WILLIAM BLAIR MUTUAL FUNDS INC, 497, 1999-05-04

WILLIAM BLAIR MUTUAL FUNDS INC
497, 1999-05-04

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<PAGE> 1
Prospectus / May 1, 1999

- --------------------------------------------------------------------------------
WILLIAM BLAIR MUTUAL FUNDS, INC.
- --------------------------------------------------------------------------------
[WILLIAM BLAIR LOGO]
- --------------------------------------------------------------------------------
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> 2

TABLE OF CONTENTS

<TABLE>
<S> <C>
SUMMARY..................................................... 3
Growth Fund........................................ 3
Discovery Fund..................................... 5
International Growth Fund.......................... 7
Emerging Markets Growth Fund....................... 9
Income Fund........................................ 11
Ready Reserves Fund................................ 13
INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES AND
RISKS..................................................... 15
Growth Fund........................................ 16
Value Discovery Fund............................... 18
International Growth Fund.......................... 20
Emerging Markets Growth Fund....................... 23
Income Fund........................................ 27
Ready Reserves Fund................................ 29
MANAGEMENT OF THE FUNDS..................................... 31
YOUR ACCOUNT................................................ 32
How to Buy Shares.................................. 32
How to Sell Shares................................. 33
How to Exchange Shares............................. 36
Dividends and Distributions........................ 36
Taxes.............................................. 37
DETERMINATION OF NET ASSET VALUE............................ 38
SHAREHOLDER SERVICES AND ACCOUNT POLICIES................... 39
INVESTMENT GLOSSARY......................................... 41

FOR MORE INFORMATION........................................ Back Cover
</TABLE>

2 William Blair Mutual Funds, Inc. May 1, 1999
<PAGE> 3

WILLIAM BLAIR GROWTH FUND SUMMARY
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE: The William Blair Growth Fund seeks long-term appreciation
of capital by investing in well-managed companies in growing industries.

MAIN INVESTMENT STRATEGIES: The Fund invests primarily in a diversified
portfolio of common stocks of domestic companies. The Adviser seeks growth
opportunities by investing in large, medium and small companies in varying
proportions. With respect to large companies, the Adviser looks for high
quality, seasoned growth companies that have demonstrated sustained growth over
a long period of time. With respect to medium-sized companies, the Adviser
searches for companies that are generally of similar investment quality to large
companies but whose records of sales and earnings growth are not as well
established. With respect to small companies, the Adviser looks for emerging,
rapid growth companies that have had especially vigorous growth in revenues and
earnings. The Fund is designed for long-term investors.

MAIN RISKS OF INVESTING: Since the Fund invests most of its assets in common
stocks, the primary risk is that the value of the stocks it holds might decrease
in response to the activities of an individual company or general economic and
market conditions. If this occurs, the Fund's net asset value may also decrease.
The securities of small and medium size companies may be more volatile and more
speculative than the securities of larger, more established issuers. In
addition, small and medium companies may be traded in low volumes, which can
increase volatility. Of course, the skill of the Adviser will play a significant
role in the Fund's ability to achieve its investment objective. The Fund's
returns will vary, and you could lose money by investing in the Fund.

FUND PERFORMANCE HISTORY

ANNUAL TOTAL RETURNS. The bar chart below provides an illustration of how the
Fund's performance has varied in each of the last 10 calendar years. The Fund's
past performance does not necessarily indicate how it will perform in the
future.
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
'1989' '1990' '1991' '1992' '1993' '1994' '1995' '1996' '1997 '1998'
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30.45 -2.02 44.37 7.61 15.51 6.45 29.07 17.99 20.07 27.15

</TABLE>

HIGHEST AND LOWEST QUARTERLY RETURNS. During the period shown in the bar chart,
the highest return for a quarter was 23.69% (fourth quarter 1998) and the lowest
return for a quarter was -14.61% (third quarter 1990). Shareholders should be
aware that the Fund is a long-term investment and is not managed for short-term
results.

AVERAGE ANNUAL RETURNS. The following table compares the Fund's average annual
returns for the periods ended December 31, 1998, to a broad-based market
benchmark.

<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
Growth Fund 27.15% 19.87% 18.96%
S&P 500* 28.57% 24.06% 19.21%
</TABLE>

- ---------------
* The Standard and Poor's 500 Stock Index generally represents broad larger
capitalization equity market performance.

May 1, 1999 Prospectus 3
<PAGE> 4

FEES AND EXPENSES:

SHAREHOLDER FEES. All William Blair Mutual Funds are no-load investments, so you
will not pay any shareholder fees when you buy or sell shares of the Fund.

ANNUAL FUND OPERATING EXPENSES are paid out of the Fund's assets and include
fees for portfolio management, maintenance of shareholder accounts, shareholder
servicing, accounting and other services. You do not pay these fees directly
but, as the example shows, these costs are borne indirectly by shareholders.

FEES AND EXPENSES OF THE FUND. This table describes the fees and expenses that
you may pay if you buy and hold shares of the Fund.

ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)

<TABLE>
<S> <C>
Management Fee.............................................. .75%
Other Expenses.............................................. .09%
---
Total Annual Fund Operating Expense......................... .84%
</TABLE>

EXAMPLE: This example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- ---------
<S> <C> <C> <C>
$86.10 $269.14 $467.64 $1,040.41
</TABLE>

FINANCIAL HIGHLIGHTS: The table below is intended to help you understand the
Fund's financial performance for the past several years. The total return
figures show what an investor in the Fund would have earned (or lost) assuming
reinvestment of all dividends and distributions. This information has been
audited by Ernst & Young LLP, whose report, along with the Fund's financial
statement, is included in the annual report, which is available upon request
(see back cover).

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.............. $15.350 $13.480 $11.900 $ 9.600 $9.730
Income from investment operations:
Net investment income (loss).................. (.003) (.023) (.010) .034 .027
Net realized and unrealized gain on
investments................................ 4.123 2.694 2.144 2.750 .581
-------- -------- -------- -------- --------
Total from investment operations................ 4.120 2.671 2.134 2.784 .608
Less distributions from:
Net investment income......................... -- -- .010 .030 .025
Net realized gain on investments.............. 1.500 .801 .544 .454 .713
-------- -------- -------- -------- --------
Total distributions............................. 1.500 .801 .554 .484 .738
-------- -------- -------- -------- --------
Net asset value, end of year.................... $17.970 $15.350 $13.480 $11.900 $9.600
-------- -------- -------- -------- --------
Total return (%)................................ 27.15 20.07 17.99 29.07 6.45
Ratios to average net assets (%):
Expenses...................................... .84 .84 .79 .65 .71
Net investment income (loss).................. (.02) (.16) (.08) .34 .32
Supplemental data:
Net assets at end of year (000s).............. $742,056 $591,353 $501,774 $363,036 $217,560
Portfolio turnover rate (%)................... 37 34 43 32 46
</TABLE>

4 William Blair Mutual Funds, Inc. May 1, 1999
<PAGE> 5

WILLIAM BLAIR VALUE DISCOVERY FUND SUMMARY
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE: The William Blair Value Discovery Fund seeks long-term
capital appreciation.

MAIN INVESTMENT STRATEGIES: The Fund invests primarily in a diversified
portfolio of the equity securities of small companies that the Adviser believes
offer a long-term investment value. In implementing its value discipline, the
Adviser evaluates the extent to which a company meets the following criteria:
(a) whether the company's current market value reflects a material discount from
the Adviser's estimate of the company's value, (b) whether the company has a
reasonable expectation of improving its level of profitability over a three-year
investment horizon, (c) whether the company has a capable and skilled management
team, (d) whether the company has a relatively strong capital structure, and (e)
whether there is a likelihood that the company will undergo a positive corporate
change within a three-year investment horizon. The weight that the Adviser gives
to each of the investment criteria depends upon the circumstances, and some of
the Fund's investments will not meet all of the criteria. The Fund is designed
for long-term investors.

MAIN RISKS OF INVESTING: Since the Fund invests most of its assets in equity
securities, the primary risk is that the value of the securities it holds might
decrease in response to the activities of an individual company or general
economic and market conditions. If this occurs, the Fund's net asset value may
also decrease. The securities of smaller companies may be more volatile and more
speculative than the securities of larger, more established issuers, which may
cause the Fund's share price to be more volatile. In addition, small companies
may be traded in low volumes. This can increase volatility and increase the risk
that the Fund will not be able to sell the security on short notice at a
reasonable price. Of course, the skill of the Adviser will play a significant
role in the Fund's ability to achieve its investment objective. The Fund's
returns will vary, and you could lose money by investing in the Fund.

FUND PERFORMANCE HISTORY

ANNUAL TOTAL RETURNS. The bar chart to the right provides an illustration of how
the Fund's performance has varied in each of the calendar years since the Fund
started. The Fund's past performance does not necessarily indicate how it will
perform in the future.

HIGHEST AND LOWEST QUARTERLY RETURNS. During the period shown in the bar chart,
the highest return for a quarter was 26.58% (quarter ended 9/30/97) and the
lowest return for a quarter was -17.59% (quarter ended 9/30/98). Shareholders
should be aware that the Fund is a long-term investment and is not managed for
short-term results.

AVERAGE TOTAL RETURNS. The following table compares the Fund's average annual
returns for the periods ended December 31, 1998, indicated to a broad-based
securities market index.

<TABLE>
<CAPTION>
1 YEAR LIFE OF FUND**
------ --------------
<S> <C> <C>
Value Discovery Fund 0.66% 15.91%
Russell 2000 Index* (2.55)% 9.20%
</TABLE>

- ---------------
* The Russell 2000 Index is a composite of the smallest 2000 stocks of the
Russell 3000 Index, which consists of the largest 3000 stocks in the U.S.
market as determined by market capitalization.
** The fund's inception was on December 23, 1996.

May 1, 1999 Prospectus 5
<PAGE> 6

FEES AND EXPENSES:

SHAREHOLDER FEES. All William Blair Mutual Funds are no-load investments, so you
will not pay any shareholder fees when you buy or sell shares of the Fund.

FEES AND EXPENSES OF THE FUND. This table describes the fees and expenses that
you may pay if you buy and hold shares of the Fund.

ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)

<TABLE>
<S> <C>
Management Fee.............................................. 1.15%
Other Expenses.............................................. .37%
-----
Total Annual Fund Operating Expenses........................ 1.52%
</TABLE>

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- ------- ------- ---------
<S> <C> <C> <C>
$155.80 $483.67 $834.50 $1,822.86
</TABLE>

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------
1998 1997 1996(A)
------- ------- -------
<S> <C> <C> <C>
Net asset value, beginning of year.......................... $12.970 $10.000 $10.000
Income from investment operations:
Net investment income..................................... .088 .029 --
Net realized and unrealized gain (loss) on investments.... (.005) 3.305 --
------- ------- -------
Total from investment operations............................ .083 3.334 --
Less distributions from:
Net investment income..................................... .093 .020 --
Net realized gain on investments.......................... -- .344 --
------- ------- -------
Total distributions......................................... .093 .364 --
------- ------- -------
Net asset value, end of year................................ $12.960 $12.970 $10.000
======= ======= =======
Total return (%)............................................ 0.66 33.46 --
Ratios to average net assets (%):
Expenses.................................................. 1.52 1.50(b) --
Net investment income..................................... .76 .29(b) --
Supplemental data:
Net assets at end of year (000s).......................... $44,675 $30,354 $ 2
Portfolio turnover rate (%)............................... 78 69 --
</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%.

6 William Blair Mutual Funds, Inc. May 1, 1999
<PAGE> 7

WILLIAM BLAIR INTERNATIONAL GROWTH FUND SUMMARY
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE: The William Blair International Growth Fund seeks
long-term capital appreciation through investment in well-managed, quality
growth companies.

MAIN INVESTMENT STRATEGIES: The Fund invests primarily in a diversified
portfolio of common stocks of foreign companies of all sizes. In choosing
investments, the Adviser performs fundamental company analysis. The Adviser
generally seeks common stocks of companies that historically have had and are
expected to maintain superior growth, profitability and quality relative to
local markets and relative to companies within the same industry worldwide.
Following stock selection, country selection and industry allocation are the
next most important investment criteria. The Adviser will vary the geographic
diversification and types of securities in which the Fund invests based upon its
continuous evaluation of economic, market and political trends throughout the
world. The Adviser normally will allocate the Fund's investments among at least
six different countries. Normally, the Fund's investments will be divided among
Continental Europe, the United Kingdom, Canada, Japan and the markets of the
Pacific Basin. However, selective investments may also be made in Latin America
and in emerging markets, which include every country in the world except the
United States, Canada, Japan, Australia, New Zealand, Hong Kong, Singapore and
most Western European countries. The Fund is designed for long-term investors.

MAIN RISKS OF INVESTING: Because the Fund invests most of its assets in common
stocks, the primary risk is that the value of the stocks it holds might decrease
in response to the activities of those companies or market and economic
conditions. If this occurs, the Fund's net asset value may also decrease.
Foreign investments often involve additional risks, including political
instability, differences in financial reporting standards, and less stringent
regulation of securities markets. These risks are magnified in less-established,
emerging markets. Because the securities held by the Fund usually will be
denominated in currencies other than the U.S. dollar, changes in foreign
currency exchange rates may adversely affect the value of the Fund's
investments. In addition, the Fund may invest in the securities of small
companies, which may be more volatile and less liquid than securities of large
companies. Of course, the skill of the Adviser will play a significant role in
the Fund's ability to achieve its investment objective. The Fund's returns will
vary, and you could lose money by investing in the Fund.

FUND PERFORMANCE HISTORY

ANNUAL TOTAL RETURNS. The bar chart to the right provides an illustration of how
the Fund's performance has varied in each calendar year since the Fund started.
The Fund's past performance does not necessarily indicate how it will perform in
the future.

HIGHEST AND LOWEST QUARTERLY RETURNS. During the period shown in the bar chart,
the highest return for a quarter was 17.43% (quarter ended 3/31/98) and the
lowest return for a quarter was -16.70% (quarter ended 9/30/98). Shareholders
should be aware that the Fund is a long-term investment and is not managed for
short-term results.
AVERAGE ANNUAL TOTAL RETURNS. The table compares the Fund's average annual total
returns for the periods indicated to a broad-based securities market index.

<TABLE>
<CAPTION>
1 YEAR 5 YEARS LIFE OF FUND**
------ ------- --------------
<S> <C> <C> <C>
International Growth Fund 11.46% 7.37% 11.10%
Morgan Stanley Int'l Index* 14.46% 7.87% 10.91%
</TABLE>

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

* The Morgan Stanley Capital International All Country World Free except
U.S. Index includes developed and emerging markets and reduces the
Japanese portion, making it comparable to the International Growth Fund in
terms of investment approach.
** The Fund's inception was on October 1, 1992.

May 1, 1999 Prospectus 7
<PAGE> 8

FEES AND EXPENSES:

SHAREHOLDER FEES. All William Blair Mutual Funds are no-load investments, so you
will not pay any shareholder fees when you buy or sell shares of the Fund.

FEES AND EXPENSES OF THE FUND. This table describes the fees and expenses that
you may pay if you buy and hold shares of the Fund.

ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)

<TABLE>
<S> <C>
Management Fee.............................................. 1.10%
Other Expenses.............................................. .26%
-----
Total Annual Fund Operating Expenses........................ 1.36%
</TABLE>

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- ------- ------- ---------
<S> <C> <C> <C>
$139.40 $433.48 $749.11 $1,643.39
</TABLE>

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year........... $13.140 $13.950 $13.120 $12.360 $13.180
Income from investment operations:
Net investment income...................... .074 .072 .029 .105 .016
Net realized and unrealized gain (loss) on
investments, foreign currency and other
assets and liabilities.................. 1.431 1.056 1.299 .785 (.025)
-------- -------- -------- ------- -------
Total from investment operations............. 1.505 1.128 1.328 .890 (.009)
Less distributions from:
Net investment income...................... .024(a) .078(a) .068(a) .130(a) .024
Net realized gain on investments........... .001 1.860 .430 -- .714
Tax return of capital........................ -- -- -- -- .073(b)
-------- -------- -------- ------- -------
Total distributions.......................... .025 1.938 .498 .130 .811
-------- -------- -------- ------- -------
Net asset value, end of year................. $14.620 $13.140 $13.950 $13.120 $12.360
======== ======== ======== ======= =======
Total return (%)............................. 11.46 8.39 10.20 7.22 (.04)
Ratios to average net assets (%):
Expenses................................... 1.36 1.43 1.44 1.48 1.51
Net investment income...................... .09 .01 .19 .87 .15
Supplemental data:
Net assets at end of year (000s)........... $139,746 $128,747 $105,148 $89,762 $70,403
Portfolio turnover rate (%)................ 98 102 89 77 40
</TABLE>

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

(a) Includes $.024, $.078, $.022 and $.061 in passive foreign investment
company transactions which are treated as ordinary income for Federal
income tax purposes for 1998, 1997, 1996 and 1995, respectively.
(b) Includes $431 relating to a tax return of capital.

8 William Blair Mutual Funds, Inc. May 1, 1999
<PAGE> 9

WILLIAM BLAIR EMERGING MARKETS GROWTH FUND SUMMARY
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE: The William Blair Emerging Markets Growth Fund seeks
long-term capital appreciation.

MAIN INVESTMENT STRATEGIES: The Fund invests primarily in a diversified
portfolio of equity securities issued by companies in emerging markets. In
choosing investments, the Adviser first analyzes individual companies. The
Adviser generally seeks well-managed companies with superior business
fundamentals, including global leadership in product quality or cost
competitiveness, dominant or improving market position within a growing local or
regional economy, and sustainable above-average and/or increasing returns on
invested capital. Following stock selection, the Adviser allocates investments
based upon its analysis of the economic strength of various countries and
industries. The Adviser normally will allocate the Fund's investments among at
least six different 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 Fund is
designed for long-term investors.

MAIN RISKS OF INVESTING: Because the Fund invests most of its assets in equity
securities of companies, the primary risk is that value of the securities it
holds might decrease in response to the activities of those companies or markets
and economic conditions. If this occurs, the Fund's net asset value may also
decrease. Foreign investments often involve additional risks, such as political
instability, differences in financial reporting standards and less stringent
regulation of securities markets. These risks may be greatly increased in
emerging market countries because the securities in emerging markets may be
subject to greater volatility and less liquidity than companies in more
developed markets. Because the securities held by the Fund usually will be
denominated in currencies other than the U.S. dollar, changes in foreign
currency exchange rates may adversely affect the value of the Fund's
investments. 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 the Fund's assets denominated in
such currencies. Many emerging markets have experienced substantial rates of
inflation for many years, and continued inflation may adversely affect the
economies and securities markets of such countries. The Fund also may invest in
the securities of small companies, which may be more volatile and less liquid
than securities of large companies. Of course, the skill of the Adviser will
play a significant role in the Fund's ability to achieve its investment
objective. The Fund's returns will vary, and you could lose money by investing
in the Fund.

FEES AND EXPENSES:

SHAREHOLDER FEES. All William Blair Mutual Funds are no-load investments, so you
will not pay any shareholder fees when you buy or sell shares of the Fund.

FEES AND EXPENSES OF THE FUND. This table describes the fees and expenses that
you may pay if you buy and hold shares of the Fund.

ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)

<TABLE>
<S> <C>
Management Fee.............................................. 1.40%
Other Expenses.............................................. 4.95%
-----
Total Annual Fund Operating Expenses........................ 6.35%*
</TABLE>

- ---------------
* Due to the Adviser voluntarily waiving fees and absorbing expenses, the
Fund's actual total expenses were 2.25% (annualized) during 1998. The
Adviser intends to voluntarily cap the Fund's expenses at 2.25%
indefinitely.

May 1, 1999 Prospectus 9
<PAGE> 10

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- --------- --------- ---------
<S> <C> <C> <C> <C>
Without expense cap*:..... $650.88 $1,923.31 $3,157.64 $6,084.16
</TABLE>

- ---------------
* With the expense cap, the Fund's operating expenses would be as follows: 1
Year: $230.63; 3 Years: $710.69; 5 Years: $1,216.96; 10 Years: $2,606.87.

FINANCIAL HIGHLIGHTS: The table below is intended to help you understand the
Fund's financial performance since the commencement of its operations. The total
return figures show what an investor in the Fund would have earned (or lost)
assuming reinvestment of all dividends and distributions. This information has
been audited by Ernst & Young LLP, whose report, along with the Fund's financial
statement, is included in the annual report, which is available upon request
(see back cover).

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1998(A)(B)
----------------------
<S> <C>
Net asset value, beginning of period............... $10.000
Income from investment operations:
Net investment income............................ .002
Net realized and unrealized gain (loss) on
investments, foreign currency and other assets
and liabilities............................... (2.372)
-------
Total from investment operations................... (2.370)
Less distributions from:
Net investment income............................ --
Net realized gain on investments................. --
-------
Total distributions................................ --
-------
Net asset value, end of year....................... $ 7.630
=======
Total return (%)................................... (23.70)
Ratios to average net assets (%):
Expenses(c)...................................... 2.25%
Net investment income(c)......................... .04%
Supplemental data:
Net assets at end of year (000s)................. $ 3,754
Portfolio turnover rate (%)...................... 226
</TABLE>

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

(a) For the period May 1, 1998 (Commencement of Operations) to December 31,
1998.
(b) Rates are annualized, except total returns for periods less than one
year.
(c) Without the waiver of expenses in 1998, the expense ratio would have been
6.35% and the net investment loss ratio would have been 4.06%.

10 William Blair Mutual Funds, Inc. May 1, 1999
<PAGE> 11

WILLIAM BLAIR INCOME FUND SUMMARY
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE: The William Blair Income Fund seeks 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.

MAIN INVESTMENT STRATEGIES: The Fund invests primarily in a diversified
portfolio of intermediate-term income-producing securities, including government
securities, U.S. dollar-denominated corporate bonds and notes, collateralized
obligations and money market instruments that are rated in one of the top three
categories. The Fund's investments are subject to certain maturity and duration
restrictions, by which the Fund seeks to approximate the total returns of an
intermediate-term debt index while also providing investors with the additional
security of shorter-term obligations. The Adviser continually considers the
Fund's exposure to interest rate risk because, if interest rates increase, the
Fund's yield may increase and the market value of the Fund's securities will
likely decrease, which would cause the Fund's net asset value and total return
to go down. If interest rates decrease, the Fund's yield may decrease and the
market value of the Fund's securities may increase, which would likely increase
the Fund's net asset value and total return.

MAIN RISKS OF INVESTING: The primary risk of investing in the Fund is interest
rate risk. The yield paid by the Fund will vary with changes in interest rates.
As noted above, changes in interest rates may cause changes in the Fund's yield,
net asset value and total return. Investments with longer maturities, which
typically provide higher yield than securities with shorter maturities, may
subject the Fund to increased price changes resulting from market yield
fluctuations. The Fund is also subject to credit risk. The Fund's net asset
value and total return may be adversely affected by the inability of the issuers
of the Fund's securities to make payment at maturity. Of course, the skill of
the Adviser will play a significant role in the Fund's ability to achieve its
investment objective. The Fund's returns will vary, and you could lose money by
investing in the Fund.

FUND PERFORMANCE HISTORY

HIGHEST AND LOWEST QUARTERLY RETURNS. During the period shown in the bar chart,
the highest return for a quarter was 5.44% (quarter ended 12/31/91) and the
lowest return for a quarter was -1.30% (quarter ended 12/31/92).

AVERAGE ANNUAL RETURNS. The following table compares the Fund's average annual
returns for the periods ended December 31, 1998, to a broad-based securities
market index.

<TABLE>
<CAPTION>
1 YEAR 5 YEARS LIFE OF FUND**
------ ------- --------------
<S> <C> <C> <C>
Income Fund 7.07% 6.22% 7.90%
Lehman Intermediate Gov't/Corp. Index* 8.44% 6.60% 8.19%
</TABLE>

- ---------------
* The Lehman Intermediate Government/Corporate Index represents broad
intermediate government/corporate bond market performance.
** The Fund's inception was on September 25, 1990.

YIELD: You may obtain the most current yield information for the Fund by calling
1-800-742-7272.

May 1, 1999 Prospectus 11
<PAGE> 12

FEES AND EXPENSES:

SHAREHOLDER FEES. All William Blair Mutual Funds are no-load investments, so you
will not pay any shareholder fees when you buy or sell shares of the Fund.

FEES AND EXPENSES OF THE FUND. This table describes the fees and expenses that
you may pay if you buy and hold shares of the Fund.

ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)

<TABLE>
<S> <C>
Management Fee.............................................. .59%
Other Expenses.............................................. .12%
----
Total Annual Fund Operating Expenses........................ .71%
</TABLE>

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- ------- ------- --------
<S> <C> <C> <C>
$72.78 $227.79 $396.32 $884.86
</TABLE>

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year........ $ 10.410 $ 10.270 $ 10.570 $ 9.850 $ 10.580
Income from investment operations:
Net investment income................... .640 .659 .619 .646 .661
Net realized and unrealized gain (loss)
on investments....................... .076 .140 (.309) .732 (.741)
-------- -------- -------- -------- --------
Total from investment operations.......... .716 .799 .310 1.378 (.080)
Less distributions from:
Net investment income................... .636 .659 .610 .658 .646
Net realized gain on investments........ -- -- -- -- .004
-------- -------- -------- -------- --------
Total distributions....................... .636 .659 .610 .658 .650
-------- -------- -------- -------- --------
Net asset value, end of year.............. $ 10.490 $ 10.410 $ 10.270 $ 10.570 $ 9.850
======== ======== ======== ======== ========
Total return (%).......................... 7.07 8.03 3.07 14.37 (.74)
Ratios to average net assets (%):
Expenses................................ .71 .71 .70 .68 .68
Net investment income................... 6.81 6.40 5.97 6.24 6.33
Supplemental data:
Net assets at end of year (000s)........ $188,051 $160,055 $150,006 $147,370 $143,790
Portfolio turnover rate (%)............. 96 83 66 54 63
</TABLE>

12 William Blair Mutual Funds, Inc. May 1, 1999
<PAGE> 13

WILLIAM BLAIR READY RESERVES FUND SUMMARY
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE: The William Blair Ready Reserves Fund seeks to obtain the
maximum current income consistent with preservation of capital by investing
exclusively in high-quality money market instruments.

MAIN INVESTMENT STRATEGIES: The Fund invests exclusively in short-term U.S.
dollar-denominated domestic and foreign money market instruments, which include
securities issued by domestic and foreign corporations; the U.S. Government, its
agencies and instrumentalities; U.S. and foreign banks; foreign governments; and
multinational organizations (e.g. the World Bank). The Fund invests exclusively
in securities that are high-quality, which means that they are rated in the top
2 categories. These instruments are considered to be among the safest
investments available because of their short maturities, liquidity and
high-quality ratings. The Fund is designed to be highly liquid and seeks to
maintain a net asset value of $1.00 per share. The Fund is designed for
investors who seek to obtain the maximum current income consistent with the
preservation of capital.

MAIN RISKS OF INVESTING: Although the Fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in the
Fund. As with any money market fund, there is a low risk that the issuers or
guarantors of securities will default on the payment of principal or interest or
the obligation to repurchase securities from the Fund. An investment in the Fund
is not insured or guaranteed by the Federal Deposit Insurance Corporation or any
other government agency. Of course, the skill of the Adviser will play a
significant role in the Fund's ability to achieve its investment objective.

FUND PERFORMANCE HISTORY

HIGHEST AND LOWEST QUARTERLY RETURNS. During the period shown in the bar chart,
the highest return for a quarter was 9.02% (quarter ended June 30, 1989) and the
lowest return for a quarter was 2.55% (quarter ended June 30, 1993).

AVERAGE ANNUAL RETURNS. The following table compares the Fund's average annual
total returns for the periods ended December 31, 1998, to a broad-based
securities market index.

<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
Ready Reserves Fund 4.98% 4.77% 5.22%
S&P-rated AAA* 4.97% 4.75% 5.20%
</TABLE>

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

* The Standard and Poor's-rated AAA Money Market Funds Index includes money
market mutual funds rated AAA by Standard and Poor's.

YIELD: You may obtain the most current yield information for the Fund by calling
1-800-742-7272.

May 1, 1999 Prospectus 13

<PAGE> 14

FEES AND EXPENSES:

SHAREHOLDER FEES. All William Blair Mutual Funds are no-load investments, so you
will not pay any shareholder fees when you buy or sell shares of the Fund. When
you present a check to redeem shares in excess of the value of the account or
for an amount less than $500, the Fund may charge your account a $25 fee.

FEES AND EXPENSES OF THE FUND. This table describes the fees and expenses that
you may pay if you buy and hold shares of the Fund.

ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)

<TABLE>
<S> <C>
Management Fee.............................................. .59%
Other Expenses.............................................. .10%
----
Total Annual Fund Operating Expenses........................ .69%
</TABLE>

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- -------- --------
<S> <C> <C> <C>
$70.73 $221.41 $ 385.32 $860.75
</TABLE>

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------------------
1998 1997 1996 1995 1994
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from investment operations:
Net investment income.................. .05 .05 .05 .05 .04
Net realized and unrealized gain (loss)
on investments...................... -- -- -- -- (.01)
---------- -------- -------- -------- --------
Total from investment operations......... .05 .05 .05 .05 .03
Less distributions from:
Net investment income.................. .05 .05 .05 .05 .04
---------- -------- -------- -------- --------
Total distributions.................... .05 .05 .05 .05 .04
---------- -------- -------- -------- --------
Capital contribution..................... -- -- -- -- .01
---------- -------- -------- -------- --------
Net asset value, end of year............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ======== ======== ======== ========
Total return (%)......................... 4.98 5.04 4.81 5.45 3.67(a)
Ratios to average net assets (%):
Expenses............................... .69 .70 .71 .72 .71
Net investment income.................. 4.87 4.92 4.78 5.30 3.61
Supplemental data:
Net assets at end of year (000s)....... $1,189,051 $904,569 $760,808 $703,993 $521,277
</TABLE>

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

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

14 William Blair Mutual Funds, Inc. May 1, 1999
<PAGE> 15

INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES AND RISKS
- --------------------------------------------------------------------------------
Each Fund is a series of William Blair Mutual Funds, Inc., an open-end
management investment company. William Blair & Company, L.L.C. (the "Adviser")
provides management and investment advisory services to the Funds.

The following section takes a closer look at the investment objectives of each
Fund, its principal investment strategies and certain related investment risks.
Each Fund's secondary strategies or investments are described in the Investment
Glossary at the end of this prospectus. In addition, the Statement of Additional
Information contains more detailed information about certain of these practices,
the potential risks and/or the limitations adopted by each Fund to help manage
such risks.

All investments, including those in mutual funds, have risks. No investment is
suitable for all investors. The Growth Fund, Value Discovery Fund, International
Growth Fund and Emerging Markets Growth Fund are intended for long-term
investors. In addition, the International Growth Fund and Emerging Markets
Growth Fund are intended for investors who can accept the risks entailed in
investing in foreign securities. Of course, there can be no assurance that a
Fund will achieve its objective.

May 1, 1999 Prospectus 15
<PAGE> 16

GROWTH FUND
- --------------------------------------------------------------------------------
GOAL AND STRATEGY

The Growth Fund seeks long-term appreciation of capital by investing in
well-managed companies in growing industries. The Fund invests primarily in a
diversified portfolio of the common stocks and equity-related securities of
domestic companies.

INVESTMENT PROCESS

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 Fund
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 seeks growth opportunities by investing in 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 recognized investment quality whose records of
sales and earnings growth are not as well established; and

SMALL, emerging, 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

The Fund invests primarily in a diversified portfolio of the common stocks of
domestic companies and related equity securities. To a limited extent, the Fund
may invest in depository receipts, illiquid securities, investment companies,
when-issued and delayed delivery securities and repurchase agreements which are
described in the Investment Glossary at the end of this prospectus. The
Investment Glossary also describes the Fund's policies with regard to borrowing,
concentration, diversification and portfolio turnover. The Fund may invest to a
limited extent in warrants, which are described in the Statement of Additional
Information.

16 William Blair Mutual Funds, Inc. May 1, 1999
<PAGE> 17

INVESTMENT RISKS

Generally, the Fund 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 Fund does not purchase any stocks
with a view to quick turnover for capital gains. When the Fund is invested
defensively, it may not achieve its investment objective.

PORTFOLIO MANAGEMENT

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

Rocky Barber, a principal of William Blair & Company, L.L.C., has co-managed the
Fund since 1992. He joined William Blair in 1986 as a portfolio manager and
manager of the Investment Management Department. In addition to his management
responsibilities, he is a member of the department's Growth team. Previously, he
was an equity and fixed-income manager with Alliance Capital Management for nine
years and president of the Alliance Capital Bond Fund, a group of fixed-income
mutual funds. Rocky is president of William Blair Mutual Funds, Inc. 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 of Chicago. Education: B.A., M.S.
and M.B.A., Stanford University; and CFA.

Mark A. Fuller, III, a principal of William Blair & Company, L.L.C., has
co-managed the Fund since 1992. 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. He is a portfolio manager for
numerous accounts 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.

May 1, 1999 Prospectus 17
<PAGE> 18

VALUE DISCOVERY FUND
- --------------------------------------------------------------------------------
GOAL AND STRATEGY

The Value Discovery Fund's objective is to seek long-term capital appreciation.
The Fund pursues its objective by investing with a value discipline primarily in
a diversified portfolio of the equity securities of small companies.

INVESTMENT PROCESS

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
Fund 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

Generally, most of the Fund's assets will be invested in the common stocks of
small companies. The Fund may also hold debentures and preferred stocks if they
are convertible into common stocks that meet the Fund's investment criteria. The
Fund may invest up to 15% of its net assets in foreign securities, which may
include American Depository Receipts or substantially similar investments;
however, the Fund may invest only up to 5% of its net assets directly in foreign
securities. To a limited extent, the Fund may invest in depository receipts,
foreign securities, illiquid securities, investment companies, real estate
investment trusts, repurchase agreements and when-issued and delayed delivery
securities which are described in the Investment Glossary at the end of this
prospectus. The Investment Glossary also describes the Fund's policies with
regard to borrowing, concentration, diversification and portfolio turnover. The
Fund may invest to a limited extent in warrants and futures, which are described
in the Statement of Additional Information.

18 William Blair Mutual Funds, Inc. May 1, 1999
<PAGE> 19

INVESTMENT RISKS

Because the Fund invests substantially all of its assets in common stocks, the
main risk is that the value of the stocks it holds may decrease in response to
the activities of an individual company or in response to general market,
business and economic conditions. If this occurs, the Fund's share price may
also decrease. Stocks of smaller companies involve greater risk than those of
larger, more established companies. This is because smaller companies may be in
earlier stages 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, and may be traded in low volumes, which may increase
volatility and liquidity risks. From time to time, the Fund 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, including uncertainties or exposure to adverse
business, financial or economic conditions which could lead to inadequate
capacity to meet timely interest and principal payments. The Fund is not
intended to be a complete investment program and there is no assurance that its
investment objective can be achieved.

Generally, the Fund 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 Fund does not purchase securities
with a view to quick turnover for capital gains. When the Fund is invested
defensively, it may not achieve its investment objective.

PORTFOLIO MANAGEMENT

The Value Discovery Fund is co-managed by Glen A. Kleczka, David S. Mitchell and
Capucine E. Price.

Glen Kleczka joined William Blair's Investment Management Services in 1996 to
lead the Fund's portfolio management team. For the previous 7 years, he was a
partner in the Private Markets and U.S. Equity groups of Brinson Partners, Inc.
and co-managed the Post-Venture Fund, whose assets totaled more than $900
million. Glen was also a member of the Private Markets Committee which approved
all venture capital and partnership investments. Previously, he spent two years
at CNA Financial Corp. as a manager of their Variable Annuity Trust equity
portfolio. While at the University of Wisconsin he was a participant at the
Center for Applied Security Analysis, a nationally recognized investment
management program. He is a member of the Investment Analyst Society of Chicago.
Education: B.S., Marquette University; M.B.A., University of Wisconsin.

David Mitchell joined William Blair in 1996 as a portfolio manager for the Fund.
In 1996, he was a partner in the U.S. Equity group of Brinson Partners, Inc. and
a member of the Post-Venture Fund management team, whose assets totaled more
than $900 million. Prior to joining Brinson, he spent four years as a co-manager
of Thomas Paine Investors, L.P., a private small-cap fund. Before joining Thomas
Paine, he was a Senior Equity Analyst on NBD's small-cap Woodward Opportunity
Fund and with Connecticut National Bank as an equity analyst and portfolio
manager. Prior to graduate studies he worked as an equity trader and a money
market portfolio manager. Education: B.A., Knox College; M.M., Northwestern
University.

Capucine "Cappy" Price joined William Blair in 1996 as a portfolio manager for
the Fund. For the previous 3 years, she was a partner in the Private Markets and
U.S. Equity groups of Brinson Partners, Inc. and a member of the Post-Venture
Fund management team, whose assets totaled more than $900 million. Previously,
she was an equity analyst for the First National Bank of Chicago. While
attending Northwestern University she was a participant in First Chicago's First
Scholar program. Education: B.A. University of Michigan; M.A., University of
Chicago; M.M., Northwestern University.

May 1, 1999 Prospectus 19
<PAGE> 20

INTERNATIONAL GROWTH FUND
- --------------------------------------------------------------------------------
GOAL AND STRATEGY

The International Growth Fund seeks long-term capital appreciation through
investment in well-managed, quality growth companies. 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.

INVESTMENT PROCESS

Stock Selection. In selecting companies for investment, fundamental company
analysis and stock selection are the Adviser's primary investment criteria. The
Adviser seeks 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 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.

Country Allocation. In pursuing the Fund's investment objective, the Adviser
will vary the geographic diversification and types of securities based upon the
Adviser's continuous evaluation of economic, market and political trends
throughout the world. The investment of the Fund's assets in various
international securities markets tends to decrease the degree to which events in
any one country can affect the entire Fund. 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. Normally, the Fund's
investments will be spread throughout the world (excluding the United States).
The Adviser intends to maintain approximately 10 to 20 percent of the Fund's
assets in emerging markets, although that allocation will vary over time.
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 Adviser will seek investment opportunities in companies at
different stages of development ranging from large, well-established companies
to smaller companies at an earlier stage of development.

PORTFOLIO SECURITIES

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

The Fund 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 Fund's assets 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 Fund does not have specific rating requirements for its
short-term securities; however, the Adviser presently does not intend to invest
more than 5% of the Fund's net assets in securities rated lower than investment
grade. The Fund may enter into forward foreign currency transactions in an
effort to protect against

20 William Blair Mutual Funds, Inc. May 1, 1999
<PAGE> 21

changes in foreign exchange rates. To a limited extent, the Fund may also invest
in depository receipts, foreign currency futures, forward foreign currency
transactions, illiquid securities, investment companies, repurchase agreements
and when-issued and delayed-delivery securities, which are described in the
Investment Glossary at the end of this prospectus. The Investment Glossary also
describes the Fund's policies with regard to borrowing, concentration,
diversification, and portfolio turnover. The Fund may invest to a very limited
extent in warrants, which are described in the Statement of Additional
Information.

INVESTMENT RISKS

General. Because the Fund invests substantially all of its assets in common
stocks, the main risk is that the value of the stocks it holds may decrease in
response to the activities of an individual company or in response to general
market, business and economic conditions. If this occurs, the Fund's share price
may also decrease.

Country Allocation. The Fund seeks to invest in companies and governments of
countries having stable or improving political environments; however, 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 securities held by the Fund 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 these Funds 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.

Operating Expenses. The Fund 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
(see "Your Account--Taxes").

Temporary Defensive Position. Although the Fund will normally invest at least
80% of its assets in the equity securities of companies domiciled outside of the
U.S., the Fund 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 Fund's
defensive strategy is no longer warranted, the Fund will adjust its portfolio
back to its normal complement of international equity securities as soon as
practicable.

Smaller Stocks. Stocks of smaller companies involve greater risk than those of
larger, more established companies. This is because smaller companies 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, and may be
traded in low volumes, which may increase volatility and liquidity risks. The
Fund is not intended to be a complete investment program and there is no
assurance that its investment objective can be achieved.

May 1, 1999 Prospectus 21
<PAGE> 22

PORTFOLIO MANAGEMENT

The International Growth Fund is managed by W. George Greig.

W. George Greig, a principal of William Blair & Company, L.L.C., has managed the
Fund since 1996 when he joined the Investment Management Department as an
international portfolio manager. He headed international equities for PNC Bank
in Philadelphia from 1995 to 1996 and, prior to that, he 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.

22 William Blair Mutual Funds, Inc. May 1, 1999
<PAGE> 23

EMERGING MARKETS GROWTH FUND
- --------------------------------------------------------------------------------
GOAL AND STRATEGY

The investment objective of the Emerging Markets Growth Fund is long-term
capital appreciation. The Fund pursues its objective by investing in a
diversified portfolio of equity securities issued by companies in emerging
economies worldwide.

INVESTMENT PROCESS

The Adviser seeks well-managed, high quality growth companies. Such companies
will generally exhibit superior business fundamentals, including one or more of
the following characteristics:

REGIONAL 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.

In pursuing the Fund's investment objective, the Adviser will vary the Fund's
geographic diversification and types of securities based upon the Adviser's
continuous evaluation of economic, market and political trends throughout the
world. The investment of the Fund's assets in various international securities
markets tends to decrease the degree to which events in any one country can
affect the entire Fund. 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. In addition, the Adviser will seek investment
opportunities in companies at different stages of development ranging from
large, well-established companies to smaller companies at an earlier stage of
development.

PORTFOLIO SECURITIES

The Fund 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 Fund 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 Fund's equity securities will be invested in
securities of issuers in one country at any given time.

The Fund 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 Fund's assets 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 Fund
does not have specific rating requirements for its short-

May 1, 1999 Prospectus 23
<PAGE> 24

term securities; however, the Adviser presently does not intend to invest more
than 5% of the Fund's net assets in securities rated below investment grade.

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

INVESTMENT RISKS

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.

Emerging Markets. 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 Fund's investments in emerging market 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.

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,

24 William Blair Mutual Funds, Inc. May 1, 1999
<PAGE> 25

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 Fund 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 been and may continue
to be adversely affected by economic conditions in the countries with which they
trade.

The securities held by the Fund 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 Fund 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 Fund 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 Fund 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.

Smaller Stocks. Stocks of smaller companies involve greater risk than those of
larger, more established companies. This is because smaller companies may be
earlier stages 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, and may be traded in low volumes, which may increase
volatility and liquidity risks. From time to time, the Fund 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, including uncertainties or exposure to adverse
business, financial or economic conditions which could lead to inadequate
capacity to meet timely interest and principal payments.

Temporary Defensive Position. Although the Fund will normally invest at least
65% of its assets in the equity securities of emerging market companies, the
Fund 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 Fund's
defensive strategy is no longer warranted, the Fund will adjust its Fund back to
its normal complement of emerging market equity securities as soon as
practicable. When the Fund is invested defensively, it may not meet its
investment objective. The Fund is not intended to be a complete investment
program, and there is no assurance that its investment objective can be
achieved.

May 1, 1999 Prospectus 25
<PAGE> 26

PORTFOLIO MANAGEMENT

The Emerging Markets Growth Fund is co-managed by W. George Greig and Jeffrey A.
Urbina.

W. George Greig, a principal of William Blair & Company, L.L.C., has co-managed
the Fund since its inception in 1998. He joined the Investment Management
Department in 1996 as an international portfolio manager. He headed
international equities for PNC Bank in Philadelphia from 1995 to 1996 and, prior
to that, he 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.

Jeffrey A. Urbina joined William Blair & Company, L.L.C. in 1996 and has
co-managed the Fund since its inception in 1998. In addition to the Emerging
Market Growth Fund, he is responsible for emerging market research for the
William Blair International Growth Fund. From 1991 to 1996, 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.

26 William Blair Mutual Funds, Inc. May 1, 1999
<PAGE> 27

INCOME FUND
- --------------------------------------------------------------------------------
GOAL AND STRATEGY

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.

INVESTMENT PROCESS

The Adviser seeks to outperform the total return of an index of broad
intermediate-term government and corporate high-grade debt through an actively
managed diversified portfolio of debt securities. The Adviser's investment
philosophy emphasizes shifts in the Fund's portfolio among various sectors of
the debt market, subject to the Fund's credit quality constraints for its
portfolio. The Adviser also actively manages the Fund based upon the average
duration and yield to maturity of the Fund's portfolio and the Adviser's
perceived trends in interest rates.

PORTFOLIO SECURITIES

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

U.S. DOLLAR-DENOMINATED CORPORATE 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 Fund'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.

The anticipated dollar-weighted average maturity of the Fund is three to seven
years. The anticipated weighted average modified duration for the Fund 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.

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 industry experience.

May 1, 1999 Prospectus 27
<PAGE> 28

Generally the Fund will remain fully invested. However, the Fund 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 Fund does not
invest in equity securities.

To a limited extent, the Fund may invest in illiquid securities, repurchase
agreements and when-issued and delayed delivery securities, which are described
in the Investment Glossary at the end of this prospectus. The Investment
Glossary also describes the Fund's policies with regard to borrowing,
concentration, diversification and portfolio turnover. In addition, the Fund's
policy regarding lending portfolio securities is described in the Statement of
Additional Information.

INVESTMENT RISKS

The Income Fund's investments are subject to price fluctuations resulting from
various factors, including rising or declining interest rates (interest rate
risk). 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. In addition, investments with
longer maturities, which typically provide better yields, may subject the Fund
to increased price changes resulting from market yield fluctuations.

The value of the Fund's securities is subject to the ability of the issuers of
such securities to make payment at maturity (credit risk). 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 Fund primarily will
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. 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 Fund 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). For a description of ratings, see Appendix
B in the Statement of Additional Information.

PORTFOLIO MANAGEMENT

The Income Fund is co-managed by Bentley Myer and James Kaplan.

Bentley Myer, a principal of William Blair & Company, L.L.C., has managed the
Fund since 1992. He 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.

Jim Kaplan, an associate of William Blair & Company, L.L.C., has co-managed the
Fund since 1999. He joined the firm's Investment Management Services department
in 1994 as a fixed-income portfolio manager. Prior to that, he was with First
Union National Bank for twelve years. While at First Union, Jim completed their
management training program in lending. His other responsibilities included
trading fixed-income securities such as money markets, municipal bonds and
mortgage backed securities. Jim also assisted in the management of the bank's
portfolio. Education: B.A., Washington & Lee University.

28 William Blair Mutual Funds, Inc. May 1, 1999
<PAGE> 29

READY RESERVES FUND
- --------------------------------------------------------------------------------
GOAL AND STRATEGY

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 Fund seeks to maintain a net
asset value of $1.00 per share. Nevertheless, there is no guarantee that the
objective of the Fund will be achieved or that the net asset value of $1.00 per
share of the Fund will be maintained.

PORTFOLIO SECURITIES

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

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

The Fund has adopted certain investment policies designed to limit the market
and financial risks of the Fund. The Fund complies with the requirements of Rule
2a-7 under the Investment Company Act of 1940, which governs the maturity and
credit quality of money market funds. The Fund 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 Fund 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, may provide higher yields. Further, the Fund 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.

To a limited extent, the Fund may invest in 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 Fund's policies
with regard to borrowing, concentration and diversification.

INVESTMENT RISK

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

May 1, 1999 Prospectus 29
<PAGE> 30

PORTFOLIO MANAGEMENT

The Ready Reserves Fund is co-managed by Bentley Myer and James Kaplan.

Bentley Myer, a principal with William Blair & Company, L.L.C., has managed the
Fund since 1992. He 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.

30 William Blair Mutual Funds, Inc. May 1, 1999
<PAGE> 31

MANAGEMENT OF THE FUNDS
- --------------------------------------------------------------------------------
DIRECTORS, OFFICERS AND ADVISER. The Board of Directors of William Blair Mutual
Funds, Inc. has overall management responsibility. The duties of the directors
and officers of the Fund include supervising the business affairs of the Fund,
monitoring investment activities and practices and considering and acting upon
future plans for the Fund. The Statement of Additional Information has the names
of and additional information about the directors and officers of the Fund. The
Adviser, William Blair & Company, L.L.C., 222 West Adams Street, Chicago,
Illinois 60606, is responsible for providing investment advisory and management
services to the Funds of the Fund, subject to the direction of the Board of
Directors. 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 150 principals and 600 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
approximately $12 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 40 analysts, with an exceptionally low
turnover rate. William Blair portfolio managers generally average more than ten
years with William Blair and more than two decades of experience in the
investment industry. The Adviser is registered as an investment adviser under
the Investment Advisers Act of 1940.

Each Fund pays the Adviser a monthly investment management fee. Fees paid for
each Fund's most recently completed fiscal year are shown below:

<TABLE>
<CAPTION>
Fund Fee as a % of Average Net Assets
- ---- --------------------------------
<S> <C>
Growth Fund 0.75%
Value Discovery Fund 1.15%
International Growth Fund 1.10%
Emerging Markets Growth Fund 1.40%
Income Fund 0.59%
Ready Reserves Fund 0.59%
</TABLE>

CUSTODIAN. The Custodian is Investors Bank and Trust Company, 200 Clarendon
Street, Boston, Massachusetts 02117. State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110, may serve as the Custodian for
Individual Retirement Accounts ("IRAs").

TRANSFER AGENT AND DIVIDEND PAYING AGENT. The Transfer Agent and Dividend Paying
Agent is State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110.

YEAR 2000. 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.
Year 2000 problems would also increase the risks of the Fund's investments. To
assess the potential effect of the Year 2000 problem, the Adviser is reviewing
information regarding the Year 2000 readiness of issuers of securities the Fund
may purchase. However, this may be difficult with certain issuers. For example,
a Fund that deals with foreign service providers or invests in foreign
securities will have difficulty determining the Year 2000 readiness of those
entities. This is especially true of entities or issuers in emerging markets.
The financial impact of these issues for the Fund is still being determined.
There can be no assurance that potential Year 2000 problems would not have a
material adverse effect on the Fund.

May 1, 1999 Prospectus 31
<PAGE> 32

YOUR ACCOUNT
- --------------------------------------------------------------------------------
HOW TO BUY SHARES (By Mail, by Wire or by Telephone)

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 Funds 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 Funds or
William Blair & Company, L.L.C. (the "Adviser").

PURCHASE PRICE. All Funds 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 Funds and, if you are a current shareholder, the Funds 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 Funds may
delay sending redemption proceeds until they determine that collected funds have
been received for the purchase of such shares, which may be up to 15 calendar
days.

RIGHT TO REJECT YOUR PURCHASE ORDER. The Fund reserves the right to decline your
purchase order upon receipt for any reason.

BY MAIL

OPENING AN ACCOUNT. To open a new account by mail (except for the Ready Reserves
Fund), make out a check for the amount of your investment, payable to "William
Blair Mutual Funds, Inc." Complete the account application included with this
Prospectus and mail the completed application and the check to the 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, make out a check for the
amount of your investment, payable to "William Blair Mutual Funds, Inc." Except
for the Ready Reserves Fund, 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.

32 William Blair Mutual Funds, Inc. May 1, 1999
<PAGE> 33

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.

BY TELEPHONE

OPENING AN ACCOUNT. See "By Wire."

ADDING TO AN ACCOUNT. Call State Street 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.

HOW TO SELL SHARES (By Mail, by Wire or by Telephone)

You can arrange to take money out of your account 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 Funds except the Ready Reserves Fund, 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.

May 1, 1999 Prospectus 33
<PAGE> 34

FOR ALL FUNDS, WRITTEN REDEMPTION REQUESTS MUST INCLUDE:

-- a letter that contains your name, the Fund'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.

BY WIRE

To redeem some or all of your shares in any Funds 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 herein. 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.

BY TELEPHONE

TO REDEEM SHARES BY TELEPHONE, YOU MUST HAVE ELECTED THIS OPTION ON YOUR ACCOUNT
APPLICATION. For all Funds except the Ready Reserves Fund, contact the 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.

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

SIGNATURE GUARANTEES. 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. 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.

34 William Blair Mutual Funds, Inc. May 1, 1999
<PAGE> 35

REDEMPTIONS IN KIND. If the Adviser determines that existing conditions make
cash payments undesirable, redemption payments may be made in whole or in part
in securities or other financial assets, valued for this purpose as they are
valued in computing the NAV for each of the Fund's shares. Shareholders
receiving securities or other financial assets on redemption may realize a gain
or loss for tax purposes, and will incur any costs of sale, as well as the
associated inconveniences. Notwithstanding the above, each of the Funds are
obligated to redeem shares solely in cash up to the lesser of $250,000 or 1% of
the net asset value of such Fund during any 90-day period for any one
shareholder of record.

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 account. 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 Fund. 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, 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 may be charged when a check is presented to redeem 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 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.

May 1, 1999 Prospectus 35
<PAGE> 36

HOW TO EXCHANGE SHARES (By Mail or by Telephone)

- -- 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 Funds for
each other at their relative net asset values so long as the shares to be
acquired are available for sale in your state of residence. There is NO SERVICE
FEE for an exchange; however, ONLY FOUR (4) EXCHANGES FROM A FUND ARE ALLOWED
WITHIN ANY 12-MONTH PERIOD. Exchanges will be effected by redeeming your shares
and purchasing shares of the other Fund or Funds 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, you must deposit them with State Street prior to any exchange of such
shares.

Neither the Funds 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 Funds or the 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.

DIVIDENDS AND DISTRIBUTIONS

INCOME DIVIDENDS. Each Fund earns dividends from stocks and interest from bond,
money market, and other investments, which are passed along to shareholders as
income dividends as long as expenses do not exceed income.

CAPITAL GAIN DISTRIBUTIONS. Each 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 shareholder, you are entitled to your portion of the Fund's net income and
gains on its investments. Each Fund passes its earnings along to you as
distributions. The Funds' 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 "Shareholder Services and Account
Policies--Dividend Options"). Cash payments are made by the Dividend Paying
Agent, State Street Bank and Trust Company, shortly following the reinvestment
date.

36 William Blair Mutual Funds, Inc. May 1, 1999
<PAGE> 37

WHEN DIVIDENDS ARE PAID

-- 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 January. The Fund attempts to maintain
relatively level monthly dividends and, 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, the Fund's net investment income
will be declared at the close of the New York Stock Exchange on
each day that the Fund is open for business, which is generally
3:00 p.m., Chicago time, as a dividend to shareholders who were
of record prior to the declaration.

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

TAXES

As with any investment, you should consider how your investment in a 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. The Fund's distributions are subject to Federal income
tax and may also be subject to state or local taxes. Distributions may be
taxable at different rates depending upon the length of time the Fund holds the
security. Your distributions are taxable when they are paid, whether you take
them in cash or reinvest them in additional shares. However, dividends declared
in October, November or December to shareholders of record as of a date in one
of those months and 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 Funds will inform you of the amount and nature of distributions
paid.

Under the Federal tax laws, 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. Redemptions of Fund shares and exchanges for shares of
other Funds are treated as sales and are subject to capital gains taxation. 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 (or exchange) 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 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 normally will recognize a capital gain or loss for Federal income tax
purposes. If you realize a loss on the redemption of Fund shares within 30 days
before or after an acquisition of shares of the same Fund, 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 shares before a Fund 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 "Your
Account--Dividends and Distributions" 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 a
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.

May 1, 1999 Prospectus 37
<PAGE> 38

DETERMINATION OF NET ASSET VALUE ("NAV")
- --------------------------------------------------------------------------------
WHEN AND HOW NET ASSET VALUE IS DETERMINED

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 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 the observance of Columbus Day
and Veterans 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
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 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 FUND 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.

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 a matrix developed by the Adviser that produces 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.

38 William Blair Mutual Funds, Inc. May 1, 1999
<PAGE> 39

SHAREHOLDER SERVICES AND ACCOUNT POLICIES
- --------------------------------------------------------------------------------
The Funds provide 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. If you have a FREE CREDIT BALANCE OF AT LEAST $1,000, the Distributor
will effect on your behalf an investment in 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 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 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 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 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 Funds automatically
reinvest all income dividends and capital gain distributions in additional
shares of 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 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.

SYSTEMATIC WITHDRAWAL PLAN. You may establish this plan with shares presently
held or through a new investment, which should 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 Funds offer a variety of qualified retirement plans,
including several types of Individual Retirement Accounts ("IRAs") (e.g.
traditional IRAs, Roth IRAs and education IRAs), Simplified Employee Pension
Plans ("SEPs") and other qualified retirement plans. Additional information
concerning such plans is available from the Funds.

May 1, 1999 Prospectus 39
<PAGE> 40

The minimum initial retirement plan investment is $2,000 and the minimum
subsequent investment is $1,000. State Street serves as custodian for IRAs.
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 Funds;
-- the Funds will pay any additional expenses that they incur 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 Funds;
-- the Funds reserve the right to change the minimum amounts for
initial and subsequent investments or to terminate any of the
plans;
-- the Funds reserve the right to waive investment minimums at the
discretion of the Distributor; and
-- the Funds require a copy of the trust agreement when shares are
to be held in trust.

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.
However, you may obtain 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 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 directly from the Fund or with the 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 Funds reserves the right to withdraw all or any part
of the offering made by this Prospectus, and the Funds or the Distributor may
reject purchase orders. From time to time, the Funds may temporarily suspend the
offering of shares to new investors. During the period of such suspension,
persons who are already shareholders of a Fund may be permitted to continue to
purchase additional shares of the Fund, to have dividends reinvested and to make
redemptions.

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 Fund have equal rights with respect to
dividends, assets and liquidation of a Fund 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 Fund will be voted in the aggregate, except when a
separate vote by Fund 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 Funds are not required to hold shareholder meetings on
an annual basis. As required by law, the Funds 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.)

40 William Blair Mutual Funds, Inc. May 1, 1999
<PAGE> 41

INVESTMENT GLOSSARY
- --------------------------------------------------------------------------------
The following glossary explains some of the types of securities in which the
Funds may invest, investment techniques they may employ, and some of the related
risks. For more information, please see the Statement of Additional Information.

BORROWING. To a certain extent, each Fund 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 (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 Fund 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 Fund 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

May 1, 1999 Prospectus 41
<PAGE> 42

of high interest rate mortgage-backed securities during times of declining
interest rates will tend to lower the return of the Fund and may even result in
losses to the Fund 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 Fund 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.

CONCENTRATION. Each of the Funds intends to invest not 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.

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.

DIVERSIFICATION. As a matter of fundamental policy, each Fund 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 Fund's net assets. In
addition, each Fund will not purchase more than 10% of the outstanding 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 Fund engages in foreign currency futures
transactions, but fails to consummate its obligations under the contract, the
net effect to the Fund 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 Fund'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

42 William Blair Mutual Funds, Inc. May 1, 1999
<PAGE> 43

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 Fund's Adviser may still not result in a successful hedging
transaction. The Fund 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 Fund 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 Investment Company Act of 1940 (the
"1940 Act") and the rules and interpretations thereunder, whenever the Fund
enters into a futures contract, the Fund will maintain a segregated account
consisting of either cash or liquid securities equal to the Fund's potential
obligation under such contracts. The segregation of assets places a practical
limit on the extent to which the Fund 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 Fund will not enter into a financial
futures contract if immediately thereafter the aggregate initial margin and
premiums for such contracts held by the Fund would exceed 5% of the liquidation
value of the Fund's assets. The Fund 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 Fund holds or intends to purchase.

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
Fund's investments against adverse exchange rate changes. Alternatively, the
Funds 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 Fund 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
Fund 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 Funds 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

May 1, 1999 Prospectus 43
<PAGE> 44

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
advisory fees or custodial fees. 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 Fund would ordinarily
invest directly. Investments in such pooled vehicles should enhance the
geographical diversification of the Fund'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 Funds intend 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 Fund's investment objective, and there is no limitation on
the length of time securities must be held by the Fund prior to being sold. Fund
turnover rate will not be a limiting factor for a Fund. Although each Fund's
turnover rate will vary from year to year, it is anticipated that each Fund'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 Fund.

REAL ESTATE INVESTMENT TRUSTS. The Value Discovery Fund may invest without
limit 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 an investment in that REIT.

REPURCHASE AGREEMENTS. Each Fund may invest in repurchase agreements.
Repurchase agreements are instruments under which a Fund 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 Fund's holding period. The
Funds 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 Fund 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

44 William Blair Mutual Funds, Inc. May 1, 1999
<PAGE> 45

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 Fund. 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 Fund may purchase newly issued securities appropriate
for the Fund on a "when-issued" basis, and may purchase or sell securities
appropriate for the Fund on a "delayed delivery" basis. When-issued or delayed
delivery transactions involve a commitment by the Fund to purchase or sell
particular securities, with payment and delivery to take place at a future date.
These transactions allow the Fund to lock in an attractive purchase price or
yield on a security the Fund 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 Fund and, for delayed delivery
purchases, no interest accrues to the Fund. Because the Fund 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 Fund's assets may be affected by such commitments. The Fund 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 Fund may invest in Variable Rate Securities that have
a demand feature entitling the Fund to resell the securities to the issuer or a
third party at an amount approximately equal

May 1, 1999 Prospectus 45
<PAGE> 46

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 Fund
determines the maturity of Variable Rate Securities in accordance with
Securities and Exchange Commission rules, which allow the Fund 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, if they have a stated maturity date of one year or less, or if
they have demand features prior to maturity.

46 William Blair Mutual Funds, Inc. May 1, 1999
<PAGE> 47

FOR MORE INFORMATION
- --------------------------------------------------------------------------------
More information about the Funds is available without charge, upon request,
including the following:

SEMI-ANNUAL/ANNUAL REPORTS

The Semi-Annual and audited Annual Reports to Shareholders include financial
statements, detailed performance information, portfolio holdings and statements
from the Fund managers. In the Fund's Annual Report, you will find a discussion
of the market conditions and investment strategies that the Adviser believes
significantly affected the Fund's performance in its last fiscal year.
Shareholder reports are incorporated by reference into this Prospectus, which
means that they are part of this Prospectus for legal purposes.

STATEMENT OF ADDITIONAL INFORMATION (SAI)

The SAI contains more detailed information about the Funds. The current SAI 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.

TO OBTAIN INFORMATION:

BY TELEPHONE
Call: 1-800-635-2886
(In Massachusetts 1-800-635-2840)

BY MAIL
Write to:
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

ON THE INTERNET

Text-only versions of fund documents can be viewed online or downloaded
from the SEC at http://www.sec.gov

You can also obtain copies by visiting the SEC's Public Reference Room in
Washington, D.C. (1-800-SEC-0330) or by sending your request and a
duplicating fee to the SEC's Public Reference Room Section, Washington,
D.C. 20549-6009.

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 Funds or their distributor. The Prospectus does not constitute an
offering by the Fund or their distributor in any jurisdiction in which such
offering may not lawfully be made.

INVESTMENT COMPANY ACT FILE NO.: 811-5344

William Blair Mutual Funds, Inc. May 1, 1999
<PAGE> 48

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

MAY 1, 1999

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, 1999. The financial statements for the William Blair
Mutual Funds, Inc. for the year ended December 31, 1998, and the Report of
Independent Auditors thereon are incorporated by reference from the Annual
Report to Shareholders dated December 31, 1998. The Prospectus and Annual
Report to Shareholders may be obtained without charge by writing or calling the
Fund.

TABLE OF CONTENTS

PAGE
----

<TABLE>
<S> <C>
MANAGEMENT OF THE FUND B-2
Investment Adviser and Distributor B-2
Directors and Officers B-3
Brokerage and Fund Transactions B-7
INVESTMENT POLICIES AND RESTRICTIONS B-8
Growth Fund B-9
Value Discovery Fund B-10
International Growth Fund B-11
Emerging Markets Growth Fund B-12
Income Fund B-13
Ready Reserves Fund B-14
INVESTMENT PRACTICES B-15
Collateralized Obligations B-15
Foreign Securities B-19
Forward Foreign Currency Transactions B-22
Foreign Currency Futures B-23
Futures B-23
High-Yield/High-Risk Securities B-23
Investment Companies B-23
Illiquid Securities B-24
Lending B-24
Repurchase Agreements B-24
Restricted Securities B-24
Small Companies B-25
Warrants B-25
When-Issued or Delayed Delivery Transactions B-25
GENERAL FUND INFORMATION B-25
Redemptions B-25
Determination of Net Asset Value B-26
Performance B-27
Tax Status B-30
Retirement Plans B-31
Independent Auditors B-32
Legal Counsel B-32
Custodian B-32
Transfer Agent Services B-32
Reports to Shareholders B-33
SHAREHOLDER RIGHTS B-33
VALUE DISCOVERY FUND--INVESTMENT CRITERIA B-33
FUND HISTORY B-34
FINANCIAL INFORMATION OF THE FUND B-34
APPENDIX A A-1
APPENDIX B B-1
</TABLE>
<PAGE> 49

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,
1998, 1997 and 1996, the Adviser received fees of $4,861,435, $4,093,417 and
$3,018,755, 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 years 1998
and 1997 and for the fiscal year from December 23, 1996 (Commencement of
Operations) to December 31, 1996, the Fund paid $442,942, $241,689 and $333,
respectively.

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, 1998, 1997 and 1996, the Adviser
received fees of $1,557,766, $1,351,263 and $1,131,309, respectively, of
which $303,364 in 1996 was paid to the former 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. For the
services and

B-2

<PAGE> 50

facilities furnished during the fiscal period from the portfolio's
incorporation on May 1, 1998 to December 31, 1998, the Adviser received fees of
$34,835. 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 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
furnished to the portfolio pursuant to the advisory agreement during the fiscal
years ended December 31, 1998, 1997 and 1996, the Fund paid $1,046,049,
$918,833 and $880,815, 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, 1998, 1997 and 1996, the Adviser received fees of $6,215,491,
$5,236,627 and $4,282,827, 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, Fuller, Greig, Hanig, Kaplan, Kayser, Kleczka,
McMullan, Myer, Sullivan and Urbina, Ms. Gassmann and Ms. Johnson, 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 (65),* (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.

B-3

<PAGE> 51

VERNON ARMOUR (71), * (1) (2) (3) Director; 633 East Woodland Road, Lake
Forest, Illinois 60045; private investor; Life Trustee, Illinois Institute of
Technology, Trustee, Northwestern Memorial Hospital and OTHO S.A. Sprague
Memorial Institute.

J. GRANT BEADLE (66), (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; Oliver Products
Company, Batts, Inc. and Woodward Governor Company.

THEODORE A. BOSLER (64), (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.

ANN P. MCDERMOTT (59), (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 (64),* Director; Principal, William Blair & Company, L.L.C.;
Director, Securities Industry Association.

JOHN B. SCHWEMM (64), (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.

ROCKY BARBER (47), Chief Executive Officer of the Fund; Principal, William
Blair & Company, L.L.C.; Vice President and Secretary, LaRabida Hospital
Foundation; Past President, Stanford Associates.

MARCO HANIG (41), President of the Fund, Associate, William Blair & Company,
L.L.C.; former Senior Vice President, First Chicago NBD and Engagement Manager,
Marakon Associates.

MARK A. FULLER, III (42), Senior Vice President; Principal, William Blair &
Company, L.L.C.

W. GEORGE GREIG (46), Senior Vice President; Principal, 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 (36), Senior Vice President; Portfolio Manager, William Blair &
Company, L.L.C.; former Partner, Brinson Partners; former Portfolio Manager,
CNA Financial Corp.

BENTLEY M. MYER (52), Senior Vice President; Principal, William Blair &
Company, L.L.C.; Director, Delnor Community Hospital.

JAMES S. KAPLAN (38), Vice President; Associate, William Blair & Company,
L.L.C.; former Vice President, First Union Bank.

JOHN P. KAYSER (49), Vice President; Principal, William Blair & Company,
L.L.C.; Director, DuPage Children's Museum.

TERENCE M. SULLIVAN (55), Vice President and Treasurer; Associate, William
Blair & Company, L.L.C.

JEFFREY A. URBINA (44), Vice President; Associate, William Blair & Company,
L.L.C.; former Director of Emerging Market Research and Portfolio Manager, Van
Kampen American Capital.

SHEILA M. JOHNSON (31), Secretary; Administrative Assistant, William Blair &
Company, L.L.C.

B-4

<PAGE> 52

JANET V. GASSMANN (32), Assistant 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. (Mr. Schwemm is Chairperson 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. 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.

The following table sets forth the compensation earned from the Fund for the
fiscal year ended December 31, 1998 by directors who are not affiliated with
the Adviser:

<TABLE>
PENSION OR
RETIREMENT
BENEFITS ESTIMATED
AGGREGATE ACCRUED ANNUAL
COMPENSATION AS PART OF BENEFITS UPON TOTAL
DIRECTOR FROM THE FUND FUND EXPENSES RETIREMENT COMPENSATION
- -------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Vernon Armour..... $20,000 0 0 $20,000
J. Grant Beadle... $23,000 0 0 $23,000
Theodore A. Bosler $23,000 0 0 $23,000
George Kelm....... $18,500 0 0 $18,500
Ann P. McDermott.. $23,000 0 0 $23,000
John B. Schwemm... $21,500 0 0 $21,500
</TABLE>

B-5

<PAGE> 53

The following table provides certain information at January 31, 1999 with
respect to persons known to the Fund to be record holders of 5% or more of the
shares of the following portfolios:

<TABLE>
PERCENT OF FUND'S
NAME AND ADDRESS OUTSTANDING
OF RECORD OWNER NUMBER OF SHARES COMMON STOCK
- --------------- ---------------- -----------------
<S> <C> <C>
GROWTH FUND
- -----------
Charles A. Schwab & Company
101 Montgomery Street 5,634,082 13.80%
San Francisco, CA 94104
William Blair Employees
Profit Sharing Plan
222 West Adams Street
Chicago, IL 60606 3,936,541 9.64%

Bank of America, Illinois Trustee
FBO Kohls Department Stores 401(k)
231 South LaSalle Street
Chicago, IL 60604 2,513,406 6.16%

VALUE DISCOVERY FUND
- --------------------
William Blair & Co., L.L.C.
Ralph G. Portis
222 West Adams Street 219,088 6.14%
Chicago, IL 60606

Charles A. Schwab & Company
101 Montgomery Street
San Francisco, CA 94104 210,676 5.90%

William Blair & Co., L.L.C.
Catlin Investments L.P.
222 West Adams Street
Chicago, IL 60606 204,260 5.72%

William Blair & Co., L.L.C.
Travis Investments L.P.
222 West Adams Street
Chicago, IL 60606 204,260 5.72%

EMERGING MARKETS GROWTH FUND
- ----------------------------
William Blair & Co., L.L.C.
Edgar David Coolidge III
222 West Adams Street 50,000 10.20%
Chicago, IL 60606

William Blair & Co., L.L.C.
John P. Nicholas, Trustee
222 West Adams Street
Chicago, IL 60606 25,000 5.10%
</TABLE>

B-6

<PAGE> 54

<TABLE>
PERCENT OF FUND'S
NAME AND ADDRESS OUTSTANDING
OF RECORD OWNER NUMBER OF SHARES COMMON STOCK
- --------------- ---------------- -----------------
<S> <C> <C>

William Blair & Co., L.L.C.
W. George Greig & Margot Greig
222 West Adams Street
Chicago, IL 60606 25,000 5.10%
</TABLE>

As of February 5, 1999, the Fund's officers and directors as a group owned (or
held or shared investment or voting power with respect to) 216,363 shares or
0.53% of the Growth Fund's stock, 133,356 shares or 3.72% of the Value
Discovery Fund's stock, 150,310 shares or 1.60% of the International Growth
Fund's stock, 71,702 shares or 14.61% of the Emerging Markets Growth Fund's
stock, 103,507 shares or 0.58% of the Income Fund's stock and 7,750,997 shares
or 0.63% 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 FUND 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.

Fund 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 Adviser

B-7

<PAGE> 55

receives research products and services from broker/dealers and third parties
in the form of written reports on individual companies and industries of
particular interest to the Adviser, general economic conditions, pertinent
Federal and State legislative developments and changes in accounting practices;
direct access by telephone or meetings with leading research analysts
throughout the financial community, corporate management personnel, and
industry experts, comparative performance and evaluation and technical
measurement services for issuers, industries and the market as a whole; access
to and monitoring of equity valuation models; and services from recognized
experts on investment matters of particular interest to the Adviser.

The Growth Fund paid total brokerage fees of $515,832, $422,714 and $394,561
in 1998, 1997 and 1996, 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.
The increase in brokerage fees from year to year is in proportion to the change
in the Fund's asset size.

The Value Discovery Fund paid total brokerage fees of $103,906 in 1998, $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 $889,064, $820,267 and
$779,507 in 1998, 1997 and 1996, 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.

The Emerging Markets Growth Fund paid brokerage fees of $60,161 in 1998. 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 the Adviser.

Purchases and sales of portfolio securities for the Income Fund and the 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, 1998,
1997 and 1996. 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.

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

B-8

<PAGE> 56

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, except as otherwise permitted by statute,
rule, exemptive order, SEC no-action letter or investment restriction.

(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.

(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.

B-9

<PAGE> 57

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.

B-10

<PAGE> 58

(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.

(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;

B-11

<PAGE> 59

(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.

(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.

B-12

<PAGE> 60

other derivative instruments or from investing in securities or other
instruments backed by physical commodities).

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:

(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.

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.

B-13

<PAGE> 61

(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.

(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:

B-14

<PAGE> 62

(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).

(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

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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.

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

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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.

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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 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 scrutinized
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

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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.

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 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,
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

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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 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

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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 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 agreement 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

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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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<PAGE> 70

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.

INVESTMENT COMPANIES. The Fund has applied for certain exemptive relief with
the SEC that, if granted, will allow the portfolios to invest a portion of
their assets into shares of the Ready Reserves Fund based upon the terms and
conditions of such relief.

B-23

<PAGE> 71

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.

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)

B-24

<PAGE> 72

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 the Emerging
Markets Growth 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 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.

B-25

<PAGE> 73

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 the observance of New Year's Day, Dr. Martin Luther King Jr.'s
Birthday, President's Day, 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 the observance of 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 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.

B-26

<PAGE> 74

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 Funds for the one-, five- and ten-year
periods, or, if less, from commencement of operations through December 31, 1998
are as follows:

<TABLE>
10-YEAR OR
1-YEAR 5-YEAR LIFE OF FUND
------ ------ ------------
<S> <C> <C> <C>
GROWTH FUND 27.15 19.87 18.96
VALUE DISCOVERY FUND (1) 0.66 N.A. 15.91
INTERNATIONAL GROWTH FUND (2) 11.46 7.37 11.10
EMERGING MARKETS GROWTH FUND (3) -- -- (23.70)
INCOME FUND (4) 7.07 6.22 7.90
</TABLE>
- -------------------
(1) Commenced operations on December 23, 1996.
(2) Commenced operations on October 1, 1992.
(3) Commenced operations on May 1, 1998.
(4) Commenced operations on September 25, 1990.

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<PAGE> 75

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 Funds for the one-, five- and ten-year periods, or, if
less, from commencement of operations through December 31, 1998 are as follows:

<TABLE>
10-YEAR OR
1-YEAR 5-YEAR LIFE OF FUND
------ ------ ------------
<S> <C> <C> <C>
GROWTH FUND 27.15 147.51 467.73
VALUE DISCOVERY FUND (1) 0.66 -- 34.34
INTERNATIONAL GROWTH FUND (2) 11.46 42.69 93.12
EMERGING MARKETS GROWTH FUND (3) -- -- (23.70)
INCOME FUND (4) 7.07 35.21 87.25
</TABLE>
- --------------------
(1) Commenced operations on December 23, 1996.
(2) Commenced operations on October 1, 1992.
(3) Commenced operations on May 1, 1998.
(4) 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]

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

The Income Fund's current yield for the 30-day period ended December 31, 1998
was 5.72%. 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.

B-28

<PAGE> 76

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.

The Ready Reserves Fund's current yield for the seven-day period ended December
31, 1998 was 4.58%. The Ready Reserves Fund's effective yield for the same
period was 4.68%.

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 FUND 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 1000, 2000 and 3000. 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 or the Lehman Intermediate Government/Corporate Bond
Index. The Lehman bond index is unmanaged and does 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.

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

-- 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.

Bank product performance may be based upon, among other things, the Bank Rate
Monitor National Index or various certificates of deposit indices. Performance
of U.S. Treasury obligations may be based upon, among other things, various
U.S. treasury bill indices. 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 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.

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 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 income 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

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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, unless an effective IRS Form W-8
or authorized substitute for Form W-8 is on file, and 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.

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. One of the tax-deferred retirement plan
accounts that may hold Fund shares is an Individual Retirement Account ("IRA").
There are three kinds of IRAs that an individual may establish: traditional
IRAs, Roth IRAs and education IRAs. With a traditional IRA, an individual may
be able to make a deductible contribution of up to $2,000 or, if less, the
amount of the individual's earned income for any taxable year prior to the year
the individual reaches age 70 1/2 if neither the individual nor his or her
spouse is an active participant in an employer's retirement plan. An
individual who is (or who has a spouse who is) an active participant in an
employer retirement plan may be eligible to make deductible IRA contributions;
the amount, if any, of IRA contributions that are deductible by such an
individual is determined by the individual's (and spouse's, if applicable)
adjusted gross income for the year. Even if an individual is not permitted to
make a deductible contribution to an IRA for a taxable year, however, the
individual nonetheless may make nondeductible contributions up to $2,000, or
100% of earned income if less, for that year. A spouse also may contribute up
to $2,000, as long as the spouses' joint earned income is at least $4,000.
There are special rules for determining how withdrawals are to be taxed if an
IRA contains both deductible and nondeductible amounts. In general, a
proportionate amount of each withdrawal will be deemed to be made from
nondeductible contributions; amounts treated as a return of nondeductible
contributions will not be taxable. Lump sum distributions from another
qualified retirement plan may be rolled over into a traditional IRA also.

With a Roth IRA, an individual may make only nondeductible contributions;
contributions can be made of up to $2,000 or, if less, the amount of the
individual's earned income for any taxable year, but only if the individual's
(and spouse's, if applicable) adjusted gross income for the year is less than
$95,000 for single individuals or $150,000 for married individuals. The
maximum contribution amount phases out and falls to zero between $95,000 and
$110,000 for single persons and between $150,000 and $160,000 for married
persons. Contributions to a Roth IRA may be made even after

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the individual attains age 70 1/2. Distributions from a Roth IRA that satisfy
certain requirements will not be taxable when taken; other distributions of
earnings will be taxable. An individual with adjusted gross income of $100,000
or less generally may elect to roll over amounts from a traditional IRA to a
Roth IRA. The full taxable amount held in the traditional IRA that is rolled
over to a Roth IRA will be taxable in the year of the rollover, except
rollovers made in 1998, which may be included in taxable income over a
four-year period.

An education IRA provides a method for saving for the higher education expenses
of a child; it is not designed for retirement savings. Generally, amounts held
in an education IRA may be used to pay for qualified higher education expenses
at an eligible (post-secondary) educational institution. An individual may
contribute to an education IRA for the benefit of a child under 18 years old if
the individual's income does not exceed certain limits. The maximum
contribution for the benefit of any one child is $500 per year. Contributions
are not deductible, but earnings accumulate tax-free until withdrawal, and
withdrawals used to pay qualified higher education expenses of the beneficiary
(or transferred to an education IRA of a qualified family member) will not be
taxable. Other withdrawals will be subject to tax.

Please call the Fund to obtain information regarding the establishment of IRAs.
An IRA plan custodian may charge fees in connection with establishing and
maintaining the IRA. An investor should consult with a competent tax adviser
for specific advice concerning his or her tax status and the possible benefits
of establishing one or more IRAs. The description above is only very general;
there are numerous other rules applicable to these plans to be considered
before establishing one.

Shareholders should consult their tax advisers about the application of the
provisions of tax law in light of their particular tax situations.

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. The custodian for IRAs may be State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110.

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

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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.

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 nonassessable 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

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:

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

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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.

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,
1998, are incorporated herein by reference. Additional copies of the reports
to shareholders may be obtained without charge by writing or calling the Fund.

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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.

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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 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.

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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.

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"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.

"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 obligor's capacity to meet its financial
commitment on the obligation is still strong.

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"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 obligor 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 "CC" is currently highly vulnerable to non-payment.

"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
volatility 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.

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"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.

"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+."

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"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-5