DARUMA FUNDS INC, 497, 1998-10-28

DARUMA FUNDS INC
497, 1998-10-28

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Prospectus
October 28, 1998

- -------------------------DARUMA MID-CAP VALUE FUND----------------------------

DARUMA

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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 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 are 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
October 28, 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, the material incorporated by reference and other information
regarding the Fund.

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

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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, the Adviser believes, 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 capitalization
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?

Generally, 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 is not well followed on Wall Street,
allowing the Adviser's emphasis on primary research to add value.

Thirdly, medium-sized companies historically undergo 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 and are willing to take on the
additional risk of investing in mid-cap stocks. This is an appropriate vehicle
for individuals, educational funding accounts, trusts, foundations, endowments,
as well as IRAs and other tax-deferred accounts.

FEES & 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 REDEMPTION 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 13 and 'Redemption of Shares' on page 14 of this Prospectus.

MINIMUM INVESTMENT

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

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FUND TABLE OF CONTENTS

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PAGE
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Fund Expenses........................... 3
Financial Highlights.................... 4
Investment Objective.................... 7
Investment Policies..................... 7
Investment Risks........................ 10
Investment Restrictions................. 11
Management of the Fund.................. 12

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PAGE
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SHAREHOLDER GUIDE
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Purchase of Shares...................... 13
Choosing a Distribution Option.......... 16
Redemption of Shares.................... 14
Dividends and Distributions............. 16
Taxes................................... 16
Net Asset Value......................... 18
</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.
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Shareholder Transaction Expenses:
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%
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Total Estimated Fund Operating Expenses (after fee waivers and expense
reimbursements)***..................................................................... 1.49%
----
----
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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. 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.

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* 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 1.97% before
reimbursement of expenses.

*** Total Fund Operating Expenses for the year ended June 30, 1998 were 2.97%
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:

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<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
Daruma Mid-Cap Value Fund.............................. $ 16 $49 $82 $179
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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.

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FINANCIAL HIGHLIGHTS

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 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 period ended
June 30, 1998. The information presented is historical and not intended to
indicate future performance of the Fund.

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FOR THE YEAR FOR THE PERIOD
ENDED 8/16/96
JUNE 30, THROUGH
1998 6/30/97
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<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
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Total from Investment Operations....................... 1.98 2.91
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Less Distributions:
Distributions from net realized gains.................. (1.55) (0.01)
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Total Distributions.................................... (1.55) (0.01)
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Net Asset Value, End of Period.............................. $ 13.33 $ 12.90
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Total Investment Return..................................... 16% 29%(c)

Ratios/Supplemental Data:
Net Assets, End of Period................................... $3,139,406 $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>

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(a) The ratio of expenses to average net assets before waiver of fees and
reimbursement 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 waiver of
fees and reimbursement of expenses 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.

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FUND PERFORMANCE

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DARUMA
MID-CAP VALUE S&P RUSSELL
FOR THE PERIOD ENDING SEPTEMBER 30, 1998 FUND MIDCAP 2000
- ----------------------------------------------------------------- ------------- ------ -------

<S> <C> <C> <C>
Quarter.......................................................... - 23.9% - 14.5% - 20.1%
Year-to-date..................................................... - 22.1 - 7.1 - 16.2
One Year......................................................... - 19.4 - 6.1 - 19.0
Average Annual Total Return Since Inception*..................... +6.4 +15.7 +6.5
</TABLE>

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* Inception date of the Daruma Mid-Cap Value Fund was August 16, 1996.

Large cap stocks continued to drive returns during the third quarter as
investors' demand for liquidity at any cost dominated. Since April, small- and
mid-cap stocks have been indiscriminately dumped despite their faster earnings
growth rates, driving their valuation relative to larger stocks to an
unprecedented low.

This marked performance variance between large- and small-cap stocks is
illustrated in the table above. The Fund's returns appear to be more closely
associated with the returns of the small-cap sector. The reason for this is
twofold. One, while we fish in a pond filled with stocks whose market
capitalization range is between $500 million and $7 billion, the Fund's
portfolio tends to weigh more heavily toward the lower end of the range,
sporting an average weighted market cap of $1.5 billion. Two, the returns of our
benchmark, the S&P MidCap Index, have been driven by a handful of very large
technology stocks like America On-line, a company with a $24 billion market cap.
This masks the lower returns of the general population of stocks in the mid-cap
sector.

Although our performance suffered during the third quarter, the Fund holds
a portfolio of solid companies with good management and defensible balance
sheets. We focus on what we want to own, not for next week, next month, or even
next year, but for the next two to five years. We will not deviate from our
investment strategy, which is finding reasonably priced stocks coupled with
accelerating earnings growth rates that have the potential to appreciate by 50%
over a two-period.

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

CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE DARUMA MID-CAP VALUE FUND
COMPARED TO THE S&P MIDCAP INDEX
AND THE RUSSELL 2000 FROM INCEPTION OF THE FUND
AUGUST 16, 1998 TO SEPTEMBER 30, 1998

[PERFORMANCE GRAPH]

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DARUMA FUND S&P MIDCAP INDEX RUSSELL 2000 INDEX
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NOTES TO PERFORMANCE:

Past performance is not predictive of future performance. The S&P MidCap
Index and the Russell 2000 are unmanaged indices. 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.

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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 ranging from $500 million to $7 billion), including common stocks
of companies listed on the S&P MidCap 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 that 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. The Fund will not pursue such a strategy unless it applies for and
receives an exemptive order from the Securities and Exchange Commission (the
'Commission'), if so required, or the Commission issues rules permitting such a
concentration of investments in investment companies. There is no assurance that
the Commission would grant any order requested by the Fund or adopt any rules
allowing such a strategy. 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.

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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 difference 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 uncertanties, including whether the payment and operationsl
systems of banks and other financial instituions 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
factions, including political and economic risks, could cause market disruption
before or after the introduction of the euro, and could adversely affect the
value of securities held by the Fund.

ADDITIONAL INVESTMENT POLICIES

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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. The Fund may trade
in 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
determines 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. Because the
institutional trading market is relatively new, it is not
possible to predict with assurance
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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
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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 100%. (A portfolio turnover rate of 100% would
occur, for example, if all 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.
</TABLE>

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.

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INVESTMENT RESTRICTIONS

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.

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The Adviser and the Company have been informed that all of the Service
Providers anticipate that their systems will be adopted 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., 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 of 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.

<PAGE>

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:

<TABLE>
<S> <C>
U.S. Mail: Daruma Mid-Cap Value Fund
or c/o American Data Services, Inc.
Overnight 150 Motor Parkway, Suite 109
Hauppauge, NY 11788
</TABLE>

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 transfer agent,
American Data Services, Inc., 150 Motor Parkway, Suite 109, Hauppauge, NY 11788,
in order to complete your initial wire purchase. Wire orders will be accepted
only on a day which the Fund, the Custodian and the 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.

<PAGE>

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.

<PAGE>

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 11788.

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

<PAGE>

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 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 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 long-term capital gains that it distributes

<PAGE>

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 a Fund's net investment income and
short-term capital gains are 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 long-term capital gains of a 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 ('Act'), enacted in August 1997, dramatically changed the taxation
of net capital gains by applying different rates thereto depending on the
taxpayer's 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.

<PAGE>

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 Directors 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 communications to current or
prospective shareholders figures reflecting total return over various time
periods. 'Total return' is the 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 $1,000, assuming reinvestment of all income dividends and capital
gain 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 well-known indices of market performance including the Standard &
Poor's ('S&P') 500 Index, S&P MidCap Index and the Russell 2000 Index. 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 indications 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 'Performance Data' 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].

<PAGE>

DESCRIPTION OF COMMON STOCK

The Company was incorporated in the State of Maryland on May 13, 1996, and
began operations on August 16, 1996. The authorized capital stock of the Company
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. As of July 24th,
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, Suite 1112,
New York, New York 10165 or by calling the Fund at (212) 687-1473 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., Hauppauge, New York, is the Fund's transfer and dividend 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, NY
10019, serve as auditors for the Fund.