WILLIAM BLAIR MUTUAL FUNDS INC, 485BPOS, 1998-04-24

WILLIAM BLAIR MUTUAL FUNDS INC
485BPOS, 1998-04-24

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<PAGE> 1

REGISTRATION NOS. 33-17463
811-5344

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OR ABOUT APRIL 24, 1998

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933

PRE-EFFECTIVE AMENDMENT NO.

POST-EFFECTIVE AMENDMENT NO. 18 [X]

AND/OR

REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940

AMENDMENT NO. 19 [X]

WILLIAM BLAIR MUTUAL FUNDS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

222 WEST ADAMS STREET
CHICAGO, ILLINOIS 60606
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (312) 364-8000

Copy to:

ROCKY BARBER CHARLES F. CUSTER, ESQUIRE
222 WEST ADAMS STREET VEDDER, PRICE, KAUFMAN & KAMMHOLZ
CHICAGO, ILLINOIS 60606 222 NORTH LASALLE STREET
(NAME AND ADDRESS OF AGENT FOR SERVICE) CHICAGO, ILLINOIS 60601

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

[ ] immediately upon filing pursuant to paragraph (b); or
[X] on May 13, 1998 pursuant to paragraph (b); or
[ ] 60 days after filing pursuant to paragraph (a)(1); or
[ ] on (date) pursuant to paragraph (a)(1); or
[ ] 75 days after filing pursuant to paragraph (a)(2); or
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.

If appropriate, check the following box:

[ ] this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.

<PAGE> 2

WILLIAM BLAIR MUTUAL FUNDS, INC.

CROSS REFERENCE SHEET

<TABLE>
<CAPTION>
ITEM NO. OF FORM N-1A Caption

PART A PROSPECTUS
- ------ ----------
<S> <C> <C>
1 Cover Page Cover page
2 Synopsis Fund Expenses
3 Condensed Financial Information Financial Highlights
4 General Description of Registrant Growth Fund; Value Discovery Fund;
International Growth Fund; Income Fund; Ready
Reserves Fund
5 Management of the Fund Management of the Fund; Growth Fund; Value
Discovery Fund; International Growth Fund;
Income Fund; Ready Reserves Fund
5A Management's Discussion of Fund Inapplicable
Performance
6 Capital Stock and Other Securities Shareholder Services and Rights; Dividend and
Distribution Policy; Other Important
Information; Taxes; back cover
7 Purchase of Securities Being Offered How to Buy; How to Sell; Exchanges; Shareholder
Services and Rights; Determination of Net Asset
Value
8 Redemption or Repurchase How to Sell; Exchanges; Shareholder Services
and Rights; Other Important Information
9 Pending Legal Proceedings Inapplicable

<CAPTION>
PART B STATEMENT OF ADDITIONAL INFORMATION
- ------ -----------------------------------
10 Cover Page Cover page
11 Table of Contents Table of Contents
12 General Information and History Inapplicable
13 Investment Objectives and Policies Investment Policies and Restrictions;
Investment Practices; Appendix A; Appendix B
14 Management of the Fund Management of the Fund
15 Control Persons and Principal Holders Management of the Fund
of Securities
16 Investment Advisory and Other Services Management of the Fund; General Fund Information
17 Brokerage Allocation and Other Practices Management of the Fund
18 Capital Stock and Other Securities Shareholder Rights
19 Purchase, Redemption and Pricing of General Fund Information
Securities Being Offered
20 Tax Status General Fund Information
21 Underwriters Management of the Fund
22 Calculation of Performance General Fund Information
23 Financial Statements Financial Information of the Fund
</TABLE>

PART C OTHER INFORMATION
- ------ -----------------
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.

<PAGE> 3

Prospectus / May 1, 1998

WILLIAM BLAIR MUTUAL FUNDS, INC.

GROWTH FUND

VALUE DISCOVERY FUND

INTERNATIONAL GROWTH FUND

EMERGING MARKETS GROWTH FUND

INCOME FUND

READY RESERVES FUND

This prospectus contains important information about the individual portfolios,
including their investment objectives. For your benefit and protection, please
read it before you invest, and keep it for future reference.

An investment in the Fund is neither insured nor guaranteed by the U.S.
Government and there can be no assurance that the Ready Reserves Fund will be
able to maintain a stable $1.00 share price.

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

William Blair Mutual Funds, Inc.
222 West Adams Street
Chicago, Illinois 60606

<PAGE> 4

TABLE OF CONTENTS

<TABLE>
<S> <C>
OVERVIEW 1
FUND EXPENSES 2
FINANCIAL HIGHLIGHTS 3
Growth Fund 3
Value Discovery Fund 4
International Growth Fund 5
Income Fund 6
Ready Reserves Fund 7
GROWTH FUND 8
VALUE DISCOVERY FUND 10
INTERNATIONAL GROWTH FUND 12
EMERGING MARKETS GROWTH FUND 15
INCOME FUND 18
READY RESERVES FUND 20
YOUR ACCOUNT 21
How to Buy 21
How to Sell 22
Exchanges 24
Shareholder Services and Rights 24
Dividend and Distribution Policy 26
When Dividends are Paid for Each Portfolio 26
Taxes 26
DETERMINATION OF NET ASSET VALUE 27
When and How Net Asset Value is Determined for the Portfolios 27
How the Market Value of Portfolio Securities is Determined 27
OTHER IMPORTANT INFORMATION 28
MANAGEMENT OF THE FUND 28
PERFORMANCE 29
INVESTMENT GLOSSARY 31
FOR MORE INFORMATION 35
</TABLE>

<PAGE> 5

OVERVIEW

William Blair Mutual Funds, Inc. (the "Fund") is a no-load, open-end
diversified mutual fund consisting of six portfolios, each with its own
investment objective and policies. Each portfolio is managed by the investment
professionals of William Blair & Company, L.L.C. (the "Adviser"), an investment
adviser with over $9.3 billion in assets under management.

For most purposes, each portfolio operates like a separate mutual fund. Each
portfolio has its own goal, strategy and risk/reward profile.

The next several pages contain information on the expenses associated with an
investment in each portfolio, as well as financial highlights for all
portfolios. Following the discussion of Fund expenses is concise information
on each of the portfolios, as follows:

GOAL AND STRATEGY: the portfolio's investment objective and the method by
which it will pursue its goal;

The Growth Fund, the Value Discovery Fund, the International Growth
Fund and the Emerging Markets Growth Fund each invest primarily in
equity securities for long-term capital appreciation. Therefore,
they may be more appropriate investments for individuals with longer
time horizons and who are willing to accept higher short-term risk
along with higher potential long-term returns.

The Income Fund invests primarily in bonds and may be more
appropriate for individuals with a shorter time horizon and who are
seeking income.

The Ready Reserves Fund invests in money market securities, which
are short-term instruments and generally provide a lower level of
income than bonds, but also provide a low degree of price
volatility.

PORTFOLIO SECURITIES: the primary types of securities in which the portfolio
invests; (Certain investments, policies and techniques are described more
fully in the "Investment Glossary" at the end of the prospectus.)

RISK FACTORS: the major risks associated with investing in the portfolio; and

PORTFOLIO MANAGEMENT: the individuals assigned by the investment adviser to
handle the day-to-day management of the portfolio.

There can be no assurance that a portfolio will meet its investment objective.
Like all investments, each portfolio is subject to market fluctuations and
financial risks. Because you could lose money by investing in these
portfolios, be sure to read all the information carefully before investing.

<PAGE> 6

FUND EXPENSES

William Blair Mutual Funds are no-load, which means you do not pay a sales
charge.
Shareholder transaction expenses for William Blair Mutual Funds:

Maximum sales load imposed on purchases NONE
Maximum sales load imposed on reinvested dividends NONE
Deferred sales load NONE
Redemption fee NONE
Exchange fee NONE

A $25 service fee will be charged when a check is presented to redeem portfolio
shares in excess of the value of the account or for an amount less than $500.

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

SIDEBAR [Fund investors pay various expenses, either directly or indirectly.
This table shows the expenses for the past year, adjusted to reflect any
reimbursements. Future expenses may be greater or less.]
<TABLE>
<CAPTION>

EMERGING
VALUE INTERNATIONAL MARKETS READY
GROWTH DISCOVERY GROWTH GROWTH INCOME RESERVES
FUND FUND FUND FUND FUND FUND
------ --------- ------------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Management fee............... .75% 1.15% 1.10% 1.40% .61% .60%
Other expenses............... .09 .63* .33 .85** .10 .10
12b-1 fee.................... None None None None None None
Total Fund operating expenses .84% 1.78%* 1.43% 2.25%** .71% .70%
</TABLE>

- --------------------------------------------------------------------------------
*For the Value Discovery Fund, the Adviser voluntarily absorbed operating
expenses that exceeded 1.50% of the portfolio's average daily net assets from
December 23, 1996 (Commencement of Operations) to December 31, 1997. During
that period, the portfolio's other expenses and total operating expenses were
.35% and 1.50%, respectively.

**After expense reimbursement. The Emerging Markets Growth Fund commenced
operations on May 1, 1998; therefore, "other expenses" are based upon the
annualized estimates for the current fiscal year, after reimbursement.
However, during the portfolio's first year of operations, the Adviser has
agreed to voluntarily absorb total operating expenses that exceed 2.25% of the
portfolio's average daily net assets; without such absorption, the portfolio's
"other expenses" would be estimated to be 1.00% and "total fund operating
expenses" would be estimated to be 2.40%.

Example: The purpose of this example is to assist you in understanding the
various costs and expenses that an investor in a portfolio may bear directly or
indirectly.

SIDEBAR [This table shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all
dividends and that the average annual return was 5%.]

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Growth Fund................. $9 $27 $47 $104
Value Discovery Fund........ $18 $56 $97 $211
International Growth Fund... $15 $46 $79 $172
Emerging Markets Growth Fund $23 $71 -- --
Income Fund................. $7 $23 $40 $ 88
Ready Reserves Fund......... $7 $22 $39 $ 87
</TABLE>

The example is for comparison purposes only and is not a representation of a
portfolio's actual expenses and returns, either past or future. It is based
upon the Annual Fund Operating Expenses shown above. Figures are shown for the
Emerging Markets Growth Fund for the one- and three-year periods only because
it is a new portfolio.

<PAGE> 7

FINANCIAL HIGHLIGHTS

The figures below for the periods ended December 31, which is each
portfolio's year end, were audited by the Fund's independent auditors.

GROWTH FUND

<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 13.480 $ 11.900 $ 9.600 $ 9.730 $ 9.390 $ 9.490 $ 6.970
Income from investment operations:
Net investment income (loss)...... (.023) (.010) .034 .027 .035 .045 .070
Net realized and unrealized gain
(loss) on investments............. 2.694 2.144 2.750 .581 1.389 .671 2.970
---------- ---------- ---------- ---------- ---------- ---------- --------
Total from investment operations.. 2.671 2.134 2.784 .608 1.424 .716 3.040
Less distributions from:
Net investment income............. -- .010 .030 .025 .035 .047 .070
Net realized gain on investments.. .801 .544 .454 .713 1.049 .769 .450
---------- ---------- ---------- ---------- ---------- ---------- --------
Total distributions............... .801 .554 .484 .738 1.084 .816 .520
---------- ---------- ---------- ---------- ---------- ---------- --------
Net asset value, end of year...... $ 15.350 $ 13.480 $ 11.900 $ 9.600 $ 9.730 $ 9.390 $ 9.490
========== ========== ========== ========== ========== ========== ========
Total return (%).................. 20.07 17.99 29.07 6.45 15.51 7.61 44.37
Ratios to average net assets (%):
Expenses.......................... .84 .79 .65 .71 .78 .83 .90
Net investment income (loss)...... (.16) (.08) .34 .32 .38 1.34 .83
Supplemental data:
Net assets at end of year (000s).. $591,353 $501,774 $363,036 $217,560 $150,046 $111,082 $91,433
Portfolio turnover rate (%)....... 34 43 32 46 55 27 33
Average commission rate........... $ .0598 $ .0621
</TABLE>

Years Ended December 31
--------------------------
1990 1989 1988
---- ---- ----

<S> <C> <C> <C>
Net asset value, beginning of year $ 7.840 $ 7.810 $ 8.210
Income from investment operations:
Net investment income (loss)...... .131 .125 .126
Net realized and unrealized gain
(loss) on investments............. (.287) 2.178 .433
-------- -------- --------
Total from investment operations.. (.156) 2.303 .559
Less distributions from:
Net investment income............. .130 .130 .160
Net realized gain on investments.. .584 2.143 .799
-------- -------- --------
Total distributions............... .714 2.273 .959
-------- -------- --------
Net asset value, end of year...... $ 6.970 $ 7.840 $ 7.810
======== ======== ========
Total return (%).................. (2.02) 30.45 7.12
Ratios to average net assets (%):
Expenses.......................... .87 .91 .92
Net investment income (loss)...... 1.70 1.36 1.46
Supplemental data:
Net assets at end of year (000s).. $62,898 $67,421 $59,767
Portfolio turnover rate (%)....... 34 34 18
Average commission rate...........
</TABLE>

3
<PAGE> 8

VALUE DISCOVERY FUND

<TABLE>
<CAPTION>
Years ended December 31
------------------------
1997 1996(a)
---- -------
<S> <C> <C>
Net asset value, beginning of period........... $10.000 $10.000
Income from investment operations:
Net investment income.......................... .029 --
Net realized and unrealized gain on investments 3.305 --
------- -------
Total from investment operations............... 3.334 --
Less distributions from:
Net investment income.......................... .020 --
Net realized gain on investments............... .344 --
-------
Total distributions............................ .364 --
-------
Net asset value, end of period................. $12.970 $10.000
======= =======
Total return (%)............................... 33.46 --
Ratios to average net assets (%):
Expenses (b)................................... 1.50 --
Net investment income (b)...................... .29 --
Supplemental data:
Net assets at end of period (000s)............. $30,354 $ 2
Portfolio turnover rate (%).................... 69 --
Average commission rate........................ $.0616 --
- --------------------------------------------------------------------------------
</TABLE>

(a) For the period December 23, 1996 (Commencement of Operations) to
December 31, 1996.

(b) Without the waiver of expenses in 1997, the expense ratio would have been
1.78% and the net investment income ratio would have been .016%.

<PAGE> 9
INTERNATIONAL GROWTH FUND

<TABLE>
<CAPTION>
Years ended December 31
--------------------------------------------------------------------------------------------------

1997 1996 1995 1994 1993 1992(a)(b)
--------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period....................... $ 13.950 $ 13.120 $12.360 $13.180 $10.130 $ 10.000
Income from investment
operations:
Net investment income (loss).... .072 .029 .105 0.016 0.008 (0.011)
Net realized and unrealized
gain (loss) on investments,
foreign currency and other
assets and liabilities.......... 1.056 1.299 .785 (0.025) 3.401 0.141
---------- --------- ---------- --------- ---------- ----------
Total from investment operations 1.128 1.328 .890 (0.009) 3.409 0.130
Less distributions from:
Net investment income........... 078(c) .068(c) .130(c) 0.024 -- --
Net realized gain on investments 1.860 .430 -- 0.714 0.359 --
Tax return of capital........... -- -- -- 0.073(d) -- --
---------- --------- ---------- --------- ---------- ---------
Total distributions............. 1.938 .498 .130 0.811 0.359 --
---------- --------- ---------- --------- ---------- ---------
Net asset value, end of period.. $ 13.140 $ 13.950 $13.120 $12.360 $13.180 $10.130
========== ========= ========== ========== ========== ==========
Total return (%)................ 8.39 10.20 7.22 (.04) 33.65 1.30
Ratios to average net assets (%)
Expenses (e).................... 1.43 1.44 1.48 1.51 1.71 1.88
Net investment income (loss) (e) .01 .19 .87 .15 .11 (.56)
Supplemental data:
Net assets at end of period
(000s).......................... $ 128,747 $ 105,148 $89,762 $70,403 $40,298 $10,767
Portfolio turnover rate (%)..... 102 89 77 40 83 5
Average commission rate (f)..... $ .0038 $ .0051
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(a) Ratios are annualized except total return for period less than one year.

(b) For the period from October 1, 1992 (Commencement of Operations) to
December 31, 1992.

(c) Includes $.078, $.022 and $.061 in passive foreign investment company
transactions which are treated as ordinary income for Federal income tax
purposes for 1997, 1996 and 1995, respectively.

(d) Includes $431 relating to a tax return of capital.

(e) Without the waiver of expenses in 1993 and 1992, the expense ratios would
have been 2.08% and 2.55% and the net investment ratios would have been
(.25)% and (1.22)%, respectively.

(f) Foreign commissions usually are lower than U.S. commissions when
expressed as cents per share due to the lower per share prices of many
non-U.S. securities.

5
<PAGE> 10

INCOME FUND

<TABLE>
<CAPTION>
Years ended December 31
----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1990 1991 1990(a)(b)
---- ---- ---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.270 $ 10.570 $ 9.850 $ 10.580 $ 10.600 $ 10.770 $10.200 $ 10.000
Income from investment operations:
Net investment income............... .659 .619 .646 .661 .651 .832 .945 .164
Net realized and unrealized gain
(loss) on investments............... .140 (.309) .732 (.741) .159 (.089) .638 .126
--------- -------- ---------- ---------- --------- --------- ------- ----------
Total from investment operations.... .799 .310 1.378 (.080) .810 .743 1.583 .290
Less distributions from:
Net investment income............... .659 .610 .658 .646 .651 .827 .870 .090
Net realized gain on investments.... -- -- -- .004 .179 .086 .143 --
--------- -------- ---------- ---------- --------- --------- ------- ----------
Total distributions................. .659 .610 .658 .650 .830 .913 1.013 .090
--------- -------- ---------- ---------- --------- --------- ------- ----------
Net asset value, end of period...... $ 10.410 $ 10.270 $ 10.570 $ 9.850 $ 10.580 $ 10.600 $10.770 $ 10,200
========= ======== ========== ========== ========= ========= ======= ==========
Total return (%).................... 8.03 3.07 14.37 (.74) 7.82 7.17 16.47 2.91
Ratios to average net assets (%):
Expenses (c)........................ .71 .70 .68 .68 .70 .88 .92 .74
Net investment income (c)........... 6.40 5.97 6.24 6.33 5.96 7.69 8.33 8.39
Supplemental data:
Net assets at end of period (000s).. $160,055 $150,006 $147,370 $143,790 $204,381 $136,896 $83,041 $ 22,899
Portfolio turnover rate (%)......... 83 66 54 63 114 47 64 159
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>

(a) Ratios are annualized except total return for period less than one year.

(b) For the period from September 25, 1990 (Commencement of Operations) to
December 31, 1990.

(c) Without the waiver of expenses in 1991 and 1990, the expense ratios would
have been 1.06% and 1.22% and the net investment income ratios would have
been 8.19% and 7.67%, respectively.

6
<PAGE> 11

READY RESERVES FUND

<TABLE>
<CAPTION>
Years ended December 31
--------------------------------------------------------------------------------------------

1997 1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from investment operations:
Net investment income................ .05 .05 .05 .04 .03 .03 .06
Net realized and unrealized gain
(loss) on investments................ -- -- (.0026)
----------- ----------- ----------- ----------- ------------ ----------- -----------
Total from investment operations....... .05 .05 .05 .04 .03 .04 .06
Less distributions from:
Net investment income................ .05 .05 .05 .04 .03 .04 .06
----------- ----------- ----------- ----------- ------------ ----------- -----------
Total distributions.................. .05 .05 .05 .04 .03 .04 .06
----------- ----------- ----------- ----------- ------------ ----------- -----------
Capital contribution................... -- -- -- .0026 -- -- --
----------- ----------- ----------- ----------- ------------ ----------- -----------
Net asset value, end of period......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
=========== =========== =========== =========== ============ =========== ===========
Total return (%)....................... 5.04 4.81 5.45 3.67(c) 2.64 3.32 5.64
Ratios to average daily net assets (%):
Expenses............................. .70 .71 .72 .71 .71 .71 .71
Net investment income................ 4.92 4.78 5.30 3.61 2.61 3.27 5.51
Supplemental data:
Net assets at end of period (000s)... $904,569 $760,808 $703,993 $521,277 $477,268 $448,797 $402,978
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
Years ended December 31
-------------------------------------
1990 1989 1988(a)(b)
---- ---- ----------
<S> <C> <C> <C>
Net asset value, beginning of period... $1.00 $1.00 $1.00
Income from investment operations:
Net investment income................ .08 .08 .04
Net realized and unrealized gain
(loss) on investments................
--------- ----------- -----------
Total from investment operations....... .08 .08 .04
Less distributions from:
Net investment income................ .08 .08 .04
--------- ----------- -----------
Total distributions.................. .08 .08 .04
--------- ----------- -----------
Capital contribution................... -- -- --
Net asset value, end of period......... $1.00 $1.00 $1.00
========= =========== ===========
Total return (%)....................... 7.81 8.86 7.79(b)
Ratios to average daily net assets (%):
Expenses............................. .75 .80 .81
Net investment income................ 7.56 8.47 7.54
Supplemental data:
Net assets at end of period (000s)..... $415,292 $342,245 $203,704
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>

(a) Ratios are annualized.

(b) For the period from June 22, 1988 (Commencement of Operations) to
December 31, 1988.

(c) The total return includes the effect of the investment adviser's capital
contribution. Without the investment adviser's capital contribution, the
total return would have been 3.40%.

<PAGE> 12

GROWTH FUND

GOAL AND STRATEGY

SIDEBAR [The portfolio seeks long-term appreciation of capital by investing in
well-managed companies in growing industries.]

The Growth Fund seeks long-term appreciation of capital by investing in
well-managed companies in growing industries. The Adviser researches the
market for companies that have grown more rapidly than the gross national
product from one business cycle to the next. The portfolio may invest in
cyclical industries when the Adviser deems them to be at or near the bottom of
their business cycle and expects a multi-year period of sustained growth.

The Adviser intends to seek growth opportunities by investing in each of the
following classes of companies in varying proportions:

LARGE, high quality, seasoned growth companies that have demonstrated
sustained growth over a long period of time;

MEDIUM-sized companies of emerging investment quality whose records of
sales and earnings growth are not as well established; and

SMALL, rapid growth companies that have had especially vigorous growth in
revenues and earnings.

The Adviser will invest in companies that it believes are well managed
considering some or all of the following investment criteria:

A LEADER IN THE FIELD. The company should be, or clearly have the expectation
of becoming, a significant provider in the primary markets it serves.

UNIQUE OR SPECIALTY COMPANY. The company should have some distinctive
attribute that cannot easily be duplicated by present or potential competitors.
This may take the form of proprietary products or processes, a unique
distribution system, an entrenched brand name or an especially strong financial
position.

QUALITY PRODUCTS OR SERVICES. The company's products or services should be
regarded as being of superior quality, which should enable the company to
obtain a premium price and to command greater customer loyalty.

MARKETING CAPABILITY. The company should have a distinctive capability in
sales, service or distribution.

VALUE TO CUSTOMER. The prices of the company's products or services should be
based upon their value to the customer, rather than their production cost.

RETURN ON EQUITY. The company should have achieved, or have the potential to
achieve, an above-average return on equity through efficient use of assets and
adequate margins, rather than excessive financial leverage. Such companies
should be able to finance most or all of their growth internally and translate
revenue and income growth into rising per share earnings and dividends.

CONSERVATIVE FINANCIAL POLICIES AND ACCOUNTING PRACTICES. The company should
have a relatively simple, clean financial structure and adhere to conservative
and straightforward accounting practices.

PORTFOLIO SECURITIES

SIDEBAR [The portfolio invests primarily in common stocks.]

The portfolio invests primarily in common stocks. The portfolio may, however,
hold convertible debentures and preferred stocks that meet its investment
criteria. To a limited extent, the portfolio may also invest in types of
securities and use investment techniques that are more fully described in the
Investment Glossary at the end of this prospectus. These include depository
receipts, illiquid securities, investment companies, when-issued and delayed
delivery securities and repurchase agreements. The Investment Glossary also
describes the portfolio's policies with regard to borrowing, concentration,
diversification and portfolio turnover, along with the risks associated with
the portfolio's investments and policies. The portfolio intends to invest to a
very limited extent in warrants, which are described in the Statement of
Additional Information.

Generally the portfolio will remain fully invested, and the Adviser will not
attempt to time the market. However, if a significant adverse market action is
anticipated, investment-grade debt securities may be held without limit as a
temporary defensive measure. Normally, the portfolio does not purchase any
stocks with a view to quick turnover for capital gains.

8
<PAGE> 13

INVESTMENT RISKS

SIDEBAR [All investments are subject to market fluctuations and financial
risks. The value of your investment will fluctuate in response to stock market
movements.]

To the extent that the portfolio invests in small companies, it takes on
additional risks. This is because small companies may be in earlier stages of
development, may be dependent upon a small number of products or services, may
lack substantial capital reserves and/or do not have proven track records.
Smaller companies may be more adversely affected by poor economic or market
conditions. In addition, small companies may be traded in low volumes, which
can increase volatility and liquidity risks. Any convertible debentures issued
by small companies are likely to be lower-rated or non-rated securities, which
generally involve more credit risk than debentures in the higher rating
categories, and generally include some speculative characteristics, including
uncertainties or exposure to adverse business, financial or economic conditions
which could lead to inadequate capacity to meet timely interest and principal
payments.

PORTFOLIO MANAGEMENT

The Growth Fund is co-managed by Rocky Barber and Mark A. Fuller, III.

Rocky Barber is a principal of William Blair & Company, L.L.C. He joined
William Blair in 1986 as a portfolio manager and manager of the Investment
Management Department. Besides his management responsibilities, he co-manages
the Growth Fund and is a member of the department's Growth team. Previously,
he was an equity manager with Alliance Capital Management for nine years and
president of the Alliance Capital Bond Fund, a group of fixed-income mutual
funds. Prior to that, Rocky was a financial analyst with the Stanford
University Endowment. Rocky is president of William Blair Mutual Funds, Inc.,
a past president of the Board of Commissioners of the Winnetka Park District
and a past Chairman of the Board of Trustees of the Stanford Business School
Trust. He currently serves on the Board of the LaRabida Children's Hospital
Foundation and is a member of the Investment Analysts Society. Education:
B.A., M.S. and M.B.A., Stanford University; and CFA.

Mark A. Fuller, III is a principal of William Blair & Company, L.L.C. He has
been with William Blair since 1983. He began his career in Institutional
Sales, developing long-standing relationships with each of the firm's research
analysts. Today he is a portfolio manager for numerous accounts, co-manages
the firm's Growth Fund and is a member of the department's Small Cap and
Aggressive Growth teams. Prior to joining William Blair, he was a sales
representative with IBM Corporation. Education: B.A., Northwestern University;
M.B.A., Northwestern University Kellogg Graduate School of Management.

9
<PAGE> 14
VALUE DISCOVERY FUND

GOAL AND STRATEGY

SIDEBAR [The portfolio's objective is long-term capital appreciation. Using a
value discipline, the portfolio invests primarily in the equity securities of
small companies.]

The Value Discovery Fund's investment objective is to seek long-term capital
appreciation. The portfolio pursues its objective by investing with a value
discipline primarily in the equity securities of small companies. In selecting
companies for investment, the Adviser evaluates the extent to which a company
meets the investment criteria set forth below. The weight given to a
particular investment criterion will depend upon the circumstances, and some
portfolio holdings may not meet all of the following criteria, which are
described more fully in the Statement of Additional Information:

MATERIAL PRICE/VALUE DISPARITY--whether the company's current market
value reflects a material discount from the Adviser's estimate of
the company's intrinsic value.

PROBABLE EXPANSION IN PROFITABILITY--whether the company has a
reasonable expectation of improving its level of profitability over
a three-year investment horizon.

SKILLED AND COMMITTED MANAGEMENT--whether the company has a capable
and skilled management team and a clearly articulated and logical
business strategy with a reasonable probability of successful
execution.

STRONG CAPITAL STRUCTURE--whether the company has a relatively
simple, clean financial structure without excessive use of financial
leverage. In addition, the company should adhere to conservative
and straightforward accounting practices.

POSITIVE CATALYST--the likelihood that the company will undergo a
positive corporate change within a three-year investment horizon.

PORTFOLIO SECURITIES

SIDEBAR [The portfolio will invest in common stocks of small companies.]

Generally, most of the portfolio will be invested in the common stocks of small
companies. Debentures and preferred stocks may be held, however, if
convertible into common stocks that meet the investment criteria of the
portfolio. The portfolio may invest up to 5% of its net assets in foreign
securities, which includes depository receipts. To a limited extent, the
portfolio may also invest in types of securities and use investment techniques
that are more fully described in the Investment Glossary at the end of this
prospectus. These include depository receipts, foreign securities, illiquid
securities, investment companies, real estate investment trusts, repurchase
agreements and when-issued and delayed delivery securities. The Investment
Glossary also describes the portfolio's policies with regard to borrowing,
concentration, diversification and portfolio turnover, along with the risks
associated with the portfolio's investments and policies. The portfolio
intends to invest to a very limited extent in warrants and futures, which are
described in the Statement of Additional Information.

Generally the portfolio will remain fully invested, and the Adviser will not
attempt to time the market. However, if a significant adverse market action is
anticipated, investment-grade debt securities may be held without limit as a
temporary defensive measure. Normally, the portfolio does not purchase
securities with a view to quick turnover for capital gains.

INVESTMENT RISKS

SIDEBAR [All investments are subject to market fluctuations and financial
risks. The value of your investment will fluctuate in response to stock market
movements.]

Stocks of small companies carry higher risks than those of larger companies.
This is because small companies may be in an earlier stage of development, may
be dependent on a small number of products or services, may lack substantial
capital reserves and/or do not have proven track records. Smaller companies
may be more adversely affected by poor economic or market conditions. In
addition, small companies may be traded in low volumes, which can increase
volatility and liquidity risks. From time to time, the portfolio may invest in
the equity securities of very small companies, often referred to as "micro-cap"
companies. The considerations noted above are generally intensified for these
investments. Any convertible debentures issued by small companies are likely
to be lower-rated or non-rated securities, which generally involve more credit
risk than debentures in the higher rating categories and generally include some
speculative characteristics.

<PAGE> 15

PORTFOLIO MANAGEMENT

The portfolio is co-managed by Glen Kleczka, David Mitchell and Capucine Price.

Glen Kleczka joined William Blair & Company, L.L.C. in 1996 and leads the Value
Discovery Fund portfolio management team. Since 1989, he was a partner in the
Private Markets and U.S. Equity groups of Brinson Partners, Inc., managing the
firm's Post-Venture Fund. This $900 million fund invested in small
capitalization companies, many of which were previously backed by venture
capitalists. Glen was a member of the firm's Private Markets Committee, which
approved all investments in venture capital deals and partnership investments.
Previously, he spent two years at CNA Financial Corp. as a co-manager of their
Variable Annuity Trust's $60 million equity allocation. Glen is a member of
the Investment Analysts Society of Chicago. Education: B.S., Finance,
Marquette University; M.S., Finance & Investment Banking, University of
Wisconsin-Madison; and CFA.

David Mitchell joined William Blair & Company, L.L.C. in 1996 as portfolio
manager of the Value Discovery Fund. Previously, he was a partner in the U.S.
Equity group at Brinson Partners, Inc. At Brinson, he was a member of a
four-person team that managed a $900 million institutional micro-cap value
product. Before that, he was co-manager of Thomas Paine Investors, L.P., a
limited partnership invested in entrepreneurial companies. Education: B.A.,
Economics, Knox College; M.B.A., Northwestern University Kellogg Graduate
School of Management; and CFA.

Capucine "Cappy" Price joined William Blair & Company, L.L.C. in 1996 as
portfolio manager of the Value Discovery Fund. From 1993 to 1996, she was a
partner in the Private Markets and U.S. Equity groups of Brinson Partners, Inc.
Her primary responsibility was investment analysis for the firm's Post-Venture
Fund, a micro-cap, value-oriented stock fund. Prior to joining Brinson
Partners, Inc., Cappy was an equity analyst and First Scholar with the First
National Bank of Chicago. Education: B.A., Economics, University of Michigan;
M.A., Social Science, University of Chicago; M.B.A., Northwestern University
Kellogg Graduate School of Management.

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<PAGE> 16
INTERNATIONAL GROWTH FUND

GOAL AND STRATEGY

SIDEBAR [The portfolio seeks long-term capital appreciation through investment
in well-managed, quality growth companies.]

The investment objective of the International Growth Fund is long-term capital
appreciation through investment in well-managed, quality growth companies.
Such companies would include companies that historically have had superior
growth, profitability and quality relative to local markets and relative to
companies within the same industry worldwide and that are expected to continue
such performance. Such companies also generally will exhibit superior business
fundamentals, including leadership in their field, quality products or
services, distinctive marketing and distribution, pricing flexibility and
revenue from products or services consumed on a steady, recurring basis. These
business characteristics should be accompanied by management that is
shareholder return-oriented and uses conservative accounting policies.
Companies with above-average returns on equity, strong balance sheets and
consistent, above-average earnings growth at reasonable valuation levels will
be the primary focus. Stock selection will take into account both local and
global comparisons. Current income is not an investment objective, although it
is anticipated that capital appreciation will normally be accompanied by modest
investment income, which may vary depending on the allocation of the
investments.

SIDEBAR [Securities markets in different countries may offer enhanced
diversification of investors' portfolios because of differences in economic,
financial, political and social factors.]

SIDEBAR [The portfolio allows investors to diversify their portfolios by
investing in various companies and economies outside the U.S., thereby taking
advantage of these differences.]

In pursuing its investment objective, the portfolio will vary the geographic
diversification and types of securities in which it invests based upon
continuous evaluation by the Adviser of economic, market and political trends
throughout the world. The investment of the portfolio's assets in various
international securities markets tends to decrease the degree to which events
in any one country can affect the entire portfolio. In making decisions
regarding the country allocation, the Adviser will consider such factors as the
conditions and growth potential of various economies and securities markets,
currency exchange rates, technological developments in the various countries
and other pertinent financial, social, national and political factors. It is
anticipated that the majority of the portfolio's investments normally will be
divided among Continental Europe, the United Kingdom, Japan and the markets of
the Pacific Basin (including Australia and New Zealand). Selective investments
may also be made in Canada and Latin America and in emerging markets worldwide.
While the portfolio normally will invest around 18% of its assets in emerging
markets, from time to time it may invest as little as 5% and as much as 30% of
its assets in such markets. The portfolio will invest in companies at
different stages of development ranging from large, well-established companies
to smaller companies at an earlier stage of development. Fundamental company
analysis and stock selection will be the most important investment criteria.

The portfolio normally will allocate its investments among not fewer than six
different countries and will not concentrate investments in any particular
industry. However, the portfolio may have more than 25% of its assets invested
in any major industrial or developed country. No more than 50% of the
portfolio's equity securities may be invested in securities of issuers of any
one country at any given time.

PORTFOLIO SECURITIES

SIDEBAR [The portfolio primarily invests in common stocks issued by foreign
companies.]

The portfolio ordinarily will invest at least 80% of its total assets in a
diversified portfolio of common stocks with above-average growth, profitability
and quality characteristics, issued by companies domiciled outside the U.S.,
and in securities convertible into, exchangeable for or having the right to buy
such common stocks. For liquidity purposes, up to 20% of the portfolio may be
held in cash (U.S. dollars and foreign currencies) or in short-term securities,
such as repurchase agreements, and domestic and foreign money market
instruments, such as government obligations, certificates of deposit, bankers'
acceptances, time deposits, commercial paper and short-term corporate debt
securities. The portfolio does not have any specific rating requirements for
its portfolio securities; however, the Adviser presently does not intend to
invest more than 5% of the portfolio's net assets in securities rated lower
than investment grade.

The portfolio may enter into forward foreign currency transactions in an effort
to protect against changes in foreign exchange rates. To a limited extent, the
portfolio may also invest in types of securities and use investment techniques
that are more fully described in the Investment Glossary at the end of this
prospectus. These include depository receipts, foreign currency futures,
forward foreign currency transactions, illiquid securities, investment
companies, repurchase agreements and when-issued and delayed delivery
securities. The Investment Glossary also describes the portfolio's policies
with regard to borrowing, concentration, diversification, and portfolio
turnover, along with the risks associated with such investments and policies.
The portfolio may invest to a very limited extent in warrants, which are
described in the Statement of Additional Information.

12
<PAGE> 17

INVESTMENT RISKS

SIDEBAR [Investments in foreign equity securities present opportunities for
both increased benefits and increased risks as compared to investments in the
U.S. securities market.]

SIDEBAR [The value of your investment will fluctuate in response to the
movement of stock markets in various countries.]

Although the Fund will try to invest in companies and governments of countries
having stable or improving political environments, there is the possibility of
expropriation or confiscatory taxation, seizure or nationalization of foreign
bank deposits or other assets, establishment of exchange controls, the adoption
of foreign government restrictions and other adverse political, social or
diplomatic developments that could affect investments in these nations.

The risks of investing in securities of foreign issuers may include less
publicly available information, less governmental regulation and supervision of
foreign stock exchanges, brokers and issuers, a lack of uniform accounting,
auditing and financial reporting standards, practices and requirements, the
possibility of expropriation, nationalization, confiscatory taxation, adverse
changes in investment or exchange control regulations, political instability,
restrictions on the flow of international capital and difficulty in obtaining
and enforcing judgments against foreign entities. Securities of some foreign
issuers are less liquid and their prices more volatile than the securities of
U.S. companies. In addition, the time period for settlement of transactions in
foreign securities generally is longer than for domestic securities. The
portfolio may invest a portion of its assets in emerging markets, which may
include developing countries or countries with new or developing capital
markets.

The risks described above, including the risks of nationalization and
expropriation of assets, are typically increased to the extent that the Fund
invests in issuers located in less developed and developing nations, whose
securities markets are sometimes referred to as "emerging securities markets."
Investments in securities located in such countries are speculative and subject
to special risks. Political and economic structures in many of these countries
may be in their infancy and developing rapidly. Such countries may also lack
the social, political and economic characteristics of more developed countries.
Certain of these countries have in the past failed to recognize private
property rights and have at times nationalized and expropriated the assets of
private companies.

The currencies of certain emerging market countries have experienced a steady
devaluation relative to the U.S. dollar, and continued devaluations may
adversely affect the value of a fund's assets denominated in such currencies.
Many emerging market countries have experienced substantial rates of inflation
for many years, and continued inflation may adversely affect the economies and
securities markets of such countries.

In addition, unanticipated political or social developments may affect the
values of the Fund's investments in these countries and the availability to the
Fund of additional investments in these countries. The small size, limited
trading volume and relative inexperience of the securities markets in these
countries may make the Fund's investments in such countries illiquid and more
volatile than investments in more developed countries, and the Fund may be
required to establish special custodial or other arrangements before making
investments in these countries. There may be little financial or accounting
information available with respect to issuers located in these countries, and
it may be difficult as a result to assess the value or prospects of an
investment in such issuers.

The securities held by the portfolio will usually be denominated in currencies
other than the U.S. dollar. Therefore, changes in foreign exchange rates will
affect the value of the securities held in the portfolio either beneficially or
adversely. Fluctuations in foreign currency exchange rates will also affect
the dollar value of dividends and interest earned, gains and losses realized on
the sale of securities and net investment income and gains, if any, available
for distribution to shareholders.

The portfolio is expected to incur operating expenses that are higher than
those of mutual funds investing exclusively in U.S. equity securities, since
expenses such as custodial fees related to foreign investments are usually
higher than those associated with investments in U.S. securities. Similarly,
brokerage commissions on purchases and sales of foreign securities are
generally higher than on domestic securities. In addition, dividends and
interest from foreign securities may be subject to foreign withholding taxes.
(For more information, see "Your Account - Dividend and Distribution
Policy--Taxes".)

Although the portfolio will normally invest at least 80% of its assets in the
equity securities of companies domiciled outside of the U.S., the portfolio may
significantly alter its make-up as a temporary defensive strategy. A defensive
strategy would only be employed if, in the judgment of the Adviser, investments
in international equity securities became decidedly unattractive because of
current or anticipated adverse economic, financial, political and social
factors. The types of securities that might be acquired and held for defensive
purposes could include fixed-income securities and securities issued by the
U.S. or foreign governments as well as domestic or foreign money market
instruments and non-convertible preferred stock, each of which would be of
investment-grade. At such time as the Adviser determines that the portfolio's
defensive strategy is no longer warranted, the portfolio will adjust its
portfolio back to its normal complement of international equity securities as
soon as practicable.

13
<PAGE> 18

PORTFOLIO MANAGEMENT

The portfolio is co-managed by Norbert W. Truderung and W. George Greig.

Norbert W. Truderung, a principal of William Blair & Company, L.L.C., joined
the firm in 1986. He is a member of the Investment Management Department's
research committee and a senior vice president of William Blair Mutual Funds,
Inc. Norbert is also a member of the department's Small and Aggressive Growth
teams. Previously, Norbert spent eight years at The Northern Trust Company as
a senior investment research analyst and as portfolio manager for the bank's
international investment funds. He was responsible for managing their
international research effort and served as a member of the bank's investment
policy committee. From 1974-78, Norbert was an investment analyst at National
City Corporation (Cleveland). He is a member of the Investment Analysts
Society of Chicago. Education: B.A., Baldwin-Wallace College; and CFA.

W. George Greig joined William Blair & Company, L.L.C.'s Investment Management
Department in 1996 as an international portfolio manager. He previously headed
international equities for PNC Bank in Philadelphia. George was a founding
partner of Pilgrim Baxter & Associates, where he was an analyst, research
director and portfolio manager for over ten years. He also served as chief
investment officer of Framlington Group plc during its association with Pilgrim
Baxter and founded and managed a joint venture between the two firms.
Education: B.S., Massachusetts Institute of Technology; M.B.A., Wharton School
of the University of Pennsylvania.

14
<PAGE> 19

EMERGING MARKETS GROWTH FUND

GOAL AND STRATEGY

SIDEBAR [The portfolio seeks long-term capital appreciation. The portfolio
pursues its objective by investing in well-managed, quality, growth companies
in emerging economies worldwide.]

The investment objective of the Emerging Markets Growth Fund is long-term
capital appreciation. The portfolio pursues its objective by investing in
well-managed, high quality growth companies. Such companies will generally
exhibit superior business fundamentals, including one or more of the following
characteristics:

GLOBAL LEADERSHIP in product quality or cost competitiveness;

DOMINANT OR IMPROVING MARKET POSITION, generally associated with a
competitive advantage in distribution, pricing or business franchise,
within a growing local or regional economy; and

SUSTAINABLE ABOVE-AVERAGE AND/OR INCREASING RETURNS on invested capital
generated from the efficient utilization of assets, increasing profit
margins or sound financial management, including improvements that may
arise from the process of privatization or restructuring of corporate
assets.

The research approach used in stock selection will focus intensively on the
soundness of corporate management, taking into account management's orientation
toward outside shareholders, incentives and ability to execute successful
strategies, commitment to transparent and conservative financial reporting
policies, and general integrity. Current income is not an investment
objective, although it is anticipated that capital appreciation will normally
be accompanied by modest investment income, which may vary depending upon the
allocation of the investments.

SIDEBAR [Securities markets in emerging markets may offer enhanced
diversification of investors' portfolios because of differences in economic,
financial, political and social factors.]

The portfolio pursues its objective by investing primarily in equity securities
issued by emerging market companies. Emerging market companies are (i)
companies organized under the laws of an emerging market country or having
securities which are traded principally on an exchange or over-the-counter in
an emerging market country; or (ii) companies which, regardless of where
organized or traded, have a significant amount of assets (at least 50%) located
in and/or derive a significant amount of their revenues (at least 50%) from
goods purchased or sold, investments made or services performed in or with
emerging market countries. Currently, emerging markets include every country in
the world other than the United States, Canada, Japan, Australia, New Zealand,
Hong Kong, Singapore and most Western European Countries.

The portfolio normally will allocate its investments among not less than six
different countries and will not concentrate investments in any particular
industry. No more than 50% of the portfolio's equity securities will be
invested in securities of issuers in of any one country at any given time.

PORTFOLIO SECURITIES

SIDEBAR [The portfolio primarily invests in common stocks issued by emerging
market companies.]

The portfolio ordinarily will invest at least 65% of its total assets in equity
securities issued by emerging market companies. Equity securities include
securities convertible into, exchangeable for or having the right to buy common
stocks. For liquidity purposes, up to 35% of the portfolio may be held in
cash (U.S. dollars and foreign currencies) or in short-term securities, such as
repurchase agreements, and domestic and foreign money market instruments, such
as government obligations, certificates of deposit, bankers' acceptances, time
deposits, commercial paper and short-term corporate debt securities. The
portfolio does not have any specific rating requirements for its portfolio
securities, however, the Adviser presently does not intend to invest more than
5% of the portfolio's net assets in securities rated below investment grade.

15
<PAGE> 20

The portfolio may enter into forward foreign currency transactions in an effort
to protect against changes in foreign exchange rates. To a limited extent, the
portfolio may also invest in types of securities and use investment techniques
that are more fully described in the Investment Glossary at the end of this
prospectus. These include depository receipts, foreign currency futures,
illiquid securities, investment companies, repurchase agreements and
when-issued and delayed delivery securities. The Investment Glossary also
describes the portfolio's policies with regard to borrowing, concentration,
diversification and portfolio turnover, along with the risks associated with
these portfolio investments and policies. The portfolio intends to invest to a
very limited extent in warrants, which are described in the Statement of
Additional Information.

INVESTMENT RISKS

SIDEBAR [Investments in foreign markets present opportunities for both
increased benefits and increased risks as compared to investments in the U.S.
securities market.]

SIDEBAR [The value of your investment will fluctuate in response to the
movement of stock markets in various countries.]

Although the portfolio will try to invest in companies operating in countries
having stable or improving political environments, there is the possibility of
expropriation or confiscatory taxation, seizure or nationalization of foreign
bank deposits or other assets, establishment of exchange controls, the adoption
of foreign government restrictions and other adverse political, social or
diplomatic developments that could affect investments in these nations. The
risks of investing in foreign companies also may include less publicly
available information, less governmental regulation and supervision of foreign
stock exchanges, brokers and issuers, a lack of uniform accounting, auditing
and financial reporting standards, practices and requirements, adverse changes
in investment regulations, restrictions on the flow of international capital
and difficulty in obtaining and enforcing judgments against foreign entities.
Securities of some foreign issuers are less liquid and their prices more
volatile than the securities of U.S. companies. In addition, the time period
for settlement of transactions in foreign securities generally is longer than
for domestic securities. These risks are typically intensified in emerging
markets, which are the less developed and developing nations. Certain of these
countries have in the past failed to recognize private property rights and have
at times nationalized and expropriated the assets of private companies.

SIDEBAR [Investments in securities located in emerging market countries are
subject to special risks.]

Investments in emerging markets companies are speculative and subject to
special risks. Political and economic structures in many of these countries
may be in their infancy and developing rapidly. Such countries may also lack
the social, political and economic characteristics of more developed countries.
The currencies of certain emerging market countries have experienced a steady
devaluation relative to the U.S. dollar, and continued devaluations may
adversely affect the value of a fund's assets denominated in such currencies.
Many emerging market countries have experienced substantial rates of inflation
for many years, and continued inflation may adversely affect the economies and
securities markets of such countries.

In addition, unanticipated political or social developments may affect the
values of the portfolio's investments in emerging market countries and the
availability to the portfolio of additional investments in these countries.
The small size, limited trading volume and relative inexperience of the
securities markets in these countries may make the portfolio's investments in
such countries illiquid and more volatile than investments in more developed
countries, and the portfolio may be required to establish special custodial or
other arrangements before making investments in these countries. There may be
little financial or accounting information available with respect to issuers
located in these countries, and it may be difficult as a result to assess the
value or prospects of an investment in such issuers.

In many foreign countries there is less government supervision and regulation
of business and industry practices, stock exchanges, brokers and listed
companies than in the U.S. There is an increased risk, therefore, of uninsured
loss due to lost, stolen, or counterfeit stock certificates. Prior
governmental approval of non-domestic investments may be required under certain
circumstances in some developing countries, and the extent of foreign
investment in domestic companies may be subject to limitation in other
developing countries. Foreign ownership limitations also may be imposed by the
charters of individual companies in developing countries to prevent, among
other concerns, violation of foreign investment limitations. Repatriation of
investment income, capital and proceeds of sales by foreign investors may
require governmental registration and/or approval in some developing countries.
The portfolio could be adversely affected by delays in or a refusal to grant
any required governmental registration or approval for such repatriation.

Further, the economies of certain developing countries may be dependent upon
international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have and may
continue to be adversely affected by economic conditions in the countries with
which they trade.

16
<PAGE> 21

currency exchange rates will also affect the dollar value of dividends and
interest earned, gains and losses realized on the sale of securities and net
investment income and gains, if any, available for distribution to
shareholders.

The portfolio may invest in Russian securities. Russian securities involve
additional significant risks, including political and social uncertainty (for
example, regional conflicts and risk of war), currency exchange rate
volatility, pervasiveness of corruption and crime in the Russian economic,
social and legal systems, delays in settling portfolio transactions and risk of
loss arising out of Russia's system of share registration and custody.
Russia's system of share registration and custody creates certain risks of loss
(including the risk of total loss) that are not normally associated with
investments in other securities markets.

The portfolio may invest in small companies. Stocks of small companies carry
higher risks than those of larger companies. This is because small companies
may be in an earlier stage of development, may be dependent on a small number
of products or services, may lack substantial capital reserves and/or do not
have proven track records. Smaller companies may be more adversely affected by
poor economic or market conditions. In addition, small companies may be traded
in low volumes, which can increase volatility and liquidity risks.
Historically, smaller capitalization stocks have been more volatile in price
than larger capitalization stocks. Among the reasons for the greater price
volatility of these securities are the less certain growth prospects of smaller
firms, the lower degree of liquidity in the markets for these stocks, and the
greater sensitivity of small companies to changing economic conditions. From
time to time, the portfolio may invest in the equity securities of very small
companies, often referred to as "micro-cap" companies. The risk considerations
noted above are generally intensified for these investments.

Although the portfolio will normally invest at least 65% of its assets in the
equity securities of emerging market companies, the portfolio may significantly
alter its make-up as a temporary defensive strategy. A defensive strategy
would only be employed if, in the judgment of the Adviser, investments in
emerging market equity securities became decidedly unattractive because of
current or anticipated adverse economic, financial, political and social
factors. The types of securities that might be acquired and held for defensive
purposes could include fixed-income securities and securities issued by the
U.S. or foreign governments as well as domestic or foreign money market
instruments and non-convertible preferred stock, each of which would be of
investment-grade. At such time as the Adviser determines that the portfolio's
defensive strategy is no longer warranted, the portfolio will adjust its
portfolio back to its normal complement of emerging market equity securities as
soon as practicable.

PORTFOLIO MANAGEMENT

The portfolio is co-managed by W. George Greig and Jeffrey A. Urbina.

Jeffrey A. Urbina joined William Blair & Company, L.L.C. in 1996. In addition
to the Emerging Market Growth Fund, he is responsible for emerging market
research for the William Blair International Growth Fund. Previously, Mr.
Urbina was Senior Vice President/Director of Emerging Market Research and a
Portfolio Manager for the Van Kampen American Capital Navigator Fund, an
emerging market equity fund listed in Luxembourg. During his five years at Van
Kampen American Capital, he also served as Director of Fixed Income Research
and was a member of the Investment Policy Committee. Before joining Van Kampen
American Capital, Mr. Urbina spent ten years at Citicorp in various capacities,
including as a Vice President in the commercial real estate group in Chicago
and as a commercial lending officer in the bank's Denver office. Mr. Urbina
began his banking career at Harris Bank in Chicago, where he was an
International Banking Officer. Education: B.A., Northwestern University;
M.B.A., Northwestern University Kellogg Graduate School of Management.

17
<PAGE> 22

INCOME FUND

GOAL AND STRATEGY

SIDEBAR [The Income Fund's objective is to provide investors with as high a
level of current income as is consistent with the preservation of capital by
investing primarily in a diversified portfolio of high-grade intermediate-term
debt securities.]

The Income Fund pursues its investment objective of providing investors with as
high a level of current income as is consistent with preservation of capital by
investing primarily in a diversified portfolio of high-grade intermediate-term
debt securities.

SIDEBAR [The duration of an instrument is different from the maturity of an
instrument in that duration measures the average period remaining until the
discounted value of the amounts due (principal and interest) under the
instrument are to be paid, rather than by the instrument's stated final
maturity. For example, a portfolio duration of five years means that if
interest rates increased by one percent, the value of the portfolio would
decrease by approximately five percent. Modified duration adjusts duration to
take into account the yield to maturity and the number of coupons received each
year. For purposes of calculating duration, instruments allowing prepayment
will be assigned a maturity schedule by the Adviser based upon general
experience.]

The anticipated dollar-weighted average maturity of the portfolio is three to
seven years. The anticipated weighted average modified duration for the
portfolio is two to five years, with a maximum duration on any instrument of
eight years. The Adviser will not continue to hold a security whose duration
has moved above eight years.

PORTFOLIO SECURITIES

As a matter of fundamental policy, under normal conditions at least 90% of the
portfolio's assets will be invested in the following:

U.S. DOLLAR-DENOMINATED DEBT SECURITIES (domestic or foreign) with long-term
ratings of "A-" or better, or an equivalent rating, by at least one of the
following four nationally recognized statistical rating organizations ("Rating
Organizations"): Duff & Phelps, Inc., Fitch Investors Service, Inc., Moody's
Investors Service, Inc. and Standard & Poor's Corporation;

OBLIGATIONS OF OR GUARANTEED BY THE UNITED STATES GOVERNMENT, its agencies or
instrumentalities. These securities include direct obligations of the U.S.
Treasury, which differ only in their interest rates, maturities and time of
issuance and obligations issued or guaranteed by U.S. Government agencies or
instrumentalities, which differ in the degree of support provided by the U.S.
Government. Although these securities are subject to the market risks
resulting from fluctuation in interest rates, they will be paid in full if held
to maturity;

COLLATERALIZED OBLIGATIONS, which are debt securities issued by a corporation,
trust or custodian, or by a U.S. Government agency or instrumentality, that are
collateralized by a portfolio or pool of assets, such as mortgages,
mortgage-backed securities, debit balances on credit card accounts or U.S.
Government securities. The issuer's obligation to make interest and/or
principal payments is secured by the underlying pool or portfolio of
securities. The Income Fund may invest in collateralized obligations that are
not guaranteed by a U.S. Government agency or instrumentality only if the
collateralized obligations are rated A- or better, or an equivalent rating, by
one of the Rating Organizations; and

COMMERCIAL PAPER obligations rated within the highest grade by one of the four
Rating Organizations.

Up to 10% of the portfolio's total assets may be invested in unrated debt
securities, provided that the Adviser deems such securities to be of at least
"A-" quality and provided that the comparable debt of the issuer has a rating
of at least "A-" or its equivalent by one of the four Rating Organizations.

Generally the portfolio will remain fully invested, and the Adviser will not
attempt to time the market. However, the portfolio for temporary defensive
purposes may invest up to 100% of its assets in other types of securities,
including high-quality commercial paper, obligations of banks and savings
institutions, U.S. Government securities, government agency securities and
repurchase agreements, or it may retain funds in cash. The portfolio does not
invest in equity securities.

To a limited extent, the portfolio may invest in types of securities and use
investment techniques, such as illiquid securities, repurchase agreements and
when-issued and delayed delivery securities, which are more fully described in
the Investment Glossary at the end of this Prospectus. The Investment Glossary
also describes the portfolio's policies with regard to borrowing,
concentration, diversification and portfolio turnover, along with the risks
associated with such investments and policies. In addition, the portfolio's
policy regarding lending portfolio securities is described in more detail in
the Statement of Additional Information.

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<PAGE> 23

INVESTMENT RISKS

The portfolio's investments are subject to financial risks. However, in the
opinion of the Adviser, the risk of loss of principal should be reduced due to
the relatively high quality of the investments in which the portfolio will
primarily invest. Obligations that are unrated are not necessarily of lower
quality than those that are rated, but may be less marketable and,
consequently, provide higher yields. The portfolio's investments are subject
to price fluctuations resulting from various factors, including rising or
declining interest rates (market risks). The value of the portfolio's
investments (other than an interest-only class of a collateralized obligation)
tends to decrease when interest rates rise and tends to increase when interest
rates fall. The value of the portfolio's securities also is subject to the
ability of the issuers of such securities to make payment at maturity
(financial risks). For example, not all securities issued or guaranteed by
agencies or instrumentalities of the U.S. Government are backed by the full
faith and credit of the United States. Such securities involve different
degrees of government backing. Some obligations issued or guaranteed by U.S.
Government agencies or instrumentalities in which the portfolio may invest are
backed by the full faith and credit of the United States, such as modified
pass-through certificates issued by the Government National Mortgage
Association, while others are backed exclusively by the agency or
instrumentality with limited rights of the issuer to borrow from the U.S.
Treasury (such as obligations of the Federal National Mortgage Association and
the Federal Home Loan Mortgage Corporation). Others are backed only by the
credit of the issuer itself (such as obligations of the Student Loan Marketing
Association). In addition, investments with longer maturities, which typically
provide better yields, may subject the portfolio to increased price changes
resulting from market yield fluctuations.

For a description of ratings, see Appendix B in the Statement of Additional
Information.

PORTFOLIO MANAGEMENT

The portfolio is managed by Bentley Myer, a principal of William Blair &
Company, L.L.C. Bentley joined the firm in 1991 as a fixed-income portfolio
manager. From 1983 to 1991 he was associated with LaSalle National Trust,
first as head of fixed-income investments and later as chief investment
officer. Prior to that, Bentley was head of the municipal investment section
of the trust department of Harris Trust and Savings Bank. He is currently a
Trustee of Delnor Community Hospital as well as a member of the Investment
Analysts Society of Chicago. Education: B.A., Middlebury College; M.B.A.,
Wharton School of the University of Pennsylvania.

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<PAGE> 24

READY RESERVES FUND

GOAL AND STRATEGY

SIDEBAR [The Ready Reserves Fund's investment objective is to obtain the
maximum current income consistent with preservation of capital by investing
exclusively in high-quality money market instruments.]

The Ready Reserves Fund pursues its investment objective of obtaining the
maximum current income consistent with preservation of capital by investing
exclusively in high-quality money market instruments. These instruments are
considered to be among the safest investments available because of their short
maturities, liquidity and high-quality ratings. The portfolio seeks to
maintain a net asset value of $1.00 per share. Nevertheless, there is no
guarantee that the objective of the portfolio will be achieved or that the net
asset value of $1.00 per share of the portfolio will be maintained.

PORTFOLIO SECURITIES

SIDEBAR [The portfolio will invest exclusively in short-term, high-quality U.S.
dollar-denominated domestic and foreign money market instruments.]

The portfolio will invest exclusively in U.S. dollar-denominated money market
instruments, including, but not limited to, those issued by:

- -- the U.S. Government, its agencies and instrumentalities;
- -- U.S. and foreign banks;
- -- Corporations
- -- Municipalities;
- -- Foreign governments; and
- -- Multinational organizations, such as the World Bank.

No more than 5% of the portfolio's assets may be invested in securities rated
in the second-highest short-term category (or unrated equivalents). The rest
of the portfolio's investments must be in the highest short-term rating
category. No more than 25% of the portfolio's assets may be invested in
obligations that are issued either by foreign banks or by foreign branches of
U.S. banks, unless these obligations are backed by the U.S. parent bank. The
portfolio maintains an average maturity of 90 days or less and does not invest
in securities with maturities of more than 13 months.

To a limited extent, the portfolio may also invest in types of securities and
use investment techniques, such as repurchase agreements, Section 4(2)
commercial paper, when-issued and delayed delivery securities and variable rate
securities, which are more fully described in the Investment Glossary at the
end of this Prospectus. The Investment Glossary also describes the portfolio's
policies with regard to borrowing, concentration, diversification and ratings,
along with the risks associated with such investments and policies.

INVESTMENT RISKS

The yield paid by the portfolio will vary with changes in interest rates.
While the portfolio seeks to maintain its $1.00 share price, there is no
guarantee that it will be able to do so.

PORTFOLIO MANAGEMENT

The portfolio is managed by Bentley Myer, a principal with William Blair &
Company, L.L.C. Bentley joined the firm in 1991 as a fixed-income portfolio
manager. From 1983 to 1991 he was associated with LaSalle National Trust,
first as head of fixed-income investments and later as chief investment
officer. Prior to that, Bentley was head of the municipal investment section
of the trust department of Harris Trust and Savings Bank. He is currently a
Trustee of Delnor Community Hospital as well as a member of the Investment
Analysts Society of Chicago. Education: B.A., Middlebury College; M.B.A.,
Wharton School of the University of Pennsylvania.

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<PAGE> 25

YOUR ACCOUNT

HOW TO BUY

<TABLE>
<S> <C>
MINIMUM INVESTMENTS

OPENING ACCOUNT
Regular Accounts...................... $5,000
IRAs.................................. $2,000

ADDING TO AN ACCOUNT
Ready Reserves Fund................... $ 1
All Other Portfolios.................. $1,000
</TABLE>

BY MAIL

OPENING AN ACCOUNT. To open a new account by mail, make out a check for the
amount of your investment, payable to "William Blair Mutual Funds, Inc." (the
"Fund"). Complete the account application included with this Prospectus and
mail the completed application and the check to the Fund's Transfer Agent,
State Street Bank and Trust Company ("State Street"), P.O. Box 9104, Boston,
Massachusetts 02266-9104.

For the Ready Reserves Fund, send your check and completed application to the
Distributor, William Blair Mutual Funds, Inc., 222 West Adams Street, Chicago,
Illinois 60606.

ADDING TO AN ACCOUNT. To purchase additional shares of the Fund, make out a
check for the amount of your investment, payable to "William Blair Mutual
Funds, Inc." Mail the check, together with a letter that specifies the
portfolio name, the account number and the name(s) in which the account is
registered, to State Street Bank and Trust Company, P.O. Box 9104, Boston,
Massachusetts 02266-9104.

For the Ready Reserves Fund, send your check and letter to the Distributor,
William Blair Mutual Funds, Inc. 222 West Adams Street, Chicago, Illinois
60606.

BY WIRE

OPENING AN ACCOUNT. First, call State Street at 1-800-635-2886 (in
Massachusetts, 1-800-635-2840) for an account number. Then instruct your bank
to wire federal funds to:

State Street Bank and Trust Co.
ABA # 011000028
DDA # 99029340
Attn: Custody & Shareholder Services
225 Franklin Street
Boston, Massachusetts 02110

Include the portfolio name in which you are investing, your assigned account
number and the name(s) in which the account is registered. Finally, complete
the account application, indicate the account number assigned to you by State
Street and mail it to William Blair Mutual Funds, Inc., 222 West Adams Street,
Chicago, Illinois 60606.

ADDING TO AN ACCOUNT. To add to your account by wire, instruct your bank to
wire federal funds to:

State Street Bank and Trust Co.
ABA # 011000028
DDA # 99029340
Attn: Custody & Shareholder Services
225 Franklin Street
Boston, Massachusetts 02110

In your request, specify the portfolio name in which you are investing, your
account number and the name(s) in which the account is registered.

To add to an existing account by wire transfer of funds, you must have selected
this option on your account application.

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<PAGE> 26

BY TELEPHONE

Opening an Account. See "By Wire."

ADDING TO AN ACCOUNT. Call your State Street account executive at
1-800-635-2886 (in Massachusetts, 1-800-635-2840). For the Ready Reserves Fund
only, call your William Blair account executive at (312) 364-8000.

Tell your account executive the portfolio name, your account number and the
name(s) in which the account is registered. You may then pay for your new
shares by mail or by wire.

To add to an existing account by telephone, you must have selected this option
on your account application.

MINIMUM INVESTMENTS. To open an account, the minimum initial investment for
regular accounts is $5,000, and the minimum initial investment for Individual
Retirement Accounts ("IRAs") is $2,000. To add to an account, the minimum
subsequent investment is generally $1,000 for all accounts, except accounts
holding shares of the Ready Reserves Fund, for which the subsequent minimum
investment is $1. The portfolios may accept smaller amounts under a group
payroll deduction or similar plan. These minimum amounts may be changed at any
time and may be waived for directors, principals, officers or employees of the
Fund or William Blair & Company, L.L.C. (the "Adviser").

SIDEBAR [All six of the Fund's portfolios are no-load funds. A load is a sales
charge that you pay when you purchase or sell your mutual fund shares.]

PURCHASE PRICE. All six portfolios of the Fund are "no-load," which means that
you do not pay a sales charge when you buy or sell shares. All purchases are
made at a price based on the net asset value per share that is next computed
after receipt of your order in proper form by the Distributor, the Transfer
Agent or a designated agent thereof. For the Ready Reserves Fund, the net
asset value per share will normally be $1.00. (For more information, see
"Determination of Net Asset Value.") If you fail to pay for your order, you
will be liable for any loss to the Fund and, if you are a current shareholder,
the Fund may redeem some or all of your shares to cover such loss.

NOTE: All purchases made by check should be in U.S. dollars and made payable
to William Blair Mutual Funds, Inc., or in the case of a retirement account,
the custodian or trustee of such account. Third party checks will not be
accepted. When purchases are made by check or periodic account investment, the
Fund may delay sending redemption proceeds until it has determined that
collected funds have been received for the purchase of such shares, which may
be up to 15 calendar days.

HOW TO SELL

You can arrange to take money out of your Fund account at any time by selling
("redeeming") some or all of your shares. You may give instructions to redeem
your shares by mail, by wire or by telephone, as described below.

BY MAIL

For all portfolios except the Ready Reserves Funds, to redeem shares by mail,
send a written redemption request signed by all account owners to State Street
Bank and Trust Company, P.O. Box 9104, Boston, Massachusetts 02266-9104.

For the Ready Reserves Fund, send your redemption request signed by all account
owners to the Distributor, William Blair & Company, L.L.C., 222 West Adams
Street, Chicago, Illinois 60606, to the attention of your account executive.
Amounts redeemed will be placed in your brokerage account.

FOR ALL SIX PORTFOLIOS OF THE FUND, WRITTEN REDEMPTION REQUESTS MUST INCLUDE:

- -- a letter that contains your name, the portfolio's name and the dollar
amount or number of shares to be redeemed;

- -- any stock certificates endorsed, or accompanied by an endorsed stock
power, to the order of the Fund; and

- -- any other necessary documents, such as an inheritance tax consent or
evidence of authority (for example, letters testamentary), dated not more
than 60 days prior to receipt thereof by State Street or the Distributor.

22
<PAGE> 27

BY TELEPHONE

To redeem shares by telephone, you must have elected this option on your
account application. For all portfolios except the Ready Reserves Fund,
contact the Fund's Transfer Agent at 1-800-635-2886 (in Massachusetts,
1-800-635-2840).

For the Ready Reserves Fund, you may redeem some or all of your shares by
telephone by calling your William Blair account executive at (312) 364-8000.
Amounts redeemed will be placed in your brokerage account.

BY WIRE

To redeem some or all of your shares in any of the six portfolios by wire, you
may contact the Transfer Agent, or the Distributor in the case of the Ready
Reserves Fund, by mail or telephone, as explained above. To redeem by wire,
you must have elected this option on your account application and attached to
the application a voided, unsigned check or deposit slip for your bank account.

NOTE: Redemption requests should NOT be sent to the Fund or to the Distributor
(except in the case of the Ready Reserves Fund).

SIDEBAR [Signature guarantees must be obtained from a bank that is a member of
the FDIC, by a brokerage firm that is a member of the NASD, or by an eligible
guarantor who is a member of, or a participant in, a signature guarantee
program.]

SIGNATURE GUARANTEES. Your redemption request must include a signature
guarantee if any of the following situations apply:

- -- You wish to redeem shares having a value of $5,000 or more in a single
transaction;

- -- Your account registration has changed; or

- -- You want a check in the amount of your redemption to be mailed to a
different address than the one on your account application (address of
record).

SIGNATURE GUARANTEES, IF REQUIRED, MUST APPEAR ON THE WRITTEN REDEMPTION
REQUEST AND ON ANY ENDORSED STOCK CERTIFICATE OR STOCK POWER.

REDEMPTION PRICE. The redemption price that you receive for your shares may be
more or less than the amount that you originally paid for them, depending upon
their net asset value at the time your redemption request is received in proper
order by the Distributor, the Transfer Agent or a designated agent thereof.
For the Ready Reserves Fund, the net asset value will usually be $1.00.

PAYMENT FOR REDEEMED SHARES. Payment normally will be mailed to you at the
address of record for your account by the third business day after receipt by
State Street (or, in the case of the Ready Reserves Fund, the Distributor) of a
redemption request and any other required documentation and after any checks in
payment for your shares have cleared.

For the Ready Reserves Fund, if the Distributor receives notice of your request
to redeem shares by 9:30 a.m., Chicago time, the redemption will be effected as
of that date and proceeds normally will be paid that day. If notice of your
redemption request is received after that time, proceeds normally will not be
paid until the next business day.

AUTOMATIC REDEMPTION OF SMALL ACCOUNTS. Because of the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem your shares
in any account that, following a redemption, is below a specified amount.
Currently, the MINIMUM IS $5,000 PER PORTFOLIO. Before the redemption is
processed, you will be notified that the value of your account has fallen below
the minimum and allowed to make an additional investment.

SPECIAL REDEMPTION METHODS FOR THE READY RESERVES FUND

In addition to the above methods, shares of the Ready Reserves Fund can be
redeemed by two other methods unique to this portfolio. Redemption requests
will be processed after the next daily dividend declaration at the net asset
value next determined upon receipt by the Distributor of a proper redemption
request. In this way, you will receive the net asset value of your shares and
all declared but unpaid dividends on your shares through the date of
redemption.

1. REDEMPTION BY CHECK. To redeem shares by check, you must fill out the
appropriate section of your account application. If your application for the
check writing privilege is approved, you will be provided with checks that may
be made payable to any person IN AN AMOUNT NOT LESS THAN $500 NOR MORE THAN $9
MILLION. There currently is no charge for this service and no limit on the
number of checks that you may write; however, these provisions are subject to
change.

The payee of the check may cash or deposit it like any other check drawn on a
bank. When the check is presented for payment, a sufficient number of full and
fractional shares from your account will be redeemed at their next determined
net asset value per share,

23
<PAGE> 28

usually $1.00, to cover the amount of the check. This enables you to continue
earning daily dividends until the check clears. Canceled checks will be
returned to you by State Street. For joint accounts, unless a single signer
has been authorized on your account application, checks must be signed by all
joint account owners.

The Fund may refuse to honor checks whenever the right of redemption has been
suspended or postponed or whenever your account is otherwise impaired. For
instance, your account would be considered to be impaired when (1) there are
insufficient assets to cover the check, (2) a "stop order" has been placed on
the check and (3) in other situations, such as where there is a dispute over
ownership of the your account. A $25 SERVICE FEE will be charged when a check
is presented to redeem portfolio shares in excess of the value of your account
or for an amount less than $500.

2. AUTOMATIC REDEMPTION. The Distributor has instituted an automatic
redemption procedure available to Ready Reserve Fund shareholders who maintain
certain brokerage accounts with it. The Distributor may use this procedure to
satisfy amounts due it by you as a result of purchases of securities or other
transactions in your brokerage account. Under this procedure, if you so elect,
your brokerage account will be scanned at the opening of business each day and,
after application of any cash balances in the brokerage account, a sufficient
number of portfolio shares will be redeemed, effective that day at the next
determined net asset value, to satisfy any amounts which you are obligated to
pay to the Distributor. You will receive all dividends declared but unpaid
through the date of redemption.

EXCHANGES

- -- Growth Fund
- -- Value Discovery Fund
- -- International Growth Fund
- -- Emerging Markets Growth Fund
- -- Income Fund
- -- Ready Reserves Fund

Subject to the following limitations, you may exchange shares of all six
portfolios for each other at their relative net asset values so long as the
portfolio shares to be acquired are registered in your state of residence.
There is NO SERVICE FEE for an exchange; however, ONLY FOUR (4) EXCHANGES FROM
A PORTFOLIO ARE ALLOWED WITHIN ANY 12-MONTH PERIOD. Exchanges will be effected
by redeeming your shares of the portfolio held and purchasing shares of the
other portfolio or portfolios requested.

BY MAIL

You may request an exchange of your shares by writing to William Blair Mutual
Funds, Inc., Attention: Exchange Department, P.O. Box 9104, Boston,
Massachusetts 02266-9104.

BY TELEPHONE

You may also exchange your shares by telephone by completing the appropriate
section on your account application. Once your telephone authorization is on
file, State Street will honor your requests to redeem shares by telephone at
1-800-635-2886 (in Massachusetts, 1-800-635-2840). If you hold certificated
shares of the Fund, you must deposit them with State Street prior to any
exchange of such shares.

Neither the Fund nor State Street will be liable for any loss, expense or cost
arising out of any telephone request pursuant to the telephone exchange
privilege, including any fraudulent or unauthorized request, and you will bear
the risk of loss, so long as the Fund or its Transfer Agent reasonably
believes, based upon reasonable verification procedures, that the telephonic
instructions are genuine. The VERIFICATION PROCEDURES include (1) recording
instructions, (2) requiring certain identifying information before acting upon
instructions and (3) sending written confirmations.

SHAREHOLDER SERVICES AND RIGHTS

SIDEBAR [William Blair provides a variety of services to help you manage your
account.]

AUTOMATIC SWEEP PROGRAM. You can purchase shares of the Ready Reserves Fund
through an automatic sweep program if you establish a brokerage account with
the Distributor, William Blair & Company, L.L.C., provided that you meet the
current minimum brokerage account size requirements. The automatic sweep
program helps you to make convenient, efficient use of free credit balances in
your William Blair brokerage account.

TO PURCHASE SHARES of the Ready Reserves Fund through the automatic sweep
program, you must have a free credit balance in your brokerage account with the
Distributor. Currently, free credit balances are used automatically to
purchase shares of the portfolio.

24
<PAGE> 29

If you have a FREE CREDIT BALANCE OF AT LEAST $1,000, the Distributor will
effect on your behalf an investment in the portfolio shares on an expedited
basis.

- -- If you have a free credit balance resulting from securities transactions
in your brokerage account at the opening of business of the Distributor,
it generally will be invested in shares of the portfolio on that same day,
but in no event later than the next business day.

- -- If you have a free credit balance resulting from a deposit made prior to
2:00 p.m., Chicago time, or a receipt of income (by check or wire), then
it will be invested in shares of the portfolio no later than the next
business day.

- -- If you have a free credit balance of at least $1 and less than $1,000, it
will be invested in shares of the portfolio within a maximum of five
business days from the day when the free credit balance is created.

DIVIDEND OPTIONS. You may choose to have your distributions reinvested in
additional shares of the Fund automatically or paid in cash by making the
appropriate election on your account application. You may change your election
at any time by providing written notice to State Street.

1. AUTOMATIC DIVIDEND REINVESTMENT PLAN. The Fund automatically reinvests all
income dividends and capital gain distributions in additional shares of a
portfolio's stock at net asset value on the reinvestment date. (For more
information, see "Dividend and Distribution Policy.")

2. CASH-DIVIDEND PLAN. You may choose to have all of your income dividends
paid in cash and/or have your capital gain distributions paid in cash. Any
distributions you do not elect to have paid in cash will be reinvested
automatically in additional shares of the Fund at net asset value.

3. AUTOMATIC DEPOSIT OF DIVIDENDS. You may elect to have all income dividends
and capital gain distributions automatically deposited in a previously
established bank account.

AUTOMATIC INVESTMENT PLAN. On your account application, you may authorize
State Street to automatically withdraw an amount of money (MINIMUM $250) from
your bank account on the fifth or twentieth day of each month. This amount
will be invested in additional shares. You may change your election at any
time by providing written notice to State Street.

MINIMUM INVESTMENTS

Initial Investment $2,000
Subsequent Investments $1,000

SYSTEMATIC WITHDRAWAL PLAN. You may establish this plan with shares presently
held or through a new investment, which the Fund suggests be at least $5,000.
Under this plan, you specify a dollar amount to be paid monthly, quarterly or
annually. Shares corresponding to the specified dollar amount are
automatically redeemed from your account on the fifth business day preceding
the end of the month, quarter or year. While this plan is in effect, all
income dividends and capital gain distributions on shares in your account will
be reinvested at net asset value in additional shares. There is no charge for
withdrawals, but the MINIMUM WITHDRAWAL IS $250 PER MONTH. Depending upon the
size of payments requested, and fluctuations in the net asset value of the
shares redeemed, redemptions under this plan may reduce or even exhaust your
account.

RETIREMENT PLANS. The Fund offers a variety of qualified retirement plans,
including Individual Retirement Accounts ("IRAs"), Simplified Employee Pension
Plans ("SEPs") and other qualified retirement plans. Additional information
concerning such plans is available from the Fund.

The minimum initial retirement plan investment is $2,000 and the minimum
subsequent investment is $1,000. State Street may act as custodian for the
portfolio's IRAs and certain other qualified retirement plans. State Street
charges a $5 plan establishment fee, an annual $15 custodial fee and a $10 fee
for each lump sum distribution from a plan. These fees may be waived under
certain circumstances.

With regard to retirement plans:

- -- participation is voluntary;
- -- you may terminate or change a plan at any time without penalty or charge
from the Fund;
- -- the Fund will pay any additional expenses that it incurs in connection
with such plans;
- -- on your account application you may select a plan or plans in which to
invest;
- -- additional forms and further information may be obtained by writing or
calling the Fund;

25
<PAGE> 30

- -- the Fund reserves the right to change the minimum amounts for initial and
subsequent investments or to terminate any of the plans;
- -- the Fund reserves the right to waive investment minimums at the discretion
of the Distributor; and
- -- the Fund requires a copy of the trust agreement when shares are to be held
in trust.

CONSULTATION WITH A PROFESSIONAL TAX ADVISER IS RECOMMENDED, both because of
the complexity of Federal tax laws and because various tax penalties are
imposed for excess contributions to, and late or premature distributions from,
IRAs or other qualified retirement plans. Termination of a plan shortly after
its adoption may have adverse tax consequences.

SHAREHOLDER RIGHTS. All shares of each portfolio have equal rights with
respect to dividends, assets and liquidation of a portfolio and equal,
noncumulative voting rights. Noncumulative voting rights allow the holder or
holders of a majority of shares, voting together for the election of directors,
to elect all the directors. All shares of each portfolio will be voted in the
aggregate, except when a separate vote by portfolio is required under the
Investment Company Act of 1940 (the "1940 Act"). Shares are fully paid and
nonassessable when issued, are transferable without restriction and have no
preemptive or conversion rights. Under Maryland law, the Fund is not required
to hold shareholder meetings on an annual basis. As required by law, the Fund
will, however, hold shareholder meetings when a sufficient number of
shareholders request a meeting, or as deemed desirable by the Board of
Directors, for such purposes as electing or removing directors, changing
fundamental policies or approving an investment management agreement. (For
additional information about shareholder voting rights, see the Statement of
Additional Information.)

DIVIDEND AND DISTRIBUTION POLICY

SIDEBAR [INCOME DIVIDENDS. Each portfolio earns dividends from stocks and
interest from bond, money market, and other investments, which are passed along
to shareholders as income dividends.]

SIDEBAR [CAPITAL GAIN DISTRIBUTIONS. The Fund realizes capital gains whenever
it sells securities for a higher price than it paid for them, which are passed
along to shareholders as capital gain distributions.]

As a Fund shareholder, you are entitled to your portion of the Fund's net
income and gains on its investments. The Fund passes its earnings along to you
as distributions. The Fund's policy is to distribute substantially all net
investment income, if any, and all net realized capital gain, if any. All
distributions of income and capital gain and any return of capital have the
effect of immediately thereafter decreasing net asset value per share. Income
dividends and capital gain distributions will be automatically reinvested in
additional shares at net asset value on the reinvestment date, unless you
specifically request otherwise (see "Dividend Options" under "Shareholder
Services and Rights"). Cash payments are made by the Fund's Dividend Paying
Agent, State Street Bank and Trust Company, shortly following the reinvestment
date.

WHEN DIVIDENDS ARE PAID FOR EACH PORTFOLIO

- -- For the Growth Fund, Value Discovery Fund, International Growth Fund and
Emerging Markets Growth Fund, all income dividends, if any, and capital
gain distributions, if any, will generally be paid in December and/or
January.

- -- For the Income Fund, income dividends are normally paid the fifteenth day
of each month if a business day, with net realized long-term capital gain
distributions, if any, generally being paid in December and/or in January.
The Fund attempts to maintain relatively level monthly dividends for the
Income Fund and therefore, from time to time, may distribute or retain net
investment income and capital gain or make a return of capital
distribution in order to pursue that goal.

- -- For the Ready Reserves Fund, on each day that the Fund is open for
business, the portfolio's net investment income will be declared at the
close of the New York Stock Exchange, which is generally 3:00 p.m.,
Chicago time, as a dividend to shareholders who were of record prior to
the declaration.

The Fund may vary these dividend practices at any time. Income dividends and
any capital gain distributions on all six portfolios will vary from year to
year. Dividends and distributions may be subject to withholding as required by
the Internal Revenue Service (see "Taxes").

TAXES

SIDEBAR [As with any investment, you should consider how your investment in the
Fund will be taxed. If your account is not a tax-deferred retirement account,
you should be aware of these tax implications.]

TAXES ON DISTRIBUTIONS. Distributions are subject to Federal income tax and
may also be subject to state or local taxes. Your distributions are taxable
when they are paid, whether you take them in cash or reinvest them in more
shares of the Fund. However, dividends declared by the Fund in October,
November or December to shareholders of record as of a date in one of those
months and

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<PAGE> 31

paid before the following February 1 are treated as having been paid on
December 31 of the calendar year declared for Federal income tax purposes. The
Fund will inform you of the amount and nature of distributions paid.

Under the Federal tax laws, each portfolio's income dividends and short-term
capital gains distributions are taxed as ordinary income. Long-term capital
gain distributions are taxed as long-term capital gains. It is anticipated
that a portion of the ordinary income dividends for the Growth Fund and the
Value Discovery Fund will be eligible for the dividends-received deduction
available for corporate shareholders. The ordinary income dividends of
International Growth Fund, Emerging Markets Growth Fund, Income Fund and Ready
Reserves Fund are not eligible for the dividends-received deduction available
to corporate shareholders.

TAXES ON TRANSACTIONS. Your redemptions--including exchanges for shares of
other Fund portfolios--are subject to capital gains tax. A capital gain or
loss is the difference between the price that you paid for your shares and the
price that you receive when you sell them. For the Ready Reserves Fund, so
long as a net asset value of $1.00 is maintained, the sale or redemption of
your shares will not result in a capital gain or loss. Any loss recognized on
the redemption of Fund shares held six months or less will be treated as a
long-term capital loss to the extent you have received any long-term capital
gain dividends on such shares. A shareholder who redeems shares of the Fund
will normally recognize a capital gain or loss for Federal income tax purposes.
If you realize a loss on the redemption of portfolio shares within 30 days
before or after an acquisition of other Fund shares, the two transactions may
be subject to the wash sale rules of the Internal Revenue Code, resulting in a
postponement of the recognition of such loss for Federal income tax purposes.

"BUYING A DIVIDEND." If you buy Fund shares before a portfolio deducts a
distribution from its net asset value, you will pay the full price for the
shares and then receive a portion of the price back in the form of a taxable
distribution. See "Dividend and Distribution Policy" for payment schedules,
and call the Distributor if you have further questions.

EFFECT OF FOREIGN TAXES. Investment income received from sources within
foreign countries may be subject to foreign income taxes, which generally will
reduce the Fund's distributions. However, the United States has entered into
tax treaties with many foreign countries that entitle certain investors to a
reduced rate of tax or to certain exemptions from tax. Accordingly, the
International Growth Fund and Emerging Markets Growth Fund will operate so as
to qualify for such reduced tax rates or tax exemptions whenever practicable.

For a more detailed discussion of taxes, see the Statement of Additional
Information.

DETERMINATION OF NET ASSET VALUE

WHEN AND HOW NET ASSET VALUE IS DETERMINED FOR THE PORTFOLIOS

SIDEBAR [NET ASSET VALUE ("NAV"). The market value of a mutual fund's total
assets, minus liabilities, divided by the number of shares outstanding is its
net asset value. The value of a single share is called its share value or
share price.]

The net asset value per share for each portfolio shall be determined as of the
close of trading on the New York Stock Exchange, which is generally 3:00 p.m.,
Chicago time (4:00 p.m. Eastern time), on each day when the Exchange is open.
In addition, the Ready Reserves Fund does not price its shares on Columbus Day
and Veteran's Day.

When net asset value is computed, quotations of foreign securities in foreign
currencies are converted into the United States dollar equivalents at the
prevailing market rates as computed by Investors Bank & Trust Company, the
Fund's custodian. Trading in securities on exchanges and over-the-counter
markets in Europe and the Far East is normally completed at various times prior
to 3:00 p.m., Chicago time, the current closing time of the New York Stock
Exchange. Trading on foreign exchanges may not take place on every day that
the New York Stock Exchange is open. Conversely, trading in various foreign
markets may take place on days when the New York Stock Exchange is not open and
on other days when a portfolio's net asset value is not calculated.
Consequently, calculation of the net asset value for the International Growth
Fund and the Emerging Markets Growth Fund may not occur at the same time as
determination of the most current market prices of the securities included in
the calculation, and the value of the net assets held by the International
Growth Fund and the Emerging Markets Growth Fund may be significantly affected
on days when shares are not available for purchase or redemption.

For the purposes of calculating the net asset value of the Ready Reserves Fund,
portfolio securities are valued at their amortized cost, which means their
acquisition cost adjusted for the amortization of a premium or discount.

HOW THE MARKET VALUE OF PORTFOLIO SECURITIES IS DETERMINED

DOMESTIC EQUITY SECURITIES. The market value of portfolio domestic equity
securities is determined by valuing securities traded on national securities
markets at the last sale price or, in the absence of a recent sale on the date
of determination, at the latest bid price. Securities traded only on the
over-the-counter market are valued at the latest bid price.

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<PAGE> 32

FOREIGN EQUITY SECURITIES. The value of a foreign equity security is
determined based upon the last sale price on the foreign exchange or market on
which it is primarily traded and in the currency of that market, as of the
close of the appropriate exchange or, if there have been no sales during that
day, at the latest bid price.

FIXED-INCOME SECURITIES. Fixed-income securities are valued by using market
quotations, independent pricing services that use prices provided by
market-makers or matrixes producing estimates of market values obtained from
yield data relating to instruments or securities with similar characteristics.

OTHER SECURITIES AND ASSETS. Other securities, and all other assets, are
valued at a fair value as determined in good faith by, or under the direction
of, the Board of Directors.

OTHER IMPORTANT INFORMATION

WRITTEN CONFIRMATIONS. Each purchase, exchange or redemption transaction is
confirmed in writing to the address of record by giving details of the purchase
or redemption.

CERTIFICATED SHARES. In the interest of safekeeping and expediting transfers
and redemptions, most shareholders prefer not to receive certificates for their
shares. Rather, the value of the shares is represented by your account
balance. The Fund will, however, issue certificated shares upon your written
request. Unless payment for shares is made by certified or cashier's check, a
share certificate will not be issued until 30 days after your purchase is
completed.

USE OF INTERMEDIARIES. If you purchase or redeem shares of the Fund through an
investment dealer, bank or other institution, that institution may impose
charges for its services. These charges would reduce your yield or return.
You may purchase or redeem shares of the Fund directly from the Fund or with
the Fund's Transfer Agent, State Street Bank, without any such charges.

TRANSFER OF SHARES. Fund shares may be transferred by a written request
addressed to the Fund and delivered to State Street giving the name and social
security or taxpayer identification number of the transferee and accompanied by
the same signature guarantees and documents as would be required for a
redemption, together with specimen signatures of all transferees.

SUSPENSION OF OFFERING. The Fund reserves the right to withdraw all or any
part of the offering made by this Prospectus, and the Fund or the Distributor
may reject purchase orders. From time to time, the Fund may temporarily
suspend the offering of its shares to new investors. During the period of such
suspension, persons who are already shareholders of a portfolio may be
permitted to continue to purchase additional shares of the portfolio, to have
dividends reinvested and to make redemptions.

MANAGEMENT OF THE FUND

BOARD OF DIRECTORS

Responsibility for overall management of the Fund rests with its directors and
officers. Their duties include supervising the business affairs of the Fund,
monitoring investment activities and practices and considering and acting upon
future plans for the Fund. The business affairs and investments of the Fund
are managed on a day-to-day basis by the Fund's Adviser, William Blair &
Company, L.L.C.

THE ADVISER

William Blair & Company, L.L.C., 222 West Adams Street, Chicago, Illinois
60606, is the investment adviser and manager of the Fund and provides the Fund
with continuous professional investment supervision. The Adviser is also the
principal underwriter and distributor of the Fund and acts as agent of the Fund
in the sale of its shares. William Blair & Company, L.L.C. was founded over 60
years ago by William McCormick Blair. Today, the firm has more than 140
principals and 700 employees. The main office in Chicago houses all research
and investment management services.

The Investment Management Department oversees the assets of the six William
Blair mutual funds, along with corporate pension plans, endowments and
foundations and individual accounts. The department currently manages over
$9.3 billion in equities, fixed-income securities and cash equivalents.

The Adviser firmly believes that clients are best served when portfolio
managers are encouraged to draw on their experience and develop new ideas.
This philosophy has helped build a hard-working, results-oriented team of over
30 portfolio managers, supported by over 35 analysts, with an exceptionally low
turnover rate. William Blair portfolio managers average more than ten years
with William Blair and more than two decades experience in the investment
industry. The Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940.

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<PAGE> 33

Pursuant to its management agreement, the Adviser directs the investment of the
assets of the Fund and is responsible for the overall management of the
business affairs of the portfolios, subject to the supervision of the Fund's
Board of Directors. The Adviser's duties include determining which investments
to buy and sell, placing brokerage orders and negotiating the terms of
securities transactions on behalf of the Fund. It also provides various other
services and facilities.

MANAGEMENT FEES

GROWTH FUND. The Growth Fund pays the Adviser a monthly management advisory
fee at an annual rate of .75% of the average daily net assets of the portfolio.

VALUE DISCOVERY FUND. The Value Discovery Fund pays the Adviser a monthly
management advisory fee at an annual rate of 1.15% of the average daily net
assets of the portfolio. The management fee is greater than that paid by most
mutual funds.

INTERNATIONAL GROWTH FUND. The International Growth Fund pays the Adviser a
monthly management advisory fee at an annual rate of 1.10% of the first $250
million of average daily net assets of the portfolio and 1.00% of average daily
net assets above $250 million. The management fee is greater than that paid by
most mutual funds.

EMERGING MARKETS GROWTH FUND. The Emerging Markets Growth Fund pays the
Adviser a monthly management fee at an annual rate of 1.40% of the average
daily net assets of the portfolio. The management fee is greater than that
paid by most mutual funds.

INCOME FUND. The Income Fund pays the Adviser a monthly management advisory
fee at an annual rate of .25% of the first $250 million of average daily net
assets of the portfolio and .20% of average daily net assets in excess of $250
million, plus 5.0% of the gross income earned. This fee structure results in
higher compensation to the Adviser when higher income is achieved, including
the higher income that is available from riskier securities.

READY RESERVES FUND. The Ready Reserves Fund pays the Adviser a monthly
management advisory fee at an annual rate of .625% of the first $250 million of
average daily net assets of the portfolio, .60% of the next $250 million, .575%
of the next $2 billion and .55% of the average daily net assets in excess of
$2.5 billion.

YEAR 2000 COMPLIANCE

A critical issue has emerged in the investment services industry and for the
economy overall regarding how existing application software programs and
operating systems can accommodate the date value for the year 2000. Many
existing application software products in the marketplace were designed only to
accommodate a two-digit date position which represents the year (e.g., "95" is
stored on the system and represents the year 1995). As a result, the year 1999
(i.e., "99") could be the maximum date value these systems will be able to
accurately process. The Fund is in the process of working with the Adviser and
other service providers to assure that the Fund is prepared for the year 2000.
The Fund has been assured by the Adviser and other service providers that they
do not believe that the Fund will be materially adversely affected by year
2000. Nevertheless, the inability of the Adviser and other service providers
to successfully address year 2000 issues could result in interruptions in the
Fund's business and have a material adverse effect on the Fund's operations.

EXPENSES

The Fund's expenses include the management advisory fees; transaction costs;
interest; taxes; legal, accounting, auditing, transfer agency and custodial
fees; and certain other operational expenses. During the Emerging Markets
Growth Fund's first year of operation, the Adviser has voluntarily agreed to
waive the advisory fee and to absorb other operating expenses if total
operating expenses exceed 2.25% of the portfolio's average daily net assets.
In addition, over a five-year period following the portfolio's commencement of
operations the Value Discovery Fund and Emerging Markets Growth Fund are
reimbursing the Adviser for organizational expenses (up to $50,000) incurred by
the Adviser in establishing the portfolio.

CUSTODIAN, TRANSFER AGENT AND DIVIDEND PAYING AGENT

The Fund's Custodian is Investors Bank and Trust Company, 200 Clarendon Street,
Boston, Massachusetts 02117. The Fund's Transfer Agent and Dividend Paying
Agent is State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110.

PERFORMANCE

From time to time, the portfolios may advertise several types of performance
information that are based upon historical results and are not necessarily
representative of the future performance of a portfolio.

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<PAGE> 34

Average annual total return is a standard measure of portfolio performance. It
assumes that any distributions of capital gains or dividends were reinvested
for the period quoted. Yield is a standard measure of performance for income
funds and money funds. Yield measures the net investment income per share
earned over a specific 30-day period for income funds and a seven-day period
for money funds.

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<PAGE> 35

INVESTMENT GLOSSARY

The following glossary explains some of the types of securities in which the
portfolios may invest, investment techniques they may employ and some of their
specific associated risks. For more information, please see the Fund's
Statement of Additional Information.

BORROWING. To a certain extent, each portfolio may borrow money from banks for
limited purposes. The Growth Fund, Value Discovery Fund, International Growth
Fund and Emerging Markets Growth Fund may borrow up to 10% of their total
assets; the Income Fund and Ready Reserves Fund may borrow up to 5% of their
total assets. Most borrowing is intended only as a temporary measure for
extraordinary or emergency purposes, such as to help meet redemption requests,
and not for leverage purposes.

COLLATERALIZED OBLIGATIONS. The Income Fund may invest in collateralized
obligations, which are debt securities issued by a corporation, trust or
custodian or by a U.S. Government agency or instrumentality, that are
collateralized by a portfolio or pool of assets, such as mortgages,
mortgage-backed securities, debit balances on credit card accounts or U.S.
Government securities. The issuer's obligation to make interest and/or
principal payments is secured by the underlying pool or portfolio of
securities.

A variety of types of collateralized obligations are available currently, and
others may become available in the future. Some obligations are for the
guaranteed payment of only principal (the principal-only or "PO" class) or only
interest (the interest-only or "IO" class), while others are for the guaranteed
payment of both, or some variation thereof. The yields to maturity on PO and
IO class obligations are more sensitive than other obligations, with the IO
class obligations being extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying assets. The portfolio will
invest only in PO and IO class mortgage obligations collateralized by
securities guaranteed by the U.S. Government. Some types of collateralized
obligations may be less liquid than other types of securities. Investments in
collateralized obligations that are deemed to be illiquid, which includes PO
and IO class mortgage obligations, will be subject to the 15% limitation on
illiquid assets.

The mortgage-backed collateralized obligations in which the portfolio may
invest include pools of mortgage loans assembled for sale to investors by
various governmental agencies such as the Government National Mortgage
Association ("GNMA") and government-related organizations such as the Federal
National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage
Corporation ("FHLMC"). Payments of principal and/or interest on such
mortgages, including prepayments, are guaranteed by the agency or
instrumentality. The agencies and instrumentalities are subject to varying
degrees of support by the U.S. Government. The effective credit quality of
collateralized obligations is the credit quality of the collateral. The
requirements as to collateralization are determined by the issuer or sponsor of
the collateralized obligation in order to satisfy rating agencies. These
collateralized obligations generally have excess collateral, but typically any
guarantee is limited to a specified percentage of the pool of assets.

The potential for appreciation in the event of a decline in interest rates may
be limited or negated by increased principal prepayments by certain
mortgage-backed securities, such as GNMA Certificates and other collateralized
obligations. During periods of declining interest rates, mortgages underlying
the security are prone to prepayment, causing the security's effective maturity
to be shortened. Prepayment of high interest rate mortgage-backed securities
during times of declining interest rates will tend to lower the return of the
portfolio and may even result in losses to the portfolio if the prepaid
securities were acquired at a premium. Because mortgage-backed securities tend
to be sensitive to prepayment rates on the underlying collateral, their value
to the portfolio is dependent upon the accuracy of the prepayment projections
used, which are a consensus derived from several major securities dealers. The
duration of many mortgage-backed securities changes substantially in response
to changes in interest rates and prepayment rates.

DEPOSITORY RECEIPTS. The Growth Fund, Value Discovery Fund, International
Growth Fund and Emerging Markets Growth Fund may invest in foreign issuers
through sponsored American Depository Receipts ("ADRs"), European Depository
Receipts ("EDRs") and Global Depository Receipts ("GDRs"). Generally, an ADR
is a dollar-denominated security issued by a U.S. bank or trust company that
represents, and may be converted into, the underlying foreign security, an EDR
represents a similar securities arrangement but is issued by a European bank
and a GDR is issued by a depository. ADRs, EDRs and GDRs may be denominated in
a currency different from the underlying securities into which they may be
converted. Typically, ADRs, in registered form, are designed for issuance in
U.S. securities markets and EDRs and GDRs, in bearer form, are designed for
issuance in European securities markets. Investments in depository receipts
entail risks similar to direct investments in foreign securities. These risks
are detailed in the sections on "Investment Risks" under the "International
Growth Fund" and "Emerging Markets Growth Fund" above and in the Statement of
Additional Information.

CONCENTRATION. Each portfolio does not intend to invest more than 25% of its
total asset in any one industry; however, the Ready Reserves Fund may invest
more than 25% of its total assets in the domestic banking industry. These
limitations do not apply to U.S. Government securities or government agency
securities, or to instruments, such as repurchase agreements, secured by these
instruments.

DIVERSIFICATION. As a matter of fundamental policy, each portfolio will not
purchase the securities of any issuer if, as a result, more than 5% of its
total assets would be invested in such issuer. For the Value Discovery Fund
and Emerging Markets Growth Fund, that limitation applies to 75% of the
portfolio's net assets. In addition, each portfolio will not purchase more
than 10% of the outstanding

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<PAGE> 36

voting securities of any issuer. These limitations do not apply to U.S.
Government securities or to government agency or instrumentality securities.

FOREIGN CURRENCY FUTURES. The International Growth Fund and Emerging Markets
Growth Fund may purchase and sell futures on foreign currencies as a hedge
against possible variation in foreign exchange rates. Foreign currency futures
contracts are traded on boards of trade and futures exchanges. A futures
contract on a foreign currency is an agreement between two parties to buy and
sell a specified amount of a particular currency for a particular price on a
future date. To the extent that the portfolio engages in foreign currency
futures transactions, but fails to consummate its obligations under the
contract, the net effect to the portfolio would be the same as speculating in
the underlying futures contract. Futures contracts entail certain risks. If
the Adviser's judgment about the general direction of rates or markets is
wrong, the portfolio's overall performance may be less than if no such
contracts had been entered into. There may also be an imperfect correlation
between movements in prices of futures contracts and the portfolio securities
being hedged. In addition, the market prices of futures contracts may be
affected by certain factors. If participants in the futures market elect to
close out their contracts through offsetting transactions rather than to meet
margin requirements, distortions in the normal relationship between the
securities and futures markets could result. In addition, because margin
requirements in the future markets are less onerous than margin requirements in
the cash market, increased participation by speculators in the futures market
could cause temporary price distortions. Due to price distortions in the
futures market and an imperfect correlation between movements in the prices of
securities and movements in the prices of futures contracts, a correct forecast
of market trends by the portfolio's Adviser may still not result in a
successful hedging transaction. The portfolio could also experience losses if
it could not close out its futures position because of an illiquid secondary
market, and losses on futures contracts are not limited to the amount invested
in the contract. The above circumstances could cause the portfolio to lose
money on the financial futures contracts and also on the value of its portfolio
securities.

To the extent required to comply with the 1940 Act and the rules and
interpretations thereunder, whenever the portfolio enters into a futures
contract, the portfolio will maintain a segregated account consisting of either
cash or liquid securities equal to the portfolio's potential obligation under
such contracts. The segregation of assets places a practical limit on the
extent to which the portfolio may engage in futures contracts.

To the extent required to comply with CFTC Rule 4.5 and in order to avoid
"commodity pool operator" status, each portfolio will not enter into a
financial futures contract if immediately thereafter the aggregate initial
margin and premiums for such contracts held by the portfolio would exceed 5% of
the liquidation value of the portfolio's assets. The portfolio will not engage
in transactions in financial futures contracts for speculation, but only in an
attempt to hedge against changes in interest rates or market conditions
affecting the value of securities that the portfolio holds or intends to
purchase.

FOREIGN SECURITIES. Securities of foreign companies may entail risks not
associated with domestic securities. The prices of such securities may be more
volatile, there may be less publicly available information about foreign
issuers and many foreign issuers are not subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
domestic issuers. These risks are detailed in the sections on "Investment
Risks" under the "International Growth Fund" and "Emerging Markets Growth Fund"
above and in the Statement of Additional Information.

FORWARD FOREIGN CURRENCY TRANSACTIONS. The International Growth Fund and
Emerging Markets Growth Fund may enter into forward foreign currency contracts
as a means of managing the risks associated with changes in exchange rates. A
forward foreign currency contract is an agreement to exchange U.S. dollars for
foreign currencies at a specified future date and specified amount which is set
by the parties at the time of entering into the contract. The Adviser will
generally use such currency contracts to fix a definite price for securities
they have agreed to buy or sell and may also use such contracts to hedge the
portfolio's investments against adverse exchange rate changes. Alternatively,
the portfolios may enter into a forward contract to sell a different foreign
currency for a fixed U.S. dollar amount where the Adviser believes that the
U.S. dollar value of the currency to be sold pursuant to the forward contract
will fall whenever there is a decline in the U.S. dollar value of the currency
in which securities of the portfolio are denominated ("cross-hedge"). The
profitability of forward foreign currency transactions depends upon correctly
predicting future changes in exchange rates between the U.S. dollar and foreign
currencies. As a result, a portfolio may incur either a gain or loss on such
transactions. While forward foreign currency transactions may help reduce
losses on securities denominated in a foreign currency, they may also reduce
gains on such securities depending on the actual changes in the currency's
exchange value relative to that of the offsetting currency involved in the
transaction. The portfolios will not enter into forward foreign currency
transactions for speculative purposes.

ILLIQUID SECURITIES. The Growth Fund, Value Discovery Fund, International
Growth Fund, Emerging Markets Growth Fund and Income Fund may each invest up to
15% of their net assets in illiquid securities. The Ready Reserves Fund may
invest up to 10% of its net assets in illiquid securities. Illiquid securities
are those securities that are not readily marketable, including restricted
securities and repurchase obligations maturing in more than seven days.

INVESTMENT COMPANIES. Subject to the provisions of the 1940 Act, the Growth
Fund, Value Discovery Fund, International Growth Fund and Emerging Markets
Growth Fund may each invest in the shares of investment companies. Investment
in other investment companies may provide advantages of diversification and
increased liquidity; however, there may be duplicative expenses, such as

<PAGE> 37

advisory fees or custodial fees. At the present time each portfolio intends to
limit its investment in other investment companies to no more than 10% of its
total assets. Several foreign governments permit investments by non-residents
in their markets only through participation in certain investment companies
specifically organized to participate in such markets. In addition,
investments in unit trusts and country funds permit investments in foreign
markets that are smaller than those in which the portfolio would ordinarily
invest directly. Investments in such pooled vehicles should enhance the
geographical diversification of the portfolio's assets while reducing the risks
associated with investing in certain smaller foreign markets. Investments in
such vehicles will provide increased liquidity and lower transaction costs than
are normally associated with direct investments in such markets; however, there
may be duplicative expenses, such as advisory fees or custodial fees.

PORTFOLIO TURNOVER RATE. None of the portfolios intends to trade portfolio
securities for the purpose of realizing short-term profits. However, each will
adjust its portfolio as considered advisable in view of prevailing or
anticipated market conditions and the portfolio's investment objective, and
there is no limitation on the length of time securities must be held by the
portfolio prior to being sold. Portfolio turnover rate will not be a limiting
factor for a portfolio. Although each portfolio's turnover rate will vary from
year to year, it is anticipated that each portfolio's turnover rate, under
normal circumstances, will be less than 100%. A higher portfolio turnover rate
would involve correspondingly higher transaction costs, which would be borne
directly by each portfolio.

RATINGS. The Ready Reserves Fund has adopted certain investment policies
designed to limit the market and financial risks of the portfolio. The
portfolio may only invest in securities that, based on their short-term
ratings, are deemed to be the highest grade, or if unrated, are of equivalent
quality in the judgment of the Adviser, subject to the supervision of the Board
of Directors. However, the portfolio may invest up to 5% of its total assets
in securities deemed within the second highest grade, or if unrated, are of
equivalent quality. In addition, portfolio investments will be limited to
instruments that the Adviser, under the supervision of the Board of Directors,
has determined present minimal credit risks. Securities are deemed to be
highest grade if they are rated high-quality by two Rating Organizations, or if
only rated by one Rating Organization, rated high-quality by that Rating
Organization. For example, commercial paper rated "Duff 1 minus," "Fitch 1,"
"Prime 1" and "A-1" by Duff & Phelps, Inc., Fitch Investors Service, Inc.,
Moody's Investors Service, Inc., and Standard & Poor's Corporation,
respectively, would be considered high quality. Obligations that are unrated
are not necessarily of lower quality than those that are rated, but may be less
marketable and, consequently, provide higher yields. Further, the portfolio
may invest in other corporate obligations maturing in thirteen months or less,
such as publicly traded bonds, debentures and notes, if they are rated within
the two highest grades by a Rating Organization. For a description of these
ratings, see Appendix B to the Statement of Additional Information.

REAL ESTATE INVESTMENT TRUSTS. The Value Discovery Fund may invest up to 15%
of its net assets in real estate investment trusts ("REITs"). REITs are
subject to volatility from risks associated with investments in real estate and
investments dependent on income from real estate, such as fluctuating demand
for real estate and sensitivity to adverse economic conditions. In addition,
the failure of a REIT to continue to qualify as a REIT for tax purposes would
have an adverse effect upon the value of a portfolio's investment in that REIT.

REPURCHASE AGREEMENTS. Each portfolio may invest in repurchase agreements.
Repurchase agreements are instruments under which a portfolio acquires
ownership of a security and the seller, a broker-dealer or a bank, agrees to
repurchase the security at a mutually agreed upon time and price. The
repurchase agreement serves to fix the yield of the security during the
portfolio's holding period. The portfolios currently intend to enter into
repurchase agreements only with member banks of the Federal Reserve System or
with primary dealers in U.S. Government securities. In all cases, the Adviser,
subject to the supervision of the Board of Directors, must be satisfied with
the creditworthiness of the seller before entering into a repurchase agreement.
In the event of the bankruptcy or other default of the seller of a repurchase
agreement, the portfolio could incur expenses and delays enforcing its rights
under the agreement and experience a decline in the value of the underlying
securities and loss of income. The maturity of a security subject to
repurchase may exceed one year, and, for the Income Fund, the modified duration
of a security subject to repurchase may exceed eight years. Repurchase
agreements maturing in more than seven days, together with any securities that
are restricted as to disposition under the federal securities laws or are
otherwise considered to be illiquid, will not exceed 15% of the net assets of
the Growth Fund, Value Discovery Fund, International Growth Fund, Emerging
Markets Growth Fund and Income Fund and 10% of the net assets of the Ready
Reserves Fund.

SECTION 4(2) PAPER. The Ready Reserves Fund may invest in commercial paper
issued in reliance upon the so-called "private placement" exemption from
registration afforded by Section 4(2) of the Securities Exchange Act of 1933
("Section 4(2) paper"). Section 4(2) paper is restricted as to disposition
under the Federal securities laws and generally is sold to institutional
investors such as the portfolio. Any resale by the purchaser must be in an
exempt transaction. Section 4(2) paper normally is resold to other
institutional investors through or with the assistance of the issuer or
investment dealers who make a market in the Section 4(2) paper, thus providing
liquidity. The Adviser considers the legally restricted but readily saleable
Section 4(2) paper to be liquid; however, pursuant to the procedures approved
by the Fund's Board of Directors, if a particular investment in Section 4(2)
paper is not determined to be liquid, that investment will be included within
the limitation on illiquid securities. The Adviser monitors the liquidity of
each investment in Section 4(2) paper on a continuing basis.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. From time to time, in the
ordinary course of business, each portfolio may purchase newly issued
securities appropriate for the portfolio on a "when-issued" basis and may
purchase or sell securities appropriate for the

33
<PAGE> 38

portfolio on a "delayed delivery" basis. When-issued or delayed delivery
transactions involve a commitment by the portfolio to purchase or sell
particular securities with payment and delivery to take place at a future date.
These transactions allow the portfolio to lock in an attractive purchase price
or yield on a security the portfolio intends to purchase. Normally, settlement
occurs within one month of the purchase or sale. During the period between
purchase and settlement, no payment is made or received by the portfolio and,
for delayed delivery purchases, no interest accrues to the portfolio. Because
the portfolio is required to set aside cash or liquid securities at least equal
in value to its commitments to purchase when-issued or delayed delivery
securities, the Adviser's ability to manage the portfolio's assets may be
affected by such commitments. The portfolio will only make commitments to
purchase securities on a when-issued or delayed delivery basis with the
intention of actually acquiring the securities, but it reserves the right to
sell them before the settlement date if it is deemed advisable.

VARIABLE RATE SECURITIES. The Ready Reserves Fund may invest in instruments
having rates of interest that are adjusted periodically or that "float"
continuously or periodically according to formulae intended to minimize
fluctuation in values of the instruments ("Variable Rate Securities"). The
interest rate on a Variable Rate Security is ordinarily determined by reference
to, or is a percentage of, an objective standard such as a bank's prime rate,
the 90-day U.S. Treasury Bill rate or the rate of return on commercial paper or
bank certificates of deposit. Generally, the changes in the interest rates on
Variable Rate Securities reduce the fluctuation in the market value of such
securities. Accordingly, as interest rates decrease or increase, the potential
for capital appreciation or depreciation is less than for fixed-rate
obligations. Further, the portfolio may invest in Variable Rate Securities
that have a demand feature entitling the portfolio to resell the securities to
the issuer or a third party at an amount approximately equal to the principal
amount thereof plus accrued interest ("Variable Rate Demand Securities"). As
is the case for other Variable Rate Securities, the interest rate on Variable
Rate Demand Securities varies according to some objective standard intended to
minimize fluctuation in the values of the instruments. Many of these Variable
Rate Demand Securities are unrated, their transfer is restricted by the issuer
and there is little if any secondary market for the securities. Thus, any
inability of the issuers of such securities to pay on demand could adversely
affect the liquidity of these securities. The portfolio determines the
maturity of Variable Rate Securities in accordance with Securities and Exchange
Commission rules, allowing the portfolio to consider certain of such
instruments as having maturities shorter than the maturity date on the face of
the instrument if they are guaranteed by the U.S. Government or its agencies,
they have a stated maturity date of one year or less or they have demand
features prior to maturity.

34
<PAGE> 39

[back cover]

FOR MORE INFORMATION

THE ANNUAL AND SEMI-ANNUAL REPORTS TO SHAREHOLDERS include financial
statements, detailed performance information, portfolio holdings and a
statement from the portfolio manager. Shareholder reports are incorporated by
reference into this Prospectus, which means that they are part of this
Prospectus for legal purposes.

THE STATEMENT OF ADDITIONAL INFORMATION contains more detailed information
about the Fund and the portfolios. The current Statement of Additional
Information has been filed with the Securities and Exchange Commission and is
incorporated by reference into this Prospectus, which means that it is part of
this Prospectus for legal purposes.

A copy of the current annual or semi-annual report or Statement of Additional
Information may be obtained without charge by writing or calling the Fund.

WILLIAM BLAIR MUTUAL FUNDS, INC.
222 West Adams Street
Chicago, Illinois 60606
(312) 364-8000

STATE STREET BANK AND TRUST COMPANY
(the Fund's Transfer Agent)
P.O. Box 9104
Boston, MA 02266-9104
1-800-635-2886
(In Massachusetts 1-800-635-2840)

No person has been authorized to give any information or to make any
representations not contained in this Prospectus and, if given or made, such
information or representations must not be relied upon as having been
authorized by the Fund or its distributor. The Prospectus does not constitute
an offering by the Fund or its distributor in any jurisdiction in which such
offering may not lawfully be made.

35
<PAGE> 40

WILLIAM BLAIR & COMPANY, L.L.C.

WILLIAM BLAIR MUTUAL FUNDS, INC.
222 WEST ADAMS STREET
CHICAGO, ILLINOIS 60606
(312) 364-8000

STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Prospectus of William Blair Mutual Funds, Inc.
(the "Fund") dated May 1, 1998. The Prospectus may be obtained without charge
by writing or calling the Fund.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
MANAGEMENT OF THE FUND..................................................... B-2
Investment Adviser and Distributor................................... B-2
Directors and Officers............................................... B-3
Brokerage and Portfolio Transactions................................. B-6
INVESTMENT POLICIES AND RESTRICTIONS....................................... B-7
Growth Fund.......................................................... B-7
Value Discovery Fund................................................. B-8
International Growth Fund............................................ B-9
Emerging Markets Growth Fund.........................................B-10
Income Fund..........................................................B-11
Ready Reserves Fund..................................................B-12
INVESTMENT PRACTICES.......................................................B-13
Collateralized Obligations...........................................B-13
Foreign Securities...................................................B-16
Forward Foreign Currency Transactions................................B-18
Foreign Currency Futures.............................................B-19
Futures..............................................................B-19
High-Yield/High-Risk Securities......................................B-19
Illiquid Securities..................................................B-20
Lending..............................................................B-20
Repurchase Agreements................................................B-20
Restricted Securities................................................B-20
Small Companies......................................................B-20
Warrants.............................................................B-20
When-Issued or Delayed Delivery Transactions.........................B-20
GENERAL FUND INFORMATION...................................................B-21
Redemptions..........................................................B-21
Determination of Net Asset Value.....................................B-21
Performance..........................................................B-22
Tax Status...........................................................B-25
Retirement Plans.....................................................B-25
Independent Auditors.................................................B-26
Legal Counsel........................................................B-26
Custodian............................................................B-26
Transfer Agent Services..............................................B-26
Reports To Shareholders..............................................B-26
SHAREHOLDER RIGHTS.........................................................B-26
Value Discovery Fund--Investment Criteria............................B-27
FUND HISTORY...............................................................B-28
FINANCIAL INFORMATION OF THE FUND..........................................B-28
APPENDIX A................................................................. A-1
APPENDIX B................................................................. B-1
</TABLE>

<PAGE> 41

MANAGEMENT OF THE FUND

INVESTMENT ADVISER AND DISTRIBUTOR. As stated in the Prospectus, William Blair
& Company, L.L.C. ("Adviser") is the Fund's investment adviser and manager.
Pursuant to an investment advisory and management agreement, the Adviser acts as
the Fund's adviser, manages its investments, administers its business affairs,
furnishes office facilities and equipment, provides clerical, bookkeeping and
administrative services, provides shareholder and information services and
permits any of its principals or employees to serve without compensation as
directors or officers of the Fund if elected to such positions. In addition to
the management advisory fee, each portfolio pays the expenses of its operations,
including a portion of the Fund's general administrative expenses, allocated on
the basis of the portfolio's net asset value. Expenses that will be borne
directly by the portfolios include, but are not limited to, the following: the
fees and expenses of independent auditors, counsel, custodian and transfer
agent, costs of reports and notices to shareholders, stationery, printing,
postage, costs of calculating net asset value, brokerage commissions or
transaction costs, taxes, registration fees, the fees and expenses of qualifying
the Fund and its shares for distribution under Federal and state securities laws
and membership dues in the Investment Company Institute or any similar
organization.

The advisory agreement for a portfolio continues in effect from year to year for
so long as its continuation is approved at least annually (a) by a majority of
the directors who are not parties to such agreement or interested persons of any
such party except in their capacity as directors of the Fund and (b) by the
shareholders of the portfolio or the Board of Directors. The agreement may be
terminated at any time upon 60 days' notice by either party; the Fund may so
terminate the agreement either by vote of the Board of Directors or by majority
vote of the outstanding shares of the affected portfolio. The agreement may
also be terminated at any time either by vote of the Board of Directors or by
majority vote of the outstanding voting shares of the subject portfolio if the
Adviser were determined to have breached the agreement. The agreement will
terminate automatically upon assignment. The agreement provides that the
Adviser shall not be liable for any error of judgment or of law, or for any loss
suffered by the Fund in connection with the matters to which the agreement
relates, except a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Adviser in the performance of its obligations and
duties, or by reason of its reckless disregard of its obligations and duties
under the agreement.

Upon termination of the agreement and when so requested by the Adviser, the Fund
will refrain from using the name "William Blair" in its name or in its business
in any form or combination.

For the services and facilities furnished to each portfolio, the Fund pays the
Adviser an advisory fee, which is accrued daily and paid monthly on the first
business day of the following month. The Growth Fund pays an advisory fee at a
rate of .75% of the portfolio's average daily net assets. Prior to May 1, 1996,
the Growth Fund paid an advisory fee at a rate of 0.625% of the portfolio's
average daily net assets up to $75 million and 0.50% of average daily net assets
above $75 million. For the fiscal years ended December 31, 1997, 1996 and 1995,
the Adviser received fees of $4,093,417, $3,018,755 and $1,561,478,
respectively.

The Value Discovery Fund pays an advisory fee at a rate of 1.15% of the
portfolio's average daily net assets. For services and facilities furnished to
the portfolio pursuant to the advisory agreement during the fiscal year 1997 and
for the fiscal year from December 23, 1996 (Communication of Operations) to
December 31, 1997, the Fund paid $241,689 and $333, respectively. For the
fiscal year 1997 and for the fiscal year from December 23, 1996 (Commencement of
Operations) to December 31, 1996, the Adviser waived fees of $57,398 and $333,
respectively. For the fiscal year ended December 31, 1997, the Adviser received
fees of $184,291. The Adviser voluntarily agreed to reimburse the portfolio
during its first year of operation should all operating expenses, including the
compensation of the Adviser but excluding taxes, interest, extraordinary
expenses and brokerage commissions or transaction costs, exceed 1.50% of average
daily net assets of the portfolio.

The International Growth Fund pays an advisory fee at a rate of 1.10% of the
first $250 million of average daily net assets plus 1.00% of average daily net
assets over $250 million. Prior to May 1, 1996, the International Growth Fund
paid an advisory fee at a rate of 1.10% of the first $100,000,000 of average
daily net assets of the portfolio and .95% of average daily net assets above
$100,000,000. Under a former investment sub-advisory agreement, the Adviser
paid a sub-adviser a monthly fee at an annual rate equal to .40% of the first
$100 million of average daily net assets of the portfolio and .275% of average
daily net assets above $100 million. For the services and facilities furnished
during the fiscal years ended December 31, 1997, 1996 and 1995, the Adviser
received fees of $1,351,263, $1,131,309 and $886,557, respectively, of which
$303,364 in 1996 and $322,384 in 1995 was paid to the sub-adviser.

The Emerging Markets Growth Fund pays an advisory fee at a rate of 1.40% of the
portfolio's average daily net assets. The Adviser voluntarily has agreed to
reimburse the portfolio during its first year of operation should all operating
expenses, including the compensation of the Adviser but excluding taxes,
interest, extraordinary expenses and brokerage commissions or transaction costs,
exceed 2.25% of average daily net assets of the portfolio.

The Income Fund pays an advisory fee at a rate of .25% of the first $250 million
of average daily net assets plus .20% of average daily net assets over $250
million plus 5% of the gross income earned by the portfolio. Prior to May 1,
1996, the Income Fund paid an advisory fee at a rate of .25% of the first $100
million of average daily net assets of the portfolio, .20% of the next $150
million and .15% of average daily net assets in excess of $250 million, plus
5.0% of the gross income earned. For the services and facilities

B-2
<PAGE> 42

furnished to the portfolio pursuant to the advisory agreement during the fiscal
years ended December 31, 1997, 1996 and 1995, the Fund paid $918,833, $880,815
and $868,277, respectively.

The Ready Reserves Fund pays an advisory fee at a rate of .625% of the first
$250 million of average daily net assets, plus .60% of the next $250 million of
average daily net assets, plus .575% of the next $2 billion of average daily net
assets, plus .55% of the average daily net assets over $2.5 billion. Prior to
May 1, 1996, the Ready Reserves Fund paid an advisory fee at a rate of .625% of
the first $250 million of average daily net assets of the portfolio, .60% of the
next $250 million, .55% of the next $500 million, .50% of the next $2 billion,
.45% of the next $2 billion and .40% of average daily net assets in excess of $5
billion. For the services and facilities furnished to the portfolio pursuant to
the advisory agreement during the fiscal years ended December 31, 1997, 1996 and
1995, the Adviser received fees of $5,236,627, $4,282,827 and $3,613,262,
respectively.

The Adviser has agreed to reimburse the Fund should all operating expenses of
the Growth Fund, Income Fund or Ready Reserves Fund, including the compensation
of the Adviser but excluding taxes, interest, extraordinary expenses and
brokerage commissions or transaction costs, exceed 1.50% of the first $30
million of average net assets of the portfolio and 1.00% of average net assets
over $30 million of the portfolio on an annual basis.

William Blair & Company, L.L.C. also is the principal underwriter and
distributor ("Distributor") for shares of the Fund and acts as agent of the Fund
in the sale of its shares. The offering of shares is continuous, although the
Distributor and the Fund reserve the right to cease the offer of shares at any
time. The Distributor pays for the printing and distribution of copies of the
prospectus and shareholder reports used in connection with the offering of
shares to prospective investors. The Distributor also pays for supplementary
sales literature and advertising costs. The foregoing services are provided at
no charge to the Funds. Terms of continuation, termination and assignment under
the underwriting agreement are substantially the same as those described above
with regard to the advisory agreement, except that termination other than upon
assignment or upon determination of breach requires six months' notice.

Messrs. Barber, Fischer and Fuller, Ms. Gassmann and Messrs. Greig, Kaplan,
Kayser, Kleczka, McMullan, Myer, Sullivan, Truderung, Truettner and Urbina, who
are directors or officers of the Fund, are also principals or employees of the
Adviser/Distributor as indicated under "Directors and Officers."

The Adviser/Distributor is a limited liability company, the affairs of which are
controlled by all its principals, none of whom owns more than 25% of the firm.
The Chief Executive Officer of the firm is E. David Coolidge, III and the
Executive Committee is comprised of Rocky Barber, E. David Coolidge, III, Edgar
D. Jannotta, John P. Kayser, Richard P. Kiphart, Albert J. Lacher, Joseph F.
LaManna, James D. McKinney and William C. Perlitz.

DIRECTORS AND OFFICERS. The directors and officers of the Fund, their ages,
their principal occupations during the last five years, their affiliations, if
any, with William Blair & Company, L.L.C. and other significant affiliations are
set forth below. Unless otherwise noted, the address of each officer and
director is 222 West Adams Street, Chicago, Illinois 60606.

CONRAD FISCHER (64),* (2) Chairman of the Board and Director; Principal, William
Blair & Company, L.L.C.; Trustee Emeritus, Chicago Child Care Society, a
non-profit organization, and Investment Committee, Kalamazoo College.

VERNON ARMOUR (70), * (1) (2) (3) Director; 633 East Woodland Road, Lake Forest,
Illinois 60045; private investor; Trustee, Illinois Institute of Technology,
Trustee Northwestern Memorial Hospital and OTHO S.A. Sprague Memorial Institute.

J. GRANT BEADLE (65), (3) Director; 985 Riomar Drive, Vero Beach, Florida 32963;
Retired Chairman and Chief Executive Officer, Union Special Corporation,
industrial sewing machine manufacturer; Retired Associate Director, Northwestern
University Institute for Learning Sciences; Director, Learning Sciences
Corporation, Oliver Products Company, Batts, Inc., Portec, Inc. and Woodward
Governor Company.

THEODORE A. BOSLER (63), (3) Director; 812 Oak Street, Winnetka, Illinois
60093; Retired Principal and Vice President, Lincoln Capital Management;
Director, Thresholds, a psychiatric recovery center, and Institute of Chartered
Financial Analysts.

GEORGE KELM (69), (1) (3) Director; 4 Court of Connecticut River, Lincolnshire,
Illinois 60069; Retired Chairman of the Board, Sahara Coal Company, Inc. and
Sahara Enterprises, Inc.; Director, Rolf Jensen & Associates, Inc.; Trustee,
Newberry Library and McCormick Theological Seminary.

ANN P. MCDERMOTT (58), (1) (3) Director; 330 Willow Road, Winnetka, Illinois
60093; Trustee, Rush Presbyterian St. Luke's Medical Center; Women's Board, Rush
Presbyterian St. Luke's Medical Center; Honorary Director, Visiting Nurse
Association; Director, Presbyterian Homes; Northwestern University, Women's
Board; University of Chicago, Women's Board; Director, Washington State
University Foundation.

JAMES M. MCMULLAN (63),* Director; Principal, William Blair & Company, L.L.C.;
Director, Securities Industry Association.

<PAGE> 43

JOHN B. SCHWEMM (63), (1) (3) Director; 2 Turvey Lane, Downers Grove, Illinois
60515; Retired Chairman and Chief Executive Officer, R.R. Donnelley & Sons
Company, printer; Director, USG Corp., building material product company, and
Walgreen Co., drug store chain.

W. JAMES TRUETTNER, JR. (66),* Director; Principal, William Blair & Company,
L.L.C.; Director, Glenview Foundation and International Travel Services.

ROCKY BARBER (46), President of the Fund; Principal, William Blair & Company,
L.L.C.; Vice President and Secretary, LaRabida Hospital Foundation; Past
President, Stanford Associates.

MARK A. FULLER, III (41), Senior Vice President; Principal, William Blair &
Company, L.L.C.

W. GEORGE GREIG (45), Senior Vice President; Portfolio Manager, William Blair &
Co., L.L.C.; former Portfolio Manager, Provident Capital Management; Manager,
Akamai, partnership affiliated with Framlington Investment Management Limited;
Partner, Pilgrim, Baxter & Greig.

GLEN KLECZKA (35), Senior Vice President; Portfolio Manager, William Blair &
Company, L.L.C.; former Partner, Brinson Partners; former Portfolio Manager,
CNA Financial Corp.

BENTLEY M. MYER (51), Senior Vice President; Principal, William Blair &
Company, L.L.C.; Director, Delnor Community Hospital.

NORBERT W. TRUDERUNG (45), Senior Vice President; Principal, William Blair &
Company, L.L.C.

JAMES S. KAPLAN (37), Vice President; Associate, William Blair & Company,
L.L.C.; former Vice President, First Union Bank.

JOHN P. KAYSER (48), Vice President; Principal, William Blair & Company,
L.L.C.; Director, DuPage Children's Museum.

TERENCE M. SULLIVAN (54), Vice President and Treasurer; Associate, William
Blair & Company, L.L.C.

JEFFREY A. URBINA (43), Vice President; Associate, William Blair & Company,
L.L.C.; former Director of Emerging Market Research and Portfolio Manager, Van
Kampen American Capital.

JANET V. GASSMANN (31), Secretary; Administrative Assistant, William Blair &
Company, L.L.C.; former Administrative Assistant, Shearson Lehman Brothers,
Inc.

*Directors who are interested persons as defined in the 1940 Act.

(1) Member of the Standing Audit Committee.

(2) Member of Interim Valuation Committee. This committee handles any
questions regarding the valuation of portfolio securities that may arise
between meetings of the Board of Directors.

(3) Mr. Kelm maintains a brokerage account with the Adviser, and Mr. Beadle,
Mr. Bosler, Ms. McDermott and Mr. Schwemm employ the Adviser to manage
assets that they control. (In addition, as a result of his former
affiliation with the Adviser as a partner of William Blair & Company,
L.L.C. from 1973 to 1982, Mr. Armour has a beneficial interest in a
Deferred Profit Sharing Plan that is managed by the Adviser.)

Effective February 1, 1998, directors who are not affiliated with the Adviser
receive an annual fee of $8,000 plus $3,000 for each meeting attended in person
plus expenses, $1,500 for each meeting by telephone and $3,000 for each
committee meeting held on a different day from a board meeting. Prior to
February 1, 1998, the directors and officers not affiliated with the Adviser
received an annual fee of $4,000 plus $2,000 for each meeting attended in person
plus expenses. The directors and officers affiliated with the Adviser received
no compensation from the Fund.

B-4
<PAGE> 44

The following table sets forth the compensation earned from the Fund for the
fiscal year ended December 31, 1997 by directors who are not affiliated with the
Adviser:

<TABLE>
<CAPTION>
DIRECTOR PENSION OR
- -------- RETIREMENT
BENEFITS ESTIMATED
AGGREGATE ACCRUED ANNUAL
COMPENSATION AS PART OF BENEFITS UPON TOTAL
FROM THE FUND FUND EXPENSES RETIREMENT COMPENSATION
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Vernon Armour............................... $12,000 0 0 $12,000
J. Grant Beadle*............................ $5,000 0 0 $5,000
Theodore A. Bosler*......................... $5,000 0 0 $5,000
George Kelm................................. $12,000 0 0 $12,000
Ann P. McDermott............................ $12,000 0 0 $12,000
John B. Schwemm............................. $10,000 0 0 $10,000
</TABLE>

*Joined the Board of Directors on October 21, 1997.

The following table provides certain information at February 6, 1998 with
respect to persons known to the Fund to be record holders of 5% or more of the
shares of the following portfolios:

<TABLE>
<CAPTION>
PERCENT OF
PORTFOLIO'S
NAME AND ADDRESS OUTSTANDING
OF RECORD OWNER NUMBER OF SHARES COMMON STOCK
--------------- ---------------- ------------
<S> <C> <C>
GROWTH FUND
-----------
Charles A. Schwab & Company 3,938,819 10.44%
101 Montgomery Street
San Francisco, CA 94104

William Blair Employees 3,885,568 10.18%
Profit Sharing Plan
222 West Adams Street
Chicago, IL 60606

Bank of America, Illinois Trustee 2,039,869 5.34%
FBO Kohls Department Stores
401(k)
231 South LaSalle Street
Chicago, IL 60604

VALUE DISCOVERY FUND
--------------------
William Blair & Co., L.L.C. 206,007 8.36%
Ralph G. Portis
222 West Adams Street
Chicago, IL 60606

William Blair & Co., L.L.C. 202,760 8.23%
Catlin Investments L.P.
222 West Adams Street
Chicago, IL 60606

William Blair & Co., L.L.C. 202,760 8.23%
Travis Investments L.P.
222 West Adams Street
Chicago, IL 60606
</TABLE>

As of February 6, 1998, the Fund's officers and directors as a group owned (or
held or shared investment or voting power with respect to) 503,035 shares or
1.3% of the Growth Fund's stock, 546,534 shares or 22.1% of the Value Discovery
Fund's stock, 731,553

B-5

<PAGE> 45

shares or 7.5% of the International Growth Fund's stock, 177,195 shares or 1.1%
of the Income Fund's stock and 13,169,233 shares or 1.4% of the shares of the
Ready Reserves Fund. These figures do not include shares of the portfolios that
may be indirectly owned by certain officers of the Fund as a result of their
interest in the William Blair Profit Sharing Plan.

BROKERAGE AND PORTFOLIO TRANSACTIONS. Decisions on portfolio transactions
(including the decision to buy or sell, the appropriate price, allocation of
brokerage, use of a broker as agent or dealer as principal and negotiation of
commissions) normally are made by the Adviser. In purchasing and selling
portfolio securities, the Fund seeks to obtain the most favorable overall
result, taking into account the net price, the method of execution and research
services provided by the broker. Such research services include economic
forecasts and analytical, narrative and statistical reports on industries and
companies for consideration by the Fund and the Adviser's other clients.

Portfolio transactions may increase or decrease the return of a portfolio
depending upon the Adviser's ability to correctly time and execute such
transactions. A portfolio turnover rate for any year is determined by dividing
the lesser of sales or purchases (excluding in either case cash equivalents,
such as short-term corporate notes) by the portfolio's monthly average net
assets and multiplying by 100 (with all securities with maturities and
expirations of one year or less excluded from the computation). The portfolio's
turnover rate will also vary from year to year depending on market conditions.
Since the Ready Reserves Fund's assets are invested in securities with short
(less than one year) effective maturities, its portfolio will turn over many
times a year. Such securities, however, are excluded from the Securities and
Exchange Commission's required portfolio turnover rate calculations, resulting
in no portfolio turnover rate for reporting purposes.

Selection of a broker for a particular portfolio transaction depends on many
factors, some of which are subjective and which include the net price, the
confidentiality, reliability, integrity, the size and nature of the transaction
and the market in which it is to occur and any research or other services that
the broker has provided. The Adviser determines the overall reasonableness of
brokerage commissions and of premiums and discounts on principal transactions
(which do not involve commissions) by review of comparable trades for the
Adviser's other clients and in the market generally. If more than one broker is
believed to be equally qualified to effect a portfolio transaction, the Adviser
may assign the transaction to a broker that has furnished research services, but
the Adviser has no agreement, formula or policy as to allocation of brokerage.
The Fund does not ordinarily market its shares through brokers and any sales of
the Fund's shares by a broker would be neither a qualifying nor disqualifying
factor in allocating brokerage. All the Fund's 1996 portfolio transactions were
with brokers that met the above requirements, some of which provided research or
other services to the Adviser.

The Fund may pay to brokers that provide research services to the Adviser a
commission higher than another broker might have charged if it is determined
that the commission is reasonable in relation to the value of the brokerage and
research services that are provided, viewed in terms of either the particular
transaction or the Adviser's overall responsibility to its advisory accounts.
The extent to which such commissions exceed commissions solely for execution
cannot be determined, but such research services, which are involved in
portfolio transactions for the Fund and for the Adviser's other advisory
accounts, can be of benefit to both the Fund and such other accounts. The value
of research services that are provided by brokers who handle portfolio
transactions for the Fund cannot be precisely determined and such services are
supplemental to the Adviser's own efforts, which are undiminished thereby. The
Adviser does not believe that its expenses are reduced by reason of such
services, which benefit the Fund and the Adviser's other clients. Transactions
in over-the-counter securities are generally executed as principal trades with
primary market makers, except where it is believed that a better combination of
price and execution could otherwise be obtained.

The Growth Fund paid total brokerage fees of $422,714, $394,561 and $254,434 in
1997, 1996 and 1995, respectively. None of these brokerage fees were paid to a
broker that was an affiliated person of the Fund or to a broker of an affiliated
person was an affiliated person of the Fund or of the Adviser.

The Value Discovery Fund paid total brokerage fees of $35,216 in 1997 and $12
for the period from December 23, 1996 (Commencement of Operations) to December
31, 1996. None of these brokerage fees were paid to a broker that was an
affiliated person of the Fund or to a broker of which an affiliated person was
an affiliated person of the Fund or of the Adviser.

The International Growth Fund paid brokerage fees of $820,267, $779,507 and
$454,667 in 1997, 1996 and 1995, respectively. None of these brokerage fees
were paid to a broker that was an affiliated person of the Fund or to a broker
of which an affiliated person was an affiliated person of the Fund or of the
Adviser.

Purchases and sales of portfolio securities for the Income Fund and Ready
Reserves Fund usually are principal transactions, either directly with the
issuer or with an underwriter or market maker, with no brokerage commissions
paid by the portfolio. No brokerage commissions were paid by the Income Fund or
the Ready Reserves Fund during the fiscal years ended December 31, 1997, 1996
and 1995. Purchases from underwriters will include a commission or concession
paid by the issuer to the underwriter and purchases from dealers serving as
market makers will include the spread between the bid and asked prices. The
primary consideration in the allocation of transactions is prompt execution of
orders in an effective manner at the most favorable price.

B-6

<PAGE> 46

The investment decisions for the Fund are reached independently from those for
other accounts managed by the Adviser. Such other accounts also may make
investments in the same type of instruments or securities as the Fund at the
same time as the Fund. When two or more accounts have funds available for
investment in similar instruments, available instruments are allocated as to
amount in a manner considered equitable to each account. In some cases this
procedure may affect the size or price of the position obtainable for the Fund.
However, it is the opinion of the Board of Directors that the benefits available
because of the Adviser's organization outweigh any disadvantages that may arise
from exposure to simultaneous transactions.

No portfolio transactions are executed for the Fund with or through the Adviser
or any affiliated broker-dealer of the Adviser. The Fund may purchase
securities from other members of an underwriting syndicate of which the Adviser
or an affiliated broker-dealer is a participant, but only under conditions set
forth in applicable rules of the Securities and Exchange Commission and in
accordance with procedures adopted and reviewed periodically by the Board of
Directors.

INVESTMENT POLICIES AND RESTRICTIONS

The Fund has adopted certain fundamental investment restrictions for each
portfolio that, along with the portfolio's investment objective, can not be
changed without approval by holders of a "majority of the outstanding voting
securities" of the portfolio, which is defined in the Investment Company Act of
1940 (the "1940 Act") to mean the lesser of (a) 67% of the shares of the
portfolio at a meeting where more than 50% of the outstanding voting shares of
the portfolio are present in person or by proxy; or (b) more than 50% of the
outstanding voting shares of the portfolio. All percentage restrictions on
investments apply at the time the investment is made and shall not be considered
to violate the limitations unless, immediately after or as a result of the
investment, a violation of the restriction occurs. There can be no assurance
that a portfolio will meet its investment objective.

GROWTH FUND.

(1) The portfolio will operate as an open-end, diversified, management type
investment company, as defined in the 1940 Act.

The Growth Fund may not:

(2) Invest in any enterprise for the purpose of exercising control or
management thereof.

(3) Buy or sell real estate or real estate loans.

(4) Underwrite the securities of other issuers.

(5) Make loans to other persons.

(6) Purchase or sell commodities or commodity contracts.

(7) Issue senior securities.

(8) Borrow money, except from banks for current obligations of a minor
character incurred in the ordinary course of business, nor borrow amounts
in excess of 10% of its gross assets. (The portfolio does not presently
intend to borrow any amount in excess of 5% of its gross assets.)

(9) Make an investment if doing so would cause more than 25% of its total
assets to be invested in any one industry.

The following are the portfolio's non-fundamental operating policies, which may
be changed by the Fund's Board of Directors without shareholder approval.

The Growth Fund may not:

(10) Pledge, or create a lien on, its assets.

(11) Purchase any security if doing so would cause more than 10% of the voting
securities of the issuer to be held by the portfolio.

(12) Purchase, except for securities acquired as part of a merger,
consolidation or acquisition of assets, more than 3% of the stock of
another investment company.

(13) Invest in futures contracts, puts, calls, straddles, spreads or any
combination thereof.

(14) Invest in illiquid securities if, as a result of such investment, more
than 15% of its net assets would be invested in illiquid securities.

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(15) Sell securities short, unless the portfolio owns or has the right to
obtain securities equivalent in kind and amount to the securities sold
short, or unless it covers such short sale as required by the current
rules and positions of the Securities and Exchange Commission or its staff
and provided that transactions in futures contracts or other derivative
instruments are not deemed to constitute selling securities short.

(16) Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions; and
provided that margin deposits in connection with futures contracts or
other derivative instruments shall not constitute purchasing securities on
margin.

VALUE DISCOVERY FUND.

The Value Discovery Fund:

(1) May not with respect to 75% of its total assets, purchase the securities
of any issuer (except securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities) if, as a result, (i) more
than 5% of the portfolio's total assets would be invested in the
securities of that issuer or (ii) the portfolio would hold more than 10%
of the outstanding voting securities of that issuer.

(2) May (i) borrow money from banks and (ii) make other investments or engage
in other transactions permissible under the 1940 Act which may involve a
borrowing, provided that the combination of (i) and (ii) shall not exceed
33 1/3% of the value of the portfolio's total assets (including the amount
borrowed), less the portfolio's liabilities (other than borrowings), or
such other percentage permitted by law, except that the portfolio may
borrow up to an additional 5% of its total assets (not including the
amount borrowed) from a bank for temporary or emergency purposes (but not
for leverage or the purchase of investments).

Note: Presently, the Value Discovery Fund only intends to borrow from banks for
temporary or emergency purposes. However, the portfolio may borrow money from
banks and make other investments or engage in other transactions permissible
under the 1940 Act which may be considered a borrowing (such as mortgage dollar
rolls and reverse repurchase agreements).

(3) May not issue senior securities, except as permitted under the 1940 Act.

(4) May not act as an underwriter of another issuer's securities, except to
the extent that the portfolio may be deemed to be an underwriter within
the meaning of the Securities Act of 1933 in connection with the purchase
and sale of portfolio securities.

(5) May not purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments (but this shall not
prevent the portfolio from purchasing or selling options, futures
contracts, or other derivative instruments or from investing in securities
or other instruments backed by physical commodities).

(6) May not make loans if, as a result, more than 33 1/3% of the portfolio's
total assets would be lent to other persons, except through (i) purchases
of debt securities or other debt instruments or (ii) engaging in
repurchase agreements.

(7) May not purchase the securities of any issuer if, as a result, 25% or
more of the portfolio's total assets would be invested in the securities
of issuers, the principal business activities of which are in the same
industry.

(8) May not purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not prohibit
the portfolio from purchasing or selling securities or other instruments
backed by real estate or of issuers engaged in real estate activities).

The following are the portfolio's non-fundamental operating policies, which may
be changed by the Fund's Board of Directors without shareholder approval.

The Value Discovery Fund may not:

(9) Sell securities short, unless the portfolio owns or has the right to
obtain securities equivalent in kind and amount to the securities sold
short, or unless it covers such short sale as required by the current
rules and positions of the Securities and Exchange Commission or its staff
and provided that transactions in futures contracts or other derivative
instruments are not deemed to constitute selling securities short.

(10) Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions; and
provided that margin deposits in connection with futures contracts or
other derivative instruments shall not constitute purchasing securities on
margin.

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(11) Invest in illiquid securities if, as a result of such investment, more
than 15% of its net assets would be invested in illiquid securities.

(12) Purchase, except for securities acquired as part of a merger,
consolidation or acquisition of assets, more than 3% of the stock of
another investment company.

(13) Engage in futures transactions which are impermissible pursuant to Rule
4.5 under the Commodity Exchange Act and, in accordance with Rule 4.5,
will use futures transactions solely for bona fide hedging transactions
(within the meaning of the Commodity Exchange Act); provided, however,
that the portfolio may, in addition to bona fide hedging transactions, use
futures transactions if the aggregate initial margin and premiums required
to establish such positions do not exceed 5% of the portfolio's net
assets. In addition, the aggregate margin deposits required on all
futures transactions being held will not exceed 5% of the portfolio's
total assets.

(14) Pledge, mortgage or hypothecate any assets owned by the portfolio except
as may be necessary in connection with permissible borrowings or
investments and then such pledging, mortgaging or hypothecating may not
exceed 33 1/3% of the portfolio's total assets at the time of the
borrowing or investment.

INTERNATIONAL GROWTH FUND.

The International Growth Fund may not:

(1) Borrow money except as a temporary measure for extraordinary or emergency
purposes and then only in an amount up to 10% of the value of its total
assets (any such borrowing under this section will not be collateralized).
The portfolio will not borrow for leverage purposes.

(2) Pledge, mortgage or create a lien on its assets.

(3) Make loans of money or portfolio securities, except through the purchase
of debt obligations and repurchase agreements.

(4) Purchase any securities if, immediately after such purchase, more than
25% of the value of the portfolio's total assets would be invested in the
securities of issuers in the same industry. There is no limitation as to
the portfolio's investments in obligations issued or guaranteed by the
U.S. government, its agencies or instrumentalities. For purposes of this
restriction, the obligations of each foreign government are deemed to
constitute an industry.

(5) Invest more than 5% of the value of its total assets in the securities of
any one issuer or purchase more than 10% of the outstanding voting
securities, or any class of securities, of any one issuer. For purposes
of this restriction, all outstanding debt securities of an issuer are
considered as one class and all preferred stock of an issuer is considered
as one class. (This restriction does not apply to obligations issued or
guaranteed by the U.S. government, or its agencies or instrumentalities.)

(6) Underwrite securities by others, except to the extent the portfolio may
be deemed to be an underwriter, under the Federal securities laws, in
connection with the disposition of portfolio securities.

(7) Purchase securities of other U.S. or foreign investment companies, except
that the portfolio may make such a purchase (a) in the open market
provided that immediately thereafter (i) not more than 10% of the
portfolio's total assets would be invested in such securities; (ii) not
more than 5% of the portfolio's total assets would be invested in
securities of any one investment company; and (iii) not more than 3% of
the total outstanding voting stock of any one investment company would be
owned by the portfolio, or (b) as part of an offer of exchange,
reorganization or as a dividend.

(8) Make short sales of securities, or purchase any securities on margin, or
maintain a short position or participate on a joint or a joint and several
basis in any trading account in securities, except that the portfolio may
(i) obtain such short-term credits as may be necessary for the clearance
of purchases and sales of securities; (ii) purchase or sell futures
contracts; and (iii) deposit or pay initial or variation margin in
connection with financial futures contracts or related options
transactions.

(9) Purchase or sell put options, call options, or combinations thereof,
except that the portfolio may engage in financial futures contracts and
related options transactions to seek to hedge against either a decline in
the value of securities included in the portfolio or an increase in the
price of securities which the portfolio plans to purchase in the future.
(10) Purchase or sell commodities or commodity contracts, except that the
portfolio may enter into financial futures contracts, options on futures
contracts and forward foreign currency exchange contracts.

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(11) Purchase or sell real estate (although it may purchase securities of
issuers that engage in real estate operations, securities that are secured
by interests in real estate or securities that represent interests in real
estate, including real estate investment trusts).

(12) Invest in interests in oil, gas or other mineral leases, rights or
royalty contracts or exploration or development programs, although it may
invest in the securities of issuers which invest in or sponsor such
programs.

(13) Invest for the purposes of exercising control or management of another
issuer.

(14) Issue any "senior securities" as defined in the 1940 Act (except for
engaging in futures and options transactions and except for borrowing
subject to the restrictions set forth above).

(15) Invest more than 5% of its total assets in securities of issuers which
with their predecessors have a record of less than three years' continuous
operation.

EMERGING MARKETS GROWTH FUND.

The Emerging Markets Growth Fund:

Note: Presently, the Emerging Markets Growth Fund only intends to borrow from
banks for temporary or emergency purposes. However, the portfolio may borrow
money from banks and make other investments or engage in other transactions
permissible under the 1940 Act which may be considered a borrowing (such as
mortgage dollar rolls and reverse repurchase agreements).

(3) May not issue senior securities, except as permitted under the 1940 Act.

The following are the portfolio's non-fundamental operating policies, which may
be changed by the Fund's Board of Directors without shareholder approval.

The Emerging Markets Growth Fund may not:

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<PAGE> 50

Exchange Commission or its staff and provided that transactions in futures
contracts or other derivative instruments are not deemed to constitute
selling securities short.

(11) Invest in illiquid securities if, as a result of such investment, more
than 15% of its net assets would be invested in illiquid securities.

(12) Purchase, except for securities acquired as part of a merger, consolidation
or acquisition of assets, more than 3% of the stock of another investment
company.

INCOME FUND.

The Income Fund may not:

(1) Purchase securities of any issuer (other than obligations of, or
guaranteed by, the United States Government, its agencies or
instrumentalities) if, as a result, more than 5% of the value of its total
assets would be invested in securities of that issuer.

(2) Purchase more than 10% of any class of securities of any issuer, except
that such restriction shall not apply to securities issued or guaranteed
by the United States Government, its agencies or instrumentalities. All
debt securities and all preferred stocks are each considered as one class.

(3) Invest more than 5% of its total assets in securities of issuers which
with their predecessors have a record of less than three years' continuous
operation.

(4) Make short sales of securities or purchase any securities on margin
except to obtain such short-term credits as may be necessary for the
clearance of transactions.

(5) Write, purchase or sell puts, calls or combinations thereof.

(6) Invest for the purpose of exercising control or management of another
issuer.

(7) Invest in commodities or commodity futures contracts or in real estate,
although it may invest in securities which are secured by real estate and
securities of issuers which invest or deal in real estate.

(8) Invest in interests in oil, gas or other mineral exploration or
development programs, although it may invest in the securities of issuers
which invest in or sponsor such programs.

(9) Underwrite securities issued by others except to the extent the portfolio
may be deemed to be an underwriter, under the Federal securities laws, in
connection with the disposition of portfolio securities.

(10) Issue senior securities as defined in the 1940 Act.

(11) Purchase common stocks, preferred stocks, warrants or other equity
securities.

(12) Make loans to others, except through the purchase of debt obligations or
repurchase agreements or the loaning of portfolio securities not exceeding
75% of the value of its total assets.

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<PAGE> 51

(13) Borrow money, except as a temporary measure and then only in an amount up
to 5% of the value of its total assets (any such borrowing under this
section will not be collateralized). The portfolio will not borrow for
leverage purposes.

(14) Concentrate more than 25% of the value of its total assets in any one
industry. This restriction does not apply to U.S. Government securities
or government agency securities, or to instruments, such as repurchase
agreements, secured by these instruments.

The following is the portfolio's non-fundamental operating policy, which may be
changed by the Fund's Board of Directors without shareholder approval.

The Income Fund may not:

(15) Invest in illiquid securities if, as a result of such investment, more
than 15% of its net assets would be invested in illiquid securities.

READY RESERVES FUND.

The Ready Reserves Fund may not:

(3) Invest more than 5% of its total assets in securities of issuers which
with their predecessors have a record of less than three years' continuous
operation.

(4) Make short sales of securities, or purchase any securities on margin
except to obtain such short-term credits as may be necessary for the
clearance of transactions.

(5) Write, purchase or sell puts, calls or combinations thereof.

(6) Invest for the purpose of exercising control or management of another
issuer.

(8) Invest in interests in oil, gas or other mineral exploration or
development programs, although it may invest in the securities of issuers
which invest in or sponsor such programs.

(10) Issue senior securities as defined in the 1940 Act.

(11) Make loans to others (except through the purchase of debt obligations or
repurchase agreements in accordance with its investment objective and
policies).

(12) Borrow money except as a temporary measure for extraordinary or emergency
purposes and then only in an amount up to 5% of the value of its total
assets (any such borrowing under this section will not be collateralized).
The portfolio will not borrow for leverage purposes.

(13) Concentrate more than 25% of the value of its total assets in any one
industry; provided, however, that the portfolio reserves freedom of action
to invest up to 100% of its total assets in certificates of deposit, time
deposits or bankers' acceptances or repurchase agreements with domestic
branches of domestic banks when management considers it to be in the
interests of the portfolio in attaining its investment objective.
(14) Invest in securities restricted as to disposition under the Federal
securities laws (except commercial paper issued under Section 4(2) of the
Securities Act of 1933).

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(15) Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets.

INVESTMENT PRACTICES

The Prospectus describes each portfolio's investment objective as well as
certain investment policies and investment techniques that the portfolio may
employ in pursuing its investment objective. The following discussion
supplements the discussion contained in the Prospectus, including the Investment
Glossary at the end of the Prospectus. Not all of the portfolios may invest in
all of the types of investments listed below.

COLLATERALIZED OBLIGATIONS. Mortgage-Backed Securities. Collateralized
obligations include mortgage-backed collateralized obligations ("mortgage-backed
securities"). Mortgage-backed securities are securities that directly or
indirectly represent a participation in, or are secured by and payable from,
mortgage loans secured by real property. There currently are three basic types
of mortgage-backed securities: (1) those issued or guaranteed by the U.S.
Government or one of its agencies or instrumentalities, such as GNMA (Government
National Mortgage Association), FNMA (Federal National Mortgage Association) and
FHLMC (Federal Home Loan Mortgage Corporation); (2) those issued by private
issuers that represent an interest in or are collateralized by mortgage-backed
securities issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities; and (3) those issued by private issuers that represent an
interest in or are collateralized by whole mortgage loans or mortgage-backed
securities without a government guarantee but that usually have some form of
private credit enhancement.

The yield characteristics of mortgage-backed securities differ from traditional
debt securities. Among the major differences are that interest and principal
payments are made more frequently, usually monthly, and that principal may be
prepaid at any time because the underlying mortgage loans generally may be
prepaid at any time. As a result, if a portfolio purchases such a security at a
premium, a prepayment rate that is faster than expected will reduce yield to
maturity, while a prepayment rate that is slower than expected will increase
yield to maturity. Conversely, if a portfolio purchases these securities at a
discount, faster than expected prepayments will increase yield to maturity,
while slower than expected prepayments will reduce it.

Prepayments on a pool of mortgage loans are influenced by a variety of economic,
geographic, social and other factors, including changes in mortgagors' housing
needs, job transfers, unemployment, mortgagors' net equity in the mortgaged
properties and servicing decisions. Generally, however, prepayments on
fixed-rate mortgage loans will increase during a period of falling interest
rates and decrease during a period of rising interest rates. Accordingly,
amounts available for reinvestment by the portfolio are likely to be greater
during a period of declining interest rates and, as a result, are likely to be
reinvested at lower interest rates than during a period of rising interest
rates. Mortgage-backed securities may decrease in value as a result of
increases in interest rates and may benefit less than other fixed income
securities from declining interest rates because of the risk of prepayment.

Guaranteed Mortgage Pass-Through Securities. Mortgage pass-through securities
represent participation interests in pools of residential mortgage loans
originated by United States Governmental or private lenders and guaranteed, to
the extent provided in such securities, by the United States Government or one
of its agencies or instrumentalities. Such securities, which are ownership
interests in the underlying mortgage loans, differ from conventional debt
securities, which provide for periodic payment of interest in fixed amounts
(usually semi-annually) and principal payments at maturity or on specified call
dates. Mortgage pass-through securities provide for monthly payments that are a
"pass-through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans, net
of any fees paid to the guarantor of such securities and the services of the
underlying mortgage loans. The guaranteed mortgage pass-through securities in
which the portfolio will invest will include those issued or guaranteed by GNMA,
FNMA and FHLMC.

GNMA is a wholly owned corporate instrumentality of the United States within the
Department of Housing and Urban Development. The National Housing Act of 1934,
as amended (the "Housing Act"), authorizes GNMA to guarantee the timely payment
of the principal of and interest on certificates ("Ginnie Mae Certificates")
that are based upon and backed by a pool of mortgage loans insured by the
Federal Housing Administration under the Housing Act or Title V of the Housing
Act of 1949 (FHA Loans), or guaranteed by the Veterans' Administration under the
Servicemen's Readjustment Act of 1944, as amended (VA Loans), or by pools of
other eligible mortgage loans. Ginnie Mae Certificates represent a pro rata
interest in one or more pools of eligible mortgage loans. The Housing Act
provides that the full faith and credit of the United States Government is
pledged to the payment of all amounts that may be required to be paid under any
guarantee. In order to meet its obligations under such guarantee, GNMA is
authorized to borrow from the United States Treasury with no limitations as to
amount.

FNMA is a federally chartered and privately owned corporation organized and
existing under the Federal National Mortgage Association Charter Act. FNMA was
originally established in 1938 as a United States Government agency to provide
supplemental liquidity to the mortgage market and was transformed into a
stockholder owned and privately managed corporation by legislation enacted in
1968. FNMA provides funds to the mortgage market primarily by purchasing home
mortgage loans from local lenders, thereby replenishing their funds for
additional lending. FNMA acquires funds to purchase home mortgage loans from
many capital market investors that may not ordinarily invest in mortgage loans
directly, thereby expanding the total amount of funds available for housing.

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Each Fannie Mae Certificate will entitle the registered holder thereof to
receive amounts representing the holder's pro rata interest in scheduled
principal payments and interest payments (at such Fannie Mae Certificate's
pass-through rate, which is net of any servicing and guarantee fees on the
underlying mortgage loans) and any principal prepayments, on the mortgage loans
in the pool represented by such Fannie Mae Certificate and such holder's
proportionate interest in the full principal amount of any foreclosed or
otherwise finally liquidated mortgage loan. The full and timely payment of
principal of and interest on each Fannie Mae Certificate will be guaranteed by
FNMA, which guarantee is not backed by the full faith and credit of the United
States Government. FNMA has limited rights to borrow from the United States
Treasury.

FHLMC is a corporate instrumentality of the United States created pursuant to
the Emergency Home Finance Act of 1970, as amended. FHLMC was established
primarily for the purpose of increasing the availability of mortgage credit for
the financing of needed housing. The principal activity of FHLMC currently
consists of the purchase of first lien, conventional, residential mortgage loans
and participation interests in such mortgage loans and the resale of the
mortgage loans so purchased in the form of mortgage securities, primarily
Freddie Mac Certificates.

FHLMC guarantees to each registered holder of a Freddie Mac Certificate the
timely payment of interest at the rate provided for by such Freddie Mac
Certificate, whether or not received. FHLMC also guarantees to each holder of a
Freddie Mac Certificate ultimate collection of all principal of the related
mortgage loans, without any offset or deduction, but does not always guarantee
the timely payment of scheduled principal. FHLMC may remit the amount due on
account of its guarantee of collection of principal at any time after default on
an underlying mortgage loan, but not later than 30 days following (i)
foreclosure sale, (ii) payment of a claim by any mortgage insurer or (iii) the
expiration of any right of redemption, whichever occurs last, but in any event
no later than one year after demand has been made upon the mortgagor for
accelerated payment of principal. The obligations of FHLMC under its guarantee
are obligations solely of FHLMC and are not backed by the full faith and credit
of the United States Government. FHLMC has limited rights to borrow from the
United States Treasury.

Private Mortgage Pass-Through Securities. Private mortgage pass-through
securities ("private pass-throughs") are structured similarly to the Ginnie Mae,
Fannie Mae and Freddie Mac mortgage pass-through securities described above and
are issued by originators of and investors in mortgage loans, including savings
and loan associations, mortgage banks, commercial banks, investment banks and
special purpose subsidiaries of the foregoing. Private pass-throughs are
usually backed by a pool of conventional fixed rate or adjustable rate mortgage
loans. Since private pass-throughs typically are not guaranteed by an entity
having the credit status of GNMA, FNMA or FHLMC, such securities generally are
structured with one or more types of credit enhancement. See "Types of Credit
Support," below.

Collateralized Mortgage Obligations and Multiclass Pass-Through Securities.
Collateralized mortgage obligations, or, "CMOs," are debt obligations
collateralized by mortgage loans or mortgage pass-through securities. Typically,
CMOs are collateralized by Ginnie Mae, Fannie Mae or Freddie Mac Certificates,
but also may be collateralized by whole loans or private pass-throughs (such
collateral collectively hereinafter referred to as "Mortgage Assets").
Multiclass pass-through securities are equity interests in a trust composed of
Mortgage Assets. Payments of principal of and interest on the Mortgage Assets
and any reinvestment income thereon provide the funds to pay debt service on the
CMOs or make scheduled distributions on the multiclass pass-through securities.
CMOs may be issued by agencies or instrumentalities of the United States
Government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing.

In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMOs, often referred to as a "tranche," is issued at a specific fixed
or floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly
or semi-annual basis. The principal of and interest on the Mortgage Assets may
be allocated among the several classes of a series of a CMO in innumerable ways.
In a common structure, payments of principal, including any principal
prepayments, on the Mortgage Assets are applied to the classes of the series of
a CMO in the order of their respective stated maturities or final distribution
dates, so that no payment of principal will be made on any class of CMOs until
all other classes having an earlier stated maturity or final distribution date
have been paid in full.

Stripped Mortgage-Backed Securities. Stripped mortgage-backed securities
("SMBS") are derivative multiclass mortgage securities. SMBS may be issued by
agencies or instrumentalities of the United States Government, or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose subsidiaries of the foregoing.

SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions on a pool of Mortgage Assets. A
common type of SMBS will have one class receiving some of the interest and most
of the principal from the Mortgage Assets, while the other class will receive
most of the interest and the remainder of the principal. In the most extreme
case, one class will receive all the interest (the interest-only or "IO" class),
while the other class will receive all the principal (the principal-only or "PO"
class). The yield to maturity on an IO class is extremely sensitive to the rate
of principal payments (including prepayments) on the related underlying Mortgage
Assets and a rapid rate of principal payments may have a material adverse
effect

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on the portfolio's yield to maturity. If the underlying Mortgage Assets
experience greater than anticipated prepayments of principal, the portfolio may
fail to fully recoup its initial investment in these securities.

Although SMBS are purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers, these securities were
only recently developed and, accordingly, may have less liquidity than other
securities. The portfolio will invest only in IO and PO class mortgage
obligations collateralized by securities guaranteed by the United States
Government.

Types of Credit Support. Mortgage-backed and asset-backed securities are often
backed by a pool of assets representing the obligations of a number of different
parties. To lessen the effect of failures by obligors on underlying assets to
make payments, such securities may contain elements of credit support. Such
credit support falls into two categories: (i) liquidity protection and (ii)
protection against losses resulting from ultimate default by an obligor on the
underlying assets. Liquidity protection refers to the provision of advances,
generally by the entity administering the pool of assets, to ensure that the
receipt of payments on the underlying pool occurs in a timely fashion.
Protection against losses resulting from ultimate default ensures ultimate
payment of the obligations on at least a portion of the assets in the pool.
Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches.

Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of "reserve
funds" (where cash or investments, sometimes funded from a portion of the
payments on the underlying assets, are held in reserve against future losses)
and "overcollateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceeds that required to make payment of the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based upon historical information
respecting the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that anticipated could adversely affect the
return on an investment in such a security.

Asset-Backed Securities. The securitization techniques used to develop
mortgage-backed securities are now being applied to a broad range of assets.
Through the use of trusts and special purpose corporations, various types of
assets, primarily automobile and credit card receivables, are being securitized
in pass-through structures similar to the mortgage pass-through structures
described above or in a pay-through structure similar to the CMO structure. The
Income Fund may invest in these and other types of asset-backed securities that
may be developed in the future.

As with mortgage-backed securities, the yield characteristics of asset-backed
securities differ from traditional debt securities. As with mortgage-backed
securities, asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties and use similar
credit enhancement techniques. See "Mortgage-Backed Securities," above. In
general, however, the collateral supporting asset-backed securities is of
shorter maturity than mortgage loans and is less likely to experience
substantial prepayments. Although certain of the factors that affect the rate
of prepayments on mortgage-backed securities also affect the rate of prepayments
on asset-backed securities, during any particular period, the predominant
factors affecting prepayment rates on mortgage-backed securities and
asset-backed securities may be different.

Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts owed on the credit cards,
thereby reducing the balance due. Most issuers of automobile receivables permit
the servicers to retain possession of the underlying obligations. If the
servicers were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have a
proper security interest in all the obligations backing such receivables.
Therefore, there is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.

Inverse Floaters. The Income Fund may invest in mortgage derivative products
like inverse floating rate debt instruments ("inverse floaters"). The interest
rate on an inverse floater resets in the opposite direction from the market rate
of interest to which the inverse floater is indexed. The income from an inverse
floater may be magnified to the extent that its rate varies by a magnitude that
exceeds the magnitude of the change in the index rate of interest. The higher
the degree of magnification in an inverse floater, the greater the volatility in
its market value. Accordingly, the duration of an inverse floater may exceed
its stated final maturity. The coupon of an inverse floating rate note moves
inversely to the movement of interest rates. In addition, mortgage-backed
inverse floaters will experience approximately the same changes in average lives
and durations that other comparable fixed-rate mortgage-backed bonds do when
prepayments rise and fall with declines and increases in interest rates. In a
rising interest rate environment, the declining coupon coupled with the increase
in the average life can magnify the price decline relative to a fixed-rate
obligation. Conversely, rate declines increase coupon income and gradually
shorten the average life, which tends to amplify the price increase. Inverse
floaters are typically priced based on a matrix.

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FOREIGN SECURITIES. Investing in foreign securities involves a series of
risks not present in investing in U.S. securities. Most of the foreign
securities held by the portfolios will not be registered with the Securities
and Exchange Commission (the "SEC"), nor will the foreign issuers be subject to
SEC reporting requirements. Accordingly, there may be less publicly available
information concerning foreign issuers of securities held by the portfolio than
is available concerning U.S. companies. Disclosure and regulatory standards in
many respects are less stringent in emerging market countries than in the U.S.
and other major markets. There also may be a lower level of monitoring and
regulation of emerging markets and the activities of investors in such markets
and enforcement of existing regulations may be extremely limited. Foreign
companies and, in particular, companies in smaller and emerging capital markets
are not generally subject to uniform accounting, auditing and financial
reporting standards, or to other regulatory requirements comparable to those
applicable to U.S. companies. The portfolio's net investment income and
capital gains from its foreign investment activities may be subject to non-U.S.
withholding taxes.

The costs attributable to foreign investing that the portfolio must bear
frequently are higher than those attributable to domestic investing; this is
particularly true with respect to emerging capital markets. For example, the
costs of maintaining custody of foreign securities exceeds custodian costs for
domestic securities and transaction and settlement costs of foreign investing
also frequently are higher than those attributable to domestic investing.
Costs associated with the exchange of currencies also make foreign investing
more expensive than domestic investing. Investment income on certain foreign
securities in which the portfolio may invest may be subject to foreign
withholding or other government taxes that could reduce the return of these
securities. Tax treaties between the United States and foreign countries,
however, may reduce or eliminate the amount of foreign tax to which the
portfolio would be subject.

The economies of individual emerging market Xcountries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rate of inflation, currency depreciation, capital reinvestment,
resource self-sufficiency and balance of payments position. Further, the
economies of developing countries generally are heavily dependent upon
international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries with
which they trade.

Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less social, political and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict a
portfolio's investment opportunities, including restrictions on investment in
issuers or industries deemed sensitive to national interests; (iv) the absence
of developed legal structures governing private or foreign investment or
allowing for judicial redress for injury to private property; (v) the absence,
until recently in certain Eastern European countries, of a capital market
structure or market-oriented economy; and (vi) the possibility that recent
favorable economic developments in Eastern Europe may be slowed or reversed by
unanticipated political or social events in such countries.

In addition, many countries in which the portfolios may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resources self-sufficiency and balance of payments
position.

Investments in Eastern European countries may involve risks of nationalization,
expropriation and confiscatory taxation. The communist governments of a number
of Eastern European countries expropriated large amounts of private property in
the past, in many cases without adequate compensation, and there can be no
assurance that such expropriation will not occur in the future. In the event
of such expropriation, a portfolio could lose a substantial portion of any
investments it has made in the affected countries. Finally, even though
certain Eastern European currencies may be convertible into U.S. dollars, the
conversion rates may be artificial to the actual market values and may be
adverse to portfolio shareholders. Further, no accounting standards exist in
Eastern European countries.

Investing in Russian securities involves a high degree of risk and special
considerations not typically associated with investing in the U.S. securities
markets, and should be considered highly speculative. Such risks include: (1)
delays in settling portfolio transactions and risk of loss arising out of
Russia's system of share registration and custody; (2) the risk that it may be
impossible or more difficult than in other countries to obtain and/or enforce a
judgment; (3) pervasiveness of corruption and crime in the Russian economic
system; (4) currency exchange rate volatility and the lack of available
currency hedging instruments; (5) higher rates of inflation (including the risk
of social unrest associated with periods of hyper-inflation); (6) controls on
foreign investment and local practices disfavoring foreign investors and
limitations on repatriation of invested capital, profits and dividends, and on
a portfolio's ability to exchange local currencies for U.S. dollars; (7) the
risk that the government of Russia or other executive or legislative bodies may
decide not to continue to support the economic reform programs implemented
since the dissolution of the Soviet Union and could follow radically different
political and/or economic policies to the detriment of investors, including
non-market-oriented policies such as the support of certain industries at the
expense of other sectors or investors, or a return to the centrally planned
economy that existed prior to the dissolution of the Soviet Union; (8) the
financial condition of Russian companies, including large amounts of
inter-company debt

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which may create a payments crisis on a national scale; (9) dependency on
exports and the corresponding importance of international trade; (10) the risk
that the Russian tax system will not be reformed to prevent inconsistent,
retroactive and/or exorbitant taxation; and (11) possible difficulty in
identifying a purchaser of securities held by a portfolio due to the
underdeveloped nature of the securities markets.

There is little historical data on Russian securities markets because they are
relatively new and a substantial proportion of securities transactions in
Russia are privately negotiated outside of stock exchanges. Because of the
recent formation of the securities markets as well as the underdeveloped state
of the banking and telecommunications systems, settlement, clearing and
registration of securities transactions are subject to significant risks.
Ownership of shares (except where shares are held through depositories that
meet the requirements of the 1940 Act) is defined according to entries in the
company's share register and normally evidenced by extracts from the register
or by formal share certificates. However, there is no central registration
system for shareholders and these services are carried out by the companies
themselves or by registrars located throughout Russia. These registrars are
not necessarily subject to effective state supervision and it is possible for a
portfolio to lose its registration through fraud, negligence or even mere
oversight. While each portfolio will endeavor to ensure that its interest
continues to be appropriately recorded either itself or through a custodian or
other agent inspecting the share register and by obtaining extracts of share
registers through regular confirmations, these extracts have no legal
enforceability and it is possible that subsequent illegal amendment or other
fraudulent act may deprive the portfolio of its ownership rights or improperly
dilute its interests. In addition, while applicable Russian regulations impose
liability on registrars for losses resulting from their errors, it may be
difficult for a portfolio to enforce any rights it may have against the
registrar or issuer of the securities in the event of loss of share
registration. Furthermore, although a Russian public enterprise with more than
1,000 shareholders is required by law to contract out the maintenance of its
shareholder register to an independent entity that meets certain criteria, in
practice this regulation has not always been strictly enforced. Because of
this lack of independence, management of a company may be able to exert
considerable influence over who can purchase and sell the company's shares by
illegally instructing the registrar to refuse to record transactions in the
share register. This practice may prevent a portfolio from investing in the
securities of certain Russian issuers deemed suitable by its portfolio manager.
Further, this also could cause a delay in the sale of Russian securities by a
portfolio if a potential purchaser is deemed unsuitable, which may expose the
portfolio to potential loss on the investment.

Each portfolio endeavors to buy and sell foreign currencies on as favorable a
basis as practicable. Some price spread in currency exchange (to cover service
charges) will be incurred, particularly when a portfolio changes investments
from one country to another or when proceeds of the sale of shares in U.S.
dollars are used for the purchase of securities in foreign countries. Also,
some countries may adopt policies which would prevent a portfolio from
transferring cash out of the country or withhold portions of interest and
dividends at the source. There is the possibility of cessation of trading on
national exchanges, expropriation, nationalization or confiscatory taxation,
withholding and other foreign taxes on income or other amounts, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), default in foreign government securities,
political or social instability, or diplomatic developments which could affect
investments in securities of issuers in foreign nations.

Foreign markets also have different clearance and settlement procedures and in
certain markets there have been times when settlements have failed to keep pace
with the volume of securities transactions, making it difficult to conduct such
transactions. Delays in settlement could result in temporary periods when
assets of the portfolio are uninvested and no return is earned thereon. The
inability of the portfolio to make intended security purchases due to
settlement problems could cause the portfolio to miss investment opportunities.
Inability to dispose of a portfolio security due to settlement problems either
could result in losses to the portfolio due to subsequent declines in the value
of such portfolio security or, if the portfolio has entered into a contract to
sell the security, could result in possible liability to the purchaser.

Foreign securities may be purchased through depository receipts, including
American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs")
Global Depository Receivables ("GDRs"), or other securities convertible into
securities of foreign issuers. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. Generally, ADRs, in registered form, are denominated in U.S.
dollars and are designed for use in the U.S. securities markets, while EDRs and
GDRs may be denominated in other currencies and are designed for use in the
European securities markets. ADRs are receipts typically issued by a U.S. bank
or trust company evidencing ownership of the underlying securities. EDRs and
GDRs are European receipts evidencing a similar arrangement. For purposes of
the portfolio's investment policies, ADRs, EDRs and GDRs are deemed to have the
same classification as the underlying securities they represent, except that
ADRs, EDRs and GDRs shall be treated as indirect foreign investments. Thus,
an ADR, EDR or GDR representing ownership of common stock will be treated as
common stock. ADR, EDR and GDR depository receipts do not eliminate all of the
risks associated with directly investing in the securities of foreign issuers.

ADR facilities may be established as either "unsponsored" or "sponsored." While
ADRs issued under these two types of facilities are in some respects similar,
there are distinctions between them relating to the rights and obligations of
ADR holders and the practices of market participants.

A depository may establish an unsponsored facility without participation by (or
even necessarily the acquiescence of) the issuer of the deposited securities,
although typically the depository requests a letter of non-objection from such
issuer prior to the establishment

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of the facility. Holders of unsponsored ADRs generally bear all the costs of
such facilities. The depository usually charges fees upon the deposit and
withdrawal of the deposited securities, the conversion of dividends into U.S.
dollars, the disposition of non-cash distributions and the performance of other
services. The depository of an unsponsored facility frequently is under no
obligation to pass through voting rights to ADR holders with respect to the
deposited securities. In addition, an unsponsored facility is generally not
obligated to distribute communications received from the issuer of the deposited
securities or to disclose material information about such issuer in the U.S. and
thus there may not be a correlation between such information and the market
value of the depository receipts.

Sponsored ADR facilities are created in generally the same manner as unsponsored
facilities, except that the issuer of the deposited securities enters into a
deposit agreements with the depository. The deposit agreement sets out the
rights and responsibilities of the issuer, the depository and the ADR holders.
With sponsored facilities, the issuer of the deposited securities generally will
bear some of the costs relating to the facility (such as dividend payment fees
of the depository), although ADR holders continue to bear certain other costs
(such as deposit and withdrawal fees). Under the terms of most sponsored
arrangements, depositories agree to distribute notices of shareholder meetings
and voting instructions and to provide shareholder communications and other
information to the ADR holders at the request of the issuer of the deposited
securities.

FORWARD FOREIGN CURRENCY TRANSACTIONS. The foreign securities held by the
International Growth Fund and the Emerging Markets Growth Fund will usually be
denominated in foreign currencies and the portfolio may temporarily hold foreign
currency in connection with such investments. As a result, the value of the
assets held by the portfolio may be affected favorably or unfavorably by changes
in foreign currency exchange rates, by exchange control regulations and by
indigenous economic and political developments. Some countries in which the
portfolios may invest may also have fixed or managed currencies that are not
free-floating against the U.S. dollar. Further, certain currencies may not be
internationally traded. Certain of these currencies have experienced a steady
devaluation relative to the U.S. dollar. Any devaluations in the currencies in
which a portfolio's securities are denominated may have a detrimental impact on
that portfolio.

The portfolio may enter into forward foreign currency contracts ("forward
currency contracts") in an effort to control some of the uncertainties of
foreign currency rate fluctuations. A forward currency contract is an agreement
to purchase or sell a specific currency at a specified future date and price
agreed to by the parties at the time of entering into the contract. The
portfolio will not engage in foreign currency contracts in which the specified
future date is more than one year from the time of entering into the contract.
In addition, the portfolio will not engage in forward currency contracts for
speculation, but only as an attempt to hedge against changes in foreign currency
exchange rates affecting the values of securities which the portfolio holds or
intends to purchase. Thus, the portfolio will not enter into a forward currency
contract if such contract would obligate the portfolio to deliver an amount of
foreign currency in excess of the value of the portfolio securities or other
assets denominated in that currency.

The International Growth Fund and the Emerging Markets Growth Fund may use
forward currency contracts to fix the value of certain securities it has agreed
to buy or sell. For example, when the portfolio enters into a contract to
purchase or sell securities denominated in a particular foreign currency, the
portfolio could effectively fix the maximum cost of those securities by
purchasing or selling a foreign currency contract, for a fixed value of another
currency, in the amount of foreign currency involved in the underlying
transaction. In this way, the portfolio can protect the value of securities in
the underlying transaction from an adverse change in the exchange rate between
the currency of the underlying securities in the transaction and the currency
denominated in the foreign currency contract, during the period between the date
the security is purchased or sold and the date on which payment is made or
received.

The International Growth Fund and the Emerging Markets Growth Fund may also use
forward currency contracts to hedge the value, in U.S. dollars, of securities it
currently owns. For example, if the portfolio held securities denominated in a
foreign currency and anticipated a substantial decline (or increase) in the
value of that currency against the U.S. dollar, the portfolio may enter into a
foreign currency contract to sell (or purchase), for a fixed amount of U.S.
dollars, the amount of foreign currency approximating the value of all or a
portion of the securities held which are denominated in such foreign currency.

Upon the maturity of a forward currency transaction, the portfolio may either
accept or make delivery of the currency specified in the contract or, at any
time prior to maturity, enter into a closing transaction which involves the
purchase or sale of an offsetting contract. An offsetting contract terminates
the portfolio's contractual obligation to deliver the foreign currency pursuant
to the terms of the forward currency contract by obligating the portfolio to
purchase the same amount of the foreign currency, on the same maturity date and
with the same currency trader, as specified in the forward currency contract.
The portfolio realizes a gain or loss as a result of entering into such an
offsetting contract to the extent the exchange rate between the currencies
involved moved between the time of the execution of the original forward
currency contract and the offsetting contract.

The use of forward currency contracts to protect the value of securities against
the decline in the value of a currency does not eliminate fluctuations in the
underlying prices of the securities the portfolio owns or intends to acquire,
but it does fix a future rate of exchange. Although such contracts minimize the
risk of loss resulting from a decline in the value of the hedged currency, they
also limit the potential for gain resulting from an increase in the value of the
hedged currency. The benefits of forward currency contracts to the portfolio
will depend on the ability of the portfolio's investment manager to accurately
predict future currency exchange rates.

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FOREIGN CURRENCY FUTURES. Generally, foreign futures contracts will be
executed on a U.S. exchange. To the extent they are not, however, engaging in
such transactions will involve the execution and clearing of trades on or
subject to the rules of a foreign board of trade. Neither the National Futures
Association nor any domestic (U.S.) exchange regulates activities of any
foreign boards of trade, including the execution, delivery and clearing of
transactions, or has the power to compel enforcement of the rules of a foreign
board of trade or any applicable foreign law. This is true even if the
exchange is formally linked to a domestic market so that a position taken on
the exchange may be liquidated by a transaction on the appropriate domestic
market. Moreover, applicable laws or regulations will vary depending on the
foreign country in which the foreign futures transaction occurs. Therefore,
entities (such as the portfolio) which trade foreign futures contracts may not
be afforded certain of the protective measures provided by the Commodity
Exchange Act, Commodity Futures Trading Commission ("CFTC") regulations, the
rules of the National Futures Association or those of a domestic (U.S.)
exchange. In particular, monies received from customers for foreign futures
transactions may not be provided the same protections as monies received in
connection with transactions on U.S. futures exchanges. In addition, the price
of any foreign futures and, therefore, the potential profits and loss thereon,
may be affected by any variance in the foreign exchange rate between the time
the order for the futures contract is placed and the time it is liquidated,
offset or exercised.

FUTURES. The Value Discovery Fund may purchase and sell futures contracts on
domestic stock indexes in order to facilitate exposure to the market or in
order to help meet redemption requests. The portfolio may purchase and sell
futures contracts on stock indexes, such as the Russell 2000 Index, as a
substitute for purchasing or selling the underlying securities. The portfolio
may not purchase or sell a futures contract unless, immediately after any such
transaction, the sum of the aggregate amount of initial margin deposits on its
existing futures positions is 5% or less of its total assets (after taking into
account certain technical adjustments).

The Value Discovery Fund may be subject to additional risks associated with
futures contracts, such as the possibility that the Adviser's forecasts of
market values and other factors are not correct, imperfect correlation between
the hedging instrument and the asset or liability being hedged, default by the
other party to the transaction and inability to close out a position because of
the lack of a liquid market. In addition to the possibility that there may be
an imperfect correlation, or no correlation at all, between movements in a
futures contract and the securities being hedged, the price of futures
contracts may not correlate perfectly with movement in the cash market due to
certain market distortions. As a result of these factors, a correct forecast
of general market trends or interest rate movements by the Adviser may still
not result in a successful hedging transaction over a short time frame.

The transactions described above are frequently referred to as derivative
transactions. In general, derivatives are instruments whose value is based
upon, or derived from, some underlying index, reference rate (e.g., interest
rates or currency exchange rates), security, commodity or other asset.

HIGH-YIELD/HIGH-RISK SECURITIES. High-yield/high-risk securities (or "junk"
bonds) are debt securities rated below investment grade by the primary rating
agencies (such as, Standard & Poor's Ratings Services and Moody's Investors
Service, Inc.).

The value of lower quality securities generally is more dependent on the
ability of the issuer to meet interest and principal payments (i.e., credit
risk) than is the case for higher quality securities. Conversely, the value of
higher quality securities may be more sensitive to interest rate movements than
lower quality securities. Issuers of high-yield securities may not be as
strong financially as those issuing bonds with higher credit ratings.
Investments in such companies are considered to be more speculative than higher
quality investments.

Issuers of high-yield securities are more vulnerable to real or perceived
economic changes (for instance, an economic downturn or prolonged period of
rising interest rates), political changes or adverse developments specific to
the issuer. The market for lower quality securities is generally less liquid
than the market for higher quality securities. Adverse publicity and investor
perceptions as well as new or proposed laws may also have a greater negative
impact on the market for lower quality securities.

ILLIQUID SECURITIES. Illiquid securities are securities that are not readily
marketable. The Board of Directors of the Fund, or its delegate, has the
ultimate authority to determine, to the extent permissible under the federal
securities laws, which securities are illiquid for purposes of this limitation.
Certain securities exempt from registration or issued in transactions exempt
from registration under the Securities Act of 1933, as amended (the "Securities
Act"), such as securities that may be resold to institutional investors under
Rule 144A under the Securities Act and Section 4(2) commercial paper may be
considered liquid under guidelines adopted by the Fund's Board of Directors.

The Board of Directors has delegated to the Adviser the day-to-day
determination of the liquidity of a security, although it has retained
oversight for such determinations. The Board of Directors has approved
procedures that allow the Adviser to deem Section 4(2) commercial paper liquid
only if the Adviser determines that there is no significant difference between
Section 4(2) commercial paper and traditional commercial paper based upon an
evaluation of the following characteristics, (i) market characteristic, such as
the nature of the security and the nature of marketplace trades; (ii) trading
characteristics, such as the frequency of trades and quotes for the security,
the number of dealers willing to purchase or sell the security and the number
of other potential purchasers; and (iii) the quality of the issue or issuer.
With respect to a portfolio's foreign holdings, a foreign security may be
considered liquid by the Adviser (despite its restricted nature under the
Securities Act) if the security can be freely traded in a foreign securities
market and the facts and circumstances support a finding of liquidity.

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LENDING. The Income Fund may from time to time lend securities (but not in
excess of 75% of its assets) from its portfolio to brokers, dealers and
financial institutions, provided: (1) the loan is secured continuously by
collateral consisting of U.S. Government securities, government agency
securities, U.S. Government instrumentality securities, cash or cash
equivalents adjusted daily to have a market value at least equal to the current
market value of the securities loaned plus accrued interest; (2) the portfolio
may at any time call the loan and regain the securities loaned; and (3) the
Adviser (under the supervision of the Board of Directors) has reviewed the
creditworthiness of the borrower and has found it satisfactory. The portfolio
will receive from the borrower amounts equal to the interest paid on the
securities loaned and will also earn income for having made the loan. Any cash
collateral will be invested in short-term securities, the income from which
will increase the return to the portfolio. The risks associated with lending
portfolio securities are similar to those of entering into repurchase
agreements. While the Value Discovery Fund has the authority to lend portfolio
securities, it has no current intention to do so.

REPURCHASE AGREEMENTS. In a repurchase agreement, a portfolio buys a security
at one price and at the time of sale, the seller agrees to repurchase the
obligation at a mutually agreed upon time and price (usually within seven
days). The repurchase agreement thereby determines the yield during the
purchaser's holding period, while the seller's obligation to repurchase is
secured by the value of the underlying security. The Adviser will monitor, on
an ongoing basis, the value of the underlying securities to ensure that the
value always equals or exceeds the repurchase price plus accrued interest.
Repurchase agreements could involve certain risks in the event of a default or
insolvency of the other party to the agreement, including possible delays or
restrictions upon a portfolio's ability to dispose of the underlying
securities. The risk to a portfolio is limited to the ability of the seller to
pay the agreed upon sum on the delivery date. In the event of default, a
repurchase agreement provides that the portfolio is entitled to sell the
underlying collateral. The loss, if any, to the portfolio will be the
difference between the proceeds from the sale and the repurchase price.
However, if bankruptcy proceedings are commenced with respect to the seller of
the security, disposition of the collateral by the portfolio may be delayed or
limited. Although no definitive creditworthiness criteria are used, the
Adviser reviews the creditworthiness of the banks and non-bank dealers with
which the portfolio enters into repurchase agreements to evaluate those risks.
The Board of Directors will review and monitor the creditworthiness of
broker-dealers and banks with which a portfolio enters into repurchase
agreements. A portfolio may, under certain circumstances, deem repurchase
agreements collateralized by U.S. government securities to be investments in
U.S. government securities.

RESTRICTED SECURITIES. Restricted securities may be sold only in privately
negotiated transactions or in a public offering with respect to which a
registration statement is in effect under the Securities Act. Where
registration is required, a portfolio may be obligated to pay all or part of
the registration expenses and a considerable period may elapse between the time
of the decision to sell and the time the portfolio may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the portfolio might obtain a less
favorable price than prevailed when it decided to sell. If through the
appreciation of restricted securities or the depreciation of unrestricted
securities, a portfolio would be in a position where more of its net assets are
invested in illiquid securities, including restricted securities that are not
readily marketable (except for 144A Securities and 4(2) commercial paper deemed
to be liquid by the Adviser), than is permitted by its investment restrictions,
the Fund will take such steps as it deems advisable, if any, to protect
liquidity.

SMALL COMPANIES. While smaller companies generally have the potential for
rapid growth, investments in smaller companies often involve greater risks than
investments in larger, more established companies because smaller companies may
lack the management experience, financial resources, product diversification
and competitive strengths of larger companies. In addition, in many instances
the securities of smaller companies are traded only over-the-counter or on a
regional securities exchange and the frequency and volume of their trading is
substantially less than is typical of larger companies. Therefore, the
securities of smaller companies may be subject to greater and more abrupt price
fluctuations. When making large sales, the portfolio may have to sell
portfolio holdings at discounts from quoted prices or may have to make a series
of small sales over an extended period of time due to the trading volume of
smaller company securities. Investors should be aware that, based on the
foregoing factors, an investment in the Value Discovery Fund, and to a lesser
extent, the Growth Fund and the International Growth Fund, may be subject to
greater price fluctuations than an investment in a fund that invests primarily
in larger, more established companies. The Adviser's research efforts may also
play a greater role in selecting securities for the portfolio than in a fund
that invests in larger, more established companies.

WARRANTS. Warrants are securities giving the holder the right, but not the
obligation, to buy the stock of an issuer at a given price (generally higher
than the value of the stock at the time of issuance) during a specified period
or perpetually. Warrants may be acquired separately or in connection with the
acquisition of securities. Warrants do not carry with them the right to
dividends or voting rights with respect to the securities that they entitle
their holder to purchase and they do not represent any rights in the assets of
the issuer. As a result, warrants may be considered to have more speculative
characteristics than certain other types of investments. In addition, the
value of a warrant does not necessarily change with the value of the underlying
securities and a warrant ceases to have value if it is not exercised prior to
its expiration date.

WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS. Each portfolio may purchase
newly issued securities on a when-issued basis and may purchase or sell
portfolio securities on a delayed delivery basis. When a portfolio purchases
securities on a when-issued or a delayed delivery basis, it becomes obligated
to purchase the securities and it has all the rights and risks attendant to
ownership of the securities, although delivery and payment occur at a later
date. A portfolio will record the transaction and reflect the liability for
the purchase and the value of the security in determining its net asset value.
The value of fixed-income securities to be delivered in the

B-20

<PAGE> 60

future will fluctuate as interest rates vary. A portfolio generally has the
ability to close out a purchase obligation on or before the settlement date,
rather than take delivery of the security.

At the time a portfolio makes the commitment to sell a security on a delayed
delivery basis, it will record the transaction and include the proceeds to be
received in determining its net asset value; accordingly, any fluctuations in
the value of the security sold pursuant to a delayed delivery commitment are
ignored in calculating net asset value so long as the commitment remains in
effect. Normally, settlement occurs within one month of the purchase or sale.

To the extent a portfolio engages in when-issued or delayed delivery purchases,
it will do so for the purpose of acquiring securities consistent with the
portfolio's investment objective and policies and not for the purpose of
investment leverage or to speculate on interest rate changes, but each
portfolio reserves the right to sell these securities before the settlement
date if deemed advisable. To the extent required to comply with Securities and
Exchange Commission Release No. IC-10666, when purchasing securities on a
when-issued or delayed delivery basis, each portfolio will maintain in a
segregated account cash or liquid securities equal to the value of such
contracts.

GENERAL FUND INFORMATION

REDEMPTIONS. Suspension of Redemption or Delay in Payment. The Fund may not
suspend the right of redemption or delay payment on its shares for more than
seven days except (a) during any period when the New York Stock Exchange is
closed (other than on weekends and customary holidays); (b) when trading in the
markets that the portfolio normally utilizes is restricted or any emergency
exists as determined by the Securities and Exchange Commission, so that
disposal of the portfolio's investments or determination of its net asset value
is not reasonably practicable; or (c) for such other periods as the Securities
and Exchange Commission may permit by order for protection of the Fund's
shareholders.

Special Redemptions. Although it is the present policy of all six of the
portfolios to redeem portfolio shares in cash, if the Board of Directors
determines that a material adverse effect would be experienced by the remaining
shareholders if payment of large redemptions were made wholly in cash, the
portfolios will pay the redemption price in whole or in part by a distribution
of portfolio instruments in lieu of cash, in conformity with the applicable
rules of the Securities and Exchange Commission, taking such instruments at the
same value used to determine net asset value and selecting the instruments in
such manner as the Board of Directors may deem fair and equitable. If such a
distribution occurs, shareholders receiving instruments and selling them before
their maturity could receive less than the redemption value of such instruments
and could also incur transaction costs. The portfolios have elected to be
governed by Rule 18f-1 under the 1940 Act, pursuant to which the portfolios are
obligated to redeem portfolio shares solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the portfolio during any 90-day period
for any one shareholder of record.

DETERMINATION OF NET ASSET VALUE. For each portfolio, net asset value is not
determined on the days that the New York Stock Exchange is closed, which
include New Year's Day, President's Day, Dr. Martin Luther King Jr.'s Birthday,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. In addition, the net asset value for the Ready Reserves Fund is
not calculated on Columbus Day and Veteran's Day. Net asset value is not
required to be computed on a day when no orders to purchase shares were
received and no shares were tendered for redemption.

As mentioned in the prospectus, the Ready Reserves Fund values its portfolio
instruments at amortized cost in accordance with Rule 2a-7 under the 1940 Act,
which means that they are valued at their acquisition cost (as adjusted for
amortization of premium or discount), rather than at current market value.
This involves initially valuing an instrument at its cost and thereafter
assuming a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. While this method provides certainty in valuation, it may
result in periods during which value, as determined by amortized cost, is
higher or lower than the price the portfolio would receive if it sold the
instrument. Calculations are made to compare the value of the portfolio's
investments valued at amortized cost with market values. Market valuations are
obtained by using actual quotations provided by market makers, estimates of
market value or values obtained from yield data relating to classes of money
market instruments published by reputable sources at the bid price for such
securities.

If a deviation of one-half of one percent or more were to occur between the net
asset value per share calculated by reference to market values and the
portfolio's $1.00 per share net asset value, or if there were any other
deviation that the Board of Directors determined would result in a material
dilution to shareholders or purchasers, the Board of Directors would promptly
consider what action, if any, should be initiated. If the portfolio's net
asset value per share (computed using market values) declined, or was expected
to decline, below $1.00 (computed using amortized cost), the Board of Directors
of the Fund might temporarily reduce or suspend dividend payments in an effort
to maintain the net asset value at $1.00 per share. As a result of such
reduction or suspension of dividends or other action by the Board of Directors,
an investor would receive less income during a given period than if such a
reduction or suspension had not taken place. Such action could result in
investors receiving no dividends for the period during which they held shares
and receiving, upon redemption, a price per share lower than that which they
paid. On the other hand, if the portfolio's net asset value per share
(computed using market values) were to increase, or were anticipated to
increase, above $1.00 (computed using

B-21
<PAGE> 61

amortized cost), the Board of Directors of the Fund might supplement dividends
in an effort to maintain the net asset value at $1.00 per share.

The Ready Reserves Fund has never had a deviation of one-half of one percent or
more between its net asset value per share calculated by reference to market
values and its $1.00 per share net asset value; therefore, no Board actions of
the type described above have been taken. To use the amortized cost method of
valuation, the portfolio is limited to investing in instruments that the Board
of Directors has determined present minimal credit risks and that are within
certain rating categories of a nationally recognized statistical rating
organization.

PERFORMANCE.

HISTORICAL PERFORMANCE

In general. The historical performance or return of the Growth Fund, the Value
Discovery Fund, the International Growth Fund, the Emerging Markets Growth Fund
and the Income Fund may be shown in the form of "average annual total return"
and "total return" figures. The Income Fund's and Ready Reserves Fund's
historical performance or return may also be shown in the form of "yield
figures." These various measures of performance are described below.

Average annual total return and total return measure both the net investment
income generated by and the effect of any realized and unrealized appreciation
or depreciation of, the underlying investments of the portfolio, assuming the
reinvestment of all dividends during the period. Average annual total return
figures represent the average annual percentage change over the period in
question. Total returns represent the aggregate percentage or dollar value
change over the period in question. Yield is a measure of the net investment
income per share earned over a specified period, expressed as a percentage of
the net asset value. Yield is an annualized figure, which means that it assumes
that a portfolio generates the same level of net investment income over a
one-year period.

The performance quotations for all of the portfolios are based upon historical
results and are not necessarily representative of future performance. Returns
and net asset value will fluctuate. The portfolios' performance depends upon
general market conditions, operating expenses and the performance of the
investment manager. Any additional fees charged by a dealer or other financial
services firm would reduce the returns described in this section.

In addition, from time to time the adviser has voluntarily absorbed certain
operating expenses of certain of the portfolios. For the Income Fund, the
Adviser has voluntarily waived certain advisory management fees for the fiscal
years from 1990 to 1993 and to the extent described under "Management of the
Fund--Investment Adviser and Distributor." For the Value Discovery Fund, the
Adviser has voluntarily waived certain advisory fees from December 23, 1996
(Commencement of Operations ) to December 31, 1997 and to the extent described
under "Management of the Fund -- Investment Adviser and Distributor." For the
Emerging Markets Growth Fund, the Adviser is currently voluntarily waiving
certain advisory management fees. Without such waiver, the performance results
noted above for these portfolios would have been lower.

Average annual total return. The portfolios' average annual total return is
computed in accordance with a standardized method prescribed by rules of the
Securities and Exchange Commission. The average annual total return for a
specific period is found by first taking a hypothetical $1,000 investment
("initial investment") in a portfolio's shares on the first day of the period
and computing the "redeemable value" of that investment at the end of the
period. The redeemable value is then divided by the initial investment and
this quotient is taken to the nth root (n representing the number of years in
the period) and 1 is subtracted from the result, which is then expressed as a
percentage. This calculation assumes that all income dividends and capital
gains distributions by the portfolio have been reinvested at net asset value on
the reinvestment dates during the period.

The average annual total return for the Growth Fund, Value Discovery Fund,
International Growth Fund and Income Fund for the one-, five- and ten-year
periods, or, if less, from commencement of operations through December 31, 1997
are as follows:

<TABLE>
<CAPTION>
10-YEAR OR
1-YEAR 5-YEAR LIFE OF FUND
------ ------ ------------
<S> <C> <C> <C>
GROWTH FUND 20.07 17.59 16.94
VALUE DISCOVERY FUND (1) 33.46 -- 33.46
INTERNATIONAL GROWTH FUND (2) 8.39 11.33 11.04
INCOME FUND (3) 8.03 6.37 8.02
</TABLE>

(1) Commenced operations on December 23, 1996.
(2) Commenced operations on October 1, 1992.
(3) Commenced operations on September 25, 1990.

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<PAGE> 62

Total return. Total return performance for a specific period is calculated by
first taking an investment (assumed below to be $10,000) ("initial investment")
in a portfolio's shares on the first day of the period and computing the
"ending value" of that investment at the end of the period. The total return
percentage is then determined by subtracting the initial investment from the
ending value, dividing the remainder by the initial investment and expressing
the result as a percentage. This calculation assumes that all income and
capital gains dividends by the portfolio have been reinvested at net asset
value on the reinvestment dates during the period. Total return may also be
shown as the increased dollar value of the hypothetical investment over the
period.

The total return for the Growth Fund, the Value Discovery Fund, the
International Growth Fund and the Income Fund for the one-, five- and ten-year
periods, or, if less, from commencement of operations through December 31, 1997
are as follows:

<TABLE>
<CAPTION>
10-YEAR OR
1-YEAR 5-YEAR LIFE OF FUND
------ ------ ------------
<S> <C> <C> <C>
GROWTH FUND 20.07 124.84 378.28
VALUE DISCOVERY FUND (1) 33.46 -- 33.46
INTERNATIONAL GROWTH FUND (2) 8.39 71.04 73.26
INCOME FUND (3) 8.03 36.16 74.89
</TABLE>

(1) Commenced operations on December 23, 1996.
(2) Commenced operations on October 1, 1992.
(3) Commenced operations on September 25, 1990.

Yield. Like the portfolios' average annual total return, the yield for the
Income Fund portfolio is computed in accordance with a standardized method
prescribed by rules of the Securities and Exchange Commission. The yield is
computed by dividing the net investment income per share earned during a
specific one-month or 30-day period by the offering price per share on the last
day of that period according to the following formula:

YIELD = 2[(((a-b)/cd)+1)(6) - 1]

<TABLE>
<S> <C>
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period entitled to receive dividends
d = the offering price (net asset value) per share on the last day of the period
</TABLE>

The Income Fund's current yield for the 30-day period ended December 31, 1997
was 6.32%. Semiannual compounding is assumed.

In computing the foregoing yield, the portfolio follows certain standardized
accounting practices specified by Securities and Exchange Commission rules.
These practices are not necessarily consistent with those that the portfolio
uses to prepare its annual and interim financial statements in accordance with
generally accepted accounting principles.

From time to time, the Fund may include in its sales literature and shareholder
reports a quotation of the current "distribution rate" for the Income Fund.
Distribution rate is simply a measure of the level of income and short-term
capital gain dividends distributed for a specified period. It differs from
yield, which is a measure of the income actually earned by the Income Fund's
investments and from total return, which is a measure of the income actually
earned by, plus the effect of any realized or unrealized appreciation or
depreciation of, such investments during the period. Distribution rate,
therefore, is not intended to be a complete measure of performance.
Distribution rate may sometimes be greater than yield since, for instance, it
may include short-term gains (which may be nonrecurring) and may not include
the effect of amortization of bond premiums.

The Ready Reserves Fund's yield quotations as they may appear in advertising
and sales materials also are calculated by a standard method prescribed by
rules of the Securities and Exchange Commission. Under that method, the
current yield quotation is annualized based on a seven-day period and computed
as follows: the portfolio's net investment income per share (accrued interest
on portfolio securities, plus or minus amortized purchase discount or premium,
less accrued expenses) is divided by the price per share (expected to remain
constant at $1.00) during the period ("base period return") and the result is
divided by seven and multiplied by 365 and the current yield figure is carried
to the nearest one-hundredth of one percent. Realized capital gains or losses
and unrealized appreciation or depreciation of investments are not included in
the calculation. The effective yield is determined by taking the base period
return and calculating the effect of assumed compounding according to the
following formula:

YIELD = [(BASE PERIOD RETURN +1)(365/7)] - 1

The Ready Reserves Fund's effective yield is calculated similarly to its
current yield, except that the net investment income earned is assumed to be
compounded when annualized. The Ready Reserves Fund effective yield will be
slightly higher than its current yield due to compounding.

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<PAGE> 63

The Ready Reserves Fund's current yield for the seven-day period ended December
31, 1997 was 4.98%. The Ready Reserves Fund's effective yield for the same
period was 5.10%.

The Ready Reserves Fund's yield fluctuates and the publication of an annualized
yield quotation is not a representation as to what an investment in the
portfolio will actually yield for any given future period. Actual yields will
depend not only on changes in interest rates on money market instruments during
the period the investment in the portfolio is held, but also on such matters as
any realized gains and losses and changes in portfolio expenses.

COMPARISON OF PORTFOLIO PERFORMANCE TO MARKET INDICES

From time to time, in marketing and other Fund literature, each portfolio's
performance may be compared to the performance of other mutual funds in general
or to the performance of particular types of mutual funds with similar goals,
as tracked by independent organizations. Such market comparisons are set forth
briefly below.

From time to time, the portfolios' performance may be compared to that of
various unmanaged stock indices such as the Standard & Poor's 500 Stock Index,
NASDAQ, Value Line and Russell 1,000, 2,000 and 3,000. The portfolios'
performance may also be compared to the performance of other growth mutual
funds or mutual fund indices as reported by CDA Investment Technologies, Inc.
("CDA"), Lipper Analytical Services, Inc. ("Lipper") or Morningstar, Inc.
("Morningstar").

- CDA: CDA is a widely recognized independent mutual fund reporting
service that is based upon changes in net asset value with all dividends
reinvested.

- LIPPER: Lipper is a widely used independent research firm that ranks
mutual funds' overall performance, investment objectives and assets.
Lipper performance figures are based on changes in net asset value, with
all income and capital gain dividends assumed to be reinvested. Lipper's
calculations do not include the effect of any sales charges imposed by
other funds. Lipper also issues a monthly yield analysis for fixed-
income funds.

- MORNINGSTAR: Morningstar rates funds on the basis of historical risk and
total return. Morningstar's ratings range from five stars (highest) to
one star (lowest) and represent Morningstar's assessment of the historical
risk level and total return of a fund as a weighted average for three-,
five- and ten-year periods. Ratings are not absolute and do not represent
future results.

The portfolios may also compare their performance with that of indices, such as
the Consumer Price Index, the Shearson Lehman Intermediate Government/Corporate
Bond Index and the Merrill Lynch Intermediate Term Corporate & Government Bond
Index. Both the Shearson Lehman and the Merrill Lynch bond indices are
unmanaged and do not adjust for taxes payable on interest or dividends. When
assessing a portfolio's performance as compared to that of any of these
indices, it is important to note the differences and similarities between the
investments that the portfolio may purchase and the investments measured by the
applicable indices.

- CONSUMER PRICE INDEX: The Consumer Price Index is generally considered
to be a measure of inflation.

- SHEARSON LEHMAN GOVERNMENT/CORPORATE INTERMEDIATE BOND INDEX: This index
generally represents the performance of intermediate government and
investment grade corporate debt securities under various market
conditions.

- MERRILL LYNCH INTERMEDIATE TERM CORPORATE & GOVERNMENT BOND INDEX: This
index also generally represents the performance of intermediate government
and investment grade corporate debt securities under various market
conditions.

Bank product performance may be based upon, among other things, the Bank Rate
Monitor National Index or various certificates of deposit indexes. Performance
of U.S. Treasury obligations may be based upon, among other things, various
U.S. treasury bill indexes. Certain of these alternative investments may offer
fixed rates of return and guaranteed principal and may be insured. Money
market fund performance may be based upon, among other things, the
IBC/Donoghue's Money Fund Average (All Taxable). Investors may also want to
compare the historical returns of various investments, performance indexes of
those investments or economic indicators, including but not limited to stocks,
bonds, certificates of deposit, money market funds and U.S. Treasury
obligations and the rate of inflation.

Comparative performance information other than that listed above may be used
from time to time in advertising the International Growth Fund and the Emerging
Markets to Growth Fund, including data from Micropal Ltd., an independent fund
reporting service, and independent unmanaged indices. For the International
Growth Fund indices include the Morgan Stanley Capital International's Europe,
Australia and the Far East (EAFE) Index or Morgan Stanley Capital
International's All Country World (Free) Except United States (ACWFxUS) Index.
For the Emerging Markets Growth Fund such indices include the MSCI Emerging
Markets (free) Index.

B-24
<PAGE> 64

In addition, the portfolios may quote information from industry or financial
publications of general U.S. or international interest, such as information
from Morningstar, the Wall Street Journal, Money Magazine, Forbes, Barron's,
Fortune, the Chicago Tribune, USA Today, Institutional Investor and Registered
Representative.

TAX STATUS. Each series (portfolio) of the Fund is treated as a separate
entity for accounting and tax purposes. The Fund has qualified and elected to
be treated as a "regulated investment company" under Subchapter M of the
Internal Revenue Code (the "Code") and intends to continue to so qualify in the
future. As such, and by complying with the applicable provisions of the Code
regarding the sources of its income, the timing of its distributions and the
diversification of its assets, the Fund will not be subject to Federal income
tax on its taxable income (including net short-term and long-term capital
gains) that is distributed to shareholders in accordance with the timing
requirements of the Code.

Each portfolio intends to declare and make distributions during the calendar
year of an amount sufficient to prevent imposition of a 4% nondeductible
Federal excise tax. The required distribution generally is the sum of 98% of a
portfolio's net investment income for the calendar year plus 98% of its net
capital gain income for the one-year period ending October 31, plus the sum of
any undistributed net investment income and capital gain net income from the
prior year, less any over-distribution from the prior year.

The Fund is required to withhold Federal income tax at the rate of 31%
(commonly called "backup withholding") from taxable distributions to
shareholders that do not provide the fund with a taxpayer identification
(social security) number or in other circumstances where shareholders have
failed to comply with Internal Revenue Service regulations.

Special tax provisions may accelerate or defer recognition of certain gains or
losses, change the character of certain gains or losses or alter the holding
periods of certain of a portfolio's securities. Specifically, the
mark-to-market rules of the Internal Revenue Code (the "Code") may require a
portfolio to recognize unrealized gains and losses on certain forward
contracts, futures and foreign currency futures held by a portfolio at the end
of the Fund's fiscal year. Under these provisions, 60% of any capital gain net
income or loss recognized will generally be treated as long-term and 40% as
short-term. Although certain foreign currency forward contracts and foreign
currency futures contracts are marked-to-market, any gain or loss related to
foreign currency fluctuations is generally treated as ordinary under Section
988 of the Code (see below). In addition, the straddle rules of the Code
require deferral of certain losses realized on positions of a straddle to the
extent that the portfolio has unrealized gains in offsetting positions at year
end. The portfolios have elected to mark-to-market their investments in
passive foreign investment companies for Federal income tax purposes.

Foreign exchange gains and losses realized by the Fund in connection with
certain transactions that involve foreign currency-denominated debt securities,
certain foreign currency options, foreign currency forward contracts, foreign
currencies or payables or receivables denominated in a foreign currency are
subject to Section 988 of the Code, which generally causes such gains and
losses to be treated as ordinary income and losses and may affect the amount,
timing and character of distributions to shareholders. For example, if a
portfolio sold a foreign stock or bond and part of the gain or loss on the sale
was attributable to an increase or decrease in the value of a foreign currency,
then the currency gain or loss may be treated as ordinary income or loss. If
such transactions result in higher net ordinary income, the dividends paid by
the portfolio will be increased; if such transactions result in lower net
ordinary income, a portion of dividends paid could be classified as a return of
capital.

The International Growth Fund and Emerging Markets Growth Fund may qualify for
and make an election permitted under the "pass through" provisions of Section
853 of the Code, which allows a regulated investment company to elect to have
its foreign tax credit taken by its shareholders instead of on its own tax
return. To be eligible for this credit, more than 50% of the value of the
Fund's total assets at the close of its taxable year must consist of stock or
other securities in foreign corporations, and the Fund must have distributed at
least 90% of its taxable income.

If the Fund makes this election, it may not take any foreign tax credit and may
not take a deduction for foreign taxes paid. However, the Fund is allowed to
include the amount of foreign taxes paid in a taxable year in its dividends
paid deduction. Each shareholder would then include in his gross income, and
treat as paid by him, his proportionate share of the foreign taxes paid by the
Fund.

If the U.S. government were to impose any restrictions, through taxation or
other means, on foreign investments by U.S. investors such as those to be made
through the portfolio, the Board of Directors of the Fund will promptly review
the policies of the International Growth Fund to determine whether significant
changes in its investments are appropriate.

Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above and in the
prospectus. Such investors may be subject to nonresident alien withholding tax
at the rate of 30% (or a lower rate under an applicable tax treaty) on amounts
treated as ordinary dividends from the Fund and, unless an effective IRS Form
W-8 or authorized substitute for Form W-8 is on file, to 31% backup withholding
on certain other payments from the Fund. Non-U.S. investors should consult
their tax advisers regarding such treatment and the application of foreign
taxes to an investment in the Fund.

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<PAGE> 65

RETIREMENT PLANS. The Fund offers a variety of retirement investment programs
whereby contributions are invested in shares of the Fund's portfolios and any
income dividends or capital gain distributions are reinvested in additional
full and fractional shares of the Fund.

Individual Retirement Accounts. The Fund has available Individual Retirement
Accounts ("IRAs") under Internal Revenue Service-approved prototypes. IRA
contributions are fully deductible only to (1) taxpayers who are not active
participants in an employer-sponsored retirement plan and (2) taxpayers who are
active participants in an employer-sponsored plan but who have adjusted gross
income below a specified level. For these purposes, a taxpayer will be deemed
to be an active participant in an employer-sponsored retirement plan if for any
part of the plan year he is an active participant under a qualified pension
plan, a qualified profit sharing or money purchase plan, a 403(a) annuity plan,
a 403(b) annuity program, a Simplified Employee Pension ("SEP") plan or a
government plan (other than a plan maintained for state and local employees
under Section 457 of the Code). A taxpayer will not be treated as an active
participant in an employer-sponsored plan because his spouse is an active
participant. However, the deductibility of IRA contributions is limited based
on adjusted gross income being above a specified level.

Married taxpayers filing a joint return who are active participants in an
employer-sponsored plan may make tax-deductible IRA contributions up to $2,000
individually, or $4,000 jointly, if their adjusted gross income ("AGI") is
$50,000 or less. For any active participant of an employer-sponsored plan who
files a joint return, the IRA deduction is gradually phased out for AGI between
$50,000 and $60,000. For married taxpayers filing a joint return where only
one spouse is an active participant in an employer-sponsored plan, a $2,000
deductible IRA contribution is available to the individual who is not an active
participant if their AGI is $150,000 or less. This deduction is gradually
phased out for AGI between $150,000 and $160,000. For single taxpayers who are
active participants in an employer-sponsored plan, a $2,000 deductible IRA
contribution is available for taxpayers with AGI up to $30,000. This deduction
is gradually phased out for AGI between $30,000 and $40,000. To the extent
that the IRA deduction is reduced or eliminated by the phase-out rules, an
individual may elect to make nondeductible IRA contributions which, when
combined with any deductible contributions, may not exceed $2,000 individually
or $4,000 jointly for a spousal IRA. Tax deductible IRA contributions are not
subject to Federal income taxation until such contributions are withdrawn.

Simplified Employee Pension Plans. An employer may establish a SEP plan under
which the employer makes contributions to all eligible employees' IRAs. Any
portfolio's shares may be used for this purpose.

Qualified Retirement Plans. A corporation, partnership or sole proprietorship
may establish a qualified money purchase pension and profit sharing plan and
make contributions for each participant up to the lesser of 25% of each
participant's gross compensation or $30,000. Such contributions may be made by
the employer and, if certain conditions are met, participants may also make
nondeductible voluntary contributions.

Under the Code, an investor has at least seven days in which to revoke an IRA
after receiving certain explanatory information about the plan. Individuals
who have received distributions from certain qualified plans may roll over all
or part of such distributions into an IRA, which will defer taxes on the
distributions and shelter investment earnings. Trustees of qualified
retirement plans and 403(b)(7) accounts are required by law to withhold 20% of
the taxable portion of any distribution that is eligible to be "rolled over."
The 20% withholding requirement, however, does not apply to distributions from
IRAs or any part of a distribution that is transferred directly to another
qualified retirement plan, 403(b)(7) account or IRA. Shareholders are advised
to consult with a tax professional regarding this requirement.

INDEPENDENT AUDITORS. The Fund's independent auditors are Ernst & Young LLP,
Sears Tower, 233 South Wacker Drive, Chicago, Illinois 60606. Ernst & Young
audits and reports upon the Fund's annual financial statements, reviews certain
regulatory reports, prepares the Fund's Federal and state tax returns and
performs other professional accounting, auditing, tax and advisory services
when engaged to do so by the Fund.

LEGAL COUNSEL. Vedder, Price, Kaufman & Kammholz, 222 North LaSalle Street,
Chicago, Illinois 60601, is the Fund's Counsel.

CUSTODIAN. The Fund's custodian, Investors Bank and Trust Company, 200
Clarendon Street, Boston, Massachusetts 02117, has custody of all securities
and cash of the Fund and attends to the collection of principal and income and
payment for and collection of proceeds of securities bought and sold by the
Fund.

TRANSFER AGENT SERVICES. State Street Bank and Trust Company ("State Street"),
225 Franklin Street, Boston, Massachusetts 02110, is the Fund's transfer agent
and dividend-paying agent. State Street, as the shareholder service agent,
provides certain bookkeeping, data processing and administrative services
pertaining to the maintenance of shareholder accounts.

REPORTS TO SHAREHOLDERS. Shareholders will receive annual audited financial
statements and semi-annual unaudited financial statements.

B-26
<PAGE> 66

SHAREHOLDER RIGHTS

All shares of each portfolio have equal rights with respect to dividends,
assets and liquidation of a portfolio and equal, noncumulative voting rights.
Noncumulative voting rights allow the holder or holders of a majority of
shares, voting together for the election of directors, to elect all the
directors. All shares of each portfolio will be voted in the aggregate, except
when a separate vote by portfolio is required under the 1940 Act. Shares are
fully paid and nonaccessible when issued, are transferable without restriction
and have no preemptive or conversion rights.

Under Maryland law, the Fund generally is not required to hold annual
shareholders' meetings. Upon the written request of ten or more shareholders
that have held Fund shares for at least six months in an amount equal to the
lesser of 1% of the outstanding shares or $25,000, the Fund will either
disseminate appropriate materials (at the expense of the requesting
shareholders) or provide such shareholders access to a list of names and
addresses of all shareholders of record. The written notice must state that
the shareholders making such request wish to communicate with the other
shareholders to obtain the signatures necessary to demand a meeting to consider
removal of a director. The Fund will hold shareholders' meetings when
requested to do so in writing by one or more shareholders collectively holding
at least 10% of the shares entitled to vote or when determined by the Board of
Directors in their discretion. Shareholders' meetings also will be held in
connection with the following matters: (1) the election or removal of
directors, if a meeting is called for such purpose; (2) the adoption of any
contract for which shareholder approval is required by the Act; (3) any
termination of the Fund; (4) any amendment of the articles of incorporation;
and (5) such additional matters as may be required by law, the articles of
incorporation, the by-laws of the Fund or any registration of the Fund with the
Securities and Exchange Commission or any state, or that the directors may
consider necessary or desirable, such as changes in fundamental investment
objectives, policies or restrictions.

The Fund's directors serve until the next meeting of shareholders, if any,
called for the purpose of electing directors and until the election and
qualification of their successors or until a director sooner dies, resigns,
retires, or is removed by a majority vote of the shares entitled to vote or by
a majority of the directors. In accordance with the Act, the Fund will hold a
shareholder meeting for the election of directors at such time that (1) less
than a majority of the directors has been elected by the shareholders and (2)
if, as a result of a vacancy in the Board of Directors, less than two-thirds of
the directors have been elected by the shareholders. A director may be removed
from office by a vote of the holders of a majority of the outstanding shares
entitled to vote.

VALUE DISCOVERY FUND--INVESTMENT CRITERIA

Material Price/Value Disparity--whether the company's current market
value reflects a material discount from the Adviser's estimate of
the company's intrinsic value. In determining a company's intrinsic
value, the Adviser generally will assess whether a company's share
price appears to be inexpensive relative to any of the following:
sales, projected earnings, projected cash flow, discounted cash
flow, asset values and liquidation value. The discount of the
market value from the intrinsic value is considered material when it
provides an adequate return opportunity compared to alternative
small company investments. The Adviser believes that the short-term
market assessment of a company's value can differ materially from a
long-term perspective. Therefore, price/value disparities can
result from particular industries and companies currently being in
disfavor in the market. As the reasons for market disfavor
dissipate, a market reassessment can result in price appreciation.
However, there is no guarantee that this will result in market
appreciation for a company.

Probable Expansion in Profitability--whether the company has a
reasonable expectation of improving its level of profitability over
a three-year investment horizon. The Adviser believes an expansion
in profit margins generally results in improved market valuation.
Therefore, the Adviser will look for companies that it believes have
the potential for normal, sustainable levels of profitability
greater than their current levels. Factors used to assess the
normal level of future profitability for a company include industry
profit levels and competitiveness and the company's competitive
advantages and business strategy.

Skilled and Committed Management--whether the company has a capable
and skilled management team and a clearly articulated and logical
business strategy with a reasonable probability of successful
execution. Generally, this determination will be made through due
diligence with management, which often includes on-site meetings.
Factors used to assess management's ability to execute its business
strategy include tangible evidence of prior business success and
management's level of financial commitment to the company through
equity ownership.

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<PAGE> 67

Strong Capital Structure--whether the company has a relatively
simple, clean financial structure without excessive use of financial
leverage. In addition, the company should adhere to conservative
and straightforward accounting practices.

Positive Catalyst--the likelihood that the company will undergo a
positive corporate change within a three-year investment horizon.
Examples of positive corporate changes may include: successful
execution of its business plan, acquisitions, mergers, spin-offs,
divestitures, new products and management additions or changes. The
portfolio seeks to invest in companies before a positive catalyst
becomes apparent to the market.

FUND HISTORY

The Fund was organized as a Maryland corporation on September 22, 1987 under
the name of William Blair Ready Reserves, Inc. On April 30, 1991, a
reorganization of the Fund and Growth Industry Shares, Inc., a Maryland
corporation, occurred such that Growth Industry Shares, Inc. was reorganized
into a separate portfolio of the Fund, now the Growth Fund portfolio, and the
Fund changed its name to William Blair Mutual Funds, Inc. Presently, the Fund
is offering shares of the six portfolios described in the prospectus. The
Board of Directors of the Fund may, however, establish additional portfolios
with different investment objectives, policies and restrictions in the future.

FINANCIAL INFORMATION OF THE FUND

The Fund's audited financial statements, including the notes thereto, contained
in the Fund's annual reports to shareholders for the period ended December 31,
1997, are incorporated herein by reference. Additional copies of the reports
to shareholders may be obtained without charge by writing or calling the Fund.

B-28

<PAGE> 68

APPENDIX A

DESCRIPTION OF MONEY MARKET INSTRUMENTS

The following information includes a description of certain money market
instruments in which the Ready Reserves Fund portfolio may invest to the extent
consistent with its investment objective.

UNITED STATES GOVERNMENT SECURITIES. These include marketable securities
issued by the United States Treasury, which consist of bills, notes and bonds.
Such securities are direct obligations of the United States government and are
backed by the full faith and credit of the United States. They differ mainly
in the length of their maturity. Treasury bills, the most frequently issued
marketable government security, have a maturity of up to one year and are
issued on a discount basis.

GOVERNMENT AGENCY SECURITIES. These include debt securities issued by
government-sponsored enterprises, federal agencies or instrumentalities and
international institutions. Such securities are not direct obligations of the
U.S. Treasury but involve some government sponsorship or guarantees. Different
instruments have different degrees of government backing. For example,
securities issued by the Federal National Mortgage Association are supported by
the agency's right to borrow money from the U.S. Treasury under certain
circumstances. Securities issued by the Student Loan Marketing Association are
supported only by the credit of the agency that issued them. Thus, the Fund
may not be able to assert a claim against the United States itself in the event
the agency or instrumentality does not meet its commitment.

SHORT-TERM CORPORATE DEBT INSTRUMENTS. These include commercial paper
(including variable amount master demand notes), which refers to short-term
unsecured promissory notes issued by corporations to finance short-term credit
needs. Commercial paper is usually sold on a discount basis and has a maturity
at the time of issuance not exceeding nine months. In addition, some
short-term paper, which can have a maturity exceeding nine months, is issued in
reliance on the so-called "private placement" exemption from registration
afforded by Section 4(2) of the Securities Act of 1933 ("Section 4(2) paper").
The Ready Reserves Fund portfolio may invest in Section 4(2) paper with
maturities of twelve months or less. Section 4(2) paper is restricted as to
disposition under the Federal securities laws and generally is sold to
institutional investors such as the Fund who agree that they are purchasing the
paper for investment and not with a view to public distribution. Variable
amount master demand notes are demand obligations that permit the investment of
fluctuating amounts at varying market rates of interest pursuant to
arrangements between the issuer and a commercial bank acting as agent for the
payees of such notes, whereby both parties have the right to vary the amount of
the outstanding indebtedness on the notes.

Because variable amount master demand notes are direct lending arrangements
between the lender and the borrower, it is not generally contemplated that such
instruments will be traded and there is no secondary market for the notes.
Typically, agreements relating to such notes provide that the lender may not
sell or otherwise transfer the note without the borrower's consent. Such notes
provide that the interest rate on the amount outstanding is adjusted
periodically, typically on a daily basis in accordance with a stated short-term
interest rate benchmark. Since the interest rate of a variable amount master
demand note is adjusted no less often than every 60 days and since repayment of
the note may be demanded at any time, the Fund values such a note in accordance
with the amortized cost basis at the outstanding principal amount of the note.

Also included are nonconvertible corporate debt securities (e.g., bonds and
debentures) with no more than one year remaining to maturity at the date of
settlement. Corporate debt securities with a remaining maturity of less than
one year tend to become quite liquid, have considerably less market value
fluctuations than longer term issues and are traded as money market securities.

BANK MONEY INSTRUMENTS. These include instruments such as certificates of
deposit, time deposits and bankers' acceptances. Certificates of deposit are
generally short-term, interest-bearing negotiable certificates issued by
commercial banks or savings and loan associations against funds deposited in
the issuing institution. A time deposit is a non-negotiable deposit in a
banking institution earning a specified interest rate over a given period of
time. A banker's acceptance is a time draft drawn on a commercial bank by a
borrower usually in connection with an international commercial transaction (to
finance the import, export, transfer or storage of goods). The borrower is
liable for payment as well as the bank, which unconditionally guarantees to pay
the draft at its face amount on the maturity date. Most acceptances have
maturities of six months or less and are traded in secondary markets prior to
maturity.

REPURCHASE AGREEMENTS. A repurchase agreement is an instrument under which the
purchaser (e.g., a mutual fund) acquires ownership of an obligation (debt
security) and the seller agrees, at the time of the sale, to repurchase the
obligation at a mutually agreed upon time and price, thereby determining the
yield during the purchaser's holding period. This results in a fixed-rate of
return insulated from market fluctuations during such period. The underlying
securities will consist only of U.S. Government or government agency or
instrumentality securities.

Repurchase agreements usually are for short periods, typically less than one
week. Repurchase agreements are considered to be loans under the 1940 Act,
with the security subject to repurchase, in effect, serving as "collateral" for
the loan. The Fund will require the seller to provide additional collateral if
the market value of the securities falls below the repurchase price at any time
during the term

A-1

<PAGE> 69

of the repurchase agreement. In the event of a default by the
seller because of bankruptcy or otherwise, the Fund may suffer time delays and
incur costs or losses in connection with the disposition of the collateral.

A-2

<PAGE> 70

APPENDIX B

COMMERCIAL PAPER RATINGS

A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. The following summarizes the rating categories used by Standard
and Poor's for commercial paper:

"A-1"- Issue's degree of safety regarding timely payment is strong. Those
issues determined to possess extremely strong safety characteristics are
denoted "A-1+."

"A-2" - Issue's capacity for timely payment is satisfactory. However, the
relative degree of safety is not as high as for issues designated "A-1."

"A-3" - Issue has an adequate capacity for timely payment. It is, however,
somewhat more vulnerable to the adverse effects of changes and circumstances
than an obligation carrying a higher designation.

"B" - Issue has only a speculative capacity for timely payment.

"C" - Issue has a doubtful capacity for payment.

"D" - Issue is in payment default. The "D" category is used when interest
payments or principal payments are not made on the due date, even if the
applicable grace period has not expired when S & P believes such payments will
be made during such grace period.

Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of one year, unless explicitly noted. The following summarizes the
rating categories used by Moody's for commercial paper:

"Prime-1" - Issuer or related supporting institutions are considered to have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.

"Prime-2" - Issuer or related supporting institutions are considered to have a
strong capacity for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.

"Prime-3" - Issuer or related supporting institutions have an acceptable
ability for repayment of senior short-term debt obligations. The effects of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.

"Not Prime" - Issuer does not fall within any of the Prime rating categories.

The three rating categories of Duff & Phelps for investment grade commercial
paper and short-term debt are "Duff 1," "Duff 2" and "Duff 3." Duff & Phelps
employs three designations, "Duff 1+," "Duff 1" and "Duff 1-," within the
highest rating category. The following summarizes the rating categories used
by Duff & Phelps for commercial paper:

"Duff 1+" - Debt possesses highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.

"Duff 1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors.
Risk factors are minor.

"Duff 1-" - Debt possesses high certainty of timely payment. Liquidity factors
are strong and supported by good fundamental protection factors. Risk factors
are very small.

"Duff 2" - Debt possesses good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good. Risk factors
are small.

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<PAGE> 71

"Duff 3" - Debt possesses satisfactory liquidity, and other protection factors
qualify issue as investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.

"Duff 4" - Debt possesses speculative investment characteristics. Liquidity is
not sufficient to ensure against disruption in debt service. Operating factors
and market access may be subject to a high degree of variation.

"Duff 5" - Issuer has failed to meet scheduled principal and/or interest
payments.

Fitch short-term ratings apply generally to debt obligations that are payable
on demand or have original maturities of up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:

"F-1+" - Securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.

"F-1" - Securities possess very strong credit quality. Issues assigned this
rating reflect an assurance of timely payment only slightly less in degree than
issues rated "F-1+."

"F-2" - Securities possess good credit quality. Issues carrying this rating
have a satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as the "F-1+" and "F-1" categories.

"F-3" - Securities possess fair credit quality. Issues assigned this rating
have characteristics suggesting that the degree of assurance for timely payment
is adequate; however, near-term adverse changes could cause these securities to
be rated below investment grade.

"F-S" - Securities possess weak credit quality. Issues assigned this rating
have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.

"D" - Securities are in actual or imminent payment default.

CORPORATE LONG-TERM DEBT RATINGS

The following summarizes the ratings used by Standard & Poor's for corporate
and municipal debt:

"AAA" - This designation represents the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment is extremely
strong.

"AA" - An obligation rated "AA" differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.

"A" - An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligator's capacity to meet its
financial commitment on the obligation is still strong.

"BBB" - An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligation to meet its financial
commitment on the obligation.

"BB," "B," "CCC," "CC," and "C" - Debt is regarded as having significant
speculative characteristics. "BB" indicates the least degree of speculation
and "C" the highest. While such obligations will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.

"BB" - Debt is less vulnerable to non-payment than other speculative issues.
However, it faces major ongoing uncertainties or exposure to adverse business,
financial or economic conditions which could lead to obligor's inadequate
capacity to meet its financial commitment on the obligation.

"B" - Debt is more vulnerable to non-payment than obligations rated "BB," but
the obligor currently has the capacity to meet its financial commitment on the
obligation. Adverse business, financial or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment
on the obligation.

"CCC" - Debt is currently vulnerable to non-payment, and is dependent upon
favorable business, financial and economic conditions for the obligor to meet
its financial commitment on the obligation. In the event of adverse business,
financial or economic conditions, the obligor is not likely to have the
capacity to meet its financial commitment on the obligation.

"CC" - An obligation rated "CCC" is currently highly vulnerable to non-payment.

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<PAGE> 72

"C" - The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.

"D" - An obligation rated "D" is in payment default. This rating is used when
payments on an obligation are not made on the date due, even if the applicable
grace period has not expired, unless S & P believes that such payments will be
made during such grace period. "D" rating is also used upon the filing of a
bankruptcy petition or the taking of similar action if payments on an
obligation are jeopardized.

PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.

"r" - This rating is attached to highlight derivative, hybrid, and certain
other obligations that S & P believes may experience high volatility or high
variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
violability or variability in total return.

The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:

"Aaa" - Bonds are judged to be of the best quality. They carry the smallest
degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.

"Aa" - Bonds are judged to be of high quality by all standards. Together with
the "Aaa" group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in "Aaa" securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in "Aaa" securities.

"A" - Bonds possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.

"Baa" - Bonds considered medium-grade obligations, i.e., they are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.

"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these ratings
provide questionable protection of interest and principal ("Ba" indicates some
speculative elements; "B" indicates a general lack of characteristics of
desirable investment; "Caa" represents a poor standing; "Ca" represents
obligations which are speculative in a high degree; and "C" represents the
lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in default.

Con. (--) - Bonds for which the security depends upon the completion of some
act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.

(P) - When applied to forward delivery bonds, indicates that the rating is
provisional pending delivery of the bonds. The rating may be revised prior to
delivery if changes occur in the legal documents or the underlying credit
quality of the bonds.

Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.

The following summarizes the ratings used by Duff & Phelps for corporate and
municipal long-term debt:

"AAA" - Debt is considered to be of the highest credit quality. The risk
factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.

"AA" - Debt is considered of high credit quality. Protection factors are
strong. Risk is modest but may vary slightly from time to time because of
economic conditions.

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<PAGE> 73

"A" - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.

"BBB" - Debt possesses below average protection factors but such protection
factors are still considered sufficient for prudent investment. Considerable
variability in risk is present during economic cycles.

"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these ratings is
considered to be below investment grade. Although below investment grade, debt
rated "BB" is deemed likely to meet obligations when due. Debt rated "B"
possesses the risk that obligations will not be met when due. Debt rated "CCC"
is well below investment grade and has considerable uncertainty as to timely
payment of principal, interest or preferred dividends. Debt rated "DD" is a
defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend averages.

To provide more detailed indications of credit quality, the "AA," "A," "BBB,"
"BB" and "B" ratings may be modified by the addition of a plus (+) or minus (-)
sign to show relative standing within these major categories.

The following summarizes the highest four ratings used by Fitch for corporate
and municipal bonds:

"AAA" - Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.

"AA" - Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA." Because bonds rated in the
"AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated
"F-1+."

"A" - Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.

"BBB" - Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.

"BB" - Bonds considered to be speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified, which
could assist the obligor in satisfying its debt service requirements.

"B" - Bonds are considered highly speculative. While securities in this class
are currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited margin
of safety and the need for reasonable business and economic activity throughout
the life of the issue.

"CCC " - Bonds have certain identifiable characteristics that, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.

"CC" - Bonds are minimally protected. Default in payments of interest and/or
principal seems probable over time.

"C" - Bonds are in imminent default in payment of interest or principal.

"DDD," "DD" and "D" - Bonds are in default on interest and/or principal
payments. Such securities are extremely speculative and should be valued on
the basis of their ultimate recovery value in liquidation or reorganization of
the obligor. "DDD" represents the highest potential for recovery on these
securities, and "D" represents the lowest potential for recovery.

To provide more detailed indications of credit quality, the Fitch ratings from
and including "AA" to "C" may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major rating categories.

B-4

<PAGE> 74

WILLIAM BLAIR MUTUAL FUNDS, INC.

PART C

OTHER INFORMATION

ITEM 24. Financial Statements and Exhibits

(a) Financial Statements:

(i) Financial Statements included in Part A
of the Registration Statement:

For Growth Fund, Value Discovery Fund, International
Growth Fund, Income Fund, and Ready Reserves Fund:

Financial Highlights

(ii) Financial Statements included in Part B
of the Registration Statement:

The following information contained in the Annual Report
for William Blair Mutual Funds, Inc. (Growth Fund, Value
Discovery Fund, International Growth Fund, Income Fund,
and Ready Reserves Fund) for the fiscal year ended
December 31, 1997 is incorporated by reference into Part
B from the Annual Report for William Blair Mutual Funds,
file number 811-5344, filed electronically on February 9,
1998 with the Securities and Exchange Commission.

William Blair Mutual Funds, Inc.

Growth Fund, Value Discovery Fund, International Growth
Fund, Income Fund, and Ready Reserves Fund

Statements of Assets and Liabilities at December
31, 1997

Statements of Operations for the Year Ended
December 31, 1997

Statements of Changes in Net Assets for the Years
Ended December 31, 1997 and 1996 (for the period
from December 23, 1996 (Commencement of Operations)
to December 31, 1996 for the Value Discovery Fund)

Notes to Financial Statements

Report of Independent Auditors

Growth Fund, Value Discovery Fund, International Growth
Fund, Income Fund, and Ready Reserves Fund

Schedules II, III, IV, V, VI and VII are omitted as
the required information is not present

Schedule I has been omitted as the required
information is presented in the Portfolio of
Investments at December 31, 1997

C-1

<PAGE> 75
(b) Exhibits

<S> <C> <C>
EX-99.B1.1 Articles of Incorporation. (1)/
EX-99.B1.2 Form of Amendment to Articles of Incorporation. (1)
EX-99.B2 By-laws, as amended. (4)/
EX-99.B3 Inapplicable.
EX-99.B4 See items 1 and 2 above.
EX-99.B5.1 Form of Management Agreement dated May 1, 1996, as amended. (3)/
EX-99.B5.2 Form of Management Agreement dated December 23, 1996. (2)/
EX-99.B5.3 Form of Management Agreement dated ______________, 1998. (4)/
EX-99.B6 Underwriting Agreement. (1)/
EX-99.B7 Inapplicable.
EX-99.B8.1 Custodian Agreement. (1)/
EX-89.B8.2 Delegation Agreement. (4)/
EX-99.B9 Inapplicable.
EX-99.B10 Opinion and Consent of Vedder, Price, Kaufman & Kammholz.
EX-99.B11.1 Consent of Ernst & Young LLP.*
EX-99.B11.2 Representation of Vedder, Price, Kaufman & Kammholz.*
EX-99.B12 Inapplicable.
EX-99.B13 Subscription Agreement. (1)/
EX-99.B14 Inapplicable.
EX-99.B15 Inapplicable.
EX-99.B16 Schedule for calculation of performance quotation. (4)
EX-99.B17 Powers of Attorney. (4)/
EX-99.B27.1 Financial Data Schedule - Growth Fund. (4)/
EX-99.B27.2 Financial Data Schedule - Value Discovery Fund. (4)
EX-99.B27.3 Financial Data Schedule - International Growth Fund (4)
EX-99.B27.4 Financial Data Schedule - Income Fund. (4)/
EX-99.B27.5 Financial Data Schedule - Ready Reserves Fund. (4)/
</TABLE>

(1)/ Incorporated herein by reference to Post-Effective Amendment No. 13 to
Registrant's Registration Statement on Form N-1A as filed on or about
March 1, 1996.

(2)/ Incorporated herein by reference to Post-Effective Amendment No. 15 to
Registrant's Registration Statement on Form N-1A as filed on or about
November 5, 1996.

(3)/ Incorporated herein by reference to Post-Effective Amendment No. 16 to
Registrant's Registration Statement on Form N-1A as filed on or about
February 26, 1997.

(4)/ Incorporated herein by reference to Post-Effective Amendment No. 17 to
Registrant's Registration Statement on Form N-1A as filed on or about
February 27, 1998.

*Filed herewith.

ITEM 25. Persons Controlled by or Under Common Control with Registrant

Inapplicable.

ITEM 26. Number of Holders of Securities

Number of holders of securities as of March 31, 1998:

<TABLE>
<CAPTION>
Number of
Title of Class Record Holders
- -------------- --------------
<S> <C>
Shares of common stock of:
Growth Fund.................................................... 10,111
Value Discovery Fund........................................... 867
International Growth Fund...................................... 1,681
Emerging Markets Growth Fund ------
Income Fund.................................................... 2,020
Ready Reserves Fund............................................ 21,056
</TABLE>

C-2

<PAGE> 76

ITEM 27. Indemnification

Section 2-418 of the Maryland General Corporation Law provides for
indemnification of directors, officers, employees and agents.

Article XII of the Registrant's Articles of Incorporation provides for
indemnification of directors and officers under certain circumstances but does
not allow such indemnification in cases of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct
of his office.

The Investment Management Agreement between the Registrant and William
Blair & Company, L.L.C. (the "Adviser") provides that, in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of
obligations or duties thereunder on the part of the Adviser, the Adviser shall
not be liable for any error of judgment or mistake of law, or for any loss
suffered by the Fund in connection with the matters to which such Agreement
relates.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "1933 Act") may be permitted to directors, officers, and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the 1933 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any
action, suit, or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of
such issue.

ITEM 28. Business and Other Connections of Investment Adviser

Registrant's investment manager is William Blair & Company, L.L.C., a
limited liability company. In addition to its services to Registrant as
investment manager as set forth in Parts A and B of this Registration Statement
on Form N-1A, William Blair & Company, L.L.C. is a registered broker-dealer and
investment adviser and engages in investment banking.

The principal occupations of the principals and primary officers of
William Blair & Company, L.L.C. are their services as principals and officers
of that Company. The address of William Blair & Company, L.L.C. and Registrant
is 222 West Adams Street, Chicago, Illinois 60606.

C-3

<PAGE> 77

Set forth below is information as to any other business, profession,
vocation or employment of a substantial nature in which each principal of
William Blair & Company, L.L.C. is, or at any time during the last two fiscal
years has been, engaged for his own account or in the capacity of director,
officer, employee, partner or trustee:

NAME AND POSITION WITH
WILLIAM BLAIR & COMPANY, L.L.C. PRINCIPAL BUSINESS CAPACITY
- ------------------------------- ------------------ --------
<S> <C> <C>
James L. Barber, Jr., LaRabida Hospital Foundation Vice President of the Board of Directors
Principal Stanford Associates Past President
William Blair Mutual Funds, Inc. President

Bowen Blair, The Art Institute of Chicago Trustee
Senior Principal Chicago Historical Society Trustee
Field Museum of Natural History Trustee

Edward McC. Blair, Sr., The Art Institute of Chicago
Senior Principal College of The Atlantic Life Trustee
Pullman Educational Foundation Board of Trustees
Rush Presbyterian-St. Luke's Life Trustee
Medical Center Life Trustee
University of Chicago Life Trustee

Edward McC. Blair, Jr., Chicago Dock and Canal Trust Trustee
Principal Chicago Zoological Society Deputy Chairman
Research Medical, Inc. Director
University of Chicago Hospital Trustee

Kurt Beuchel, Social Security Fund of the
Principal Principality of Liechtenstein Member, Investment Advisory Board

David G. Chandler, The Bruss Company Director
Principal Encore Paper Company Director
Electronic Manufacturing Systems, Inc. Director
Gibraltar Packaging Group Director
Harmonic Systems, Inc. Director
Morton Grove Pharmaceuticals, Inc. Director
Predelivery Service Corporation Director
Sweetwater Sound, Inc. Director

E. David Coolidge, III, Pittway Corporation Director
Chief Executive Officer

Conrad Fischer, APM Limited Partnership General Partner
Principal Chicago Child Care Trustee, Emeritus
Kalamazoo College Investment Committee
William Blair Mutual Funds, Inc. Chairman and Director
</TABLE>

C-4

<PAGE> 78

NAME AND POSITION WITH
WILLIAM BLAIR & COMPANY, L.L.C. PRINCIPAL BUSINESS CAPACITY
- ------------------------------- ------------------ --------
<S> <C> <C>
Mark A. Fuller, III, Fuller Investment Company President
Principal Fulsen Howney Partners Partner
Three Rio Grande, LLC Principal
William Blair Mutual Funds, Inc. Senior Vice President

John K. Greene, Chicago Horticultural Society
Principal Children's Home & Aid Society Trustee
of Illinois, Inc. Trustee
Hazelden Chairman, Illinois Board of Directors
Vulcan Materials Co. Director

Thomas L. Greene, Tyler School of Secretarial Science 25% Owner
Principal

James P. Hickey, Eagle Point Software Director
Principal

Edgar D. Jannotta, Sr., AAR Corporation Director
Senior Principal AON Corporation Director
Bandag, Incorporated Director
Commonwealth Edison Director
Molex, Incorporated Director
New York Stock Exchange, Inc. Director
Oil-Dri Corporation of America Director
Safety-Kleen Corporation Director
Sloan Valve Company Director
Unicom Corporation Director
</TABLE>

C-5

<PAGE> 79

NAME AND POSITION WITH
WILLIAM BLAIR & COMPANY, L.L.C. PRINCIPAL BUSINESS CAPACITY
- ------------------------------- ------------------ --------
<S> <C> <C>
Big Sky Joint Venture General Partner

Edgar D. Jannotta, Sr., The Bruss Company Director
Principal CARA Corporation Director
Chicago Communities in Schools Director
Corporate Project Resources, Inc. Director
Daisytek International Director
Electronic Manufacturing Services, Inc. Director
Gibraltar Packaging Director
Towne Holdings, Inc. Director

Richard P. Kiphart, McCormick Theological Seminary Board of Directors
Principal

Robert Lamphier, IV, Ag. Med, Inc. Chairman
Principal

James McMullan, Security Industry Association Director
Principal

William Blair Mutual Funds, Inc. Director

David W. Morrison, Bell Flavors & Fragrances, Inc. Director
Principal

Timothy M. Murray, AGI, Inc. Director
Principal

Daisytek International Director
Mede America, Inc. Director
MRC Group, Inc. Director
Portland Food Products, Incorporated Director
Towne Holdings, Inc. Director

Bentley M. Myer, Delnor Community Hospital Director
Principal

William Blair Mutual Funds, Inc. Senior Vice President

Daniel Nichols, Armani Racing Stable Partner
Principal

David G. O'Neill, Elder Care Information Network Director
Principal

Resume Link, Inc. Director

Svboda, Collins & Co. Advisory Board

Phillip Reitz XOLOX Corporation Advisory Board

Neal L. Seltzer, Scholarship and Guidance Foundation Director
Principal
Lake Shore Country Club Director

William Semmer, Chicago Home and Garden Magazine Director
Principal

Ronald B. Stansell, AFO Limited Partnership Limited Partner
Principal
</TABLE>

C-6

<PAGE> 80

NAME AND POSITION WITH
WILLIAM BLAIR & COMPANY, L.L.C. PRINCIPAL BUSINESS CAPACITY
- ------------------------------- ------------------ --------
<S> <C> <C>
Thomas H. Story, Security APL, Inc. Member, Advisory Council
Principal

Mark Timmerman, DIY Home Warehouse, Incorporated Director
Principal
Prophet 21, Incorporated Director

Norbert W. Truderung, William Blair Mutual Funds, Inc. Senior Vice President
Principal

W. James Truettner, Jr., Glenview Foundation Director
Principal
International Travel Services Director

William Blair Mutual Funds, Inc. Director
</TABLE>

ITEM 29. Principal Underwriters

(a) Inapplicable.

(b) The principal business address of each principal and
officer of William Blair & Company, L.L.C., principal underwriter
for Registrant, is 222 West Adams Street, Chicago, Illinois
60606. See Item 28 for information with respect to officers and
principals of William Blair & Company, L.L.C.

ITEM 30. Location of Accounts and Records

All such accounts, books and other documents are maintained by the
Registrant's officers at the offices of the Registrant and the offices of the
Investment Adviser, William Blair & Company, L.L.C., 222 West Adams Street,
Chicago, Illinois 60606. Shareholder account information and original
shareholder correspondence is also available at the offices of the Transfer
Agent and Dividend Paying Agent, State Street Bank and Trust Company, P.O. Box
9104, Boston, Massachusetts 02205-9104.

ITEM 31. Management Services

Inapplicable.

ITEM 32. Undertakings

(a) Inapplicable.

(b) With respect to the Emerging Markets Growth Fund,
Registrant undertakes to file a post-effective amendment,
using financial statements which need not be certified,
within four to six months from the effective date of
Registrant's 1933 Act registration statement.

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

C-7

<PAGE> 81

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the registrant has duly caused this amended
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Chicago, and State of Illinois, on the 21st day
of April, 1998.

WILLIAM BLAIR MUTUAL FUNDS, INC.

By: /s/ ROCKY BARBER
---------------------------------------
Rocky Barber, President

Pursuant to the requirements of the Securities Act of 1933, this
post-effective amendment to the registration statement has been signed below by
the following persons in the capacity and on the date indicated.

SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>

/s/ VERNON ARMOUR* Director April 21, 1998
- ------------------------
Vernon Armour

/s/ J. GRANT BEADLE* Director April 21, 1998
- ------------------------
J. Grant Beadle

/s/ THEODORE A. BOSLER* Director April 21, 1998
- ------------------------
Theodore A. Bosler

/s/ CONRAD FISCHER Director (Chairman of the Board) April 21, 1998
- ------------------------
Conrad Fischer

/s/ GEORGE KELM* Director April 21, 1998
- ------------------------
George Kelm

/s/ ANN P. MCDERMOTT* Director April 21, 1998
- ------------------------
Ann P. McDermott

/s/ JAMES M. MCMULLAN* Director April 21, 1998
- ------------------------
James M. McMullan

/s/ JOHN B. SCHWEMM* Director April 21, 1998
- ------------------------
John B. Schwemm

/s/ W. JAMES TRUETTNER, JR.* Director April 21, 1998
- ----------------------------
W. James Truettner, Jr.

President
/s/ ROCKY BARBER (Principal Executive Officer) April 21, 1998
- ----------------------------
James L. Barber, Jr.

/s/ TERENCE M. SULLIVAN Treasurer (Principal Financial
- ---------------------------- Officer, Principal Accounting April 21, 1998
Terence M. Sullivan Officer)
</TABLE>

* Rocky Barber signs this document pursuant to a power of attorney incorporated
herein by reference to Post-Effective Amendment No. 17 to Registrant's
Registration Statement on Form N-1A as filed on or about February 27, 1998.

<PAGE> 82

EXHIBIT INDEX

<TABLE>
<CAPTION>
<S> <C>
EX-99.B1.1 Articles of Incorporation. (1)/
EX-99.B1.2 Form of Amendment to Articles of Incorporation. (1)/
EX-99.B2 By-laws, as amended. (4)/
EX-99.B3 Inapplicable.
EX-99.B4 See items 1 and 2 above.
EX-99.B5.1 Form of Management Agreement dated May 1, 1996, as amended. (3)/
EX-99.B5.2 Form of Management Agreement dated December 23, 1996. (2)/
EX-99.B5.3 Form of Management Agreement dated ___________, 1998. (4)/
EX-99.B6 Underwriting Agreement. (1)/
EX-99.B7 Inapplicable.
EX-99.B8.1 Custodian Agreement. (1)/
EX-99.B8.2 Delegation Agreement (4)/
EX-99.B9 Inapplicable.
EX-99.B10 Opinion and Consent of Vedder, Price, Kaufman & Kammholz. (4)/
EX-99.B11.1 Consent of Ernst & Young LLP.*
EX-99.B11.2 Representation of Vedder, Price, Kaufman & Kammholz.*
EX-99.B12 Inapplicable.
EX-99.B13 Subscription Agreement. (1)/
EX-99.B14 Inapplicable.
EX-99.B15 Inapplicable.
EX-99.B16 Schedule for calculation of performance quotation. (4)/
EX-99.B17 Powers of Attorney. (4)/
EX-99.B27.1 Financial Data Schedule - Growth Fund. (4)/
EX-99.B27.2 Financial Data Schedule - Value Discovery Fund. (4)/
EX-99.B27.3 Financial Data Schedule - International Growth Fund. (4)/
EX-99.B27.4 Financial Data Schedule - Income Fund. (4)/
EX-99.B27.5 Financial Data Schedule - Ready Reserves Fund. (4)/
</TABLE>

(1)/ Incorporated herein by reference to Post-Effective Amendment No. 13 to
Registrant's Registration Statement on Form N-1A as filed on or about
March 1, 1996.

(2)/ Incorporated herein by reference to Post-Effective Amendment No. 15 to
Registrant's Registration Statement on Form N-1A as filed on or about
November 5, 1996.

(3)/ Incorporated herein by reference to Post-Effective Amendment No. 16 to
Registrant's Registration Statement on Form N-1A as filed on or about
February 26, 1997.

(4)/ Incorporated herein by reference to Post-Effective Amendment No. 17 to
Registrant's Registration Statement on Form N-1A as filed on or about
February 27, 1998.

*Filed herewith.

<PAGE> 1
EXHIBIT 99.B11.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions "Financial
Highlights" and "Independent Auditors" and to the use of our report dated
February 3, 1998 for William Blair Mutual Funds, Inc. (comprised of the Growth
Fund, Value Discovery Fund, International Growth Fund, Income Fund and Ready
Reserves Fund) in the Registration Statement (Form N-1A) of William Blair
Mutual Funds, Inc., and its incorporation by reference in the related
Prospectus and Statement of Additional Information, filed with the Securities
and Exchange Commission in this Post-Effective Amendment No. 18 to the
Registration Statement under the Securities Act of 1933 (Registration No.
33-17463) and this Amendment No. 19 to the Registration Statement under the
Investment Company Act of 1940 (Registration No. 811-5344).

/s/ ERNST & YOUNG LLP
-----------------------------------
ERNST & YOUNG LLP

Chicago, Illinois
April 24, 1998

<PAGE> 1
EXHIBIT 99.B11.2

April 24, 1998

Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

RE: WILLIAM BLAIR MUTUAL FUNDS
POST-EFFECTIVE AMENDMENT NO. 18
FILE NOS. 33-17463 AND 811-5344

To the Commission:

On behalf of William Blair Mutual Funds (the "Fund") we are transmitting
electronically for filing pursuant to the Securities Act of 1933 (the "1933
Act") and the Investment Company Act of 1940, the Fund's Post-Effective
Amendment No. 18 to its Registration Statement on Form N-1A, including
exhibits, marked to show changes from the Fund's previously filed
Post-Effective Amendment to its Registration Statement.

This Amendment is being filed pursuant to the conditions and requirements
of Rule 485(b) under the 1933 Act for the purpose of including the report of
auditors to the Fund's annual report and making certain other non-material
changes. Pursuant to the requirements of paragraph (b)(4) of Rule 485 under
the 1933 Act, we represent that the Amendment does not contain disclosures
which would render it ineligible to become effective under paragraph (b) of
Rule 485.

Very truly yours,

VEDDER, PRICE, KAUFMAN & KAMMHOLZ

By: /s/ Ann E. Oglanian
-------------------------------
Ann E. Oglanian