UNDISCOVERED MANAGERS FUNDS, 497, 1999-01-21

UNDISCOVERED MANAGERS FUNDS
497, 1999-01-21

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[LOGO]undiscovered managers(TM)

UNDISCOVERED MANAGERS FUNDS

INSTITUTIONAL CLASS
P R O S P E C T U S

December 28, 1998

INSTITUTIONAL CLASS SHARES OF:
---------------------------------------------------------

UNDISCOVERED MANAGERS BEHAVIORAL GROWTH FUND
UNDISCOVERED MANAGERS BEHAVIORAL VALUE FUND
UNDISCOVERED MANAGERS BEHAVIORAL LONG/SHORT FUND
UNDISCOVERED MANAGERS SPECIAL SMALL CAP FUND
UNDISCOVERED MANAGERS REIT FUND
UNDISCOVERED MANAGERS SMALL CAP VALUE FUND
UNDISCOVERED MANAGERS HIDDEN VALUE FUND
UNDISCOVERED MANAGERS CORE EQUITY FUND
UNDISCOVERED MANAGERS ALL CAP VALUE FUND
UM INTERNATIONAL EQUITY FUND
UM INTERNATIONAL SMALL CAP EQUITY FUND

Undiscovered Managers Funds
Plaza of the Americas
700 North Pearl Street, Suite 1700
Dallas, Texas 75201
1-888-242-3514

<PAGE>

Institutional Class
Prospectus December 28, 1998

UNDISCOVERED MANAGERS FUNDS

Undiscovered Managers Funds (the "Trust") is a registered open-end management
investment company with eleven separately managed portfolios (each a "Fund," and
collectively, the "Funds"). Undiscovered Managers, LLC ("Undiscovered Managers")
is the investment adviser of the Funds. Each Fund's portfolio is managed by a
sub-adviser selected by Undiscovered Managers for its experience managing a
portfolio of this kind:

o Undiscovered Managers Behavioral Growth Fund (the "Behavioral Growth Fund")
is managed by Fuller & Thaler Asset Management, Inc.

o Undiscovered Managers Behavioral Value Fund (the "Behavioral Value Fund")
is managed by Fuller & Thaler Asset Management, Inc.

o Undiscovered Managers Behavioral Long/Short Fund (the "Behavioral
Long/Short Fund") is managed by Fuller & Thaler Asset Management, Inc.

o Undiscovered Managers Special Small Cap Fund (the "Special Small Cap Fund")
is managed by Kestrel Investment Management Corporation.

o Undiscovered Managers REIT Fund (the "REIT Fund") is managed by Bay Isle
Financial Corporation.

o Undiscovered Managers Small Cap Value Fund (the "Small Cap Value Fund") is
managed by J.L. Kaplan Associates, LLC.

o Undiscovered Managers Hidden Value Fund (the "Hidden Value Fund") is
managed by J.L. Kaplan Associates, LLC.

o Undiscovered Managers Core Equity Fund (the "Core Equity Fund") is managed
by Waite & Associates, L.L.C.

o Undiscovered Managers All Cap Value Fund (the "All Cap Value Fund") is
managed by E.R. Taylor Investments, Inc.

o UM International Equity Fund (the "International Equity Fund") is managed
by Unibank Securities, Inc.

o UM International Small Cap Equity Fund (the "International Small Cap Equity
Fund") is managed by Unibank Securities, Inc.

Each Fund's investment objective is long-term growth of capital, except for the
Behavioral Growth Fund and the Behavioral Long/Short Fund, which have the
investment objective of growth of capital, the REIT Fund, which has the
investment objective of high total investment return, and the Behavioral Value
Fund, the International Equity Fund and the International Small Cap Equity
Fund, which have the investment objective of capital appreciation. In seeking
to achieve its objective, each Fund invests primarily in equity securities of
U.S. companies, except for the International Equity Fund and the International
Small Cap Equity Fund, both of which invest primarily in equity securities of
companies that are principally traded on any of the stock markets of Europe,
Asia, Australia or New Zealand. There can be no assurance that the Funds will
achieve their investment objectives.

The Behavioral Growth Fund, the REIT Fund, the Small Cap Value Fund, the Hidden
Value Fund, the Core Equity Fund and the All Cap Value Fund currently offer two
classes of shares -- Institutional Class shares and Investor Class shares. The
Behavioral Value Fund, the Behavioral Long/Short Fund, the Special Small Cap
Fund, the International Equity Fund and the International Small Cap Equity Fund
offer only Institutional Class shares. This Prospectus concisely describes the
information that an investor should know before investing in Institutional
Class shares of each Fund. Please read it carefully and keep it for future
reference. Investor Class shares of those Funds that offer such shares are
described in a separate prospectus. To obtain more information about such
Funds' Investor Class shares, please call toll free 1-888-242-3514.

A Statement of Additional Information (the "SAI") dated December 28, 1998, is
available upon request and free of charge. Write to Undiscovered Managers, LLC,
Plaza of the Americas, 700 North Pearl Street, Suite 1700, Dallas, Texas 75201,
or call toll free 1-888-242-3514. The SAI, which contains more detailed
information about the Funds, has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated by reference into this Prospectus.
The SEC maintains a Website (http://www.sec.gov) that contains the SAI,
material incorporated by reference into this Prospectus and the SAI, and other
information regarding registrants that file electronically with the SEC.

For more information about establishing an account, or any other information
about the Funds, call toll free 1-888-242-3514.

- --------------------------------------------------------------------------------
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
- --------------------------------------------------------------------------------

2
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
<S> <C>
Summary of Expenses .................................................. 4
Financial Highlights ................................................. 8
The Funds ............................................................ 10
Behavioral Growth Fund ............................................. 10
Behavioral Value Fund .............................................. 11
Behavioral Long/Short Fund ......................................... 12
Special Small Cap Fund ............................................. 13
REIT Fund .......................................................... 14
Small Cap Value Fund ............................................... 15
Hidden Value Fund .................................................. 16
Core Equity Fund ................................................... 17
All Cap Value Fund ................................................. 18
International Equity Fund .......................................... 19
International Small Cap Equity Fund ................................ 20
All Funds .......................................................... 21
More Information About the Funds' Investments and Risk Considerations 22
Management of the Funds .............................................. 26
Portfolio Transactions ............................................... 28
How to Purchase Shares ............................................... 29
General Shareholder Services ......................................... 31
How to Redeem Shares ................................................. 31
Calculation of Performance Information ............................... 33
Dividends, Capital Gain Distributions and Taxes ...................... 33
Organization and Capitalization of the Trust ......................... 34
Appendix A--Fund Performance ......................................... A-1
</TABLE>

3
<PAGE>

SUMMARY OF EXPENSES

The following information is provided to assist an investor in understanding
the various expenses that an investor in Institutional Class shares of a Fund
will bear directly or indirectly. The information about each Fund's
Institutional Class shares shown below is based on annualized projected
expenses of the Institutional Class shares for the fiscal year that ends on
August 31, 1999. The information below should not be considered a
representation of past or future expenses, as actual expenses may be greater or
less than those shown. The examples show the cumulative expenses attributable
to a hypothetical $1,000 investment in the Institutional Class shares of each
Fund over specified periods, assuming the 5% annual return required under
federal regulations.

<TABLE>
<CAPTION>
Behavioral Behavioral Behavioral
Growth Fund Value Fund Long/Short Fund
--------------- --------------- ----------------
Institutional Institutional Institutional
Class Class Class
--------------- --------------- ----------------
<S> <C> <C> <C>
Shareholder Transaction Expenses:
Maximum Sales Load Imposed on Purchases
(as % of offering price) .................................................... none none none
Maximum Sales Load Imposed on Reinvested
Dividends (as % of offering price) .......................................... none none none
Maximum Deferred Sales Load (as % of original
purchase price or redemption proceeds,
as applicable) .............................................................. none none none
Redemption Fees (as a % of amount
redeemed)(1) ................................................................ none 1.00%(2) 1.00%(2)
Exchange Fees (as a % of amount exchanged)..................................... none 1.00%(2) 1.00%(2)
Annual Operating Expenses
(as a percentage of average net assets):
Management Fees ............................................................... 0.95% 1.05% 1.55%
12b-1 Fees .................................................................... none none none
Other Operating Expenses (after expense
reimbursements) ............................................................. 0.35% 0.35% 0.45%
Total Operating Expenses (after expense
reimbursements) ............................................................. 1.30% 1.40% 2.00%(3)
Example(4):
An investor would pay the following expenses on a $1,000 investment
assuming (i) a 5% annual return and (ii) redemption at period end, or no
such redemption:
</TABLE>

<TABLE>
<CAPTION>
Behavioral Growth Fund Behavioral Value Fund Behavioral Long/Short Fund
---------------------------- ---------------------------- ---------------------------
Redemption No Redemption Redemption No Redemption Redemption No Redemption
------------ --------------- ------------ --------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
One Year ............ $13 $13 $24 $14 $30 $20
Three Years ......... $41 $41 $44 $44 $63 $63
</TABLE>

(1) Redemptions by wire transfer are subject to a wire fee (currently $5) that
is deducted from the redemption proceeds.
(2) A contingent redemption fee in the amount of 1.00% is imposed on
redemptions and exchanges of Fund shares held for one year or less from
the time of purchase. The contingent redemption fee does not apply to
reinvested dividends. See "How to Redeem Shares--Contingent Redemption
Fee."
(3) Total Operating Expenses do not include dividend expenses incurred in
connection with short sales, which are included in and reduce the
investment return of the Fund.
(4) Under SEC rules, recently-organized funds, such as the Funds, are required
to show expenses in an example for one- and three-year periods only.

Other Operating Expenses are based on estimated amounts for the 1999 fiscal
year after giving effect to voluntary expense limitations. Undiscovered
Managers, the Funds' investment adviser, has voluntarily agreed, for an
indefinite period, to limit the Institutional Class Total Operating Expenses of
each of the Behavioral Growth, Behavioral Value and Behavioral Long/Short Funds
to the percentages of net assets shown above, subject to later reimbursement by
such Funds in certain circumstances. Without this agreement, estimated Other
Operating Expenses and Total Operating Expenses for the Institutional Class
would be 1.76% and 2.71%, respectively, for the Behavioral Growth Fund; 2.27%
and 3.32%, respectively, for the Behavioral Value Fund; and 2.32% and 3.87%,
respectively, for the Behavioral Long/Short Fund. See "Management of the
Funds--Advisory and Sub-Advisory Fees."
(continued)

4
<PAGE>

<TABLE>
<CAPTION>
Special Small Cap REIT Small Cap Value
Fund Fund Fund
-------------------------- --------------- -----------------
Institutional Institutional Institutional
Class Class Class
-------------------------- --------------- -----------------
<S> <C> <C> <C>
Shareholder Transaction Expenses:
Maximum Sales Load Imposed on
Purchases (as % of offering price) ................................ none none none
Maximum Sales Load Imposed on
Reinvested Dividends (as % of
offering price) ................................................... none none none
Maximum Deferred Sales Load (as % of
original purchase price or redemption
proceeds, as applicable) .......................................... none none none
Redemption Fees(1) .................................................. none none none
Exchange Fees ....................................................... none none none
Annual Operating Expenses
(as a percentage of average net assets):
Management Fees ..................................................... Fees vary from 0.65% to 1.05% 1.05%
1.65% based on the invest-
ment performance of the
Fund relative to a bench-
mark (2)
12b-1 Fees .......................................................... none none none
Other Operating Expenses (after expense
reimbursements) ................................................... 0.55% 0.35% 0.35%
Total Operating Expenses (after expense
reimbursements) ................................................... Expenses vary from 1.20% 1.40% 1.40%
to 2.20% based on,
among other things, the
investment performance
of the Fund relative to a
benchmark (2)
Example(3):
An investor would pay the following expenses on a $1,000
investment assuming a 5% annual return (with or without a
redemption at the end of each time period):
One Year ............................................................ $17 $14 $14
Three Years ......................................................... $38-69(2) $44 $44
</TABLE>

(1) Redemptions by wire transfer are subject to a wire fee (currently $5) that
is deducted from the redemption proceeds.
(2) The advisory fee rate for the Special Small Cap Fund will vary depending on
the investment performance of the Fund. In particular, the applicable fee
rate is determined by adding to (or subtracting from) 1.15% one-fifth of
the number of basis points by which the total return of the Fund during
the one-year period ending at the end of a quarter exceeds (or falls short
of) the total return of the Russell 2000 Index during the one-year period
ending at the end of such quarter. The advisory fee rate will not exceed
the annual rate of 1.65% nor be less than the annual rate of 0.65%. The
Russell 2000 Index is composed of the common stocks of the 2000 smallest
of the 3000 largest publicly-traded U.S. companies, measured by market
capitalization. See "Management of the Funds -- Advisory and Sub-Advisory
Fees."
(3) Under SEC rules, recently-organized funds, such as the Funds, are required
to show expenses in an example for one- and three-year periods only.

Other Operating Expenses are based on estimated amounts for the 1999 fiscal
year after giving effect to voluntary expense limitations. Undiscovered
Managers, the Funds' investment adviser, has voluntarily agreed, for an
indefinite period, to limit the Institutional Class Total Operating Expenses of
each of the Special Small Cap, REIT and Small Cap Value Funds to the
percentages of net assets shown above, subject to later reimbursement by such
Funds in certain circumstances. Without this agreement, estimated Other
Operating Expenses and Total Operating Expenses for the Institutional Class
would be 1.22% and 2.37%, respectively, for the Special Small Cap Fund; 1.32%
and 2.37%, respectively, for the REIT Fund; and 1.41% and 2.46%, respectively,
for the Small Cap Value Fund. See "Management of the Funds -- Advisory and
Sub-Advisory Fees."
(continued)

5
<PAGE>

<TABLE>
<CAPTION>
Hidden Core All Cap
Value Equity Value
Fund Fund Fund
--------------- --------------- --------------
Institutional Institutional Institutional
Class Class Class
--------------- --------------- --------------
<S> <C> <C> <C>
Shareholder Transaction Expenses:
Maximum Sales Load Imposed on
Purchases (as % of offering price) ............................................ none none none
Maximum Sales Load Imposed on
Reinvested Dividends (as % of offering
price) ........................................................................ none none none
Deferred Sales Load (as % of original
purchase price or redemption proceeds,
as applicable) ................................................................ none none none
Redemption Fees(1) .............................................................. none none none
Exchange Fees ................................................................... none none none
Annual Operating Expenses
(as a percentage of average net assets):
Management Fees ................................................................. 0.95% 0.74% 0.74%
12b-1 Fees ...................................................................... none none none
Other Operating Expenses (after expense
reimbursements) ............................................................... 0.35% 0.25% 0.25%
Total Operating Expenses (after expense
reimbursements) ............................................................... 1.30% 0.99% 0.99%
Example(2):
An investor would pay the following expenses on a $1,000 investment
assuming a 5% annual return (with or without a redemption at the
end of each time period):
One Year ........................................................................ $13 $10 $10
Three Years ..................................................................... $41 $32 $32
</TABLE>

- ------------
(1) Redemptions by wire transfer are subject to a wire fee (currently $5) that
is deducted from the redemption proceeds.
(2) Under SEC rules, recently-organized funds, such as the Funds, are required
to show expenses in an example for one- and three-year periods only.

Other Operating Expenses are based on estimated amounts for the 1999 fiscal
year after giving effect to voluntary expense limitations. Undiscovered
Managers, the Funds' investment adviser, has voluntarily agreed, for an
indefinite period, to limit the Institutional Class Total Operating Expenses of
each of the Hidden Value, Core Equity and All Cap Value Funds to the
percentages of net assets shown above, subject to later reimbursement by such
Funds in certain circumstances. Without this agreement, estimated Other
Operating Expenses and Total Operating Expenses for the Institutional Class
would be 9.71% and 10.66%, respectively, for the Hidden Value Fund; 7.87% and
8.61%, respectively, for the Core Equity Fund; and 30.28% and 31.02%,
respectively, for the All Cap Value Fund. See "Management of the Funds --
Advisory and Sub-Advisory Fees."

(continued)

6
<PAGE>

<TABLE>
<CAPTION>
International International
Equity Small Cap Equity
Fund Fund
------------------ -----------------
Institutional Institutional
Class Class
------------------ -----------------
<S> <C> <C>
Shareholder Transaction Expenses:
Maximum Sales Load Imposed on
Purchases (as % of offering price) ................................................ none none
Maximum Sales Load Imposed on
Reinvested Dividends (as % of offering
price) ............................................................................ none none
Deferred Sales Load (as % of original
purchase price or redemption proceeds,
as applicable) .................................................................... none none
Redemption Fees (as a % of amount
redeemed)(1) ...................................................................... 1.00%(2) 1.00%(2)
Exchange Fees (as a % of amount exchanged)........................................... 1.00%(2) 1.00%(2)
Annual Operating Expenses
(as a percentage of average net assets):
Management Fees ..................................................................... 0.95% 1.15%
12b-1 Fees .......................................................................... none none
Other Operating Expenses (after expense
reimbursements) ................................................................... 0.50% 0.45%
Total Operating Expenses (after expense
reimbursements) ................................................................... 1.45% 1.60%
Example(3):
An investor would pay the following expenses on a $1,000 investment assuming (i) a 5%
annual return and (ii) redemption at period end, or no such redemption:

</TABLE>

<TABLE>
<CAPTION>
International Small Cap
International Equity Fund Equity Fund
---------------------------- ---------------------------
Redemption No Redemption Redemption No Redemption
------------ --------------- ------------ --------------
<S> <C> <C> <C> <C>
One Year ............ $25 $15 $26 $16
Three Years ......... $46 $46 $50 $50
</TABLE>

- ------------
(1) Redemptions by wire transfer are subject to a wire fee (currently $5) that
is deducted from the redemption proceeds.
(2) A contingent redemption fee in the amount of 1.00% is imposed on
redemptions and exchanges of Fund shares held for one year or less from
the time of purchase. The contingent redemption fee does not apply to
reinvested dividends. See "How to Redeem Shares--Contingent Redemption
Fee."
(3) Under SEC rules, recently-organized funds, such as the Funds, are required
to show expenses in an example for one- and three-year periods only.

Other Operating Expenses are based on estimated amounts for the 1999 fiscal
year after giving effect to voluntary expense limitations. Undiscovered
Managers, the Funds' investment adviser, has voluntarily agreed, for an
indefinite period, to limit the Institutional Class Total Operating Expenses of
each of the International Equity and International Small Cap Equity Funds to
the percentages of net assets shown above, subject to later reimbursement by
such Funds in certain circumstances. Without this agreement, estimated Other
Operating Expenses and Total Operating Expenses for the Institutional Class
would be 1.61% and 2.56%, respectively, for the International Equity Fund; and
1.61% and 2.76%, respectively, for the International Small Cap Equity Fund. See
"Management of the Funds -- Advisory and Sub-Advisory Fees."

7
<PAGE>

FINANCIAL HIGHLIGHTS

Selected data for a share of beneficial interest outstanding throughout the
period

<TABLE>
<CAPTION>
Behavioral Special Small Cap
Growth Small REIT Value
Fund Cap Fund Fund Fund
------------------ ------------------- ------------------- ------------------
Institutional Institutional Institutional Institutional
Class(1) Class(1) Class(1) Class(1)
------------------ ------------------- ------------------- ------------------
Period Period Period Period
ended ended ended ended
August 31, August 31, August 31, August 31,
1998 1998 1998 1998
------------------ ------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Net Asset Value, beginning of period ................ $ 12.50 $ 12.50 $ 12.50 $ 12.50
Income from Investment Operations:
Net investment income (loss) (+) ................... (0.02) (0.03) 0.20 0.00 (A)
Net realized and unrealized gain (loss)
on investments .................................... (0.62) (2.07) (2.06) (1.60)
--------- ---------- ---------- ----------
Total income (loss) from Investment Operations (0.64) (2.10) (1.86) (1.60)
--------- ---------- ---------- ----------
Net increase (decrease) in net asset value from
operations ......................................... (0.64) (2.10) (1.86) (1.60)
--------- ---------- ---------- ----------
Net Asset Value, end of period ...................... $ 11.86 $ 10.40 $ 10.64 $ 10.90
========= ========== ========== ==========
Total Return ........................................ (5.12)%* * (16.80)%* * (14.88)%* * (12.80)%* *
Ratios/Supplemental Data:
Net Assets, end of period (in 000's) ................ $ 5,254 $ 11,286 $ 9,122 $ 13,849
Ratios to average net assets:
Net investment income (loss) including
reimbursement .................................... (0.35)%* (0.51)%* 4.85%* 0.15%*
Operating expenses including reimbursement ......... 1.30%* 1.70%* 1.40%* 1.40%*
Portfolio Turnover Rate ............................. 67%** 9%** 52%** 10%**
Average Commission Rate Paid ........................ $0.0439*** $0.0534*** $0.0532*** $ 0.0587***
</TABLE>

+ The operating expenses of the Fund may reflect a reduction of the Adviser
fee, an allocation of expenses to the Investment Adviser, or both. Had such
actions not been taken, the ratios and net investment income (loss) per
share would have been as follows:

<TABLE>
<S> <C> <C> <C> <C>
Net investment income (loss) ................... (5.08)%* (3.13)%* 1.63%* (3.32)%*
Operating Expenses ............................. 6.03%* 4.32%* 4.62%* 4.87%*
Net investment income (loss) per share ......... $ (0.27) $ (0.15) $ 0.07 $ (0.08)
</TABLE>

- ----------------
* Annualized
** Not Annualized
*** Not Audited
(1) The Fund's Institutional Class commenced investment operations on:
Behavioral Growth Fund--12/31/97; Special Small Cap Fund--12/30/97; REIT
Fund--01/01/98 and Small Cap Value Fund--12/30/97.
(A) Represents less than $0.005 per share.

The above information (except for the information relating to the average
commission rate paid by the Funds) has been audited by Deloitte & Touche LLP,
independent auditors. The report of Deloitte & Touche LLP is incorporated by
reference in the Trust's SAI and may be obtained by shareholders upon request
and without charge. These Financial Highlights should be read in conjunction
with the other audited financial statements and related notes which are
incorporated by reference in the Trust's SAI.

A discussion of the performance of each Fund in the fiscal year ended
August 31, 1998, is included in the Trust's Annual Report for the fiscal year
ended August 31, 1998. Copies of the Trust's Annual Report are available upon
request and without charge. A comparison of the performance of each Fund's
Institutional Class over the life of the Fund with that of a benchmark
securities index is included in Appendix A to this Prospectus.

8
<PAGE>

FINANCIAL HIGHLIGHTS--(CONTINUED)

Selected data for a share of beneficial interest outstanding throughout the
period

<TABLE>
<CAPTION>
Hidden Core All Cap
Value Equity Value
Fund Fund Fund
------------------- ----------------- ------------------
Institutional Institutional Institutional
Class(1) Class(1) Class(1)
------------------- ----------------- ------------------
Period Period Period
ended ended ended
August 31, August 31, August 31,
1998 1998 1998
------------------- ----------------- ------------------
<S> <C> <C> <C>
Net Asset Value, beginning of period ..................... $ 12.50 $ 12.50 $ 12.50
Income from Investment Operations:
Net investment income (loss) (+) ........................ 0.03 0.05 0.06
Net realized and unrealized gain (loss)
on investments ......................................... (2.77) 0.20 (1.03)
---------- --------- ---------
Total income (loss) from Investment Operations ......... (2.74) 0.25 (0.97)
---------- --------- ---------
Net increase (decrease) in net asset value from
operations .............................................. (2.74) 0.25 (0.97)
---------- --------- ---------
Net Asset Value, end of period ........................... $ 9.76 $ 12.75 $ 11.53
========== ========= =========
Total Return ............................................. (21.92)%** 2.00%** (7.76)%* *
Ratios/Supplemental Data:
Net Assets, end of period (in 000's) ..................... $ 925 $ 1,295 $ 289
Ratios to average net assets:
Net investment income (loss) including
reimbursement ......................................... 0.58%* 1.18%* 0.95%*
Operating expenses including reimbursement .............. 1.30%* 0.99%* 0.99%*
Portfolio Turnover Rate .................................. 74%** 46%** 36%**
Average Commission Rate Paid ............................. $0.0545*** $0.0618*** $0.0600***
</TABLE>

<TABLE>
<S> <C> <C> <C>
Net investment income (loss) ................... (15.16)%* (16.23)%* (41.18)%*
Operating Expenses ............................. 17.04%* 18.40%* 43.12%*
Net investment income (loss) per share ......... $ (0.77) $ (0.68) $ (2.73)
</TABLE>

- ----------------
* Annualized
** Not Annualized
*** Not Audited
(1) The Fund's Institutional Class commenced investment operations on:
Hidden Value Fund--12/31/97; Core Equity Fund--12/31/97 and All Cap Value
Fund--12/31/97.

9
<PAGE>

THE FUNDS

The following sections present information about the investment objective,
policies and strategies, sub-adviser and portfolio manager(s) for each Fund.

BEHAVIORAL GROWTH FUND
- -------------------------

The Behavioral Growth Fund's investment objective is growth of capital.

The Fund seeks to achieve its objective by investing primarily in common stocks
of U.S. companies that the Fund's sub-adviser believes have growth
characteristics. In selecting stocks for the Fund, the sub-adviser applies
principles based on behavioral studies. The sub-adviser believes that
behavioral biases on the part of investors may cause the market to under-react
to new, positive information concerning a company. The sub-adviser analyzes
companies that have recently announced higher than expected earnings, and seeks
to determine whether the market value of the company's stock fully reflects the
sub-adviser's expectations as to the company's future earnings and growth
prospects. The sub-adviser expects that the median market capitalization of
stocks held by the Fund will ordinarily be approximately $1 billion, and that
the average market capitalization will be between $1.5 and $2 billion, but the
median and average capitalizations could be significantly higher or lower. The
Fund will ordinarily remain substantially fully invested in common stocks.

Fuller & Thaler Asset Management, Inc. ("Fuller & Thaler"), formerly known as
RJF Asset Management, Inc., is the sub-adviser to the Fund. Fuller & Thaler,
411 Borel Avenue, Suite 402, San Mateo, California was founded in 1993, and
currently serves as an investment adviser to pension and profit sharing plans,
academic institutions and other institutional investors.

Russell J. Fuller and Frederick W. Stanske have day-to-day responsibility for
the management of the Fund's portfolio. Mr. Fuller founded Fuller & Thaler and
has served as its President since 1993. He was a Vice President of Strategic
Development of Concord Capital Management from 1990 to 1993, and a Professor of
Finance and Chair of the Department of Finance at Washington State University
from 1984 to 1990. Mr. Stanske joined Fuller & Thaler in 1996 as Vice President
and Portfolio Manager and became Senior Vice President and Portfolio Manager in
1997. Prior to joining Fuller & Thaler, Mr. Stanske was employed as a
Securities Analyst at Farmers Insurance Group from 1987 to 1989 and as a Vice
President and Research Analyst at Fisher Investments from 1989 to 1996.

10
<PAGE>

BEHAVIORAL VALUE FUND
- -------------------------

The Behavioral Value Fund's investment objective is capital appreciation.

The Fund seeks to achieve its objective by investing primarily in common stocks
of U.S. companies. In selecting stocks for the Fund, the sub-adviser applies
principles based on behavioral studies. The sub-adviser believes that
behavioral biases on the part of investors may cause the market to over-react
to old, negative information and under-react to new, positive information
concerning a company. In order to take advantage of such behavioral biases, the
sub-adviser begins by looking at companies that have (i) price-to-earnings
ratios below the median in their industry group or (ii) decreasing stock values
on an absolute basis. Within such universes of stocks, the sub-adviser selects
investments for the Fund based on such factors as (i) recent underperformance
of the company's stock relative to the market, (ii) significant share purchases
by company insiders or (iii) stock repurchase activity by the company. The
sub-adviser expects that the median market capitalization of stocks held by the
Fund will ordinarily be within the range of stocks encompassed by the Russell
2000 Index, but the median capitalization could be significantly higher or
lower. The Fund will ordinarily remain substantially fully invested in common
stocks.

The Fund's sub-adviser is Fuller & Thaler, and Russell J. Fuller and, effective
as of January 1, 1999, Mark Moon have day-to-day responsibility for managing
the Fund's portfolio. Mr. Moon will join Fuller & Thaler effective as of
January 1, 1999 as Vice President, Portfolio Manager. Prior to joining Fuller &
Thaler, Mr. Moon was employed as Chief Investment Officer at Heidt Capital
Group, LLC from 1995 to 1998 and as Assistant Treasurer at AMGEN INC. from 1989
to 1995. For more information about Fuller & Thaler and Mr. Fuller, see
"Behavioral Growth Fund" above.

11
<PAGE>

BEHAVIORAL LONG/
SHORT FUND
- -------------------------

The Behavioral Long/Short Fund's investment objective is growth of capital.

The Fund seeks to achieve its objective by taking long positions in stocks of
U.S. companies that the Fund's sub-adviser believes are undervalued and short
positions in stocks of other U.S. companies that the Fund's sub-adviser
believes are overvalued. See "More Information About the Funds' Investments and
Risk Considerations--Short Sales" below. When taking long positions, the
sub-adviser utilizes a combination of its growth and value strategies. A
portion of the Fund's long portfolio is selected using the strategies used for
selecting stocks for the Behavioral Growth Fund. The remainder of the long
portfolio is selected using the strategies used for selecting stocks for the
Behavioral Value Fund. For a description of such strategies, see "Behavioral
Growth Fund" and "Behavioral Value Fund" above. When taking short positions,
the sub-adviser begins with universes of stocks that have high valuation ratios
and then analyzes companies within such universes that have had recent stock
issuances or where there has been a significant divestiture of company stock by
management. In constructing the Fund's long and short portfolios, the
sub-adviser does not seek to achieve characteristics that would tend to reduce
the likelihood of divergence in the value of the two portfolios (such as
similar industry weightings). In this respect, the Fund differs from so-called
"market neutral" funds. There may be instances when the sub-adviser will have
to terminate short positions at a time when it would not otherwise do so in
order to ensure that the market value of all short positions does not exceed
100% of the value of the Fund's net assets. The sub-adviser expects that the
median market capitalization of stocks held by the Fund will ordinarily be
approximately $1.5 billion, but the median capitalization could be
significantly higher or lower. The Fund will ordinarily remain substantially
fully invested in common stocks. The dollar value of the Fund's long portfolio
will at least equal the dollar value of its short portfolio, and, under normal
market conditions, the dollar value of the long portfolio could exceed that of
the short portfolio by up to 30%.

Investment in shares of the Fund is more volatile and risky than some other
forms of investment. If the sub-adviser takes long positions in stocks that
underperform the market and short positions in stocks that outperform the
market, then the losses of the Fund may exceed those of other stock mutual
funds. Furthermore, because the Fund's sub-adviser will manage both a long and
a short portfolio, an investment in the Fund will involve the risk that the
sub-adviser may make more poor investment decisions than a manager of a typical
stock mutual fund with only a long portfolio.

The Fund's sub-adviser is Fuller & Thaler, and Russell J. Fuller, Frederick W.
Stanske and, effective as of January 1, 1999, Mark Moon have day-to-day
responsibility for managing the Fund's long portfolio, and Mr. Stanske and,
effective as of January 1, 1999, Mr. Moon have day-to-day responsibility for
managing the Fund's short portfolio. For more information about Fuller & Thaler
and Messrs. Fuller and Stanske, see "Behavioral Growth Fund" above, and for
more information about Mr. Moon, see "Behavioral Value Fund" above.

12
<PAGE>

SPECIAL SMALL CAP FUND
- -------------------------

The Special Small Cap Fund's investment objective is long-term growth of
capital.

The Fund seeks to achieve its objective by investing primarily in common stocks
of small cap U.S. companies that have one or more of the following special
characteristics: (1) the company has recently been spun off or divested from a
former parent company, (2) the company has announced or is conducting a program
to buy back its own stock, (3) the company has made or intends to make a
relatively significant sale of assets, or (4) the sub-adviser believes the
company is undervalued because of other special circumstances, such as
regulatory changes affecting its industry. Under normal market conditions, the
Fund invests at least 65% of its assets in stocks of companies in such special
situations with market capitalization of between $50 million and $1.2 billion.

Kestrel Investment Management Corporation ("Kestrel Management") is the
sub-adviser to the Fund. Kestrel Management, 411 Borel Avenue, Suite 403, San
Mateo, California, was founded in 1993, and serves as an investment adviser for
pension and profit sharing plans, trusts, charitable organizations, and other
institutional and individual investors.

David J. Steirman and Abbott J. Keller have day-to-day responsibility for the
management of the Fund. Messrs. Steirman and Keller have served as President
and Chief Investment Officer, respectively, of Kestrel Management since
founding the firm in 1993. Messrs. Steirman and Keller have worked together in
the investment management business for more than twenty years, having served
from 1981 to 1993 as vice president and investment strategist, respectively, at
Concord Capital Management, and having both been employed before that at
American National Bank of Chicago.

13
<PAGE>

REIT FUND
- -------------------------

The REIT Fund's investment objective is high total investment return through a
combination of capital appreciation and current income.

The Fund seeks to achieve its objective by investing substantially all of its
assets, and in any event in normal market conditions at least 65% of its
assets, in equity securities of real estate investment trusts ("REITs"),
including REITs with relatively small market capitalization. In selecting
investments for the Fund, the Fund's sub-adviser seeks to identify REITs that
have good management, strong balance sheets, above average growth in funds from
operations and that trade at a discount to their underlying value.

Bay Isle Financial Corporation ("Bay Isle") is the Fund's sub-adviser. Bay
Isle, 160 Sansome Street, San Francisco, California, was founded in 1986, and
serves as an investment adviser to pension and profit sharing plans, trusts,
charitable organizations, and other institutional and individual investors.

William F.K. Schaff has day-to-day responsibility for the management of the
Fund's portfolio. He receives significant analytical assistance from Bay Isle's
chief REIT analyst, Ralph L. Block. Mr. Schaff has served as a portfolio
manager and Chief Investment Officer of Bay Isle since 1989. Mr. Block has
nearly 30 years' experience investing in REITs and is the author of a recent
book on REIT investing, The Essential REIT. Mr. Block has served as a REIT
analyst for Bay Isle since 1993. Mr. Block was also a Partner of the law firm
of Graven Perry Block Brody & Qualls from 1969 to 1995.

14
<PAGE>

SMALL CAP VALUE FUND
- -------------------------

The Small Cap Value Fund's investment objective is long-term growth of capital.

The Fund seeks to achieve its objective by investing primarily in common stocks
of companies with a market float of $1.2 billion or less that the Fund's
sub-adviser considers to be undervalued at the time of purchase and to have the
potential for long-term capital appreciation. (Market float is the total value
of all the outstanding shares of a company that are registered for public
trading and does not include shares held by company founders or other insiders
that are not freely resalable.) In selecting stocks for the Fund, the Fund's
sub-adviser will consider, among other things, the issuer's earning power and
the relative value of the issuer's assets. Under normal market conditions, the
Fund will invest at least 65% of its total assets in common stocks of companies
with a market float of $1.2 billion or less.

J.L. Kaplan Associates, LLC ("Kaplan Associates") is the sub-adviser to the
Fund. Kaplan Associates, 222 Berkeley Street, Suite 2010, Boston,
Massachusetts, is the successor firm to J.L. Kaplan Associates, an investment
advisory firm founded in 1976. Kaplan Associates serves as an investment
adviser to pension and profit sharing plans, trusts, charitable organizations
and other institutional and private investors.

James L. Kaplan and Paul Weisman have day-to-day responsibility for managing
the Fund's portfolio. Mr. Kaplan has been the principal of Kaplan Associates
and its predecessor since founding the firm in 1976. From 1972 to 1984, he was
Associate Professor of Mathematics at Boston University. Mr. Weisman has been a
portfolio manager at the firm since 1986. From 1984 to 1986, Mr. Weisman was an
investment analyst at Delphi Management, Inc.

15
<PAGE>

HIDDEN VALUE FUND
- -------------------------

The Hidden Value Fund's investment objective is long-term growth of capital.

The Fund seeks to achieve its objective by investing primarily in common stocks
of companies that the Fund's sub-adviser considers to be undervalued at the
time of purchase and to have the potential for long-term capital appreciation.
The sub-adviser believes that the value of certain stocks will tend to be
"hidden" from the market for reasons including the coverage of certain
companies by relatively few securities analysts. The sub-adviser expects that
the median market capitalization of stocks held by the Fund will ordinarily
range from $800 million to $5 billion. In selecting stocks for the Fund, the
sub-adviser will consider, among other things, the issuer's earning power and
the relative value of the issuer's assets. Under normal market conditions, the
Fund will invest at least 65% of its total assets in common stocks.

The Fund's sub-adviser is Kaplan Associates, and James L. Kaplan and Paul
Weisman have day-to-day responsibility for managing the Fund's portfolio. For
more information about Kaplan Associates and Messrs. Kaplan and Weisman, see
"Small Cap Value Fund" above.

16
<PAGE>

CORE EQUITY FUND
- -------------------------

The Core Equity Fund's investment objective is long-term growth of capital.

The Fund seeks to achieve its objective by investing substantially all of its
assets in common stocks of well-established, high-quality U.S. companies.
Although the common stocks in which the Fund invests will typically have larger
market capitalization, the Fund may invest in stocks with capitalization as low
as $1 billion. In selecting investments for the Fund, the Fund's sub-adviser
will consider, among other things, its expectations as to the relative
performance of various sectors of the economy and the relative growth prospects
of different companies within such sectors. Under normal market conditions, the
Fund will ordinarily be substantially fully invested in common stocks of U.S.
companies.

Waite & Associates, L.L.C. is the Fund's sub-adviser. Waite & Associates,
L.L.C., 601 South Figueroa Street, Los Angeles, California, is the successor
firm to Waite & Associates, the successor firm to Waite & Correnti, an
investment advisory firm founded in 1978. Leslie A. Waite and Diana L. Calhoun
have day-to-day responsibility for the management of the Fund's portfolio. Mr.
Waite founded Waite & Correnti in 1978 and has served since then as President
and Chief Investment Officer of the firm. Ms. Calhoun joined the firm in 1981
and holds the positions of Managing Director and Senior Portfolio Manager. Ms.
Calhoun held the position of Senior Vice President of Trading from 1981 until
becoming a Managing Director in 1997, and has been a Senior Portfolio Manager
since 1992.

17
<PAGE>

ALL CAP VALUE FUND
- -------------------------

The All Cap Value Fund's investment objective is long-term growth of capital.

The Fund seeks to achieve its objective by investing in common stocks of
companies of any market capitalization (small-, mid- or large-cap) that its
sub-adviser believes are undervalued and therefore offer above-average
potential for capital growth. In selecting these stocks, the sub-adviser will
consider, among other things, the issuer's cash flow, price-to-book ratio,
return on capital, balance sheets, and management. The Fund will ordinarily
remain substantially fully invested in common stocks.

E.R. Taylor Investments, Inc. ("E.R. Taylor") is the sub-adviser to the Fund.
E.R. Taylor, 46 South Main Street, Suite 4, Concord, New Hampshire, was founded
in 1983, and serves as an investment adviser to endowment funds, charitable
organizations and other institutional and individual investors. E.R. Taylor's
philosophy is to invest in undervalued, quality companies where management uses
cash flow to build shareholder value.

Investment decisions for the Fund are made by E.R. Taylor's Investment
Committee, which consists of six investment professionals. Sherwood T. Small,
President of E.R. Taylor, is the Chairman of the Investment Committee. Mr.
Small has served as President of E.R. Taylor since 1992.

18
<PAGE>

INTERNATIONAL EQUITY FUND
- -------------------------

The International Equity Fund's investment objective is capital appreciation.

The Fund seeks to achieve its objective by investing in common stocks or other
equity securities of issuers of any market capitalization (small-, mid- or
large-cap) that are principally traded on any of the stock markets of Europe,
Asia, Australia or New Zealand. Although permitted to invest in equity
securities that are principally traded on any of the foregoing stock markets,
the Fund will not, under normal market conditions, invest more than 15% of its
total assets in issuers whose equity securities are not principally traded in
countries included in the Morgan Stanley Capital International Europe,
Australasia, Far East ("MSCI EAFE") Index. In selecting investment securities
for the Fund, the sub-adviser focuses on economies, industries or companies
that are undergoing significant structural or other changes. Under normal
market conditions, the Fund will ordinarily be substantially fully invested in
equity securities.

Unibank Securities, Inc. ("Unibank"), 13-15 West 54th Street, New York, New
York, was founded in 1994, and is the sub-adviser to the Fund. Unibank or its
affiliate, Unibank A/S, currently serves as an investment adviser to pension
and profit sharing plans, trusts and other institutional and private investors.
Investment decisions for the Fund are made by an investment team.

19
<PAGE>

INTERNATIONAL SMALL CAP
EQUITY FUND
- -------------------------

The International Small Cap Equity Fund's investment objective is capital
appreciation.

The Fund seeks to achieve its objective by investing primarily in common stocks
or other equity securities of small cap issuers that are principally traded on
any of the stock markets of Europe, Asia, Australia or New Zealand. Although
permitted to invest in equity securities that are principally traded on any of
the foregoing stock markets, it is expected that the Fund will invest primarily
in issuers whose equity securities are principally traded on stock markets in
Europe. The Fund will not, under normal market conditions, invest more than 15%
of its total assets in issuers whose equity securities are not principally
traded on stock markets in countries included in the MSCI EAFE Index. In
selecting investment securities for the Fund, the sub-adviser focuses on
economies, industries or companies that are undergoing significant structural
or other changes. Under normal market conditions, the Fund will ordinarily be
substantially fully invested in equity securities and will invest at least 65%
of its total assets in equity securities of issuers with market
capitalizations, at the time of purchase, of under $1.5 billion.

The Fund's sub-adviser is Unibank. Investment decisions for the Fund are made
by an investment team. For more information about Unibank, see "International
Equity Fund" above.

20
<PAGE>

ALL FUNDS

THE FUNDS' INVESTMENTS
In addition to the investments described above, each Fund may lend its
portfolio securities and enter into repurchase agreements. See "More
Information About the Funds' Investments and Risk Considerations" below.

INVESTMENT OBJECTIVES AND POLICIES
Except as explicitly described otherwise, the investment objective and policies
of each of the Funds are not "fundamental" and may be changed without
shareholder approval.

DIVERSIFICATION
Each Fund is a "diversified" fund, as defined in the Investment Company Act of
1940 (the "1940 Act"), except for the REIT and the Special Small Cap Funds,
which are "non-diversified." With respect to 75% of its assets, a diversified
fund may not invest more than 5% of its total assets in the securities of any
one issuer (except U.S. government securities) while the remaining 25% of its
total assets is not subject to such restriction. A non-diversified fund is
restricted with respect to 50% of its total assets from investing more than 5%
of its total assets in the securities of any one issuer (except U.S. government
securities), and with respect to the remaining 50% of its total assets from
investing more than 25% of its total assets in the securities of any one
issuer. A non-diversified fund may invest a greater percentage of its total
assets in securities of individual issuers, or may invest in a smaller number
of different issuers, than a diversified fund. Accordingly, a non-diversified
fund is more susceptible to risks associated with particular issuers than a
diversified fund.

21
<PAGE>

MORE INFORMATION ABOUT THE FUNDS' INVESTMENTS AND RISK CONSIDERATIONS

It is important to understand the following risks inherent in a Fund before you
invest.

COMMON STOCKS AND OTHER EQUITY SECURITIES
Common stocks and similar equity securities are securities that represent an
ownership interest (or the right to acquire such an interest) in a company and
include securities exercisable for or convertible into common stocks (e.g.,
warrants). While offering greater potential for long-term growth, common stocks
and similar equity securities are more volatile and more risky than some other
forms of investment. Therefore, the value of your investment in a Fund may
sometimes decrease instead of increase. Each Fund may invest in equity
securities of companies with relatively small market capitalization. Securities
of such companies may be more volatile than the securities of larger, more
established companies and the broad equity market indices. See "Small
Companies" below. Each Fund's investments may include securities traded
"over-the-counter" as well as those traded on a securities exchange. Some
over-the-counter securities may be more difficult to sell under some market
conditions.

Convertible securities include other securities, such as warrants, that provide
an opportunity for equity participation. Because convertible securities can be
converted into equity securities, their values will normally increase or
decrease as the values of the underlying equity securities increase or
decrease. The movements in the prices of convertible securities, however, may
be smaller than the movements in the value of the underlying equity securities.

SMALL COMPANIES
All of the Funds may invest in companies with relatively small market
capitalization, and several of the Funds will invest primarily in such
companies. See "The Funds" above.

Investments in companies with relatively small capitalization may involve
greater risk than is usually associated with stocks of larger companies. These
companies often have sales and earnings growth rates which exceed those of
companies with larger capitalization. Such growth rates may in turn be
reflected in more rapid share price appreciation. However, companies with
smaller capitalization often have limited product lines, markets or financial
resources and may be dependent upon a relatively small management group. The
securities may have limited marketability and may be subject to more abrupt or
erratic movements in price than securities of companies with larger
capitalization or market averages in general. The net asset value per share of
Funds that invest in companies with smaller capitalization therefore may
fluctuate more widely than market averages.

REPURCHASE AGREEMENTS
All of the Funds will normally invest at least 65% of their total assets in
common stocks or other equity securities. Any assets not invested in common
stocks or other equity securities will generally be held in the form of cash or
in repurchase agreements.

Under a repurchase agreement, a Fund buys securities from a seller, usually a
bank or brokerage firm, with the understanding that the seller will repurchase
the securities at a higher price at a later date. If the seller fails to
repurchase the securities, the Fund has rights to sell the securities to third
parties. Repurchase agreements can be regarded as loans by the Fund to the
seller, collateralized by the securities that are the subject of the agreement.
Repurchase agreements afford an opportunity for the Fund to earn a return on
available cash at relatively low credit risk, although the Fund may be subject
to various delays and risks of loss if the seller fails to meet its obligation
to repurchase.

The staff of the SEC is currently of the view that repurchase agreements
maturing in more than seven days are illiquid securities.

LOANS OF SECURITIES
The Funds may lend their portfolio securities, provided that cash or equivalent
collateral equal to at least 100% of the market value of the securities loaned
is continuously maintained by the borrower with the Funds. During the time
securities are on loan, the borrower will pay the Fund an amount equivalent to
any dividends or interest paid on such securities, and the Fund may invest the
cash collateral and earn additional income, or it may receive an agreed upon
amount of interest income from the borrower who has delivered equivalent
collateral. These loans are subject to termination at the option of the Fund or
the borrower. A Fund may pay reasonable administrative and

22
<PAGE>

custodial fees in connection with a loan and may pay a negotiated portion of
the interest earned on the cash or equivalent collateral to the borrower or
placing broker. It is not currently anticipated that any Fund will have on loan
at any given time securities totaling more than one-third of its net assets. A
Fund runs the risk that the counterparty to a loan transaction will default on
its obligation and that the value of the collateral received may be
insufficient to cover the securities loaned as a result of an increase in the
value of the securities or decline in the value of the collateral.

SHORT SALES
The Behavioral Long/Short Fund will make short sales of securities. A short
sale is a transaction in which the Fund sells a security it does not own in
anticipation that the market price of that security will decline. When the Fund
makes a short sale, it must borrow the security sold short from a broker or
other institution and deliver it to the other party to the transaction. The
Fund will incur a loss as a result of a short sale if the price of the borrowed
security increases between the date of the short sale and the date on which the
Fund replaces such security. The Fund will realize a gain if the security
declines in price between those dates. There can be no assurance that the Fund
will be able to close out a short position at any particular time or at an
acceptable price. Although the Fund's gain is limited to the amount at which it
sold a security short, its potential loss is limited only by the maximum
attainable price of the security less the price at which the security was sold
short. Until the security sold short is replaced, the Fund is required to repay
the lender any dividends or interest that accrue during the period of the loan.
To borrow the security, the Fund also may be required to pay a premium. The
Fund also will incur transaction costs in effecting short sales. The amount of
any gain resulting from a short sale will be decreased, and the amount of any
loss increased, by the amount of premiums, dividends, interest or expenses the
Fund may be required to pay in connection with a short sale.

Until the Fund replaces a borrowed security, it will maintain daily a
segregated account with its custodian containing cash, U.S. Government
securities or other liquid securities such that the amount deposited in the
account plus any amount deposited with a broker or other custodian as
collateral will at least equal the current market value of the security sold
short. Depending on arrangements made with such broker or custodian, the Fund
may not receive any payments (including interest) on collateral deposited with
such broker or custodian. The Fund will not make a short sale if, after giving
effect to such sale, the market value of all short positions exceeds 100% of
the value of the Fund's net assets. The Fund's use of short sales may result in
the Fund realizing more short-term capital gains (generally subject to tax at
ordinary income tax rates) than it would if it did not engage in short sales.

REAL ESTATE INVESTMENT TRUSTS
The REIT Fund will invest primarily in shares of REITs. REITs pool investors'
funds for investment primarily in income producing real estate or real estate
related loans or interests. Under the Internal Revenue Code of 1986, as amended
(the "Code"), a REIT is not taxed on income it distributes to its shareholders
if it complies with several requirements relating to its organization,
ownership, assets, and income and a requirement that it generally distribute to
its shareholders at least 95% of its taxable income (other than net capital
gains) for each taxable year. REITs can generally be classified as Equity
REITs, Mortgage REITs and Hybrid REITs. Equity REITs, which invest the majority
of their assets directly in real property, derive their income primarily from
rents. Equity REITs can also realize capital gains by selling properties that
have appreciated in value. Mortgage REITs, which invest the majority of their
assets in real estate mortgages, derive their income primarily from interest
payments. Hybrid REITs combine the characteristics of both Equity REITs and
Mortgage REITs.

While the Fund will not invest in real estate directly, the Fund may be subject
to risks similar to those associated with the direct ownership of real estate
(in addition to securities markets' risks) because of its policy of
concentration in the securities of companies in the real estate industry. These
risks include declines in the value of real estate, risks related to general
and local economic conditions, dependency on management skill, heavy cash flow
dependency, possible lack of availability of mortgage funds, overbuilding,
extended vacancies of properties, increased competition, increases in property
taxes and operating expenses, changes in zoning laws, losses due to costs
resulting from the clean-up of environmental problems, liability to third
parties for damages resulting from environmental problems, casualty or
condemnation losses, limitations on rents, changes in neighborhood values and
in the appeal of properties to tenants and changes in interest rates.

23
<PAGE>

In addition to these risks, Equity REITs may be affected by changes in the
value of the underlying property owned by the trusts, while Mortgage REITs may
be affected by the quality of any credit they extend. Further, Equity REITs and
Mortgage REITs are dependent upon management skills and generally may not be
diversified. Equity REITs and Mortgage REITs are also subject to heavy cash
flow dependency, defaults by borrowers and self-liquidation. In addition,
Equity REITs and Mortgage REITs could possibly fail to qualify for tax-free
pass-through of income under the Code or to maintain their exemptions from
registration under the 1940 Act. There is also the risk that borrowers under
mortgages held by a REIT or lessees of property that a REIT owns may be unable
to meet their obligations to the REIT. In the event of a default by a borrower
or lessee, the REIT may experience delays in enforcing its rights as a
mortgagee or lessor and may incur substantial costs associated with protecting
its investments. In addition to the foregoing risks, certain "special purpose"
REITs in which the Fund may invest may have their assets in specific real
estate sectors, such as hotel REITs, nursing home REITs or warehouse REITs, and
are therefore subject to the risks associated with adverse developments in any
such sectors.

FOREIGN SECURITIES
The International Equity and International Small Cap Equity Funds (the
"International Funds") will invest primarily in foreign securities. Investments
in foreign securities present risks not typically associated with investments
in comparable securities of U.S. issuers.

Since most foreign securities are denominated in foreign currencies or traded
primarily in securities markets in which settlements are made in foreign
currencies, the value of these investments and the net investment income
available for distribution to shareholders of the International Funds may be
affected favorably or unfavorably by changes in currency exchange rates or
exchange control regulations. Because the International Funds may purchase
securities denominated in foreign currencies, a change in the value of any such
currency against the U.S. dollar will result in a change in the U.S. dollar
value of the Funds' assets and the Funds' income available for distribution.

In addition, although the International Funds' income may be received or
realized in foreign currencies, the Funds will be required to compute and
distribute their income in U.S. dollars. Therefore, if the value of a currency
relative to the U.S. dollar declines after a Fund's income has been earned in
that currency, translated into U.S. dollars and declared as a dividend, but
before payment of such dividend, the Fund could be required to liquidate
portfolio securities to pay such dividend. Similarly, if the value of a
currency relative to the U.S. dollar declines between the time a Fund incurs
expenses in U.S. dollars and the time such expenses are paid, the amount of
such currency required to be converted into U.S. dollars in order to pay such
expenses in U.S. dollars will be greater than the equivalent amount in such
currency of such expenses at the time they were incurred.

There may be less information publicly available about a foreign corporate or
government issuer than about a U.S. issuer, and foreign corporate issuers are
not generally subject to accounting, auditing and financial reporting standards
and practices comparable to those in the United States. The securities of some
foreign issuers are less liquid and at times more volatile than securities of
comparable U.S. issuers. Foreign brokerage commissions and securities custody
costs are often higher than those in the United States, and judgments against
foreign entities may be more difficult to obtain and enforce. With respect to
certain foreign countries, there is a possibility of governmental expropriation
of assets, confiscatory taxation, political or financial instability and
diplomatic developments that could affect the value of investments in those
countries. The receipt of interest on foreign government securities may depend
on the availability of tax or other revenues to satisfy the issuer's
obligations.

The International Funds' investments in foreign securities may include
investments in emerging or developing countries, whose economies or securities
markets are not yet highly developed. Special risks associated with these
investments (in addition to the risks associated with foreign investments
generally) may include, among others, greater political uncertainties, an
economy's dependence on revenues from particular commodities or on
international aid or development assistance, currency transfer restrictions,
highly limited numbers of potential buyers for such securities and delays and
disruptions in securities settlement procedures.

The International Funds may invest in foreign equity securities either by
purchasing such securities directly or by purchasing "depository receipts."
Depository receipts are instruments issued by a bank that represent an interest
in equity securities held by arrangement with the bank. Depository

24
<PAGE>

receipts can be either "sponsored" or "unsponsored." Sponsored depository
receipts are issued by banks in cooperation with the issuer of the underlying
equity securities. Unsponsored depository receipts are arranged without
involvement by the issuer of the underlying equity securities. Less information
about the issuer of the underlying equity securities may be available in the
case of unsponsored depository receipts.

In determining whether to invest in securities of foreign issuers, the
sub-adviser of the International Funds will consider the likely effects of
foreign taxes on the net yield available to such Funds and to their
shareholders. Compliance with foreign tax law may reduce each such Fund's net
income available for distribution to its shareholders.

FOREIGN CURRENCY
Most foreign securities in the International Funds' portfolios will be
denominated in foreign currencies or traded in securities markets in which
settlements are made in foreign currencies. Similarly, any income on such
securities is generally paid to the Fund holding such securities in foreign
currencies. The value of these foreign currencies relative to the U.S. dollar
varies continually, causing changes in the dollar value of the Fund's portfolio
investments (even if the local market price of the investments is unchanged)
and changes in the dollar value of the Fund's income available for distribution
to its shareholders. The effect of changes in the dollar value of a foreign
currency on the dollar value of the Fund's assets and on the net investment
income available for distribution may be favorable or unfavorable.

The International Funds may incur costs in connection with conversions between
various currencies. In addition, each International Fund may be required to
liquidate portfolio assets, or may incur increased currency conversion costs,
to compensate for a decline in the dollar value of a foreign currency occurring
between the time when the Fund declares and pays a dividend, or between the
time when the Fund accrues and pays an operating expense in U.S. dollars.

CURRENCY HEDGING TRANSACTIONS
Each of the International Funds may, at the discretion of its sub-adviser,
engage in foreign currency exchange transactions, in connection with the
purchase and sale of portfolio securities, to protect the value of specific
portfolio positions or in anticipation of changes in relative values of
currencies in which current or future Fund portfolio holdings are denominated
or quoted. Currency hedging transactions may include forward contracts
(contracts with another party to buy or sell a currency at a specified price on
a specified date), futures contracts (which are similar to forward contracts
but are traded on an exchange) and options to buy or sell currencies and
currency futures contracts. For more information on foreign currency hedging
transactions, see the SAI. The International Funds' sub-adviser expects to
engage in currency hedging transactions only under unusual circumstances.
Therefore, investors in the International Funds will ordinarily be exposed to
the risks associated with fluctuations in the value of the U.S. dollar relative
to the currencies in which those Funds' portfolio securities trade.

"YEAR 2000" MATTERS
Many of the services provided to the Funds depend on the smooth functioning of
computer systems. Many systems in use today cannot distinguish between the year
1900 and the year 2000. Should any of the service systems of a Fund fail to
process information properly, such failure could have an adverse impact on the
Fund's operations and services provided to shareholders. Undiscovered Managers,
the sub-advisers and the distributor, administrator, sub-administrator,
transfer agent, custodians and certain other service providers to each of the
Funds have reported that each expects to modify its systems, as necessary,
prior to January 1, 2000 to address this so-called "Year 2000 problem."
However, there can be no assurance that the problem will be corrected in all
respects and that the Funds' operations and services provided to shareholders
will not be adversely affected.

25
<PAGE>

MANAGEMENT OF THE FUNDS

Undiscovered Managers is the investment adviser of each Fund and has
responsibility for the management of the Funds' affairs, under the supervision
of the Trust's Board of Trustees. Each Fund's investment portfolio is managed
on a day-to-day basis by that Fund's sub-adviser, under the general oversight
of Undiscovered Managers and the Board of Trustees. Undiscovered Managers
monitors and evaluates each sub-adviser to assure that the sub-adviser is
managing its Fund consistently with the Fund's investment objective and
restrictions and applicable laws and guidelines. Undiscovered Managers does
not, however, determine what investments will be purchased or sold for a Fund.

Undiscovered Managers was organized in 1997 as a Delaware limited liability
company. The address of Undiscovered Managers is Plaza of the Americas, 700
North Pearl Street, Dallas, Texas 75201. Mark P. Hurley, the President of
Undiscovered Managers, and AMRESCO, Inc., a publicly traded corporation engaged
in residential mortgage banking, commercial mortgage banking, asset management
and commercial finance, each own more than 25% of the voting securities of
Undiscovered Managers and therefore are regarded to control Undiscovered
Managers for purposes of the 1940 Act. Each of the sub-advisers, except
Unibank, is regarded for purposes of the 1940 Act as being controlled by the
following persons, each of whom is a principal of the firm and owns more than
25% of the voting securities of the firm: Russell J. Fuller (Fuller & Thaler);
David J. Steirman and Abbott J. Keller (Kestrel Management); Gary G. Pollock
and William F.K. Schaff (Bay Isle); James L. Kaplan (Kaplan Associates); Leslie
A. Waite (Waite & Associates, L.L.C.); and Sherwood T. Small (E.R. Taylor).
Unibank is regarded for purposes of the 1940 Act as being controlled by
Unidanmark A/S, a publicly traded financial services holding company in
Denmark. Unibank has no prior experience managing mutual funds.

The Bank of New York is the custodian for each Fund, except the Behavioral
Long/Short Fund whose custodian is Custodial Trust Company. First Data
Distributors, Inc. (the "Distributor") is the distributor for all the Funds.

ADVISORY AND SUB-ADVISORY FEES AND OTHER EXPENSES

Each Fund pays Undiscovered Managers a management fee at the following annual
percentage rates of the Fund's daily net assets, subject to the fee deferral
arrangements described below:

<TABLE>
<CAPTION>
Fund Fee Rate
<S> <C>
Behavioral Growth Fund 0.95%
Behavioral Value Fund 1.05%
Behavioral Long/Short Fund 1.55%
Special Small Cap Fund 0.65-1.65%*
REIT Fund 1.05%
Small Cap Value Fund 1.05%
Hidden Value Fund 0.95%
Core Equity Fund 0.74%
All Cap Value Fund 0.74%
International Equity Fund 0.95%
International Small Cap Equity Fund 1.15%
</TABLE>

- ------------
* After December 29, 1998, the advisory fee rate for the Special Small Cap Fund
will vary depending on the investment performance of the Fund. In
particular, the applicable fee rate is determined by adding to (or
subtracting from) 1.15% one-fifth of the number of basis points by which the
total return of the Fund during the one-year period ending at the end of a
quarter exceeds (or falls short of) the total return of the Russell 2000
Index during the one-year period ending at the end of such quarter. The
advisory fee rate will not exceed the annual rate of 1.65% nor be less than
the annual rate of 0.65%. Until December 29, 1998, the annual fee rate is
1.15%. The Russell 2000 Index is composed of the common stocks of the 2000
smallest of the 3000 largest publicly-traded U.S. companies, measured by
market capitalization. The Fund uses the Russell 2000 Index as the standard
of performance comparison because that index is well known to investors and
is commonly regarded as representative of the performance of United States
smaller capitalization stocks. The sponsor of the Russell 2000 Index does
not sponsor and is not in any other way affiliated with the Fund.

26
<PAGE>

As described above, the advisory fee rate for the Special Small Cap Fund will
vary depending on the investment performance of the Fund. The following table
provides information concerning a range of potential advisory fee rates for the
Special Small Cap Fund.

<TABLE>
<CAPTION>
Special Small Cap Fund
Total Return Differential Fee
with respect to Russell 2000 Index Percentage
<S> <C>
-2.5% .65%*
-1.5% .85%
0% 1.15%
1.5% 1.45%
2.5% 1.65%**
</TABLE>

- ------------
* Minimum advisory fee rate even if the total return of the Russell 2000 Index
exceeds the total return of the Fund by more than 2.5%.
** Maximum advisory fee rate even if the total return of the Fund exceeds the
total return of the Russell 2000 Index by more than 2.5%.

Undiscovered Managers pays each Fund's sub-adviser a sub-advisory fee at the
following annual percentage rates of the specified levels of the Fund's average
daily net assets:

<TABLE>
<CAPTION>
Fund Sub-adviser Fee Rate as % of Fund's Net Assets
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Behavioral Growth Fund Fuller & Thaler 0.60% of the first $200 million
----- -------------------------------------
0.55% of the next $100 million
----- -------------------------------------
0.50% of assets in excess of $300 million
- ---------------------------------------------------------------------------------------------------------
Behavioral Value Fund Fuller & Thaler 0.70% of the first $200 million
----- -------------------------------------
0.65% of the next $100 million
----- -------------------------------------
0.60% of assets in excess of $300 million
- ---------------------------------------------------------------------------------------------------------
Behavioral Long/Short Fuller & Thaler 1.20% of the first $200 million
Fund ----- -------------------------------------
1.15% of the next $100 million
----- -------------------------------------
1.10% of assets in excess of $300 million
- ---------------------------------------------------------------------------------------------------------
Special Small Cap Fund Kestrel Management 0.30% - of all assets
1.30%*
- ---------------------------------------------------------------------------------------------------------
REIT Fund Bay Isle 0.70% of the first $200 million
------- -------------------------------------
0.65% of the next $100 million
------- -------------------------------------
0.60% of assets in excess of $300 million
- ---------------------------------------------------------------------------------------------------------
Small Cap Value Fund Kaplan Associates 0.70% of the first $200 million
------- -------------------------------------
0.65% of the next $100 million
------- -------------------------------------
0.60% of assets in excess of $300 million
- ---------------------------------------------------------------------------------------------------------
Hidden Value Fund Kaplan Associates 0.60% of the first $200 million
------- -------------------------------------
0.55% of the next $100 million
------- -------------------------------------
0.50% of assets in excess of $300 million
- ---------------------------------------------------------------------------------------------------------
Core Equity Fund Waite & Associates, L.L.C. 0.40% of the first $200 million
------- -------------------------------------
0.35% of the next $100 million
------- -------------------------------------
0.30% of assets in excess of $300 million
- ---------------------------------------------------------------------------------------------------------
All Cap Value Fund E.R. Taylor 0.40% of the first $200 million
------- -------------------------------------
0.35% of the next $100 million
------- -------------------------------------
0.30% of assets in excess of $300 million
- ---------------------------------------------------------------------------------------------------------
International Equity Fund Unibank 0.60% of the first $200 million
------- -------------------------------------
0.55% of the next $100 million
------- -------------------------------------
0.50% of assets in excess of $300 million
- ---------------------------------------------------------------------------------------------------------
International Small Cap Unibank 0.80% of the first $200 million
Equity Fund ------- -------------------------------------
0.75% of the next $100 million
------- -------------------------------------
0.70% of assets in excess of $300 million
- ---------------------------------------------------------------------------------------------------------
</TABLE>

- ------------
*After December 29, 1998, the sub-advisory fee rate for the Special Small Cap
Fund will vary depending on the investment performance of the Fund. In
particular, the applicable fee rate is deter-

27
<PAGE>

mined by adding to (or subtracting from) 0.80% one-fifth of the number of basis
points by which the total return of the Fund during the one-year period ending
at the end of a quarter exceeds (or falls short of) the total return of the
Russell 2000 Index during the one-year period ending at the end of such
quarter. The sub-advisory fee rate will not exceed the annual rate of 1.30% nor
be less than the annual rate of 0.30%. Until December 29, 1998, the annual fee
rate is 0.80%. For more information about the Russell 2000 Index, see the
footnote to the Funds' Advisory Fee Table above.

The Trust intends to apply for an exemptive order from the SEC to permit
Undiscovered Managers, subject to the approval of the Trust's Board of Trustees
and certain other conditions, to enter into sub-advisory agreements with
sub-advisers other than the current sub-adviser of any Fund without obtaining
shareholder approval. The exemptive request will also seek to permit, without
obtaining shareholder approval, the terms of an existing sub-advisory agreement
to be changed or the employment of an existing sub-adviser to be continued
after events that would otherwise cause an automatic termination of a
sub-advisory agreement when such changes or continuation are approved by the
Trust's Board of Trustees. There is no assurance that the SEC will issue the
exemptive order. This Prospectus would be revised and shareholders notified if
the sub-adviser of any Fund is changed.

Pursuant to an Administrative Services Agreement, Undiscovered Managers has
agreed to provide each Fund all administrative services, including but not
limited to corporate secretarial, treasury, blue sky and fund accounting
services. For these services, each Fund pays Undiscovered Managers a monthly
fee at the annual rate of 0.25% of the Fund's average net asset value.
Undiscovered Managers has entered into an agreement with First Data Investor
Services Group, Inc. ("First Data") to provide certain of the foregoing
administrative services, at the expense of Undiscovered Managers. First Data
has no responsibility with respect to the oversight of any Fund's investment
advisory services.

OTHER FUND EXPENSES

In addition to the investment advisory fee, each Fund pays all expenses not
expressly assumed by Undiscovered Managers, including taxes, brokerage
commissions, fees under the Service and Distribution Plan with respect to the
Fund, if any, fees and expenses of registering and qualifying the Fund's shares
under federal and state securities laws, fees of the Fund's custodian, transfer
agent, independent accountants and legal counsel, expenses of shareholders' and
Trustees' meetings, expenses of preparing, printing and mailing prospectuses to
existing shareholders and fees of Trustees who are not directors, officers or
employees of Undiscovered Managers. In general, fees and expenses of a Fund are
allocated pro rata among such Fund's shares, regardless of class. Fees under the
Service and Distribution Plan with respect to a Fund, if any, however, are
allocated only to that Fund's Investor Class shares. Certain other expenses
relating to a particular class (such as class-specific shareholder services
fees) may be allocated solely to that class.

Undiscovered Managers has voluntarily agreed, for an indefinite period, to
reduce its fees and pay the expenses of each Fund's Institutional Class in
excess of the following annual percentage rates of the average daily net assets
of each Fund's Institutional Class, subject to the obligation of the Fund to
repay Undiscovered Managers such expenses in future years, if any, when the
Fund's Institutional Class expenses fall below the stated percentage rate, but
only to the extent that such repayment would not cause the Fund's Institutional
Class expenses in any such future year to exceed the stated percentage rate,
and provided that the Funds are not obligated to repay any such expenses more
than two years after the end of the fiscal year in which they were incurred:
0.99% for the All Cap Value Fund and the Core Equity Fund; 1.30% for the
Behavioral Growth Fund and the Hidden Value Fund; 1.40% for the Behavioral
Value Fund, the REIT Fund and the Small Cap Value Fund; 1.45% for the
International Equity Fund; 1.60% for the International Small Cap Equity Fund;
2.00% for the Behavioral Long/Short Fund; and, for the Special Small Cap Fund,
the sum of 0.55% plus the advisory fee rate for the Fund for the year in
question. Undiscovered Managers may change or terminate these voluntary
arrangements at any time, but this Prospectus would be supplemented to describe
the change.

PORTFOLIO TRANSACTIONS

28
<PAGE>

efficient and effective services in executing, clearing and settling an order
and will charge commission rates which, when combined with the quality of the
foregoing services, will produce best price and execution for the transaction.
This does not necessarily mean that the lowest available brokerage commission
will be paid. However, the commissions are believed to be competitive with
generally prevailing rates. Each sub-adviser uses its best efforts to obtain
information as to the general level of commission rates being charged by the
brokerage community from time to time and evaluates the overall reasonableness
of brokerage commissions paid on transactions by reference to such data. In
making such evaluation, all factors affecting liquidity and execution of the
order, as well as the amount of the capital commitment by the broker in
connection with the order, are taken into account.

A sub-adviser's receipt of research services from brokers may sometimes be a
factor in its selection of a broker that it believes will provide best price
and execution for a transaction. These research services include not only a
wide variety of reports on such matters as economic and political developments,
industries, companies, securities, portfolio strategy, account performance,
daily prices of securities, stock and bond market conditions and projections,
asset allocation and portfolio structure, but also meetings with management
representatives of issuers and with other analysts and specialists. Although it
is in many cases not possible to assign an exact dollar value to these
services, they may, to the extent used, tend to reduce the sub-adviser's
expenses. Such services may be used by a sub-adviser in managing other client
accounts and in some cases may not be used with respect to the Funds. Receipt
of services or products other than research from brokers is not a factor in the
selection of brokers. Consistent with the Rules of Fair Practice of the
National Association of Securities Dealers, Inc., and subject to seeking best
price and execution, purchases of shares of a Fund by customers of
broker-dealers may be considered as a factor in the selection of broker-dealers
to execute the Fund's securities transactions.

A sub-adviser may cause a Fund to pay a broker-dealer that provides brokerage
and research services to the sub-adviser an amount of commission for effecting
a securities transaction for that Fund in excess of the amount another
broker-dealer would have charged for effecting that transaction. The
sub-adviser must determine in good faith that such greater commission is
reasonable in relation to the value of the brokerage and research services
provided by the executing broker-dealer viewed in terms of that particular
transaction or the sub-adviser's overall responsibilities to the Fund and its
other clients. The sub-adviser's authority to cause a Fund to pay greater
commissions is also subject to such policies as the Trustees of the Trust may
adopt from time to time.

Portfolio transactions for the International Equity and International Small Cap
Equity Funds may be effected by Aros Securities Inc., which is an affiliate of
Unibank, the sub-adviser to such Funds.

It is not possible to predict the Funds' portfolio turnover rates with
certainty. Each Fund's sub-adviser has indicated, however, that it does not
expect that the annual portfolio turnover rate of the Fund(s) it manages would
normally exceed the following rates: 50% for the All Cap Value, Core Equity,
REIT and International Equity Funds; 60% for the International Small Cap Equity
Fund; 75% for the Small Cap Value, Hidden Value and Special Small Cap Funds;
100% for the Behavioral Value Fund; 200% for the Behavioral Growth Fund and
300% for the Behavioral Long/Short Fund. Any Fund's portfolio turnover rate in
any year could be significantly higher or lower than these estimates. Higher
levels of portfolio turnover may result in higher transactions costs and higher
levels of taxable realized capital gains (including short-term capital gains
generally taxed at ordinary income tax rates). See "Dividends, Capital Gain
Distributions and Taxes" below.

HOW TO PURCHASE SHARES

An investor may make an initial purchase of Institutional Class shares of any
Fund by submitting a completed application form and payment to:

Undiscovered Managers Funds
4400 Computer Drive
P.O. Box 5181
Westborough, MA 01581-5181

29
<PAGE>

The minimum initial investment in any Fund is $250,000 in that Fund. A minimum
investment of $10,000 applies to the Trustees of the Trust, investment advisory
clients of the sub-advisers (and their directors, officers and employees), and
employees of Undiscovered Managers and the parents, spouses and children of the
foregoing. The minimum investment may be waived by Undiscovered Managers in its
sole discretion and will be waived for any new shareholder in Undiscovered
Managers Funds who initially invests less than $250,000 but signs a letter of
intent stating the shareholder's intention to bring his or her balance to
$250,000 within six months after the initial purchase. For investors who
purchase through a financial intermediary and hold their shares through an
omnibus account with that financial intermediary, the minimum initial
investment applies to the omnibus account and not to the investors
individually. Undiscovered Managers reserves the right to redeem the accounts
at net asset value of shareholders that have signed a letter of intent but fail
to meet the minimum investment within the specified time or to waive any
minimum investment in its sole discretion. Subsequent investments must be at
least $50,000.

If the balance in a shareholder's account with a Fund is less than a minimum
amount set by the Trustees of the Trust from time to time (currently $250,000
for all accounts), that Fund may close the account and send the proceeds to the
shareholder. Shareholders who are affected by this policy will be notified of
the Fund's intention to close the account and will have 60 days immediately
following the notice to bring the account up to the minimum. The minimum does
not apply to automatic investment plans or accounts that have fallen below the
minimum solely because of fluctuations in a Fund's net asset value per share.

Shares of any Fund may be purchased by (i) cash, (ii) exchanging securities on
deposit with a custodian acceptable to Undiscovered Managers or (iii) any
combination of such securities and cash. Purchase of shares of the Fund in
exchange for securities is subject in each case to the determination by
Undiscovered Managers that the securities to be exchanged are acceptable for
purchase by the Fund. In all cases, Undiscovered Managers reserves the right to
reject any securities that are proposed for exchange. Securities accepted by
Undiscovered Managers in exchange for Fund shares will be valued in the same
manner as the Fund's assets as described below as of the time of the Fund's
next determination of net asset value after such acceptance. All dividends and
subscription or other rights which are reflected in the market price of
accepted securities at the time of valuation become the property of the Fund
and must be delivered to the Fund upon receipt by the investor from the issuer.
Generally, a gain or loss for federal income tax purposes would be realized
upon the exchange of securities by an investor that is subject to federal
income taxation, depending upon the investor's basis in the securities
tendered. An investor who wishes to purchase shares by exchanging securities
should obtain instructions by calling 1-800-667-1224.

Undiscovered Managers will not approve the acceptance of securities in exchange
for shares of any Fund unless (1) Undiscovered Managers and the applicable
sub-adviser in their discretion, believes the securities are appropriate
investments for the Fund; (2) the investor represents and agrees that all
securities offered to the Fund can be resold by the Fund without restriction
under the Securities Act of 1933, as amended, or otherwise; and (3) the
securities are eligible to be acquired under the Fund's investment policies and
restrictions. No investor owning 5% or more of a Fund's shares may purchase
additional shares of that Fund by an exchange of securities.

All purchases made by check should be in U.S. dollars and made payable to
Undiscovered Managers Funds. Third party checks will not be accepted. When
purchases are made by check, redemption proceeds will not be sent until the
check paying for the investment has cleared, which may take up to 15 calendar
days.

Upon acceptance of an investor's order, First Data opens an account, applies
the payment to the purchase of full and fractional Fund shares and mails a
statement of the account confirming the transaction.

After an account has been established, an investor may send subsequent
investments at any time directly to First Data at the above address. The
remittance must be accompanied by either the account identification slip
detached from a statement of account or a note containing sufficient
information to identify the account, i.e., the Fund name and the investor's
account number or name and social security number.

Initial and subsequent investments can also be made by federal funds wire.
Investors should instruct their banks to wire federal funds to Boston Safe
Deposit & Trust Company, ABA #011001234. The text of the wire should read as
follows:

30
<PAGE>

Boston Safe Deposit & Trust Company
ABA #011001234
Account #145483
FBO: Shareholder Name and Account Number
FOR: Undiscovered Managers Funds

A bank may charge a fee for transmitting funds by wire.

Each Fund and the Distributor reserve the right to reject any purchase order,
including orders in connection with exchanges, for any reason which the Fund or
the Distributor in its sole discretion deems appropriate. Although the Funds do
not presently anticipate that they will do so, each Fund reserves the right to
suspend or change the terms of the offering of its shares.

Except for the broker-dealer transaction-based or other fees described in the
next paragraph, the price an investor pays will be the per share net asset value
next calculated after a proper investment order is received by the Trust's
transfer or other agent or sub-agent. Shares of the Funds are sold with no
front-end or contingent deferred sales charges. The net asset value of each
Fund's shares is calculated once daily as of the close of regular trading on the
New York Stock Exchange on each day the Exchange is open for trading, by
dividing the Fund's net assets by the number of shares outstanding. Portfolio
securities are valued at their market value as more fully described in the SAI.

The Distributor may accept telephone orders from broker-dealers, and other
intermediaries designated by such broker-dealers, who have been previously
approved by the Distributor. A Fund will be deemed to have received a purchase
order when an approved broker-dealer or its authorized designee accepts such
order. It is the responsibility of such broker-dealers to promptly forward
purchase or redemption orders to the Distributor. Although there are no
front-end or contingent deferred sales charges imposed by the Funds or the
Distributor, broker-dealers may charge the investor a transaction-based fee or
other fee for their services at either the time of purchase or the time of
redemption. Such charges may vary among broker-dealers but in all cases will be
retained by the broker-dealers and not remitted to the Funds.

GENERAL SHAREHOLDER SERVICES

The Funds offer the following shareholder services, which are more fully
described in the SAI. Explanations and forms are available from First Data.
Telephone redemption and exchange privileges will be established automatically
when an investor opens an account unless an investor elects on the application
to decline the privileges. Other privileges must be specifically elected. A
signature guarantee will be required to establish a privilege after an account
is opened.

Free Exchange Privilege. Institutional Class shares of any Fund may be
exchanged, subject to any applicable redemption fees, for Institutional Class
shares of any other Fund. Institutional Class shares may not be exchanged for
Investor Class shares. Exchanges may be made by written instructions or by
telephone, unless an investor elected on the application to decline telephone
exchange privileges. The exchange privilege should not be viewed as a means for
taking advantage of short-term swings in the market, and the Funds reserve the
right to terminate or limit the privilege of any shareholder who makes more
than four exchanges in any calendar year. An exchange of shares of one Fund for
shares of another Fund will generally be treated as a sale of the exchanged
shares for federal income tax purposes. The Funds may terminate or change the
terms of the exchange privilege at any time, upon 60 days' notice to
shareholders.

Retirement Plans. The Funds' Institutional Class shares may be purchased by all
types of tax-deferred retirement plans. The Distributor makes available
retirement plan forms for IRAs.

Systematic Withdrawal Plan. If the value of an account is at least $25,000, an
investor may have periodic cash withdrawals automatically paid to the investor
or any person designated by the investor.

Automatic Investment Plan. Voluntary monthly investments of at least $1,000 may
be made automatically by pre-authorized withdrawals from an investor's checking
account.

HOW TO REDEEM SHARES

An investor can redeem shares of any Fund by sending a written request to First
Data at 4400 Computer Drive, P.O. Box 5181, Westborough, MA 01581-5181, Attn:
Undiscovered Managers Funds. As described below, an investor may also redeem
shares of any Fund by calling Undiscovered Man-

31
<PAGE>

agers at 1-800-667-1224. Proceeds resulting from a written or telephonic
redemption request can be wired to an investor's bank account or sent by check
in the name of the registered owners to their record address.

The written request must include the name of the Fund, the class of shares, the
account number, the exact name(s) in which the shares are registered, and the
number of shares or the dollar amount to be redeemed. All owners of the shares
must sign the request in the exact names in which the shares are registered
(this appears on an investor's confirmation statement) and should indicate any
special capacity in which they are signing (such as trustee or custodian or on
behalf of a partnership, corporation or other entity). Investors requesting
that redemption proceeds be wired to their bank accounts must provide specific
wire instructions.

If (1) an investor is redeeming shares worth more than $50,000, (2) an investor
is requesting that the proceeds check be made out to someone other than the
registered owners or be sent to an address other than the record address, (3)
the account registration has changed within the last 30 days or (4) an investor
is providing instructions to wire the proceeds to a bank account not designated
on the application, the investor must have his or her signature guaranteed by
an eligible guarantor. Eligible guarantors include commercial banks, trust
companies, savings associations, credit unions and brokerage firms that are
members of domestic securities exchanges. Before submitting the redemption
request, an investor should verify with the guarantor institution that it is an
eligible guarantor. Signature guarantees by notaries public are not acceptable.

When an investor telephones a redemption request, the proceeds are wired to the
bank account previously chosen by the investor. A wire fee (currently $5) will
be deducted from the proceeds. A telephonic redemption request must be received
by Undiscovered Managers prior to the close of regular trading on the New York
Stock Exchange. If an investor telephones a request to Undiscovered Managers
after the Exchange closes or on a day when the Exchange is not open for
business, Undiscovered Managers cannot accept the request and a new request
will be necessary.

If an investor decides to change the bank account to which proceeds are to be
wired, an investor must send in this change on the Service Options Form with a
signature guarantee. Telephonic redemptions may only be made if an investor's
bank is a member of the Federal Reserve System or has a correspondent bank that
is a member of the System. Unless an investor indicates otherwise on the
account application, Undiscovered Managers will be authorized to act upon
redemption and exchange instructions received by telephone from the investor or
any person claiming to act as the investor's representative who can provide
Undiscovered Managers with the investor's account registration and address as
it appears on the records of the Trust. Undiscovered Managers will employ these
or other reasonable procedures to confirm that instructions communicated by
telephone are genuine. The Trust, First Data, the Distributor, Undiscovered
Managers and the sub-advisers will not be liable for any losses due to
unauthorized or fraudulent instructions if these or other reasonable procedures
are followed, but may be liable for any losses due to unauthorized or
fraudulent instructions in the event reasonable procedures are not followed.
For further information, consult Undiscovered Managers. In times of heavy
market activity, an investor who encounters difficulty in placing a redemption
or exchange order by telephone may wish to place the order by mail as described
above.

The redemption price for shares of any Fund will be the net asset value per
share next determined after the redemption request and any necessary special
documentation are received by First Data or an approved broker-dealer or its
authorized designee in proper form, less any applicable redemption fee. See
"Contingent Redemption Fee" below.

Proceeds resulting from a written redemption request will normally be mailed to
an investor within seven days after receipt of the investor's request, if the
request is in good order. Telephonic redemption proceeds will normally be wired
to an investor's bank on the first business day following receipt of a proper
redemption request. If an investor purchased shares by check and the check was
deposited less than fifteen days prior to the redemption request, the Fund may
withhold redemption proceeds until the check has cleared.

The Trust may suspend the right of redemption and may postpone payment for more
than seven days when the New York Stock Exchange is closed for other than
weekends or holidays, or if permitted by the rules of the SEC when trading on
the Exchange is restricted or during an emergency which makes it impracticable
for the Funds to dispose of their securities or to determine fairly the value
of its net assets, or during any other period permitted by the SEC for the
protection of investors.

32
<PAGE>

CONTINGENT REDEMPTION FEE

Each of the Behavioral Value Fund, the Behavioral Long/Short Fund, the
International Equity Fund and the International Small Cap Equity Fund are
intended for long-term investors. In each such Fund, short-term "market timers"
who engage in frequent purchases and redemptions can disrupt the Fund's
investment program and create additional transaction costs that are borne by
all shareholders. For these reasons, each of the Behavioral Value Fund, the
Behavioral Long/Short Fund, the International Equity Fund and the International
Small Cap Equity Fund assess a redemption fee in the amount of 1.00% on
redemptions and exchanges of Fund shares held for one year or less from the
time of purchase.

The contingent redemption fee will be paid to the Fund from which the
redemption is made to help offset brokerage and other Fund costs associated
with redemptions. The Funds will use the "First-in, First-out" (FIFO) method to
determine the holding period of an investor's shares. Under this method, the
date of the redemption or exchange will be compared with the earliest purchase
date of Fund shares held in the account. If this holding period is one year or
less, the contingent redemption fee will be assessed. Redemption fees are not
sales loads or contingent deferred sales loads.

The contingent redemption fee does not apply to any shares purchased through
the reinvestment of dividends.

CALCULATION OF PERFORMANCE INFORMATION

The Funds may include in advertising their "total return" for the one-, five-
and ten-year periods (or for the life of a Fund, if shorter) through the most
recent calendar quarter. These total returns represent the average annual
compounded rate of return on a hypothetical investment of $1,000 in a Fund and
do not reflect any applicable contingent redemption or exchange fee. Total
return would be lower if such redemption or exchange fee were included. Total
return may also be presented for other periods and on a cumulative (in addition
to average annual) basis. All data are based on a Fund's past investment
results and do not predict future performance. Quotations of investment
performance for any period when an expense limitation was in effect will be
greater than if the limitation had not been in effect.

DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAXES

The Funds declare and pay their net investment income to shareholders as
dividends annually. Each Fund also distributes all of its net capital gains
realized from the sale of portfolio securities. Any capital gain distributions
are normally made annually, but may, to the extent permitted by law, be made
more frequently as deemed advisable by the Trustees of the Trust. The Trustees
may change the frequency with which the Funds declare or pay dividends.

Dividends and capital gain distributions will automatically be reinvested in
additional shares of the same Fund on the record date unless an investor has
elected to receive cash.

Each Fund intends to qualify as a regulated investment company under the Code.
As a regulated investment company, and provided that the Fund distributes
substantially all its net investment income to its shareholders, the Fund
itself will not pay any federal income tax on its distributed income and gains.

Income dividends and short term capital gain distributions are taxable as
ordinary income whether distributed in cash or additional shares. Long-term
capital gain distributions from all Funds are taxable as long-term capital
gains (generally subject to a 20% tax rate) whether distributed in cash or
additional shares and regardless of how long an investor has owned shares of a
Fund. Distributions are taxable to a shareholder of a Fund even if they are
paid from income or gains earned by the Fund prior to the shareholder's
investment (and thus were included in the price paid by the shareholder).

33
<PAGE>

fied that the investor has underreported income in the past, or (3) if an
investor fails to certify to the Fund that the investor is not subject to such
withholding.

Certain designated dividends from the Funds are expected to be eligible for the
dividends-received deduction for corporate shareholders (subject to a holding
period requirement). However, any distributions received by a Fund from REITs
will not qualify for the dividends-received deduction. A Fund's investment in
REIT securities may require such Fund to accrue and distribute income not yet
received. In order to generate sufficient cash to make the requisite
distributions, the Fund may be required to sell securities in its portfolio
that it otherwise would have continued to hold (including when it is not
advantageous to do so). A Fund's investment in REIT securities also may result
in the Fund's receipt of cash in excess of the REIT's earnings; if the Fund
distributes such amounts, such distribution could constitute a return of
capital to Fund shareholders for federal income tax purposes.

First Data will send each investor and the Internal Revenue Service an annual
statement detailing federal tax information, including information about
dividends and distributions paid to the investor during the preceding year. Be
sure to keep this statement as a permanent record. A fee may be charged for any
duplicate information that an investor requests.

Each of the International Funds may be liable to foreign governments for taxes
relating primarily to investment income or capital gains on foreign securities
in such Fund's portfolio. Each International Fund may in some circumstances be
eligible to, and in its discretion may, make an election under the Code which
may allow certain Fund shareholders to claim a foreign tax credit or deduction
(but not both) on their U.S. income tax return. If a Fund makes the election,
the amount of each shareholder's distribution reported on the information
returns filed by such Fund with the Internal Revenue Service must be increased
by the amount of the shareholder's portion of such Fund's foreign tax paid. In
addition, each International Fund's investment in foreign securities or foreign
currencies may increase or accelerate such Fund's recognition of ordinary
income and may affect the timing or amount of such Fund's distributions.

NOTE: The foregoing summarizes certain tax consequences of investing in the
Funds for shareholders who are U.S. citizens or corporations. Before
investing, an investor should consult his or her own tax adviser for
more information concerning the federal, state, local and foreign tax
consequences of investing in, redeeming or exchanging Fund shares.

ORGANIZATION AND CAPITALIZATION OF THE TRUST

Each Fund is a series of the Trust. The Trust was organized as a Massachusetts
business trust on September 29, 1997. The Trust is authorized to issue an
unlimited number of full and fractional shares of beneficial interest in
multiple series. The Trustees may, without shareholder approval, divide the
shares of any series into two or more classes. Currently, the Behavioral Growth
Fund, the REIT Fund, the Small Cap Value Fund, the Hidden Value Fund, the Core
Equity Fund and the All Cap Value Fund have two classes of
shares--Institutional Class shares and Investor Class shares. The Behavioral
Value Fund, the Behavioral Long/Short Fund, the Special Small Cap Fund, the
International Equity Fund and the International Small Cap Equity Fund have only
Institutional Class shares. Investor Class shares are offered in a separate
prospectus. Each share in a Fund has one vote, with fractional shares voting
proportionally. All Trust shares entitled to vote will vote together
irrespective of series or class unless the rights of a particular series or
class would be adversely affected by the vote, in which case a separate vote of
that series or class will be required to decide the question. Shares are freely
transferable, are entitled to dividends as declared by the Trustees of the
Trust, and, if a Fund were liquidated, would receive the net assets of such
Fund. Each Fund may suspend the sale of shares at any time and may refuse any
order to purchase shares. The Trust does not generally hold regular shareholder
meetings and will do so only when required by law. Shareholders may remove the
Trustees of the Trust from office by votes cast at a shareholder meeting or by
written consent.

Investor Class shares are identical to Institutional Class shares, except that
Investor Class shares bear certain additional fees such as distribution fees and
fees for additional personal services to Investor Class shareholders and/or the
maintenance of Investor Class shareholder accounts and have separate voting
rights in certain circumstances. Since Investor Class shares of a Fund, if any,
bear such additional fees, and consequently higher total fees, they are expected
to have a lower total return than Institutional Class shares of such Fund.
Institutional Class shares do not convert into Investor Class shares, and
Investor Class shares do not convert into Institutional Class shares.

34
<PAGE>

As of November 15, 1998, the following persons or entities held more than 25%
of the outstanding shares of a Fund, and as a result, may be deemed to
"control" such Fund as that term is defined in the 1940 Act.

<TABLE>
<S> <C>
Behavioral Growth Fund Charles Schwab & Co., Inc. (on behalf of certain of
its customers)

Behavioral Value Fund None*

Behavioral Long/Short Fund None*

Special Small Cap Fund Charles Schwab & Co., Inc. (on behalf of certain of
its customers)

REIT Fund Charles Schwab & Co., Inc. (on behalf of certain of
its customers)

Small Cap Value Fund Charles Schwab & Co., Inc. (on behalf of certain of
its customers)

Hidden Value Fund None

Core Equity Fund Charles Schwab & Co., Inc. (on behalf of certain of
its customers)

All Cap Value Fund Undiscovered Managers, LLC
BankBoston, custodian for Charles L. Edson IRA

International Equity Fund None*

International Small Cap Equity Fund None*
</TABLE>

- ------------
* The Fund had not commenced operations as of November 15, 1998.

Shareholders could, under certain circumstances, be held personally liable for
the obligations of the Trust. However, the risk of a shareholder incurring
financial loss on account of such liability is considered remote since it may
arise only in very limited circumstances.

35
<PAGE>

APPENDIX A

FUND PERFORMANCE

COMPARATIVE PERFORMANCE MEASUREMENT: GROWTH OF A $10,000 INVESTMENT IN A
FUND'S INSTITUTIONAL CLASS SHARES AND A BENCHMARK SECURITIES INDEX

[TABULAR REPRESENTATION OF LINE CHART]

BEHAVIORAL GROWTH FUND

12/97 2/98 5/98 8/98

Behavioral Growth Inst $10,000 $11,240 $11,384 $9,488
Russell 2500 Growth Index $10,000 $10,839 $10,616 $7,648

Total Return of the Behavioral Growth Fund from 12/31/97 (commencement of
investment operations) to 8/31/98 = (5.12)%

Total Return of the Russell 2500 Growth Index from 12/31/97 to 8/31/98 =
(23.52)%

[TABULAR REPRESENTATION OF LINE CHART]

REIT FUND

1/98 2/98 5/98 8/98

REIT Inst $10,000 $9,704 $9,680 $8,512
Morgan Stanley REIT Index $10,000 $9,686 $9,482 $7,982

Total Return of the REIT Fund from 1/1/98 (commencement of investment
operations) to 8/31/98 = (14.88)%

Total Return of the Morgan Stanley REIT Index from 1/1/98 to 8/31/98 = (20.18)%

[TABULAR REPRESENTATION OF LINE CHART]

SPECIAL SMALL CAP FUND

12/97 2/98 5/98 8/98

Special Small Cap Inst $10,000 $10,408 $10,784 $8,320
Russell 2000 Index $10,000 $10,827 $10,726 $7,960

Total Return of the Special Small Cap Fund from 12/30/97 (commencement of
investment operations) to 8/31/98 = (16.80)%

Total Return of the Russell 2000 Index from 12/30/97 to 8/31/98 = (20.40)%

[TABULAR REPRESENTATION OF LINE CHART]

SMALL CAP VALUE FUND

12/97 2/98 5/98 8/98

Small Cap Value Inst $10,000 $10,736 $11,672 $8,720
Russell 2000 Index $10,000 $10,827 $10,726 $7,960

Total Return of the Small Cap Value Fund from 12/30/97 (commencement of
investment operations) to 8/31/98 = (12.80)%

Total Return of the Russell 2000 Index from 12/30/97 to 8/31/98 = (20.40)%

Each of the illustrations above compares a $10,000 investment made in
Institutional Class shares of a Fund on the date of the commencement of
investment operations of such Fund to a $10,000 investment made in a benchmark
securities index on such date. All index and Fund performance assumes
reinvestment of distributions. Total return information provided for the period
beginning with the commencement of investment operations of a Fund through
8/31/98. Past performance cannot predict future results. Performance results
reflect any voluntary limitations and waivers of Fund expenses by Undiscovered
Managers. Absent these expense limitations and waivers, performance results
would have been lower. Each index's performance has not been adjusted for
ongoing management, distribution and operating expenses and sales charges
applicable to mutual fund investments. It is not possible to invest directly in
an index.

A-1
<PAGE>

[TABULAR REPRESENTATION OF LINE CHART]

HIDDEN VALUE FUND

12/97 2/98 5/98 8/98

Hidden Value Inst $10,000 $10,696 $10,680 $7,808
Russell Mid Cap Index $10,000 $10,661 $10,849 $8,799

Total Return of the Hidden Value Fund from 12/31/97 (commencement of investment
operations) to 8/31/98 = (21.92)%

Total Return of the Russell Mid Cap Index from 12/31/97 to 8/31/98 = (12.01)%

[TABULAR REPRESENTATION OF LINE CHART]

CORE EQUITY FUND

12/97 2/98 5/98 8/98

Core Equity Inst $10,000 $10,824 $11,296 $10,200
S&P 500 Index $10,000 $10,836 $11,308 $ 9,961

Total Return of the Core Equity Fund from 12/31/97 (commencement of investment
operations) to 8/31/98 = 2.00%

Total Return of the S&P 500 Index from 12/31/97 to 8/31/98 = (0.39)%

[TABULAR REPRESENTATION OF LINE CHART]

ALL CAP VALUE FUND

12/97 2/98 5/98 8/98

All Cap Value Inst $10,000 $10,928 $11,520 $9,224
Russell 1000 Value Index $10,000 $10,540 $11,092 $9,394

Total Return of the All Cap Value Fund from 12/31/97 (commencement of investment
operations) to 8/31/98 = (7.76)%

Total Return of the Russell 1000 Value Index from 12/31/97 to 8/31/98 = (6.06)%

A-2

<PAGE>

[This Page Intentionally Left Blank]
<PAGE>

INVESTMENT ADVISER

Undiscovered Managers, LLC
Plaza of the Americas
700 North Pearl Street, Suite 1700
Dallas, Texas 75201
Toll free: 888-242-3514
Phone: 214-999-7200
Fax: 214-999-7201

================================================================================

DISTRIBUTOR

First Data Distributors, Inc.
4400 Computer Drive
Westborough, Massachusetts 01581

LEGAL COUNSEL

Ropes & Gray
One International Place
Boston, Massachusetts 02110

TRANSFER AGENT

First Data Investor Services Group, Inc.
4400 Computer Drive
Westborough, Massachusetts 01581

INDEPENDENT AUDITORS

Deloitte & Touche LLP
125 Summer Street
Boston, Massachusetts 02110

CUSTODIANS

The Bank of New York
48 Wall Street
New York, New York 10286

Custodial Trust Company
101 Carnegie Center
Princeton, New Jersey 08540

<PAGE>

UNDISCOVERED MANAGERS FUNDS

Supplement dated December 28, 1998 to Investor Class Prospectus
dated December 28, 1998

On December 15, 1998, the Trustees of Undiscovered Managers Funds (the
"Trust") unanimously approved a Service and Distribution Plan (the "Service and
Distribution Plan") relating to the Investor Class shares of the Trust. See page
18 of the Trust's Investor Class Prospectus for a description of the Service and
Distribution Plan. The Service and Distribution Plan will not take effect with
respect to any of the following funds of the Trust until it has been approved by
that particular fund's Investor Class shareholders: Undiscovered Managers
Behavioral Growth Fund, Undiscovered Managers Small Cap Value Fund, Undiscovered
Managers Hidden Value Fund, Undiscovered Managers Core Equity Fund and
Undiscovered Managers All Cap Value Fund. A special meeting of Investor Class
shareholders is proposed to be held for all such funds on January 29, 1999 for
the purpose of voting on the Service and Distribution Plan. For any such fund,
until such time as its Investor Class shareholders approve the Service and
Distribution Plan, the Shareholder Servicing Plan of the Trust (the "Shareholder
Servicing Plan") will remain in effect for such fund. Below is a description of
the Shareholder Servicing Plan.

Pursuant to the Shareholder Servicing Plan, Undiscovered Managers, LLC, may
provide (or arrange for another intermediary or agent to provide) certain
services to Investor Class shareholders of the Trust (Undiscovered Managers,
LLC, or such entity is referred to as a "Servicing Agent" in such capacity).
Such services may include transfer agent and sub-transfer agent services,
accounting services and other administrative and recordkeeping services to both
record owners and non-record owners of Investor Class shares. The Shareholder
Servicing Plan permits the Trust's funds with Investor Class shares to pay fees
of up to 0.35% of the average daily net asset value of Investor Class shares to
Servicing Agents for these services.

<PAGE>

[LOGO]undiscovered managers(TM)

UNDISCOVERED MANAGERS FUNDS

INVESTOR CLASS
P R O S P E C T U S

DECEMBER 28, 1998

INVESTOR CLASS SHARES OF:
-------------------------------------------------------

UNDISCOVERED MANAGERS BEHAVIORAL GROWTH FUND
UNDISCOVERED MANAGERS REIT FUND
UNDISCOVERED MANAGERS SMALL CAP VALUE FUND
UNDISCOVERED MANAGERS HIDDEN VALUE FUND
UNDISCOVERED MANAGERS CORE EQUITY FUND
UNDISCOVERED MANAGERS ALL CAP VALUE FUND

Undiscovered Managers Funds
Plaza of the Americas
700 North Pearl Street, Suite 1700
Dallas, Texas 75201
1-888-242-3514

<PAGE>

INVESTOR CLASS
Prospectus December 28, 1998

UNDISCOVERED MANAGERS FUNDS

Undiscovered Managers Funds (the "Trust") is a registered open-end management
investment company with eleven separately managed portfolios. Six of the Trust's
portfolios (each such portfolio a "Fund," and collectively, the "Funds") offer
Investor Class shares. Undiscovered Managers, LLC ("Undiscovered Managers") is
the investment adviser of the Funds. Each Fund's portfolio is managed by a
sub-adviser selected by Undiscovered Managers for its experience managing a
portfolio of this kind:

o Undiscovered Managers Behavioral Growth Fund (the "Behavioral Growth Fund")
is managed by Fuller & Thaler Asset Management, Inc.

o Undiscovered Managers REIT Fund (the "REIT Fund") is managed by Bay Isle
Financial Corporation.

o Undiscovered Managers Small Cap Value Fund (the "Small Cap Value Fund") is
managed by J.L. Kaplan Associates, LLC.

o Undiscovered Managers Hidden Value Fund (the "Hidden Value Fund") is
managed by J.L. Kaplan Associates, LLC.

o Undiscovered Managers Core Equity Fund (the "Core Equity Fund") is managed
by Waite & Associates, L.L.C.

o Undiscovered Managers All Cap Value Fund (the "All Cap Value Fund") is
managed by E.R. Taylor Investments, Inc.

Each Fund's investment objective is long-term growth of capital, except for the
Behavioral Growth Fund, which has the investment objective of growth of capital
and the REIT Fund, which has the investment objective of high total investment
return. In seeking to achieve its objective, each Fund invests primarily in
equity securities of U.S. companies. There can be no assurance that the Funds
will achieve their investment objectives.

Each Fund currently offers two classes of shares -- Investor Class shares and
Institutional Class shares. This Prospectus concisely describes the information
that an investor should know before investing in Investor Class shares of each
Fund. Please read it carefully and keep it for future reference. Institutional
Class shares of the Funds are described in a separate prospectus. To obtain
more information about Institutional Class shares of the Funds, please call
toll free 1-888-242-3514.

A Statement of Additional Information (the "SAI") dated December 28, 1998, is
available upon request and free of charge. Write to Undiscovered Managers, LLC,
Plaza of the Americas, 700 North Pearl Street, Suite 1700, Dallas, Texas 75201,
or call toll free 1-888-242-3514. The SAI, which contains more detailed
information about the Funds and other series of the Trust, has been filed with
the Securities and Exchange Commission (the "SEC") and is incorporated by
reference into this Prospectus. The SEC maintains a Website
(http://www.sec.gov) that contains the SAI, material incorporated by reference
into this Prospectus and the SAI, and other information regarding registrants
that file electronically with the SEC.

For more information about establishing an account, or any other information
about the Funds and any other series of the Trust, call toll free
1-888-242-3514.

- --------------------------------------------------------------------------------
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
- --------------------------------------------------------------------------------

2
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
<S> <C>
Summary of Expenses .................................................. 4
Financial Highlights ................................................. 6
The Funds ............................................................ 8
Behavioral Growth Fund ............................................. 8
REIT Fund .......................................................... 9
Small Cap Value Fund ............................................... 10
Hidden Value Fund .................................................. 11
Core Equity Fund ................................................... 12
All Cap Value Fund ................................................. 13
All Funds .......................................................... 14
More Information About the Funds' Investments and Risk Considerations 15
Management of the Funds .............................................. 17
Portfolio Transactions ............................................... 19
How to Purchase Shares ............................................... 19
General Shareholder Services ......................................... 21
How to Redeem Shares ................................................. 21
Calculation of Performance Information ............................... 23
Dividends, Capital Gain Distributions and Taxes ...................... 23
Organization and Capitalization of the Trust ......................... 23
Appendix A--Fund Performance ......................................... A-1
</TABLE>

3
<PAGE>

SUMMARY OF EXPENSES

The following information is provided to assist an investor in understanding
the various expenses that an investor in Investor Class shares of a Fund will
bear directly or indirectly. The information about each Fund's Investor Class
shares shown below is based on annualized projected expenses of the Investor
Class shares for the fiscal year that ends on August 31, 1999. The information
below should not be considered a representation of past or future expenses, as
actual expenses may be greater or less than those shown. The examples show the
cumulative expenses attributable to a hypothetical $1,000 investment in the
Investor Class shares of each Fund over specified periods, assuming the 5%
annual return required under federal regulations.

<TABLE>
<CAPTION>
Behavioral Small
Growth REIT Cap Value
Fund Fund Fund
------------ ---------- ----------
Investor Investor Investor
Class Class Class
------------ ---------- ----------
<S> <C> <C> <C>
Shareholder Transaction
Expenses:
Maximum Sales Load Imposed on
Purchases (as % of offering price) ......... none none none
Maximum Sales Load Imposed on
Reinvested Dividends (as % of
offering price) ............................ none none none
Maximum Deferred Sales Load (as % of
original purchase price or redemption
proceeds, as applicable) ................... none none none
Redemption Fees* ............................. none none none
Exchange Fees ................................ none none none
Annual Operating Expenses
(as a percentage of average net assets):
Management Fees .............................. 0.95% 1.05% 1.05%
12b-1 Fees** ................................. 0.35% 0.35% 0.35%
Other Operating Expenses
(after expense reimbursements) ............. 0.35% 0.35% 0.35%
Total Operating Expenses (after expense
reimbursements) ............................ 1.65% 1.75% 1.75%
Example***:
An investor would pay the following
expenses on a $1,000 investment
assuming a 5% annual return (with or
without a redemption at the end of
each time period):
One Year ..................................... $17 $18 $18
Three Years .................................. $52 $55 $55
</TABLE>

- ------------
* Redemptions by wire transfer are subject to a wire fee (currently $5) that
is deducted from the redemption proceeds.
** Because of the ongoing nature of the 12b-1 fees, long-term shareholders of
Investor Class shares may pay more than the economic equivalent of the
maximum front-end sales charges permitted by rules of the National
Association of Securities Dealers, Inc.
*** Under SEC rules, recently-organized funds, such as the Funds, are required
to show expenses in an example for one- and three-year periods only.

Other Operating Expenses are based on estimated amounts for the 1999 fiscal
year after giving effect to voluntary expense limitations. Undiscovered
Managers, the Funds' investment adviser, has voluntarily agreed, for an
indefinite period, to limit the Investor Class Total Operating Expenses of each
of the Behavioral Growth, REIT and Small Cap Value Funds to the percentages of
net assets shown above, subject to later reimbursement by such Funds in certain
circumstances. Without this agreement, estimated Other Operating Expenses and
Total Operating Expenses for the Investor Class would be 2.11% and 3.06%,
respectively, for the Behavioral Growth Fund; 1.67% and 2.72%, respectively,
for the REIT Fund; and 1.76% and 2.81%, respectively, for the Small Cap Value
Fund. See "Management of the Funds -- Advisory and Sub-Advisory Fees."

(continued)

4
<PAGE>

<TABLE>
<CAPTION>
Hidden Core All Cap
Value Equity Value
Fund Fund Fund
---------- ---------- ---------
Investor Investor Investor
Class Class Class
---------- ---------- ---------
<S> <C> <C> <C>
Shareholder Transaction
Expenses:
Maximum Sales Load Imposed on
Purchases (as % of offering price) ......... none none none
Maximum Sales Load Imposed on
Reinvested Dividends (as % of
offering price) ............................ none none none
Maximum Deferred Sales Load (as % of
original purchase price or redemption
proceeds, as applicable) ................... none none none
Redemption Fees* ............................. none none none
Exchange Fees ................................ none none none
Annual Operating Expenses
(as a percentage of average net assets):
Management Fees .............................. 0.95% 0.74% 0.74%
12b-1 Fees** ................................. 0.35% 0.35% 0.35%
Other Operating Expenses
(after expense reimbursements) ............. 0.35% 0.25% 0.25%
Total Operating Expenses (after expense 1.65% 1.34% 1.34%
reimbursements) ............................
Example***:
An investor would pay the following
expenses on a $1,000 investment
assuming a 5% annual return (with or
without a redemption at the end of
each time period):
One Year ..................................... $17 $14 $14
Three Years .................................. $52 $42 $42
</TABLE>

- ------------
* Redemptions by wire transfer are subject to a wire fee (currently $5) that
is deducted from the redemption proceeds.
** Because of the ongoing nature of the 12b-1 fees, long-term shareholders of
Investor Class shares may pay more than the economic equivalent of the
maximum front-end sales charges permitted by the rules of the National
Association of Securities Dealers, Inc.
*** Under SEC rules, recently-organized funds, such as the Funds, are required
to show expenses in an example for one- and three-year periods only.

Other Operating Expenses are based on estimated amounts for the 1999 fiscal
year after giving effect to voluntary expense limitations. Undiscovered
Managers, the Funds' investment adviser, has voluntarily agreed, for an
indefinite period, to limit the Investor Class Total Operating Expenses of each
of the Hidden Value, Core Equity and All Cap Value Funds to the percentages of
net assets shown above, subject to later reimbursement by such Funds in certain
circumstances. Without this agreement, estimated Other Operating Expenses and
Total Operating Expenses for the Investor Class would be 10.06% and 11.01%,
respectively, for the Hidden Value Fund; 8.22% and 8.96%, respectively, for the
Core Equity Fund; and 30.63% and 31.37%, respectively, for the All Cap Value
Fund. See "Management of the Funds -- Advisory and Sub-Advisory Fees."

5
<PAGE>

FINANCIAL HIGHLIGHTS

Selected data for a share of beneficial interest outstanding throughout the
period

<TABLE>
<CAPTION>
Behavioral Small Cap Hidden
Growth Value Value
Fund Fund Fund
------------------ ------------------ -----------------
Investor Investor Investor
Class(1) Class(1) Class(1)
------------------ ------------------ -----------------
Period ended Period ended Period ended
August 31, August 31, August 31,
1998 1998 1998
------------------ ------------------ -----------------
<S> <C> <C> <C>
Net Asset Value, beginning of period ..................................... $ 14.74 $ 13.45 $ 12.09
Income from Investment Operations:
Net investment income (loss) (+) ........................................ 0.00 (A) 0.00 (A) 0.01
Net realized and unrealized gain (loss) on
investments ........................................................... (2.89) (2.54) (2.34)
---------- ---------- ----------
Total income (loss) from Investment
Operations ........................................................... (2.89) (2.54) (2.33)
---------- ---------- ----------
Net increase (decrease) in net asset value
from operations ......................................................... (2.89) (2.54) (2.33)
---------- ---------- ----------
Net Asset Value, end of period ........................................... $ 11.85 $ 10.91 $ 9.76
========== ========== ==========
Total Return ............................................................. (19.61)%** (18.88)%** (19.27)%**
Ratios/Supplemental Data:
Net Assets, end of period (in 000's) ..................................... $ 40 $ 31 $ 40
Ratios to average net assets:
Net investment income (loss) including
reimbursement ......................................................... (0.35)%* 0.15%* 0.58%*
Operating expenses including
reimbursement ......................................................... 1.30%* 1.40%* 1.30%*
Portfolio Turnover Rate .................................................. 67%** 10%** 74%**
Average Commission Rate Paid ............................................. $0.0439*** $0.0587*** $0.0545***

Net investment income (loss) ............................................ (5.43)%* (3.67)%* (15.51)%*
Operating Expenses ...................................................... 6.38%* 5.22%* 17.39%*
Net investment income (loss) per share .................................. $ (0.07) $ (0.04) $ (0.15)

</TABLE>

- ----------------
* Annualized
** Not Annualized
*** Not Audited
(1) The Fund's Investor Class commenced operations on July 31, 1998.
(A) Represents less than $0.005 per share.

A discussion of the performance of each Fund in the fiscal year ended
August 31, 1998, is included in the Trust's Annual Report for the fiscal year
ended August 31, 1998. Copies of the Trust's Annual Report are available upon
request and without charge. A comparison of the performance of each Fund's
Investor Class over the life of such class with that of a benchmark securities
index is included in Appendix A to this Prospectus.

6
<PAGE>

FINANCIAL HIGHLIGHTS--(CONTINUED)

Selected data for a share of beneficial interest outstanding throughout the
period

<TABLE>
<CAPTION>
Core All Cap
Equity Value
Fund Fund
------------------- ------------------
Investor Investor
Class(1) Class(1)
------------------- ------------------
Period ended Period ended
August 31, August 31,
1998 1998
------------------- ------------------
<S> <C> <C>
Net Asset Value, beginning of period ..................................................... $ 14.75 $ 14.18
Income from Investment Operations:
Net investment income (loss) (+) ........................................................ 0.01 0.01
Net realized and unrealized gain (loss) on
investments ........................................................................... (2.01) (2.67)
---------- ----------
Total income (loss) from Investment Operations ........................................ (2.00) (2.66)
---------- ----------
Net increase (decrease) in net asset value from
operations .............................................................................. (2.00) (2.66)
---------- ----------
Net Asset Value, end of period ........................................................... $ 12.75 $ 11.52
========== ==========
Total Return ............................................................................. (13.56)%** (18.76)%*
Ratios/Supplemental Data:
Net Assets, end of period (in 000's) ..................................................... $ 43 $ 41
Ratios to average net assets:
Net investment income (loss) including
reimbursement ......................................................................... 1.18%* 0.95%*
Operating expenses including reimbursement .............................................. 0.99%* 0.99%*
Portfolio Turnover Rate .................................................................. 46%** 36%**
Average Commission Rate Paid ............................................................. $0.0618*** $0.0600***

Net investment income (loss) ............................................................ (16.58)%* (41.53)%*
Operating Expenses ...................................................................... 18.75%* 43.47%*
Net investment income (loss) per share .................................................. $ (0.21) $ (0.48)

</TABLE>

- ----------------
* Annualized
** Not Annualized
*** Not Audited
(1) The Fund's Investor Class commenced operations on July 31, 1998.

A discussion of the performance of each Fund in the fiscal year ended
August 31, 1998, is included in the Trust's Annual Report for the fiscal year
ended August 31, 1998. Copies of the Trust's Annual Report are available upon
request and without charge. A comparison of the performance of each Fund's
Investor Class over the life of such class with that of a benchmark securities
index is included in Appendix A to this Prospectus.

7
<PAGE>

THE FUNDS

The following sections present information about the investment objective,
policies and strategies, sub-adviser and portfolio manager(s) for each Fund.

BEHAVIORAL GROWTH FUND
- -------------------------

The Behavioral Growth Fund's investment objective is growth of capital.

8
<PAGE>

REIT FUND
- -------------------------

The REIT Fund's investment objective is high total investment return through a
combination of capital appreciation and current income.

9
<PAGE>

SMALL CAP VALUE FUND
- -------------------------

The Small Cap Value Fund's investment objective is long-term growth of capital.

10
<PAGE>

HIDDEN VALUE FUND
- -------------------------

The Hidden Value Fund's investment objective is long-term growth of capital.

11
<PAGE>

CORE EQUITY FUND
- -------------------------

The Core Equity Fund's investment objective is long-term growth of capital.

12
<PAGE>

ALL CAP VALUE FUND
- -------------------------

The All Cap Value Fund's investment objective is long-term growth of capital.

13
<PAGE>

ALL FUNDS

DIVERSIFICATION
Each Fund is a "diversified" fund, as defined in the Investment Company Act of
1940 (the "1940 Act"), except for the REIT Fund, which is "non-diversified."
With respect to 75% of its assets, a diversified fund may not invest more than
5% of its total assets in the securities of any one issuer (except U.S.
government securities) while the remaining 25% of its total assets is not
subject to such restriction. A non-diversified fund is restricted with respect
to 50% of its total assets from investing more than 5% of its total assets in
the securities of any one issuer (except U.S. government securities), and with
respect to the remaining 50% of its total assets from investing more than 25%
of its total assets in the securities of any one issuer. A non-diversified fund
may invest a greater percentage of its total assets in securities of individual
issuers, or may invest in a smaller number of different issuers, than a
diversified fund. Accordingly, a non-diversified fund is more susceptible to
risks associated with particular issuers than a diversified fund.

14
<PAGE>

MORE INFORMATION ABOUT THE FUNDS' INVESTMENTS AND RISK CONSIDERATIONS

It is important to understand the following risks inherent in a Fund before you
invest.

SMALL COMPANIES
All of the Funds may invest in companies with relatively small market
capitalization, and the Small Cap Value Fund will invest primarily in such
companies. See "The Funds--Small Cap Value Fund" above.

The staff of the SEC is currently of the view that repurchase agreements
maturing in more than seven days are illiquid securities.

15
<PAGE>

income from the borrower who has delivered equivalent collateral. These loans
are subject to termination at the option of the Fund or the borrower. A Fund
may pay reasonable administrative and custodial fees in connection with a loan
and may pay a negotiated portion of the interest earned on the cash or
equivalent collateral to the borrower or placing broker. It is not currently
anticipated that any Fund will have on loan at any given time securities
totaling more than one-third of its net assets. A Fund runs the risk that the
counterparty to a loan transaction will default on its obligation and that the
value of the collateral received may be insufficient to cover the securities
loaned as a result of an increase in the value of the securities or decline in
the value of the collateral.

REAL ESTATE INVESTMENT TRUSTS
The REIT Fund will invest primarily in shares of REITs. REITs pool investors'
funds for investment primarily in income producing real estate or real estate
related loans or interests. Under the Internal Revenue Code of 1986, as amended
(the "Code"), a REIT is not taxed on income it distributes to its shareholders
if it complies with several requirements relating to its organization,
ownership, assets and income and a requirement that it generally distribute to
its shareholders at least 95% of its taxable income (other than net capital
gains) for each taxable year. REITs can generally be classified as Equity
REITs, Mortgage REITs and Hybrid REITs. Equity REITs, which invest the majority
of their assets directly in real property, derive their income primarily from
rents. Equity REITs can also realize capital gains by selling properties that
have appreciated in value. Mortgage REITs, which invest the majority of their
assets in real estate mortgages, derive their income primarily from interest
payments. Hybrid REITs combine the characteristics of both Equity REITs and
Mortgage REITs.

"YEAR 2000" MATTERS
Many of the services provided to the Funds depend on the smooth functioning of
computer systems. Many systems in use today cannot distinguish between the year
1900 and the year 2000. Should any of the service systems of a Fund fail to
process information properly, such failure could have an adverse impact on the
Fund's operations and services provided to shareholders. Undiscovered Managers,
the sub-advisers and the distributor, administrator, sub-administrator,
transfer agent, custodian and certain other service providers to each of the
Funds have reported that each expects to modify its systems, as necessary,
prior to January 1, 2000 to address this so-called "Year 2000 problem."
However, there can be no assurance that the problem will be corrected in all
respects and that the Funds' operations and services provided to shareholders
will not be adversely affected.

16
<PAGE>

MANAGEMENT OF THE FUNDS

Undiscovered Managers was organized in 1997 as a Delaware limited liability
company. The address of Undiscovered Managers is Plaza of the Americas, 700
North Pearl Street, Dallas, Texas 75201. Mark P. Hurley, the President of
Undiscovered Managers, and AMRESCO, Inc., a publicly traded corporation engaged
in residential mortgage banking, commercial mortgage banking, asset management
and commercial finance, each own more than 25% of the voting securities of
Undiscovered Managers and therefore are regarded to control Undiscovered
Managers for purposes of the 1940 Act. Each of the sub-advisers is regarded for
purposes of the 1940 Act as being controlled by the following persons, each of
whom is a principal of the firm and owns more than 25% of the voting securities
of the firm: Russell J. Fuller (Fuller & Thaler); Gary G. Pollock and William
F.K. Schaff (Bay Isle); James L. Kaplan (Kaplan Associates); Leslie A. Waite
(Waite & Associates, L.L.C.); and Sherwood T. Small (E.R. Taylor).

The Bank of New York is the custodian for all the Funds. First Data
Distributors, Inc. (the "Distributor") is the distributor for all the Funds.

ADVISORY AND SUB-ADVISORY FEES AND OTHER EXPENSES

Each Fund pays Undiscovered Managers a management fee at the following annual
percentage rates of the Fund's daily net assets, subject to the fee deferral
arrangements described below:

<TABLE>
<CAPTION>
Fund Fee Rate
<S> <C>
Behavioral Growth Fund 0.95%
REIT Fund 1.05%
Small Cap Value Fund 1.05%
Hidden Value Fund 0.95%
Core Equity Fund 0.74%
All Cap Value Fund 0.74%

</TABLE>

Undiscovered Managers pays each Fund's sub-adviser a sub-advisory fee at the
following annual percentage rates of the specified levels of the Fund's average
daily net assets:

17
<PAGE>

The Trust intends to apply for an exemptive order from the SEC to permit
Undiscovered Managers, subject to the approval of the Trust's Board of Trustees
and certain other conditions, to enter into sub-advisory agreements with
sub-advisers other than the current sub-adviser of any Fund or any other series
of the Trust without obtaining shareholder approval. The exemptive request will
also seek to permit, without obtaining shareholder approval, the terms of an
existing sub-advisory agreement to be changed or the employment of an existing
sub-adviser to be continued after events that would otherwise cause an
automatic termination of a sub-advisory agreement when such changes or
continuation are approved by the Trust's Board of Trustees. There is no
assurance that the SEC will issue the exemptive order. This Prospectus would be
revised and shareholders notified if the sub-adviser of any Fund is changed.

Under a Service and Distribution Plan adopted by the Trust pursuant to Rule
12b-1 under the 1940 Act (the "Service and Distribution Plan"), the Trust may
pay to the Distributor or any successor principal underwriter of the Trust or to
one or more other persons or entities (which may but need not be affiliated with
the Trust or any of its investment advisers or other service providers),
pursuant to agreements executed on behalf of the Trust by one or more officers
of the Trust or by the Distributor or any successor principal underwriter of the
Trust, fees as compensation for any or all of the following: (i) engaging in
activities or bearing expenses primarily intended to result in the sale of
Investor Class shares of the Trust, (ii) providing services relating to the
Investor Class shares of the Trust (which would be in addition to any general
services provided to a Fund as a whole) and (iii) providing additional personal
services to the Trust's Investor Class shareholders and/or for the maintenance
of Investor Class shareholder accounts. On an annual basis, the aggregate amount
of fees under the Service and Distribution Plan with respect to each Fund will
not exceed 0.35% of the Fund's average daily net assets attributable to its
Investor Class shares.

OTHER FUND EXPENSES

Undiscovered Managers has voluntarily agreed, for an indefinite period, to
reduce its fees and pay the expenses of each Fund's Investor Class in excess of
the following annual percentage rates of the average daily net assets of each
Fund's Investor Class, subject to the obligation of the Fund to repay
Undiscovered Managers such expenses in future years, if any, when the Fund's
Investor Class expenses fall below the stated percentage rate, but only to the
extent that such repayment would not cause the Fund's Investor Class expenses
in any such future year to exceed the stated percentage rate, and provided that
the Funds are not obligated to repay any such expenses more than two years
after the end of the fiscal year in which they were incurred: 1.34% for the All
Cap Value Fund and the Core Equity Fund; 1.65% for the Behavioral Growth Fund
and the Hidden Value Fund; and 1.75% for the REIT Fund and the Small Cap Value
Fund. Undiscovered Managers may change or terminate these voluntary
arrangements at any time, but this Prospectus would be supplemented to describe
the change.

18
<PAGE>

PORTFOLIO TRANSACTIONS

In addition to selecting portfolio investments for the Fund(s) it manages, each
sub-adviser selects brokers or dealers to execute securities purchases and
sales for the Fund's account. Each sub-adviser selects only brokers or dealers
which it believes are financially responsible, will provide efficient and
effective services in executing, clearing and settling an order and will charge
commission rates which, when combined with the quality of the foregoing
services, will produce best price and execution for the transaction. This does
not necessarily mean that the lowest available brokerage commission will be
paid. However, the commissions are believed to be competitive with generally
prevailing rates. Each sub-adviser uses its best efforts to obtain information
as to the general level of commission rates being charged by the brokerage
community from time to time and evaluates the overall reasonableness of
brokerage commissions paid on transactions by reference to such data. In making
such evaluation, all factors affecting liquidity and execution of the order, as
well as the amount of the capital commitment by the broker in connection with
the order, are taken into account.

It is not possible to predict the Funds' portfolio turnover rates with
certainty. Each Fund's sub-adviser has indicated, however, that it does not
expect that the annual portfolio turnover rate of the Fund(s) it manages would
normally exceed the following rates: 50% for the All Cap Value, Core Equity and
REIT Funds, 75% for the Small Cap Value and Hidden Value Funds, and 200% for
the Behavioral Growth Fund. Any Fund's portfolio turnover rate in any year
could be significantly higher or lower than these estimates. Higher levels of
portfolio turnover may result in higher transactions costs and higher levels of
taxable realized capital gains (including short-term capital gains generally
taxed at ordinary income tax rates). See "Dividends, Capital Gain Distributions
and Taxes" below.

HOW TO PURCHASE SHARES

An investor may make an initial purchase of Investor Class shares of any Fund
by submitting a completed application form and payment to:

Undiscovered Managers Funds
4400 Computer Drive
P.O. Box 5181
Westborough, MA 01581-5181

19
<PAGE>

20
<PAGE>

Boston Safe Deposit & Trust Company
ABA #011001234
Account #145483
FBO: Shareholder Name and Account Number
FOR: Undiscovered Managers Funds

A bank may charge a fee for transmitting funds by wire.

GENERAL SHAREHOLDER SERVICES

Free Exchange Privilege. Investor Class shares of any Fund may be exchanged for
Investor Class shares of any other Fund. Investor Class shares may not be
exchanged for Institutional Class shares. Exchanges may be made by written
instructions or by telephone, unless an investor elected on the application to
decline telephone exchange privileges. The exchange privilege should not be
viewed as a means for taking advantage of short-term swings in the market, and
the Funds reserve the right to terminate or limit the privilege of any
shareholder who makes more than four exchanges in any calendar year. An
exchange of shares of one Fund for shares of another Fund will generally be
treated as a sale of the exchanged shares for federal income tax purposes. The
Funds may terminate or change the terms of the exchange privilege at any time,
upon 60 days' notice to shareholders.

Retirement Plans. The Funds' Investor Class shares may be purchased by all
types of tax-deferred retirement plans. The Distributor makes available
retirement plan forms for IRAs.

Systematic Withdrawal Plan. If the value of an account is at least $25,000, an
investor may have periodic cash withdrawals automatically paid to the investor
or any person designated by the investor.

Automatic Investment Plan. Voluntary monthly investments of at least $1,000 may
be made automatically by pre-authorized withdrawals from an investor's checking
account.

HOW TO REDEEM SHARES

21
<PAGE>

22
<PAGE>

CALCULATION OF PERFORMANCE INFORMATION

The Funds may include in advertising their "total return" for the one-, five-
and ten-year periods (or for the life of a Fund, if shorter) through the most
recent calendar quarter. These total returns represent the average annual
compounded rate of return on a hypothetical investment of $1,000 in a Fund.
Total return may also be presented for periods and on a cumulative (in addition
to average annual) basis. All data are based on a Fund's past investment
results and do not predict future performance. Quotations of investment
performance for any period when an expense limitation was in effect will be
greater than if the limitation had not been in effect.

DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAXES

Dividends and capital gain distributions will automatically be reinvested in
additional shares of the same Fund on the record date unless an investor has
elected to receive cash.

Each Fund is required to withhold 31% of any redemption proceeds (including the
value of shares exchanged) and all income dividends and capital gain
distributions it pays to the investor (1) if the investor does not provide a
correct, certified taxpayer identification number, (2) if the Fund is notified
that the investor has underreported income in the past, or (3) if an investor
fails to certify to the Fund that the investor is not subject to such
withholding.

NOTE: The foregoing summarizes certain tax consequences of investing in the
Funds for shareholders who are U.S. citizens or corporations. Before
investing, an investor should consult his or her own tax adviser for
more information concerning the federal, state and local tax
consequences of investing in, redeeming or exchanging Fund shares.

ORGANIZATION AND CAPITALIZATION OF THE TRUST

23
<PAGE>

divide the shares of any series into two or more classes. Currently each Fund
has two classes of shares -- Investor Class shares and Institutional Class
shares. Certain other series of the Trust have only Institutional Class shares.
Institutional Class shares are offered in a separate prospectus. Each share in
a Fund has one vote, with fractional shares voting proportionally. All Trust
shares entitled to vote will vote together irrespective of series or class
unless the rights of a particular series or class would be adversely affected
by the vote, in which case a separate vote of that series or class will be
required to decide the question. Shares are freely transferable, are entitled
to dividends as declared by the Trustees of the Trust, and, if a Fund were
liquidated, would receive the net assets of such Fund. Each Fund may suspend
the sale of shares at any time and may refuse any order to purchase shares. The
Trust does not generally hold regular shareholder meetings and will do so only
when required by law. Shareholders may remove the Trustees of the Trust from
office by votes cast at a shareholder meeting or by written consent.

Institutional Class shares are identical to Investor Class shares, except that
Investor Class shares bear certain additional fees such as distribution fees and
fees for additional personal services to Investor Class shareholders and/or the
maintenance of Investor Class shareholder accounts and have separate voting
rights in certain circumstances. Since Investor Class shares of a Fund bear such
additional fees, and consequently higher total fees, they are expected to have a
lower total return than Institutional Class shares of such Fund. Investor Class
shares do not convert into Institutional Class shares, and Institutional Class
shares do not convert into Investor Class shares.

<TABLE>
<S> <C>
Behavioral Growth Fund Charles Schwab & Co., Inc. (on behalf of certain of its
customers)

REIT Fund Charles Schwab & Co., Inc. (on behalf of certain of its
customers)

Small Cap Value Fund Charles Schwab & Co., Inc. (on behalf of certain of its
customers)

Hidden Value Fund None

Core Equity Fund Charles Schwab & Co., Inc. (on behalf of certain of its
customers)

All Cap Value Fund Undiscovered Managers, LLC
BankBoston, custodian for Charles L. Edson IRA
</TABLE>

24
<PAGE>

APPENDIX A

FUND PERFORMANCE

COMPARATIVE PERFORMANCE MEASUREMENT: GROWTH OF A $10,000 INVESTMENT IN A
FUND'S INVESTOR CLASS SHARES AND A BENCHMARK SECURITIES INDEX

[TABULAR REPRESENTATION OF LINE CHART]

BEHAVIORAL GROWTH FUND

7/98 8/98

Behavioral Growth Inv $10,000 $8,039
Russell 2500 Growth Index $10,000 $7,553

Total Return of the Behavioral Growth Fund from 7/31/98 (initial offering of
Investor Class shares) to 8/31/98 = (19.61)%

Total Return of the Russell 2500 Growth Index from 7/31/98 to 8/31/98 =
(24.47)%

[TABULAR REPRESENTATION OF LINE CHART]

HIDDEN VALUE FUND

7/98 8/98

Hidden Value Inv $10,000 $8,073
Russell Mid Cap Index $10,000 $8,258

Total Return of the Hidden Value Fund from 7/31/98 (initial offering of
Investor Class shares) to 8/31/98 = (19.27)%

Total Return of the Russell Mid Cap Index from 7/31/98 to 8/31/98 = (17.42)%

[TABULAR REPRESENTATION OF LINE CHART]

SMALL CAP VALUE FUND

7/98 8/98

Small Cap Value Inv $10,000 $8,112
Russell 2000 Index $10,000 $7,878

Total Return of the Small Cap Value Fund from 7/31/98 (initial offering of
Investor Class shares) to 8/31/98 = (18.88)%

Total Return of the Russell 2000 Index from 7/31/98 to 8/31/98 = (21.22)%

[TABULAR REPRESENTATION OF LINE CHART]

CORE EQUITY FUND

7/98 8/98

Core Equity Inv $10,000 $8,644
S&P 500 Index $10,000 $8,389

Total Return of the Core Equity Fund from 7/31/98 (initial offering of Investor
Class shares) to 8/31/98 = (13.56)%

Total Return of the S&P 500 Index from 7/31/98 to 8/31/98 = (16.11)%

Each of the illustrations above compares a $10,000 investment made in Investor
Class shares of a Fund on the initial offering date of such Investor Class
shares to a $10,000 investment made in a benchmark securities index on such
date. All index and Fund performance assumes reinvestment of distributions.
Total return information provided for the period beginning with the initial
offering date of Investor Class shares of a Fund through 8/31/98. Past
performance cannot predict future results. Performance results reflect any
voluntary limitations and waivers of Fund expenses by Undiscovered Managers.
Absent these expense limitations and waivers, performance results would have
been lower. Each index's performance has not been adjusted for ongoing
management, distribution and operating expenses and sales charges applicable to
mutual fund investments. It is not possible to invest directly in an index.

A-1
<PAGE>

[TABULAR REPRESENTATION OF LINE CHART]

ALL CAP VALUE FUND

7/98 8/98

All Cap Value Inv $10,000 $8,124
Russell 1000 Value Index $10,000 $8,395

Total Return of the All Cap Value Fund from 7/31/98 (initial offering of
Investor Class shares) to 8/31/98 = (18.76)%

Total Return of the Russell 1000 Value Index from 7/31/98 to 8/31/98 = (16.05)%

The illustration above compares a $10,000 investment made in Investor Class
shares of the All Cap Value Fund on the initial offering date of its Investor
Class shares to a $10,000 investment made in the Russell 1000 Value Index on
such date. All index and Fund performance assumes reinvestment of
distributions. Total return information provided for the period beginning with
the initial offering date of Investor Class shares of a Fund through 8/31/98.
Past performance cannot predict future results. Performance results reflect any
voluntary limitations and waivers of Fund expenses by Undiscovered Managers.
Absent these expense limitations and waivers, performance results would have
been lower. The Russell 1000 Value Index's performance has not been adjusted
for ongoing management, distribution and operating expenses and sales charges
applicable to mutual fund investments. It is not possible to invest directly in
an index.

A-2
<PAGE>

[This Page Intentionally Left Blank]
<PAGE>

INVESTMENT ADVISER
Undiscovered Managers, LLC
Plaza of the Americas
700 North Pearl Street, Suite 1700
Dallas, Texas 75201
Toll free: 888-242-3514
Phone: 214-999-7200
Fax: 214-999-7201

================================================================================

DISTRIBUTOR

First Data Distributors, Inc.
4400 Computer Drive
Westborough, Massachusetts 01581

LEGAL COUNSEL

Ropes & Gray
One International Place
Boston, Massachusetts 02110

TRANSFER AGENT

First Data Investor Services Group, Inc.
4400 Computer Drive
Westborough, Massachusetts 01581

INDEPENDENT AUDITORS

Deloitte & Touche LLP
125 Summer Street
Boston, Massachusetts 02110

CUSTODIAN

The Bank of New York
48 Wall Street
New York, New York 10286

<PAGE>

[LOGO]undiscovered managers(TM)

UNDISCOVERED MANAGERS FUNDS

Statement of Additional Information

December 28, 1998

This Statement of Additional Information is not a prospectus. This Statement of
Additional Information relates to the Undiscovered Managers Funds' Investor
Class Prospectus dated December 28, 1998, and the Undiscovered Managers Funds'
Institutional Class Prospectus dated December 28, 1998. If a series of
Undiscovered Managers Funds has more than one form of current prospectus, each
reference to the "Prospectus" in this Statement of Additional Information shall
include all of such series' prospectuses unless otherwise noted. This Statement
of Additional Information should be read with the applicable prospectus. A copy
of the Prospectus may be obtained from Undiscovered Managers Funds, Plaza of
the Americas, 700 North Pearl Street, Suite 1700, Dallas, Texas 75201.

<PAGE>

Table of Contents

<TABLE>
<S> <C>
Investment Objectives, Policies and Restrictions .................... 3
Management of the Trust ............................................. 7
Ownership of Shares of the Funds .................................... 8
Investment Advisory and Other Services .............................. 11
Portfolio Transactions and Brokerage ................................ 16
Description of the Trust ............................................ 17
How to Buy Shares ................................................... 19
Net Asset Value ..................................................... 19
Shareholder Services ................................................ 19
Redemptions ......................................................... 20
Income Dividends, Capital Gain Distributions and Tax Status ......... 21
Calculation of Total Return ......................................... 23
Performance Comparisons ............................................. 24
Financial Statements ................................................ 27
Appendix A--Publications That May Contain Fund Information .......... A-1
Appendix B--Advertising and Promotional Literature .................. B-1
</TABLE>

2
<PAGE>

INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS

The investment objective and policies of each series (each a "Fund" and
collectively, the "Funds") of Undiscovered Managers Funds (the "Trust") are
summarized in the Prospectus under "The Funds" and "More Information About the
Funds' Investments and Risk Considerations." The investment policies of each
Fund set forth in the Prospectus and in this Statement of Additional
Information may be changed by the Fund's adviser, subject to review and
approval by the Trust's Board of Trustees, without shareholder approval except
that any Fund policy explicitly identified as "fundamental" may not be changed
without the approval of the holders of a majority of the outstanding shares of
the Fund (which in the Prospectus and this Statement of Additional Information
means the lesser of (i) 67% of the shares of the Fund represented at a meeting
at which at least 50% of the outstanding shares are represented or (ii) more
than 50% of the outstanding shares).

Investment Restrictions--Undiscovered Managers All Cap Value Fund, Undiscovered
Managers Behavioral Growth Fund, Undiscovered Managers Behavioral Value Fund,
Undiscovered Managers Core Equity Fund, Undiscovered Managers Hidden Value
Fund, Undiscovered Managers REIT Fund, Undiscovered Managers Small Cap Value
Fund, Undiscovered Managers Special Small Cap Fund, UM International Equity
Fund and UM International Small Cap Equity Fund

The following investment restrictions are fundamental policies of Undiscovered
Managers All Cap Value Fund (the "All Cap Value Fund"), Undiscovered Managers
Behavioral Growth Fund (the "Behavioral Growth Fund"), Undiscovered Managers
Behavioral Value Fund (the "Behavioral Value Fund"), Undiscovered Managers Core
Equity Fund (the "Core Equity Fund"), Undiscovered Managers Hidden Value Fund
(the "Hidden Value Fund"), Undiscovered Managers REIT Fund (the ("REIT Fund"),
Undiscovered Managers Small Cap Value Fund (the "Small Cap Value Fund"),
Undiscovered Managers Special Small Cap Fund (the "Special Small Cap Fund"), UM
International Equity Fund (the "International Equity Fund") and UM
International Small Cap Equity Fund (the "International Small Cap Equity
Fund").

Each Fund will not:

1. Borrow money in excess of 331/3% of the value of its total assets (not
including the amount borrowed) at the time the borrowing is made.

2. Underwrite securities issued by other persons except to the extent that, in
connection with the disposition of its portfolio investments, it may be
deemed to be an underwriter under certain federal securities laws.

3. Purchase or sell real estate, although it may purchase securities of
issuers which deal in real estate, securities which are secured by
interests in real estate, and securities which represent interests in real
estate, and it may acquire and dispose of real estate or interests in real
estate acquired through the exercise of its rights as a holder of debt
obligations secured by real estate or interests therein.

4. Purchase or sell commodities or commodity contracts, except that the Fund
may purchase and sell financial futures contracts and options, and may
enter into swap agreements, foreign exchange contracts and other financial
transactions not involving physical commodities.

5. Make loans, except by purchase of debt obligations in which the Fund may
invest consistent with its investment policies, by entering into repurchase
agreements, or by lending its portfolio securities.

6. Purchase securities (other than securities of the U.S. government, its
agencies or instrumentalities) if, as a result of such purchase, more than
25% of the Fund's total assets would be invested in any one industry;
except that the REIT Fund will invest more than 25% of its total assets in
securities issued by real estate investment trusts (as defined in the
Internal Revenue Code of 1986 (the "Code")).

7. Issue any class of securities which is senior to the Fund's shares of
beneficial interest, except for permitted borrowings.

Although the Funds are permitted to borrow money to a limited extent, no Fund
currently intends to do so.

3
<PAGE>

In addition to the foregoing fundamental investment restrictions, it is
contrary to each Fund's present policy, which may be changed without
shareholder approval, to:

Invest in (a) securities which at the time of such investment are not readily
marketable, (b) securities restricted as to resale (excluding securities
determined by the Trustees of the Trust (or the person designated by the
Trustees to make such determinations) to be readily marketable), and (c)
repurchase agreements maturing in more than seven days, if, as a result, more
than 15% of the Fund's net assets (taken at current value) would be invested in
securities described in (a), (b) and (c) above.

All percentage limitations on investments will apply at the time of the making
of an investment (except for the non-fundamental restriction set forth in the
immediately preceding paragraph) and shall not be considered violated unless an
excess or deficiency occurs or exists immediately after and as a result of such
investment.

Investment Restrictions--Undiscovered Managers Behavioral Long/Short Fund

The following investment restrictions are fundamental policies of Undiscovered
Managers Behavioral Long/Short Fund (the "Behavioral Long/Short Fund").

The Fund will not:

1. Borrow money in excess of 33-1/3% of the value of its total assets (not
including the amount borrowed) at the time the borrowing is made. Short
sales and related borrowings of securities are not subject to this
restriction.

7. Issue any class of securities which is senior to the Fund's shares of
beneficial interest, except for permitted borrowings; any pledge or
encumbrance of assets; short sales; any collateral arrangements with
respect to short sales, swaps, options, future contracts and options on
future contracts and with respect to initial and variation margin; and the
purchase or sale of options, future contracts or options on future
contracts.

Although the Fund is permitted to borrow money to a limited extent, it does not
currently intend to do so.

In addition to the foregoing fundamental investment restrictions, it is
contrary to the Fund's present policy, which may be changed without shareholder
approval, to:

All percentage limitations on investments will apply at the time of the making
of an investment (except for the non-fundamental restriction set forth in the
immediately preceding paragraph and

4
<PAGE>

the paragraph immediately preceding such paragraph) and shall not be considered
violated unless an excess or deficiency occurs or exists immediately after and
as a result of such investment.

ADDITIONAL DESCRIPTION OF INVESTMENTS

The following is an additional description of certain investments of certain of
the Funds.

Short Sales. The Behavioral Long/Short Fund will seek to realize gains through
short sales. Short sales are transactions in which the Fund sells a security
that it does not own, in anticipation of a future decline in the value of that
security. To complete such a transaction, the Fund must borrow the security to
make delivery to the buyer. The Fund is then obligated to replace the security
borrowed by purchasing it in the market at or prior to the time of replacement.
The price at such time may be more or less than the price at which the security
was sold by the Fund. Until the security is replaced, the Fund is required to
repay the lender any dividends or interest that accrue during the period of the
loan. To borrow the security, the Fund may also be required to pay a premium,
which would increase the cost of the security sold. The net proceeds of the
short sale will be retained by the broker (or by the Fund's custodian in a
special custody account), to the extent necessary to meet margin requirements,
until the short position is closed out. The Fund will also incur transaction
costs in effecting short sales.

The Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date which the
Fund replaces the borrowed security. The Fund will realize a gain if the
security declines in price between those dates. The amount of any gain will be
decreased, and the amount of any loss increased, by the amount of the premium,
dividends, interest or expenses the Fund may be required to pay in connection
with a short sale. An increase in the value of a security sold short by the
Fund over the price at which it was sold short will result in a loss to the
Fund. There can be no assurance that the Fund will be able to close out the
position at any particular time or at any acceptable price. The Fund's use of
short sales may cause the Fund to realize higher amounts of short-term capital
gains which are generally taxed at ordinary income tax rates than it would if
it did not engage in short sales.

Foreign Currency Hedging Transactions. Each of the International Equity and the
International Small Cap Equity Funds (the "International Funds") may engage in
foreign currency exchange transactions. The International Funds may (i)
purchase or sell a foreign currency on a spot (or cash) basis at the prevailing
spot rate, (ii) enter into negotiated contracts to purchase or sell foreign
currencies at a future date ("forward contracts"), (iii) purchase and sell
standardized, exchange-traded foreign currency futures contracts and (iv)
purchase exchange-listed and over-the-counter call and put options on foreign
currency futures contracts and on foreign currencies. A put option on a futures
contract gives a Fund the right to assume a short position in the futures
contract until the expiration of the option. A put option on currency gives a
Fund the right to sell a currency at an exercise price until the expiration of
the option. A call option on a futures contract gives a Fund the right to
assume a long position in the futures contract until the expiration of the
option. A call option on currency gives a Fund the right to purchase a currency
at the exercise price until the expiration of the option.

The precise matching of the amounts of foreign currency exchange transactions
and the value of any related portfolio securities will not generally be
possible since the future value of such securities in foreign currencies will
change as a consequence of market movements in the value of those securities
between the dates the currency exchange transactions are entered into and the
dates they mature.

It is impossible to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, in cases where a Fund seeks to protect the value of portfolio
securities through a foreign currency hedging transaction, it may be necessary
for a Fund to purchase additional foreign currency on the spot market (and bear
the expense of such purchase) if the market value of the security or securities
being hedged is less than the amount of foreign currency a Fund is obligated to
deliver and if a decision is made to sell the security or securities and make
delivery of the foreign currency. Conversely, it may be necessary to sell on
the spot market some of the foreign currency received upon the sale of the
portfolio security or securities if the market value of such security or
securities exceeds the amount of foreign currency a Fund is obligated to
deliver.

Foreign currency transactions that are intended to hedge the value of
securities a Fund owns or contemplates purchasing do not eliminate fluctuations
in the underlying prices of those securities.

5
<PAGE>

Rather, such currency transactions simply establish a rate of exchange which
can be used at some future point in time. Additionally, although these
techniques tend to minimize the risk of loss due to a change in the value of
the currency involved, they tend to limit any potential gain that might result
from the increase in the value of such currency.

Currency Forward and Futures Contracts. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the
contract as agreed by the parties, at a price set at the time of the contract.
In the case of a cancelable forward contract, the holder has the unilateral
right to cancel the contract at maturity by paying a specified fee. The
contracts traded in the interbank market are negotiated directly between
currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades. A foreign currency futures contract is a
standardized contract for the future delivery of a specified amount of a
foreign currency at a future date at a price set at the time of the contract.
Foreign currency futures contracts are traded on futures exchanges.

Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. For example, the maturity date of a
forward contract may be any fixed number of days from the date of the contract
agreed upon by the parties, rather than a date selected in accordance with
exchange rules in a predetermined month. Forward contracts may be in any
amounts agreed upon by the parties rather than standardized amounts. Also,
forward foreign exchange contracts are traded directly between currency traders
so that no intermediary is required. A forward contract generally requires no
margin or other deposit.

At the maturity of a forward or futures contract, a Fund may either accept or
make delivery of the currency specified in the contract, or at or prior to
maturity enter into a closing transaction involving the purchase or sale of an
offsetting contract. Closing transactions with respect to futures contracts are
effected on an exchange; a clearing corporation associated with the exchange
typically assumes responsibility for closing out such contracts. Closing
transactions with respect to forward contracts are usually effected with the
currency trader who is a party to the original forward contract. It may
therefore be more difficult to effect a closing transaction with respect to a
forward contract than with respect to a futures contract.

Positions in foreign currency futures contracts may be closed out only on an
exchange that provides a secondary market in such contracts. Although the Funds
intend to purchase or sell foreign currency futures contracts only on exchanges
where there appears to be an active secondary market, there is no assurance
that a secondary market on an exchange will exist for any particular contract
or at any particular time. In such event, it may not be possible to close a
futures position and, in the event of adverse price movements, a Fund would
continue to be required to make daily cash payments of variation margin.

Each International Fund will maintain cash or liquid securities eligible for
purchase by such Fund in a segregated account with the Fund's custodian in an
amount at least equal to (i) the difference between the current value of such
Fund's liquid holdings that settle in the relevant currency and such Fund's
outstanding obligations under currency forward contracts, or (ii) the current
amount, if any, that would be required to be paid to enter into an offsetting
forward currency contract which would have the effect of closing out the
original forward contract.

Foreign Currency Options. Options on foreign currencies operate similarly to
options on securities, and are traded primarily in the over-the-counter market,
although options on foreign currencies are listed on several exchanges. There
can be no assurance that a liquid secondary market will exist for a particular
option at any specific time. Options on foreign currencies are affected by all
of those factors that influence foreign exchange rates and investments
generally.

The value of a foreign currency option is dependent upon the value of the
foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, investors
may be disadvantaged by having to deal in an odd lot market (generally
consisting of transactions of less than $1 million) for the underlying foreign
currencies at prices that are less favorable than for round lots.

There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or

6
<PAGE>

revised on a timely basis. Available quotation information is generally
representative of very large transactions in the interbank market and thus may
not reflect relatively smaller transactions (less than $1 million) where rates
may be less favorable. The interbank market in foreign currencies is a global,
around-the-clock market. To the extent that the U.S. options markets are closed
while the markets for the underlying currencies remain open, significant price
and rate movements may take place in the underlying markets that cannot be
reflected in the U.S. options markets.

Foreign Currency Conversion. Although foreign exchange dealers do not charge a
fee for currency conversion, they do realize a profit based on the difference
(the "spread") between prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to a Fund at
one rate, while offering a lesser rate of exchange should a Fund desire to
resell that currency to the dealer.

For a discussion of tax considerations relating to foreign currency
transactions, see "Income Dividends, Capital Gain Distributions and Tax
Status," below.

MANAGEMENT OF THE TRUST

The Trustees and officers of the Trust, their ages, addresses and principal
occupations during the past five years are as follows:

*Mark P. Hurley (40)--Trustee and President. President and Chief Executive
Officer of Undiscovered Managers, LLC since September, 1997; formerly Managing
Director of Merrill Lynch & Company from February, 1996 to January, 1997;
formerly Vice President of Goldman, Sachs & Co. from August, 1992 to February,
1996.

Roger B. Keating (37)--Trustee. 550 15th Street, Suite 24, San Francisco,
California 94103; President and Chief Executive Officer of ReacTV since March,
1998; Senior Vice President of Online Division of Comcast Cable Communications
from May, 1996 to March, 1998; Area Vice President and General Manager of West
Florida area of Comcast Cable Communications from August, 1993 to May, 1996;
formerly Principal of Mercer Management Consulting from October, 1987 to
August, 1993.

Matthew J. Kiley (37)--Trustee. ARAMARK Tower, 1101 Market Street,
Philadelphia, Pennsylvania 19107; Executive Vice President of Sports and
Entertainment and Vice President of Global Food and Support Services at ARAMARK
Corp. since September, 1996; formerly Manager at McKinsey & Company from
January, 1990 to September, 1996.

Robert P. Schmermund (43)--Trustee. 900 19th Street, N.W., Suite 400,
Washington, D.C. 20006; Communications Director of America's Community Bankers
since January, 1993.

Mary Chris Sayre (35)--Secretary. Employee of Undiscovered Managers, LLC since
October, 1997; formerly Assistant to Chairman and President and Special Events
Coordinator at Prentiss Properties Trust from February, 1997 to October, 1997;
formerly Director of University Honors Program and Dedman College Mentoring
Program at Southern Methodist University from June, 1991 to February, 1997.

- ------------
* Trustees who are "interested persons" (as defined in the Investment Company
Act of 1940) of the Trust or of the Trust's investment adviser,
Undiscovered Managers, LLC.

The address of each Trustee and officer of the Trust affiliated with
Undiscovered Managers, LLC ("Undiscovered Managers") is Plaza of the Americas,
700 North Pearl Street, Dallas, Texas 75201.

The Trust pays no compensation to its officers or to the Trustees listed above
who are officers or employees of Undiscovered Managers. Each Trustee who is not
an officer or employee of Undiscovered Managers is compensated at the rate of
$10,000 per annum. The Trust provides no pension or retirement benefits to the
Trustees but has adopted a deferred payment arrangement under which each
Trustee who is to receive fees from the Trust may elect not to receive such
fees on a current basis but to receive in a subsequent period an amount equal
to the value that such fees would have if they had been invested in one or more
of the Funds on the normal payment date for such fees. As a result of this
method of calculating the deferred payments, each Fund, upon making the
deferred payments, will be in the same financial position as if the fees had
been paid on the normal payment dates.

7
<PAGE>

The following table estimates the amount of compensation to be paid (or
deferred in lieu of current payment) by the Trust during its fiscal year ending
August 31, 1999 to the persons who are to serve as Trustees during such period:

<TABLE>
<CAPTION>
Total Compensation
Aggregate Compensation From Trust and
Person From Trust Fund Complex*
- ---------------------- ------------------------ -------------------
<S> <C> <C>
Mark P. Hurley $ 0 $ 0
Roger B. Keating $10,000 $10,000
Matthew J. Kiley $10,000 $10,000
Robert P. Schmermund $10,000 $10,000
</TABLE>

- ------------
* No Trustee receives any compensation from any mutual fund affiliated with
Undiscovered Managers, other than the Trust.

OWNERSHIP OF SHARES OF THE FUNDS

<TABLE>
<CAPTION>
Fund Name % Ownership
<S> <C> <C>
Behavioral Growth Fund Charles Schwab & Co., Inc. (on behalf of 69.51%
certain of its customers)

Behavioral Value Fund None* --

Behavioral Long/Short None* --
Fund

Special Small Cap Fund Charles Schwab & Co., Inc. (on behalf of 86.63%
certain of its customers)

REIT Fund Charles Schwab & Co., Inc. (on behalf of 82.45%
certain of its customers)

Small Cap Value Fund Charles Schwab & Co., Inc. (on behalf of 87.25%
certain of its customers)

Hidden Value Fund None --

Core Equity Fund Charles Schwab & Co., Inc. (on behalf of 78.94%
certain of its customers)

All Cap Value Fund Undiscovered Managers, L.L.C. 27.97%
BankBoston, custodian for Charles L. Edson 25.10%
IRA

International Equity Fund None*

International Small Cap None* --
Equity Fund
</TABLE>

- ------------
* The Fund had not commenced operations as of November 15, 1998.

8
<PAGE>

As of November 15, 1998, to the Trust's knowledge, the following persons or
entities owned of record or beneficially 5% or more of the outstanding
Institutional Class shares of the following Funds:

<TABLE>
<CAPTION>
Institutional Class Shares
- ------------------------------------------------------------------------------------
Fund Name and Address % Ownership
- ---------------------------- -------------------------------------- ------------
<S> <C> <C>
Behavioral Growth Fund Charles Schwab & Co., Inc. 69.70%
Special Customer A/C
FBO Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104

Jewish Community Foundation of the 13.35%
Jewish Federation of South Palm Beach
9901 Donna Klein Boulevard
Boca Raton, FL 33428

FTC & Co. 6.48%
Datalynx #846058621
House Account
P.O. Box 173736
Denver, CO 60217

Behavioral Value Fund None* --

Behavioral Long/Short Fund None* --

Special Small Cap Fund Charles Schwab & Co., Inc. 86.63%
Special Customer A/C
FBO Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104

REIT Fund Charles Schwab & Co., Inc. 82.45%
Special Customer A/C
FBO Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104

BankBoston Customer Rollover IRA 6.81%
FBO Myron DuBain
160 Sansome Street, 17th Floor
San Francisco, CA 94104

Small Cap Value Fund Charles Schwab & Co., Inc. 87.47%
Special Customer A/C
FBO Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104

Hidden Value Fund Charles Schwab & Co., Inc. 13.90%
Special Customer A/C
FBO Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104

Mark P. Hurley 6.29%
4121 Caruth Boulevard
Dallas, TX 75225

(continued)
</TABLE>

9
<PAGE>

<TABLE>
<CAPTION>
Institutional Class Shares
- ------------------------------------------------------------------------------------------
Fund Name and Address % Ownership
- ------------------------------------- ----------------------------------- ------------
<S> <C> <C>
Hidden Value Fund (cont.) Michael B. Hermon 5.64%
David E. Hermon, CUST
P.O. Box 530
Marblehead, MA 01945

Ethan N. Hermon 5.64%
David E. Hermon, CUST
P.O. Box 530
Marblehead, MA 01945

Hassay Savage Co. 5.02%
10 Industrial Boulevard
Turners Falls, MA 01376

Core Equity Fund Charles Schwab & Co., Inc. 80.05%
Special Customer A/C
FBO Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104

Sofiya Balta 5.79%
1401 E. 10th Street, #128
Greenville, NC 27858

All Cap Value Fund BankBoston Customer IRA 28.63%
FBO Charles L. Edson
5802 Surrey Street
Chevy Chase, MD 20815

Mark P. Hurley 20.36%
4121 Caruth Boulevard
Dallas, TX 75225

BankBoston CUST 18.48%
James P. Nicholls IRA Rollover
737 Cole Street
San Francisco, CA 94117

Undiscovered Managers, LLC 17.84%
Plaza of the Americas
700 North Pearl Street
Dallas, TX 75201

BankBoston CUST IRA 10.43%
FBO Walter E. Grinder
4205 Minton Drive
Fairfax, VA 22032

International Equity Fund None* --

International Small Cap Equity Fund None* --
</TABLE>

- ------------
* The Fund had not commenced operations as of November 15, 1998.

10
<PAGE>

Investor Class Shares

As of November 15, 1998, Undiscovered Managers owned of record 100% of the
outstanding Investor Class shares of the Behavioral Growth Fund, the Hidden
Value Fund, the Core Equity Fund and the All Cap Value Fund. In addition, as of
such date, Undiscovered Managers owned of record 77.02%, and Marion William
Blair and Analee Blair, JTWROS, P.O. Box 170938, Irving, Texas 75017, owned of
record 22.98%, of the outstanding Investor Class shares of the Small Cap Value
Fund. Although as of the date of this Statement of Additional Information the
REIT Fund is authorized to issue Investor Class shares, as of November 15,
1998, no Investor Class shares of the REIT Fund were outstanding.

Ownership by Trustees and Officers

As of November 15, 1998, the Trustees and officers of the Trust owned
beneficially the following Institutional Class shares, which represent the
following percentage ownership of such class of shares, of each of the
following Funds:

<TABLE>
<CAPTION>
Fund Shares % Ownership
<S> <C> <C>
Special Small Cap Fund 17,125.181 1.16%
Hidden Value Fund 7,320.644 6.29%
Core Equity Fund 5,289.140 2.18%
All Cap Value Fund 5,105.514 20.36%
</TABLE>

As of November 15, 1998, the Trustees and officers of the Trust owned
beneficially (i) less than one percent of the Institutional Class shares of the
Behavioral Growth Fund, the REIT Fund and the Small Cap Value Fund and (ii) none
of the Investor Class shares of any of the Funds. As of such date, the
Behavioral Value Fund, the Behavioral Long/Short Fund, the International Equity
Fund and the International Small Cap Equity Fund had not commenced operations.

None of the foregoing amounts include amounts owned by Undiscovered Managers, of
which Mr. Hurley, a Trustee of the Trust, is a controlling person.

INVESTMENT ADVISORY AND OTHER SERVICES

Investment Adviser and Sub-Advisers
As described in the Prospectus, Undiscovered Managers is the investment adviser
of each Fund and has responsibility for the management of the Funds' affairs,
under the supervision of the Trust's Board of Trustees. Each Fund's investment
portfolio is managed on a day-to-day basis by that Fund's sub-adviser, under
the general oversight of Undiscovered Managers and the Board of Trustees. See
"The Funds" and "Management of the Funds" in the Prospectus. Undiscovered
Managers is a limited liability company organized under the laws of Delaware
with two voting members, Mark P. Hurley and AMRESCO, Inc., a publicly traded
corporation, each owning more than 25% of the voting securities of Undiscovered
Managers and therefore regarded to control Undiscovered Managers for purposes
of the 1940 Act. As disclosed in this Statement of Additional Information under
the heading "Management of the Trust," (i) Mark P. Hurley is a Trustee and the
President of the Trust as well as the President and Chief Executive Officer and
a controlling member of Undiscovered Managers, and (ii) Mary Chris Sayre is the
Secretary of the Trust as well as an employee of Undiscovered Managers.
Undiscovered Managers is further affiliated with the Trust through its
ownership as of November 15, 1998, of more than 5% of the outstanding shares of
the All Cap Value Fund.

11
<PAGE>

Under each Fund's advisory agreement with Undiscovered Managers, Undiscovered
Managers is entitled to fees, payable at least quarterly, of a certain
percentage of the average daily net asset value of such Fund. For a description
of such fees, see "Management of the Funds" in the Prospectus. During the
Trust's fiscal year ended August 31, 1998, the advisory fees payable by the
Funds to Undiscovered Managers pursuant to the relevant advisory agreement
(before giving effect to expense reductions under the expense deferral
arrangements described below), and the amount of expense reductions under the
expense deferral arrangements, were as follows:

<TABLE>
<CAPTION>
Fund Advisory Fee Expense Reduction
<S> <C> <C>
Behavioral Growth Fund $ 22,389 $22,389
Behavioral Value Fund -0-* -0-*
Behavioral Long/Short Fund -0-* -0-*
Special Small Cap Fund $ 61,497 $61,497
REIT Fund $ 36,513 $36,513
Small Cap Value Fund $ 31,827 $31,827
Hidden Value Fund $ 4,606 $ 4,606
Core Equity Fund $ 3,175 $ 3,175
All Cap Value Fund $ 1,260 $ 1,260
International Equity Fund -0-* -0-*
International Small Cap Equity Fund -0-* -0-*
</TABLE>

- ------------
* The Fund had not commenced operations as of August 31, 1998.

After December 29, 1998, the advisory fee payable by the Special Small Cap Fund
varies depending on the Fund's investment performance. For a description of
such fee rate see "Management of the Funds" in the Prospectus.

As described in the Prospectus, Undiscovered Managers has agreed to certain
additional, voluntary arrangements to limit each Fund's expenses. These
arrangements may be modified or terminated by Undiscovered Managers at any
time. See "Trust Expenses" below.

Under each sub-advisory agreement relating to the Funds between Undiscovered
Managers and such Fund's sub-adviser, the sub-adviser is entitled to fees,
payable at least quarterly, by Undiscovered Managers out of the fees it
receives, of a certain percentage of the average daily net asset value of such
Fund. For a description of such fees, see "Management of the Funds" in the
Prospectus. During the Trust's fiscal year ended August 31, 1998, Undiscovered
Managers paid the following amounts as sub-advisory fees to the following
sub-advisers pursuant to the relevant sub-advisory agreements:

<TABLE>
<CAPTION>
Fund Sub-Adviser Sub-Advisory Fee
<S> <C> <C>
Behavioral Growth Fund Fuller & Thaler Asset Management, Inc. $14,139
Behavioral Value Fund Fuller & Thaler Asset Management, Inc. -0-*
Behavioral Long/Short Fund Fuller & Thaler Asset Management, Inc. -0-*
Special Small Cap Fund Kestrel Investment Management Corporation $42,754
REIT Fund Bay Isle Financial Corporation $24,342
Small Cap Value Fund J.L. Kaplan Associates, LLC $21,214
Hidden Value Fund J.L. Kaplan Associates, LLC $ 2,907
Core Equity Fund Waite & Associates, L.L.C. $ 1,715
All Cap Value Fund E.R. Taylor Investments, Inc. $ 680
International Equity Fund Unibank Securities, Inc. -0-*
International Small Cap Unibank Securities, Inc. -0-*
Equity Fund
</TABLE>

- ------------
* The Fund had not commenced operations as of August 31, 1998.

12
<PAGE>

After December 29, 1998, the sub-advisory fee payable by Undiscovered Managers
relating to the Special Small Cap Fund varies depending on the Fund's
investment performance. For a description of such fee rate, see "Management of
the Funds" in the Prospectus.

Each Fund's advisory agreement and sub-advisory agreement provides that it will
continue in effect for two years from its date of execution and thereafter from
year to year if its continuance is approved at least annually (i) by the Board
of Trustees of the Trust or by vote of a majority of the outstanding voting
securities of the relevant Fund and (ii) by vote of a majority of the Trustees
who are not "interested persons" of the Trust, Undiscovered Managers or the
relevant sub-adviser, as that term is defined in the 1940 Act, cast in person
at a meeting called for the purpose of voting on such approval. Any amendment
to an advisory agreement must be approved by vote of a majority of the
outstanding voting securities of the relevant Fund and by vote of a majority of
the Trustees who are not interested persons, cast in person at a meeting called
for the purpose of voting on such approval. Any amendment to a sub-advisory
agreement must be approved by vote of a majority of the outstanding voting
securities of the relevant Fund and by vote of a majority of the Trustees who
are not interested persons, cast in person at a meeting called for the purpose
of voting on such approval, unless such approvals are no longer required by
law.

The advisory agreement may be terminated without penalty by vote of the Board
of Trustees of the Trust or by vote of a majority of the outstanding securities
of the relevant Fund, upon sixty days' written notice, and by Undiscovered
Managers upon ninety days' written notice. The advisory agreement shall
automatically terminate in the event of its assignment. The advisory agreement
for each of the Funds provides that Undiscovered Managers owns all rights to
and control of the name "Undiscovered Managers." The advisory agreement for
each of the International Equity Fund and the International Small Cap Equity
Fund also provides that Undiscovered Managers owns all rights to and control of
the name "UM." Each advisory agreement will automatically terminate if the
Trust or the Fund shall at any time be required by Undiscovered Managers to
eliminate all reference to the words "Undiscovered Managers" or "UM," as
applicable, in the name of the Trust or the Fund, unless the continuance of the
agreement after such change of name is approved by a majority of the
outstanding voting securities of the relevant Fund and by a majority of the
Trustees who are not interested persons of the Trust or Undiscovered Managers,
cast in person at a meeting called for the purpose of voting on such approval.

Each sub-advisory agreement may be terminated without penalty by Undiscovered
Managers, by vote of the Board of Trustees or by vote of a majority of the
outstanding voting securities of the relevant Fund, upon sixty days' written
notice, and each terminates automatically in the event of its assignment and
upon termination of the related advisory agreement. Certain of the sub-advisory
agreements may be terminated by the relevant sub-adviser in certain
circumstances.

Each advisory and sub-advisory agreement provides that Undiscovered Managers or
the applicable sub-adviser shall not be subject to any liability in connection
with the performance of its services thereunder in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations and duties.

The Trust intends to apply for an exemptive order from the Securities and
Exchange Commission to permit Undiscovered Managers, subject to the approval of
the Trust's Board of Trustees and certain other conditions, to enter into
sub-advisory agreements with sub-advisers other than the current sub-adviser of
any Fund and amend sub-advisory agreements with sub-advisers without obtaining
shareholder approval. See "Management of the Funds" in the Prospectus.

Trust Expenses

The Trust pays the compensation of its Trustees who are not officers or
employees of Undiscovered Managers; registration, filing and other fees in
connection with requirements of regulatory authorities; all charges and expenses
of its custodian and transfer agent; the charges and expenses of its independent
accountants; all brokerage commissions and transfer taxes in connection with
portfolio transactions; fees under the Service and Distribution Plan (as
described below); all taxes and fees payable to governmental agencies; the cost
of any certificates representing shares of the Funds; the expenses of meetings
of the shareholders and trustees of the Trust; the charges and expenses of the
Trust's legal counsel; interest on any borrowings by the Funds; the cost of
services, including services of counsel, required in connection with the
preparation of, and the cost of print-

13
<PAGE>

ing, the Trust's registration statements and prospectuses, including amendments
and revisions thereto, annual, semiannual and other periodic reports of the
Trust, and notices and proxy solicitation material furnished to shareholders or
regulatory authorities, to the extent that any such materials relate to the
Trust or its shareholders; and the Trust's expenses of bookkeeping, accounting,
auditing and financial reporting, including related clerical expenses. Fees
under the Service and Distribution Plan with respect to a Fund, if any, are
allocated only to that Fund's Investor Class shares. Certain other expenses
relating to a particular class (such as class specific shareholder services
fees) may be allocated solely to that class.

As described in the Prospectus, Undiscovered Managers has voluntarily agreed,
for an indefinite period, to reduce its fees and pay the expenses of each
Fund's Institutional and Investor Classes in excess of the following annual
percentage rates of the average daily net assets of such Fund's Institutional
and Investor Classes, respectively, subject to the obligation of each class of
a Fund to repay Undiscovered Managers such class's expenses in future years, if
any, when such class's expenses fall below the stated percentage rate, but only
to the extent that such repayment would not cause such class's expenses in any
such future year to exceed the stated percentage rate, and provided that such
class is not obligated to repay any such expenses more than two years after the
end of the fiscal year in which they were incurred:

<TABLE>
<CAPTION>
Fund Institutional Class Investor Class
- ------------------------------------- ---------------------------------- ---------------
<S> <C> <C>
Behavioral Growth Fund 1.30% 1.65%
Behavioral Value Fund 1.40% N/A*
Behavioral Long/Short Fund 2.00% N/A*
Special Small Cap Fund 0.55% plus the advisory fee rate N/A*
for the year in question
REIT Fund 1.40% 1.75%
Small Cap Value Fund 1.40% 1.75%
Hidden Value Fund 1.30% 1.65%
Core Equity Fund 0.99% 1.34%
All Cap Value Fund 0.99% 1.34%
International Equity Fund 1.45% N/A*
International Small Cap Equity Fund 1.60% N/A*
</TABLE>

- ------------
* The Fund does not currently have an Investor Class.

Undiscovered Managers may change or terminate these voluntary arrangements at
any time.

Administrator

Pursuant to an Administrative Services Agreement between the Trust and
Undiscovered Managers, each Fund is obligated to pay Undiscovered Managers a
fee at the annual rate of 0.25% of such Fund's average net assets for providing
administrative services to that Fund. During the Trust's fiscal year ended
August 31, 1998, the following amounts were payable to Undiscovered Managers
pursuant to the Administrative Services Agreement: $5,892 from the Behavioral
Growth Fund, $13,369 from the Special Small Cap Fund, $8,693 from the REIT
Fund, $7,578 from the Small Cap Value Fund, $1,212 from the Hidden Value Fund,
$1,073 from the Core Equity Fund and $426 from the All Cap Value Fund. These
amounts were subject to reduction and reimbursement under the expense deferral
arrangements described above. Undiscovered Managers has entered into an
agreement with First Data Investor Services Group, Inc. ("First Data") for the
provision of certain administrative services to the Funds at Undiscovered
Managers' expense. See "Management of the Funds" in the Prospectus.

Distributor

Institutional Class and Investor Class shares are sold on a continuous basis by
the Trust's distributor, First Data Distributors, Inc., (the "Distributor").
Under the Distribution Agreement between the Trust and the Distributor, the
Distributor is not obligated to sell any specific amount of shares of the
Trust, but will use efforts deemed appropriate by it to solicit orders for the
sale of the Trust's

14
<PAGE>

shares and to undertake such advertising and promotion as it believes
reasonable in connection with such solicitation. The Distributor received no
underwriting commissions from the Trust for the fiscal year ended on August 31,
1998.

Service and Distribution Plan
Under a Service and Distribution Plan adopted by the Trust pursuant to Rule
12b-1 under the 1940 Act (the "Service and Distribution Plan"), the Trust may
pay to the Distributor or any successor principal underwriter of the Trust or
to one or more other persons or entities (which may but need not be affiliated
with the Trust or any of its investment advisers or other service providers),
pursuant to agreements executed on behalf of the Trust by one or more officers
of the Trust or by the Distributor or any successor principal underwriter of
the Trust, fees as compensation for any or all of the following: (i) engaging
in activities or bearing expenses primarily intended to result in the sale of
Investor Class shares of the Trust, (ii) providing services relating to the
Investor Class shares of the Trust (which would be in addition to any general
services provided to a Fund as a whole) and (iii) providing additional personal
services to the Trust's Investor Class shareholders and/or for the maintenance
of Investor Class shareholder accounts. On an annual basis, the aggregate
amount of fees under the Service and Distribution Plan with respect to each
Fund will not exceed 0.35% of the Fund's average daily net assets attributable
to its Investor Class shares, if any.

The Service and Distribution Plan may be terminated at any time as to any Fund
by vote of a majority of the Trustees of the Trust who are not interested
persons of the Trust (as defined in the 1940 Act) and who have no direct or
indirect financial interest in the operation of the Service and Distribution
Plan or any agreements related to it, or by a vote of a majority of the
outstanding Investor Class voting securities of that Fund (as defined in the
1940 Act). Any change in the Service and Distribution Plan that would
materially increase the cost to the Investor Class shares of a Fund to which
the Service and Distribution Plan relates requires approval by the Investor
Class shareholders of that Fund. The Trustees of the Trust review at least
quarterly a written report of such costs and the purposes for which such costs
have been incurred. All material amendments to the Service and Distribution
Plan requires a vote of the Trustees of the Trust, including a majority of the
Trustees of the Trust who are not interested persons of the Trust (as defined
in the 1940 Act) and who have no direct or indirect financial interest in the
operation of the Service and Distribution Plan or any agreements related to it,
cast in person at a meeting called for such purpose. For so long as the Service
and Distribution Plan is in effect, selection and nomination of those Trustees
of the Trust who are not interested persons of the Trust shall be committed to
the discretion of such disinterested persons.

The Service and Distribution Plan will continue in effect for successive
one-year periods, provided that each such continuance is specifically approved
(i) by the vote of a majority of the Trustees of the Trust who are not
interested persons of the Trust (as defined in the 1940 Act) and who have no
direct or indirect financial interest in the operation of the Service and
Distribution Plan or any agreements related to it and (ii) by the vote of a
majority of the entire Board of Trustees of the Trust, in each case cast in
person at a meeting called for the purpose of voting on the continuance of the
Service and Distribution Plan.

The Trustees of the Trust believe that the Service and Distribution Plan will
provide benefits to each Fund with Investor Class shares. The Trustees of the
Trust believe that the Service and Distribution Plan is likely to result in
greater sales and/or fewer redemptions of the Trust's Investor Class shares,
and thus higher asset levels in the Funds with Investor Class shares although
it is impossible to know for certain the level of sales and redemptions of the
Trust's Investor Class shares that would occur in the absence of the Service
and Distribution Plan or under alternative distribution arrangements. The
Trustees of the Trust believe that higher asset levels could benefit the Funds
with Investor Class shares by reducing Fund expense ratios and/or by affording
greater investment flexibility to such Funds.

Additional Arrangements
Custodial Arrangements. The Bank of New York, 48 Wall Street, New York, New
York 10286, is the custodian for each Fund except the Behavioral Long/Short
Fund. Custodial Trust Company, 101 Carnegie Center, Princeton, New Jersey
08540, is the custodian for the Behavioral Long/Short Fund. The custodians hold
in safekeeping certificated securities and cash belonging to the Funds and, in
such capacity, are the registered owners of securities held in book entry form
belonging to the Funds. Upon instruction, the custodians receive and deliver
cash and securities of the Funds in con-

15
<PAGE>

nection with Fund transactions and collects all dividends and other
distributions made with respect to Fund portfolio securities. The custodians
also maintain certain accounts and records of the Funds.

Independent Auditors. The Funds' independent auditors are Deloitte & Touche
LLP, 125 Summer Street, Boston, Massachusetts 02110. Deloitte & Touche LLP
conducts an annual audit of the Funds' financial statements, assists in the
preparation of the Funds' federal and state income tax returns and consults
with the Funds as to matters of accounting and federal and state income
taxation.

PORTFOLIO TRANSACTIONS AND BROKERAGE

In placing orders for the purchase and sale of portfolio securities for each
Fund, each sub-adviser seeks the best price and execution, subject to each
sub-adviser's ability to pay brokers or dealers commissions in excess of
commissions another broker or dealer would have charged for effecting such
transaction in recognition of such broker's or dealer's provision of brokerage
and research products and/or services to the sub-adviser. Transactions in
unlisted securities are carried out through broker-dealers who make the primary
market for such securities unless, in the judgment of each sub-adviser, a more
favorable price can be obtained by carrying out such transactions through other
brokers or dealers. See "Portfolio Transactions" in the Prospectus.

During the fiscal year ended August 31, 1998, the Trust paid, on behalf of the
following Funds, the aggregate amount of commissions set forth below:

<TABLE>
<CAPTION>
Fund Commissions
<S> <C>
Behavioral Growth Fund $14,632
Behavioral Value Fund -0-*
Behavioral Long/Short Fund -0-*
Special Small Cap Fund $34,920
REIT Fund $40,434
Small Cap Value Fund $36,083
Hidden Value Fund $3,627
Core Equity Fund $1,156
All Cap Value Fund $743
International Equity Fund -0-*
International Small Cap Equity Fund -0-*
</TABLE>

- ------------
* The Fund had not commenced operations as of August 31, 1998.

During the fiscal year ended August 31, 1998, the sub-advisers to each of the
following Funds directed brokerage transactions, in such aggregate amounts and
for such aggregate commissions as are set forth below, for the purpose of
obtaining research services:

<TABLE>
<CAPTION>
Brokerage Related
Fund Transactions($) Commissions($)
<S> <C> <C>
Behavioral Growth Fund $7,101,041 $11,662
Behavioral Value Fund -0-* -0-*
Behavioral Long/Short Fund -0-* -0-*
Special Small Cap Fund $8,578,440 $25,667
REIT Fund $12,975,950 $31,252
Small Cap Value Fund $14,887,336 $33,691
Hidden Value Fund $1,926,828 $3,069
Core Equity Fund -0- -0-
All Cap Value Fund $541,934 $743
International Equity Fund -0-* -0-*
International Small Cap Equity Fund -0-* -0-*
</TABLE>

- ------------
* The Fund had not commenced operations as of August 31, 1998.

During the fiscal year ended August 31, 1998, the All Cap Value Fund purchased
securities of Merrill Lynch & Co., a regular broker of the Fund, that were
valued as of August 31, 1998 at $9,240.

16
<PAGE>

DESCRIPTION OF THE TRUST

The Trust, registered with the Securities and Exchange Commission (the "SEC")
as an open-end management investment company, is organized as a Massachusetts
business trust under the laws of Massachusetts by an Agreement and Declaration
of Trust dated September 29, 1997 (as amended, the "Declaration of Trust").

The Declaration of Trust currently permits the Trustees to issue an unlimited
number of full and fractional shares of each series. Each share of each Fund
represents an equal proportionate interest in such Fund with each other share
of that Fund and is entitled to a proportionate interest in the dividends and
distributions from that Fund. The shares of each Fund do not have any
preemptive rights. Upon termination of any Fund, whether pursuant to
liquidation of the Trust or otherwise, shareholders of that Fund are entitled
to share pro rata in the net assets of that Fund available for distribution to
shareholders. The Declaration of Trust also permits the Trustees to charge
shareholders directly for custodial, transfer agency and servicing expenses.

The Declaration of Trust also permits the Trustees, without shareholder
approval, to subdivide any series of shares into various classes of shares with
such preferences and other rights as the Trustees may designate. The Trustees
may also, without shareholder approval, establish one or more additional
separate portfolios for investments in the Trust. Shareholders' investments in
such an additional portfolio would be evidenced by a separate series of shares
(i.e., a new "Fund").

The Declaration of Trust provides for the perpetual existence of the Trust. The
Trust or any Fund, however, may be terminated at any time by vote of at least
two-thirds of the outstanding shares of each Fund affected. The Declaration of
Trust further provides that the Trustees may also terminate the Trust or any
Fund upon written notice to the shareholders.

The shares of the Behavioral Growth Fund, the REIT Fund, the Small Cap Value
Fund, the Hidden Value Fund, the Core Equity Fund and the All Cap Value Fund are
divided into two classes of shares--Institutional Class shares and Investor
Class shares. The Behavioral Value Fund, the Behavioral Long/Short Fund, the
Special Small Cap Fund, the International Equity Fund and the International
Small Cap Equity Fund only offer Institutional Class shares. In general,
expenses of each Fund are borne by all the shares in such Fund, regardless of
class, on a pro rata basis relative to the net assets of each class. Fees under
the Service and Distribution Plan with respect to a Fund, if any, however, are
allocated only to that Fund's Investor Class shares. Certain other expenses
relating to a particular class (such as class-specific shareholder services
fees) may be allocated solely to that class.

The assets received by any class of the Funds for the issue or sale of its
shares and all income, earnings, profits, losses and proceeds therefrom,
subject only to the rights of creditors, are allocated to, and constitute the
underlying assets of, that class. The underlying assets of any class of the
Funds are segregated and are charged with the expenses with respect to that
class and with a share of the general expenses of the corresponding Fund. Any
general expenses of a Fund that are not readily identifiable as belonging to a
particular class of such Fund are allocated by or under the direction of the
Trustees in such manner as the Trustees determine to be fair and equitable.
While the expenses of the Trust are allocated to the separate books of account
of each Fund, certain expenses may be legally chargeable against the assets of
all classes of the Funds.

Voting Rights
As summarized in the Prospectus, shareholders are entitled to one vote for each
full share held (with fractional votes for each fractional share held) and may
vote (to the extent provided in the Declaration of Trust) on the election of
Trustees and the termination of the Trust and on other matters submitted to the
vote of shareholders.

The Declaration of Trust provides that on any matter submitted to a vote of all
Trust shareholders, all Trust shares entitled to vote shall be voted together
irrespective of series or class unless the rights of a particular series or
class would be adversely affected by the vote, in which case a separate vote of
that series or class shall be required to decide the question. Also, a separate
vote shall be held whenever required by the 1940 Act or any rule thereunder.
Rule 18f-2 under the 1940 Act provides in effect that a series or class shall
be deemed to be affected by a matter unless it is clear that the interests of
each series or class in the matter are substantially identical or that the
matter

17
<PAGE>

does not affect any interest of such series or class. On matters affecting an
individual series or class, only shareholders of that series or class are
entitled to vote. Consistent with the current position of the SEC, shareholders
of all series and classes vote together, irrespective of series or class, on the
election of Trustees and the selection of the Trust's independent accountants,
but shareholders of each series vote separately on other matters requiring
shareholder approval, such as certain changes in investment policies of that
series or the approval of the investment advisory and sub-advisory agreements
relating to that series.

There will normally be no meetings of shareholders for the purpose of electing
Trustees except that, in accordance with the 1940 Act, (i) the Trust will hold
a shareholders' meeting for the election of Trustees at such time as less than
a majority of the Trustees holding office have been elected by shareholders,
and (ii) if, as a result of a vacancy on the Board of Trustees, less than
two-thirds of the Trustees holding office have been elected by the
shareholders, that vacancy may be filled only by a vote of the shareholders. In
addition, Trustees may be removed from office by a written consent signed by
the holders of two-thirds of the outstanding shares and filed with the Trust's
custodian or by a vote of the holders of two-thirds of the outstanding shares
at a meeting duly called for that purpose, which meeting shall be held upon the
written request of the holders of not less than 10% of the outstanding shares.

Upon written request by ten shareholders of record, who have been such for at
least six months preceding the date of such request and who hold shares in the
aggregate having a net asset value of at least one percent (1%) of the
outstanding shares, stating that such shareholders wish to communicate with the
other shareholders for the purpose of obtaining the signatures necessary to
demand a meeting to consider removal of a Trustee, the Trust has undertaken to
provide a list of shareholders or to disseminate appropriate materials (at the
expense of the requesting shareholders).

Except as set forth above, the Trustees shall continue to hold office and may
appoint successor Trustees. Voting rights are not cumulative.

No amendment may be made to the Declaration of Trust without the affirmative
vote of a majority of the outstanding shares of the Trust, except (i) to change
the Trust's name or to cure technical problems in the Declaration of Trust and
(ii) to establish, change or eliminate the par value of any shares (currently
all shares have no par value).

Shareholder and Trustee Liability
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Trust. However, the
Declaration of Trust disclaims shareholder liability for acts or obligations of
each Fund and requires that notice of such disclaimer be given in each
agreement, obligation or instrument entered into or executed by the Trust or
the Trustees. The Declaration of Trust provides for indemnification out of
assets of a Fund or assets attributable to the particular class of a Fund for
all loss and expense of any shareholder held personally liable for the
obligations of such Fund or such class. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is considered
remote since it is limited to circumstances in which the disclaimer is
inoperative and the Fund itself would be unable to meet its obligations.

The Declaration of Trust further provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law. However, nothing in the
Declaration of Trust protects a Trustee against any liability to which the
Trustee 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. The By-Laws of the Trust provide for indemnification by the Trust
of the Trustees and officers of the Trust except with respect to any matter as
to which any such person is found after final adjudication in an action, suit
or proceeding not to have acted in good faith in the reasonable belief that
such action was in the best interests of the Trust. No officer or Trustee may
be indemnified against any liability to the Trust or the Trust's shareholders
to which such person 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 or her office.

18
<PAGE>

HOW TO BUY SHARES

Subject to minimum initial investment requirements and certain other
conditions, an investor may make an initial purchase of shares of any class of
shares of any Fund by submitting a completed application form and payment to:

Undiscovered Managers Funds
4400 Computer Drive
P.O. Box 5181
Westborough, MA 01581-5181

The procedures for purchasing shares of any class of shares of any Fund are
summarized in "How to Purchase Shares" in the Prospectus.

NET ASSET VALUE

The net asset value of any class of shares of each Fund is determined by
dividing that Fund's total net assets (the excess of its assets over its
liabilities) by the total number of shares of the Fund outstanding and rounding
to the nearest cent. Such determination is made as of the close of regular
trading on the New York Stock Exchange on each day on which that Exchange is
open for unrestricted trading, and no less frequently than once daily on each
day during which there is sufficient trading in a Fund's portfolio securities
that the value of that Fund's shares might be materially affected. The New York
Stock Exchange is expected to be closed on the following weekdays: New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Equity
securities listed on an established securities exchange or on the Nasdaq
National Market System are normally valued at their last sale price on the
exchange where primarily traded or, if there is no reported sale during the
day, and in the case of over-the-counter securities not so listed, at the last
bid price. Other securities for which current market quotations are not readily
available (including restricted securities, if any) and all other assets are
taken at fair value as determined in good faith by the Board of Trustees,
although the actual calculations may be made by persons acting pursuant to the
direction of the Board.

Generally, trading in foreign securities markets is substantially completed
each day at various times prior to the close of regular trading on the New York
Stock Exchange. Occasionally, events affecting the value of equity securities
of non-U.S. issuers not traded on a U.S. exchange may occur between the
completion of substantial trading of such securities for the day and the close
of regular trading on the New York Stock Exchange, which events will not be
reflected in the computation of the Fund's net asset value. If events
materially affecting the value of any Fund's portfolio securities occur during
such period, then these securities will be valued at their fair value as
determined in good faith by or in accordance with procedures approved by the
Board of Trustees.

SHAREHOLDER SERVICES

Open Accounts
A shareholder's investment in any Fund is automatically credited to an open
account maintained for the shareholder by First Data. Following each
transaction in the account, a shareholder will receive an account statement
disclosing the current balance of shares owned and the details of recent
transactions in the account. After the close of each fiscal year First Data
will send each shareholder a statement providing federal tax information on
dividends and distributions paid to the shareholder during the year. This
statement should be retained as a permanent record. Shareholders will be
charged a fee for duplicate information.

The open account system permits the purchase of full and fractional shares and,
by making the issuance and delivery of certificates representing shares
unnecessary, eliminates the problems of handling and safekeeping certificates
and the cost and inconvenience of replacing lost, stolen, mutilated or
destroyed certificates.

The costs of maintaining the open account system are borne by the Trust, and no
direct charges are made to shareholders. Although the Trust has no present
intention of making such direct charges to shareholders, it reserves the right
to do so. Shareholders will receive prior notice before any such charges are
made.

19
<PAGE>

Systematic Withdrawal Plan
A Systematic Withdrawal Plan, referred to in the Prospectus under "Shareholder
Services--Systematic Withdrawal Plan," provides for monthly, quarterly,
semiannual or annual withdrawal payments of $1000 or more from the account of a
shareholder provided that the account has a value of at least $25,000 at the
time the plan is established.

Payments will be made either to the shareholder or to any other person
designated by the shareholder. If payments are issued to an individual other
than the registered owner(s), a signature guarantee will be required on the
Plan application. Income dividends and capital gain distributions will be
reinvested at the net asset value determined as of the close of regular trading
on the New York Stock Exchange on the record date for the dividend or
distribution.

Since withdrawal payments represent proceeds from liquidation of shares, the
shareholder should recognize that withdrawals may reduce and possibly exhaust
the value of the account, particularly in the event of a decline in net asset
value. Accordingly, the shareholder should consider whether a Systematic
Withdrawal Plan and the specified amounts to be withdrawn are appropriate in
the circumstances. The Trust makes no recommendations or representations in
this regard. It may be appropriate for the shareholder to consult a tax adviser
before establishing such a plan. See "Redemptions" and "Income Dividends,
Capital Gain Distributions and Tax Status" below for certain information as to
federal income taxes.

Exchange Privilege
Shareholders may redeem their shares of any Fund, subject to any applicable
redemption fees, and have the proceeds applied on the same day to purchase the
same class of shares of any other Fund. The value of shares exchanged must be
at least $1,000 and all exchanges are subject to the minimum investment
requirement of the Fund into which the exchange is being made. This option is
summarized in the Prospectus under "Shareholder Services--Free Exchange
Privilege."

Exchanges may be effected by (1) making a telephone request by calling
1-800-667-1224, provided that a special authorization form is on file with
First Data, or (2) sending a written exchange request to First Data accompanied
by an account application for the appropriate Fund. The Trust reserves the
right to modify this exchange privilege without prior notice.

An exchange constitutes a sale of the shares for federal income tax purposes on
which the investor may realize a capital gain or loss.

IRAs
Under "Shareholder Services--Retirement Plans," the Prospectus refers to IRAs
established under a prototype plan made available by the Distributor. These
plans may be funded with shares of any Fund. All income dividends and capital
gain distributions of plan participants must be reinvested. Plan documents and
further information can be obtained from the Distributor.

Check with your financial or tax adviser as to the suitability of Fund shares
for your retirement plan.

REDEMPTIONS

The procedures for redemption of shares of any class of any Fund are summarized
in the Prospectus under "How to Redeem Shares."

Except as noted below, signatures on redemption requests must be guaranteed by
commercial banks, trust companies, savings associations, credit unions or
brokerage firms that are members of domestic securities exchanges. Signature
guarantees by notaries public are not acceptable. However, as noted in the
Prospectus, a signature guarantee will not be required if the proceeds of the
redemption do not exceed $50,000 and the proceeds check is made payable to the
registered owner(s) and mailed to the record address.

If a shareholder selects the telephone redemption service in the manner
described in the next paragraph, Fund shares may be redeemed by making a
telephone call directly to Undiscovered Managers at 1-800-667-1224. When a
telephonic redemption request is received, the proceeds are wired to the bank
account previously chosen by the shareholder and a nominal wire fee (currently
$5.00) is deducted. Telephonic redemption requests must be received by
Undiscovered Managers prior to the close of regular trading on the New York
Stock Exchange on a day when the Exchange is open for business. Requests made
after that time or on a day when the New York Stock Exchange

20
<PAGE>

is not open for business cannot be accepted by Undiscovered Managers and a new
request will be necessary.

In order to redeem shares by telephone, a shareholder must either select this
service when completing the Fund application or must do so subsequently on the
Service Options Form available from First Data. When selecting the service, a
shareholder must designate a bank account to which the redemption proceeds
should be wired. Any change in the bank account so designated must be made by
furnishing to First Data a completed Service Options Form with a signature
guarantee. Whenever the Service Options Form is used, the shareholder's
signature must be guaranteed as described above. Telephone redemptions may only
be made if an investor's bank is a member of the Federal Reserve System or has
a correspondent bank that is a member of the System. If the account is with a
savings bank, it must have only one correspondent bank that is a member of the
System. The Trust, First Data, the Distributor, Undiscovered Managers and the
sub-advisers are not responsible for the authenticity of withdrawal
instructions received by telephone. In the event that reasonable procedures are
not followed in the verification of withdrawal instructions, the foregoing
parties may be liable for any losses due to unauthorized instructions.

The redemption price will be the net asset value per share next determined
after the redemption request and any necessary special documentation are
received by First Data or an approved broker-dealer or its authorized designee
in proper form, less any applicable redemption fee. Proceeds resulting from a
written redemption request will normally be mailed to you within seven days
after receipt of your request in good order. Telephonic redemption proceeds
will normally be wired on the first business day following receipt of a proper
redemption request. In those cases where you have recently purchased your
shares by check and your check was received less than fifteen days prior to the
redemption request, the Fund may withhold redemption proceeds until your check
has cleared.

Each Fund will normally redeem shares for cash; however, each Fund reserves the
right to pay the redemption price wholly or partly in kind if the Board of
Trustees of the Trust determines it to be advisable in the interest of the
remaining shareholders. If portfolio securities are distributed in lieu of
cash, the shareholder will normally incur brokerage commissions upon subsequent
disposition of any such securities. However, the Trust has elected to be
governed by Rule 18f-1 under the 1940 Act pursuant to which the Trust is
obligated to redeem shares solely in cash for any shareholder during any 90-day
period up to the lesser of $250,000 or 1% of the total net asset value of the
Trust at the beginning of such period.

A redemption constitutes a sale of shares for federal income tax purposes on
which the investor may realize a long- or short-term capital gain or loss. See
"Income Dividends, Capital Gain Distributions and Tax Status."

INCOME DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAX STATUS

As described in the Prospectus under "Dividends, Capital Gain Distributions and
Taxes" it is the policy of each Fund to pay its shareholders, as dividends,
substantially all net investment income and to distribute annually all net
realized capital gains, if any, after offsetting any capital loss carryovers.

Income dividends and capital gain distributions are payable in full and
fractional shares of the particular Fund based upon the net asset value
determined as of the close of regular trading on the New York Stock Exchange on
the record date for each dividend or distribution. Shareholders, however, may
elect to receive their income dividends or capital gain distributions, or both,
in cash. The election may be made at any time by submitting a written request
directly to First Data. In order for a change to be in effect for any dividend
or distribution, it must be received by First Data on or before the record date
for such dividend or distribution.

As required by federal law, detailed federal tax information will be furnished
to each shareholder for each calendar year on or before January 31 of the
succeeding year.

Each Fund intends to qualify each year as a regulated investment company under
Subchapter M of the Code and to qualify for the special tax treatment accorded
regulated investment companies and their shareholders. In order so to qualify,
the Fund must, among other things, (i) derive at least 90% of its gross income
from dividends, interest, payments with respect to certain securities loans,
gains

21
<PAGE>

from the sale of stock, securities or foreign currencies, or other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies; (ii) distribute with respect to each taxable year at least 90% of
the sum of its taxable net investment income, its net tax-exempt income (if
any), and the excess, if any, of net short-term capital gains over net
long-term capital losses for such year; and (iii) at the end of each fiscal
quarter maintain at least 50% of the value of its total assets in cash, cash
items (including receivables), government securities, securities of other
regulated investment companies, and other securities of issuers which
represent, with respect to each issuer, no more than 5% of the value of the
Fund's total assets and 10% of the outstanding voting securities of such
issuer, and with no more than 25% of the value of its total assets invested in
the securities (other than those of the U.S. government or other regulated
investment companies) of any one issuer or of two or more issuers which the
Fund controls and which are engaged in the same, similar or related trades and
businesses. If it qualifies for treatment as a regulated investment company,
the Fund will not be subject to federal income tax on income paid to its
shareholders in the form of dividends or capital gain distributions.

An excise tax at the rate of 4% will be imposed on the excess, if any, of each
Fund's "required distribution" over its actual distributions in any calendar
year. Generally, the "required distribution" is 98% of the Fund's ordinary
income for the calendar year plus 98% of its capital gain net income recognized
during the one-year period ending on October 31 plus undistributed amounts from
prior years. Each Fund intends to make distributions sufficient to avoid
imposition of the excise tax. Distributions declared by a Fund during October,
November or December to shareholders of record on a date in any such month and
paid by the Fund during the following January will be treated for federal tax
purposes as paid by the Fund and received by shareholders on December 31 of the
year in which declared.

Dividends and distributions on a Fund's shares are generally subject to federal
income tax as described herein to the extent they do not exceed the Fund's
realized income and gains, even though such dividends and distributions may
economically represent a return of a particular shareholder's investment. Such
distributions are likely to occur in respect of shares purchased at a time when
a Fund's net asset value reflects gains that are either unrealized, or realized
but not distributed. Shareholders of each Fund will be subject to federal
income taxes on distributions made by the Fund whether received in cash or
additional shares of the Fund. Distributions by each Fund of net income and
short-term capital gains, if any, will be taxable to shareholders as ordinary
income. Distributions of long-term capital gains (generally subject to a 20%
tax rate), if any, will be taxable to shareholders as long-term capital gains,
without regard to how long a shareholder has held shares of the Fund. Some 1998
distributions of long-term capital gains realized in 1997 may be subject to a
28% tax rate.

In general, sales, redemptions and exchanges of each Fund's shares are taxable
events and, accordingly, shareholders may realize gains and losses on these
transactions. If shares have been held for more than one year, gain or loss
realized will be long-term capital gain or loss, provided the shareholder holds
the shares as a capital asset. If shares have been held for one year or less,
the gain or loss on the sale, redemption or exchange of such shares will be
treated as short-term capital gain. In general, if a shareholder sells Fund
shares at a loss within six months after purchasing the shares, the loss will
be treated as a long-term capital loss to the extent of any long-term capital
gain distributions received by the shareholder. Furthermore, no loss will be
allowed on the sale of Fund shares to the extent the shareholder acquired other
shares of the same Fund within 30 days prior to the sale of the loss shares or
30 days after such sale.

Dividends and certain interest income earned by each of the International Funds
from foreign securities may be subject to foreign withholding taxes or other
taxes. So long as more than 50% of the value of a Fund's total assets at the
close of any taxable year consists of stock or securities of foreign
corporations, such Fund may elect, for federal income tax purposes, to treat
certain foreign taxes paid by it, including generally any withholding taxes and
other foreign income taxes, as paid by its shareholders. It is possible that
each of the International Funds will make this election in certain years. The
remaining Funds do not expect to be eligible to make this election. If a Fund
makes the election, the amount of such foreign taxes paid by the Fund will be
included in its shareholders' income pro rata (in addition to taxable
distributions actually received by them). A shareholder's ability to claim a
foreign tax credit or deduction in respect of foreign taxes paid by such Fund
may be subject to certain limitations imposed by the Code, as a result of which
a shareholder may not get a full credit or deduction for the amount of such
taxes. Shareholders who do not itemize on their federal income tax returns may
claim a credit (but no deduction) for such foreign taxes.

22
<PAGE>

Each of the International Funds' transactions in foreign currencies and hedging
activities may give rise to ordinary income or loss to the extent such income
or loss results from fluctuations in value of the foreign currency concerned.
In addition, such activities will likely produce a difference between book
income and taxable income. This difference may cause a portion of each such
Fund's income distributions to constitute a return of capital for tax purposes
or require such Fund to make distributions exceeding book income to qualify as
a regulated investment company for tax purposes.

Investment by each of the International Funds in "passive foreign investment
companies" could subject such Funds to a U.S. federal income tax or other
charge on the proceeds from the sale of its investment in such a company;
however, this tax can be avoided by making an election to mark such investments
to market annually or to treat the passive foreign investment company as a
"qualified electing fund".

A "passive foreign investment company" is any foreign corporation (i) 75
percent or more of the income of which for the taxable year is passive income
or (ii) at least 50% of the assets of which (generally by value, but by
adjusted tax basis in certain cases), on average, produce or are held for the
production of passive income. Generally, passive income for this purpose means
dividends, interest (including income equivalent to interest), royalties,
rents, annuities, the excess of gains over losses from certain property
transactions and commodities transactions, and foreign currency gains. Passive
income for this purpose does not include rents and royalties received by the
foreign corporation from active business and certain income received from
related persons.

The foregoing is a general and abbreviated summary of the applicable provisions
of the Code and regulations currently in effect. For the complete provisions,
reference should be made to the pertinent Code sections and regulations. The
Code and regulations are subject to change by legislative or administrative
action.

Dividends and distributions also may be subject to state and local taxes.
Shareholders are urged to consult their tax advisers regarding specific
questions as to federal, state, local and foreign taxes.

The foregoing discussion relates solely to U.S. federal income tax law.
Non-U.S. investors should consult their tax advisers concerning the tax
consequences of ownership of shares of the Fund, including the possibility that
distributions may be subject to a 30% U.S. withholding tax (or a reduced rate
of withholding provided by treaty).

CALCULATION OF TOTAL RETURN

Total Return with respect to a Fund is a measure of the change in value of an
investment in such Fund over the period covered and assumes any dividends or
capital gains distributions are reinvested immediately, rather than paid to the
investor in cash. The formula for calculating total return includes four steps:
(1) adding to the total number of shares purchased through a hypothetical
$1,000 investment in the Fund all additional shares which would have been
purchased if all dividends and distributions paid or distributed during the
period had been immediately reinvested; (2) calculating the value of the
hypothetical initial investment of $1,000 as of the end of the period by
multiplying the total number of shares owned at the end of the period by the
net asset value per share on the last trading day of the period; (3) assuming
redemption at the end of the period; and (4) dividing the resulting account
value by the initial $1,000 investment.

23
<PAGE>

The table below sets forth the total return of (i) the Institutional Class
shares of each Fund from such Fund's commencement of operations through the
fiscal year ended August 31, 1998, and (ii) the Investor Class shares of each
Fund that offers such shares from the initial offering of such class of shares
through the fiscal year ended August 31, 1998.

<TABLE>
<CAPTION>
Total Return* Total Return*
Fund Institutional Class Investor Class
<S> <C> <C>
Behavioral Growth Fund (5.12)% (19.61)%**
(commencement of operations December 31, 1997)

Behavioral Value Fund N/A*** N/A***
(commencement of operations after August 31, 1998)

Behavioral Long/Short Fund N/A*** N/A***
(commencement of operations after August 31, 1998)

Special Small Cap Fund (16.80)% N/A***
(commencement of operations December 30, 1997)

REIT Fund (14.88)% N/A***
(commencement of operations January 1, 1998)

Small Cap Value Fund (12.80)% (18.88)%**
(commencement of operations December 30, 1997)

Hidden Value Fund (21.92)% (19.27)%**
(commencement of operations December 31, 1997)

Core Equity Fund 2.00% (13.56)%**
(commencement of operations December 31, 1997)

All Cap Value Fund (7.76)% (18.76)%**
(commencement of operations December 31, 1997)

International Equity Fund N/A*** N/A***
(commencement of operations after August 31, 1998)

International Small Cap Equity Fund N/A*** N/A***
(commencement of operations after August 31, 1998)
</TABLE>

- ------------
* Not annualized.
** Investor Class shares first offered on July 31, 1998.
*** No information available since either the Fund or the class within the Fund
was not offered prior to August 31, 1998.

PERFORMANCE COMPARISONS

Total Return. Each Fund may from time to time include its total return
information in advertisements or in information furnished to present or
prospective shareholders. Each Fund may from time to time also include in
advertisements or information furnished to present or prospective shareholders
(i) the ranking of performance figures relative to such figures for groups of
mutual funds categorized by Lipper Analytical Services, Inc. or Micropal, Inc.
as having similar investment objectives, (ii) the rating assigned to the Fund
by Morningstar, Inc. based on the Fund's risk-adjusted performance relative to
other mutual funds in its broad investment class, and/or (iii) the ranking of
performance figures relative to such figures for mutual funds in its general
investment category as determined by CDA/Weisenberger's Management Results.

Lipper Analytical Services, Inc. ("Lipper") distributes mutual fund rankings
monthly. The rankings are based on total return performance calculated by
Lipper, generally reflecting changes in net asset value adjusted for
reinvestment of capital gains and income dividends. The rankings do not reflect
deduction of any sales charges. Lipper rankings cover a variety of performance
periods,

24
<PAGE>

including year-to-date, 1-year, 5-year, and 10-year performance. Lipper
classifies mutual funds by investment objective and asset category.

Micropal, Inc. ("Micropal") distributes mutual fund rankings weekly and
monthly. The rankings are based upon performance calculated by Micropal,
generally reflecting changes in net asset value that can be adjusted for the
reinvestment of capital gains and dividends. If deemed appropriate by the user,
performance can also reflect deductions for sales charges. Micropal rankings
cover a variety of performance periods, including year-to-date, 1-year, 5-year
and 10-year performance. Micropal classifies mutual funds by investment
objective and asset category.

Morningstar, Inc. ("Morningstar") distributes mutual fund ratings twice a
month. The ratings are divided into five groups: highest, above average,
neutral, below average and lowest. They represent a fund's historical
risk/reward ratio relative to other funds in its broad investment class as
determined by Morningstar. Morningstar ratings cover a variety of performance
periods, including 3-year, 5-year, 10-year and overall performance. The
performance factor for the overall rating is a weighted-average return
performance (if available) reflecting deduction of expenses and sales charges.
Performance is adjusted using quantitative techniques to reflect the risk
profile of the fund. The ratings are derived from a purely quantitative system
that does not utilize the subjective criteria customarily employed by rating
agencies such as Standard & Poor's and Moody's Investors Service, Inc.

CDA/Weisenberger's Management Results ("Weisenberger") publishes mutual fund
rankings and is distributed monthly. The rankings are based entirely on total
return calculated by Weisenberger for periods such as year-to-date, 1-year,
3-year, 5-year and 10-year. Mutual funds are ranked in general categories
(e.g., international bond, international equity, municipal bond, and maximum
capital gain). Weisenberger rankings do not reflect deduction of sales charges
or fees.

As is discussed in greater detail below, performance information may also be
used to compare the performance of the Funds to certain widely acknowledged
standards or indices for stock market performance, such as those listed below.

Consumer Price Index. The Consumer Price Index, published by the U.S. Bureau of
Labor Statistics, is a statistical measure of changes, over time, in the prices
of goods and services in major expenditure groups.

Dow Jones Industrial Average. The Dow Jones Industrial Average is a market
value-weighted and unmanaged index of 30 large industrial stocks traded on the
New York Stock Exchange.

Morgan Stanley REIT Index. The Morgan Stanley REIT Index is a market
capitalization weighted total return index of 93 REITs which exceed certain
minimum liquidity criteria concerning market capitalization, shares
outstanding, trading volume and per share market price.

MSCI EAFE Index. The MSCI-EAFE Index contains over 1000 stocks from 20
different countries with Japan (approximately 50%), United Kingdom, France and
Germany being the most heavily weighted.

MSCI EAFE ex-Japan Index. The MSCI-EAFE ex-Japan Index consists of all stocks
contained in the MSCI-EAFE Index, other than stocks from Japan.

MSCI EAFE Small Cap Index. The MSCI-EAFE Small Cap Index contains over 1200
stocks of companies that (i) have market capitalizations of between $200
million and $800 million and (ii) are from any of 20 different countries with
Japan, United Kingdom, France and Germany being the most heavily weighted.

NAREIT Equity Index. The NAREIT Equity Index consists of all tax qualified
equity REITs listed on the New York Stock Exchange, American Stock Exchange and
NASDAQ National Market System.

Russell Midcap Index. The Russell Midcap Index is comprised of the 800 smallest
of the 1000 largest U.S.-domiciled corporations, ranked by market
capitalization.

Russell 1000 Value Index. The Russell 1000 Value Index is comprised of those
companies within the 1000 largest U.S.-domiciled corporations with lower
price-to-book ratios and lower forecasted growth values.

25
<PAGE>

Russell 2000 Index. The Russell 2000 Index is comprised of the 2000 smallest of
the 3000 largest U.S.-domiciled corporations, ranked by market capitalization.

Russell 2000 Value Index. The Russell 2000 Value Index is comprised of those
companies within the 2000 smallest of the 3000 largest U.S.-domiciled
corporations with lower price-to-book ratios and lower forecasted growth
values.

Russell 2500 Index. The Russell 2500 Index is comprised of the 2500 smallest of
the 3000 largest U.S.-domiciled corporations, ranked by market capitalization.

Russell 2500 Growth Index. The Russell 2500 Growth Index is comprised of those
companies within the 2500 smallest of the 3000 largest U.S.-domiciled
corporations with higher price-to-book ratios and higher forecasted growth
values.

Standard & Poor's/Barra Growth Index. The Standard & Poor's/Barra Growth Index
is constructed by ranking the securities in the S&P 500 by price-to-book ratio
and including the securities with the highest price-to-book ratios that
represent approximately half of the market capitalization of the S&P 500.

Standard & Poor's/Barra Value Index. The Standard & Poor's/Barra Value Index is
constructed by ranking the securities in the S&P 500 by price-to-book ratio and
including the securities with the lowest price-to-book ratios that represent
approximately half of the market capitalization of the S&P 500.

Standard & Poor's 500 Composite Stock Price Index (the "S&P 500"). The S&P 500
is a market value-weighted and unmanaged index showing the changes in the
aggregate market value of 500 stocks relative to the base period 1941-43. The
S&P 500 is composed almost entirely of common stocks of companies listed on the
New York Stock Exchange, although the common stocks of a few companies listed
on the American Stock Exchange or traded over-the-counter are included. The 500
companies represented include 400 industrial, 60 transportation and 40
financial services concerns. The S&P 500 represents about 80% of the market
value of all issues traded on the New York Stock Exchange. The S&P 500 is the
most common index for the overall U.S. stock market.

3-month U.S. Treasury Bills. 3-month U.S. Treasury bills are direct obligations
of the United States Treasury which are issued with a three month maturity. No
interest is paid on Treasury bills; instead, they are issued at a discount and
repaid at full face value when they mature. They are backed by the full faith
and credit of the United States Government.

Wilshire Real Estate Securities Index. The Wilshire Real Estate Securities
Index is a market capitalization weighted index of publicly traded real estate
securities (such as REITs, real estate operating companies and partnerships)
which satisfy certain minimum requirements in book value, market
capitalization, percentage of revenue generated from ownership and operation of
real estate assets and liquidity.

Performance information about the Funds will be provided in the Funds' annual
reports, which will be available upon request and without charge. In addition,
from time to time, articles about the Funds regarding performance, rankings and
other characteristics of the Funds may appear in publications including, but
not limited to, the publications included in Appendix A. In particular, the
performance of the Funds may be compared in some or all of these publications
to the performance of various indices and investments for which reliable
performance data is available and to averages, performance rankings, or other
information prepared by recognized mutual fund statistical services. Such
publications may also publish their own rankings or performance reviews of
mutual funds, including the Funds. References to or reprints of such articles
may be used in the Funds' promotional literature. References to articles
regarding personnel of the sub-advisers who have portfolio management
responsibility may also be used in the Funds' promotional literature. For
additional information about the Funds' advertising and promotional literature,
see Appendix B.

26
<PAGE>

FINANCIAL STATEMENTS

The Trust's audited Financial Statements for the fiscal year ended August 31,
1998, included in the Trust's Annual Report filed with the Securities and
Exchange Commission, pursuant to Section 30(d) of the 1940 Act and the rules
promulgated thereunder, are hereby incorporated in this Statement of Additional
Information. A copy of the Trust's Annual Report is available without charge
upon request from Undiscovered Managers, LLC, Plaza of the Americas, 700 North
Pearl Street, Suite 1700, Dallas, Texas 75201 or by calling toll free
1-888-242-3514.

27
<PAGE>

APPENDIX A

Publications That May Contain Fund Information

ABC and affiliates
Adam Smith's Money World
America On Line
Anchorage Daily News
Atlanta Constitution
Atlanta Journal
Arizona Republic
Austin American Statesman
Baltimore Sun
Bank Investment Marketing
Barron's
Bergen County Record (NJ)
Bloomberg Business News
Bond Buyer
Boston Business Journal
Boston Globe
Boston Herald
Broker World
Business Radio Network
Business Week
CBS and affiliates
CDA Investment Technologies
CFO
Changing Times
Chicago Sun Times
Chicago Tribune
Christian Science Monitor
Christian Science Monitor News Service
Cincinnati Enquirer
Cincinnati Post
CNBC
CNN
Columbus Dispatch
CompuServe
Dallas Morning News
Dallas Times-Herald
Denver Post
Des Moines Register
Detroit Free Press
Donoghues Money Fund Report
Dorman, Dan (syndicated column)
Dow Jones News Service
Economist
FACS of the Week
Fee Adviser
Financial News Network
Financial Planning
Financial Planning on Wall Street
Financial Research Corp.
Financial Services Week
Financial World
Fitch Insights
Forbes
Fort Lauderdale Sun Sentinel
Fort Worth Star-Telegram
Fortune
Fox Network and affiliates
Fund Action
Fund Decoder
Global Finance
(The) Guarantor
Hartford Courant
Houston Chronicle
INC
Indianapolis Star
Individual Investor
Institutional Investor
International Herald Tribune
Internet
Investment Advisor
Investment Company Institute
Investment Dealers Digest
Investment Profiles
Investment Vision
Investor's Daily
IRA Reporter
Journal of Commerce
Kansas City Star
KCMO (Kansas City)
KOA-AM (Denver)
LA Times
Leckey, Andrew (syndicated column)
Lear's
Life Association News
Lifetime Channel
Miami Herald
Milwaukee Sentinel
Money Magazine
Money Maker
Money Management Letter
Morningstar
Mutual Fund Market News
Mutual Funds Magazine
National Public Radio
National Underwriter
NBC and affiliates
New England Business
New England Cable News
New Orleans Times-Picayune
New York Daily News
New York Times
Newark Star Ledger
Newsday
Newsweek
Nightly Business Report
Orange County Register
Orlando Sentinel
Palm Beach Post

A-1
<PAGE>

Pension World
Pensions and Investments
Personal Investor
Philadelphia Inquirer
Porter, Sylvia (syndicated column)
Portland Oregonian
Prodigy
Public Broadcasting Service
Quinn, Jane Bryant (syndicated column)
Registered Representative
Research Magazine
Resource
Rocky Mountain News
Rukeyser's Business (syndicated column)
Sacramento Bee
San Diego Tribune
San Francisco Chronicle
San Francisco Examiner
San Jose Mercury
Seattle Post-Intelligencer
Seattle Times
Securities Industry Management
Smart Money
St. Louis Post Dispatch
St. Petersburg Times
Standard & Poor's Outlook
Standard & Poor's Stock Guide
Stanger's Investment Advisor
Stockbroker's Register
Strategic Insight
Tampa Tribune
Time
Tobias, Andrew (syndicated column)
Toledo Blade
UPI
US News and World Report
USA Today
USA TV Network
Value Line
Wall Street Journal
Wall Street Letter
Wall Street Week
Washington Post
WBZ
WBZ-TV
WCVB-TV
WEEI
WHDH
Worcester Telegram
World Wide Web
Worth Magazine
WRKO

A-2
<PAGE>

APPENDIX B

Advertising and Promotional Literature

Undiscovered Managers Funds' advertising and promotional material may include,
but is not limited to, discussions of the following information:

o Undiscovered Managers Funds' participation in wrap fee and no transaction
fee programs

o Characteristics of the various sub-advisers, including the locations of
offices, investment practices and clients

o Specific and general investment philosophies, strategies, processes and
techniques

o Specific and general sources of information, economic models, forecasts and
data services utilized, consulted or considered in the course of providing
advisory or other services

o Industry conferences at which the various sub-advisers participate

o Current capitalization, levels of profitability and other financial
information

o Identification of portfolio managers, researchers, economists, principals
and other staff members and employees

o The specific credentials of the above individuals, including but not
limited to, previous employment, current and past positions, titles and
duties performed, industry experience, educational background and degrees,
awards and honors

o Specific identification of, and general reference to, current individual,
corporate and institutional clients, including pension and profit sharing
plans

o Current and historical statistics relating to:
-- total dollar amount of assets managed
-- Undiscovered Managers Funds' assets managed in total and by Fund
-- the growth of assets
-- asset types managed

References may be included in Undiscovered Managers Funds' advertising and
promotional literature about 401(k) and retirement plans that offer the Funds.
The information may include, but is not limited to:

o Specific and general references to industry statistics regarding 401(k) and
retirement plans including historical information and industry trends and
forecasts regarding the growth of assets, numbers or plans, funding
vehicles, participants, sponsors and other demographic data relating to
plans, participants and sponsors, third party and other administrators,
benefits consultants and firms with whom Undiscovered Managers Funds may or
may not have a relationship.

o Specific and general reference to comparative ratings, rankings and other
forms of evaluation as well as statistics regarding the Funds as 401(k) or
retirement plan funding vehicles produced by industry authorities, research
organizations and publications.

B-1