PBGH FUNDS INC
497, 1996-07-01
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<PAGE>
 
                             THE PBHG FUNDS, INC.
                               PBHG CLASS SHARES
                                 
                              JUNE 26, 1996     
 
The PBHG Funds, Inc. (the "Fund") is a mutual fund that offers a convenient
and economical means of investing in professionally managed portfolios of
securities. This Prospectus offers the PBHG Class Shares of the PBHG Limited
Fund (the "Portfolio"):
                               
                            PBHG LIMITED FUND     
   
This Prospectus sets forth concisely the information about the Fund and the
Portfolio that a prospective investor should know before investing. Investors
are advised to read this Prospectus and retain it for future reference. A
Statement of Additional Information dated June 26, 1996, has been filed with
the Securities and Exchange Commission and is available upon request and
without charge by calling 1-800-433-0051. The Statement of Additional
Information is incorporated into this Prospectus by reference.     
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
   
In order to facilitate the management of the Portfolio, the Board of Directors
of the Fund has determined that the Portfolio shall close to new and
subsequent investments at the close of business on the Business Day (as
defined herein) on which the net asset value of the Portfolio first exceeds
$100 million. This decision does not affect the status of any other portfolio
of the Fund.     
       
<PAGE>
 
TABLE OF CONTENTS
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<TABLE>
<S>                                                                          <C>
Summary.....................................................................   2
Expense Summary.............................................................   4
The Fund and the Portfolios.................................................   5
Investment Objective and Policies...........................................   5
General Investment Policies and Strategies..................................   5
Risk Factors................................................................   6
Investment Limitations......................................................   7
How to Purchase Fund Shares.................................................   7
</TABLE>
<TABLE>   
<S>                                                                          <C>
Shareholder Services........................................................   9
How to Redeem Fund Shares...................................................  10
Share Price.................................................................  11
Performance Advertising.....................................................  11
Taxes.......................................................................  11
General Information.........................................................  12
Glossary of Permitted Investments...........................................  15
</TABLE>    
SUMMARY
- --------------------------------------------------------------------------------
 
  The PBHG Funds, Inc. (the "Fund") is an open-end management investment com-
pany which provides a convenient way to invest in professionally managed diver-
sified and non-diversified portfolios of securities. This summary provides ba-
sic information about the PBHG Limited Fund (the "Limited Fund" or the "Portfo-
lio"). This summary is qualified in its entirety by reference to the more de-
tailed information provided elsewhere in this Prospectus and in the Statement
of Additional Information.
   
  WHAT ARE THE INVESTMENT OBJECTIVES, PROGRAM AND POLICIES OF THE
PORTFOLIO? The Portfolio seeks long-term capital appreciation. There can be no
assurance that the Portfolio will achieve its investment objective. The Portfo-
lio invests primarily in a diversified portfolio of equity securities, with
smaller market capitalization or annual revenues of up to $250 million, that
are believed by Pilgrim Baxter & Associates, Ltd. (the "Adviser") to have an
outlook for strong earnings growth in and the potential for significant long-
term capital appreciation.     
 
  WHAT ARE THE RISKS INVOLVED WITH AN INVESTMENT IN THE PORTFOLIO? The Portfo-
lio invests in securities that fluctuate in value, and investors should expect
the Portfolio's net asset value per share to fluctuate. The Portfolio may in-
vest in common stocks and convertible securities that may be traded in the
over-the-counter market. Some of these securities may not be as liquid as ex-
change-listed stocks. In addition, the Portfolio may invest in equity securi-
ties of smaller market capitalization companies which typically are more vola-
tile than equity securities of larger, more established companies but which
also offer the possibilities of more rapid growth. The Portfolio may invest in
equity securities of non-U.S. issuers, which are subject to certain risks not
typically associated with domestic securities. Such risks include changes in
currency rates and in exchange control regulations, costs associated with con-
versions between various currencies, limited publicly available information re-
garding foreign issuers, lack of uniformity in accounting, auditing and finan-
cial standards and requirements, greater securities market volatility, less li-
quidity, less government supervision of securities markets, changes in taxes on
income on securities, and possible seizure, nationalization or expropriation of
the foreign issuer or foreign deposits. See "Investment Objectives and Poli-
cies" and "Glossary of Permitted Investments."
 
                                       2
<PAGE>
 
  WHO IS THE ADVISER? Pilgrim Baxter & Associates, Ltd. serves as the invest-
ment adviser to the Portfolio. See "The Adviser."
   
  WHO IS THE ADMINISTRATOR? PBHG Fund Services, a wholly-owned subsidiary of
the Adviser, serves as the administrator of the Fund. See "The Administrator."
    
  WHO IS THE TRANSFER AGENT? DST Systems, Inc. serves as the transfer agent,
dividend disbursing agent and shareholder servicing agent of the Fund. See "The
Transfer Agent."
 
  IS THERE A SALES LOAD? No, PBHG Class Shares of the Portfolio are offered on
a no-load basis.
 
  IS THERE A MINIMUM INVESTMENT? The Portfolio has a minimum initial investment
of $5,000 for regular accounts and $2,000 for Individual Retirement Accounts
("IRAs").
   
  HOW DO I PURCHASE AND REDEEM SHARES? Purchases and redemptions may be made
through the Transfer Agent on any day on which the New York Stock Exchange is
open for business ("Business Day"). A purchase order will be effective as of
the Business Day it is received by the Transfer Agent if the Transfer Agent re-
ceives sufficient information to execute the order and receives payment by
check or readily available funds prior to 4:00 p.m., Eastern time. Redemption
orders placed with the Transfer Agent prior to 4:00 p.m., Eastern time on any
Business Day will be effective that day. The purchase and redemption price for
shares is the net asset value per share determined as of the end of the day the
order is effective. The Fund also offers a Systematic Withdrawal Plan. See
"Shareholder Services."     
 
                                       3
<PAGE>
 
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EXPENSE SUMMARY
- -------------------------------------------------------------------------------
 
SHAREHOLDER TRANSACTION EXPENSES
<TABLE> 
<CAPTION> 
- -------------------------------------------------------------------------------
                                                                        LIMITED
                                                                          FUND
- --------------------------------------------------------------------------------
<S>                                                                      <C>
Sales Load Imposed on Purchases                                           None
Sales Load Imposed on Reinvested Dividends                                None
Deferred Sales Load                                                       None
Redemption Fees(1)                                                        None
Exchange Fees                                                             None
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
(1) A wire redemption charge, currently $10.00, is deducted from the amount of
    a Federal Reserve wire redemption payment made at the request of a
    shareholder.
 
ANNUAL OPERATING EXPENSES
   
(as a percentage of average net assets after applicable expense reimbursements
or fee waivers)     
<TABLE>   
<CAPTION> 
- ------------------------------------------------------------------------------
                                                                       LIMITED
                                                                        FUND
- ------------------------------------------------------------------------------
<S>                                                                    <C>
Advisory Fees(2)                                                        1.00%
12b-1 Fees                                                               None
Other Expenses (after expense reimbursement)(3)                          .50%
- ------------------------------------------------------------------------------
Total Operating Expenses (net of fee waiver or expense reimbursement,
 if any)                                                                1.50%
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>    
   
(2) The Adviser has agreed to waive a portion of its fee and reimburse
    expenses in an amount that operates to limit annual operating expenses for
    the current fiscal year to not more than 1.50% of the average daily net
    assets of the Limited Fund. The Adviser reserves the right to terminate
    its fee waivers and reimbursements at any time in its sole discretion.
    Absent fee waivers and reimbursements, Advisory Fees and Total Operating
    Expenses for the Limited Fund would be 1.00% and 1.50%, respectively. See
    "The Adviser."     
(3) "Other Expenses" is based on estimated amounts for the current fiscal
    year. See "The Administrator."
 
EXAMPLE
<TABLE>
<CAPTION> 
- -------------------------------------------------------------------------------
                                                                 1 YEAR 3 YEARS
- -------------------------------------------------------------------------------
<S>                                                 <C>          <C>    <C>
An investor in a Portfolio would pay the following  Limited Fund  $15     $47
 expenses on a $1,000 investment assuming (1) 5%
 annual return, and (2) redemption at the end of
 each time period.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
   
The example is based upon estimated other expenses of the Limited Fund, as set
forth in the "Annual Operating Expenses" table above. THE EXAMPLE SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist
the investor in understanding the various costs and expenses that may be
directly or indirectly borne by investors in each Portfolio. See "The Adviser"
and "The Administrator."     
 
                                       4
<PAGE>
 
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THE FUND AND THE PORTFOLIOS
- -------------------------------------------------------------------------------
   
The Fund is an open-end investment company that currently offers shares in
nine separate series (the "Portfolios"). This Prospectus relates solely to the
PBHG Class Shares for the PBHG Limited Fund. Each share of the Portfolio rep-
resents an undivided interest in the Portfolio. The Fund's shares are cur-
rently divided into two classes of shares (PBHG Class and Trust Class) having
such preferences and special or relative rights and privileges as the Board of
Directors determines. Only the Portfolio's PBHG Class Shares are offered by
this Prospectus. The Trust Class Shares are generally subject to the same ex-
penses as the PBHG Class Shares but also bear a Rule 12b-1 shareholder servic-
ing fee of .25% of the average daily net assets attributable to its shares.
The Trust Class Shares are not currently available for this Portfolio. Addi-
tional information pertaining to the Fund may be obtained by writing the
Fund's transfer agent, DST Systems, Inc., P.O. Box 419534, Kansas City,
Missouri 64141-6534, or by calling 1-800-433-0051.     
 
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
- -------------------------------------------------------------------------------
 
PBHG LIMITED FUND
   
The PBHG Limited Fund seeks long-term capital appreciation. Under normal con-
ditions, the Portfolio will invest primarily in a diversified portfolio of eq-
uity securities (i.e., common stocks, preferred stocks, rights, warrants and
securities convertible into or exchangeable for common stocks) of companies,
with smaller market capitalizations or annual revenues of up to $250 million,
that are believed by the Adviser to have superior long-term growth prospects
and potential for long-term capital appreciation. The average and median mar-
ket capitalizations of holdings in the Portfolio may, however, fluctuate over
time as a result of market valuation levels and the availability of specific
investment opportunities. In addition, the Portfolio may continue to hold se-
curities of companies whose market capitalizations or revenues grow above $250
million subsequent to purchase, if such companies continues to satisfy the
other investment policies of the Portfolio.     
 
The Portfolio seeks to invest in smaller capitalization companies poised for
rapid and dynamic growth. In selecting holdings for the Portfolio, the Adviser
focuses on companies that possess exceptional or strong historical growth
characteristics and whose trend of earnings and stock prices are expected by
the Adviser to grow faster than those of the U.S. stock market as a whole.
Dividend income will not be considered in selecting holdings for the Portfo-
lio.
 
The securities of smaller companies are usually less actively followed by ana-
lysts and may be undervalued by the market, which can provide significant op-
portunities for capital appreciation. However, the securities of such smaller
companies may also involve greater risks and may be subject to more volatile
market movements than securities of larger, more established companies. See
"Risk Factors" for further information about smaller company securities.
 
The Portfolio will normally be as fully invested as practicable in common
stocks and investment grade securities convertible into common stocks. The
Portfolio also may invest up to 5% of its assets in warrants and rights to
purchase common stocks. Normally, the Portfolio will purchase only securities
traded in the United States or Canada on registered exchanges or in the over-
the-counter market. The Portfolio may invest up to 15% of its total assets in
securities of foreign issuers (including American Depository Receipts ("ADRs")
and forward foreign currency exchange contracts, and may invest to 15% of its
net assets in illiquid securities, but will not invest more than 10% of its
net assets in restricted securities. The Portfolio may also purchase securi-
ties on a when-issued or delayed-delivery basis. See "Glossary of Permitted
Investments."
 
There can be no assurance that the Portfolio will achieve its investment ob-
jective.
 
- -------------------------------------------------------------------------------
GENERAL INVESTMENT POLICIES AND STRATEGIES
- -------------------------------------------------------------------------------
 
INVESTMENT PROCESS:
 
The Adviser's investment process in managing the assets of the Limited Fund is
both quantitative and fundamental, and is extremely focused on quality earn-
ings growth. In seeking to identify investment opportunities for the Portfo-
lio, the Adviser begins by creating a universe of rapidly growing companies
with market capitalizations within the parameters described for the Portfolio
and that possess certain quality characteristics. Using proprietary software
and research models that incorporate important attributes of successful
growth, such as positive earnings surprises, upward earnings estimate revi-
sions, and accelerating sales and
 
                                       5
<PAGE>
 
earnings growth, the Adviser creates a universe of growing companies. Then,
using fundamental research, the Adviser evaluates each company's earnings
quality and assesses the sustainability of the company's current growth
trends. Through this highly disciplined process, the Adviser seeks to con-
struct investments for the Portfolio that possess strong growth characteris-
tics. The Adviser tries to keep the Portfolio fully invested at all times. Be-
cause the universe of companies will undoubtedly experience volatility in
stock price, it is important that shareholders in the Portfolio maintain a
long-term investment perspective. Of course, there can be no assurance that
use of these techniques will be successful, even over the long term.
 
PORTFOLIO TURNOVER
   
Portfolio turnover will tend to rise during periods of economic turbulence and
decline during periods of stable growth. A higher turnover rate (100% or more)
increases transaction costs (e.g., brokerage commissions) and increases real-
ized gains and losses. It is expected that under normal market conditions, the
annual portfolio turnover rates for the Limited Fund will not exceed 100%.
    
TEMPORARY DEFENSIVE POSITIONS
 
Under normal market conditions, the Portfolio expects to be fully invested in
its primary investments, as described above. However, for temporary defensive
purposes, when the Adviser determines that market conditions warrant, the
Portfolio may invest up to 100% of its assets in cash and money market instru-
ments (consisting of securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities; certificates of deposit, time deposits and
bankers' acceptances issued by banks or savings and loan associations having
net assets of at least $500 million as stated on their most recently published
financial statements; commercial paper rated in one of the two highest rating
categories by at least one nationally recognized statistical rating organiza-
tion ("NRSRO"); repurchase agreements involving such securities; and, to the
extent permitted by applicable law and the Portfolio's investment restric-
tions, shares of other investment companies investing solely in money market
securities). To the extent the Portfolio is invested in temporary defensive
instruments, it will not be pursuing its investment objective. See "Glossary
of Permitted Investments" and the Statement of Additional Information.
 
- -------------------------------------------------------------------------------
RISK FACTORS
- -------------------------------------------------------------------------------
 
SMALL CAPITALIZATION STOCKS
 
Investments in common stocks in general are subject to market risks that may
cause their prices to fluctuate over time. Therefore, an investment in the
Portfolio may be more suitable for long-term investors who can bear the risk
of these fluctuations. The Portfolio may invest in securities of issuers with
small market capitalizations. While the Adviser intends to invest in small
companies that have strong balance sheets and that the Adviser's research in-
dicates should exceed consensus earnings expectations, any investment in small
companies involves greater risk and price volatility than that customarily as-
sociated with investments in larger, more established companies. The
securities of small companies are often traded in the over-the-counter market,
and might not be traded in volumes typical of securities traded on a national
securities exchange. Thus, the securities of small companies are likely to be
subject to more abrupt or erratic market movements, than securities of larger,
more established companies.
 
OVER-THE-COUNTER MARKET
 
The Portfolio may invest in over-the-counter stocks. In contrast to the secu-
rities exchanges, the over-the-counter market is not a centralized facility
which limits trading activity to securities of companies which initially sat-
isfy certain defined standards. Generally, the volume of trading in an un-
listed or over-the-counter common stock is less than the volume of trading in
a listed stock. This means that the depth of market liquidity of some stocks
in which the Portfolio may invest may not be as great as that of other securi-
ties and if the Portfolio were to dispose of such a stock, it might have to
offer the shares at a discount from recent prices, or sell the shares in small
lots over an extended period of time.
 
FOREIGN SECURITIES
 
Investing in the securities of foreign issuers involves special risks and con-
siderations not typically associated with investing in U.S. companies. These
risks and considerations include differences in accounting, auditing and fi-
nancial reporting standards, generally higher commission rates on foreign
portfolio transactions, the possibility of expropriation or confiscatory taxa-
tion, adverse changes in investment or exchange control regulations, political
instability
 
                                       6
<PAGE>
 
which could affect U.S. investment in foreign countries and potential restric-
tions on the flow of international capital and currencies. Foreign issuers may
also be subject to less government regulation than U.S. companies. Moreover,
the dividends and interest payable on foreign securities may be subject to
foreign withholding taxes, thus reducing the net amount of income available
for distribution to the Portfolio's shareholders. Further, foreign securities
often trade with less frequency and volume than domestic securities and,
therefore, may exhibit greater price volatility. Changes in foreign exchange
rates will affect, favorably or unfavorably, the value of those securities
which are denominated or quoted in currencies other than the U.S. dollar.
 
For additional information regarding risks and permitted investments, see
"Glossary of Permitted Investments" and the Statement of Additional Informa-
tion.
 
- -------------------------------------------------------------------------------
INVESTMENT LIMITATIONS
- -------------------------------------------------------------------------------
 
The investment objective of the Portfolio, and the investment limitations set
forth herein, and certain investment limitations contained in the Statement of
Additional Information, are fundamental policies of the Portfolio. The Portfo-
lio's fundamental policies cannot be changed without the consent of the hold-
ers of a majority of the Portfolio's outstanding shares.
 
The Portfolio may not:
 
1. Purchase securities of any issuer (except securities issued or guaranteed
by the United States, its agencies or instrumentalities and repurchase agree-
ments involving such securities) if, as a result, more than 5% of the total
assets of the Portfolio would be invested in the securities of such issuer.
 
2. Purchase any securities which would cause 25% or more of the total assets
of the Portfolio to be invested in the securities of one or more issuers con-
ducting their principal business activities in the same industry, provided
that this limitation does not apply to investments in obligations issued or
guaranteed by the U.S. Government or its agencies and instrumentalities and
repurchase agreements involving such securities. For purposes of this limita-
tion, (i) utility companies will be divided according to their services, for
example, gas distribution, gas transmission, electric and telephone will each
be considered a separate industry, and (ii) financial service companies will
be classified according to the end users of their services, for example, auto-
mobile finance, bank finance and diversified finance will each be considered a
separate industry. For purposes of this limitation, supranational organiza-
tions are deemed to be issuers conducting their principal business activities
in the same industry.
   
3. Borrow money except for temporary for emergency purposes and then only in
an amount not exceeding 10% of the value of total assets. This borrowing pro-
vision is included solely to facilitate the orderly sale of portfolio securi-
ties to accommodate substantial redemption requests if they should occur and
is not for investment purposes. All borrowings in excess of 5% of the Portfo-
lio's total assets will be repaid before making investments.     
 
The foregoing percentages will apply at the time of the purchase of a securi-
ty.
 
- -------------------------------------------------------------------------------
HOW TO PURCHASE FUND SHARES
- -------------------------------------------------------------------------------
   
You may purchase shares of the Portfolio directly through DST Systems, Inc.
("DST" or the "Transfer Agent"). Purchases of shares of the Portfolio may be
made on any day on which the New York Stock Exchange is open for business
("Business Day"). Shares of the Portfolio are offered only to residents of
states in which such shares are eligible for purchase. Certain brokers assist
their clients in the purchase or redemption of shares and charge a fee for
this service in addition to the Portfolio's public offering price.     
 
You may place orders by mail and wire. If you have elected the Telephone Pur-
chase Authorization option on your Account Application, you may place orders
by telephone. If market conditions are extraordinarily active, or if severe
weather or other emergencies exist, and you experience difficulties placing
redemption orders by telephone, you may wish to consider placing your order by
other means, such as mail or overnight delivery.
   
Neither the Fund nor the Transfer Agent will be responsible for any loss, lia-
bility, cost or expense for acting upon wire instructions or upon telephone
instructions that it reasonably believes to be genuine. The Fund and the
Transfer Agent will each employ reasonable procedures to confirm that instruc-
tions communicated by telephone are genuine, including requiring a form of
personal identification prior     
 
                                       7
<PAGE>
 
   
to acting upon instructions received by telephone and recording telephone in-
structions.     
 
The Fund reserves the right to reject any purchase order or to suspend or mod-
ify the continuous offering of its shares.
   
Since investment opportunities for smaller market capitalization securities
may be more limited than those in other sectors of the market, it is expected
that, in order to facilitate the management of the Portfolio, the Adviser will
recommend to the Fund's Board of Directors that the Portfolio, from time to
time, should discontinue the sale of its shares to new investors. If such a
determination is made, the Portfolio will be closed to additional investments.
Such a decision would not affect the status of any other portfolio of the
Fund.     
   
In this regard, the Board of Directors of the Fund has determined that the
Portfolio shall close to new and subsequent investments at the close of busi-
ness on the Business Day on which the net asset value of the Portfolio first
exceeds $100 million.     
 
MINIMUM INVESTMENT
   
The minimum initial investment in the Portfolio is $5,000, and there is no
minimum for subsequent purchases. The minimum initial investment for IRA's is
$2,000. The Distributor may waive the minimum at its discretion. No minimum
applies to subsequent purchases.     
 
INITIAL PURCHASES BY MAIL
 
An account may be opened by mailing a check or other negotiable bank draft
payable to--PBHG Limited Fund-- for $5,000 or more, and a completed Account
Application to The PBHG Funds, Inc. c/o DST Systems, Inc., P.O. Box 419534,
Kansas City, Missouri 64141-6534.
 
ADDITIONAL PURCHASES BY PHONE (TELEPHONE PURCHASE AUTHORIZATION)
 
If you have made this election, you may purchase additional shares by tele-
phoning the Transfer Agent at 1-800-433-0051. THE TELEPHONE PURCHASE AUTHORI-
ZATION IS AN ELECTION AVAILABLE ON THE ACCOUNT APPLICATION. THE MINIMUM TELE-
PHONE PURCHASE IS $1,000, AND THE MAXIMUM IS FIVE TIMES THE NET ASSET VALUE OF
SHARES HELD BY THE SHAREHOLDER ON THE DAY PRECEDING SUCH TELEPHONE PURCHASE
FOR WHICH PAYMENT HAS BEEN RECEIVED. The telephone purchase will be made at
the offering price next computed after the receipt of the call by the Transfer
Agent. Payment for the telephone purchase must be received by the Transfer
Agent within seven days. If payment is not received within seven days, you
will be liable for all losses incurred as a result of the purchase.
 
INITIAL PURCHASE BY WIRE
 
If you have an account with a commercial bank that is a member of the Federal
Reserve System, you may purchase shares of the Portfolio by requesting that
your bank transmit funds by wire. Before making an initial investment by wire,
you must first telephone 1-800-433-0051 to be assigned an account number. Your
name, account number, taxpayer identification number or Social Security Num-
ber, and address must be specified in the wire. In addition, an Account Appli-
cation should be promptly forwarded to: DST Systems, Inc., P.O. Box 419534,
Kansas City, Missouri 64141-6534. All wires must be sent as follows: United
Missouri Bank of Kansas, N.A.; ABA #10-10-00695; for Account Number 98705-
23469; Further Credit: Limited Fund.
 
ADDITIONAL PURCHASES BY WIRE
   
Additional investments may be made at any time through the wire procedures de-
scribed in the previous section, which must include your name and account num-
ber. Your bank may impose a fee for investments by wire.     
       
GENERAL INFORMATION REGARDING PURCHASES
 
A purchase order will be effective as of the day received by the Transfer
Agent if the Transfer Agent receives sufficient information to execute the or-
der and receives payment before 4:00 p.m., Eastern time. Payment may be made
by check or readily available funds. The purchase price of shares of the Port-
folio is the net asset value per share next determined after a purchase order
is effective. Purchases will be made in full and fractional shares of the
Portfolio calculated to three decimal places. The Fund will not issue certifi-
cates representing shares of the Portfolio.
 
If a check received for the purchase of shares does not clear, the purchase
will be canceled, and you could be lia-
 
                                       8
<PAGE>
 
ble for any losses or fees incurred. The Fund reserves the right to reject a
purchase order when the Fund determines that it is not in the best interests
of the Fund or its shareholders to accept such order.
 
- -------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- -------------------------------------------------------------------------------
 
SHAREHOLDER INQUIRIES AND SERVICES OFFERED
   
If you have any questions about the Portfolio or the shareholder services de-
scribed below, please call the Fund at 1-800-433-0051. Written inquiries
should be sent to DST SYSTEMS, INC., P.O. BOX 419534, KANSAS CITY, MISSOURI
64141-6534. The Fund reserves the right to amend the shareholder services de-
scribed below or to change the terms or conditions relating to such services
upon 60 days' notice to shareholders. You may, however, discontinue any serv-
ice you select, provided that with respect to the Systematic Withdrawal Plan
described below, the Fund's Transfer Agent receives your notification to dis-
continue such service(s) at least ten days before the next scheduled invest-
ment or withdrawal date.     
   
SYSTEMATIC WITHDRAWAL PLAN     
   
For your convenience, the Fund provides a systematic withdrawal plan that ena-
ble you to withdraw from your account(s) with a minimum of paperwork. You can
utilize this plan by simply completing the appropriate section of the Account
Application.     
          
The Systematic Withdrawal Plan provides a convenient way for you to receive
current income while maintaining your investments in the Portfolio. The Sys-
tematic Withdrawal Plan permits you to have payments of $50 or more automati-
cally transferred from your account in the Portfolio to your designated check-
ing or savings account on a monthly, quarterly, or semi-annual basis. In order
to start this Plan, you must have a minimum balance of $5,000 in any account
utilizing this feature. Your systematic withdrawals will be processed on a
regular basis beginning on or about either the first or fifteenth day of the
month, quarter or semi-annual period you select.     
 
EXCHANGE PRIVILEGES
   
Once payment for your shares has been received (i.e., an account has been es-
tablished), you may exchange some or all of your shares for shares of the
other eight portfolios of the Fund currently available to the public. However,
if you own shares of any portfolio of the Fund other than the PBHG Cash Re-
serves Fund, you are limited to four (4) exchanges annually from such portfo-
lio to the PBHG Cash Fund. Exchanges are made at net asset value. The Fund re-
serves the right to change the terms and conditions of the exchange privilege
discussed herein, or to terminate the exchange privilege, upon sixty days' no-
tice. Exchanges will be made only after proper instructions in writing or by
telephone (an "Exchange Request") are received for an established account by
the Transfer Agent. The exchange privilege may be exercised only in those
states where the shares of the Portfolio may legally be sold.     
 
TAX-SHELTERED RETIREMENT PLANS
 
A variety of retirement plans, including IRAs, SEP-IRAs, 401(a) Keogh and Cor-
porate money purchase pension and profit sharing plans, and 401(k) and 403(b)
plans are available to investors in the Fund.
 
(1) INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS"). You may save for your retirement
and shelter your investment income from current taxes by either: (a) estab-
lishing a new IRA; or (b) "rolling-over" to the Fund monies from other IRA ac-
counts or lump sum distributions from a qualified retirement plan. If you are
between 18 and 70 1/2 years of age, you can use an IRA to invest up to $2,000
per year of your earned income in the Portfolio. You may also invest up to
$250 per year in a spousal IRA if your spouse has no earned income.
 
(2) SEP-IRAS. If you are a self-employed person, you can establish a Simpli-
fied Employee Pension Plan ("SEP-IRA"). A SEP-IRA is designed to provide per-
sons with self-employed income (and their eligible employees) with many of the
same tax advantages as a Keogh, but with fewer administrative requirements.
 
(3) 401(A) KEOGH AND CORPORATE RETIREMENT PLANS. Both a prototype money pur-
chase pension plan and a profit sharing plan, which may be used alone or in
combination, are available for self-employed individuals and their partners,
and corporations to provide tax-sheltered retirement benefits for individuals
and employees.
 
(4) 401(K) PLANS. Through the establishment of a 401(k) plan by a corporation
of any size, employees can invest a
                                       9
<PAGE>
 
portion of their wages in the Portfolio on a tax-deferred basis in order to
help them meet their retirement needs.
 
(5) 403(B) PLANS. Section 403(b) plans are custodial accounts which are avail-
able to employees of most non-profit organizations and public schools.
 
OTHER SPECIAL ACCOUNTS
 
The Fund also offers the following special accounts to meet your needs:
 
(1) UNIFORM GIFT TO MINORS. By establishing a Uniform Gift to Minors Account
with the Fund you can build a fund for your children's education or a nest egg
for their future and, at the same time, potentially reduce your own income
taxes.
 
(2) CUSTODIAL AND FIDUCIARY ACCOUNTS. The Fund provides a convenient means of
establishing custodial and fiduciary accounts for investors with fiduciary re-
sponsibilities.
 
For further information regarding any of the above retirement plans and ac-
counts, please call toll free at 1-800-433-0051. Retirement investors may,
however, wish to consult with their own tax counsel or adviser.
 
- -------------------------------------------------------------------------------
HOW TO REDEEM FUND SHARES
- -------------------------------------------------------------------------------
 
Redemption orders received by the Transfer Agent prior to 4:00 p.m., Eastern
time on any Business Day will be effective that day. The redemption price of
shares is the net asset value per share of the Portfolio next determined after
the redemption order is effective. Payment on redemption will be made as
promptly as possible and, in any event, within seven days after the redemption
order is received, provided, however, that redemption proceeds for shares pur-
chased by check (including certified or cashier's checks) will be forwarded
only upon collection of payment for such shares; collection of payment may
take up to 15 days. You may not close your accounts by telephone.
 
You may receive redemption payments in the form of a check or by Federal Re-
serve or ACH wire transfer.
 
BY MAIL
 
There is no charge for having a check for redemption proceeds mailed.
 
BY TELEPHONE
 
Redemption orders may be placed by telephone. Neither the Fund nor the Trans-
fer Agent will be responsible for any loss, liability, cost or expense for
acting upon wire instructions or upon telephone instructions that it reasona-
bly believes to be genuine. The Fund and the Transfer Agent will each employ
reasonable procedures to confirm that instructions communicated by telephone
are genuine, including requiring a form of personal identification prior to
acting upon instructions received by telephone and recording telephone in-
structions. If reasonable procedures are not employed, the Fund and the Trans-
fer Agent may be liable for any losses due to unauthorized or fraudulent tele-
phone transactions.
 
If market conditions are extraordinarily active, or other extraordinary cir-
cumstances exist and you experience difficulties placing redemption orders by
telephone, you may wish to consider placing your order by other means, such as
mail or overnight delivery.
 
BY WIRE
 
The Custodian will deduct a wire charge, currently $10.00, from the amount of
a Federal Reserve wire redemption payment made at the request of a sharehold-
er. Shareholders cannot redeem shares of the Portfolio by Federal Reserve wire
on federal holidays restricting wire transfers.
 
BY ACH
 
The Fund does not charge for ACH wire transactions; however, such transactions
will not be posted to your bank account until the second Business Day follow-
ing the transaction.
 
SIGNATURE GUARANTEES
 
A signature guarantee is a widely accepted way to protect you by verifying the
signature on certain redemption requests. The Fund requires signature guaran-
tees to be provided in the following circumstances: (1) written requests for
redemptions in excess of $50,000; (2) all requests to wire redemption pro-
ceeds; and (3) redemption requests that provide that the redemption proceeds
should be sent to an address other than the address of record or to a person
other than the registered shareholder(s) for the account. Signature guarantees
can be obtained from any of the following insti-
 
                                      10
<PAGE>
 
tutions: a national or state bank, a trust company, a federal savings and loan
association, or a broker-dealer that is a member of a national securities ex-
change. The Fund does not accept guarantees from notaries public or organiza-
tions that do not provide reimbursement in the case of fraud.
 
MINIMUM ACCOUNT SIZE
 
Due to the relatively high cost of maintaining smaller accounts, the Fund re-
serves the right to redeem shares in any account if, as the result of redemp-
tions, the value of that account drops below $2,500. You will be allowed at
least 60 days, after notice by the Fund, to make an additional investment to
bring your account value up to at least $2,500 before the redemption is proc-
essed.
 
The right of redemption may be suspended or the date of payment of redemption
proceeds postponed during certain periods as set forth more fully in the
Statement of Additional Information.
 
- -------------------------------------------------------------------------------
SHARE PRICE
- -------------------------------------------------------------------------------
 
The net asset value per share of the Portfolio is determined by dividing the
total market value of the Portfolio's investments and other assets, less any
liabilities, by the total outstanding shares of the Portfolio. Net asset value
per share is determined daily as of the close of trading on the New York Stock
Exchange (currently 4:00 p.m., Eastern time) on any Business Day. The net as-
set value per share of the Portfolio is listed under PBHG in the mutual fund
section of most major daily newspapers, including the Wall Street Journal.
 
- -------------------------------------------------------------------------------
PERFORMANCE ADVERTISING
- -------------------------------------------------------------------------------
 
From time to time, the Portfolio may advertise its yield and total return.
These figures will be based on historical earnings and are not intended to in-
dicate future performance. No representation can be made regarding actual fu-
ture yields or returns. Yield refers to the annualized income generated by an
investment in the Portfolio over a specified 30-day period. The yield is cal-
culated by assuming that the same amount of income generated by the investment
during that period is generated in each 30-day period over one year and is
shown as a percentage of the investment.
 
The total return of the Portfolio refers to the average compounded rate of re-
turn on a hypothetical investment, for designated time periods (including but
not limited to the period from which the Portfolio commenced operations
through the specified date), assuming that the entire investment is redeemed
at the end of each period and assuming the reinvestment of all dividend and
capital gain distributions.
 
The Portfolio may periodically compare its performance to that of other mutual
funds tracked by mutual fund rating services (such as Lipper Analytical Serv-
ices, Inc.) or by financial and business publications and periodicals, broad
groups of comparable mutual funds, unmanaged indices which may assume invest-
ment of dividends but generally do not reflect deductions for administrative
and management costs, and other investment alternatives. The Portfolio may
quote services such as Morningstar, Inc., a service that ranks mutual funds on
the basis of risk-adjusted performance, and Ibbotson Associates of Chicago,
Illinois, which provides historical returns of the capital markets in the U.S.
The Portfolio may use long-term performance of these capital markets to demon-
strate general long-term risk versus reward scenarios and could include the
value of a hypothetical investment in any of the capital markets. The Portfo-
lio may also quote financial and business publications and periodicals as they
relate to fund management, investment philosophy, and investment techniques.
 
The Portfolio may quote various measures of volatility and benchmark correla-
tion in advertising and may compare these measures to those of other funds.
Measures of volatility attempt to compare historical share price fluctuations
or total returns to a benchmark while measures of benchmark correlation indi-
cate how valid a comparative benchmark might be. Measures of volatility and
correlation are calculated using averages of historical data and cannot be
calculated precisely.
 
- -------------------------------------------------------------------------------
TAXES
- -------------------------------------------------------------------------------
 
The following summary of federal income tax consequences is based on current
tax laws and regulations, which may be changed by legislative, judicial or ad-
ministrative action. No attempt has been made to present a detailed explana-
tion of the federal, state or local income tax treatment of the Portfolio or
its shareholders. Accordingly, you are urged to consult your tax advisors re-
garding specific
 
                                      11
<PAGE>
 
questions as to federal, state and local income taxes. See the Statement of
Additional Information.
 
TAX STATUS OF THE PORTFOLIO:
 
The Portfolio is treated as a separate entity for federal income tax purposes
and is not combined with the Fund's other Portfolios. The Portfolio intends to
qualify or to continue to qualify for the special tax treatment afforded regu-
lated investment companies as defined under Subchapter M of the Internal Reve-
nue Code of 1986, as amended. So long as the Portfolio qualifies for this spe-
cial tax treatment, it will be relieved of federal income tax on that part of
its net investment income and net capital gain (the excess of net long-term
capital gain over net short-term capital loss) which it distributes to share-
holders.
 
TAX STATUS OF DISTRIBUTIONS:
 
The Portfolio will distribute all of its net investment income (including, for
this purpose, net short-term capital gain) to shareholders. Dividends from net
investment income will be taxable to shareholders as ordinary income whether
received in cash or in additional shares. Distributions from net investment
income will qualify for the dividends-received deduction for corporate share-
holders only to the extent such distributions are derived from dividends paid
by domestic corporations. It can be expected that only certain dividends of
the Portfolio will qualify for that deduction. Any net capital gains will be
distributed annually and will be taxed to shareholders as long-term capital
gains, regardless of how long the shareholder has held shares and regardless
of whether the distributions are received in cash or in additional shares. The
Portfolio will make annual reports to shareholders of the federal income tax
status of all distributions, including the amount of dividends eligible for
the dividends-received deduction.
 
Certain securities purchased by the Portfolio (such as U.S. Treasury STRIPS,
defined in "Glossary of Permitted Investments" below) are sold with original
issue discount and thus do not make periodic cash interest payments. The Port-
folio will be required to include as part of its current net investment income
the accrued discount on such obligations for purposes of the distribution re-
quirement even though the Portfolio has not received any interest payments on
such obligations during that period. Because the Portfolio distributes all of
its net investment income to its shareholders, the Portfolio may have to sell
portfolio securities to distribute such accrued income, which may occur at a
time when the Adviser would not have chosen to sell such securities and which
may result in a taxable gain or loss.
 
Income received on direct U.S. obligations is exempt from income tax at the
state level when received directly by the Portfolio, and may be exempt, de-
pending on the state, when received by a shareholder as income dividends from
the Portfolio provided certain state-specific conditions are satisfied. Not
all states permit such income dividends to be tax exempt, and some require
that a certain minimum percentage of an investment company's income be derived
from state tax-exempt interest. The Portfolio will inform shareholders annu-
ally of the percentage of income and distributions derived from direct U.S.
obligations. You should consult your tax advisor to determine whether any por-
tion of the income dividends received from the Portfolio is considered tax ex-
empt in your particular state.
 
Dividends declared by the Portfolio in October, November or December of any
year and payable to shareholders of record on a date in one of those months
will be deemed to have been paid by the Portfolio and received by the share-
holders on December 31 of that year, if paid by the Portfolio at any time dur-
ing the following January.
 
The Portfolio intends to make sufficient distributions prior to the end of
each calendar year to avoid liability for the federal excise tax that may be
applicable to regulated investment companies.
 
TAX TREATMENT OF TRANSACTIONS:
 
Each sale, exchange or redemption of the Portfolio's shares is a taxable event
to the shareholder.
 
Income derived by the Portfolio from securities of foreign issuers may be sub-
ject to foreign withholding taxes.
 
- -------------------------------------------------------------------------------
GENERAL INFORMATION
- -------------------------------------------------------------------------------
 
THE FUND
 
The Fund, an open-end management investment company, was originally incorpo-
rated in Delaware in 1985 under the name PBHG Growth Fund, Inc. Effective July
31, 1992, the Fund was reorganized as a Maryland corporation pursuant to an
Agreement and Articles of Merger which was
                                      12
<PAGE>
 
approved by Fund shareholders on July 21, 1992. On September 8, 1993, the
Fund's shareholders voted to change the name of the Fund to The Advisors' In-
ner Circle Fund II, Inc. On May 2, 1994, the Fund's shareholders voted to
change the name of the Fund to The PBHG Funds, Inc. The Fund has an authorized
capitalization of six billion four hundred million shares of $0.001 par value
common stock. All consideration received by the Fund for shares of any Portfo-
lio and all assets of such Portfolio belong to that Portfolio and would be
subject to liabilities related thereto. The Fund reserves the right to create
and issue shares of additional portfolios.
   
Each portfolio of the Fund pays its respective expenses relating to its opera-
tion, including fees of its service providers, audit and legal expenses, ex-
penses of preparing prospectuses, proxy solicitation material and reports to
shareholders, costs of custodial services and registering its shares under
federal and state securities laws, pricing and insurance expenses and pays ad-
ditional expenses including litigation and other extraordinary expenses, bro-
kerage costs, interest charges, taxes and organization expenses.     
 
THE ADVISER
 
Pilgrim Baxter & Associates, Ltd. is a professional investment management firm
and registered investment adviser that, along with its predecessors, has been
in business since 1982. The controlling shareholder of the Adviser is United
Asset Management Corporation ("UAM"), a New York Stock Exchange listed holding
company principally engaged, through affiliated firms, in providing institu-
tional investment management services and acquiring institutional investment
management firms. UAM's corporate headquarters are located at One Interna-
tional Place, Boston, Massachusetts 02110. The Adviser currently has discre-
tionary management authority with respect to approximately $8 billion in as-
sets. In addition to advising the Portfolio, the Adviser provides advisory
services to the Fund's other Portfolios and to pension and profit-sharing
plans, charitable institutions, corporations, individual investors, trusts and
estates, and other investment companies. The principal business address of the
Adviser is 1255 Drummers Lane, Suite 300, Wayne, Pennsylvania 19087.
 
The Adviser serves as the investment adviser to the Portfolio under an invest-
ment advisory agreement with the Fund (the "Advisory Agreement"). The Adviser
makes the investment decisions for the assets of the Portfolio and continu-
ously reviews, supervises and administers the investment program of the Port-
folio, subject to the supervision of, and policies established by, the Board
of Directors of the Fund.
 
For its services, the Adviser is entitled to a fee, which is calculated daily
and paid monthly, at an annual rate of 1.00% of the Limited Fund's average
daily net assets. The investment advisory fees paid by the Portfolio are
higher than those paid by most investment companies, although the Adviser be-
lieves the fees to be comparable to those paid by investment companies with
similar investment objectives and policies. The Adviser has voluntarily agreed
to waive a portion of its fee and reimburse expenses in an amount necessary to
limit annual operating expenses to not more than 1.50% of the average daily
net assets of the Limited Fund. The Adviser reserves the right to terminate
its voluntary fee waivers and reimbursements at any time in its sole discre-
tion.
 
The Portfolio will be managed by Christine M. Baxter, CFA. Ms. Baxter has
worked as an equity analyst and portfolio manager for the Adviser since 1991
and has, with Gary L. Pilgrim, CFA, managed the Emerging Growth Fund since its
inception in June 1993.
 
THE ADMINISTRATOR
   
PBHG Fund Services (the "Administrator"), a wholly-owned subsidiary of Pilgrim
Baxter & Associates, Ltd., provides the Fund with administrative services, in-
cluding regulatory reporting and all necessary office space, equipment, per-
sonnel and facilities. For these administrative services, the Administrator is
entitled to a fee, which is calculated daily and paid monthly, at an annual
rate of .15% of the average daily net assets of the Portfolio. The principal
place of business of the Administrator is 1255 Drummers Lane, Suite 300,
Wayne, Pennsylvania 19087.     
 
THE TRANSFER AGENT
 
DST Systems, Inc., P.O. Box 419534, Kansas City, Missouri 64141-6534, serves
as the transfer agent, dividend disbursing agent and shareholder servicing
agent for the Fund under a transfer agent agreement with the Fund.
   
From time to time, the Fund may pay amounts to third parties that provide sub-
transfer agency and other adminis     
 
                                      13
<PAGE>
 
   
trative services relating to the Fund to persons who beneficially own inter-
ests in the Fund, such as participants in 401(k) plans. These services may in-
clude, among other things, sub-accounting services, answering inquiries relat-
ing to the Fund, delivering, on behalf of the Fund, proxy statements, annual
reports, updated Prospectuses, other communications regarding the Fund, and
related services as the Fund or the beneficial owners may reasonably request.
In such cases, the Fund will not compensate such third parties at a rate that
is greater than the rate the Fund is currently paying the Fund's Transfer
Agent for providing these services to shareholders investing directly in the
Fund.     
 
THE DISTRIBUTOR
 
SEI Financial Services Company (the "Distributor"), 680 East Swedesford Road,
Wayne, Pennsylvania 19087-1658, a wholly-owned subsidiary of SEI, provides the
Fund with distribution services. No compensation is paid to the Distributor
for distribution services for the shares of the Portfolio.
 
DIRECTORS OF THE FUND
 
The management and affairs of the Fund are supervised by the Board of Direc-
tors under the laws of the State of Maryland. The Directors have approved con-
tracts under which, as described above, certain companies provide essential
management services to the Fund.
 
VOTING RIGHTS
   
Each share held entitles the shareholder of record to one vote. Shareholders
of the Portfolio will vote separately on matters relating solely to the Port-
folio, such as approval of advisory agreements and changes in fundamental pol-
icies, and matters affecting some but not all portfolios of the Fund will be
voted on only by shareholders of the affected Portfolios. Shareholders of all
portfolios of the Fund will vote together in matters affecting the Fund gener-
ally, such as the election of Directors or selection of accountants. As a
Maryland corporation, the Fund is not required to hold and does not intend to
hold annual meetings of shareholders, but shareholder approval will be sought
for certain changes in the operation of the Fund and for the election of Di-
rectors under certain circumstances. In addition, a Director may be removed by
the remaining Directors or by shareholders at a special meeting called upon
written request of shareholders owning at least 10% of the outstanding shares
of the Fund. In the event that such a meeting is requested, the Fund will pro-
vide appropriate assistance and information to the shareholders requesting the
meeting.     
 
REPORTING
 
The Fund issues unaudited financial information semi-annually, and audited fi-
nancial statements annually for the Portfolio. The Fund also furnishes peri-
odic reports and, as necessary, proxy statements to shareholders of record.
 
SHAREHOLDER INQUIRIES
 
You may direct inquiries to the Fund by writing to The PBHG Funds, Inc., P.O.
Box 419009, Kansas City, Missouri 64141-6009, or by calling 1-800-433-0051.
 
DIVIDENDS AND DISTRIBUTIONS
 
Substantially all of the net investment income (exclusive of capital gains) of
the Portfolio is distributed in the form of annual dividends. If any capital
gain is realized, substantially all of it will be distributed by the Portfolio
at least annually.
 
Shareholders automatically receive all dividends and capital gain distribu-
tions in additional shares at the net asset value determined on the next Busi-
ness Day after the record date, unless the shareholder has elected to take
such payment in cash. Shareholders may change their election by providing
written notice to the Transfer Agent at least 15 days prior to the distribu-
tion. Shareholders may receive payments for cash distributions in the form of
a check or by Federal Reserve or ACH wire transfer.
 
Dividends and distributions of the Portfolio are paid on a per share basis.
The value of each share will be reduced by the amount of the payment. If
shares are purchased shortly before the record date for a dividend or distri-
bution of capital gains, a shareholder will pay the full price for the shares
and receive some portion of the price back as a taxable dividend or distribu-
tion.
 
CUSTODIAN
 
CoreStates Bank, N.A., Broad and Chestnut Streets, P.O. Box 7618, Philadel-
phia, Pennsylvania 19101, serves as the custodian for the Limited Fund (the
"Custodian").
 
                                      14
<PAGE>
 
The Custodian holds cash, securities and other assets of the Fund as required
by the Investment Company Act of 1940, as amended (the "1940 Act").
 
- -------------------------------------------------------------------------------
GLOSSARY OF PERMITTED INVESTMENTS
- -------------------------------------------------------------------------------
 
The following is a description of permitted investments for the Portfolio.
 
AMERICAN DEPOSITARY RECEIPTS ("ADRS") -- ADRs are securities, typically issued
by a U.S. financial institution (a "depositary"), that evidence ownership in-
terests in a security or a pool of securities issued by a foreign issuer and
deposited with the depositary. ADRs include American Depositary Shares and New
York Shares. ADRs may be available for investment through "sponsored" or
"unsponsored" facilities. A sponsored facility is established jointly by the
issuer of the security underlying the receipt and a depositary, whereas an
unsponsored facility may be established by a depositary without participation
by the issuer of the receipt's underlying security.
 
Holders of an unsponsored depositary receipt generally bear all the costs of
the unsponsored facility. The depositary of an unsponsored facility frequently
is under no obligation to distribute shareholder communications received from
the issuer of the deposited security or to pass through to the holders of the
receipts voting rights with respect to the deposited securities.
   
CONVERTIBLE SECURITIES -- Securities such as rights, bonds, notes and pre-
ferred stocks which are convertible into or exchangeable for common stocks.
Convertible securities have characteristics similar to both fixed income and
equity securities. Because of the conversion feature, the market value of con-
vertible securities tends to move together with the market value of the under-
lying common stock. As a result, the Portfolio's selection of convertible se-
curities is based, to a great extent, on the potential for capital apprecia-
tion that may exist in the underlying stock. The value of convertible securi-
ties is also affected by prevailing interest rates, the credit quality of the
issuer, and any call provisions. If for any reason investment grade convert-
ible securities purchased by the Portfolio fall below investment grade, the
Portfolio will dispose of such securities in an orderly manner.     
 
EQUITY SECURITIES -- Investments in common stocks, preferred stocks and other
equity related securities are subject to market risks which may cause their
prices to fluctuate over time. Changes in the value of portfolio securities
will not necessarily affect cash income derived from these securities but will
affect the Portfolio's net asset value.
 
FORWARD FOREIGN CURRENCY CONTRACTS -- Foreign currency exchange transactions
may be conducted on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market, or through entering into forward cur-
rency contracts to protect against uncertainty in the level of future exchange
rates between a particular foreign currency and the U.S. dollar, or between
foreign currencies in which the Portfolio's securities are or may be denomi-
nated. A forward foreign currency contract involves an obligation to purchase
or sell a specific currency amount at a future date, which may be any fixed
number of days from the date of the contract, agreed upon by the parties, at a
price set at the time of the contract. Under normal circumstances, considera-
tion of the prospect for changes in currency exchange rates will be incorpo-
rated into the Portfolio's long-term investment strategies. However, the
Adviser believes that it is important to have the flexibility to enter into
forward foreign currency contracts when it determines that the best interests
of the Portfolio will be served.
 
When the Adviser believes that the currency of a particular country may suffer
a significant decline against the U.S. dollar or against another currency, the
Portfolio may enter into a forward foreign currency contract to sell, for a
fixed amount of U.S. dollars or other appropriate currency, the amount of for-
eign currency approximating the value of some or all of the Portfolio's secu-
rities denominated in such foreign currency.
 
At the maturity of a forward foreign currency contract, the Portfolio may ei-
ther sell a portfolio security and make delivery of the foreign currency, or
it may retain the security and terminate its contractual obligation to deliver
the foreign currency by purchasing an "offsetting" contract with the same cur-
rency trader, obligating it to purchase, on the same maturity date, the same
amount of the foreign currency. The Portfolio may realize a gain or loss from
currency transactions.
 
 
                                      15
<PAGE>
 
Generally, the Portfolio will enter into forward foreign currency contracts
only as a hedge against foreign currency exposure affecting the Portfolio or
to hedge a specific security transaction or portfolio position. If the Portfo-
lio enters into forward foreign currency contracts to cover activities which
are essentially speculative, the Portfolio will segregate cash or readily mar-
ketable securities with its Custodian, or a designated sub-custodian, in an
amount at all times equal to or exceeding the Portfolio's commitment with re-
spect to such contracts.
 
ILLIQUID SECURITIES -- Securities that cannot be disposed of in the ordinary
course of business within seven days at approximately the price at which the
Portfolio has valued the security.
 
MONEY MARKET INSTRUMENTS -- Money market securities are high-quality, dollar-
denominated, short-term debt instruments. They consist of: (i) bankers' ac-
ceptances, certificates of deposits, notes and time deposits of highly-rated
U.S. banks and U.S. branches of foreign banks; (ii) U.S. Treasury obligations
and obligations issued or guaranteed by the agencies and instrumentalities of
the U.S. Government; (iii) high-quality commercial paper issued by U.S. and
foreign corporations; (iv) debt obligations with a maturity of one year or
less issued by corporations with outstanding high-quality commercial papers;
and (v) repurchase agreements involving any of the foregoing obligations en-
tered into with highly-rated banks and broker-dealers.
 
REPURCHASE AGREEMENTS -- Agreements by which a person obtains a security and
simultaneously commits to return it to the seller at an agreed upon price (in-
cluding principal and interest) on an agreed upon date within a number of days
from the date of purchase. The Fund's Custodian or its agents will hold the
security as collateral for the repurchase agreement. Collateral must be main-
tained at a value at least equal to 102% of the purchase price. The Portfolio
bears a risk of loss in the event the other party defaults on its obligations
and the Portfolio is delayed or prevented from exercising its right to dispose
of the collateral securities or if the Portfolio realizes a loss on the sale
of the collateral securities. The Adviser will enter into repurchase agree-
ments on behalf of the Portfolio only with financial institutions deemed to
present minimal risk of bankruptcy during the term of the agreement based on
guidelines established and periodically reviewed by the Directors. Repurchase
agreements are considered loans under the 1940 Act, as well as for federal and
state income tax purposes.
 
RESTRICTED SECURITIES -- Securities that may not be sold freely to the public
absent registration under the Securities Act of 1933 or an exemption from reg-
istration. The Portfolio may invest in restricted securities that the Adviser
determines are liquid, based on guidelines and procedures developed and estab-
lished by the Board of Directors of the Fund. The Board of Directors will pe-
riodically review such procedures and guidelines and will monitor the Advis-
er's implementation of such procedures and guidelines. Under these procedures
and guidelines, the Adviser will consider the frequency of trades and quotes
for the security, the number of dealers in, and potential purchasers for, the
securities, dealer undertakings to make a market in the security, and the na-
ture of the security and of the marketplace trades. The Portfolio may purchase
restricted securities sold in reliance upon the exemption from registration
provided by Rule 144A under the Securities Act of 1933. Restricted securities
may be difficult to value because market quotations may not be readily avail-
able. Because of the restrictions on the resale of restricted securities, they
may pose liquidity problems for the Portfolio.
 
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES -- The Portfolio may purchase se-
curities on a when-issued or delay-delivery basis. When the Portfolio pur-
chases securities in a when-issued or delayed-delivery basis, the price of
such securities is fixed at the time of the commitment, but delivery and pay-
ment for the securities may take place up to 120 days after the date of the
commitment to purchase. The securities so purchased are subject to market
fluctuation and no interest accrues to the purchaser during this period. When-
issued and delayed-delivery securities involve a risk of loss if the value of
the security to be purchased declines prior to the settlement date or in-
creases in value and there is a failure to deliver the security.
 
U.S. GOVERNMENT SECURITIES -- Bills, notes and bonds issued by the U.S. Gov-
ernment and backed by the full faith and credit of the United States.
 
U.S. TREASURY OBLIGATIONS -- Bills, notes and bonds issued by the U.S. Trea-
sury.
 
WARRANTS -- Instruments giving holders the right, but not the obligation, to
buy shares of a company at a given price during a specified period.
 
                                      16
<PAGE>
 
The PBHG Funds, INC.
P.O. Box 419534
Kansas City, MO 64141-6534

Investment Adviser:
Pilgrim Baxter & Associates, Ltd.

Distributor:
SEI Financial Services Company










To open an account, 
receive account information,
make inquiries or
request literature:

1-800-433-0051



PROSPECTUS
  July 1, 1996


        PBHG
        Limited Fund











[LOGO OF THE PBHG FUNDS INC APPEARS HERE]
<PAGE>

         
                              THE PBHG FUNDS, INC.

                               PBHG LIMITED FUND

                              INVESTMENT ADVISER:
                       PILGRIM BAXTER & ASSOCIATES, LTD.
    
This Statement of Additional Information is not a prospectus and relates only to
the PBHG Limited Fund (the "Portfolio").  It is intended to provide additional
information regarding the activities and operations of The PBHG Funds, Inc. (the
"Fund") and the Portfolio, and should be read in conjunction with the
Portfolio's Prospectus dated June 26, 1996. The Prospectus for the Portfolio may
be obtained without charge by calling 1-800-431-0051.     
    
<TABLE> 
<CAPTION> 


                               TABLE OF CONTENTS

<S>                                                                       <C> 
THE FUND..................................................................S - 2
DESCRIPTION OF PERMITTED INVESTMENTS......................................S - 2
INVESTMENT LIMITATIONS....................................................S - 3
THE ADVISER...............................................................S - 5
THE ADMINISTRATOR and Sub-Administrator...................................S - 7
THE DISTRIBUTOR...........................................................S - 8
DIRECTORS AND OFFICERS OF THE FUND........................................S - 8
COMPUTATION OF YIELD.....................................................S - 11
CALCULATION OF TOTAL RETURN..............................................S - 11
PURCHASE AND REDEMPTION OF SHARES........................................S - 11
DETERMINATION OF NET ASSET VALUE.........................................S - 12
TAXES....................................................................S - 12
PORTFOLIO TRANSACTIONS...................................................S - 14
DESCRIPTION OF SHARES....................................................S - 15
</TABLE> 
     
    
June 26, 1996     

<PAGE>
 
THE FUND

This Statement of Additional Information relates only to the Fund's PBHG Limited
Fund (the "Portfolio").  The Portfolio is a separate series of The PBHG Funds,
Inc. (the "Fund"), which was originally incorporated in Delaware on August 2,
1985, under the name PBHG Growth Fund, Inc., and commenced business shortly
thereafter as an open-end diversified management investment company under the
Investment Company Act of 1940, as amended (the "1940 Act").  On July 21, 1992,
shareholders of the Fund approved an Agreement and Articles of Merger pursuant
to which the Fund was reorganized and merged into a new Maryland corporation,
also named PBHG Growth Fund, Inc. On September 8, 1993, the shareholders of the
Fund voted to change the name of the Fund to The Advisors' Inner Circle Fund II,
Inc.  On May 2, 1994, the shareholders voted to change the Fund's name to The
PBHG Funds, Inc.  The Fund also offers shares of eight other portfolios, PBHG
Growth Fund, PBHG Emerging Growth Fund, PBHG Large Cap Growth Fund, PBHG Select
Equity Fund, PBHG International Fund, PBHG Cash Reserves Fund, PBHG Technology &
Communications Fund and PBHG Core Growth Fund, by a separate prospectus and
statement of additional information.  The Portfolio is a separate mutual fund,
and each share of the Portfolio represents an equal proportionate interest in
the Portfolio.  See "Description of Shares."  No investment in shares of the
Portfolio should be made without first reading the Portfolio's Prospectus.
Capitalized terms not defined herein are defined in the Portfolio's Prospectus.

DESCRIPTION OF PERMITTED INVESTMENTS

Repurchase agreements are agreements by which a person (e.g., the Portfolio)
obtains a security and simultaneously commits to return the security to the
seller (a member bank of the Federal Reserve System or primary securities dealer
as recognized by the Federal Reserve Bank of New York) at an agreed upon price
(including principal and interest) on an agreed upon date within a number of
days (usually not more than seven) from the date of purchase.  The resale price
reflects the purchase price plus an agreed upon market rate of interest which is
unrelated to the coupon rate or maturity of the underlying security.  A
repurchase agreement involves the obligation of the seller to pay the agreed
upon price, which obligation is in effect secured by the value of the underlying
security.

Repurchase agreements are considered to be loans by the Portfolio for purposes
of its investment limitations.  The repurchase agreements entered into by the
Portfolio will provide that the underlying security at all times shall have a
value at least equal to 102% of the resale price stated in the agreement (the
Adviser monitors compliance with this requirement).  Under all repurchase
agreements entered into by the Portfolio, the Fund's custodian or its agent must
take possession of the underlying collateral.  However, if the seller defaults,
the Portfolio could realize a loss on the sale of the underlying security to the
extent that the proceeds of the sale, including accrued interest, are less than
the resale price provided in the agreement including interest.  In addition,
even though the Bankruptcy Code provides protection for most repurchase
agreements, if the seller should be involved in bankruptcy or insolvency
proceedings, the Portfolio may incur delay and costs in selling the underlying
security or may suffer a loss of

                                     S - 2
<PAGE>
 
principal and interest if the Portfolio is treated as an unsecured creditor of
the seller and is required to return the underlying security to the seller's
estate.

Investment Company Shares

The Portfolio may invest in shares of money market mutual funds, to the extent
set forth under "Investment Limitations" below.  Since such funds pay management
fees and other expenses, shareholders of the Portfolio would indirectly pay both
the Portfolio's expenses and the expenses of underlying funds with respect to
the Portfolio's assets invested therein.  Applicable regulations prohibit the
Portfolio from acquiring the securities of other investment companies if, as a
result of such acquisition, the Portfolio owns more than 3% of the total voting
stock of the company; more than 5% of the Portfolio's total assets are invested
in securities of any one investment company; or more than 10% of the total
assets of the Portfolio are invested in securities (other than treasury stock)
issued by all investment companies.
    
Puts, Calls, Straddles, Spreads and Futures Contracts

The Portfolio has no current intention in the foreseeable future of utilizing 
puts, calls, straddles, spreads or futures contracts or any combination thereof.
     

INVESTMENT LIMITATIONS

Fundamental Policies

The Portfolio has adopted certain investment restrictions which, in addition to
those restrictions in the Prospectus, are fundamental and may not be changed
without approval by a majority vote of the Portfolio's shareholders.  Such
majority is defined in the 1940 Act as the lesser of (i) 67% or more of the
voting securities of the Portfolio present in person or by proxy at a meeting,
if the holders of more than 50% of the outstanding voting securities are present
or represented by proxy; or (ii) more than 50% of the outstanding voting
securities of the Portfolio.

The Portfolio may not:

1.   Acquire more than 10% of the voting securities of any one issuer.

2.   Invest in companies for the purpose of exercising control.

3.   Borrow money except for temporary or emergency purposes and then only in an
     amount not exceeding 10% of the value of total assets.  This borrowing
     provision is included solely to facilitate the orderly sale of portfolio
     securities to accommodate substantial redemption requests if they should
     occur and is not for investment purposes.  All borrowings in excess of 5%
     of the Portfolio's total assets will be repaid before making investments.

4.   Make loans, except that the Portfolio, in accordance with the Portfolio's
     investment objectives and policies, may (i) purchase or hold debt
     instruments, and (ii) enter into repurchase agreements as described in the
     Portfolio's Prospectus and Statement of Additional Information.

                                     S - 3
<PAGE>
 
5.   Pledge, mortgage or hypothecate assets, except (i) to secure temporary
     borrowings permitted by the Portfolio's limitation on permitted borrowings,
     or (ii) in connection with permitted transactions regarding options and
     futures contracts, in aggregate amounts not to exceed 10% of total assets
     taken at current value of the time of the incurrence of such pledge,
     mortgage or hypothecation.

6.   Purchase or sell real estate, real estate limited partnership interests,
     futures, contracts, commodities or commodity contracts, except that this
     shall not prevent the Portfolio from (i) investing in readily marketable
     securities of issuers which can invest in real estate or commodities,
     institutions that issue mortgages, or real estate investment trusts which
     deal in real estate or interests therein, pursuant to the Portfolio's
     investment objective and policies, and (ii) entering into futures contracts
     and options thereon that are listed on a national securities or commodities
     exchange where, as a result thereof, no more than 5% of the total assets
     for the Portfolio (taken at market value at the time of entering into the
     futures contracts) would be committed to margin deposits on such futures
     contracts and premiums paid for unexpired options on such futures
     contracts; provided that, in the case of an option that is "in-the-money"
     at the time of purchase, the "in-the-money" amount, as defined under
     Commodity Futures Trading Commission regulations, may be excluded in
     computing the 5% limit.  The Portfolio (as a matter of operating policy)
     will utilize only listed futures contracts and options thereon.

7.   Make short sales of securities, maintain a short position or purchase
     securities on margin, except that the Portfolio may (i) obtain short-term
     credits as necessary for the clearance of security transactions, and (ii)
     establish margin accounts as may be necessary in connection with the
     Portfolio's use of options and futures contracts.

8.   Act as an underwriter of securities of other issuers except as it may be
     deemed an underwriter in selling a portfolio security.

9.   Purchase securities of other investment companies except as permitted by
     the 1940 Act and the rules and regulations thereunder.

10.  Issue senior securities (as defined in the 1940 Act) except in connection
     with permitted borrowing money or pledging, mortgaging or hypothecating
     assets, as described in the Portfolio's limitation on borrowing money, the
     Portfolio's limitation on permitted borrowings and the Portfolio's
     limitation on pledging, mortgaging or hypothecating assets, or as permitted
     by rule, regulation or orders of the SEC.

11.  Invest in interests in oil, gas or other mineral exploration or development
     programs.

                                     S -4
<PAGE>
 
Non-fundamental Policies

In addition to the foregoing, and the policies set forth in the Portfolio's
Prospectus, the Portfolio has adopted additional investment restrictions which
may be amended by the Board of Directors without a vote of shareholders.

The Portfolio may not:

1.   Invest in illiquid securities in an amount exceeding, in the aggregate, 15%
     of its net assets.  This limitation does not include any Rule 144A
     restricted security that has been determined by, or pursuant to procedures
     established by, the Board, based on trading markets for such security, to
     be liquid.  However, certain state securities regulators have required that
     the Portfolio not invest more than 10% of its net assets in restricted
     securities; the Portfolio will so limit its investments, but intends to
     remove or loosen this restriction once permitted to do so by state
     regulators.
         
    
2.   Purchase securities of other investment companies, except to the extent
     such purchase is limited to shares of money market open-end investment
     companies and the Adviser will waive its fee on that portion of the assets
     placed in such money market open-end investment companies.

3.   Purchase or retain securities of an issuer if, to the knowledge of the
     Portfolio, an officer, trustee, partner or director of the Portfolio or any
     investment adviser of the Portfolio owns beneficially more than 1/2 of 1%
     of the shares or securities of such issuer and all such officers, trustees,
     partners and directors owning more than 1/2 of 1% of such shares or
     securities together own more than 5% of such shares or securities.

4.   Purchase puts, calls, straddles, spreads, and any combination thereof, if
     by reason thereof the value of its aggregate investment in such classes of
     securities will exceed 5% of its total assets.      
    
5.   Invest (i) more than 5% of its net assets in warrants or (ii) more than 2% 
     of its net assets in warrants that are not traded on the New York Stock 
     Exchange or the American Stock Exchange.     

The foregoing percentages will apply at the time of the purchase of a security,
except with respect to the limitation on investing in illiquid securities.

                                     S - 5
<PAGE>
 
THE ADVISER

The Fund and Pilgrim Baxter & Associates, Ltd. (the "Adviser") have entered into
an advisory agreement (the "Advisory Agreement").  The Advisory Agreement
provides certain limitations on the Adviser's liability, but also provides that
the Adviser shall not be protected against any liability to the Fund or its
shareholders by reason of willful misfeasance, bad faith or gross negligence on
its part in the performance of its duties or from reckless disregard of its
obligations or duties thereunder.

The Advisory Agreement obligates the Adviser to: (1) provide a program of
continuous investment management for the Fund in accordance with the Fund's
investment objectives, policies and limitations; (2) make investment decisions
for the Fund; and (3) place orders to purchase and sell securities for the Fund,
subject to the supervision of the Board of Directors.  The Advisory Agreement
requires the Adviser to pay its overhead and employee costs and the compensation
and expenses of all its partners, officers and employees who serve as officers
and executive employees of the Fund.  The Advisory Agreement provides that the
Adviser is not responsible for other expenses of operating the Fund.  See the
Prospectuses for a description of expenses borne by the Fund.

The Adviser is entitled to a fee which is calculated daily and paid monthly at
an annual rate of 1.00% of the average net assets of the Portfolio.

The Adviser has voluntarily agreed to waive a portion of its fee and reimburse
expenses in an amount that operates to limit total annual operating expenses to
not more than 1.5% of the average daily net assets of the Portfolio.  The
Adviser reserves the right to terminate its voluntary fee waivers and
reimbursements at any time in its sole discretion.

The annual fees of the Adviser will be reduced to the extent that the Fund's
ordinary expenses for any fiscal year (including advisory fees, but excluding
brokerage commissions, interest, local, state and federal taxes and
extraordinary expenses) exceed the expense limitations of any state having
jurisdiction over the Fund. In such event, the annual advisory fees will be
reduced pro rata (but not below zero) to the extent necessary to comply with
such expense limitations.  At the date of this Statement of Additional
Information, the strictest expense limitation applicable to the Fund is 2.5% of
the first $30 million of the Fund's average net assets, 2.0% of the next $70
million of average net assets, and 1.5% of the remaining average net assets of
any fiscal year.

To the extent the Portfolio is registered in the State of California and
purchases securities of open-end investment companies, the Adviser will waive
its advisory fee on that portion of the Portfolio's assets invested in such
securities.

The continuance of the Advisory Agreement after the first two years must be
specifically approved at least annually (i) by the Fund's Board of Directors or
by vote of a majority of the Fund's outstanding voting securities and (ii) by
the affirmative vote of a majority of the Directors who are not parties to the
agreement or interested persons of any such party by votes

                                     S - 6
<PAGE>
 
cast in person at a meeting called for such purpose.  The Advisory Agreement may
be terminated (i) at any time without penalty by the Fund upon the vote of a
majority of the Directors or by vote of the majority of the Fund's outstanding
voting securities upon 60 days' written notice to the Adviser or (ii) by the
Adviser at any time without penalty upon 60 days' written notice to the Fund.
The Advisory Agreement will also terminate automatically in the event of its
assignment (as defined in the 1940 Act).

   
THE ADMINISTRATOR AND SUB-ADMINISTRATOR    

   
The Fund and PBHG Fund Services (the "Administrator") entered into the
Administrative Services Agreement (the "Administrative Agreement") on July 1,
1996, pursuant to which the Administrator oversees the administration of the
business and affairs of the Fund, including services provided to it by various
third parties. The Administrator, a wholly-owned subsidiary of the Adviser, was
organized as a Pennsylvania business trust and has its principal place of
business at 1255 Drummers Lane, Suite 300, Wayne, Pennsylvania 19087. Under the
Administrative Agreement, the Administrator is entitled to a fee from the Fund,
which is calculated daily and paid monthly, at an annual rate of 0.15% of the
average daily net assets of each series of the Fund, including the Portfolio.
The Administrative Agreement provides that the Administrator shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the Fund
in connection with the matters to which the Administrative Agreement relates,
except a loss resulting from willful misfeasance, bad faith or negligence on the
part of the Administrator in the performance of its duties. The Administrative
Agreement shall remain in effect until December 31, 1998 and shall thereafter
continue in effect for successive periods of one year unless terminated by
either party upon not less than 90 days' prior written notice to the other 
party.    

   
The Fund, the Administrator and SEI Fund Resources (the "Sub-Administrator") 
entered into the Sub-Administrative Services Agreement ("Sub-Administrative
Agreement") on July 1, 1996 pursuant to which the Sub-Administrator assists the
Administrator in connection with the administration of the business and affairs
of the Fund. Prior to July 1, 1996, the Sub-Administrator served as the
administrator of the Fund. The Sub-Administrator is a wholly-owned subsidiary of
SEI Financial Management Company("SEI Financial"), which is a wholly-owned 
subsidiary of SEI Corporation ("SEI"). The Sub-Administrator was organized as a
Delaware business trust, and has its principal business offices at 680 East
Swedesford Road, Wayne Pennsylvania 19087-1658. Under the Sub-Administrative 
Agreement, the Sub-Administrator is entitled to a fee from the Administrator,
which is calculated daily and paid monthly, (i) at an annual rate of 0.07.% of
the average daily net assets of each series of the Fund, including the
Portfolio, with respect to the first $2.5 billion of the total average daily net
asset of the Fund; and (ii) at the annual rate of .025% of average daily net 
assets of each series of the Fund, including the Portfolio, with respect to the
total average daily net assets of the Fund in excess of $2.5 billion. The Sub-
Administrative Agreement provides that the Sub-Administrator shall not be liable
for any error of judgement or mistake of law or for any loss suffered by the
Fund in connection with the matters to which the Sub-Administrative Agreement
relates, except a loss resulting from willful misfeasance, bad faith or
negligence on the part of the Sub-Administrator in the performance of its
duties. The Sub-Administrative Agreement shall remain in effect until December
31, 1998 and shall thereafter continue in effect for successive periods of one
year, unless terminated by either party upon not less than 90 days' prior
written notice to the other party.    

THE DISTRIBUTOR

   
SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary of
SEI and the Fund are parties to a distribution agreement (the "Distribution
Agreement") dated July 1, 1996 pursuant to which the Distributor serves as
principal underwriter for the Fund. The Distributor will receive no compensation
for distribution serving in such capacity.    

The Distribution Agreement is renewable annually.  The Distribution Agreement
may be terminated by the Distributor, by a majority vote of the Directors who
are not interested persons and have no financial interest in the Distribution
Agreement or by a majority vote of the outstanding securities of the Fund upon
not more than 60 days' written notice by either party or upon assignment by the
Distributor.

DIRECTORS AND OFFICERS OF THE FUND

The management and affairs of the Fund are supervised by the Directors under the
laws of the State of Maryland.  The Directors and executive officers of the Fund
and their principal occupations for the last five years are set forth below.
Each may have held other positions with the named companies during that period.
Unless otherwise noted, the business address of each executive officer is SEI
Financial Management Corporation, 680 East Swedesford Road, Wayne, PA 19087-
1658:

                                     S - 7
<PAGE>

     
JOHN R. BARTHOLDSON (51) - Director - Triumph Group Holdings, Inc., 
1255 Drummers Lane, Suite 200, Wayne, PA 19087-1590.  Chief Financial Officer 
and Director, The Triumph Group Holdings, Inc. since 1992.  Senior Vice 
President and Chief Financial Officer, Lukens, Inc., 1978-1992.     
    
HAROLD J. BAXTER (50)* - Director - Chairman, Chief Executive Officer and
Director, the Adviser, 1255 Drummers Lane, Suite 300, Wayne, PA 19087-1590 since
1982. Trustee, the Administrator since May 1996.     
    
JETTIE M. EDWARDS (49) - Director - Syrus Associates, 76 Seaview Drive, Santa
Barbara, California 93108.  Consultant, Syrus Associates since 1986; Trustee,
Provident Investment Counsel Trust (investment company) since 1992.     
    
ALBERT A. MILLER (62) - Director - 7 Jennifer Drive, Holmdel, New Jersey 07733.
Principal and Treasurer, JK Equipment Exporters since 1995; Advisor and
Secretary, The Underwoman Shoppes Inc. (retail clothing stores) since 1980.  
Merchandising Group Vice President, R.H. Macy & Co., 1958-1995 (retired).     
    
GARY PILGRIM (55) - President - President, Secretary, Treasurer and Director, 
the Adviser since 1982.  Trustee, the Administrator since May 1996.     
    
CARMEN V. ROMEO (52) - Treasurer, Assistant Secretary - Director, Executive Vice
President, Chief Financial Officer and Treasurer of SEI, 680 East Swedesford
Road, Wayne PA 19087-1658. Director and Treasurer, the Sub-Administrator since
June 1996 and the Distributor and SEI Financial, 680 East Swedesford Road, Wayne
PA 19087-1658 since 1981.    
    
SANDRA K. ORLOW (42) - Vice President, Assistant Secretary - Vice President and
Assistant Secretary of SEI, SEI Financial and the Distributor since 1983 and the
Sub-Administrator since June 1996.    
    
KEVIN P. ROBINS (35) - Vice President, Assistant Secretary - Senior Vice
President, Secretary and General Counsel of SEI, and the Distributor since 1994
and the Sub-Administrater since June 1996. Associate, Morgan, Lewis & Bockius
LLP (law firm), 1988-1992.    
    
JEFFREY A. COHEN, CPA (35) - Controller, Assistant Secretary - Director,
International and Domestic Funds Accounting, SEI since 1991. Audit Manager,
Price Waterhouse prior to 1991.     
    
KATHRYN L. STANTON (37) - Vice President, Assistant Secretary - Vice President,
Assistant Secretary of SEI, SEI Financial and the Distributor since 1994 and the
Sub-Administrator since June 1996. Associate, Morgan, Lewis & Bockius LLP (law
firm), 1989-1994.    
    
TODD CIPPERMAN (30) - Vice President, Assistant Secretary - Vice President,
Assistant Secretary of SEI, SEI Financial and the Distributor since 1995 and the
Sub-Administrator since June 1996. Associate, Dewey Ballantine (law firm) 1994-
1995, Associate, Winston & Strawn (law firm), 1991-1994.    
                                     S - 8
<PAGE>
 
     
JOSEPH LYDON (36) - Vice President, Assistant Secretary - Director of Business
Administration, SEI since April, 1995. Vice President of Fund Group,
Vice President of the Advisor - Dreman Value Management, LP, President of Dreman
Financial Services, Inc., 1989-1995.      
    
BARBARA A. NUGENT (40) - Vice President and Assistant Secretary, SEI since April
1996. Associate, Drinker, Biddle & Reath (law firm), 1994-1996. Assistant Vice 
President, Delaware Service Company, Inc., 1988-1993.      
    
MICHAEL HARRINGTON (27) - Assistant Vice President - Mutual Fund Coordinator,
the Adviser since 1994. Secretary, the Administrator since May 1996. Account 
Manager, SEI, 1991-1994.      
    
LEE T. CUMMINGS (32) - Vice President - Director of Mutual Fund Operations, the 
Adviser since 1996. Treasurer, the Administrator since May 1996. Investment 
Accounting Officer, Delaware Group of Funds, Inc., 1994-1996. Vice President, 
Fund/Plan Services, Inc., 1992-1994. Assistant Vice President, Fund/Plan 
Services, Inc., 1990-1992.      
    
BRIAN BEREZNAK (34) - Vice President, Assistant Secretary - Chief Operating
Officer, the Adviser since 1983. Trustee and President, the Administrator since 
May 1996.      
    
DARLENE DEREMER (40) - Vice President - President, DeRemer Associates (financial
consulting), 155 South Street, Wrentham, MA 02093 since 1987.      
    
JANE A. KANTER (47) - Secretary - Partner, Katten Muchin & Zavis, 1025 Thomas
Jefferson Street, N.W., East Lobby - Suite 700, Washington, D.C. 20007 (law
firm) since 1994; Partner, Freedman Levy Kroll & Simonds (law firm), 1987-1994.
     
___________________
*Mr. Baxter is a Director who may be deemed to be an "interested person" of the
Fund as that term is defined in the 1940 Act.

                                     S - 9
<PAGE>
 
Each current Director of the Fund who is not an "interested person" of the Fund
is expected to receive the following compensation during the fiscal year ending
March 31, 1997:
<TABLE>
<CAPTION> 
 
 
                                                                    
                                                                                               Total      
                                                 Pension or                                Compensation  
                              Aggregate          Retirement                                  from the    
                             Compensation         Benefits             Estimated             Portfolio    
      Name of Person,          from the        Accrued as Part           Annual             and the Fund
        Position             Portfolio*              of              Benefits Upon            Paid to      
                                               Fund Expenses           Retirement            Directors*   
                                                                         
 
 
 
<S>                          <C>               <C>                   <C>                   <C>
                                                                               
John R. Bartholdson,         less than             N/A                   N/A               $12,000 for
Director                      $1,500                                                       services on
                                                                                           one Board
                                                                                       
Harold J. Baxter,            N/A                   N/A                   N/A               N/A
Director**                                                                      
                                                                                       
Jettie M. Edwards,           less than             N/A                   N/A               $12,000 for
Director                       $1,500                                                      services on
                                                                                           one Board
                                                                                              
Albert A. Miller,            less than             N/A                   N/A               $12,000 for
Director                       $1,500                                                      services on
                                                                                           one Board
                                                                         
====================================================================================================================================

</TABLE>                                                         
___________________                                              

*The Fund is expected to pay approximately $3,000 to each Director who is not an
"interested person" of the Fund for each regular meeting of the Board of
Directors during the fiscal year ending March 31, 1997.  The Portfolio is
expected to pay its proportionate share of the total compensation, based on its
total net assets relative to the total net assets of the Fund.

**Mr. Baxter is a Director who may be deemed to be an "interested person" of the
Fund, as that term is defined in the 1940 Act, and consequently will be
receiving no compensation from the Fund.

As the Portfolio's initial shareholder, SEI Financial, 680 East Swedesford Road,
Wayne, PA 19087-1658, holds all of the outstanding shares, both beneficially and
of record, of the Portfolio as of the start of business on July 1, 1996.

                                    S - 10
<PAGE>
 
COMPUTATION OF YIELD

From time to time, the Portfolio may advertise yield.  These figures will be
based on historical earnings and are not intended to indicate future
performance.  The yield of the Portfolio refers to the annualized income
generated by an investment in the Portfolio over a specified 30-day period.  The
yield is calculated by assuming that the income generated by the investment
during that period generated each period over one year and is shown as a
percentage of the investment.  In particular, yield will be calculated according
to the following formula:

     Yield = (2 (a-b/cd + 1)/6/ - 1) where a = dividends and interest earned
     during the period; b = expenses accrued for the period (net of
     reimbursement); c = the current daily number of shares outstanding during
     the period that were entitled to receive dividends; and d = the maximum
     offering price per share on the last day of the period.

CALCULATION OF TOTAL RETURN

     From time to time, the Portfolio may advertise total return.  The total
     return of the Portfolio refers to the average compounded rate of return to
     a hypothetical investment for designated time periods (including but not
     limited to, the period from which the Portfolio commenced operations
     through the specified date), assuming that the entire investment is
     redeemed at the end of each period.  In particular, total return will be
     calculated according to the following formula:  P (1 + T)/n/ = ERV, where P
     = a hypothetical initial payment of $1,000; T = average annual total
     return; n = number of years; and ERV = ending redeemable value of a
     hypothetical $1,000 payment made at the beginning of the designated time
     period as of the end of such period.

     Quotations of total return, which are not annualized, represent historical
     earnings and asset value fluctuations.  Total return is based on past
     performance and is not a guarantee of future results.

     PURCHASE AND REDEMPTION OF SHARES

     Purchases and redemptions may be made through the Distributor on any day on
     which the New York Stock Exchange is open for business.  Currently, the
     following holidays are observed by the Fund:  New Year's Day, Presidents'
     Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving
     Day and Christmas Day. Shares of the Portfolio are offered on a continuous
     basis.

     It is currently the Fund's policy to pay all redemptions in cash.  The Fund
     retains the right, however, to alter this policy to provide for redemptions
     in whole or in part by a distribution in-kind of securities held by the
     Portfolio in lieu of cash.  Shareholders may incur brokerage charges on the
     sale of any such securities so received in payment of redemptions.

     The Fund reserves the right to suspend the right of redemption and/or to
     postpone the date of payment upon redemption for any period on which
     trading on the New York Stock Exchange is restricted, or during the
     existence of an emergency (as determined by the SEC by rule or

                                    S - 11
<PAGE>
 
     regulation) as a result of which disposal or valuation of the Portfolio's
     securities is not reasonably practicable, or for such other periods as the
     SEC has by order permitted.  The Fund also reserves the right to suspend
     sales of shares of the Portfolio for any period during which the New York
     Stock Exchange, the Adviser, the Administrator, the Transfer Agent and/or
     the Custodian are not open for business.

     DETERMINATION OF NET ASSET VALUE

     The securities of the Portfolio are valued by the Administrator.  The
     Administrator will use an independent pricing service to obtain valuations
     of securities.  The pricing service relies primarily on prices of actual
     market transactions as well as trade quotations.  The procedures of the
     pricing service and its valuations are reviewed by the officers of the Fund
     under the general supervision of the Directors.

     Portfolio securities listed on an exchange or quoted on a national market
     system are valued at the last sales price.  Other securities are quoted at
     the mean between the most recent bid and asked prices.  In the event a
     listed security is traded on more than one exchange, it is valued at the
     last sale price on the exchange on which it is principally traded.  If
     there are no transactions in a security during the day, it is valued at the
     mean between the most recent bid and asked prices.  However, debt
     securities (other than short-term obligations) including listed issues, are
     valued on the basis of valuations furnished by a pricing service which
     utilizes electronic data processing techniques to determine valuations for
     normal institutional size trading units of debt securities, without
     exclusive reliance upon exchange or over-the-counter prices.  Short-term
     obligations are valued at amortized cost.  Securities for which market
     quotations are not readily available and other assets held by the Fund, if
     any, are valued at their fair value as determined in good faith by the
     Board of Directors.

     TAXES

     The following is only a summary of certain income tax considerations
     generally affecting the Portfolio and its shareholders, and is not intended
     as a substitute for careful tax planning.  Shareholders are urged to
     consult their tax advisors with specific reference to their own tax
     situations, including their state and local income tax liabilities.

     Federal Income Tax

     The following discussion of federal income tax consequences is based on the
     Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
     issued thereunder as in effect on the date of this Statement of Additional
     Information.  New legislation, as well as administrative changes or court
     decisions, may significantly change the conclusions expressed herein, and
     may have a retroactive effect with respect to the transactions contemplated
     herein.

     The Portfolio intends to qualify as a "regulated investment company"
     ("RIC") as defined under Subchapter M of the Code.  By maintaining its
     qualifications as a RIC, the Portfolio intends to eliminate or reduce to a
     nominal amount the federal taxes to which it may be subject.


                                    S - 12
<PAGE>
 
     In order to qualify for treatment as a RIC under the Code, the Portfolio
     must distribute annually to its shareholders at least the sum of 90% of its
     net interest income excludable from gross income plus 90% of its investment
     company taxable income (generally, net investment income plus net short-
     term capital gain) ("Distribution Requirement") and also must meet several
     additional requirements.  Among these requirements are the following:  (i)
     at least 90% of the Portfolio's gross income each taxable year must be
     derived from dividends, interest, payments with respect to securities loans
     and gains from the sale or other disposition of stock or securities, or
     certain other income; (ii) the Portfolio must derive less than 30% of its
     gross income each taxable year from the sale or other disposition of stocks
     or securities held for less than three months; (iii) at the close of each
     quarter of the Portfolio's taxable year, at least 50% of the value of its
     total assets must be represented by cash and cash items, U.S. Government
     securities, securities of other RICs and other securities, with such other
     securities limited, in respect to any one issuer, to an amount that does
     not exceed 5% of the value of the Portfolio's assets and that does not
     represent more than 10% of the outstanding voting securities of such
     issuer; and (iv) at the close of each quarter of the Portfolio's taxable
     year, not more than 25% of the value of its assets may be invested in
     securities (other than U.S. Government securities or the securities of
     other RICs) of any one issuer or of two or more issuers which are engaged
     in the same, similar or related trades or businesses if the Portfolio owns
     at least 20% of the voting power of such issuers.

     Notwithstanding the Distribution Requirement described above, which
     requires only that the  Portfolio distribute at least 90% of its annual
     investment company taxable income and does not require any minimum
     distribution of net capital gain (the excess of net long-term capital gain
     over net short-term capital loss), the Portfolio will be subject to a
     nondeductible 4% federal excise tax to the extent it fails to distribute by
     the end of any calendar year 98% of its ordinary income for that year and
     98% of its capital gain net income (the excess of short- and long-term
     capital gains over short- and long-term capital losses) for the one-year
     period ending on October 31 of that calendar year, plus certain other
     amounts.

     In certain cases, the Portfolio will be required to withhold, and remit to
     the U.S. Treasury, 31% of any distributions paid to a shareholder who (1)
     has failed to provide a correct taxpayer identification number, (2) is
     subject to backup withholding by the Internal Revenue Service, or (3) has
     not certified to the Portfolio that such shareholder is not subject to
     backup withholding.

     If the Portfolio fails to qualify as a RIC for any taxable year, it will be
     taxable at regular corporate rates on its net investment income and net
     capital gain without any deductions for amounts distributed to
     shareholders.  In such an event, all distributions (including capital gains
     distributions) will be taxable as ordinary dividends to the extent of the
     Portfolio's current and accumulated earnings and profits and such
     distributions will generally be eligible for the corporate dividends-
     received deduction.

     State Taxes

     Distributions by the Portfolio to shareholders and the ownership of shares
     may be subject to state and local taxes.

                                    S - 13
<PAGE>
 
     PORTFOLIO TRANSACTIONS

     The Adviser is authorized to select brokers and dealers to effect
     securities transactions for the Portfolio.  The Adviser will seek to obtain
     the most favorable net results by taking into account various factors,
     including price, commission, if any, size of the transactions and
     difficulty of executions, the firm's general execution and operational
     facilities and the firm's risk in positioning the securities involved.
     While the Adviser generally seeks reasonably competitive spreads or
     commissions, the Fund will not necessarily be paying the lowest spread or
     commission available.  The Adviser seeks to select brokers or dealers that
     offer the Portfolio best price and execution or other services which are of
     benefit to the Portfolio.  Certain brokers or dealers assist their clients
     in the purchase of shares from the Distributor and charge a fee for this
     service in addition to the Portfolio's public offering price.  In the case
     of securities traded in the over-the-counter market, the Adviser expects
     normally to seek to select primary market makers.

     The Adviser may, consistent with the interests of the Portfolio, select
     brokers on the basis of the research services they provide to the Adviser.
     Such services may include analyses of the business or prospects of a
     company, industry or economic sector, or statistical and pricing services.
     Information so received by the Adviser will be in addition to and not in
     lieu of the services required to be performed by the Adviser under the
     Advisory Agreement.  If, in the judgment of the Adviser, the Portfolio or
     other accounts managed by the Adviser will be benefitted by supplemental
     research services, the Adviser is authorized to pay brokerage commissions
     to a broker furnishing such services which are in excess of commissions
     which another broker may have charged for effecting the same transaction.
     These research services include advice, either directly or through
     publications or writings, as to the value of securities, the advisability
     of investing in, purchasing or selling securities, and the availability of
     securities or purchasers or sellers of securities; furnishing of analyses
     and reports concerning issuers, securities or industries; providing
     information on economic factors and trends; assisting in determining
     portfolio strategy; providing computer software used in security analyses;
     and providing portfolio performance evaluation and technical market
     analyses.  The expenses of the Adviser will not necessarily be reduced as a
     result of the receipt of such supplemental information, and such services
     may not be used exclusively, or at all, with respect to the Portfolio or
     account generating the brokerage, and there can be no guarantee that the
     Adviser will find all of such services of value in advising the Portfolio.

     It is expected that the Portfolio may execute brokerage or other agency
     transactions through the Distributor, which is a registered broker-dealer,
     for a commission in conformity with the 1940 Act, the Securities Exchange
     Act of 1934 and rules promulgated by the SEC.  Under these provisions, the
     Distributor is permitted to receive and retain compensation for effecting
     portfolio transactions for the Portfolio on an exchange if a written
     contract is in effect between the Distributor and the Portfolio expressly
     permitting the Distributor to receive and retain such compensation.  These
     rules further require that commissions paid to the Distributor by the
     Portfolio for exchange transactions not exceed "usual and customary"
     brokerage commissions.  The rules define "usual and customary" commissions
     to include amounts which are "reasonable and fair compared to the
     commission, fee or other remuneration received or to be received by

                                    S - 14
<PAGE>
 
     other brokers in connection with comparable transactions involving similar
     securities being purchased or sold on a securities exchange during a
     comparable period of time."  In addition, the Adviser may direct commission
     business to one or more designated broker-dealers, including the
     Distributor, in connection with such broker-dealer's payment of certain of
     the Portfolio's or the Fund's expenses.  Because shares of the Portfolio
     are not marketed through intermediary broker-dealers, it is not the
     Portfolio's practice to allocate brokerage or effect principal transactions
     with broker-dealers on the basis of sales of shares that may be made
     through such firms.  However, the Adviser may place orders for the purchase
     or sale of portfolio securities with qualified broker-dealers who refer
     clients to the Portfolio.  The Directors, including those who are not
     "interested persons" of the Fund, have adopted procedures for evaluating
     the reasonableness of commissions paid to the Distributor and will review
     these procedures periodically.

     Consistent with the Rules of Fair Practice of the National Association of
     Securities Dealers, Inc. and subject to seeking best execution and such
     other policies as the Board of Directors may determine, the Adviser may
     consider sales of Fund shares as a factor in the selection of dealers to
     execute portfolio transactions for the Fund.

     DESCRIPTION OF SHARES

     The Fund is authorized to issue an unlimited number of shares of the
     Portfolio and to create additional portfolios of the Fund.  Each share of
     the Portfolio represents an equal proportionate interest in the Portfolio
     with each other share.  Shares are entitled upon liquidation to a pro rata
     share in the net assets of the Portfolio available for distribution to
     shareholders.  Shareholders have no preemptive rights.  All consideration
     received by the Fund for shares of the Portfolio and all assets in which
     such consideration is invested belong to the Portfolio and would be subject
     to the liabilities related thereto.

                                    S - 15


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