<PAGE>
Dear Shareholder:
In one of the more treacherous stock market periods in recent history, the
Hilliard Lyons Growth Fund dropped by 8.4% in the third quarter of 1998. The
S&P 500 dropped more, 10.3%. At September 30, the Fund was down 4.8% for 1998
while the Standard & Poor's 500 Index was up 6.0%. The volatility continued in
October, but was positive. As this letter is written, the Fund has regained
all its losses and is ahead by 9.4% for the year. In keeping with its
historical pattern, the Fund performed well relative to other equity investors
in a difficult period of stocks.
There is sad news to report. On September 7th General Dillman A. Rash died.
General Rash was an original Director and investor in the Fund. He was a man
of enormous intellect and generosity. Always competitive, always demanding
excellence, General Rash was on a constant quest to improve everything he
touched including the Hilliard Lyons Growth Fund. He was a good friend, loyal
and full of good humor. We will miss him.
STORMY WEATHER
The great investor Warren Buffet has said that until the tide goes out, you
don't know who's swimming naked. Well, the tide went out in the third quarter
and we are happy to report that the Hilliard Lyons Growth Fund was well clad
when exposed to the elements. There were positive developments on both a
quantitative and qualitative basis. In terms of relative performance, the Fund
had a good third quarter and has continued to outperform in October. That is
only part of the story, however. The average stock Fund was down 15.0% for the
quarter and 6.4% for the year. Funds which emphasized anything but the largest
companies in the S&P 500 experienced significant losses for the most part.
Much investment activity took place for the Fund. We think that it emerged
from the period stronger by virtue of the moves we made. First, we had
repeatedly voiced our uneasiness investing funds in a speculative, high priced
market. As a result, earlier in the year cash built up to a level at times
greater than 20%. Severe drops in some fine stocks we had hoped to buy made it
possible to reduce our cash position considerably. Currently, the Fund is 92%
invested in stocks. We also made important changes in existing holdings. In
the worst market conditions, the babies are usually thrown out with the bath
water, and a good opportunity becomes available to correct past investment
mistakes. In the most recent period, we sold holdings in which we had lost
conviction or which we determined were not up to our quality standards. We
switched to stocks in what we think are superior businesses. While we received
poor prices for our sales, we feel that we bought better and stronger
companies at equally cheap prices. Frankly, we liked the bad spell. It allowed
us to take some action for which we had waited a long time.
OUTLOOK
The Hilliard Lyons Growth Fund's investment moves are always driven by
individual company considerations as opposed to a "top down" approach.
However, broad economic factors drive stock prices in the short run. The
market's dive in the third quarter was in response to worldwide developments
that were at times truly chilling. Markets become most treacherous when the
health of the world's large financial institutions is called into question.
This has happened repeatedly over the last few months. In Japan, home to some
of the world's largest banks, many are considered to be on shaky ground. They
are believed to list as assets many loans that are unlikely to be repaid.
Failure to acknowledge this reality keeps institutions afloat,
Continued . . . . .
1
<PAGE>
avoids widespread financial panic, but retards healthy recovery. Exposure to
losses in loans and investments in emerging companies in Asia, Eastern Europe,
and Russia have led to stunningly large write-offs at blue chip banks and
brokerage companies. Commitments to speculative hedge funds, whose primary
activity is gambling on valuation relationships between a myriad of world
financial instruments, also led to extensive losses and precipitous declines
in many financial stocks. These are just the most glaring problems which have
surfaced. World stock market fears in this case were quite substantive in
nature and touched Wall Street in the process.
We are optimistic that over time many of today's ailing financial
institutions will recover. This conviction stems from our belief that the
healthy parts of the world's financial structures dwarf the shaky parts. It is
strongly in the interest of the healthy institutions to prevent a crisis of
confidence in all financial institutions because of problems with a few. The
trick is to let economic pain be doled out to those who deserve it without
damaging the innocent. Human beings are emotional and occasionally overdo a
good thing. In this case, it was support of growth in emerging economies.
Cleansing the system takes time. Complicated solutions require extensive
thought and negotiation. This process is in progress. Consolidations and
ownership shifts are currently taking place.
Our expectation for a continuation of the above average stock market profits
of the past few years are quite tempered during this period of rebuilding in
many emerging economies and selected financial institutions. We are always
grateful to have the kind of investors we have in the Hilliard Lyons Growth
Fund. They have long-term horizons which enable them to see lulls in stock
market progress more as opportunities than reason for impatience. We
appreciate your support and believe our Fund, with its distinctive style, can
deliver above average returns to the conservative investor.
DONALD F. KOHLER
Chairman
SAMUEL C. HARVEY
President
2
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Company Value
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- 87.2%
-------------------------------------------------------------------------------
BASIC INDUSTRY -- 4.5%
---------------------------------------------------------------------
126,000 Sigma-Aldrich.......................................... $ 3,638,250
-----------
3,638,250
CAPITAL GOODS -- 15.7%
---------------------------------------------------------------------
157,000 Dover Corp............................................. 4,847,375
21,000 General Electric Co.................................... 1,670,813
16,800 Hubbell Inc. CL B...................................... 596,400
57,000 Nordson Corp........................................... 2,679,000
115,000 Raychem Corp........................................... 2,803,125
-----------
12,596,713
CONSUMER DURABLE -- 5.6%
---------------------------------------------------------------------
116,000 Donaldson Inc.......................................... 1,856,000
90,000 Harley-Davidson Inc.................................... 2,643,750
-----------
4,499,750
CONSUMER NON-DURABLE -- 9.9%
---------------------------------------------------------------------
81,900** Bush Boake Allen Inc................................... 2,190,825
40,000 Gillette Co. .......................................... 1,530,000
30,000 Lauder Estee Cos. Inc. CL A............................ 1,537,500
97,000 Mattel Inc. ........................................... 2,716,000
-----------
7,974,325
FINANCIAL -- 26.7%
---------------------------------------------------------------------
57,500 American International Group Inc. ..................... 4,427,500
23** Berkshire Hathaway Inc................................. 1,370,800
216,000 Cincinnati Financial Corp.............................. 6,642,000
72,500 Federal Home Loan Mortgage Corp........................ 3,584,219
18,000 Fifth Third Bancorp.................................... 1,035,000
52,312 Synovus Financial Corp................................. 1,033,162
39,000 Wachovia Corp.......................................... 3,324,750
-----------
21,417,431
HEALTH CARE -- 9.8%
---------------------------------------------------------------------
38,500 Allergan Inc........................................... 2,247,438
44,000 Johnson & Johnson...................................... 3,443,000
65,550 Life Technologies Inc.................................. 2,187,731
-----------
7,878,169
</TABLE>
<TABLE>
<CAPTION>
Market
Shares Company Value
- --------------------------------------------------------------------------------
<C> <S> <C>
RETAIL & SERVICES -- 15.0%
-----------------------------------------------------------------------
135,000 Brady WH Co. CL A......................................... 2,801,250
49,000 Gannett Inc............................................... 2,624,561
85,000 G & K Services Inc. CL A.................................. 3,984,375
59,000 Walgreen Co............................................... 2,599,688
----------
12,009,874
TOTAL COMMON STOCKS --
(COST --$53,727,015).............................................. 70,014,512
----------
</TABLE>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 13.6%
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Description
----------- -----------
<C> <S> <C> <C> <C>
$10,915,000 Federal Home Loan Bank
Purchase Yield 5.983%,
due 10/01/98............ 10,915,000
-----------
TOTAL U.S. GOVERNMENT
AGENCY OBLIGATIONS (AM-
ORTIZED COST --
$10,915,000)............ 10,915,000
-----------
OTHER ASSETS LESS LIABILITIES --
(-0.8%)............................ (610,685)
-----------
TOTAL NET ASSETS $80,318,827
-----------
Net assets
Investor A shares....... $73,725,744
Investor B shares....... 6,593,083
-----------
$80,318,827
Shares of capital stock
Investor A shares....... 2,556,389
Investor B shares....... 229,476
-----------
2,785,865
Net assets value
Investor A shares--re-
demption price per
share................... $ 28.83
Investor B shares--of-
fering price per share*. $ 28.72
</TABLE>
The percentage shown for each investment category is the total value of that
category as a percentage of the total net assets of the Fund.
* Redemption price of Investor B shares varies based on length of time shares
are held.
**Non-income producing security.
HILLIARD LYONS GROWTH FUND, INC.
STATEMENT OF NET ASSETS
(UNAUDITED)
SEPTEMBER 30, 1998
3
<PAGE>
----------------------------------
THIRD QUARTER REPORT
SEPTEMBER 30, 1998
J.J.B. HILLIARD, W.L. LYONS, INC.
HILLIARD LYONS CENTER
LOUISVILLE, KENTUCKY 40202
(502) 588-8400
(800) 444-1854
----------------------------------
DIRECTORS
William A. Blodgett, Jr.
John C. Owens
Stewart E. Conner
Gilbert L. Pamplin
Donald F. Kohler
OFFICERS
Donald F. Kohler--Chairman
Samuel C. Harvey--President
Thomas A. Corea--Vice President
Joseph C. Curry, Jr.--Vice President, Treasurer and Secretary
Dianna P. Wengler--Vice President
DISTRIBUTOR
J.J.B. Hilliard, W.L. Lyons, Inc.
Hilliard Lyons Center
P.O. Box 32760
Louisville, Kentucky 40232-2760
(502) 588-9145
(800) 444-1854
TRANSFER AGENT AND CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02266
AUDITORS
Ernst & Young LLP
400 West Market Street
Louisville, Kentucky 40202
LEGAL COUNSEL
Brown, Todd & Heyburn PLLC
3200 Providian Center
Louisville, Kentucky 40202
This report is intended for the information of shareholders of the Hilliard
Lyons Growth Fund, Inc., but it may also be used as sales literature when pre-
ceded or accompanied by the current prospectus, which gives details about
charges, expenses, investment objectives and operating policies of the Fund.
THIRD QUARTER REPORT
SEPTEMBER 30, 1998
