<PAGE>
Lehman Brothers Funds, Inc.
-----------
DAILY INCOME
FUND
---------------
MUNICIPAL INCOME
FUND
---------------
SELECTED GROWTH
STOCK PORTFOLIO
---------------
-------------------
ANNUAL
REPORT
July 31, 1995
---------------------
LEHMAN BROTHERS
<PAGE>
Lehman Brothers Funds, Inc.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Shareholder Letter.............................................................. 1
Daily Income Fund:
Portfolio Highlights.......................................................... 6
Portfolio of Investments...................................................... 7
Municipal Income Fund:
Portfolio Highlights.......................................................... 10
Portfolio of Investments...................................................... 11
Selected Growth Stock Portfolio:
Portfolio Highlights.......................................................... 22
Portfolio of Investments...................................................... 23
Statements of Assets and Liabilities............................................ 27
Statements of Operations........................................................ 29
Statements of Changes in Net Assets............................................. 30
Financial Highlights:
Daily Income Fund:
Select Shares............................................................... 32
CDSC Shares................................................................. 33
Municipal Income Fund:
Select Shares............................................................... 34
CDSC Shares................................................................. 35
Selected Growth Stock Portfolio:
CDSC Shares................................................................. 36
Notes to Financial Statements................................................... 37
Report of Ernst & Young LLP, Independent Auditors............................... 48
Tax Information................................................................. 49
</TABLE>
--------------
THIS REPORT IS FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE
DAILY INCOME FUND, THE MUNICIPAL INCOME FUND AND THE SELECTED GROWTH STOCK
PORTFOLIO. ITS USE IN CONNECTION WITH ANY OFFERING OF THE FUNDS' SHARES IS
AUTHORIZED ONLY IF ACCOMPANIED OR PRECEDED BY THE FUNDS' CURRENT PROSPECTUSES.
<PAGE>
DEAR SHAREHOLDER:
We are pleased to present the Annual Report for the Lehman Brothers Funds,
Inc. (the "Company") for the fiscal year ended July 31, 1995. This Annual Report
includes information on the Company's three investment portfolios:
/ / Daily Income Fund
/ / Municipal Income Fund
/ / Selected Growth Stock Portfolio
DAILY INCOME FUND
INVESTMENT OBJECTIVE: Daily Income Fund is designed to provide investors
with as high a level of current income as is consistent with stability of
principal. The Fund invests in a portfolio consisting of a broad range of U.S.
dollar-denominated short-term instruments, including U.S. government and U.S.
and foreign bank and commercial obligations and repurchase agreements relating
to such obligations.
PERFORMANCE: The Fund's 7-day and 30-day yields on July 31, 1995 were 5.35%
and 5.38%, respectively.
MUNICIPAL INCOME FUND
INVESTMENT OBJECTIVE: Municipal Income Fund is designed to provide
investors with as high a level of current income exempt from federal income tax
as is consistent with stability of principal. The Fund invests substantially all
of its assets in short-term tax-exempt obligations issued by state and local
governments and their agencies and certain other tax-exempt securities.
PERFORMANCE: The Fund's 7-day and 30-day yields on July 31, 1995 were 3.41%
and 3.20%, respectively. On a tax-equivalent yield basis, the Fund's 7-day and
30-day yields were 5.59% and 5.25%, respectively, for investors in the 39% tax
bracket.
SELECTED GROWTH STOCK PORTFOLIO
INVESTMENT OBJECTIVE: Selected Growth Stock Portfolio is designed to
provide investors with long-term capital appreciation. Under normal market
conditions, the Fund invests primarily in equity securities which the Fund's
investment adviser believes to have the potential for above-average capital
appreciation. Typically, the Fund's holdings will consist of shares of small-
and medium-sized companies.
PERFORMANCE: For the year ending July 31, 1995, the Fund's total return was
37.27% compared with 30.64% for the Lipper Mid-Cap Fund Average, and 24.93% for
the Russell 2000 Small Capitalization Index. Total return assumes that dividends
are reinvested in additional Fund shares and reflects certain fee waivers but
not sales charges.
1
<PAGE>
THE ECONOMY
MONEY MARKETS: Since our last report, the pace of economic growth
decelerated in two distinct stages and, ultimately, led to a reversal of the
Federal Reserve Board's (the "Fed") monetary policy and a decline in interest
rates. Following the very strong 5.1% growth of Gross Domestic Product ("GDP")
in the fourth quarter of 1994, the slower but still healthy 2.8% rate
experienced in the first quarter of 1995 was viewed to be more sustainable. The
initial estimates of 2.0% to 2.5% GDP growth for the second quarter of 1995,
however, proved to be optimistic in light of the surprisingly weak economic
data, particularly in employment, housing, and consumer durables. The stream of
data was so anemic that many observers felt that the desired "soft landing"
scenario would turn into a rather bumpy one and could unravel into a classic
recession. At the same time, rates of inflation remained manageable. These
conditions enabled the fixed-income markets to continue a powerful rally on the
belief that the next monetary policy decision by the Fed would be to ease the
availability of credit in an effort to revive the economy. During the six-month
period, interest rates of various maturities fell in a range from 50 basis
points to 150 basis points, including the Fed's July 6, 1995 easing operation of
25 basis points which was the first since 1992. It was ironic that significant
signs of economic strength began to emerge immediately after the Fed's action
and this led some commentators to suggest that the easing may not have been
necessary in order to sustain a modest pace of growth. The average maturity of
the DAILY INCOME FUND was extended during the first half of the period in
anticipation of falling rates.
MUNICIPAL MARKET: The single most influential factor in the tax-exempt
money market has been the supply of variable rate demand paper. When supply has
been thin, typically as maturity proceeds and coupon payments enter the market
in the beginning of each month, yields on variable securities have been driven
down as low as 1.9% to 2.0%. Conversely, when supply of this paper has been
plentiful, typically at mid-month, yields have climbed as high as 4.0% to 4.1%.
This extreme rate of volatility has caused wide swings in the returns of
tax-exempt money market funds in general, a trend which we believe will continue
in the future.
We have been hedging, to the fullest extent possible, the MUNICIPAL INCOME
FUND from these yield swings by forsaking variable rate paper in favor of
longer, fixed-rate notes. This strategy has allowed us not only to smooth out
returns but also to maintain a favorable position vis-a-vis our portfolio
maturities in the declining interest rate environment that has recently
developed.
EQUITY MARKET: During periods of slowing economic growth and the resulting
decline in profit potential, higher multiples are easier to justify, but at the
same time, the likelihood of an earnings shortfall also rises. The stock price
gains achieved thus far in 1995 were a result of strong overall growth in
profits. We believe U.S. corporations will continue to generate strong earnings
and positive cash flow for the near future. The gap between actual results and
market expectations has narrowed, however, and the search for solid performing
stocks is becoming more of a challenge.
2
<PAGE>
The SELECTED GROWTH STOCK PORTFOLIO'S current positions emphasize service
businesses that, in our view, share such characteristics as recurring revenues,
stable cash flows and positive earnings momentum. We believe the portfolio is
well positioned for the second half of 1995 and early 1996.
LOOKING FORWARD
The critical question that fixed-income investors now face relates to the
extent of the rebound in consumer spending and whether it will translate into a
resumption of faster production rates and the attendant employment gains. We
subscribe to forecasts supporting a modestly improving economy (2.0% to 2.5% GDP
growth in the second half of 1995) following a small gain in the second quarter
of 1995 (1.0% or less). We believe that the Fed has so far orchestrated a soft
landing and will continue to pursue that strategy with gradual easing of
short-term interest rates of 25 basis points every three months or so from the
current Fed Funds rate of 5.75%. This should encourage consumption without
igniting inflation. We believe long term rates, which are currently around
6.90%, will most likely trade in a range between 6.25% and 7.25% over the next
six months.
We believe that the climate for growth issues in the equity market continues
to be positive with valuations attractive. However, low interest rates and
lessening concerns over inflation will most likely result in the potential for a
given fund to outperform the market being more limited. We believe that
selectivity will prove to be the discerning characteristic for outperformance in
the coming year.
Sincerely,
Andrew D. Gordon
President
September 25, 1995
3
<PAGE>
MANAGEMENT DISCUSSION AND PERFORMANCE ANALYSIS
The Lehman Selected Growth Stock Portfolio's net asset value per share
advanced 37% in the twelve months since July 1994. By comparison, the Russell
2000 Small Capitalization Index increased 25% and the Lipper Mid-Cap Funds, 31%
over the same period. We attribute the Fund's better performance to our decision
to hold higher proportions of the Fund's assets in the technology and media
sectors than represented by the relevant indices. This decision was based on our
belief that both sectors have compelling valuations and healthy growth
characteristics. The technology sector continues to provide leadership for
growth issues, however there tends to be a good deal of volatility to these
holdings. Nevertheless, in our view, fundamentals remain healthy and we continue
to overweight the sector, choosing market leaders in segments of technology that
we believe are poised to do well. We have further diversified that effort with
companies in a position to utilize new technology as a means of improving
services offered. We believe these businesses offer such characteristics as
recurring revenues, healthy cash flows and consistent growth, thus are
inherently less volatile than manufacturers. Policy Management Systems
Corporation, Paychex, Inc., Health Management Systems, and GTECH Holdings
Corporation are representative of some of our top holdings in these businesses.
Further, with health care reform apparently discounted in health care issues, we
have begun to establish some meaningful positions in that sector as well. In an
environment of slowing economic growth these issues have the further appeal of
being less dependent upon the economic cycle.
4
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
LEHMAN SELECTED GROWTH STOCK PORTFOLIO MIDCAP AVERA RUSSELL 2000 IX TR
<S> <C> <C> <C>
5/20/94 $10,000
05/94 $9,920 $10,000 $10,000
06/94 $9,670 $9,577 $9,663
07/94 $9,730 $9,808 $9,821
08/94 $10,270 $10,404 $10,368
09/94 $10,270 $10,353 $10,333
10/94 $10,440 $10,533 $10,292
11/94 $10,020 $10,085 $9,876
12/94 $10,233 $10,277 $10,140
01/95 $10,273 $10,220 $10,012
02/95 $10,723 $10,677 $10,429
03/95 $11,234 $11,026 $10,608
04/95 $11,344 $11,155 $10,843
05/95 $11,354 $11,347 $11,030
06/95 $12,396 $12,021 $11,602
07/95 $13,357 $12,860 $12,270
</TABLE>
The graph above shows the results of a hypothetical $10,000 invested in the
Selected Growth Stock Portfolio - CDSC Shares from the inception of the Fund,
compared to a theoretical investment of $10,000 in the respective indices over
the same period. (Index results are calculated beginning the first day of the
month following the commencement of the Fund's operations.) The results for the
Fund reflect the waiver of a portion of fees by the Adviser and Administrator of
the Fund for the period indicated.
The Russell 2000 Small Capitalization Index is a capitalization weighted total
return index which is comprised of 2000 of the smallest capitalized U.S.
domiciled companies whose common stock is traded in the U.S. on the New York
Stock Exchange, American Stock Exchange and NASDAQ. The Lipper Mid-Cap Fund
Average was derived from a universe of only those mutual funds that were in
existence as of the inception date of the Fund and are comprised of mid-cap
funds tracked by Lipper Analytical Services, Inc.
NOTE: The performance shown represents past performance and is not a guarantee
of future results. A portfolio's share price and investment return will vary
with market conditions, and the value of shares, when redeemed, may be worth
more or less than the original cost. Also, the figures shown above do not
reflect the effect of any sales charge.
+ Assumes the reinvestment of all dividends and distributions.
5
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS JULY 31, 1995
ASSET DISTRIBUTION (BY INSTRUMENT)
[PIE CHART]
<TABLE>
<CAPTION>
INSTRUMENT PERCENTAGE
<S> <C>
Bank/Corporate Notes 33.6%
Commercial Paper 19.1%
Municipal Notes 5.7%
U.S. Government Agency Security 3.5%
Promissory Notes 1.4%
Repurchase Agreements and Net Other Assets
and Liabilities 36.7%
</TABLE>
AVERAGE WEIGHTED MATURITY OF PORTFOLIO
39 Days
6
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS JULY 31, 1995
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
<C> <S> <C>
- -------------------------------------------------------------------------------
BANK/CORPORATE NOTES -- 33.6%
Bank of New York, Wilmington:
$ 6,429,000 6.350% due 2/23/96 $ 6,434,000
25,000,000 5.960% due 7/15/96 25,000,000
Bear Stearns & Company Inc., Variable Rate:
15,000,000 6.220% due 2/9/96 15,000,000
15,000,000 6.083% due 2/26/96 15,000,000
20,000,000 Beta Finance Inc., Variable Rate,
6.075% due 11/22/95** 19,996,318
10,000,000 CS First Boston, Inc., Variable Rate,
6.175% due 2/26/96** 10,000,000
20,000,000 FCC National Bank of Wilmington, Variable Rate,
6.200% due 1/17/96 19,997,314
20,000,000 First Bank South Dakota, Variable Rate,
5.825% due 2/5/96 19,995,028
20,000,000 Goldman Sachs Group LP, Variable Rate,
5.963% due 2/2/96 20,000,000
20,000,000 Merrill Lynch & Company, Inc., Variable Rate,
6.013% due 9/8/95 20,000,000
10,000,000 NationsBank of Texas,
7.050% due 2/8/96 10,000,000
25,000,000 PNC Bank, N.A.,
6.450% due 12/12/95 25,003,036
20,000,000 SMM Trust, 1994-B, Variable Rate,
6.175% due 8/11/95** 20,000,000
9,949,000 SMM Trust, 1994-D, Variable Rate,
5.984% due 10/27/95** 9,949,000
------------
TOTAL BANK/CORPORATE NOTES (COST $236,374,696) 236,374,696
------------
COMMERCIAL PAPER -- 19.1%
8,000,000 Countrywide Funding Corporation,
5.820%+ due 8/18/95 7,978,013
20,000,000 du Pont (E.I.) de Nemours & Company,
6.090%+ due 1/9/96 19,455,283
25,000,000 Ford Motor Credit Company,
6.200%+ due 9/11/95 24,823,473
10,000,000 General Electric Capital Corporation,
5.640%+ due 12/1/95 9,808,867
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31, 1995
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
- -------------------------------------------------------------------------------
<C> <S> <C>
COMMERCIAL PAPER -- (CONTINUED)
General Motors Acceptance Corporation:
$ 10,000,000 6.260%+ due 8/15/95 $ 9,975,656
15,000,000 5.970%+ due 11/6/95 14,758,713
10,000,000 Postipankki Ltd.,
5.750%+ due 8/15/95 9,977,639
SFC USA Inc.:
10,025,000 6.000%+ due 8/7/95 10,014,975
10,000,000 5.900%+ due 9/8/95 9,937,722
7,800,000 Sheffield Receivables Corporation,
5.750%+ due 8/11/95** 7,787,541
10,000,000 Swedbank Inc.,
5.810%+ due 11/9/95 9,838,611
------------
TOTAL COMMERCIAL PAPER (COST $134,356,493) 134,356,493
------------
MUNICIPAL NOTES -- 5.7%
40,000,000 Orange County, California, Taxable Notes,
Variable Rate,
7.013% due 6/30/96 (See Note 7) 40,000,000
-- Letter of credit issued by Chemical Bank,
expiring 7/10/96 --
------------
TOTAL MUNICIPAL NOTES (COST $40,000,000) 40,000,000
------------
U.S. GOVERNMENT AGENCY SECURITY -- 3.5% (COST $25,000,000)
25,000,000 Federal National Mortgage Association, Variable
Rate,
6.350% due 10/7/96 25,000,000
------------
PROMISSORY NOTE -- 1.4% (COST $10,000,000)
10,000,000 Goldman Sachs & Company,
5.938% due 11/24/95 10,000,000
------------
REPURCHASE AGREEMENTS -- 38.2%
100,000,000 Agreement with BZW Securities Inc., dated 7/31/95
bearing 5.900% to be repurchased at
$100,016,389 on 8/1/95, collateralized by
$108,052,754 U.S. Government Agency Securities
with various maturities and interest rates
(market value -- $102,075,357) 100,000,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31, 1995
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
- -------------------------------------------------------------------------------
<C> <S> <C>
REPURCHASE AGREEMENTS -- (CONTINUED)
$169,066,000 Agreement with Lehman Brothers Government
Securities Inc., dated 7/31/95 bearing 6.000%
to be repurchased at $169,094,178 on 8/1/95,
collateralized by $181,898,772 U.S. Government
Agency Securities with various maturities and
interest rates (market value -- $172,432,801) $169,066,000
------------
TOTAL REPURCHASE AGREEMENTS (COST $269,066,000) 269,066,000
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST $714,797,189*) 101.5% 714,797,189
OTHER ASSETS AND LIABILITIES (NET) (1.5) (10,442,501)
- -------------------------------------------------------------------------------
NET ASSETS 100.0% $704,354,688
- -------------------------------------------------------------------------------
<FN>
* Aggregate cost for Federal tax purposes.
** Securities exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
+ Annualized yield at date of purchase.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- ---------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS JULY 31, 1995
ASSET DISTRIBUTION (BY INDUSTRY)
[PIE CHART]
<TABLE>
<CAPTION>
INDUSTRY PERCENTAGE
<S> <C>
Education 5.2%
General Obligation 23.4%
Hospital 11.8%
Housing 13.0%
Industrial Development Revenue 9.5%
Pollution Control Revenue 3.8%
Transportation 6.7%
Utility 12.3%
Other 12.6%
Net Other Assets and Liabilities 1.7%
</TABLE>
AVERAGE WEIGHTED MATURITY OF PORTFOLIO
68 Days
10
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS JULY 31, 1995
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
<C> <S> <C>
- ------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES -- 98.3%
ALABAMA -- 1.4%
$ 3,935,000 Alabama Financing Authority, Multi-Family Housing
Revenue, (Southtrust Bank, LOC),
4.000% due 7/1/20++ $ 3,935,000
------------
ALASKA -- 4.4%
13,000,000 Alaska State, Housing Finance Corporation, Series
C,
(CreditSuisse/Westdeutsche LB, BPA),
3.950% due 6/1/26++ 13,000,000
------------
ARIZONA -- 0.7%
500,000 Apache County, Arizona, Industrial Development
Authority,
Pollution Control Revenue, (Chemical Bank,
LOC),
3.850% due 6/15/20++ 500,000
1,700,000 Pima County, Arizona, Industrial Development
Authority,
(Tuscon Electric Project), (Barclays Bank,
LOC),
3.800% due 3/15/18++ 1,700,000
------------
2,200,000
------------
CALIFORNIA -- 3.4%
10,000,000 California State, Revenue Anticipation Warrants,
Series C,
(Bank of America, LOC),
5.750% due 4/25/96 10,083,753
------------
COLORADO -- 1.4%
2,000,000 Arapahoe County, Colorado, Capital Improvement
Trust Fund,
4.450% due 8/31/26+++ 2,000,000
Denver, Colorado, City & County:
1,200,000 Childrens Hospital Revenue, (FGIC Insured),
(Sakura, BPA),
3.800% due 10/1/18++ 1,200,000
1,000,000 Multi-Family Housing Revenue, (Banque Paribas,
BPA),
3.800% due 10/1/06++ 1,000,000
------------
4,200,000
------------
DISTRICT OF COLUMBIA -- 0.1%
300,000 District of Columbia, Georgetown University,
Series D,
(Sanwa Bank, BPA),
4.050% due 4/1/17++ 300,000
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31, 1995
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
- ------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
FLORIDA -- 4.8%
$ 1,400,000 Alachua County, Florida, Health Facilities
Revenue,
(Kredietbank, LOC),
3.800% due 1/1/21++ $ 1,400,000
1,000,000 Broward County, Florida, General Obligation
Notes,
Pre-refunded 7/1/96,
7.875% due 1/1/12 1,057,430
1,200,000 Dade County, Florida, Housing Finance Authority,
(Trust Company Bank, LOC),
3.750% due 9/1/05++ 1,200,000
Orange County, Florida, Health Facilities
Revenue:
6,280,000 Series C44, (MBIA Insured), (Sakura, BPA),
4.850% due 10/1/06++ 6,280,000
4,100,000 (MBIA Insured), (Sakura, BPA),
4.950% due 10/1/08++ 4,100,000
100,000 Sarasota County, Florida, Health Facilities
Authority Revenue,
(Bay Village Project), (Barnett Bank, LOC),
3.900% due 12/1/19++ 100,000
------------
14,137,430
------------
GEORGIA -- 6.9%
8,740,000 Georgia Municipal Electric Authority, Power
Revenue, Series B,
(FSA Insured), (Morgan Guaranty Trust, BPA),
3.950% due 1/1/16++ 8,740,000
4,250,000 Georgia State, Putters-Series 22, General
Obligation Bonds,
(Morgan Guaranty Trust, BPA),
3.950% due 7/1/04++ 4,250,000
6,500,000 Municipal Electric Authority of Georgia, (General
Resolution),
Series B, (Morgan Guaranty Trust, BPA),
4.250% due 6/1/20+++ 6,508,766
1,080,000 Walton, Georgia, Industrial Building Authority,
Series A,
(Union Bank of Switzerland, LOC),
4.100% due 10/1/02++ 1,080,000
------------
20,578,766
------------
HAWAII -- 0.6%
1,750,000 Hawaii State, Putters-Series BZ,
(Morgan Guaranty Trust, BPA),
3.950% due 10/1/06++ 1,750,000
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31, 1995
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
- ------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
ILLINOIS -- 6.3%
$ 2,000,000 Chicago, Illinois, O'Hare International Airport,
Special Facility Revenue, Series B, (Lt Credit
Bank Japan, LOC),
4.800% due 12/1/17+ $ 2,000,000
1,000,000 Chicago, Illinois, Tender Notes, Series A,
(Morgan Guaranty Trust, LOC),
4.600% due 10/31/96+++ 1,000,000
1,500,000 Chicago, Illinois, General Obligation Bonds,
(Sanwa Bank, LOC),
3.850% due 1/1/10++ 1,500,000
8,000,000 Cook County, Illinois, Municipal Securities
Trust,
(MBIA Insured), (Societe Generale, BPA),
4.000% due 11/15/23++ 8,000,000
Illinois Development Finance Authority,
Industrial Revenue:
2,200,000 (Tokai Bank, LOC),
4.750% due 11/1/06++ 2,200,000
1,000,000 (Harris Trust, LOC),
4.000% due 10/1/08++ 1,000,000
3,000,000 Illinois Health Facilities Authority Revenue,
Series A,
4.500% due 8/1/15+++ 3,000,000
------------
18,700,000
------------
INDIANA -- 2.5%
7,300,000 Indianapolis, Indiana, Industrial Economic
Development Authority, Series D, (SMC
Pneumatics Inc.), (Asahi Bank, LOC),
4.750% due 9/1/95 7,300,000
------------
KENTUCKY -- 0.3%
1,000,000 County of Graves, Revenue Bonds, Series 1988,
(Bank of New York, LOC),
4.000% due 12/1/12++ 1,000,000
------------
LOUISIANA -- 7.2%
3,700,000 Ascension Parish, Louisiana, Pollution Control
Revenue,
(Shell Oil, GTC),
4.100% due 9/1/23+ 3,700,000
800,000 Calcasieu Parish, Louisiana, (Citgo Petroleum
Corporation), (Westdeutshe Landesbank, LOC),
3.850% due 8/1/04++ 800,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31, 1995
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
- ------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
LOUISIANA -- (CONTINUED)
De Soto Parish, Louisiana, Pollution Control
Revenue:
$ 1,400,000 (Swepco Project), Series A, (Swiss Bank, LOC),
3.750% due 7/1/18++ $ 1,400,000
1,900,000 (Swepco Project), Series B, (Swiss Bank, LOC),
3.750% due 7/1/18++ 1,900,000
1,100,000 Lake Charles, Louisiana, Harbor and Term
Facilities Revenue, (Westdeutsche Landesbank,
LOC),
3.850% due 8/1/07++ 1,100,000
Louisiana Housing Finance Agency, Multi-Family
Housing Authority Revenue, (Sumitomo Trust,
LOC):
6,400,000 (New Orleans Project),
4.850% due 12/1/25++ 6,400,000
6,100,000 (Allouette Project),
4.850% due 1/1/26++ 6,100,000
------------
21,400,000
------------
MAINE -- 2.2%
1,390,000 Maine State, Housing Authority Mortgage Revenue,
Series A-1,
(Bank of America, BPA),
4.400% due 11/15/10+++ 1,390,393
5,000,000 Maine State, Tax Anticipation Notes,
4.500% due 6/28/96 5,032,814
------------
6,423,207
------------
MARYLAND -- 4.1%
4,500,000 Baltimore County, Maryland, Series 20, General
Obligation Bonds, (Morgan Guaranty Trust, BPA),
3.950% due 7/1/16++ 4,500,000
1,500,000 Maryland State, Health and Higher Education
Revenue, Series B, (Mellon Bank, LOC),
3.900% due 7/1/24++ 1,500,000
Northeast, Maryland, Waste Disposal Authority,
(MBIA Insured), (Citibank, BPA):
1,000,000 3.750% due 1/1/03+++ 1,000,000
3,000,000 3.750% due 1/1/06+++ 3,000,000
2,200,000 3.750% due 1/1/07+++ 2,200,000
------------
12,200,000
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31, 1995
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
- ------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
MASSACHUSETTS -- 3.5%
$ 1,410,000 Commonwealth of Massachusetts, Housing Finance
Agency,
(FGIC Insured),
4.100% due 6/1/17+++ $ 1,410,000
9,000,000 Massachusetts Bay Transportation Authority,
Series A,
5.500% due 3/1/96 9,043,858
------------
10,453,858
------------
MICHIGAN -- 2.5%
2,000,000 Michigan State Financial Assurance Authority,
(Canadian Imperial Bank, LOC),
3.900% due 12/1/04++ 2,000,000
5,000,000 Michigan State Strategic Fund, Pollution Control
Revenue,
(Dow Chemical, GTC),
4.200% due 8/1/03+++ 5,000,000
300,000 Midland County, Michigan, Economic Development
Revenue,
(Dow Chemical, GTC),
3.750% due 12/1/15+ 300,000
------------
7,300,000
------------
MINNESOTA -- 0.6%
1,795,000 South Minnesota Municipal Power Agency, Series C,
Pre-refunded 1/1/96,
7.125% due 1/1/15 1,851,298
------------
MISSOURI -- 1.6%
2,000,000 Carthage, Missouri, Industrial Development
Authority, Series A, (Wachovia Bank Georgia,
LOC),
4.150% due 4/1/07++ 2,000,000
1,250,000 Missouri Environmental Improvement & Energy
Resource,
Pollution Control Revenue, Union Electric
Company, Series A,
(Union Bank of Switzerland, LOC),
4.000% due 6/1/14+++ 1,250,000
500,000 Missouri State Health and Educational Facilities,
Series B,
(Morgan Guaranty Trust, LOC),
3.750% due 11/1/19++ 500,000
1,000,000 Osage Beach, Missouri, Industrial Development
Authority Revenue, (NationsBank, LOC),
4.050% due 1/1/11++++ 1,000,000
------------
4,750,000
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31, 1995
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
- ------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
NEW HAMPSHIRE -- 0.3%
$ 1,000,000 New Hampshire State College, Capital
Improvements, Series B,
8.250% due 11/1/95 $ 1,009,234
------------
NEW JERSEY -- 2.2%
5,000,000 Camden County, New Jersey, Tax Anticipation
Bonds, Series A,
5.250% due 2/14/96 5,011,560
555,000 Middlesex County, New Jersey, Utilities Authority
Revenue, BT-94,
(MBIA Insured), (Bankers Trust Company, BPA),
3.900% due 8/15/02++ 555,000
900,000 New Jersey State Turnpike Authority, (MBIA
Insured),
(Bankers Trust Company, BPA),
3.900% due 1/1/00++ 900,000
------------
6,466,560
------------
NEW MEXICO -- 0.5%
300,000 Alberquerque, New Mexico, Revenue Bonds,
(Charter Hospital Project), (Bankers Trust
Company, LOC),
3.800% due 3/1/14++ 300,000
1,000,000 Eddy County, New Mexico, Pollution Control
Revenue,
(Rabobank Nederland, LOC),
3.800% due 2/1/03++ 1,000,000
------------
1,300,000
------------
NEW YORK -- 7.8%
3,910,000 Monroe County, New York, Putters, Series 24C,
(Morgan Guaranty Trust, BPA),
4.150% due 6/1/06++ 3,910,000
400,000 New York, New York, General Obligation Bonds,
Series C,
Subseries C-4, (Fuji Bank, LOC),
3.850% due 8/1/95+ 400,000
6,900,000 New York, New York, Tender Options Custody
Receipts,
(Bankers Trust Company, BPA),
3.850% due 3/15/97++ 6,900,000
New York State, Dormitory Authority Revenue,
General Obligation Bonds:
2,000,000 (Morgan Guaranty Trust, BPA),
3.750% due 7/1/10++ 2,000,000
3,000,000 Putters, (Morgan Guaranty Trust, BPA),
3.750% due 7/1/09++ 3,000,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31, 1995
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
- ------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
NEW YORK -- (CONTINUED)
New York State, Dormitory Authority Revenue,
General Obligation Bonds -- (continued):
$ 4,300,000 (FGIC Insured), (Societe Generale, BPA),
3.900% due 7/1/23++ $ 4,300,000
2,000,000 New York State, Local Government, (Bank of Novia
Scotia, BPA),
3.500% due 4/2/21++ 2,000,000
500,000 Triborough Bridge and Tunnel Authority, New York,
Special Obligation Bonds, (MBIA Insured),
(Bankers Trust Company, BPA),
3.900% due 1/1/04++ 500,000
------------
23,010,000
------------
NORTH CAROLINA -- 1.7%
1,650,000 City of Greensboro, North Carolina, Public
Improvement Revenue, (Wachovia Bank N.C., BPA),
3.750% due 4/1/10++ 1,650,000
1,000,000 North Carolina Medical Care Community Revenue,
(Wachovia Bank N.C., BPA),
3.800% due 9/1/02++ 1,000,000
2,500,000 Wake County, North Carolina, Industrial
Facilities & Pollution Control Revenue, Series
C, (Sumitomo Bank, LOC),
3.950% due 10/1/15++ 2,500,000
------------
5,150,000
------------
OHIO -- 4.3%
300,000 Cincinnati, Ohio, Student Loan Funding
Corporation, Loan Revenue, Series 1983A, (Fuji
Bank, LOC),
3.850% due 12/29/98++ 300,000
11,600,000 Clermont County, Ohio, Hospital Facilities
Revenue, Series B,
(Mercy Health Systems, GTC),
3.850% due 9/1/21++ 11,600,000
1,000,000 Cuyahoga County, Ohio, Industrial Development
Revenue,
(Hong Kong Shanghai, LOC),
3.950% due 12/1/09++++ 1,000,000
------------
12,900,000
------------
OREGON -- 0.5%
1,500,000 Oregon State, Health, Housing & Education,
Project A,
(Banque Nationale De Paris, LOC),
3.750% due 7/1/25++ 1,500,000
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31, 1995
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
- ------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
PENNSYLVANIA -- 11.0%
Delaware Valley, Pennsylvania, Regional Financing
Authority:
$ 3,915,000 (Marine Midland/Hong Kong Shanghai, LOC),
3.950% due 8/1/16++ $ 3,915,000
5,000,000 (Hong Kong Shanghai, LOC),
3.950% due 12/1/18++ 5,000,000
2,565,000 Pennsylvania Housing Finance Agency,
Single-Family Housing Revenue, Series Q,
4.350% due 4/1/08+++ 2,565,000
4,330,000 Pennsylvania State, Certificates of
Participation, Series A38,
(Sakura, BPA),
4.500% due 7/1/00++ 4,330,000
1,000,000 Pennsylvania State, Higher Education Facilities
Authority,
College & University Revenue,
(Carnegie-Mellon), Series A,
(Union Bank of Switzerland, BPA),
3.750% due 11/1/15++ 1,000,000
3,000,000 Philadelphia, Pennsylvania, School District Tax &
Revenue
Anticipation Notes,
4.500% due 6/28/96 3,014,431
11,000,000 Philadelphia, Pennsylvania, Tax & Revenue
Anticipation Notes, Series A,
4.500% due 6/27/96 11,052,569
1,900,000 Quakertown, Pennsylvania, General Health
Authority,
(National Westminster USA, LOC),
3.850% due 12/1/11++ 1,900,000
------------
32,777,000
------------
SOUTH CAROLINA -- 2.1%
600,000 Lexington County, South Carolina, Charter Rivers
Hospital,
(Mitsubishi Bank Ltd., LOC),
3.800% due 6/1/07++ 600,000
5,000,000 Piedmont, South Carolina, Municipal Power Agency,
Pre-refunded 1/1/96,
9.700% due 1/1/24 5,267,984
400,000 South Carolina Jobs-Economic Development
Authority,
(Credit Commerciale, LOC),
3.900% due 11/7/07++ 400,000
------------
6,267,984
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31, 1995
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
- ------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
TENNESSEE -- 4.4%
Chattanooga, Tennessee, Industrial Development
Board,
Industrial Development Revenue, (Credit Suisse,
LOC):
$ 1,000,000 3.800% due 12/15/12++ $ 1,000,000
1,300,000 3.800% due 12/15/12++ 1,300,000
3,200,000 Knox County, Tennessee, Health, Educational &
Housing Authority, Mercy Health Systems, Series
B, (Mercy Health Systems, GTC),
3.850% due 9/1/14++ 3,200,000
2,000,000 Memphis, Tennessee, Electric System Revenue,
Pre-refunded 1/1/96,
7.875% due 1/1/06 2,081,898
5,500,000 Metropolitan Nashville Airport Authority,
Tennessee Airport Revenue, (FGIC Insured),
(Societe Generale, BPA),
3.750% due 7/1/19++ 5,500,000
------------
13,081,898
------------
TEXAS -- 3.1%
Brazos River, Texas, Pollution Control Revenue,
(Dow Chemical Project-B), (Dow Chemical, GTC):
1,000,000 4.150% due 10/1/99+++ 1,000,000
3,000,000 4.250% due 10/1/99++ 3,000,000
1,470,000 Lewisville, Texas, Independent School District,
(MBIA Insured),
5.900% due 2/15/96 1,479,942
100,000 Tarrant County, Texas, Health Facilities
Development,
(Harris Methodist Health Systems), (Fuji Bank
Ltd., LOC),
4.050% due 9/1/18++ 100,000
3,700,000 Texas State Tax & Revenue Anticipation Notes,
5.000% due 8/31/95 3,703,045
------------
9,282,987
------------
UTAH -- 0.7%
2,000,000 Utah Intermountain Power Agency Revenue,
(Industrial Bank of Japan, BPA),
4.150% due 7/1/09+++ 2,000,000
------------
WASHINGTON -- 2.4%
1,000,000 Student Loan Financing Association, Loan Revenue,
Series B,
(Sanwa Bank, LOC),
3.850% due 12/1/02++ 1,000,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31, 1995
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
- ------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
WASHINGTON -- (CONTINUED)
$ 6,030,000 Washington State Public Power Supply Revenue,
Series 1A,
(Morgan Guaranty Trust, BPA),
4.150% due 7/1/03++ $ 6,030,000
------------
7,030,000
------------
WISCONSIN -- 2.8%
2,000,000 Milwaukee, Wisconsin, Industrial Development
Revenue,
(Pharmacia AB, GTC),
4.350% due 6/1/09++ 2,000,000
6,320,000 Wisconsin Public Power System Revenue, Series A,
(AMBAC Insured), (Societe Generale, BPA),
4.000% due 7/1/14++ 6,320,000
------------
8,320,000
- ------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST $291,658,975*) 98.3% 291,658,975
OTHER ASSETS AND LIABILITIES (NET) 1.7 5,163,441
- ------------------------------------------------------------------------------
NET ASSETS 100.0% $296,822,416
- ------------------------------------------------------------------------------
<FN>
* Aggregate cost for Federal tax purposes was $291,659,301.
+ Variable rate demand notes are payable upon not more than one business
day's notice. The interest rate shown reflects the rate in effect on July
31, 1995.
++ Variable rate demand notes are payable upon not more than seven calendar
days' notice. The interest rate shown reflects the rate in effect on July
31, 1995.
+++ Put bonds and notes have demand features that mature within one year.
++++ Variable rate demand notes are payable upon not more than thirty calendar
days' notice. The interest rate shown reflects the rate in effect on July
31, 1995.
AMBAC -- American Municipal Bond Assurance Corporation
BPA -- Instruments supported by bond purchase agreement.
FGIC -- Federal Guaranty Insurance Corporation
FSA -- Financial Security Association
GTC -- Instruments guaranteed by corporation.
LOC -- Instruments supported by bank letter of credit.
MBIA -- Municipal Bond Investors Assurance
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31, 1995
SUMMARY OF MUNICIPAL BONDS BY COMBINED RATINGS#
<TABLE>
<CAPTION>
MOODY'S STANDARD & POOR'S
RATING OR RATING TOTAL
<S> <C> <C>
Aaa AAA 6.9%
Aa, Aa2, Aa3 AA 4.1%
MIG1, VMIG1, P-1 A-1, A-1+, SP-1, SP-1+ 73.4%
MIG-2 SP-1 3.0%
MIG2, VMIG2, P-2 SP-2 7.6%
NON RATED NON RATED 5.0%
-------
100.0%
</TABLE>
# Bonds are not necessarily rated the same by both services.
Note:
Approximately 76% of the municipal bonds and notes held by the Fund have credit
enhancement features backing them. Such features may have been considered by the
rating agency in rating these securities.
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
SELECTED GROWTH STOCK PORTFOLIO
- ---------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS JULY 31, 1995
INDUSTRY BREAKDOWN
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ELECTRIC 22.0%
<S> <C>
Computer & Computer Services 21.2%
Healthcare 10.4%
Consumer Services 6.4%
Broadcasting 6.3%
Telecommunications 5.3%
Entertainment 4.5%
Financial Services 3.5%
Other Common Stocks 17.5%
Net Other Assets and Liabilities 2.9%
</TABLE>
TOP TEN HOLDINGS
<TABLE>
<CAPTION>
PERCENTAGE OF
COMPANY NET ASSETS
<S> <C>
- ------------------------------------------------------------------------
Policy Management Systems Corporation 3.5%
GTECH Holdings Corporation 2.6
Paychex, Inc. 2.4
Health Management Systems 2.4
Cirrus Logic Inc. 2.4
Teradyne, Inc. 2.1
Apollo Group Inc., Class A 2.0
International Rectifier Corporation 2.0
Kent Electronics Corporation 2.0
ADC Communications Inc. 2.0
---
23.4%
---
---
</TABLE>
22
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
SELECTED GROWTH STOCK PORTFOLIO
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS JULY 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
<C> <S> <C>
- -------------------------------------------------------------------------
COMMON STOCKS -- 97.1%
ELECTRIC -- 22.0%
10,000 Amphenol Corporation, Class A** $ 271,250
20,000 Cirrus Logic Inc.** 920,000
16,100 Franklin Electric Publishing, Inc.** 507,150
10,000 General Instrument Corporation** 368,750
10,000 Integrated Circuit Systems** 150,156
10,000 Integrated Device Technology** 626,250
9,000 Intel Corporation 585,000
20,000 International Rectifier Corporation** 800,000
19,550 Kent Electronics Corporation** 799,106
10,000 SGS-THOMSON N.V.** 472,500
19,000 S3 Inc.** 764,750
10,000 Tektronix Inc. 481,250
10,000 Tencor Instruments** 440,000
10,000 Teradyne, Inc.** 818,750
10,000 Unitrode Corporation** 295,000
10,000 VLSI Technology Inc.** 296,250
-----------
8,596,162
-----------
COMPUTER & COMPUTER SERVICES -- 21.2%
15,000 Adaptec Inc.** 641,250
10,000 Adobe Systems Inc. 617,500
25,000 BISYS Group, Inc.** 600,000
10,000 C-Cube Microsystems Inc.** 350,000
10,000 Cadence Design Systems, Inc.** 377,500
10,000 Ceridian Corporation** 413,750
10,000 Cheyenne Software Inc.** 186,250
10,000 Converse Technology Inc.** 183,750
1,000 Cybex Corporation** 24,500
10,700 Datametrics Corporation** 96,300
10,000 Hyperion Software** 517,500
10,000 Novell Inc.** 181,250
35,000 Orbital Sciences Corporation** 616,875
30,000 Pace Health Management Systems** 165,000
25,500 Policy Management Systems Corporation** 1,367,438
25,000 Quarterdeck Corporation** 367,188
15,000 Scitex Corporation Ltd., Ord. 300,000
10,000 Seagate Technology Inc.** 443,750
10,000 Silicon Graphics Inc.** 420,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
SELECTED GROWTH STOCK PORTFOLIO
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- -------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- (CONTINUED)
COMPUTER & COMPUTER SERVICES -- (CONTINUED)
7,500 Submicron Systems** $ 65,625
10,000 Tecnomatix Technologies Ltd.** 102,500
6,000 VideoServer Inc.** 270,750
-----------
8,308,676
-----------
HEALTHCARE -- 10.4%
11,000 Apria Healthcare Group** 357,500
10,000 Biogen, Inc.** 460,000
10,000 Community Health Systems, Inc.** 392,500
30,000 Health Management Systems** 930,000
20,000 HEALTHSOUTH Corporation** 385,000
17,500 Inphynet Medical Management** 380,625
10,000 Manor Care, Inc. 323,750
16,000 Orthofix International N.V.** 278,000
10,000 Ostex International Inc.** 205,000
15,000 Pacific Physician Services Inc.** 240,000
7,500 Pediatric Services of America** 136,875
-----------
4,089,250
-----------
CONSUMER SERVICES -- 6.4%
10,000 DIMAC Corporation** 161,250
10,000 Loewen Group Inc. 353,750
15,000 Paging Network Inc.** 592,500
15,000 Pronet, Inc. 414,375
20,000 Regis Corporation** 410,000
19,900 SPS Transaction Services, Inc.** 562,175
-----------
2,494,050
-----------
BROADCASTING -- 6.3%
10,000 Clear Channel Communications** 668,750
10,000 Lin Television Corporation** 377,500
10,000 Renaissance Communication** 382,500
10,000 Sinclair Broadcasting Group Inc., Class A** 305,000
10,000 Turner Broadcasting Systems Inc., Class A 217,500
15,000 United Video Satellite Group, Inc., Class A** 498,750
-----------
2,450,000
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
SELECTED GROWTH STOCK PORTFOLIO
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- -------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- (CONTINUED)
TELECOMMUNICATIONS -- 5.3%
20,000 ADC Communications Inc.** $ 775,000
10,000 CommNet Cellular, Inc.** 285,000
20,000 ECI Telecom Ltd. 302,500
10,000 Grupo Iusacell S.A., Series L, ADS** 136,250
10,000 Mobile Telecommunication Technologies
Corporation** 308,750
10,000 Telebit Corporation** 47,500
10,000 Transaction Network Service 215,000
-----------
2,070,000
-----------
ENTERTAINMENT -- 4.5%
10,000 Acclaim Entertainment, Inc.** 237,500
17,000 Bally Entertainment Corporation** 218,875
35,000 GTECH Holdings Corporation** 1,023,750
10,000 Harrah's Entertainment Inc.** 268,750
-----------
1,748,875
-----------
FINANCIAL SERVICES -- 3.5%
28,333 Apollo Group Inc., Class A** 800,407
15,000 Equifax Inc. 575,625
-----------
1,376,032
-----------
ADMINISTRATIVE SERVICES -- 3.1%
10,000 Fiserv Inc.** 282,500
25,000 Paychex, Inc. 931,250
-----------
1,213,750
-----------
MEDICAL & DENTAL EQUIPMENT -- 3.1%
10,000 Neopath, Inc.** 182,500
15,000 Thermedics Inc.** 300,000
5,000 Thermo Cardiosystems** 192,500
15,000 Thermotrex Corporation** 528,750
-----------
1,203,750
-----------
PHARMACEUTICALS -- 2.0%
10,000 Vivus Inc.** 152,500
17,200 Watson Pharmaceuticals** 619,200
-----------
771,700
-----------
PUBLISHING -- 1.7%
10,000 Scholastic Corporation** 657,500
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
SELECTED GROWTH STOCK PORTFOLIO
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- -------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- (CONTINUED)
MANUFACTURING -- 1.6%
10,000 AptarGroup Inc. $ 332,500
10,000 Fusion Systems** 310,000
-----------
642,500
-----------
CHEMICALS -- 1.3%
10,000 Sigma-Aldrich Corporation 502,500
-----------
INSURANCE -- 1.2%
10,000 CMAC Investment Corporation 491,250
-----------
RETAIL -- 1.0%
22,500 Arbor Drugs, Inc. 376,875
-----------
MISCELLANEOUS -- 2.5%
10,000 Bay View Capital 247,500
15,000 Pharmaceutical Marketing Services Inc.** 136,875
5,000 Promus Hotel Corporation** 123,125
10,000 Thermo Fibertek Inc.** 218,750
15,000 Wendy's International Inc. 279,375
-----------
1,005,625
- -------------------------------------------------------------------------
TOTAL INVESTMENTS (COST $28,906,981*) 97.1% 37,998,495
OTHER ASSETS AND LIABILITIES (NET) 2.9 1,125,286
- -------------------------------------------------------------------------
NET ASSETS 100.0% $39,123,781
- -------------------------------------------------------------------------
<FN>
* Aggregate cost for Federal tax purposes was $29,001,702.
** Non-income producing securities.
ADS -- American Depositary Share
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
26
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
- ---------------------------------------------------------------------------
STATEMENTS OF ASSETS & LIABILITIES JULY 31, 1995
<TABLE>
<CAPTION>
SELECTED
DAILY MUNICIPAL GROWTH
INCOME INCOME STOCK
NOTES FUND FUND PORTFOLIO
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost $714,797,189,
$291,658,975 and $28,906,981,
respectively) 1
See accompanying schedules:
Securities $445,731,189 $291,658,975 $37,998,495
Repurchase agreements 269,066,000 -- --
- -------------------------------------------------------------------------------------
Total Investments 714,797,189 291,658,975 37,998,495
Cash 157,239 -- 95,321
Receivable for investment securities sold -- 5,720,067 1,812,841
Receivable for Fund shares sold 4,864,948 1,404,130 41,629
Dividends and/or interest receivable 3,064,143 2,011,642 1,860
Unamortized organization costs 6 288,805 113,919 82,793
Other assets 2,398 586 12,778
- -------------------------------------------------------------------------------------
TOTAL ASSETS 723,174,722 300,909,319 40,045,717
- -------------------------------------------------------------------------------------
LIABILITIES:
Payable for investment securities purchased -- -- 608,850
Payable for Fund shares redeemed 17,825,569 3,658,332 159,669
Dividends payable 415,447 110,660 --
Investment advisory fee payable 2 102,810 44,203 40,838
Administration fee payable 2 104,777 54,318 11,071
Distribution fee payable 3 106,179 46,494 24,487
Service fee payable 3 -- -- 8,163
Transfer Agent fee payable 2 89,844 10,429 1,350
Custodian fee payable 2 29,200 20,900 18,400
Accrued Directors' fees and expenses 2 2,750 2,750 11,000
Due to custodian -- 96,649 --
Accrued expenses and other payables 143,458 42,168 38,108
- -------------------------------------------------------------------------------------
TOTAL LIABILITIES 18,820,034 4,086,903 921,936
- -------------------------------------------------------------------------------------
NET ASSETS $704,354,688 $296,822,416 $39,123,781
- -------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
27
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
- --------------------------------------------------------------------
STATEMENTS OF ASSETS & LIABILITIES (CONTINUED) JULY 31, 1995
<TABLE>
<CAPTION>
SELECTED
DAILY MUNICIPAL GROWTH
INCOME INCOME STOCK
FUND FUND PORTFOLIO
- -------------------------------------------------------------------------------------
NET ASSETS consist of:
<S> <C> <C> <C>
Undistributed net investment income $ 27,184 $ 10,071 $ --
Accumulated net realized gain/(loss) on
investments (9,600) (17,134) 1,643,242
Unrealized appreciation of investments -- -- 9,091,514
Par value 704,347 296,840 2,933
Paid-in capital in excess of par value 703,632,757 296,532,639 28,386,092
- -------------------------------------------------------------------------------------
$704,354,688 $296,822,416 $39,123,781
- -------------------------------------------------------------------------------------
NET ASSETS:
Select Shares $704,331,739 $296,822,315 N/A
CDSC Shares++ $ 22,949 $ 101 $39,123,781
- -------------------------------------------------------------------------------------
SHARES OUTSTANDING:
Select Shares 704,324,475 296,839,449 N/A
CDSC Shares++ 22,950 101 2,933,207
- -------------------------------------------------------------------------------------
SELECT SHARES
NET ASSET VALUE, offering and
redemption price per share $1.00 $1.00 N/A
- -------------------------------------------------------------------------------------
CDSC SHARES++
NET ASSET VALUE and offering price per share+ $1.00 $1.00 $13.34
- -------------------------------------------------------------------------------------
<FN>
+ Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
++ Selected Growth Stock Portfolio CDSC Shares were formerly called Portfolio
Shares.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
28
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
- ---------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1995
<TABLE>
<CAPTION>
DAILY MUNICIPAL SELECTED
INCOME INCOME GROWTH STOCK
NOTES FUND FUND PORTFOLIO
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $39,495,913 $10,271,760 $ 142,284
Dividends -- -- 118,012
- -------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 39,495,913 10,271,760 260,296
- -------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fee 2 2,060,855 791,446 248,738
Distribution fee 3 1,717,379 659,537 248,738
Service fee 3 -- -- 82,913
Administration fee 2 1,373,903 527,631 66,330
Transfer Agent fee 2 937,288 119,953 17,511
Legal and audit fees 148,505 59,558 42,085
Custodian fee 2 86,947 56,088 22,378
Amortization of organization costs 6 96,181 37,938 21,803
Directors' fees and expenses 2 22,372 22,372 22,372
Other 176,141 100,496 43,807
- -------------------------------------------------------------------------------------
Total expenses 6,619,571 2,375,019 816,675
- -------------------------------------------------------------------------------------
Fees waived by Investment Advisor, Administrator
and/or Distributor 2 and 3 (1,544,069) (564,613) (120,207)
- -------------------------------------------------------------------------------------
NET EXPENSES 5,075,502 1,810,406 696,468
- -------------------------------------------------------------------------------------
NET INVESTMENT INCOME/(LOSS) 34,420,411 8,461,354 (436,172)
- -------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN/(LOSS)
ON INVESTMENTS: 1 and 4
Net realized gain/(loss) from:
Securities (9,307) (4,807) 2,267,444
Written options -- -- 34,749
- -------------------------------------------------------------------------------------
Net realized gain/(loss) on investments 1 (9,307) (4,807) 2,302,193
- -------------------------------------------------------------------------------------
Net change in unrealized appreciation/(depreciation) of:
Securities -- -- 9,236,163
Written options -- -- (15,374)
- -------------------------------------------------------------------------------------
Net unrealized appreciation of investments -- -- 9,220,789
- -------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN/
(LOSS) ON INVESTMENTS (9,307) (4,807) 11,522,982
- -------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $34,411,104 $8,456,547 $11,086,810
- -------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
29
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
- ---------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED JULY 31, 1995
<TABLE>
<CAPTION>
DAILY MUNICIPAL SELECTED
INCOME INCOME GROWTH STOCK
NOTES FUND FUND PORTFOLIO
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
Net investment income/(loss) $ 34,420,411 $ 8,461,354 $ (436,172)
Net realized gain/(loss) on investments (9,307) (4,807) 2,302,193
Net unrealized appreciation of investments -- -- 9,220,789
- -------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 34,411,104 8,456,547 11,086,810
Distributions to shareholders from net investment
income:
Select Shares (34,402,841) (8,461,282) --
CDSC Shares++ (707) (72) (38,112)
Distributions to shareholders from net realized
gains:
Select Shares (16,863) -- --
CDSC Shares++ -- -- (101)
Net increase/(decrease) in net assets from share
transactions:
Select Shares 5 (114,213,786) 32,401,995 --
CDSC Shares++ 5 22,850 (9,787) 1,733,990
- -------------------------------------------------------------------------------------
Net increase/(decrease) in net assets (114,200,243) 32,387,401 12,782,587
NET ASSETS:
Beginning of year 818,554,931 264,435,015 26,341,194
- -------------------------------------------------------------------------------------
End of year (including undistributed net
investment income of $27,184, $10,071 and $0,
respectively) $704,354,688 $296,822,416 $39,123,781
- -------------------------------------------------------------------------------------
<FN>
++ Selected Growth Stock Portfolio CDSC Shares were formerly called Portfolio
Shares.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
30
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
- --------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED JULY 31, 1994*
<TABLE>
<CAPTION>
DAILY MUNICIPAL SELECTED
INCOME INCOME GROWTH STOCK
NOTES FUND FUND PORTFOLIO
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
Net investment income $ 21,941,977 $ 4,608,292 $ 36,097
Net realized gain/(loss) on securities sold
during the period 16,570 (12,327) (219,954)
Net unrealized depreciation of securities and
written options during the period -- -- (129,275)
- -------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting
from operations 21,958,547 4,595,965 (313,132)
Distributions to shareholders from net investment
income:
Select Shares (21,941,977) (4,608,279) --
CDSC Shares++ -- (13) --
Net increase in net assets from share
transactions:
Select Shares 5 818,538,261 264,437,454 --
CDSC Shares++ 5 100 9,888 26,654,326
- -------------------------------------------------------------------------------------
Net increase in net assets 818,554,931 264,435,015 26,341,194
NET ASSETS:
Beginning of period -- -- --
- -------------------------------------------------------------------------------------
End of period (including undistributed net
investment income of $60,635, $23,114 and
$38,112, respectively) $818,554,931 $264,435,015 $26,341,194
- -------------------------------------------------------------------------------------
<FN>
* Daily Income Fund and Municipal Income Fund both commenced operations on
August 2, 1993 and Selected Growth Stock Portfolio commenced operations on
May 20, 1994.
++ Selected Growth Stock Portfolio CDSC Shares were formerly called Portfolio
Shares.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
31
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND
- ---------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A SELECT SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
07/31/95 07/31/94*
<S> <C> <C>
Net asset value, beginning of period $ 1.00 $ 1.00
- -------------------------------------------------------------------------------------
Net investment income+ 0.0505 0.0297
- -------------------------------------------------------------------------------------
Dividends from net investment income (0.0505) (0.0297)
Dividends from net realized gains --## --
- -------------------------------------------------------------------------------------
Total dividends (0.0505) (0.0297)
- -------------------------------------------------------------------------------------
Net asset value, end of period $ 1.00 $ 1.00
- -------------------------------------------------------------------------------------
Total return++ 5.14% 3.03%
- -------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $704,332 $818,555
Ratio of net investment income to average net assets 5.01% 3.01%**
Ratio of operating expenses to average net assets+++ 0.74% 0.66%**
- -------------------------------------------------------------------------------------
<FN>
* Daily Income Fund Select Shares commenced operations on August 2, 1993.
** Annualized.
+ Net investment income per share before waiver of fees by Investment Adviser,
Administrator and Distributor for the year ended July 31, 1995 and the
period ended July 31, 1994 was $0.0483 and $0.0269, respectively.
++ Total return represents aggregate total return for the period indicated.
+++ Annualized operating expense ratios before waiver of fees by Investment
Adviser, Administrator and Distributor for the year ended July 31, 1995 and
the period ended July 31, 1994 were 0.96% and 0.95%, respectively.
## Amount is less than $0.0001 per share.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
32
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CDSC SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
07/31/95*
<S> <C>
Net asset value, beginning of period $ 1.00
- --------------------------------------------------------------------------------
Net investment income+ 0.0379
Dividends from net investment income (0.0379)
- --------------------------------------------------------------------------------
Net asset value, end of period $ 1.00
- --------------------------------------------------------------------------------
Total return++ 3.85%
- --------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 23
Ratio of net investment income to average net assets 5.01%**
Ratio of operating expenses to average net assets+++ 0.74%**
- --------------------------------------------------------------------------------
<FN>
* Daily Income Fund CDSC Shares commenced operations on November 16, 1994.
** Annualized.
+ Net investment income per share before waiver of fees by Investment Adviser,
Administrator and Distributor for the period ended July 31, 1995 was
$0.0362.
++ Total return represents aggregate total return for the period indicated and
does not reflect the effect of any sales charge.
+++ Annualized operating expense ratio before waiver of fees by Investment
Adviser, Administrator and Distributor for the period ended July 31, 1995
was 0.96%.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
33
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A SELECT SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
07/31/95 07/31/94*
<S> <C> <C>
Net asset value, beginning of period $ 1.00 $ 1.00
- -------------------------------------------------------------------------------------
Net investment income+ 0.0318 0.0207
Dividends from net investment income (0.0318) (0.0207)
- -------------------------------------------------------------------------------------
Net asset value, end of period $ 1.00 $ 1.00
- -------------------------------------------------------------------------------------
Total return++ 3.23% 2.09%
- -------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $296,822 $264,425
Ratio of net investment income to average net assets 3.21% 2.06%**
Ratio of operating expenses to average net assets+++ 0.69% 0.64%**
- -------------------------------------------------------------------------------------
<FN>
* Municipal Income Fund Select Shares commenced operations on August 2, 1993.
** Annualized.
+ Net investment income per share before waiver of fees by Investment Adviser,
Administrator and Distributor for the year ended July 31, 1995 and the
period ended July 31, 1994 was $0.0296 and $0.0182, respectively.
++ Total return represents aggregate total return for the period indicated.
+++ Annualized operating expense ratios before waiver of fees by Investment
Adviser, Administrator and Distributor for the year ended July 31, 1995 and
the period ended July 31, 1994 were 0.90% and 0.89%, respectively.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
34
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CDSC SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
07/31/95 07/31/94*
<S> <C> <C>
Net asset value, beginning of period $ 1.00 $ 1.00
- -------------------------------------------------------------------------------------
Net investment income+ 0.0317 0.0018
Dividends from net investment income (0.0317) (0.0018)
- -------------------------------------------------------------------------------------
Net asset value, end of period $ 1.00 $ 1.00
- -------------------------------------------------------------------------------------
Total return++ 3.23% 0.18%
- -------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) --# $ 10
Ratio of net investment income to average net assets 3.21% 2.06%**
Ratio of operating expenses to average net assets+++ 0.69% 0.64%**
- -------------------------------------------------------------------------------------
<FN>
* Municipal Income Fund CDSC Shares commenced operations on July 6, 1994.
** Annualized.
+ Net investment income per share before waiver of fees by Investment Adviser,
Administrator and Distributor for the year ended July 31, 1995 and the
period ended July 31, 1994 was $0.0293 and $0.0017, respectively.
++ Total return represents aggregate total return for the period indicated and
does not reflect the effect of any sales charge.
+++ Annualized operating expense ratios before waiver of fees by Investment
Adviser, Administrator and Distributor for the year ended July 31, 1995 and
the period ended July 31, 1994 were 0.90% and 0.89%, respectively.
# Total net assets for CDSC Shares were $101 at July 31, 1995.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
35
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
SELECTED GROWTH STOCK PORTFOLIO
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CDSC SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
07/31/95 07/31/94*
<S> <C> <C>
Net asset value, beginning of period $ 9.73 $10.00
- -------------------------------------------------------------------------------------
Income from investment operations:
Net investment income/(loss)+ (0.15) 0.01
Net realized and unrealized gain/(loss) on investments 3.77 (0.28)
- -------------------------------------------------------------------------------------
Total from investment operations 3.62 (0.27)
- -------------------------------------------------------------------------------------
Dividends from net investment income (0.01) --
Dividends from net realized gains --## --
- -------------------------------------------------------------------------------------
Total dividends (0.01) --
- -------------------------------------------------------------------------------------
Net asset value, end of period $13.34 $ 9.73
- -------------------------------------------------------------------------------------
Total return++ 37.27% (2.70)%
- -------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $39,124 $26,341
Ratio of net investment income/(loss) to average net assets (1.32)% 1.06%**
Ratio of operating expenses to average net assets+++ 2.10% 2.04%**
Portfolio turnover rate 192% 33%
- -------------------------------------------------------------------------------------
<FN>
* Selected Growth Stock Portfolio CDSC Shares (formerly called Portfolio
Shares) commenced operations on May 20, 1994.
** Annualized.
+ Net investment income/(loss) per share before waiver of fees and/or expenses
reimbursed by Investment Adviser and Administrator for the year ended July
31, 1995 and the period ended July 31, 1994 was ($0.19) and $0.00,
respectively.
++ Total return represents aggregate total return for the period indicated and
does not reflect the effect of any sales charge.
+++ Annualized operating expense ratios before waiver of fees and/or expenses
reimbursed by Investment Adviser and Administrator for the year ended July
31, 1995 and the period ended July 31, 1994 were 2.46% and 3.42%,
respectively.
## Amount is less than $0.01 per share.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
36
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Lehman Brothers Funds, Inc. (the "Company") was incorporated under the laws
of the State of Maryland on May 5, 1993. It is an open-end management investment
company, which currently offers three funds: Lehman Brothers Daily Income Fund
("Daily Income Fund"), Lehman Brothers Municipal Income Fund ("Municipal Income
Fund") and Lehman Brothers Selected Growth Stock Portfolio ("Selected Growth
Stock Portfolio") (individually a "Fund" and collectively, the "Funds"). The
Daily Income Fund and the Municipal Income Fund currently offer two classes of
shares: Select Shares and CDSC Shares. Selected Growth Stock Portfolio currently
offers one class of shares, referred to as CDSC Shares for purposes of this
report. Select Shares are offered without a front-end sales load or contingent
deferred sales charge. CDSC Shares may be subject to a contingent deferred sales
charge. All classes of shares of each Fund represent interests in the Fund in
proportion to their net asset value and otherwise have identical rights and
privileges except with respect to the effect of the respective sales charges,
the distribution and/or service fees borne by each class, expenses allocable
exclusively to each class and voting rights on matters affecting a single class.
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements.
PORTFOLIO VALUATION: Portfolio securities held by the Daily Income Fund and
the Municipal Income Fund are valued at amortized cost which approximates market
value. Amortized cost valuation involves valuing a security at cost initially
and, thereafter, assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. Portfolio securities held by the Selected Growth Stock
Portfolio which are traded on a recognized stock exchange are valued at the last
sale price on the securities exchange on which such securities are primarily
traded or in the absence of sales in such market, at the mean between the
closing bid and asked prices. Selected Growth Stock Portfolio securities traded
only on over-the-counter markets are valued on the basis of the closing
over-the-counter sales prices or, if no sale occurred on such day, at the mean
of the current bid and asked prices. Securities which are traded both on the
over-the-counter market and on a stock exchange will be valued according to the
broadest and most representative market. Certain securities of the
37
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Selected Growth Stock Portfolio may be valued by one or more principal market
makers. Restricted securities, securities for which market quotations are not
readily available, and other assets of the Selected Growth Stock Portfolio are
valued at fair value under the supervision of the Board of Directors. Short-term
investments that mature in 60 days or less are valued at amortized cost.
REPURCHASE AGREEMENTS: The Funds may engage in repurchase agreement
transactions. Each Fund values repurchase agreements at cost and accrues
interest into interest receivable. Under the terms of a typical repurchase
agreement, the Fund will take possession of an underlying debt obligation
subject to an obligation of the seller to repurchase, and the Fund to resell,
the obligation at an agreed-upon price and time, thereby determining the yield
during the Fund's holding period. The value of the collateral, taken as a part
of the repurchase agreement, is at least equal at all times to the total amount
of the repurchase obligations, including interest. In the event of counter party
default, the Fund has the right to use the collateral to offset losses incurred.
There is potential loss to the Fund in the event the Fund is delayed or
prevented from exercising its rights to dispose of the collateral securities,
including the risk of a possible decline in the value of the underlying
securities during the period while the Fund seeks to assert its rights. Lehman
Brothers Global Asset Management, Inc., the Funds' investment adviser (the
"Investment Adviser" or "LBGAM"), acting under the supervision of the Board of
Directors, reviews the value of the collateral and the creditworthiness of those
banks and dealers with which the Funds enter into repurchase agreements to
evaluate potential risks.
OPTION CONTRACTS: The Selected Growth Stock Portfolio may purchase or write
exchange-listed and over-the-counter put and call options on securities,
financial futures contracts, equity indices and other financial instruments for
hedging and other strategic transactions in an attempt to protect against
possible changes in the market value of securities held or to be purchased by
the Fund resulting from the securities market, to protect the Fund's unrealized
gains in the value of its securities, to facilitate the sale of those securities
for investment purposes, to establish a position in the derivatives market as a
temporary substitute for purchasing or selling particular securities or to seek
to enhance the Fund's income or gains.
38
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Upon the purchase of a put option or a call option by the Selected Growth
Stock Portfolio, the premium paid is recorded as an investment, the value of
which is marked-to-market daily. When a purchased option expires, the Fund will
realize a loss in the amount of the cost of the option. When the Fund enters
into a closing sale transaction, the Fund will realize a gain or loss depending
on whether the sales proceeds from the closing sale transaction are greater or
less than the cost of the option. When the Fund exercises a put option, it will
realize a gain or loss from the sale of the underlying security and the proceeds
from such sale will be decreased by the premium originally paid. When the Fund
exercises a call option, the cost of the security which the Fund purchases upon
exercise will be increased by the premium originally paid.
When the Selected Growth Stock Portfolio writes a call option or a put
option, an amount equal to the premium received by the Fund is recorded as a
liability, the value of which is marked-to-market daily. When a written option
expires, the Fund realizes a gain equal to the amount of the premium received.
When the Fund enters into a closing purchase transaction, the Fund realizes a
gain (or loss if the cost of the closing purchase transaction exceeds the
premium received when the option was sold) without regard to any unrealized gain
or loss on the underlying security, and the liability related to such option is
eliminated. When a written call option is exercised, the Fund realizes a gain or
loss from the sale of the underlying security and the proceeds from such sale
are increased by the premium originally received. When a written put option is
exercised, the amount of the premium originally received will reduce the cost of
the security which the Fund purchased upon exercise.
The risk associated with purchasing options is limited to the premium
originally paid. The risk in writing a call option is that the Fund may forego
the opportunity for profit if the market price of the underlying security
increases and the option is exercised. The risk in writing a put option is that
the Fund may incur a loss if the market price of the underlying security
decreases and the option is exercised.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded as of the trade date. Interest income is recorded on the accrual basis.
Dividend income is recorded on the ex-dividend date. Realized gains
39
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
and losses on investments sold are recorded on the basis of identified cost.
Investment income and realized and unrealized gains and losses are allocated
based upon the relative net assets of each class of shares.
EXPENSES: Operating expenses directly attributable to a class of shares are
charged to that class' operations. Expenses for each Fund not directly
attributable to the operation of any class of shares are prorated among the
classes based upon the relative net assets of each class of shares.
FEDERAL INCOME TAXES: The Funds have qualified and intend to qualify each
year as regulated investment companies pursuant to the requirements of the
Internal Revenue Code of 1986, as amended. The Funds distribute substantially
all of their taxable income to their shareholders, therefore, no Federal income
tax provision is required.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment
income of the Daily Income Fund and the Municipal Income Fund are determined on
a class level and are declared daily and paid monthly. Dividends from net
investment income of the Selected Growth Stock Portfolio are declared and paid
annually. Capital gains, unless offset by any available capital loss
carryforward, are distributed to shareholders annually after the close of the
fiscal year in which they have been earned, or more frequently to maintain the
Fund's net asset value of $1.00 per share for the Daily Income Fund and the
Municipal Income Fund. In order to avoid the application of a 4% non-deductible
excise tax on certain undistributed amounts of ordinary income and capital
gains, each Fund may make additional distributions of any undistributed ordinary
income or capital gains before December 31, of a given year and expects to make
any other distributions as are necessary to avoid the application of this tax.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments of
income and gains on various investment securities held by the Funds, timing
differences and differing characterizations of distributions made by each Fund
as a whole.
40
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the year ended July 31, 1995, permanent differences resulting from book
and tax accounting for organizational costs were reclassified to paid-in
capital.
2. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE AND OTHER
RELATED PARTY TRANSACTIONS
LBGAM serves as the Funds' Investment Adviser pursuant to separate
investment advisory agreements with each Fund. LBGAM is a wholly-owned
subsidiary of Lehman Brothers Holdings Inc. ("Holdings"). Under the investment
advisory agreements, LBGAM is entitled to receive from the Daily Income Fund and
the Municipal Income Fund a monthly fee at an annual rate of 0.30% of the value
of each Fund's respective average daily net assets. LBGAM is entitled to receive
from the Selected Growth Stock Portfolio a monthly fee at an annual rate of
0.75% of the value of the Fund's average daily net assets. LBGAM may voluntarily
waive advisory fees. For the year ended July 31, 1995, LBGAM voluntarily waived
advisory fees as follows:
<TABLE>
<CAPTION>
FEES WAIVED
<S> <C>
----------------------------------------------------------------
Daily Income Fund $676,511
Municipal Income Fund 239,023
Selected Growth Stock Portfolio 94,900
----------------------------------------------------------------
</TABLE>
The Shareholder Services Group, Inc. ("TSSG"), a wholly-owned subsidiary of
First Data Corporation, serves as the Funds' administrator pursuant to an
administration agreement. Under the administration agreement, TSSG is entitled
to receive from each Fund a monthly fee at an annual rate of 0.20% of the value
of each Fund's respective average daily net assets. TSSG may voluntarily waive
administration fees. For the year ended July 31, 1995, TSSG voluntarily waived
administration fees as follows:
<TABLE>
<CAPTION>
FEES WAIVED
<S> <C>
----------------------------------------------------------------
Daily Income Fund $386,692
Municipal Income Fund 140,919
Selected Growth Stock Portfolio 25,307
----------------------------------------------------------------
</TABLE>
41
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the year ended July 31, 1995, the Selected Growth Stock Portfolio
incurred total brokerage commissions of $146,255, of which $29,184 was paid to
Lehman Brothers Inc. ("Lehman Brothers").
A contingent deferred sales charge may be imposed upon the redemption of CDSC
Shares within two years after the date of purchase. The amount of the contingent
deferred sales charge will depend on the number of years since the shareholder
made the purchase payment from which the amount is being redeemed.
During the year ended July 31, 1995, Lehman Brothers received the following
contingent deferred sales charges applicable to CDSC Shares only:
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED
SALES
CHARGES
RECEIVED
<S> <C>
----------------------------------------------------------------
Daily Income Fund $ 1,000
Selected Growth Stock Portfolio 119,088
----------------------------------------------------------------
</TABLE>
No employee of Holdings, Lehman Brothers, LBGAM or TSSG receives any
compensation from the Company for serving as an officer or Director of the
Company. The Company pays each Director who is not a director, an officer or
employee of Holdings, Lehman Brothers, LBGAM or TSSG or their affiliates a fee
of $20,000 per annum, plus $500 per meeting attended, and reimburses each of
them for travel and out-of-pocket expenses.
Boston Safe Deposit and Trust Company, an indirect wholly-owned subsidiary of
Mellon Bank Corporation, serves as the Funds' custodian. TSSG serves as the
Funds' transfer agent.
3. SERVICE AGREEMENTS
Lehman Brothers acts as the distributor of each Fund's shares.
Pursuant to Rule 12b-1 under the Investment Company Act of 1940, the Company
has adopted a plan of distribution (the "Plan of Distribution") with respect to
each class of shares of the Daily Income Fund and the Municipal
42
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Income Fund. Under the Plan of Distribution, the Daily Income Fund and the
Municipal Income Fund have agreed, with respect to each class, to pay Lehman
Brothers a distribution fee accrued daily and paid monthly at an annual rate of
0.25% of the value of their respective average daily net assets for advertising,
marketing and distributing its shares.
In addition, the Company has adopted a services and distribution plan (the
"Plan") with respect to the Selected Growth Stock Portfolio. Under the Plan, the
Selected Growth Stock Portfolio has agreed to pay Lehman Brothers a service fee,
accrued daily and paid monthly, at an annual rate of 0.25% of the value of the
Fund's average daily net assets, and a distribution fee, accrued daily and paid
monthly, at an annual rate of 0.75% of the value of the Fund's average daily net
assets. The service fee is used by Lehman Brothers to pay Investment
Representatives or Introducing Brokers for servicing shareholder accounts. The
distribution fee is paid to Lehman Brothers for advertising, marketing and
distributing its shares.
For the year ended July 31, 1995, each Fund incurred the following
distribution fees:
<TABLE>
<CAPTION>
SELECT SHARES CDSC SHARES
<S> <C> <C>
-----------------------------------------------------------------
Daily Income Fund $1,717,343 $ 36
Municipal Income Fund 659,530 7
Selected Growth Stock Portfolio -- 248,738
-----------------------------------------------------------------
</TABLE>
The Selected Growth Stock Portfolio incurred service fees of $82,913 for the
year ended July 31, 1995.
Lehman Brothers may waive fees in relation to the Plan of Distribution. For
the year ended July 31, 1995, Lehman Brothers waived fees in relation to the
Plan of Distribution as follows:
<TABLE>
<CAPTION>
FEES WAIVED
<S> <C>
----------------------------------------------------------------
Daily Income Fund $480,866
Municipal Income Fund 184,671
----------------------------------------------------------------
</TABLE>
43
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding short-term
investments, aggregated $74,018,306 and $57,900,675, respectively, for the year
ended July 31, 1995 for the Selected Growth Stock Portfolio. At July 31, 1995,
aggregate gross unrealized appreciation for all securities in which there is an
excess of value over tax cost was $9,205,664 and aggregate gross unrealized
depreciation for all securities in which there is an excess of tax cost over
value was $208,871 for the Selected Growth Stock Portfolio. Net unrealized
appreciation on a tax basis was $8,996,793 for the Selected Growth Stock
Portfolio. Net unrealized depreciation was $326 for the Municipal Income Fund.
Written option activity for the Selected Growth Stock Portfolio for the year
ended July 31, 1995 was as follows:
<TABLE>
<CAPTION>
NUMBER
OF
CONTRACTS PREMIUM
<S> <C> <C>
-----------------------------------------------------------------
Option outstanding at July 31, 1994 50 $ 34,749
Option expired (50) (34,749)
-----------------------------------------------------------------
Option outstanding at July 31, 1995 0 $ 0
-----------------------------------------------------------------
</TABLE>
5. SHARES OF CAPITAL STOCK
The Board of Directors has authority to issue 10 billion shares of capital
stock ($0.001 par value) for the Company. The shares of the Daily Income Fund
and the Municipal Income Fund are divided into three classes of shares, Select
Shares, CDSC Shares and Global Clearing Shares. Global Clearing Shares have not
yet been offered to the public. Since the Daily Income Fund and the Municipal
Income Fund have sold shares, issued shares as reinvestments of dividends and
redeemed shares only at the net asset value of $1.00 per share, the number of
shares represented by such sales, reinvestments and redemptions is the same as
the dollar amounts shown below for such transactions.
44
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The tables below summarize the capital stock transactions for the Daily
Income Fund and the Municipal Income Fund:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
07/31/95 07/31/94*
<S> <C> <C>
SHARES AND SHARES AND
DAILY INCOME FUND: AMOUNT AMOUNT
-----------------------------------------------------------------
Select Shares:
Sold $ 3,904,923,625 $ 4,591,256,544
Dividend Reinvestment 34,228,906 19,498,755
Redeemed (4,053,366,317) (3,792,217,038)
-----------------------------------------------------------------
Net increase/(decrease) $ (114,213,786) $ 818,538,261
-----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDED
07/31/95**
<S> <C>
SHARES AND
AMOUNT
-----------------------------------------------------------------
CDSC Shares:
Sold $ 74,550
Dividend Reinvestment 633
Redeemed (52,333)
-----------------------------------------------------------------
Net increase $ 22,850
-----------------------------------------------------------------
<FN>
* Daily Income Fund Select Shares commenced operations on August 2, 1993.
** Daily Income Fund CDSC Shares commenced operations on November 16, 1994.
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
07/31/95 07/31/94*
<S> <C> <C>
SHARES AND SHARES AND
MUNICIPAL INCOME FUND: AMOUNT AMOUNT
-----------------------------------------------------------------
Select Shares:
Sold $ 1,351,615,104 $ 1,214,682,908
Dividend Reinvestment 8,434,959 4,150,160
Redeemed (1,327,648,068) (954,395,614)
-----------------------------------------------------------------
Net increase $ 32,401,995 $ 264,437,454
-----------------------------------------------------------------
<FN>
* Municipal Income Fund Select Shares commenced operations on August 2, 1993.
</TABLE>
45
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
07/31/95 07/31/94**
SHARES AND SHARES AND
MUNICIPAL INCOME FUND (CONTINUED): AMOUNT AMOUNT
<S> <C> <C>
-----------------------------------------------------------------
CDSC Shares:
Sold -- $ 9,888
Dividend Reinvestment $ 78 --
Redeemed (9,865) --
-----------------------------------------------------------------
Net increase/(decrease) $ (9,787) $ 9,888
-----------------------------------------------------------------
<FN>
** Municipal Income Fund CDSC Shares commenced operations on July 6, 1994.
</TABLE>
The table below summarizes the capital stock transactions for the Selected
Growth Stock Portfolio:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
07/31/95 07/31/94*
SELECTED GROWTH STOCK PORTFOLIO: SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
-----------------------------------------------------------------
CDSC Shares:
Sold 1,317,909 $ 13,970,294 2,712,257 $26,711,937
Dividend Reinvestment 2,703 27,599 -- --
Redeemed (1,093,817) (12,263,903) (5,845) (57,611)
-----------------------------------------------------------------
Net increase 226,795 $ 1,733,990 2,706,412 $26,654,326
-----------------------------------------------------------------
<FN>
* Selected Growth Stock Portfolio CDSC Shares (formerly called Portfolio Shares)
commenced operations on May 20, 1994.
</TABLE>
6. ORGANIZATION COSTS
The Funds bear all costs in connection with their organization including fees
and expenses of registering and qualifying their shares for distribution under
Federal and state securities regulations. All such costs are being amortized on
the straight-line method over a period of five years from the commencement of
operations of each Fund. In the event that any of the initial shares of the
Funds are redeemed during such amortization period, the Funds
46
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
will be reimbursed for any unamortized organization costs in the same proportion
as the number of shares redeemed bears to the number of initial shares held at
the time of redemption.
7. LETTER OF CREDIT
On December 6, 1994, Orange County, California filed for bankruptcy. The
Daily Income Fund held on that date, and continues to hold as of July 31, 1995,
Orange County, California, Taxable Notes (the "Orange County Notes") with a
stated principal value of $40,000,000, which originally matured on July 10,
1995. Subsequent to the bankruptcy filing by Orange County, Holdings
unconditionally agreed to purchase from the Daily Income Fund on demand or upon
the occurrence of certain events, all or such portion of the Orange County Notes
as necessary to ensure that the offering price of the Fund's shares was
maintained on a daily basis at $1.00 per share. On July 10, 1995, the Daily
Income Fund elected to accept an offer from Orange County to extend the maturity
of the Orange County Notes with revised interest terms through June 30, 1996
(the "Revised Orange County Notes"). On July 10, 1995, the agreement to purchase
provided by Holdings was replaced by an irrevocable letter of credit issued by
Chemical Bank for the benefit of the Fund guaranteeing payment of principal and
interest on the Revised Orange County Notes up to an aggregate amount of
$43,000,000. Holdings has agreed to reimburse Chemical Bank for any payments
that Chemical Bank makes to the Daily Income Fund pursuant to the letter of
credit. In addition, Holdings has unconditionally agreed to pay the Fund any
amount by which the amount available under the letter of credit is insufficient
to pay principal and interest on the Revised Orange County Notes when due at or
prior to the extended maturity date of the Revised Orange County Notes. The
letter of credit expires at the close of business July 10, 1996.
8. CAPITAL LOSS CARRYFORWARDS
At July 31, 1995, the Municipal Income Fund had available for Federal income
tax purposes $16,808 of unused capital losses that expire July 31, 2003.
47
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Shareholders and Directors
Lehman Brothers Funds, Inc.
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of Lehman Brothers Funds, Inc. (the "Fund")
(comprising, respectively, the Lehman Brothers Daily Income Fund, the Lehman
Brothers Municipal Income Fund and the Lehman Brothers Selected Growth Stock
Portfolio) as of July 31, 1995, and the related statements of operations for the
year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
periods indicated therein for each Fund class of shares. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of July
31, 1995, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective portfolios constituting Lehman Brothers Funds, Inc. at July
31, 1995, the results of their operations for the year then ended, the changes
in their net assets for each of the two years in the period then ended and
financial highlights for each of the periods indicated therein for each Fund
class of shares, in conformity with generally accepted accounting principles.
[LOGO]
Boston, Massachusetts
September 1, 1995
48
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
- ---------------------------------------------
TAX INFORMATION (UNAUDITED)
FOR THE YEAR ENDED JULY 31, 1995
Distributions made from investment income by the Municipal Income Fund are 100%
tax exempt for regular Federal income tax purposes.
Of the total distributions made by the Daily Income Fund from investment income,
4.18% is derived from investments in U.S. Government and Agency obligations. All
or a portion of the distributions made from this income may be exempt from
taxation at the state level. Please consult your tax adviser for state specific
information.
49
<PAGE>
LEHMAN BROTHERS
Lehman Brothers Inc. All Rights Reserved
Member SIPC
