BARON ASSET FUND, 497, 1997-09-24

BARON ASSET FUND
497, 1997-09-24

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P R O S P E C T U S

BARON FUNDS

AUGUST 1997

BARON ASSET FUND
BARON GROWTH & INCOME FUND
BARON SMALL CAP FUND

767 Fifth Avenue, New York, New York 10153
1-800-99-BARON 212-583-2100

BARON ASSET FUND, started in June of 1987, BARON GROWTH & INCOME FUND, started
in January of 1995, and BARON SMALL CAP FUND, started in September of 1997, are
no-load, open-end, diversified management investment companies, commonly
referred to as mutual funds. BARON ASSET FUND'S investment objective is to seek
capital appreciation through investments in securities of small and medium sized
companies, with undervalued assets or favorable growth prospects. BARON GROWTH &
INCOME FUND'S investment objective is to seek capital appreciation with income
as a secondary objective. BARON SMALL CAP FUND'S investment objective is to seek
capital appreciation through investments primarily in securities of small
companies. These Funds are described in this Prospectus and are referred to
individually as a "Fund" and collectively as the "Funds" or "Baron Funds."

The Funds are no-load funds. They sell and redeem their shares at net asset
value without any sales charges or redemption fees. The minimum initial
investment is $2,000. There is no minimum for subsequent purchases. The minimum
for purchases made pursuant to the Funds' Automatic Investment Plan is $500 with
a $50 monthly minimum for subsequent purchases.

This Prospectus sets forth concisely the essential information 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 August 27, 1997, containing additional and more detailed
information about the Funds, has been filed with the Securities and Exchange
Commission and is hereby incorporated by reference into this Prospectus. A copy
of the Statement of Additional Information may be obtained without charge by
writing or calling the Funds at the address and telephone number set forth
above.

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
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

August 27, 1997
<PAGE>

TABLE OF CONTENTS
FUND EXPENSES...............................................................3
FINANCIAL HIGHLIGHTS........................................................5
INVESTMENT OBJECTIVES AND PHILOSOPHY........................................7
INVESTMENT POLICIES AND RISKS...............................................8
INVESTMENT PERFORMANCE.....................................................17
MANAGEMENT OF THE FUND.....................................................18
DISTRIBUTION PLAN..........................................................23
HOW TO PURCHASE SHARES.....................................................23
HOW TO REDEEM SHARES.......................................................25
DETERMINING YOUR SHARE PRICE...............................................28
DIVIDENDS AND DISTRIBUTIONS................................................28
TAXES......................................................................29
GENERAL INFORMATION................... ....................................30
MANAGEMENT DISCUSSION AND ANALYSIS.........................................31

The net asset value per share and the value of a shareholder's holding in the
Funds will vary with economic and market conditions. The dividends paid by each
Fund will increase or decrease in relation to the income received by that Fund
from its investments and the expenses incurred by that Fund.

There is no assurance that the Funds will achieve their respective objectives.
The Funds do not purport to offer a complete investment program to which
investors should commit all of their investment capital. Please see the section
entitled "Investment Policies and Risks" starting on page 8 for a discussion of
the risks associated with the Funds.

No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus in connection with
the offer contained in the Prospectus and, if given or made, such information or
representations may not be relied upon as authorized by the Funds, their
Investment Adviser or any affiliate thereof. This Prospectus does not constitute
an offer to sell or a solicitation of any offer to buy securities in any state
to any person to whom it is unlawful to make such offer in such state.

The Funds have registered some or all of the shares intended to be sold pursuant
to this Prospectus under state securities laws.

<PAGE>

FUND EXPENSES

SHAREHOLDER TRANSACTION EXPENSES:

Sales Load Imposed on Purchases........................NONE
Redemption Fee.........................................NONE
Deferred Sales Load....................................NONE
Exchange Fees..........................................NONE

There are additional charges associated with retirement accounts and wire
transfers. Purchases and redemptions may also be made through broker-dealers or
others who may charge a commission or other transaction fee for their services.
(See "How to Purchase Shares" and "How to Redeem Shares")

ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets):

- --------------------------------------------------------------------------------
MANAGEMENT 12B-1 OTHER TOTAL
FEES FEES EXPENSES OPERATING
EXPENSES
- --------------------------------------------------------------------------------
BARON
ASSET
FUND 1.00% 0.25% 0.15% 1.40%
- --------------------------------------------------------------------------------
BARON
GROWTH
&
INCOME
FUND 1.00% 0.25% 0.29% 1.54%*
- --------------------------------------------------------------------------------
BARON
SMALL
CAP
FUND 1.00% 0.25% 0.25% 1.50%*
- --------------------------------------------------------------------------------

The expenses set forth in the table above for BARON ASSET FUND and BARON GROWTH
& INCOME FUND are based on actual expenses incurred for the fiscal year ended
September 30, 1996. For the nine months ended June 30, 1997, BARON ASSET FUND'S
total annualized operating expenses were 1.35% and BARON GROWTH & INCOME FUND'S
total annualized operating expenses were 1.41%. Because BARON SMALL CAP FUND is
a new fund, "other expenses" is based on estimated amounts for the current
fiscal year.

*The Adviser will reduce its fee to the extent required to limit BARON GROWTH &
INCOME FUND'S and BARON SMALL CAP FUND'S operating expenses to 1.5%.

<PAGE>

EXAMPLE

A Shareholder would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return, and (2) redemption at the end of each time period:

- --------------------------------------------------------------------------------
YEAR 1 3 5 10
- --------------------------------------------------------------------------------
BARON ASSET FUND $14 $44 $77 $168
- --------------------------------------------------------------------------------
BARON GROWTH &
INCOME FUND $15 $47 $82 $179
- --------------------------------------------------------------------------------
BARON SMALL CAP FUND $15 $47 $82 $179
- --------------------------------------------------------------------------------

This information is provided to assist an investor in understanding the various
costs and expenses that an investor will bear, directly or indirectly, as a
shareholder of each of the Funds. This information should not be considered a
representation of past or future expenses, as actual expenses fluctuate and may
be greater or less than those shown. The example assumes a 5% annual return as
required by SEC regulations applicable to all mutual funds. The actual
performance of the Funds will vary and may result in an actual return greater or
less than 5%. The Funds have a plan of distribution pursuant to Rule 12b-1
pursuant to which the Funds pay the Distributor a fee for distribution-related
services at the annual rate of .25% of the respective Fund's average daily net
assets. As a result, long-term shareholders of the Funds may pay more than the
economic equivalent of the maximum front-end sales load permitted by the rules
of the National Association of Securities Dealers, Inc. ("NASD"). For a
description of the various costs and expenses incurred in the operation of the
Funds, as well as any expense reimbursement or reduction arrangements, see
"Management of the Funds" and "Distribution Plan."

<PAGE>

FINANCIAL HIGHLIGHTS

The following tables show, on a per share basis, the changes in net asset value,
total return and ratios/supplemental data for a share of beneficial interest of
BARON ASSET FUND and BARON GROWTH & INCOME FUND for each period. The information
was audited by Coopers & Lybrand L.L.P., the Funds' independent auditors. Their
report and the Financial Statements for the Funds are included in the Funds'
Annual Report and the Statement of Additional Information, which are available
from the Distributor. The following information should be read in conjunction
with the Financial Statements and related notes.

BARON ASSET FUND
- ------------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
JUNE 30, 1997 YEAR ENDED SEPTEMBER 30
(UNAUDITED) 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987*
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value Beginning of Year.. $35.50 $29.30 $22.82 $21.91 $16.20 $14.80 $10.88 $17.22 $12.98 $11.95 $10.00

INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss)..... (0.19) (0.06) (0.09) (0.14) (0.13) (0.08) 0.07 0.21 0.13 0.05 0.07
Net Realized and Unrealized
Gains (Losses) on Investments.... 6.47 6.29 7.23 1.82 6.00 1.52 4.05 (5.14) 4.81 1.18 1.88
----- ----- ----- ----- ----- ------ ----- ------ ----- ----- -----
Total from Investment Operation.. 6.28 6.23 7.14 1.68 5.87 1.44 4.12 (4.93) 4.94 1.23 1.95

LESS DISTRIBUTIONS
Dividends from Net Investment
Income......................... 0 0 0 0 0 (0.04) (0.20) (0.16) (0.05) (0.03) 0
Distributions from Net Realized
Gains............................ (0.04) (0.03) (0.66) (0.77) (0.16) 0 0 (1.25) (0.65) (0.17) 0
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -----
Total Distributions.............. (0.04) (0.03) (0.66) (0.77) (0.16) (0.04) (0.20) (1.41) (0.70) (0.20) 0
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -----
Net Asset Value, End of Period... $41.74 $35.50 $29.30 $22.82 $21.91 $16.20 $14.80 $10.88 $17.22 $12.98 $11.95
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== =====
TOTAL RETURN..................... 17.7% 21.3% 32.3% 8.0% 36.5% 9.7% 38.3% (30.7%) 39.9% 10.7% 19.5%
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== =====
RATIOS/SUPPLEMENTAL DATA
Net Assets (in millions), End of
Period........................... $2,306.2 $1,166.1 $290.0 $80.3 $59.9 $43.8 $47.4 $40.0 $47.7 $11.7 $3.9
Ratio of Expenses to Average Net
Assets........................... 1.4%** 1.4% 1.4% 1.6% 1.8% 1.7% 1.7% 1.8% 2.1% 2.5% 2.8%**
Ratio of Net Investment Income
(Loss) to Average Net Assets..... (0.5%)** (0.3%) (0.5%) (0.7%) (0.7%) (0.5%) 0.5% 1.5% 1.3% 0.5% 1.9%**
Portfolio Turnover Rate.......... 13.3% 19.3% 35.2% 55.9% 107.9% 95.5% 142.7% 97.8% 148.9% 242.4% 84.7%
Average per share commission
rate paid***..................... $0.0600 $0.0600

- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

* For the period June 12, 1987 (commencement of operations) to
September 30, 1987.
** Annualized.
*** Disclosure required for fiscal years beginning after September 1, 1995.

BARON ASSET FUND'S Adviser and/or Baron Capital reimbursed BARON ASSET FUND for
expenses aggregating $8,561 (less than $.01 per share) in 1990, $27,315 ($.01
per share) in 1989, $83,219 ($.11 per share) in 1988, and $36,330 ($.20 per
share) in 1987. The reimbursement amounts are excluded from the expense data
above.

<PAGE>

BARON GROWTH & INCOME FUND
- --------------------------------------------------------------------------------------------------------------------------
NINE MONTHS YEAR
ENDED ENDED
JUNE 30, 1997 SEPTEMBER 30
(UNAUDITED) 1996 1995*
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value Beginning of Year.......................... $18.40 $14.77 $10.00

INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss)............................... 0.05 0.11 0.04
Net Realized and Unrealized Gains
(Losses) on Investments.................................... 3.62 3.66 4.73
------ ------ ------
Total from Investment Operations 3.67 3.77 4.77

LESS DISTRIBUTIONS
Dividends from Net Investment Income....................... (0.09) (0.04) 0
Distributions from Net Realized Gains...................... (0.16) (0.10) 0
------ ------ ------
Total Distributions........................................ (0.25) (0.14) 0
------ ------ ------
Net Asset Value, End of Period............................. $21.82 $18.40 $14.77
====== ====== ======
TOTAL RETURN............................................... 20.2% 25.8% 47.7%
====== ====== ======
RATIOS/SUPPLIMENTAL DATA
Net Assets (in millions), End of Period.................... $317.0 $207.2 $28.6
Ratio of Expenses to Average Net Assets.................... 1.4%** 1.5% 2.0%**
Ratio of Net Investment Income (Loss) to
Average Net Assets......................................... 0.5%** 1.2% 1.1%**
Portfolio Turnover Rate.................................... 23.9% 40.3% 40.6%
Average per share commission rate paid ***................. $0.06 $0.06
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>

* For the period January 3, 1995 (commencement of operations) to
September 30, 1995.
** Annualized.
*** Disclosure required for fiscal years beginning after September 1, 1995.

The Fund's Custodian offset custody fees of $5,252 (less than $0.01 per share)
in 1996 and $12,003 (less than $0.01 per share) in 1995. The expense offset
amount is included in the expense data above.

<PAGE>
INVESTMENT OBJECTIVES AND PHILOSOPHY

The investment objective of BARON ASSET FUND is to seek capital appreciation
through investments in securities of small and medium sized companies with
undervalued assets or favorable growth prospects. Production of income, if any,
is incidental to this objective. The investment objective of BARON GROWTH &
INCOME FUND is to seek capital appreciation with income as a secondary
objective. The investment objective of BARON SMALL CAP FUND is to seek capital
appreciation through investments primarily in securities of small companies.
These investment objectives are fundamental and, as such, may not be changed
without the approval of a majority of the respective Fund's outstanding shares.
There is no assurance that the Funds will achieve their investment objectives.
Investment decisions are made by the Funds' investment adviser, BAMCO, Inc. (the
"Adviser").

BARON ASSET FUND and BARON SMALL CAP FUND seek to achieve their investment
objectives by investing their assets in diversified portfolios of primarily
common stocks. BARON GROWTH & INCOME FUND seeks to achieve its investment
objective by investing in equity and debt securities. BARON ASSET FUND and BARON
GROWTH & INCOME FUND invest primarily in the securities of small sized companies
with market capitalizations of approximately $100 million to $1 billion and
medium sized companies with market values of $1 billion to $2 billion. BARON
SMALL CAP FUND will invest at least 65% of its total assets, measured at cost,
in the securities of smaller companies with market values of up to $1 billion.
Although Baron Funds invest primarily in small and medium sized companies, the
Funds will not sell positions just because their market values have increased.
The other kinds of investments each Fund makes and the risks associated
therewith are discussed starting on page 8 in connection with the Funds'
investment policies.

The Funds seek to purchase securities judged by their Adviser to have favorable
price to value characteristics based on the Adviser's assessment of their
prospects for future growth and profitability. The Adviser seeks securities that
the Adviser believes have the potential to increase in value at least 50% over
two subsequent years, although that goal may not be achieved. As a guide in
selecting such investments, the Adviser studies and considers such fundamentals
as business profitability, balance sheet strength, undervalued and unrecognized
assets, price multiples of free cash flow and income, perceived management
skills, unit growth, and the potential to capitalize upon anticipated economic
trends. Securities are selected for investment after thorough research of the

<PAGE>

issuers, the industries in which they operate, and their managements. The Funds
invest principally in businesses for the long term; they are not short-term
traders of securities.

When the Adviser determines that opportunities for profitable investments are
limited or that adverse market conditions exist and believes that investing for
temporary defensive purposes is appropriate, all or a portion of the Funds'
assets may be invested in money market instruments, which include U.S.
Government securities, certificates of deposit, time deposits, bankers'
acceptances, short-term investment grade corporate bonds and other short-term
debt instruments, and repurchase agreements. Investment grade obligations would
be classified at the time of the investment within the four highest ratings of
Standard & Poor's Corporation ("S&P") or Moody's Investor's Service, Inc.
("Moody's"), or, if unrated, would be determined by the Adviser to be of
comparable high quality and liquidity. The Funds may also invest in money market
instruments in anticipation of investing cash positions or of meeting
redemptions. To the extent the Funds are so invested their investment objectives
may not be achieved.

INVESTMENT POLICIES AND RISKS

BARON ASSET FUND AND BARON SMALL CAP FUND

In seeking to achieve their investment objective of capital appreciation, BARON
ASSET FUND and BARON SMALL CAP FUND invest primarily in common stocks but may
also invest in other equity-like securities such as convertible bonds and
debentures, preferred stocks, warrants and convertible preferred stocks.
Securities are selected solely for their capital appreciation potential, and
investment income is not a consideration.

BARON GROWTH & INCOME FUND

BARON GROWTH & INCOME FUND seeks capital appreciation and income by investing in
equity and debt securities. The proportion of BARON GROWTH & INCOME FUND'S
assets invested in each type of security will vary depending entirely on the
Adviser's view of then-existing investment opportunities and economic
conditions. The Fund will usually be more heavily invested in equity securities
than debt securities, but at other times may have a large portion of its assets
invested in debt securities, often with equity characteristics. The portion of
the portfolio invested in equity securities is comprised of common stocks and
other equity-like securities such as convertible bonds and debentures, preferred
stocks, warrants and convertible preferred stocks. The debt security portion of

<PAGE>

the portfolio may include notes, bonds, and money market instruments. The debt
securities generally will have equity-like characteristics but may consist of
all varieties of corporate debt, including the debt of financially distressed
companies, debt convertible into equity, and debt issued or guaranteed by the
U.S. government or its agencies or instrumentalities, without restriction as to
duration. There is no minimum rating for debt securities. Equity securities are
purchased for their capital appreciation potential, but may also be purchased
for income purposes because of their dividends. Debt securities are purchased
for both their income potential and their capital appreciation opportunities.

GENERAL POLICIES SMALL AND MEDIUM SIZED COMPANIES

BARON ASSET FUND and BARON GROWTH & INCOME FUND invest primarily in small to
medium sized companies with market values between $100 million and $2 billion.
BARON SMALL CAP FUND invests in primarily smaller sized companies with market
values up to $1 billion, although the Fund may increase the market
capitalization in the future. The Adviser believes there is more potential for
capital appreciation in smaller companies, but there also may be more risk.
Securities of smaller companies may not be well known to most investors and may
be thinly traded. There is more reliance on the skills of a company's management
and on their continued tenure. Investments may be attractively priced relative
to the Adviser's assessment of a company's growth prospects, management
expertise, and business niche, yet have modest or no current cash flows or
earnings. Although the Adviser concentrates on a company's growth prospects, it
also focuses on cash flow, asset value and reported earnings. This investment
approach requires a long-term outlook and may require shareholders to assume
more risk and to have more patience than investing in the securities of larger,
more established companies. From time to time the Adviser may purchase
securities of larger, more widely followed companies for any of the Funds if it
believes such investments meet the Adviser's investment criteria and the Funds'
investment objectives. The Funds may invest up to 35% of their respective total
assets in larger companies if the Adviser perceives an attractive opportunity in
a larger company. The Funds may continue to make investments in a company even
though its market capitalization has increased beyond the limits stated, if, in
the Adviser's judgment, the company is still an attractive investment.

Equity securities may fluctuate in value, often based on factors unrelated to
the value of the issuer or its securities. Since convertible securities combine

<PAGE>

the investment characteristics of both bonds and common stocks, the Funds absorb
the market risks of both stocks and bonds. The combination does, however, make
the investment less sensitive to interest rate changes than straight bonds of
comparable maturity and quality. Because of these factors, convertible
securities are likely to perform differently than broadly-based measures of the
stock and bond markets.

DEBT SECURITIES

The debt securities in which the Funds may invest include rated and unrated
securities and convertible instruments. In making investment selections, the
Adviser, in addition to using nationally recognized statistical rating
organizations ("NRSROs"), also makes its own independent judgments about a
security and its issuer. Securities which are not rated by an NRSRO are
purchased based solely on the Adviser's assessment of the security and its
issuer. BARON GROWTH & INCOME FUND and BARON SMALL CAP FUND may invest up to 35%
of their respective total assets in non-investment grade debt securities,
commonly referred to as "junk bonds." There is no minimum rating for the debt
securities that may be purchased for those Funds. Lower rated securities may
have a higher yield and the potential for a greater return than investment grade
securities but may also have more risk. Lower rated securities are generally
meant for longer-term investing and may be subject to certain risks with respect
to the issuing entity and to market fluctuations. The NRSROs may characterize
these securities as speculative, with moderate or little protection as to the
payment of interest and principal. See the Statement of Additional Information
for a general description of NRSRO ratings of debt obligations. The ratings by
these NRSROs represent their opinions as to the quality of the debt obligations
which they undertake to rate. It should be emphasized that ratings are relative
and subjective, and although ratings may be useful in evaluating the safety of
interest and principal payments, they do not evaluate the market value risks of
these securities. The Adviser will also evaluate the securities and the ability
of the issuers to pay interest and principal. The Fund's ability to achieve its
investment objective may be more dependent on the Adviser's credit analysis than
might be the case with higher rated securities. The market price and yield of
lower rated securities are generally more volatile than those of higher rated
securities. Factors adversely affecting the market price and yield of these
securities will adversely affect the Fund's net asset value. The trading market
for these securities may be less liquid than that of higher rated securities.
Companies that issue lower rated securities may be highly leveraged or may have

<PAGE>

unstable earnings, and consequently the risk of the investment in the securities
of such issuers may be greater than with higher rated securities.

With respect to debt securities generally, the interest bearing features of such
securities carry a promise of income flow, but the price of the securities are
inversely affected by changes in interest rates and are therefore subject to the
risk of market price fluctuations. The market values of debt securities may also
be affected by changes in the credit ratings or financial condition of the
issuers.

BARON GROWTH & INCOME FUND and BARON SMALL CAP FUND from time to time may also
purchase indebtedness and participations therein, both secured and unsecured, of
debtor companies in reorganization or financial restructuring. Such indebtedness
may be in the form of loans, notes, bonds or debentures. Participations normally
are made available only on a nonrecourse basis by financial institutions, such
as banks or insurance companies, or by governmental institutions, such as the
Resolution Trust Corporation or the Federal Deposit Insurance Corporation or the
Pension Benefit Guaranty Corporation. When the Funds purchase a participation
interest they assume the credit risk associated with the bank or other financial
intermediary as well as the credit risk associated with the issuer of any
underlying debt instrument. The Funds may also purchase trade and other claims
against, and other unsecured obligations of, such debtor companies, which
generally represent money due a supplier of goods or services to such company.
Some debt securities purchased by the Funds may have very long maturities. The
length of time remaining until maturity is one factor the Adviser considers in
purchasing a particular indebtedness. The purchase of indebtedness of a troubled
company always involves a risk as to the credit worthiness of the issuer and the
possibility that the investment may be lost. The Adviser believes that the
difference between perceived risk and actual risk creates the opportunity for
profit which can be realized through thorough analysis. There are no established
markets for some of this indebtedness and it is less liquid than more heavily
traded securities. Indebtedness of the debtor company to a bank are not
securities of the banks issuing or selling them. The Funds may purchase loans
from national and state chartered banks as well as foreign ones. The Funds may
invest in senior indebtedness of the debtor companies, although on occasion
subordinated indebtedness may also be acquired. The Funds may also invest in
distressed first mortgage obligations and other debt secured by real property.
The Funds do not currently anticipate investing more than 5% of their respective
assets in trade and other claims.

<PAGE>

BARON GROWTH & INCOME FUND may invest in zero-coupon, step-coupon, and
pay-in-kind securities. These securities are debt securities that do not make
regular interest payments. Zero-coupon and step-coupon securities are sold at a
deep discount to their face value; pay-in-kind securities pay interest through
the issuance of additional securities. The market value of these debt securities
generally fluctuates in response to changes in interest rates to a greater
degree than interest-paying securities of comparable term and quality.

OPTIONS

BARON ASSET FUND may, in certain market conditions, use options to defer
recognition of unrealized gains in the portfolio and to take advantage of
perceived investment opportunities. BARON ASSET FUND may write (sell) call
options or buy put options on specific securities BARON ASSET FUND owns or may
be deemed covered where, in the Adviser's judgment, there may be temporary
downward pressure on the security. The Adviser does not expect options
transactions to be a significant part of BARON ASSET FUND'S investment program.
BARON GROWTH & INCOME FUND and BARON SMALL CAP FUND may purchase put and call
options and write (sell) covered put and call options on equity and/or debt
securities. A call option gives the purchaser of the options the right to buy,
and when exercised obligates the writer to sell, the underlying security at the
exercise price. A put option gives the purchaser of the option the right to
sell, and when exercised obligates the writer to buy, the underlying security at
the exercise price. The writing of put options will be limited to situations
where the Adviser believes that the exercise price is an attractive price at
which to purchase the underlying security. A put option sold by a Fund would be
considered covered by the Fund's placing cash or liquid securities in a
segregated account with the custodian in an amount necessary to fulfill the
obligation undertaken. Options may fail as hedging techniques in cases where the
price movements of the securities underlying the options do not follow the price
movements of the portfolio securities subject to the hedge. Gains on investments
in options depend on the Adviser's ability to predict correctly the direction of
stock prices, interest rates, and other economic factors. The Adviser could be
wrong in its predictions. Where a liquid secondary market does not exist, the
Fund would likely be unable to control losses by closing its position.

The Funds may engage in options transactions on specific securities that may be
listed on national securities exchanges or traded in the over-the-counter
market. Options not traded on a national securities exchange are treated as
illiquid securities and may be considered to be "derivative securities." Options

<PAGE>

transactions will not exceed 25% of BARON GROWTH & INCOME FUND'S or BARON SMALL
CAP FUND'S net assets, as measured by the securities covering the options, or 5%
of net assets, as measured by the premiums paid for the options, at the time the
transactions are entered into.

BORROWINGS

The Funds may borrow up to 5% of their respective net assets for extraordinary
or emergency temporary investment purposes or to meet redemption requests which
might otherwise require an untimely sale of portfolio securities. In addition,
BARON GROWTH & INCOME FUND and BARON SMALL CAP FUND may borrow for other
short-term purposes. To the extent a Fund borrows, it must maintain continuous
asset coverage of 300% of the amount borrowed. BARON GROWTH & INCOME FUND and
BARON SMALL CAP FUND will not borrow in an amount exceeding 25% of the value of
their respective total assets, including the amount borrowed, as of the time the
borrowing is made. Such borrowing has special risks. Any amount borrowed will be
subject to interest costs that may or may not exceed the appreciation of the
securities purchased.

As a form of borrowing, BARON GROWTH & INCOME FUND may engage in reverse
repurchase agreements with certain banks or non-bank dealers, where it sells a
security and simultaneously agrees to buy it back later at a mutually agreed
upon price. If it engages in reverse repurchase agreements BARON GROWTH & INCOME
FUND will maintain a segregated account consisting of liquid assets or highly
marketable securities to cover its obligations. Reverse repurchase agreements
may expose the Fund to greater fluctuations in the value of its assets.

SHORT SALES AGAINST THE BOX

For the purpose of either protecting or deferring unrealized gains on portfolio
securities, BARON GROWTH & INCOME FUND and BARON SMALL CAP FUND may make short
sales "against the box" where the Fund sells short a security it already owns or
has the right to obtain without payment of additional consideration an equal
amount of the same type of securities sold. The proceeds of the short sale will
be held by the broker until the settlement date, at which time the Fund delivers
the security to close the short position. If the Fund sells securities short
against the box, it may protect unrealized gains, but will lose the opportunity
to profit on such securities if the price rises. BARON GROWTH & INCOME FUND and
BARON SMALL CAP FUND will not sell short against the box in excess of 25% of
their respective net assets.

<PAGE>

LENDING

The Funds may lend their portfolio securities to broker-dealers and other
institutions as a means of earning additional income. In lending their portfolio
securities, the Funds may incur delays in recovery of loaned securities or a
loss of rights in the collateral. To minimize such risks, such loans will only
be made if the Funds deem the other party to be of good standing and determines
that the income justifies the risk. BARON ASSET FUND will not lend more than 10%
of its total assets and BARON GROWTH & INCOME FUND and BARON SMALL CAP FUND will
not lend more than 25% of their respective total assets.

ILLIQUID SECURITIES

BARON ASSET FUND may invest up to 10%, and BARON GROWTH & INCOME FUND and BARON
SMALL CAP FUND may invest up to 15%, of their respective net assets in
securities that are not readily marketable or are otherwise restricted. The
absence of a trading market could make it difficult to ascertain a market value
for illiquid positions. A Fund's net asset value could be adversely affected if
there were no ready buyer at an acceptable price at the time the Fund decided to
sell. Time-consuming negotiations and expenses could occur in disposing of the
shares.

FOREIGN SECURITIES

The Funds may invest up to 10% of their respective total assets directly in the
securities of foreign issuers which are not publicly traded in the U.S. and may
also invest in foreign securities in domestic markets through depository
receipts without regard to this limitation. The Adviser currently intends to
invest not more than 10% of the Funds' assets in foreign securities, including
both direct investments and investments made through depository receipts. These
securities may involve additional risks not associated with securities of
domestic companies, including exchange rate fluctuations, political or economic
instability, the imposition of exchange controls, or expropriation or
confiscatory taxation. Issuers of foreign securities are subject to different,
often less detailed, accounting, reporting and disclosure requirements than are
domestic issuers.

SHORT-TERM TRADING AND TURNOVER

The Funds may engage in short-term trading where the Adviser believes that the
anticipated gains outweigh the costs of short-term trading. The Adviser expects
that the average turnover rate of the Funds' portfolios should not exceed 100%.
The turnover rate may vary from year to year depending on how the Adviser

<PAGE>

anticipates portfolio securities will perform. Short-term trading will increase
the amount of brokerage commissions paid by each Fund and the amount of possible
short-term capital gains. The amount of portfolio activity will not be a
limiting factor in making portfolio decisions.

REAL ESTATE INVESTMENT TRUSTS

The Funds may invest in the equity securities of real estate investment trusts
("REITs"). A REIT is a corporation or business trust that invests substantially
all of its assets in real estate and derives most of its income from rents from
real property or interest on loans secured by mortgages on real property. REITs
which meet certain specific requirements of the Internal Revenue Code
effectively do not pay corporate level federal income tax. REITs may be affected
adversely by changes in the value of their underlying properties and by defaults
by borrowers or tenants. REITs are dependent on the skills of their management
and have limited diversification. REITs also rely on their ability to generate
cash flow to make distributions to shareholders and some REITs may have
self-liquidation provisions allowing mortgages to be paid in full. The market
value of REITs may also be affected by changes in the tax laws or by their
inability to qualify for the tax-free pass-through of their income. The REIT
portion of the portfolio may also be affected by general fluctuations in real
estate values.

REPURCHASE AGREEMENTS

The Funds may enter into repurchase agreements with certain banks or non-bank
dealers. In a repurchase agreement the Fund buys a security at one price, and at
the time of sale, the seller agrees to repurchase that security at a mutually
agreed upon time and price. Repurchase agreements could involve certain risks in
the event of the failure of the seller to repurchase the securities as agreed,
which may cause a fund to suffer a loss, including loss of interest on or
principal of the security, and costs associated with delay and enforcement of
the repurchase agreement. Repurchase agreements with a duration of more than
seven days are considered illiquid securities and are subject to the
restrictions stated above.

MORTGAGE-BACKED SECURITIES

BARON GROWTH & INCOME FUND may invest up to 5% of its assets in mortgage-backed
securities that are issued or guaranteed by U.S. government agencies or
instrumentalities, such as the Government National Mortgage Association and the
Federal National Mortgage Association. Mortgage-backed securities represent

<PAGE>

direct or indirect participation in, or are secured by and payable from,
mortgage loans secured by real property. These securities are subject to the
risk that prepayments on the underlying mortgages will cause the principal and
interest on the mortgage-backed securities to be paid prior to their stated
maturities. Mortgage prepayments are more likely to accelerate during periods of
declining long-term interest rates. If a prepayment occurs, BARON GROWTH &
INCOME FUND may have unanticipated proceeds which it may then have to invest at
a lower interest rate, and may be penalized by not having participated in a
comparable security not subject to prepayment.

WHEN-ISSUED SECURITIES

The Funds may invest up to 5% of their respective assets in debt and equity
securities purchased on a when-issued basis. Although the payment and interest
terms of when-issued securities are established at the time the purchaser enters
into the commitment, the actual payment for and delivery of when-issued
securities generally takes place within 45 days. The Fund bears the risk that
interest rates on debt securities at the time of delivery may be higher or lower
than those contracted for on the when-issued security. Failure of the issuer to
deliver the security purchased on a when-issued basis may result in a loss or
missed opportunity to make an alternative investment.

SPECIAL SITUATIONS

The Funds may invest in "special situations." A special situation arises when,
in the opinion of the Adviser, the securities of a company will be recognized
and appreciate in value due to a specific anticipated development at that
company. Such developments might include a new product, a management change, an
acquisition or a technological advancement. Investments in special situations
may carry an additional risk of loss in the event that the anticipated
development does not occur or does not attract the expected attention. The
special situation may involve securities of companies with higher market
capitalizations.

<PAGE>

INVESTMENT PERFORMANCE

The investment results of each Fund quoted in advertisements and other sales
literature may refer to average annual total return and actual return. Average
annual total return assumes that an investment in the Fund was purchased with an
initial payment of $1,000 and that the investment was redeemed at the end of a
stated period of time, after giving effect to the reinvestment of all dividends
and distributions during the period at the net asset value on the reinvestment
date. The return is expressed as a percentage rate which, if applied on a
compounded annual basis, would result in the redeemable value of the investment
at the end of the period. Because average annual returns are annualized they
tend to even out variations in the returns, and are not the same as actual
year-by-year results. The actual return performance calculations, which also may
be quoted in advertising, reflect the results of a continuous shareholder who
does not redeem. It measures the percentage change between the net asset value
of a hypothetical $1,000 investment in each Fund at the beginning of a period
and the net asset value of that investment at the end of a period, assuming
reinvestment of all dividend and capital gain distributions at the net asset
value on the reinvestment date. The performance of major market indices such as
the Dow Jones Industrial Average, Russell 2000, and Standard & Poor's 500 may
also be included in advertising so that each Fund's results may be compared with
those of groups of unmanaged securities widely regarded by investors as measures
of market performance. Brokerage fees are not factored into the performance of
the indices. The performance data of the Funds include all recurring fees such
as brokerage and investment advisory fees. Data and rankings from Lipper
Analytical Services, Inc., CDA Investment Technologies, Morningstar or other
industry publications may also be used in advertising. See the Statement of
Additional Information.

Performance results represent past performance and are not necessarily
representative of future results. Investment return and principal value will
fluctuate so that shares may be worth more or less than their original cost when
redeemed.

The annual report contains additional performance information which is available
upon request without charge by writing or calling the Funds at the address and
telephone number set forth on the back of this Prospectus.

<PAGE>

MANAGEMENT OF THE FUND

INVESTMENT ADVISER

BAMCO, Inc., the Adviser, is located at 767 Fifth Avenue, New York, New York
10153, and is responsible for portfolio management. It is a wholly owned
subsidiary of Baron Capital Group, Inc. ("BCG"). Baron Capital, Inc. ("Baron
Capital"), a registered broker-dealer and the distributor of the shares of the
Funds, is also a wholly owned subsidiary of BCG.

Under separate Advisory Agreements with each Fund (the "Advisory Agreements"),
the Adviser furnishes continuous investment advisory services and management to
each Fund. Mr. Ronald Baron is the chief investment officer of the Adviser and
is primarily responsible for the day-to-day management of the portfolios of
BARON ASSET FUND and BARON GROWTH & INCOME FUND. He has managed the portfolios
of these Funds since their inception. Mr. Clifford Greenberg is primarily
responsible for the day-to-day management of BARON SMALL CAP FUND. Mr. Greenberg
joined Baron Funds in January of 1997. Prior to that he was a general partner
and portfolio manager at HPB Associates, L.P., an investment partnership. The
Adviser also keeps the books of account of each series, and calculates daily the
income and net asset value per share of each Fund.

As compensation for the services rendered under each Advisory Agreement, the
Adviser receives a fee payable monthly from the assets of each Fund equal to 1%
per annum of each Fund's respective average daily net asset value.

<PAGE>

BROKERAGE

Brokerage transactions for the Funds are effected chiefly by or through its
Adviser's affiliate, Baron Capital, when consistent with the policy of obtaining
the best net results for the Funds and subject to the conditions and limitations
of the 1940 Act. Baron Capital is a registered broker-dealer and a member of the
NASD. In determining the best net results for the Fund, the Adviser will examine
factors such as price (including the applicable brokerage commission or dealer
spread), size of order, efficiency and reliability of execution. The Funds'
Board of Trustees has adopted procedures in conformity with Rule 17e-1 under the
1940 Act to ensure that all brokerage commissions paid to Baron Capital are
reasonable and fair compared to the commission, fee or other remuneration
received by other brokers in connection with comparable transactions involving
similar securities being purchased or sold on a securities exchange during a
comparable period of time. The Funds will also consider sales of their shares as
a factor in the selection of broker-dealers to execute portfolio transactions.
See Statement of Additional Information for a description of the commissions
paid to Baron Capital.

<PAGE>

TRUSTEES AND EXECUTIVE OFFICERS

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

The Funds' Board of Trustees has overall responsibility for the management of
the Funds. The Trustees and executive officers of the Funds and their principal
occupations during the last five years are set forth below.

<PAGE>

POSITION HELD WITH PRINCIPAL OCCUPATION(S) DURING PAST
NAME AND ADDRESS THE FUNDS FIVE YEARS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Irwin Greenberg Trustee Chairman, Lehigh Valley Hospital Board (1991-Present);
3048 Congress Street Retail Consultant, (1990- Present); Director,
Allentown, PA 18101 Cedar Crest College(1990-Present); President
and Chief Executive Officer, Hess's Department Stores
(1976-1990).
- ------------------------------------------------------------------------------------------------------------------------------------
Clifford Vice President Vice President, Baron Capital, Inc., Baron Capital Group, Inc.,
Greenberg767 Fifth Avenue BAMCO, Inc. (1997-Present); General Partner, HPB Associates, L.P.
New York, NY 10153 (1984-1996) (investment partnership).
- ------------------------------------------------------------------------------------------------------------------------------------
Linda S. Martinson*+ Secretary, Vice President and General Counsel and Secretary of:
767 Fifth Avenue Vice President Baron Capital, Inc. (1983-Present), BAMCO, Inc. (1987-Present),
New York, NY 10153 and Trustee Baron Capital Group, Inc. (1984-Present), Baron Capital
Management, Inc. (1983-Present).
- ------------------------------------------------------------------------------------------------------------------------------------
Charles N. Mathewson Trustee Chairman of the Board, International Game Technology
5270 Neil Road (1986-Present) (manufacturer of microprocessor-controlled gaming
Reno, NV 89502-4169 machines and monitoring systems).
- ------------------------------------------------------------------------------------------------------------------------------------
Harold W. Milner Trustee Retired; President and Chief Executive Officer, Kahler
2293 Morningstar Drive Realty Corporation (1985-1997) (hotel ownership and management).
Park City, UT 84060
- ------------------------------------------------------------------------------------------------------------------------------------
Raymond Noveck+ Trustee President, Strategic Systems, Inc. (1990- Present)
31 Karen Road (health care information); Director, Horizon/CMS Healthcare
Waban, MA 02168 Corporation (1987-Present).
- ------------------------------------------------------------------------------------------------------------------------------------
Susan Robbins Vice President Senior Analyst, Vice President and Director of:
767 Fifth Avenue Baron Capital, Inc. (1982- Present), Baron Capital Management,
New York, NY 10153 Inc. (1983-Present), Baron Capital Group, Inc.(1984-Present).
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

* Trustees deemed to be "interested persons" of the Fund as that term is defined
in the Investment Company Act of 1940.

+ Members of the Executive Committee, which is empowered to exercise all of the
powers, including the power to declare dividends, of the full Board of
Trustees when the full Board of Trustees is not in session.

<PAGE>

DISTRIBUTION PLAN

The Funds' shares are distributed by Baron Capital, which is the principal
underwriter of the shares of each Fund, pursuant to a distribution plan under
Rule 12b-1 of the 1940 Act ("Distribution Plan"). The Distribution Plan
authorizes the Fund to pay the Principal Underwriter a distribution fee equal on
an annual basis to 0.25% of each Fund's average daily net assets. The
distribution fee is paid to the Principal Underwriter in connection with its
activities or expenses primarily intended to result in the sale of shares,
including, but not limited to, compensation to registered representatives or
other employees of the Principal Underwriter who engage in or support the
distribution of shares or who service shareholder accounts; telephone expenses;
interest expenses; preparing, printing and distributing promotional and
advertising material; preparing, printing and distributing the Prospectus and
reports to other than current shareholders; and commissions and other fees to
broker-dealers or other persons (excluding banks) who have introduced investors
to the Funds. See the Statement of Additional Information for a more detailed
listing of the expenses covered by the Distribution Plan.

HOW TO PURCHASE SHARES

Shares of BARON ASSET FUND, BARON GROWTH & INCOME FUND and BARON SMALL CAP FUND
are offered without any sales load. This means you may purchase, redeem, or
exchange shares directly without paying a sales charge. An application is
included with this prospectus. A special application is required to open an
individual retirement account ("IRA"). Purchase applications are subject to
acceptance by the Funds and the Funds reserve the right to reject any purchase
application in whole or part. All purchase payments will be invested in full and
fractional shares at a price based on the next calculation of net asset value
after the order is received by the transfer agent. See "Net Asset Value."

The minimum initial investment is $2,000 unless you choose to invest through the
Baron InvestPlan (see page 25). There is no minimum for subsequent purchases.
Shareholders who are employees of the Adviser or its affiliates and their
immediate families are not subject to the minimums. The Fund may redeem the
shares of any shareholder who has an account balance of less than $2,000. See
"How to Redeem Shares."

At present, only U.S. citizens and non-U.S. citizens with a tax identification
number who reside in the U.S., may purchase shares of the Funds. Please call the
Funds' transfer agent at 1-800-442-3814, if you have any questions.

<PAGE>

No certificates will be issued except upon written request, and no certificates
are issued for fractional shares. The Funds' transfer agent establishes an
account for each shareholder to which all shares purchased are credited,
together with any dividends and capital gain distributions which may be paid in
additional shares. Whenever a transaction occurs in a shareholder's account, the
transfer agent will mail a statement showing the transaction and the status of
the account.

You may invest the following ways:

BY MAIL

To open a new account send your signed application form with your check payable
to Baron Funds to: Baron Funds P.O. Box 419946 Kansas City, MO 64141-6946

PLEASE MAKE SURE YOU INDICATE HOW MUCH MONEY YOU WANT INVESTED IN WHICH FUND.
Checks must be payable in U.S. dollars and must be drawn on a U.S. bank. Third
party checks, credit cards and cash will not be accepted.

When making subsequent investments, complete the additional investment form
provided at the bottom of your account statement or purchase confirmation. If
you do not have that form, write a note indicating in which Baron Fund the
investment should go and the account number. Send it to the address above.

BY WIRE

You can make your initial or subsequent investments in the Funds by wire. To do
so: (1) contact the Funds' transfer agent, DST Systems, Inc., at 1-800-442-3814
to obtain an account number. (2) Complete and sign the application form and mail
it to Baron Funds, P.O. Box 419946, Kansas City, MO 64141-6946. (3) Instruct
your bank to wire funds to the United Missouri Bank of Kansas City, N.A., ABA
No. 1010-0069-5, Account No. 98-7037-101-4. (4) Be sure to specify the following
information in the wire: (a) Fund you are buying, (b) your account number, (c)
your name, and (d) your wire number.

Please be sure to include your name and account number. The Fund will not be
responsible for the consequences of delays in the wiring process.

BY TELEPHONE

Once your account is open you may make subsequent investments by telephone and
exchange between the Funds if you have elected that option on the application.
By choosing this option you authorize Baron

<PAGE>

Funds to draw on your bank account. Please note that your accounts must be
identically registered. To add this option to your account, call 1-800-442-3814
for the forms.

BARON INVESTPLAN

Baron InvestPlan is an automatic investment plan offered by the Funds. The
minimum initial investment is $500 with monthly investments of as little as $50
automatically invested from your checking account. To enroll in the Baron
InvestPlan, complete the Enrollment Form (available by calling 1-800-99-BARON),
attach a voided check and mail them to Baron Funds, P.O. Box 419946, Kansas
City, MO 64141-6946.

THROUGH BROKER-DEALERS

You may purchase shares of the Funds through a broker-dealer or other financial
institution that may charge a transaction fee. Investors should be aware that if
you purchase the shares directly from the Funds, no transaction fee is charged.
The Funds will effect purchase orders through broker dealers at the net asset
value next determined after the Fund has received the order from the
broker-dealer.

HOW TO REDEEM SHARES

Shares of the Funds may be redeemed by any of the methods described below. If
you are selling shares in an IRA account please read the information in the IRA
kit.

BY MAIL

Shares may be sold by executing a written request for redemption, as described
below, and mailing the request to Baron Funds, P.O. Box 419946, Kansas City, MO
64141-6946.

The redemption request must specify the name of the Fund, the number of shares,
or dollar amount, to be redeemed and the account number. The request must be
signed in exactly the same way the account is registered, including the
signature of each joint owner, if applicable. A signature guarantee is required
for redemptions greater than $25,000. See the "Special Information About
Redemptions" section on page 26. If any certificates have been issued for shares
that are included in the redemption request, the certificates must be presented
in properly endorsed form. Within three days after receipt of a redemption
request by the transfer agent in proper form, the Fund will normally mail you
the proceeds.

<PAGE>

BY TELEPHONE

If you have selected the telephone redemption option when you opened your
account, you may redeem your shares by telephone. To add this option to your
account call 1-800-442-3814 for a telephone redemption form. Once made, your
telephone request cannot be modified or canceled. The minimum amount that you
may redeem by telephone is $1,000. The maximum amount that you may redeem by
telephone in any quarter is $25,000. You may receive the proceeds by any one of
the following methods: (a) we will mail a check to the address to which your
account is registered, (b) we will transmit the proceeds by Electronic Funds
Transfer to a pre-authorized bank account (usually a two banking day process),
or (c) we will wire the proceeds to a pre-authorized bank account for a $10.00
fee (usually a next banking day process).

The Funds reserve the right to refuse a telephone redemption if they believe it
advisable to do so. The Fund, and hence its shareholders, will bear the risk of
loss from fraudulent or unauthorized instructions received over the telephone
provided that the Fund reasonably believes that such instructions are genuine.
The Funds and their transfer agent employ reasonable procedures to confirm that
instructions communicated by telephone are genuine, including recording
telephonic instructions and sending written confirmations. The Funds may incur
liability if they do not follow these procedures.

BY BROKER-DEALER

You may redeem shares through broker-dealers or other institutions who may
charge you a fee. The Funds may have special redemption procedures with certain
broker-dealers.

SPECIAL INFORMATION ABOUT REDEMPTIONS

If the amount to be redeemed is greater than $25,000, all of the signatures on a
redemption request and/or certificate must be guaranteed by an "eligible"
guarantor. A signature guarantee is a widely accepted way to protect you and the
Funds by verifying the signature on your request. The Funds will honor a
signature guarantee from acceptable financial institutions such as banks, trust
companies, savings and loan associations, credit unions and broker-dealers. A
notary public is not an acceptable guarantor. No signature guarantee is required
for redemptions of $25,000 or less, per quarter, if proceeds are sent to the
address of record.

A corporate resolution, specifying the authorized signatory and containing the
corporate seal, is required for corporations that are redeeming. Further
documentation may be requested from corporations, administrators, executors,

<PAGE>

trustees, custodians, or others who hold shares in a fiduciary or representative
capacity to evidence the authority of the person or entity making the request.
If there are any questions concerning the required documentation, the transfer
agent should be contacted in advance at 1-800-442-3814. Redemptions will not be
effective or complete until all of the foregoing conditions, including receipt
of all required documentation by the transfer agent, have been satisfied.

If you have recently purchased shares please be aware that your redemption
request may not be honored until the purchase check has cleared your bank, which
generally occurs within ten calendar days. Upon receipt of a redemption request
in proper form, the shares will be redeemed at their next computed net asset
value following receipt of redemption requests by the transfer agent. The net
asset value of shares on redemption may be more or less than the investor's cost
depending on the market value of the Fund's portfolio securities at the time of
redemption. A redemption of shares is a taxable event that may result in
recognition of a gain or loss for tax purposes.

The Funds may suspend the right of redemption or postpone the date of payment
beyond three days during any period when (a) the New York Stock Exchange is
closed other than customary weekend and holiday closings; (b) trading on the New
York Stock Exchange is restricted; (c) the Securities and Exchange Commission
has by order permitted such suspension; or (d) an emergency, as defined by rules
and regulations of the Securities and Exchange Commission, exists as a result of
which disposal of portfolio securities or determination of the value of the
Funds' net assets is not reasonably practicable.

If you redeem more than $250,000 or 1% of the net asset value of a Fund during
any 90-day period, the Fund has the right to pay the redemption price, either
totally or partially, by a distribution of portfolio securities instead of cash.
The securities distributed in such a distribution would be valued at the same
amount as that assigned to them in calculating the net asset value for the
shares being redeemed or repurchased. If shares are redeemed in kind, the
redeeming investor may incur brokerage costs in converting such securities to
cash.

The Trustees may, in order to reduce the expenses of the Funds, redeem all of
the shares of any shareholder whose account, due to the redemption of shares,
has a net asset value of less than $2,000. The Funds will give 60 days' prior
written notice to shareholders whose shares are being redeemed to allow them to
purchase sufficient additional shares of the Funds to avoid such redemption.

<PAGE>

DETERMINING YOUR SHARE PRICE

Your purchases, sales or exchanges will be processed at the net asset value per
share of the Fund as of the close of the New York Stock Exchange (the
"Exchange") (currently 4:00 p.m., New York City time) on each day that the
Exchange is open for trading by dividing the current market value of the Fund's
total assets less all of its liabilities by the total number of shares
outstanding at the time the determination is made. Valid purchase and redemption
orders placed prior to the close of the Exchange on a day the Exchange is open
for trading are executed at the net asset value determined as of the close that
day, and orders placed after that time are valued as of the close of the next
trading day. The Funds may have arrangements with certain institutional entities
with respect to the actual receipt of orders. The Funds reserve the right to
change the time at which orders are priced if the Exchange closes at a different
time or an emergency exists.

The Funds' portfolio securities traded on any national stock exchange or quoted
on the NASDAQ National Market System are valued on the basis of the last sale
price on the date of valuation or, in the absence of any sale on that date, the
last sale price on the date the security last traded. Other securities are
valued at the mean of the most recent bid and asked prices if market quotations
are readily available. Where market quotations are not readily available the
securities are valued at their fair value as determined in good faith by the
Board of Trustees, or by the Adviser, pursuant to procedures established by the
Board. Money market instruments and debt securities with a remaining maturity of
sixty days or less are valued by the amortized cost method unless such method
does not represent fair value. Odd lot differentials and brokerage commissions
are excluded in calculating net asset value. Securities quoted in a foreign
currency are valued daily in U.S. dollars at the foreign currency exchange rates
that are prevailing at the time the daily net asset value per share is
determined. If events that materially affect the value of a Fund's foreign
investments occur, the investments will be valued at their fair value as
determined in good faith by the Board of Trustees.

DIVIDENDS AND DISTRIBUTIONS

Each Fund intends to distribute all of its net investment income and realized
capital gains, if any, to its shareholders in a single, combined distribution by
December 31 of each year. After every distribution, the value of a share is
automatically reduced by the amount of the distribution. You may elect to have
all your dividends and capital gains distributions from the Funds automatically
reinvested in additional shares of that Fund at the next computed net asset

<PAGE>

value at the close of business on the payment date. You may, instead, elect to
receive your distributions in cash, which the Fund will pay by either crediting
your bank account by Electronic Funds Transfer or issuing a check to you within
five business days of the reinvestment date. If no election is made all
distributions will automatically be reinvested in shares of the Fund. You may
change your election by notifying the Fund in writing prior to the record date
for a particular distribution. There are no charges in connection with the
reinvestment of distributions. If a shareholder has elected to receive dividends
and/or distributions in cash and the postal or other delivery service is unable
to deliver checks to the shareholder's address of record, such shareholder's
distribution option will automatically be converted to having all dividend and
other distributions reinvested in additional shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.

TAXES

Each Fund intends to qualify each year as a regulated investment company under
the Internal Revenue Code of 1986 (the "Code"). Qualification as a regulated
investment company relieves the Fund of federal income and excise taxes on the
portion of its net ordinary income and net realized capital gain distributed to
shareholders.

You are subject to federal income tax at ordinary income tax rates on any
dividends derived from net investment income and distributions of net short-term
capital gains, whether received in cash or in additional shares. A portion of
such dividends received by corporate shareholders may qualify for the
dividends-received deduction. Distributions of net capital gain (the excess of
net long-term capital gains over net short-term capital losses) are taxable to
you as long-term gains regardless of how long you have held your Fund shares.
Dividends and distributions declared by the Fund may also be subject to state
and local taxes.

If you purchase shares shortly before a distribution, you must pay income taxes
on the distribution, even though the value of your investment (plus cash
received, if any) remains the same. The share price at the time of your purchase
may include unrealized gains in the securities held in the investment portfolio
of that Fund. If these portfolio securities are subsequently sold and the gains
are realized, they will (to the extent not offset by capital loses) be paid to
you as a distribution of capital gains and be taxable to you.

The Fund will be required to withhold 31% of all dividends, distributions and
redemption proceeds if you do not provide the Fund with your valid social
security or taxpayer identification number or are otherwise subject to backup

<PAGE>

withholding. In addition to the 31% backup withholding, your account will be
charged $50 to reimburse the Fund for any penalty that the IRS imposes on the
Fund for your failure to provide the required information.

Each shareholder will receive information annually on Form 1099 as to the
federal income tax status of all dividends and other distributions paid or
deemed paid to them for the year.

The foregoing is only a summary of some important tax considerations generally
affecting the Funds and their shareholders. Prospective shareholders are urged
to consult their tax advisers concerning the tax consequences of this
investment.

GENERAL INFORMATION

The Funds are organized as diversified open-end management investment companies
registered under the Investment Company Act of 1940 ("1940 Act") as three series
of Baron Asset Fund, a Massachusetts business trust organized under the laws of
The Commonwealth of Massachusetts on February 19, 1987. The Funds are each
authorized to issue an indefinite number of shares of beneficial interest. The
Declaration of Trust permits the Trustees to establish additional series. Each
share of a Fund has one vote on all matters for which a shareholder vote is
required, and participates equally in dividend and capital gain distributions
when and if declared by the Fund and in the Fund's net assets upon liquidation.
Shares are fully paid and non-assessable and there are no preemptive, conversion
or exchange rights. Shares do not have cumulative voting rights and, as a
result, holders of at least 50% of the shares voting for Trustees can elect all
Trustees and the remaining shareholders would not be able to elect any Trustees.

As a Massachusetts business trust, annual shareholder meetings are not required.
Shareholders have certain rights, as set forth in the Declaration of Trust,
including the right to call a meeting of shareholders for the purpose of voting
on the removal of one or more Trustees on the written request of not less than
10% of the outstanding shares. Such removal can be effected upon the action of
two-thirds of the outstanding shares.

CUSTODIAN, TRANSFER AGENT AND DIVIDEND AGENT

The Bank of New York, 48 Wall Street, New York, New York 10015 is the custodian
for the Funds' cash and securities. DST Systems, Inc. serves as transfer agent
and dividend disbursing agent for the shares. In their respective capacities
both institutions maintain certain financial and accounting records pursuant to

<PAGE>

agreements with the Funds. They do not assist in and are not responsible for
investment decisions involving assets of the Funds.

SHAREHOLDER INFORMATION

All shareholder inquiries regarding account information or transactions should
be directed to DST Systems, Inc., P.O. Box 419946, Kansas City, MO 64141-6946,
or by telephone to 1-800-442-3814.

Shareholder inquiries about general Fund information should be directed to the
Funds' office at 1-800-99-BARON or 212-583-2100.

Shareholders will be provided semi-annual unaudited and annual audited reports,
including a listing of portfolio securities held. A single copy of each report
will be mailed to an address at which more than one registered shareholder with
the same last name (except nominees) has indicated mail is to be delivered,
unless a shareholder requests otherwise.

MANAGEMENT DISCUSSION AND ANALYSIS

BARON ASSET FUND

BARON ASSET FUND performed well in the fiscal year ended September 30, 1996,
both absolutely and relative to other equity funds and market averages. The
Fund's one year performance of 21.3% was better than its 17.9% average annual
performance since its inception almost ten years ago. BARON ASSET FUND ranks
among the top 2% of all taxable equity funds since its inception in June 1987,
according to Lipper Analytical data.

[GRAPH]

<PAGE>

Although the Fund performed well during the year, performance was not uniform
throughout the year nor was the performance uniform across all areas of
investment. BARON ASSET FUND began the fiscal year under-performing the market
averages in the December 1995 quarter, significantly out-performing the market
averages in the March and June quarters of 1996, and then closed the year
under-performing the market averages in the September 1996 quarter. The Fund's
approach to analyzing the long-term prospects of businesses leaves it
susceptible to short periods of under-performance when other investors focus on
short term events and ignore the positive long term prospects of businesses that
our research has identified. After a period of negative returns and
under-performance for the last five months, the portfolio seems attractively
priced relative to the fundamental performance of the companies in which we are
invested, and we are well-positioned for relatively good performance in 1997.

The performance of the Fund was not uniform across sectors. The Fund performed
well with its investments in Amusement & Recreation, Business Services,
Education, Government Services, Media & Entertainment and Retail Stores.
However, the Fund did not perform well with its investments in Communications,
Financial Services and Health Care Services. While the stock prices of these
investments did not perform well during the year, in most cases the fundamentals
of these businesses were strong and these industries that under-performed last
year represent significant opportunities for the Fund in the upcoming year.

BARON ASSET FUND concentrates its investments in small and mid-sized companies.
During the year the performance of market averages that represent this universe
of smaller companies significantly under-performed the market averages that
represent more established large cap companies. We believe that in the
slow-growth environment that we anticipate for 1997, investors should be willing
to pay a premium for those companies that can grow at above average rates and
small cap stocks should do well in this environment after under-performing in
1996.

In fiscal year 1997, the Fund will continue to invest in companies that are
undervalued, with significant growth prospects and increasing profitability. The
companies will continue to be identified through our independent research
efforts. Companies in which we invest will have the potential to increase in
price at least 50% over the next two years. The Fund will remain diversified not
only by industry and by investment theme, but also by external factors that we
have identified that could affect company performance. This approach to
investing in companies, and not trading in stocks, should allow the Fund to

<PAGE>

continue to produce above average rates of return with an attractive risk
profile. We are looking forward to a successful 1997.

BARON GROWTH & INCOME FUND

BARON GROWTH & INCOME FUND performed well in the fiscal year ended September 30,
1996, both absolutely and relative to other equity funds and the market
averages. The Fund is the number one ranked growth & income fund since its
inception on January 3, 1995, according to Lipper Analytical data.

The Fund's strong performance can be attributed to its investment strategy of
allocating approximately 60% of its portfolio to rapidly growing, well managed,
very profitable small-cap companies that are attractively priced, and the
remaining 40% to value oriented, income producing securities, also principally
of smaller companies.

[GRAPH]

The growth component of the Fund performed well with its investments in
Amusement & Recreation, Business Services, Education, Government Services and
Retail Stores. The Fund's investments in Communications and Health Care Services
under-performed the Fund overall and provide opportunities for strong
performance in 1997.

The income component of the Fund performed well with its heavy allocation of, on
average, nearly 23% of the portfolio in REITs. The REIT portion of the Fund
gained 26.5% for the year. The combination of strong performance from this

<PAGE>

income component and substantial current income provided the Fund with very
attractive relative risk characteristics for a fund that is mostly invested in
small cap companies.

In fiscal year 1997, the Fund's portfolio should continue to be structured as it
was in fiscal year 1996. At least 30% of the portfolio will likely remain
invested in income producing securities. We currently expect that more than half
of this portfolio segment will be invested in REITs. We expect the income
component of the Fund to produce annual returns of approximately 15%. This is a
combination of attractive yields and moderate business growth. The growth
component of the portfolio, like that of BARON ASSET FUND, will be fully
invested in stocks that have the potential to appreciate in value at least 50%
during the next two years.

The Fund's portfolio is well positioned to offer attractive returns by investing
in small cap companies with significant growth potential, while mitigating risk
because of the cushion provided by its investments in income-producing
securities. We are looking forward to a successful 1997.

<PAGE>

NOT PART OF THE PROSPECTUS

HOW TO PURCHASE SHARES

(Please consult the Prospectus for more detailed information)

BY MAIL

To open a new account send your application form with your check payable to:
Baron Funds
P.O. Box 419946
Kansas City, MO 64141-6946

When making subsequent investments, complete the additional investment form
provided at the bottom of your account statement or purchase confirmation, or
write a note indicating in which Baron Fund the investment should go and the
account number.

BY TELEPHONE

Once your account is open you may make subsequent investments by telephone and
exchange among the Funds if you have elected that option on the application. By
choosing this option you authorize Baron Funds to draw on your bank account.
Please note that your accounts must be identically registered. To add this
option to your account, call 1-800-442-3814 for the forms.

BY WIRE

Baron Funds
P.O. Box 419946
Kansas City, MO 64141-6946

(3) Instruct your bank to wire funds to the
United Missouri Bank of Kansas City, N.A.
ABA No. 1010-0069-5
Account No. 98-7037-101-4.

(4) Be sure to specify the following information in the wire:
(a) the Fund you are buying,
(b) your account number,
(c) your name, and
(d) your wire number.

BY BROKER-DEALERS

<PAGE>

HOW TO REDEEM SHARES

(Please consult the Prospectus for more detailed information)

BY MAIL

Shares may be sold by executing a written request for redemption, as described
below, and mailing the request to:

Baron Funds
P.O. Box 419946
Kansas City, MO 64141-6946

The redemption request must specify the name of the Fund, the number of shares,
or dollar amount, to be redeemed and the account number.

BY TELEPHONE

If you have selected the telephone redemption option when you opened your
account, you may redeem up to $25,000 per quarter by telephone. To add this
option to your account call 1-800-442-3814 for a telephone redemption form. Once
made, your telephone request cannot be modified or canceled. The minimum amount
that you may redeem by telephone is $1,000.

BY WIRE

To have redeemed shares wired to you please call 1-800-442-3814 for
instructions.

BY BROKER-DEALERS

You may redeem shares through broker-dealers or other institutions who may
charge you a fee.

SPECIAL INFORMATION ABOUT REDEMPTIONS

If the amount to be redeemed is greater than $25,000, all of the signatures on a
redemption request and/or certificate must be guaranteed by an "eligible"
guarantor. Corporations and other entities may have additional requirements.

<PAGE>

BARON ASSET FUND
BARON GROWTH & INCOME FUND
BARON SMALL CAP FUND

767 Fifth Avenue
New York, New York 10153
(800) 99-BARON
212-583-2100

STATEMENT OF ADDITIONAL INFORMATION
August 27, 1997

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

BARON ASSET FUND is a no-load, open-end, diversified management investment
company organized as a series fund with three series currently available
(individually a "Fund" and collectively the "Funds"): BARON ASSET FUND, started
in June of 1987, BARON GROWTH & INCOME FUND, started in January of 1995, and
BARON SMALL CAP FUND, started September 30, 1997. BARON ASSET FUND'S investment
objective is to seek capital appreciation through investments in securities of
small and medium sized companies with under valued assets or favorable growth
prospects. BARON GROWTH & INCOME FUND'S investment objective is to seek capital
appreciation with income as a secondary objective. BARON SMALL CAP FUND'S
investment objective is to seek capital appreciation through investments
primarily in securities of small companies.

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

This Statement of Additional Information is not a prospectus and is only
authorized for distribution when preceded or accompanied by the Funds'
prospectus dated August 27, 1997 as amended or supplemented from time to time
(the "Prospectus"). This Statement of Additional Information contains additional
and more detailed information than that set forth in the Prospectus and should
be read in conjunction with the Prospectus. Additional copies of the Prospectus
may be obtained without charge by writing or calling the Funds at the address
and telephone number set forth above.

No dealer, salesman or any other person has been authorized to give any
information or to make any representations, other than those contained in this
Statement of Additional Information or in the related Prospectus, in connection
with the offer contained herein, and, if given or made, such other information
or representations must not be relied upon as having been authorized by the
Funds or the Distributor. This Statement of Additional Information and the
related Prospectus do not constitute an offer by the Funds or by the Distributor
to sell or a solicitation of any offer to buy any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful to make such
offer in such jurisdiction.

<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE IN
STATEMENT
OF
ADDITIONAL PAGE IN
INFORMATION PROSPECTUS
<S> <C> <C>

Investment Objectives and Policies............................ 3 6
Investment Restrictions.............................. 3
Short Sales Against the Box.......................... 7 11
Option Transactions.................................. 8 10
Use of Segregated and Other Special Accounts 10 10
Depository Receipts.................................. 11 12

Medium and Lower Rated Corporate Debt Securities.............. 12 8
Turnover Rate........................................ 14 12

Management of the Funds
Board of Trustees and Officers....................... 15 16
Principal Holders of Shares.......................... 17
Investment Adviser................................... 17 15
Distributor.......................................... 19 18
Distribution Plan.................................... 20 18
Brokerage............................................ 23 15
Custodian, Transfer Agent and
Dividend Agent....................................... 26 25

Redemption of Shares.......................................... 26 20

Net Asset Value............................................... 26 22

Taxes ..................................................... 27 24

Organization and Capitalization............................... 28 25
General.............................................. 28 25
Shareholder and Trustee Liability.................... 28

Other Information............................................. 27 25
Independent Accountants.............................. 27 4
Calculation of Performance Data...................... 27 14

</TABLE>

<PAGE>

INVESTMENT OBJECTIVES AND POLICIES

The following information supplements the discussion of the Funds'
investment objectives and policies set forth on pages 6-14 of the Prospectus.
Unless otherwise specified, the investment programs and restrictions are not
fundamental policies. Such operating policies are subject to change by the
Fund's Board of Trustees without the approval by the shareholders. Shareholders
will, however, be notified prior to any material changes. Fundamental policies
may be changed only with the approval of a majority of the Funds' outstanding
voting securities. Investment Restrictions

BARON ASSET FUND, BARON GROWTH & INCOME FUND, and BARON SMALL CAP FUND have
adopted the following investment restrictions, which include those described in
the Prospectus. These restrictions represent fundamental policies of the Funds
and may not be changed without the approval of the Funds' shareholders. Unless
otherwise noted, all percentage restrictions are as of the time of the
investment after giving effect to the transaction. BARON ASSET FUND may not:

1. Issue senior securities except in connection with any permitted borrowing
where the Fund is deemed to have issued a senior security;

2. Borrow money except from banks for temporary purposes in an amount not
exceeding 5% of the Fund's total assets less liabilities at the time the
borrowing is made;

3. Purchase securities on margin except for short-term credit necessary for
the clearance of portfolio transactions;

4. Make short sales of securities, maintain a short position, write put
options or buy futures contracts;

5. Purchase or sell commodities or commodity contracts;

6. Purchase or sell real estate or real estate mortgage loans or invest in the
securities of real estate companies unless such securities are publicly
traded;

7. Invest in oil, gas or mineral-related programs or leases;

8. Invest more than 25% of the value of its total assets in any one industry,
except investments in U.S. government securities;

<PAGE>
9. Purchase the securities of any one issuer other than the U.S. government or
any of its agencies or instrumentalities, if immediately after such
purchase more than 5% of the value of the Fund's total assets would be
invested in such issuer or the Fund would own more than 10% of the
outstanding voting securities of such issuer, except that up to 25% of the
value of the Fund's total assets may be invested without regard to the 5%
and 10% limitations;

10. Invest more than 10% of the value of the Fund's total assets in securities
which are restricted or not readily marketable or in repurchase agreements
maturing or terminable in more than seven days;

11. Invest in securities of other open end investment companies (except in
connection with a merger, consolidation or other reorganization and except
for the purchase of shares of registered open-end money market mutual funds
if double advisory fees are not assessed), invest more than 5% of the value
of the Fund's total assets in more than 3% of the total outstanding voting
securities of another investment company or more than 10% of the value of
the Fund's total assets in securities issued by other investment companies;

12. Participate on a joint, or a joint and several, basis in any securities
trading account;

13. Underwrite securities of other issuers;

14. Make loans to other persons, except up to 10% of the value of the Fund's
total assets in loans of portfolio securities and except to the extent that
the purchase of publicly traded debt securities and the entry into
repurchase agreements in accordance with the Fund's investment objective
and policies may be deemed to be loans;

15. Mortgage, pledge or hypothecate any portfolio securities owned or held by
the Fund, except as may be necessary in connection with permitted
borrowing;

16. Invest more than 5% of its total assets in warrants to purchase common
stock;

<PAGE>

17. Purchase securities of any issuer with a record of less than three years'
continuous operation, including predecessors, except obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities, if
such purchase would cause the investments of the Fund in all such issuers
to exceed 5% of the value of the total assets of the Fund; or

18. Purchase or retain any securities of an issuer any of whose officers,
directors, trustees or security holders is an officer or Trustee of the
Fund, or is a member, officer or Director of the Adviser, if after the
purchase of the securities of such issuer by the Fund one or more of such
persons owns beneficially more than 1/2 of 1% of the shares or securities,
or both, all taken at market value, of such issuer, and such persons owning
more than 1/2 of 1% of such shares or securities together own beneficially
more than 5% of such shares or securities, or both, all taken at market
value.

BARON GROWTH & INCOME FUND and BARON SMALL CAP FUND may not:

1. Issue senior securities or borrow money or utilize leverage in excess of
25% of its net assets (plus 5% for emergency or other short-term purposes)
from banks from time to time.

2. Except as described in the prospectus, engage in short-sales, purchase
securities on margin or maintain a net short position.

3. Purchase or sell commodities or commodity contracts except for hedging
purposes and in conformity with regulations of the Commodities Futures
Trading Commission such that the Fund would not be considered a commodity
pool.

4. Purchase or sell oil and gas interests or real estate. Debt or equity
securities issued by companies engaged in the oil, gas or real estate
business are not considered oil or gas interests or real estate for
purposes of this restriction. First mortgage loans and other direct
obligations secured by real estate are not considered real estate for
purposes of this restriction.

<PAGE>

5. Invest more than 25% of the value of its total assets in any one industry,
except investments in U.S. government securities.

6. Purchase the securities of any one issuer other than the U.S. government or
any of its agencies or instrumentalities, if immediately after such
purchase more than 5% of the value of the Fund's total assets would be
invested in such issuer or the Fund would own more than 10% of the
outstanding voting securities of such issuer, except that up to 25% of the
value of the Fund's total assets may be invested without regard to the 5%
and 10% limitations.

7. Underwrite securities of other issuers.

8. Make loans, except to the extent the purchase of debt obligations of any
type (including repurchase agreements and corporate commercial paper) are
considered loans and except that the Fund may lend portfolio securities to
qualified institutional investors in compliance with requirements
established from time to time by the Securities and Exchange Commission and
the securities exchanges where such securities are traded.

9. Participate on a joint, or a joint and several, basis in any securities
trading account.

10. Mortgage, pledge or hypothecate any of its assets, except as may be
necessary in connection with options, loans of portfolio securities, or
other permitted borrowings.

11. Purchase securities of any issuer with a record of less than three years'
continuous operations, including predecessors, except obligations issued or
guaranteed by the U.S. government or its agencies or instrumentalities, if
such purchase would cause the investments of the Fund in all such issuers
to exceed 5% of the value of the total assets of the Fund.

12. Invest more than 15% of its assets in restricted or illiquid securities,
including repurchase agreements maturing in more than seven days.

<PAGE>

As a non-fundamental policy, BARON GROWTH & INCOME FUND and BARON SMALL CAP FUND
will not:

1. Invest in securities of other registered investment companies (except in
connection with a merger, consolidation or other reorganization and except
for the purchase of shares of registered open-end money market funds if
double advisory fees are not assessed), invest more than 5% of the value of
the Fund's total assets in more than 3% of the total outstanding voting
securities of another investment company or more than 10% of the value of
the Fund's total assets in securities issued by other investment companies.

2. Invest more than 5% of its total assets in warrants to purchase common
stock.

3. Purchase the securities of any issuer of which any officer or director of
the Fund owns 1/2 of 1% of the outstanding securities or in which the
officers and directors in the aggregate own more than 5%.

The Securities and Exchange Commission currently requires that the
following conditions be met whenever portfolio securities are loaned: (1) the
Fund must receive at least 100% cash collateral from the borrower; (2) the
borrower must increase such collateral whenever the market value of the
securities rises above the level of such collateral; (3) the Fund must be able
to terminate the loan at any time; (4) the Fund must receive reasonable interest
on the loan, as well as any dividends, interest or other distributions on the
loaned securities, and any increase in market value; (5) the Fund may pay only
reasonable custodian fees in connection with the loan; and (6) while voting
rights on the loaned securities may pass to the borrower, the Fund's trustees
must terminate the loan and regain the right to vote the securities if a
material event adversely affecting the investment occurs. These conditions may
be subject to future modifications. The portfolios of the Funds are valued every
day the New York Stock Exchange is open for trading.

With respect to investments in warrants, the Funds will not invest in
excess of 2% of the value of the particular Fund's net assets in warrants that
are not listed on the New York or American Stock Exchanges. Warrants are
essentially options to purchase equity securities at a specified price valid for
a specific period of time. Their prices do not necessarily move parallel to the
prices of the underlying securities. Warrants have no voting rights, receive no
dividends and have no rights with respect to the assets of the issuer.

SHORT SALES AGAINST THE BOX

BARON GROWTH & INCOME FUND and BARON SMALL CAP FUND may sell short "against
the box" to protect or defer an unrealized gain in a security. At the time of
the short sale, the Funds will either own or have the unconditional right to
acquire at no additional cost the identical security sold short. The Funds may
use this technique in connection with convertible securities as well as common
stock. The Funds may have to pay a fee to borrow securities, which would
partially offset any gain thereon.

<PAGE>

OPTIONS TRANSACTIONS

BARON ASSET FUND may write (sell) call options and purchase put options,
and BARON GROWTH & INCOME FUND and BARON SMALL CAP FUND may purchase or write
put or call options. The purpose of writing covered call options is to reduce
the effect of price fluctuations of the securities owned by the Fund (and
involved in the options) on the Fund's net asset value per share.

A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation, when exercised, to buy, the
underlying security, at the exercise price. For instance, the Fund's purchase of
a put option on a security might be designed to protect its holdings in the
underlying security against a substantial decline in the market value by giving
the Fund the right to sell such security at the exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller if exercised, the obligation to sell, the underlying security at
the exercise price. The Fund's purchase of a call option on a security might be
intended to protect the Fund against an increase in the price of the underlying
security that it intends to purchase in the future by fixing the price at which
it may purchase such security or to limit the loss to the extent of the premium
for a security it might otherwise purchase. An American style put or call option
may be exercised at any time during a fixed period while a European style put or
call option may be exercised only upon expiration or during a fixed period prior
thereto, and the Funds may engage in either style option. The Funds are
authorized to engage in transactions with respect to exchange-listed options and
over-the- counter options ("OTC options"). Exchange-listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
The discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.

With certain exceptions, OCC-issued and exchange-listed options generally
settle by physical delivery of the underlying security, although in the future
cash settlement may become available. Rather than taking or making delivery of
the underlying security through the process of exercising the option, listed
options are usually closed by entering into offsetting purchase or sale
transactions that do not result in ownership of the new option.

The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange- listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms. The hours of trading for
listed options may not coincide with the hours during which the underlying
instruments are traded. To the extent that the option markets close before the
markets for the underlying instruments, significant price and rate movements can
take place in the underlying markets that cannot be reflected in the option
markets.

<PAGE>

OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange-listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including terms such as method of settlement, term, exercise price,
premium, guarantees and security, are negotiated by the parties. The Funds
expect generally to enter into OTC options that have cash settlement provisions,
although they are not required to do so.

Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, or other instrument underlying an OTC option it
has entered into with a Fund or fails to make a cash settlement payment due in
according with the option, the Fund will lose any premium it paid for the option
as well as any anticipated benefit of the transaction. Accordingly, the Adviser
must assess the creditworthiness of each such Counterparty or any guarantor or
credit enhancement of the Counterparty's credit to determine the likelihood that
the terms of the OTC option will be satisfied. The Funds will engage in OTC
option transactions only with United States securities dealers recognized by the
Federal Reserve Bank of New York as "primary dealers" or broker dealers,
domestic or foreign banks or other financial institutions which have received
(or the guarantors of the obligations of which have received) a short-term
credit rating of "A-1" from Standard & Poor's Corporation ("S&P") or "P-1" from
Moody's Investor Services ("Moody's") or an equivalent rating from any
nationally recognized statistical rating organization ("NRSRO"). The staff of
the SEC currently takes the position that OTC options purchased by a fund, and
portfolio securities "covering" the amount of the fund's obligation pursuant to
an OTC option sold by it (the cost of the sell-back plus the in-the-money
amount, if any,) are illiquid, and are subject to a fund's limitations on
investments in illiquid securities.

If a Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities in its portfolio or will increase the Fund's
income. The sale of put options can also provide income.

BARON GROWTH & INCOME FUND and BARON SMALL CAP FUND may purchase and sell
call options, and BARON ASSET FUND may sell options, on corporate debt
securities and equity securities (including convertible securities). All calls
sold by the Funds must be "covered" (i.e., a Fund must own the underlying
securities) or must meet the asset segregation requirements described below as
long as the call is outstanding. Even though a Fund will receive the option
premium to help protect it against loss, a call sold by a Fund exposes that Fund
during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require the Fund to hold a security or instrument which it might otherwise
have sold.

<PAGE>

BARON GROWTH & INCOME FUND and BARON SMALL CAP FUND may purchase and sell
put options, and BARON ASSET FUND may buy put options, on corporate debt
securities and equity securities (including convertible securities). All put
options must be covered. In selling put options, there is a risk that the Fund
may be required to buy the underlying security at a disadvantageous price above
the market price.

USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS

Many hedging transactions, in addition to other requirements, require that
a Fund segregate liquid high grade assets with its custodian to the extent Fund
obligations are not otherwise "covered" through ownership of the underlying
security or instrument. In general, either the full amount of any obligation by
the Fund to pay or deliver securities or assets must be covered at all times by
the securities or instruments required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid high grade securities at
least equal to the current amount of the obligation must be segregated with the
custodian. The segregated assets cannot be sold or transferred unless equivalent
assets are substituted in their place or it is no longer necessary to segregate
them. For example, a call option written by the Fund will require that Fund to
hold the securities subject to the call (or securities convertible into the
needed securities without additional consideration) or to segregate liquid high
grade securities sufficient to purchase and deliver the securities if the call
is exercised. A put option written requires that the Fund segregate liquid, high
grade assets equal to the exercise price. Hedging transactions may be covered by
other means when consistent with applicable regulatory policies.

OTC options entered into by a Fund will generally provide for cash
settlement. As a result, when the Fund sells these instruments it will only
segregate an amount of assets equal to its accrued net obligations, as there is
no requirement for payment or delivery of amounts in excess of the net amount.
These amounts will equal 100% of the exercise price in the case of a noncash
settled put, the same as an OCC guaranteed listed option sold by the Fund, or
the in-the-money amount plus any sell-back formula amount in the case of a
cash-settled put or call. OCC-issued and exchange-listed options sold by a Fund
other than those above generally settle with physical delivery, or with an
election of either physical delivery, or cash settlement and the Fund will
segregate an amount of assets equal to the full value of the option. OTC options
settling with physical delivery, or with an election of either physical delivery
or cash settlement, will be treated the same as other options settling with
physical delivery.

<PAGE>

DEPOSITORY RECEIPTS

The Funds may invest in securities commonly known as American Depository
Receipts ("ADRs"), and in European Depository Receipts ("EDRs") or other
securities convertible into securities of foreign issuers. ADRs are certificates
issued by a United States bank or trust company and represent the right to
receive securities of a foreign issuer deposited in a domestic bank or foreign
branch of a United States bank and traded on a United States exchange or in an
over-the-counter market. EDRs are receipts issued in Europe generally by a
non-U.S. bank or trust company that evidence ownership of non-U.S. or domestic
securities. Generally, ADRs are in registered form and EDRs are in bearer form.
There are no fees imposed on the purchase or sale of ADR's or EDRs although the
issuing bank or trust company may impose on the purchase of dividends and the
conversion of ADRs and EDRs into the underlying securities. Investment in ADRs
has certain advantages over direct investment in the underlying non-U.S.
securities, since (i) ADRs are U.S. dollar denominated investments which are
easily transferable and for which market quotations are readily available and
(ii) issuers whose securities are represented by ADRs are subject to the same
auditing, accounting and financial reporting standards as domestic issuers. EDRs
are not necessarily denominated in the currency of the underlying security.

MEDIUM AND LOWER RATED CORPORATE DEBT SECURITIES

BARON GROWTH & INCOME FUND and BARON SMALL CAP FUND may invest in
securities that are rated in the medium to lowest rating categories by S&P and
Moody's, some of which may be known as "junk bonds." The Funds may invest in
securities of distressed issuers when the intrinsic values of such securities
have, in the opinion of the Adviser, warranted such investment. Corporate debt
securities rated Baa are regarded by Moody's as being neither highly protected
nor poorly secured. Interest payments and principal security appears adequate to
Moody's for the present, but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such securities
are regarded by Moody's as lacking outstanding investment characteristics and
having speculative characteristics. Corporate debt securities rated BBB are
regarded by S&P as having adequate capacity to pay interest and repay principal.
Such securities are regarded by S&P as normally exhibiting adequate protection
parameters, although adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for securities in this rating category than in higher rated categories.

<PAGE>

Corporate debt securities which are rated B are regarded by Moody's as
generally lacking characteristics of the desirable investment. In Moody's view,
assurance of interest and principal payments or of maintenance of other terms of
the security over any long period of time may be small. Corporate debt
securities rated BB, B, CCC, CC and C are regarded by S&P on balance as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. In S&P's view,
although such securities likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. BB and B are regarded by S&P as indicating the
two lowest degrees of speculation in this group of ratings. Securities rated D
by S&P or C by Moody's are in default and are not currently performing.

The Funds will rely on the Adviser's judgment, analysis and experience in
evaluating debt securities. Ratings by S&P and Moody's evaluate only the safety
of principal and interest payments, not market value risk. Because the
creditworthiness of an issuer may change more rapidly than is able to be timely
reflected in changes in credit ratings, the Adviser monitors the issuers of
corporate debt securities held in the Funds' portfolio. The credit ratings
assigned by a rating agency to a security is a factor considered by the Adviser
in selecting a security, but the intrinsic value in light of market conditions
and the Adviser's analysis of the fundamental values underlying the issuer are
of more significance. Because of the nature of medium and lower rated corporate
debt securities, achievement by the Funds of their respective investment
objectives when investing in such securities is dependent on the credit analysis
of the Adviser. If the Funds purchased primarily higher rated debt securities,
risks would be substantially reduced.

<PAGE>

A general economic downturn or a significant increase in interest rates
could severely disrupt the market for medium and lower grade corporate debt
securities and adversely affect the market value of such securities. Securities
in default are relatively unaffected by such events or by changes in prevailing
interest rates. In addition, in such circumstances, the ability of issuers of
medium and lower grade corporate debt securities to repay principal and to pay
interest, to meet projected business goals and to obtain additional financing
may be adversely affected. Such consequences could lead to an increased
incidence of default for such securities and adversely affect the value of the
corporate debt securities in a Fund's portfolio. The secondary market prices of
medium and lower grade corporate debt securities are less sensitive to changes
in interest rates than are higher rated debt securities, but are more sensitive
to adverse economic changes or individual corporate developments. Adverse
publicity and investor perceptions, whether or not based on rational analysis,
may also affect the value and liquidity of medium and lower grade corporate debt
securities, although such factors also present investment opportunities when
prices fall below intrinsic values. Yields on debt securities in the portfolio
that are interest rate sensitive can be expected to fluctuate over time. In
addition, periods of economic uncertainty and changes in interest rates can be
expected to have an impact on the market price of any medium to lower grade
corporate debt securities in the portfolio and thus could have an effect on the
net asset value of a Fund if other types of securities did not show offsetting
changes in values. The secondary market value of corporate debt securities
structured as zero coupon securities or payment-in-kind securities may be more
volatile in response to changes in interest rates than debt securities which pay
interest periodically in cash. Because such securities do not pay current
interest, but rather, income is accrued, to the extent that a Fund does not have
available cash to meet distribution requirements with respect to such income, it
could be required to dispose of portfolio securities that it otherwise would
not. Such disposition could be at a disadvantageous price. Investment in such
securities also involves certain tax considerations.

To the extent that there is no established market for some of the medium or
low grade corporate debt securities in which the Funds may invest, there may be
thin or no trading in such securities and the ability of the Adviser to value
accurately such securities may be adversely affected. Further, it may be more
difficult for a Fund to sell securities for which no established

<PAGE>

retail market exists as compared with securities for which such a market does
exist. During periods of reduced market liquidity and in the absence of readily
available market quotations for medium and lower grade corporate debt securities
held in a Fund's portfolio, the responsibility of the Adviser to value that
Fund's securities becomes more difficult and the Adviser's judgment may play a
greater role in the valuation of the Fund's securities due to a reduced
availability of reliable objective data. To the extent that a Fund purchases
illiquid corporate debt securities or securities which are restricted as to
resale, that Fund may incur additional risks and costs. Illiquid and restricted
securities may be particularly difficult to value and their disposition may
require greater effort and expense than more liquid securities. A Fund may be
required to incur costs in connection with the registration of restricted
securities in order to dispose of such securities, although under Rule 144A
under the Securities Act of 1933 certain securities may be determined to be
liquid pursuant to procedures adopted by the Board of Trustees under applicable
guidelines.

TURNOVER RATE

The adviser expects that the average annual turnover rate of the portfolios
of BARON ASSET FUND, BARON GROWTH & INCOME FUND and BARON SMALL CAP FUND should
not exceed 100%. A portfolio turnover rate of 100% would occur if all the
securities in the portfolio were replaced in a one year period. The portfolio
turnover rate is calculated by dividing the lesser of portfolio purchases or
sales by the average monthly value of portfolio securities, excluding short term
securities. For the year ended September 30, 1995, BARON ASSET FUND'S portfolio
turnover was 35%. For the year ended September 30, 1996, BARON ASSET FUND'S
portfolio turnover was 19% and BARON GROWTH & INCOME FUND'S portfolio turnover
was 40%. For the period January 3, 1995 (commencement of operations) to
September 30, 1995, BARON GROWTH & INCOME'S portfolio turnover was 41% (54% on
an annualized basis). BARON SMALL CAP FUND has no historical rates to report at
this time. The turnover rate fluctuates depending on market conditions.

<PAGE>

MANAGEMENT OF THE FUNDS

BOARD OF TRUSTEES AND OFFICERS

The Trustees and executive officers of the Funds and their principal
occupations during the last five years are set forth below.

POSITION HELD WITH PRINCIPAL OCCUPATION(S) DURING PAST
NAME AND ADDRESS THE FUNDS FIVE YEARS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Ronald Baron*+ President, Chief President and Director of: Baron Capital, Inc.
767 Fifth Avenue Investment Officer (1982-Present), Baron Capital Management, Inc.
New York, NY 10153 & Trustee (1983-Present), Baron Capital Group, Inc.
(1984-Present), BAMCO, Inc. (1987-Present).
- ------------------------------------------------------------------------------------------------------------------------------------
Norman S. Edelcup Trustee Chairman, Item Processing of America
244 Atlantic Isle (1989-Present), (financial institution service bureau);
N. Miami Beach, FL 33160 Director, Valhi, Inc. (1975-Present) (diversified
company); Director, Artistic Greetings, Inc.(1985-Present).
- ------------------------------------------------------------------------------------------------------------------------------------
Neal M. Elliott Trustee President, Chief Executive Officer and Chairman,
6001 Indian School Rd., NE Horizon/CMS Healthcare Corp. (1986-Present)
Albuquerque, NM 87110 (long-term health care); Director, LTC Properties,
Inc. (1992-Present) (real estate investment trust);
Director, Frontier Natural Gas Corp. (1991-Present)
(oil and gas exploration).
- ------------------------------------------------------------------------------------------------------------------------------------
Mark M. Feldman Trustee President and Chief Executive Officer, Cold Spring Group, Inc.
444 Madison Ave, Ste 703 (1993-Present) (reorganization and restructuring consulting);
New York, N.Y. 10020 Executive Vice President and Chief Restructuring Officer,
Lomas Financial Corp. and subsidiaries (1995-1996)
(reorganizing debtors-in-possession); Trustee,
Aerospace Creditors Liquidating Trust (1993-Present)
(administers and liquidates assets).
- ------------------------------------------------------------------------------------------------------------------------------------
Irwin Greenberg Trustee Chairman, Lehigh Valley Hospital Board (1991-Present);
3048 Congress Street Retail Consultant, (1990- Present); Director,
Allentown, PA 18101 Cedar Crest College(1990-Present); President
and Chief Executive Officer, Hess's Department Stores
(1976-1990).
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

POSITION HELD WITH PRINCIPAL OCCUPATION(S) DURING PAST
NAME AND ADDRESS THE FUNDS FIVE YEARS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Clifford Vice President Vice President, Baron Capital, Inc., Baron Capital Group, Inc.,
Greenberg767 Fifth Avenue BAMCO, Inc. (1997-Present); General Partner, HPB Associates, L.P.
New York, NY 10153 (1984-1996) (investment partnership).
- ------------------------------------------------------------------------------------------------------------------------------------
Linda S. Martinson*+ Secretary, Vice President and General Counsel and Secretary of:
767 Fifth Avenue Vice President Baron Capital, Inc. (1983-Present), BAMCO, Inc. (1987-Present),
New York, NY 10153 and Trustee Baron Capital Group, Inc. (1984-Present), Baron Capital
Management, Inc. (1983-Present).
- ------------------------------------------------------------------------------------------------------------------------------------
Charles N. Mathewson Trustee Chairman of the Board, International Game Technology
5270 Neil Road (1986-Present) (manufacturer of microprocessor-controlled gaming
Reno, NV 89502-4169 machines and monitoring systems).
- ------------------------------------------------------------------------------------------------------------------------------------
Harold W. Milner Trustee Retired; President and Chief Executive Officer, Kahler
2293 Morningstar Drive Realty Corporation (1985-1997) (hotel ownership and management).
Park City, UT 84060
- ------------------------------------------------------------------------------------------------------------------------------------
Raymond Noveck+ Trustee President, Strategic Systems, Inc. (1990- Present)
31 Karen Road (health care information); Director, Horizon/CMS Healthcare
Waban, MA 02168 Corporation (1987-Present).
- ------------------------------------------------------------------------------------------------------------------------------------
Susan Robbins Vice President Senior Analyst, Vice President and Director of:
767 Fifth Avenue Baron Capital, Inc. (1982- Present), Baron Capital Management,
New York, NY 10153 Inc. (1983-Present), Baron Capital Group, Inc.(1984-Present).
- ------------------------------------------------------------------------------------------------------------------------------------
Morty Schaja* Senior Vice Senior Vice President and Chief Operating Officer of
767 Fifth Avenue President, Chief Baron Capital, Inc. (1997-Present), Managing Director,
New York, NY 10153 Operating Officer Vice President, Baron Capital, Inc. (1991-Present)
and Trustee and Director, Baron Capital Group, Inc., Baron Capital
Management, Inc., and BAMCO, Inc. (1997-Present).
- ------------------------------------------------------------------------------------------------------------------------------------
Daniel Tisch Trustee Partner, Mentor Partners, L.P. (1987- Present)
500 Park Avenue (investment partnership).
New York, NY 10022
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

* Trustees deemed to be "interested persons" of the Fund as that term is defined
in the Investment Company Act of 1940.

The Trustees who are not affiliated with or interested persons of the
Funds' investment adviser receive fees of $5,000 annually plus an attendance fee
of $500 for each meeting attended in person ($250 for telephone participation).
The Trustees who are interested persons of the Funds' investment adviser receive
no compensation from the Funds. As indicated in the above table, certain
Trustees and officers also hold positions with the Funds' adviser and
distributor.

PRINCIPAL HOLDERS OF SHARES

As of December 20, 1996, the following persons were known to the Funds to be
the record or beneficial owners of more than 5% of the outstanding securities of
the Funds:

BARON ASSET BARON GROWTH
FUND & INCOME FUND

CHARLES SCHWAB & CO., INC. 52.1% 49.5%
NATIONAL FINANCIAL SERVICES CORP. 9.9% 17.1%
BANKERS TRUST CO. 5.3%

All of the above record owners are brokerage firms or trust companies that hold
stock for the benefit of their respective customers. As of December 31, 1996,
all of the officers and Trustees of BARON ASSET FUND as a group beneficially
owned directly or indirectly 0.56% of BARON ASSET FUND'S outstanding shares and
0.74% of BARON GROWTH & INCOME FUND'S outstanding shares.

<PAGE>
INVESTMENT ADVISER

The investment adviser to the Funds is BAMCO, Inc. (the "Adviser"), a New
York corporation with its principal offices at 767 Fifth Avenue, New York, N.Y.
10153 and a subsidiary of Baron Capital Group, Inc. ("BCG"). Mr. Ronald Baron is
the controlling stockholder of BCG and is BAMCO's chief investment officer. Mr.
Baron has over 25 years of experience as a Wall Street analyst and has managed
money for others for over 20 years. He has been a participant in Barron's
Roundtable and has been a featured guest on Wall Street Week, CNN and CNBC/FNN.
Pursuant to separate Advisory Agreements with each Fund (the "Advisory
Agreement"), the Adviser furnishes continuous investment advisory services and
management to each Fund, including making the day-to-day investment decisions
and arranging portfolio transactions for the Funds subject to such policies as
the Trustees may determine. BARON ASSET FUND incurred advisory expenses of
$6,923,899 for the year ended September 30, 1996; $1,549,306 for the year ended
September 30, 1995; and $674, 234 for the year ended September 30, 1994. BARON
GROWTH & INCOME FUND incurred advisory expenses of $994,621 for the year ended
September 30, 1996; and $60,398 for the period January 3, 1995 (commencement of
operations) to September 30, 1995. BARON SMALL CAP FUND has no operating history
at this time.

Under the Advisory Agreement, the Adviser, at its own expense and without
reimbursement from the Funds, furnishes office space and all necessary office
facilities, equipment and executive personnel for managing the Funds, and pays
the salaries and fees of all officers and Trustees who are interested persons of
the Adviser.

The Funds pay all operating and other expenses not borne by the Adviser
such as audit, accounting and legal fees; custodian fees; expenses of
registering and qualifying its shares with federal and state securities
commissions; expenses in preparing shareholder reports and proxy solicitation
materials; expenses associated with each Fund's shares such as dividend
disbursing, transfer agent and registrar fees; certain insurance expenses;
compensation of Trustees who are not interested persons of the Adviser; and
other miscellaneous business expenses. The Funds also pay the expenses of
offering the shares of each respective Fund, including the registration and
filing fees, legal and accounting fees and costs of printing the prospectus and
related documents. Each Fund also pays all taxes imposed on it and all brokerage
commissions and expenses incurred in connection with its portfolio transactions.

<PAGE>

Ronald Baron is the controlling stockholder, President and a Director of
BCG. The Adviser utilizes the staffs of Baron Capital and Baron Capital's
subsidiary Baron Capital Management, Inc. ("BCM") to provide research.
Directors, officers or employees of the Adviser and/or its affiliates may also
serve as officers or Trustees of the Fund. BCM is an investment adviser to
institutional and individual accounts. Clients of BCM and Baron Capital have
investment objectives which may vary only slightly from those of each other and
of the Fund. BCM and Baron Capital invest assets in such clients' accounts and
in the accounts of principals and employees of BCM and Baron Capital in
investments substantially similar to, or the same as, those which constitute the
principal investments of the Fund. When the same securities are purchased for or
sold by the Fund and any of such other accounts, it is the policy of the
Adviser, BCM and Baron Capital to allocate such transactions in a manner deemed
equitable by the Adviser, and for the Adviser's, BCM's and Baron Capital's
principals and employees to take either the same or least favorable price of the
day.

Each Advisory Agreement provides that the Fund may use "Baron" as part of
its name for so long as the Adviser serves as investment adviser to that Fund.
Each Fund acknowledges that the word "Baron" in its name is derived from the
name of the entities controlling, directly and indirectly, the Adviser, which
derive their name from Ronald Baron; that such name is the property of the
Adviser and its affiliated companies for copyright and/or other purposes; and
that if for any reason the Adviser ceases to be that Fund's investment adviser,
that Fund will promptly take all steps necessary to change its name to one that
does not include "Baron," absent the Adviser's written consent.

Each Advisory Agreement provides that the Adviser shall have no liability
to that Fund or its shareholders for any error of judgment or mistake of law or
for any loss suffered by that Fund; provided, that the Adviser shall not be
protected against liabilities arising by virtue of willful misfeasance, bad
faith or gross negligence, or reckless disregard of the Adviser's obligations
under the Advisory Agreement.

The Advisory Agreement with respect to BARON ASSET FUND and BARON GROWTH &
INCOME FUND were approved by a majority of the Trustees, including a majority of
the Trustees who are not "interested persons" ( as defined by the Investment
Company Act of 1940 ( "1940 Act" ) ) on May 11, 1987, and October 21, 1994,
respectively.

<PAGE>

The Advisory Agreement with respect to BARON SMALL CAP FUND was approved by a
majority of the Trustees, including a majority of the non- interested Trustees,
on July 29, 1997. BARON SMALL CAP FUND'S Advisory Agreement is for an initial
two year period but the Advisory Agreements must normally be approved annually
by the Trustees or a majority of the particular Fund's shares and by a majority
of the Trustees who are not parties to the Advisory Agreement or interested
persons of any such party. With respect to BARON ASSET FUND and BARON GROWTH &
INCOME FUND, such approval for 1996 was approved at a Board of Trustees meeting
held on April 16, 1996.

Each Advisory Agreement is terminable without penalty by either the Fund
(when authorized by majority vote of either its outstanding shares or the
Trustees) or the Adviser on 60 days' written notice. Each Advisory Agreement
shall automatically terminate in the event of its "assignment" (as defined by
1940 Act).

DISTRIBUTOR

The Funds have a distribution agreement with Baron Capital, Inc., ("Baron
Capital" or the "Distributor") a New York corporation and a subsidiary of BCG
(controlled by Ronald Baron), located at 767 Fifth Avenue, New York, N.Y. 10153.
Baron Capital is affiliated with the Adviser. The Distributor acts as the agent
for the Funds for the continuous public offering of their shares on a best
efforts basis pursuant to a distribution plan adopted under Rule 12b-1 under the
1940 Act ("Distribution Plan").

DISTRIBUTION PLAN

The Distribution Plan authorizes the Funds to pay the Distributor a
distribution fee equal on an annual basis to 0.25% of the Funds' average daily
net assets. The fee was reduced to 0.25% from 0.50% on July 12, 1993. The
distribution fee is paid to the Distributor in connection with its activities or
expenses primarily intended to result in the sale of shares, including, but not
limited to, compensation to registered representatives or other employees of the
Distributor; compensation to and expenses of employees of the Distributor who
engage in or support the distribution of shares or who service shareholder
accounts; telephone expenses; interest expenses; preparing, printing and
distributing promotional and advertising material; preparing, printing and
distributing the Prospectus and reports to other than current shareholders; and
commissions and other fees to broker-dealers or other persons (excluding banks)
who have introduced investors to the Fund.

<PAGE>

If and to the extent the expenses listed below are considered to be
primarily intended to result in the sale of shares within the meaning of Rule
12b-1, they are exempted from the limits set forth above: (a) the costs of
preparing, printing or reproducing and mailing all required reports and notices
to shareholders; (b) the costs of preparing, printing or reproducing and mailing
all proxy statements and proxies (whether or not such proxy materials include
any item relating to or directed toward the sale of shares); (c) the costs of
preparing, printing or reproducing and mailing all prospectuses and statements
of additional information; (d) all legal and accounting fees relating to the
preparation of any such report, prospectus, and proxy materials; (e) all fees
and expenses relating to the qualification of the Funds and/or their shares
under the securities or "Blue Sky" laws of any jurisdiction; (f) all fees under
the 1940 Act and the Securities Act of 1933, including fees in connection with
any application for exemption relating to or directed toward the sale of Shares;
(g) all fees and assessments, if any, of the Investment Company Institute or any
successor organization, whether or not its activities are designed to provide
sales assistance; (h) all costs of preparing and mailing confirmations of shares
sold or redeemed and reports of share balances; (i) all costs of responding to
telephone or mail inquiries of shareholders or prospective shareholders.

The Distribution Plan requires that while it is in effect the Distributor
report in writing, at least quarterly, the amounts of all expenditures, the
identity of the payees and the purposes for which such expenditures were made
for the preceding fiscal quarter.

For the fiscal year ended September 30, 1996, BARON ASSET FUND paid
distribution fees to the Distributor of $1,730,975 (an additional $696,333 was
incurred but not paid pursuant to the 0.25% limitation), and BARON GROWTH &
INCOME FUND paid distribution fees to the Distributor of $248,655 (an additional
$90,398 was incurred but not paid pursuant to the 0.25% limitation).

<PAGE>

The distribution expenses incurred by the Distributor for the fiscal year ended
September 30, 1996 with respect to these two Funds were as follows:

(a) ADVERTISING $ 4,548

(b) PRINTING AND MAILING OF
PROSPECTUSES TO OTHER THAN
CURRENT SHAREHOLDERS 560,132

(d) OTHER 649,064

Trustees of the Funds who were not interested persons of the Funds had no
direct or indirect financial interest in the operation of the Distribution Plan
or the Distribution Agreement. Ronald Baron, an interested person of the Funds,
the Adviser and the Distributor, had such an interest.

BARON ASSET FUND received net proceeds of approximately $1,084,669,617 from
sales of its shares during the fiscal year ended September 30, 1996. The cost of
shares redeemed by the Fund during such year was approximately $305,341,662.
BARON GROWTH & INCOME FUND received net proceeds of approximately $203,482,737
from sales of its shares for the fiscal year ended September 30,1996. The cost
of shares redeemed by the Fund during such period was approximately $43,883,283.
BARON SMALL CAP FUND has no operating history.

The Distribution Plan has been approved by the Funds' Board of Trustees,
including a majority of the Trustees who are not interested persons of the Funds
and who have no direct or indirect financial interest in the operation of the
Distribution Plan or in any agreements related thereto. In approving the
Distribution Plan, the Trustees considered various factors and determined that
there is a reasonable likelihood that the Plan will benefit the Funds and their
shareholders.

Baron Capital is authorized to make payments to authorized dealers, banks
and other financial institutions who have rendered distribution assistance and
ongoing shareholder support services, shareholder servicing assistance or record
keeping. Certain states may require that any such person be registered as a
dealer with such state. The Funds may execute portfolio transactions with and
purchase securities issued by depository institutions that receive payments
under the Distribution Plan. No preference will be shown in the selection of
investments for the instruments of such depository institutions. Baron Capital
may also retain part of the distribution fee as compensation for its services
and expenses in connection with the distribution of shares.

<PAGE>

Baron Capital anticipates that its actual expenditures will substantially
exceed the distribution fee received by its during the early years of the Funds,
and that in later years its expenditures may be less than the distribution fee,
thus enabling Baron Capital to realize a profit in those years. For example, if
a Fund's average daily net asset value were $2 million, even if Baron Capital
incurred $50,000 of distribution expenses, it would receive only $10,000 as its
fee. Alternatively, if, the Fund's daily average net assets were $25 million,
and Baron Capital incurred $60,000 of distribution expenses, it would receive
$125,000 as its fee giving Baron Capital a $65,000 profit. If the Distribution
Plan is terminated, the Funds will owe no payments to Baron Capital other than
any portion of the distribution fee accrued through the effective date of
termination but then unpaid.

Unless terminated in accordance with its terms, the Distribution Plan shall
continue in effect until, and from year to year thereafter if, such continuance
is specifically approved at least annually by its Trustees and by a majority of
the Trustees who are not interested persons of the Fund and who have no direct
or indirect financial interest in the operation of the Distribution Plan or in
any agreements related thereto, such votes cast in person at a meeting called
for the purpose of such vote.

The Distribution Plan may be terminated at any time by the vote of a
majority of the members of the Funds' Board of Trustees who are not interested
persons of the Funds and have no direct or indirect financial interest in the
operation of the Distribution Plan or in any agreements related thereto or by
the vote of a majority of the outstanding shares. The Distribution Plan may not
be amended to increase materially the amount of payments to be made without the
approval of a majority of the shareholders. All material amendments must be
approved by a vote of the Trustees and of the Trustees who are not interested
persons of the Funds and have no direct or indirect financial interest in the
operation of the Distribution Plan or in any agreements related thereto, such
votes cast in person at a meeting called for the purpose of such vote.

<PAGE>

The Glass-Steagall Act and other applicable laws, among other things,
prohibit banks from engaging in business of underwriting, selling or
distributing securities. Accordingly, the Distributor will enter into agreements
with banks only to provide administrative assistance. However, changes in
federal or state statues and regulations pertaining to the permissible
activities of banks and their affiliates, as well as judicial or administrative
decisions or interpretations could prevent a bank from continuing to perform all
or a part of the contemplated services. If a bank were prohibited from so
acting, the Trustees would consider what actions, if any, would be necessary to
continue to provide efficient and effective shareholder services. It is not
expected that shareholders would suffer any adverse financial consequences as a
result of these occurrences.

BROKERAGE

The Adviser is responsible for placing the portfolio brokerage business of
the Funds with the objective of obtaining the best net results for the Funds,
taking into account prompt, efficient and reliable executions at a favorable
price. Brokerage transactions for the Funds are effected chiefly by or through
the Adviser's affiliate, Baron Capital, when consistent with this objective and
subject to the conditions and limitations of the 1940 Act. Baron Capital is a
member of the National Association of Securities Dealers, Inc., but is not a
member of any securities exchange.

The Funds' Board of Trustees has adopted procedures pursuant to Rule 17e-1
of the 1940 Act which are reasonably designed to provide that the commissions
paid to Baron Capital are reasonable and fair compared to the commission, fee or
other enumeration received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. The Board reviews no
less frequently than quarterly that all transactions effected pursuant to Rule
17e-1 during the preceding quarter were effected in compliance with such
procedures. The Funds and the Adviser furnish such reports and maintain such
records as required by Rule 17e-1. The Funds do not deal with Baron Capital in
any portfolio transaction in which Baron Capital acts as principal.

For the fiscal year ended September 30, 1996, of the total $1,576,882
brokerage commissions paid by BARON ASSET FUND and BARON GROWTH & INCOME FUND,
$1,383,564 brokerage commissions were paid to Baron Capital. The brokerage
commissions paid to Baron Capital represent 87.7% of the aggregate dollar amount
of brokerage commissions paid and 58.4% of the aggregate dollar amount of
transactions involving the payment of commissions for the 1996 fiscal year. For
the fiscal year ended September 30, 1995, of the total $369,753 brokerage
commissions paid by the Funds, $341,336 in brokerage commissions were paid to
Baron Capital. The brokerage commissions paid to Baron Capital represent 92.3%
of the aggregate dollar amount of brokerage commissions paid and 89.0% of the
aggregate dollar amount of transactions involving the payment of commissions for
the 1995 fiscal year. For the fiscal year ended September 30, 1994, of the total
$131,851 in brokerage commissions paid by BARON ASSET FUND, $118,918 in
brokerage commissions were paid to Baron Capital. The brokerage commissions paid
to Baron Capital represent 90.2% of the aggregate dollar amount of brokerage
commissions paid and 89.9% of the aggregate dollar amount of transactions
involving the payment of commissions for BARON ASSET FUND for the 1994 fiscal
year. BARON SMALL CAP FUND has no operating history.

<PAGE>

Under the Investment Advisory Agreements and as permitted by Section 28(e)
of the Securities and Exchange Act of 1934, the Adviser may cause the Funds to
pay a broker-dealer (except Baron Capital) which provides brokerage and research
services to the Adviser an amount of commission for effecting a securities
transaction for the Funds in excess of the amount other broker-dealers would
have charged for the transaction if the Adviser determines in good faith that
the greater commission is consistent with the Funds' policies and is reasonable
in relation to the value of the brokerage and research services provided by the
executing broker-dealer viewed in terms of either a particular transaction or
the Adviser's overall responsibilities to the Funds or to its other clients. The
term "brokerage and research services" includes advice as to the value of
securities, the advisability of investing in, purchasing, or selling securities,
and the availability of securities or of purchasers or sellers of securities;
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts;
and effecting securities transactions and performing functions incidental
thereto such as clearance and settlement. Such research and information may be
used by the Adviser or its affiliates to supplement the services it is required
to perform pursuant to the Advisory Agreement in serving the Funds and/or other
advisory clients of affiliates.

Broker-dealers may be willing to furnish statistical research and other
factual information or services to the Adviser for no consideration other than
brokerage or underwriting commissions. Securities may be bought or sold through
such broker-dealers, but at present, unless otherwise directed by the Funds, a
commission higher than one charged elsewhere will not be paid to such a firm
solely because it provided research to the Adviser. Research provided by brokers
is used for the benefit of all of the Adviser's or its affiliates' clients and
not solely or necessarily for the benefit of the Funds. The Adviser's investment
management personnel attempt to evaluate the quality of research provided by
brokers. Results of this effort are sometimes used by the Adviser as a
consideration the in the selection of brokers to execute portfolio transactions.

Baron Capital acts as broker for, in addition to the Funds, accounts of BCM
and Baron Capital, including accounts of principals and employees of Baron
Capital, BCM and the Adviser. Investment decisions for the Funds for investment
accounts managed by BCM and for accounts of Baron Capital are made independent
of each other in light of differing considerations for the various accounts. The
same investment decision may, however, be made for two or more of the Adviser's,
BCM's and/or Baron Capital's accounts. In such event, simultaneous transactions
are inevitable. Purchases and sales are averaged as to price where possible and
allocated to account in a manner deemed equitable by the Adviser in conjunction
with BCM and Baron Capital. This procedure could have a detrimental effect upon
the price or value of the security for the Funds, but may have a beneficial
effect.

The investment advisory fee that the Funds pay to the Adviser is not
reduced as a consequence of the Adviser's receipt of brokerage and research
services. To the extent the Funds' portfolio transactions are used to obtain
such services, the brokerage commissions paid by the Funds will exceed those
that might otherwise be paid by an amount that cannot be presently determined.
Such services would by useful and of value to the Adviser in serving both the
Funds and other clients and, conversely, such services obtained by the placement
of brokerage business of other clients would by useful to the Adviser in
carrying out its obligations to the Funds.

<PAGE>

CUSTODIAN, TRANSFER AGENT AND DIVIDEND AGENT

The Bank of New York, 48 Wall Street, New York, NY, is the custodian for
the Funds' cash and securities. DST Systems, Inc., CT-7 Tower, 1004 Baltimore,
Kansas City, MO 64105, is the transfer agent and dividend agent for the Funds'
shares. Neither institution assists in or is responsible for investment
decisions involving assets of the Funds. Both institutions are responsible for
the maintenance of the Funds' portfolios and general accounting records, and
provide certain shareholder services.

REDEMPTION OF SHARES

The Funds expect to make all redemptions in cash, but have reserved the
right to make payment, in whole or in part, in portfolio securities. Payment
will be made other than all in cash if the Funds' Board of Trustees determines
that economic conditions exist which would make payment wholly in cash
detrimental to a particular fund's best interests. Portfolio securities to be so
distributed, if any, would be selected in the discretion of the Funds' Board of
Trustees and priced as described under "Determining Your Share Price" herein and
in the Prospectus.

NET ASSET VALUE

As more fully set forth in the Prospectus under "Determining Your Share
Price," the net asset value per share of each Fund is determined as of the close
of the New York Stock Exchange on each day that the Exchange is open. The
Exchange is open all week days that are not holidays, which it announces
annually. The most recent announcement states it will not be open on New Year's
Day, Martin Luther King, Jr.'s Day, Washington's Birthday, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving and Christmas.

Securities traded on more than one national securities exchange are valued
at the last sale price of the day as of which such value is being determined as
reflected at the close of the exchange which is the principal market for such
securities.

U.S. Government obligations and other debt instruments having sixty days or
less remaining until maturity are stated at amortized cost. Debt instruments
having a greater remaining maturity will be valued at the highest bid price from
the dealer maintaining an active market in that security or on the basis of
prices obtained from a pricing service approved by the Board of Trustees.

<PAGE>

TAXES

Each Fund intends to qualify every year as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986 (the "Code").
Qualification as a regulated investment company relieves the Funds of Federal
income taxes on the portion of their net investment income and net realized
capital gains distributed to shareholders. The Funds intend to distribute
virtually all of their net investment income and net realized capital gains at
least annually to their respective shareholders.

A non-deductible 4% excise tax will be imposed on a Fund to the extent that
it does not distribute (including declaration of certain dividends), during each
calendar year, (i) 98% of its ordinary income for such calendar year, (ii) 98%
of its capital gain net income (the excess of short and long term capital gain
over short and long term capital loss) for each one-year period ending October
31 and (iii) certain other amounts not distributed in previous years.
Shareholders will be taxed during each calendar year on the full amount of such
dividends distributed (including certain declared dividends not actually paid
until the next calendar year).

For Federal income tax purposes, distributions paid from net investment
income and from any net realized short-term capital gains are taxable to
shareholders as ordinary income, whether received in cash or in additional
shares. Distributions paid from net capital gains are taxable as long-term
capital gains, whether received in cash or shares and regardless of how long a
shareholder has held the shares, and are not eligible for the dividends received
deduction. Distributions of investment income (but not distributions of
short-term or long-term capital gains) received by shareholders will qualify for
the 70% dividends received deduction available to corporations to the extent
designated by the Fund in a notice to each shareholder. Unless all of a Fund's
gross income constitutes dividends from domestic corporations qualifying for the
dividends received deduction, a portion of the distributions of investment
income to those holders of that Fund which are corporations will not qualify for
the 70% dividends received deduction. The dividends received deduction for
corporate holders maybe further reduced if the shares with respect to which
dividends are received are treated as debt-financed or deemed to have been held
for less than forty-six (46) days.

<PAGE>

The Funds will send written notices to shareholders regarding the Federal
income tax status of all distributions made during each calendar year as
ordinary income or capital gain and the amount qualifying for the 70% dividends
received deduction.

The foregoing relates to Federal income taxation. Distributions may also be
subject to state and local taxes. The Funds are organized as a Massachusetts
business trust. Under current law, so long as the Funds qualify for the Federal
income tax treatment described above, it is believed that they will not be
liable for any income or franchise tax imposed by Massachusetts.

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

ORGANIZATION AND CAPITALIZATION
GENERAL

BARON ASSET FUND is an open-end investment company organized as a series
fund and established under the laws of The Commonwealth of Massachusetts by a
Declaration of Trust dated February 19, 1987, as amended. The three series
currently available are BARON ASSET FUND, BARON GROWTH & INCOME FUND, and BARON
SMALL CAP FUND. Shares entitle their holders to one vote per share. Shares have
noncumulative voting rights, which means that holders of more than 50% of the
shares voting for the election of Trustees can elect all Trustees and, in such
event, the holders of the remaining shares voting for the election of Trustees
will not be able to elect any person or persons as Trustees. Shares have no
preemptive or subscription rights, and are transferable.

SHAREHOLDER AND TRUSTEE LIABILITY

Under Massachusetts law, shareholders of a Massachusetts business trust
may, under certain circumstances, be held personally liable as partners for the
obligations of the trust. The Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Fund or any
series thereof. Notice of such disclaimer will normally be given in each
agreement, obligation or instrument entered into or executed by the Funds or
Trustees. The Declaration of Trust provides for indemnification by a Fund for
any loss suffered by a shareholder as a result of an obligation of that Fund.

<PAGE>

The Declaration of Trust also provides that a Fund shall, upon request, assume
the defense of any claim made against any shareholder for an act or obligation
of that Fund and satisfy any judgement thereon. Thus, the risk of a shareholder
incurring financial loss on account or shareholder liability is limited to
circumstances in which the Fund itself would be unable to meets its obligations.
The Trustees believe that, in view of the above, the risk of personal liability
of shareholders is remote. The Declaration of Trust further provides that the
Trustees will not be liable for errors of judgement or mistakes of fact or law,
but nothing in the Declaration of trust protects a trustee against liability to
which he or she would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her office.

OTHER INFORMATION

INDEPENDENT ACCOUNTANTS

Coopers & Lybrand L.L.P., 1301 Avenue of the Americas, New York, New York
10019, has been selected as independent accountants of the Funds.

CALCULATIONS OF PERFORMANCE DATA

Advertisements and other sales literature for the Funds may refer to
average annual total return and actual return. Average annual total return is
computed by finding the average annual compounded rates of return over a given
period that would equate a hypothetical initial investment to the ending
redeemable value thereof, as follows:

P(1+T)^n =ERV

Where: P = a hypothetical initial payment of $1,000
T = average annual total return
^n = number of years
ERV = ending redeemable value at the end of the period
of a hypothetical $1,000 investment made at the
beginning of the period

Actual return is computed by measuring the percentage change between the
net asset value of a hypothetical $1,000 investment in the Fund at the beginning
of a period and the net asset value of that investment at the end of a period.
The performance data used in advertisements does not give effect to a 2%
contingent deferred sales charge that is no longer applicable.

<PAGE>

All performance calculations assume that dividends and distributions are
reinvested at the net asset value on the appropriate reinvestment dates and
include all recurring fees. Computed in the manner described above, the
performance of BARON ASSET FUND has been:

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL ACTUAL RETURN (does not
RETURN (prior to January 1, 1992 include the 2% contingent
includes the 2% contingent deferred sales load)
deferred sales load where
investment is less than 3 years)

Year ended +22.0% +22.0%
12/31/96

Year ended +35.3% +35.3%
12/31/95

Year ended + 7.4% + 7.4%
12/31/94

Year ended +23.5% +23.5%
12/31/93

Year ended +13.9% +13.9%
12/31/92

Year ended +32.0% +34.0%
12/31/91

Year ended -20.5% -18.5%
12/31/90

Year Ended +23.0% +25.0%
12/31/89

Year Ended +32.4% +34.4%
12/31/88

Inception (06/12/87) +17.6% +371.0%
to 12/31/96

Inception (06/12/87) +17.1% +286.2%
to 12/31/95

Inception (06/12/87) +14.9% +185.5%
to 12/31/94

Inception (06/12/87) +16.1% +165.8%
to 12/31/93

Inception (06/12/87) +14.8% +115.2%
to 12/31/92

Inception (06/12/87) +15.0% +89.0%
to 12/31/91

</TABLE>

<PAGE>

Inception (06/12/87) +10.1% +41.0%
to 12/31/90

Inception (06/12/87) +23.4% +73.0%
to 12/31/89

Inception (06/12/87) +22.1% +38.4%
to 12/31/88

Five Years Ended +22.3% +173.9%
12/31/95

For BARON GROWTH & INCOME FUND the performance has been:

Year Ended 12/31/96 +27.7% +27.7%

Year Ended 12/31/95 +52.5% +52.5%

Two Years Ended +39.6% +94.8%
12/31/96
(From Inception
01/03/95)

</TABLE>

BARON SMALL CAP FUND has no operating history.

In addition to advertising average annual and actual return data,
comparative performance information may be used in advertising materials about
the Funds, including data and other information from Lipper Analytical Services,
Inc., CDA Investment Technologies, Morningstar Inc., Money, Forbes, SEI,
Ibbotson, No Load Investor, Growth Fund Guide, Fortune, Barron's, The New York
Times, The Wall Street Journal, Changing Times, Medical Economics, Business
Week, Consumer Digest, Dick Davis Digest, Dickenson's Retirement Letter, Equity
Fund Outlook, Executive Wealth Advisor, Financial World, Investor's Daily, Time,
Personal Finance, Investment Advisor, Smartmoney, Rukeyser, Kiplinger's, NAPFA
News, US News, Bottomline, Investors Business Daily, Bloomberg Radio, CNBC,
and/or USA Today. The Fund may also use comparative performance data from
indexes such as the Dow Jones Industrial Average, Standard & Poor's 400, 500,
Small Cap 600, 1,500, or Midcap 400, Value Line Index, Wilshire 4,500, 5000, or
Small Cap; NASDAQ/OTC Composite, New York Stock Exchange; and the Russell 1000,
2000, 2500, 3000, 2000 Growth, 2000 Value, or Midcap. With respect to the rating
services,the Fund may use performance information that ranks the Fund in any of
the following categories: all funds, aggressive growth funds, value funds, mid-
cap funds, small-cap funds, growth and income funds, equity income funds, and
any combination of the above listed categories.