DARUMA FUNDS INC, 485APOS, 1998-08-31

DARUMA FUNDS INC
485APOS, 1998-08-31

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As filed with the Securities and Exchange Commission on August 31, 1998

Registration No. 333-03709
ICA No. 811-07621

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]

Post-Effective Amendment No. 4
[X]

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]

Post-Effective Amendment No. 4
[X]

(Check appropriate box or boxes)

THE DARUMA FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)

60 East 42nd Street, Ste. 1112
New York, New York 10165
Registrant's Telephone Number, including Area Code: (212) 687-1233

Mariko O. Gordon
Daruma Asset Management, Inc.
60 East 42nd Street, Ste. 1112
New York, New York 10165
(Name and Address of Agent for Service)

Copy to: Robert K. Fulton, Esq.
Werner & Kennedy
1633 Broadway
New York, New York 10019

Approximate date of Proposed Public Offering: As soon as practicable after this
Registration Statement becomes effective.

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

[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485

The Registrant declares that an indefinite amount of its shares of beneficial
interest is being registered by this Registration Statement pursuant to Section
24(f) under the Investment Company Act of 1940, as amended, and Rule 24f-2
thereunder.

THE DARUMA FUNDS, INC.
Registration Statement on Form N-1A

- -----------------------

CROSS REFERENCE SHEET -
Pursuant to Rule 404(c)

- -----------------------

<TABLE>
<CAPTION>
Part A
Item No. Prospectus Heading
<S> <C>
1. Cover Page............................................... Cover Page

2. Synopsis................................................. Fund Facts and Fund Expenses

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

4. General Description of Registrant........................ Cover Page; Investment Objective;
Additional Investment Policies;
Investment Restrictions

5. Management of the Fund................................... Management of the Fund; Custodian,
Transfer and Dividend Agent

5a. Management's Discussion of the Fund..................... Management of the Fund; Dividends
and Distributions and Net Asset Value

6. Capital Stock and Other Securities....................... Purchase of Shares; Redemption of
Shares; Description of Common Stock

7. Purchase of Securities Being Offered..................... Purchase of Shares; Description
of Common Stock

8. Redemption or Repurchase................................. Redemption of Shares

9. Legal Proceedings........................................ Not Applicable

</TABLE>
<TABLE>
<CAPTION>
Part B
Item No. Caption in Statement of Additional Information
<S> <C>
10. Cover Page............................................... Cover Page

11. Table of Contents........................................ Table of Contents
</TABLE>

<TABLE>
<S> <C>
12. General Information and History.......................... The Fund; Management of the Fund;
Description of the Fund

13. Investment Objectives and Policies....................... Investment Objective, Policies and
Restrictions; Risk Factors and
other Considerations

14. Management of the Fund................................... Management of the Fund and Investment
Adviser

15. Control Persons and Principal Holders of
Securities............................................ Management of the Fund and Investment
Adviser

16. Investment Advisory and Other Services................... Management of the Fund;
Pricing of Shares; Redemptions In Kind
and Exchange; Counsel and
Independent Auditors

17. Brokerage Allocation..................................... Portfolio Transactions

18. Capital Stock and Other Securities....................... Description of the Fund

19. Purchase, Redemption and Pricing of Securities
Being Offered.......................................... Pricing of Shares; Redemptions In Kind

20. Tax Status............................................... Taxation

21. Underwriters............................................. Not Applicable

22. Calculations of Yield.................................... Performance Data

23. Financial Statements..................................... Financial Statements
</TABLE>

DARUMA MID-CAP VALUE FUND
60 East 42nd Street
Suite 1112
New York, NY 10165
(800) 435-5076

October 28, 1998

The Daruma Mid-Cap Value Fund (the "Fund") is a series of The Daruma Funds, Inc.
(the "Company"), a no-load diversified, open-end management investment company
incorporated in the State of Maryland. The Fund's investment objective is to
seek long-term capital appreciation by investing primarily (at least 65% of its
total assets under normal circumstances) in the common stocks of medium
capitalization companies. Current income is incidental to the Fund's investment
objective. The Fund seeks to provide investors an opportunity to participate in
the long-term growth of the economy through the investment returns offered by
the common stocks of companies which appear to be undervalued and whose earnings
growth prospects are improving. The Fund is designed for long-term investors who
can accept stock market risk as well as the more volatile returns of mid-cap
stocks vs. "blue chip" stocks. There can be no assurance that the Fund's
investment objective will be met.

Investment Adviser - Daruma Asset Management, Inc.

The Fund is offered on a no-load basis and there are no sales commissions,
exchange, redemption or 12b-1 fees. The Fund's minimum initial investment is
$1,000 and the minimum subsequent investment is $100. The minimum initial
purchase requirement for retirement and UGMA (Uniform Gifts to Minors Act)
accounts as well as accounts established with automatic investment plans is
$500.

This Prospectus concisely sets forth information about the Fund a prospective
investor should know before investing. It should be read and retained for future
reference. The Statement of Additional Information, dated August xx, 1998, has
been filed with the Securities and Exchange Commission and is incorporated
herein by reference. For a free copy of the Statement of Additional Information,
write or call the Fund at the address or telephone number shown above. The
Commission maintains a website (http:www.sec.gov) that contains the SAI,
material incorporated by reference and other information regarding the Fund.

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

FUND FACTS

Investment Objective
To provide long-term capital appreciation by investing, under normal
circumstances, at least 65% of its total assets in medium capitalization
(mid-cap) companies.

Investment Strategy
The Fund invests in undervalued mid-cap companies whose anticipated earnings
growth will accelerate. The Fund believes that buying the common stock of
companies that are cheap and changing provides the best combination of risk
and reward. Companies with equity market capitalizations from $500 million to
$7 billion at the time of investment are considered mid-cap companies. The
company may revise this standard based on market conditions.

The Fund will invest in a portfolio normally composed of approximately 35 common
stocks representing the Adviser's best ideas, diversified among a broad range of
industries.

Why Focus on Mid-Cap Stocks?
The cumulative performance of mid-cap stocks since 1926 falls slightly below
that of small-cap stocks, but well ahead of large-cap stocks. At the same time,
mid-cap stocks are subject to less volatility than small-cap stocks. By focusing
on the mid-cap sector, the Fund hopes to capture most of the long-term
outperformance smaller companies generate versus larger companies, while
experiencing less volatility and risk.

Secondly, the mid-cap universe generally is not well followed on Wall Street,
allowing the Adviser's emphasis on primary research to add value.

Thirdly, medium-sized companies historically have undergone evolutionary changes
in their businesses at a faster rate than large companies do, allowing for more
frequent investment opportunities.

Who Should Invest in the Fund?
Investors who have a long-term time horizon can invest without concern for
current income and are willing to take on the additional risk of investing in
mid-cap stocks in seeking capital appreciation. This is an appropriate vehicle
for individuals, educational funding accounts, trusts, foundations, endowments,
as well as IRAs and other tax-deferred accounts.

Fees and Sales Charges
The Daruma Mid-Cap Value Fund is 100% no-load. There are no sales charges, no
12b-1 fees, no redemption fees and no fees associated with the reinvestment of
dividends.

Purchase and Redemptions of Fund Shares
A complete description regarding the alternatives available to shareholders for
the purchase and/or redemption of Fund shares is provided under "Purchase of
Shares" on

page 8 and "Redemption of Shares" on page 10 of this Prospectus.

Minimum Investment
The Fund's minimum initial investment is $1,000 and subsequent investments are
$100 or retirement and UGMA (Uniform Gifts to Minors Act) accounts and accounts
established with automatic investment plans, the minimum initial requirement is
$500.

FUND TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page Page
<S> <C> <C> <C>
Fund Expenses SHAREHOLDER GUIDE
Financial Highlights
Investment Objective Purchase of Shares
Investment Policies Choosing a Distribution Option
Investment Risks Redemption of Shares
Investment Restrictions Dividends and Distributions
Management of the Fund Taxes
Net Asset Value
</TABLE>

FUND EXPENSE TABLE

Unless otherwise indicated, the expenses shown below are for the current fiscal
year. The Adviser has voluntarily agreed to reimburse and/or waive fees so that
the Fund's operating expenses, exclusive of taxes, interest, brokerage
commissions and extraordinary expenses will not exceed 1.50%.

The following table illustrates all expenses and fees that you would incur as a
shareholder of the Fund.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses:
<S> <C>
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
12b-1 Fee None
Redemption Fee None

Annual Fund Operating Expenses (as a percentage of average net
assets)
Management Fees (after waivers)* 0.00%
Other Expenses (after expense reimbursements)** 1.49%
------
Total Fund Operating Expenses (after fee waivers and
expense reimbursements)*** 1.49%

</TABLE>

The above table is designed to assist you in understanding the various costs and
expenses that a shareholder would bear directly or indirectly as an investor in
this Fund. The

management fee will decline as the Fund's assets increase. See "Management of
the Fund". The Adviser has voluntarily undertaken to keep the total expenses of
the Fund at or below 1.50% and intends to waive all management fees and assume
other expenses, if and to the extent necessary, to maintain that expense ratio.

*Management fees for the year ended June 30, 1998 were 1.00% before taking into
account fee waivers.

**Other expenses for the year ended June 30, 1998 were 4.10% before
reimbursement of expenses.

***Total Fund Operating Expenses for the year ended June 30, 1998 were 5.10%
before waiver of fees and reimbursement of expenses by the Adviser.

The following example illustrates the expenses that you would incur on a $1,000
investment over various periods, assuming a 5% annual rate of return, and at a
1.50% expense ratio:

<TABLE>
<S> <C> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years

Daruma Mid-Cap Value Fund $16 $49 $82 $179
</TABLE>

This example is illustrative only and should not be considered a representation
of past or future expenses or performance. Actual expenses may be higher or
lower than those shown.

FINANCIAL HIGHLIGHTS (Selected Per Share Data for an Average Share Outstanding
and Ratios throughout each Period)

The following financial highlights are part of the Fund's financial statements
and have been audited by Ernst & Young LLP, Independent Auditors. The Fund's
financial statements and Ernst & Young LLP's unqualified report on them are
included in the Fund's Annual Report to Shareholders and are incorporated by
reference into the Statement of Additional Information and this Prospectus.
Further information about the Fund's performance is contained elsewhere in this
Prospectus and in the Fund's Annual Report to Shareholders for the year ended
June 30, 1998. The information presented is historical and not intended to
indicate future performance of the Fund.

<TABLE>
<CAPTION>
For the period
For the year 8/16/98
Ended through
June 30, 1998 June 30,1998
-------------- ---------------
<S> <C> <C>
Net Asset Value, Beginning of Period $12.90 $10.00
Income from Investment Operations:
Net investment loss (0.07)(d) (0.07)(d)
Net realized and unrealized gain on investments 2.05 2.98
----- -----
</TABLE>

<TABLE>
<S> <C> <C>
14.88 12.91
Less Distributions:
Distributions from net realized gains (1.55) (0.01)
------ ------
Total Distributions (1.55) (0.01)
Net Asset Value, End of Period $13.33 $12.90
------ ------
Total Investment Return 16% 29%(c)
Ratios/Supplemental Data:
Net Assets, End of Period $3,193,406 $1,459,161
Ratio of Expenses to Average Net Assets (a) 1.49% 1.49%(c)
Ratio of Net Investment Loss to Average
Net Assets (b) -0.50% -0.60%(c)
Portfolio Turnover Rate 73% 46%
</TABLE>

(a) The ratio of expenses to average net assets before waiver of fees and
reimbursements of expenses by the investment adviser would have been 2.97% for
the year ended June 30, 1998 and 5.10% for the period ended June 30,1997.

(b) The ratio of net investment loss to average net assets before the waivers
and expense reimbursements by the investment adviser would have been -2.00% for
the year ended June 30, 1998 and -4.21% for the period ended June 30, 1997.

(d) Calculated using average shares outstanding during the period.

FUND PERFORMANCE*
<TABLE>
<CAPTION>
Daruma
For the Period Mid-Cap Value S&P
Ending June 30, 1998 Fund MidCap

<S> <C> <C>
Six Months: 2.38% 8.85%
One Year Average Annual Total Return: 16.02% 27.57%
Average Annual Total Return Since Inception:* 26.72% 31.41%
================================= ========================
</TABLE>
*Inception date of the Daruma Mid-Cap Value Fund was August 16, 1996.

For the six months ended June 30, 1998, the Daruma Mid-Cap Value Fund was up
2.4% versus 8.9% for the S&P MidCap Index. The Fund lagged the market for
several reasons. One, the stock market's returns were primarily driven by the
largest companies as investor concerns about the economy and the continuation of
the bull market triggered a flight to quality. Two, value returns lagged growth
as investors continued to chase stocks selling at high price/earnings multiples.
In short, it was a period that was not kind to small and mid-cap value stocks.

The Fund's management seeks to build a well-diversified portfolio composed of no
more than 35 stocks that are undervalued at the time of purchase but have the
potential to appreciate 50% over a two year period. The Fund's cumulative
performance at June 30, 1998 was +50%, which is consistent with our stated
goals. We will continue to implement the Fund's investment strategy.

The following graph illustrates the growth in value of $10,000 invested in the
Fund from its inception to June 30, 1998.

[PERFORMANCE GRAPH]

Time Value S&P
Daruma Mid-Cap
Fund Index
<S> <C> <C>
8/16/96 $10,000 $10,000
9/30/96 $10,380 $10,428
12/31/96 $10,773 $11,059
3/31/97 $10,614 $10,896
6/30/97 $12,917 $12,499
9/30/97 $14,148 $14,521
12/31/97 $14,638 $14,649
3/31/98 $15,627 $16,278
6/30/98 $14,986 $15,946
</TABLE>

- ----------------------------------
*Past performance is not predictive of future performance. The S&P MidCap Index
is an unmanaged index. All performance returns include the reinvestment of
income and capital gains distributions. The Daruma Mid-Cap Value Fund's returns
are stated net of all fees and expenses. Further information relating to Fund
performance including expense reimbursements, is contained in the Financial
Highlights section of this Prospectus.

INVESTMENT OBJECTIVE

The Fund's investment objective is to seek long-term capital appreciation by
investing, under normal circumstances, at least 65% of its total assets in the
common stocks of medium capitalization companies (companies with market
capitalization at the time of investment ranging from $500 million to $7
billion), including common stocks of companies listed on the S&P Mid-Cap Index,
although the Company's Board of Directors may change this definition based on
market conditions. Current income is incidental to the Fund's investment
objective. There can be no assurance that the Fund's investment objective will
be met. The Fund attempts to achieve its investment objective by investing
primarily in common stocks.

INVESTMENT POLICIES

The Adviser believes that original research drives performance. The Adviser, on
behalf of its clients, invests in companies that it believes are about to
undergo significant positive changes in earnings growth, and whose valuations do
not yet reflect such changes. The Adviser attempts to identify those mid-cap
companies who meet these investment criteria by conducting its own thorough and
original research.

The Fund will normally consist of a portfolio of approximately 35 securities
considered by the Adviser to be the companies with the most compelling
risk/reward profiles. The Adviser believes that by investing in a portfolio of
approximately 35 companies, the Fund will be able to diversify its holdings and
avoid certain of the risks associated with an investment in mid-cap companies.
Although the Fund will invest, under normal circumstances, at least 65% of its
total assets in the common stocks of medium capitalization companies, it may
also invest in other types of equity and debt securities such as nonconvertible
and convertible preferred stocks, bonds and warrants, foreign securities (such
as ADRs), U.S. government and agency securities, short-term fixed income
securities, and may retain assets in cash or cash equivalents, when the
investment in such securities is considered consistent with the Fund's
investment objective by the Adviser. The Fund will only invest in investment
grade bonds and short-term fixed income securities having an S&P rating at the
time of investment of at least, or equivalent to, BBB (which rating may have
speculative characteristics) or, if unrated, determined by the Adviser to be of
comparable quality. The values of debt and fixed income securities are likely to
decline in times of rising interest rates and to rise in times of falling
interest rates. In general, the longer the maturity of a fixed income security,
the more pronounced is the effect of a change in interest rates on the value of
the security. Securities in the lowest investment grade debt category generally
have higher yields, may have speculative characteristics and, as a result,
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity to make principal and interest payments than is the case
with higher investment grade securities. Although the Fund currently does not do
so, it may, from time to time, invest more than 25% of the value of its total
assets in the securities of other investment companies (open or closed-end) and
up to 5% of its total assets in the securities of any one other investment
company. Shareholders should be aware that such an investment would result in a
layering of fees. The Fund may not necessarily buy any or all of these types of
securities, or use any or all of the techniques described in this prospectus.

Currency Fluctuations
Investments in foreign securities may be denominated in foreign currencies. The
value of Fund investment denominated in foreign currencies may be effected,
favorably or unfavorably, by the relative strength of the U.S. dollar, changes
in foreign currency and U.S. dollar exchange rates and exchange control
regulation. The Fund's net asset value per share may, therefore, be affected by
changes in currency exchange rates. Changes in foreign currency exchange rates
may affect the value of dividends and interest earned, gains and losses realized
on the sale of securities and net investment income and gains, if

any, to be distributed to shareholders by the Fund. Foreign currency exchange
rates generally are determined by the forces of supply and demand in foreign
exchange markets and the relative merits of investment in different countries,
actual or perceived changes in interest rates or other complex factors, as seen
from an international perspective. Currency exchange rates also can be effected
unpredictably by intervention by U.S. or foreign governments or central banks or
the failure to intervene, or by currency controls or political developments in
the U.S. or abroad. In addition, the Fund may incur costs in connection with
conversions between various currencies.

The expected introduction of a single currency, the euro, on January 1, 1999 for
participating nations in the European Economic and Monetary Union presents
unique uncertainties, including whether the payment and operational systems of
banks and other financial institutions will be ready by the scheduled launch
date; the legal treatment of certain outstanding financial contracts that refer
to existing currencies rather than the euro; the establishment of exchange rates
for existing currencies and the euro; and the creation of suitable clearing and
settlement payment systems for the new currency. These or other factors,
including political and economic risks, could cause market disruptions before or
after the introduction of the euro, and could adversely affect the value of
securities held by the Fund.

Additional Investment Policies

Borrowing
The Fund, may from time to time, borrow money from banks for temporary, and/or
extraordinary purposes. The Fund does not intend to engage in reverse repurchase
agreements. Such borrowing will not exceed an amount equal to one-third of the
value of the Fund's total assets less its liabilities. The Fund will not
purchase additional securities when borrowings exceed 5% of total assets.

Illiquid Securities
The Fund may invest up to 15% of its net assets in illiquid securities, (i.e.,
securities that cannot be expected to be sold within seven days at approximately
the price at which they are valued); including restricted securities and
repurchase agreements maturing in more than seven days. Any illiquid securities
purchased by the Fund will have been registered under the Securities Act of
1933. The Fund may purchase restricted securities that may be offered and sold
only to "qualified institutional buyers" under Rule 144A of the Securities Act
of 1933, and the Fund's Board of Directors may determine, when Appropriate, that
specific Rule 144A securities are liquid and not subject to the 15% limitation
on illiquid securities. Should the Board of Directors make this determination,
it will carefully monitor the security (focusing on such factors, among others,
as trading activity and availability of information) to determine that the
Rule 144A security continues to be liquid. It is not possible to predict with
assurance exactly how the market for Rule 144A securities will further evolve.
This investment practice could have the effect of increasing the level of
illiquidity in the Fund to the extent that qualified institutional buyers become
for a time uninterested in purchasing Rule 144A securities. Generally, foreign
securities freely tradeable in their

principal markets are not considered restricted or illiquid securities. Illiquid
securities may be difficult for the Fund to value or dispose of because of the
absence of an active trading market. The sale of some illiquid securities by the
Fund may be subject to legal restrictions, which may be costly.

Temporary Investments
When the Adviser believes that market conditions warrant a temporary defensive
position, the Fund may invest up to 100% of its assets in short-term instruments
such as U.S. Treasury bills, high quality commercial paper, bank certificates of
deposit, bankers' acceptances, or repurchase agreements collateralized by U.S.
Government securities. To the extent that the Fund is investing in these
temporarily defensive instruments, it will not be pursuing its investment
objective.

Repurchase Agreements
Subject to guidelines established by the company's Board of Directors, the Fund
may enter into repurchase agreements. In a repurchase agreement the Fund
effectively makes a loan by purchasing a U.S. Government security and
simultaneously committing to resell that security to the seller at an agreed
upon price on an agreed upon date (usually not more than seven days) from the
date of purchase. Repurchase agreements may be entered into with a Federal
Reserve System bank or "primary dealers" in U.S. Government securities.

Foreign Securities
The Fund will not invest more than 15% of its total assets in foreign debt
and/or equity securities, or ADRs. Foreign securities investments involve
certain risks, such as political or economic instability of the issuer or of the
country of issue and the possibility of imposition of exchange controls. These
securities may also be subject to greater fluctuations in price than the
securities of U.S. corporations, and there may be less publicly available
information about their operations. Foreign companies may not be subject to
accounting standards or governmental supervision comparable to U.S. companies,
and foreign markets may be less liquid or more volatile than U.S. markets and
may offer less protection to investors such as the Fund. In addition, dividends
and interest paid by foreign issuers may be subject to withholding and other
foreign taxes, and transaction costs such as brokerage commissions are generally
higher than in the United States.

Short Sales
The Fund will only make short sales (up to a maximum of 10%) that are short
sales of securities "against the box". A short sale "against the box" is a sale
of a security that the Fund at all times during which the short position is open
either owns an equal amount of or has the immediate and unconditional right to
acquire at no additional cost. The Fund will make short sales "against the box"
as a form of hedging to offset potential declines in long positions in the same
or similar securities.

Portfolio Turnover
The Fund's portfolio turnover rate will be influenced by the Fund's investment
objectives,

other investment policies, market conditions and the need to meet redemptions.
While the rate of portfolio turnover will not be a limiting factor when the
Adviser deems changes appropriate, it is anticipated that given the Fund's
objective, its annual portfolio turnover should not generally exceed 50%. (A
portfolio turnover rate of 50% would occur, for example, if half of the stocks
in the Fund were replaced over a period of one year.)

High turnover (generally in excess of 100%) involves correspondingly greater
brokerage commissions and other transaction costs. Trading in fixed income
securities does not generally involve the payment of brokerage commissions but
does involve indirect transaction costs.

Except as noted elsewhere in this prospectus, the aforementioned investment
policies and practices are not fundamental and the Board of Directors of the
Fund may change such policies without the vote of a majority of outstanding
voting securities of the Fund as defined by the Investment Company Act of 1940,
as amended. A more detailed description of the Fund's investment policies,
including a list of those restrictions on the Fund's investment activities,
which cannot be changed without such a vote, appears in the Statement of
Additional Information.

INVESTMENT RISKS

The Fund is designed for long-term investors who are willing to invest without
concern for current income and to accept the risks associated with investing in
a mutual fund seeking long-term capital appreciation. Investors should consider
their investment goals, their time horizon for achieving them and their
tolerance for risk before investing in the Fund. The Fund, which will be
primarily invested in common stocks of mid-cap companies, is subject to
different risk profiles. Market risk is risk associated with price declines over
short or extended periods of time. As the U.S. economy has expanded, corporate
profits have grown and share prices have risen. Economic growth has been
punctuated by periodic declines where share prices of even the best managed and
most profitable companies decline. Stocks of mid-cap companies may not be well
known to the public, have lower trading volume and may be more volatile in price
than larger capitalized stocks included in the S&P 500 Stock Index. Thus, the
Fund should only be used as an investment vehicle for those with longer time
horizons, and should not be used to capture short-term swings in the market.

Although the Fund is diversified within the meaning of the Investment Company
Act of 1940, it will normally invest in a limited number (approximately 35) of
securities. Thus this Fund may contain more risk than other funds with a similar
objective invested in a broader range of securities. To the extent that the Fund
invests in a limited number of securities, it may be more susceptible to any
single, corporate, economic, political or regulatory occurrence than a more
widely diversified fund.

INVESTMENT RESTRICTIONS
<PAGE>
<PAGE>

As a diversified investment company the Fund has adopted certain fundamental
restrictions which may not be changed without the approval of a majority of the
outstanding voting shares, as that term is defined in the Investment Company Act
of 1940. These restrictions are provided in greater detail in the Statement of
Additional Information and provide, in part, that the Fund will not:

(a) with respect to 75% of its total assets, invest more than 5% of its assets
in the securities of any one issuer, excluding obligations of the U.S.
Government;

(b) own more than 10% of the outstanding voting securities of any one issuer;

(d) invest in companies for the purpose of exercising control of management. In
addition to the aforementioned investment restrictions, and in addition to other
restrictions listed in the Statement of Additional Information, the Fund may not
(except where specified):

(i) purchase securities on margin or borrow money, except from banks for
temporary and/or extraordinary purposes;

(ii) mortgage, pledge or hypothecate any assets except that the Fund may pledge
not more than one-third of its total assets to secure borrowings made in
accordance with paragraph (i) above. However, although not a fundamental
policy of the Fund, as a matter of operating policy in order to comply
with certain state statutes, the Fund will not pledge its assets in excess
of an amount equal to 15% of total assets;

(iii) lend portfolio securities of value exceeding in the aggregate one third of
the market value of the Fund's total assets less liabilities other than
obligations created by these transactions; or

(iv) make loans to others, except through the purchase of portfolio
investments, including repurchase agreements.

Year 2000 Risks
Many services provided to the Company and the Fund by the Adviser and the
Company's other service providers (collectively, the "Service Providers") rely
on the functioning of their respective computer systems. Many computer systems
cannot distinguish the year 2000 from the year 1900, with resulting potential
difficulty in performing various systems functions (the "Year 2000 Issue"). The
Year 2000 Issue could potentially have an adverse impact on the handling of
security trades, the payment of interest and dividends, pricing, account
services and other Company operations.

The Service Providers recognize the importance of the Year 2000 Issue and have
advised the Company that they are taking appropriate steps necessary in
preparation for the year 2000. At this time, there can be no assurance that
these steps will be sufficient to avoid any adverse impact on the Fund, nor can
there be any assurance that the Year 2000 Issue will not have an adverse effect
on the Fund's investments or on global markets or economies generally. In
addition, it has been reported that foreign institutions have made less progress
in addressing the Year 2000 Issue than major U.S. entities, which could
adversely affect any foreign investments by the Fund.

The Adviser and the Company have been informed that all of the Service Providers
anticipate that their systems will be adapted in time for the year 2000. The
Company and the Adviser will continue to monitor the Year 2000 Issue in an
effort to confirm appropriate preparation by the Service Providers.

MANAGEMENT OF THE FUND

Adviser
Daruma Asset Management, Inc. (the"Adviser"), a registered investment adviser,
is a New York corporation with its principal office located at 60 East 42nd
Street, Suite 1112, New York, New York 10165. The Adviser has been retained by
the Board of Directors as the investment adviser for the Fund pursuant to an
Investment Advisory Agreement entered into with the Fund. Mariko O. Gordon,
President and Chief Investment Officer of the Adviser, is primarily responsible
for supervising the Fund's daily investment management activities. The Adviser
had assets under management of approximately $156,000,000 at July 31, 1998. Ms.
Gordon has over twelve years experience in the investment management business.
Prior to founding the Adviser in 1995, Ms. Gordon was an equity owner in and
Director of Research at Valenzuela Capital Management, Inc. ("VCM") from 1990 to
1995, a firm specializing in small to mid-cap stocks with over $1 billion under
management. Ms. Gordon's sole responsibility at VCM was portfolio management.
Prior to joining VCM, from 1987 to 1990, she was the Director of Systematic
Research at Royce & Associates, Inc., an investment firm specializing in
small-cap value stocks and adviser to several mutual funds, including the
Pennsylvania Mutual Fund. Ms. Gordon started her investment career as a research
analyst at Manning & Napier Advisors, Inc., a firm managing $2 billion for ERISA
and Taft-Hartley clients. Ms. Gordon is a Chartered Financial Analyst and a
graduate of Princeton University.

The Fund's Annual Report to shareholders contains information regarding the
Fund's performance and will be provided without charge, upon request.

Adviser's Fees

According to the terms of the Investment Advisory Agreement, the Fund will pay a
monthly advisory fee at an annual rate equal to 1% of the first $100 million of
the Fund's average daily net assets; 0.75% of the next $100 million of such net
assets; and 0.50% of the Fund's average daily net assets more than $200 million.
Any portion of the advisory fee received by the Adviser may be used by the
Adviser to provide investor and administrative services. The Adviser may
voluntarily waive a portion of its fee or assume certain expenses of the Fund,
including distribution expenses. This would have the effect of lowering the
overall expense ratio of the Fund and of increasing total return to investors in
the Fund. See "Expense Limitation" in the Statement of Additional Information.

Other Expenses

In addition to the Adviser's management fee, the Fund bears the costs of the
following: shareholder servicing expenses, custodial, transfer agent,
accounting, legal and audit fees; costs of preparing and printing prospectuses
and reports sent to shareholders; state and federal registration fees and
expenses; proxy and annual meeting expenses (if any); and director/trustee fees
and expenses.

PURCHASE OF SHARES

Initial Investments by Mail
Subject to acceptance by the Fund, an account may be opened by completing and
signing an Account Application Form and mailing it to the Fund at the address
noted below, together with a check (subject to the Fund's minimum investment)
payable to:

U.S. Mail: Daruma Mid-Cap Value Fund
or c/o American Data Services, Inc.
Overnight 150 Motor Parkway, Ste. 109
Hauppague, NY 11788

The minimum initial investment in the Fund is $1,000. Retirement and UGMA
(Uniform Gifts to Minors Act) accounts, as well as accounts established with
automatic investment plans, however, may initially invest a minimum of $500.
Subject to acceptance by the Fund, payment for the purchase of shares received
by mail will be credited to a shareholder's account at the net asset value per
share of the Fund next determined after receipt. Your purchase of shares of the
Fund will be effected at the next share price calculated after receipt of your
investment.

Initial Investments by Wire
Subject to acceptance by the Fund, shares of the Fund may be purchased by wiring
immediately available federal funds (subject to the Fund's minimum investment)
to the Fund's custodian, Star Bank (the "Custodian") (see instructions below).
The minimum initial investment in the Fund is $1,000. Retirement and UGMA
Uniform Gifts to Minors Act) accounts, as well as accounts established with
automatic investment plans, however, may initially invest a minimum of $500. In
order to wire funds, you must first call the Fund's transfer agent, American
Data Services, Inc. (the "Transfer Agent"), at 888-532-7862 to set up your
account and obtain an account number. You should be prepared to provide the
information on the application to the Transfer Agent. Then, you should provide
your bank with the following information for purposes of wiring your investment:

Star Bank, N.A. Cinti/Trust
ABA #0420-0001-3
Ref: Daruma Mid-Cap Value Fund
DDA# 485776538
Shareholder Account Number:
Account Name:

You are required to mail a signed application to the American Data Services,
Inc. 150 Motor Parkway, Ste. 109, Hauppage, NY 11788 in order to complete your
initial wire purchase. Wire orders will be accepted only on a day which the Fund
and the Custodian and Transfer Agent are open for business. A wire purchase will
not be considered made until the wired money is received and the purchase is
accepted by the Fund. Any delays, which may occur in wiring money, including
delays, which may occur in processing by the banks, are not the responsibility
of the Fund or the Transfer Agent. There is presently no fee for the receipt of
wired funds, but the right to charge shareholders for this service is reserved
by the Fund.

Additional Investments
Additional investments may be made at any time subject to the Fund's minimum
subsequent investment of $100, by mailing a check to the Fund at the address
noted under "Initial Investments by Mail" (payable to Daruma Mid-Cap Value Fund)
or by wiring monies to the Custodian using the instructions outlined above
(Initial Investments by Wire).

Additional investments may also be made by the Automatic Investment Plan which
allows you to make regular, automatic transfers ($50 minimum) from your bank
account to purchase shares in your Daruma Fund account on the monthly or
quarterly schedule you select. For more information on the Automatic Investment
Plan please call the Fund at 800-435-5076.

The purchase price paid for initial and subsequent purchases of shares of the
Fund is the current public offering price, that is, the next determined net
asset value of the shares after the order is placed. See "Net Asset Value"
herein. The Fund reserves the right to reject any subscription for shares.

The Fund must receive an order and payment by the close of business for the
purchase to be effective and dividends to be earned on the same day. If funds
are received after the close of business, the purchase will become effective and
dividends will be earned on the next business day. Purchases made by check will
be invested and begin earning income on the next business day after the check is
received.

The Fund will not cancel any trade (purchase or redemption) believed to be
authentic once the trade has been received. If your check or wire does not clear
your transaction will be canceled and you will be responsible for any loss the
Fund incurs. If you are already a shareholder, the Fund can redeem shares from
any identically registered account in the Fund as reimbursement for any loss
incurred.

Shares of the Fund may also be sold to corporations or other institutions such
as trusts, foundations or broker-dealers purchasing for the accounts of others
("Shareholder Organizations"). Investors purchasing and redeeming shares of the
Fund through a Shareholder Organization may be charged a transaction-based fee
or other fee for the services of such organization. Each Shareholder
Organization is responsible for

transmitting to its customers a schedule of any such fees and information
regarding any additional or different conditions regarding purchases and
redemptions. Customers of Shareholder Organizations should read this Prospectus
in light of the terms governing accounts with their organization. The Fund does
not pay to or receive compensation from Shareholder Organizations for the sale
of the Fund's shares.

Retirement Plans
The Fund offers a wide range of plans for individuals and institutions,
including large and small businesses: IRAs, SEP-IRAs and Keoghs (profit sharing,
money purchase pension). For information on IRAs and all other retirement plans,
please call the Fund at (800) 435-5076.

REDEMPTION OF SHARES

The Fund allows you to redeem shares without redemption fees. You may redeem any
portion of your account at any time. Shares of the Fund may be redeemed by mail,
or, if authorized, by telephone. The value of shares redeemed may be more or
less than the purchase price, depending on the market value of the investment
securities held by the Fund.

By Mail. The Fund will redeem its shares at the net asset value next determined
after the request is received if all the required documentation is received in
"good order". The net asset value per share of the Fund is determined as of 4:15
p.m., New York time, on each day that the New York Stock Exchange (the "NYSE")
and the Fund are open for business. Requests should be addressed to Daruma
Mid-Cap Value Fund c/o American Data Services,150 Motor Parkway, Suite 109,
Hauppauge, NY 1788.

Requests in "good order" must include the following information and
documentation:

1. The account number and fund name;

2. The amount of the transaction (specified in dollars or shares);

3. Signatures of all owners EXACTLY as they are registered on the account;

4. Any certificates that you hold for the account; any required signature
guarantees (see "Signature Guarantees" below); and

5. Other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodianships, corporations, pension and profit sharing
plans and other organizations.

If you are not certain of the requirements for a redemption, please call
Shareholder Services at (888) 532-7862. Redemptions specifying a certain date or
share price cannot be accepted and will be returned.

Signature Guarantees

To protect shareholder accounts, the Fund and its transfer agent from fraud,
signature

guarantees are required to enable the Fund to verify the identity of the person
who has authorized a redemption from an account. Signature guarantees are
required for (1) redemptions where the proceeds are to be sent to someone other
than the registered shareholder(s) and the registered address, and (2) share
transfer requests. Signature guarantees may be obtained from certain eligible
financial institutions, including but not limited to, the following: banks,
trust companies, credit unions, securities brokers and dealers, savings and loan
associations and participants in the Securities Transfer Association Medallion
Program ("STAMP"), the Stock Exchange Medallion Program ("SEMP") or the New York
Stock Exchange Medallion Signature Program ("MSP"). Shareholders may contact
Shareholder Services at (888) 532-7862 for further details.

By Telephone
Shareholders, who have elected on their application form telephone redemption
privileges, may redeem by telephone provided the proceeds are mailed to their
address of record. To redeem shares by telephone, you or your preauthorized
representative may call shareholder services at (888) 532-7862. Redemption
requests received by telephone by 4:15 p.m. eastern time are processed on the
day of receipt; redemption requests received by telephone after 4:15 p.m.
eastern time are processed on the business day following receipt. TELEPHONE
REDEMPTIONS WILL NOT BE PERMITTED FOR A PERIOD OF SIXTY DAYS AFTER A CHANGE IN
THE ADDRESS OF RECORD. The Fund has authorized the Transfer Agent to act on
telephone instructions from any person representing himself or herself to be a
shareholder and reasonably believed by the Transfer Agent to be genuine. The
Fund and the Transfer Agent will employ reasonable procedures to confirm that
instructions communicated are genuine and, if it does not, the Fund or the
Transfer Agent may be liable for any losses due to unauthorized or fraudulent
instructions. The procedures employed by the Fund in connection with
transactions initiated by telephone include tape recording of telephone
instructions and requiring some form of personal identification prior to acting
upon instructions received by telephone. Neither the Fund nor the Transfer Agent
will be liable for following telephone instructions reasonably believed to be
genuine. The Fund reserves the right to revise or terminate the telephone
redemption privilege at any time. If you have trouble making a telephone
redemption during periods of drastic economic or market changes, your redemption
request may be made by regular or express mail. It will be implemented at the
net asset value next determined after your request has been received by our
transfer agent in Good Order.

Further Redemption Information
Redemption proceeds for shares of the Fund recently purchased by check may not
be distributed until payment for the purchase has been collected, which may take
up to fifteen business days from the purchase date. Shareholders can avoid this
delay by utilizing the wire purchase option.

Other than as described above, payment of the redemption proceeds will be made
within five days after receipt of an order for a redemption. The Fund may
suspend the right of redemption or postpone the date at times when the NYSE or
the bond market is closed or under any emergency circumstances as determined by
the United States Securities and

<PAGE>
<PAGE>
Exchange Commission (the "SEC"). If the Board of Directors determines that it
would be detrimental to the best interests of the remaining shareholders of the
Fund to make a payment wholly or partly in cash, the Fund may pay the redemption
proceeds in whole or in part by a distribution in-kind of readily marketable
securities held by the Fund in lieu of cash in conformity with applicable rules
of the SEC. Investors generally will incur brokerage charges on the sale of
portfolio securities so received in payment of redemptions.

DIVIDENDS AND DISTRIBUTIONS

The Fund intends to pay dividends from net investment income annually in
December. The Fund also intends to distribute its net realized capital gains, if
any, in December. Dividends and distributions will be automatically reinvested
in additional shares of the Fund unless the shareholder chooses otherwise.
Dividends and distributions may be made on a more frequent basis to comply with
the distribution requirement of the Internal Revenue Code.

Choosing A Distribution Option

Distribution of dividends from the Fund may be made in accordance with several
options. A shareholder may select one of two distribution options:

1. Automatic Reinvestment Option. Both dividends and capital gains
distributions will be automatically reinvested in additional shares of the
Fund unless the investor has elected the all cash option.

2. All Cash Option. Both dividend and capital gains distributions will be paid
in cash.

TAXES

The Fund intends to continue to qualify under the Internal Revenue Code of 1986,
as amended, as a regulated investment company. As a regulated investment
company, the Fund will not be subject to federal income taxes on the investment
company taxable income and net capital gains that it distributes to its
investors, provided that at least 90% of its investment company taxable income
for the taxable year is distributed. Shareholders will receive information
annually as to the tax status of distributions made by the Fund for the calendar
year. Distributions paid from the Fund's net investment income and net
short-term capital gains are generally taxable to shareholders as ordinary
income dividends. A portion of the Fund's dividend may qualify for the corporate
dividends-received deduction, subject to certain limitations. The portion of a
Fund's dividends qualifying for such deduction is generally limited to the
aggregate taxable dividends received by the Fund from domestic corporations.

Distributions paid from net long-term capital gains of the Fund are treated by a
shareholder for Federal income tax purposes as long-term capital gains,
regardless of how long a shareholder has held Fund shares. The Taxpayer Relief
Act of 1997 (the "Act"), enacted in August 1997, dramatically changed the
taxation of net capital gains by applying different rates thereto, depending on
the taxpayers holding period and marginal rate of federal income tax. Under the
Act different maximum tax rates apply to a non-corporate taxpayer's holding
period. These rates are generally 28% for gain recognized on capital assets held
for more than one year but not more than 18 months and 20% (10% for taxpayers in
the 15% marginal tax bracket) for gain recognized on capital assets held for
more than 18 months. A fund must divide each net capital gain distribution into
28% and 20% rate gain distributions (in accordance with the holding periods for
the securities it sold that generated the distributed gain). However, as a
result of recent legislation, the 18 month holding period has been eliminated.
Accordingly, for sales of capital assets on or after January 1, 1998, the
maximum tax rate of 20% would be applicable if the capital asset was held for
more than one year.

The redemption of shares is a taxable event, and a shareholder may realize a
capital gain or capital loss. The Fund will report to redeeming shareholders the
proceeds of the redemptions. However, because the tax consequences of a
redemption will also depend on the shareholder's basis in the redeemed shares
for tax purposes, shareholders should retain their account statements for use in
determining their tax liability on a redemption.

At the time of the shareholder's purchase, the Fund's net asset value may
reflect undistributed income or capital gains. A subsequent distribution of
these amounts by the Fund will be taxable to the shareholder even though the
distribution economically is a return of part of the shareholder's investment.

Keep in mind that if you purchase shares in the Fund shortly before the record
date for a dividend or capital gains distribution, regardless of whether you are
investing your distributions or receiving them in cash, you will be assessed
taxes on the amount of the capital gain and/or dividend distribution later paid
even though you owned the Fund shares for just a short period of time. While the
total value of your investment will be the same after the distribution -- the
amount of the distribution will offset the drop in the net asset value of the
shares -- you should be aware of the tax implications the timing of your
purchase may have. Prospective investors should, therefore, inquire about
potential distributions before investing.

The Fund is required to withhold 31% of taxable dividends, capital gain
distributions and redemptions that are paid to non-corporate shareholders who
have not complied with Internal Revenue Service taxpayer identification
regulations. Shareholders may avoid the withholding requirement by certifying on
the Account Application Form their proper Social Security or Taxpayer
Identification Number and certifying that they are not subject to backup
withholding.

NET ASSET VALUE

Purchases and redemptions are made at net asset value. The Transfer Agent
determines net asset value per share as of the close of regular trading on the
NYSE, on each day the NYSE is open for trading. Net asset value is determined
by dividing the total assets of the Fund, less all liabilities, by the total
number of shares outstanding.

Market values for securities listed on an exchange are based upon the latest
quoted sales prices as of 4:00 p.m. eastern time, on the valuation date.
Securities not traded on the valuation date are valued at the mean of the latest
quoted bid and asked prices. Securities not listed on an exchange are valued at
the latest quoted bid price. Temporary cash investments and debt obligations
with 60 days or less remaining to maturity are valued at cost, unless the Board
of Directors determines that this does not represent fair value. All prices of
listed securities are taken from the exchange where the security is primarily
traded. Securities may be valued on the basis of prices provided by a pricing
service when such prices are believed to reflect the fair market value of such
securities. Securities for which market quotations are not readily available or
which are restricted as to sale, and other assets are valued by such methods the
Board of Director deems in good faith to reflect fair value.

The Transfer Agent computes the Fund's net asset value once daily on Monday
through Friday, at 4:15 p.m. New York time, except on the holidays listed under
"Net Asset Value" in the Statement of Additional Information.

FUND PERFORMANCE

From time to time, the Fund may include in advertisements or communications to
current or prospective shareholders figures reflecting total return over various
time periods. "Total return" is the average annual rate of return on an amount
invested in a Fund from the beginning to the end of the stated period. "Average
annual total return" is computed by calculating the percentage change in the
value of an investment of $1000, assuming reinvestment of all income dividends
and capital gains distributions to the end of the specified period. Total
returns are historical measures of past performance and are not intended
to indicate future performance.

The Fund may compare its performance with performance rankings compiled by
independent organizations and publications that monitor the performance of
mutual funds (such as Lipper Analytical Services, Inc., Morningstar, Inc., or
Barron's). Performance information may be quoted numerically or may be presented
in a table, graph or other illustration. In addition, Fund performance may be
compared to other selected mutual funds, mutual fund averages, well-known
indices of market performance including the Standard & Poor's ("S&P") 500 Index,
S&P MidCap Index and the Russell 2000. Such performance ratings or comparisons
may be made with funds that may have different investment restrictions,
objectives, policies or techniques than the Fund and such other funds or market
indicators may be comprised of securities that differ significantly from the
Fund's investments.

Additional information about the performance of the Fund is contained in the SAI
under" " and is also contained in the Fund's annual report to shareholders, both
of which you may obtain by calling 1-800-435-5076, or E-mail at
[email protected].

DESCRIPTION OF COMMON STOCK

The Fund was incorporated in the State of Maryland on May 13, 1996, and began
operations on August 16, 1996. The authorized capital stock of the Fund consists
of one billion shares of stock having a par value of one-tenth of one cent
($0.001) per share. The Company's Board of Directors is authorized to divide the
unissued shares into separate series of stock, each series representing a
separate, additional investment portfolio. The Board currently has authorized
the division of the unissued shares into one series. Shares of any series or
class will have identical voting rights, except where, by law, certain issues
must be approved by a majority of the shares of the affected series or class.
Each share of any series or class of shares when issued will have equal
dividend, distribution, liquidation and voting rights for which it will be
issued and each fractional share will have those rights in proportion to the
percentage that the fractional share represents of a whole share. Shares will be
voted in the aggregate. All shares, when issued in accordance with the terms of
the offering, will be fully paid and non-assessable. Shares are redeemable at
net asset value, at the option of the investor. On July 24, 1996, certain
persons purchased 10,189 shares of the Fund at an initial purchase price of
$10.00 per share.

The shares of the Fund have non-cumulative voting rights, which means that the
holders of more than 50% of the shares outstanding voting for the election of
directors can elect 100% of the directors if the holders choose to do so, and,
in that event, the holders of the remaining shares will not be able to elect any
person or persons to the Board of Directors. Unless specifically requested by an
investor who is an investor of record, the Fund does not issue certificates
evidencing Fund shares.

Annual meetings of shareholders will not be held except as required by the
Investment Company Act of 1940 and other applicable law . An annual meeting will
be held to vote on the removal of a Director or Directors of the Company if
requested in writing by the holders of shares entitled to cast not less than 10%
of all the votes entitled to be cast at

such meeting. Special meetings may be called for purposes such as electing and
removing Directors, changing fundamental investment policies or approving an
investment management contract. If a meeting is held and you cannot attend, you
can vote by proxy. Before the meeting, the Fund will send you proxy materials
that explain the issues to be decided and include a voting card for you to mail
back.

SHAREHOLDER INFORMATION

General information about the Fund may be requested in writing to the
shareholder servicing department of the Fund, 60 East 42nd Street, Ste.
1112,801, New York, New York 10165 or by calling the Fund at (212) 687-1233 or
(800) 435-5076.

CUSTODIAN, TRANSFER AND DIVIDEND AGENT

Star Bank, N.A. of Cincinnati, Ohio, serves as custodian for the Fund's cash and
securities. The Custodian does not assist in, and is not responsible for,
investment decisions involving assets of the Fund. American Data Services, Inc.,
Hauppague, New York, is the Fund's transfer and dividend disbursing agent.

COUNSEL AND INDEPENDENT AUDITORS

Legal matters in connection with the issuance of shares of common stock of the
Fund are passed upon by Werner & Kennedy, 1633 Broadway, New York, New York
10019. Ernst & Young LLP, independent auditors, 787 Seventh Avenue, New York,
New York, 10019, serves as auditors for the Fund.

DARUMA MID-CAP VALUE FUND

Statement of Additional Information

This Statement of Additional Information sets forth information which
may be of interest to investors but which is not necessarily included in the
Fund's Prospectus, dated October 28, 1998 (the "Prospectus"). This Statement of
Additional Information is not a prospectus and should be read in conjunction
with the Prospectus, a copy of which may be obtained without charge by writing
to the Fund at 60 East 42nd Street, Suite 1112, New York, New York 10165, or by
calling Shareholder Services at (800) 435-5076.

Investment Adviser
Daruma Asset Management, Inc.

Custodian Transfer Agent
Star Bank, N.A. American Data Services, Inc.

August 28, 1998

TABLE OF CONTENTS

THE FUND 2
INVESTMENT OBJECTIVE, POLICES AND RESTRICTIONS 2
RISK FACTORS AND SPECIAL CONSIDERATIONS 4
MANAGEMENT OF THE FUND 7
INVESTMENT ADVISOR 11
PORTFOLIO TRANSACTIONS 13
PRICING OF SHARES 13
REDEMPTIONS IN KIND 14
TAXATION 14
DESCRIPTION OF THE FUND 16
PERFORMANCE DATA 17
CUSTODIAN AND TRANSFER AND DIVIDEND AGENT 21
COUNSEL AND INDEPENDENT AUDITORS 21
FINANCIAL STATEMENTS 22

</TABLE>

THE FUND

Daruma Mid-Cap Value Fund (the "Fund"), is a no-load diversified,
open-end, investment company, and a series of The Daruma Funds, Inc. which was
incorporated under Maryland law on May 13, 1996. This Fund is designed for
long-term investors who understand and are willing to accept the risk of loss
involved in seeking long-term capital appreciation. The Fund should not be used
as a trading vehicle. Daruma Asset Management, Inc. (the "Adviser"), manages the
investments of the Fund from day-to-day in accordance with the Fund's investment
objective and policies.

INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS

A detailed description of the types and quality of the securities in
which the Fund may invest is given in the Prospectus and is incorporated herein
by reference. The investment objective is fundamental and may be changed only
with

the approval of a "majority of the outstanding voting securities" (as defined in
the Investment Company Act of 1940) of the Fund. There can be no assurance that
the Fund's investment objective will be achieved.

The Fund's investment objective is to seek long-term capital
appreciation by investing primarily in the common stocks of medium
capitalization U.S. companies. Current income is incidental to the Fund's
investment objective. The Fund is designed for long-term investors who
understand and are willing to accept the risk of loss involved in investing in a
mutual fund seeking long-term capital appreciation. Investors should consider
their investment goals, their time horizon for achieving them, and their
tolerance for risks before investing in the Fund.

The Adviser believes that the Fund is suitable for investment only by
persons who can invest without concern for current income and who are in a
financial position to assume above-average investment risks in searching for
long-term capital appreciation.

The Adviser believes that original research drives performance. The
Adviser invests for its clients in companies that are about to undergo
significant positive changes in earnings growth, and whose valuations do not yet
reflect those changes. The Adviser attempts to identify those mid-cap companies
who meet these investment criteria by conducting its own thorough and original
research.

The Fund intends to concentrate its portfolio in companies whose market
cap ranges from $500 million to $7 billion, across a wide array of industry
sectors, subject to market conditions. The Adviser's overall stock selection for
the Fund is not based on the capitalization or size of the company but rather on
an assessment of the company's fundamental prospects. The Fund will normally
consist of a portfolio normally made up of approximately 35 securities
representing the Adviser's best ideas, diversified among a broad range of
industries that are considered to be companies with the most compelling
risk/reward profiles. As such, the Fund is not an appropriate investment for
individuals who are not long-term investors and who, as their primary objective,
require safety of principal or stable income from their investments.

The Fund may not, as a matter of fundamental policy:

(1) Issue any senior securities except insofar as the Fund may be deemed to have
issued a senior security in connection with any permitted borrowing;

(2) Purchase securities on margin or write call options on its portfolio
securities; or purchase securities while borrowings exceed 15% of its total
assets;

(3) Sell securities short except to sell securities "short against the box";
Borrow money, except from banks for temporary and/or extraordinary purposes in
an amount not to exceed one-third of the value of the Fund's total assets less
its liabilities (total net assets).

(5) Underwrite the securities of other issuers, except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933 in disposing of a
portfolio security.

(6) Invest more than an aggregate of 15% of its total assets in repurchase
agreements maturing in more than seven days, variable rate demand instruments
exercisable in more

than seven days or securities that are not readily marketable.

(7) Purchase or sell real estate, real estate investment trust securities,
commodities or commodity contracts, or oil and gas interests, but this shall not
prevent the Fund from investing in Government obligations secured by real estate
or an interest in real estate.

(8) Make loans to others, except through the purchase of portfolio investments,
including repurchase agreements, as described under "Risk Factors and Special
Considerations".

(9) Invest more than 25% of its assets in the securities of "issuers" in any
single industry and provided also that there shall be no limitation on the Fund
to purchase obligations issued or guaranteed by the United States government,
its agencies or instrumentalities. When the assets and revenues of an agency,
authority, instrumentality or other political subdivision are separate from
those of the government creating the issuing entity and a security is backed
only by the assets and revenues of the entity, the entity would be deemed to be
the sole issuer of the security. Similarly, in the case of an industrial revenue
bond, if that bond is backed only by the assets and revenues of the
non-governmental issuer, then such non-governmental issuer would be deemed to be
the sole issuer. If, however, in either case, the creating government guarantees
a security, such a guarantee would be considered a separate security and would
be treated as an issue of such government.

Invest more than 25% of the value of its total assets in the securities of other
investment companies (open or closed-end) and up to 5% of its total assets in
the securities of any one other investment company. All such securities must be
acquired by the Fund in the open market, in transactions involving no
commissions or discounts to a sponsor or dealer (other than customary brokerage
commissions). The issuers of such securities acquired by the Fund are not
required to redeem them in an amount exceeding 1% o f such issuers' total
outstanding securities during any period of less than 30 days, and the Fund will
vote all proxies with respect to such securities in the same proportion as the
vote of all other holders of such securities.

(11) Invest in companies for the purpose of exercising control of management.

(12) Own more than 10% of the outstanding voting securities of any one issuer;

(13) With respect to 75% of its assets, invest more than 5% of its assets in the
securities of any one issuer, excluding obligations of the U.S. Government.

Mortgage, pledge or hypothecate any assets except that the Fund may pledge not
more than one-third of its total assets to secure borrowings. However, although
not a fundamental policy of the Fund, as a matter of operating policy in order
to comply with certain state statutes, the Fund will not pledge its assets in
excess of an amount equal to 15% of total assets.

Percentage Restrictions

Any investment restrictions herein which involve a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by, an acquisition
or disposition of securities or assets of, or borrowings by, the Fund.

RISK FACTORS AND SPECIAL CONSIDERATIONS

Fund's Rights as Stockholder

As noted above, the Fund may not invest in a company for the purpose of
exercising control or management. However, the Fund may exercise its rights as a
stockholder and communicate its views on important matters of policy to a
company's management, the board of directors and/or stockholders if the Adviser
or the Board of Directors determine that such matters could have a significant
effect on the value of the Fund's investment in the company. The activities that
the Fund may engage in, either individually or in conjunction with others, may
include, among others, supporting or opposing proposed changes in a company's
corporate structure or business activities; seeking changes in a company's board
of directors or management; seeking changes in a company's direction or
policies; seeking the sale or reorganization of a company or a portion of its
assets; or supporting or opposing third party takeover attempts. This area of
corporate activity is increasingly prone to litigation, and therefore it is
possible but not likely that the Fund could be involved in lawsuits related to
such activities.

The Adviser will monitor such activities with a view to mitigating, to the
extent possible, the risk of litigation against the Fund and the risk of actual
liability if the Fund is involved in litigation. However, no guarantee can be
made that litigation against the Fund will not be undertaken or liabilities
incurred.

The Fund may, at its expense or in conjunction with others, pursue
litigation or otherwise exercise its rights as a security holder to seek to
protect the interests of security holders if the Adviser and the Fund's Board of
Directors determine this to be in the best interest of the Fund's shareholders.

Foreign Securities

The Fund may invest up to 15% of its assets in certain foreign debt and
equity securities or ADRs. Investment in foreign equity securities, obligations
of foreign issuers and in direct obligations of foreign nations involves
somewhat different investment risks from those of United States domestic
issuers. There may be limited publicly available information with respect to
foreign issuers and foreign issuers are not generally subject to uniform
accounting, auditing and financial standards and requirements comparable to
those applicable to domestic companies. There may also be less government
supervision and regulation of foreign securities exchanges, brokers and listed
companies than in the United States. Foreign securities markets have
substantially less volume than domestic securities exchanges and securities of
some foreign companies are less liquid and more volatile than securities of
comparable domestic companies. Brokerage commissions and other transaction costs
on foreign securities exchanges are generally higher than in the United States.
Dividends and interest paid by foreign issuers may be subject to withholding and
other foreign taxes, which may decrease the net return on foreign investments as
compared to dividends and interest paid to the Fund by domestic companies.
Additional risks include future political and economic developments, the
possibility that a foreign jurisdiction might impose or change withholding taxes
on income payable

with respect to foreign securities, the possible seizure, nationalization or
expropriation of foreign issuer or foreign deposits and the possible adoption of
foreign governmental restrictions such as exchange controls.

American Depository Receipts (ADRs) are certificates held in trust by a
bank or similar financial institution evidencing ownership of shares of a
foreign-based issuer. Designed for use in U.S. securities markets, ADRs are
alternatives to the purchase of the underlying foreign securities in their
national markets and currencies.

ADR facilities may be established as either unsponsored or sponsored.
While ADRs issued under these two types of facilities are in some respects
similar, there are distinctions between them relating to the rights and
obligations of ADR holders and the practices of market participants. A
depository may establish an unsponsored facility without participation by (or
even necessarily the acquiescence of) the issuer of the deposited securities,
although typically the depository requests a letter of non-objection from such
issuer prior to the establishment of the facility. Holders of unsponsored ADRs
generally bear all the cost of such facilities. The depository usually charges
fees upon the deposit and withdrawal of the deposited securities, the conversion
of dividends into U.S. dollars, the disposition of non-cash distributions and
the performance of other services. The depository of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited securities or to pass through voting
rights to ADR holders in respect of the deposited securities. Sponsored ADR
facilities are created in generally the same manner as unsponsored facilities,
except that the issuer of the deposited securities enters into a deposit
agreement with the depository. The deposit agreement sets out the rights and
responsibilities of the issuer, the depository and the ADR holders. With
sponsored facilities, the issuer of the deposited securities generally will bear
some of the costs relating to the facility (such as deposit and withdrawal
fees). Under the terms of most sponsored arrangements, depositories agree to
distribute notices of shareholder meetings and voting instructions and to
provide shareholder communications and other information to the ADR holders at
the request of the issuer of the deposited securities.

U.S. Government Obligations

U.S. Government obligations are obligations that are backed by the full
faith and credit of the United States, by the credit of the issuing or
guaranteeing agency or by the agency's right to borrow from the U.S. Treasury.
They include (i) U.S. Treasury Obligations, which differ only in their interest
rates, maturities and times of issuance as follows: U.S. Treasury bills
(maturity of one year or less), U.S. Treasury notes (maturity of one year or ten
years), U.S. Treasury bonds (generally maturities of more than ten years); and
(ii) obligations issued or guaranteed by U.S. Government agencies and
instrumentalities that are supported by the full faith and credit of the United
States (such as securities issued by the Government national Mortgage
Association, the Federal Housing Administration, the Department of Housing and
Urban Development, the Export-Import Bank, the General Services Administration
and the Maritime Administration and certain securities issued by the Farmers'
Home Administration and the Small Business Administration. The maturities of
U.S. Government obligations usually range from three months to thirty years.

Repurchase Agreements

When the Fund purchases securities, it may enter into a repurchase
agreement with the seller wherein the seller agrees, at the time of sale, to
repurchase the security at a mutually agreed upon time and price. The Fund may
enter into repurchase agreements with member banks of the Federal Reserve System
and with broker-dealers who are recognized as primary dealers in the United
States government securities by the Federal Reserve Bank of New York. Although
the securities subject to the repurchase agreement might bear maturities
exceeding one year, settlement for the repurchase would never be more that 397
days after the Fund's acquisition of the securities and normally would be within
a shorter period of time. The resale price will be in excess of the purchase
price, reflecting an agreed upon market rate effective for the period of time
the Fund's money will be invested in the security, and will not be related to
the coupon rate of the purchased security. At the time the Fund enters into a
repurchase agreement the value of the underlying security, including accrued
interest, will be equal to or exceed the value of the repurchase agreement and,
in the case of a repurchase agreement exceeding one day, the seller will agree
that the value of the underlying security, including accrued interest, will at
all times be equal to or exceed the value of the repurchase agreement. The Fund
may engage in a repurchase agreement with respect to any security in which it is
authorized to invest, even though the underlying security may mature in more
than one year. The collateral securing the seller's obligation must be of a
credit quality at least equal to the Fund's investment criteria for securities
in which it invests and will be held by the Custodian or in the Federal Reserve
Book Entry System.

For purposes of the Investment Company Act of 1940, a repurchase
agreement is deemed to be a loan from the Fund to the seller subject to the
repurchase agreement and is therefore subject to the Fund's investment
restriction applicable to loans. It is not clear whether a court would consider
the securities purchased by the Fund subject to a repurchase agreement as being
owned by the Fund or as being collateral for a loan by the Fund to the seller.
In the event of the commencement of bankruptcy or insolvency proceedings with
respect to the seller of the securities before repurchase of the security under
a repurchase agreement, the Fund may encounter delay and incur costs before
being able to sell the security. Delays may involve loss of interest or decline
in price of the security. If the court characterized the transactions as a loan
and the Fund has not perfected a security interest in the security, the Fund may
be required to return the security to the seller's estate and be treated as
unsecured creditor of the seller. As an unsecured creditor, the Fund would be at
the risk of losing some or all of the principal income involved in the
transaction. As with any unsecured debt obligation purchased for the Fund,
CastleRock seeks to minimize the risk of loss thorough repurchase agreements by
analyzing the creditworthiness of the obligor, in this case the seller. Apart
from the risk of bankruptcy or insolvency proceedings, there is also the risk
that the seller may fail to repurchase the security, in which case the Fund may
incur a loss if the proceeds of the sale to a third party are less than the
repurchase price. However, if the market value of the securities subject to the
repurchase agreement becomes less than the repurchase price (including
interest), the Fund involved will direct the seller of the security to deliver
additional securities so that the market value of all securities subject to the
repurchase agreement will equal or exceed the repurchase price. It is possible
that a Fund will be unsuccessful in seeking to impose on the seller a
contractual obligation to deliver additional securities.

Selling Short Against the Box

The Fund may make short sales of securities "against the box". A short sale
"against the box" is a sale of a security that the Fund at all times during
which the short position is open either owns an equal amount of or has the
immediate and unconditional right to acquire at no additional cost. The Fund
will make short sales "against the box" as a form of hedging to offset potential
declines in long positions in the same or similar securities.

MANAGEMENT OF THE FUND

The directors and officers of the Fund and their principal occupations
during the past five years are set forth below. Their titles may have varied
during this period. Unless otherwise indicated, the address of each director and
officer is 60 East 42nd Street, Suite 1112, New York, NY 10165.

The following table sets forth certain information as to each director
and officer of the Fund:

Compensation Table
(For the fiscal year ended June 30, 1998)

<TABLE>
<CAPTION>
Retirement Benefits
Name of Person Aggregate Compensation Accrued as Part of
Position From Fund Fund Expenses
<S> <C> <C>
Fred Ali -0- -0-
Director
25542 Novela Way
Valencia, CA 91355

Elizabeth A. Duffy -0- -0-
Director
Woodrow Wilson National
Fellowship Foundation
5 Vaughn Drive
Princeton, NJ 08543

Brian J. Heidtke -0- -0-
Director
Colgate-Palmolive
300 Park Avenue
New York, NY 10022

Mariko Gordon* -0- -0-
President and Director
of the Fund; & President
and CEO of the Adviser

Noreen McKee* -0- -0-
Vice President, Treasurer
and Director of the Fund; &
Vice President & Treasurer
of the Adviser
</TABLE>

*An interested person of the Fund and/or the Adviser within the meaning of
Section 2(a)(19) of the Investment Company Act of 1940 (the "1940 Act")

Fred Ali, 48, Director of the Fund. Executive director of Covenant House
California since February 1991.

Elizabeth A. Duffy, 32, Director of the Fund. Program & Research Associate of
The Andrew W. Mellon Foundation since June 1993. From September 1991 to June
1993 she attended and completed the MBA program at Stanford University Graduate
School of Business.

Brian J. Heidtke, 56, Director of the Fund. Vice President, Finance and
Treasurer of Colgate-Palmolive Company since June 1986.

Mariko O. Gordon, 36, President and Director of the Fund, and President and
Chief Investment Officer of the Adviser has over 12 years experience in the
investment management business. Prior to co-founding the Adviser in 1995, Ms.
Gordon was an equity owner in and Director of Research at Valenzuela Capital
Management, Inc. ("VCM") a firm specializing in small to mid-cap stocks with
over $1 billion under management. Ms. Gordon's sole responsibility at VCM was
portfolio management. Prior to joining VCM, from 1987 to 1990 she was the
Director of Systematic Research at Royce & Associates, Inc., an investment firm
specializing in small-cap value stocks and adviser to several mutual funds,
including Pennsylvania Mutual Fund. Ms. Gordon started her investment career as
a research analyst at Manning & Napier Advisors, Inc., a firm managing $2
billion for ERISA and Taft-Hartley clients. Ms. Gordon is a Chartered Financial
Analyst and a graduate of Princeton University.

Noreen D. McKee, 48, Vice-President and Treasurer of the Fund and of the Adviser
is a certified public accountant and has over 15 years experience in the
investment management business. For one year prior to joining the Adviser in
1995, she was the Chief Operating Officer at Valenzuela Capital Management, Inc.
At VCM she was responsible for the financial, administrative and compliance
functions of the firm. From 1985 to 1993, she worked as the Controller of Royce
& Associates, Inc. ("Royce"). At Royce, her primary responsibilities included
the accounting, tax and managerial functions for six mutual funds and two
limited partnerships in compliance with the Investment Advisors Act and the
Investment Company Act of 1940. Ms. McKee has an M.S. in Accounting from Pace
University and a B.S. in Behavioral Science from York College of Pennsylvania.

Mary B. O'Byrne, 37, Secretary of the Fund and Director of Operations. Prior to
joining the Fund, from 1985 to 1996, Ms. O'Byrne worked at The Royce Funds ("the
funds"), a family of ten mutual funds with over $2 billion in assets. She was
primarily responsible for all Blue Sky registrations and assisted with SEC
filings. In addition, she handled the funds' day-to-day financial management
activities interfacing with the funds' custodian and transfer agent. Ms. O'Byrne
has extensive knowledge and experience in all aspects of mutual fund
administration. In 1980, she received a certificate in business administration
from the College of Further Studies, Cavan, Ireland.

Each Director who is not an interested person of the Fund receives a
base annual fee of $0.

PRINCIPAL HOLDERS OF SHARES

As of April 24, 1998, the following persons were known to the Fund to be
the beneficial owners of 5% or more of the outstanding shares of the Fund:

<TABLE>
<CAPTION>
Percentage of
Name Number of Shares Outstanding Shares
<S> <C> <C>
Wm. F. & Donald Gratz TTEE 26,335 12.19%
Treitel-Gratz Co. Inc. Pft. Sh. Tr.
U/A Dtd 1/1/83
13-01 Queens Plaza South
Long Island City, NY 11101

Anthony D'Ottavio 17,963 8.32%
47 East Maple St.
Dallastown, PA 17313

John W. Baackes 11,712 5.42%
Capital Area Community
Health Plan 403(B)
15 Pateman Circle
Menands, NY 12204

Brian J. Heidtke 10,968 5.08%
585 Sparrowbush Road
Wyckoff, NJ 07481

Alec J. Wilkinson TTEE 10,835 5.02%
A.J. Wilkinson Profit Sharing Plan
310 West End Avenue, #5A
New York, NY 10023
</TABLE>

As of April 24, 1998, all of the directors and officers of the Fund,
collectively, beneficially owned, directly or indirectly (including the power to
vote or to dispose of any shares), approximately 13% of the outstanding
shares.

INVESTMENT ADVISER

Daruma Asset Management, Inc., a registered investment adviser, is a New
York corporation, with its principal offices located at 60 East 42nd Street,
Suite 1112, New York, NY 10165. The Adviser has been employed by the Board of
Directors to serve as the investment adviser of the Fund pursuant to an
Investment Advisory Agreement entered into by the Fund. Currently, the Adviser's
only investment company client is the Fund. The Adviser supervises all aspects
of the Fund's operations and provides investment advice and portfolio management
services to the Fund.

Pursuant to the Advisory Agreement and subject to the supervision of the Fund's
Board of Directors, the Adviser makes the Fund's day-to-day investment
decisions, arranges for the execution of portfolio transactions and generally
manages the Fund's investments.

Mariko O. Gordon, President and Chief Investment Officer of the Adviser,
is primarily responsible for supervising the Fund's investment management
activities. The Adviser had assets under management of approximately
$156,000,000 at July 31, 1998.

The Adviser provides persons satisfactory to the Board of Directors of
the Fund to serve as officers of the Fund. Such officers, as well as certain
other employees and directors of the Fund, may be directors, officers or
employees of the Adviser or it affiliates.

The Adviser also may provide the Fund with supervisory personnel who
will be responsible for supervising the performance of administrative services,
accounting and related services, net asset value calculation, reports to and
filings with regulatory authorities, and services relating to such functions.
The personnel rendering such supervisory services may be employees of the
Adviser, of its affiliates or of other organizations. The Advisory Agreement was
approved initially on July 31, 1997, and in its current form on August 25, 1998
by the Board of Directors, including a majority of the directors who are not
interested persons (as defined in the Investment Company Act of 1940) of the
Fund or the Adviser.

The Advisory Agreement has a term which extends to July 31, 1999 and may
be continued thereafter for successive twelve-month periods beginning each July
31, provided that such continuance is specifically approved annually by a
majority vote of the Fund's outstanding voting securities or by the Board of
Directors, and in either case by a majority of the directors who are not parties
to the Advisory Agreement or interested persons of any such party, by votes cast
in person at a meeting called for the purpose of voting on such matter.

The Advisory Agreement is terminable without penalty by the Fund on
sixty days' written notice when authorized either by a majority vote of the
outstanding voting shares of the Fund or by a vote of a majority of the Fund's
Board of Directors, or by the Adviser on sixty days' written notice, and will
automatically terminate in the event of its assignment. The Advisory Agreement
provides that in the absence of willful misfeasance, bad faith or gross
negligence on the part of the Adviser, or of reckless disregard of its
obligations thereunder, the Adviser shall not be liable for any action or
failure to act in accordance with its duties thereunder.

Adviser's Fees

Pursuant to the terms of the Advisory Agreement, the Fund will pay a
monthly advisory fee equal to 1% of the first $100 million of the Fund's average
daily net assets; 0.75% of the next $100 million of such net assets; and 0.50%
of the Fund's average daily net assets over $200 million. This fee is higher
than the fee paid by most other mutual funds; however, the Board of Directors
believes that this fee is reasonable in light of the services performed by the
Adviser for the Fund. Any portion of the advisory fees received by the Adviser
may be used by the Adviser to provide investor and administrative services. The
Adviser may voluntarily waive a portion or its entire fee or assume certain
expenses of the Fund, including expenses for distribution of Fund shares. This
would have the effect of lowering the overall expense ratio of the Fund and of
increasing yield to investors. See "Expense Limitations" below. For the year
ended June 30, 1998, the Fund paid (or accrued) to the Adviser investment
advisory fees of $0 (net of fee waivers of $21,267).

Expense Limitations

The Adviser has agreed to reimburse the Fund for its expenses (exclusive
of interest, taxes, brokerage, and extraordinary expenses) which in any year
exceed 1.5%. For the purpose of this obligation to reimburse expenses, the
Fund's annual expenses are estimated and accrued daily, and any appropriate
estimated

payments are made to it on a monthly basis. From time to time, the Adviser may
voluntarily assume certain expenses of the Fund.

This would have the effect of lowering the overall expense ratio and of
increasing yield to investors. Subject to the undertaking of the Adviser to
reimburse the Fund for its excess expenses as described above, the Fund has,
under the Advisory Agreement, confirmed its obligation for payment of all other
expenses, including without limitation: fees payable to the Adviser, Custodian
and Transfer and Dividend Agent; brokerage and commission expenses; federal,
state or local taxes, including issuance and transfer taxes incurred by or
levied on it; commitment fees, certain insurance premiums and membership fees
and dues in investment company organizations; interest charges on borrowings;
telecommunications expenses; recurring and non-recurring legal and accounting
expenses; costs of organization and maintaining the Fund's existence as a
corporation; compensation, including director's fees, of any directors, officers
or employees who are not also officers of the Adviser or its affiliates and
costs of other personnel providing administrative and clerical services; costs
of stockholders' services and costs of stockholders reports, proxy solicitations
and corporate meetings, fees and expenses or registering its shares under the
appropriate Federal securities laws and of qualifying its shares under
applicable state securities laws, including expenses attendant upon the initial
registration and qualification of these shares and attendant upon renewals of,
or amendments to, those registrations and qualifications; and expenses of
preparing, printing and delivering the Prospectus and financial statements to
existing shareholders and of printing shareholder application forms for
shareholder accounts.

The Fund may from time-to-time hire its own employees or contract to
have management services performed by third parties, and the management of the
Fund intends to do so whenever it appears advantageous to the Fund. The Fund's
expenses for employees and for such services are among the expenses subject to
the expense limitation described above.

PORTFOLIO TRANSACTIONS

The Adviser is responsible for selecting the brokers who effect the purchases
and sales of the Fund's portfolio securities. No broker is selected to effect a
securities transaction for the Fund unless such broker is believed by the
Adviser to be capable of obtaining the best price and execution for the security
involved in the transaction. In addition to considering a broker's execution
capability, the Adviser generally considers the brokerage and research services
which the broker has provided to it, including any research relating to the
security involved in the transaction and/or to other securities. Such services
may include general economic research, market and statistical information,
industry and technical research, strategy and company research, and may be
written or oral. The Adviser determines the overall reasonableness of brokerage
commissions paid, after considering the amount another broker might have charged
for effecting the transaction and the value placed by the Adviser upon the
brokerage and/or research services provided by such broker, viewed in terms of
either that particular transaction or the Adviser's overall responsibilities
with respect to its accounts.

The Adviser is authorized, under Section 28(e) of the Securities
Exchange Act of 1934 and under its Investment Advisory Agreement with the Fund,
to pay a brokerage commission in excess of that which another broker might have
charged for effecting the same transaction, in recognition of the value of
brokerage and research services provided by the broker.

Brokerage and research services furnished by brokers through whom the
Fund effects securities transactions may be used by the Adviser in servicing all
of its accounts and not all of such services may be used by the Adviser in
connection with the Fund.

Even though investment decisions for the Fund are made independently
from those for other accounts managed by the Adviser, the same security is
frequently purchased, held or sold by the Fund and the other accounts because
such security may be suitable for all of them. When the Fund and such other
accounts are simultaneously engaged in the purchase or sale of the same
security, the Adviser seeks to average the transactions as to price and allocate
them as to amount in a manner believed to be equitable to each. In some cases,
this procedure may adversely affect the price paid or received by the Fund or
the size of the position obtainable for the Fund.

PRICING OF SHARES

The purchase and redemption price of the Fund's shares is based on its
current net asset value per share. See "Net Asset Value Per Share" in the Fund's
prospectus.

As set forth under "Net Asset Value Per Share", the Fund's transfer
agent determines the net asset value per share of the Fund at the close of
regular trading on the New York Stock Exchange (the "Exchange") on each day that
the Exchange is open. The Exchange is open on all weekdays that are not
holidays. Thus, it is closed on Saturdays and Sundays and on New Year's Day,
Washington's Birthday, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas.

REDEMPTIONS IN KIND

It is possible that conditions may arise in the future, which would, in
the judgment of the Fund's Board of Directors or management, make it undesirable
for the Fund to pay for all redemptions in cash. In such cases, payment may be
made in portfolio securities or other property of the Fund. However, the Fund
has obligated itself under the Investment Company Act of 1940 to redeem for cash
all shares presented for redemption by any one shareholder up to $250,000 (or 1%
of the Fund's net assets if that is less) in any 90-day period. Securities
delivered in payment of redemptions would be valued at the same value assigned
to them in computing the net asset value per share for purposes of such
redemption. Shareholders receiving such securities would incur brokerage costs
when securities are sold.

TAXATION

The Fund intends to continue to qualify under the Internal Revenue Code
of 1986, as amended ("the Code"), as a regulated investment company. As a
regulated investment company, the Fund will not be subject to federal income
taxes on its investment company taxable income and the net long-term capital
gains that it distributes to its shareholders, provided that at least 90% of its
investment company taxable income for the taxable year is distributed, and
numerous other requirements concerning regulated investment companies are
satisfied.

These requirements include the following: (1) the Fund must derive at least 90%
of its gross income each taxable year from dividends, interest, payments with
respect to securities loans and gains from the sale or other disposition of

securities; or other income (including gains from options or futures) derived
with respect to its business of investing in securities ("Income Requirement");
(2) at the close of each quarter of the Fund's taxable year, at least 50% of the
value of its total assets must be represented by cash and cash items, U.S.
government securities, securities of other RICs and other securities, with these
other securities limited, in respect of any one issuer, to an amount that does
not exceed 5% of the value of the Fund's total assets and that does not
represent more than 10% of the issuer's outstanding voting securities; and (3)
at the close of each quarter of the Fund's taxable year, not more than 25% of
the value of its total assets may be invested in securities (other than U.S.
government securities or the securities of other RICs) of any one issuer.

The Fund's policy is to distribute as dividends each year 100% (and in no event
less than 90%) of its investment company taxable income. The Fund will be
treated as a separate corporation and generally will have to comply with the
qualifications and other requirements applicable to regulated investment
companies. If for any taxable year the Fund does not qualify as a regulated
investment company, all of its taxable income would be taxable at corporate
rates and no distributions would qualify as tax exempt.

The Fund has adopted a policy of declaring dividends annually in an
amount based on its net investment income. The amount of each dividend may
differ from actual net investment income calculated in accordance with federal
income tax purposes. Dividends paid from taxable income, if any, and
distributions of any realized short-term capital gains are taxable to
shareholders as ordinary income, whether received in cash or reinvested in
additional shares of the Fund. Distributions of new realized capital gains after
utilization of capital loss carryforwards, if any, are made annually to meet
applicable distribution and excise tax requirements.

The Fund may be subject to state or local tax in jurisdictions in which
the Fund is organized or may be deemed to be doing business. However, Maryland
taxes regulated investment companies in a manner that is generally similar to
the federal income tax rules described herein.

Distributions may be subject to state and local income taxes. In
addition, the treatment of the Fund and its shareholders in those states that
have income tax laws might differ from their treatments under the federal income
tax laws.

The Code imposes a nondeductible 4% excise tax on the Fund unless it
meets certain requirements with respect to distributions of ordinary income and
capital gain net income. The formula requires payment to shareholders during a
calendar year of distributions representing at least 98% of the Fund's ordinary
income for the calendar year, plus at least 98% of the excess of its capital
gains over its capital losses realized during the one-year period ending October
31 during such year, which shall be reduced but not below net capital gain) by
the amount of the Fund's net ordinary loss for the year. It is anticipated that
this provision will not have any material impact on the Fund.

Dividends and interest paid by foreign issuers may be subject to
withholding and other foreign taxes, which may decrease the net return on
foreign investments as compared to dividends and interest paid by domestic
issuers. The Fund does not expect that it will qualify to elect to pass through
to its shareholders the rights to take a foreign tax credit for foreign taxes
withheld from dividends and interest payments.

Back-up Withholding/Withholding Tax

Under the Code, certain non-corporate shareholders may be subject to 31%
withholding on reportable dividends, capital gains distributions and redemption
payments ("back-up withholding"). Generally, shareholders subject to back-up
withholding will be those for whom a taxpayer identification number and certain
required certifications are not on file with the Fund or who, to the Fund's
knowledge, have furnished an incorrect number. In addition, the Fund is required
to withhold from distributions to any shareholder who does not certify to the
Fund that such shareholder is not subject to back-up withholding due to
notification by the Internal Revenue Service that such shareholder has
under-reported interest or dividend income. When establishing any account, an
investor must certify under penalties of perjury that such investor's taxpayer
identification number is correct and that such investor is not subject to or is
exempt from back-up withholding.

Ordinary income distributions paid to shareholders who are non-resident
aliens or which are foreign entities will be subject to 30% United States
withholding tax unless a reduced rate of withholding or a withholding exemption
is provided under an applicable treaty. Non-U.S. shareholders are urged to
consult their own tax advisers concerning the United States tax consequences to
them of investing in the Fund.

Timing of Purchases and Distributions

At the time of an investor's purchase, the Fund's net asset value may
reflect undistributed income or capital gains or net unrealized appreciation of
securities held by the Fund. A subsequent distribution to the investor of such
amounts, although it may in effect constitute a return of her or its investment
in an economic sense, would be taxable to the shareholder as ordinary income or
capital gain as described above. Investors should carefully consider the tax
consequences of purchasing Fund shares just prior to a distribution, as they
will receive a distribution that is taxable to them.

Sale or Redemptions of Shares

Gain or loss recognized by a shareholder upon the sale, redemption or
other taxable disposition of shares in the Fund (provided that such shares are
held by the shareholder as a capital asset) will be treated as capital gain or
loss, measured by the difference between the adjusted basis of the shares and
the amount realized on the sale, redemption or other taxable disposition. Such
gain or loss will be long-term capital gain or loss if the shares disposed of
were held for more than one year. Wash sale losses will be disallowed. A wash
sale loss occurs when the shares disposed of are replaced (including by
receiving shares upon the reinvestment of distributions) within a period of 61
days, beginning 30 days before and ending 30 days after the sale of the shares.
In such a case, the basis of the shares acquired will be increased to reflect
the disallowed loss. A loss recognized upon the sale, redemption or other
taxable disposition of shares held for 6 months or less will be treated as a
long-term capital loss to the extent of any long-term capital gain distributions
received with respect to such shares.

The foregoing relates to Federal income taxation. Distributions, as well
as any gains from a sale, redemption or other taxable disposition of Fund
shares, also may be subject to state and local taxes. Under current law, so long
as the Fund qualifies for Federal income tax treatment described above, it

is believed that the Fund will not be liable for any income or franchise tax
imposed by Maryland.

Investors are urged to consult their own tax advisers regarding the
application to them of Federal, state and local tax laws.

DESCRIPTION OF THE FUND

The Fund was incorporated in the State of Maryland on May 13, 1996. The
authorized capital stock of the Fund consists of one billion shares of stock
having a par value of $.001 per share. The Fund's Board of Directors is
authorized to divide the unissued shares into separate classes and series of
stock, each series representing a separate, additional investment portfolio. The
Board currently has authorized the division of the unissued shares into one
series. Shares of any class or series will have identical voting rights, except
where, by law, certain matters must be approved by a majority of the shares of
the affected class or series. Each share of any class or series of shares when
issued has equal dividend, distribution, liquidation and voting rights within
the class or series for which it was issued, and each fractional share has those
rights in proportion to the percentage that the fractional share represents a
whole share. Shares will be voted in the aggregate. There are no conversion or
preemptive rights in connection with any shares of the Fund. All shares, when
issued in accordance with the terms of the offering, will be fully paid and
non-assessable. Shares are redeemable at net asset value, at the option of the
investor.

The shares of the Fund have non-cumulative voting rights, which means
that the holders of more than 50% of the shares outstanding voting for the
election of directors can elect 100% of the directors if the holders choose to
do so, and, in that event, the holders of the remaining shares will not be able
to elect any person or persons to the Board of Directors. Unless specifically
requested by an investor who is an investor of record, the Fund does not issue
certificates evidencing Fund shares.

As a general matter, the Fund will not hold annual or other meetings of
the Fund's shareholders. This is because the By-laws of the Fund provide for
annual meetings only (a) for the election of directors, (b) for approval of
revisions to the Fund's investment advisory agreement, and (c) upon the written
request of holders of shares entitled to cast not less than twenty-five percent
of all the votes entitled to be cast at such meeting. Annual and other meetings
may be required with respect to such additional matters relating to the Fund as
may be required by the Investment Company Act of 1940 (the "Act") including the
removal of Fund directors and communication among shareholders, any registration
of the Fund with the Securities and Exchange Commission or any state, or as the
Directors may consider necessary or desirable. Each Director serves until the
next meeting of shareholders called for the purpose of considering the election
or reelection of such Director or of a successor to such Director, and until the
election and qualification of his or her successor, elected at such meeting, or
until such Director sooner dies, resigns, retires or is removed by the vote of
the shareholders.

PERFORMANCE DATA

The Fund's performance may be compared in advertisements to the
performance of other mutual funds in general or to the performance of particular
types of mutual funds, especially those with similar investment objectives. Such
comparisons may be expressed as mutual fund rankings prepared by Lipper

Analytical Services, Inc. ("Lipper"), an independent service that monitors the
performance of registered investment companies. Money market funds and municipal
funds are not included in the Lipper survey. The Lipper performance analysis
ranks funds on the basis of total return, assuming reinvestment of
distributions, but does not take sales charges or redemption fees payable by
shareholders into consideration and is prepared without regard to tax
consequences.

The Lipper General Equity Funds Average can be used to show how the
Fund's performance compares to a broad-based set of equity funds. The Lipper
General Equity Funds Average is an average of the total returns of all equity
funds (excluding international funds and funds that specialize in particular
industries or types of investments) tracked by Lipper.

Ibbotson Associates (Ibbotson) provides historical returns of the
capital markets in the United States. The Fund's performance may be compared to
the long-term performance of the U.S. capital markets in order to demonstrate
general long-term risk versus reward investment scenarios. Performance
comparisons could also include the value of a hypothetical investment in common
stocks, long-term bonds or U.S. Treasury securities. Ibbotson calculates total
returns in the same manner as the Fund.

The capital markets tracked by Ibbotson are common stocks, small
capitalization stocks, long-term corporate bonds, intermediate-term government
bonds, long-term government bonds, U.S. Treasury bills and the U.S. rate of
inflation. These capital markets are based on the returns of several different
indices. For common stocks, the S&P 500 is used. For small capitalization
stocks, return is based on the return achieved by Dimensional Fund Advisors
(DFA) Small Company Fund. This fund is a market-value-weighted index of the
ninth and tenth deciles of the New York Stock Exchange (NYSE), plus stocks
listed on the American Stock Exchange (AMEX) and over-the-counter (OTC) with the
same or less capitalization as the upper bound of the NYSE ninth decile.

The S&P 500 Composite Stock Price Index is an unmanaged index of common
stocks frequently used as a general measure of stock market performance. The
Index's performance figures reflect changes of market prices and quarterly
reinvestment of all distributions.

The S&P Mid-Cap Index is an unmanaged index of 400 domestic
companies frequently used as a general measure of stock market performance. The
Index's performance figures reflect changes of market prices and quarterly
reinvestment of all distributions.

The Russell 2000, prepared by the Frank Russell Company, tracks the
return of the common stock of the 2,000 smallest out of the 3,000 largest
publicly traded U.S.-domiciled companies by market capitalization. The Russell
2000 tracks the return on these stocks based on price appreciation or
depreciation and includes dividends.

U.S. Treasury bonds are securities backed by the credit and taxing power
of the U.S. government, and, therefore, present virtually no risk of default.
Although such government securities fluctuate in price, they are highly liquid
and may be purchased and sold with relatively small transaction costs (direct
purchase of U.S. Treasury securities can be made with no transaction costs).
Returns on intermediate-term government bonds are based on a one-bond portfolio
constructed each year, containing a bond that is the shortest non-callable bond
available with a maturity of not less than five years. This bond is held for

the calendar year and returns are recorded. Returns on long-term government
bonds are based on a one-bond portfolio constructed each year, containing a bond
that meets several criteria, including having a term of approximately 20 years.
The bond is held for the calendar year and returns are recorded. Returns on U.S.
Treasury bills are based on a one-bill portfolio constructed each month,
containing the shortest term bill having not less than one month to maturity.
The total return on the bill is the month-end price divided by the previous
month-end price, minus one. Data up to 1976 is from the U.S. Government Bond
file at the University of Chicago's Center for Research in Security Prices; the
Wall Street Journal is the source thereafter. Inflation rates are based on the
Consumer Price Index.

From time to time, in reports and promotional literature, the Fund's
performance also may be compared to other mutual Funds tracked by financial or
business publications and periodicals, such as Kiplinger's, Individual Investor,
Money, Forbes, Business Week, Barron's, The Financial Times, Fortune, Mutual
Fund Magazine and The Wall Street Journal. In addition, financial or business
publications and periodicals as they relate to fund management, investment
philosophy and investment techniques may be quoted.

The Fund's performance may also be compared to those of other
compilations or indices.

Advertising for the Fund may contain examples of the effects of periodic
investment plans, including the principle of dollar cost averaging. In such a
program, an investor invests a fixed dollar amount in a fund at periodic
intervals, thereby purchasing fewer shares when prices are high and more shares
when prices are low. While such a strategy does not assure a profit or guard
against loss in a declining market, the investor's average cost per share can be
lower than if fixed numbers of shares are purchased at the same intervals. In
evaluating such a plan, investors should consider their ability to continue
purchasing shares during periods of low price levels. The Fund may be available
for purchase through retirement plans or other programs offering deferral of or
exemption from income taxes, which may produce superior after-tax returns over
time. For example, a $1,000 investment earning a taxable return of 10% annually
would have an after-tax value of $2,004 after ten years, assuming tax was
deducted from the return each year at a 28% rate. An equivalent tax-deferred
investment would have an after-tax value of $2,147 after ten years, assuming tax
was deducted at a 28% rate from the tax-deferred earnings at the end of the
ten-year period.

Total Return Calculations

Total return quotes reflect all aspects of the Fund's return, including
the effect of reinvesting dividends and capital gains distributions, and any
change in the Fund's net asset value per share (NAV) over the period. Average
annual total returns are calculated by determining the growth or decline in
value of a hypothetical historical investment in the Fund over a stated period,
and then calculating the annually compounded percentage rate that would have
produced the same result if the rate of growth or decline in value had been
constant over the period. For example, a cumulative return of 100% over ten
years would produce an average annual total return of 7.18%, which is the steady
annual rate of return that would equal 100% growth on a compounded basis in ten
years. While average annual total returns are a convenient means of comparing
investment alternatives, investors should realize that the Fund's performance is
not constant over time, but changes from year to year, and that average

annual total returns represent averaged figures as opposed to the actual
year-to-year performance of the Fund.

In addition to average annual total returns, the Fund's cumulative or
total returns, reflecting the simple change in value of an investment over a
stated period, may be quoted. Average annual and cumulated total returns may be
quoted as a percentage or as a dollar amount, and may be calculated for a single
investment, a series of investments, or a series of redemptions, over any time
period. Total returns may be broken down into their components of income and
capital (including capital gains and changes in share prices) in order to
illustrate the relationship of these factors and their contributions to total
return. Total returns and other performance information may be quoted
numerically or in a table, graph or similar illustration.

Risk Measurements

Quantitative measures of "total risk", which quantify the total
variability of a portfolio's returns around, or below, its average return, may
be used in advertisements and in communications with current and prospective
shareholders. These measures include standard deviation of total return and the
Morningstar risk statistic. Such communications may also include market risk
measures, such as beta , and risk-adjusted measures of performance such as the
Sharpe Ratio and Morningstar's star rating system.

Standard Deviation. The risk associated with a fund or portfolio can be
viewed as the volatility of its returns, measured by the standard deviation of
those returns. For example, a fund's historical risk could be measured by
computing the standard deviation of its monthly total returns over some prior
period, such as three years. The larger the standard deviation of monthly
returns, the more volatile, i.e., spread out around the fund's average monthly
total return, the fund's monthly total returns have been over the prior period.
Standard deviation of total return can be calculated for funds of different
objectives, ranging from equity funds to fixed income funds, and can be measured
over different time frames. The standard deviation figures presented are
annualized statistics based on the trailing 36 monthly returns. Approximately
68% of the time, the annual total return of a fund will differ from its mean
annual total return by no more than plus or minus the standard deviation figure.
95% of the time, a fund's annual total return will be within a range of plus or
minus 2x the standard deviation from its mean annual total return.

Beta. Beta measures the sensitivity of a security's, or a portfolio's,
return to the market's returns. It measures the relationship between a fund's
Excess return (over 3-month T-bills) and the excess return of the benchmark
index (S&P500 for domestic equity funds). The market's beta is by definition
equal to 1. Portfolios with betas greater than 1 are more volatile than the
market, and portfolios with betas less than 1 are less volatile than the market.
For example, if a portfolio has a beta of 2, a 10% market excess return would be
expected to result in a 20% portfolio excess return, and a 10% market loss would
be expected to result in a 20% portfolio loss (excluding the effects of any
firm-specific risk that has not been eliminated through diversification).

Morningstar Risk. The Morningstar proprietary risk statistic evaluates a
fund's downside volatility relative to that of other funds in its class based on
the underperformance of the fund relative to the riskless T-bill return. It then
compares this statistic to those of other funds in the same broad investment
class.

Sharpe Ratio. Also known as the Reward-to-Variability Ratio, this is the
ratio of a fund's average return in excess of the risk-free rate of return
("average excess return") to the standard deviation of the fund's excess
returns. It measures the returns earned in excess of those that could have been
earned on a riskless investment per unit of total risk assumed.

Morningstar Star Ratings. Morningstar, Inc. is a mutual fund rating
service that rates mutual funds on the basis of risk-adjusted performance.
Ratings may change monthly. Funds with at least three years of performance
history are assigned ratings from one star (lowest) to five stars (highest).
Morningstar ratings are calculated from the funds' three-, five- and ten-year
average annual returns (when available). Funds' returns are adjusted for fees
and sales loads. Ten percent of the funds in an investment category receive five
stars, 22.5% receive four stars, 35% receive three stars, 22.5% receive two
stars, and the bottom 10% receive one star.

None of the quantitative risk measures taken alone can be used for a
complete analysis and, when taken individually, can be misleading at times.
However, when considered in some combination and with the total returns of a
fund, they can provide the investor with additional information regarding the
volatility of a fund's performance. Such risk measures will change over time and
are not necessarily predictive of future performance or risk.

CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT

Star Bank, N.A. (the "Custodian"), serves as custodian for the Fund's
cash and securities. Pursuant to a Custodian Agreement with the Fund, it is
responsible for maintaining the books and records of the Fund's portfolio
securities and cash. The Custodian does not assist in, and is not responsible
for, investment decisions involving assets of the Fund. American Data Services,
Inc. (the "Transfer Agent") acts as the Fund's transfer and dividend disbursing
agent.

COUNSEL AND INDEPENDENT AUDITORS

Legal matters in connection with the issuance of shares of common stock
of the Fund are passed upon by Werner & Kennedy. Ernst & Young LLP, independent
auditors, are the auditors of the Fund.

FINANCIAL STATEMENTS

The Fund's Annual Report to Shareholders for the fiscal year ended
June 30, 1998 is a separate document supplied with this Statement of Additional
Information and the financial statements, accompanying notes and report of
independent auditors appearing therein are incorporated herein by this
reference.

PART C - OTHER INFORMATION

Item 24. FINANCIAL STATEMENTS AND EXHIBITS.

(A) FINANCIAL STATEMENTS
Included in Prospectus:

(1) Fund Expenses

(2) Financial Highlights

Included in Part C:

* (1) Annual Report to Shareholders dated June 30, 1998
incorporated by reference.

(B) EXHIBITS

** (1) Articles of Incorporation of the Registrant.

** (2) Form of By-Laws of the Registrant.

(3) Not Applicable.

(4) Not Applicable.

** (5) Form of Investment Advisory Agreement.

(6) Not Applicable.

(7) Not Applicable.

** (8) Custody Agreement.

** (9) Transfer Agency and Service Agreement

** (9.1) Fund Accounting Service Agreement

(10) Consent of Werner & Kennedy LLP as to the legality
of the securities being registered, including their
consent to the filing thereof and as to the use of
their name under the heading "Counsel and
Independent Auditors" in the Prospectus and the
Statement of Additional Information.

(11) Consent of Ernst & Young, LLP, Independent Auditors.

* Incorporated herein by reference from the Annual Report to Shareholders
dated June 30, 1998, filed with the SEC on August 31, 1998.

** Filed as an exhibit to the Registrant's Registration Statement, 333-03709,
filed on May 14, 1996 and incorporated herein by reference.

(12) Not Applicable.

(13) Not Applicable.

(14) Not Applicable.

(15) Not Applicable.

(16) Not Applicable.

(17) Not Applicable.

(18) Not Applicable.

(19) Not Applicable

Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.

None.

Item 26. NUMBER OF HOLDERS OF SECURITIES.

<TABLE>
<CAPTION>
Number of Record Holders
Title of Class as of July 31, 1998
<S> <C>
Common Stock 408
</TABLE>

Item 27. INDEMNIFICATION.

In accordance with Section 2-418 of the General Corporation Law of the
State of Maryland, Article NINTH of the Registrant's Articles of Incorporation
provides in part that, the Corporation shall indemnify (i) its currently acting
and former directors and officers to the fullest extent required or permitted by
the General Laws of the State of Maryland now or hereafter in force, including
the advance of expenses under the procedures and to the fullest extent permitted
by law, and (ii) other employees and agents to such extent as shall be
authorized by the Board of Directors or the By-Laws and as permitted by law,
provided, however, that no director or officer of the Corporation shall be
indemnified against any liability to the Corporation or its security holders to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office. Such indemnification shall not be exclusive of any other rights to
which those seeking indemnification may be entitled and the Board of Directors
may take such action as is necessary to carry out these indemnification
provisions and is expressly empowered to adopt, approve and amend from time to
time such by-laws, resolutions or contracts implementing such provisions or such
indemnification arrangements as may be permitted by law. No amendment of the
charter of the Corporation or repeal of any of its provisions shall limit or
eliminate the right of indemnification provided hereunder with respect to acts
or omissions occurring prior to such amendment or repeal.

In addition, and to the fullest extent permitted by Maryland statutory
or decisional law, as amended or interpreted, and the Investment Company Act of
1940, no director or officer of the Corporation shall be personally liable to
the Corporation or its stockholders for money damages; provided, however, that
such indemnification shall not be construed to protect any director or officer
of the Corporation against any liability to the Corporation or its security
holders to which he would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office. No amendment of the charter of the Corporation or repeal
of any of its provisions shall limit or eliminate the limitation of liability
provided to directors and officers hereunder with respect to any act or omission
occurring prior to such amendment or repeal.

Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, directors, officers and
controlling persons of the Registrant by the Registrant pursuant to the Articles
of Incorporation or otherwise, the Registrant is aware that in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and, therefore, is unenforceable. In the event
that a claim for indemnification against such liabilities (other than the

payment by the Registrant of expenses incurred or paid by trustees, directors,
officers or controlling persons of the Registrant in connection with the
successful defense of any act, suite or proceeding) is asserted by such
trustees, directors, officers or controlling persons in connection with the
shares being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issues.

Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.

The description of the Registrant's adviser, Daruma Asset Management,
Inc., under the caption "Management of the Fund" in the Prospectus and
"Management of the Fund" in the Statement of Additional Information constituting
parts A and B, respectively, of the Registration Statement are incorporated
herein by reference.

Item 29. PRINCIPAL UNDERWRITERS.

NONE.

Item 30. LOCATION OF ACCOUNTS AND RECORDS.

Accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder, in general, are maintained in the physical possession of the
Registrant at 60 East 42nd Street, Suite 1112, New York, New York 10165; records
relating to the investment advisory or management of the Registrant will be
maintained by the Registrant's Investment Adviser at 60 East 42nd Street, Suite
1112, New York, NY 101650; the Registrant's transfer and dividend disbursing
agent, American Data Services, Inc. of Hauppage, New York will maintain physical
possession of Registrant's shareholder and fund accounting records; and the
custodian, Star Bank, N.A. at 425 Walnut Street, Cincinnati, Ohio 45201 will
maintain physical possession of the Registrant's custodial records.

Item 31. MANAGEMENT SERVICES.

Not Applicable.

Item 32. UNDERTAKINGS.

(a) The Registrant undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.

(b) The Registrant undertakes (although not required to hold annual
shareholder meetings) if requested to do so by the holders of at least 10% of
its outstanding shares, to call a meeting of shareholders for the purpose of
voting upon the question of removal of a director or directors and to assist in
communications with other shareholders as required by Section 16(c).

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Pre-Effective Amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized in the City of New York, and State
of New York, on the 25th day of August, 1998.

THE DARUMA FUNDS, INC.

By: /s/ Mariko O. Gordon
Mariko O. Gordon, President

Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated.

<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
(1) Principal Executive Officer:

By:/s/ Mariko O. Gordon President August 25, 1998
Mariko O. Gordon

(2) Majority of Directors

By:/s/ Fred Ali Director August 25, 1998
Fred Ali

By:/s/ Elizabeth A. Duffy Director August 25, 1998
Elizabeth A. Duffy

By:/s/ Brian J. Heidtke Director August 25, 1998
Brian J. Heidtke

By:/s/ Mariko O. Gordon Director August 25, 1998
Mariko O. Gordon

By:/s/ Noreen McKee Director August 25, 1998
Noreen McKee
</TABLE>

<PAGE>

[WERNER & KENNEDY LETTERHEAD]

August 28, 1998

The Daruma Funds, Inc.
60 East 42nd Street, Suite 1112
New York, NY 10165

Re: Post-Effective Amendment No. 4 to the Registration Statement
of The Daruma Funds, Inc. filed on Form N-1A under the
Securities Act of 1933 and Amendment No. 4 to the Registration
Statement under the Investment Company Act of 1940
Securities Act Registration No.: 333-03709
Investment Company Act No.: 811-07621
Our File No. 11960-00-101

Dear Mesdames and Messrs.

You have requested us, as counsel to The Daruma Funds, Inc. (the
"Company"), to furnish you with this opinion and consent in connection with the
above-referenced registration statement (the "Registration Statement") filed by
the Company under the Securities Act of 1933, as amended (the "1933 Act"), and
the Investment Company Act of 1940, as amended (the "1940 Act").

We have made such examination of the statutes, authorities, and records
of the Company and other documents as in our judgment are necessary to form a
basis for opinions hereinafter expressed. In our examination, we have assumed
the genuineness of all signatures on, and authenticity of, and the conformity to
original documents of all copies submitted to us. As to various questions of
fact material to our opinion, we have relied upon statements and certificates of
officers and representatives of the Company and others.

Based upon the foregoing, we are of the opinion that the Company is a
Maryland corporation organized with one or more series of shares and is
registered as an open-end management investment company under the 1940 Act, and
that the shares, when issued and sold in accordance with the laws of applicable
Jurisdictions, and with the terms of the Prospectus and Statement of Additional
Information included as part of the Registration Statement, will be valid,
legally issued, fully paid, and non-assessable.

We hereby consent to the use of this opinion as an exhibit to the
Regisgtration Statement under the 1933 Act and the 1940 Act, and to the
reference to our name under the heading "Counsel and Independent Auditors"
included in the Registration Statement.

Very truly yours,

Werner & Kennedy

By: Robert K. Fulton
---------------------------------
Robert K. Fulton

<PAGE>

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions "Financial
Highlights" in the Prospectus and "Counsel and Independent Auditors" in the
"Statement of Additional Information" and to the use of our report dated
July 31, 1998, in this Registration Statement (Form N-1A No. 333-03709) of The
Daruma Funds, Inc.

Ernst & Young LLP
----------------------------------
ERNST & YOUNG LLP

New York, New York
August 28, 1998

<PAGE>