UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

Investment Company Act File Number 811-5344

William Blair Funds

(Exact name of registrant as specified in charter)

222 West Adams Street, Chicago, IL	60606
(Address of principal executive offices)	(Zip Code)

Marco Hanig

William Blair Funds

222 West Adams Street, Chicago, IL 60606

(Name and address of agent for service)

Registrant’s telephone number, including area code: 312-236-1600

Date of fiscal year end: December 31

Date of reporting period: December 31, 2005

Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.

A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A Registrant is not required to respond to the collection of information contained in Form N-CSR unless the form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimates and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. (ss) 3507.

Item 1. December 31, 2005 Annual Reports transmitted to shareholders.

Table of Contents

A Letter from the President	2
Growth Fund
An Overview from the Portfolio Manager	5
Portfolio of Investments	8
Tax-Managed Growth Fund
An Overview from the Portfolio Managers	9
Portfolio of Investments	13
Large Cap Growth Fund
An Overview from the Portfolio Managers	14
Portfolio of Investments	17
Small Cap Growth Fund
An Overview from the Portfolio Manager	18
Portfolio of Investments	21
Small-Mid Cap Growth Fund
An Overview from the Portfolio Managers	23
Portfolio of Investments	26
International Growth Fund
An Overview from the Portfolio Manager	27
Portfolio of Investments	31
International Equity Fund
An Overview from the Portfolio Manager	35
Portfolio of Investments	39
International Small Cap Growth Fund
An Overview from the Portfolio Manager	42
Portfolio of Investments	45
Emerging Markets Growth Fund
An Overview from the Portfolio Managers	48
Portfolio of Investments	52
Value Discovery Fund
An Overview from the Portfolio Managers	54
Portfolio of Investments	57
Income Fund
An Overview from the Portfolio Managers	58
Portfolio of Investments	61
Ready Reserves Fund
An Overview from the Portfolio Managers	64
Portfolio of Investments	66
Financial Statements	67
Notes to Financial Statements	76
Report of Independent Registered Public Accounting Firm	100
Board of Trustees and Officers	101
Fund Expenses	107

This report is submitted for the general information of the shareholders of the William Blair Funds. It is not authorized for distribution to prospective investors unless accompanied or preceded by a prospectus of the William Blair Funds. Please carefully consider the Funds’ investment objectives, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus, which you may obtain by calling 1-800-742-7272. Read it carefully before you invest or send money.

December 31, 2005 William Blair Funds    1

Marco Hanig

A LETTER FROM THE PRESIDENT

Dear Shareholders:

In 2005, the U.S. stock market prolonged its rally into a third year, but with moderate growth. The Standard & Poor’s 500 Index of large cap stocks posted a 4.91% return, and the Russell 2000^® Index of small cap stocks was up 4.55%. Despite the rise in interest rates, bonds had positive returns, with the Lehman Aggregate Bond Index increasing 2.44%. Abroad, returns were higher, with the MSCI All Country World Free Ex-US Index of foreign stocks up 17.11%

After the bursting of the technology bubble in 2000-2002, the market rebounded sharply in 2003, then began to slow down to low double-digit growth in 2004, and in 2005 leveled off further to a modest single-digit growth rate. The economy is growing quite nicely, but growth in stock prices has been dampened by high energy prices and the continuing efforts by the Fed to keep the economy from overheating by raising interest rates.

The big story was the out-performance of mid-cap stocks, which did better than both small and large-caps. Beginning in 2003, small caps had done much better than mid- and large-caps, and it had been widely expected that eventually this trend would reverse. This is beginning to happen, as leadership shifted from small-caps to mid-caps. It remains to be seen whether, as expected, this trend will continue and result in large-caps having their day in the sun in the coming year.

The differences between value and growth were very modest, with value just edging out growth one more year, continuing a five-year winning streak. This trend is also widely expected to reverse, and the fact that it didn’t happen in 2005 was a bit of a surprise.

Total Returns by Russell Style Index

January 1 through December 31, 2005

	Value		Blend		Growth
Large Cap (Russell 1000)	7.05	%	6.27	%	5.26	%
Mid Cap (Russell MidCap)	12.65	%	12.65	%	12.10	%
Small Cap (Russell 2000)	4.71	%	4.55	%	4.15	%

The best news for our shareholders is that each and every one of our funds had positive absolute returns in 2005. In terms of relative performance, the top performer was the newly launched Emerging Markets Growth Fund, which beat the MSCI Emerging Markets benchmark by a wide margin (42.52% vs. 29.26%) in the first seven months of its existence, due in significant part to participation in the IPO of Baidu, the Google of China. The Tax-Managed Growth Fund and the Growth Fund also did quite well, with returns of 12.46% and 9.75% respectively versus 5.17% for the Russell 3000 Growth Index. The International Growth Fund, with returns of 21.65% versus 17.11% for the MSCI World ex-US Index rounds out the list of strong relative performers. Funds that struggled in relative terms during the year were Value Discovery Fund, which posted a 0.49% return vs. 4.71% for the Russell 2000 Value Index, and the International Equity Fund, with a 13.50% return vs. 17.11% for the MSCI All Country World Free ex-US Index. The Fund managers’ letters discuss in greater detail the reasons for their over- or under-performance.

As always, thank you for investing with us!

Marco Hanig

As always, we thank you for investing with us!

Marco Hanig

Please see page 4 for important performance disclosure information.

2    Annual Report December 31, 2005

PERFORMANCE AS OF DECEMBER 31, 2005—CLASS N SHARES

	1 Yr	3 Yr	5 Yr	10 Yr (or since inception)	Inception Date	Overall Morningstar Rating
Growth Fund	9.75	13.36	-1.35	6.45	3/20/46	«««
Morningstar Large Growth	6.46	13.88	-3.36	6.95		Among 1,353 large growth funds
Russell 3000® Growth	5.17	13.78	-3.15	6.48
Standard & Poor’s 500	4.91	14.39	0.54	9.07
Tax-Managed Growth Fund						««««
Return before Taxes	12.46	13.80	0.06	0.18	12/27/99	Among 1,353 large growth funds
After Taxes on Distributions	12.46	13.80	0.06	0.18
After Taxes on Distributions and Sale of Fund Shares	8.10	11.94	0.05	0.15
Morningstar Large Growth	6.46	13.88	-3.36	—
Russell 3000® Growth	5.17	13.78	-3.15	-6.45
Large Cap Growth Fund	3.69	10.46	-5.20	-6.96	12/27/99	««
Morningstar Large Growth	6.46	13.88	-3.36	—		Among 1,353 large growth funds
Russell 1000® Growth	5.26	13.23	-3.58	-6.85
Small Cap Growth Fund	1.18	27.73	16.79	19.68	12/27/99	«««««
Morningstar Small Growth	5.74	19.56	2.17	—		Among 650 small growth funds
Russell 2000® Growth	4.15	20.93	2.28	-1.37
The Small Cap Growth Fund’s performance during 2000 was primarily attributable to investments in initial public offerings (IPOs) during a rising market. Since then, IPOs have had an insignificant effect on the Fund’s performance.
Small-Mid Cap Growth Fund	10.72	—	—	11.64	12/29/03	Not rated.
Morningstar Mid-Cap Growth	9.70	—	—	—
Russell 2500TM Growth	8.17	—	—	11.75
International Growth Fund	21.65	27.03	8.46	13.68	10/1/92	«««««
Morningstar Foreign Large Growth	15.27	21.66	2.15	5.69		Among 196 foreign large growth funds
MSCI All Country World Free Ex-US	17.11	26.20	6.66	6.70
International Equity Fund	13.50	—	—	16.85	5/24/04	Not rated.
Morningstar Foreign Large Growth	15.27	—	—	—
MSCI All Country World Free Ex-US	17.11	—	—	25.10
International Small Cap Growth	—	—	—	11.60	11/1/05	Not rated.
MSCI All Country World Free Small Cap Ex-US	—	—	—	10.68
Emerging Markets Growth Fund	—	—	—	42.52	6/6/05	Not rated.
MSCI Emerging Markets Free	—	—	—	29.26
A portion of the Emerging Markets Growth Funds performance since inception was attributable to an investment in an initial public offering (IPO).
Value Discovery Fund	0.49	16.19	10.46	11.98	12/23/96	««
Morningstar Small Value	6.13	22.30	13.50	—		Among 276 small value funds
Russell 2000®	4.55	22.13	8.22	8.64
Russell 2000® Value	4.71	23.18	13.55	12.31
Income Fund	1.71	2.66	4.59	5.11	10/1/90	««««
Morningstar Short-Term Bond	1.43	1.96	3.82	4.63		Among 317 short-term bond funds
Lehman Intermediate Govt./Credit Bond Index	1.57	2.96	5.49	5.80

Please see the next page for important disclosure information.

December 31, 2005 William Blair Funds    3

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher that the data quoted. Returns shown are average annual total returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate and you may have a gain or a loss when you sell shares. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds.com. Investing in smaller companies involves special risks, including higher volatility and lower liquidity. International and emerging markets investing involves special risk considerations, including currency fluctuations, lower liquidity, economic and political risk. As interest rates rise, bond prices will fall and bond funds become more volatile. From time to time, the investment advisor may waive fees or reimburse expenses for certain Funds. Without these waivers, performance would be lower. Class N shares are available to the general public without a sales load.

Tax-Managed Growth Fund’s after-tax returns are calculated using the highest historical individual federal marginal income tax rates, and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor’s tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. After-tax returns are shown only for Class N and the after-tax returns for Class N shares will vary.

Morningstar Ratings^TM are as of 12/31/05 and are subject to change every month. The ratings are based on a risk-adjusted return measure that accounts for variation in a fund’s monthly performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each Category receive 5 stars, the next 22.5% receive 4 stars, the middle 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a fund is derived from a weighted-average of the performance figures associated with its three-, five- and ten-year (if applicable) Morningstar Rating metrics. The 3/5/10 year Morningstar ratings were as follows: Growth Fund «««/«««/«««, Tax-Managed Growth Fund «««/««««/NA, and Large Cap Growth Fund ««/««/NA, out of 1,353/1,065/370 large growth funds; Small Cap Growth Fund «««««/«««««/NA out of 650/507/NA small growth funds; Value Discovery Fund «/««/NA out of 276/192/NA small value funds; International Growth Fund ««««/«««««/««««« out of 196/151/62 foreign large growth funds; Income Fund ««««/««««/«««« out of 317/227/131 short-term bond funds.

Please carefully consider the Funds’ investment objectives, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus, which you may obtain by calling 1-800-742-7272. Read it carefully before you invest or send money. William Blair & Company, L.L.C., distributor. 02/06.

4    Annual Report December 31, 2005

John F. Jostrand

GROWTH FUND

The Growth Fund invests primarily in common stocks of domestic growth companies that the Advisor expects to have sustainable, above-average growth from one business cycle to the next.

AN OVERVIEW FROM THE PORTFOLIO MANAGER

How did the Fund perform over the last year? How did the Fund’s performance compare to its benchmark?

The Growth Fund posted a 9.75% increase on a total return basis (Class N Shares) for the 12 months ended December 31, 2005. By comparison, the Fund’s benchmarks, the Russell 3000^® Growth Index gained 5.17%, while the Standard & Poor’s 500 Index rose 4.91%.

What were the most significant factors impacting Fund performance?

Stock selection was the strongest factor with respect to the Fund’s overall out-performance relative to the benchmark for the year. The Fund’s overweight position to stocks with the smallest capitalizations (below $2 billion), along with particularly strong stock selection in this area, provided the largest benefit to absolute and relative returns.

Which sectors enhanced the Fund’s return? What were among the best performing investments for the Fund?

The strongest contributing sector to the Fund and Russell 3000^® Growth Index returns during the year was Health Care. Our extremely strong stock selection allowed the Fund to significantly outpace the Russell 3000^® Growth Index in this area. Health Care Equipment and Supplies offered the largest benefit to absolute and relative returns. Alcon, Inc. in the eye care area, received approval for its ReStor Lens for cataract surgery, and Medicare approved funding of the procedure; these proved to be catalysts for stock appreciation. Kyphon, Inc. a provider of groundbreaking product and technique in spine restoration surgery, also experienced strong growth during the year. The Health Care Providers and Services industry provided the second best returns within health care for the portfolio, with UnitedHealth Group, Express Scripts, Inc. and American Healthways, Inc. posting positive stock price gains.

Information Technology stocks were the second largest contributors to Fund returns, on both an absolute and relative basis. A large benefit came from the software area, where the Fund showed positive results while the Russell 3000^® Growth Index had negative returns. Nuance Communications, Inc., providing imaging services, with a focus on voice-oriented command services, scan-to-digital and fax-to-digital services, saw strong stock price gains during the year. Adobe Inc. also had excellent results, particularly in the fourth quarter.

Were there any investment strategies or themes that did not measure up to your expectations?

Consumer stocks were soft during the year, taking the brunt of rising interest rates and higher oil prices. In the Fund, our stocks within the Retail sector were particularly disappointing. Kohl’s Corporation was anticipated to achieve promising results after some significant management changes, remerchandising of products, and adding several items to higher

December 31, 2005 William Blair Funds    5

margin personal care and beauty lines. The softness in consumer stocks in general, combined with discount pricing and unseasonable weather contributed to the stock’s weakness. In a similar vein, Bed, Bath and Beyond, Inc. had an optimistic outlook with respect to their new larger “box” stores, their strong competitive position, and their roll out of Christmas Tree Stores. The company experienced modest sales results during the year, which disappointed investors who anticipated much better growth. In the last quarter, the company announced that financial results were likely to be at the lower end of the expected range, news which further pressured the stock.

Dell Inc. was the largest detractor from returns, both on an absolute and relative basis. Despite meeting earnings estimates during the year, the stock experienced some weakness in revenues driven by aggressive pricing strategies to stave off the recently rejuvenated Hewlett-Packard Co. Additionally, the stock experienced significant Price/Earnings multiple compression.

We were slightly underweight in Energy stock during the year. Although our stock selection significantly outpaced the Russell 3000^® Growth Index, our underweight caused a modest drag to relative performance.

What is your current strategy? How is the Fund positioned?

We continue to seek interesting opportunities for sustainable growth in the Information Technology and Health Care areas. We are cautious in the consumer area, particularly to stocks that are heavily reliant on the lower-end customer, and have not found compelling growth opportunities in the consumer staples area.

Compared to historic ratios, valuations are relatively compressed, resulting in no significant differentiation between higher and lower quality companies. As the economy slows, we believe the higher quality companies will be able to differentiate themselves from those of average quality due to superior business models that will likely generate above average growth, and be rewarded with higher earnings multiples.

6    Annual Report December 31, 2005

Growth Fund

Performance Highlights (unaudited)

Average Annual Total Return at 12/31/2005

	1 Year		3 Year		5 Year		10 Year		Since Inception(a)
Growth Fund Class N	9.75	%	13.36	%	(1.35	)%	6.45	%	—
Growth Fund Class I	10.08		13.69		(1.10	)	—		0.73
Russell 3000® Growth Index	5.17		13.78		(3.15	)	6.48		(2.91	)
S&P 500 Index	4.91		14.39		0.54		9.07		1.13

(a) For the period from October 1, 1999 to December 31, 2005.

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher than the data quoted. Results shown are average annual returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate and you may have a gain or loss when you sell shares. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds.com. Class N shares are available to the general public without a sales load. Class I shares are available to certain institutional investors and advisory clients of William Blair & Company L.L.C. without a sales load or distribution (12b-1) or service fees.

The performance highlights and graph presented above do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

The Russell 3000^® Growth Index consists of large, medium, and small-capitalization companies with above average price-to-book ratios and forecasted growth rates. The index is weighted by market capitalization and large/medium/small companies make up approximately 80%/15%/5% of the index.

The S&P 500 Index indicates broad larger capitalization equity market performance.

This report identifies the Fund’s investments on December 31, 2005. These holdings are subject to change. Not all stocks in the Fund performed the same, nor is there any guarantee that these stocks will perform as well in the future. Market forecasts provided in this report may not necessarily come to pass.

Sector Diversification (unaudited)

The sector diversification shown is based on the total investment portfolio.

December 31, 2005 William Blair Funds    7

Growth Fund

Portfolio of Investments, December 31, 2005 (all dollar amounts in thousands)

Issuer	Shares	Value
Common Stocks
Information Technology—33.4%
*Adobe Systems Incorporated	174,860	$	6,463
Arm Holding plc—ADR	749,885		4,657
*Cognizant Technology Solutions Corporation	64,565		3,251
*Dell, Inc.	255,425		7,660
*EMC Corporation	544,550		7,417
First Data Corporation	125,230		5,386
*J2 Global Communications, Inc.	106,415		4,548
*Jabil Circuit, Inc.	169,205		6,276
Linear Technology Corporation	97,420		3,514
Microchip Technology, Inc.	83,560		2,686
*Network Appliance, Inc.	109,780		2,964
*Nuance Communications, Inc.	737,765		5,629
Paychex, Inc.	163,200		6,221
*PDF Solutions, Inc.	82,870		1,347
Taiwan Semiconductor Mfg. Co. Ltd.—ADR	774,470		7,675
*ValueClick, Inc.	284,980		5,161
*WebEx Communications, Inc.	174,285		3,770
			84,625
Health Care—29.7%
Allergan, Inc.	35,440		3,826
*Amgen, Inc.	144,735		11,414
*Axcan Pharma, Inc.†	249,540		3,778
*IDEXX Laboratories, Inc.	59,090		4,253
*Integra Lifesciences Holding Corporation	143,470		5,088
*Kyphon, Inc.	77,510		3,165
*MedImmune, Inc.	94,065		3,294
Medtronic, Inc.	207,085		11,922
*ResMed, Inc.	81,830		3,135
Sanofi-Aventis—ADR	167,595		7,357
Schering-Plough Corporation	295,815		6,168
UnitedHealth Group, Inc.	163,435		10,156
Valeant Pharmaceuticals International	104,115		1,882
			75,438
Consumer Discretionary—14.2%
*Bed, Bath & Beyond, Inc.	174,480		6,307
*CarMax, Inc.	101,335		2,805
*Education Management Corporation	138,960		4,657
Johnson Controls, Inc.	52,855		3,854
*Kohl’s Corporation	118,190		5,744
*Laureate Education, Inc.	87,030		4,570
*Shuffle Master, Inc.	113,455		2,852

*Non-income producing securities

ADR = American Depository Receipt

† = U.S. listed foreign security

VRN = Variable Rate Note

Issuer	Shares or Principal Amount		Value
Common Stocks—(continued)
Consumer Discretionary—(continued)
*Williams-Sonoma, Inc.		120,840	$	5,214
				36,003
Industrials—11.5%
*Coinstar, Inc.		194,020		4,429
Corporate Executive Board Company		44,780		4,017
Danaher Corporation		185,946		10,372
Graco, Inc.		111,730		4,076
Knight Transportation, Inc.		300,900		6,238
				29,132
Financials—4.2%
Goldman Sachs Group, Inc.		42,595		5,440
SLM Corporation		94,295		5,194
				10,634
Materials—2.9%
Praxair, Inc.		141,165		7,476
Energy—1.8%
Suncor Energy, Inc.†		71,095		4,488
Total Common Stock—97.7% (cost $184,148)				247,796
Investment in Affiliate
William Blair Ready Reserves		724,307		724
Total Investment in Affiliate—0.3% (cost $724)				724
Short-Term Investment
Prudential Funding Demand Note, VRN 3.93%, due 1/03/06	$	3,868,000		3,868
Total Short-Term Investment—1.5% (cost $3,868)				3,868
Total Investments—99.5% (cost $188,740)				252,388
Cash and other assets, less liabilities—0.5%				1,171
Net assets—100.0%			$	253,559

See accompanying Notes to Financial Statements.

8    Annual Report December 31, 2005

Mark A. Fuller III

Gregory J. Pusinelli

TAX-MANAGED GROWTH FUND

The Tax-Managed Growth Fund invests primarily in common stocks of large, medium and small domestic growth companies that the Advisor expects will have sustainable, above-average growth from one business cycle to the next.

AN OVERVIEW FROM THE PORTFOLIO MANAGERS

How did the Fund perform over the last year? How did the Fund’s performance compare to its benchmark?

The Tax-Managed Growth Fund posted a strong 12.46% gain on a total return basis (Class N Shares) for the 12 months ended December 31, 2005. By comparison, the Fund’s primary benchmark, the Russell 3000^® Growth Index increased 5.17% and the Standard & Poor’s 500 Stock Index gained 4.91%.

What were the most significant market factors impacting Fund performance?

The stock market, as represented by the Standard & Poor’s 500 Index, finished the year in positive territory. In spite of this showing, the equity markets were restrained in 2005 by high energy prices, an ongoing Federal Reserve campaign to raise short-term interest rates, and a flat interest rate yield curve, which many interpreted as a signal that slower economic growth might be on the horizon.

Concerns that rising energy prices could dampen economic growth weighed on the equity markets for a good part of the year. In addition, indications early in the year that inflationary pressures had the potential to increase had an unsettling effect on equity market participants.

Investors also worried about the potential for slowing corporate profits, although optimism during the second quarter earnings reporting period seemed to provide some underlying support to the market.

Lastly, investors were troubled by the Federal Reserve’s eight interest rate increases during 2005. Investors grew increasingly concerned that the Fed was being overly cautious—and perhaps too restrictive—with its monetary policy.

What were among the best performing investments for the Fund?

Health Care was the strongest performing sector for the Tax-Managed Growth Fund in 2005, followed by Energy and Industrials. Four of the top five performing stocks were Health Care names.

ExpressScripts, Inc., which was up over 119%, was the best performing stock in the Fund’s portfolio. ExpressScripts provides pharmacy-benefit management services to managed-care firms, third-party administrators, large employers, and union-sponsored benefit plans, representing more than 50 million members. ExpressScripts continued to experience strong growth in their business throughout the course of the year.

We trimmed our position in ExpressScripts during the fourth quarter, mainly taking profits in view of our belief that the stock had achieved fairly full valuation.

December 31, 2005 William Blair Funds    9

Suncor Energy, Inc. was the second-best performing investment for the Fund in 2005, rising over 79%. Suncor Energy produces and refines oil from the Alberta oil sands in Canada and is a pioneer in oil sands production.

Genentech, Inc. was the third strongest contributor for the Fund in 2005, and was up over 69%. Genentech’s cancer products—and their crossover use for different types of cancers—look promising. Increased earnings estimates for the company, especially during the second quarter, reinforced our enthusiasm for this company. We especially favor this company because Genentech has an entire portfolio of products, compared to other biotechnology companies which may only have one drug either in test trials or to market. Valuation of this stock, however, seems “rich” in our view.

What were among the weakest performing investments for the Fund?

Valeant Pharmaceuticals International was the worst-performing investment for the Fund for the year. Valeant markets more than 400 health-care products worldwide. As we reported earlier this year, concerns about the company’s ability to get certain new drugs approved by the FDA hurt this stock. We nonetheless believe in this company and their strong new management team that has joined the firm from many of the world’s top pharmaceutical companies. We should also note that we “tax-traded” Valeant, harvesting a tax-loss by selling the stock in November and then buying it back in late December. This strategy was one example of our efforts to manage the Fund in a tax-efficient manner. We are willing to withstand the short-term fluctuations in the company’s share price because of this management, and because of Valeant’s promising portfolio of products which is in various stages of testing.

Investors Financial Services Corp., was the second worst-performing stock for the Fund last year. Investors’ earnings have suffered from the flattening interest rate yield curve resulting from the Federal Reserve’s short-term interest rate hikes, as higher short-term rates impact margins.

Pfizer, Inc., was the third worst-performing investment for the Fund in 2005, in terms of impacting the Fund’s return. With an insufficient lineup of new drugs coming down the pipeline, and competitive pressures to its cholesterol-lowering drug Lipitor, we sold the stock in December, believing the company was unlikely to meet our long-term minimum growth objectives.

What is your current strategy? How is the Fund positioned?

During the fourth quarter we added four new names to the Fund’s portfolio of investments: DR Horton, Inc., Johnson Controls, Inc., MedImmune, Inc., and Network Appliance, Inc.

DR Horton is the largest homebuilder in the country based on homes sold, and operates in about 75 major markets across 25 states. Although some investors are nervous about the prospects for the housing market in an environment of gradually rising interest rates, we like this company’s solid management team and long uninterrupted track record of growth. We took advantage of price weakness in the stock to add this company to the Fund’s portfolio.

Johnson Controls operates three distinct business segments: automotive interiors, vehicle batteries, and building controls and services. We chose this well-managed company in part to increase our exposure to the Industrial sector.

MedImmune, Inc., is a biotechnology company with a very interesting pipeline of new drugs and expectations for a strong earnings growth rate over the next several years.

10    Annual Report December 31, 2005

Network Appliance, an information technology company, sells hardware, software, and services for customers to store and manage critical data across their networks. Network Appliance was an early pioneer in building storage hardware that could easily attach to a customer’s existing network as a simple “storage appliance.” In an era of ever-increasing information flow, we believe this company should benefit from the demand for its products, and its ability to take market share from its competitors.

After several years of “value” stocks outperforming their “growth” stock counterparts, sometime during 2005 the pendulum swung back towards growth. This strength in growth stocks is reflected in the performance of the Fund’s Russell 3000 Growth Index benchmark. With this trend seeming to now move in our favor, we are optimistic that the cycle may continue, as it has historically, for an extended period.

Regardless of whether this trend may continue, with the potential for higher interest rates and slower growth in the economy in 2006—and subsequently lower forecasted corporate profits growth—we are encouraged by the earnings growth potential of the companies in the Fund’s portfolio. In such an environment, security selection becomes even more important. We believe our focus on quality franchise businesses and a respect for downside risk should serve us well as we begin the new year.

December 31, 2005 William Blair Funds    11

Tax-Managed Growth Fund

Performance Highlights (unaudited)

Average Annual Total Return at 12/31/2005

	1 Year		3 Year		5 Year		Since Inception(a)
Tax-Managed Growth Fund Class N	12.46	%	13.80	%	0.06	%	0.18	%
Tax-Managed Growth Fund Class I	12.86		14.07		0.31		0.44
Russell 3000® Growth Index	5.17		13.78		(3.15	)	(6.45	)
S&P 500 Index	4.91		14.39		0.54		(1.00	)

(a) For the period from December 27, 1999 to December 31, 2005.

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher than the data quoted. Results shown are average annual total returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate and you may have a gain or loss when you sell shares. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds.com. From time to time, the investment adviser may waive fees or reimburse expenses for the Fund. Without these waivers, performance would be lower. Class N shares are available to the general public without a sales load. Class I shares are available to certain institutional investors and advisory clients of William Blair & Company, L.L.C., without a sales load or distribution (12b-1) or service fees.

The performance highlights and graph presented above do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

The Russell 3000^® Growth Index consists of large, medium, and small-capitalization companies with above average price-to-book ratios and forecasted growth rates. The index is weighted by market capitalization and large/medium/small companies make up approximately 80%/15%/5% of the index.

The S&P 500 Index indicates broad larger capitalization equity market performance.

This report identifies the Fund’s investments on December 31, 2005. These holdings are subject to change. Not all stocks in the Fund performed the same, nor is there any guarantee that these stocks will perform as well in the future. Market forecasts provided in this report may not necessarily come to pass.

Sector Diversification (unaudited)

The sector diversification shown is based on the total investment portfolio.

12    Annual Report December 31, 2005

Tax-Managed Growth Fund

Portfolio of Investments, December 31, 2005 (all dollar amounts in thousands)

Issuer	Shares	Value
Common Stocks
Health Care—20.0%
Alcon, Inc.†	965	$	125
*Amgen, Inc.	2,625		207
*Express Scripts, Inc., Class “A”	1,420		119
*Genentech, Inc.	1,940		180
IMS Health, Inc.	5,110		127
*MedImmune, Inc.	2,080		73
*ResMed, Inc.	4,734		181
Sanofi-Aventis—ADR	2,480		109
*St. Jude Medical, Inc.	2,550		128
Stryker Corporation	1,330		59
Valeant Pharmaceuticals International	6,450		117
*Zimmer Holdings, Inc.	2,060		139
			1,564
Information Technology—18.6%
*Activision, Inc.	4,283		59
*Adobe Systems Incorporated	3,470		128
Arm Holdings plc—ADR	9,500		59
*CACI International, Inc., Class “A”	1,470		84
CDW Corporation	1,750		101
*EMC Corporation	7,110		97
First Data Corporation	3,130		135
*Intuit, Inc.	2,645		141
*Jabil Circuit, Inc.	3,825		142
Microchip Technology, Inc.	4,500		145
*Network Appliance, Inc.	2,550		69
Paychex, Inc.	3,660		139
*ScanSource, Inc.	1,330		73
Taiwan Semiconductor Mfg. Co. Ltd.—ADR	8,220		81
			1,453
Industrials—14.5%
C.H. Robinson Worldwide, Inc.	5,040		187
Danaher Corporation	3,260		182
Expeditors International of Washington	2,425		164
Fastenal Company	5,440		213
General Electric Company	3,615		127
Knight Transportation, Inc.	5,273		109
Pentair, Inc.	4,410		152
			1,134
Consumer Discretionary—14.2%
*Bed, Bath & Beyond, Inc.	2,230		81
*CarMax, Inc.	2,920		81
D. R. Horton, Inc.	2,230		80
Dollar General Corporation	4,560		87
*eBAY, Inc.	1,850		80
Johnson Controls, Inc.	1,580		115
*Laureate Education, Inc.	2,830		148
Lowe’s Companies, Inc.	1,875		125
Time Warner, Inc.	4,890		85

*Non-income producing securities

ADR = American Depository Receipt

† = U.S. listed foreign security

VRN = Variable Rate Note

Issuer	Shares or Principal Amount		Value
Common Stocks—(continued)
Consumer Discretionary—(continued)
*Univision Communications, Inc.		1,960	$	57
*Williams-Sonoma, Inc.		3,935		170
				1,109
Financials—7.7%
AFLAC, Inc.		1,500		70
Ambac Financial Group, Inc.		1,560		120
American International Group		2,380		162
Investors Financial Service Corporation		2,420		89
Moody’s Corporation		2,620		161
				602
Consumer Staples—7.0%
Colgate-Palmolive Company		2,590		142
PepsiCo, Inc.		3,045		180
Walgreen Co.		2,555		113
Whole Foods Market, Inc.		1,460		113
				548
Energy—6.0%
EOG Resources, Inc.		1,010		74
Smith International, Inc.		2,050		76
Suncor Energy, Inc.†		5,010		316
				466
Materials—4.5%
Airgas, Inc.		5,990		197
Praxair, Inc.		2,870		152
				349
Total Common Stock—92.5% (cost $5,112)				7,225
Investment in Affiliate
William Blair Ready Reserves		362,919		363
Total Investment in Affiliate—4.6% (cost $363)				363
Short-Term Investment
Prudential Funding Demand Note, VRN 3.93%, due 1/03/06	$	165,000		165
Total Short-Term Investment—2.1% (cost $165)				165
Total Investments—99.2% (cost $5,640)				7,753
Cash and other assets, less liabilities—0.8%				62
Net assets—100.0%			$	7,815

See accompanying Notes to Financial Statements.

December 31, 2005 William Blair Funds    13

James W. Golan

John F. Jostrand

Norbert W. Truderung

LARGE CAP GROWTH FUND

The Large Cap Growth Fund invests primarily in common stocks of large domestic growth companies of high quality that the Advisor believes have demonstrated sustained growth over a long period of time.

AN OVERVIEW FROM THE PORTFOLIO MANAGERS

How did the Fund perform over the last year? How did the Fund’s performance compare to its benchmark?

The Large Cap Growth Fund posted a 3.69% increase on a total return basis (Class N Shares) for the 12 months ended December 31, 2005. By comparison, the Fund’s benchmark, the Russell 1000 Growth^® Index, gained 5.26%.

What were the most significant factors impacting Fund performance?

The Large Cap Growth strategy underperformed the Russell 1000 Growth^® Index, facing two significant headwinds during the year: the considerable out-performance of the smaller capitalization stocks within the benchmark and relative under-performance by higher quality stocks. In the Russell 1000 Growth^® Index, the smallest stocks (under $8 billion market capitalization) contributed nearly half of the Index’s returns for the year. Since we are required to invest at least 80% of the Fund’s net assets in stocks of companies with market capitalizations of at least $8 billion, we had little representation in that area. As a result, our portfolio underperformed the benchmark in the below $8 billion market cap range. That said, we were able to find some compelling quality growth stocks at the high end of the large cap range; in particular: UnitedHealth Group, Inc., Amgen, Inc., and Goldman Sachs Group, Inc. These stocks provided significant relative out-performance against names with market capitalizations above $50 billion held in the benchmark.

Higher quality stocks continued to give ground to lower quality counterparts during the year, a trend that began three years ago with the earnings acceleration at the beginning of the economic recovery. In 2005, using return on equity (ROE) as a proxy for quality, the stocks in the Russell 1000 Index with the highest ROEs returned an average of 3%, while the stocks with the lowest ROEs returned roughly 11%. Our philosophy leads us to invest in higher quality companies, which we believe tend to outperform over the long-term. While performance of our highest quality stocks was more than double those in the index, our lack of significant investment in lower quality issues has been a relative drag on the portfolio.

Which sectors enhanced the Fund’s return? What were among the best performing investments for the Fund?

With respect to sectors and stocks, Health Care stocks offered the strongest benefit to Fund performance during the year. UnitedHealth, Amgen and Alcon were three of the top performing stocks in the Fund. We were underweight large cap pharmaceuticals due to concerns about pricing, pipeline issues, and significant legal and regulatory problems, which was also a benefit to overall returns.

Our extremely strong stock selection allowed the Fund to significantly outpace the benchmark in the Health Care sector. Health care equipment and supplies offered the largest benefit to absolute and relative returns. Alcon, in the eye care area, received approval for its ReStor Lens for cataract surgery, and Medicare approved funding of the procedure; these proved to be catalysts for stock appreciation. Medtronic, Inc., a leader in devices and techniques for treating

14    Annual Report December 31, 2005

chronic care patients, also achieved positive results during the year. The health care providers and services industry provided the second best returns within the Health Care sector of the Fund, with both UnitedHealth Group and Caremark posting positive stock price gains.

Financial stocks did well in the portfolio for the year as well. Goldman Sachs strengthened during the year as the company’s investment banking activity continued to be strong, and bodes well for the coming year. SLM Corp., the student loan processing company, overcame concerns regarding the significant regulatory and governmental issues facing other agencies, and posted modestly positive results for the year

Were there any investment strategies or themes that did not measure up to your expectations?

Consumer stocks were soft during the year, taking the brunt of rising interest rates and higher oil prices. In the portfolio, our stocks within the retail section were particularly disappointing. Kohl’s Corporation was anticipated to achieve promising results after some significant management changes, remerchandising of products, and adding several items to higher margin personal care and beauty lines. The softness in consumer stocks in general, combined with discount pricing and unseasonable weather contributed to the stock’s weakness. In a similar vein, Bed, Bath and Beyond, Inc. had an optimistic outlook with respect to their new larger “box” stores, their strong competitive position, and their roll out of Christmas Tree Stores. The company experienced modest sales results during the year, which disappointed investors who anticipated much better growth. In the last quarter, the company announced that financial results were likely to be at the lower end of the expected range, news which further pressured the stock.

Technology stocks offered a mixed bag during the year. Taiwan Semiconductor Mfg Co. Ltd. and Adobe Systems Incorporated both provided positive contribution to the Fund’s return. Conversely, Dell, Inc. was the largest detractor from returns, both on an absolute and relative basis. Despite meeting earnings estimates during the year, the stock experienced some weakness in revenues driven by aggressive pricing strategies to stave off the recently rejuvenated Hewlett-Packard Co. Additionally, the stock experienced significant Price/Earnings multiple compression.

What is your current strategy? How is the Fund positioned?

We continue to find the best opportunities for quality growth investments in the Technology and Health Care sectors. Although we did not hold many financial stocks in 2005 due to lack of compelling growth opportunities, we are now finding a few new investments in this area. Given that price-to-earnings ratios (P/Es) are at relatively low levels (20x currently versus 24x average over 16 years), we are seeking compelling growth stories at good valuations in the large cap area. We believe that the moderating growth environment that analysts anticipate for 2006 may tend to favor higher quality growth stocks.

December 31, 2005 William Blair Funds    15

Large Cap Growth Fund

Performance Highlights (unaudited)

Average Annual Total Return at 12/31/2005

	1 Year		3 Year		5 Year		Since Inception(a)
Large Cap Growth Fund Class N	3.69	%	10.46	%	(5.20	)%	(6.96	)%
Large Cap Growth Fund Class I	3.96		10.82		(4.98	)	(6.74	)
Russell 1000® Growth Index	5.26		13.23		(3.58	)	(6.85	)

(a) For the period from December 27, 1999 to December 31, 2005.

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher than the data quoted. Results shown are average annual total returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate and you may have a gain or loss when you sell shares. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds.com. From time to time, the investment adviser may waive fees or reimburse expenses for the Fund. Without these waivers, performance would be lower. Class N shares are available to the general public without a sales load. Class I shares are available to certain institutional investors and advisory clients of William Blair & Company, L.L.C., without a sales load or distribution (12b-1) or service fees.

The performance highlights and graph presented above do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

The Russell 1000^® Growth Index consists of large-capitalization companies with above average-to-book ratios and forecasted growth rates.

This report identifies the Fund’s investments on December 31, 2005. These holdings are subject to change. Not all stocks in the Fund performed the same, nor is there any guarantee that these stocks will perform as well in the future. Market forecasts provided in this report may not necessarily come to pass.

Sector Diversification (unaudited)

The sector diversification shown is based on the total investment portfolio.

16    Annual Report December 31, 2005

Large Cap Growth Fund

Portfolio of Investments, December 31, 2005 (all dollar amounts in thousands)

Issuer	Shares	Value
Common Stocks
Information Technology—32.7%
Accenture, Ltd.†	10,395	$	300
*Adobe Systems Incorporated	11,520		426
*Corning Incorporated	19,045		374
*Dell, Inc.	22,475		674
*EMC Corporation	32,560		444
First Data Corporation	10,025		431
Infosys Technologies Ltd.—ADR	2,720		220
Linear Technology Corporation	10,800		390
*Network Appliance, Inc.	7,120		192
Paychex, Inc.	11,300		431
Qualcomm Incorporated	7,970		343
SAP AG—ADR	3,625		163
Taiwan Semiconductor Mfg. Co. Ltd.—ADR	58,517		580
*Yahoo!, Inc.	14,235		558
			5,526
Health Care—23.6%
Allergan, Inc.	3,075		332
*Amgen, Inc.	7,640		602
*Caremark Rx, Inc.	6,375		330
*MedImmune, Inc.	6,325		222
Medtronic, Inc.	16,970		977
Sanofi-Aventis—ADR	11,355		498
Schering-Plough Corporation	15,015		313
UnitedHealth Group, Inc.	11,375		707
			3,981
Consumer Discretionary—12.6%
*Apollo Group, Inc., Class “A”	4,340		262
*Bed, Bath & Beyond, Inc.	11,470		415
Johnson Controls, Inc.	3,500		255
*Kohl’s Corporation	11,263		547
Nike, Inc., Class “B”	5,570		484
Staples, Inc.	7,350		167
			2,130
Industrials—8.1%
3M Company	4,230		328
Danaher Corporation	14,197		792
General Electric Company	7,155		251
			1,371

*Non-income producing securities

ADR = American Depository Receipt

† = U.S. listed foreign security

Issuer	Shares	Value
Common Stocks—(continued)
Financials—7.7%
Capital One Financial Corporation	1,990	$	172
Goldman Sachs Group, Inc.	4,110		525
Schwab (Charles) Corporation	12,820		188
SLM Corporation	7,655		422
			1,307
Consumer Staples—4.4%
PepsiCo, Inc.	7,470		441
Walgreen Co.	6,675		296
			737
Energy—3.8%
Schlumberger Limited†	3,245		315
Suncor Energy, Inc.†	5,050		319
			634
Materials—3.5%
Praxair, Inc.	11,355		601
Total Common Stock—96.4% (cost $14,585)			16,287
Investment in Affiliate
William Blair Ready Reserves	424,078		424
Total Investment in Affiliate—2.5% (cost $424)			424
Total Investments—98.9% (cost $15,009)			16,711
Cash plus other assets less liabilities—1.1%			177
Net assets—100.0%		$	16,888

See accompanying Notes to Financial Statements.

December 31, 2005 William Blair Funds    17

Karl W. Brewer

SMALL CAP GROWTH FUND

The Small Cap Growth Fund invests primarily in common stocks of small domestic growth companies that the Advisor expects to have solid growth in earnings.

AN OVERVIEW FROM THE PORTFOLIO MANAGER

How did the Fund perform over the last year? How did the Fund’s performance compare to its benchmark?

The Small Cap Growth Fund posted a 1.18% increase on a total return basis (Class N Shares) for the 12 months ended December 31, 2005. By comparison, the Fund’s benchmark, the Russell 2000 Growth^® Index, gained 4.15% during the period, while the Russell 2000^® Index rose 4.55%.

What were the most significant factors impacting Fund performance? What factors were behind the Fund’s performance versus the benchmark?

With respect to the Fund’s performance compared to the Russell 2000^® Growth Index benchmark, stock selection in Health Care was the biggest detractor from relative performance while stock selection in the Consumer Discretionary and Energy sectors also detracted. Strong stock selection within the Information Technology sector was the main contributor toward relative performance.

While there was not a large disparity in returns from a style perspective, value narrowly outperformed growth during 2005 (and as evidenced by the Russell 2000 Value Index’s increase of 4.71%, compared to the Russell 2000 Growth Index’s gain of 4.15%). Growth outperformed value in the fourth quarter (with the Russell 2000 Growth Index up 1.61%, versus the Russell 2000 Value Index’s gain of 0.66%). From a market capitalization perspective, mid-cap stocks once again outperformed their small and large cap counterparts during the fourth quarter as they did for 2005 as a whole.

Within the Russell 2000 Growth Index during 2005, Energy was the sector of the year. Over half of the return for the index came from Energy stocks (roughly 2.8% of the 4.15% return of the index). The Health Care and Industrial sectors were also mildly outperforming sectors compared to the rest of the market. Within the small cap health care space, we saw a large disparity between the poor relative performance of pharmaceutical and biotechnology stocks as compared to both healthcare providers and healthcare equipment stocks. Information Technology finished the year down in absolute terms and was therefore an underperforming sector. Within the sector, the market preferred computer software and services over computer hardware and semiconductors. The small cap Financials sector, due to the many regional banks that were adversely affected by the flattening of the yield curve, and the Consumer Discretionary sector joined Information Technology as the major sectors that underperformed the broader small cap market.

What were among the best performing investments for the Fund?

Two specific stocks that helped the portfolio during 2005 were Nuance Communications, Inc. and ValueClick, Inc. Nuance Communications was a top contributor for the Fund in the fourth quarter and for 2005 as a whole. ScanSoft and Nuance merged during the year and the new entity kept the name Nuance. This merger of two industry leaders, the continued evolution of speech recognition technology and increased coverage of the stock by Wall

18    Annual Report December 31, 2005

Street helped drive growth in the stock price during 2005. ValueClick was one of the top performers for the Fund for 2005 as well. The company is focused on the online advertising market. The stock price appreciated over the year as management executed and grew the business, made a strategic acquisition, and as Wall Street increasingly discovered the company.

What were among the weakest performing investments for the Fund?

Two of the Fund’s worst performing stocks were TRM Corp and Cell Therapeutics. TRM Corp, an owner and operator of ATM networks, was a poor performer for the Fund in both the fourth quarter and for 2005. The company announced disappointing earnings in November in part due to higher than expected expenses related to operating their expanding network of ATM’s. The company should have realized cost savings and scale as they built their network, but, this did not happen and as a result we liquidated the position. Cell Therapeutics, a biotechnology stock, was also one of the largest detractors from performance for 2005. We liquidated the position during the second quarter after they announced a series of negative data points relating to prospective pipeline drugs.

What is your current outlook?

As we look at 2006, there are a number of dynamics that could affect the equity markets. Ben Bernanke takes over for Alan Greenspan as the Chairman of the Federal Reserve in the first quarter of 2006. His efforts to tame inflation and keep the economy on track will be watched closely. A possible housing market slowdown, high heating bills and any implications of an inverted yield curve are the ubiquitously discussed headwinds in the marketplace. However, we are still seeing healthy levels of economic and corporate earnings growth, contained inflation, and signs of business spending picking up after the past couple years of record earnings growth have left companies flush with cash. A possible reversal of the multi-year trend of value outperforming growth, after growth’s outperformance in the second half of the 2005, could create another tailwind for our quality growth style of investing. Regardless of the macro environment, we will continue to look for durable businesses whose stocks have favorable risk reward profiles.

Is there any other news with respect to the Fund?

Also, with respect to illiquid securities in the Fund, Overhill Farms Inc. is a portfolio holding that we acquired through a Private Investment in Public Equity (PIPE) transaction in late December. Overhill Farms is a food distribution company whose customers include restaurants and airlines. We were able to purchase shares in the transaction at a discount to market prices and we expect these shares to become freely tradable within 120 days of the transaction. The Fund’s Pricing Committee and Valuation Committee is currently pricing the security at fair value.

December 31, 2005 William Blair Funds    19

Small Cap Growth Fund

Performance Highlights (unaudited)

Average Annual Total Return at 12/31/2005

	1 Year		3 Year		5 Year		Since Inception(a)
Small Cap Growth Fund Class N	1.18	%	27.73	%	16.79	%	19.68	%
Small Cap Growth Fund Class I	1.48		28.03		17.09		19.97
Russell 2000® Growth Index	4.15		20.93		2.28		(1.37	)
Russell 2000® Index	4.55		22.13		8.22		7.03

(a) For the period from December 27, 1999 to December 31, 2005.

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher than the data quoted. Results shown are average annual total returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate and you may have a gain or loss when you sell shares. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds.com. Investing in smaller companies involves special risks, including higher volatility and lower liquidity. From time to time, the investment advisor may waive fees or reimburse expenses for the Fund. Without these waivers, performance would be lower. Class N shares are available to the general public without a sales load. Class I shares are available to certain institutional investors and advisory clients of William Blair & Company, L.L.C., without a sales load or distribution (12b-1) or service fees.

The performance highlights and graph presented above do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

The Russell 2000^® Growth Index consists of small-capitalization companies with above average price-to-book ratios and forecasted growth rates.

The Russell 2000^® Index is an unmanaged composite of the smallest 2000 stocks of the Russell 3000^® Index.

This report identifies the Fund’s investments on December 31, 2005. These holdings are subject to change. Not all stocks in the Fund performed the same, nor is there any guarantee that these stocks will perform as well in the future. Market forecasts provided in this report may not necessarily come to pass.

Sector Diversification (unaudited)

The sector diversification shown is based on the total investment portfolio.

20    Annual Report December 31, 2005

Small Cap Growth Fund

Portfolio of Investments, December 31, 2005 (all dollar amounts in thousands)

Issuer	Shares	Value
Common Stocks
Information Technology—31.3%
*Access Integrated Technologies, Inc.	444,977	$	4,619
*AMIS Holdings, Inc.	1,093,370		11,644
ARM Holdings, plc—ADR	670,962		4,167
*BISYS Group, Inc. (The)	30,400		426
*eCollege.com, Inc.	528,451		9,528
*Electronic Clearing House	652,297		6,503
*Euronet Worldwide, Inc.	269,342		7,488
*Heartland Payment Systems, Inc.	420,061		9,099
*Internet Capital Group, Inc.	1,547,474		12,720
*Intrado, Inc.	459,813		10,585
*J2 Global Communications, Inc.	272,164		11,632
*Kanbay International, Inc.	816,719		12,978
*Lionbridge Technologies, Inc.	1,184,467		8,315
*Nuance Communications, Inc.	2,834,256		21,625
*OPNET Technologies, Inc.	924,040		8,492
*Optimal Group, Inc.†	782,973		15,863
*Patni Computer Systems—ADR	32,800		760
*PDF Solutions, Inc.	1,035,312		16,824
*Skillsoft, plc—ADR	1,251,567		6,884
*TNS, Inc.	714,969		13,713
*Ultimate Software Group, Inc.	534,336		10,190
*ValueClick, Inc.	840,728		15,226
*Volterra Semiconductor Corporation	1,466,807		22,002
*WebEx Communications, Inc.	606,862		13,126
*Workstream, Inc.†	3,661,887		6,038
			260,447
Consumer Discretionary—21.4%
*4 Kids Entertainment, Inc.	466,935		7,326
*Century Casinos, Inc.	956,611		8,227
*Cumulus Media, Inc., Class “A”	918,476		11,398
*DeVry, Inc.	142,190		2,844
*Dick’s Sporting Goods, Inc.	326,915		10,866
*Jarden Corporation	593,687		17,900
*Laureate Education, Inc.	464,237		24,377
*Lions Gate Entertainment Corporation†	2,018,315		15,501
*Meritage Homes Corporation	141,540		8,906
*Mikohn Gaming Corporation	652,260		6,438
Nautilus Group, Inc.	623,177		11,628
*Nevada Gold and Casinos, Inc.	507,589		5,274
*Shuffle Master, Inc.	483,154		12,146
Strayer Education, Inc.	154,064		14,436
*ValueVision Media, Inc., Class “A”	1,047,885		13,203
*WMS Industries, Inc.	283,170		7,105
			177,575
Industrials—14.7%
*Coinstar, Inc.	454,275		10,371
Comfort Systems USA, Inc.	1,399,760		12,878
*Corrections Corporation of America	267,820		12,044
*CRA International, Inc.	199,420		9,510
*FirstService Corporation†	523,250		13,421
*Frozen Food Express Industries, Inc.	483,765		5,336
*Hudson Highland Group, Inc.	178,684		3,102

Issuer	Shares	Value
Common Stocks—(continued)
Industrials—(continued)
*Huron Consulting Group, Inc.	352,527	$	8,457
*Kforce, Inc.	1,375,450		15,350
*Labor Ready, Inc.	560,035		11,660
*Marten Transport, Ltd.	480,115		8,748
*SIRVA, Inc.	1,430,630		11,445
			122,322
Health Care—11.4%
*Axcan Pharma, Inc.†	692,964		10,491
*Encore Medical Corporation	1,739,235		8,609
*Integra Lifesciences Holdings Corporation	387,449		13,739
*Lifecore Biomedical, Inc.	319,389		5,184
*Matria Healthcare, Inc.	239,815		9,295
*Nuvasive, Inc.	489,168		8,854
*PSS World Medical, Inc.	304,390		4,517
*Psychiatric Solutions, Inc.	161,196		9,469
*Sangamo Biosciences, Inc.	609,818		2,458
*Santarus, Inc.	974,738		5,341
*Telik, Inc.	560,033		9,515
*Zila, Inc.	1,965,922		7,569
			95,041
Financials—7.4%
*Affiliated Managers Group, Inc.	168,242		13,501
American Equity Investment Life Holding Co.	511,500		6,675
East West Bancorp, Inc.	248,557		9,070
*First Cash Financial Services, Inc.	527,424		15,380
Highland Hospitality Corporation	632,260		6,986
National Financial Partners Corporation	191,639		10,071
			61,683
Energy—6.8%
*ATP Oil and Gas Corporation	195,422		7,233
*Gasco Energy Inc.	860,817		5,621
*Grey Wolf, Inc.	1,658,622		12,821
*Hornbeck Offshore Services, Inc.	351,044		11,479
*Petrohawk Energy Corporation	876,596		11,589
*Toreador Resources Corporation	349,696		7,368
			56,111
Materials—1.6%
Airgas, Inc.	415,618		13,674
Consumer Staples—0.5%
*Overhill Farms, Inc.**	1,684,600		4,348
Total Common Stock—95.1% (cost $670,756)			791,201
Investment in Affiliate
William Blair Ready Reserves	11,002,174		11,002
Total Investment in Affiliate—1.3% (cost $11,002)			11,002

See accompanying Notes to Financial Statements.

December 31, 2005 William Blair Funds    21

Small Cap Growth Fund

Portfolio of Investments, December 31, 2005 (all dollar amounts in thousands)

Issuer	Principal Amount		Value
Short-Term Investments
American Express Demand Note, VRN 4.235%, due 1/3/06	$	8,413,000	$	8,413
Prudential Funding Demand Note, VRN 3.930%, due 1/3/06	$	13,176,000		13,176
Total Short-Term Investments—2.6% (cost $21,589)				21,589
Total Investments—99.0% (cost $703,347)				823,792
Cash and other assets, less liabilities—1.0%				7,946
Net assets—100.0%			$	831,738

*Non-income producing securities

ADR = American Depository Receipt

† = U.S. listed foreign security

VRN = Variable Rate Note

**Fair Valued pursuant to Valuation Procedures adopted by the Board of Trustees. The holding represents 0.52% of the Fund’s net assets at December 31, 2005. This security was also deemed illiquid pursuant to Liquidity Procedures approved by the Board of Trustees.

See accompanying Notes to Financial Statements.

22    Annual Report December 31, 2005

Karl W. Brewer

Harvey H. Bundy, III

Robert C. Lanphier, IV

SMALL-MID CAP GROWTH FUND

The Small-Mid Cap Growth Fund primarily invests in a diversified portfolio of common stocks of small and medium-sized domestic growth companies that the Advisor expects to experience solid growth in earnings.

AN OVERVIEW FROM THE PORTFOLIO MANAGERS

How did the Fund perform over the last year? How did the Fund’s performance compare to its benchmark?

The Small-Mid Cap Growth Fund posted a 10.72% total return (Class N Shares) for the year ended December 31, 2005. By comparison, the Fund’s benchmark, the Russell 2500 Growth^® Index, returned 8.17% during the period.

What were the most significant factors impacting Fund performance? What factors were behind the Fund’s performance versus the benchmark?

There was no significant disparity in returns from a style perspective during the year. Measured by most broad-based indexes, value narrowly outperformed growth during 2005. However, within the small to mid cap space as represented by the Russell 2500 Indexes, growth edged value for 2005 (Russell 2500 Growth^® Index +8.17%; Russell 2500 Value^® Index +7.74%) as it did in the fourth quarter specifically. From a market capitalization perspective, mid-cap stocks once again outperformed their small and large cap counterparts during the fourth quarter as they did for 2005 as a whole.

Within the Russell 2500 Growth Index, energy stocks were by far the best performers during 2005. Small to mid cap industrial names turned in the second strongest results among the six major sectors. The Consumer Discretionary, Financials, Health Care and Information Technology sectors all underperformed the broader market. Within the small to mid cap health care space, we saw a large disparity between the poor relative performance of pharmaceutical and biotechnology stocks as compared to both healthcare providers and healthcare equipment stocks. Within the Information Technology sector, computer software and services outperformed computer hardware and semiconductor stocks. The small to mid cap Financials sector underperformed during the year mostly due to the many regional banks that were adversely affected by the flattening of the yield curve.

Relative to the benchmark, strong stock selection within the Information Technology sector was the main contributor toward the Fund’s relative outperformance. Stock selection and our overweight position in the Industrials sector also contributed to the Fund’s relative outperformance during 2005. Also, our higher average market capitalization was modestly advantageous toward relative performance. Stock selection in the Energy sector was a detractor from relative performance. This was mostly due to our stocks not keeping pace with the roughly 57% average return for energy stocks in the benchmark.

What were among the weakest performing investments for the Fund?

Two of the weakest performing issues in the Fund in 2005 were Cell Therapeutics and AMIS Holdings. Cell Therapeutics is a biotechnology stock in the Health Care sector. We liquidated the position during the second quarter after they announced a series of negative data points relating to prospective pipeline drugs. AMIS Holdings, a semiconductor holding within the information technology sector, detracted from the Fund’s performance for 2005 as well. The

December 31, 2005 William Blair Funds    23

company’s design capabilities are used for various applications in the automotive, industrial and medical fields and represent attractive growth catalysts for the stock. However, the level of earnings growth investors were expecting for 2005 did not come to fruition and the stock price suffered accordingly.

What were among the best performing investments for the Fund?

Among the strongest performing issues for the Fund were ValueClick, Inc. and Fastenal Company. ValueClick is focused on the online advertising market. The stock price appreciated over the year as management executed and grew the business, made a strategic acquisition, and as Wall Street increasingly discovered the company. Fastenal, a distributor of various industrial supplies, was a strong contributor to the Fund’s performance for the fourth quarter and the full year 2005. The company continues to drive earnings growth organically through store growth and efficient management of the business. Fastenal, as did many of our industrial holdings, also benefited from the realization by the market that we are more likely in the earlier part of this capital goods cycle.

What is your current outlook?

As we look at 2006, there are a number of dynamics that could affect the equity markets. Ben Bernanke takes over for Alan Greenspan as the Chairman of the Federal Reserve in the first quarter of 2006. His efforts to tame inflation and keep the economy on track will be watched closely. A possible housing market slowdown, high heating bills and any implications of an inverted yield curve are the ubiquitously discussed headwinds in the marketplace. However, we are still seeing healthy levels of economic and corporate earnings growth, contained inflation, and signs of business spending picking up after the past couple years of record earnings growth have left companies flush with cash. A possible reversal of the multi-year trend of value outperforming growth, after growth’s outperformance in the second half of the 2005, could create another tailwind for our quality growth style of investing. Regardless of the macro environment, we will continue to look for durable businesses whose stocks have favorable risk reward profiles.

24    Annual Report December 31, 2005

Small-Mid Cap Growth Fund

Performance Highlights (unaudited)

Average Annual Total Return at 12/31/2005

	1 Year		Since Inception(a)
Small-Mid Cap Growth Fund Class N	10.72	%	11.64	%
Small-Mid Cap Growth Fund Class I	11.05		11.90
Russell 2500® Growth Index	8.17		11.75

(a) For the period from December 29, 2003 to December 31, 2005.

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher than the data quoted. Results shown are average annual total returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate and you may have a gain or loss when you sell shares. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds.com. Investing in smaller companies involves special risks, including higher volatility and lower liquidity. From time to time, the investment advisor may waive fees or reimburse expenses for the Fund. Without these waivers, performance would be lower. Class N shares are available to the general public without a sales load. Class I shares are available to certain institutional investors and advisory clients of William Blair & Company, L.L.C., without a sales load or distribution (12b-1) or service fees.

The performance highlights and graph presented above do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

The Russell 2500^™ Growth Index measures the performance of those Russell 2500 companies with above average price-to-book ratios and forecasted growth rates.

This report identifies the Fund’s investments on December 31, 2005. These holdings are subject to change. Not all stocks in the Fund performed the same, nor is there any guarantee that these stocks will perform as well in the future. Market forecasts provided in this report may not necessarily come to pass.

Sector Diversification (unaudited)

The sector diversification shown is based on the total investment portfolio.

December 31, 2005 William Blair Funds    25

Small-Mid Cap Growth Fund

Portfolio of Investments, December 31, 2005 (all dollar amounts in thousands)

Issuer	Shares	Value
Common Stocks
Information Technology—25.3%
*Activision, Inc.	52,600	$	723
*Amis Holdings, Inc.	67,700		721
CDW Corporation	19,460		1,120
*Intrado, Inc.	39,070		899
*Intuit, Inc.	34,400		1,834
*Iron Mountain, Inc.	32,514		1,373
*J2 Global Communications, Inc.	32,600		1,393
*Jabil Circuit, Inc.	48,200		1,788
*Kanbay International, Inc.	55,300		879
Microchip Technology, Inc.	57,400		1,845
*Nuance Communications, Inc.	123,400		942
*PDF Solutions, Inc.	57,000		926
*Ultimate Software Group, Inc.	51,200		976
*ValueClick, Inc.	72,636		1,315
*Webex Communications, Inc.	48,340		1,046
			17,780
Consumer Discretionary—24.6%
*Bed, Bath and Beyond, Inc.	36,800		1,330
*CarMax, Inc.	42,500		1,176
*DeVry, Inc.	11,200		224
*Dick’s Sporting Goods, Inc.	21,500		715
Gentex Corporation	17,200		335
*Getty Images, Inc.	12,200		1,089
*Jarden Corporation	39,550		1,193
*Lamar Advertising Company, Class “A”	23,700		1,094
*Laureate Education, Inc.	44,449		2,334
*Life Time Fitness, Inc.	20,800		792
*O’Reilly Automotive, Inc.	41,900		1,341
The Ryland Group, Inc.	13,100		945
*Shuffle Master, Inc.	36,400		915
*Sonic Corporation	23,700		699
Strayer Education, Inc.	10,400		975
*Tractor Supply Company	20,000		1,059
*Williams-Sonoma, Inc.	24,100		1,040
			17,256
Industrials—19.5%
*Beacon Roofing Supply, Inc.	28,203		810
C.H. Robinson Worldwide, Inc.	22,900		848
*Coinstar, Inc.	37,133		848
Corporate Executive Board Company	11,700		1,049
*Corrections Corporation of America	21,800		980
Expeditors International of Washington	15,800		1,067
Fastenal Company	55,400		2,171
Graco Inc.	20,100		733
*Kforce, Inc.	62,965		703
Knight Transportation, Inc.	50,950		1,056
*Monster Worldwide, Inc.	23,900		976
MSC Industrial Direct Company, Inc., Class “A”	20,340		818
Pentair, Inc.	47,900		1,654
			13,713

*Non-income producing securities

VRN = Variable Rate Note

† = U.S. listed foreign security

Issuer	Shares or Principal Amount		Value
Common Stocks—(continued)
Health Care—12.3%
*IDEXX Laboratories, Inc.		12,500	$	900
*Integra LifeSciences Holdings Corporation		32,540		1,154
*Kinetic Concepts, Inc.		13,900		552
*Kyphon, Inc.		28,200		1,151
*Patterson Companies, Inc.		30,300		1,012
*Pharmaceutical Product Development, Inc.		7,300		452
*PSS/World Medical, Inc.		25,600		380
*ResMed, Inc.		39,600		1,517
*Telik, Inc.		55,200		938
Valeant Pharmaceuticals International		34,500		624
				8,680
Energy—7.7%
*Grant Prideco, Inc.		15,300		675
Smith International, Inc.		45,000		1,670
*Toreador Resources Corporation		29,500		621
*Ultra Petroleum Corporation†		19,000		1,060
XTO Energy Corporation		30,900		1,358
				5,384
Financials—3.1%
American Equity Investment Life Holding Co.		42,850		559
East West Bancorp, Inc.		22,600		825
National Financial Partners Corporation		15,200		799
				2,183
Materials—3.0%
Airgas, Inc.		63,300		2,083
Total Common Stock—95.5% (cost $58,611)				67,079
Investment in Affiliate
William Blair Ready Reserves		2,012,239		2,012
Total Investment in Affiliate—2.9% (cost $2,012)				2,012
Short-Term Investment
Prudential Funding Demand Note, VRN 3.930%, due 1/3/06	$	2,971,000		2,971
Total Short-Term Investment—4.2% (cost $2,971)				2,971
Total Investments—102.6% (cost $63,594)				72,062
Liabilities, plus cash and other assets—(2.6)%				(1,851	)
Net assets—100%			$	70,211

See accompanying Notes to Financial Statements.

26    Annual Report December 31, 2005

W. George Greig

INTERNATIONAL GROWTH FUND

The International Growth Fund invests primarily in common stocks of foreign growth companies.

AN OVERVIEW FROM THE PORTFOLIO MANAGER

How did the Fund perform over the last year? How did the Fund’s performance compare to its benchmark?

The International Growth Fund posted a 21.65% gain (Class N Shares) for the 12 months ended December 31, 2005. By comparison, the Fund’s benchmark, the MSCI All Country World Free except US Index, rose 17.11%.

What were the most significant factors impacting international markets during 2005?

During the first six months of 2005 the international equity markets were largely flat; however, during the last half of the year the equity markets sharply appreciated (and as evidenced by the annual 17.11% MSCI All Country World (Free) except US Index return). International equities significantly outpaced US equities as measured by the Standard & Poor’s 500 Index, which rose 4.91% year to date. This increase was despite US dollar appreciation versus most foreign currencies, which reduced returns to US investors. The MSCI EAFE Index rose 29.54% in local terms, which translated into 14.02% to US dollar investors, as the US dollar appreciated an average 13% relative to EAFE (Europe and Australasia, Far East Equity) country currencies.

Positive second half international equity market performance was driven by strong results across sectors, capitalizations and regions. With its improving macroeconomic backdrop and positive consumer sentiment, Japan was one of the strongest developed regions year to date, up 25.63% in US dollar terms, only lagging behind Canada, which returned nearly 29%. Emerging markets were the strongest part of the international markets overall, returning 34.54% as measured by the MSCI Emerging Markets Index, while developed small capitalization stocks rose 25.48%. Both areas outperformed larger capitalization developed markets, as measured by the EAFE Index.

What factors were behind the Fund’s performance versus the benchmark?

In this positive market environment, the Fund rose 21.65% during the year, significantly surpassing the 17.11% MSCI all Country World Index Free ex-US Index return. This outperformance was driven by strong stock selection across most sectors and regions. In particular, stock selection in Energy, Financials, Information Technology and Telecommunication Services sectors were the areas of the most value added, as was stock selection in Emerging Asia, Japan and Pacific Free ex-Japan. In addition, the Fund’s allocation to small capitalization and emerging markets companies, coupled with strong stock selection in these names, also added value.

What is your outlook for the international markets?

After a third consecutive year of strong equity returns worldwide, markets have for the most part erased the losses of the 2000-2002 bear market. As the new year begins, many national and regional indices (with the obvious exceptions of Nasdaq and the Japanese market benchmarks) are at or approaching historic highs. Even in the US, where index returns were modest, a majority of individual stocks offered better performance.

December 31, 2005 William Blair Funds    27

Prices have been propelled higher by strong fundamentals: exceptional earnings growth and a surprisingly stable inflation and long term interest rate environment. The only two elements of cyclical risk in the global economic picture have been Fed tightening and rising energy costs, and up to now, neither of them has had a significant impact on growth. Relative economic stability has enabled strong corporate performance to act as the key driver of share price gains over the course of the last several years. Accordingly, if the structural framework of the global economy remains in equilibrium, and corporate growth and profitability continue to meet or exceed expectations, the market environment will remain conducive to solid equity returns.

The principal risks in the macro picture are well known, and mostly focused on the US: household sector leverage and inadequate savings; consumer vulnerability to weakness in home prices; interest rate and exchange rate risks associated with the US current account deficit; the potential for a central bank policy error (such as overreacting to transitory inflation signs); a ‘superspike’ in oil and gas prices beyond what has already taken place; and/or exogenous variables such as avian flu, terrorist disruptions, or natural disasters.

Since none of these issues are new, the only way they could have a dramatic impact on the market risk profile would be if one of them suddenly had a delayed or cumulative effect, or if two or more of them combined in some unforeseen way. These possibilities cannot be conclusively ruled out, but at the same time, the resilience of the financial and economic infrastructure—perhaps a byproduct of increasing global integration—has been impressive over the last decade.

The other key variable in the outlook is corporate profitability and growth, where we have seen continued strength in the US and dramatic improvement in Japan, Europe, and in many developing markets. This aspect of the market environment shows no sign of deteriorating or even slackening the pace of improvement. Corporate management continues to focus on improving supply chain management, capital and labor productivity, cost control, and marketing. Returns on capital are now well above the cost of capital in every principal region of the world; and while there are concerns that ‘excessive’ profitability is a risk factor in itself, there is no signal apparent of either complacency or irrational competitive behavior undermining corporate performance on a wide scale.

Even in a benign economic and earnings scenario, of course, there is no guarantee of supernormal returns or a continuation of the trends of 2003-05. There is a reasonable (although not conclusive) case that cyclical growth may slow in the US and China in 2006, and profit growth may be restrained as a result. In addition, growth in the energy and financial sectors may be held back by price declines and yield curve flattening, respectively. On the other hand, Japan and more recently Europe seem to be benefiting from the effects of a strong external environment and solid corporate profitability, and could continue to mount moderate but self-sustaining recoveries. On a global basis, there is probably not much reason to anticipate significantly lower earnings growth in 2006, but some deceleration seems likely.

In the context of the current profit and interest rate picture, current valuations should not present a significant issue for potential returns, and even areas that have seen relatively strong recent performance, such as small caps and Japan, are not so extended as to be unusually risky on valuation grounds alone.

Emerging markets continue to be a special case, influenced by long term changes outside of the business cycle. Whereas previous cycles were dominated by unstable investment flows and highly volatile production and trade patterns, virtually all of the developing world is now seeing new dynamics of high savings, credit development, job creation and household spending growth, as well as more responsible and transparent corporate behavior. These factors are reducing financial risk at the same time they create new avenues of growth in emerging economies, and have been instrumental in driving exceptional returns in this asset class since 1999.

28    Annual Report December 31, 2005

On balance, we see a reasonable balance between risk and opportunity for the year ahead, particularly as international markets continue to be led by the ongoing trend toward better corporate performance and governance. At the margins of any set of expectations, of course, are the ‘unknown unknowns’. Volatility has been relatively low for some time, and global markets have not faced any major discontinuities for several years. Any investment strategy predicated on anticipation of normal growth and risk parameters has to be adaptable to evolving change, and adaptability built into portfolio structure from the bottom up is probably the most consistent method for refining strategy.

December 31, 2005 William Blair Funds    29

International Growth Fund

Performance Highlights (unaudited)

Average Annual Total Return at 12/31/2005

	1 Year		3 Year		5 Year		10 Year		Since Inception(a)
International Growth Fund Class N	21.65	%	27.03	%	8.46	%	13.68	%	—
International Growth Fund Class I	22.00		27.32		8.74		—		11.69	%
MSCI All Country World Free Ex-US Index	17.11		26.20		6.66		6.70		5.30
Lipper International Index	15.67		23.10		5.33		7.74		—

(a) For the period from October 1, 1999 to December 31, 2005.

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher than the data quoted. Results shown are average annual total returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate and you may have a gain or loss when you sell shares. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds.com. International investing involves special risk considerations, including currency fluctuations, lower liquidity, economic and political risk. Class N shares are available to the general public without a sales load. Class I shares are available to certain institutional investors and advisory clients of William Blair & Company, L.L.C., without a sales load or distribution (12b-1) or service fees.

The performance highlights and graph presented above do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

The Morgan Stanley Capital International (MSCI) All Country World Free Ex-US Index is an unmanaged index that includes developed and emerging markets and reduced Japanese portion, making it more comparable to the International Growth Fund in terms of investment approach.

The Lipper International Index is a composite of international growth mutual funds.

This report identifies the Fund’s investments on December 31, 2005. These holdings are subject to change. Not all stocks in the Fund performed the same, nor is there any guarantee that these stocks will perform as well in the future. Market forecasts provided in this report may not necessarily come to pass.

Sector Diversification (unaudited)

The sector diversification shown is based on the total investment portfolio.

30    Annual Report December 31, 2005

International Growth Fund

Portfolio of Investments, December 31, 2005 (all dollar amounts in thousands)

Issuer	Shares	Value
Common Stocks—Europe—31.7%
Austria—1.7%
Erste Bank (Banking)	716,600	$	39,783
*Raiffeisen Interantional Bank (Banking)	607,400		39,696
			79,479
France—8.4%
April Group S.A. (Insurance brokers)	271,643		11,197
BNP Paribas (Banking)	545,200		43,991
Dassault Systems S.A. (Computer aided design)	535,500		30,172
Essilor International (Health care supplies)	377,200		30,397
Eurazeo (Diversified financial services)	177,030		18,450
Hermes International SCA (Apparel and luxury goods)	135,000		33,652
Iliad S.A. (Internet software and services)	239,550		14,805
Klepierre (Real estate)	117,500		11,017
*Nexity (Real estate management)	283,600		14,389
*Orpea (Hospital and nursing management)	281,612		15,428
Sanofi-Aventis (Pharmaceuticals)	834,400		72,963
Technip-Coflexip S.A. (Construction)	505,160		30,499
Vinci S.A.(Construction)	408,200		35,117
Zodiac S.A. (Aerospace and defense)	341,000		21,860
			383,937
Germany—6.5%
AWD Holdings AG (Financial services)	74,116		2,047
Bijou Brigitte (Fashon jewelry accessories)	60,100		16,207
Celesio AG (Pharmaceuticals)	409,480		35,165
Continental AG (Diversified manufacturing)	602,200		53,331
Did Deutscher Industrie Svc (Commercial services)	290,894		16,972
E.ON AG (Energy)	450,000		46,442
GFK AG (Commercial services)	290,948		9,721
*Q-Cells AG (Alternative energy sources)	71,500		4,164
Rational AG (Business equipment)	70,300		9,336
SAP AG (Software)	450,500		81,078
Solarworld AG (Alternative energy sources)	42,500		5,686
Stada Arzneimittel AG (Pharmaceuticals)	433,000		14,127
			294,276
Greece—1.5%
Coca-Cola Hellenic Bottling S.A. (Beverages)	757,471		22,246
EFG Eurobank (Banking)	683,400		21,563
National Bank of Greece (Banking)	521,880		22,184
			65,993
Ireland—2.1%
Anglo Irish Bank plc (Finance)	2,645,100		39,923
Kingspan Group plc (Construction)	1,250,000		15,673
*Ryanair Holdings plc—ADR (Airlines)	568,000		31,802
United Drug plc (Pharmaceuticals)	2,090,100		9,038
			96,436
Italy—2.1%
Credito Emiliano SpA (Banking)	1,389,900		15,509
Luxottica Group SpA (Apparel and luxury goods)	1,708,600		43,359

Issuer	Shares	Value
Common Stocks—Europe—31.7%—(continued)
Italy—(continued)
Pirelli & C Real Estate SpA (Real estate development)	197,752	$	10,794
Saipem SpA (Energy equipment and services)	1,614,800		26,480
			96,142
Netherlands—0.6%
*Tomtom NV (Computer software)	781,500		26,806
Norway—0.6%
Statoil Asa (Oil and gas)	1,197,900		27,470
Spain—1.4%
Grupo Ferrovial S.A. (Industrial services)	331,900		23,015
*Industria De Textile (Retail trade)	1,313,400		42,858
			65,873
Sweden—0.8%
*Capio AB (Health care)	560,800		9,981
Clas Ohlson AB (Retail)	609,250		11,545
*Modern Times Group (Television)	348,800		14,551
			36,077
Switzerland—6.0%
*Actelion Ltd. (Biotechnology)	59,478		4,909
*EFG International (Commercial banking)	509,800		13,565
Nobel Biocare Holdings AG (Medical equipment and supplies)	100,400		22,078
Phonak Holdings AG (Hearing technology)	356,300		15,349
Roche Holdings AG (Health care)	722,900		108,280
SGS S.A. (Industrials)	35,800		30,149
UBS AG (Banking)	840,000		79,761
			274,091
Japan—22.0%
Aeon Credit Service Co., Ltd. (Consumer finance)	309,900		29,311
Aeon Mall Co., Ltd. (Real estate)	447,700		21,810
Arrk Corporation (Miscellaneous manufacturer)	200,300		14,727
*Askul Corporation (Retail trade)	173,900		5,394
*Chiyoda Corp. (Construction)	1,200,600		27,497
Chugai Pharmaceutical Company (Pharamceuticals)	2,386,900		51,333
Denso Corporation (Auto parts manufacturing)	2,360,800		81,695
Honeys Company, Ltd. (Luxury goods)	177,400		14,452
Hoya Corporation (Electronic technology)	1,678,200		60,293
ITO EN, Ltd. (Beverages)	246,800		14,803
*K.K. Davinci Advisors (Consulting services)	2,038		15,313
*Kenedix, Inc. (Investment management services)	2,697		16,986
Keyence Corporation (Electronic technology)	167,460		47,601
Komeri Co. (Speciality retail)	557,200		23,887
MISUMI Group, Inc. (Metal production)	305,600		13,279
Mitsubishi Tokyo Financial (Financial services)	6,497		88,433
Nakanishi Inc. (Medical specialties)	113,400		12,723

See accompanying Notes to Financial Statements.

December 31, 2005 William Blair Funds    31

International Growth Fund

Portfolio of Investments, December 31, 2005 (all dollar amounts in thousands)

Issuer	Shares	Value
Common Stocks—Japan—22.0%—(continued)
Neomax Co., Ltd. (Electronic equipment and instruments)	453,400	$	14,920
Nidec Corporation (Electronic technology)	581,000		49,405
Nitori Company Ltd. (Specialty stores)	184,260		17,145
Nitto Denko Corporation (Electronic technology)	462,500		36,018
Orix Corporation (Consumer finance)	361,500		91,970
Park 24 Co., Ltd. (Commercial services)	629,200		22,469
Point Inc. Ltd. (Apparel and footwear retail)	293,900		24,550
Ryohin Keikaku Co. Ltd. (Retail stores)	328,000		28,680
Sharp Corp. (Electronics)	3,089,700		46,989
Shimamura Company Ltd. (Retail stores)	207,500		28,660
Sparx Asset Management Co. (Financial)	4,636		13,558
Sundrug Co., Ltd. (Drug stores)	262,500		14,376
United Arrows, Ltd. (Specialty retail)	333,900		21,184
Yamada Denki Company (Retail trade)	417,400		52,156
			1,001,617
Emerging Asia—10.2%
China—1.4%
China Mengniu Dairy Co. (Food products)	12,187,000		10,346
Ctrip.com International Ltd.—ADR (Hotels, restaurants and leisure)	211,700		12,226
*Foxconn International (Manufacturing services)	11,418,000		18,642
Fu Ji Food & Catering (Hotels, restaurants and leisure)	4,930,000		8,076
Li Ning Co. Ltd. (Leisure equipment and products)	14,320,000		10,158
Ports Design Limited (Apparel and luxury goods)	4,896,500		5,697
			65,145
India—1.9%
*Bharti Tele-Ventures (Wireless telecommunication services)	1,704,700		13,107
HDFC Bank (Banking)	1,340,400		21,039
Housing Development Finance Corp. (Financial services)	1,012,000		27,153
Infosys Technologies, Ltd. (Consulting and software services)	349,724		23,299
			84,598
Malaysia—0.8%
*Airasia Bhd (Air transport)	28,178,000		11,850
Bumiputra Commerce Holdings Bhd (Banking)	12,485,200		18,833
Transmile Group Bhd (Airport development and maintence)	1,237,300		3,467
			34,150
South Korea—3.7%
Hyundai Motor Co. (Automobiles)	283,490		27,061
*Kookmin Bank (Banking)	501,900		37,956
Korea Investment Holdings Co. Ltd. (Diversified financial services)	348,300		14,632
*NHN Corp. (Internet software and services)	118,200		31,235

Issuer	Shares	Value
Common Stocks—Emerging Asia—10.2%—(continued)
South Korea—(continued)
Samsung Electronics Co. (Semiconductors)	65,290	$	42,149
Shinsegae Co. Ltd. (Discount retail)	39,190		17,138
			170,171
Taiwan—2.4%
Hon Hai Precision Industry (Computers)	9,040,150		49,774
*Mediatek Inc. (Semiconductors and equipment)	3,279,500		38,443
Novatek Microelectronics (Semiconductors and equipment)	3,832,847		22,478
			110,695
United Kingdom—9.5%
BG Group plc (Industrial services)	8,956,000		88,552
*Burren Energy plc (Energy)	1,374,137		21,583
*Cairn Energy plc (Petroleum refining)	841,900		27,762
Capita Group plc (Commercial services)	3,553,280		25,457
Carphone Warehouse Group plc (Consumer electronics)	2,538,498		12,089
HBOS plc (Commercial banking)	3,942,700		67,205
*Michael Page International (Personnel services)	3,694,200		17,138
Reckitt Benckiser plc (Household products)	987,000		32,519
Standard Chartered plc (Banking)	1,550,000		34,458
Tesco plc (Food retail)	13,483,100		76,782
Ultra Electronic Holdings plc (Electronic products)	864,200		14,706
VT Group plc (Shipbuilding)	1,733,900		12,626
			430,877
Asia—6.9%
Australia—3.4%
BHP Billiton Ltd. (Diversified resources)	2,769,400		46,155
Billabong International Ltd. (Apparel and luxury goods)	1,315,200		13,989
Macquarie Bank, Ltd. (Financial services)	900,400		44,772
*Sigma Company, Ltd. (Medical distributors)	9,378,397		21,478
Toll Holdings, Ltd. (Trucking)	2,632,900		28,666
			155,060
Hong Kong—2.3%
*China Insurance International (Insurance)	20,893,438		8,869
Esprit Holdings Ltd. (Apparel, footwear and retail)	3,740,500		26,534
Li & Fung Ltd. (Distributions)	17,030,000		32,771
Techtronic Industries Co. (Consumer durables)	14,861,200		35,356
			103,530
Singapore—1.2%
Capitaland, Ltd. (Real estate operation)	19,412,000		40,104
Goodpack Ltd. (Air freight and logistics)	5,561,000		5,698
Osim International Ltd. (Consumer sundries)	10,810,200		10,319
			56,121

See accompanying Notes to Financial Statements.

32    Annual Report December 31, 2005

International Growth Fund

Portfolio of Investments, December 31, 2005 (all dollar amounts in thousands)

Issuer	Shares	Value
Common Stocks—Emerging Latin America—6.1%
Brazil—1.5%
Companhia de Concessoes Rodoviarias (Public thoroughfares)	257,300	$	8,149
*Diagnosticos Da America S.A. (Health care services)	436,600		8,128
Gol Linhas Aereas Int S.P—ADR (Air transport)	692,600		19,538
*Natura Cosmeticos S.A. (Cosmetics)	589,200		25,969
*Submarino S.A. (E-commerce)	400,000		7,105
			68,889
Chile—1.5%
Banco Santander SP—ADR (Banking)	403,300		17,987
Cencosud S.A.—ADR 144A (Retail stores)	783,030		23,282
S.A.C.I. Falabella (Department stores)	9,085,600		24,921
			66,190
Columbia—0.4%
Bancolombia S.A.—ADR (Banking)	632,400		18,232
Mexico—2.5%
America Movil S.A. (Communications)	14,460,800		21,171
*Consorcio Ara Sa De Cv (Construction)	2,013,300		8,825
*Corporacion Geo Sa De Cv (Real estate)	6,077,400		21,484
*Desarrolladora Homex S.A.—ADR (Household durables)	437,500		13,423
*Urbi Desarrollos Urbanos S.A. (Household durables)	2,116,800		14,667
Walmart de Mexico (Retail trade)	6,441,600		35,827
			115,397
Panama—0.2%
*Copa Holdings S.A. Class “A” (Airlines)†	278,000		7,589
Emerging Europe, Mid-East, Africa—4.7%
Czech Republic—0.2%
*Central European Media Enterprises Ltd. Class “A” (Television)†	110,146		6,378
Egypt—0.5%
Orascom Contruction Industry (Construction)	649,041		24,679
Romania—0.2%
Romanian Development Bank (Commercial banks)	1,518,250		6,638
Russia—0.5%
*Novatek OAO—GDR (Oil, gas drilling and exploration)	719,200		16,067
*Pyaterochka Holdings—GDR (Consumer staples)	590,567		8,534
			24,601
South Africa—2.7%
African Bank Investments (Consumer loans)	1,492,522		5,794
Aspen Pharmacare (Pharmaceuticals)	2,383,200		12,602
Edgars Consolidated Stores (Apparel, footwear and retail)	3,157,630		17,595
*MTN Group Ltd. (Telecommunication services)	2,339,400		23,005

Issuer	Shares or Principal Amount		Value
Common Stocks—Emerging Europe, Mid-East, Africa—4.7%—(continued)
South Africa—(continued)
Naspers Ltd. (Media)		997,500	$	17,714
Sasol ASA (Energy)		1,301,900		46,951
				123,661
Turkey—0.6%
*Turkiye Garanti Bankasi A.S. (Banking)		7,578,875		27,318
Canada—4.2%
Canadian National Railway Company (Railroads)		759,400		60,817
*Gildan Activewear, Inc. (Apparel and luxury goods)		368,900		15,860
Manulife Financial Corp. (Life and health insurance)		767,500		45,053
*Research in Motion Ltd. (Wireless telecommunication)		452,300		29,849
Ritchie Brothers Auctioneers, Inc. (Buisness services)†		276,400		11,678
*Rona, Inc. (Building materials)		787,100		14,517
Shoppers Drug Mart Corp. (Retail trade)		356,700		13,489
				191,263
Total Common Stock—95.3% (cost $3,130,698)				4,339,379
Preferred Stock
Brazil—1.4%
Banco Itau Holding (Banking)		1,766,500		42,565
Petroleo Brasileiro S.A. (Oil, gas drilling, and exploration)		1,359,800		21,656
				64,221
Germany—0.3%
Porsche AG (Automobiles)		19,732		14,151
Total Preferred Stock—1.7% (cost $49,612)				78,372
Investment in Affiliate
William Blair Ready Reserves Fund		28,677,624		28,678
Total Investment in Affiliate—0.7% (cost $28,678)				28,678
Short-Term Investments
American Express Demand Note, VRN 4.235% due 1/3/06	$	37,499,000		37,499
Prudential Funding Demand Note, VRN 3.930% due 1/3/06	$	31,441,000		31,441
Total Short-Term Investments—1.5% (cost $68,940)				68,940
Total Investments—99.2% (cost $3,277,928)				4,515,369
Cash and other assets, less liabilities—0.8%				35,708
Net assets—100.0%			$	4,551,077

See accompanying Notes to Financial Statements.

December 31, 2005 William Blair Funds    33

International Growth Fund

Portfolio of Investments, December 31, 2005 (all dollar amounts in thousands)

* Non-income producing securities

ADR = American Depository Receipt

GDR = Global Depository Receipt

VRN = Variable Rate Note

† = U.S. listed foreign security

For securities, primarily traded on exchanges or markets that close before the close of regular trading on the New York Stock Exchange, the Fund uses an independent pricing service on a daily basis to fair value price the securities pursant to Valuation Procedures adopted by the Board of Trustees.

At December 31, 2005 the Fund’s Portfolio of Investments includes the following industry categories:

Financials	25.8%
Consumer Discretionary	22.2%
Information Technology	13.2%
Industrials and Services	11.9%
Healthcare	9.8%
Energy	7.0%
Consumer Staples	5.5%
Materials	2.0%
Telecommunication Services	1.6%
Utilities	1.0%
	100.0%

At December 31, 2005 the Fund’s Portfolio of Investments includes the following currency categories:

Euro	24.7%
Japanese Yen	22.7%
British Pound Sterling	9.8%
Swiss Franc	6.2%
United States Dollar	4.2%
Canadian Dollar	4.1%
South Korean Won	3.9%
Hong Kong Dollar	3.5%
Australian Dollar	3.5%
South African Rand	2.8%
Brazilian Real	2.6%
Taiwan Dollar	2.5%
Mexico Nuevo Peso	2.3%
Indian Rupee	1.9%
Singapore Dollar	1.3%
All other currencies	4.0%
	100.0%

See accompanying Notes to Financial Statements.

34    Annual Report December 31, 2005

W. George Greig

INTERNATIONAL EQUITY FUND

The International Equity Fund invests primarily in common stocks of companies included in the Morgan Stanley Capital International All Country World ex-U.S. Index.

AN OVERVIEW FROM THE PORTFOLIO MANAGER

How did the Fund perform during the last year? How did the Fund’s performance compare to its benchmark?

The International Equity Fund posted a 13.50% increase (Class N Shares) for the 12 months ended December 31, 2005. By comparison, the Fund’s benchmark, the MSCI All Country World Free except US Index, rose 17.11%.

What factors were behind the Fund’s performance versus the benchmark?

While the Fund significantly outperformed the broad and growth index benchmarks during the fourth quarter, it lagged the broad benchmark during the six month period ended December 31, 2005, due to third quarter results. The Fund’s quality growth discipline, which manifested itself in the overweighted allocation in Information Technology and Consumer sectors at the expense of Materials and Energy during the third quarter, hampered results. Somewhat mitigating this performance was strong stock selection across sectors and regions during the fourth quarter, coupled with positive results from emerging markets exposure.

What were the most significant factors impacting international markets during 2005?

During the first six months of 2005 the international equity markets were largely flat; however, during the last half of the year the equity markets sharply appreciated (and as evidenced by the annual 17.11% MSCI All Country World Free except US Index return). International equities significantly outpaced US equities as measured by the Standard & Poor’s 500 Index, which rose 4.91% year to date. This increase was despite US dollar appreciation versus most foreign currencies, which reduced returns to US investors. The MSCI EAFE Index rose 29.54% in local terms, which translated into 14.02% to US dollar investors, as the US dollar appreciated an average 13% relative to EAFE (Europe and Australasia, Far East Equity) country currencies.

Positive second half international equity market performance was driven by strong results across sectors, capitalizations and regions. With its improving macroeconomic backdrop and positive consumer sentiment, Japan was one of the strongest developed regions year to date, up 25.63% in US dollar terms, only lagging behind Canada, which returned nearly 29%. Emerging markets were the strongest part of the international markets overall, returning 34.54% as measured by the MSCI Emerging Markets Index, while developed small capitalization stocks rose 25.48%. Both areas outperformed larger capitalization developed stocks, as measured by the EAFE Index.

What is your outlook for the international markets?

After a third consecutive year of strong equity returns worldwide, markets have for the most part erased the losses of the 2000-2002 bear market. As the new year begins, many national and regional indices (with the obvious exceptions of Nasdaq and the Japanese market benchmarks) are at or approaching historic highs. Even in the US, where index returns were modest, a majority of individual stocks offered better performance.

December 31, 2005 William Blair Funds    35

Prices have been propelled higher by strong fundamentals: exceptional earnings growth and a surprisingly stable inflation and long term interest rate environment. The only two elements of cyclical risk in the global economic picture have been Fed tightening and rising energy costs, and up to now, neither of them has had a significant impact on growth. Relative economic stability has enabled strong corporate performance to act as the key driver of share price gains over the course of the last several years. Accordingly, if the structural framework of the global economy remains in equilibrium, and corporate growth and profitability continue to meet or exceed expectations, the market environment will remain conducive to solid equity returns.

The principal risks in the macro picture are well known, and mostly focused on the US: household sector leverage and inadequate savings; consumer vulnerability to weakness in home prices; interest rate and exchange rate risks associated with the US current account deficit; the potential for a central bank policy error (such as overreacting to transitory inflation signs); a ‘superspike’ in oil and gas prices beyond what has already taken place; and/or exogenous variables such as avian flu, terrorist disruptions, or natural disasters.

Since none of these issues are new, the only way they could have a dramatic impact on the market risk profile would be if one of them suddenly had a delayed or cumulative effect, or if two or more of them combined in some unforeseen way. These possibilities cannot be conclusively ruled out, but at the same time, the resilience of the financial and economic infrastructure-perhaps a byproduct of increasing global integration-has been impressive over the last decade.

The other key variable in the outlook is corporate profitability and growth, where we have seen continued strength in the US and dramatic improvement in Japan, Europe, and in many developing markets. This aspect of the market environment shows no sign of deteriorating or even slackening the pace of improvement. Corporate management continues to focus on improving supply chain management, capital and labor productivity, cost control, and marketing. Returns on capital are now well above the cost of capital in every principal region of the world; and while there are concerns that ‘excessive’ profitability is a risk factor in itself, there is no signal apparent of either complacency or irrational competitive behavior undermining corporate performance on a wide scale.

Even in a benign economic and earnings scenario, of course, there is no guarantee of supernormal returns or a continuation of the trends of 2003-05. There is a reasonable (although not conclusive) case that cyclical growth may slow in the US and China in 2006, and profit growth may be restrained as a result. In addition, growth in the energy and financial sectors may be held back by price declines and yield curve flattening, respectively. On the other hand, Japan and more recently Europe seem to be benefiting from the effects of a strong external environment and solid corporate profitability, and could continue to mount moderate but self-sustaining recoveries. On a global basis, there is probably not much reason to anticipate significantly lower earnings growth in 2006, but some deceleration seems likely.

In the context of the current profit and interest rate picture, current valuations should not present a significant issue for potential returns, and even areas that have seen relatively strong recent performance, such as small caps and Japan, are not so extended as to be unusually risky on valuation grounds alone.

Emerging markets continue to be a special case, influenced by long term changes outside of the business cycle. Whereas previous cycles were dominated by unstable investment flows and highly volatile production and trade patterns, virtually all of the developing world is now seeing new dynamics of high savings, credit development, job creation and household spending growth, as well as more responsible and transparent corporate behavior. These factors are reducing financial risk at the same time they create new avenues of growth in emerging economies, and have been instrumental in driving exceptional returns in this asset class since 1999.

36    Annual Report December 31, 2005

On balance, we see a reasonable balance between risk and opportunity for the year ahead, particularly as international markets continue to be led by the ongoing trend toward better corporate performance and governance. At the margins of any set of expectations, of course, are the ‘unknown unknowns’. Volatility has been relatively low for some time, and global markets have not faced any major discontinuities for several years. Any investment strategy predicated on anticipation of normal growth and risk parameters has to be adaptable to evolving change, and adaptability built into portfolio structure from the bottom up is probably the most consistent method for refining strategy.

December 31, 2005 William Blair Funds    37

International Equity Fund

Performance Highlights (unaudited)

Average Annual Total Return at 12/31/2005

	1 Year		Since Inception(a)
International Equity Fund Class N	13.50	%	16.85	%
International Equity Fund Class I	13.81		17.30
MSCI All Country World Free Ex-US	17.11		25.10
Lipper International Index	15.67		—

(a) For the period from May 24, 2004 to December 31, 2005.

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher than the data quoted. Results shown are average annual returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate and you may have a gain or loss when you sell shares. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds.com. Class N shares are available to the general public without a sales load. Class I shares are available to certain institutional investors and advisory clients of William Blair & Company L.L.C. without a sales load or distribution (12b-1) or service fees.

The performance highlights and graph presented above do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

The Morgan Stanley Capital International (MSCI) All Country World Free Ex-US Index is an unmanaged index that includes developed and emerging markets and reduced Japanese portion, making it more comparable to the International Growth Fund in terms of investment approach.

The Lipper International Index is a composite of international growth mutual funds.

This report identifies the Fund’s investments on December 31, 2005. These holdings are subject to change. Not all stocks in the Fund performed the same, nor is there any guarantee that these stocks will perform as well in the future. Market forecasts provided in this report may not necessarily come to pass.

Sector Diversification (unaudited)

The sector diversification shown is based on the total investment portfolio.

38    Annual Report December 31, 2005

International Equity Fund

Portfolio of Investments, December 31, 2005 (all dollar amounts in thousands)

Issuer	Shares	Value
Common Stocks—Europe—36.8%
Austria—1.8%
Erste Bank (Banking)	28,200	$	1,566
*Raiffeisen International Bank (Banking)	24,100		1,575
			3,141
France—8.5%
BNP Paribas (Banking)	29,500		2,380
Dassault Systems S.A. (Computer aided design)	17,700		997
Essilor International (Health care supplies)	17,600		1,418
Eurazeo (Diversified financial services)	8,300		865
Hermes International SCA (Apparel and luxury goods)	7,500		1,870
Iliad S.A. (Internet software and services)	6,600		408
Sanofi-Aventis (Pharmaceuticals)	47,100		4,119
Technip-Coflexip S.A. (Construction)	23,300		1,407
Vinci S.A. (Construction)	19,400		1,669
			15,133
Germany—7.6%
Bijou Brigitte (Fashion jewelry accessories)	1,900		512
Celesio AG (Pharmaceuticals)	21,200		1,821
Continental AG (Diversified manufacturing)	36,050		3,193
E.ON AG (Energy)	27,200		2,807
*Qiagen, Inc. (Health care)	53,800		630
SAP AG (Software)	25,600		4,607
			13,570
Greece—1.6%
Coca-Cola Hellenic Bottling S.A. (Beverages)	38,100		1,119
EFG Eurobank (Banking)	27,400		864
National Bank of Greece (Banking)	23,100		982
			2,965
Ireland—2.0%
Anglo Irish Bank plc (Finance)	113,600		1,715
*Ryanair-ADR (Air transport)	32,300		1,808
			3,523
Italy—2.0%
Luxottica Group SpA (Apparel and luxury goods)	97,300		2,469
Saipem SpA (Energy equipment and services)	70,500		1,156
			3,625
Netherlands—0.4%
*Tomtom NV (Computer software)	21,900		751
Norway—1.4%
Statoil ASA (Oil and gas)	109,600		2,513
Spain—1.9%
Grupo Ferrovial S.A. (Industrial services)	13,100		908
*Industria De Textile (Retail trade)	76,400		2,493
			3,401
Sweden—0.5%
*Capio AB (Health care)	21,300		379
*Modern Times Group (Television)	10,800		451
			830

Issuer	Shares	Value
Common Stocks—Europe—36.8%—(continued)
Switzerland—9.1%
*Actelion Ltd. (Biotechnology)	2,200	$	182
*EFG International (Commercial banking)	24,300		647
Nobel Biocare Holding AG (Medical equipment and supplies)	3,840		844
Phonak Holdings AG (Hearing technology)	11,400		491
Roche Holdings AG (Health care)	35,200		5,272
SGS S.A. (Industrials)	1,450		1,221
Synthes, Inc. (Health care)	28,500		3,204
UBS AG (Banking)	44,800		4,254
			16,115
Japan—21.7%
Aeon Credit Service Co., Ltd. (Consumer finance)	7,800		738
Aeon Mall Co., Ltd. (Real estate)	20,600		1,003
*Askul Corporation (Retail trade)	8,000		248
*Chiyoda Corporation (Construction )	44,000		1,008
Chugai Pharmaceutical Company (Pharamceuticals)	99,400		2,138
Denso Corporation (Auto parts manufacturing)	119,200		4,125
Hoya Corporation (Electronic technology)	71,300		2,562
*K.K. Davinci Advisors (Consulting services)	66		496
*Kenedix, Inc. (Investment management services)	79		498
Keyence Corporation (Electronic technology)	11,100		3,155
Komeri Co., Ltd. (Specialty retail)	16,900		724
MISUMI Group, Inc. (Metal production)	11,500		500
Mitsubishi Tokyo Financial (Financial services)	377		5,131
Neomax Co., Ltd. (Electronic equipment and instruments)	16,000		526
Nidec Corporation (Electronic technology)	25,000		2,126
Nitto Denko Corporation (Electronic technology)	19,500		1,519
Orix Corporation (Consumer finance)	17,400		4,427
Point Inc. Ltd. (Apparel and footwear retail)	7,600		635
Ryohin Keikaku Co. Ltd. (Retail stores)	10,800		944
Sharp Corporation (Electronics)	184,400		2,804
Shimamura Company Ltd. (Retail stores)	6,300		870
Sundrug Co., Ltd. (Drug stores)	6,000		329
Yamada Denki Co., Ltd. (Retail trade)	16,000		1,999
			38,505
United Kingdom—11.0%
BG Group plc (Industrial services)	514,600		5,088
*Cairn Energy plc (Petroleum refining)	24,700		815
Capita Group plc (Commercial services)	222,600		1,595
Carphone Warehouse Group plc (Consumer electronics)	97,000		462
HBOS plc (Commercial banking)	202,700		3,455
Reckitt Benckiser plc (Household products)	65,500		2,158
Standard Chartered plc (Banking)	120,000		2,668
Tesco plc (Food retailer)	590,800		3,364
			19,605
Emerging Asia—8.6%
China—0.6%
*Foxconn International (Manufacturing services)	625,000		1,020

See accompanying Notes to Financial Statements.

December 31, 2005 William Blair Funds    39

International Equity Fund

Portfolio of Investments, December 31, 2005 (all dollar amounts in thousands)

Issuer	Shares	Value
Common Stocks—Emerging Asia—8.6%—(continued)
India—2.2%
*Bharti Tele-Ventures (Wireless telecommunication services)	131,873	$	1,014
HDFC Bank (Banking)	66,300		1,041
Housing Development Finance Corp. (Financial services)	34,000		912
Infosys Technologies Ltd. (Consulting and software services)	15,100		1,006
			3,973
Malaysia—0.3%
Bumiputra Commerce Holdings Bhd (Banking)	407,700		615
South Korea—2.9%
Hyundai Motor Company (Automobiles)	15,900		1,518
*Kookmin Bank (Banking)	18,450		1,395
Samsung Electronics Co. (Semiconductors)	3,400		2,195
			5,108
Taiwan—2.6%
Hon Hai Precision Industry Corp. (Computers)	523,931		2,885
*Mediatek, Inc. (Electronic technology)	151,200		1,772
			4,657
Asia—6.1%
Australia—2.8%
BHP Billiton Ltd. (Diversified resources)	105,800		1,763
Macquarie Bank Ltd. (Financial services)	34,400		1,711
*Sigma Company, Ltd. (Medical distributors)	153,007		350
Toll Holdings Ltd. (Trucking)	109,800		1,196
			5,020
Hong Kong—2.5%
Esprit Holdings Ltd. (Apparel, footwear and retail)	226,500		1,607
Li & Fung Ltd. (Distributions)	612,000		1,178
Techtronic Industries Co. (Consumer durables)	682,800		1,624
			4,409
Singapore—0.8%
Capitaland, Ltd. (Real estate operations)	660,000		1,364
Canada—5.2%
Canadian National Railway Co. (Railroads)	49,500		3,964
Manulife Financial Corporation (Life and health insurance)	46,800		2,747
*Research in Motion Ltd. (Wireless telecommunication)	26,200		1,729
Shoppers Drug Mart Corporation (Retail trade)	20,600		779
			9,219
Emerging Latin America—2.8%
Brazil— 0.5%
Companhia de Concessoes Rodoviarias (Public thoroughfares)	8,300		263
*Natura Cosmeticos S.A. (Cosmetics)	12,700		560
			823

Issuer	Shares or Principal Amount		Value
Common Stocks—Emerging Latin America—2.8%—(continued)
Columbia—0.4%
Bancolumbia S.A.—ADR (Banking)		22,000	$	634
Mexico—1.9%
America Movil S.A. (Communications)		730,100		1,069
Walmart de Mexico (Retail trade)		402,900		2,241
				3,310
Emerging Europe, Mid-East, Africa—1.6%
South Africa—1.6%
Naspers Ltd. (Media)		38,000		675
Sasol ASA (Energy)		58,999		2,128
				2,803
Total Common Stock—93.8% (cost $149,823)				166,632
Preferred Stocks
Brazil—1.5%
Banco Itau S.A. (Banking)		78,300		1,887
Petroleo Brasileiro S.A. (Oil, gas drilling, and exploration)		50,400		802
				2,689
Germany—0.3%
Porsche AG (Automobiles)		790		567
Total Preferred Stocks—1.8% (cost $2,871)				3,256
Investment in Affiliate
William Blair Ready Reserves Fund		1,560,119		1,560
Total Investment in Affiliate—0.9% (cost $1,560)				1,560
Short-Term Investments
American Express Demand Note, VRN, 4.235%, due 1/03/06	$	4,875,000		4,875
Prudential Funding Demand Note, VRN, 3.930%, due 1/03/06	$	2,480,000		2,480
Total Short-Term Investments—4.1% (cost $7,355)				7,355
Total Investments—100.6% (cost $161,609)				178,803
Liabilities plus cash and other assets—(0.6%)				(1,093	)
Net assets—100.0%			$	177,710

* Non-income producing securities

ADR = American Depository Receipt

VRN = Variable Rate Note

See accompanying Notes to Financial Statements.

40    Annual Report December 31, 2005

International Equity Fund

Portfolio of Investments, December 31, 2005 (all dollar amounts in thousands)

For securities, primarily traded on exchanges or markets that close before the close of regular trading on the New York Stock Exchange, the Fund uses an independent pricing service on a daily basis to fair value price the securities pursuant to Valuation Procedures adopted by the Board of Trustees.

At December 31, 2005 the Fund’s Portfolio of Investments includes the following industry categories:

Financials	26.8%
Consumer Discretionary	19.5%
Information Technology	14.9%
Healthcare	12.3%
Industrials and Services	8.3%
Energy	8.2%
Consumer Staples	4.9%
Materials	1.9%
Utilities	1.7%
Telecommunication Services	1.5%
	100.0%

At December 31, 2005 the Fund’s Portfolio of Investments includes the following currency categories:

Euro	26.4%
Japanese Yen	22.7%
British Pound Sterling	11.5%
Swiss Franc	9.5%
Canadian Dollar	5.4%
Hong Kong Dollar	3.2%
South Korean Won	3.0%
Australian Dollar	2.9%
Taiwan Dollar	2.7%
Indian Rupee	2.3%
Brazilian Real	2.1%
Mexico Nuevo Peso	2.0%
South African Rand	1.7%
Norwegian Krone	1.5%
United States Dollar	1.4%
Singapore Dollar	0.8%
Swedish Krona	0.5%
Malaysian Ringgit	0.4%
	100.0%

See accompanying Notes to Financial Statements.

December 31, 2005 William Blair Funds    41

Jeffrey A. Urbina

INTERNATIONAL SMALL CAP GROWTH FUND

The International Small Cap Growth Fund primarily invests in a diversified portfolio of common stocks of small cap companies in developed and emerging markets.

AN OVERVIEW FROM THE PORTFOLIO MANAGER

I am pleased to have the International Small Cap Growth Fund become the newest addition to the William Blair Fund Family and would like to thank our shareholders for investing with us.

I am enthusiastic about the opportunities available to me as the manager of the International Small Cap Growth Fund. The International Small Cap Growth Fund will invest in companies with market capitalizations of $5 billion or less, and will seek 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. 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. In managing the Fund I will focus on companies with above-average returns on equity, strong balance sheets and consistent, above-average earnings growth.

How did the Fund perform since its inception? How did the Fund’s performance compare to its benchmark?

The International Small Cap Growth Fund commenced operations on November 1, 2005. Through the period ending December 31, 2005, the Fund posted a gain of 11.60% (Class N Shares), ahead of the 10.68% return of the Fund’s benchmark, the MSCI World Small Cap ex-U.S. Index, for this short time period.

What factors were behind the Fund’s performance versus the benchmark?

The International Small Cap Growth Fund’s “since inception” performance was driven by strong stock selection in emerging markets and Japanese small capitalization stocks. In particular, the Fund’s allocation to and stock selection in Japanese specialty retailers added value, as did the Fund’s focus on Japanese small cap financials. From a sector perspective, the Fund’s stock selection in Consumer Discretionary, Financials, Industrials and Information Technology augmented relative results.

What is your outlook for the international markets?

After a third consecutive year of strong equity returns worldwide, markets have for the most part erased the losses of the 2000-2002 bear market. As the new year begins, many national and regional indices (with the obvious exceptions of Nasdaq and the Japanese market benchmarks) are at or approaching historic highs. Even in the US, where index returns were modest, a majority of individual stocks offered better performance.

Prices have been propelled higher by strong fundamentals: exceptional earnings growth and a surprisingly stable inflation and long term interest rate environment. The only two elements of cyclical risk in the global economic picture have been Fed tightening and rising energy costs, and up to now, neither of them has had a significant impact on growth. Relative economic stability has enabled strong corporate performance to act as the key driver of share price gains over the course of the last several years. Accordingly, if the structural framework

42    Annual Report December 31, 2005

of the global economy remains in equilibrium, and corporate growth and profitability continue to meet or exceed expectations, the market environment will remain conducive to solid equity returns.

The principal risks in the macro picture are well known, and mostly focused on the US: household sector leverage and inadequate savings; consumer vulnerability to weakness in home prices; interest rate and exchange rate risks associated with the US current account deficit; the potential for a central bank policy error (such as overreacting to transitory inflation signs); a ‘superspike’ in oil and gas prices beyond what has already taken place; and/or exogenous variables such as avian flu, terrorist disruptions, or natural disasters.

Since none of these issues are new, the only way they could have a dramatic impact on the market risk profile would be if one of them suddenly had a delayed or cumulative effect, or if two or more of them combined in some unforeseen way. These possibilities cannot be conclusively ruled out, but at the same time, the resilience of the financial and economic infrastructure—perhaps a byproduct of increasing global integration—has been impressive over the last decade.

The other key variable in the outlook is corporate profitability and growth, where we have seen continued strength in the US and dramatic improvement in Japan, Europe, and in many developing markets. This aspect of the market environment shows no sign of deteriorating or even slackening the pace of improvement. Corporate management continues to focus on improving supply chain management, capital and labor productivity, cost control, and marketing. Returns on capital are now well above the cost of capital in every principal region of the world; and while there are concerns that ‘excessive’ profitability is a risk factor in itself, there is no signal apparent of either complacency or irrational competitive behavior undermining corporate performance on a wide scale.

Even in a benign economic and earnings scenario, of course, there is no guarantee of supernormal returns or a continuation of the trends of 2003-05. There is a reasonable (although not conclusive) case that cyclical growth may slow in the US and China in 2006, and profit growth may be restrained as a result. In addition, growth in the energy and financial sectors may be held back by price declines and yield curve flattening, respectively. On the other hand, Japan and more recently Europe seem to be benefiting from the effects of a strong external environment and solid corporate profitability, and could continue to mount moderate but self-sustaining recoveries. On a global basis, there is probably not much reason to anticipate significantly lower earnings growth in 2006, but some deceleration seems likely.

In the context of the current profit and interest rate picture, current valuations should not present a significant issue for potential returns, and even areas that have seen relatively strong recent performance, such as small caps and Japan, are not so extended as to be unusually risky on valuation grounds alone.

Emerging markets continue to be a special case, influenced by long term changes outside of the business cycle. Whereas previous cycles were dominated by unstable investment flows and highly volatile production and trade patterns, virtually all of the developing world is now seeing new dynamics of high savings, credit development, job creation and household spending growth, as well as more responsible and transparent corporate behavior. These factors are reducing financial risk at the same time they create new avenues of growth in emerging economies, and have been instrumental in driving exceptional returns in this asset class since 1999.

On balance, we see a reasonable balance between risk and opportunity for the year ahead, particularly as international markets continue to be led by the ongoing trend toward better corporate performance and governance. At the margins of any set of expectations, of course, are the ‘unknown unknowns’. Volatility has been relatively low for some time, and global markets have not faced any major discontinuities for several years. Any investment strategy predicated on anticipation of normal growth and risk parameters has to be adaptable to evolving change, and adaptability built into portfolio structure from the bottom up is probably the most consistent method for refining strategy.

December 31, 2005 William Blair Funds    43

International Small Cap Growth Fund

Performance Highlights (unaudited)

Average Annual Total Return at 12/31/2005

	Since Inception(a)
International Small Cap Growth Fund Class N	11.60	%
International Small Cap Growth Fund Class I	11.60
MSCI World Ex-US Small Cap Index	10.68

(a) For the period from November 1, 2005 (Commencement of Operations) to December 31, 2005.

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher than the data quoted. Results shown are average annual returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate and you may have a gain or loss when you sell shares. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds.com. Class N shares are available to the general public without a sales load. Class I shares are available to certain institutional investors and advisory clients of William Blair & Company L.L.C. without a sales load or distribution (12b-1) fees. International investing involves special risk considerations, including currency fluctuations, lower liquidity, economic and political risk.

The performance highlights and graph presented above do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

The Morgan Stanley Capital International (MSCI) World Ex-US Small Cap Index is an unmanaged index that is designated to measure equity performance of small cap stocks in developed and emerging markets.

This report identifies the Fund’s investments on December 31, 2005. These holdings are subject to change. Not all stocks in the Fund performed the same, nor is there any guarantee that these stocks will perform as well in the future. Market forecasts provided in this report may not necessarily come to pass.

Sector Diversification (unaudited)

The sector diversification shown is based on the total investment portfolio.

44    Annual Report December 31, 2005

International Small Cap Growth Fund

Portfolio of Investments, December 31, 2005 (all dollar amounts in thousands)

Issuer	Shares	Value
Common Stocks—Europe—30.0%
France—7.0%
April Group S.A. (Insurance brokers)	18,600	$	767
Iliad S.A. (Internet software and services)	12,050		745
Klepierre (Real estate)	5,450		511
*Nexity (Real estate management)	9,850		500
*Orpea (Hospital and nursing management)	4,600		252
Zodiac S.A. (Aerospace and defense)	12,000		769
			3,544
Germany—9.0%
Bijou Brigitte (Fashion jewelry accessories)	2,400		647
*CTS Eventim (Leisure & recreation products)	20,700		503
Did Deutscher Industrie Svc (Commercial services)	8,500		496
GFK AG (Commercial services)	10,900		364
*Q-Cells AG (Alternative energy sources)	8,100		472
*Qiagen NV (Biomedical)	50,900		596
Rational AG (Business equipment)	3,900		518
Solarworld AG (Alternative energy sources)	3,550		475
Stada Arzneimittel AG (Pharmaceuticals)	15,000		489
			4,560
Greece—1.0%
Bank of Piraeus (Banking)	23,300		497
Ireland—1.7%
Kingspan Group plc (Construction)	38,600		484
United Drug plc (Pharmaceuticals)	86,500		374
			858
Italy—3.9%
Amplifon SpA (Retail)	7,480		505
Credito Emiliano SpA (Banking)	44,400		495
Pirelli & C Real Estate SpA (Real estate development)	4,500		246
Tod’s SpA (Footwear apparel)	11,200		755
			2,000
Luxembourg—0.5%
*Transcom Worldwide S.A. (E-services and consulting)	28,700		237
Netherlands—0.9%
*Tomtom NV (Computer software)	14,000		480
Sweden—4.1%
*Capio AB (Health care)	41,400		737
Clas Ohlson AB (Retail)	17,100		324
HIQ International AB (Computer services)	41,600		226
*Modern Times Group (Television)	12,100		505
*Tradedoubler AB (E-services and consulting)	14,000		271
			2,063
Switzerland—1.9%
*Actelion Ltd. (Biotechnology)	970		80
*EFG International (Banking)	9,250		246
Phonak Holdings AG (Hearing technology)	14,600		629
			955

Issuer	Shares	Value
Common Stocks—Japan—27.2%
Aeon Credit Service Co., Ltd. (Consumer finance)	8,500	$	804
Aeon Mall Co., Ltd. (Real estate)	21,400		1,043
Arrk Corporation (Miscellaneous manufacturer)	7,400		544
*Askul Corporation (Retail trade)	1,900		59
*Chiyoda Corp. (Construction)	32,000		733
Honeys Company, Ltd. (Luxury goods)	9,000		733
ITO EN, Ltd. (Beverages)	8,300		498
*K.K. Davinci Advisors (Consulting services)	32		240
*Kenedix, Inc. (Investment management services)	39		246
Komeri Co. (Specialty retail)	12,000		514
MISUMI Group, Inc. (Metal production)	16,800		730
Nakanishi Inc. (Medical specialties)	4,300		482
Neomax Co., Ltd. (Electronic equipment and instruments)	23,000		757
Nitori Company Ltd. (Specialty stores)	5,800		540
Park 24 Co., Ltd. (Commercial services)	17,000		607
Point Inc. Ltd. (Apparel and footwear retail)	9,500		793
Ryohin Keikaku Co. Ltd. (Retail stores)	9,700		848
Shimamura Company Ltd. (Retail stores)	5,700		787
Sparx Asset Management Co. (Financial)	188		550
Sundrug Co., Ltd. (Drug stores)	13,600		745
Suruga Bank (Banking)	56,000		703
United Arrows, Ltd. (Specialty retail)	12,200		774
			13,730
United Kingdom—10.3%
Accident Exchange Group plc (Auto rental)	34,200		242
*Burren Energy plc (Energy)	46,600		732
*Cairn Energy plc (Petroleum refining)	22,500		742
Capita Group plc (Commercial services)	105,100		753
Carphone Warehouse Group plc (Consumer electronics)	109,000		519
*Michael Page International (Personnel services)	106,200		493
Tullow Oil plc (Oil, gas drilling and exploration)	158,100		735
Ultra Electronic Holdings plc (Electronic products)	29,000		493
VT Group plc (Shipbuilding)	67,500		491
			5,200
Emerging Asia—8.0%
China—3.1%
Ctrip.com International Ltd.—ADR (Hotels, restaurants and leisure)	4,100		237
*Focus Media Holdings—ADR (Advertising sales)	7,500		253
Li Ning Co. Ltd. (Leisure equipment and products)	326,873		232
Ports Design Limited (Apparel and luxury goods)	207,500		241
*Suntech Power Holdings Co. Ltd—ADR (Alternative energy sources)	22,900		624
			1,587
India—1.0%
HDFC Bank—ADR (Banking)	9,500		483
Malaysia—0.9%
*Airasia Bhd (Air transport)	552,900		233
Transmile Group Bhd (Airport development and maintenance)	78,500		220
			453

See accompanying Notes to Financial Statements.

December 31, 2005 William Blair Funds    45

International Small Cap Growth Fund

Portfolio of Investments, December 31, 2005 (all dollar amounts in thousands)

Issuer	Shares	Value
Common Stocks—Emerging Asia—8.0%—(continued)
South Korea—1.6%
Hana Tour Service Inc. (Travel services)	6,300	$	299
*NHN Corporation (Internet software and services)	1,900		502
			801
Taiwan—1.4%
Novatek Microelectronics (Semiconductors and equipment)	123,000		721
Emerging Latin America—6.3%
Brazil—3.3%
*Diagnosticos Da America S.A. (Health care services)	25,100		467
Gol Linhas Aereas Int S.P.—ADR (Air transport)	17,300		488
*Natura Cosmeticos S.A. (Cosmetics)	10,500		463
*Submarino S.A.(E-commerce)	14,600		259
			1,677
Chile—1.0%
Cencosud S.A.—ADR 144A (Retail stores)	16,500		491
Mexico—1.5%
*Urbi Desarrollos Urbanos S.A. (Household durables)	105,800		733
Panama—0.5%
*Copa Holdings S.A. Class “A” (Airlines)†	9,900		270
Asia—6.0%
Australia—2.6%
Billabong International Ltd. (Apparel and luxury goods)	24,400		260
*Sigma Company, Ltd. (Medical distributors)	231,972		531
Toll Holdings, Ltd. (Trucking)	46,500		506
			1,297
Hong Kong—1.4%
Techtronic Industries Co. (Consumer durables)	304,500		725
New Zeland—0.5%
*Pumpkin Patch, Ltd. (Retail apparel)	110,500		254
Singapore—1.5%
Goodpack Ltd. (Air freight and logistics)	322,000		330
Osim International Ltd. (Consumer sundries)	235,000		224
Raffles Education Corp. Ltd. (Schools)	199,800		202
			756
Emerging Europe, Mid-East, Africa—4.6%
Czech Republic—0.2%
*Central European Media Enterprises Ltd. Class “A” (Television)†	1,700		98

Issuer	Shares or Principal Amount		Value
Common Stocks—Emerging Europe, Mid-East, Africa—4.6%—(continued)
Egypt—1.1%
Orascom Construction Industry (Construction)		14,200	$	540
Russia—0.4%
*Pyaterochka Holdings—GDR (Consumer staples)		14,800		214
South Africa—2.9%
African Bank Investments (Consumer loans)		193,700		752
Aspen Pharmacare (Pharmaceuticals)		94,500		500
Edgars Consolidated Stores (Apparel, footwear and retail)		40,900		228
				1,480
Canada—2.0%
*FirstService Corp. (Diversified commercial services)†		10,000		257
*Gildan Activewear, Inc. (Apparel and luxury goods)		5,800		249
Ritchie Brothers Auctioneers, Inc. (Buisness services)†		5,900		249
*Rona, Inc. (Building materials)		13,600		251
				1,006
Total Common Stock—94.4% (cost $43,429)				47,711
Investment in Affiliate
William Blair Ready Reserves Fund		410,264		410
Total Investment in Affiliate—0.8% (cost $410)				410
Short-Term Investments
American Express Demand Note, VRN 4.235 % due 1/3/06	$	1,416,000		1,416
Prudential Funding Demand Note, VRN 3.930% due 1/3/06	$	1,915,000		1,915
Total Short-Term Investments—6.6% (cost $3,331)				3,331
Total Investments—101.8% (cost $47,170)				51,452
Liabilities plus cash and other assets—(1.8)%				(918	)
Net assets—100.0%			$	50,534

*Non-income producing securities

ADR = American Depository Receipt

GDR = Global Depository Receipt

VRN = Variable Rate Note

† = U.S. listed foreign security

See accompanying Notes to Financial Statements.

46    Annual Report December 31, 2005

International Small Cap Growth Fund

Portfolio of Investments, December 31, 2005 (all dollar amounts in thousands)

For securities, primarily traded on exchanges or markets that close before the close of regular trading on the New York Stock Exchange, the Fund uses an independent pricing service on a daily basis to fair value price the securities pursuant to Valuation Procedures adopted by the Board of Trustees.

At December 31, 2005 the Fund’s Portfolio of Investments includes the following industry categories:

Consumer Discretionary	30.2%
Industrials and Services	26.3%
Financials	15.2%
Healthcare	9.5%
Information Technology	6.7%
Energy	5.9%
Consumer Staples	4.0%
Telecommunication Services	1.5%
Materials	0.7%
	100.0%

At December 31, 2005 the Fund’s Portfolio of Investments includes the following currency categories:

Japanese Yen	28.8%
Euro	25.0%
British Pound Sterling	10.9%
United States Dollar	7.7%
Swedish Krona	4.8%
South African Rand	3.1%
Australian Dollar	2.7%
Hong Kong Dollar	2.5%
Brazilian Real	2.5%
Swiss Franc	2.0%
South Korean Won	1.7%
Singapore Dollar	1.6%
Mexican Nuevo Peso	1.5%
Taiwan Dollar	1.5%
Egyptian Pound	1.1%
Canadian Dollar	1.1%
All other currencies	1.5%
	100.0%

See accompanying Notes to Financial Statements.

December 31, 2005 William Blair Funds    47

W. George Greig

Todd M. McClone

Jeffrey A. Urbina

EMERGING MARKETS GROWTH FUND

The Emerging Markets Growth Fund primarily invests in a diversified portfolio of equity securities issued by growth companies in emerging economies worldwide.

AN OVERVIEW FROM THE PORTFOLIO MANAGERS

How did the Fund perform since its inception? How did the Fund’s performance compare to its benchmark?

The Emerging Markets Growth Fund commenced operations on June 6, 2005. Through the period ending December 31, 2005, the Fund posted a gain of 42.52%, ahead of the 29.26% return of the Fund’s benchmark, the MSCI Emerging Markets Free Index.

What were the most significant factors impacting international markets during 2005?

During the first six months of 2005 the international equity markets were largely flat; however, during the last half of the year the equity markets sharply appreciated (and as evidenced by the annual 17.11% MSCI All Country World (Free) except US Index return). International equities significantly outpaced the US as measured by the Standard & Poor’s 500 Index, which rose 4.91% year to date. This increase was despite US dollar appreciation versus most foreign currencies, which reduced returns to US investors. The MSCI EAFE Index rose 29.54% in local terms, which translated into 14.02% to US dollar investors, as the US dollar appreciated an average 13% relative to EAFE (Europe and Australasia, Far East Equity) country currencies.

Positive second half international equity market performance was driven by strong results across sectors, capitalizations and regions. Emerging markets were the strongest part of the international markets overall, returning 34.54% as measured by the MSCI Emerging Markets Index. Within emerging markets, Latin America was the strongest region, returning 50.42%, while the Emerging Europe and Africa region was up nearly 39%, and Emerging Asia returned 27.50%.

What factors were behind the Fund’s performance versus the benchmark?

The Emerging Markets Growth Fund’s “since inception” performance was augmented by strong stock selection in Emerging Asia and Latin America, coupled with regional positioning. Within Emerging Asia, Consumer Discretionary, Information Technology, and Telecommunication Services holdings in particular performed well while Latin American Telecommunication Services and Industrials holdings were the strongest performers. Stock selection across most sectors contributed to the Fund’s outperformance during the period with the largest value added in Industrials, Information Technology, Consumer Discretionary and Telecommunication Services.

What is your outlook for the international markets?

After a third consecutive year of strong equity returns worldwide, markets have for the most part erased the losses of the 2000-2002 bear market. As the new year begins, many national and regional indices (with the obvious exceptions of Nasdaq and the Japanese market benchmarks) are at or approaching historic highs. Even in the US, where index returns were modest, a majority of individual stocks offered better performance.

48    Annual Report December 31, 2005

Prices have been propelled higher by strong fundamentals: exceptional earnings growth and a surprisingly stable inflation and long term interest rate environment. The only two elements of cyclical risk in the global economic picture have been Fed tightening and rising energy costs, and up to now, neither of them has had a significant impact on growth. Relative economic stability has enabled strong corporate performance to act as the key driver of share price gains over the course of the last several years. Accordingly, if the structural framework of the global economy remains in equilibrium, and corporate growth and profitability continue to meet or exceed expectations, the market environment will remain conducive to solid equity returns.

The principal risks in the macro picture are well known, and mostly focused on the US: household sector leverage and inadequate savings; consumer vulnerability to weakness in home prices; interest rate and exchange rate risks associated with the US current account deficit; the potential for a central bank policy error (such as overreacting to transitory inflation signs); a ‘superspike’ in oil and gas prices beyond what has already taken place; and/or exogenous variables such as avian flu, terrorist disruptions, or natural disasters.

Since none of these issues are new, the only way they could have a dramatic impact on the market risk profile would be if one of them suddenly had a delayed or cumulative effect, or if two or more of them combined in some unforeseen way. These possibilities cannot be conclusively ruled out, but at the same time, the resilience of the financial and economic infrastructure—perhaps a byproduct of increasing global integration—has been impressive over the last decade.

The other key variable in the outlook is corporate profitability and growth, where we have seen continued strength in the US and dramatic improvement in Japan, Europe, and in many developing markets. This aspect of the market environment shows no sign of deteriorating or even slackening the pace of improvement. Corporate management continues to focus on improving supply chain management, capital and labor productivity, cost control, and marketing. Returns on capital are now well above the cost of capital in every principal region of the world; and while there are concerns that ‘excessive’ profitability is a risk factor in itself, there is no signal apparent of either complacency or irrational competitive behavior undermining corporate performance on a wide scale.

Even in a benign economic and earnings scenario, of course, there is no guarantee of supernormal returns or a continuation of the trends of 2003-05. There is a reasonable (although not conclusive) case that cyclical growth may slow in the US and China in 2006, and profit growth may be restrained as a result. In addition, growth in the energy and financial sectors may be held back by price declines and yield curve flattening, respectively. On the other hand, Japan and more recently Europe seem to be benefiting from the effects of a strong external environment and solid corporate profitability, and could continue to mount moderate but self-sustaining recoveries. On a global basis, there is probably not much reason to anticipate significantly lower earnings growth in 2006, but some deceleration seems likely.

In the context of the current profit and interest rate picture, current valuations should not present a significant issue for potential returns, and even areas that have seen relatively strong recent performance, such as small caps and Japan, are not so extended as to be unusually risky on valuation grounds alone.

Emerging markets continue to be a special case, influenced by long term changes outside of the business cycle. Whereas previous cycles were dominated by unstable investment flows and highly volatile production and trade patterns, virtually all of the developing world is now seeing new dynamics of high savings, credit development, job creation and household spending growth, as well as more responsible and transparent corporate behavior. These factors are reducing financial risk at the same time they create new avenues of growth in emerging economies, and have been instrumental in driving exceptional returns in this asset class since 1999.

December 31, 2005 William Blair Funds    49

On balance, we see a reasonable balance between risk and opportunity for the year ahead, particularly as international markets continue to be led by the ongoing trend toward better corporate performance and governance. At the margins of any set of expectations, of course, are the ‘unknown unknowns’. Volatility has been relatively low for some time, and global markets have not faced any major discontinuities for several years. Any investment strategy predicated on anticipation of normal growth and risk parameters has to be adaptable to evolving change, and adaptability built into portfolio structure from the bottom up is probably the most consistent method for refining strategy.

50    Annual Report December 31, 2005

Emerging Markets Growth Fund

Performance Highlights (unaudited)

Average Annual Total Return at 12/31/2005

	Since Inception(a)
Emerging Markets Growth Fund Class N	42.52	%
Emerging Markets Growth Fund Class I	42.72
MSCI Emerging Markets Free Index	29.26

(a) For the period from June 6, 2005 (Commencement of Operations) to December 31, 2005.

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher than the data quoted. Results shown are average annual returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate and you may have a gain or loss when you sell shares. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds.com. Class N shares are available to the general public without a sales load. Class I shares are available to certain institutional investors and advisory clients of William Blair & Company L.L.C. without a sales load or distribution (12b-1) fees. International investing involves special risk considerations, including currency fluctuations, lower liquidity, economic and political risk.

The performance highlights and graph presented above do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

The Morgan Stanley Capital International (MSCI) Emerging Markets Free Index is an index that is designated to measure equity performance in the global emerging markets.

This report identifies the Fund’s investments on December 31, 2005. These holdings are subject to change. Not all stocks in the Fund performed the same, nor is there any guarantee that these stocks will perform as well in the future. Market forecasts provided in this report may not necessarily come to pass.

Sector Diversification (unaudited)

The sector diversification shown is based on the total investment portfolio.

December 31, 2005 William Blair Funds    51

Emerging Markets Growth Fund

Portfolio of Investments, December 31, 2005 (all dollar amounts in thousands)

Issuer	Shares	Value
Common Stocks—Emerging Asia—44.0%
China—7.5%
China Mungniu Dairy Co. Ltd. (Food products)	2,834,000	$	2,406
Ctrip.com International Ltd.—ADR (Hotels, restaurants, and leisure)	19,300		1,115
*Focus Media Holding Ltd.—ADR (Advertising sales)	31,000		1,047
*Foxconn International (Manufacturing services)	2,701,000		4,410
Fu Ji Food and Catering Services Holdings Ltd (Hotels, restaurants, and leisure)	782,000		1,281
Li Ning Co. Ltd (Leisure equipment and products)	1,640,000		1,163
*Parkson Retail Group Ltd. (Retail stores)	768,900		1,388
Ports Design Ltd. (Apparel and luxury goods)	1,075,000		1,251
*Suntech Power Holdings Co. Ltd—ADR (Alternate energy sources)	172,600		4,703
			18,764
India—10.6%
*Bharti Tele-Ventures (Wireless telecommunication services)	920,700		7,079
HDFC Bank (Banking)	302,300		4,745
*Housing Development Finance Corp. (Financial services)	177,900		4,773
Infosys Technologies, Ltd. (Consulting and software services)	146,800		9,780
			26,377
Malaysia—3.8%
*Airasia Bhd (Air transport)	5,449,000		2,291
Bumiputra Commerce Holding Bhd (Banking)	3,347,800		5,050
Transmile Group Bhd (Airport development and maintenance)	765,400		2,145
			9,486
South Korea—13.8%
Hana Tour Service (Travel service)	64,700		3,068
Hyundai Motor Co. Ltd. (Automobiles)	64,590		6,165
*Kookmin Bank (Banking)	65,940		4,987
Korea Investment Holdings Co. Ltd. (Diversified financial services)	61,630		2,589
*NHN Corporation (Internet software and services)	9,500		2,510
Samsung Electronics Co. (Semiconductors)	15,800		10,200
Shinsegae Co. Ltd. (Discount retail)	11,100		4,854
			34,373
Taiwan—8.3%
Hon Hai Precision Industry (Computers)	1,332,107		7,334
*Mediatek Inc. (Semiconductors and equipment)	685,800		8,039
Novatek Microelectronics (Semiconductors and equipment)	926,724		5,435
			20,808

Issuer	Shares	Value
Common Stocks—Emerging Europe, Mid-East, Africa—22.4%
Czech Republic—0.3%
*Central European Media Enterprises Ltd., Class “A” (Television)†	15,100	$	874
Egypt—2.1%
Orascom Contruction Industry—GDR (Construction)	69,900		5,242
Hungary—1.9%
MOL Magyar Olaj-es Gazipari (Oil company)	24,900		2,336
Richter Gedeon Rt. (Pharmaceuticals)	12,600		2,265
			4,601
Russia—2.4%
*Novatek OAO—GDR 144A (Oil, gas drilling, and exploration)	214,100		4,814
*Pyaterochka Holdings—GDR (Food and retail)	73,900		1,068
			5,882
South Africa—13.7%
African Bank Investments (Banking)	1,310,300		5,087
Aspen Pharmacare Holdings Ltd. (Pharmaceuticals)	471,700		2,494
Edgars Consolidated Stores (Apparel, footwear and retail)	312,200		1,740
*MTN Group Ltd. (Telecommunication services)	783,600		7,706
Naspers Ltd. (Media)	272,900		4,846
Sasol Ltd. (Oil company)	205,800		7,422
Standard Bank Group Ltd. (Banking)	402,700		4,839
			34,134
Turkey—2.0%
*Turkiye Garanti Bankasi A.S. (Banking)	1,414,300		5,098
Emerging Latin America—21.8%
Brazil— 3.9%
Cia de Concessoes Rodoviarias (Public thoroughfares)	38,900		1,232
*Diagnosticos da America S.A. (Health care services)	126,800		2,361
Gol Linhas Aereas Int S.P—ADR (Air transport)	85,700		2,418
*Natura Cosmeticos S.A. (Cosmetics)	53,900		2,376
*Submarino S.A. (Internet and catalog retail)	69,800		1,240
			9,627
Chile—5.8%
Banco Santander SP—ADR (Banking)	105,200		4,692
Cencosud S.A.—ADR 144A (Retail stores)	84,600		2,515
S.A.C.I. Falabella S.A. (Retail stores)	2,657,400		7,289
			14,496
Columbia—1.9%
Bancolombia S.A.—ADR (Banking)	166,900		4,812

See accompanying Notes to Financial Statements.

52    Annual Report December 31, 2005

Emerging Markets Growth Fund

Portfolio of Investments, December 31, 2005 (all dollar amounts in thousands)

Issuer	Shares or Principal Amount		Value
Common Stocks—Emerging Latin America—21.8%—(continued)
Mexico—9.8%
America Movil S.A. (Communications)		3,190,700	$	4,671
*Corporacion Geo Sa De Cv (Real estate)		1,409,000		4,981
*Urbi Desarrollos Urbanos S.A. (Household durables)		703,200		4,872
Walmart de Mexico (Retail trade)		1,757,900		9,777
				24,301
Panama—0.4%
*Copa Holdings S.A., Class “A” (Airlines)†		40,900		1,117
Total Common Stock—88.2% (cost $191,210)				219,992
Preferred Stock
Brazil—4.7%
Banco Itau Holding (Banking)		189,800		4,574
Petroleo Brasileiro S.A. (Oil, gas drilling, and exploration)		446,400		7,109
Total Preferred Stock—4.7% (cost $10,796)				11,683
Investment in Affiliate
William Blair Ready Reserves Fund		3,821,204		3,821
Total Investment in Affiliate—1.5% (cost $3,821)				3,821
Short-Term Investments
American Express Demand Note, VRN 4.235% due 1/3/06	$	3,778,000		3,778
Prudential Funding Demand Note, VRN 3.930% due 1/3/06	$	3,659,000		3,659
Total Short-Term Investments—3.0% (cost $7,437)				7,437
Total Investments—97.4% (cost $213,264)				242,933
Cash and other assets less liabilities—2.6%				6,415
Net assets—100.0%			$	249,348

* Non-income producing securities

ADR = American Depository Receipt

GDR = Global Depository Receipt

VRN = Variable Rate Note

† = U.S. listed foreign security

For securities, primarily traded on exchanges or markets that close before the close of regular trading on the New York Stock Exchange, the Fund uses an independent pricing service on a daily basis to fair value price the securities pursant to Valuation Procedures adopted by the Board of Trustees.

At December 31, 2005 the Fund’s Portfolio of Investments includes the following currency categories:

United States Dollar	14.9%
South Korean Won	14.8%
South African Rand	14.7%
Indian Rupee	11.4%
Mexico Nuevo Peso	10.5%
Taiwan Dollar	9.0%
Brazilian Real	8.2%
Hong Kong Dollar	5.1%
Malaysian Ringgit	4.1%
Chilean Peso	3.1%
Turkish Lira	2.2%
Hungarian Forint	2.0%
	100.0%

At December 31, 2005 the Fund’s Portfolio of Investments includes the following industry categories:

Consumer Discretionary	22.7%
Financials	22.1%
Information Technology	20.6%
Energy	11.4%
Industrials and Services	9.7%
Telecommunication Services	8.4%
Consumer Staples	3.1%
Health Care	2.0%
	100.0%

See accompanying Notes to Financial Statements.

December 31, 2005 William Blair Funds    53

Mark T. Leslie

David S. Mitchell

VALUE DISCOVERY FUND

The Value Discovery Fund invests in the equity securities of small companies that we believe offer a long-term investment value seeking to identify undervalued companies with sound business fundamentals—“broken stocks not broken companies.”

AN OVERVIEW FROM THE PORTFOLIO MANAGERS

How did the Fund perform over the last year?

The Value Discovery Fund posted a 0.49% increase on a total return basis (Class N shares) during the year ending December 31, 2005. By comparison, the Fund’s primary benchmark, the Russell 2000® Value Index, gained 4.71%, while the Russell 2000® Index gained 4.55%.

What were the most significant factors impacting Fund performance? What factors were behind the Fund’s performance versus the benchmark?

The Technology and Health Care sectors hampered both absolute and relative performance for the year. The underperformance relative to the benchmark was entirely a function of poor stock selection as opposed to any economic impact or ill-timed sector weightings. As detailed below, stock selection in Technology and Healthcare was plagued by unforeseen disappoints in company-specific fundamentals. Industrials and Energy were the two sectors that contributed most positively to absolute performance during the year as oil and gas prices remained strong and the manufacturing economy continued to be healthy. As a result, performance relative to the benchmark did improve significantly for the Fund during the fourth quarter.

What were among the best performing sectors for the Fund? Were there any investment themes that produced the best results?

Two sectors added meaningful value relative to the benchmark during 2005. The Industrials sector contributed 257 basis points of excess value relative to the benchmark. Three of the Fund’s five biggest contributors were Industrial Holdings: Midwest Air Group (a regional airline), which increased 93.8%; General Cable (a wire and cable manufacturer), which gained 42.2%, and Watsco (an HVAC distributor), which was up 72.3%. Midwest Air benefited from improved revenue and a dramatically improved competitive position at its primary hub in Milwaukee. General Cable continued to see strong demand for its products, particularly energy cable for electrical distribution, and was able to adequately offset rising raw material prices. Watsco, a long time Fund holding, saw good demand for air conditioning products and continues to experience margin expansion.

The Financials sector added 199 basis points of excess value to the Fund during 2005 relative to its primary benchmark. Strong performance from Seabright Insurance (a specialty workers’ comp underwriter), which was up 58.4%, and Jones Lang LaSalle (a real estate services and management company), which increased 35.3%, were the top two performers in this sector. Insurance stocks performed particularly well for the Fund in 2005 with six of the top ten performing holdings in the Financials sector and five of the top twenty overall portfolio contributors. The strong performance in insurance was broadly based across life and property/casualty and primarily company specific factors, the property insurers also have seen generally improved pricing post Hurricanes Katrina and Rita.

What were among the weakest performing sectors for the Fund? Were there any investments that did not measure up to your expectations?

As mentioned earlier, the Technology and Health Care sectors were far and away the biggest detractors for the year and, unfortunately, more than offset the positive performance in

54    Annual Report December 31, 2005

Industrials and Financials. Technology performance was particularly dismal, detracting 463 basis points versus the benchmark. This was even more disappointing given that two of the Fund’s biggest positive contributors to performance were in this sector: SPSS (a statistical software company), which gained 97.8%, and Plexus (a contract manufacturer), which was up 47.2%. There were many disappointing performers in the sector with the biggest detractor being Borland Software (an application development company), which was down 50.2%. Borland was especially painful as the company had shown improving results throughout 2004 culminating in an excellent fourth quarter only to revert to its prior difficulties during the first quarter of 2005. The Health Care sector was plagued by poor stock selection and multiple disappointments including Par Pharmaceutical (a generic drugs company), which decreased 35.3%, Encore Medical (an orthopedic rehabilitation products company), which declined 27.1%, and two drug discovery companies, Discovery Partners, which decreased 23.8%, and Albany Molecular, which declined 27.1%.

While the previous paragraph highlights the primary difficulties experienced by the Fund in 2005, it is worth noting that subsequent to Mark Leslie joining the Fund as Co-Manager in late July, performance in both these sectors has significantly improved. This is encouraging as we have made major changes to our holdings in both these sectors over the last several months. The drag from these sectors was inconsequential during the fourth quarter as Health Care and Technology detracted only 3 and 20 basis points, respectively. In both cases we believe we enhanced the fundamental quality of the Fund’s holdings without a meaningful tradeoff in valuation.

What is your current strategy? How is the Fund positioned?

We continue to be somewhat underweighted in Financials although not to the same extent as in prior quarters. Overall it remains challenging to find value in this sector but we have discovered a few names that met our standards: Commercial Capital Bancorp, Western Alliance Bancorp, Cogdell Spencer, and Quanta Capital.

2005 was clearly a disappointing year for the Fund. In addition to sub-par performance we were forced to make a large, long-term capital gains distribution due in large part to significant redemption activity. However, we are encouraged by our first full quarter together as co-managers and look forward to proving ourselves as we move forward. We have made significant changes in the portfolio subsequent to Mark’s arrival and, while one full quarter is not a trend, we believe that our process and philosophy are sound and that a solid foundation has been put into place. We appreciate your confidence in us and thank you for investing in the Fund.

December 31, 2005 William Blair Funds    55

Value Discovery Fund

Performance Highlights (unaudited)

Average Annual Total Return at 12/31/2005

	1 Year		3 Year		5 Year		Since Inception
Value Discovery Fund Class N	0.49	%	16.19	%	10.46	%	11.98	(a)
Value Discovery Fund Class I	0.70		16.38		10.72		13.43	(b)
Russell 2000® Index	4.55		22.13		8.22		8.64	(a)
							8.88	(b)
Russell 2000® Value Index	4.71		23.18		13.55		12.31	(a)
							14.62	(b)

(a) For the period from December 23, 1996 (Commencement of the Class) to December 31, 2005.

(b) For the period from October 1, 1999 (Commencement of the Class) to December 31, 2005.

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher than the data quoted. Results shown are average annual total returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate and you may have a gain or loss when you sell shares. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds.com. Investing in smaller companies involves special risks, including higher volatility and lower liquidity. From time to time, the investment adviser may waive fees or reimburse expenses for the Fund. Without these waivers, performance would be lower. Class N shares are available to the general public without a sales load. Class I shares are available to certain institutional investors and advisory clients of William Blair & Company, L.L.C., without a sales load or distribution (12b-1) or service fees.

The performance highlights and graph presented above do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

The Russell 2000^® Index is the Fund’s primary benchmark. The Russell 2000^® Index is unmanaged composite of the smallest 2000 stocks of the Russell 3000 Index.

The Russell 2000^® Value Index consists of small-capitalization companies with below average price-to-book ratios and forecasted growth rates.

This report identifies the Fund’s investments on December 31, 2005. These holdings are subject to change. Not all stocks in the Fund performed the same, nor is there any guarantee that these stocks will perform as well in the future. Market forecasts provided in this report may not necessarily come to pass.

Sector Diversification (unaudited)

The sector diversification shown is based on the total investment portfolio.

56    Annual Report December 31, 2005

Value Discovery Fund

Portfolio of Investments, December 31, 2005 (all dollar amounts in thousands)

Issuer	Shares	Value
Common Stocks
Financials—28.2%
*AmericanWest Bancorporation	43,495	$	1,028
AmerUs Group, Class “A”	30,595		1,734
Argonaut Group, Inc.	30,745		1,008
Astoria Financial Corporation	45,425		1,335
Cogdell Spencer, Inc.	44,755		756
Comercial Capital Bancorp	49,795		852
Donegal Group, Inc., Class “A”	50,641		1,177
Equity Inns, Inc.	99,914		1,354
*Franklin Bank Corporation	74,210		1,335
*Jones Lang LaSalle, Inc	23,435		1,180
*KMG America Coporation	115,155		1,057
*Meadowbrook Insurance Group, Inc.	202,825		1,185
Midwest Banc Holdings, Inc.	59,477		1,323
National Financial Partners Corporation	18,900		993
*Quanta Capital Holdings	170,600		870
*Seabright Insurance Holdings, Inc.	75,248		1,251
*Western Alliance Bancorp	13,715		410
Winston Hotels, Inc.	102,675		1,017
			19,865
Industrials—16.9%
*Artesyn Technologies, Inc.	96,764		997
*Coinstar, Inc.	36,875		842
*Esco Technologies, Inc.	18,600		827
General Cable Corporation	66,845		1,317
*Genlyte Group, Inc.	18,900		1,012
Hughes Supply, Incorporated	20,705		742
Kennametal, Inc.	16,725		853
*SCS Transportation, Inc.	46,110		980
*Tal International Group, Inc.	35,530		734
*Teletech Holdings, Inc.	107,640		1,297
Toro Company	32,025		1,402
Watsco, Inc.	15,510		928
			11,931
Information Technology—12.9%
*Anixter International, Inc.	40,380		1,580
*Bisys Group, Inc.	125,605		1,760
*Carrier Access Corporation	116,935		578
*Entegris, Inc.	105,800		996
*LTX Corporation	203,210		914
*Semitool, Inc	68,179		742
*SPSS, Inc.	49,136		1,520
*Tier Technologies, Inc., Class “B”	132,871		975
			9,065
Consumer Discretionary—7.8%
BorgWarner, Inc.	25,610		1,553
*Casual Male Retail Group, Inc.	117,700		721
*Navigant International, Inc.	116,695		1,266
*Restoration Hardware, Inc.	152,989		921
Woverine World Wide	47,640		1,070
			5,531
Consumer Staples—5.9%
*BJ’s Wholesale Club, Inc.	33,100		978
*Elizabeth Arden, Inc.	53,685		1,077
*Hain Celestial Group, Inc.	52,993		1,121
*Playtex Products, Inc.	70,555		965
			4,141

Issuer	Shares or Principal Amount		Value
Common Stocks—(Continued)
Health Care—5.5%
*Encore Medical Corporation		255,375	$	1,264
*Magellan Health Services		33,870		1,065
*Pediatrix Medical Group		8,590		761
Vital Signs, Inc.		18,420		789
				3,879
Energy—5.4%
*Forest Oil Corporation		15,245		695
*Grey Wolf, Inc.		106,385		822
*KCS Energy, Inc.		28,970		702
St. Mary Land & Exploration Company		26,585		979
*Toreador Resources Corporation		29,445		620
				3,818
Materials—4.3%
Silgan Holdings, Inc.		29,595		1,069
Spartech Corporation		87,755		1,926
				2,995
Utilities—2.5%
Atmos Energy Corporation		68,125		1,782
Total Common Stock—89.4% (cost $50,986)				63,007
Convertible Bond
Midwest Express Holdings, 6.750%, due 10/01/08**	$	2,157,000		2,433
Total Convertible Bond—3.4% (cost $2,157)				2,433
Exchange Traded Fund
ishares, Russell 2000 Value		32,690		2,155
Total Exchange Traded Fund—3.1% (cost $2,232)				2,155
Investment in Affiliate
William Blair Ready Reserves Fund		73,242		73
Total Investment in Affiliate—0.1% (cost $73)				73
Short-Term Investment
Prudential Funding Demand Note, VRN 3.930% due 1/3/06	$	545,000		545
Total Short-Term Investment—0.8% (cost $545)				545
Total Investments—96.8% (cost $55,993)				68,213
Cash and other assets, less liabilities—3.2%				2,226
Net assets—100.0%			$	70,439

*Non-income producing

**Fair Valued pursuant to Valuation Procedures adopted by the Board of Trustees. The holding represents 3.46% of the Fund’s net assets at December 31, 2005.

VRN = Variable Rate Note

See accompanying Notes to Financial Statements.

December 31, 2005 William Blair Funds    57

James S. Kaplan

Christopher T. Vincent

INCOME FUND

The Income Fund invests in high-grade intermediate-term debt securities.

AN OVERVIEW FROM THE PORTFOLIO MANAGERS

How did the Fund perform over the last year? How did the Fund’s performance compare to its benchmark?

The Income Fund posted a 1.71% gain on a total return basis (Class N Shares) for the 12 months ended December 31, 2005. By comparison, the Fund’s benchmark, the Lehman Intermediate Government/Credit Bond Index, rose 1.57%, while the Fund’s peer group, the Morningstar Short-Term Bond Category, increased 1.43%.

What were the most significant factors impacting Fund performance? What factors were behind the Fund’s performance versus the benchmark?

Interest rates were the most significant factor impacting Fund performance during 2005. The year ended on a positive note with the Fund’s performance holding its own in spite of the Federal Reserve’s measured program to raise interest rates.

Beginning on February 2nd and ending on December 13th, the Federal Reserve raised the federal funds rate on overnight loans between banks eight times during the year, each time by 0.25%—starting at 2.25% and ending at 4.25%. The last rate increase was the thirteenth since June, 2004.

The Fund’s return remained positive, aided by the significant flattening of the yield curve over the course of the year, a trend which had begun in 2004. The short end of the yield curve underperformed, with the yields on 2-year Treasury notes rising 1.33% during the year. However, the long-end of the yield curve, as indicated by yields on 10-year Treasury securities, rose only slightly, by 0.17%.

Credit quality improved on the Corporate bond side of the market during 2005, and on the Mortgage-backed side it was a year in which prepayment risk lessened as the year progressed.

Which investment strategies enhanced the Fund’s return? Were there any investment strategies that produced the best results?

One of our primary strategies during the early part of 2005 was to tilt the Fund toward higher credit quality securities, as we did not believe risk premiums adequately compensated us for investing in corporate bonds—especially in lower-rated securities.

For example, we reduced our holdings in BBB-rated corporate securities from 9.7% at the end of the fourth quarter of 2004 to 5.8% at the end of March, reinvesting proceeds in U.S. Treasury and Agency securities. However, we generally evaluated risks on a security-by-security basis, and did not believe some of the default events occurring in the marketplace were part of a larger industry “contagion,” affecting all corporate issues. By mid-year, our holdings of BBB-rated securities stood at 7.3%, and at year end our BBB-rated holdings stood at 6.4%. At 25%, we consider the Fund to have a neutral allocation to Corporate bonds.

Mortgage-backed and Asset-backed securities continued to provide the Fund with consistent, solid excess returns when compared to U.S. Treasury securities.

58    Annual Report December 31, 2005

The performance of Mortgage-backed securities was somewhat weak early in the fourth quarter, but finished the year with strength. December, in fact, was an excellent month for mortgage-backed issues. Part of the bullish enthusiasm for these securities stemmed from sentiment that the Federal Reserve may have come to the end of its recent credit-tightening cycle.

What were among the weakest performing investments for the Fund?

Corporate bonds were a modestly weak sector for the Fund. Nervousness about potential shareholder-friendly activity or actions by corporate management which might be to the detriment of Corporate bondholders continued to be a major theme that weighed on the Corporate bond market.

However, although there were some isolated default events in the Corporate bond market (and none involving any of the Fund’s investments) risk premiums continue to reflect solid fundamentals and healthy foreign demand.

What is your current strategy? How is the Fund positioned?

We remain committed to the Mortgage- and Asset-backed sectors of the bond market, although the yield advantage—or “spreads”—between these sectors and U.S. Treasury bonds are not quite as attractive compared to prior quarters. We nonetheless expect Mortgage-backed and Asset-backed securities to continue to provide solid levels of excess returns versus their Treasury counterparts.

We believe we have structured our Asset-backed holdings to withstand any weakness in the housing market, if, for example, the credit quality of borrowers should slip. Furthermore, the overall credit risk of our Fund’s portfolio is lower at year end than it was at the beginning of 2005.

Two noteworthy additions to the Fund’s Corporate bond holdings included American Express and Valero Energy. American Express, best known for its credit card business, is the streamlined business unit that remains after the firm’s divestiture of its former financial advisor segment, American Express Financial Advisors, which was spun off to shareholders in late September as Ameriprise.

Valero Energy is the largest refiner in North America, and we purchased its bonds based on improving credit fundamentals in the Energy sector.

The market behaves as though it believes that the Federal Reserve may hike rates one more time in January. We expect the Federal Reserve Board to move to raise rates at its January 31 meeting, which will also be Fed Chairman Alan Greenspan’s last before the new Fed Chairman nominee Ben Bernanke assumes the leadership role.

It should be noted that traditional Fed tightening cycles have typically been more painful for the fixed income markets; something we believe has been delayed by higher equity prices, a robust housing market with rising home values and strong foreign demand for U.S. debt investments. Only time will tell if the effects of the Fed’s credit tightening efforts will be more keenly felt later.

We may be moving into a period where the Fed is more “data dependent” than before. The measured and automatic interest rate increases of the last 18 months will give way to a period where the Fed analyzes economic data as it is released, then formulates its decisions regarding monetary policy accordingly. There is much more uncertainty regarding future Fed policy than there has been in recent memory.

December 31, 2005 William Blair Funds    59

Income Fund

Performance Highlights (unaudited)

Average Annual Total Return at 12/31/2005

	1 Year		3 Year		5 Year		10 Year		Since Inception(a)
Income Fund Class N	1.71	%	2.66	%	4.59	%	5.11	%	—
Income Fund Class I	1.92		2.82		4.74		—		5.43
Lehman Intermediate Government Credit Bond Index	1.57		2.96		5.49		5.80		5.98

(a) For the period from October 1, 1999 to December 31, 2005.

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher than the data quoted. Results shown are average annual total returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate and you may have a gain or loss when you sell shares. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds.com. Class N shares are available to the general public without a sales load. Class I shares are available to certain institutional investors and advisory clients of William Blair & Company, L.L.C., without a sales load or distribution (12b-1) or service fees.

The performance highlights and graph presented above do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

The Lehman Intermediate Government/Credit Bond Index indicates broad intermediate government/corporate bond market performance.

This report identifies the Fund’s investments on December 31, 2005. These holdings are subject to change. Not all investments in the Fund performed the same, nor is there any guarantee that these investments will perform as well in the future. Market forecasts provided in this report may not necessarily come to pass.

Sector Diversification (unaudited)

The sector diversification shown is based on the total investment portfolio.

60    Annual Report December 31, 2005

Income Fund

Portfolio of Investments, December 31, 2005 (all amounts in thousands)

Issuer	Principal Amount	Value
U.S. Government and U.S. Government Agency—48.8%
U.S. Treasury—6.3%
U.S. Treasury Note, 6.500%, due 2/15/10	$  12,940	$  13,959
U.S. Treasury Note, 4.750%, due 5/15/14	5,550	5,685
Total U.S. Treasury Obligations	18,490	19,644
Government National Mortgage Association (GNMA)—2.2%
#780405, 9.500%, due 11/15/17	822	892
#589335, 6.500%, due 10/15/22	2,404	2,513
#357322, 7.000%, due 9/15/23	210	221
#616250, 6.000%, due 2/15/24	1,864	1,913
#2002-48, Tranche 0B, 6.000%, due 5/16/30	1,243	1,255
Total Government National Mortage Association	6,543	6,794
Small Business Administration—0.0%
Receipt for Multiple Originator Fees, #3, 0.669%, due 11/01/08 (Interest Only) WAC	—	35
Federal Home Loan Mortgage Corp. (FHLMC)—18.5%
#1417, Tranche SA, 14.294%, due 11/15/07, VRN	828	846
#G10067, 7.000%, due 1/1/08	410	417
#G10147, 8.500%, due 2/1/08	91	93
#1601, Tranche PJ, 6.000%, due 10/15/08, VRN	1,526	1,539
#1612, Tranche SE, 8.100%, due 11/15/08, VRN	749	759
#G90028, 7.000%, due 5/17/09	460	469
#E80050, 6.000%, due 10/1/09	741	754
#G90019, 7.500%, due 12/17/09	569	584
7.000%, due 3/15/10	5,950	6,459
#E65418, 7.000%, due 8/1/10	389	395
#G10457, 7.000%, due 2/1/11	573	592
#E00436, 7.000%, due 6/1/11	536	555
#G10708, 6.500%, due 8/1/12	319	328
#E91999, 5.000%, due 10/1/12	1,228	1,226
#G11218, 7.000%, due 10/1/12	172	177
#E96147, 5.000%, due 5/1/13	1,673	1,670
#E95846, 4.500%, due 5/1/13	1,423	1,388
#G10839, 5.500%, due 10/1/13	1,500	1,512
#E72924, 7.000%, due 10/1/13	1,386	1,439
#E00639, 5.000%, due 3/1/14	2,020	2,013
#J02572, 7.500%, due 6/1/14	2,481	2,605
#E81697, 8.000%, due 5/1/15	2,930	3,118
#E81908, 8.500%, due 12/1/15	160	171
#G11688, 7.000%, due 2/1/16	982	1,020
#J02184, 8.000%, due 4/1/16	2,402	2,555
#G90022, 8.000%, due 9/17/16	826	876
#G11702, 7.500%, due 12/1/16	964	1,012
#G11486, 7.500%, due 4/1/17	1,181	1,241
#E90398, 7.000%, due 5/1/17	1,483	1,538
#M30028, 5.500%, due 5/1/17	448	455
#G11549, 7.000%, due 7/1/17	1,078	1,119
#G90027, 6.000%, due 11/17/17	1,776	1,815
#G11756, 7.000%, due 12/1/17	1,898	1,969
#G30254, 6.500%, due 5/1/19	3,166	3,276

Issuer	Principal Amount	Value
U.S. Government and U.S. Government Agency—(continued)
Federal Home Loan Mortgage Corp. (FHLMC)—(continued)
#G30255, 7.000%, due 7/1/21	$1,112	$1,163
#G30268, 7.000%, due 7/1/21	2,332	2,447
#C67537, 9.500%, due 8/1/21	238	258
#G30243, 6.000%, due 12/1/21	2,210	2,253
#D95621, 6.500%, due 7/1/22	3,911	4,037
#A45790, 7.500%, due 5/1/35	1,242	1,303
Total FHLMC Mortgage Obligations	55,363	57,446
Federal National Mortgage Association (FNMA)—21.8%
#545560, 8.000%, due 5/1/07	423	433
#1992-192, Tranche SC, 7.470%, due 11/25/07, VRN	358	357
#93-196, Tranche SA, 14.600%, due 10/25/08, VRN	553	596
#1993-221, Tranche SG, 5.675%, due 12/25/08, VRN	415	406
#765396, 5.500%, due 1/1/09	401	404
#695512, 8.000%, due 9/1/10	542	565
#725479, 8.5%, due 10/1/10	1,011	1,053
#255056, 5.000%, due 12/1/10	2,119	2,111
6.250%, due 2/1/11	6,775	7,155
#313816, 6.000%, due 4/1/11	648	661
#577393, 10.000%, due 6/1/11	302	325
#577395, 10.000%, due 8/1/11	1,009	1,093
#254705, 5.500%, due 3/1/13	2,073	2,092
#254788, 6.500%, due 4/1/13	720	742
#725315, 8.000%, due 5/1/13	1,014	1,078
#190539, 6.000%, due 1/1/14	551	562
#806463, 7.000%, due 3/1/14	1,034	1,074
#593561, 9.500%, due 8/1/14	481	522
#567027, 7.000%, due 9/1/14	2,092	2,175
#567026, 6.500%, due 10/1/14	1,985	2,042
#458124, 7.000%, due 12/15/14	587	601
#598453, 7.000%, due 6/1/15	709	729
#576554, 8.000%, due 1/1/16	2,029	2,166
#576553, 8.000%, due 2/1/16	3,011	3,215
#555747, 8.000%, due 5/1/16	705	750
#735569, 8.000%, due 10/1/16	3,593	3,821
#725410, 7.500%, due 4/1/17	1,611	1,695
#643217 , 6.500%, due 6/1/17	436	448
#682075, 5.500%, due 11/1/17	1,324	1,333
#662925, 6.000%, due 12/1/17	1,758	1,804
#251960, 6.000%, due 9/1/18	757	772
#740847, 6.000%, due 10/1/18	1,734	1,772
#458147, 10.000%, due 8/15/20	1,228	1,344
#735367, 6.000%, due 3/1/22	3,098	3,155
#835563, 7.000%, due 10/1/20	1,595	1,672
#735574, 8.00%, due 3/1/22	1,309	1,400
#735104, 7.000%, due 5/1/22	3,218	3,375
#725927, 7.000%, due 8/1/22	2,591	2,714
#735137, 6.500%, due 11/1/22	1,709	1,769
#1993-19, Tranche SH, 11.234%, due 4/25/23, VRN	11	16
#254797, 5.000%, due 6/1/23	2,123	2,078
#806458, 8.00%, due 6/1/28	1,699	1,814
#797846, 7.000%, due 3/1/32	2,671	2,787
#654674, 6.500%, due 9/1/32	386	396
#733897, 6.500%, due 12/1/32	648	677
Total FNMA Mortgage Obligations	65,046	67,749

See accompanying Notes to Financial Statements.

December 31, 2005 William Blair Funds    61

Income Fund

Portfolio of Investments, December 31, 2005 (all amounts in thousands)

Issuer	NRSRO Rating	Principal Amount	Value
Collateralized Mortgage Obligations—24.7%
Security National Mortgage Loan Trust, 2002-2, Tranche M2, 6.460%, due 8/25/08*	A+	$    2,500	$    2,486
Countrywide Alternative Loan Trust, 2003-11T1, Tranche M, 4.750%, due 7/25/18	AA+	1,881	1,822
ABFS, 2002-2, Tranche A6, 5.850%, due 3/15/19	AAA	1,550	1,570
RALI, 2004-QS16, Tranche 2M1, 5.000%, due 12/25/19	AA	1,764	1,704
RALI, 2004-QS16, Tranche 2M3, 5.00%, due 12/25/19	BBB	298	279
RALI, 2005-QS14, Tranche 1M1, 5.25%, due 9/25/20	AA	1,030	1,002
RALI, 2005-QS14, Tranche 1M2, 5.25%, due 9/25/20	A	324	311
First Plus, 1997-4, Tranche M2, 7.830%, due 9/11/23	A	538	538
First Plus, 1997-4, Tranche A8, 7.810%, due 9/11/23	AAA	366	366
First Plus, 1998-2, Tranche M2, 8.010%, due 5/10/24	A	337	336
First Plus, 1998-3, Tranche M2, 7.920%, due 5/10/24	A2	127	127
Bear Stearns ABS, 2001-A, Tranche M1, 7.540%, due 2/15/31	A	2,700	2,733
Delta Funding Home Equity Loan Trust, 2000-4, Tranche M1, 7.150%, due 2/15/31	AA	3,000	3,023
Structured Asset Securities Corp., 2005-SC1, Tranche 1A2, 9.250%, due 5/25/31*	AAA	3,320	3,521
Aames Mortgage Trust, 2001-1, Tranche M2, 7.588%, due 6/25/31	A	1,216	1,247
IMSA, 2001-5, Tranche M1 7.250%, due 8/25/31	AAA	2,222	2,216
Conseco Finance, 2001-B, Tranche 1M1 7.272%, due 6/15/32	AA	1,263	1,279
Credit Suisse First Boston, 2002-22, Tranche 2M2 6.500%, due 6/25/32	A	3,041	3,049
Security National Mortgage Loan Trust, 2004-1A, Tranche M2, 6.750%, due 06/25/32*	A	1,600	1,562
Structured Assets Security Corporation, 2002-13, Tranche B1, 6.750%, due 7/25/32, VRN	AAA	2,556	2,578
Structured Assets Security Corporation, 2002-17, Tranche B3, 6.082%, due 9/25/32, VRN	A	1,914	1,902
LSSCO, 2004-2, Tranche M1, 5.898%, due 2/28/33, VRN*	AA	1,794	1,795
LSSCO, 2004-2, Tranche M2, 5.898%, due 2/28/33, VRN*	A	1,376	1,376
Ameriquest Mortgage Securities, 2003-5, Tranche M3, 6.009%, due 4/25/33	A+	3,385	3,387
ABFS, 2002-2, Tranche A-7, 5.215%, due 7/15/33, VRN	AAA	244	244
ABFS, 2002-3, Tranche M1, 5.402%, due 9/15/33, VRN	AA	1,500	1,495

Issuer	NRSRO Rating	Principal Amount	Value
Collateralized Mortgage Obligations—(continued)
Structured Asset Securities Corp., 2003-28XS, Tranche M3, 6.500%, due 9/25/33	Baa1	$    3,020	$    3,023
Residential Asset Mortgage Prouducts, 2003-RS9, Tranche MI1, 5.800%, due 10/25/33	AA	250	249
Residential Asset Mortgage Prouducts, 2003-RS9, Tranche MI2, 6.300%, due 10/25/33	A	2,200	2,202
ACE, 2004-SD1, Tranche M3 7.129%, due 11/25/33, VRN	BBB	2,099	1,995
Residential Asset Mortgage Products, 2003-RS11, Tranche MI1, 5.597%, due 12/25/33	AA	2,400	2,404
Deutsche Mortgage Securites, Inc., 2004-2, Tranche M1 5.090%, due 1/25/34	AA	2,055	2,012
GRP Real Estate Asset Trust, 2004-2, Tranche A, 4.210%, due 7/25/34*	A	1,428	1,428
FHASI, 2004-AR4, Tranche 3A1 4.590%, due 8/25/34	AAA	1,715	1,683
RAAC, 2005-SP1, Tranche M1 5.504%, due 9/25/34	AA	2,634	2,543
Security National Mortgage Loan Trust, 2004-2A, Tranche M2, 6.352%, due 11/25/34*	A	2,200	2,138
GRP Real Estate Asset Trust, 2005-1 Tranche A, 4.850%, due 1/25/35*	A	1,623	1,623
Security National Mortgage Loan Trust, 2005-1A, Tranche M2, 6.530%, due 2/25/35*	A	1,475	1,437
Security National Mortgage Loan Trust, 2005-1A, Tranche B1, 7.450%, due 2/25/35*	BBB	950	927
Structured Asset Securities Corp., 2005-9XS, Tranche 1A2B, 6.500%, due 5/25/35	AAA	3,435	3,467
Security National Mortgage Loan Trust, 2005-2, Tranche B1, 7.750%, due 2/25/36*	BBB	1,550	1,516
Security National Mortgage Loan Trust, 2005-2, Tranche M2, 7.321%, due 2/25/36*	A	2,075	2,074
Blackrock Capital Finance, 1997-R1 WAC, 1.876%, due 3/25/37, VRN*	AAA	459	470
ACE, 2005-SN1, Tranche M1, 5.520%, due 11/25/39, VRN	AA+	1,075	1,061
ACE, 2005-SN1, Tranche M2, 5.770%, due 11/25/39, VRN	A+	625	618
ACE, 2005-SD3, Tranche M2, 6.129%, due 8/25/45, VRN	A+	1,895	1,895
Total Collateralized Mortgage Obligations		77,009	76,713
Corporate Obligations—25.2%
Block Financial Corporation, 8.500%, due 4/15/07	BBB+	2,724	2,836
Applied Materials, Inc., 6.750%, due 10/15/07	A-	2,875	2,952
Amgen Inc., 6.500%, due 12/01/07	A+	1,000	1,030

See accompanying Notes to Financial Statements.

62    Annual Report December 31, 2005

Income Fund

Portfolio of Investments, December 31, 2005 (all amounts in thousands)

Issuer	NRSRO Rating	Principal Amount	Value
Corporate Obligations—(continued)
DaimlerChrysler, NA Holdings, 4.750%, due 1/15/08	A3	$    2,675	$    2,651
Wells Fargo Company, 3.500%, due 4/4/08	AA	1,450	1,409
Philips Petroleum, 8.750%, due 5/25/10	A-	3,600	4,141
Household Finance Corporation, 8.000%, due 7/15/10	A	2,450	2,733
Boeing Capital Corporation, 7.375%, due 9/27/10	A	2,549	2,805
Sprint Capital Corporation, 7.625%, due 1/30/11	A-	2,000	2,206
Morgan Stanley, 6.750%, due 4/15/11	A+	3,375	3,633
Goldman Sachs Group, Inc., 6.600%, due 1/15/12	A+	3,050	3,276
Lehman Brothers Holdings, Inc. 6.625%, due 1/18/12	A+	2,650	2,861
National Rural Utility Cooperative, 7.250%, due 3/1/12	A	3,025	3,374
Valero Energy Corporation, 6.875%, due 4/15/12	BBB-	2,065	2,250
General Electric Capital Corporation, 6.000%, due 6/15/12	AAA	2,650	2,791
Citigroup, Inc. 5.625%, due 8/27/12	A+	2,675	2,757
SLM Corporation, 5.125%, due 8/27/12	A	2,050	2,053
Verizon Global Funding Corporation, 7.375%, due 9/1/12	A+	2,675	2,983
Cox Communications,Inc., 7.125%, due 10/1/12	BBB-	2,425	2,598
IBM Corporation, 4.750%, due 11/29/12	A+	3,375	3,348
Kroger Company, 5.500%, due 2/1/13	BBB	1,500	1,481
Ohio Power Company, 5.500%, due 2/15/13	A3	1,900	1,934
Altria Group, Inc. 7.000%, due 11/4/13	BBB	2,180	2,386
American Movil SA, 5.500%, due 3/1/14	A3	2,000	1,975

Issuer	NRSRO Rating	Principal Amount	Value
Corporate Obligations—(continued)
Bank of America Corporation, 5.375%, due 6/15/14	AA-	$2,325	$2,364
SBC Communications, Inc., 5.100%, due 9/15/14	A	2,500	2,442
Codelco, Inc.—144A 4.750%, due 10/15/14*	A	2,425	2,349
United Technologies Corporation, 4.875%, due 5/1/15	A	2,725	2,698
Telecom Italia, 5.250%, due 10/1/15	A-	3,000	2,913
American Express Credit Corporation, 5.300%, due 12/2/15	A+	3,000	3,015
Total Corporate Obligations		74,893	78,244
Total Long Term Investments—98.7% (cost $310,427)		297,344	306,625
Short-Term Investments
American Express Corporation, VRN, 4.235%, due 1/3/06	A+	$249	249
Prudential Funding LLC, VRN, 3.930%, due 1/3/06	A+	$224	224
Total Short-Term Investments—0.2% (cost $473)		473	473
Total Investments—98.9% (cost $310,900)		$297,817	307,098
Cash and other assets, less liabilities—1.1%			3,398
Net Assets—100%			$310,496

WAC = Weighted Average Coupon

VRN = Variable Rate Note

NRSRO = Nationally Recognized Statistical Rating Organization, such as S&P, Moody’s or Fitch (unaudited)

The obligations of certain U. S. Government-sponsored securities are neither issued nor guaranteed by the U. S. Treasury

*Deemed illiquid pursuant to Liquidity Procedures adopted by the Board of Trustees. These holdings represent 8.0% of the net assets at December 31, 2005.

See accompanying Notes to Financial Statements.

December 31, 2005 William Blair Funds    63

James S. Kaplan

Christopher T. Vincent

READY RESERVES FUND

The Ready Reserves Fund invests primarily in short-term U.S. dollar-denominated money market instruments, and exclusively in high quality securities that are rated in the top two categories of credit quality.

AN OVERVIEW FROM THE PORTFOLIO MANAGERS

Federal Reserve Board Monetary policy was the focus of the money markets during 2005.

The Federal Reserve raised the federal funds rate on overnight loans between banks by 0.25% eight times during the year, on February 2, March 22, May 3, June 30, August 9, September 30, November 1 and December 13—from 2.50% to 4.25%. Since June of 2004, the Federal Reserve has raised this benchmark short-term interest rate 13 times.

In a statement that accompanied the announcement of its December rate increase, the Federal Reserve Board indicated its work may not be finished yet. In a statement that accompanied the rate hike the Fed said, “the committee judges that some further measured policy firming is likely to be needed.”

However, for the first time since the Fed began raising short-term interest rates in the summer of 2004, the Fed did not refer to its monetary policy as “accommodative,” a term which most Fed watchers interpret as meaning the Fed believes rates are lower than they should be in order to keep inflation in check over the long term.

Many Fed watchers, in turn, concluded from this language that the Fed officials moved closer to a “neutral” position.

The money markets behave as though one more Federal Reserve rate hike is expected in January. We expect the Federal Reserve Board to move to raise rates at its January 31 meeting, which will also be Fed Chairman Alan Greenspan’s last before the new Fed Chairman nominee Ben Bernanke assumes the leadership role.

We may be moving into a period where the Fed is more “data dependent” than before. The measured and automatic interest rate increases of the last 18 months will give way to a period where the Fed analyzes economic data as it is released, then formulates its decisions regarding monetary policy accordingly. There is much more uncertainty regarding future Fed policy than there has been in recent memory.

We intend to maintain our strategy of using commercial paper in the short end of the market, barbelled with fixed-rate obligations with slightly longer maturities, and also will continue to emphasize floating-rate obligations, which price off of LIBOR. (LIBOR is the London Interbank Offered Rate, which is the rate the creditworthiest international banks dealing in Eurodollars—U.S. currency held in banks outside of the U.S.—charge each other for large loans.)

At December 31, 2005, the Fund’s average maturity was 59 days, compared to 59 days at June 30, 2005, and 55.2 days at the end of 2004.

The return for the year ended December 31, 2005, of the Fund’s Class N Shares was 2.62%, versus the 2.44% return of the Fund’s benchmark, the AAA-Rated Money Market Funds Average. Total assets were $1.10 billion at December 31, 2005, compared to $1.14 billion at June 30, 2005 and $1.09 billion at December 31, 2004.

64    Annual Report December 31, 2005

Ready Reserves Fund

Performance Highlights (unaudited)

The Fund’s 7 day yield on December 31, 2005 was 3.61%.

Average Annual Total Returns—Class N Shares year ending December 31, 2005.

	1 Year		3 Year		5 Year		10 Year
Ready Reserves Fund	2.62	%	1.35	%	1.80	%	3.43	%
AAA Rated Money Market Funds	2.44		1.22		1.70		3.43

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher than the data quoted. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds.com. Class N Shares are available to the general public without a sales load. Total return includes reinvestment of income. Yields fluctuate and are not guaranteed. An investment in the Fund is neither insured nor guaranteed by the Federal Deposit Insurance Corp. (FDIC) or any government agency. 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.

The AAA Rated Money Market Funds Average represents the average annual composite performance of all AAA rated First Tier Retail Money Market Funds listed by IBC Financial data.

This report identifies the Fund’s investment’s on December 31, 2005. These holdings are subject to change. Not all fixed-income securities in the Fund performed the same, nor is there any guarantee that these fixed-income securities will perform as well in the future. Market forecasts provided in this report may not necessarily come to pass.

Sector Diversification (unaudited)

The sector diversification shown is based on the total investment portfolio.

December 31, 2005 William Blair Funds    65

Ready Reserves Fund

Portfolio of Investments, December 31, 2005 (all dollar amounts in thousands)

Issuer	Principal Amount		Amortized Cost
Mortage Backed Securities—2.7%
Federal Home Loan Bank (FHLB), 4.404%, 3/28/06	$	9,871	$	9,874
Federal Home Loan Mortgage Corp. (FHLMC), 2.750%, 5/17/06		6,682		6,718
Federal National Mortgage Assoc. (FNMA), 2.900%-5.500%, 2/22/06-4/1/06		12,995		12,999
Total Mortgage Backed Securities		29,548		29,591
Canadian Fixed Rate Notes—4.1%
Province of Ontario, 2.350%-6.000%, 2/21/06-12/15/06		12,721		12,566
Province of Quebec, 5.500%-6.500%, 1/17/06-4/11/06		32,292		32,063
Total Canadian Fixed Rate Notes		45,013		44,629
Fixed Rate Notes—29.7%
Abbott Laboratories, 5.625%-6.400%, 7/1/06-12/1/06		24,022		23,890
American General Finance Corp, 3.638%-5.875%, 1/6/06-7/14/06		21,643		21,641
Anheuser Busch Company, 5.600%, 7/06/06		5,060		5,038
B.P. Capital PLC, 2.350%-6.950%, 6/15/06-12/29/06		10,789		10,838
Brown Forman Corp, 2.125%, 3/15/06		21,819		21,906
Caterpillar Financial Services, 2.650%-9.000%, 1/30/06-5/1/06		22,647		22,652
Cheveron Corporation, 8.250%, 10/1/06		515		513
Colgate-Palmolive Corporation, 5.340%, 3/27/06		12,301		12,219
Du Pont (E.I) De Numours 8.250%, 9/15/06		10,243		10,131
Eli Lilly & Company, 5.500%, 7/15/06		13,220		13,157
GE Capital Corp 2.750%-5.350%, 1/30/06-9/25/06		24,372		24,260
IBM Corporation, 4.875%, 10/1/06		3,002		3,002
Merck & Company, 5.250%, 7/1/06		7,748		7,713
National Rural Utility Coop, 3.000%-6.000%, 2/15/06-5/15/06		19,582		19,611
Paccar Financial, 2.500%-4.290%, 2/17/06-8/1/06		4,460		4,463
Pfizer Inc., 5.625%, 2/1/06		9,232		9,089
Pitney Bowes Inc., 5.875%, 5/1/06		5,546		5,528
SBC Communications, 5.750%-5.875, 2/15/06-5/2/06		23,991		23,965
SLM Corporation, 3.361%, 1/13/06		11,961		11,951
Toyota Motor Credit, 2.800%-5.650%, 1/18/06-1/15/07		9,306		9,318
US Bancorp, 2.750%, 3/30/06		8,094		8,131
USAA Capital Corporation, 7.050%, 11/8/06		1,001		999
Wal-Mart Stores, 4.351%-8.000%, 3/16/06-9/15/06		33,299		33,172
Wells Fargo Financial, 4.540%-7.125%, 2/15/06-8/15/06		20,984		20,678
Total Fixed Rate Notes		324,837		323,865

VRN = Variable Rate Note

Issuer	Principal Amount		Amortized Cost
Variable Rate Notes—9.3%
General Electric Capital Corporation, 4.457%-4.627%, 2/13/06-3/20/06	$	9,663	$	9,660
Paccar Financial Corporation, 4.270%-4.520%, 2/17/06-3/20/06		28,490		28,494
SLM Corp, 4.370%, 1/25/06		14,008		14,007
Toyota Motor Credit, 4.360%-4.510%, 2/27/06-3/15/06		23,925		23,923
US Bank, 4.230%-4.491%, 1/30/06-3/29/06		14,278		14,277
Wells Fargo Financial, 3.960%-4.570%, 3/13/06-3/15/06		11,465		11,460
Total Variable Rate Notes		101,829		101,821
Asset Backed Commercial Paper—51.4%
Alpine Securitization Corporation, 4.260%-4.330%, 1/12/06-2/3/06		45,000		44,848
Amsterdam Funding Corporation, 4.180%-4.320%, 1/5/06-1/20/06		35,000		34,941
Chariot Funding, L.L.C., 4.350%, 2/10/06		14,763		14,692
Ciesco, L.L.C., 4.190%, 1/12/06		10,000		9,987
CRC Funding, L.L.C., 4.190%, 1/6/06		15,000		14,991
FCAR Owner Trust, 4.280%-4.340%, 1/23/06-2/7/06		45,000		44,851
Govco, Inc., 4.300%-4.340%, 1/26/06-2/9/06		35,000		34,854
Jupiter Securitization Corporation, 4.130%-4.300%, 1/4/06-1/27/06		25,000		24,949
Kittyhawk Funding, 4.210%-4.220%, 1/11/06-1/20/06		30,000		29,952
Mortgage Interest Networking Trust, 4.310%-4.370%, 1/26/06-2/2/06		45,000		44,850
New Center Asset Trust, 4.160%-4.290%, 1/5/06-1/24/06		45,000		44,927
Old Line Funding, 4.200%-4.270%, 1/10/06-1/17/06		34,708		34,655
Park Avenue Receivables, 4.120%-4.300%, 1/3/06-1/25/06		20,000		19,969
Ranger Funding, 4.230%-4.300%, 1/9/06-1/23/06		25,000		24,951
Sheffield Receivables, 4.140%-4.190%, 1/3/06-1/10/06		45,000		44,966
Thames Asset Global Securitization, 4.200%-4.330%, 1/4/06-1/24/06		45,916		45,836
Thunder Bay Funding, 4.170%-4.200%, 1/4/06-1/17/06		26,806		26,776
Variable Funding, 4.250%, 1/20/06		10,000		9,978
Windmill Funding Corporation, 4.290%, 1/31/06		10,000		9,964
Total Asset Backed Commercial Paper		562,193		560,937
Demand Notes—2.9%
American Express Corporation, VRN, 4.235%, 1/3/06		17,647		17,647
Prudential Funding, VRN, 3.930%, 1/3/06		14,221		14,221
Total Demand Notes		31,868		31,868
Total Investments—100.1% (cost $1,092,711)	$	1,095,288		1,092,711
Liabilities plus cash and other assets—(0.1)%				(857	)
Net assets—100.0%			$	1,091,854
Portfolio Weighted Average Maturity				59 Days

See accompanying Notes to Financial Statements.

66    Annual Report December 31, 2005

Statements of Assets and Liabilities

December 31, 2005 (all dollar amounts in thousands)

	Growth Fund			Tax- Managed Growth Fund			Large Cap Growth Fund			Small Cap Growth Fund
Assets
Investments in securities, at cost	$	188,016		$	5,277		$	14,585		$	692,345
Investments in Affiliated Fund, at cost		724			363			424			11,002
Investments in securities, at value	$	251,664		$	7,390		$	16,287		$	812,790
Investments in Affiliated Fund, at value		724			363			424			11,002
Cash		15			—			—			69
Receivable for fund shares sold		1,570			175			196			15,029
Receivable for investment securities sold		—			—			—			3,378
Receivable from Advisor		—			12			4			—
Dividend and interest receivable		36			5			9			218
Total assets		254,009			7,945			16,920			842,486
Liabilities
Payable for investment securities purchased		—			117			—			8,560
Payable for fund shares redeemed		189			—			15			1,129
Management fee payable		180			—			—			756
Distribution fee payable		11			—			2			104
Other accrued expenses		70			13			15			199
Total liabilities		450			130			32			10,748
Net Assets	$	253,559		$	7,815		$	16,888		$	831,738
Capital
Composition of Net Assets
Par value of shares of beneficial interest	$	23		$	1		$	2		$	35
Capital paid in excess of par value		188,022			7,497			20,554			721,374
Accumulated net investment income (loss)		(1	)		—			—			—
Accumulated realized gain (loss)		1,867			(1,796	)		(5,370	)		(10,116	)
Net unrealized appreciation (depreciation) of investments and foreign currencies		63,648			2,113			1,702			120,445
Net Assets	$	253,559		$	7,815		$	16,888		$	831,738
Class N Shares
Net Assets	$	51,196		$	305		$	8,325		$	499,603
Shares Outstanding		4,517,497			30,212			1,286,887			21,025,345
Net Asset Value Per Share	$	11.33		$	10.11		$	6.47		$	23.76
Class I Shares
Net Assets	$	202,363		$	7,510		$	8,563		$	332,135
Shares Outstanding		17,565,504			731,554			1,306,213			13,748,968
Net Asset Value Per Share	$	11.52		$	10.27		$	6.56		$	24.16

See accompanying Notes to Financial Statements.

December 31, 2005 William Blair Funds    67

Statements of Operations

For the Year Ended December 31, 2005 (all dollar amounts in thousands)

	Growth Fund			Tax- Managed Growth Fund			Large Cap Growth Fund			Small Cap Growth Fund
Investment income
Dividends	$	1,326		$	41		$	83		$	1,251
Less foreign tax withheld		(28	)		(1	)		(1	)		—
Income from Affiliated Fund		41			6			11			220
Interest		52			1			2			448
Total income		1,391			47			95			1,919
Expenses
Investment advisory fees		1,873			48			83			8,101
Distribution fees		122			—			8			1,108
Custodian fees		73			34			39			145
Transfer agent fees		144			8			15			536
Professional fees		37			18			19			57
Registration fees		30			28			29			54
Other expenses		99			5			9			267
Total expenses before waiver		2,378			141			202			10,268
Less expenses waived or absorbed by the Advisor		—			(62	)		(86	)		—
Net expenses		2,378			79			116			10,268
Net investment income (loss)		(987	)		(32	)		(21	)		(8,349	)
Net realized and unrealized gain (loss) on investments, foreign currency transactions and other assets and liabilities
Net realized gain (loss) on investments		27,667			90			79			48,921
Change in net unrealized appreciation (depreciation) on investments and other assets and liabilities		(3,560	)		703			593			(35,365	)
Net increase (decrease) in net assets resulting from operations	$	23,120		$	761		$	651		$	5,207

See accompanying Notes to Financial Statements.

68    Annual Report December 31, 2005

Statements of Changes in Net Assets

For the Years Ended December 31, 2005 and 2004 (all amounts in thousands)

	Growth Fund						Tax- Managed Growth Fund						Large Cap Growth Fund						Small Cap Growth Fund
	2005			2004			2005			2004			2005			2004			2005			2004
Operations
Net investment income (loss)	$	(987	)	$	(1,071	)	$	(32	)	$	(41	)	$	(21	)	$	(23	)	$	(8,349	)	$	(7,267	)
Net realized gain (loss) on investments, foreign currency transactions and other assets and liabilities		27,667			14,917			90			460			79			196			48,921			80,817
Change in net unrealized appreciation (depreciation) on investments, and other assets and liabilities		(3,560	)		5,610			703			(38	)		593			149			(35,365	)		78,333
Net increase (decrease) in net assets resulting from operations		23,120			19,456			761			381			651			322			5,207			151,883
Distributions to shareholders from
Net investment income		—			—			—			—			—			—			—			—
Net realized gain		(8,977	)		—			—			—			—			—			(71,631	)		(54,782	)
		(8,977	)		—			—			—			—			—			(71,631	)		(54,782	)
Capital stock transactions
Net proceeds from sale of shares		19,807			35,194			1,775			246			11,656			1,655			345,073			260,030
Shares issued in reinvestment of income dividends and capital gain distributions		8,262			—			—			—			—			—			69,879			53,276
Less cost of shares redeemed		(64,159	)		(60,798	)		(568	)		(1,651	)		(1,836	)		(1,079	)		(287,999	)		(158,022	)
Net increase (decrease) in net assets resulting from capital share transactions		(36,090	)		(25,604	)		1,207			(1,405	)		9,820			576			126,953			155,284
Increase (decrease) in net assets		(21,947	)		(6,148	)		1,968			(1,024	)		10,471			898			60,529			252,385
Net assets
Beginning of year		275,506			281,654			5,847			6,871			6,417			5,519			771,209			518,824
End of year	$	253,559		$	275,506		$	7,815		$	5,847		$	16,888		$	6,417		$	831,738		$	771,209
Undistributed net investment income (loss) at the end of the year	$	(1	)	$	—		$	—		$	—		$	—		$	—		$	—		$	—

See accompanying Notes to Financial Statements.

December 31, 2005 William Blair Funds    69

Statements of Assets and Liabilities

December 31, 2005 (all dollar amounts in thousands)

	Small-Mid Cap Growth Fund		International Growth Fund			International Equity Fund			International Small Cap Growth Fund
Assets
Investments in securities, at cost	$	61,582	$	3,249,250		$	160,049		$	46,760
Investments in Affiliated Fund, at cost		2,012		28,678			1,560			410
Investments in securities, at value	$	70,050	$	4,486,691		$	177,243		$	51,042
Investments in Affiliated Fund, at value		2,012		28,678			1,560			410
Cash		—		135			9			—
Foreign currency, at value (cost $20,285, $1,346 and $44, respectively)		—		20,397			1,375			45
Receivable for fund shares sold		397		32,017			528			254
Receivable for investment securities sold		138		9,454			125			304
Receivable from Advisor		—		—			—			—
Dividend and interest receivable		25		3,499			77			22
Total assets		72,622		4,580,871			180,917			52,077
Liabilities
Payable for investment securities purchased		2,298		22,565			819			1,487
Payable for fund shares redeemed		28		2,009			2,211			—
Management fee payable		53		3,782			121			6
Distribution and shareholder administration fee payable		2		643			4			2
Other accrued expenses		30		795			52			48
Total liabilities		2,411		29,794			3,207			1,543
Net Assets	$	70,211	$	4,551,077		$	177,710		$	50,534
Capital
Composition of Net Assets
Par value of shares of beneficial interest	$	6	$	180		$	14		$	5
Capital paid in excess of par value		60,869		3,322,455			163,267			45,907
Accumulated net investment income (loss)		—		(40,521	)		(600	)		(99	)
Accumulated realized gain (loss)		868		31,482			(2,193	)		442
Net unrealized appreciation (depreciation) of investments and foreign currencies		8,468		1,237,481			17,222			4,279
Net Assets	$	70,211	$	4,551,077		$	177,710		$	50,534
Class N Shares
Net Assets	$	11,409	$	3,144,078		$	20,725		$	2,618
Shares Outstanding		919,897		124,648,171			1,611,361			234,591
Net Asset Value Per Share	$	12.40	$	25.22		$	12.86		$	11.16
Class I Shares
Net Assets	$	58,802	$	1,406,999		$	156,985		$	12,753
Shares Outstanding		4,720,884		55,074,581			12,132,710			1,142,550
Net Asset Value Per Share	$	12.46	$	25.55		$	12.94		$	11.16

See accompanying Notes to Financial Statements.

70    Annual Report December 31, 2005

Statements of Operations

For the Year Ended December 31, 2005 (all dollar amounts in thousands)

	Small-Mid Cap Growth Fund			International Growth Fund			International Equity Fund			International Small Cap Growth Fund(a)
Investment income
Dividends	$	174		$	56,041		$	589		$	57
Less foreign tax withheld		—			(4,516	)		(36	)		—
Income from Affiliated Fund		32			660			38			1
Interest		35			2,909			142			16
Total income		241			55,094			733			74
Expenses
Investment advisory fees		494			34,942			670			61
Distribution fees		24			5,945			21			—
Shareholder administration fees		—			—			—			3
Custodian fees		51			1,876			158			34
Transfer agent fees		31			2,323			21			1
Professional fees		23			166			33			24
Registration fees		32			200			47			8
Other expenses		18			1,163			11			3
Total expenses before waiver		673			46,615			961			134
Less expenses waived or absorbed by the Advisor		(50	)		—			(182	)		(54	)
Net expenses		623			46,615			779			80
Net investment income (loss)		(382	)		8,479			(46	)		(6	)
Net realized and unrealized gain (loss) on investments, foreign currency transactions and other assets and liabilities
Net realized gain (loss) on investments		1,453			301,245			(1,923	)		442
Net realized gain (loss) on foreign currency transactions and other assets and liabilities		—			(14,433	)		(725	)		(87	)
Total net realized gain (loss)		1,453			286,812			(2,648	)		355
Change in net unrealized appreciation (depreciation) on investments and other assets and liabilities		6,094			457,704			16,797			4,279
Net increase (decrease) in net assets resulting from operations	$	7,165		$	752,995		$	14,103		$	4,628

(a) For the period from November 1, 2005 (Commencement of Operations) to December 31, 2005.

See accompanying Notes to Financial Statements.

December 31, 2005 William Blair Funds    71

Statements of Changes in Net Assets

For the Years Ended December 31, 2005 and 2004 (all amounts in thousands)

	Small-Mid Cap Growth Fund						International Growth Fund						International Equity Fund						International Small Cap Growth Fund
	2005			2004			2005			2004			2005			2004(a)			2005(b)
Operations
Net investment income (loss)	$	(382	)	$	(152	)	$	8,479		$	(1,748	)	$	(46	)	$	(11	)	$	(6	)
Net realized gain (loss) on investments, foreign currency transactions and other assets and liabilities		1,453			5			286,812			106,478			(2,648	)		641			355
Change in net unrealized appreciation (depreciation) on investments, foreign currency transactions and other assets and liabilities		6,094			2,395			457,704			341,262			16,797			425			4,279
Net increase (decrease) in net assets resulting from operations		7,165			2,248			752,995			445,992			14,103			1,055			4,628
Distributions to shareholders from
Net investment income		—			—			(21,550	)		(2,616	)		—			—			(6	)
Net realized gain		(495	)		—			(254,334	)		—			—			—			—
		(495	)		—			(275,884	)		(2,616	)		—			—			(6	)
Capital stock transactions
Net proceeds from sale of shares		43,370			21,231			1,424,671			1,143,395			196,067			16,380			46,006
Shares issued in reinvestment of income dividends and capital gain distributions		457			—			246,145			2,161			—			—			6
Less cost of shares redeemed		(6,260	)		(1,178	)		(598,284	)		(487,197	)		(42,149	)		(7,746	)		(100	)
Net increase (decrease) in net assets resulting from capital stock transactions		37,567			20,053			1,072,532			658,359			153,918			8,634			45,912
Increase (decrease) in net assets		44,237			22,301			1,549,643			1,101,735			168,021			9,689			50,534
Net assets
Beginning of year		25,974			3,673			3,001,434			1,899,699			9,689			—			—
End of year	$	70,211		$	25,974		$	4,551,077		$	3,001,434		$	177,710		$	9,689		$	50,534
Undistributed net investment income (loss) at the end of the year	$	—		$	—		$	(40,521	)	$	(17,106	)	$	(600	)	$	(79	)	$	(99	)

(a) For the period from May 24, 2004 (Commencement of Operations) to December 31, 2004.

(b) For the period from November 1, 2005 (Commencement of Operations) to December 31, 2005.

See accompanying Notes to Financial Statements.

72    Annual Report December 31, 2005

Statements of Assets and Liabilities

December 31, 2005 (all dollar amounts in thousands)

	Emerging Markets Growth Fund			Value Discovery Fund		Income Fund			Ready Reserves Fund
Assets
Investments in securities, at cost	$	209,443		$	55,920	$	310,900		$	1,092,711
Investments in Affiliated Fund, at cost		3,821			73		—			—
Investments in securities, at value	$	239,112		$	68,140	$	307,098		$	1,092,711
Investments in Affiliated Fund, at value		3,821			73		—			—
Cash		1			165		—			—
Foreign currency, at value (cost $2,860)		2,878			—		—			—
Receivable for fund shares sold		1,269			45		1,491			—
Receivable for investment securities sold		2,930			2,372		—			—
Dividend and interest receivable		132			86		2,876			5,356
Total assets		250,143			70,881		311,465			1,098,067
Liabilities
Payable for investment securities purchased		518			—		—			5,398
Payable for fund shares redeemed		45			340		777			—
Management fee payable		153			18		114			202
Distribution and shareholder administration fee payable		9			32		13			—
Shareholder services fee payable		—			—		—			308
Dividend payable		—			—		—			218
Other accrued expenses		70			52		65			87
Total liabilities		795			442		969			6,213
Net Assets	$	249,348		$	70,439	$	310,496		$	1,091,854
Capital
Composition of Net Assets
Par value of shares of beneficial interest	$	18		$	4	$	31		$	826
Capital paid in excess of par value		219,209			55,221		331,017			1,091,974
Accumulated net investment income (loss)		(322	)		3		—			81
Accumulated realized gain (loss)		757			2,991		(16,750	)		(1,027	)
Net unrealized appreciation (depreciation) of investments and foreign currencies		29,686			12,220		(3,802	)		—
Net Assets	$	249,348		$	70,439	$	310,496		$	1,091,854
Class N Shares
Net Assets	$	21,673		$	16,163	$	100,840		$	1,091,854
Shares Outstanding		1,529,656			1,081,344		10,259,859			1,091,908,251
Net Asset Value Per Share	$	14.17		$	14.95	$	9.83		$	1.00
Class I Shares
Net Assets	$	38,244		$	54,276	$	209,656
Shares Outstanding		2,696,122			3,589,587		21,354,489
Net Asset Value Per Share	$	14.19		$	15.12	$	9.82

See accompanying Notes to Financial Statements.

December 31, 2005 William Blair Funds    73

Statements of Operations

For the Year Ended December 31, 2005 (all dollar amounts in thousands)

	Emerging Markets Growth Fund(a)			Value Discovery Fund			Income Fund			Ready Reserves Fund
Investment income
Dividends	$	586		$	1,316		$	—		$	—
Less foreign tax withheld		(24	)		—			—			—
Income from Affiliated Fund		26			28			—			—
Interest		90			172			14,756			34,688
Total income		678			1,516			14,756			34,688
Expenses
Investment advisory fees		508			1,518			1,422			2,614
Distribution fees		6			53			141			—
Shareholder administration fees		22			—			—			—
Shareholder services fees		—			—			—			3,776
Custodian fees		148			112			97			170
Transfer agent fees		12			100			102			38
Professional fees		29			37			40			67
Registration fees		41			30			36			23
Other expenses		4			47			66			177
Total expenses before waiver		770			1,897			1,904			6,865
Less expenses waived or absorbed by the Advisor		(161	)		(333	)		—			—
Net expenses		609			1,564			1,904			6,865
Net investment income (loss)		69			(48	)		12,852			27,823
Net realized and unrealized gain (loss) on investments, foreign currency transactions and other assets and liabilities
Net realized gain (loss) on investments		1,926			39,004			(1,052	)		—
Net realized gain (loss) on foreign currency transactions and other assets and liabilities		(391	)		—			—			—
Total net realized gain (loss)		1,535			39,004			(1,052	)		—
Change in net unrealized appreciation (depreciation) on investments and other assets and liabilities		29,686			(49,149	)		(6,151	)		—
Net increase (decrease) in net assets resulting from operations	$	31,290		$	(10,193	)	$	5,649		$	27,823

(a) For the period from June 6, 2005 (Commencement of Operations) to December 31, 2005.

See accompanying Notes to Financial Statements.

74    Annual Report December 31, 2005

Statements of Changes in Net Assets

For the Years Ended December 31, 2005 and 2004 (all amounts in thousands)

	Emerging Markets Growth Fund(a)			Value Discovery Fund						Income Fund						Ready Reserves Fund
	2005			2005			2004			2005			2004			2005			2004
Operations
Net investment income (loss)	$	69		$	(48	)	$	84		$	12,852		$	11,549		$	27,823		$	8,967
Net realized gain (loss) on investments, foreign currency transactions and other assets and liabilities		1,535			39,004			26,728			(1,052	)		(1,841	)		—			13
Change in net unrealized appreciation (depreciation) on investments, foreign currency transactions and other assets and liabilities		29,686			(49,149	)		240			(6,151	)		(2,534	)		—			—
Net increase (decrease) in net assets resulting from operations		31,290			(10,193	)		27,052			5,649			7,174			27,823			8,980
Distributions to shareholders from
Net investment income		—			—			—			(16,070	)		(14,033	)		(27,823	)		(8,967	)
Net realized gain		(1,169	)		(24,647	)		(26,037	)		—			—			—			—
		(1,169	)		(24,647	)		(26,037	)		(16,070	)		(14,033	)		(27,823	)		(8,967	)
Capital stock transactions
Net proceeds from sale of shares		224,893			19,288			58,405			95,102			93,503			1,131,031			1,678,077
Shares issued in reinvestment of income dividends and capital gain distributions		1,122			24,267			25,638			12,541			10,085			27,698			8,904
Capital contribution by the Advisor		—			—			—			—			—			—			1,000
Less cost of shares redeemed		(6,788	)		(184,452	)		(75,993	)		(80,810	)		(67,707	)		(1,159,815	)		(1,748,986	)
Net increase (decrease) in net assets resulting from capital stock transactions		219,227			(140,897	)		8,050			26,833			35,881			(1,086	)		(61,005	)
Increase (decrease) in net assets		249,348			(175,737	)		9,065			16,412			29,022			(1,086	)		(60,992	)
Net assets
Beginning of year		—			246,176			237,111			294,084			265,062			1,092,940			1,153,932
End of year	$	249,348		$	70,439		$	246,176		$	310,496		$	294,084		$	1,091,854		$	1,092,940
Undistributed net investment income (loss) at the end of the year	$	(322	)	$	3		$	36		$	—		$	173		$	81		$	81

(a) For the period from June 6, 2005 (Commencement of Operations) to December 31, 2005.

See accompanying Notes to Financial Statements.

December 31, 2005 William Blair Funds    75

Notes to Financial Statements

(1) Significant Accounting Policies

(a) Description of the Fund

William Blair Funds (the “Fund”) is a diversified mutual fund registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. For each portfolio, the number of shares authorized is unlimited. The Fund currently consists of the following fourteen portfolios (the “Portfolios”), each with its own investment objectives and policies.

Equity Portfolios	International Portfolios
Growth	International Growth
Tax-Managed Growth	International Equity
Large Cap Growth	International Small Cap Growth
Small Cap Growth	Institutional International Growth
Small-Mid Cap Growth	Institutional International Equity
Value Discovery	Emerging Markets Growth
	Fixed Income Portfolio
	Income
	Money Market Portfolio
	Ready Reserves

The investment objectives of the Portfolios are as follows:

Equity	Long-term capital appreciation.
International	Long-term capital appreciation.
Fixed Income	High level of current income with relative stability of principal.
Money Market	Current income, a stable share price and daily liquidity.

The Institutional International Growth Fund, the Institutional International Equity Fund and the Institutional Class of the International Small Cap Growth Fund and Emerging Markets Growth Fund issue a separate report.

(b) Share Classes

Three different classes of shares currently exist: N, I and Institutional. This report includes financial highlight information for Classes N and I. The table below describes the Class N shares and the Class I shares covered by this report:

Class	Description
N	Class N shares are sold to the general public, either directly through the Fund’s distributor or through a select number of financial intermediaries. Class N shares are sold without any sales load, and carry an annual 12b-1 distribution fee (0.25% for the Equity and International Portfolios and 0.15% for the Fixed Income Portfolio) or a service fee (0.35% for the Money Market Portfolio), and an annual shareholder administration fee (0.15% for the International Small Cap Growth Portfolio and Emerging Markets Growth Portfolio).
I	Class I shares are sold to a limited group of investors. They do not carry any sales load or distribution fees and generally have lower ongoing expenses than the other classes. Class I shares of the International Small Cap Growth Portfolio and Emerging Markets Growth Portfolio carry an annual shareholder administration fee of 0.15%.

Investment income, realized and unrealized gains and losses, and certain portfolio level expenses and expense reductions, if any, are allocated based on the relative net assets of each class, except for certain class specific expenses which are charged directly to the appropriate class. Differences in class expenses may result in the payment of different per share dividends by class. All share classes of the Portfolios have equal rights with respect to voting subject to class specific arrangements.

(c) Investment Valuation

The market value of domestic equity securities and options is determined by valuing securities traded on national securities exchanges or markets or in the over-the-counter markets at the last sales price or, if applicable, the official closing price or, in the absence of a sale on the date of valuation, at the latest bid price.

76    Annual Report December 31, 2005

For international securities, if the foreign exchange or market on which a security is primarily traded closes before the close of regular trading on the New York Stock Exchange (4:00 p.m. Eastern time), the Funds use an independent pricing service on a daily basis to estimate the fair value price as of the close of regular trading on the New York Stock Exchange. The Board of Trustees has determined that the passage of time between when foreign exchanges or markets close and when the Funds calculate their net asset values could cause the value of international securities to no longer be representative of their market price or accurate. Otherwise, the value of foreign equity securities is determined based on the last sale price on the foreign exchange or market on which it is primarily traded or, if there have been no sales during that day, at the latest bid price. Foreign currency forward contracts and foreign currencies are valued at the forward and current exchange rates, respectively, prevailing on the date of valuation. In addition, quarterly the Board of Trustees receives a report which tracks the fair value prices used to calculate the net asset value to the next day’s opening local prices.

Long-term, fixed income securities are valued based on market quotations, or by independent pricing services that use prices provided by market makers or by estimates of market values obtained from yield data relating to instruments or securities with similar characteristics.

Investments in other funds are valued at the underlying fund’s net asset value on the date of valuation. Other securities, and all other assets, including securities for which a market price is not available, or the value of which is affected by a significant valuation event, are valued at fair value as determined in good faith by, or under the direction of the Board of Trustees and in accordance with the Fund’s valuation procedures. As of December 31, 2005, there were securities held in Small Cap Growth, International Growth, International Equity, International Small Cap Growth, Emerging Markets Growth and Value Discovery Portfolios requiring fair valuation pursuant to the Fund’s valuation procedures. Short-term securities held in the Ready Reserves Fund are valued at amortized cost, which approximates market value.

(d) Investment income and investment transactions

Dividend income is recorded on the ex-dividend date, except for those dividends from certain foreign securities which are recorded as soon as the information is available. Foreign currency gains and losses associated with fluctuations in the foreign currency rate versus the United States dollar are recorded in the Statement of Operations as a component of the net realized gain (loss) on foreign currency transactions and other assets and liabilities.

Premiums and discounts are accreted and amortized on a straight-line basis for short-term investments and on an effective interest method for long-term investments.

Interest income is determined on the basis of the interest accrued, adjusted for amortization of premium or discount. Variable rate bonds and floating rate notes earn interest at coupon rates that fluctuate at specific time intervals. The interest rates shown in the Portfolio of Investments for the Income Portfolio and the Ready Reserves Portfolio were the rates in effect on December 31, 2005. Put bonds may be redeemed at the discretion of the holder on specified dates prior to maturity.

Paydown gains and losses on mortgage and asset-backed securities are treated as an adjustment to interest income. For the year ended December 31, 2005, the Income Portfolio recognized a reduction of interest income and a reduction of net realized loss of $2,990 (in thousands). This reclassification has no effect on the net asset value of the Portfolio.

Securities transactions are recorded on the trade date. Realized gains and losses from securities transactions are recognized on the basis of high cost lot sell selection.

(e) Share Valuation and Dividends to Shareholders

Shares are sold and redeemed on a continuous basis at net asset value. The net asset value per share is determined separately for each class by dividing the Portfolio’s net assets attributable to that class by the number of shares of the class outstanding as of the close of regular trading on the New York Stock Exchange, which is generally 3:00 p.m. Central time (4:00 p.m. Eastern time), on each day the Exchange is open. Redemption fees may be applicable to redemptions within 60 days of purchase. The redemption fees collected by the Fund are netted against the amount of Redemptions for presentation on the Statement of Changes in Net Assets.

December 31, 2005 William Blair Funds    77

For the year ended December 31, 2005, the redemption fees collected by the Portfolios were as follows (in thousands):

	Redemption Fees
Growth	$	3
Tax-Managed Growth		—
Large Cap Growth		—
Small Cap Growth		17
Small Mid-Cap Growth		—
International Growth		51
International Equity		3
International Small Cap Growth		—
Emerging Markets Growth		10
Value Discovery		3
Income		—

Dividends from net investment income, if any, of the Growth, Tax-Managed Growth, Large Cap Growth, Small Cap Growth, Small-Mid Cap Growth, International Growth, International Equity, International Small Cap Growth, Emerging Markets Growth and Value Discovery Portfolios are declared at least annually. Dividends from the Income and the Ready Reserves Portfolios are declared monthly and daily, respectively. Capital gain distributions, if any, are declared at least annually in December. Dividends payable to shareholders are recorded on the ex-dividend date.

The timing and characterization of certain income and capital gain distributions are determined annually in accordance with Federal income tax regulations that may differ from U.S. generally accepted accounting principles. As a result, net investment income or loss and net realized gain or loss for a reporting period may differ from the amount distributed during such period. In addition, the Portfolios may periodically record reclassifications among certain capital accounts to reflect differences between financial reporting and income tax basis distributions. The reclassifications were reported in order to reflect the tax treatment for certain permanent differences that exist between income tax regulations and U.S. generally accepted accounting principles. The reclassifications relate to net operating losses, Section 988 currency gains and losses, recharacterization of dividends received from investments in REITs, expired capital loss carryforwards, and gain or loss on in-kind transactions. These reclassifications have no impact on the net asset values of the Portfolios. Accordingly, at December 31, 2005, the following reclassifications were recorded (in thousands):

Portfolio	Undistributed Net Investment Income/(Loss)			Accumulated Undistributed Net Realized Gain/(Loss)			Capital Paid In Excess of Par Value
Growth	$	986		$	1		$	(987	)
Tax-Managed Growth		32			—			(32	)
Large Cap Growth		21			—			(21	)
Small Cap Growth		8,349			(8,316	)		(33	)
Small-Mid Cap Growth		382			(20	)		(362	)
International Growth		(10,344	)		10,344			—
International Equity		(475	)		472			3
International Small Cap Growth		(87	)		87			—
Emerging Markets Growth		(391	)		391			—
Value Discovery		15			(16,587	)		16,572
Income		3,045			(2,990	)		(55	)
Ready Reserves		—			1			(1	)

78    Annual Report December 31, 2005

Distributions from net realized gains for book purposes may include short-term capital gains, which are included as ordinary income for tax purposes. The tax character of distributions paid during 2005 and 2004 was as follows (in thousands):

	Distributions Paid In 2005				Distributions Paid In 2004
Portfolio	Ordinary Income		Long-Term Capital Gains		Ordinary Income		Long-Term Capital Gains
Growth	$	—	$	8,977	$	—	$	—
Tax-Managed Growth		—		—		—		—
Large Cap Growth		—		—		—		—
Small Cap Growth		11,335		60,296		15,332		39,450
Small-Mid Cap Growth		—		495		—		—
International Growth		21,550		254,334		2,616		—
International Equity		—		—		—		—
International Small Cap Growth		6		—		—		—
Emerging Markets Growth		1,169		—		—		—
Value Discovery		—		24,647		—		26,037
Income		16,070		—		14,033		—
Ready Reserves		27,823		—		8,967		—

As of December 31, 2005, the components of distributable earnings on a tax basis were as follows (in thousands):

Portfolio	Undistributed Ordinary Income		Accumulated Capital and Other Losses		Undistributed Long-Term Gain		Net Unrealized Appreciation / (Depreciation)
Growth	$	—	$	—	$	2,034	$	63,480
Tax-Managed Growth		—		1,796		—		2,113
Large Cap Growth		—		5,327		—		1,659
Small Cap Growth		—		7,540		—		117,869
Small-Mid Cap Growth		—		—		1,113		8,223
International Growth		24,244		—		34,770		1,169,428
International Equity		1,109		1,042		—		14,362
International Small Cap Growth		511		—		—		4,111
Emerging Markets Growth		404		—		1,158		28,559
Value Discovery		—		—		4,318		10,896
Income		—		16,667		—		(3,885	)
Ready Reserves		81		1,027		—		—

(f) Options

The Portfolios may engage in options transactions on security indices and other financial indices and in doing so achieve similar objectives to what they would achieve through the sale or purchase of options on individual securities or other instruments.

Option writing. When a Portfolio writes an option, an amount equal to the premium received by the Portfolio is recorded as a liability and is subsequently adjusted to the current fair value of the option written. Premiums received from writing options that expire unexercised are treated by the Portfolio on the expiration date as realized gains from investments. The difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or, if the premium is less than the amount paid for the closing purchase transaction, as a realized loss. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security or currency in determining whether the Portfolio has realized a gain or loss. If a put option is exercised, the premium reduces the cost basis of the securities purchased by the Portfolio. The Portfolio as writer of an option bears the market risk of an unfavorable change in the price of the security underlying the written option. There were no open options at December 31, 2005.

(g) Foreign Currency Translation and Forward Foreign Currency Contracts

The International Growth, International Equity, International Small Cap Growth and Emerging Markets Growth Portfolios may invest in securities denominated in foreign currencies. As such, assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at the current exchange rate on the date of valuation. The Portfolios may enter into

December 31, 2005 William Blair Funds    79

foreign currency forward contracts (1) as a means of managing the risks associated with changes in the exchange rates for the purchase or sale of a specific amount of a particular foreign currency, and (2) to hedge the value, in U.S. dollars, of portfolio securities. Gains and losses from foreign currency transactions associated with purchases and sales of investments and foreign currency forward contracts are included with the net realized and unrealized gain or loss on investments.

(h) Income Taxes

Each Portfolio intends to comply with the special provisions of Subchapter M of the Internal Revenue Code available to regulated investment companies and, therefore, no provision for Federal income taxes has been made in the accompanying financial statements since each Portfolio intends to distribute substantially all of its taxable income to its shareholders and be relieved of all Federal income taxes.

The cost of investments for Federal income tax purposes and related gross unrealized appreciation/(depreciation) and net unrealized appreciation/(depreciation) at December 31, 2005, were as follows (in thousands):

Portfolio	Cost of Investments		Gross Unrealized Appreciation		Gross Unrealized Depreciation		Net Unrealized Appreciation/ (Depreciation)
Growth	$	188,908	$	65,480	$	2,000	$	63,480
Tax-Managed Growth		5,640		2,158		45		2,113
Large Cap Growth		15,052		1,888		229		1,659
Small Cap Growth		705,923		141,526		23,657		117,869
Small-Mid Cap Growth		63,839		9,850		1,627		8,223
International Growth		3,345,981		1,185,856		16,428		1,169,428
International Equity		164,469		15,390		1,028		14,362
International Small Cap Growth		47,338		4,497		386		4,111
Emerging Markets Growth		214,391		28,804		245		28,559
Value Discovery		57,317		11,878		982		10,896
Income		310,983		1,449		5,334		(3,885	)
Ready Reserves		1,092,711		—		—		—

At December 31, 2005, the Portfolios have unused capital loss carryforwards available for Federal income tax purposes to be applied against future capital gains, if any. If not applied, the carryforwards will expire as follows (in thousands):

Portfolio	2006		2007		2008		2009		2010		2011		2012		2013		Total
Growth	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Tax-Managed Growth		—		—		—		273		1,037		468		—		—		1,778
Large Cap Growth		—		—		246		2,714		1,582		769		—		—		5,311
Small Cap Growth		—		—		—		—		—		—		—		—		—
Small-Mid Cap Growth		—		—		—		—		—		—		—		—		—
International Growth		—		—		—		—		—		—		—		—		—
International Equity		—		—		—		—		—		—		—		1,042		1,042
International Small Cap Growth		—		—		—		—		—		—		—		—		—
Emerging Markets Growth		—		—		—		—		—		—		—		—		—
Value Discovery		—		—		—		—		—		—		—		—		—
Income		—		1,249		3,292		—		1,692		1,582		4,431		3,398		15,644
Ready Reserves		1		51		24		—		930		—		21		—		1,027

The International Growth, International Equity, International Small Cap Growth and Emerging Markets Growth Portfolios have elected to mark-to-market their investments in Passive Foreign Investment Companies (“PFICs”) for Federal income tax purposes. In accordance with this election, the Portfolios recognized net unrealized appreciation/(depreciation) of $51,869, $1,706, $117 and $726, respectively (in thousands) in 2005, all of which has been reclassified from unrealized gain/(loss) on investments to undistributed net investment income.

80    Annual Report December 31, 2005

For the period November 1, 2005 through December 31, 2005, the following Portfolios incurred net realized capital or foreign currency losses. Each Portfolio intends to treat this loss as having occurred in fiscal year 2006 for Federal income tax purposes (in thousands):

Portfolio	Capital Loss
Growth	$	—
Tax-Managed Growth		18
Large Cap Growth		16
Small Cap Growth		7,540
Small-Mid Cap Growth		—
International Growth		—
International Equity		—
International Small Cap Growth		—
Emerging Markets Growth		—
Value Discovery		—
Income		1,023
Ready Reserves		—

(i) Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results may differ from those estimates.

(2) Transactions with Affiliates

(a) Management and Expense Limitation Agreements

Each Portfolio has a management agreement with William Blair & Company L.L.C. (the “Company”) for investment advisory, administrative, and other accounting services. Each Portfolio pays the Company an annual fee, payable monthly, based on a specified percentage of its average daily net assets. A summary of the annual rates expressed as a percentage of average daily net assets is as follows:

Equity Portfolios			International Portfolios
Growth	0.75	%	International Growth and International Equity
Tax-Managed Growth	0.80	%	First $250 million	1.10	%
Large Cap Growth	0.80	%	In excess of $250 million	1.00	%
Small Cap Growth	1.10	%	International Small Cap Growth	1.00	%
Small-Mid Cap Growth	1.00	%	Emerging Markets Growth	1.10	%
Value Discovery	1.15	%
Fixed Income Portfolio			Money Market Portfolio
Income*			Ready Reserves
First $250 million	0.25	%	First $250 million	0.275	%
In excess of $250 million	0.20	%	Next $250 million	0.250	%
*Management fee also includes a charge of 5% of gross income.			Next $2 billion In excess of $2.5 billion	0.225 0.200	% %

December 31, 2005 William Blair Funds    81

Some of the Portfolios have also entered into Expense Limitation Agreements with the Company. Under the terms of these Agreements, the Company has agreed to waive its advisory fees and absorb other operating expenses through April 30, 2006, if total expenses for each class of the following Portfolios exceed the following rates (as a percentage of average daily net assets):

	Class N Shares				Class I Shares
	Through April 30, 2005		Effective May 1, 2005		Through April 30, 2005		Effective May 1, 2005
Tax-Managed Growth	1.54	%	1.53	%	1.29	%	1.28	%
Large Cap Growth	1.34	%	1.25	%	1.09	%	1.00	%
Small Cap Growth	1.53	%	1.50	%	1.40	%	1.25	%
Small-Mid Cap Growth	1.54	%	1.40	%	1.29	%	1.15	%
International Growth	N/A		1.48	%	N/A		1.23	%
International Equity	1.50	%	1.48	%	1.25	%	1.23	%
International Small Cap Growth	N/A		1.65	%	N/A		1.40	%
Emerging Markets Growth	N/A		1.65	%	N/A		1.40	%
Value Discovery	1.34	%	1.34	%	1.25	%	1.09	%
Income Fund	N/A		0.75	%	N/A		N/A

For a period of five years subsequent to the Commencement of Operations of each Fund, the Company is entitled to reimbursement from the Tax-Managed Growth, Large Cap Growth, and Small Cap Growth Portfolios for previously waived fees and expenses to the extent the overall expense ratio remains below the percentages indicated. As a result, the total expense ratio for the Portfolios during the period the agreement is in effect will not fall below the percentages indicated. The Company’s right to be reimbursed under these agreements expired December 27, 2004. Under this provision, the Small Cap Growth Portfolio reimbursed the Advisor $164, for the year ended December 31, 2004 (in thousands).

For a period of three years subsequent to the Commencement of Operations of the Small-Mid Cap Growth, the International Equity, International Small Cap Growth and the Emerging Markets Growth Portfolios, the Company is entitled to reimbursement for previously waived fees and expenses to the extent the overall expense ratio remains below the percentages indicated. The total amount available for recapture at December 31, 2005 is $131 (in thousands) for the Small-Mid Cap Growth Portfolio, $244 for the International Equity Portfolio, $54 for the International Small Cap Growth Portfolio and $161 for the Emerging Markets Growth Portfolio.

For the year ended December 31, 2005, the investment advisory fees incurred by the Portfolios and related fee waivers were as follows (in thousands) :

Portfolio	Gross Advisory Fee		Fee Waiver		Net Advisory Fee		Additional Expenses (Recovered) or Absorbed by Advisor
Growth	$	1,873	$	—	$	1,873	$	—
Tax-Managed Growth		48		48		—		14
Large Cap Growth		83		83		—		3
Small Cap Growth		8,101		—		8,101		—
Small-Mid Cap Growth		494		50		444		—
International Growth		34,942		—		34,942		—
International Equity		670		182		488		—
International Small Cap Growth		61		54		7		—
Emerging Markets Growth		508		161		347		—
Value Discovery		1,518		319		1,199		—
Income		1,422		—		1,422		—
Ready Reserves		2,614		—		2,614		—

(b) Underwriting, Distribution Services and Service Agreement

Each Portfolio except Ready Reserves Portfolio has a Distribution Agreement with the Company for distribution services. Each Portfolio pays the Company an annual fee, payable monthly, based on a specified percentage of its average daily net assets of specified share classes. The annual rates expressed as a percentage of average daily net assets for Class N is 0.25% for all Portfolios except the Income Portfolio, which is 0.15%. Pursuant to the Distribution Agreement, the Company enters into related selling group agreements with various firms at various rates for sales of the Portfolios’ Class N shares.

82    Annual Report December 31, 2005

Distribution fees incurred by the Portfolios to the Company, for the year ended December 31, 2005, were as follows (in thousands):

Portfolio	Gross Distribution Fees		Fee Waiver		Net Distribution Fee
Growth	$	122	$	—	$	122
Tax-Managed Growth		—		—		—
Large Cap Growth		8		—		8
Small Cap Growth		1,108		—		1,108
Small-Mid Cap Growth		24		—		24
International Growth		5,945		—		5,945
International Equity		21		—		21
International Small Cap Growth		—		—		—
Emerging Markets Growth		8		—		8
Value Discovery		53		14		39
Income		141		—		141

The Ready Reserves Portfolio has a Service Agreement with the Company to provide shareholder services and automatic sweep services. The Portfolio pays the Company an annual fee, payable monthly, based upon 0.35% of the average daily net assets of Class N. For the year ended December 31, 2005, the following fees were incurred (in thousands):

Ready Reserves $ 3,776

The International Small Cap Growth and the Emerging Markets Growth Portfolios have a Shareholder Administration Agreement with the Company to provide shareholder administration services. Class N and Class I shares of the Portfolios pay the Company an annual fee, payable monthly, based upon 0.15% of average daily net assets attributable to each class, respectively. For the year ended December 31, 2005, the following fees were incurred (in thousands):

International Small Cap Growth	$	3
Emerging Markets Growth		22

(c) Trustees Fees

The Portfolios incurred fees of $218 (in thousands) to non-interested trustees of the Fund for the year ended December 31, 2005. Interested trustees are not compensated.

(d) Investments in Affiliated Portfolio

Pursuant to an Exemptive Order granted by the Securities and Exchange Commission in January, 2001, each of the Portfolios of the Fund may invest in the William Blair Ready Reserves Portfolio (“Ready Reserves”), an open-end money market portfolio managed by the Advisor. Ready Reserves Portfolio is used as a cash management option to the other Portfolios in the Fund. The Advisor waives management fees and shareholder service fees earned from the other Portfolios’ investment in the Ready Reserves Fund. The fees waived with respect to each Portfolio for the year ended December 31, 2005 are listed below. Distributions received from Ready Reserves are reflected as dividend income in each Portfolio’s statement of operations. Amounts relating to the Portfolios’ investments in Ready Reserves were as follows for the year ended December 31, 2005 (in thousands):

Portfolio	Purchases		Sales Proceeds		Fees Waived		Dividend Income		Value		Percent of Net Assets
Growth	$	46,212	$	45,626	$	11	$	41	$	724	0.3	%
Tax-Managed Growth		2,298		1,982		1		6		363	4.6
Large Cap Growth		10,184		9,937		2		11		424	2.5
Small Cap Growth		79,733		90,580		52		220		11,002	1.3
Small-Mid Cap Growth		18,182		17,146		8		32		2,012	2.9
International Growth		125,312		136,500		152		660		28,678	0.7
International Equity		18,145		16,804		7		38		1,560	0.9
International Small Cap Growth		3,170		2,760		—		1		410	0.8
Emerging Markets Growth		17,270		13,449		5		26		3,821	1.5
Value Discovery		33,889		40,717		8		28		73	0.1

December 31, 2005 William Blair Funds    83

(e) Capital Contribution to Affiliated Portfolio

In 2004, the Company voluntarily contributed $1 million dollars to the Ready Reserves Portfolio for which it did not receive any shares. This contribution is reflected on the Statement of Changes in Net Assets.

(3) Investment Transactions

Investment transactions, excluding money market instruments, for the year ended December 31, 2005 were as follows (in thousands):

Portfolio	Purchases		Sales
Growth	$	132,859	$	184,856
Tax-Managed Growth		2,096		1,474
Large Cap Growth		14,622		5,328
Small Cap Growth		633,328		577,945
Small-Mid Cap Growth		64,587		29,936
International Growth		3,113,784		2,361,056
International Equity		220,070		74,046
International Small Cap Growth		50,786		7,799
Emerging Markets Growth		240,654		40,574
Value Discovery		163,644		326,814
Income		155,850		127,568

(4) Foreign Currency Forward Contracts

To protect itself against a decline in the value of foreign currency against the U.S. dollar, the International Growth, International Equity, International Small Cap Growth and Emerging Markets Growth Portfolios enter into foreign currency forward contracts with its custodian and others. The Portfolios bear the market risk that arises from changes in foreign currency rates and bears the credit risk if the counterparty fails to perform under the contract. The net realized and unrealized gains and losses associated with foreign currency forward contracts are reflected in the accompanying financial statements. There were no open foreign currency forward contracts at December 31, 2005.

(5) Subsequent Events

The Fund filed a Post-Effective Amendment to its Registration Statement on November 17, 2005 for the purpose of adding a new portfolio to the Fund, William Blair Mid Cap Growth Fund-Class N and Class I. The new Portfolio commenced operations on February 1, 2006.

84    Annual Report December 31, 2005

(5) Fund Share Transactions

The following table summarizes the activity in capital shares of each Portfolio (in thousands):

	Sales (Dollars)
	Year Ended December 31, 2005						Year Ended December 31, 2004
Portfolio	Class N		Class I		Total		Class N		Class I		Total
Growth	$	10,753	$	9,054	$	19,807	$	19,930	$	15,264	$	35,194
Tax-Managed Growth		113		1,662		1,775		—		246		246
Large Cap Growth		7,918		3,738		11,656		99		1,556		1,655
Small Cap Growth		236,433		108,640		345,073		182,154		77,876		260,030
Small Mid-Cap Growth		5,104		38,266		43,370		7,409		13,822		21,231
International Growth		1,066,440		358,231		1,424,671		806,487		336,908		1,143,395
International Equity (a)		18,044		178,024		196,068		1,729		14,645		16,374
International Small Cap Growth (b)		2,422		11,684		14,106
Emerging Markets Growth (c)		20,123		31,981		52,104		—		—		—
Value Discovery		1,656		17,632		19,288		13,405		45,000		58,405
Income (d)		57,943		37,159		95,102		50,605		42,898		93,503
Ready Reserves		1,131,031		—		1,131,031		1,678,077		—		1,678,077
	Reinvested Distributions (Dollars)
	Year Ended December 31, 2005						Year Ended December 31, 2004
Portfolio	Class N		Class I		Total		Class N		Class I		Total
Growth	$	1,778	$	6,484	$	8,262	$	—	$	—	$	—
Tax-Managed Growth		—		—		—		—		—		—
Large Cap Growth		—		—		—		—		—		—
Small Cap Growth		42,338		27,541		69,879		33,424		19,852		53,276
Small Mid-Cap Growth		77		380		457		—		—		—
International Growth		170,874		75,271		246,145		497		1,664		2,161
International Equity (a)		—		—		—		—		—		—
International Small Cap Growth (b)		—		—		—
Emerging Markets Growth (c)		104		160		264		—		—		—
Value Discovery		5,835		18,431		24,266		3,559		22,079		25,638
Income		4,620		7,921		12,541		2,575		7,510		10,085
Ready Reserves		27,698		—		27,698		8,904		—		8,904
	Redemptions (Dollars)
	Year Ended December 31, 2005						Year Ended December 31, 2004
Portfolio	Class N		Class I		Total		Class N		Class I		Total
Growth	$	14,242	$	49,911	$	64,153	$	15,081	$	45,717	$	60,798
Tax-Managed Growth		8		554		562		41		1,610		1,651
Large Cap Growth		185		1,647		1,832		134		945		1,079
Small Cap Growth		214,257		73,727		287,984		128,696		29,326		158,022
Small Mid-Cap Growth		2,617		3,636		6,253		924		254		1,178
International Growth		477,866		120,404		598,270		409,543		77,654		487,197
International Equity (a)(d)		1,207		40,936		42,143		1		7,745		7,746
International Small Cap Growth (b)		—		100		100
Emerging Markets Growth (c)		1,024		605		1,629		—		—		—
Value Discovery		18,736		165,704		184,440		9,478		66,515		75,993
Income		40,325		40,480		80,805		16,560		51,147		67,707
Ready Reserves		1,159,815		—		1,159,815		1,748,986		—		1,748,986

(a) For the period from May 24, 2004 (Commencement of Operations) to December 31, 2004.

(b) For the period from November 1, 2005 (Commencement of Operation) to December 31, 2005.

(c) For the period from June 6, 2005 (Commencement of Operations) to December 31, 2005.

(d) For 2005, the sales of Class I shares for Income Fund reflect two in-kind purchases totaling $4.2 million dollars. For 2004, the sales of Class I for Income Fund reflect two in-kind purchases totaling $1.4 million dollars. For 2004, the redemptions for Class I for International Equity Fund reflects an in-kind redemption of $7.7 million. This in-kind redemption resulted in a non-taxable gain of $739 (in thousands).

December 31, 2005 William Blair Funds    85

	Net Change in Net Assets relating to Fund Share Activity (Dollars)
	Year Ended December 31, 2005									Year Ended December 31, 2004
Portfolio	Class N			Class I			Total			Class N			Class I			Total
Growth	$	(1,711	)	$	(34,373	)	$	(36,084	)	$	4,849		$	(30,453	)	$	(25,604	)
Tax-Managed Growth		105			1,108			1,213			(41	)		(1,364	)		(1,405	)
Large Cap Growth		7,733			2,091			9,824			(35	)		611			576
Small Cap Growth		64,514			62,454			126,968			86,882			68,402			155,284
Small Mid-Cap Growth		2,564			35,010			37,574			6,485			13,568			20,053
International Growth		759,448			313,098			1,072,546			397,441			260,918			658,359
International Equity (a)		16,837			137,088			153,925			1,728			6,900			8,628
International Small Cap Growth (b)		2,422			11,584			14,006			—			—			—
Emerging Markets Growth (c)		19,203			31,536			50,739			—			—			—
Value Discovery		(11,245	)		(129,641	)		(140,886	)		7,486			564			8,050
Income		22,238			4,600			26,838			36,620			(739	)		35,881
Ready Reserves		(1,086	)		—			(1,086	)		(62,005	)		—			(62,005	)
	Sales (Shares)
	Year Ended December 31, 2005									Year Ended December 31, 2004
Portfolio	Class N			Class I			Total			Class N			Class I			Total
Growth		992			846			1,838			2,031			1,516			3,547
Tax-Managed Growth		11			168			179			—			29			29
Large Cap Growth		1,273			597			1,870			16			259			275
Small Cap Growth		9,448			4,272			13,720			7,573			3,260			10,833
Small Mid-Cap Growth		450			3,393			3,843			714			1,328			2,042
International Growth		45,004			15,184			60,188			41,858			17,229			59,087
International Equity (a)		1,550			14,844			16,394			165			1,392			1,557
International Small Cap Growth (b)		235			1,153			1,388			—			—			—
Emerging Markets Growth (c)		1,604			2,731			4,335			—			—			—
Value Discovery		78			829			907			576			1,900			2,476
Income		5,777			3,717			9,494			4,919			4,171			9,090
Ready Reserves		1,131,031			—			1,131,031			1,678,077			—			1,678,077
	Reinvested Distributions (Shares)
	Year Ended December 31, 2005									Year Ended December 31, 2004
Portfolio	Class N			Class I			Total			Class N			Class I			Total
Growth		155			555			710			—			—			—
Tax-Managed Growth		—			—			—			—			—			—
Large Cap Growth		—			—			—			—			—			—
Small Cap Growth		1,752			1,121			2,873			1,331			781			2,112
Small Mid-Cap Growth		6			30			36			—			—			—
International Growth		6,912			3,007			9,919			23			78			101
International Equity (a)		—			—			—			—			—			—
International Small Cap Growth (b)		—			—			—			—			—			—
Emerging Markets Growth (c)		7			12			19			—			—			—
Value Discovery		390			1,218			1,608			160			991			1,151
Income		464			796			1,260			251			734			985
Ready Reserves		27,698			—			27,698			8,904			—			8,904

(a) For the period from May 24, 2004 (Commencement of Operations) to December 31, 2004.

(b) For the period from November 1, 2005 (Commencement of Operations) to December 31, 2005.

(c) For the period from June 6, 2005 (Commencement of Operations) to December 31, 2005.

86    Annual Report December 31, 2005

	Redemptions (Shares)
	Year Ended December 31, 2005						Year Ended December 31, 2004
Portfolio	Class N		Class I		Total		Class N		Class I		Total
Growth	1,313		4,632		5,945		1,529		4,528		6,057
Tax-Managed Growth	—		59		59		5		190		195
Large Cap Growth	30		264		294		22		158		180
Small Cap Growth	8,709		2,954		11,663		5,546		1,239		6,785
Small Mid-Cap Growth	234		303		537		86		26		112
International Growth	20,661		5,142		25,803		21,332		4,005		25,337
International Equity (a)	104		3,398		3,502		—		705		705
International Small Cap Growth (b)	—		10		10		—		—		—
Emerging Markets Growth (c)	81		47		128		—		—		—
Value Discovery	892		7,748		8,640		408		2,844		3,252
Income	4,028		4,056		8,084		1,614		4,985		6,599
Ready Reserves	1,159,815		—		1,159,815		1,748,986		—		1,748,986
	Net Change in Shares Outstanding relating to Fund Share Activity (Shares)
	Year Ended December 31, 2005						Year Ended December 31, 2004
Portfolio	Class N		Class I		Total		Class N		Class I		Total
Growth	(166	)	(3,231	)	(3,397	)	502		(3,012	)	(2,510	)
Tax-Managed Growth	11		109		120		(5	)	(161	)	(166	)
Large Cap Growth	1,243		333		1,576		(6	)	101		95
Small Cap Growth	2,491		2,439		4,930		3,358		2,802		6,160
Small Mid-Cap Growth	222		3,120		3,342		628		1,302		1,930
International Growth	31,255		13,049		44,304		20,549		13,302		33,851
International Equity (a)	1,446		11,446		12,892		165		687		852
International Small Cap Growth (b)	235		1,143		1,378		—		—		—
Emerging Markets Growth (c)	1,530		2,696		4,226		—		—		—
Value Discovery	(424	)	(5,701	)	(6,125	)	328		47		375
Income	2,213		457		2,670		3,556		(80	)	3,476
Ready Reserves	(1,086	)	—		(1,086	)	(62,005	)	—		(62,005	)

(a) For the period from May 24, 2004 (Commencement of Operations) to December 31, 2004.

(b) For the period from November 1, 2005 (Commencement of Operations) to December 31, 2005.

(c) For the period from June 6, 2005 (Commencement of Operations) to December 31, 2005.

December 31, 2005 William Blair Funds    87

Financial Highlights

Growth Fund

	Class N
	Years Ended December 31,
	2005			2004			2003			2002			2001
Net asset value, beginning of year	$	10.70		$	9.97		$	8.06		$	10.87		$	12.73
Income (loss) from investment operations:
Net investment income (loss)		(0.06	)		(0.06	)		(0.06	)		(0.07	)		(0.06	)
Net realized and unrealized gain (loss) on investments		1.11			0.79			1.97			(2.74	)		(1.66	)
Total from investment operations		1.05			0.73			1.91			(2.81	)		(1.72	)
Less distributions from:
Net investment income		—			—			—			—			—
Net realized gain		0.42			—			—			—			0.14
Total distributions		0.42			—			—			—			0.14
Net asset value, end of year	$	11.33		$	10.70		$	9.97		$	8.06		$	10.87
Total return (%)		9.75			7.32			23.70			(25.85	)		(13.53	)
Ratios to average daily net assets (%):
Expenses		1.15			1.17			1.19			1.19			1.18
Net investment income (loss)		(0.60	)		(0.60	)		(0.67	)		(0.73	)		(0.57	)
	Class I
	Years Ended December 31,
	2005			2004			2003			2002			2001
Net asset value, beginning of year	$	10.84		$	10.08		$	8.12		$	10.93		$	12.77
Income (loss) from investment operations:
Net investment income (loss)		(0.04	)		(0.04	)		(0.04	)		(0.05	)		(0.04	)
Net realized and unrealized gain (loss) on investments		1.14			0.80			2.00			(2.76	)		(1.66	)
Total from investment operations		1.10			0.76			1.96			(2.81	)		(1.70	)
Less distributions from:
Net investment income		—			—			—			—			—
Net realized gain		0.42			—			—			—			0.14
Total distributions		0.42			—			—			—			0.14
Net asset value, end of year	$	11.52		$	10.84		$	10.08		$	8.12		$	10.93
Total return (%)		10.08			7.54			24.14			(25.71	)		(13.33	)
Ratios to average daily net assets (%):
Expenses		0.90			0.92			0.94			0.94			0.93
Net investment income (loss)		(0.35	)		(0.35	)		(0.42	)		(0.48	)		(0.32	)

	Years Ended December 31,
	2005		2004		2003		2002		2001
Supplemental data for all classes:
Net assets at end of year (in thousands)	$	253,599	$	275,506	$	281,654	$	255,625	$	386,096
Portfolio turnover rate (%)		54		35		45		29		74

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher than the data quoted. Results shown are annual returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate and you may have a gain or loss when you sell shares. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds.com.

Note: Net investment income (loss) per share is based on the average shares outstanding during the year.

88    Annual Report December 31, 2005

Financial Highlights

Tax-Managed Growth Fund

	Class N
	Years Ended December 31,
	2005			2004			2003			2002			2001
Net asset value, beginning of year	$	8.99		$	8.41		$	6.86		$	9.07		$	10.08
Income (loss) from investment operations:
Net investment income (loss)		(0.07	)		(0.08	)		(0.07	)		(0.06	)		(0.05	)
Net realized and unrealized gain (loss) on investments		1.19			0.66			1.62			(2.15	)		(0.96	)
Total from investment operations		1.12			0.58			1.55			(2.21	)		(1.01	)
Less distributions from:
Net investment income		—			—			—			—			—
Net realized gain		—			—			—			—			—
Total distributions		—			—			—			—			—
Net asset value, end of year	$	10.11		$	8.99		$	8.41		$	6.86		$	9.07
Total return (%)		12.46			6.90			22.59			(24.37	)		(10.02	)
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		1.53			1.54			1.49			1.36			1.36
Expenses, before waivers and reimbursements		2.55			2.26			2.26			2.22			3.64
Net investment income (loss), net of waivers and reimbursements		(0.76	)		(0.92	)		(0.91	)		(0.72	)		(0.57	)
Net investment income (loss), before waivers and reimbursements		(1.78	)		(1.64	)		(1.68	)		(1.58	)		(2.85	)
	Class I
	Years Ended December 31,
	2005			2004			2003			2002			2001
Net asset value, beginning of year	$	9.10		$	8.50		$	6.92		$	9.12		$	10.11
Income (loss) from investment operations:
Net investment income (loss)		(0.05	)		(0.06	)		(0.05	)		(0.04	)		(0.03	)
Net realized and unrealized gain (loss) on investments		1.22			0.66			1.63			(2.16	)		(0.96	)
Total from investment operations		1.17			0.60			1.58			(2.20	)		(0.99	)
Less distributions from:
Net investment income		—			—			—			—			—
Net realized gain		—			—			—			—			—
Total distributions		—			—			—			—			—
Net asset value, end of year	$	10.27		$	9.10		$	8.50		$	6.92		$	9.12
Total return (%)		12.86			7.06			22.83			(24.12	)		(9.79	)
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		1.28			1.29			1.24			1.11			1.11
Expenses, before waivers and reimbursements		2.30			2.01			2.01			1.97			3.39
Net investment income (loss), net of waivers and reimbursements		(0.51	)		(0.67	)		(0.66	)		(0.47	)		(0.32	)
Net investment income (loss), before waivers and reimbursements		(1.53	)		(1.39	)		(1.43	)		(1.33	)		(2.60	)

	Years Ended December 31,
	2005		2004		2003		2002		2001
Supplemental data for all classes:
Net assets at end of year (in thousands)	$	7,815	$	5,847	$	6,871	$	5,303	$	7,211
Portfolio turnover rate (%)		25		31		37		44		37

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher than the data quoted. Results shown are annual returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate and you may have a gain or loss when you sell shares. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds.com.

Note: Net investment income (loss) per share is based on the average shares outstanding during the year.

December 31, 2005 William Blair Funds    89

Financial Highlights

Large Cap Growth Fund

	Class N
	Years Ended December 31,
	2005			2004			2003			2002			2001
Net asset value, beginning of year	$	6.24		$	5.93		$	4.80		$	6.72		$	8.45
Income (loss) from investment operations:
Net investment income (loss)		(0.02	)		(0.04	)		(0.04	)		(0.04	)		(0.05	)
Net realized and unrealized gain (loss) on investments		0.25			0.35			1.17			(1.88	)		(1.68	)
Total from investment operations		0.23			0.31			1.13			(1.92	)		(1.73	)
Less distributions from:
Net investment income		—			—			—			—			—
Net realized gain		—			—			—			—			—
Total distributions		—			—			—			—			—
Net asset value, end of year	$	6.47		$	6.24		$	5.93		$	4.80		$	6.72
Total return (%)		3.69			5.23			23.54			(28.57	)		(20.47	)
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		1.28			1.38			1.42			1.36			1.36
Expenses, before waivers and reimbursements		2.08			2.29			2.39			2.45			3.01
Net investment income (loss), net of waivers and reimbursements		(0.37	)		(0.63	)		(0.76	)		(0.71	)		(0.79	)
Net investment income (loss), before waivers and reimbursements		(1.17	)		(1.54	)		(1.73	)		(1.80	)		(2.44	)
	Class I
	Years Ended December 31,
	2005			2004			2003			2002			2001
Net asset value, beginning of year	$	6.31		$	5.99		$	4.82		$	6.74		$	8.47
Income (loss) from investment operations:
Net investment income (loss)		(0.01	)		(0.02	)		(0.03	)		(0.03	)		(0.04	)
Net realized and unrealized gain (loss) on investments		0.26			0.34			1.20			(1.89	)		(1.69	)
Total from investment operations		0.25			0.32			1.17			(1.92	)		(1.73	)
Less distributions from:
Net investment income		—			—			—			—			—
Net realized gain		—			—			—			—			—
Total distributions		—			—			—			—			—
Net asset value, end of year	$	6.56		$	6.31		$	5.99		$	4.82		$	6.74
Total return (%)		3.96			5.34			24.27			(28.49	)		(20.43	)
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		1.03			1.13			1.17			1.11			1.11
Expenses, before waivers and reimbursements		1.83			2.04			2.14			2.20			2.76
Net investment income (loss), net of waivers and reimbursements		(0.12	)		(0.38	)		(0.51	)		(0.46	)		(0.54	)
Net investment income (loss), before waivers and reimbursements		(0.92	)		(1.29	)		(1.48	)		(1.55	)		(2.19	)

	Years Ended December 31,
	2005		2004		2003		2002		2001
Supplemental data for all classes:
Net assets at end of year (in thousands)	$	16,888	$	6,417	$	5,519	$	5,469	$	5,991
Portfolio turnover rate (%)		53		39		33		52		87

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher than the data quoted. Results shown are annual returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate and you may have a gain or loss when you sell shares. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds.com.

Note: Net investment income (loss) per share is based on the average shares outstanding during the year.

90    Annual Report December 31, 2005

Financial Highlights

Small Cap Growth Fund

	Class N
	Years Ended December 31,
	2005			2004			2003			2002			2001
Net asset value, beginning of year	$	25.72		$	21.83		$	13.72		$	16.58		$	13.16
Income (loss) from investment operations:
Net investment income (loss)		(0.30	)		(0.30	)		(0.21	)		(0.19	)		(0.17	)
Net realized and unrealized gain (loss) on investments		0.64			6.20			8.68			(2.67	)		3.59
Total from investment operations		0.34			5.90			8.47			(2.86	)		3.42
Less distributions from:
Net investment income		—			—			—			—			—
Net realized gain		2.30			2.01			0.36			—			—
Total distributions		2.30			2.01			0.36			—			—
Net asset value, end of year	$	23.76		$	25.72		$	21.83		$	13.72		$	16.58
Total return (%)		1.18			27.24			61.88			(17.25	)		25.99
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		1.49			1.49			1.55			1.56			1.59
Expenses, before waivers and reimbursements		1.49			1.46			1.52			1.62			1.95
Net investment income (loss), net of waivers and reimbursements		(1.23	)		(1.27	)		(1.22	)		(1.31	)		(1.15	)
Net investment income (loss), before waivers and reimbursements		(1.23	)		(1.24	)		(1.19	)		(1.37	)		(1.51	)
	Class I
	Years Ended December 31,
	2005			2004			2003			2002			2001
Net asset value, beginning of year	$	26.04		$	22.03		$	13.82		$	16.65		$	13.18
Income (loss) from investment operations:
Net investment income (loss)		(0.25	)		(0.24	)		(0.18	)		(0.16	)		(0.13	)
Net realized and unrealized gain (loss) on investments		0.67			6.26			8.75			(2.67	)		3.60
Total from investment operations		0.42			6.02			8.57			(2.83	)		3.47
Less distributions from:
Net investment income		—			—			—			—			—
Net realized gain		2.30			2.01			0.36			—			—
Total distributions		2.30			2.01			0.36			—			—
Net asset value, end of year	$	24.16		$	26.04		$	22.03		$	13.82		$	16.65
Total return (%)		1.48			27.54			62.15			(17.00	)		26.33
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		1.24			1.24			1.35			1.31			1.34
Expenses, before waivers and reimbursements		1.24			1.21			1.28			1.37			1.70
Net investment income (loss), net of waivers and reimbursements		(0.98	)		(1.02	)		(1.02	)		(1.06	)		(0.90	)
Net investment income (loss), before waivers and reimbursements		(0.98	)		(0.99	)		(0.95	)		(1.12	)		(1.26	)

	Years Ended December 31,
	2005		2004		2003		2002		2001
Supplemental data for all classes:
Net assets at end of period (in thousands)	$	831,738	$	771,209	$	518,824	$	78,581	$	54,658
Portfolio turnover rate (%)		80		109		103		133		147

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher than the data quoted. Results shown are annual returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate and you may have a gain or loss when you sell shares. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds.com.

Note: Net investment income (loss) per share is based on the average shares outstanding during the year.

December 31, 2005 William Blair Funds    91

Financial Highlights

Small-Mid Cap Growth Fund

	Class N
	Years Ended December 31,
	2005			2004			2003 (a)
Net asset value, beginning of year	$	11.28		$	9.94		$	10.00
Income (loss) from investment operations:
Net investment income (loss)		(0.11	)		(0.13	)		—
Net realized and unrealized gain (loss) on investments		1.32			1.47			(0.06	)
Total from investment operations		1.21			1.34			(0.06	)
Less distributions from:
Net investment income		—			—			—
Net realized gain		0.09			—			—
Total distributions		0.09			—			—
Net asset value, end of year	$	12.40		$	11.28		$	9.94
Total return (%)		10.72			13.48			(0.60	)
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		1.45			1.54			1.54	(b)
Expenses, before waivers and reimbursements		1.54			2.14			1.54	(b)
Net investment income (loss), net of waivers and reimbursements		(0.97	)		(1.26	)		(1.54	)(b)
Net investment income (loss), before waivers and reimbursements		(1.06	)		(1.86	)		(1.54	)(b)
	Class I
	Years Ended December 31,
	2005			2004			2003 (a)
Net asset value, beginning of year	$	11.30		$	9.94		$	10.00
Income (loss) from investment operations:
Net investment income (loss)		(0.08	)		(0.11	)		—
Net realized and unrealized gain (loss) on investments		1.33			1.47			(0.06	)
Total from investment operations		1.25			1.36			(0.06	)
Less distributions from:
Net investment income		—			—			—
Net realized gain		0.09			—			—
Total distributions		0.09			—			—
Net asset value, end of year	$	12.46		$	11.30		$	9.94
Total return (%)		11.05			13.68			(0.60	)
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		1.20			1.29			1.29	(b)
Expenses, before waivers and reimbursements		1.29			1.89			1.29	(b)
Net investment income (loss), net of waivers and reimbursements		(0.72	)		(1.01	)		(1.29	)(b)
Net investment income (loss), before waivers and reimbursements		(0.81	)		(1.61	)		(1.29	)(b)

	Years Ended December 31,
	2005		2004		2003
Supplemental data for all classes:
Net assets at end of year (in thousands)	$	70,211	$	25,974	$	3,673
Portfolio turnover rate (%)		62		55		—	(b)

(a) For the period from December 29, 2003 (Commencement of Operations) to December 31, 2003.

(b) Rates are annualized for periods that are less than a year.

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher than the data quoted. Results shown are annual returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate and you may have a gain or loss when you sell shares. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds.com.

Note: Net investment income (loss) per share is based on the average shares outstanding during the year.

92    Annual Report December 31, 2005

Financial Highlights

International Growth Fund

	Class N
	Years Ended December 31,
	2005		2004			2003		2002			2001
Net asset value, beginning of year	$	22.09	$	18.65		$	13.13	$	15.48		$	17.93
Income (loss) from investment operations:
Net investment income (loss) (a)		0.15		(0.02	)		0.02		(0.05	)		(0.02	)
Net realized and unrealized gain (loss) on investments		4.60		3.47			5.52		(2.30	)		(2.43	)
Total from investment operations		4.75		3.45			5.54		(2.35	)		(2.45	)
Less distributions from:
Net investment income		0.11		0.01			0.02		—			—
Net realized gain		1.51		—			—		—			—
Total distributions		1.62		0.01			0.02		—			—
Net asset value, end of year	$	25.22	$	22.09		$	18.65	$	13.13		$	15.48
Total return (%)		21.65		18.48			42.21		(15.18	)		(13.66	)
Ratios to average daily net assets (%):
Expenses		1.42		1.47			1.50		1.51			1.60
Net investment income (loss)		0.16		(0.16	)		0.05		(0.36	)		(0.11	)
	Class I
	Years Ended December 31,
	2005		2004			2003		2002			2001
Net asset value, beginning of year	$	22.34	$	18.85		$	13.27	$	15.60		$	18.02
Income (loss) from investment operations:
Net investment income (loss) (a)		0.27		0.01			0.09		(0.01	)		0.02
Net realized and unrealized gain (loss) on investments		4.61		3.53			5.54		(2.32	)		(2.44	)
Total from investment operations		4.88		3.54			5.63		(2.33	)		(2.42	)
Less distributions from:
Net investment income		0.16		0.05			0.05		—			—
Net realized gain		1.51		—			—		—			—
Total distributions		1.67		0.05			0.05		—			—
Net asset value, end of year	$	25.55	$	22.34		$	18.85	$	13.27		$	15.60
Total return (%)		22.00		18.79			42.42		(14.94	)		(13.43	)
Ratios to average daily net assets (%):
Expenses		1.17		1.22			1.25		1.26			1.35
Net investment income (loss)		0.41		0.09			0.30		(0.11	)		0.14
	Years Ended December 31,
	2005		2004			2003		2002			2001
Supplemental data for all classes:
Net assets at end of year (in thousands)	$	4,551,077	$	3,001,434		$	1,899,699	$	778,788		$	454,055
Portfolio turnover rate (%)		70		79			57		73			112

(a) Excludes $0.37, $0.12, $0.03, $0.00, and $0.00, of PFIC mark to market which are treated as ordinary income for Federal tax purposes for the years 2005, 2004, 2003, 2002, and 2001, respectively.

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher than the data quoted. Results shown are annual returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate and you may have a gain or loss when you sell shares. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds.com.

Note: Net investment income (loss) per share is based on the average shares outstanding during the year.

December 31, 2005 William Blair Funds    93

Financial Highlights

International Equity Fund

	Class N
	Years Ended December 31,
	2005			2004 (a)
Net asset value, beginning of year	$	11.33		$	10.00
Income (loss) from investment operations:
Net investment income (loss) (c)		(0.01	)		(0.04	)
Net realized and unrealized gain (loss) on investments		1.54			1.37
Total from investment operations		1.53			1.33
Less distributions from:
Net investment income		—			—
Net realized gain		—			—
Total distributions		—			—
Net asset value, end of year	$	12.86		$	11.33
Total return (%)		13.50			13.30
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		1.48			1.50	(b)
Expenses, before waivers and reimbursements		1.81			2.96	(b)
Net investment income (loss), net of waivers and reimbursements		(0.33	)		(0.77	)(b)
Net investment income (loss), before waivers and reimbursements		(0.66	)		(2.23	)(b)
	Class I
	Years Ended December 31,
	2005			2004 (a)
Net asset value, beginning of year	$	11.37		$	10.00
Income (loss) from investment operations:
Net investment income (loss) (c)		(0.01	)		(0.01	)
Net realized and unrealized gain (loss) on investments		1.58			1.38
Total from investment operations		1.57			1.37
Less distributions from:
Net investment income		—			—
Net realized gain		—			—
Total distributions		—			—
Net asset value, end of year	$	12.94		$	11.37
Total return (%)		13.81			13.70
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		1.23			1.25	(b)
Expenses, before waivers and reimbursements		1.56			2.71	(b)
Net investment income (loss), net of waivers and reimbursements		(0.08	)		(0.52	)(b)
Net investment income (loss), before waivers and reimbursements		(0.41	)		(1.98	)(b)

	Years Ended December 31,
	2005		2004
Supplemental data for all classes:
Net assets at end of year (in thousands)	$	177,710	$	9,689
Portfolio turnover rate (%)		127		108	(b)

(a) For the period from May 24, 2004 (Commencement of Operations) to December 31, 2004.

(b) Rates are annualized for periods that are less than a year.

(c) Excludes $0.33 and $0.02 of PFIC mark to market which is treated as ordinary income for Federal tax purposes for the years 2005 and 2004, respectively.

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher than the data quoted. Results shown are annual returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate and you may have a gain or loss when you sell shares. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds.com.

Note: Net investment income (loss) per share is based on the average shares outstanding during the year.

94    Annual Report December 31, 2005

Financial Highlights

International Small Cap Growth Fund

	Class N
	Period Ended
	12/31/2005 (a)
Net asset value, beginning of period	$	10.00
Income (loss) from investment operations:
Net investment income (loss) (b)		(0.01	)
Net realized and unrealized gain (loss) on investments		1.17
Total from investment operations		1.16
Less distributions from:
Net investment income		—
Net realized gain		—
Total distributions		—
Net asset value, end of period	$	11.16
Total return (%)		11.60
Ratios to average daily net assets (%) (c):
Expenses, net of waivers and reimbursements		1.65
Expenses, before waivers and reimbursements		2.57
Net investment income (loss), net of waivers and reimbursements		(0.40	)
Net investment income (loss), before waivers and reimbursements		(1.32	)
	Class I
	Period Ended
	12/31/2005 (a)
Net asset value, beginning of period	$	10.00
Income (loss) from investment operations:
Net investment income (loss) (b)		—
Net realized and unrealized gain (loss) on investments		1.16
Total from investment operations		1.16
Less distributions from:
Net investment income		—
Net realized gain		—
Total distributions		—
Net asset value, end of period	$	11.16
Total return (%)		11.60
Ratios to average daily net assets (%) (c):
Expenses, net of waivers and reimbursements		1.40
Expenses, before waivers and reimbursements		2.32
Net investment income (loss), net of waivers and reimbursements		(0.15	)
Net investment income (loss), before waivers and reimbursements		(1.07	)

	Period Ended
	12/31/2005 (a)
Supplemental data for all classes:
Net assets at end of period (in thousands)	$	50,534
Portfolio turnover rate (%) (c)		127

(a) For the period from November 1, 2005 (Commencement of Operations) to December 31, 2005.

(b) Excludes $0.11 of PFIC mark to market which is treated as ordinary income for Federal tax purposes.

(c) Rates are annualized for periods that are less than a year.

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher than the data quoted. Results shown are annual returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate and you may have a gain or loss when you sell shares. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds.com.

Note: Net investment income (loss) per share is based on the average shares outstanding during the period.

December 31, 2005 William Blair Funds    95

Financial Highlights

Emerging Markets Growth Fund

	Class N
	Period Ended
	12/31/2005 (a)
Net asset value, beginning of period	$	10.00
Income (loss) from investment operations:
Net investment income (loss) (b)		(0.01	)
Net realized and unrealized gain (loss) on investments		4.26
Total from investment operations		4.25
Less distributions from:
Net investment income		—
Net realized gain		0.08
Total distributions		0.08
Net asset value, end of period	$	14.17
Total return (%)		42.52
Ratios to average daily net assets (%) (c):
Expenses, net of waivers and reimbursements		1.55
Expenses, before waivers and reimbursements		1.91
Net investment income (loss), net of waivers and reimbursements		(0.11	)
Net investment income (loss), before waivers and reimbursements		(0.47	)
	Class I
	Period Ended
	12/31/2005 (a)
Net asset value, beginning of period	$	10.00
Income (loss) from investment operations:
Net investment income (loss) (b)		0.01
Net realized and unrealized gain (loss) on investments		4.26
Total from investment operations		4.27
Less distributions from:
Net investment income		—
Net realized gain		0.08
Total distributions		0.08
Net asset value, end of period	$	14.19
Total return (%)		42.72
Ratios to average daily net assets (%) (c):
Expenses, net of waivers and reimbursements		1.40
Expenses, before waivers and reimbursements		1.76
Net investment income (loss), net of waivers and reimbursements		0.04
Net investment income (loss), before waivers and reimbursements		(0.32	)
	Period Ended
	12/31/2005 (a)
Supplemental data for all classes:
Net assets at end of period (in thousands)	$	249,348
Portfolio turnover rate (%) (c)		77

(a) For the period from June 6, 2005 (Commencement of Operations) to December 31, 2005.

(b) Excludes $0.11 of PFIC mark to market which is treated as ordinary income for Federal tax purposes.

(c) Rates are annualized for periods that are less than a year.

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher than the data quoted. Results shown are annual returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate and you may have a gain or loss when you sell shares. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds.com.

Note: Net investment income (loss) per share is based on the average shares outstanding during the period.

96    Annual Report December 31, 2005

Financial Highlights

Value Discovery Fund

	Class N
	Years Ended December 31,
	2005			2004			2003			2002			2001
Net asset value, beginning of year	$	22.70		$	22.68		$	16.28		$	18.23		$	16.20
Income (loss) from investment operations:
Net investment income (loss)		(0.02	)		(0.01	)		(0.06	)		(0.03	)		0.08
Net realized and unrealized gain (loss) on investments		0.14			2.68			6.46			(1.92	)		2.74
Total from investment operations		0.12			2.67			6.40			(1.95	)		2.82
Less distributions from:
Net investment income		—			—			—			—			0.03
Net realized gain		7.87			2.65			—			—			0.76
Total distributions		7.87			2.65			—			—			0.79
Net asset value, end of year	$	14.95		$	22.70		$	22.68		$	16.28		$	18.23
Total return (%)		0.49			12.05			39.31			(10.70	)		17.39
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		1.34			1.34			1.49			1.53			1.61
Expenses, before waivers and reimbursements		1.64			1.48			1.58			1.53			1.66
Net investment income (loss), net of waivers and reimbursements		(0.22	)		(0.06	)		(0.30	)		(0.16	)		0.28
Net investment income (loss), before waivers and reimbursements		(0.52	)		(0.20	)		(0.39	)		(0.16	)		0.23
	Class I
	Years Ended December 31,
	2005			2004			2003			2002			2001
Net asset value, beginning of year	$	22.82		$	22.76		$	16.31		$	18.19		$	16.16
Income (loss) from investment operations:
Net investment income (loss)		—			0.01			(0.03	)		0.01			0.17
Net realized and unrealized gain (loss) on investments		0.17			2.70			6.48			(1.89	)		2.70
Total from investment operations		0.17			2.71			6.45			(1.88	)		2.87
Less distributions from:
Net investment income		—			—			—			—			0.08
Net realized gain		7.87			2.65			—			—			0.76
Total distributions		7.87			2.65			—			—			0.84
Net asset value, end of year	$	15.12		$	22.82		$	22.76		$	16.31		$	18.19
Total return (%)		0.70			12.18			39.55			(10.34	)		17.72
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		1.14			1.23			1.33			1.34			1.36
Expenses, before waivers and reimbursements		1.39			1.23			1.33			1.34			1.41
Net investment income (loss), net of waivers and reimbursements		(0.02	)		0.05			(0.14	)		0.03			0.53
Net investment income (loss), before waivers and reimbursements		(0.27	)		0.05			(0.14	)		0.03			0.48

	Years Ended December 31,
	2005		2004		2003		2002		2001
Supplemental data for all classes:
Net assets at end of year (in thousands)	$	70,439	$	246,176	$	237,111	$	190,802	$	149,292
Portfolio turnover rate (%)		125		50		51		20		48

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher than the data quoted. Results shown are annual returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate and you may have a gain or loss when you sell shares. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds.com.

Note: Net investment income (loss) per share is based on the average shares outstanding during the year.

December 31, 2005 William Blair Funds    97

Financial Highlights

Income Fund

	Class N
	Years Ended December 31,
	2005			2004			2003			2002		2001
Net asset value, beginning of year	$	10.19		$	10.43		$	10.62		$	10.34	$	10.22
Income (loss) from investment operations:
Net investment income (loss) (a)		0.47			0.52			0.40			0.55		0.55
Net realized and unrealized gain (loss) on investments		(0.30	)		(0.26	)		(0.02	)		0.25		0.17
Total from investment operations		0.17			0.26			0.38			0.80		0.72
Less distributions from:
Net investment income		0.53			0.50			0.57			0.52		0.60
Net realized gain		—			—			—			—		—
Total distributions		0.53			0.50			0.57			0.52		0.60
Net asset value, end of year	$	9.83		$	10.19		$	10.43		$	10.62	$	10.34
Total return (%)		1.71			2.61			3.68			7.91		7.18
Ratios to average daily net assets (%):
Expenses		0.73			0.78			0.77			0.81		0.94
Net investment income (loss)		4.09			4.12			4.09			5.23		5.38
	Class I
	Years Ended December 31,
	2005			2004			2003			2002		2001
Net asset value, beginning of year	$	10.15		$	10.40		$	10.62		$	10.35	$	10.24
Income (loss) from investment operations:
Net investment income (loss) (a)		0.52			0.59			0.43			0.57		0.58
Net realized and unrealized gain (loss) on investments		(0.33	)		(0.31	)		(0.04	)		0.24		0.15
Total from investment operations		0.19			0.28			0.39			0.81		0.73
Less distributions from:
Net investment income		0.52			0.53			0.61			0.54		0.62
Net realized gain		—			—			—			—		—
Total distributions		0.52			0.53			0.61			0.54		0.62
Net asset value, end of year	$	9.82		$	10.15		$	10.40		$	10.62	$	10.35
Total return (%)		1.92			2.79			3.76			8.04		7.32
Ratios to average daily net assets (%):
Expenses		0.58			0.63			0.62			0.66		0.79
Net investment income (loss)		4.24			4.27			4.24			5.38		5.53

	Years Ended December 31,
	2005	2004	2003	2002	2001
Supplemental data for all classes:
Net assets at end of year (in thousands)	$310,496	$294,084	$265,062	$196,136	$	176,264
Portfolio turnover rate (%)	41	43	36	66		82

(a) As required, in 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began treating any paydown gain or losses on mortgage and asset backed securities as an adjustment to income. The effect of this change for the year 2001 was to decrease net investment income per share by $.05 and increase the net realized and unrealized gain and loss per share by $.05. It decreases the Ratio of Net Investment Income to Average Net Assets from 5.87% to 5.38% for Class N for 2001. It decreased the Ratio of Net Investment Income from 6.02% to 5.53% for Class I shares for 2001.

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher than the data quoted. Results shown are annual returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate and you may have a gain or loss when you sell shares. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds.com.

Note: Net investment income (loss) per share is based on the average shares outstanding during the year.

98    Annual Report December 31, 2005

Financial Highlights

Ready Reserves Fund

	Class N
	Years Ended December 31,
	2005		2004		2003		2002		2001
Net asset value, beginning of year	$	1.00	$	1.00	$	1.00	$	1.00	$	1.00
Income (loss) from investment operations:
Net investment income (loss)		0.03		0.01		0.01		0.01		0.04
Total from investment operations		0.03		0.01		0.01		0.01		0.04
Less distributions from:
Net investment income		0.03		0.01		0.01		0.01		0.04
Total distributions		0.03		0.01		0.01		0.01		0.04
Net asset value, end of year	$	1.00	$	1.00	$	1.00	$	1.00	$	1.00
Total return (%)		2.62		0.80		0.66		1.28		3.66
Ratios to average daily net assets (%)
Expenses		0.64		0.65		0.66		0.67		0.67
Net investment income (loss)		2.57		0.80		0.66		1.28		3.63
Supplemental data:
Net assets at end of year (in thousands)	$	1,091,854	$	1,092,940	$	1,153,932	$	1,324,001	$	1,403,740

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher than the data quoted. Results shown are annual returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate and you may have a gain or loss when you sell shares. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds.com.

December 31, 2005 William Blair Funds    99

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Trustees and Shareholders

William Blair Funds

We have audited the accompanying statements of assets and liabilities, including the portfolios of investments, of the Growth Fund, Tax-Managed Growth Fund, Large Cap Growth Fund, Small Cap Growth Fund, Small-Mid Cap Growth Fund, International Growth Fund, International Equity Fund, International Small Cap Growth Fund, Emerging Markets Growth Fund, Value Discovery Fund, Income Fund and Ready Reserves Fund (collectively, the “Portfolios”) (twelve of the Portfolios constituting the William Blair Funds) as of December 31, 2005, and the related statements of operations, statements of changes in net assets and financial highlights for the periods indicated therein. These financial statements and financial highlights are the responsibility of the Portfolios’ management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Portfolios’ internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Portfolios’ internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2005, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the above mentioned Portfolios of the William Blair Funds at December 31, 2005, the results of their operations, changes in their net assets and financial highlights for the periods indicated therein, in conformity with U.S. generally accepted accounting principles.

Chicago, Illinois

February 3, 2006

100    Annual Report December 31, 2005

Trustees and Officers (Unaudited). The trustees and officers of the William Blair Funds, 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. The address of each trustee and officer is 222 West Adams Street, Chicago, Illinois 60606.

Name and Age	Position(s) Held with Fund	Term of Office and Length of Time Served(1)	Principal Occupation(s) During Past 5 Years	Number of Portfolios in Fund Complex Overseen by Trustee	Other Directorships Held by Trustee/Officer
Interested Trustees
Frederick Conrad Fischer, 71*	Chairman of the Board of Trustees	Since 1987	Principal, William Blair & Company, L.L.C.; Partner, APM Limited Partnership	14	Trustee Emeritus, Chicago Child Care Society, a non-profit organization; Trustee Emeritus Kalamazoo College
Michelle Seitz, 40*	Trustee	Since 2002	Principal, William Blair & Company, L.L.C.	14	N/A
Non-Interested Trustees
Theodore A. Bosler, 71	Trustee	Since 1997	Retired Principal and Vice President, Lincoln Capital Management	14	Desert Foothills Land Trust, Institute of Chartered Financial Analysts, and Thresholds.
Ann P. McDermott, 66	Trustee	Since 1996	Board member and officer for various civic and charitable organizations over the past thirty years; professional experience prior thereto, registered representative for New York Stock Exchange firm	14	Northwestern University, Women’s Board; Rush Presbyterian St. Luke’s Medical Center, Women’s Board; University of Chicago, Women’s Board; Visiting Nurses Association, Honorary Director
Donald J. Reaves, 59	Trustee	Since 2004	Vice President for Administration and Chief Financial Officer, University of Chicago since 2002. Executive Vice President and Chief Financial Officer, Brown University from 1993 to 2002	14	American Student Assistance Corp.; Amica Mutual Insurance Company; NACUBO (National Association of College and University Business Officers)
John B. Schwemm, 71	Trustee	Since 1990	Retired Chairman and Chief Executive Officer, R.R. Donnelley & Sons Company	14	USG Corp., building material manufacturer, and Walgreen Co.
Donald L. Seeley, 61	Trustee	Since 2003	Director, Applied Investment Management Program, University of Arizona Department of Finance, Formerly Vice Chairman and Chief Financial Officer, True North Communications, Inc., marketing communications and advertising firm	14	Beverly Enterprises, Inc., provider of eldercare and rehabilitative services; Warnaco Group, Inc. intimate apparel, sportswear, and swimwear manufacturer.
Robert E. Wood II, 67	Trustee	Since 1999	Retired Executive Vice President, Morgan Stanley Dean Witter	14	Chairman, Add-Vision, Inc. manufacturer of surface animation systems, and Micro-Combustion, LLC

December 31, 2005 William Blair Funds    101

Name and Age	Position(s) Held with Fund	Term of Office and Length of Time Served(1)	Principal Occupation(s) During Past 5 Years	Number of Portfolios in Fund Complex Overseen by Trustee	Other Directorships Held by Trustee/Officer
Officers
Marco Hanig, 47	President	Since 1999	Principal, William Blair & Company, L.L.C.	N/A	Chicago Scores
Karl W. Brewer, 39	Senior Vice President	Since 2000	Principal, William Blair & Company, L.L.C.	N/A	N/A
Harvey H. Bundy, III, 61	Senior Vice President	Since 2003	Principal, William Blair & Company, L.L.C.	N/A	N/A
Mark A. Fuller, III, 48	Senior Vice President	Since 1993	Principal, William Blair & Company, L.L.C.	N/A	Partner, Fulsen Howney Partners
James W. Golan , 44	Senior Vice President	Since 2005	Principal, William Blair & Company, L.L.C.	N/A	N/A
W. George Greig, 53	Senior Vice President	Since 1996	Principal, William Blair & Company, L.L.C.	N/A	N/A
Michael A. Jancosek, 46	Senior Vice President Vice President	Since 2004 Since 2000	Principal, William Blair & Company L.L.C. Associate, William Blair & Company, L.L.C.	N/A	N/A
John F. Jostrand, 51	Senior Vice President	Since 1999	Principal, William Blair & Company, L.L.C.	N/A	N/A
James S. Kaplan, 45	Senior Vice President Vice President	Since 2004 Since 1995	Principal, William Blair & Company, L.L.C. Associate, William Blair & Company, L.L.C.	N/A	N/A
Robert C. Lanphier, IV, 49	Senior Vice President	Since 2003	Principal, William Blair & Company, L.L.C.	N/A	Chairman, AG. Med, Inc.
David S. Mitchell, 45	Senior Vice President Vice President	Since 2004 Since 2003	Principal, William Blair & Company, L.L.C. Associate, William Blair & Company, L.L.C.	N/A	N/A
Gregory J. Pusinelli, 47	Senior Vice President	Since 1999	Principal, William Blair & Company, L.L.C.	N/A	N/A
Norbert W. Truderung, 53	Senior Vice President	Since 1992	Principal, William Blair & Company, L.L.C.	N/A	N/A
Jeffrey A. Urbina, 50	Senior Vice President	Since 1998	Principal, William Blair & Company, L.L.C.	N/A	N/A
Christopher T. Vincent, 49	Senior Vice President Vice President	Since 2004 Since 2002	Principal, William Blair & Company, L.L.C. Associate, William Blair & Company, L.L.C.; former Managing Director/Senior Portfolio Manager, Zurich Scudder Investments	N/A	Uhlich Children’s Home

102    Annual Report December 31, 2005

Name and Age	Position(s) Held with Fund	Term of Office and Length of Time Served(1)	Principal Occupation(s) During Past 5 Years	Number of Portfolios in Fund Complex Overseen by Trustee	Other Directorships Held by Trustee/Officer
Mark T. Leslie, 38	Vice President	Since 2005	Associate, William Blair & Company, L.L.C. formerly, U.S. Bancorp Asset Management	N/A	N/A
Todd M. McClone, 36	Vice President	Since 2005	Associate, William Blair & Company, L.L.C.	N/A	N/A
Terence M. Sullivan, 61	Vice President and Treasurer	Since 1997	Associate, William Blair & Company, L.L.C.	N/A	N/A
Colette M. Garavalia, 44	Secretary	Since 2000	Associate, William Blair & Company, L.L.C.	N/A	N/A

* Mr. Fischer and Ms. Seitz are interested persons of the William Blair Funds because each is a principal of William Blair & Company, L.L.C., the Funds’ investment advisor and principal underwriter.

(1) Each Trustee serves until the election and qualification of a successor, or until death, resignation or retirement or removal as provided in the Fund’s Declaration of Trust. Retirement for non-interested Trustees occurs no later than at the conclusion of the first regularly scheduled Board meeting of the Fund’s fiscal year that occurs after the Trustee’s 72nd birthday. The Fund’s officers are elected annually by the Trustees.

The Statement of Additional Information for the William Blair Funds includes additional information about the trustees and is available without charge by calling 1-800-635-2886 (in Massachusetts 1-800-635-2840) or by writing the Fund.

December 31, 2005 William Blair Funds    103

Board Approval of International Small Cap Growth Fund’s Advisory Agreement (unaudited)

During the six months ended December 31, 2005, the Board of Trustees approved the Fund’s advisory agreement with the Company on behalf of the International Small Cap Growth Fund (the “Portfolio”). The advisory agreement with respect to the Portfolio was approved, by the Board of Trustees, including all of the trustees who are not parties to such agreement or interested persons of any such party, on July 19, 2005. The Board of Trustees, including a majority of the independent trustees, determined that approval of the advisory agreement was in the best interests of the Portfolio. The independent trustees met separately from the “interested” trustees of the Fund and officers and employees of the Company to consider approval of the advisory agreement and were assisted by independent legal counsel in making their determination. The Board of Trustees, including the independent trustees, did not identify any single factor or group of factors as all important or controlling and considered all factors together.

Nature, Quality and Extent of Services. In evaluating the nature, quality and extent of services expected to be provided, the Board noted that the Company is a quality firm with a reputation for integrity and honesty that employs high quality people.

The Board considered the Company’s Form ADV, biographical information about the Portfolio’s portfolio manager, the administrative services to be performed by the Company, financial information regarding the Company, the compliance regime created by the Company and the anticipated financial support of the Portfolio.

The Board also reviewed the Company’s performance for managing a Canadian international small cap fund as well as the performance of the other William Blair international funds. The Board concluded that the performance of the Canadian fund was too new to judge and that the performance of the other William Blair international funds was good.

Profitability. With respect to the costs of services provided and profits realized by the Company, the Board considered profitability information provided by the Company with respect to the Fund as a whole and the proposed expense cap for the Portfolio. Based on this information, the Board concluded that the Company’s profitability was not unreasonable.

Economies of Scale. The Board considered the extent to which economies of scale would be realized as the Portfolio grows and considered management’s representations that there are few opportunities for economies of scale in the investment process, that economies of scale are unexpected during the start-up process and that the Portfolio has capacity constraints. In considering whether fee levels reflect economies of scale for the benefit of Portfolio investors, the Board reviewed the Portfolio’s projected asset size, the Portfolio’s projected total and net expense ratios and the expense cap proposed. The Board concluded that the projected total expense ratio, after giving effect to the expense cap proposed by the Company, were reasonable.

Fees and Expenses. The Board compared the amounts to be paid to the Company for advisory and administrative services with other registered funds included in the Portfolio’s Lipper expense universe. In addition, the Board compared amounts paid to the Company by other registered funds, including other Portfolios in the Fund and a fund for which the Company acts as a subadvisor, and by the Company’s other clients. The Board also considered that the Company proposed to waive advisory fees for the Portfolio according to the proposed expense cap. The Board concluded that the Portfolio’s advisory fee was reasonable.

Other Benefits to the Company. The Board considered benefits derived by the Company from its relationship with the Portfolio, including soft dollars. The Board concluded that, after taking into account this benefit, the advisory fee was reasonable. Based on all of the information considered and the conclusions reached, the Board determined to approve the advisory agreement.

104    Annual Report December 31, 2005

(unaudited)

Proxy Voting

A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities and information regarding how the Fund voted proxies relating to portfolio securities for the most recent 12-month period ended June 30 are available without charge, upon request, by calling 1-800-635-2886 (in Massachusetts 1-800-635-2840), at www.williamblairfunds.com and on the SEC’s website at http://www.sec.gov.

Quarterly Portfolio Schedules

The Fund files its complete schedule of portfolio holdings with the SEC for the first and third fiscal quarters of each fiscal year (quarters ended March 31 and September 30) on Form N-Q. The Fund’s Forms N-Q are available on the SEC’s website at http://www.sec.gov and may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the SEC’s Public Reference Room may be obtained by calling 1-800-SEC-0330.

December 31, 2005 William Blair Funds    105

Useful Information About Your Report (unaudited)

Please refer to this information when reviewing the Expense Example for each Fund.

Expense Example

As a shareholder of a Fund, you incur two types of costs: (1) transaction costs such as redemption fees and (2) ongoing costs, including management fees, distribution (12b-1) fees (for Class N shares except for Ready Reserves Fund), service fee (for Class N of Ready Reserves Fund), shareholder administration fee (for Class N and Class I shares of International Small Cap Growth Fund and Emerging Markets Growth Fund) and other Fund expenses. The example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. To do so, compare the Fund’s 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire six-month period from July 1, 2005 to December 31, 2005.

Actual Expenses

In each example, the first line for each share class in the table provides information about the actual account values and actual expenses. These expenses reflect the effect of any expense cap applicable to the share class during the period. Without this expense cap, the costs shown in the table would have been higher. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Period” to estimate the expenses you paid on your account during the period.

Hypothetical Example for Comparison Purposes

In each example, the second line for each share class in the table provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses. This is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund to other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

Please note that the expenses shown in both examples are meant to highlight your ongoing costs only and do not reflect any transactional costs or account type fees, such as redemption fees and IRA Fiduciary Administration fees, respectively. These fees are fully described in the prospectus. Therefore, the second line of each share class in the table is useful in comparing ongoing costs only and will not help you determine the relative costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

106    Annual Report December 31, 2005

Fund Expenses (unaudited)

The examples below show you the ongoing costs (in dollars) of investing in your fund and allows you to compare these costs with those of other mutual funds. Please refer to the previous page for a detailed explanation of the information presented on this chart.

	Beginning Account Value 7/1/2005		Ending Account Value 12/31/2005		Expenses Paid during Period(a)			Annualized Expense Ratio
Growth Fund
Class N—actual return	$	1,000.00	$	1,105.70	$	6.10		1.15	%
Class N—hypothetical 5% return		1,000.00		1,019.41		5.85		1.15
Class I—actual return		1,000.00		1,107.00		4.78		0.90
Class I—hypothetical 5% return		1,000.00		1,020.67		4.58		0.90
Tax-Managed Growth Fund
Class N—actual return		1,000.00		1,113.40		8.15		1.53
Class N—hypothetical 5% return		1,000.00		1,017.49		7.78		1.53
Class I—actual return		1,000.00		1,115.10		6.82		1.28
Class I—hypothetical 5% return		1,000.00		1,018.75		6.51		1.28
Large Cap Growth Fund
Class N—actual return		1,000.00		1,055.50		6.63		1.28
Class N—hypothetical 5% return		1,000.00		1,018.75		6.51		1.28
Class I—actual return		1,000.00		1,058.10		5.34		1.03
Class I—hypothetical 5% return		1,000.00		1,020.01		5.24		1.03
Small Cap Growth Fund
Class N—actual return		1,000.00		1,055.70		7.72		1.49
Class N—hypothetical 5% return		1,000.00		1,017.69		7.58		1.49
Class I—actual return		1,000.00		1,057.40		6.43		1.24
Class I—hypothetical 5% return		1,000.00		1,018.95		6.31		1.24
Small-Mid Cap Growth Fund
Class N—actual return		1,000.00		1,113.10		7.72		1.45
Class N—hypothetical 5% return		1,000.00		1,017.90		7.37		1.45
Class I—actual return		1,000.00		1,114.50		6.40		1.20
Class I—hypothetical 5% return		1,000.00		1,019.16		6.11		1.20
International Growth Fund
Class N—actual return		1,000.00		1,098.60		7.87		1.42
Class N—hypothetical 5% return		1,000.00		1,018.05		7.22		1.42
Class I—actual return		1,000.00		1,200.70		6.49		1.17
Class I—hypothetical 5% return		1,000.00		1,019.31		5.96		1.17
International Equity Fund
Class N—actual return		1,000.00		1,148.20		8.01		1.48
Class N—hypothetical 5% return		1,000.00		1,017.74		7.53		1.48
Class I—actual return		1,000.00		1,150.20		6.67		1.23
Class I—hypothetical 5% return		1,000.00		1,019.00		6.26		1.23
International Small Cap Growth Fund
Class N—actual return (since inception period)		1,000.00		1,116.00		2.87	(b)	1.65
Class N—hypothetical 5% return (6 month period)		1,000.00		1,016.89		8.39		1.65
Class I—actual return (since inception period)		1,000.00		1,116.00		2.43	(b)	1.40
Class I—hypothetical 5% return (6 month period)		1,000.00		1,018.15		7.12		1.40
Emerging Markets Growth Fund
Class N—actual return		1,000.00		1,389.10		9.33		1.55
Class N—hypothetical 5% return		1,000.00		1,017.39		7.88		1.55
Class I—actual return		1,000.00		1,391.10		8.44		1.40
Class I—hypothetical 5% return		1,000.00		1,018.15		7.12		1.40

December 31, 2005 William Blair Funds    107

	Beginning Account Value 7/1/2005		Ending Account Value 12/31/2005		Expenses Paid during Period(a)		Annualized Expense Ratio
Value Discovery Fund
Class N—actual return	$	1,000.00	$	1,054.10	$	6.94	1.34	%
Class N—hypothetical 5% return		1,000.00		1,018.45		6.82	1.34
Class I—actual return		1,000.00		1,055.10		5.91	1.14
Class I—hypothetical 5% return		1,000.00		1,019.46		5.80	1.14
Income Fund
Class N—actual return		1,000.00		1,003.80		3.69	0.73
Class N—hypothetical 5% return		1,000.00		1,021.53		3.72	0.73
Class I—actual return		1,000.00		1,005.10		2.93	0.58
Class I—hypothetical 5% return		1,000.00		1,022.28		2.96	0.58
Ready Reserves Fund
Class N—actual return		1,000.00		1,015.80		3.25	0.64
Class N—hypothetical 5% return		1,000.00		1,021.98		3.26	0.64

(a) Expenses are equal to the annualized expense ratio, multiplied by the average account value over the period, multiplied by the number of days in the period (184), and divided by 365 (to reflect the one-half-year period.)

(b) For the period November 1, 2005 (Commencement of Operations) until December 31, 2005.

108    Annual Report December 31, 2005

BOARD OF TRUSTEES

Frederick Conrad Fischer, Chairman

Principal, William Blair & Company, L.L.C.

Theodore A. Bosler

Retired Principal and Vice President, Lincoln Capital Management Company

Ann P. McDermott

Director and Trustee

Profit and not-for-profit organizations

Donald J. Reaves

Vice President for Administration and Chief Financial Officer, University of Chicago

Donald L. Seeley

Adjunct Lecturer and Director, University of Arizona Department of Finance

John B. Schwemm

Retired Chairman and CEO, R.R. Donnelley & Sons Company

Michelle R. Seitz

Principal, William Blair & Company, L.L.C.,

Robert E. Wood II

Retired Executive Vice President, Morgan Stanley Dean Witter

Officers

Marco Hanig, President

Karl W. Brewer, Senior Vice President

Harvey H. Bundy III, Senior Vice President

Mark A. Fuller, III, Senior Vice President

James W. Golan, Senior Vice President

W. George Greig, Senior Vice President

Michael A. Jancosek, Senior Vice President

John F. Jostrand, Senior Vice President

James S. Kaplan, Senior Vice President

Robert C. Lanphier, IV, Senior Vice President

David S. Mitchell, Senior Vice President

Gregory J. Pusinelli, Senior Vice President

Norbert W. Truderung, Senior Vice President

Jeffrey A. Urbina, Senior Vice President

Christopher T. Vincent, Senior Vice President

Mark T. Leslie, Vice President

Todd M. McClone, Vice President

Terence M. Sullivan, Vice President and Treasurer

Colette M. Garavalia, Secretary

Investment Advisor

William Blair & Company, L.L.C.

Legal Counsel

Vedder, Price, Kaufman & Kammholz, P.C.

Independent Registered Public Accounting Firm

Ernst & Young LLP

Transfer Agent

State Street Bank and Trust Company

P.O. Box 8506

Boston, MA 02266-8506

For customer assistance, call 1-800-635-2886

(Massachusetts 1-800-635-2840)

Date of First Use February, 2006    109

Table of Contents

Institutional International Growth Fund
An Overview from the Portfolio Manager	2
Portfolio of Investments	6
Institutional International Equity Fund
An Overview from the Portfolio Manager	10
Portfolio of Investments	14
International Small Cap Growth Fund
An Overview from the Portfolio Manager	17
Portfolio of Investments	20
Emerging Markets Growth Fund
An Overview from the Portfolio Managers	23
Portfolio of Investments	27
Financial Statements	29
Notes to Financial Statements	32
Report of Independent Registered Public Accounting Firm	41
Board of Trustees and Officers	42
Fund Expense Information	48

This report is submitted for the general information of the shareholders of the William Blair Funds. It is not authorized for distribution to prospective investors unless accompanied or preceded by a prospectus of the William Blair Funds. Please consider the Funds’ investment objectives, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus, which you may obtain by calling 1-800-742-7272. Read it carefully before you invest or send money. William Blair & Company, LLC., distributor.

December 31, 2005 William Blair Funds    1

W. George Greig

INSTITUTIONAL INTERNATIONAL GROWTH FUND

The Institutional International Growth Fund invests primarily in common stocks of foreign growth companies of all sizes.

AN OVERVIEW FROM THE PORTFOLIO MANAGER

How did the Fund perform over the last year? How did the Fund’s performance compare to its benchmark?

The Institutional International Growth Fund posted a 22.76% gain for the 12 months ended December 31, 2005. By comparison, the Fund’s benchmark, the MSCI All Country World Free except US Index, rose 17.11%.

What factors were behind the Fund’s performance versus the benchmark?

In this positive market environment, the Fund rose 22.76% during the year, significantly surpassing the 17.11% MSCI All Country World Free ex-US Index return. In particular, stock selection in Energy, Financials, Information Technology and Telecommunication Services sectors were the areas of the most value added, as was stock selection in Emerging Asia, Japan and Pacific Free ex-Japan. In addition, the Fund’s allocation to small capitalization and emerging markets companies, coupled with strong stock selection in these names, also added value.

What were the most significant factors impacting international markets during 2005?

During the first six months of 2005 the international equity markets were largely flat; however, during the last half of the year the equity markets sharply appreciated as evidenced by the annual 17.11% MSCI All Country World Free except US Index return. International equities significantly outpaced the US equities as measured by the Standard and Poor’s 500 Index, which rose 4.91% year to date. This increase was despite US dollar appreciation versus most foreign currencies, which reduced returns to US investors. The MSCI EAFE Index rose 29.54% in local terms, which translated into 14.02% to US dollar investors, as the US dollar appreciated an average 13% relative to EAFE (Europe and Australasia, Far East Equity) country currencies.

Positive second half international equity market performance was driven by strong results across sectors, capitalizations and regions. With its improving macroeconomic backdrop and positive consumer sentiment, Japan was one of the strongest developed regions year to date, up 25.63% in US dollar terms, only lagging behind Canada, which returned nearly 29%. Emerging markets were the strongest part of the international markets overall, returning 34.54% as measured by the MSCI Emerging Markets Index, while developed small capitalization stocks rose 25.48%. Both areas outperformed larger capitalization developed stocks, as measured by the EAFE Index.

What is your outlook for the international markets?

After a third consecutive year of strong equity returns worldwide, markets have for the most part erased the losses of the 2000-2002 bear market. As the new year begins, many national and regional indices (with the obvious exceptions of Nasdaq and the Japanese market benchmarks) are at or approaching historic highs. Even in the US, where index returns were modest, a majority of individual stocks offered better performance.

2    Annual Report December 31, 2005

Prices have been propelled higher by strong fundamentals: exceptional earnings growth and a surprisingly stable inflation and long term interest rate environment. The only two elements of cyclical risk in the global economic picture have been Fed tightening and rising energy costs, and up to now, neither of them has had a significant impact on growth. Relative economic stability has enabled strong corporate performance to act as the key driver of share price gains over the course of the last several years. Accordingly, if the structural framework of the global economy remains in equilibrium, and corporate growth and profitability continue to meet or exceed expectations, the market environment will remain conducive to solid equity returns.

The principal risks in the macro picture are well known, and mostly focused on the US: household sector leverage and inadequate savings; consumer vulnerability to weakness in home prices; interest rate and exchange rate risks associated with the US current account deficit; the potential for a central bank policy error (such as overreacting to transitory inflation signs); a ‘superspike’ in oil and gas prices beyond what has already taken place; and/or exogenous variables such as avian flu, terrorist disruptions, or natural disasters.

Since none of these issues are new, the only way they could have a dramatic impact on the market risk profile would be if one of them suddenly had a delayed or cumulative effect, or if two or more of them combined in some unforeseen way. These possibilities cannot be conclusively ruled out, but at the same time, the resilience of the financial and economic infrastructure-perhaps a byproduct of increasing global integration-has been impressive over the last decade.

The other key variable in the outlook is corporate profitability and growth, where we have seen continued strength in the US and dramatic improvement in Japan, Europe, and in many developing markets. This aspect of the market environment shows no sign of deteriorating or even slackening the pace of improvement. Corporate management continues to focus on improving supply chain management, capital and labor productivity, cost control, and marketing. Returns on capital are now well above the cost of capital in every principal region of the world; and while there are concerns that ‘excessive’ profitability is a risk factor in itself, there is no signal apparent of either complacency or irrational competitive behavior undermining corporate performance on a wide scale.

Even in a benign economic and earnings scenario, of course, there is no guarantee of supernormal returns or a continuation of the trends of 2003-05. There is a reasonable (although not conclusive) case that cyclical growth may slow in the US and China in 2006, and profit growth may be restrained as a result. In addition, growth in the energy and financial sectors may be held back by price declines and yield curve flattening, respectively. On the other hand, Japan and more recently Europe seem to be benefiting from the effects of a strong external environment and solid corporate profitability, and could continue to mount moderate but self-sustaining recoveries. On a global basis, there is probably not much reason to anticipate significantly lower earnings growth in 2006, but some deceleration seems likely.

In the context of the current profit and interest rate picture, current valuations should not present a significant issue for potential returns, and even areas that have seen relatively strong recent performance, such as small caps and Japan, are not so extended as to be unusually risky on valuation grounds alone.

Emerging markets continue to be a special case, influenced by long term changes outside of the business cycle. Whereas previous cycles were dominated by unstable investment flows and highly volatile production and trade patterns, virtually all of the developing world is now seeing new dynamics of high savings, credit development, job creation and household spending growth, as well as more responsible and transparent corporate behavior. These factors are reducing financial risk at the same time they create new avenues of growth in emerging economies, and have been instrumental in driving exceptional returns in this asset class since 1999.

December 31, 2005 William Blair Funds    3

On balance, we see a reasonable balance between risk and opportunity for the year ahead, particularly as international markets continue to be led by the ongoing trend toward better corporate performance and governance. At the margins of any set of expectations, of course, are the ‘unknown unknowns’. Volatility has been relatively low for some time, and global markets have not faced any major discontinuities for several years. Any investment strategy predicated on anticipation of normal growth and risk parameters has to be adaptable to evolving change, and adaptability built into portfolio structure from the bottom up is probably the most consistent method for refining strategy.

4    Annual Report December 31, 2005

Institutional International Growth Fund

Performance Highlights (unaudited)

Average Annual Total Return at 12/31/2005

	1 Year		3 Year		Since Inception(a)
Institutional International Growth Fund	22.76	%	27.37	%	21.89	%
MSCI All Country World Free Ex-US Index	17.11		26.20		21.67

(a) For the period from July 26, 2002 (Commencement of Operations) to December 31, 2005.

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher than the data quoted. Results shown are average annual returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate and you may have a gain or loss when you sell shares. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds.com. International investing involves special risk considerations, including currency fluctuations, lower liquidity, economic and political risk.

The performance highlights and graph presented above do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

The Morgan Stanley Capital International (MSCI) All Country World Free ex-US Index is an unmanaged index that includes developed and emerging markets and reduced Japanese portion, making it more comparable to the Institutional International Growth Fund in terms of investment approach.

This report identifies the Fund’s investments on December 31, 2005. These holdings are subject to change. Not all stocks in the Fund performed the same, nor is there any guarantee that these stocks will perform as well in the future. Market forecasts provided in this report may not necessarily come to pass.

Sector Diversification (unaudited)

The sector diversification shown is based on the total investment portfolio.

December 31, 2005 William Blair Funds    5

Institutional International Growth Fund

Portfolio of Investments, December 31, 2005 (all dollar amounts in thousands)

Issuer	Shares	Value
Common Stocks—Europe—32.3%
Austria—1.8%
Erste Bank (Banking)	238,900	$	13,263
* Raiffeisen International Bank (Banking)	215,800		14,104
			27,367
France—8.6%
April Group S.A. (Insurance brokers)	99,500		4,101
BNP Paribas (Banking)	188,500		15,209
Dassault Systems S.A. (Computer aided design)	191,500		10,790
Essilor International (Health care supplies)	127,600		10,283
Eurazeo (Diversified financial services)	67,300		7,014
Hermes International SCA (Apparel and luxury goods)	46,700		11,641
Iliad S.A. (Internet software and services)	88,000		5,439
Klepierre (Real estate)	44,270		4,151
* Nexity (Real estate management)	94,900		4,815
* Orpea (Hospital and nursing management)	95,233		5,217
Sanofi-Aventis (Pharmaceuticals)	287,095		25,105
Technip-Coflexip S.A. (Construction)	179,580		10,842
Vinci S.A. (Construction)	143,200		12,319
Zodiac S.A. (Aerospace and defense)	115,700		7,417
			134,343
Germany—6.5%
AWD Holdings AG (Financial services)	28,800		795
Bijou Brigitte (Fashon jewelry accessories)	20,200		5,447
Celesio AG (Pharmaceuticals)	141,650		12,165
Continental AG (Diversified manufacturing)	208,100		18,429
Did Deutscher Industrie Svc (Commercial services)	102,524		5,982
E.ON AG (Energy)	151,080		15,592
GFK AG (Commercial services)	106,000		3,542
* Q-Cells AG (Alternative energy sources)	26,300		1,532
Rational AG (Business equipment)	24,890		3,305
SAP AG (Software)	156,400		28,148
Solarworld AG (Alternative energy sources)	15,700		2,100
Stada Arzneimittel AG (Pharmaceuticals)	149,800		4,887
			101,924
Greece—1.5%
Coca-Cola Hellenic Bottling S.A. (Beverages)	270,800		7,953
EFG Eurobank (Banking)	246,700		7,784
National Bank of Greece (Banking)	182,990		7,779
			23,516
Ireland—2.2%
Anglo Irish Bank plc (Finance)	915,100		13,812
Kingspan Group plc (Construction)	481,100		6,032
* Ryanair Holdings plc—ADR (Airlines)	196,500		11,002
United Drug plc (Pharmaceuticals)	736,700		3,186
			34,032
Italy—2.1%
Credito Emiliano SpA (Banking)	464,500		5,183
Luxottica Group SpA (Apparel and luxury goods)	581,100		14,747

Issuer	Shares	Value
Common Stocks—Europe—32.3%—(continued)
Italy—2.1%—(continued)
Pirelli & C Real Estate SpA (Real estate development)	75,800	$	4,137
Saipem SpA (Energy equipment and services)	544,300		8,926
			32,993
Netherlands—0.6%
* Tomtom NV (Computer software)	265,500		9,107
Norway—0.6%
Statoil Asa (Oil and gas)	415,600		9,531
Spain—1.5%
Grupo Ferrovial S.A. (Industrial services)	114,300		7,926
* Industria De Textile (Retail trade)	454,900		14,844
			22,770
Sweden—0.8%
* Capio AB (Health care)	185,800		3,307
Clas Ohlson AB (Retail)	201,700		3,822
* Modern Times Group (Television)	122,250		5,100
			12,229
Switzerland—6.1%
* Actelion Ltd. (Biotechnology)	20,700		1,709
* EFG International (Commercial banking)	189,300		5,037
*Nobel Biocare Holdings AG (Medical equipment and supplies)	34,210		7,523
Phonak Holdings AG (Hearing technology)	124,100		5,346
Roche Holdings AG (Health care)	248,600		37,237
SGS S.A. (Industrials)	12,400		10,442
UBS AG (Banking)	290,600		27,593
			94,887
Japan—22.3%
Aeon Credit Service Co., Ltd. (Consumer finance)	107,200		10,139
Aeon Mall Co., Ltd. (Real estate)	153,300		7,468
Arrk Corporation (Miscellaneous manufacturer)	69,400		5,103
* Askul Corporation (Retail trade)	65,100		2,019
* Chiyoda Corp. (Construction)	410,800		9,409
Chugai Pharmaceutical Company (Pharamceuticals)	825,800		17,760
Denso Corporation (Auto parts manufacturing)	817,400		28,286
Honeys Company, Ltd. (Luxury goods)	58,000		4,725
Hoya Corporation (Electronic technology)	580,600		20,859
ITO EN, Ltd. (Beverages)	85,400		5,122
* K.K. Davinci Advisors (Consulting services)	698		5,245
* Kenedix, Inc. (Investment management services)	924		5,819
Keyence Corporation (Electronic technology)	56,690		16,114
Komeri Co. (Speciality retail)	187,900		8,055
MISUMI Group, Inc. (Metal production)	110,500		4,801
Mitsubishi Tokyo Financial (Financial services)	2,242		30,517
Nakanishi Inc. (Medical specialties)	42,500		4,768
Neomax Co., Ltd. (Electronic equipment and instruments)	156,700		5,157

See accompanying Notes to Financial Statements.

6    Annual Report December 31, 2005

Institutional International Growth Fund

Portfolio of Investments, December 31, 2005 (all dollar amounts in thousands)

Issuer	Shares	Value
Common Stocks—Japan—22.3%—(continued)
Nidec Corporation (Electronic technology)	201,000	$	17,092
Nitori Company Ltd. (Specialty stores)	67,340		6,266
Nitto Denko Corporation (Electronic technology)	158,300		12,328
Orix Corporation (Consumer finance)	124,200		31,598
Park 24 Co., Ltd. (Commercial services)	231,000		8,249
Point Inc. Ltd. (Apparel and footwear retail)	100,590		8,403
Ryohin Keikaku Co. Ltd. (Retail stores)	112,300		9,819
Sharp Corp. (Electronics)	1,069,100		16,259
Shimamura Company Ltd. (Retail stores)	73,100		10,097
Sparx Asset Management Co. (Financial)	1,547		4,524
Sundrug Co., Ltd. (Drug stores)	96,300		5,274
United Arrows, Ltd. (Specialty retail)	113,000		7,169
Yamada Denki Company (Retail trade)	142,900		17,856
			346,300
Emerging Asia—10.5%
China—1.5%
China Mengniu Dairy Co. (Food products)	4,495,000		3,816
Ctrip.com International Ltd.—ADR (Hotels, restaurants and leisure)	69,400		4,008
*Foxconn International (Manufacturing services)	3,918,800		6,398
Fu Ji Food & Catering (Hotels, restaurants and leisure)	1,819,000		2,980
Li Ning Co. Ltd. (Leisure equipment and products)	5,260,000		3,731
Ports Design Limited (Apparel and luxury goods)	2,184,000		2,541
			23,474
India—1.9%
*Bharti Tele-Ventures (Wireless telecommunication services)	585,900		4,505
HDFC Bank (Banking)	464,900		7,297
Housing Development Finance Corp. (Financial services)	375,400		10,073
Infosys Technologies, Ltd. (Consulting and software services)	123,928		8,256
			30,131
Malaysia—0.8%
*Airasia Bhd (Air transport)	9,748,600		4,100
Bumiputra Commerce Holdings Bhd (Banking)	4,251,600		6,413
Transmile Group Bhd (Airport development and maintenance)	475,400		1,332
			11,845
South Korea—3.8%
Hyundai Motor Co. (Automobiles)	97,300		9,288
*Kookmin Bank (Banking)	173,600		13,129
Korea Investment Holdings Co. Ltd. (Diversified financial services)	128,600		5,402
*NHN Corp. (Internet software and services)	41,200		10,887
Samsung Electronics Co. (Semiconductors)	22,560		14,564
Shinsegae (Discount retail)	14,010		6,127
			59,397

Issuer	Shares	Value
Common Stocks—Emerging Asia—10.5%—(continued)
Taiwan—2.5%
Hon Hai Precision Industry (Computers)	3,127,589	$	17,220
* Mediatek Inc. (Semiconductors and equipment)	1,212,200		14,210
Novatek Microelectronics (Semiconductors and equipment)	1,331,340		7,808
			39,238
United Kingdom—9.6%
BG Group plc (Industrial services)	3,100,920		30,660
*Burren Energy plc (Energy)	478,500		7,516
*Cairn Energy plc (Petroleum refining)	295,800		9,754
Capita Group plc (Commercial services)	1,211,000		8,676
Carphone Warehouse Group plc (Consumer electronics)	892,000		4,248
HBOS plc (Commercial banking)	1,351,900		23,043
*Michael Page International (Personnel services)	1,251,000		5,804
Reckitt Benckiser plc (Household products)	347,150		11,438
Standard Chartered plc (Banking)	531,800		11,822
Tesco plc (Food retail)	4,623,400		26,329
Ultra Electronic Holdings plc (Electronic products)	299,000		5,088
VT Group plc (Shipbuilding)	641,200		4,669
			149,047
Asia—7.0%
Australia—3.5%
BHP Billiton Ltd. (Diversified resources)	958,100		15,968
Billabong International Ltd. (Apparel and luxury goods)	455,800		4,848
Macquarie Bank, Ltd. (Financial services)	311,500		15,489
*Sigma Company, Ltd. (Medical distributors)	3,440,673		7,879
Toll Holdings, Ltd. (Trucking)	910,900		9,918
			54,102
Hong Kong—2.3%
*China Insurance International (Insurance)	7,841,160		3,328
Esprit Holdings Ltd. (Apparel, footwear and retail)	1,294,000		9,179
Li & Fung Ltd. (Distributions)	6,094,000		11,727
Techtronic Industries Co. (Consumer durables)	5,021,900		11,948
			36,182
Singapore—1.2%
Capitaland, Ltd. (Real estate operation)	6,569,000		13,571
Goodpack Ltd. (Air freight and logistics)	2,063,000		2,114
Osim International Ltd. (Consumer sundries)	3,612,200		3,448
			19,133
Emerging Latin America—6.2%
Brazil—1.6%
Companhia de Concessoes Rodoviarias (Public thoroughfares)	103,300		3,272
*Diagnosticos Da America S.A. (Health care services)	161,300		3,003
Gol Linhas Aereas Int S.P—ADR (Air transport)	239,600		6,759

See accompanying Notes to Financial Statements.

December 31, 2005 William Blair Funds    7

Institutional International Growth Fund

Portfolio of Investments, December 31, 2005 (all dollar amounts in thousands)

Issuer	Shares	Value
Common Stocks—Emerging Latin America—6.2%—(continued)
*Natura Cosmeticos S.A. (Cosmetics)	193,300	$	8,519
*Submarino S.A. (E-commerce)	146,000		2,593
			24,146
Chile—1.4%
Banco Santander SP—ADR (Banking)	136,233		6,076
Cencosud S.A.—ADR 144A (Retail stores)	261,300		7,769
S.A.C.I. Falabella (Department stores)	3,143,300		8,622
			22,467
Columbia—0.4%
Bancolombia S.A.—ADR (Banking)	217,700		6,276
Mexico—2.6%
America Movil S.A. (Communications)	4,838,100		7,083
*Consorcio Ara Sa De Cv (Construction)	782,300		3,429
*Corporacion Geo Sa De Cv (Real estate)	2,052,400		7,255
*Desarrolladora Homex S.A.—ADR (Household durables)	160,600		4,927
*Urbi Desarrollos Urbanos S.A. (Household durables)	732,900		5,078
Walmart de Mexico (Retail trade)	2,186,800		12,163
			39,935
Panama—0.2%
*Copa Holdings S.A. Class "A" (Airlines)†	94,300		2,574
Emerging Europe, Mid-East, Africa—4.7%
Czech Republic—0.1%
*Central European Media Enterprises Ltd. Class "A" (Television)	38,000		2,200
Egypt—0.5%
Orascom Construction Industry (Construction)	224,543		8,538
Romania—0.2%
Romanian Development Bank (Commercial banks)	531,500		2,324
Russia—0.5%
*Novatek OAO—GDR (Oil, gas drilling and exploration)	241,300		5,387
*Pyaterochka Holdings—GDR (Consumer staples)	201,500		2,912
			8,299
South Africa—2.8%
African Bank Investments (Consumer loans)	516,600		2,006
Aspen Pharmacare (Pharmaceuticals)	879,500		4,651
Edgars Consolidated Stores (Apparel, footwear and retail)	1,211,000		6,748

*Non-income producing securities

†U.S. listed foreign security

ADR = American Depository Receipt

GDR = Global Depository Receipt

VRN = Variable Rate Note

For securities, primarily traded on exchanges or markets that close before the close of regular trading on the New York Stock Exchange, the Fund uses an independent pricing service on a daily basis to fair value price the securities pursuant to Valuation Procedures adopted by the Board of Trustees.

Issuer		Shares or Principal Amount		Value
Common Stocks—Emerging Europe, Mid-East, Africa—4.7%—(continued)
South Africa—2.8%—(continued)
*MTN Group Ltd. (Telecommunication services)		828,500	$	8,147
Naspers Ltd. (Media)		333,600		5,924
Sasol ASA (Energy)		430,000		15,507
				42,983
Turkey—0.6%
*Turkiye Garanti Bankasi A.S. (Banking)		2,585,450		9,319
Canada—4.3%
Canadian National Railway Company (Railroads)		260,500		20,862
*Gildan Activewear, Inc. (Apparel and luxury goods)		123,400		5,305
Manulife Financial Corp. (Life and health insurance)		260,100		15,268
*Research in Motion Ltd. (Wireless telecommunication)		168,000		11,087
Ritchie Brothers Auctioneers, Inc. (Business services) †		93,700		3,959
*Rona, Inc. (Building materials)		279,600		5,157
Shoppers Drug Mart Corp. (Retail trade)		123,400		4,667
				66,305
Total Common Stock—96.9% (cost $1,086,287)				1,506,914
Preferred Stocks
Brazil—1.4%
Banco Itau Holding (Banking)		597,400		14,395
Petroleo Brasileiro S.A. (Oil, gas drilling, and exploration)		464,400		7,396
				21,791
Germany—0.3%
Porsche AG (Automobiles)		6,780		4,862
Total Preferred Stocks—1.7% (cost $15,936)				26,653
Investment in Affiliate
William Blair Ready Reserves Fund		1,079,430		1,079
Total Investment in Affiliate—0.1% (cost $1,079)				1,079
Short-Term Investments
American Express Demand Note, VRN 3.710% due 1/3/06	$	6,696,000		6,696
Prudential Funding Demand Note, VRN 3.868% due 1/3/06	$	6,964,000		6,964
Total Short-term Investments—0.8% (cost $13,660)				13,660
Total Investments—99.5% (cost $1,116,962)				1,548,306
Cash and other assets, less liabilities—0.5%				7,108
Net assets—100.0%			$	1,555,414

See accompanying Notes to Financial Statements.

8    Annual Report December 31, 2005

Institutional International Growth Fund

Portfolio of Investments, December 31, 2005 (all dollar amounts in thousands)

At December 31, 2005 the Fund's Portfolio of Investments includes the following currency categories:

Euro	24.8%
Japanese Yen	22.6%
British Pound Sterling.	9.7%
Swiss Franc	6.2%
United States Dollar.	4.2%
Canadian Dollar	4.1%
South Korean Won	3.9%
Hong Kong Dollar	3.6%
Australian Dollar	3.5%
South African Rand.	2.8%
Brazilian Real.	2.6%
Taiwan Dollar	2.6%
Mexico Nuevo Peso.	2.3%
Indian Rupee.	2.0%
Singapore Dollar.	1.2%
All other currencies.	3.9%
	100.0%

At December 31, 2005 the Fund's Portfolio of Investments includes the following industry categories:

Finance	25.8%
Consumer Discretionary	22.2%
Information Technology	13.2%
Industrials	12.0%
Health Care	9.7%
Energy	6.9%
Consumer Staples	5.5%
Materials	2.0%
Telecommunication Services	1.7%
Utilities	1.0%
	100.0%

See accompanying Notes to Financial Statements.

December 31, 2005 William Blair Funds    9

W. George Greig

INSTITUTIONAL INTERNATIONAL EQUITY FUND

The Institutional International Equity Fund invests primarily in common stocks of companies included in the Morgan Stanley Capital International All Country World ex-U.S. Index.

AN OVERVIEW FROM THE PORTFOLIO MANAGER

How did the Fund perform over the last year? How did the Fund’s performance compare to its benchmark?

The Institutional International Equity Fund posted an 18.26% increase for the 12 months ended December 31, 2005. By comparison, the Fund’s benchmark, the MSCI All Country World Free except US Index, rose 17.11%.

What factors were behind the Fund’s performance versus the benchmark?

In this positive market environment, the Fund rose 18.26% year to date, surpassing the MSCI All Country World Free ex-US Index return. Positive relative performance was bolstered by strong stock selection in Pacific ex-Japan and Japan as well as in emerging markets, coupled with the underweighted allocation to the UK. From a sector perspective, strong stock selection in Energy, Financials, Telecommunication Services and Utilities also contributed to the Fund’s outperformance versus its benchmark.

What were the most significant factors impacting international markets during 2005?

During the first six months of 2005 the international equity markets were largely flat; however, during the last half of the year the equity markets sharply appreciated as evidenced by the annual 17.11% MSCI All Country World Free except US Index return. International equities significantly outpaced US equities as measured by the Standard & Poor’s 500 Index, which rose 4.91% year to date. This increase was despite US dollar appreciation versus most foreign currencies, which reduced returns to US investors. The MSCI EAFE Index rose 29.54% in local terms, which translated into 14.02% to US dollar investors, as the US dollar appreciated an average 13% relative EAFE (Europe and Australasia, Far East Equity) country currencies.

Positive second half international equity market performance was driven by strong results across sectors, capitalizations and regions. With its improving macroeconomic backdrop and positive consumer sentiment, Japan was one of the strongest developed regions year to date, up 25.63% in US dollar terms, only lagging behind Canada, which returned nearly 29%. Emerging markets were the strongest part of the international markets overall, returning 34.54% as measured by the MSCI Emerging Markets Index, while developed small capitalization stocks rose 25.48%. Both areas outperformed larger capitalization developed stocks, as measured by the EAFE Index.

What is your outlook for the international markets?

The shape of the global economic cycle is shifting. The modest deceleration in growth driven by higher oil prices and a downturn in China’s imports may be receding into the background as other cyclical forces begin to edge growth higher.

Evidence from a number of sources—including recent purchasing managers’ index releases, indications of temporary help demand, technology demand indicators (in Asia), and credit

10    Annual Report December 31, 2005

growth (in Europe)—suggest that the industrial economies may be poised to reaccelerate after a number of sluggish quarters.

On the other hand, rising short term interest rates, higher oil prices and the effects of housing inflation have not had the predicted negative effects on domestic demand, either in the US or elsewhere. Household spending in China and other emerging markets have remained strong, while strong employment and income growth in Japan have steadied the economy there in the face of slowing net exports.

A reacceleration in global growth after the 2004-05 slowdown could be reinforced by stronger investment spending backed by bulging corporate cash and profits, implying cyclical strength in technology and machinery as well as improving growth performance in previous laggards Europe and Japan.

What is your current outlook?

After a third consecutive year of strong equity returns worldwide, markets have for the most part erased the losses of the 2000-2002 bear market. As the new year begins, many national and regional indices (with the obvious exceptions of Nasdaq and the Japanese market benchmarks) are at or approaching historic highs. Even in the US, where index returns were modest, a majority of individual stocks offered better performance.

Prices have been propelled higher by strong fundamentals: exceptional earnings growth and a surprisingly stable inflation and long term interest rate environment. The only two elements of cyclical risk in the global economic picture have been Fed tightening and rising energy costs, and up to now, neither of them has had a significant impact on growth. Relative economic stability has enabled strong corporate performance to act as the key driver of share price gains over the course of the last several years. Accordingly, if the structural framework of the global economy remains in equilibrium, and corporate growth and profitability continue to meet or exceed expectations, the market environment will remain conducive to solid equity returns.

The principal risks in the macro picture are well known, and mostly focused on the US: household sector leverage and inadequate savings; consumer vulnerability to weakness in home prices; interest rate and exchange rate risks associated with the US current account deficit; the potential for a central bank policy error (such as overreacting to transitory inflation signs); a ‘superspike’ in oil and gas prices beyond what has already taken place; and/or exogenous variables such as avian flu, terrorist disruptions, or natural disasters.

Since none of these issues are new, the only way they could have a dramatic impact on the market risk profile would be if one of them suddenly had a delayed or cumulative effect, or if two or more of them combined in some unforeseen way. These possibilities cannot be conclusively ruled out, but at the same time, the resilience of the financial and economic infrastructure—perhaps a byproduct of increasing global integration—has been impressive over the last decade.

The other key variable in the outlook is corporate profitability and growth, where we have seen continued strength in the US and dramatic improvement in Japan, Europe, and in many developing markets. This aspect of the market environment shows no sign of deteriorating or even slackening the pace of improvement. Corporate management continues to focus on improving supply chain management, capital and labor productivity, cost control, and marketing. Returns on capital are now well above the cost of capital in every principal region of the world; and while there are concerns that ‘excessive’ profitability is a risk factor in itself, there is no signal apparent of either complacency or irrational competitive behavior undermining corporate performance on a wide scale.

Even in a benign economic and earnings scenario, of course, there is no guarantee of supernormal returns or a continuation of the trends of 2003-05. There is a reasonable

December 31, 2005 William Blair Funds    11

(although not conclusive) case that cyclical growth may slow in the US and China in 2006, and profit growth may be restrained as a result. In addition, growth in the energy and financial sectors may be held back by price declines and yield curve flattening, respectively. On the other hand, Japan and more recently Europe seem to be benefiting from the effects of a strong external environment and solid corporate profitability, and could continue to mount moderate but self-sustaining recoveries. On a global basis, there is probably not much reason to anticipate significantly lower earnings growth in 2006, but some deceleration seems likely.

In the context of the current profit and interest rate picture, current valuations should not present a significant issue for potential returns, and even areas that have seen relatively strong recent performance, such as small caps and Japan, are not so extended as to be unusually risky on valuation grounds alone.

Emerging markets continue to be a special case, influenced by long term changes outside of the business cycle. Whereas previous cycles were dominated by unstable investment flows and highly volatile production and trade patterns, virtually all of the developing world is now seeing new dynamics of high savings, credit development, job creation and household spending growth, as well as more responsible and transparent corporate behavior. These factors are reducing financial risk at the same time they create new avenues of growth in emerging economies, and have been instrumental in driving exceptional returns in this asset class since 1999.

On balance, we see a reasonable balance between risk and opportunity for the year ahead, particularly as international markets continue to be led by the ongoing trend toward better corporate performance and governance. At the margins of any set of expectations, of course, are the ‘unknown unknowns’. Volatility has been relatively low for some time, and global markets have not faced any major discontinuities for several years. Any investment strategy predicated on anticipation of normal growth and risk parameters has to be adaptable to evolving change, and adaptability built into portfolio structure from the bottom up is probably the most consistent method for refining strategy.

12    Annual Report December 31, 2005

Institutional International Equity Fund

Performance Highlights (unaudited)

Average Annual Total Return at 12/31/2005

	1 Year		Since Inception(a)
Institutional International Equity Fund	18.26	%	18.80	%
MSCI All Country World Free Ex-US Index	17.11		20.17

(a) For the period from December 1, 2004 (Commencement of Operations) to December 31, 2005.

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher than the data quoted. Results shown are average annual returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate and you may have a gain or loss when you sell shares. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds.com. International investing involves special risk considerations, including currency fluctuations, lower liquidity, economic and political risk.

The performance highlights and graph presented above do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

The Morgan Stanley Capital International (MSCI) All Country World Free Ex-US Index is an unmanaged index that includes developed and emerging markets and reduced Japanese portion, making it more comparable to the Institutional International Equity Fund in terms of investment approach.

This report identifies the Fund’s investments on December 31, 2005. These holdings are subject to change. Not all stocks in the Fund performed the same, nor is there any guarantee that these stocks will perform as well in the future. Market forecasts provided in this report may not necessarily come to pass.

Sector Diversification (unaudited)

The sector diversification shown is based on the total investment portfolio.

December 31, 2005 William Blair Funds    13

Institutional International Equity Fund

Portfolio of Investments, December 31, 2005 (all dollar amounts in thousands)

Issuer	Shares	Value
Common Stocks—Europe—36.4%
Austria—1.8%
Erste Bank (Banking)	42,370	$	2,352
*Raiffeisen International Bank (Banking)	30,900		2,019
			4,371
France—8.4%
BNP Paribas (Banking)	41,700		3,365
Dassault Systems S.A. (Computer aided design)	24,300		1,369
Essilor International (Health care supplies)	24,200		1,950
Eurazeo (Diversified financial services)	11,100		1,157
Hermes International SCA (Apparel and luxury goods)	10,200		2,543
Iliad S.A. (Internet software and services)	8,500		525
Sanofi-Aventis (Pharmaceuticals)	66,200		5,789
Technip-Coflexip S.A. (Construction)	32,300		1,950
Vinci S.A. (Construction)	27,200		2,340
			20,988
Germany—7.6%
Bijou Brigitte (Fashion jewelry accessories)	2,700		728
Celesio AG (Pharmaceuticals)	29,700		2,551
Continental AG (Diversified manufacturing)	50,670		4,487
E.ON AG (Energy)	37,900		3,911
*Qiagen, Inc. (Health care)	79,900		936
SAP AG (Software)	35,950		6,470
			19,083
Greece—1.7%
Coca-Cola Hellenic Bottling S.A. (Beverages)	56,340		1,655
EFG Eurobank (Banking)	38,460		1,214
National Bank of Greece (Banking)	32,450		1,379
			4,248
Ireland—1.9%
Anglo Irish Bank plc (Finance)	154,700		2,335
*Ryanair-ADR (Air transport)	44,500		2,492
			4,827
Italy—2.0%
Luxottica Group SpA (Apparel and luxury goods)	135,400		3,436
Saipem SpA (Energy equipment and services)	99,100		1,625
			5,061
Netherlands—0.4%
*Tomtom NV (Computer software)	29,800		1,022
Norway—1.4%
Statoil ASA (Oil and gas)	150,060		3,441
Spain—1.8%
Grupo Ferrovial S.A. (Industrial services)	17,200		1,193
*Industria De Textile (Retail trade)	104,500		3,410
			4,603
Sweden—0.5%
*Capio AB (Health care)	32,200		573
*Modern Times Group (Television)	15,800		659
			1,232
Switzerland—8.9%
*Actelion Ltd. (Biotechnology)	3,650		301
*EFG International (Commercial banking)	31,200		830

Issuer	Shares	Value
Common Stocks—Europe—36.4%—(continued)
Switzerland—8.9%—(continued)
Nobel Biocare Holdings AG (Medical equipment and supplies)	5,400	$	1,188
Phonak Holdings AG (Hearing technology)	16,000		690
Roche Holdings AG (Health care)	49,450		7,407
SGS SA (Industrials)	1,950		1,642
Synthes, Inc. (Health care)	39,280		4,416
UBS AG (Banking)	62,465		5,931
			22,405
Japan—21.3%
Aeon Credit Service Co., Ltd. (Consumer finance)	11,800		1,116
Aeon Mall Co., Ltd. (Real estate)	29,100		1,418
*Askul Corporation (Retail trade)	8,600		267
*Chiyoda Corporation (Construction)	63,000		1,443
Chugai Pharmaceutical Company (Pharamceuticals)	135,600		2,916
Denso Corporation (Auto parts manufacturing)	167,400		5,793
Hoya Corporation (Electronic technology)	100,200		3,600
*K.K. Davinci Advisors (Consulting services)	90		676
*Kenedix, Inc. (Investment management services)	109		686
Keyence Corporation (Electronic technology)	15,800		4,491
Komeri Co., Ltd. (Specialty retail)	24,700		1,059
MISUMI Group, Inc. (Metal production)	16,700		726
Mitsubishi Tokyo Financial (Financial Services)	529		7,200
Neomax Co., Ltd. (Electronic equipment and instruments)	22,000		724
Nidec Corporation (Electronic technology)	34,600		2,942
Nitto Denko Corporation (Electronic technology)	26,300		2,048
Orix Corporation (Consumer finance)	24,500		6,233
Point Inc. Ltd. (Apparel and footwear retail)	11,000		919
Ryohin Keikaku Co. Ltd. (Retail stores)	14,400		1,259
Sharp Corporation (Electronics)	236,000		3,589
Shimamura Company Ltd. (Retail stores)	8,200		1,133
Sundrug Co., Ltd. (Drug stores)	8,500		466
Yamada Denki Co. Ltd. (Retail trade)	22,600		2,824
			53,528
United Kingdom—11.0%
BG Group plc (Industrial services)	722,800		7,147
*Cairn Energy plc (Petroleum refining)	34,700		1,144
Capita Group plc (Commercial services)	312,550		2,239
Carphone Warehouse Group plc (Consumer electronics)	140,100		667
HBOS plc (Commercial banking)	284,700		4,853
Reckitt Benckiser plc (Household products)	91,200		3,005
Standard Chartered plc (Banking)	169,000		3,757
Tesco plc (Food retailer)	829,900		4,726
			27,538
Emerging Asia—8.7%
China—0.6%
*Foxconn International (Manufacturing services)	878,000		1,433
India—2.2%
*Bharti Tele-Ventures (Wireless telecommunication services)	185,231		1,424
HDFC Bank (Banking)	91,190		1,431

See accompanying Notes to Financial Statements.

14    Annual Report December 31, 2005

Institutional International Equity Fund

Portfolio of Investments, December 31, 2005 (all dollar amounts in thousands)

Issuer	Shares	Value
Common Stocks—Emerging Asia—8.7%—(continued)
India—2.2%—(continued)
Housing Development Finance Corp. (Financial services)	48,000	$	1,288
Infosys Technologies Ltd. (Consulting and software services)	21,188		1,412
			5,555
Malaysia—0.4%
Bumiputra Commerce Holdings Bhd (Banking)	577,600		871
South Korea—2.9%
Hyundai Motor Company (Automobiles)	22,500		2,148
*Kookmin Bank (Banking)	25,400		1,921
Samsung Electronics Co. (Semiconductors)	4,822		3,113
			7,182
Taiwan—2.6%
Hon Hai Precision Industry Corp. (Computers)	737,234		4,059
*Mediatek, Inc. (Electronic technology)	214,900		2,519
			6,578
Asia—6.0%
Australia—2.8%
BHP Billiton Ltd. (Diversified resources)	146,600		2,443
Macquarie Bank Ltd. (Financial services)	48,300		2,402
*Sigma Company, Ltd. (Medical distributors)	219,089		502
Toll Holdings Ltd. (Trucking)	161,200		1,755
			7,102
Hong Kong—2.5%
Esprit Holdings Ltd. (Apparel, footwear and retail)	316,500		2,245
Li & Fung Ltd. (Distributions)	869,000		1,672
Techtronic Industries Co. (Consumer durables)	959,400		2,283
			6,200
Singapore—0.7%
Capital and, Ltd. (Real estate operations)	908,000		1,876
Canada—5.0%
Canadian National Railway Co. (Railroads)	69,600		5,574
Manulife Financial Corporation (Life and health insurance)	64,300		3,775
*Research in Motion Ltd. (Wireless telecommunication)	31,800		2,098
Shoppers Drug Mart Corporation (Retail trade)	29,800		1,127
			12,574
Emerging Latin America—2.7%
Brazil—0.5%
Companhia de Concessoes Rodoviarias (Public thoroughfares)	12,300		389
*Natura Cosmeticos S.A. (Cosmetics)	18,100		798
			1,187
Columbia—0.4 %
Bancolumbia S.A.—ADR (Commerical banks)	32,000		923

Issuer	Shares or Principal Amount		Value
Common Stocks—Emerging Latin America— 2.7%—(continued)
Mexico—1.8%
America Movil S.A. (Communications)		1,025,600	$	1,501
Walmart de Mexico (Retail trade)		564,300		3,139
				4,640
Emerging Europe, Mid-East, Africa—1.5%
South Africa—1.5%
Naspers, Ltd. (Media)		54,000		959
Sasol ASA (Energy)		81,200		2,928
				3,887
Total Common Stock—92.6% (cost $206,975)				232,355
Preferred Stocks
Brazil—1.5%
Banco Itau S.A. (Banking)		106,600		2,569
Petroleo Brasileiro S.A. (Oil, gas drilling, and exploration)		71,300		1,135
				3,704
Germany—0.3%
Porsche AG (Automobiles)		1,215		872
Total Preferred Stocks—1.8% (cost $3,963)				4,576
Investment in Affiliate
William Blair Ready Reserves Fund		93,454		93
Total Investment in Affiliate—0.0% (cost $93)				93
Short-Term Investments
American Express Demand Note, VRN 4.235%, due 1/03/06	$	8,895,000		8,895
Prudential Funding Demand Note, VRN 3.930%, due 1/03/06	$	1,867,000		1,867
Total Short-Term Investments—4.3% (cost $10,762)				10,762
Total Investments—98.7% (cost $221,793)				247,786
Cash and other assets, less liabilities—1.3%				3,143
Net assets—100.0%			$	250,929

See accompanying Notes to Financial Statements.

December 31, 2005 William Blair Funds    15

Institutional International Equity Fund

Portfolio of Investments, December 31, 2005 (all dollar amounts in thousands)

* Non-income producing securities

ADR = American Depository Receipt

GDR = Global Depository Receipt

VRN = Variable Rate Note

For securities, excluding those primarily traded on exchanges or markets that close before the close of regular trading on the New York Stock Exchange, the Fund uses an independent pricing service on a daily basis to fair value price the securities pursuant to Valuation Procedures adopted by the Board of Trustees.

At December 31, 2005 the Fund’s Portfolio of Investments includes the following currency categories:

Euro	26.4%
Japanese Yen	22.6%
British Pound Sterling.	11.6%
Swiss Franc	9.5%
Canadian Dollar	5.3%
Hong Kong Dollar	3.2%
South Korean Won	3.0%
Australian Dollar	3.0%
Taiwan Dollar	2.8%
Indian Rupee.	2.3%
Brazilian Real.	2.1%
Mexico Nuevo Peso.	2.0%
South African Rand	1.6%
Norwegian Krone.	1.5%
United States Dollar	1.4%
Singapore Dollar	0.8%
Swedish Krona	0.5%
Malaysian Ringgit	0.4%
	100.0%

At December 31, 2005 the Fund’s Portfolio of Investments includes the following industry categories:

Finance	26.8%
Consumer Discretionary	19.4%
Information Technology	14.9%
Health Care	12.3%
Industrials	8.4%
Energy	8.2%
Consumer Staples	5.0%
Materials	1.9%
Utilities	1.6%
Telecommunication Services	1.5%
	100.0%

See accompanying Notes to Financial Statements.

16    Annual Report December 31, 2005 --

Jeffrey A. Urbina

INTERNATIONAL SMALL CAP GROWTH FUND

The International Small Cap Growth Fund primarily invests in a diversified portfolio of common stocks of small cap companies in developed and emerging markets.

AN OVERVIEW FROM THE PORTFOLIO MANAGER

I am pleased to have the International Small Cap Growth Fund become the newest addition to the William Blair Fund Family and would like to thank our shareholders for investing with us.

I am enthusiastic about the opportunities available to me as the manager of the International Small Cap Growth Fund. The International Small Cap Growth Fund will invest in companies with market capitalizations of $5 billion or less, and will seek 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. 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. In managing the Fund I will focus on companies with above-average returns on equity, strong balance sheets and consistent, above-average earnings growth.

How did the Fund perform since its inception? How did the Fund’s performance compare to its benchmark?

The International Small Cap Growth Fund commenced operations on November 1, 2005. Through the period ending December 31, 2005, the Fund posted a gain of 11.62% (Institutional Class Shares), ahead of the 10.68% return of the Fund’s benchmark, the MSCI World Small Cap Free ex-U.S. Index, for this short time period.

What factors were behind the Fund’s performance versus the benchmark?

The International Small Cap Growth Fund’s “since inception” performance was driven by strong stock selection in emerging markets and Japanese small capitalization stocks. In particular, the Fund’s allocation to and stock selection in Japanese specialty retailers added value, as did the Fund’s focus on Japanese small cap financials. From a sector perspective, the Fund’s stock selection in Consumer Discretionary, Financials, Industrials and Information Technology augmented relative results.

What is your outlook for the international markets?

After a third consecutive year of strong equity returns worldwide, markets have for the most part erased the losses of the 2000-2002 bear market. As the new year begins, many national and regional indices (with the obvious exceptions of Nasdaq and the Japanese market benchmarks) are at or approaching historic highs. Even in the US, where index returns were modest, a majority of individual stocks offered better performance.

Prices have been propelled higher by strong fundamentals: exceptional earnings growth and a surprisingly stable inflation and long term interest rate environment. The only two elements of cyclical risk in the global economic picture have been Fed tightening and rising energy costs, and up to now, neither of them has had a significant impact on growth. Relative economic stability has enabled strong corporate performance to act as the key driver of share price gains over the course of the last several years. Accordingly, if the structural framework

December 31, 2005 William Blair Funds    17

of the global economy remains in equilibrium, and corporate growth and profitability continue to meet or exceed expectations, the market environment will remain conducive to solid equity returns.

The principal risks in the macro picture are well known, and mostly focused on the US: household sector leverage and inadequate savings; consumer vulnerability to weakness in home prices; interest rate and exchange rate risks associated with the US current account deficit; the potential for a central bank policy error (such as overreacting to transitory inflation signs); a ‘superspike’ in oil and gas prices beyond what has already taken place; and/or exogenous variables such as avian flu, terrorist disruptions, or natural disasters.

Since none of these issues are new, the only way they could have a dramatic impact on the market risk profile would be if one of them suddenly had a delayed or cumulative effect, or if two or more of them combined in some unforeseen way. These possibilities cannot be conclusively ruled out, but at the same time, the resilience of the financial and economic infrastructure—perhaps a byproduct of increasing global integration—has been impressive over the last decade.

The other key variable in the outlook is corporate profitability and growth, where we have seen continued strength in the US and dramatic improvement in Japan, Europe, and in many developing markets. This aspect of the market environment shows no sign of deteriorating or even slackening the pace of improvement. Corporate management continues to focus on improving supply chain management, capital and labor productivity, cost control, and marketing. Returns on capital are now well above the cost of capital in every principal region of the world; and while there are concerns that ‘excessive’ profitability is a risk factor in itself, there is no signal apparent of either complacency or irrational competitive behavior undermining corporate performance on a wide scale.

Even in a benign economic and earnings scenario, of course, there is no guarantee of supernormal returns or a continuation of the trends of 2003-05. There is a reasonable (although not conclusive) case that cyclical growth may slow in the US and China in 2006, and profit growth may be restrained as a result. In addition, growth in the energy and financial sectors may be held back by price declines and yield curve flattening, respectively. On the other hand, Japan and more recently Europe seem to be benefiting from the effects of a strong external environment and solid corporate profitability, and could continue to mount moderate but self-sustaining recoveries. On a global basis, there is probably not much reason to anticipate significantly lower earnings growth in 2006, but some deceleration seems likely.

In the context of the current profit and interest rate picture, current valuations should not present a significant issue for potential returns, and even areas that have seen relatively strong recent performance, such as small caps and Japan, are not so extended as to be unusually risky on valuation grounds alone.

Emerging markets continue to be a special case, influenced by long term changes outside of the business cycle. Whereas previous cycles were dominated by unstable investment flows and highly volatile production and trade patterns, virtually all of the developing world is now seeing new dynamics of high savings, credit development, job creation and household spending growth, as well as more responsible and transparent corporate behavior. These factors are reducing financial risk at the same time they create new avenues of growth in emerging economies, and have been instrumental in driving exceptional returns in this asset class since 1999.

On balance, we see a reasonable balance between risk and opportunity for the year ahead, particularly as international markets continue to be led by the ongoing trend toward better corporate performance and governance. At the margins of any set of expectations, of course, are the ‘unknown unknowns’. Volatility has been relatively low for some time, and global markets have not faced any major discontinuities for several years. Any investment strategy predicated on anticipation of normal growth and risk parameters has to be adaptable to evolving change, and adaptability built into portfolio structure from the bottom up is probably the most consistent method for refining strategy.

18    Annual Report December 31, 2005

International Small Cap Growth Fund

Performance Highlights (unaudited)

Average Annual Total Return at 12/31/2005

	Since Inception(a)
International Small Cap Growth Fund Institutional Class	11.62	%
MSCI WLD EX-US Small Cap Free Index	10.68

(a) For the period from November 1, 2005 (Commencement of Operations) to December 31, 2005.

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher than the data quoted. Results shown are average annual returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate and you may have a gain or loss when you sell shares. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds.com. International investing involves special risk considerations, including currency fluctuations, lower liquidity, economic and political risk.

The performance highlights and graph presented above do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

The Morgan Stanley Capital International (MSCI) World Ex-US Small Cap Free Index is an unmanaged index that is designated to measure equity performance of small cap stocks in developed and emerging markets.

This report identifies the Fund’s investments on December 31, 2005. These holdings are subject to change. Not all stocks in the Fund performed the same, nor is there any guarantee that these stocks will perform as well in the future. Market forecasts provided in this report may not necessarily come to pass.

Sector Diversification (unaudited)

The sector diversification shown is based on the total investment portfolio.

December 31, 2005 William Blair Funds    19

International Small Cap Growth Fund

Portfolio of Investments, December 31, 2005 (all dollar amounts in thousands)

Issuer	Shares	Value
Common Stocks—Europe—30.0%
France—7.0%
April Group S.A. (Insurance brokers)	18,600	$	767
Iliad S.A. (Internet software and services)	12,050		745
Klepierre (Real estate)	5,450		511
*Nexity (Real estate management)	9,850		500
*Orpea (Hospital and nursing management)	4,600		252
Zodiac S.A. (Aerospace and defense)	12,000		769
			3,544
Germany—9.0%
Bijou Brigitte (Fashion jewelry accessories)	2,400		647
*CTS Eventim (Leisure and recreation products)	20,700		503
Did Deutscher Industrie Svc (Commercial services)	8,500		496
GFK AG (Commercial services)	10,900		364
*Q-Cells AG (Alternative energy sources)	8,100		472
*Qiagen NV (Biomedical)	50,900		596
Rational AG (Business equipment)	3,900		518
Solarworld AG (Alternative energy sources)	3,550		475
Stada Arzneimittel AG (Pharmaceuticals)	15,000		489
			4,560
Greece—1.0%
Bank of Piraeus (Banking)	23,300		497
Ireland—1.7%
Kingspan Group plc (Construction)	38,600		484
United Drug plc (Pharmaceuticals)	86,500		374
			858
Italy—3.9%
Amplifon SpA (Retail)	7,480		505
Credito Emiliano SpA (Banking)	44,400		495
Pirelli & C Real Estate SpA (Real estate development)	4,500		246
Tod’s SpA (Footwear apparel)	11,200		755
			2,000
Luxembourg—0.5%
*Transcom Worldwide S.A. (E-services and consulting)	28,700		237
Netherlands—0.9%
*Tomtom NV (Computer software)	14,000		480
Sweden—4.1%
*Capio AB (Health care)	41,400		737
Clas Ohlson AB (Retail)	17,100		324
HIQ International AB (Computer services)	41,600		226
*Modern Times Group (Television)	12,100		505
*Tradedoubler AB (E-services and consulting)	14,000		271
			2,063
Switzerland—1.9%
*Actelion Ltd. (Biotechnology)	970		80
*EFG International (Banking)	9,250		246
Phonak Holdings AG (Hearing technology)	14,600		629
			955
Japan—27.2%
Aeon Credit Service Co., Ltd. (Consumer finance)	8,500		804
Aeon Mall Co., Ltd. (Real estate)	21,400		1,043

Issuer	Shares	Value
Common Stocks—Japan—27.2%—(continued)
Arrk Corporation (Miscellaneous manufacturer)	7,400	$	544
*Askul Corporation (Retail trade)	1,900		59
*Chiyoda Corp. (Construction)	32,000		733
Honeys Company, Ltd. (Luxury goods)	9,000		733
ITO EN, Ltd. (Beverages)	8,300		498
*K.K. Davinci Advisors (Consulting services)	32		240
*Kenedix, Inc. (Investment management services)	39		246
Komeri Co. (Specialty retail)	12,000		514
MISUMI Group, Inc. (Metal production)	16,800		730
Nakanishi Inc. (Medical specialties)	4,300		482
Neomax Co., Ltd. (Electronic equipment and instruments)	23,000		757
Nitori Company Ltd. (Specialty stores)	5,800		540
Park 24 Co., Ltd. (Commercial services)	17,000		607
Point Inc. Ltd. (Apparel and footwear retail)	9,500		793
Ryohin Keikaku Co. Ltd. (Retail stores)	9,700		848
Shimamura Company Ltd. (Retail stores)	5,700		787
Sparx Asset Management Co. (Financial)	188		550
Sundrug Co., Ltd. (Drug stores)	13,600		745
Suruga Bank (Banking)	56,000		703
United Arrows, Ltd. (Specialty retail)	12,200		774
			13,730
United Kingdom—10.3%
Accident Exchange Group plc (Auto rental)	34,200		242
*Burren Energy plc (Energy)	46,600		732
*Cairn Energy plc (Petroleum refining)	22,500		742
Capita Group plc (Commercial services)	105,100		753
Carphone Warehouse Group plc (Consumer electronics)	109,000		519
*Michael Page International (Personnel services)	106,200		493
Tullow Oil plc (Oil, gas drilling and exploration)	158,100		735
Ultra Electronic Holdings plc (Electronic products)	29,000		493
VT Group plc (Shipbuilding)	67,500		491
			5,200
Emerging Asia—8.0%
China—3.1%
Ctrip.com International Ltd.—ADR (Hotels, restaurants and leisure)	4,100		237
*Focus Media Holdings—ADR (Advertising sales)	7,500		253
Li Ning Co. Ltd. (Leisure equipment and products)	326,873		232
Ports Design Limited (Apparel and luxury goods)	207,500		241
*Suntech Power Holdings Co. Ltd—ADR (Alternative energy sources)	22,900		624
			1,587
India—1.0%
HDFC Bank—ADR (Banking)	9,500		483
Malaysia—0.9%
*Airasia Bhd (Air transport)	552,900		233
Transmile Group Bhd (Airport development and maintenance)	78,500		220
			453

See accompanying Notes to Financial Statements.

20    Annual Report December 31, 2005

International Small Cap Growth Fund

Portfolio of Investments, December 31, 2005 (all dollar amounts in thousands)

Issuer	Shares	Value
Common Stocks—Emerging Asia—8.0%—(continued)
South Korea—1.6%
Hana Tour Service Inc. (Travel services)	6,300	$	299
*NHN Corporation (Internet software and services)	1,900		502
			801
Taiwan—1.4%
Novatek Microelectronics (Semiconductors and equipment)	123,000		721
Emerging Latin America—6.3%
Brazil—3.3%
*Diagnosticos Da America S.A. (Health care services)	25,100		467
Gol Linhas Aereas Int S.P.—ADR (Air transport)	17,300		488
*Natura Cosmeticos S.A. (Cosmetics)	10,500		463
*Submarino S.A.(E-commerce)	14,600		259
			1,677
Chile—1.0%
Cencosud S.A.—ADR 144A (Retail stores)	16,500		491
Mexico—1.5%
*Urbi Desarrollos Urbanos S.A. (Household durables)	105,800		733
Panama—0.5%
*Copa Holdings S.A. Class “A” (Airlines)†	9,900		270
Asia—6.0%
Australia—2.6%
Billabong International Ltd. (Apparel and luxury goods)	24,400		260
*Sigma Company, Ltd. (Medical distributors)	231,972		531
Toll Holdings, Ltd. (Trucking)	46,500		506
			1,297
Hong Kong—1.4%
Techtronic Industries Co. (Consumer durables)	304,500		725
New Zeland—0.5%
*Pumpkin Patch, Ltd. (Retail apparel)	110,500		254
Singapore—1.5%
Goodpack Ltd. (Air freight and logistics)	322,000		330
Osim International Ltd. (Consumer sundries)	235,000		224
Raffles Education Corp. Ltd. (Schools)	199,800		202
			756
Emerging Europe, Mid-East, Africa—4.6%
Czech Republic—0.2%
*Central European Media Enterprises Ltd. Class “A” (Television)†	1,700		98

*Non-income producing securities

ADR = American Depository Receipt

GDR = Global Depository Receipt

VRN = Variable Rate Note

† = U.S. listed foreign security

Issuer	Shares or Principal Amount		Value
Common Stocks—Emerging Europe, Mid-East, Africa—4.6%—(continued)
Egypt—1.1%
Orascom Construction Industry (Construction)		14,200	$	540
Russia—0.4%
*Pyaterochka Holdings—GDR (Consumer staples)		14,800		214
South Africa—2.9%
African Bank Investments (Consumer loans)		193,700		752
Aspen Pharmacare (Pharmaceuticals)		94,500		500
Edgars Consolidated Stores (Apparel, footwear and retail)		40,900		228
				1,480
Canada—2.0%
*FirstService Corp. (Diversified commercial services)†		10,000		257
*Gildan Activewear, Inc. (Apparel and luxury goods)		5,800		249
Ritchie Brothers Auctioneers, Inc. (Business services)†		5,900		249
*Rona, Inc. (Building materials)		13,600		251
				1,006
Total Common Stock—94.4% (cost $43,429)				47,711
Investment in Affiliate
William Blair Ready Reserves Fund		410,264		410
Total Investment in Affiliate—0.8% (cost $410)				410
Short-Term Investments
American Express Demand Note, VRN 4.235 % due 1/3/06	$	1,416,000		1,416
Prudential Funding Demand Note, VRN 3.930% due 1/3/06	$	1,915,000		1,915
Total Short-Term Investments—6.6% (cost $3,331)				3,331
Total Investments—101.8% (cost $47,170)				51,452
Liabilities plus cash and other assets—(1.8)%				(918	)
Net assets—100.0%			$	50,534

See accompanying Notes to Financial Statements.

December 31, 2005 William Blair Funds    21

International Small Cap Growth Fund

Portfolio of Investments, December 31, 2005 (all dollar amounts in thousands)

For securities, primarily traded on exchanges or markets that close before the close of regular trading on the New York Stock Exchange, the Fund uses an independent pricing service on a daily basis to fair value price the securities pursuant to Valuation Procedures adopted by the Board of Trustees.

At December 31, 2005 the Fund’s Portfolio of Investments includes the following industry categories:

Consumer Discretionary	30.2%
Industrials and Services	26.3%
Financials	15.2%
Healthcare	9.5%
Information Technology	6.7%
Energy	5.9%
Consumer Staples	4.0%
Telecommunication Services	1.5%
Materials	0.7%
	100.0%

At December 31, 2005 the Fund’s Portfolio of Investments includes the following currency categories:

Japanese Yen	28.8%
Euro	25.0%
British Pound Sterling	10.9%
United States Dollar	7.7%
Swedish Krona	4.8%
South African Rand	3.1%
Australian Dollar	2.7%
Hong Kong Dollar	2.5%
Brazilian Real	2.5%
Swiss Franc	2.0%
South Korean Won	1.7%
Singapore Dollar	1.6%
Mexican Nuevo Peso	1.5%
Taiwan Dollar	1.5%
Egyptian Pound	1.1%
Canadian Dollar	1.1%
All other currencies	1.5%
	100.0%

See accompanying Notes to Financial Statements.

22    Annual Report December 31, 2005

W. George Greig

Todd M. McClone

Jeffrey A. Urbina

EMERGING MARKETS GROWTH FUND

The Emerging Markets Growth Fund primarily invests in a diversified portfolio of equity securities issued by growth companies in emerging economies worldwide.

AN OVERVIEW FROM THE PORTFOLIO MANAGERS

How did the Fund perform since its inception? How did the Fund’s performance compare to its benchmark?

The Emerging Markets Growth Fund commenced operations on June 6, 2005. Through the period ending December 31, 2005, the Fund posted a gain of 42.82% (Institutional Class Shares), ahead of the 29.26% return of the Fund’s benchmark, the MSCI Emerging Markets Index.

What factors were behind the Fund’s performance versus the benchmark?

The Emerging Markets Growth Fund’s “since inception” performance was augmented by strong stock selection in Emerging Asia and Latin America, coupled with regional positioning. Within Emerging Asia, Consumer Discretionary, Information Technology, and Telecommunication Services holdings in particular performed well while Latin American Telecommunication Services and Industrials holdings were the strongest performers. Stock selection across most sectors contributed to the Fund’s outperformance during the period with the largest value added in Industrials, Information Technology, Consumer Discretionary and Telecommunication Services.

What were the most significant factors impacting international markets during 2005?

During the first six months of 2005 the international equity markets were largely flat; however, during the last half of the year the equity markets sharply appreciated as evidenced by the annual 17.11% MSCI All Country World Free except US Index return. International equities significantly outpaced the US as measured by the Standard & Poor’s 500 Index, which rose 4.91% year to date. This increase was despite US dollar appreciation versus most foreign currencies, which reduced returns to US investors. The MSCI EAFE Index rose 29.54% in local terms, which translated into 14.02% to US dollar investors, as the US dollar appreciated an average 13% relative to EAFE (Europe and Australasia, Far East Equity) country currencies.

Positive second half international equity market performance was driven by strong results across sectors, capitalizations and regions. Emerging markets were the strongest part of the international markets overall, returning 34.54% as measured by the MSCI Emerging Markets Index. Within emerging markets, Latin America was the strongest region, returning 50.42%, while the Emerging Europe and Africa region was up nearly 39%, and Emerging Asia returned 27.50%.

What is your outlook for the international markets?

After a third consecutive year of strong equity returns worldwide, markets have for the most part erased the losses of the 2000-2002 bear market. As the new year begins, many national and regional indices (with the obvious exceptions of Nasdaq and the Japanese market benchmarks) are at or approaching historic highs. Even in the US, where index returns were modest, a majority of individual stocks offered better performance.

December 31, 2005 William Blair Funds    23

Prices have been propelled higher by strong fundamentals: exceptional earnings growth and a surprisingly stable inflation and long term interest rate environment. The only two elements of cyclical risk in the global economic picture have been Fed tightening and rising energy costs, and up to now, neither of them has had a significant impact on growth. Relative economic stability has enabled strong corporate performance to act as the key driver of share price gains over the course of the last several years. Accordingly, if the structural framework of the global economy remains in equilibrium, and corporate growth and profitability continue to meet or exceed expectations, the market environment will remain conducive to solid equity returns.

The principal risks in the macro picture are well known, and mostly focused on the US: household sector leverage and inadequate savings; consumer vulnerability to weakness in home prices; interest rate and exchange rate risks associated with the US current account deficit; the potential for a central bank policy error (such as overreacting to transitory inflation signs); a ‘superspike’ in oil and gas prices beyond what has already taken place; and/or exogenous variables such as avian flu, terrorist disruptions, or natural disasters.

Since none of these issues are new, the only way they could have a dramatic impact on the market risk profile would be if one of them suddenly had a delayed or cumulative effect, or if two or more of them combined in some unforeseen way. These possibilities cannot be conclusively ruled out, but at the same time, the resilience of the financial and economic infrastructure—perhaps a byproduct of increasing global integration—has been impressive over the last decade.

The other key variable in the outlook is corporate profitability and growth, where we have seen continued strength in the US and dramatic improvement in Japan, Europe, and in many developing markets. This aspect of the market environment shows no sign of deteriorating or even slackening the pace of improvement. Corporate management continues to focus on improving supply chain management, capital and labor productivity, cost control, and marketing. Returns on capital are now well above the cost of capital in every principal region of the world; and while there are concerns that ‘excessive’ profitability is a risk factor in itself, there is no signal apparent of either complacency or irrational competitive behavior undermining corporate performance on a wide scale.

Even in a benign economic and earnings scenario, of course, there is no guarantee of supernormal returns or a continuation of the trends of 2003-05. There is a reasonable (although not conclusive) case that cyclical growth may slow in the US and China in 2006, and profit growth may be restrained as a result. In addition, growth in the energy and financial sectors may be held back by price declines and yield curve flattening, respectively. On the other hand, Japan and more recently Europe seem to be benefiting from the effects of a strong external environment and solid corporate profitability, and could continue to mount moderate but self-sustaining recoveries. On a global basis, there is probably not much reason to anticipate significantly lower earnings growth in 2006, but some deceleration seems likely.

In the context of the current profit and interest rate picture, current valuations should not present a significant issue for potential returns, and even areas that have seen relatively strong recent performance, such as small caps and Japan, are not so extended as to be unusually risky on valuation grounds alone.

Emerging markets continue to be a special case, influenced by long term changes outside of the business cycle. Whereas previous cycles were dominated by unstable investment flows and highly volatile production and trade patterns, virtually all of the developing world is now seeing new dynamics of high savings, credit development, job creation and household spending growth, as well as more responsible and transparent corporate behavior. These factors are reducing financial risk at the same time they create new avenues of growth in emerging economies, and have been instrumental in driving exceptional returns in this asset class since 1999.

24    Annual Report December 31, 2005

On balance, we see a reasonable balance between risk and opportunity for the year ahead, particularly as international markets continue to be led by the ongoing trend toward better corporate performance and governance. At the margins of any set of expectations, of course, are the ‘unknown unknowns’. Volatility has been relatively low for some time, and global markets have not faced any major discontinuities for several years. Any investment strategy predicated on anticipation of normal growth and risk parameters has to be adaptable to evolving change, and adaptability built into portfolio structure from the bottom up is probably the most consistent method for refining strategy.

December 31, 2005 William Blair Funds    25

Emerging Markets Growth Fund

Performance Highlights (unaudited)

Average Annual Total Return at 12/31/2005

	Since Inception(a)
Emerging Markets Growth Fund Institutional Class	42.82	%
MSCI Emerging Markets Free Index	29.26

(a) For the period from June 6, 2005 (Commencement of Operations) to December 31, 2005.

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher than the data quoted. Results shown are average annual returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate and you may have a gain or loss when you sell shares. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds.com. International investing involves special risk considerations, including currency fluctuations, lower liquidity, economic and political risk.

The performance highlights and graph presented above do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

The Morgan Stanley Capital International (MSCI) Emerging Markets Free Index is an index that is designated to measure equity performance in the global emerging markets.

This report identifies the Fund’s investments on December 31, 2005. These holdings are subject to change. Not all stocks in the Fund performed the same, nor is there any guarantee that these stocks will perform as well in the future. Market forecasts provided in this report may not necessarily come to pass.

Sector Diversification (unaudited)

The sector diversification shown is based on the total investment portfolio.

26    Annual Report December 31, 2005

Emerging Markets Growth Fund

Portfolio of Investments, December 31, 2005 (all dollar amounts in thousands)

Issuer	Shares	Value
Common Stocks—Emerging Asia—44.0%
China—7.5%
China Mungniu Dairy Co. Ltd. (Food products)	2,834,000	$	2,406
Ctrip.com International Ltd.—ADR (Hotels, restaurants, and leisure)	19,300		1,115
*Focus Media Holding Ltd.—ADR (Advertising sales)	31,000		1,047
*Foxconn International (Manufacturing services)	2,701,000		4,410
Fu Ji Food and Catering Services Holdings Ltd (Hotels, restaurants, and leisure)	782,000		1,281
Li Ning Co. Ltd (Leisure equipment and products)	1,640,000		1,163
*Parkson Retail Group Ltd. (Retail stores)	768,900		1,388
Ports Design Ltd. (Apparel and luxury goods)	1,075,000		1,251
*Suntech Power Holdings Co. Ltd—ADR (Alternate energy sources)	172,600		4,703
			18,764
India—10.6%
*Bharti Tele-Ventures (Wireless telecommunication services)	920,700		7,079
HDFC Bank (Banking)	302,300		4,745
Housing Development Finance Corp. (Financial services)	177,900		4,773
Infosys Technologies, Ltd. (Consulting and software services)	146,800		9,780
			26,377
Malaysia—3.8%
*Airasia Bhd (Air transport)	5,449,000		2,291
Bumiputra Commerce Holding Bhd (Banking)	3,347,800		5,050
Transmile Group Bhd (Airport development and maintenance)	765,400		2,145
			9,486
South Korea—13.8%
Hana Tour Service (Travel service)	64,700		3,068
Hyundai Motor Co. Ltd. (Automobiles)	64,590		6,165
*Kookmin Bank (Banking)	65,940		4,987
Korea Investment Holdings Co. Ltd. (Diversified financial services)	61,630		2,589
*NHN Corporation (Internet software and services)	9,500		2,510
Samsung Electronics Co. (Semiconductors)	15,800		10,200
Shinsegae Co. Ltd. (Discount retail)	11,100		4,854
			34,373
Taiwan—8.3%
Hon Hai Precision Industry (Computers)	1,332,107		7,334
*Mediatek Inc. (Semiconductors and equipment)	685,800		8,039
Novatek Microelectronics (Semiconductors and equipment)	926,724		5,435
			20,808

Issuer	Shares	Value
Common Stocks—Emerging Europe, Mid-East, Africa—22.4%
Czech Republic—0.3%
*Central European Media Enterprises Ltd., Class “A” (Television)†	15,100	$	874
Egypt—2.1%
Orascom Contruction Industry—GDR (Construction)	69,900		5,242
Hungary—1.9%
MOL Magyar Olaj-es Gazipari (Oil company)	24,900		2,336
Richter Gedeon Rt. (Pharmaceuticals)	12,600		2,265
			4,601
Russia—2.4%
*Novatek OAO—GDR 144A (Oil, gas drilling, and exploration)	214,100		4,814
*Pyaterochka Holdings—GDR (Food and retail)	73,900		1,068
			5,882
South Africa—13.7%
African Bank Investments (Banking)	1,310,300		5,087
Aspen Pharmacare Holdings Ltd. (Pharmaceuticals)	471,700		2,494
Edgars Consolidated Stores (Apparel, footwear and retail)	312,200		1,740
*MTN Group Ltd. (Telecommunication services)	783,600		7,706
Naspers Ltd. (Media)	272,900		4,846
Sasol Ltd. (Oil company)	205,800		7,422
Standard Bank Group Ltd. (Banking)	402,700		4,839
			34,134
Turkey—2.0%
*Turkiye Garanti Bankasi A.S. (Banking)	1,414,300		5,098
Emerging Latin America—21.8%
Brazil— 3.9%
Cia de Concessoes Rodoviarias (Public thoroughfares)	38,900		1,232
*Diagnosticos da America S.A. (Health care services)	126,800		2,361
Gol Linhas Aereas Int S.P—ADR (Air transport)	85,700		2,418
*Natura Cosmeticos S.A. (Cosmetics)	53,900		2,376
*Submarino S.A. (Internet and catalog retail)	69,800		1,240
			9,627
Chile—5.8%
Banco Santander SP—ADR (Banking)	105,200		4,692
Cencosud S.A.—ADR 144A (Retail stores)	84,600		2,515
S.A.C.I. Falabella S.A. (Retail stores)	2,657,400		7,289
			14,496
Columbia—1.9%
Bancolombia S.A.—ADR (Banking)	166,900		4,812

See accompanying Notes to Financial Statements.

December 31, 2005 William Blair Funds    27

Emerging Markets Growth Fund

Portfolio of Investments, December 31, 2005 (all dollar amounts in thousands)

Issuer	Shares or Principal Amount		Value
Common Stocks—Emerging Latin America—21.8%—(continued)
Mexico—9.8%
America Movil S.A. (Communications)		3,190,700	$	4,671
*Corporacion Geo Sa De Cv (Real estate)		1,409,000		4,981
*Urbi Desarrollos Urbanos S.A. (Household durables)		703,200		4,872
Walmart de Mexico (Retail trade)		1,757,900		9,777
				24,301
Panama—0.4%
*Copa Holdings S.A., Class “A” (Airlines)†		40,900		1,117
Total Common Stock—88.2% (cost $191,210)				219,992
Preferred Stock
Brazil—4.7%
Banco Itau Holding (Banking)		189,800		4,574
Petroleo Brasileiro S.A. (Oil, gas drilling, and exploration)		446,400		7,109
Total Preferred Stock—4.7% (cost $10,796)				11,683
Investment in Affiliate
William Blair Ready Reserves Fund		3,821,204		3,821
Total Investment in Affiliate—1.5% (cost $3,821)				3,821
Short-Term Investments
American Express Demand Note, VRN 4.235% due 1/3/06	$	3,778,000		3,778
Prudential Funding Demand Note, VRN 3.930% due 1/3/06	$	3,659,000		3,659
Total Short-Term Investments—3.0% (cost $7,437)				7,437
Total Investments—97.4% (cost $213,264)				242,933
Cash and other assets, less liabilities—2.6%				6,415
Net assets—100.0%			$	249,348

* Non-income producing securities

ADR = American Depository Receipt

GDR = Global Depository Receipt

VRN = Variable Rate Note

† = U.S. listed foreign security

For securities, excluding those primarily traded on exchanges or markets that close before the close of regular trading on the New York Stock Exchange, the Fund uses an independent pricing service on a daily basis to fair value price the securities to Valuation Procedures adopted by the Board of Trustees.

At December 31, 2005 the Fund’s Portfolio of Investments includes the following currency categories:

United States Dollar	14.9%
South Korean Won	14.8%
South African Rand	14.7%
Indian Rupee	11.4%
Mexico Nuevo Peso	10.5%
Taiwan Dollar	9.0%
Brazilian Real	8.2%
Hong Kong Dollar	5.1%
Malaysian Ringgit	4.1%
Chilean Peso	3.1%
Turkish Lira	2.2%
Hungarian Forint	2.0%
	100.0%

At December 31, 2005 the Fund’s Portfolio of Investments includes the following industry categories:

Consumer Discretionary	22.7%
Finance	22.1%
Information Technology	20.6%
Energy	11.4%
Industrials	9.7%
Telecommunication Services	8.4%
Consumer Staples	3.1%
Health Care	2.0%
	100.0%

See accompanying Notes to Financial Statements.

28    Annual Report December 31, 2005

Statements of Assets and Liabilities

December 31, 2005 (all dollar amounts in thousands)

	Institutional International Growth Fund			Institutional International Equity Fund			International Small Cap Growth Fund			Emerging Markets Growth Fund
Assets
Investments in securities, at cost	$	1,115,883		$	221,700		$	46,760		$	209,443
Investments in Affiliated Fund, at cost		1,079			93			410			3,821
Investments in securities, at value	$	1,547,227		$	247,693		$	51,042		$	239,112
Investments in Affiliated Fund, at value		1,079			93			410			3,821
Cash		47			13			—			1
Foreign currency, at value (cost $7,455, $1,623, $44, and $2,860, respectively)		7,557			1,660			45			2,878
Receivable for fund shares sold		3,486			2,500			254			1,269
Receivable for investment securities sold		3,915			199			304			2,930
Receivable from Advisor		—			7			—			—
Dividend and interest receivable		1,221			129			22			132
Total assets		1,564,532			252,294			52,077			250,143
Liabilities
Payable for investment securities purchased		7,633			1,170			1,487			518
Payable for fund shares redeemed		96			—			—			45
Management fee payable		1,234			122			6			153
Distribution and shareholder services fee payable		—			—			2			9
Other accrued expenses		155			73			48			70
Total liabilities		9,118			1,365			1,543			795
Net Assets	$	1,555,414		$	250,929		$	50,534		$	249,348
Capital
Composition of Net Assets
Par value of shares of beneficial interest	$	86		$	21		$	5		$	18
Capital paid in excess of par value		1,126,781			226,639			45,907			219,209
Accumulated net investment income (loss)		(14,549	)		(581	)		(99	)		(322	)
Accumulated realized gain (loss)		11,677			(1,178	)		442			757
Net unrealized appreciation (depreciation) of investments and foreign currencies		431,419			26,028			4,279			29,686
Net Assets	$	1,555,414		$	250,929		$	50,534		$	249,348
Net Assets	$	1,555,414		$	250,929		$	—		$	—
Shares Outstanding		85,869,096			20,833,285			—			—
Net Asset Value Per Share	$	18.11		$	12.04		$	—		$	—
Institutional Share Class
Net Assets	$	—		$	—		$	35,163		$	189,431
Shares Outstanding		—			—			3,150,242			13,339,140
Net Asset Value Per Share	$	—		$	—		$	11.16		$	14.20

See accompanying Notes to Financial Statements.

December 31, 2005 William Blair Funds    29

Statements of Operations

For the Year Ended December 31, 2005 (all dollar amounts in thousands)

	Institutional International Growth Fund			Institutional International Equity Fund			International Small Cap Growth Fund(a)			Emerging Markets Growth Fund (b)
Investment income
Dividends	$	21,422		$	1,033		$	57		$	586
Less foreign tax withheld		(1,716	)		(76	)		—			(24	)
Income from Affiliated Fund		175			31			1			26
Interest		678			183			16			90
Total income		20,559			1,171			74			678
Expenses
Investment advisory fees		12,489			824			61			508
Distribution fees		—			—			—			6
Shareholder administration fees		—			—			3			22
Custodian fees		845			183			34			148
Transfer agent fees		47			5			1			12
Professional fees		89			44			24			29
Registration fees		47			49			8			41
Other expenses		277			17			3			4
Total expenses before waiver		13,794			1,122			134			770
Less expenses waived or absorbed by the Advisor		—			(208	)		(54	)		(161	)
Net expenses		13,794			914			80			609
Net investment income (loss)		6,765			257			(6	)		69
Net realized and unrealized gain (loss) on investments, foreign currency transactions and other assets and liabilities
Net realized gain (loss) on investments		116,446			(812	)		442			1,926
Net realized gain (loss) on foreign currency transactions and other assets and liabilities		(6,149	)		(614	)		(87	)		(391	)
Total net realized gain (loss)		110,297			(1,426	)		355			1,535
Change in net unrealized appreciation (depreciation) on investments and other assets and liabilities		167,187			25,499			4,279			29,686
Net increase (decrease) in net assets resulting from operations	$	284,249		$	24,330		$	4,628		$	31,290

(a) For the period from November 1, 2005 (Commencement of Operations) to December 31, 2005.

(b) For the period from June 6, 2005 (Commencement of Operations) to December 31, 2005.

See accompanying Notes to Financial Statements.

30    Annual Report December 31, 2005

Statements of Changes in Net Assets

For the Periods Ended December 31, 2005 and 2004 (all amounts in thousands)

	Institutional International Growth Fund						Institutional International Equity Fund						International Small Cap Growth Fund			Emerging Markets Growth Fund
	2005			2004			2005			2004(a)			2005(b)			2005(c)
Operations
Net investment income (loss)	$	6,765		$	1,475		$	257		$	(3	)	$	(6	)	$	69
Net realized gain (loss) on investments, foreign currency transactions and other assets and liabilities		110,297			6,935			(1,426	)		(142	)		355			1,535
Change in net unrealized appreciation (depreciation) on investments, foreign currency transactions and other assets and liabilities		167,187			168,587			25,499			529			4,279			29,686
Net increase (decrease) in net assets resulting from operations		284,249			176,997			24,330			384			4,628			31,290
Distributions to shareholders from
Net investment income		(11,444	)		(605	)		(442	)		—			(6	)		—
Net realized gain		(112,356	)		—			(3	)		—			—			(1,169	)
		(123,800	)		(605	)		(445	)		—			(6	)		(1,169	)
Capital stock transactions
Net proceeds from sale of shares		114,081			597,277	(d)		201,804			27,000			46,006			224,893
Shares issued in reinvestment of income dividends and capital gain distributions		120,609			487			383			—			6			1,122
Less cost of shares redeemed		(63,161	)		(28,231	)		(2,527	)		—			(100	)		(6,788	)
Net increase (decrease) in net assets resulting from capital stock transactions		171,529			569,533			199,660			27,000			45,912			219,227
Increase (decrease) in net assets		331,978			745,925			223,545			27,384			50,534			249,348
Net assets
Beginning of period	$	1,223,436		$	477,511		$	27,384		$	—		$	—		$	—
End of period	$	1,555,414		$	1,223,436		$	250,929		$	27,384		$	50,534		$	249,348
Undistributed net investment income (loss) at the end of the year	$	(14,549	)	$	(5,484	)	$	(581	)	$	(125	)	$	(99	)	$	(322	)
Capital stock transactions in dollars
Institutional Share Class (only)
Sales													$	31,900		$	172,789
Reinvested distributions														6			858
Redemptions														—			5,159
Net change in net assets relating to fund share activity													$	31,906		$	168,488
Capital stock transactions in shares
Shares sold		6,656			43,026			18,357			2,685			3,150			13,777
Shares issued in reinvestment of income dividends or capital gain distributions		6,798			31			32			—			—			62
Less shares redeemed		(3,750	)		(1,991	)		(240	)		—			—			(500	)
Net change in shares outstanding		9,704			41,066			18,149			2,685			3,150			13,339

(a) For the period from December 1, 2004 (Commencement of Operations) to December 31, 2004.

(b) For the period from November 1, 2005 (Commencement of Operations) to December 31, 2005.

(c) For the period from June 6, 2005 (Commencement of Operations) to December 31, 2005.

(d) The net proceeds from sale of shares include $73 million dollars in two in-kind purchase transactions completed during 2004.

See accompanying Notes to Financial Statements.

December 31, 2005 William Blair Funds    31

Notes to Financial Statements

(1) Significant Accounting Policies

(a) Description of the Fund

William Blair Funds (the “Fund”) is a diversified mutual fund registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The number of shares authorized for this Fund is unlimited. The Fund currently consists of the following fourteen portfolios (the “Portfolios”), each with its own investment objectives and policies.

Equity Portfolios	International Portfolios
Growth	International Growth
Tax-Managed Growth	International Equity
Large Cap Growth	Institutional International Growth
Small Cap Growth	Institutional International Equity
Small-Mid Cap Growth	International Small Cap Growth
Value Discovery	Emerging Markets Growth
	Fixed Income Portfolio
	Income
	Money Market Portfolio
	Ready Reserves

The investment objectives of the Portfolios are as follows:

Equity	Long-term capital appreciation.
International	Long-term capital appreciation.
Fixed Income	High level of current income with relative stability of principal.
Money Market	Current income, a stable share price and daily liquidity.

The Institutional International Growth Fund, the Institutional International Equity Fund and the Institutional Share Class of the International Small Cap Growth Fund and the Emerging Markets Growth Fund are the only Portfolios covered in this report.

(b) Share Classes

Three different classes of shares of the International Small Cap Growth Fund and Emerging Markets Growth Fund currently exist: N, I and Institutional. This report includes financial information for only the Institutional Class. The Institutional share class is sold to institutional investors, including but not limited to employee benefit plans, endowments, foundations, trusts and corporations, who are able to meet the Fund’s high minimum investment requirement. The minimum initial investment required is $5 million.

(c) Investment Valuation

The market value of domestic equity securities and options is determined by valuing securities traded on national securities exchanges or markets or in the over-the-counter markets at the last sales price or, if applicable, the official closing price or, in the absence of a sale on the date of valuation, at the latest bid price.

For international securities, if the foreign exchange or market on which a security is primarily traded closes before the close of regular trading on the New York Stock Exchange (4:00 p.m. Eastern time), the Funds use an independent pricing service on a daily basis to estimate the fair value price as of the close of regular trading on the New York Stock Exchange. The Board of Trustees has determined that the passage of time between when foreign exchanges or markets close and when the Funds calculate their net asset values could cause the value of international securities to no longer be representative of their market price or accurate. In addition, quarterly the Board of Trustees receives a report which tracks the fair value prices used to calculate the net asset value to the next day’s opening local prices. Otherwise, the value of foreign equity securities is determined based on the last sale price on the foreign exchange or market on which it is primarily traded or, if there have been no sales during that day, at the latest bid price. Foreign currency forward contracts and foreign currencies are valued at the forward and current exchange rates, respectively, prevailing on the date of valuation.

32    Annual Report December 31, 2005

Investments in other funds are valued at the underlying fund’s net asset value on the date of valuation. Other securities, and all other assets, including securities for which a market price is not available, or the value of which is affected by a significant valuation event, are valued at fair value as determined in good faith by, or under the direction of the Board of Trustees and in accordance with the Fund’s valuation procedures. As of December 31, 2005, there were securities held in the Institutional International Growth, Institutional International Equity, International Small Cap Growth and Emerging Markets Growth Portfolios requiring fair valuation by the Board of Trustees pursuant to the Fund’s valuation procedures.

(d) Investment income and investment transactions

Dividend income is recorded on the ex-dividend date, except for those dividends from certain foreign securities which are recorded as soon as the information is available. Foreign currency gains and losses associated with fluctuation in the foreign currency rate versus the United States dollar are recorded on the Statement of Operations as a component of net realized gains/(losses) on foreign currency transactions and other assets and liabilities.

Premiums and discounts are accreted and amortized on a straight-line basis for short-term investments and on an effective interest method for long-term investments.

Interest income is determined on the basis of the interest accrued, adjusted for amortization of premium or discount. Variable rate bonds and floating rate notes earn interest at coupon rates that fluctuate at specific time intervals.

Securities transactions are recorded on the trade date. Realized gains and losses from securities transactions are reported on an identified cost basis.

(e) Share Valuation and Dividends to Shareholders

Shares are sold and redeemed on a continuous basis at net asset value. The net asset value per share is determined by dividing the Portfolio’s net assets by the number of shares outstanding as of the close of regular trading on the New York Stock Exchange, which is generally 3:00 p.m. Central time (4:00 p.m. Eastern time), on each day the Exchange is open.

Dividends from net investment income, if any, are declared at least annually. Capital gain distributions, if any, are declared at least annually in December. Dividends payable to shareholders are recorded on the ex-dividend date.

The timing and characterization of certain income and capital gain distributions are determined annually in accordance with Federal income tax regulations that may differ from U.S. generally accepted accounting principles. As a result, net investment income or loss and net realized gain or loss for a reporting period may differ from the amount distributed during such period. In addition, the Portfolios may periodically record reclassifications among certain capital accounts to reflect differences between financial reporting and income tax basis distributions. The reclassifications were reported in order to reflect the tax treatment for certain permanent differences that exist between income tax regulations and U.S. generally accepted accounting principles. The reclassifications relate to section 988 currency gains and losses, and recharacterization of unrealized appreciation on PFICs (Passive Foreign Investment Corporations). These reclassifications have no impact on the net asset values of the Portfolio. Accordingly, at December 31, 2005, the following reclassifications were recorded (in thousands):

Portfolio	Undistributed Net Investment Income/(Loss)			Accumulated Undistributed Net Realized Gain/ (Loss)		Capital Paid In Excess of Par Value
Institutional International Growth	$	(4,386	)	$	4,386	$	—
Institutional International Equity		(271	)		271		—
International Small Cap Growth		(87	)		87		—
Emerging Markets Growth		(391	)		391		—

Distributions from net realized gains for book purposes may include short-term capital gains, which are included as ordinary income for tax purposes. The tax character of distributions paid during 2005 and 2004 was as follows (in thousands):

	Distributions Paid In 2005				Distributions Paid In 2004
Portfolio	Ordinary Income		Long-Term Capital Gains		Ordinary Income		Long-Term Capital Gains
Institutional International Growth	$	14,610	$	109,190	$	605	$	—
Institutional International Equity		445		—		—		—
International Small Cap Growth		6		—		—		—
Emerging Markets Growth		1,169		—		—		—

December 31, 2005 William Blair Funds    33

As of December 31, 2005, the components of distributable earnings on a tax basis were as follows (in thousands):

Portfolio	Undistributed Ordinary Income		Accumulated Capital and Other Losses		Undistributed Long-Term Gain		Net Unrealized Appreciation / (Depreciation)
Institutional International Growth	$	12,597	$	—	$	9,285	$	406,665
Institutional International Equity		1,453		493		—		23,309
International Small Cap Growth		511		—		—		4,111
Emerging Markets Growth		404		—		1,158		28,559

(f) Foreign Currency Translation and Foreign Currency Forward Contracts

The Portfolios may invest in securities denominated in foreign currencies. As such, assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at the current exchange rate on the date of valuation. These Portfolios may enter into foreign currency forward contracts (1) as a means of managing the risks associated with changes in the exchange rates for the purchase or sale of a specific amount of a particular foreign currency, and (2) to hedge the value, in U.S. dollars, of portfolio securities. Gains and losses from foreign currency transactions associated with purchases and sales of investments and foreign currency forward contracts are included with the net realized and unrealized gain or loss on investments.

(g) Income Taxes

The Portfolios intend to comply with the special provisions of Subchapter M of the Internal Revenue Code available to regulated investment companies and, therefore, no provision for Federal income taxes has been made in the accompanying financial statements since each Portfolio intends to distribute substantially all of its taxable income to its shareholders and be relieved of all Federal income taxes.

The Portfolios have elected to mark-to-market their investments in Passive Foreign Investment Companies (“PFICs”) for Federal income tax purposes. In accordance with this election, the Institutional International Growth, Institutional International Equity, International Small Cap Growth and Emerging Markets Growth Portfolios recognized net unrealized appreciation (depreciation) of $19,062, $2,034, $117 and $726, respectively (in thousands) in 2005, all of which has been treated as an adjustment to the cost of investments for tax purposes. The Portfolios also treat the deferred loss associated with current and prior year wash sales as an adjustment to the cost of investments for tax purposes. The cost of investments for Federal income tax purposes and related gross unrealized appreciation/(depreciation) and net unrealized appreciation/(depreciation) at December 31, 2005 were as follows (in thousands):

Portfolio	Cost of Investments		Gross Unrealized Appreciation		Gross Unrealized Depreciation		Net Unrealized Appreciation / (Depreciation)
Institutional International Growth	$	1,141,716	$	412,547	$	5,882	$	406,665
Institutional International Equity		224,512		24,032		723		23,309
International Small Cap Growth		47,338		4,497		386		4,111
Emerging Markets Growth		214,391		28,804		245		28,559

At December 31, 2005, the Portfolios, with the exception of Institutional International Equity, have no unused capital loss carryforwards available for Federal income tax purposes to be applied against future capital gains, if any. Institutional International Equity Portfolio has an unused capital loss carryforward of $383 (in thousands) that will not expire until 2013.

For the period November 1, 2005 through December 31, 2005, the Institutional International Equity Portfolio incurred net realized capital or foreign currency losses. The Portfolio intends to treat this loss as having occurred in fiscal year 2006 for Federal income tax purposes (in thousands):

Portfolio	Capital Loss
Institutional International Growth	$	—
Institutional International Equity		110
International Small Cap Growth		—
Emerging Markets Growth		—

34    Annual Report December 31, 2005

(h) Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results may differ from those estimates.

(2) Transactions with Affiliates

(a) Management and Expense Limitation Agreements

The Institutional International Growth and Institutional International Equity Portfolios have a management agreement with William Blair & Company L.L.C. (the “Company”) for investment advisory, administrative, and other accounting services. The Portfolios pay the Company an annual fee, payable monthly, based on a specified percentage of its average daily net assets. A summary of the annual rates expressed as a percentage of average daily net assets is as follows:

First $500 million	1.00	%
Next $500 million	0.95	%
In excess of $1 billion	0.90	%

The Emerging Markets Growth Portfolio pays the Company a 1.10% annual fee payable monthly, based on its average daily net assets. The International Small Cap Growth Portfolio pays the Company a 1.00% annual fee payable monthly, based on its average daily net assets.

The Portfolios have also entered into Expense Limitation Agreements with the Company. Under the terms of these Agreements, the Company has agreed to waive its advisory fees and absorb other operating expenses through April 30, 2006, if total expenses of either the Institutional International Growth or Institutional International Equity Portfolios’ exceeds 1.10% of average daily net assets or 1.25% of average daily net assets for the Institutional Share Class of the International Small Cap Growth and Emerging Markets Growth Portfolios.

For a period of three years subsequent to the Commencement of Operations of the Fund, the Company is entitled to reimbursement from the Institutional International Growth, Institutional International Equity, International Small Cap Growth and Emerging Markets Growth Portfolios for previously waived fees and expenses to the extent the overall expense ratio remains below the percentages indicated. The total amount available for recapture at December 31, 2005 is $320, $229, $54 and $161 (in thousands) for Institutional International Growth, Institutional International Equity, International Small Cap Growth and Emerging Markets Growth Portfolios, respectively. As a result, the total expense ratio for a Portfolio during the period the agreement is in effect, will not fall below the percentage indicated.

For the year ended December 31, 2005, the investment advisory fees incurred by the Portfolio and related fee waivers were as follows (in thousands) :

Portfolio	Gross Advisory Fee		Fee Waiver		Net Advisory Fee		Expenses (Recovered) or Absorbed by Advisor
Institutional International Growth	$	12,489	$	—	$	12,489	$	—
Institutional International Equity		824		208		616		—
International Small Cap Growth		61		54		7		—
Emerging Markets Growth		508		161		347		—

(b) Trustees Fees

The Portfolio incurred fees of $52 (in thousands) to non-interested trustees of the Fund for the year ended December 31, 2005. Interested trustees are not compensated.

(c) Investments in Affiliated Portfolio

Pursuant to an Exemptive Order granted by the Securities and Exchange Commission in January, 2001, each of the Portfolios of the Fund may invest in the William Blair Ready Reserves Portfolio (“Ready Reserves”), an open-end money market

December 31, 2005 William Blair Funds    35

portfolio managed by the Advisor. Ready Reserves Portfolio is used as a cash management option to the other Portfolios in the Fund. The Advisor waives management fees and shareholder service fees earned from the other Portfolios investment in the Ready Reserves Fund. The fees waived with respect to the Portfolio for the year ended December 31, 2005 are listed below. Distributions received from Ready Reserves are reflected as dividend income in the Portfolio’s statement of operations. Amounts relating to the Portfolio’s investments in Ready Reserves were as follows for the year ended December 31, 2005 (in thousands):

Portfolio	Purchases		Sales Proceeds		Fees Waived		Dividend Income		Value		Percent of Net Assets
Institutional International Growth	$	32,994	$	41,325	$	41	$	175	$	1,079	0.1	%
Institutional International Equity		17,931		18,212		7		31		93	—
International Small Cap Growth		3,170		2,760		—		1		410	0.8
Emerging Markets Growth		17,270		13,449		5		26		3,821	1.5

(3) Investment Transactions

Investment transactions, excluding money market instruments, for the year ended December 31, 2005 were as follows (in thousands):

Portfolio	Purchases		Sales
Institutional International Growth	$	996,356	$	944,611
Institutional International Equity		260,358		66,901
International Small Cap Growth		50,786		7,799
Emerging Markets Growth		240,654		40,574

(4) Foreign Currency Forward Contracts

To protect itself against a decline in the value of foreign currency against the U.S. dollar, each Portfolio enters into foreign currency forward contracts with its custodian and others. The Portfolio bears the market risk that arises from changes in foreign currency rates and bears the credit risk if the counterparty fails to perform under the contract. The net realized and unrealized gains and losses associated with foreign currency forward contracts are reflected in the accompanying financial statements. There were no open foreign forward contracts at December 31, 2005.

36    Annual Report December 31, 2005

Financial Highlights

Institutional International Growth Fund

	Years Ended December 31,
	2005		2004		2003		2002(a)
Net asset value, beginning of year	$	16.06	$	13.60	$	9.567	$	10.000
Income from investment operations:
Net investment income (b)		0.09		0.03		0.073		—
Net realized and unrealized gain (loss) on investments		3.53		2.44		3.993		(0.430	)
Total from investment operations		3.62		2.47		4.066		(0.430	)
Less distributions from:
Net investment income		0.15		0.01		0.033		0.003
Net realized gain		1.42		—		—		—
Total distributions		1.57		0.01		0.033		0.003
Net asset value, end of year	$	18.11	$	16.06	$	13.600	$	9.567
Total return (%)		22.76		18.15		42.47		(4.27	)
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		1.05		1.10		1.10		1.10	(c)
Expenses, before waivers and reimbursements		1.05		1.11		1.16		1.29	(c)
Net investment income (loss), net of waivers and reimbursements		0.52		0.18		0.37		(0.05	)(c)
Net investment income (loss), before waivers and reimbursements		0.52		0.17		0.31		(0.24	)(c)

	Years Ended December 31,
	2005		2004		2003		2002
Supplemental data:
Net assets at end of period (in thousands)	$	1,555,414	$	1,223,436	$	477,511	$	149,848
Portfolio turnover rate (%)		74		72		56		59	(c)

(a) For the period from July 26, 2002 (Commencement of Operations) to December 31, 2002.

(b) Excludes $0.25, $0.10, $0.06, and $0.02 of PFIC mark to market which is treated as ordinary income for Federal tax purposes for the years 2005, 2004, 2003 and 2002, respectively.

(c) Rates are annualized for periods that are less than a year.

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher that the data quoted. Results shown are annual returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate and you may have a gain or loss when you sell shares. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds. com.

Note: Net investment income (loss) per share is based on the average shares outstanding during the year.

December 31, 2005 William Blair Funds    37

Financial Highlights

Institutional International Equity Fund

	Years Ended December 31,
	2005		2004(a)
Net asset value, beginning of year	$	10.20	$	10.00
Income from investment operations:
Net investment income (b)		—		—
Net realized and unrealized gain (loss) on investments		1.86		0.20
Total from investment operations		1.86		0.20
Less distributions from:
Net investment income		0.02		—
Net realized gain		—		—
Total distributions		0.02		—
Net asset value, end of year	$	12.04	$	10.20
Total return (%)		18.26		2.00
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		1.10		1.10	(c)
Expenses, before waivers and reimbursements		1.35		2.46	(c)
Net investment income (loss), net of waivers and reimbursements		0.31		(0.21	)(c)
Net investment income (loss), before waivers and reimbursements		0.06		(1.57	)(c)

	Years Ended December 31,
	2005		2004
Supplemental data:
Net assets at end of period (in thousands)	$	250,929	$	27,384
Portfolio turnover rate (%)		84		45	(c)

(a) For the period from December 1, 2004 (Commencement of Operations) to December 31, 2004.

(b) Excludes $0.27 and $0.01 of PFIC mark to market which is treated as ordinary income for Federal tax purposes for the years 2005 and 2004, respectively.

(c) Rates are annualized for periods that are less than a year.

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher that the data quoted. Results shown are annual returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate and you may have a gain or loss when you sell shares. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds. com.

Note: Net investment income (loss) per share is based on the average shares outstanding during the year.

38    Annual Report December 31, 2005

Financial Highlights

International Small Cap Growth Fund

Institutional Share Class

	Period Ended
	December 31, 2005(a)
Net asset value, beginning of period	$	10.00
Income from investment operations:
Net investment income (b)		—
Net realized and unrealized gain on investments		1.16
Total from investment operations		1.16
Less distributions from:
Net investment income (c)		—
Net realized gain		—
Total distributions		—
Net asset value, end of period	$	11.16
Total return (%)		11.62
Ratios to average daily net assets (%) (d):
Expenses, net of waivers and reimbursements		1.25
Expenses, before waivers and reimbursements		2.17
Net investment income (loss), net of waivers and reimbursements		0.00
Net investment income (loss), before waivers and reimbursements		(0.92	)
	Period Ended
	December 31, 2005
Supplemental data for all classes:
Net assets at end of period (in thousands)	$	50,534
Portfolio turnover rate (%) (d)		127

(a) For the period from November 1, 2005 (Commencement of Operations) to December 31, 2005.

(b) Excludes $0.11 of PFIC mark to market which is treated as ordinary income for Federal tax purposes.

(c) Distribution less than $0.01 per share.

(d) Rates are annualized for periods that are less than a year.

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher that the data quoted. Results shown are annual returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate and you may have a gain or loss when you sell shares. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds. com.

Note: Net investment income (loss) per share is based on the average shares outstanding during the period.

December 31, 2005 William Blair Funds    39

Financial Highlights

Emerging Markets Growth Fund

Institutional Share Class

	Period Ended
	December 31, 2005(a)
Net asset value, beginning of period	$	10.00
Income from investment operations:
Net investment income (b)		0.01
Net realized and unrealized gain on investments		4.27
Total from investment operations		4.28
Less distributions from:
Net investment income		—
Net realized gain		0.08
Total distributions		0.08
Net asset value, end of period	$	14.20
Total return (%)		42.82
Ratios to average daily net assets (%) (c):
Expenses, net of waivers and reimbursements		1.25
Expenses, before waivers and reimbursements		1.61
Net investment income (loss), net of waivers and reimbursements		0.19
Net investment income (loss), before waivers and reimbursements		(0.17	)
	Period Ended
	December 31, 2005(a)
Supplemental data for all classes:
Net assets at end of period (in thousands)	$	249,348
Portfolio turnover rate (%) (c)		77

(a) For the period from June 6, 2005 (Commencement of Operations) to December 31, 2005.

(b) Excludes $0.11 of PFIC mark to market which is treated as ordinary income for Federal tax purposes.

(c) Rates are annualized for periods that are less than a year.

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher that the data quoted. Results shown are annual returns, which assume reinvestment of dividends and capital gains. Investment returns and principal will fluctuate and you may have a gain or loss when you sell shares. For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds. com.

Note: Net investment income (loss) per share is based on the average shares outstanding during the period.

40    Annual Report December 31, 2005

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Trustees and Shareholders

William Blair Funds

We have audited the accompanying statements of assets and liabilities, including the portfolios of investments, of the Institutional International Growth Fund, Institutional International Equity Fund, International Small Cap Growth Fund and Emerging Markets Growth Fund (collectively, the “Portfolios”) (four of the Portfolios constituting the William Blair Funds) as of December 31, 2005, and the related statements of operations, statements of changes in net assets and financial highlights for the periods indicated therein. These financial statements and financial highlights are the responsibility of the Portfolios’ management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Portfolios’ internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Portfolios’ internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2005, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the above mentioned Portfolios of the William Blair Funds at December 31, 2005, the results of their operations, changes in their net assets and financial highlights for the periods indicated therein, in conformity with U.S. generally accepted accounting principles.

Chicago, Illinois

February 3, 2006

December 31, 2005 William Blair Funds    41

Trustees and Officers. (Unaudited) The trustees and officers of the William Blair Funds, 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. The address of each trustee and officer is 222 West Adams Street, Chicago, Illinois 60606.

Name and Age	Position(s) Held with Fund	Term of Office and Length of Time Served(1)	Principal Occupation(s) During Past 5 Years	Number of Portfolios in Fund Complex Overseen by Trustee	Other Directorships Held by Trustee/Officer
Interested Trustees
Frederick Conrad Fischer, 71*	Chairman of the Board of Trustees	Since 1987	Principal, William Blair & Company, L.L.C.; Partner, APM Limited Partnership	14	Trustee Emeritus, Chicago Child Care Society, a non-profit organization; Trustee Emeritus Kalamazoo College
Michelle Seitz, 40*	Trustee	Since 2002	Principal, William Blair & Company, L.L.C.	14	N/A
Non-Interested Trustees
Theodore A. Bosler, 71	Trustee	Since 1997	Retired Principal and Vice President, Lincoln Capital Management	14	Desert Foothills Land Trust; Institute of Chartered Financial Analysts; Thresholds
Ann P. McDermott, 66	Trustee	Since 1996	Board member and officer for various civic and charitable organizations over the past thirty years; professional experience prior thereto, registered representative for New York Stock Exchange firm	14	Northwestern University, Women’s Board; Rush Presbyterian St. Luke’s Medical Center, Women’s Board; University of Chicago, Women’s Board; Visiting Nurses Association, Honorary Director
Donald J. Reaves, 59	Trustee	Since 2004	Vice President for Administration and Chief Financial Officer, University of Chicago since 2002. Executive Vice President and Chief Financial Officer, Brown University from 1993 to 2002	14	American Student Assistance Corp.; Amica Mutual Insurance Company; NACUBO (National Association of College and University Business Officers)
John B. Schwemm, 71	Trustee	Since 1990	Retired Chairman and Chief Executive Officer, R.R. Donnelley & Sons Company	14	USG Corp., building material manufacturer, and Walgreen Co.
Donald L. Seeley, 61	Trustee	Since 2003	Director, Applied Investment Management Program, University of Arizona Department of Finance, Formerly Vice Chairman and Chief Financial Officer, True North Communications, Inc., marketing communications and advertising firm	14	Beverly Enterprises, Inc., provider of eldercare and rehabilitative services; Warnaco, Group Inc., intimate apparel, sportswear and swimwear manufacturer

42    Annual Report December 31, 2005

Name and Age	Position(s) Held with Fund	Term of Office and Length of Time Served(1)	Principal Occupation(s) During Past 5 Years	Number of Portfolios in Fund Complex Overseen by Trustee	Other Directorships Held by Trustee/Officer
Robert E. Wood II, 67	Trustee	Since 1999	Retired Executive Vice President, Morgan Stanley Dean Witter	14	Chairman, Add-Vision, Inc. manufacturer of surface animation systems, and Micro-Combustion, LLC
Officers
Marco Hanig, 47	President	Since 1999	Principal, William Blair & Company, L.L.C.	N/A	Chicago Scores
Karl W. Brewer, 39	Senior Vice President	Since 2000	Principal, William Blair & Company, L.L.C.	N/A	N/A
Harvey H. Bundy, III, 61	Senior Vice President	Since 2003	Principal, William Blair & Company, L.L.C.	N/A	N/A
Mark A. Fuller, III, 48	Senior Vice President	Since 1993	Principal, William Blair & Company, L.L.C.	N/A	Partner, Fulsen Howney Partners
James W. Golan, 44	Senior Vice President	Since 2005	Principal, William Blair & Company, L.L.C.	N/A	N/A
W. George Greig, 53	Senior Vice President	Since 1996	Principal, William Blair & Company, L.L.C.	N/A	N/A
Michael A. Jancosek, 46	Senior Vice President Vice President	Since 2004 Since 2000	Principal, William Blair & Company L.L.C. Associate, William Blair & Company, L.L.C.	N/A	N/A
John F. Jostrand, 51	Senior Vice President	Since 1999	Principal, William Blair & Company, L.L.C.	N/A	N/A
James S. Kaplan, 45	Senior Vice President Vice President	Since 2004 Since 1995	Principal, William Blair & Company, L.L.C. Associate, William Blair & Company, L.L.C.	N/A	N/A
Robert C. Lanphier, IV, 49	Senior Vice President	Since 2003	Principal, William Blair & Company, L.L.C.	N/A	Chairman, AG. Med, Inc.
David S. Mitchell, 45	Senior Vice President Vice President	Since 2004 Since 2003	Principal, William Blair & Company, L.L.C. Associate, William Blair & Company, L.L.C.	N/A	N/A

December 31, 2005 William Blair Funds    43

Name and Age	Position(s) Held with Fund	Term of Office and Length of Time Served(1)	Principal Occupation(s) During Past 5 Years	Number of Portfolios in Fund Complex Overseen by Trustee	Other Directorships Held by Trustee/Officer
Gregory J. Pusinelli, 46	Senior Vice President	Since 1999	Principal, William Blair & Company, L.L.C.	N/A	N/A
Norbert W. Truderung, 53	Senior Vice President	Since 1992	Principal, William Blair & Company, L.L.C.	N/A	N/A
Jeffrey A. Urbina, 50	Senior Vice President	Since 1998	Principal, William Blair & Company, L.L.C.	N/A	N/A
Christopher T. Vincent, 49	Senior Vice President Vice President	Since 2004 Since 2002	Principal, William Blair & Company, L.L.C. Associate, William Blair & Company, L.L.C.; former Managing Director/Senior Portfolio Manager, Zurich Scudder Investments	N/A	Uhlich Children’s Home
Mark T. Leslie, 38	Vice President	Since 2005	Associate, William Blair & Company, L.L.C.; former Portfolio Manager, U.S. Bancorp Asset Management	N/A	N/A
Todd M. McClone, 36	Vice President	Since 2005	Associate, William Blair & Company, L.L.C.	N/A	N/A
Terence M. Sullivan, 61	Vice President and Treasurer	Since 1997	Associate, William Blair & Company, L.L.C.	N/A	N/A
Colette M. Garavalia, 44	Secretary	Since 2000	Associate, William Blair & Company, L.L.C.	N/A	N/A

* Mr. Fischer and Ms. Seitz are interested persons of the William Blair Funds because each is a principal of William Blair & Company, L.L.C., the Funds’ investment advisor and principal underwriter.

(1) Each Trustee serves until the election and qualification of a successor, or until death, resignation or retirement or removal as provided in the Fund’s Declaration of Trust. Retirement for non-interested Trustees occurs no later than at the conclusion of the first regularly scheduled Board meeting of the Fund’s fiscal year that occurs after the Trustee’s 72nd birthday. The Fund’s officers are elected annually by the Trustees.

The Statement of Additional Information for the William Blair Funds includes additional information about the trustees and is available without charge by calling 1-800-635-2886 (in Massachusetts 1-800-635-2840) or by writing the Fund.

44    Annual Report December 31, 2005

Board Approval of International Small Cap Growth Fund’s Advisory Agreement (unaudited)

During the six months ended December 31, 2005, the Board of Trustees approved the Fund’s advisory agreement with the Company on behalf of the International Small Cap Growth Fund (the “Portfolio”). The advisory agreement with respect to the Portfolio was approved, by the Board of Trustees, including all of the trustees who are not parties to such agreement or interested persons of any such party, on July 19, 2005. The Board of Trustees, including a majority of the independent trustees, determined that approval of the advisory agreement was in the best interests of the Portfolio. The independent trustees met separately from the “interested” trustees of the Fund and officers and employees of the Company to consider approval of the advisory agreement and were assisted by independent legal counsel in making their determination. The Board of Trustees, including the independent trustees, did not identify any single factor or group of factors as all important or controlling and considered all factors together.

Nature, Quality and Extent of Services. In evaluating the nature, quality and extent of services expected to be provided, the Board noted that the Company is a quality firm with a reputation for integrity and honesty that employs high quality people.

The Board considered the Company’s Form ADV, biographical information about the Portfolio’s portfolio manager, the administrative services to be performed by the Company, financial information regarding the Company, the compliance regime created by the Company and the anticipated financial support of the Portfolio.

The Board also reviewed the Company’s performance for managing a Canadian international small cap fund as well as the performance of the other William Blair international funds. The Board concluded that the performance of the Canadian fund was too new to judge and that the performance of the other William Blair international funds was good.

Profitability. With respect to the costs of services provided and profits realized by the Company, the Board considered profitability information provided by the Company with respect to the Fund as a whole and the proposed expense cap for the Portfolio. Based on this information, the Board concluded that the Company’s profitability was not unreasonable.

Economies of Scale. The Board considered the extent to which economies of scale would be realized as the Portfolio grows and considered management’s representations that there are few opportunities for economies of scale in the investment process, that economies of scale are unexpected during the start-up process and that the Portfolio has capacity constraints. In considering whether fee levels reflect economies of scale for the benefit of Portfolio investors, the Board reviewed the Portfolio’s projected asset size, the Portfolio’s projected total and net expense ratios and the expense cap proposed. The Board concluded that the projected total expense ratio, after giving effect to the expense cap proposed by the Company, were reasonable.

Fees and Expenses. The Board compared the amounts to be paid to the Company for advisory and administrative services with other registered funds included in the Portfolio’s Lipper expense universe. In addition, the Board compared amounts paid to the Company by other registered funds, including other Portfolios in the Fund and a fund for which the Company acts as a subadvisor, and by the Company’s other clients. The Board also considered that the Company proposed to waive advisory fees for the Portfolio according to the proposed expense cap. The Board concluded that the Portfolio’s advisory fee was reasonable.

Other Benefits to the Company. The Board considered benefits derived by the Company from its relationship with the Portfolio, including soft dollars. The Board concluded that, after taking into account this benefit, the advisory fee was reasonable. Based on all of the information considered and the conclusions reached, the Board determined to approve the advisory agreement.

December 31, 2005 William Blair Funds    45

Additional Information (unaudited)

Proxy Voting

A description of the policies and procedures that the William Blair Institutional International Growth Fund, the William Blair Institutional International Equity Fund and the William Blair Emerging Markets Growth Fund use to determine how to vote proxies relating to portfolio securities and information regarding how the Fund voted proxies relating to portfolio securities for the most recent 12-month period ended June 30 are available without charge, upon request, by calling 1-800-635-2886 (in Massachusetts 1-800-635-2840), at www.williamblairfunds.com and on the SEC’s website at http://www.sec.gov.

Quarterly Portfolio Schedules

The Fund files its complete schedule of portfolio holdings with the SEC for the first and third fiscal quarters of each fiscal year (quarters ended March 31 and September 30) on Form N-Q. The Fund’s Forms N-Q are available on the SEC’s website at http://www.sec.gov and may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the SEC’s Public Reference Room may be obtained by calling 1-800-SEC-0330.

46    Annual Report December 31, 2005

Useful Information About Your Report (unaudited)

Please refer to this information when reviewing the Expense Example for each Fund.

Expense Example

As a shareholder of a Fund, you incur ongoing costs, including management fees and other Fund expenses. The example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. To do so, compare the Fund’s 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire six-month period from July 1, 2005 to December 31, 2005.

Actual Expenses

In each example, the first line for each share class in the table provides information about the actual account values and actual expenses. These expenses reflect the effect of any expense cap applicable to the share class during the period. Without this expense cap, the costs shown in the table would have been higher. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Period” to estimate the expenses you paid on your account during the period.

Hypothetical Example for Comparison Purposes

In each example, the second line for each share class in the table provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses. This is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund to other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

Please note that the expenses shown in both examples are meant to highlight your ongoing costs only and do not reflect any transactional costs or account type fees. These fees are fully described in the prospectus. Therefore, the second line of each share class in the table is useful in comparing ongoing costs only and will not help you determine the relative costs of owning different funds.

December 31, 2005 William Blair Funds    47

Fund Expenses (Unaudited)

The examples below show you the ongoing costs (in dollars) of investing in your fund and allows you to compare these costs with those of other mutual funds. Please refer to previous page for a detailed explanation of the information presented on this chart.

	Beginning Account Value 7/1/2005		Ending Account Value 12/31/2005		Expenses Paid during Period(a)			Annualized Expense Ratio
Institutional International Growth Fund
Actual return	$	1,000.00	$	1,207.30	$	5.84		1.05	%
Hypothetical 5% return		1,000.00		1,019.91		5.35		1.05
Institutional International Equity Fund
Actual return		1,000.00		1,180.30		6.05		1.10
Hypothetical 5% return		1,000.00		1,019.66		5.60		1.10
International Small Cap Growth Fund Institutional Share Class
Actual return (since inception period)		1,000.00		1,116.20		2.17	(b)	1.25
Hypothetical 5% return (six month period)		1,000.00		1,018.90		6.36		1.25
Emerging Markets Growth Fund Institutional Share Class
Actual return		1,000.00		1,390.70		7.53		1.25
Hypothetical 5% return		1,000.00		1,018.90		6.36		1.25

(a) Expenses are equal to the annualized expense ratio, multiplied by the average account value over the period, multiplied by the number of days in the period (184), and divided by 365 (to reflect the one-half-year period).

(b) For the period November 1, 2005 (Commencement of Operations) until December 31, 2005.

48    Annual Report December 31, 2005

BOARD OF TRUSTEES

Frederick Conrad Fischer, Chairman

Principal, William Blair & Company, L.L.C.

Theodore A. Bosler

Retired Principal and Vice President, Lincoln Capital Management Company

Ann P. McDermott

Director and Trustee

Profit and not-for-profit organizations

Donald J. Reaves

Vice President for Administration and Chief Financial Officer, University of Chicago

Donald L. Seeley

Adjunct Lecturer and Director, University of Arizona Department of Finance

John B. Schwemm

Retired Chairman and CEO, R.R. Donnelley & Sons Company

Michelle R. Seitz

Principal, William Blair & Company, L.L.C.

Robert E. Wood II

Retired Executive Vice President, Morgan Stanley Dean Witter

Officers

Marco Hanig, President

Karl W. Brewer, Senior Vice President

Harvey H. Bundy III, Senior Vice President

Mark A. Fuller, III, Senior Vice President

James W. Golan, Senior Vice President

W. George Greig, Senior Vice President

Michael A. Jancosek, Senior Vice President

John F. Jostrand, Senior Vice President

James S. Kaplan, Senior Vice President

Robert C. Lanphier, IV, Senior Vice President

David S. Mitchell, Senior Vice President

Gregory J. Pusinelli, Senior Vice President

Norbert W. Truderung, Senior Vice President

Jeffrey A. Urbina, Senior Vice President

Christopher T. Vincent, Senior Vice President

Mark T. Leslie, Vice President

Todd M. McClone, Vice President

Terence M. Sullivan, Vice President and Treasurer

Colette M. Garavalia, Secretary

Investment Advisor

William Blair & Company, L.L.C.

Legal Counsel

Vedder, Price, Kaufman & Kammholz, P.C.

Independent Registered Public Accounting Firm

Ernst & Young LLP

Transfer Agent

State Street Bank and Trust Company

P.O. Box 8506

Boston, MA 02266-8506

For customer assistance, call 1-800-635-2886

(Massachusetts 1-800-635-2840)

Date of First Use February 2006    49

Item 2. Code of Ethics

As of the end of the period covered by this Form N-CSR, the Registrant has adopted a code of ethics that applies to its principal executive officer and principal financial officer. Such code of ethics is posted on the Registrant’s website: www.williamblairfunds.com. There were no amendments to or waives of the code of ethics during the period covered by this report.

Item 3. Audit Committee Financial Expert

The Registrant’s Board of Trustees has determined that the Registrant has at least one “audit committee financial expert” (as defined in Item 3 of Form N-CSR) serving on its Audit Committee. Mr. Donald L. Seeley, the Registrant’s audit committee financial expert, is “independent” for purposes of Item 3 to Form N-CSR.

An “audit committee financial expert” is not an “expert” for any purpose, including for purposes of Section 11 of the Securities Act of 1933, as a result of being designated as an “audit committee financial expert.” Further, the designation of a person as an “audit committee financial expert” does not mean that the person has any greater duties, obligations, or liability than those imposed on the person without the “audit committee financial expert” designation. Similarly, the designation of a person as an “audit committee financial expert” does not affect the duties, obligations, or liability of any other member of the audit committee or Board of Trustees.

Item 4. Principal Accountant Fees and Services

Audit Fees

For the fiscal years ended December 31, 2004 and 2005, Ernst & Young, LLP, the Registrant’s principal accountant (“E&Y), billed the Registrant $215,000 and $280,800, respectively, for professional services rendered for the audit of the Registrant’s annual financial statements or services that are normally provided in connection with statutory and regulatory filings.

Audit-Related Fees

For the fiscal years ended December 31, 2004 and 2005, E&Y billed the Registrant $0 and $27,700, respectively for assurance and related services that are reasonably related to the performance of the audit of the Registrant’s financial statements and that are not reported above, such as reviewing prospectuses and SEC filings. For engagements that William Blair & Company L.L.C, the Registrant’s investment adviser (“William Blair”) or any of its control affiliates entered into with E&Y on or after May 6, 2003, E&Y provided no audit-related services to William Blair or any of its control affiliates that were for engagements directly related to the Registrant’s operations and financial reporting.

Tax Fees

For the fiscal years ended December 31, 2004 and 2005, E&Y billed the Registrant $45,200 and $69,850, respectively, for professional services rendered for tax compliance, tax advice and tax planning. Such services consisted of preparation of tax returns, year-end distribution review, qualifying dividend income analysis and computation of foreign tax credit pass through. For engagements with E&Y entered into on or after May 6, 2003, the Audit Committee pre-approved all tax services that E&Y provided to the Registrant.

For engagements that William Blair or any of its control affiliates entered into with E&Y on or after May 6, 2003, E&Y provided no tax services to William Blair or any of its control affiliates that were for engagements directly related to the Registrant’s operations and financial reporting.

All Other Fees

For the fiscal years ended December 31, 2004 and 2005, E&Y did not bill the Registrant for products and services other than the services reported above. For engagements that William Blair or any of its control affiliates entered into with E&Y on or after May 6, 2003, E&Y provided no other services to William Blair or any of its control affiliates that were for engagements directly related to the Registrant’s operations and financial reporting.

Audit Committee Pre-Approval Policies and Procedures

Pursuant to Registrant’s Audit Committee Charter (the “Charter”), the Audit Committee is responsible for pre-approving any engagement of the principal accountant to provide non-prohibited services to the Registrant, including the fees and other compensation to be paid to the principal accountant, to the extent required by Rule 2-01(c)(7) of Regulation S-X. Any member of the Audit Committee may grant pre-approval for engagements of less than $5,000. All such delegated pre-approvals will be presented to the Audit Committee no later than the next Audit Committee meeting. Pursuant to the Charter, the Audit Committee is also responsible for pre-approving any engagement of the principal accountant, including the fees and other compensation to be paid to the principal accountant, to provide non-audit services to the Registrant’s investment adviser (or any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the Registrant), if the engagement relates directly to the operations and financial reporting of the Registrant, to the extent required by Rule 2-01(c)(7) of Regulation S-X. Any member of the Audit Committee may grant pre-approval for engagements of less than $5,000. All such delegated pre-approvals will be presented to the Audit Committee no later than the next Audit Committee meeting.

Non-Audit Fees

For the fiscal years ended December 31, 2004 and 2005, E&Y billed the Registrant $45,200 and $69,850, respectively, in non-audit fees (tax services). For the same periods, E&Y billed William Blair and its control affiliates $195,540 (#) and $8,600, respectively, in non-audit fees. The Registrant’s Audit Committee has considered whether the provision of non-audit services that were rendered to William Blair or any of its control affiliates that were not pre-approved pursuant to Rule 2-01(c)(7)(ii) of Regulation S-X is compatible with maintaining E&Y’s independence. Such non-audit services primarily pertained to due diligence reviews performed for the Corporate Finance Group of William Blair and did not relate to the Registrant’s operations or financial reporting.

# $39,240 of which includes audit and related tax work relating to a William Blair Company control affiliate.

Item 5. Audit Committee of Listed Registrants

Not Applicable to this Registrant, insofar as the Registrant is not a listed company.

Item 6. Schedule of Investments

See Schedule of Investments in Item 1

Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies

Not applicable to this Registrant, insofar as the Registrant is not a closed-end management investment company.

Item 8. Portfolio Mangers of Closed Investment Companies

Not applicable to this Registrant, insofar as the Registrant is not a closed-end management investment company.

Item 9. Purchase of Equity Securities by Closed end Management Investment Companies and Affiliated Purchasers

Not applicable to this Registrant, insofar as the Registrant is not a closed-end management investment company.

Item 10. Submission of Matters to a Vote of Security Holders

There have been no material changes to the procedures by which shareholders may recommend nominees to the Registrant’s Board of Trustees since the Registrant last provided disclosure in response to this item.

Item 11.

Controls and Procedures

(a) The Registrant’s principal executive and principal financial officer, or persons performing similar functions, have concluded that the Registrant’s Disclosure Controls and Procedures (as defined in Rule 30-a-3( c ) under the Investment Company Act of 1940, as amended (the “1940 Act”) (17 CFR 270.30a-3 ( c )) are effective, as of a date within 90 days of the filing date of this report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3 (b)1/c under the 1940 Act (17 CFR 270.30a-3( b ) and Rules 13a-15( b ) or 15d-15(b) under the Exchange Act (17 CFR 240.13a-15(b) or 240.15d-15(b)).

(b) There were no changes in the Registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the final quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting.

Item 12. Exhibits

12. (a) (1) Code of Ethics

Not applicable because it is posted on Registrant’s website.

12. (a) (2) (1)

Certification of Principal Executive Officer Required by Rule 30a-2(a) of the Investment Company Act

12. (a) (2) (2)

Certification of Principal Financial Officer Required by Rule 30a-2(a) of the Investment Company Act.

12. (a) (3)

Not applicable to this Registrant.

12. (b)

Certification of Chief Executive Officer and Certification of Chief Financial Officer Required by Rule 30a-2(b) of the Investment Company Act

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	William Blair Funds
	/s/ Marco Hanig
By:	Marco Hanig
	President (Chief Executive Officer)

Date: February 24, 2006

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated

/s/ Marco Hanig

By:	Marco Hanig
	President (Chief Executive Officer)

Date: February 24, 2006

/s/ Terence M. Sullivan

By:	Terence M. Sullivan
	Treasurer (Chief Financial Officer)

Date: February 24, 2006