municipal obligations, the interest on which is exempt from
regular federal income tax. Under normal market conditions, the Fund will
invest substantially all of its assets in investment grade municipal
obligations. All or a portion of the Fund's dividends may be a specific
preference item for purposes of the federal individual and corporate
alternative minimum taxes.

LEHMAN BROTHERS INC. sponsors the Fund and acts as distributor of the Fund's
shares. LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC. serves as the Fund's
investment adviser.

The address of the Fund is 3 World Financial Center, New York, New York 10285.
Performance and other information regarding the Fund may be obtained by calling
800-_________.

Shares of the Fund are being offered during an initial subscription period
scheduled to end on _______ __, 1994. Subsequent to such date, the Fund will
engage in a continuous offering of its shares. See "Purchase, Redemption and
Exchange of Shares."

This Prospectus briefly sets forth certain information about the Fund that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about the
Fund, contained in a Statement of Additional Information dated ___________ __,
1994, as amended or supplemented from time to time, has been filed with the
Securities and Exchange Commission and is available to investors without charge
by calling 800-_________. The Statement of Additional Information is
incorporated in its entirety by reference into this Prospectus.

SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SUCH SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE CERTAIN INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE> 213

PROSPECTUS SUMMARY

BENEFITS TO INVESTORS

The Fund offers investors several important benefits:

o investment liquidity through convenient purchase and
redemption procedures.

o a convenient way to invest without the administrative and
recordkeeping burdens normally associated with the direct
ownership of securities.

o automatic dividend reinvestment feature, plus exchange
privilege with the shares of certain other funds in the Lehman
Brothers Group of Funds.

INVESTMENT OBJECTIVE

The Fund's investment objective is to seek a high level of current income that
is exempt from regular federal income tax, consistent with the preservation of
capital. In seeking to achieve its objective, the Fund will invest primarily in
investment grade municipal obligations, the interest on which is exempt from
regular federal income tax. Under normal market conditions, the Fund will
invest substantially all of its assets in investment grade municipal
obligations. All or a portion of the Fund's dividends may be a specific
preference item for purposes of the federal individual and corporate
alternative minimum taxes.

PURCHASE OF SHARES

-2-
<PAGE> 214

subscriptions for shares will be payable and shares will be issued. Following
termination of the subscription period, the Fund will begin a continuous
offering of shares. During the continuous offering, Premier Shares of the Fund
may be purchased at the next determined net asset value per share. Purchase
orders for Premier Shares must be transmitted to Lehman Brothers by telephone
and payments must be received by the Fund's custodian in immediately available
federal funds. See "Purchase, Redemption and Exchange of Shares."

INVESTMENT MINIMUMS

REDEMPTION OF SHARES

MANAGEMENT OF THE FUND

EXCHANGE PRIVILEGE

Premier Shares of the Fund may be exchanged for Premier Shares of certain other
funds in the Lehman Brothers Group of Funds. See "Exchange Privilege."

DIVIDENDS AND DISTRIBUTIONS

RISK FACTORS AND SPECIAL CONSIDERATIONS

-3-
<PAGE> 215

-4-
<PAGE> 216

BACKGROUND AND EXPENSE INFORMATION

<TABLE>
EXPENSE SUMMARY

<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Advisory Fees . . . . . . . . . . . . . . . . . . . . . . . . . . ____%
Rule 12b-1 Fees . . . . . . . . . . . . . . . . . . . . . . . . none
Other Expenses - including Administration Fees* . . . . . . . . . ____%

Total Fund Operating Expenses . . . . . . . . . . . . . . . . . . ____%
<FN>
- ----------------
* The amount set forth for "Other Expenses" is based on estimates for the current fiscal year.
</TABLE>

<TABLE>
EXAMPLE

You would pay the following expenses on a $1,000 investment, assuming a 5% annual return:

<CAPTION>
1 year 3 years
---------------- ----------------
<S> <C>
$___ $___
</TABLE>

-5-
<PAGE> 217

INVESTMENT OBJECTIVE AND POLICIES

GENERAL

The Fund's investment objective is to seek a high level of current income that
is exempt from regular federal income tax, consistent with the preservation of
capital. In seeking to achieve its objective, the Fund will invest primarily in
investment grade municipal obligations, the interest on which is exempt from
regular federal income tax. Under normal market conditions, the Fund will
invest substantially all of its assets in investment grade municipal
obligations. All or a portion of the Fund's dividends may be a specific
preference item for purposes of the federal individual and corporate
alternative minimum taxes. There can be no assurance that the Fund will achieve
its investment objective. For a discussion of certain risks and considerations
associated with an investment in the Fund, see "Risk Factors and Special
Considerations."

Opinions relating to the validity of Municipal Obligations and to the exemption
of interest thereon from regular federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance, and opinions
relating to the validity of and the tax-exempt status of payments received by
the Fund from tax-exempt derivative securities are rendered by counsel to the
respective sponsors of such securities. The Fund and LBGAM will rely on such
opinions and will not review independently the underlying proceedings relating
to the issuance of Municipal Obligations, the creation of any tax-exempt
derivative securities or the bases for such opinions.

-6-
<PAGE> 218

Although the Fund may invest more than 25% of its net assets in (i) Municipal
Obligations whose issuers are in the same state and (ii) Municipal Obligations
the interest on which is paid solely from revenues of similar projects, it does
not presently intend to do so on a regular basis. To the extent the Fund's
assets are concentrated in Municipal Obligations that are payable from the
revenues of similar projects, are issued by issuers located in the same state
or are private activity bonds, the Fund will be subject to the peculiar

-7-
<PAGE> 219

risks presented by the laws and economic conditions relating to such states,
projects and bonds to a greater extent than it would be if its assets were not
so concentrated.

TEMPORARY INVESTMENTS

OTHER INVESTMENTS AND INVESTMENT PRACTICES

-8-
<PAGE> 220

custodial receipts. A number of different arrangements are possible. In a
typical custodial receipt arrangement, an issuer or a third party owner of
Municipal Obligations deposits such obligations with a custodian in exchange
for two classes of custodial receipts. The two classes have different
characteristics, but, in each case, payments on the two classes are based on
payments received on the underlying Municipal Obligations. One class has the
characteristics of a typical auction rate security, where at specified
intervals its interest rate is adjusted, and ownership changes, based on an
auction mechanism. This class's interest rate generally is at a level
comparable to that of a Municipal Obligation of similar quality and having a
maturity equal to the period between interest rate adjustments. The second
class bears interest at a rate that exceeds the interest rate typically borne
by a security of comparable quality and maturity; this rate also is adjusted,
but in this case inversely to changes in the rate of interest of the first
class. If the interest rate on the first class exceeds the coupon rate of the
underlying Municipal Obligations, its interest rate will exceed the rate paid
on the second class. In no event will the aggregate interest paid with respect
to the two classes exceed the interest paid by the underlying Municipal
Obligations. The value of the second class and similar securities should be
expected to fluctuate more than the value of a Municipal Obligation of
comparable quality and maturity and their purchase by the Fund should increase
the volatility of its net asset value and, thus, its price per share. These
custodial receipts are sold in private placements. The Fund also may purchase
directly from issuers, and not in a private placement, Municipal Obligations
having characteristics similar to custodial receipts. These securities may be
issued as part of a multi-class offering and the interest rate on certain
classes may be subject to a cap or floor.

-9-
<PAGE> 221

limitation. In determining the liquidity of municipal lease obligations and
certificates of participation, LBGAM will consider a variety of factors,
including: (1) the willingness of dealers to bid for the security; (2) the
number of dealers willing to purchase or sell the obligation and the number of
other potential buyers; (3) the frequency of trades or quotes for the
obligation; and (4) the nature of marketplace trades. In addition, the
Investment Adviser will consider factors unique to particular lease obligations
and certificates of participation affecting the marketability thereof. These
include the general creditworthiness of the issuer, the importance of the
property covered by the lease to the issuer and the likelihood that the
marketability of the obligation will be maintained throughout the time the
obligation is held by the Fund.

-10-
<PAGE> 222

change in the index rate of interest. The higher degree of leverage inherent in
inverse floaters is associated with greater volatility in their market values.
Accordingly, the duration of an inverse floater may exceed its stated final
maturity. Since the market for these instruments is relatively new, the holder
of an inverse floater may have difficulty finding a ready purchaser.

Asset-Backed Securities. The Fund may purchase asset-backed securities.
Asset-backed securities represent defined interests in an underlying pool of
assets. Such securities may be issued as pass-through certificates, which
represent undivided fractional interests in the underlying pool of assets.
Alternatively, asset-backed securities may be issued as interests, generally in
the form of debt securities, in a special purpose entity organized solely for
the purpose of owning the underlying assets and issuing such securities. In the
latter case, such securities are secured by and payable from a stream of
payments generated by the underlying assets. The assets underlying asset-backed
securities are often a pool of assets similar to one another, such as municipal
lease receivables. Alternatively, the underlying assets may be particular types
of securities, various contractual rights to receive payments and/or other
types of assets. Asset-backed securities frequently carry credit protection in
the form of extra collateral, subordinate certificates, cash reserve accounts,
letters of credit or other enhancements.

-11-
<PAGE> 223

-12-
<PAGE> 224

Hedging and Derivatives. The Fund is authorized to use various hedging and
investment strategies described below to hedge market risks (such as broad or
specific market movements and interest rates), to manage the effective maturity
or duration of debt instruments held by the Fund, or to seek to increase the
Fund's income or gain. Over time, techniques and instruments may change as new
instruments and strategies are developed or regulatory changes occur.
Limitations on the portion of the Fund's assets that may be used in connection
with the investment strategies described below appear in the Statement of
Additional Information.

-13-
<PAGE> 225

a position in the derivatives markets as a substitute for purchasing or selling
particular debt securities or to seek to enhance the Fund's income or gain. The
Fund may use any or all types of Derivatives at any time; no particular
strategy will dictate the use of one type of transaction rather than another,
as use of any authorized Derivative will be a function of numerous variables,
including market conditions. The ability of the Fund to utilize Derivatives
successfully will depend on LBGAM's ability to predict pertinent market
movements, which cannot be assured. These skills are different from those
needed to select portfolio securities. The Fund is not a "commodity pool"
(i.e., a pooled investment vehicle which trades in commodity futures contracts
and options thereon and the operator of which is registered with the Commodity
Futures Trading Commission (the "CFTC")) and Derivatives involving futures
contracts and options on futures contracts will be purchased, sold or entered
into only for bona fide hedging purposes, provided that the Fund may enter into
such transactions for purposes other than bona fide hedging if, immediately
thereafter, the sum of the amount of its initial margin and premiums on open
contracts and options would not exceed 5% of the liquidation value of the
Fund's portfolio, provided, further, that, in the case of an option that is
in-the-money, the in-the-money amount may be excluded in calculating the 5%
limitation. The use of Derivatives in certain circumstances will require that
the Fund segregate cash, liquid high grade debt obligations or other assets to
the extent the Fund's obligations are not otherwise "covered" through ownership
of the underlying security, financial instrument or currency. See "Risk Factors
and Special Considerations - Other Investments and Investment Practices."

The degree of the Fund's use of Derivatives may be limited by certain
provisions of the Code. See "Taxes."

INVESTMENT LIMITATIONS

-14-
<PAGE> 226

same investment objective and policies and substantially the same investment
restrictions as those with respect to the Fund.

3. The Fund may not purchase any securities which would cause 25% or more
of the value of its total assets at the time of such purchase to be invested in
the securities of one or more issuers conducting their principal business
activities in the same industry; provided that there is no limitation with
respect to investments in U.S. Government Securities or Municipal Obligations
(other than those backed only by the assets and revenues of non-governmental
users), and provided further, that the Fund may invest all or substantially all
of its assets in another registered investment company having the same
investment objective and policies and substantially the same investment
restrictions as those with respect to the Fund.

RISK FACTORS AND SPECIAL CONSIDERATIONS

CHANGES IN INTEREST RATES

Because the Fund will generally invest in fixed income securities, the net
asset value of the Fund's portfolio, and hence its shares, can be expected to
change as general levels of interest rates fluctuate. Except to the extent that
values are affected independently by other factors such as developments
relating to a specific issuer, when interest rates decline, the value of a
fixed income portfolio can generally be expected to rise. Conversely, when
interest rates rise, the value of a fixed income portfolio can generally be
expected to decline. These fluctuations can be expected to be greater with
respect to investments in fixed income securities with longer maturities than
investments in securities with shorter maturities.

-15-
<PAGE> 227

OTHER INVESTMENTS AND INVESTMENT PRACTICES

PURCHASE, REDEMPTION AND EXCHANGE OF SHARES

PURCHASES IN THE INITIAL OFFERING

-16-
<PAGE> 228

PURCHASES IN THE CONTINUOUS OFFERING

ADDITIONAL PURCHASE INFORMATION

REDEMPTION OF SHARES

-17-
<PAGE> 229

EXCHANGE PRIVILEGE

-18-
<PAGE> 230

OTHER MATTERS

VALUATION OF SHARES

MANAGEMENT OF THE FUND

INVESTMENT ADVISER - LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC.

-19-
<PAGE> 231

LBGAM is located at 3 World Financial Center, New York, New York 10285. LBGAM
is a wholly owned subsidiary of Lehman Brothers Holdings, Inc. ("Holdings").

ADMINISTRATOR - THE SHAREHOLDER SERVICES GROUP, INC.

On May 6, 1994, TSSG acquired the third party mutual fund administration
business of The Boston Company Advisors, Inc., an indirect wholly-owned
subsidiary of Mellon Bank Corporation ("Mellon"). In connection with this
transaction, Mellon assigned to TSSG its agreement with Lehman Brothers such
that Lehman Brothers and its affiliates, consistent with their fiduciary duties
and assuming certain service quality standards are met, would recommend TSSG as
the provider of administration services to the Fund. This duty to recommend
expires on May 21, 2000. In addition, under the terms of the Stock Purchase
Agreement dated September 14, 1992 between Mellon and Lehman Brothers (then
named Shearson Lehman Brothers Inc.), Lehman Brothers agreed to recommend
Boston Safe, an indirect wholly owned subsidiary of Mellon, as custodian of
mutual funds affiliated with Lehman Brothers until May 21, 2000, to the extent
consistent with its fiduciary duties and other applicable law.

DISTRIBUTOR - LEHMAN BROTHERS

EXPENSES

-20-
<PAGE> 232

disbursing agent, certain insurance premiums, outside auditing and legal
expenses, costs of shareholder reports and shareholder meetings and any
extraordinary expenses. The Fund also pays for brokerage fees and commissions
(if any) in connection with the purchase and sale of portfolio securities. Fund
expenses are allocated to Premier Shares based on either expenses identifiable
to the Premier Shares or relative net assets of the Premier Shares and other
classes of Fund shares. LBGAM and TSSG have agreed to reimburse the Fund to the
extent required by applicable state law for certain expenses that are described
in the Statement of Additional Information relating to the Fund. In addition,
in order to maintain a competitive expense ratio LBGAM and TSSG have agreed to
reimburse the Fund for certain operating expenses for a period of at least one
year from the date of this Prospectus. See "Background and Expense
Information."

DIVIDENDS

Each shareholder or its authorized representative will receive an annual
statement designating the amount of any dividends and distributions made during
each year and their federal tax qualification.

TAXES

The Fund intends to qualify and elect to be treated as a regulated investment
company for federal income tax purposes under Subchapter M of the Code. If so
qualified, the Fund will not be subject to federal income taxes on its
investment company taxable income (as that term is defined in the Code,
determined without regard to the deduction for dividends paid) and net capital
gain (the excess of the Fund's net long-term capital gain over its net
short-term capital loss), if any, that it distributes to its shareholders in
each taxable year. To qualify as a regulated investment company, the Fund must,
among other things, distribute to its shareholders at least 90% of its net
investment company taxable income for such taxable year, and at least 90% of
its net tax- exempt interest income for such taxable year. However, the Fund
would be subject to corporate income tax at a rate of 35% on any undistributed
income or net capital gain. The Fund must also derive less than 30% of its
gross income in each taxable year from the sale or other disposition of certain
securities held for less than three months (the "30% limitation"). If in any
year the Fund should fail to qualify as a regulated investment company, the
Fund would be subject to federal income tax in the same manner as an ordinary
corporation and distributions to shareholders would be taxable to such holders

-21-
<PAGE> 233

as ordinary income to the extent of the earnings and profits of the Fund.
Distributions in excess of earnings and profits will be treated as a tax-free
return of capital, to the extent of a holder's basis in its shares, and any
excess, as a long- or short-term capital gain.

The Fund intends to distribute substantially all of its investment company
taxable income each year. Such distributions, whether paid in cash or
reinvested in additional shares, will be taxable as ordinary income to Fund
shareholders who are not currently exempt from federal income taxes. Federal
income taxes for distributions to an Individual Retirement Account ("IRA") or a
qualified retirement plan are deferred under the Code. It is not anticipated
that a significant portion of the Fund's distributions will be eligible for the
dividends received deduction for corporations. Distributions to shareholders of
net capital gain that are designated by the Fund as "capital gain dividends,"
whether paid in cash or reinvested in additional shares, will be taxable as
long-term capital gains regardless of how long the shares have been held by
such shareholders. The Fund does not expect to recognize significant net
capital gains. Shareholders receiving distributions from the Fund in the form
of additional shares will be treated for federal income tax purposes as
receiving a distribution in an amount equal to the fair market value of the
additional shares on the date of such a distribution.

-22-
<PAGE> 234

is imposed at the rate of .12% on the excess of the corporation's modified
federal alternative minimum taxable income over $2,000,000. Shareholders
receiving Social Security benefits should note that all exempt-interest
dividends will be taken into account in determining the taxability of such
benefits.

_________________________

THE FUND'S PERFORMANCE

From time to time, the "total return," "yield," "effective yield" and
"tax-equivalent yield" for shares may be quoted in advertisements or reports to
shareholders. Total return and yield quotations are computed separately for
each class of shares. Total return figures show the average percentage change
in the value of an investment in the Fund from the beginning date of the
measuring period to the end of the measuring period. These figures reflect
changes in the price of the shares and assume that any income dividends and/or
capital gains distributions made by the Fund during the period were reinvested
in shares of the Fund. Total return figures include any applicable sales
charges, service fees and distribution fees payable with respect to a class.

-23-
<PAGE> 235

graphs and may indicate subtotals of the various components of total return
(that is, change in the value of initial investment, income dividends and
capital gains distributions).

ADDITIONAL INFORMATION

-24-
<PAGE> 236

All shares of the Company, when issued, will be fully paid and nonassessable.

Boston Safe, an indirect wholly owned subsidiary of Mellon, is located at One
Boston Place, Boston, Massachusetts 02108, and serves as custodian of the
Fund's investments.

The Shareholder Services Group, Inc., a subsidiary of First Data Corporation,
is located at One Exchange Place, Boston, Massachusetts 02109, and serves as
the Fund's transfer agent.

-25-
<PAGE> 237

LEHMAN BROTHERS MUNICIPAL BOND FUND

Prospectus

________ __, 1994

<TABLE>
TABLE OF CONTENTS

<S> <C>
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Background and Expense Information . . . . . . . . . . . . . . . . . . . . . . . 5

Investment Objective and Policies . . . . . . . . . . . . . . . . . . . . . . . . 6

Risk Factors and Special Considerations . . . . . . . . . . . . . . . . . . . . . 15

Purchase, Redemption and Exchange of Shares . . . . . . . . . . . . . . . . . . . 16

Valuation of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

The Fund's Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>
<PAGE> 238

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.

SUBJECT TO COMPLETION-DATED SEPTEMBER 8, 1994

PROSPECTUS

LEHMAN BROTHERS MUNICIPAL BOND FUND

An Investment Portfolio of Lehman Brothers Funds, Inc.

________________, 1994

The shares described in this Prospectus represent interests in a class of
shares ("Select Shares") of the LEHMAN BROTHERS MUNICIPAL BOND FUND (the
"Fund"). The Fund is a diversified portfolio of Lehman Brothers Funds, Inc.
(the "Company"), an open-end management investment company. Select Shares may
not be purchased by individuals directly, but institutional investors may
purchase shares for accounts maintained by individuals.

The Fund's investment objective is to seek a high level of current income that
is exempt from regular federal income tax, consistent with the preservation of
capital. In seeking to achieve its objective, the Fund will invest primarily in
investment grade municipal obligations, the interest on which is exempt from
regular federal income tax. Under normal market conditions, the Fund will
invest substantially all of its assets in investment grade municipal
obligations. All or a portion of the Fund's dividends may be a specific
preference item for purposes of the federal individual and corporate
alternative minimum taxes.

LEHMAN BROTHERS INC. sponsors the Fund and acts as distributor of the Fund's
shares. LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC. serves as the Fund's
investment adviser.

The address of the Fund is 3 World Financial Center, New York, New York 10285.
Performance and other information regarding the Fund may be obtained by calling
800-_________.

Shares of the Fund are being offered during an initial subscription period
scheduled to end on _______ __, 1994. Subsequent to such date, the Fund will
engage in a continuous offering of its shares. See "Purchase, Redemption and
Exchange of Shares."

This Prospectus briefly sets forth certain information about the Fund that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about the
Fund, contained in a Statement of Additional Information dated ___________ __,
1994, as amended or supplemented from time to time, has been filed with the
Securities and Exchange Commission and is available to investors without charge
by calling 800-_________. The Statement of Additional Information is
incorporated in its entirety by reference into this Prospectus.

SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SUCH SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE CERTAIN INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE> 239
PROSPECTUS SUMMARY

BENEFITS TO INVESTORS

The Fund offers investors several important benefits:

o investment liquidity through convenient purchase and
redemption procedures.

o a convenient way to invest without the administrative and
recordkeeping burdens normally associated with the direct
ownership of securities.

o automatic dividend reinvestment feature, plus exchange
privilege with the shares of certain other funds in the Lehman
Brothers Group of Funds.

INVESTMENT OBJECTIVE

The Fund's investment objective is to seek a high level of current income that
is exempt from regular federal income tax, consistent with the preservation of
capital. In seeking to achieve its objective, the Fund will invest primarily in
investment grade municipal obligations, the interest on which is exempt from
regular federal income tax. Under normal market conditions, the Fund will
invest substantially all of its assets in investment grade municipal
obligations. All or a portion of the Fund's dividends may be a specific
preference item for purposes of the federal individual and corporate
alternative minimum taxes.

PURCHASE OF SHARES

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<PAGE> 240
orders for Select Shares must be transmitted to Lehman Brothers by telephone
and payments must be received by the Fund's custodian in immediately available
federal funds. See "Purchase, Redemption and Exchange of Shares."

INVESTMENT MINIMUMS

REDEMPTION OF SHARES

MANAGEMENT OF THE FUND

EXCHANGE PRIVILEGE

Select Shares of the Fund may be exchanged for Select Shares of certain other
funds in the Lehman Brothers Group of Funds. See "Exchange Privilege."

DIVIDENDS AND DISTRIBUTIONS

RISK FACTORS AND SPECIAL CONSIDERATIONS

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BACKGROUND AND EXPENSE INFORMATION

<TABLE>
EXPENSE SUMMARY

<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Advisory Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ____%
Rule 12b-1 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.25%
Other Expenses - including Administration Fees* . . . . . . . . . . . . . . . ____%

Total Fund Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . ____%
<FN>
- -----------------
* The amount set forth for "Other Expenses" is based on estimates for the current fiscal year.
</TABLE>

<TABLE>
EXAMPLE

You would pay the following expenses on a $1,000 investment, assuming a 5% annual return:

<CAPTION>
1 year 3 years
---------------- ----------------
<S> <C>
$___ $___
</TABLE>

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<PAGE> 242
INVESTMENT OBJECTIVE AND POLICIES

GENERAL

The Fund's investment objective is to seek a high level of current income that
is exempt from regular federal income tax, consistent with the preservation of
capital. In seeking to achieve its objective, the Fund will invest primarily in
investment grade municipal obligations, the interest on which is exempt from
regular federal income tax. Under normal market conditions, the Fund will
invest substantially all of its assets in investment grade municipal
obligations. All or a portion of the Fund's dividends may be a specific
preference item for purposes of the federal individual and corporate
alternative minimum taxes. There can be no assurance that the Fund will achieve
its investment objective. For a discussion of certain risks and considerations
associated with an investment in the Fund, see "Risk Factors and Special
Considerations."

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<PAGE> 243
amount of assets which may be held uninvested. Uninvested cash reserves will
not earn income. In addition to or in lieu of holding uninvested cash reserves
under the aforementioned circumstances, the Fund may elect to invest in high
quality, short-term instruments of the types described below under "Temporary
Investments" and repurchase agreements with respect to such instruments, the
income from which is subject to federal income tax. To the extent that the Fund
deviates from its investment policies as a result of the unavailability of
suitable Municipal Obligations or for other temporary defensive purposes, its
investment objective of seeking income exempt from regular federal income tax
may not be achieved.

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<PAGE> 244
TEMPORARY INVESTMENTS

OTHER INVESTMENTS AND INVESTMENT PRACTICES

Custodial Receipts and Certificates. The Fund may purchase custodial receipts
representing the right to receive certain future principal and interest
payments on Municipal Obligations which underlie the custodial receipts. A
number of different arrangements are possible. In a typical custodial receipt
arrangement, an issuer or a third party owner of Municipal Obligations deposits
such obligations with a custodian in exchange for two classes of custodial
receipts. The two classes have different characteristics, but, in each case,
payments on the two classes are based on payments received on the underlying
Municipal Obligations. One class has the characteristics of a typical auction
rate security, where at specified intervals its interest rate is adjusted, and
ownership changes, based on an auction mechanism.

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<PAGE> 245
This class's interest rate generally is at a level comparable to that of a
Municipal Obligation of similar quality and having a maturity equal to the
period between interest rate adjustments. The second class bears interest at a
rate that exceeds the interest rate typically borne by a security of comparable
quality and maturity; this rate also is adjusted, but in this case inversely to
changes in the rate of interest of the first class. If the interest rate on the
first class exceeds the coupon rate of the underlying Municipal Obligations,
its interest rate will exceed the rate paid on the second class. In no event
will the aggregate interest paid with respect to the two classes exceed the
interest paid by the underlying Municipal Obligations. The value of the second
class and similar securities should be expected to fluctuate more than the
value of a Municipal Obligation of comparable quality and maturity and their
purchase by the Fund should increase the volatility of its net asset value and,
thus, its price per share. These custodial receipts are sold in private
placements. The Fund also may purchase directly from issuers, and not in a
private placement, Municipal Obligations having characteristics similar to
custodial receipts. These securities may be issued as part of a multi-class
offering and the interest rate on certain classes may be subject to a cap or
floor.

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<PAGE> 246
Other Participation Interests. The Fund may purchase participation certificates
issued by a bank, insurance company or other financial institution in
obligations owned by such institutions or affiliated organizations that may
otherwise be purchased by the Fund, and loan participation certificates. A
participation certificate gives the Fund an undivided interest in the
underlying obligations in the proportion that the Fund's interest bears to the
total principal amount of such obligations. Certain of such participation
certificates may carry a demand feature that would permit the holder to tender
them back to the issuer or to a third party prior to maturity. See "Floating
and Variable Rate Notes" below for additional information with respect to
demand instruments that may be purchased by the Fund. Loan participation
certificates are considered by the Fund to be "illiquid" for purposes of its
investment policy with respect to illiquid securities as set forth under
"Illiquid Securities" below.

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<PAGE> 247

counter. These factors may have an adverse effect on the Fund's ability to
dispose of particular securities and may limit the Fund's ability to obtain
accurate market quotations for purposes of valuing securities and calculating
net asset value and to sell securities at fair value. If any privately
placed securities held by the Fund are required to be registered under the
securities laws of one or more jurisdictions before being resold, the Fund may
be required to bear the expenses of registration. The Fund may also purchase
securities that are not registered under the Securities Act of 1933, as amended,
but which can be sold to qualified institutional buyers in accordance with Rule
144A under that Act ("Rule 144A securities"). Rule 144A securities generally
must be sold to other qualified institutional buyers. The Fund may also invest
in commercial obligations issued in reliance on the so-called "private
placement" exemption from registration afforded by Section 4(2) of the
Securities Act of 1933, as amended ("Section 4(2) paper"). Section 4(2) paper is
restricted as to disposition under the federal securities laws, and generally is
sold to institutional investors such as the Fund who agree that they are
purchasing the paper for investment and not with a view to public distribution.
Any resale by the purchaser must be in an exempt transaction. Section 4(2) paper
normally is resold to other institutional investors like the Fund through or
with the assistance of the issuer or investment dealers who make a market in the
Section 4(2) paper, thus providing liquidity. If a particular investment in Rule
144A securities, Section 4(2) paper or private placement securities is not
determined to be liquid, that investment will be included within the 15%
limitation on investment in illiquid securities. The ability to sell Rule 144A
securities to qualified institutional buyers is a recent development and it is
not possible to predict how this market will mature. LBGAM will monitor the
liquidity of such restricted securities under the supervision of the Board of
Directors. See "Investment Objective and Policies - Additional Information on
Portfolio Instruments and Certain Investment Practices - Illiquid and Restricted
Securities" in the Statement of Additional Information.

Asset-Backed Securities. The Fund may purchase asset-backed securities.
Asset-backed securities represent defined interests in an underlying pool of
assets. Such securities may be issued as pass-through certificates, which
represent undivided fractional interests in the underlying pool of assets.
Alternatively, asset-backed securities may be issued as interests, generally in
the form of debt securities, in a special purpose entity organized solely for
the purpose of owning the underlying assets and issuing such securities. In the
latter case, such securities are secured by and payable from a stream of
payments generated by the underlying assets. The assets underlying asset-backed
securities are often a pool of assets similar to one another, such as municipal
lease receivables. Alternatively, the underlying assets may be particular types
of securities, various contractual rights to receive payments and/or other
types of assets. Asset-backed securities frequently carry credit protection in
the form of extra collateral, subordinate certificates, cash reserve accounts,
letters of credit or other enhancements.

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<PAGE> 248
maturity date, and a stand-by commitment entitles the Fund to same-day
settlement and to receive an exercise price equal to the amortized cost of the
underlying security plus accrued interest, if any, at the time of exercise. In
the event that the party obligated to purchase the underlying security from the
Fund defaults on its obligation to purchase the underlying security, then the
Fund might be unable to recover all or a portion of any loss sustained from
having to sell the security elsewhere. Acquisition of puts will have the effect
of increasing the cost of securities subject to the put and thereby reducing
the yields otherwise available from such securities.

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<PAGE> 249
may have to borrow from a bank at a higher interest rate if an interfund loan
is called or not renewed. Any delay in repayment to a lending fund could result
in a lost investment opportunity or additional borrowing costs.

Hedging and Derivatives. The Fund is authorized to use various hedging and
investment strategies described below to hedge market risks (such as broad or
specific market movements and interest rates), to manage the effective maturity
or duration of debt instruments held by the Fund, or to seek to increase the
Fund's income or gain. Over time, techniques and instruments may change as new
instruments and strategies are developed or regulatory changes occur.
Limitations on the portion of the Fund's assets that may be used in connection
with the investment strategies described below appear in the Statement of
Additional Information.

Derivatives may be used to attempt to protect against possible changes in the
market value of securities held in or to be purchased for the Fund's portfolio
resulting from securities markets fluctuations, to protect the Fund's
unrealized gains in the value of its portfolio securities, to facilitate the
sale of those securities for investment purposes, to manage the effective
maturity or duration of the Fund's portfolio, to establish a position in the
derivatives markets as a substitute for purchasing or selling particular debt
securities or to seek to enhance the Fund's income or gain. The Fund may use
any or all types of Derivatives at any time; no particular strategy will
dictate the use of one type of transaction rather than another, as use of any
authorized Derivative will be a function of numerous variables, including
market conditions. The ability of the Fund to utilize Derivatives successfully
will depend on LBGAM's ability to predict pertinent market movements, which
cannot be assured. These skills are different from those needed to select
portfolio securities. The Fund is not a "commodity pool" (i.e., a pooled
investment vehicle which trades in commodity futures contracts and options
thereon and the operator of which is registered with the Commodity Futures
Trading Commission (the "CFTC")) and Derivatives involving futures contracts
and options on futures contracts will be purchased, sold or entered into only
for bona fide hedging purposes, provided that the Fund may enter into such
transactions for purposes other than bona fide hedging if, immediately
thereafter, the sum of the amount of its initial margin and premiums on open
contracts and options would not exceed 5% of the liquidation value of the
Fund's portfolio, provided, further, that, in the case of an option that is
in-the-money, the in-the-money amount may be excluded in calculating the 5%
limitation. The use of Derivatives in certain circumstances will require that
the Fund segregate cash, liquid high grade debt obligations or other assets to
the extent the Fund's obligations are not otherwise "covered" through ownership
of the underlying security, financial instrument or currency. See "Risk Factors
and Special Considerations - Other Investments and Investment Practices."

-12-
<PAGE> 250
A detailed discussion of Derivatives, including applicable requirements of the
CFTC, the requirement to segregate assets with respect to these transactions
and special risks associated with such strategies, appears in the Statement of
Additional Information.

The degree of the Fund's use of Derivatives may be limited by certain
provisions of the Code. See "Taxes."

INVESTMENT LIMITATIONS

3. The Fund may not purchase any securities which would cause 25% or more
of the value of its total assets at the time of such purchase to be invested in
the securities of one or more issuers conducting their principal business
activities in the same industry; provided that there is no limitation with
respect to investments in U.S. Government Securities or Municipal Obligations
(other than those backed only by the assets and revenues of non-governmental
users), and provided further, that the Fund may invest all or substantially all
of its assets in another registered investment company having the same
investment objective and policies and substantially the same investment
restrictions as those with respect to the Fund.

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<PAGE> 251
The Fund may, in the future, seek to achieve its investment objective by
investing all of its assets in a no-load, open-end management investment
company having the same investment objective and policies and substantially the
same investment restrictions as those applicable to the Fund. In such event,
the Fund's investment advisory agreement would be terminated and the
administrative services fees paid by the Fund would be reduced. Such investment
would be made only if the Company's Board of Directors believes that the
aggregate per share expenses of each class of the Fund and such other
investment company will be less than or approximately equal to the expenses
which each class of the Fund would incur if the Fund were to continue to retain
the services of an investment adviser for the Fund and the assets of the Fund
were to continue to be invested directly in portfolio securities.

RISK FACTORS AND SPECIAL CONSIDERATIONS

CHANGES IN INTEREST RATES

Because the Fund will generally invest in fixed income securities, the net
asset value of the Fund's portfolio, and hence its shares, can be expected to
change as general levels of interest rates fluctuate. Except to the extent that
values are affected independently by other factors such as developments
relating to a specific issuer, when interest rates decline, the value of a
fixed income portfolio can generally be expected to rise. Conversely, when
interest rates rise, the value of a fixed income portfolio can generally be
expected to decline. These fluctuations can be expected to be greater with
respect to investments in fixed income securities with longer maturities than
investments in securities with shorter maturities.

OTHER INVESTMENTS AND INVESTMENT PRACTICES

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<PAGE> 252
PURCHASE, REDEMPTION AND EXCHANGE OF SHARES

PURCHASES IN THE INITIAL OFFERING

Shares of the Fund are being offered through Lehman Brothers, the Fund's
distributor, during a period scheduled to end on __________ __, 1994, subject
to extension by agreement between the Fund and Lehman Brothers (the
"Subscription Period"). The price for Select Shares of the Fund during the
Subscription Period will be $10.00 per share. On the fifth business day
following termination of the Subscription Period (the "Closing Date"),
subscriptions for shares will be payable and shares will be issued. Following
termination of the Subscription Period, the Fund will begin a continuous
offering of shares. Investors will not be required to pay for shares offered
during the Subscription Period until the Closing Date, and they may revoke
subscriptions until the termination of the Subscription Period. Purchase orders
for Premier Shares placed during the Subscription Period must be transmitted to
Lehman Brothers by telephone before 4:00 p.m. on the last day of the
Subscription Period, and payment in respect of such orders must be received in
federal funds immediately available to the Fund's custodian before 3:00 p.m.,
Eastern time on the Closing Date, in each case in accordance with the
procedures described below under "Purchases in the Continuous Offering." The
Fund and Lehman Brothers reserve the right to withdraw, cancel or modify the
initial offering of shares without notice and to reject any purchase order.

PURCHASES IN THE CONTINUOUS OFFERING

ADDITIONAL PURCHASE INFORMATION

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<PAGE> 253
Subaccounting Services. Institutions are encouraged to open single master
accounts. However, certain institutions may wish to use the transfer agent's
subaccounting system to minimize their internal recordkeeping requirements. The
transfer agent charges a fee based on the level of subaccounting services
rendered. Institutions holding Fund shares in a fiduciary, agency, custodial or
similar capacity may charge or pass through subaccounting fees as part of or in
addition to normal trust or agency account fees. They may also charge fees for
other services provided which may be related to the ownership of Fund shares.
This Prospectus should, therefore, be read together with any agreement between
the customer and the institution with regard to the services provided, the fees
charged for those services and any restrictions and limitations imposed.

REDEMPTION OF SHARES

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<PAGE> 254
EXCHANGE PRIVILEGE

OTHER MATTERS

VALUATION OF SHARES

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<PAGE> 255
MANAGEMENT OF THE FUND

INVESTMENT ADVISER - LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC.

LBGAM is located at 3 World Financial Center, New York, New York 10285. LBGAM
is a wholly owned subsidiary of Lehman Brothers Holdings, Inc. ("Holdings").

ADMINISTRATOR - THE SHAREHOLDER SERVICES GROUP, INC.

On May 6, 1994, TSSG acquired the third party mutual fund administration
business of The Boston Company Advisors, Inc., an indirect wholly-owned
subsidiary of Mellon Bank Corporation ("Mellon"). In connection with this
transaction, Mellon assigned to TSSG its agreement with Lehman Brothers such
that Lehman Brothers and its affiliates, consistent with their fiduciary duties
and assuming certain service quality standards are met, would recommend TSSG as
the provider of administration services to the Fund. This duty to recommend
expires on May 21, 2000. In addition, under the terms of the Stock Purchase
Agreement dated September 14, 1992 between Mellon and Lehman Brothers (then
named Shearson Lehman Brothers Inc.), Lehman Brothers agreed to recommend
Boston Safe, an indirect wholly owned subsidiary of Mellon, as custodian of
mutual funds affiliated with Lehman Brothers until May 21, 2000, to the extent
consistent with its fiduciary duties and other applicable law.

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<PAGE> 256
DISTRIBUTOR - LEHMAN BROTHERS

SERVICE ORGANIZATIONS

EXPENSES

The Fund's expenses include taxes, interest, fees and salaries of the directors
and officers who are not directors, officers or employees of the Fund's service
contractors, SEC fees, state securities qualification fees, costs of preparing
and printing prospectuses for regulatory purposes and for distribution to
shareholders, advisory and administration fees, charges of the custodian,
transfer agent and dividend disbursing agent, certain insurance premiums,
outside auditing and legal expenses, costs of shareholder reports and
shareholder meetings and any extraordinary expenses. The Fund also pays for
brokerage fees and commissions (if any) in connection with the purchase and
sale of portfolio securities. Fund expenses are allocated to Select Shares
based on either expenses identifiable to the Select Shares or relative net
assets of the Select Shares and other classes of Fund shares. LBGAM and TSSG
have agreed to reimburse the Fund to the extent required by applicable state
law for certain expenses that are described in the Statement of Additional
Information relating to the Fund. In addition, in order to maintain a
competitive expense ratio LBGAM and TSSG have agreed to reimburse the Fund for
certain operating expenses for a period of at least one year from the date of
this Prospectus. See "Background and Expense Information."

BANKING LAWS

Banking laws and regulations currently prohibit a bank holding company
registered under the federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, or controlling a
registered, open-end investment company engaged continuously in the issuance of
its shares and prohibit banks generally from issuing, underwriting, selling or
distributing securities such as Fund shares. Such banking laws and regulations
do not prohibit such a holding company or affiliate generally from acting as
investment adviser, transfer agent or custodian to such an investment company
or from purchasing shares of such a company for or upon the order of customers.
Some Service Organizations may

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<PAGE> 257
be subject to such banking laws and regulations. In addition, state securities
laws on this issue may differ from the interpretation of federal law expressed
herein and banks and financial institutions may be required to register as
dealers pursuant to state law.

DIVIDENDS

Dividends are determined in the same manner and are paid in the same amount for
each Fund share, except that certain expenses borne differ by class. As a
result, the per share dividends on Select Shares will be lower than those on
Premier Shares and higher than those on certain other classes of the Fund's
shares.

Each shareholder or its authorized representative will receive an annual
statement designating the amount of any dividends and distributions made during
each year and their federal tax qualification.

TAXES

The Fund intends to qualify and elect to be treated as a regulated investment
company for federal income tax purposes under Subchapter M of the Code. If so
qualified, the Fund will not be subject to federal income taxes on its
investment company taxable income (as that term is defined in the Code,
determined without regard to the deduction for dividends paid) and net capital
gain (the excess of the Fund's net long-term capital gain over its net
short-term capital loss), if any, that it distributes to its shareholders in
each taxable year. To qualify as a regulated investment company, the Fund must,
among other things, distribute to its shareholders at least 90% of its net
investment company taxable income for such taxable year, and at least 90% of
its net tax- exempt interest income for such taxable year. However, the Fund
would be subject to corporate income tax at a rate of 35% on any undistributed
income or net capital gain. The Fund must also derive less than 30% of its
gross income in each taxable year from the sale or other disposition of certain
securities held for less than three months (the "30% limitation"). If in any
year the Fund should fail to qualify as a regulated investment company, the
Fund would be subject to federal income tax in the same manner as an ordinary
corporation and distributions to shareholders would be taxable to such holders
as ordinary income to the extent of the earnings and profits of the Fund.
Distributions in excess of earnings and profits will be treated as a tax-free
return of capital, to the extent of a holder's basis in its shares, and any
excess, as a long- or short-term capital gain.

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<PAGE> 258
The Fund intends to distribute substantially all of its investment company
taxable income each year. Such distributions, whether paid in cash or
reinvested in additional shares, will be taxable as ordinary income to Fund
shareholders who are not currently exempt from federal income taxes. Federal
income taxes for distributions to an Individual Retirement Account ("IRA") or a
qualified retirement plan are deferred under the Code. It is not anticipated
that a significant portion of the Fund's distributions will be eligible for the
dividends received deduction for corporations. Distributions to shareholders of
net capital gain that are designated by the Fund as "capital gain dividends,"
whether paid in cash or reinvested in additional shares, will be taxable as
long-term capital gains regardless of how long the shares have been held by
such shareholders. The Fund does not expect to recognize significant net
capital gains. Shareholders receiving distributions from the Fund in the form
of additional shares will be treated for federal income tax purposes as
receiving a distribution in an amount equal to the fair market value of the
additional shares on the date of such a distribution.

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<PAGE> 259
investment income may be taxable to investors as dividend income though a
substantial portion of such distributions may be derived from interest on
tax-exempt obligations which, if realized directly, would be exempt from such
income taxes.

_________________________

THE FUND'S PERFORMANCE

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<PAGE> 260
In reports or other communications to shareholders or in advertising materials,
performance of Fund shares may be compared with that of other mutual funds or
classes of shares of other mutual funds, as listed in the rankings prepared by
Lipper Analytical Services, Inc. or similar independent services that monitor
the performance of mutual funds, or other industry or financial publications
such as Barron's, Business Week, CDA Investment Technologies, Inc., Changing
Times, Forbes, Fortune, Institutional Investor, Investors Daily, Money,
Morningstar Mutual Fund Values, The New York Times, USA Today and The Wall
Street Journal. Performance figures are based on historical earnings and are
not intended to indicate future performance. The Statement of Additional
Information contains a further description of the methods used to determine
performance. Investors may call 800-__________ to obtain current performance
figures.

ADDITIONAL INFORMATION

The Company has received an order from the SEC permitting it, subject to
certain terms and conditions, to establish multiple classes of shares within
each series. The Fund currently offers six classes of shares: "Select Shares,"
"Premier Shares," and Class A, B, C and W Shares. This Prospectus relates only
to the Select Shares. Shares of each class represent interests in the Fund in
proportion to each share's net asset value. Premier Shares are sold to
institutions that have not entered into servicing or other agreements with the
Fund in connection with their investments and pay no Rule 12b-1 distribution or
shareholder service fees. Class A, B and C shares are offered directly to
individual investors. Class A shares bear a sales charge at the time of
purchase while Class B shares are subject to a contingent deferred sales charge
at the time of redemption. Class A, B and C shares are sold under a plan
adopted pursuant to Rule 12b-1 and, in addition to the Fund's other operating
expenses, bear aggregate expenses pursuant to such plans at annual rates not
exceeding .25%, 1.00% and 1.00% of the respective values of the net assets
attributable to such classes. Class W shares bear no sales charges,
distribution or shareholder service fees and are offered only to participants
in the Lehman Brothers WRAP Program and similar programs. Participants in the
Lehman Brothers WRAP Program and similar programs pay fees based upon the
aggregate value of their investments in participating mutual funds, including
the Fund. Certain Fund expenses are allocated separately to each class of
shares based upon expenses identifiable by class.

All shares of the Company, when issued, will be fully paid and nonassessable.

Boston Safe, an indirect wholly owned subsidiary of Mellon, is located at One
Boston Place, Boston, Massachusetts 02108, and serves as custodian of the
Fund's investments.

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<PAGE> 261
The Shareholder Services Group, Inc., a subsidiary of First Data Corporation,
is located at One Exchange Place, Boston, Massachusetts 02109, and serves as
the Fund's transfer agent.

-24-
<PAGE> 262
LEHMAN BROTHERS MUNICIPAL BOND FUND

Prospectus

________ __, 1994

<TABLE>
TABLE OF CONTENTS

<S> <C>
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Background and Expense Information . . . . . . . . . . . . . . . . . . . . . . . 4

Investment Objective and Policies . . . . . . . . . . . . . . . . . . . . . . . . 5

Risk Factors and Special Considerations . . . . . . . . . . . . . . . . . . . . . 14

Purchase, Redemption and Exchange of Shares . . . . . . . . . . . . . . . . . . . 15

Valuation of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

The Fund's Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
</TABLE>
<PAGE> 263

SUBJECT TO COMPLETION-DATED SEPTEMBER 8, 1994

PROSPECTUS

LEHMAN BROTHERS NEW YORK MUNICIPAL BOND FUND

An Investment Portfolio of Lehman Brothers Funds, Inc.

______________, 1994

This Prospectus describes the LEHMAN BROTHERS NEW YORK MUNICIPAL BOND
FUND (the "Fund"), a non- diversified portfolio of Lehman Brothers
Funds, Inc. (the "Company"), an open-end management investment company.
This Prospectus relates to the three classes of shares of the Fund that
are offered directly to individual investors and a fourth class of
shares that is offered only to participants in the Lehman Brothers WRAP
Program and similar programs, as described herein.

The Fund's investment objective is to seek a high level of current
income that is exempt from regular federal income tax and New York
State and New York City personal income taxes, consistent with the
preservation of capital. In seeking to achieve its objective, the Fund
will invest primarily in investment grade municipal obligations, the
interest on which is exempt from regular federal income tax and New
York State and New York City personal income taxes. Under normal market
conditions, the Fund will invest substantially all of its assets in
investment grade municipal obligations. All or a portion of the Fund's
dividends may be a specific preference item for purposes of the federal
individual and corporate alternative minimum taxes.

LEHMAN BROTHERS INC. sponsors the Fund and acts as distributor of the
Fund's shares. LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC. serves as
the Fund's investment adviser.

The address of the Fund is 3 World Financial Center, New York, New York
10285. Performance and other information regarding the Fund may be
obtained through a Lehman Brothers Investment Representative or by
calling 800-_________.

Shares of the Fund are being offered during an initial subscription
period scheduled to end on _______ __, 1994. Subsequent to such date,
the Fund will engage in a continuous offering of its shares. See
"Purchase of Shares."

This Prospectus briefly sets forth certain information about the Fund
that investors should know before investing. Investors are advised to
read this Prospectus and retain it for future reference. Additional
information about the Fund, contained in a Statement of Additional
Information dated ___________ __, 1994, as amended or supplemented from
time to time, has been filed with the Securities and Exchange
Commission and is available to investors without charge by calling
800-_____________. The Statement of Additional Information is
incorporated in its entirety by reference into this Prospectus.

SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SUCH SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE CERTAIN INVESTMENT
RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 264

PROSPECTUS SUMMARY

BENEFITS TO INVESTORS

The Fund offers investors several important benefits:

o investment liquidity through convenient purchase and
redemption procedures.

o a convenient way to invest without the administrative and
recordkeeping burdens normally associated with the direct
ownership of securities.

o automatic dividend reinvestment feature, plus exchange
privilege with the shares of certain other funds in the Lehman
Brothers Group of Funds.

INVESTMENT OBJECTIVE

The Fund's investment objective is to seek a high level of current income that
is exempt from regular federal income tax and New York State and New York City
personal income taxes, consistent with the preservation of capital. In seeking
to achieve its objective, the Fund will invest primarily in investment grade
municipal obligations, the interest on which is exempt from regular federal
income tax and New York State and New York City personal income taxes. Under
normal market conditions, the Fund will invest substantially all of its assets
in investment grade municipal obligations. All or a portion of the Fund's
dividends may be a specific preference item for purposes of the federal
individual and corporate alternative minimum taxes. There can be no assurance
that the Fund will achieve its investment objective. For a discussion of
certain risks and considerations associated with an investment in the Fund, see
"Risk Factors and Special Considerations."

All of the municipal obligations in which the Fund invests will be rated, at
the time of investment, at least in the category "Baa" or the equivalent by
Moody's Investors Service, Inc. ("Moody's") or "BBB" or the equivalent by
Standard and Poor's Ratings Group ("S&P"), be comparably rated by another
nationally recognized statistical rating organization ("NRSRO"), or, if not
rated, be of comparable quality as determined by the Fund's investment adviser.

VARIABLE PRICING SYSTEM

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<PAGE> 265

CLASS A SHARES

CLASS B SHARES

CLASS B CONVERSION FEATURE

CLASS C SHARES

CLASS W SHARES

INITIAL OFFERING OF SHARES

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<PAGE> 266

shares of the Fund may be purchased at the next determined net asset value per
share, subject in the case of Class A shares and Class B shares to the sales
charges described above.

PURCHASE OF SHARES

INVESTMENT MINIMUMS

SYSTEMATIC INVESTMENT PLAN

REDEMPTION OF SHARES

The Fund redeems shares at their next determined net asset value in accordance
with the procedures described herein and subject, in the case of Class B
shares, to any applicable CDSC.

MANAGEMENT OF THE FUND

EXCHANGE PRIVILEGE

DIVIDENDS AND DISTRIBUTIONS

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<PAGE> 267

through dividend and distribution reinvestments will become eligible for
conversion to Class A shares on a pro-rata basis. See "Dividends" and "Variable
Pricing System."

RISK FACTORS AND SPECIAL CONSIDERATIONS

The Fund is classified as a "non-diversified" investment company under the U.S.
Investment Company Act of 1940, as amended (the "1940 Act"), which means that
there are no limitations on the percentage of the Fund's assets that may be
invested in the securities of a single issuer (other than the Fund's
concentration policy, which generally limits investments in a single industry
to 25% of its total assets). The Fund intends to comply, however, with the
diversification requirements imposed on regulated investment companies by the
U.S. Internal Revenue Code of 1986, as amended (the "Code"), which generally
means that with respect to 50% of the Fund's portfolio, no more than 5% of the
Fund's assets will be invested in any one issuer and with respect to the other
50% of the Fund's portfolio, not more than 25% of the Fund's assets will be
invested in any one issuer.

In addition, the Fund may invest up to 15% of its total assets in illiquid
securities, and engage in hedging and derivatives transactions and certain
other investment practices, which may entail certain risks. For a more complete
discussion of the risks associated with an investment in the Fund, see
"Investment Objective and Policies - Other Investment Practices" and "Risk
Factors and Special Considerations."

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<PAGE> 268

BACKGROUND AND EXPENSE INFORMATION

The Fund offers multiple classes of shares, four of which are offered by this
Prospectus. Each share of the Fund accrues income in the same manner, but
certain expenses differ based upon the Class. See "Additional Information."
The following Expense Summary lists the costs and expenses that holders of
Class A, Class B, Class C and Class W shares can expect to incur as investors
in the Fund, based upon estimated expenses and average net assets for the
current fiscal year. The costs and expenses for Class W shares include fees for
WRAP (but not those for different advisory services).

MAXIMUM ANNUAL WRAP FEE
(as a percentage of the value of
Fund shares held on the last
calendar day of the previous
quarter) . . . . . . . . . . . . -- -- -- 1.50%

Total Fund Operating Expenses . . ____% ____% ____% ____%
<FN>
- ----------------
* Upon conversion, Class B shares will no longer be subject to a distribution fee. Lehman Brothers
receives an annual 12b-1 service fee of .25% of the value of average daily net assets of Class A
shares, and receives an annual 12b-1 fee of 1.00% of the value of average daily net assets of
Class B and Class C shares, consisting of a .75% distribution fee and a .25% service fee.

** The amount set forth for "Other Expenses" is based on estimates for the current fiscal year.
</TABLE>

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<PAGE> 269

EXAMPLE

VARIABLE PRICING SYSTEM

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<PAGE> 270

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<PAGE> 271

INVESTMENT OBJECTIVE AND POLICIES

GENERAL

The Fund's investment objective is to seek a high level of current income that
is exempt from regular federal income tax and New York State and New York City
personal income taxes, consistent with the preservation of capital. In seeking
to achieve its objective, the Fund will invest primarily in investment grade
municipal obligations, the interest on which is exempt from regular federal
income tax and New York State and New York City personal income taxes. Under
normal market conditions, the Fund will invest substantially all of its assets
in investment grade municipal obligations. All or a portion of the Fund's
dividends may be a specific preference item for purposes of the federal
individual and corporate alternative minimum taxes.

All of the municipal obligations in which the Fund invests will be rated, at
the time of investment, at least in the category "Baa" or the equivalent by
Moody's or "BBB" or the equivalent by S&P, be comparably rated by another
NRSRO, or, if not rated, be of comparable quality as determined by the Fund's
investment adviser. Should an issue of municipal obligations cease to be rated
or have its rating reduced below the minimum rating required for purchase by
the Fund subsequent to purchase, LBGAM will determine whether it is in the best
interest of the Fund to continue to hold the obligation. A description of
Moody's and S&P ratings is contained in the Statement of Additional
Information. Under normal market conditions, the Fund's portfolio will have a
dollar- weighted average final maturity, measured at the time an investment is
made, of between 15 and 25 years. There is no limit on the maturity of any
individual security held by the Fund.

In pursuing its investment objective, the Fund invests substantially all of its
assets in a portfolio of tax-exempt obligations issued by or on behalf of the
State of New York and its cities, municipalities and other public authorities,
by or on behalf of states, territories and possessions of the United States and
their respective authorities, agencies, instrumentalities and political
subdivisions, and tax-exempt derivative securities such as tender option bonds,
participations, beneficial interests in trusts and partnership interests, or
any other obligations, the interest on which is exempt from regular federal
income tax and from the personal income taxes of New York State and New York
City (collectively "New York Municipal Obligations"). Except as described
below, the Fund will not knowingly purchase securities the interest on which is
subject to regular federal income tax or the personal income taxes of New York
State or New York City. (See, however, "Taxes" below, concerning treatment of
dividends paid by the Fund for purposes of the federal alterative minimum tax
applicable to particular categories of investors.)

Opinions relating to the validity of New York Municipal Obligations and to the
exemption of interest thereon from regular federal income tax and the personal
income taxes of New York State and New York City are rendered by bond counsel
to the respective issuers at the time of issuance, and opinions relating to the
validity of and the tax-exempt status of payments received by the Fund from
tax-exempt derivative securities are rendered by counsel to the respective
sponsors of such securities. The Fund and LBGAM will rely on such opinions and
will not review independently the underlying proceedings relating to the
issuance of New York Municipal Obligations, the creation of any tax-exempt
derivative securities or the bases for such opinions.

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<PAGE> 272

below under "Temporary Investments," repurchase agreements with respect to such
instruments, and municipal obligations issued by other states, their agencies
or instrumentalities, the income from which is subject to federal income tax
and the personal income taxes of New York State and New York City. To the
extent that the Fund deviates from its investment policies as a result of the
unavailability of suitable New York Municipal Obligations or for other
temporary defensive purposes, its investment objective of seeking income exempt
from regular federal income tax and the personal income taxes of New York State
and New York City may not be achieved.

New York Municipal Obligations are classified as general obligation bonds,
revenue bonds and notes. General obligation bonds are secured by the issuer's
pledge of its faith, credit and taxing power for the payment of principal and
interest. Revenue bonds are payable from the revenue derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise or other specific revenue source, but not from the general
taxing power. Tax-exempt industrial development bonds, in most cases, are
revenue bonds that generally do not carry the pledge of the credit of the
issuing municipality, but generally are guaranteed by the corporate entity on
whose behalf they are issued. Notes are short-term instruments which are
obligations of the issuing municipalities or agencies and are sold in
anticipation of a bond sale, collection of taxes or receipt of other revenues.
New York Municipal Obligations include municipal lease/purchase agreements
which are similar to installment purchase contracts for property or equipment
issued by municipalities. New York Municipal Obligations bear fixed, floating
or variable rates of interest, which are determined in some instances by
formulas under which the New York Municipal Obligation's interest rate will
change directly or inversely to changes in interest rates or an index, or
multiples thereof, in many cases subject to a maximum and a minimum. Certain
Municipal Obligations are subject to redemption at a date earlier than their
stated maturity pursuant to call options, which may be separated from the
related Municipal Obligation and purchased and sold separately.

The Tax Reform Act of 1986 (the "Act") substantially revised provisions of
prior law affecting the issuance and use of proceeds of certain tax-exempt
obligations. A new definition of private activity bonds was applied to many
types of bonds, including those which were industrial development bonds under
prior law. Interest on private activity bonds is tax-exempt only if the bonds
fall within certain defined categories of qualified private activity bonds and
meet the requirements specified in those respective categories. The Act
generally did not change the tax treatment of bonds issued to finance
governmental operations. The changes generally apply to bonds issued after
August 15, 1986, with certain transitional rule exemptions. As used in this
Prospectus, the term "private activity bonds" also includes industrial
development revenue bonds issued pursuant to the Code. The portion of dividends
paid by the Fund that is attributable to interest on certain private activity
bonds is an item of tax preference for purposes of the federal individual and
corporate alternative minimum taxes.

Although the Fund may invest more than 25% of its net assets in New York
Municipal Obligations the interest on which is paid solely from revenues of
similar projects, it does not presently intend to do so on a regular basis. To
the extent the Fund's assets are concentrated in New York Municipal Obligations
that are payable from the revenues of similar projects or are private activity
bonds, the Fund will be subject to the peculiar risks presented by the laws and
economic conditions relating to such projects and bonds to a greater extent
than it would be if its assets were not so concentrated.

TEMPORARY INVESTMENTS

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<PAGE> 273

at any time invest its assets in such instruments for cash management purposes,
pending investment in accordance with the Fund's investment objective and
policies and to meet operating expenses.

The taxable obligations in which the Fund may invest include obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities ("U.S.
Government Securities"); bank obligations, such as certificates of deposit,
time deposits and bankers' acceptances; corporate debt obligations, including
commercial paper; and repurchase agreements. To be eligible for investment
under the circumstances described above, such instruments (other than U.S.
Government Securities) must be issued by an issuer having a short-term debt
rating of A-1 or better by S&P, a rating of Prime-1 by Moody's, a comparable
rating from another NRSRO or, if unrated, deemed to be of equivalent quality by
LBGAM.

OTHER INVESTMENTS AND INVESTMENT PRACTICES

Tender Option Bonds. The Fund may purchase tender option bonds. A tender option
bond is generally a long- term municipal obligation (generally held pursuant to
a custodial arrangement) bearing interest at a fixed rate substantially higher
than prevailing short-term tax-exempt rates, that has been coupled with the
agreement of a third party, such as a bank, broker-dealer or other financial
institution, pursuant to which such institution grants the security holders the
option, at periodic intervals, to tender their securities to the institution
and receive the face value thereof. As consideration for providing the option,
the financial institution receives periodic fees equal to the difference
between the municipal obligation's fixed coupon rate and the rate, as
determined by remarketing or similar agent at or near the commencement of such
period, that would cause the securities coupled with the tender option to trade
at or near par on the date of such determination. Thus, after payment of this
fee, the security holder effectively holds a demand obligation that bears
interest at the prevailing short-term tax exempt rate. LBGAM will consider on
an ongoing basis the creditworthiness of the issuer of the underlying New York
Municipal Obligation, of any custodian and of the third party provider of the
tender option. In certain instances and for certain tender option bonds, the
option may be terminable in the event of a default in payment of principal or
interest on the underlying New York Municipal Obligation and for other reasons.
Additionally, the above description of Tender Option Bonds is meant only to
provide an example of one possible structure of such obligations, and the Fund
may purchase tender option bonds with different types of ownership, payment,
credit and/or liquidity arrangements.

Custodial Receipts and Certificates. The Fund may purchase custodial receipts
representing the right to receive certain future principal and interest
payments on New York Municipal Obligations which underlie the custodial
receipts. A number of different arrangements are possible. In a typical
custodial receipt arrangement, an issuer or a third party owner of New York
Municipal Obligations deposits such obligations with a custodian in exchange
for two classes of custodial receipts. The two classes have different
characteristics, but, in each case, payments on the two classes are based on
payments received on the underlying New York Municipal Obligations. One class
has the characteristics of a typical auction rate security, where at specified
intervals its interest rate is adjusted, and ownership changes, based on an
auction mechanism. This class's interest rate generally is at a level
comparable to that of a New York Municipal Obligation of similar quality and
having a maturity equal to the period between interest rate adjustments. The
second class bears interest at a rate that exceeds the interest rate typically
borne by a security of comparable quality and maturity; this rate also is
adjusted, but in this case inversely to changes in the rate of interest of the
first class. If the interest rate on the first class exceeds the coupon rate of
the underlying New York Municipal Obligations, its interest rate will exceed
the rate paid on the second class. In no event will the aggregate interest paid
with respect to the two classes exceed the interest paid by the underlying New
York Municipal Obligations. The value of the second class and similar
securities should be expected to fluctuate more than the value of a New York
Municipal Obligation of comparable quality and maturity and their purchase by
the Fund should increase the volatility of its net asset value and, thus, its
price per share. These custodial receipts are sold in private placements. The
Fund also may purchase directly from issuers, and not in a private placement,
New York Municipal Obligations having

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<PAGE> 274

characteristics similar to custodial receipts. These securities may be issued
as part of a multi-class offering and the interest rate on certain classes may
be subject to a cap or floor.

Certain municipal lease obligations and certificates of participation may be
deemed illiquid for the purpose of the Fund's 15% limitation on investments in
illiquid securities. Other New York Municipal Obligations and certificates of
participation acquired by the Fund may be determined by LBGAM, pursuant to
guidelines adopted by the Board of Directors of the Company, to be liquid
securities for the purpose of such limitation. In determining the liquidity of
municipal lease obligations and certificates of participation, LBGAM will
consider a variety of factors, including: (1) the willingness of dealers to
bid for the security; (2) the number of dealers willing to purchase or sell the
obligation and the number of other potential buyers; (3) the frequency of
trades or quotes for the obligation; and (4) the nature of marketplace trades.
In addition, the Investment Adviser will consider factors unique to particular
lease obligations and certificates of participation affecting the marketability
thereof. These include the general creditworthiness of the issuer, the
importance of the property covered by the lease to the issuer and the
likelihood that the marketability of the obligation will be maintained
throughout the time the obligation is held by the Fund.

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<PAGE> 275

income. The seller under a repurchase agreement will be required to maintain
the value of the securities subject to the agreement at not less than the
repurchase price. Default by the seller would, however, expose the Fund to
possible loss because of adverse market action or delay in connection with the
disposition of the underlying obligations.

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<PAGE> 276

investment in illiquid securities. The ability to sell Rule 144A securities to
qualified institutional buyers is a recent development and it is not possible
to predict how this market will mature. LBGAM will monitor the liquidity of
such restricted securities under the supervision of the Board of Directors. See
"Investment Objective and Policies - Additional Information on Portfolio
Instruments and Certain Investment Practices - Illiquid and Restricted
Securities" in the Statement of Additional Information.

Asset-Backed Securities. The Fund may purchase asset-backed securities.
Asset-backed securities represent defined interests in an underlying pool of
assets. Such securities may be issued as pass-through certificates, which
represent undivided fractional interests in the underlying pool of assets.
Alternatively, asset-backed securities may be issued as interests, generally in
the form of debt securities, in a special purpose entity organized solely for
the purpose of owning the underlying assets and issuing such securities. In the
latter case, such securities are secured by and payable from a stream of
payments generated by the underlying assets. The assets underlying asset-backed
securities are often a pool of assets similar to one another, such as municipal
lease receivables. Alternatively, the underlying assets may be particular types
of securities, various contractual rights to receive payments and/or other
types of assets. Asset-backed securities frequently carry credit protection in
the form of extra collateral, subordinate certificates, cash reserve accounts,
letters of credit or other enhancements.

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<PAGE> 277

Hedging and Derivatives. The Fund is authorized to use various hedging and
investment strategies described below to hedge market risks (such as broad or
specific market movements and interest rates), to manage the effective maturity
or duration of debt instruments held by the Fund, or to seek to increase the
Fund's income or gain. Over time, techniques and instruments may change as new
instruments and strategies are developed or regulatory changes occur.
Limitations on the portion of the Fund's assets that may be used in connection
with the investment strategies described below appear in the Statement of
Additional Information.

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<PAGE> 278

regulatory requirements (collectively, these transactions are referred to in
this Prospectus as "Derivatives"). The Fund's interest rate transactions may
take the form of swaps, caps, floors and collars.

Derivatives may be used to attempt to protect against possible changes in the
market value of securities held in or to be purchased for the Fund's portfolio
resulting from securities markets fluctuations, to protect the Fund's
unrealized gains in the value of its portfolio securities, to facilitate the
sale of those securities for investment purposes, to manage the effective
maturity or duration of the Fund's portfolio, to establish a position in the
derivatives markets as a substitute for purchasing or selling particular debt
securities or to seek to enhance the Fund's income or gain. The Fund may use
any or all types of Derivatives at any time; no particular strategy will
dictate the use of one type of transaction rather than another, as use of any
authorized Derivative will be a function of numerous variables, including
market conditions. The ability of the Fund to utilize Derivatives successfully
will depend on LBGAM's ability to predict pertinent market movements, which
cannot be assured. These skills are different from those needed to select
portfolio securities. The Fund is not a "commodity pool" (i.e., a pooled
investment vehicle which trades in commodity futures contracts and options
thereon and the operator of which is registered with the Commodity Futures
Trading Commission (the "CFTC")) and Derivatives involving futures contracts
and options on futures contracts will be purchased, sold or entered into only
for bona fide hedging purposes, provided that the Fund may enter into such
transactions for purposes other than bona fide hedging if, immediately
thereafter, the sum of the amount of its initial margin and premiums on open
contracts and options would not exceed 5% of the liquidation value of the
Fund's portfolio, provided, further, that, in the case of an option that is
in-the-money, the in-the-money amount may be excluded in calculating the 5%
limitation. The use of Derivatives in certain circumstances will require that
the Fund segregate cash, liquid high grade debt obligations or other assets to
the extent the Fund's obligations are not otherwise "covered" through ownership
of the underlying security, financial instrument or currency. See "Risk Factors
and Special Considerations - Other Investments and Investment Practices."

The degree of the Fund's use of Derivatives may be limited by certain
provisions of the Code. See "Taxes."

INVESTMENT LIMITATIONS

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<PAGE> 279

net proceeds of any borrowings and reduced by any liabilities and indebtedness
other than such borrowings. Additional investments will not be made by the Fund
when borrowings exceed 5% of total net assets, provided, however, that the Fund
may increase its interest in another registered investment company having the
same investment objective and policies and substantially the same investment
restrictions as those with respect to the Fund while such borrowings are
outstanding.

2. The Fund may not purchase any securities which would cause 25% or more
of the value of its total assets at the time of such purchase to be invested in
the securities of one or more issuers conducting their principal business
activities in the same industry; provided that there is no limitation with
respect to investments in U.S. Government Securities or New York Municipal
Obligations (other than those backed only by the assets and revenues of
non-governmental users), and provided further, that the Fund may invest all or
substantially all of its assets in another registered investment company having
the same investment objective and policies and substantially the same
investment restrictions as those with respect to the Fund.

RISK FACTORS AND SPECIAL CONSIDERATIONS

Because the Fund will invest primarily in obligations issued by the State of
New York and its cities, municipalities and other public authorities, it is
more susceptible to factors adversely affecting issuers of such obligations
than a comparable municipal bond fund that is not so concentrated. New York
State, New York City and other debt-issuing entities located in New York State
have, at various times in the past, encountered financial difficulties. A
continuation or recurrence of the financial difficulties previously experienced
by the issuers of New York Municipal Obligations could result in defaults or
declines in the market values of those issuers' existing obligations and,
possibly, in the obligations of other issuers of New York Municipal
Obligations. If either New York State or any of its local governmental entities
is unable to meet its financial obligations, the income derived by the Fund and
its ability to preserve capital and liquidity could be adversely affected. See
"Special Factors Affecting the Fund's Investments in New York Municipal
Obligations" in the Statement of Additional Information for further
information.

CHANGES IN INTEREST RATES

Because the Fund will generally invest in fixed income securities, the net
asset value of the Fund's portfolio, and hence its shares, can be expected to
change as general levels of interest rates fluctuate. Except to the extent that
values are affected independently by other factors such as developments
relating to a specific issuer, when interest rates decline, the value of a
fixed income portfolio can generally be expected to rise. Conversely, when
interest rates rise, the value of a fixed income portfolio can generally be
expected to decline. These fluctuations can be expected to be greater with
respect to investments in fixed income securities with longer maturities than
investments in securities with shorter maturities.

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<PAGE> 280

NON-DIVERSIFIED STATUS

The Fund is classified as a "non-diversified" investment company under the 1940
Act, which means that there are no limitations on the percentage of the Fund's
assets that may be invested in the securities of a single issuer. As a
non-diversified investment company, the Fund may invest a greater proportion of
its assets in the obligations of a smaller number of issuers and, as a result,
may be subject to greater risk with respect to portfolio securities. The Fund
intends to comply, however, with the diversification requirements imposed on
regulated investment companies by the Code, which generally means that with
respect to 50% of the Fund's portfolio, no more than 5% of the Fund's assets
will be invested in any one issuer and with respect to the other 50% of the
Fund's portfolio, not more than 25% of the Fund's assets will be invested in
any one issuer. See "Taxes."

OTHER INVESTMENTS AND INVESTMENT PRACTICES

Inverse floaters involve special risks, including substantial volatility in
their market values and potential illiquidity. In addition, Derivatives involve
special risks, including possible default by the other party to the
transaction, illiquidity and, to the extent LBGAM's view as to certain market
movements is incorrect, the risk that the use of Derivatives could result in
greater losses than if it had not been used. Use of put and call options could
result in losses to the Fund, force the purchase or sale of portfolio
securities at inopportune times or for prices higher or lower than current
market values, or cause the Fund to hold a security it might otherwise sell.
The use of options and futures transactions entails certain special risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund could create the possibility that losses on the Derivative will be greater
than gains in the value of the Fund's position. In addition, futures and
options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. The Fund might not be able to
close out certain positions without incurring substantial losses. To the extent
the Fund utilizes futures and options transactions for hedging, such
transactions should tend to minimize the risk of loss due to a decline in the
value of the hedged position and, at the same time, limit any potential gain to
the Fund that might result from an increase in value of the position. Finally,
the daily variation margin requirements for futures contracts create a greater
ongoing potential financial risk than would purchases of options, in which case
the exposure is limited to the cost of the initial premium and transaction
costs. Losses resulting from the use of Derivatives will reduce the Fund's net
asset value, and possibly income, and the losses may be greater than if
Derivatives had not been used. Additional information regarding the risks and
special considerations associated with Derivatives appears in the Statement of
Additional Information.

SPECIAL CONSIDERATIONS FOR WRAP PARTICIPANTS

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<PAGE> 281

PURCHASE OF SHARES

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<PAGE> 282

(c) the Fund's Systematic Investment Plan, for which the minimum and subsequent
investment is $100. For employees of Lehman Brothers and its affiliates, the
minimum initial investment is $1,000 and the minimum subsequent investment is
$500. Investors in Class C shares, in addition to satisfying the foregoing
minimum investment requirements, are subject to an aggregate minimum initial
investment requirement of $25,000 in Class C shares of funds in the Lehman
Brothers Group of Funds. The Funds reserve the right at any time to vary the
initial and subsequent investment minimums. Introducing Brokers may impose
higher minimum investment requirements than the foregoing requirements.
Investors in Class W shares through WRAP are subject to an overall minimum
investment requirement for participation in WRAP. Certificates for Fund shares
are not issued unless expressly requested in writing to the Fund's transfer
agent, and are not issued for fractional shares. It is considerably more
complicated to redeem shares held in certificate form.

CLASS A SHARES

<TABLE>
<CAPTION>
SALES CHARGE AS % OF SALES CHARGE AS %
AMOUNT OF INVESTMENT OFFERING PRICE OF NET ASSET VALUE

* No sales charge is imposed on purchases of $1 million or more; however, a CDSC of .75% is imposed for
the first year after purchase. The CDSC on Class A shares is payable to Lehman Brothers which compensates
Lehman Brothers Investment Representatives upon the sale of these shares. The CDSC is waived in the same
circumstances in which the CDSC applicable to Class B shares is waived. See "Redemption of Shares--
Contingent Deferred Sales Charge--Class B shares--Waivers of CDSC."
</TABLE>

REDUCED SALES CHARGES--CLASS A SHARES

Reduced sales charges are available to investors who are eligible to combine
their purchases of Class A shares to receive volume discounts. Investors
eligible to receive volume discounts include individuals and their immediate
families, tax-qualified employee benefit plans and trustees or other
professional fiduciaries (including a bank, or an investment adviser registered
with the SEC under the Investment Advisers Act of 1940, as amended) purchasing
shares for one or more trust estates or fiduciary accounts even though more
than one beneficiary is involved. Reduced sales charges on Class A shares are
also available under a combined right of accumulation, under which an investor
may combine the value of Class A shares already held in the Fund and certain
other funds in the Lehman Brothers Group of Funds, along with the value of the
Fund's Class A shares being purchased, to qualify for a reduced sales charge.
For example, if an investor owns Class A shares of the Fund and certain other
funds in the Lehman Brothers Group of Funds that have an aggregate value of
$74,000, and makes an additional investment in Class A shares of the Fund of
$27,000, the sales charge applicable to the additional investment would be 4%,
rather than the 4.75% normally charged on a $27,000 purchase. Investors
interested in further information regarding reduced sales charges should
contact their Lehman Brothers Investment Representatives.

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<PAGE> 283

Lehman Brothers or its registered investment advisory affiliates; (c)
directors, trustees or general partners of any investment company for which
Lehman Brothers serves as distributor; (d) any other investment company in
connection with the combination of such company with the Fund by merger,
acquisition of assets or otherwise; (e) shareholders who have redeemed Class A
shares in the Fund (or Class A shares of another fund in the Lehman Brothers
Group of Funds that is sold with a maximum 4.75% sales charge) and who wish to
reinvest their redemption proceeds in the Fund, provided the reinvestment is
made within 30 days of the redemption; and (f) any client of a newly-employed
Lehman Brothers Investment Representative (for a period up to 90 days from the
commencement of the Investment Representative's employment with Lehman
Brothers), on the condition that the purchase is made with the proceeds of the
redemption of shares of a mutual fund which (i) was sponsored by the Investment
Representative's prior employer, (ii) was sold to a client by the Investment
Representative, and (iii) when purchased, such shares were sold with a sales
charge or, are subject to a change upon redemption.

CLASS B SHARES

CLASS C SHARES

CLASS W SHARES

-21-
<PAGE> 284

LEHMAN BROTHERS 401(K) PROGRAM

Once a Participating Plan has made an initial investment in the Fund, all of
its subsequent investments in the Fund must be in the same Class of shares,
except as otherwise described below.

-22-
<PAGE> 285

<TABLE>
Class A Shares. The sales charges for Class A shares acquired by Participating
Plans are as follows:

<CAPTION>
SALES CHARGE AS % OF SALES CHARGE AS %
AMOUNT OF INVESTMENT OFFERING PRICE OF NET ASSET VALUE

- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Less than $100,000 4.75 4.99%
$100,000 but under $250,000 3.50 3.63%
$250,000 but under $500,000 2.50 2.56%
$500,000 but under $750,000 2.00 2.04%
$750,000 or more .00 .00%
- --------------------------------------------------------------------------------------------------------------
</TABLE>

Class A Shares acquired through the 401(k) Program will not be subject to a
CDSC.

-23-
<PAGE> 286

the eighth anniversary date. Once the exchange has occurred, a Participating
Plan will not be eligible to acquire additional Class B shares of the Fund but
instead may acquire Class A shares of the Fund. If the Participating Plan
elects not to exchange all of its Class B shares at that time, each Class B
share held by the Participating Plan will have the same conversion feature as
Class B shares held by other investors. See "Variable Pricing System - Class B
Shares."

REDEMPTION OF SHARES

Fund shares may be redeemed in one of the following ways:

REDEMPTION THROUGH LEHMAN BROTHERS OR AN INTRODUCING BROKER

-24-
<PAGE> 287

in proper form. The Shareholder Services Group, Inc. serves as the Fund's
transfer agent and is located at One Exchange Place, Boston, Massachusetts
02109.

REDEMPTION BY MAIL

Lehman Brothers __________________ Fund
Class A, B, C or W (please specify)
c/o The Shareholder Services Group, Inc.
P.O. Box _______
Boston, Massachusetts 02009

AUTOMATIC CASH WITHDRAWAL PLAN

CONTINGENT DEFERRED SALES CHARGE - CLASS B SHARES

-25-
<PAGE> 288

of Shares - Lehman Brothers 401(k) Program." Solely for purposes of determining
the number of years since a purchase payment was made, all purchase payments
made during a month will be aggregated and deemed to have been made on the last
Friday of the preceding Lehman Brothers statement month. The following table
sets forth the rates of the CDSC for redemptions of Class B shares by
shareholders other than Participating Plans in the 401(k) Program:

<TABLE>
<CAPTION>
YEAR SINCE PURCHASE PAYMENTS WERE MADE CDSC
- ------------------------------------------------------------------------------------------------- --------------------------------
<S> <C>
First . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.75%
Second . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.00%
Third . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.00%
Fourth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.00%
Fifth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.00%
Sixth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.00%
Seventh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.00%
Eighth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.00%
</TABLE>

CLASS W SHARES AND WRAP

EXCHANGE PRIVILEGE

-26-
<PAGE> 289

their net asset value. To obtain information regarding the availability of
funds into which shares of the Fund may be exchanged, investors should contact
their Lehman Brothers Investment Representatives.

Class C and W Exchanges. Class C and Class W shares of the Fund may be
exchanged for shares of the same class of the funds referred to above without
charge.

VALUATION OF SHARES

-27-
<PAGE> 290

MANAGEMENT OF THE FUND

INVESTMENT ADVISER - LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC.

LBGAM is located at 3 World Financial Center, New York, New York 10285. LBGAM
is a wholly owned subsidiary of Lehman Brothers Holdings, Inc. ("Holdings").

ADMINISTRATOR - THE SHAREHOLDER SERVICES GROUP, INC.

-28-
<PAGE> 291

DISTRIBUTOR - LEHMAN BROTHERS

EXPENSES

-29-
<PAGE> 292

BANKING LAWS

DIVIDENDS

Each shareholder or its authorized representative will receive an annual
statement designating the amount of any dividends and distributions made during
each year and their federal and New York tax qualification.

TAXES

The Fund intends to qualify and elect to be treated as a regulated investment
company for federal income tax purposes under Subchapter M of the Code. If so
qualified, the Fund will not be subject to federal income taxes on its
investment company taxable income (as that term is defined in the Code,
determined without regard to the deduction for dividends paid) and net capital
gain (the excess of the Fund's net long-term capital gain over its net
short-term capital loss), if any, that it distributes to its shareholders in
each taxable year. To qualify as a regulated investment company, the Fund must,
among other things, distribute to its shareholders at least 90% of its net
investment company taxable income for such taxable year, and at least 90% of
its net tax- exempt interest income for such taxable year. However, the Fund
would be subject to corporate income tax at a rate of 35% on any undistributed
income or net capital gain. The Fund must also derive less than 30% of its
gross income in each taxable year from the sale or other disposition of certain
securities held for less than three months (the "30% limitation"). If in any
year the Fund should fail to qualify as a regulated investment company, the
Fund would be subject to federal income tax in the same manner as an ordinary
corporation and distributions to shareholders would be taxable to such holders

-30-
<PAGE> 293

The Fund intends to distribute substantially all of its investment company
taxable income each year. Such distributions, whether paid in cash or
reinvested in additional shares, will be taxable as ordinary income to Fund
shareholders who are not currently exempt from federal income taxes. Federal
income taxes for distributions to an IRA or a qualified retirement plan are
deferred under the Code. It is not anticipated that a significant portion of
the Fund's distributions will be eligible for the dividends received deduction
for corporations. Distributions to shareholders of net capital gain that are
designated by the Fund as "capital gain dividends," whether paid in cash or
reinvested in additional shares, will be taxable as long-term capital gains
regardless of how long the shares have been held by such shareholders. The Fund
does not expect to recognize significant net capital gains. Shareholders
receiving distributions from the Fund in the form of additional shares will be
treated for federal income tax purposes as receiving a distribution in an
amount equal to the fair market value of the additional shares on the date of
such a distribution.

-31-
<PAGE> 294

investment income may be taxable to investors as dividend income though a
substantial portion of such distributions may be derived from interest on
tax-exempt obligations which, if realized directly, would be exempt from such
income taxes.

As noted above, shareholders, out of their own assets, will pay a WRAP advisory
fee. For most shareholders who are individuals, this fee will be treated as a
"miscellaneous itemized deduction" for federal income tax purposes. Under
current federal income tax law, an individual's miscellaneous itemized
deductions for any taxable year shall be allowed as a deduction only to the
extent that the aggregate of these deductions exceeds 2% of adjusted gross
income. Such deductions are also subject to the general limitation on itemized
deductions for individuals having, in 1994, adjusted gross income in excess of
$111,800 ($55,900 for married individuals filing separately).

NEW YORK STATE AND LOCAL TAX MATTERS

Exempt-interest dividends paid to shareholders of the Fund will not be subject
to New York State and New York City personal income taxes to the extent they
represent interest income directly attributable to federally tax exempt
obligations of the State of New York and its political subdivisions and
instrumentalities (as well as certain other federally tax exempt obligations
the interest on which is exempt from New York State and New York City personal
income taxes). The Fund intends that substantially all of the dividends it
designates as exempt-interest dividends will also be exempt from New York State
and New York City personal income taxes. Exempt-interest dividends paid by the
Fund, however, may be taxable to shareholders who are subject to taxation
outside New York State and New York City.

Corporate shareholders subject to New York State franchise tax or New York City
general corporation tax will be required to include all dividends received from
the Fund (including exempt-interest dividends) as net income subject to such
taxes. Furthermore, for purposes of calculating a corporate shareholder's
liability for such taxes under the alternative tax base measured by business
and investment capital, such shareholder's shares of the Fund will be included
in computing such shareholder's investment capital.

Shareholders will not be subject to the New York City unincorporated business
tax solely by reason of their ownership of shares in the Fund. If a shareholder
is subject to the New York City unincorporated business tax, income and gains
derived from the Fund will be subject to such tax, except for exempt-interest
dividend income that is directly to interest on New York municipal obligations.
Shares of the Fund will be exempt from local property taxes in New York State
and New York City.

_________________________

-32-
<PAGE> 295

Accordingly, potential investors in the Fund should consult their tax advisers
with specific reference to their own tax situation.

THE FUND'S PERFORMANCE

-33-
<PAGE> 296

ADDITIONAL INFORMATION

All shares of the Company, when issued, will be fully paid and nonassessable.

Boston Safe, an indirect wholly owned subsidiary of Mellon, is located at One
Boston Place, Boston, Massachusetts 02108, and serves as custodian of the
Fund's investments.

The Shareholder Services Group, Inc., a subsidiary of First Data Corporation,
is located at One Exchange Place, Boston, Massachusetts 02109, and serves as
the Fund's transfer agent.

-34-
<PAGE> 297

LEHMAN BROTHERS NEW YORK MUNICIPAL BOND FUND

Prospectus

________ __, 1994

<TABLE>
TABLE OF CONTENTS

<S> <C>
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Background and Expense Information . . . . . . . . . . . . . . . . . . . . . . . 6

Variable Pricing System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Investment Objective and Policies . . . . . . . . . . . . . . . . . . . . . . . . 9

Risk Factors and Special Considerations . . . . . . . . . . . . . . . . . . . . . 17

Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Exchange Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Valuation of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

The Fund's Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
</TABLE>

<PAGE> 298

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.

SUBJECT TO COMPLETION-DATED SEPTEMBER 8, 1994

PROSPECTUS

LEHMAN BROTHERS NEW YORK MUNICIPAL BOND FUND

An Investment Portfolio of Lehman Brothers Funds, Inc.

________________, 1994

The shares described in this Prospectus represent interests in a class of
shares ("Premier Shares") of the LEHMAN BROTHERS NEW YORK MUNICIPAL BOND FUND
(the "Fund"). The Fund is a non-diversified portfolio of Lehman Brothers Funds,
Inc. (the "Company"), an open-end management investment company. Premier Shares
may not be purchased by individuals directly, but institutional investors may
purchase shares for accounts maintained by individuals.

The Fund's investment objective is to seek a high level of current income that
is exempt from regular federal income tax and New York State and New York City
personal income taxes, consistent with the preservation of capital. In seeking
to achieve its objective, the Fund will invest primarily in investment grade
municipal obligations, the interest on which is exempt from regular federal
income tax and New York State and New York City personal income taxes. Under
normal market conditions, the Fund will invest substantially all of its assets
in investment grade municipal obligations. All or a portion of the Fund's
dividends may be a specific preference item for purposes of the federal
individual and corporate alternative minimum taxes.

LEHMAN BROTHERS INC. sponsors the Fund and acts as distributor of the Fund's
shares. LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC. serves as the Fund's
investment adviser.

The address of the Fund is 3 World Financial Center, New York, New York 10285.
Performance and other information regarding the Fund may be obtained by calling
800-_________.

Shares of the Fund are being offered during an initial subscription period
scheduled to end on _______ __, 1994. Subsequent to such date, the Fund will
engage in a continuous offering of its shares. See "Purchase, Redemption and
Exchange of Shares."

This Prospectus briefly sets forth certain information about the Fund that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about the
Fund, contained in a Statement of Additional Information dated ___________ __,
1994, as amended or supplemented from time to time, has been filed with the
Securities and Exchange Commission and is available to investors without charge
by calling 800-_________. The Statement of Additional Information is
incorporated in its entirety by reference into this Prospectus.

SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SUCH SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE CERTAIN INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE> 299

PROSPECTUS SUMMARY

BENEFITS TO INVESTORS

The Fund offers investors several important benefits:

o investment liquidity through convenient purchase and
redemption procedures.

o a convenient way to invest without the administrative and
recordkeeping burdens normally associated with the direct
ownership of securities.

o automatic dividend reinvestment feature, plus exchange
privilege with the shares of certain other funds in the Lehman
Brothers Group of Funds.

INVESTMENT OBJECTIVE

The Fund's investment objective is to seek a high level of current income that
is exempt from regular federal income tax and New York State and New York City
personal income taxes, consistent with the preservation of capital. In seeking
to achieve its objective, the Fund will invest primarily in investment grade
municipal obligations, the interest on which is exempt from regular federal
income tax and New York State and New York City personal income taxes. Under
normal market conditions, the Fund will invest substantially all of its assets
in investment grade municipal obligations. All or a portion of the Fund's
dividends may be a specific preference item for purposes of the federal
individual and corporate alternative minimum taxes. There can be no assurance
that the Fund will achieve its investment objective. For a discussion of
certain risks and considerations associated with an investment in the Fund, see
"Risk Factors and Special Considerations."

-2-
<PAGE> 300

PURCHASE OF SHARES

INVESTMENT MINIMUMS

REDEMPTION OF SHARES

MANAGEMENT OF THE FUND

EXCHANGE PRIVILEGE

Premier Shares of the Fund may be exchanged for Premier Shares of certain other
funds in the Lehman Brothers Group of Funds. See "Exchange Privilege."

DIVIDENDS AND DISTRIBUTIONS

-3-
<PAGE> 301

RISK FACTORS AND SPECIAL CONSIDERATIONS

In addition, the Fund may invest up to 15% of its total assets in illiquid
securities, and engage in hedging and derivatives transactions and certain
other investment practices, which may entail certain risks. For a more complete
discussion of the risks associated with an investment in the Fund, see
"Investment Objective and Policies - Other Investment Practices" and "Risk
Factors and Special Considerations."

-4-
<PAGE> 302

BACKGROUND AND EXPENSE INFORMATION

<TABLE>
EXPENSE SUMMARY

<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Advisory Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ____%
Rule 12b-1 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . none
Other Expenses - including Administration Fees* . . . . . . . . . . . . . . . ____%

Total Fund Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . ____%
<FN>
- ----------------
* The amount set forth for "Other Expenses" is based on estimates for the current fiscal year.
</TABLE>

<TABLE>
EXAMPLE

You would pay the following expenses on a $1,000 investment, assuming a 5% annual return:

<CAPTION>
1 year 3 years
---------------- ----------------
<S> <C>
$___ $___
</TABLE>

INVESTMENT OBJECTIVE AND POLICIES

GENERAL

-5-
<PAGE> 303

York State and New York City personal income taxes. Under normal market
conditions, the Fund will invest substantially all of its assets in investment
grade municipal obligations. All or a portion of the Fund's dividends may be a
specific preference item for purposes of the federal individual and corporate
alternative minimum taxes.

Except during temporary defensive periods, as described below under "Temporary
Investments," the Fund will invest substantially all, but in no event less than
80%, of its total assets in New York Municipal Obligations. The Fund may hold
uninvested cash reserves pending investment and during temporary defensive
periods, including when suitable tax-exempt obligations are unavailable. There
is no percentage limitation on the amount of assets which may be held
uninvested. Uninvested cash reserves will not earn income. In addition to or in
lieu of holding uninvested cash reserves under the aforementioned
circumstances, the Fund may elect to invest in high quality, short-term
instruments of the types described below under "Temporary Investments,"
repurchase agreements with respect to such instruments, and municipal
obligations issued by other states, their agencies or instrumentalities, the
income from which is subject to federal income tax and the personal income
taxes of New York State and New York City.

-6-
<PAGE> 304

To the extent that the Fund deviates from its investment policies as a result
of the unavailability of suitable New York Municipal Obligations or for other
temporary defensive purposes, its investment objective of seeking income exempt
from regular federal income tax and the personal income taxes of New York State
and New York City may not be achieved.

The Tax Reform Act of 1986 (the "Act") substantially revised provisions of
prior law affecting the issuance and use of proceeds of certain tax-exempt
obligations. A new definition of private activity bonds was applied to many
types of bonds, including those which were industrial development bonds under
prior law. Interest on private activity bonds is tax-exempt only if the bonds
fall within certain defined categories of qualified private activity bonds and
meet the requirements specified in those respective categories. The Act
generally did not change the tax treatment of bonds issued to finance
governmental operations. The changes generally apply to bonds issued after
August 15, 1986, with certain transitional rule exemptions. As used in this
Prospectus, the term "private activity bonds" also includes industrial
development revenue bonds issued pursuant to the Code. The portion of dividends
paid by the Fund that is attributable to interest on certain private activity
bonds is an item of tax preference for purposes of the federal individual and
corporate alternative minimum taxes.

TEMPORARY INVESTMENTS

-7-
<PAGE> 305

comparable quality as determined by the Fund's investment adviser. If
short-term tax-exempt debt instruments are unavailable or in LBGAM's judgment,
do not afford sufficient protection against adverse market conditions, the Fund
may invest in taxable obligations, as described below. The Fund may also at any
time invest its assets in such instruments for cash management purposes,
pending investment in accordance with the Fund's investment objective and
policies and to meet operating expenses.

OTHER INVESTMENTS AND INVESTMENT PRACTICES

-8-
<PAGE> 306

in the rate of interest of the first class. If the interest rate on the first
class exceeds the coupon rate of the underlying New York Municipal Obligations,
its interest rate will exceed the rate paid on the second class. In no event
will the aggregate interest paid with respect to the two classes exceed the
interest paid by the underlying New York Municipal Obligations. The value of
the second class and similar securities should be expected to fluctuate more
than the value of a New York Municipal Obligation of comparable quality and
maturity and their purchase by the Fund should increase the volatility of its
net asset value and, thus, its price per share. These custodial receipts are
sold in private placements. The Fund also may purchase directly from issuers,
and not in a private placement, New York Municipal Obligations having
characteristics similar to custodial receipts. These securities may be issued
as part of a multi-class offering and the interest rate on certain classes may
be subject to a cap or floor.

Certain municipal lease obligations and certificates of participation may be
deemed illiquid for the purpose of the Fund's 15% limitation on investments in
illiquid securities. Other New York Municipal Obligations and certificates of
participation acquired by the Fund may be determined by LBGAM, pursuant to
guidelines adopted by the Board of Directors of the Company, to be liquid
securities for the purpose of such limitation. In determining the liquidity of
municipal lease obligations and certificates of participation, LBGAM will
consider a variety of factors, including: (1) the willingness of dealers to
bid for the security; (2) the number of dealers willing to purchase or sell the
obligation and the number of other potential buyers; (3) the frequency of
trades or quotes for the obligation; and (4) the nature of marketplace trades.
In addition, the Investment Adviser will consider factors unique to particular
lease obligations and certificates of participation affecting the marketability
thereof. These include the general creditworthiness of the issuer, the
importance of the property covered by the lease to the issuer and the
likelihood that the marketability of the obligation will be maintained
throughout the time the obligation is held by the Fund.

-9-
<PAGE> 307

-10-
<PAGE> 308

having maturities longer than seven days and securities that do not have
readily available market quotations. In addition, the Fund may invest in
securities that are sold in private placement transactions between their
issuers and their purchasers and that are neither listed on an exchange nor
traded over-the-counter. These factors may have an adverse effect on the Fund's
ability to dispose of particular securities and may limit the Fund's ability to
obtain accurate market quotations for purposes of valuing securities and
calculating net asset value and to sell securities at fair value. If any
privately placed securities held by the Fund are required to be registered
under the securities laws of one or more jurisdictions before being resold, the
Fund may be required to bear the expenses of registration. The Fund may also
purchase securities that are not registered under the Securities Act of 1933,
as amended, but which can be sold to qualified institutional buyers in
accordance with Rule 144A under that Act ("Rule 144A securities"). Rule 144A
securities generally must be sold to other qualified institutional buyers. The
Fund may also invest in commercial obligations issued in reliance on the
so-called "private placement" exemption from registration afforded by Section
4(2) of the Securities Act of 1933, as amended ("Section 4(2) paper"). Section
4(2) paper is restricted as to disposition under the federal securities laws,
and generally is sold to institutional investors such as the Fund who agree
that they are purchasing the paper for investment and not with a view to public
distribution. Any resale by the purchaser must be in an exempt transaction.
Section 4(2) paper normally is resold to other institutional investors like the
Fund through or with the assistance of the issuer or investment dealers who
make a market in the Section 4(2) paper, thus providing liquidity. If a
particular investment in Rule 144A securities, Section 4(2) paper or private
placement securities is not determined to be liquid, that investment will be
included within the 15% limitation on investment in illiquid securities. The
ability to sell Rule 144A securities to qualified institutional buyers is a
recent development and it is not possible to predict how this market will
mature. LBGAM will monitor the liquidity of such restricted securities under
the supervision of the Board of Directors. See "Investment Objective and
Policies - Additional Information on Portfolio Instruments and Certain
Investment Practices - Illiquid and Restricted Securities" in the Statement of
Additional Information.

Asset-Backed Securities. The Fund may purchase asset-backed securities.
Asset-backed securities represent defined interests in an underlying pool of
assets. Such securities may be issued as pass-through certificates, which
represent undivided fractional interests in the underlying pool of assets.
Alternatively, asset-backed securities may be issued as interests, generally in
the form of debt securities, in a special purpose entity organized solely for
the purpose of owning the underlying assets and issuing such securities. In the
latter case, such securities are secured by and payable from a stream of
payments generated by the underlying assets. The assets underlying asset-backed
securities are often a pool of assets similar to one another, such as municipal
lease receivables. Alternatively, the underlying assets may be particular types
of securities, various contractual rights to receive payments and/or other
types of assets. Asset-backed securities frequently carry credit protection in
the form of extra collateral, subordinate certificates, cash reserve accounts,
letters of credit or other enhancements.

-11-
<PAGE> 309

investment objective and policies and substantially the same investment
restrictions as those applicable to the Fund, as described below under
"Investment Limitations."

-12-
<PAGE> 310

good standing and only when, in the judgment of LBGAM, the income to be earned
from the loans justifies the attendant risks.

Hedging and Derivatives. The Fund is authorized to use various hedging and
investment strategies described below to hedge market risks (such as broad or
specific market movements and interest rates), to manage the effective maturity
or duration of debt instruments held by the Fund, or to seek to increase the
Fund's income or gain. Over time, techniques and instruments may change as new
instruments and strategies are developed or regulatory changes occur.
Limitations on the portion of the Fund's assets that may be used in connection
with the investment strategies described below appear in the Statement of
Additional Information.

-13-
<PAGE> 311

in commodity futures contracts and options thereon and the operator of which is
registered with the Commodity Futures Trading Commission (the "CFTC")) and
Derivatives involving futures contracts and options on futures contracts will
be purchased, sold or entered into only for bona fide hedging purposes,
provided that the Fund may enter into such transactions for purposes other than
bona fide hedging if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open contracts and options would not exceed 5%
of the liquidation value of the Fund's portfolio, provided, further, that, in
the case of an option that is in- the-money, the in-the-money amount may be
excluded in calculating the 5% limitation. The use of Derivatives in certain
circumstances will require that the Fund segregate cash, liquid high grade debt
obligations or other assets to the extent the Fund's obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. See "Risk Factors and Special Considerations - Other
Investments and Investment Practices."

The degree of the Fund's use of Derivatives may be limited by certain
provisions of the Code. See "Taxes."

INVESTMENT LIMITATIONS

1. The Fund may not borrow money, except that the Fund may borrow money
from banks or from other funds advised by Lehman Brothers or its affiliates, or
enter into reverse repurchase agreements, in each case for temporary or
emergency purposes only (not for leveraging or investment), in aggregate
amounts not exceeding 33-1/3% of the value of its total assets at the time of
such borrowing. For purposes of the foregoing investment limitation, the term
"total assets" shall be calculated after giving effect to the net proceeds of
any borrowings and reduced by any liabilities and indebtedness other than such
borrowings. Additional investments will not be made by the Fund when borrowings
exceed 5% of total net assets, provided, however, that the Fund may increase
its interest in another registered investment company having the same
investment objective and policies and substantially the same investment
restrictions as those with respect to the Fund while such borrowings are
outstanding.

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their principal business activities in the same industry; provided that there
is no limitation with respect to investments in U.S. Government Securities or
New York Municipal Obligations (other than those backed only by the assets and
revenues of non-governmental users), and provided further, that the Fund may
invest all or substantially all of its assets in another registered investment
company having the same investment objective and policies and substantially the
same investment restrictions as those with respect to the Fund.

RISK FACTORS AND SPECIAL CONSIDERATIONS

CHANGES IN INTEREST RATES

Because the Fund will generally invest in fixed income securities, the net
asset value of the Fund's portfolio, and hence its shares, can be expected to
change as general levels of interest rates fluctuate. Except to the extent that
values are affected independently by other factors such as developments
relating to a specific issuer, when interest rates decline, the value of a
fixed income portfolio can generally be expected to rise. Conversely, when
interest rates rise, the value of a fixed income portfolio can generally be
expected to decline. These fluctuations can be expected to be greater with
respect to investments in fixed income securities with longer maturities than
investments in securities with shorter maturities.

NON-DIVERSIFIED STATUS

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respect to portfolio securities. The Fund intends to comply, however, with the
diversification requirements imposed on regulated investment companies by the
Code, which generally means that with respect to 50% of the Fund's portfolio,
no more than 5% of the Fund's assets will be invested in any one issuer and
with respect to the other 50% of the Fund's portfolio, not more than 25% of the
Fund's assets will be invested in any one issuer. See "Taxes."

OTHER INVESTMENTS AND INVESTMENT PRACTICES

PURCHASE, REDEMPTION AND EXCHANGE OF SHARES

PURCHASES IN THE INITIAL OFFERING

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by telephone before 4:00 p.m. on the last day of the Subscription Period, and
payment in respect of such orders must be received in federal funds immediately
available to the Fund's custodian before 3:00 p.m., Eastern time on the Closing
Date, in each case in accordance with the procedures described below under
"Purchases in the Continuous Offering." The Fund and Lehman Brothers reserve
the right to withdraw, cancel or modify the initial offering of shares without
notice and to reject any purchase order.

PURCHASES IN THE CONTINUOUS OFFERING

ADDITIONAL PURCHASE INFORMATION

REDEMPTION OF SHARES

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EXCHANGE PRIVILEGE

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exchange is being made. Prospectuses may be obtained from Lehman Brothers by
calling 1-800-368-5556. Lehman Brothers reserves the right to reject any
exchange request. The exchange privilege may be modified or terminated at any
time after notice to shareholders.

OTHER MATTERS

VALUATION OF SHARES

MANAGEMENT OF THE FUND

INVESTMENT ADVISER - LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC.

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purchase and sell securities. As compensation for the services of LBGAM as
investment adviser to the Fund, LBGAM is paid a monthly fee by the Fund at the
annual rate of 0.___% of the value of the Fund's average daily net assets.

LBGAM is located at 3 World Financial Center, New York, New York 10285. LBGAM
is a wholly owned subsidiary of Lehman Brothers Holdings, Inc. ("Holdings").

ADMINISTRATOR - THE SHAREHOLDER SERVICES GROUP, INC.

On May 6, 1994, TSSG acquired the third party mutual fund administration
business of The Boston Company Advisors, Inc., an indirect wholly-owned
subsidiary of Mellon Bank Corporation ("Mellon"). In connection with this
transaction, Mellon assigned to TSSG its agreement with Lehman Brothers such
that Lehman Brothers and its affiliates, consistent with their fiduciary duties
and assuming certain service quality standards are met, would recommend TSSG as
the provider of administration services to the Fund. This duty to recommend
expires on May 21, 2000. In addition, under the terms of the Stock Purchase
Agreement dated September 14, 1992 between Mellon and Lehman Brothers (then
named Shearson Lehman Brothers Inc.), Lehman Brothers agreed to recommend
Boston Safe, an indirect wholly owned subsidiary of Mellon, as custodian of
mutual funds affiliated with Lehman Brothers until May 21, 2000, to the extent
consistent with its fiduciary duties and other applicable law.

DISTRIBUTOR - LEHMAN BROTHERS

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EXPENSES

The Fund's expenses include taxes, interest, fees and salaries of the directors
and officers who are not directors, officers or employees of the Fund's service
contractors, SEC fees, state securities qualification fees, costs of preparing
and printing prospectuses for regulatory purposes and for distribution to
shareholders, advisory and administration fees, charges of the custodian,
transfer agent and dividend disbursing agent, certain insurance premiums,
outside auditing and legal expenses, costs of shareholder reports and
shareholder meetings and any extraordinary expenses. The Fund also pays for
brokerage fees and commissions (if any) in connection with the purchase and
sale of portfolio securities. Fund expenses are allocated to Premier Shares
based on either expenses identifiable to the Premier Shares or relative net
assets of the Premier Shares and other classes of Fund shares. LBGAM and TSSG
have agreed to reimburse the Fund to the extent required by applicable state
law for certain expenses that are described in the Statement of Additional
Information relating to the Fund. In addition, in order to maintain a
competitive expense ratio LBGAM and TSSG have agreed to reimburse the Fund for
certain operating expenses for a period of at least one year from the date of
this Prospectus. See "Background and Expense Information."

DIVIDENDS

TAXES

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at least 90% of its net tax-exempt interest income for such taxable year.
However, the Fund would be subject to corporate income tax at a rate of 35% on
any undistributed income or net capital gain. The Fund must also derive less
than 30% of its gross income in each taxable year from the sale or other
disposition of certain securities held for less than three months (the "30%
limitation"). If in any year the Fund should fail to qualify as a regulated
investment company, the Fund would be subject to federal income tax in the same
manner as an ordinary corporation and distributions to shareholders would be
taxable to such holders as ordinary income to the extent of the earnings and
profits of the Fund. Distributions in excess of earnings and profits will be
treated as a tax-free return of capital, to the extent of a holder's basis in
its shares, and any excess, as a long- or short-term capital gain.

The Fund intends to distribute substantially all of its investment company
taxable income each year. Such distributions, whether paid in cash or
reinvested in additional shares, will be taxable as ordinary income to Fund
shareholders who are not currently exempt from federal income taxes. Federal
income taxes for distributions to an Individual Retirement Accounts ("IRA") or
a qualified retirement plan are deferred under the Code. It is not anticipated
that a significant portion of the Fund's distributions will be eligible for the
dividends received deduction for corporations. Distributions to shareholders of
net capital gain that are designated by the Fund as "capital gain dividends,"
whether paid in cash or reinvested in additional shares, will be taxable as
long-term capital gains regardless of how long the shares have been held by
such shareholders. The Fund does not expect to recognize significant net
capital gains. Shareholders receiving distributions from the Fund in the form
of additional shares will be treated for federal income tax purposes as
receiving a distribution in an amount equal to the fair market value of the
additional shares on the date of such a distribution.

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NEW YORK STATE AND LOCAL TAX MATTERS

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interest dividend income that is directly to interest on New York municipal
obligations. Shares of the Fund will be exempt from local property taxes in New
York State and New York City.

_________________________

THE FUND'S PERFORMANCE

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performance of mutual funds, or other industry or financial publications such
as Barron's, Business Week, CDA Investment Technologies, Inc., Changing Times,
Forbes, Fortune, Institutional Investor, Investors Daily, Money, Morningstar
Mutual Fund Values, The New York Times, USA Today and The Wall Street Journal.
Performance figures are based on historical earnings and are not intended to
indicate future performance. The Statement of Additional Information contains a
further description of the methods used to determine performance. Investors may
call 800-__________ to obtain current performance figures.

ADDITIONAL INFORMATION

All shares of the Company, when issued, will be fully paid and nonassessable.

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Boston Safe, an indirect wholly owned subsidiary of Mellon, is located at One
Boston Place, Boston, Massachusetts 02108, and serves as custodian of the
Fund's investments.

The Shareholder Services Group, Inc., a subsidiary of First Data Corporation,
is located at One Exchange Place, Boston, Massachusetts 02109, and serves as
the Fund's transfer agent.

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