William Blair Funds NCSR Certified annual shareholder report (management investment company)

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, 2006

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, 2006 Annual Reports transmitted to shareholders.

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Table of Contents


A Letter from the President		2

Growth Fund
An Overview from the Portfolio Managers		5
Portfolio of Investments		8

Tax-Managed Growth Fund
An Overview from the Portfolio Managers		9
Portfolio of Investments		12

Large Cap Growth Fund
An Overview from the Portfolio Managers		13
Portfolio of Investments		16

Small Cap Growth Fund
An Overview from the Portfolio Managers		17
Portfolio of Investments		20

Mid Cap Growth Fund
An Overview from the Portfolio Managers		22
Portfolio of Investments		25

Small-Mid Cap Growth Fund
An Overview from the Portfolio Managers		26
Portfolio of Investments		29

International Markets Overview		30

International Growth Fund
An Overview from the Portfolio Manager		32
Portfolio of Investments		34

International Equity Fund
An Overview from the Portfolio Manager		38
Portfolio of Investments		40

International Small Cap Growth Fund
An Overview from the Portfolio Manager		43
Portfolio of Investments		45

Emerging Markets Growth Fund
An Overview from the Portfolio Managers		47
Portfolio of Investments		49

Value Discovery Fund
An Overview from the Portfolio Managers		51
Portfolio of Investments		54

Income Fund
An Overview from the Portfolio Managers		55
Portfolio of Investments		59

Ready Reserves Fund
An Overview from the Portfolio Managers		62
Portfolio of Investments		64

Financial Statements		66

Notes to Financial Statements		78

Report of Independent Registered Public Accounting Firm		104

Board of Trustees and Officers		105

Fund Expenses		110

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, 2006

William Blair Funds 1

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Marco Hanig

A LETTER FROM THE PRESIDENT

Dear Shareholders:

2006 was a good year for investors. The stock market prolonged its rally into a fourth year, with the Standard & Poor’s 500 Index of large cap stocks up 15.79%, the Russell 2000^® Index of small cap stocks up 18.37%, and the MSCI All Country World Ex-US Index of foreign stocks up 27.16%. Bonds also had positive returns, with the Lehman Aggregate Bond Index increasing 4.33%.

Once again, value outperformed growth, and small cap did slightly better than large cap, a trend that has now lasted for several years. Many observers have been predicting that this trend will finally reverse, but have been proven wrong so far. The current value cycle has now lasted for over 6 years (Q3 2000 until now), which is almost the exact length of the previous growth cycle (Q3 1994 to Q3 2000). Foreign stocks once again outperformed domestic ones, aided by the ongoing depreciation of the US dollar.

Total Returns by Russell Style Index

January 1 through December 31, 2006


	Value		Blend		Growth
Large Cap (Russell^® 1000)	22.25	%	15.46	%	9.07	%
Mid Cap (Russell Midcap^®)	20.22	%	15.26	%	10.66	%
Small Cap (Russell^® 2000)	23.48	%	18.37	%	13.35	%

The best news for our shareholders is that each and every one of our funds had positive absolute returns in 2006. In terms of relative performance, there were several stand-outs. Comparing the Funds’ 2006 returns to their respective Morningstar categories of peer funds, the Value Discovery Fund posted a return of 21.78% vs. 16.26% for its Small Value peers, the Emerging Markets Growth Fund returned 37.90% vs. 32.38% for Diversified Emerging Markets peers, and the Growth Fund returned 12.42% vs. 6.93% for its Large Growth peers.

Funds that did quite well in absolute returns in 2006, but not as well relative to peers were the International Small Cap Growth Fund (20.32% vs. 26.73% for Foreign Small/Mid Growth peers) and International Equity Fund (19.96% vs. 23.78% for Foreign Large Growth peers). The Funds’ managers discuss the challenges they faced in their letters to shareholders.

In terms of long-term returns, the 10-year return of the International Growth Fund (14.94% vs. 6.85% for Foreign Growth peers) the 10-year return for the Income Fund (5.23% vs. 4.59% for Short Term Bond peers), and the 5-year return of the Small Cap Growth Fund (14.50% vs. 6.12% for Small Growth peers) are particularly noteworthy.

As always, thank you for investing with us!

LOGO

Marco Hanig

2 Annual Report

December 31, 2006

PERFORMANCE AS OF DECEMBER 31, 2006—CLASS N SHARES


	1 Yr	3 Yr	5 Yr	10 Yr (or since inception)	Inception Date	Overall Morningstar Rating

Growth Fund	12.42	9.81	3.96	5.94	3/20/1946	«««
Morningstar Large Growth	6.93	7.15	2.88	5.88		Among 1,405 large growth funds
Russell 3000^® Growth	9.46	7.17	3.02	5.34		Among 1,405 large growth funds
Standard & Poor’s 500	15.79	10.44	6.19	8.42

Tax-Managed Growth Fund						««««
Return before Taxes	8.21	9.16	3.82	1.29	12/27/1999	Among 1,405 large growth funds
After Taxes on Distributions	8.21	9.16	3.82	1.29		Among 1,405 large growth funds
After Taxes on Distributions and Sale of Fund Shares	5.34	7.89	3.28	1.10
Morningstar Large Growth	6.93	7.15	2.88	—
Russell 3000^® Growth	9.46	7.17	3.02	-4.39
Standard & Poor’s 500	15.79	10.44	6.19	1.24

Large Cap Growth Fund	6.34	5.08	0.47	-5.18	12/27/1999	««
Morningstar Large Growth	6.93	7.15	2.88	—		Among 1,405 large growth funds
Russell 1000^® Growth	9.07	6.87	2.69	-4.79		Among 1,405 large growth funds

Small Cap Growth Fund	14.12	13.68	14.50	18.89	12/27/1999	«««««
Morningstar Small Growth	10.49	9.22	6.12	—		Among 648 small growth funds
Russell 2000^® Growth	13.35	10.51	6.93	0.50		Among 648 small growth funds
Russell 2000^®	18.37	13.56	11.39	8.51
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.

Mid Cap Growth Fund	—	—	—	4.60	2/1/2006	Not rated.
Russell Midcap^® Growth Index	—	—	—	4.28

Small-Mid Cap Growth Fund	9.68	11.28	—	11.00	12/29/2003	«««
Morningstar Mid-Cap Growth	9.01	10.85	—	—		Among 823
Russell 2500^TM Growth	12.26	11.64	—	11.36		mid cap growth funds

International Growth Fund	23.06	21.05	16.43	14.94	10/1/1992	«««««
Morningstar Foreign Large Growth	23.78	17.96	12.54	6.85		Among 206 foreign large growth funds
MSCI World Ex-US	27.16	21.81	16.87	8.59		Among 206 foreign large growth funds

International Equity Fund	19.96	—	—	18.06	5/24/2004	Not rated.
Morningstar Foreign Large Growth	23.78	—	—	—
MSCI World Ex-US	27.16	—	—	25.80

International Small Cap Growth Fund	20.32	—	—	28.78	11/1/2005	Not rated.
Morningstar Foreign Small/Mid Growth	26.73	—	—	—
MSCI World Ex-US Small Cap	19.82	—	—	27.41

Please see the next page for important disclosure information.

See accompanying Notes to Financial Statements.

December 31, 2006

William Blair Funds 3

PERFORMANCE AS OF DECEMBER 31, 2006—CLASS N SHARES—CONTINUED


	1 Yr	3 Yr	5 Yr	10 Yr (or since inception)	Inception Date	Overall Morningstar Rating

Emerging Markets Growth Fund	37.90	—	—	53.65	6/6/2005	Not rated.
Morningstar Diversified Emerging Markets	32.38	—	—	—
MSCI Emerging Markets	32.59	—	—	40.84
A portion of the Emerging Markets Growth Funds performance since inception is attributable to an investment in an initial public offering (IPO).

Value Discovery Fund	21.78	11.10	11.27	12.99	12/23/1996	«««
Morningstar Small Value	16.26	14.04	13.85	12.39		Among 304 small value funds
Russell 2000^®	18.37	13.56	11.39	9.44		Among 304 small value funds
Russell 2000^® Value	23.48	16.48	15.37	13.27

Income Fund	4.25	2.85	4.01	5.23	10/1/1990	««««
Morningstar Short-Term Bond	4.01	2.34	3.15	4.59		Among 371 short-term bond funds
Lehman Intermediate Govt./Credit Bond Index	4.07	2.89	4.52	5.80		Among 371 short-term bond funds

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher than 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^TMare as of 12/31/06 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 1,405/1,109/447 large growth funds; Small Cap Growth Fund ««««/«««««/NA out of 648/532/NA small growth funds; Small-Mid Cap Growth Fund «««/NA/NA out of 823/NA/NA mid cap growth funds; Value Discovery Fund ««/««/««« out of 304/220/71 small value funds; International Growth Fund ««««/««««/««««« out of 206/174/71 foreign large growth funds; Income Fund ««««/««««/«««« out of 371/250/153 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.

See accompanying Notes to Financial Statements.

4 Annual Report

December 31, 2006

LOGO

David C. Fording

LOGO

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 MANAGERS

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

The Growth Fund posted a 12.42% increase on a total return basis (Class N Shares) for the 12 months ended December 31, 2006. By comparison, the Fund’s benchmark, the Russell 3000^® Growth Index, gained 9.46%.

What were the most significant factors impacting Fund performance?

US equity markets ultimately turned in very strong results for 2006, despite interim push-me-pull-you behavior. Investor sentiment and its relation to market activity during the year can be evaluated in terms of trimesters: extensive optimism in the first four months of the year, driven primarily by stronger than expected earnings reports from the fourth quarter of 2005; bearish defensiveness after the May Federal Reserve announcement that monetary policy would continue to tighten; and strong positive sentiment from mid-July forward as commodity prices receded, the Federal Reserve paused, and third quarter corporate earnings continued at a higher than expected double-digit pace.

Given the extended nature of this “recovery” cycle, during which value-oriented, traditionally cyclical stocks are out-performing, many strategists and economists are now referring to this era as a “profit supercycle”. Companies across the board have experienced double-digit earnings gains for an unprecedented 15 consecutive quarters. This has fed into the strong leadership of value over growth. Moreover, the fact that our portfolio has an even greater growth bias relative to the Russell 3000^® Growth benchmark, caused a significant headwind to relative returns during the year. Additionally, our positioning towards the smaller end of the capitalization spectrum provided a negative bias in the portfolio versus the benchmark. However, our extremely strong stock selection significantly overwhelmed these factors.

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

Our choices within the Information Technology sector showed the importance of strong stock selection to portfolio results on both an absolute and relative basis. Although technology stocks were among the weakest performers during the year in terms of absolute returns, the portfolio achieved its strongest results with stocks in this area. WebEx Communications, Inc. successfully navigated a successful transition in its pricing model and continued to beat estimates during the year, providing a sizeable stock return and benefit to the portfolio. Nuance Communications also appreciated significantly during the year. The firm’s strategic acquisitions in the past 18 months propelled it to a market leadership position in voice recognition technology, which is witnessing accelerated adoption in new applications. In the first quarter of 2006, Nuance announced the acquisition of Dictaphone, further securing its leadership position in this high growth area.

December 31, 2006

William Blair Funds 5

Consumer Discretionary stock selection was also strongly beneficial to relative portfolio results. Monetary tightening, rising commodity prices and housing market concerns weighed on stocks within this sector, particularly in the first half of the year. Despite macro concerns, our bottom-up stock selection process brought us two interesting opportunities: Marriott International Inc. and Kohl’s Corp. Hotels and leisure stocks enjoyed very strong returns during the year, as strong trends in business travel particularly benefited these companies. Marriott was one of the biggest beneficiaries of this trend, with most of their properties located in major cities. Kohl’s Corp. had a stellar year as well. The company successfully executed on its new management strategies, branching out from its basic wear into proprietary designer lines from some of the most popular brands, such as Chaps from Ralph Lauren. Additionally, the company revamped several of its stores into more customer-friendly formats, and gained market share from some of the floundering larger department store chains. The company is just beginning to benefit from financial and operational strategies that should continue to provide margin improvement.

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

Health Care provided indigestion during the year. With concerns about changes in Medicare reimbursement allowances, looming regulatory issues, and product safety concerns overhanging the market, much of health care had a tough year. Medtronic Inc., in the medical device area, suffered a significant pullback in stock price due to a significant decrease in the rate of growth in its implantable cardioverter defibrillator market. Certain pharmaceuticals and various specialty health technology companies did well, but biotechnology stocks performed poorly during the fourth quarter and the year. Amgen, Inc., one of our larger portfolio holdings, faced significant competitive issues regarding patent challenges during the year. We continue to think that several biotech firms offer great opportunity for new products that could have numerous applications over broad populations, but investors were not as appreciative of the longer-term outlook for these companies during 2006.

Although technology stocks as a whole benefited the portfolio, two names were among the greatest detractors; Jabil Circuit, Inc. and Cisco Systems, Inc. Jabil experienced some operational problems at a specific manufacturing plant earlier in the year, followed by a pall cast on the stock due to an options investigation which resulted in delayed reporting of financial results. Cisco Systems was not owned in the portfolio, but as one of the largest and strongest performing stocks in the benchmark, hurt on a relative basis.

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

In 2007, given widespread belief that the US economy is set to slow, it is possible that markets will be less focused on absolute earnings growth (as long as it is flat to modestly positive, as expected), but will instead focus on the potential for earnings multiple expansion. Price-to-earnings (P/E) ratios have compressed significantly over the last few years, resulting in a lack of differentiation between companies with high short-term earnings growth and ones with truly sustainable earnings growth rates. Earnings growth continues to look healthy for the new year, although it will likely be at much more modest levels than those of the previous three years. Although it sounds paradoxical, growth stocks, particularly high quality growth stocks, tend to perform well in a slowing economy, as investors will commonly pay a premium for companies that can sustain earnings during this time. We believe that as overall earnings growth decelerates, investors will pay more attention to earnings multiples, and reward stocks with longer, more sustainable earnings trends.

6 Annual Report

December 31, 2006

Growth Fund

Performance Highlights (unaudited)

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Average Annual Total Return at 12/31/2006


	1 Year		3 Year		5 Year		10 Year		Since Inception
Growth Fund Class N	12.42	%	9.81	%	3.96	%	5.94	%	—	%
Growth Fund Class I	12.64		10.07		4.22		—		2.29	(a)
Russell 3000^® Growth Index	9.46		7.17		3.02		5.34		(1.30	)(a)
S&P 500 Index	15.79		10.44		6.19		8.42		3.02	(a)

(a)

For the period from October 1, 1999 to December 31, 2006.

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, 2006. 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)

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

December 31, 2006

William Blair Funds 7

Growth Fund

Portfolio of Investments, December 31, 2006 (all dollar amounts in thousands)


Issuer	Shares	Value

*Common Stocks*
Information Technology—30.2%
*Activision, Inc.	204,385	$	3,524
*Adobe Systems Incorporated	147,180		6,052
Arm Holding plc—ADR	448,545		3,274
*Cognizant Technology Solutions Corporation	43,145		3,329
*EMC Corporation	501,570		6,621
*Euronet Worldwide, Inc.	141,655		4,206
*F5 Networks, Inc.	62,135		4,611
*FLIR Systems, Inc.	126,780		4,035
*J2 Global Communications, Inc.	234,870		6,400
Jabil Circuit, Inc.	263,885		6,478
*Network Appliance, Inc.	108,245		4,252
*Nuance Communications, Inc.	209,505		2,401
Paychex, Inc.	194,885		7,706
Taiwan Semiconductor Mfg. Co. Ltd.—ADR	787,360		8,606
*WebEx Communications, Inc.	128,815		4,494
*Yahoo!, Inc.	150,110		3,834

			79,823

Health Care—21.6%
*Amgen, Inc.	128,085		8,750
C.R. Bard, Inc.	63,940		5,305
*Genentech, Inc.	91,860		7,453
*Gilead Sciences, Inc.	57,200		3,714
*Healthways, Incorporated	92,590		4,417
*Integra Lifesciences Holding Corporation	132,150		5,628
*Kyphon, Inc.	118,455		4,786
*MedImmune, Inc.	86,635		2,804
Medtronic, Inc.	99,495		5,324
*Pharmaceutical Product Development, Incorporated	180,955		5,830
ResMed, Inc.	61,905		3,047

			57,058

Consumer Discretionary—14.8%
Coinstar, Inc.	152,820		4,672
Johnson Controls, Inc.	48,645		4,179
*Kohl’s Corporation	81,730		5,593
*Laureate Education, Inc.	98,645		4,797
Marriott International, Inc., Class “A”	110,625		5,279
McCormick & Schmick’s Seafood Restaurants, Inc.	26,196		630
*Nike, Inc., Class “B”	55,640		5,510
Staples, Inc.	210,550		5,621
*VistaPrint Limited†	90,056		2,982

			39,263

Industrials & Services—11.6%
Corporate Executive Board Company	54,930		4,817
Danaher Corporation	142,066		10,291
Graco, Inc.	102,920		4,078
Knight Transportation, Inc.	164,090		2,798
Rockwell Automation, Inc.	60,330		3,685
Rockwell Collins, Inc.	77,660		4,915

			30,584

*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 Staples—7.1%
PepsiCo, Inc.		130,480	$	8,162
Wal Mart De Mexico Sa De Cv—ADR		112,220		4,853
Walgreen Co.		124,960		5,734

				18,749

Financials—6.2%
Goldman Sachs Group, Inc.		39,250		7,825
Charles Schwab & Co., Inc.		229,755		4,443
SLM Corporation		86,850		4,236

				16,504

Energy—4.1%
Smith International, Inc.		140,090		5,754
Suncor Energy, Inc.†		65,445		5,164

				10,918

Materials—2.9%
Praxair, Inc.		130,065		7,717

Total Common Stock—98.5% (cost $198,025)				260,616


*Investment in Affiliate*
William Blair Ready Reserves		2,573,577		2,574

Total Investment in Affiliate—1.0% (cost $2,574)				2,574


*Short-Term Investment*
Prudential Funding Demand Note, VRN 5.180%, due 1/2/07	$	300,000		300

Total Short-Term Investment—0.1% (cost $300)				300


*Repurchase Agreement*
Investors Bank & Trust Company, 5.01% dated 12/29/2006, due 1/2/2007, repurchase price $1,209, collateralized by FNMA Pool # 694524		1,208,656		1,209

Total Repurchase Agreement—0.5% (cost $1,209)				1,209

Total Investments—100.1% (cost $202,108)				264,699
Liabilities, plus cash and other assets—(0.1)%				(174	)

Net assets—100.0%			$	264,525

See accompanying Notes to Financial Statements.

8 Annual Report

December 31, 2006

LOGO

Mark A. Fuller III

LOGO

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

The Tax-Managed Growth Fund posted an 8.21% gain on a total return basis (Class N Shares) for the 12 months ended December 31, 2006. By comparison, the Fund’s benchmark, the Russell 3000^® Growth Index increased 9.46% while the Standard & Poor’s 500 Stock Index rose 15.79%.

What were the most significant market factors impacting Fund performance?

Encouraged by the resilience of the economy in the face of Federal Reserve interest-rate increases, high oil prices and a cooling housing market, the equity markets advanced during 2006.

After stubbornly forging ahead in the first quarter of the year, concerns about inflation and the sustainability of corporate profits led to a market sell-off late in the second quarter. By the end of June, the Fed had conducted its fourth interest rate increase of the year, and investors began to worry that the Fed was being too heavy-handed in its administration of monetary policy. In fact, many economists began to worry about the prospects for a recession.

However, the economy and consumers proved to be stronger than expected. Job growth was favorable. Oil prices stabilized and the Fed ended its two-year campaign of measured rate increases. Although the housing market did slump, a feared collapse in housing prices did not materialize. Also, consumer spending contributed to a respectable holiday season for retail sales.

The equity markets, in turn, seemed to catch a second wind in the fourth quarter, which drove the Dow Jones Industrial Average and the Russell 2000^® Index of small stocks to record levels late in the year.

On the downside, our underweight position in Consumer Discretionary stocks, along with their uninspiring returns relative to the benchmark hurt our performance relative to the Russell 3000^® Growth Index.

With concerns about changes in Medicare reimbursements, looming regulatory issues and product concerns overhanging the market, Health Care companies had a tough year. Consequently, our holdings in the Health Care sector, in which we were slightly overweight the Russell 3000^® Growth Index, modestly underperformed, and were a slight drag on Fund performance.

Financials were the best-performing sector for the Fund. Our overweight position in Financials relative to the Fund’s Russell 3000^® Growth Index benchmark, combined with strong performance by our individual holdings in this sector, benefited the Fund.

Energy was the second-best performing sector for the Fund, followed by Industrials. Again in both sectors, our overweight position, combined with strong performance by our stocks in these sectors, were positive factors.

What were among the best performing investments for the Fund?

The Fund’s top three contributors to return in 2006 were Intercontinental Exchange, Expeditors International of Washington and Suncor Energy.

December 31, 2006

William Blair Funds 9

The Fund’s biggest contributor to performance was Intercontinental Exchange, which was up 169% for the Fund for the calendar year. Intercontinental Exchange is an electronic marketplace for trading of energy futures, options and over-the-counter contracts. We view Intercontinental Exchange as the electronic counterpart to the New York Mercantile Exchange (NYMEX). Some of Intercontinental Exchange’s traded commodities include oil and refined products, natural gas, power and emissions, and the company has a good competitive position within the energy area.

Expeditors International, which advanced on the strength in the economy and the Industrial sector, gained 20.5% for the Fund. Expeditors International is primarily a consolidator and secondarily a forwarder of international air and ocean freight.

Suncor Energy was up 25% for the Fund for the year. Suncor’s strong performance reflected the strength throughout the Energy sector, which was the second strongest sector in terms of overall contribution to return. Suncor Energy produces and refines oil from the Alberta oil sands in Canada and is a pioneer in oil sands production.

What were among the weakest performing investments for the Fund?

Jabil Circuit, a Technology company which provides electronics manufacturing services for other firms, was the worst performing investment for the Fund for the year, declining 33%. The company missed its earnings forecasts for two consecutive quarters.

The second-worst performing investment for the Fund was retailer Williams Sonoma, which decreased 26.5%, and which we sold out of the Fund’s portfolio during the second half of the year. Worries about consumer spending during a period of rising interest rates, higher energy prices and declining home values weighed heavily on this stock.

The third worst performing stock for the Fund was St. Jude Medical, which was down 27%. St. Jude manufactures cardiovascular medical devices, including the world’s most widely used mechanical heart valve. Generally speaking, investors grew concerned about the less-than-friendly competitive market environment the company was facing, and a slowdown in the company’s sales had investors questioning the effectiveness of the company’s cardiac devices.

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

During the fourth quarter of 2006, we started seeing some signs that large capitalization stocks might be poised to assume a leadership role in the market, in terms of price performance. In a moderating economic environment, larger and more established companies with proven business models and sustainable earnings growth typically do not have the overall significant correlation to economic growth than that of cyclically-oriented and smaller companies.

Because the Fund has the flexibility and freedom to move across the stock market capitalization spectrum, we are keeping a close watch on large cap stocks. More specifically, as the average weighted market capitalization of the Fund is well below half that of the Russell 3000^® Growth Index benchmark, we will be closely evaluating whether we should raise this weighting. Currently, the Fund does not have any “mega” cap names in its portfolio, and we will be researching whether or not we believe the Fund should have representation in this area.

We are currently underweight in Technology, a very economically sensitive sector, and will be looking for opportunity to increase the Fund’s weighting.

We believe the environment remains favorable for corporate profit growth in 2007. And we are encouraged by the earnings growth potential of the companies in the Fund’s portfolio, despite what we expect to be a year of tempered economic growth. In such an environment, security selection becomes even more important. We believe our focus on quality franchise businesses and a respect for downside risk is the appropriate time-tested approach for the year ahead.

10 Annual Report

December 31, 2006

Tax-Managed Growth Fund

Performance Highlights (unaudited)

LOGO

Average Annual Total Return at 12/31/2006


	1 Year		3 Year		5 Year		Since Inception(a)
Tax-Managed Growth Fund Class N	8.21	%	9.16	%	3.82	%	1.29	%
Tax-Managed Growth Fund Class I	8.57		9.47		4.10		1.56
Russell 3000^® Growth Index	9.46		7.17		3.02		(4.39	)
S&P 500 Index	15.79		10.44		6.19		1.24

(a)

For the period from December 27, 1999 to December 31, 2006.

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 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 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.

Sector Diversification (unaudited)

LOGO

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

December 31, 2006

William Blair Funds 11

Tax-Managed Growth Fund

Portfolio of Investments, December 31, 2006 (all dollar amounts in thousands)


Issuer	Shares	Value

*Common Stocks*
Health Care—32.0%
*Amgen, Inc.	4,195	$	287
C.R.Bard, Inc.	1,720		143
Caremark Rx, Inc.	2,260		129
*Express Scripts, Inc., Class “A”	1,610		115
*Genentech, Inc.	2,270		184
*Healthways, Inc.	4,100		196
IMS Health, Inc.	8,850		243
*Kyphon, Inc.	2,750		111
*MedImmune, Inc.	4,310		140
Medtronic, Inc.	2,730		146
*Patterson Companies, Inc.	5,710		203
Pharmaceutical Product Development, Inc.	6,000		193
*Psychiatric Solutions, Inc.	4,840		182
*ResMed, Inc.	5,564		274
Sanofi-Aventis—ADR	3,130		144
*Santarus, Inc.	11,940		93
Stryker Corporation	3,630		200
*Zimmer Holdings, Inc.	1,310		103

			3,086

Information Technology—20.7%
*Activision, Inc.	5,023		86
*Adobe Systems Incorporated	4,070		167
Arm Holdings plc—ADR	12,010		88
*CACI International, Inc., Class “A”	1,720		97
*Euronet Worldwide, Inc.	3,770		112
*F5 Networks, Inc.	1,710		127
First Data Corporation	3,670		94
Jabil Circuit, Inc.	2,570		63
Microchip Technology, Inc.	5,270		172
*Network Appliance, Inc.	5,680		223
Paychex, Inc.	6,000		237
Qualcomm Incorporated	2,030		77
*ScanSource, Inc.	3,120		95
Taiwan Semiconductor Mfg. Co. Ltd.—ADR	10,706		117
*WebEx Communications, Inc.	2,890		101
Western Union Company	6,240		140

			1,996

Industrials & Services—13.3%
C.H. Robinson Worldwide, Inc.	2,950		121
Danaher Corporation	3,820		277
Fastenal Company	6,380		229
General Electric Company	7,015		261
Knight Transportation, Inc.	7,832		133
Rockwell Collins, Inc.	4,130		261

			1,282

Financials—8.6%
*Affiliated Managers Group, Inc.	1,050		110
American International Group	2,790		200
*IntercontinentalExchange, Inc.	940		102
Investors Financial Services Corporation	4,740		202
Moody’s Corporation	3,070		212

			826

*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 Staples—5.8%
Colgate-Palmolive Company		3,030	$	198
PepsiCo, Inc.		3,575		223
Walgreen Co.		2,985		137

				558

Consumer Discretionary—5.8%
*CarMax, Inc.		3,430		184
Johnson Controls, Inc.		1,900		163
*Laureate Education, Inc.		4,280		208

				555

Energy—5.5%
Smith International, Inc.		4,380		180
Suncor Energy, Inc.†		4,490		354

				534

Materials—4.1%
Airgas, Inc.		4,890		198
Praxair, Inc.		3,360		200

				398

Total Common Stock—95.8% (cost $7,110)				9,235


*Investment in Affiliate*
William Blair Ready Reserves		105,621		106

Total Investment in Affiliate—1.1% (cost $106)				106


*Short-Term Investment*
Prudential Funding Demand Note, VRN 5.180%, due 1/2/07	$	106,000		106

Total Short-Term Investment—1.1% (cost $106)				106


*Repurchase Agreement*
Investors Bank & Trust Company, 5.01% dated 12/29/2006, due 1/2/2007, repurchase price $91, collateralized by SBA Pool # 507426		90,992		91

Total Repurchase Agreement—0.9% (cost $91)				91

Total Investments—98.9% (cost $7,413)				9,538
Cash and other assets, less liabilities—1.1%				106

Net assets—100.0%			$	9,644

See accompanying Notes to Financial Statements.

12 Annual Report

December 31, 2006

LOGO

James S. Golan

LOGO

John F. Jostrand

LOGO

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 6.34% increase on a total return basis (Class N Shares) for the 12 months ended December 31, 2006. By comparison, the Fund’s benchmark, the Russell 1000^® Growth Index, gained 9.07%.

What were the most significant factors impacting Fund performance?

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

Health Care provided indigestion during the year. With concerns about changes in Medicare reimbursement allowances, looming regulatory issues and product safety concerns overhanging the market, much of health care had a tough year. Medtronic Inc. in the medical device area suffered a large pullback in stock price due to a significant decrease in the rate of growth in its implantable cardioverter defibrillator market. Certain pharmaceuticals and various specialty health technology companies did well, but biotechnology stocks performed poorly during the fourth quarter and the year. Amgen, Inc., one of our larger portfolio holdings, faced potential competitive issues regarding patent challenges during the year. We continue to think that biotechs offer great opportunity for new products that could have numerous applications over broad populations, but investors were not as appreciative of the longer-term outlook for these companies during 2006.

December 31, 2006

William Blair Funds 13

Information Technology stocks provided the largest contribution to index returns, but were not as strong in the portfolio. The largest detractor, accounting for most of the return differential, was Yahoo! Inc. The much vaunted Project Panama search platform was scheduled to be launched toward the end of third quarter 2006, but concerns related to quality control caused the launch to be delayed until early 2007. Faster than expected erosion in the branded business, combined with competitor Google Inc. extending its reach with the purchase of YouTube, further depressed the stock’s price.

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

Our choices within the Consumer Discretionary sector showed the importance of strong stock selection to relative portfolio results. Monetary tightening, rising commodity prices and housing market concerns weighed on stocks within this sector, particularly in the first half of the year. Despite macro concerns, our bottom-up stock selection process brought us two interesting opportunities: Marriott International Inc. and Kohl’s Corp. Hotels and leisure stocks enjoyed very strong returns during the year, as strong trends in business travelers to urban areas particularly benefited these companies. Marriott was one of the biggest beneficiaries of this trend, with most of their properties located in major cities. Kohl’s Corp. had a stellar year as well. The company successfully executed on its new management strategies, branching out from its basic wear into proprietary designer lines from some of the most popular names, such as Chaps from Ralph Lauren. Additionally, the company revamped several of its stores into more customer-friendly formats, and gained market share from some of the floundering larger department store chains. The company is just beginning to benefit from financial strategies that should continue to provide margin improvement.

Similarly, although growth-oriented energy stocks did not see significant appreciation, our holdings did. Both Schlumberger Ltd. and Suncor Energy Inc. achieved strong double-digit gains during the year, as investors rewarded their innovative technologies and strong management teams.

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

It is likely that several of the drivers in the second half of 2006 will persist in 2007. Earnings growth continues to look healthy for the new year, although it will likely be at much more modest levels than those of the previous three years. Although it sounds paradoxical, growth stocks, particularly high quality growth stocks, tend to perform well in a slowing economy, as investors will commonly pay a premium for companies that can sustain earnings during this time. We think that as overall earnings growth decelerates, investors will pay more attention to earnings multiples, and reward stocks with longer, more sustainable earnings trends.

14 Annual Report

December 31, 2006

Large Cap Growth Fund

Performance Highlights (unaudited)

LOGO

Average Annual Total Return at 12/31/2006


	1 Year		3 Year		5 Year		Since Inception(a)
Large Cap Growth Fund Class N	6.34	%	5.08	%	0.47	%	(5.18	)%
Large Cap Growth Fund Class I	6.55		5.28		0.73		(4.96	)
Russell 1000^® Growth Index	9.07		6.87		2.69		(4.79	)

(a)

For the period from December 27, 1999 to December 31, 2006.

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.

Sector Diversification (unaudited)

LOGO

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

December 31, 2006

William Blair Funds 15

Large Cap Growth Fund

Portfolio of Investments, December 31, 2006 (all dollar amounts in thousands)


Issuer	Shares	Value

*Common Stocks*
Information Technology—29.5%
*Adobe Systems Incorporated	16,180	$	665
*Cisco Systems Incorporated	32,834		897
*Corning Incorporated	17,080		320
*EMC Corporation	36,540		482
Infosys Technologies Ltd.—ADR	4,920		268
Jabil Circuit, Inc.	24,055		591
*Network Appliance, Inc.	11,020		433
Paychex, Inc.	21,030		831
Qualcomm Incorporated	9,265		350
Taiwan Semiconductor Mfg. Co. Ltd.—ADR	59,339		649
*Yahoo!, Inc.	18,430		471

			5,957

Consumer Discretionary—15.5%
Johnson Controls, Inc.	5,210		448
*Kohl’s Corporation	6,398		438
Marriott International, Inc., Class “A”	16,944		809
Nike, Inc., Class “B”	8,920		883
Staples, Inc.	20,275		541

			3,119

Health Care—14.6%
*Amgen, Inc.	10,210		698
C. R. Bard, Inc.	4,920		408
*Genentech, Inc.	8,455		686
*Gilead Sciences, Inc.	6,900		448
*MedImmune, Inc.	7,350		238
Medtronic, Inc.	8,825		472

			2,950

Industrials & Services—11.1%
3M Company	6,195		483
Danaher Corporation	11,182		810
Rockwell Automation, Inc.	4,610		281
Rockwell Collins, Inc.	10,550		668

			2,242

Financials—9.9%
Capital One Financial Corporation	4,880		375
Franklin Resources, Inc.	2,130		235
Goldman Sachs Group, Inc.	4,140		825
Charles Schwab & Co, Inc.	29,320		567

			2,002

*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 Staples—8.8%
PepsiCo, Inc.		10,250	$	641
Wal Mart De Mexico Sa De Cv—ADR		8,530		369
Walgreen Co.		16,545		759

				1,769

Energy—5.0%
Schlumberger Limited†		8,710		550
Suncor Energy, Inc.†		5,860		462

				1,012

Materials—2.9%
Praxair, Inc.		9,840		584

Total Common Stock—97.3% (cost $16,914)				19,635


*Investment in Affiliate*
William Blair Ready Reserves		54,409		54

Total Investment in Affiliate—0.2% (cost $54)				54


*Short-Term Investment*
Prudential Funding Demand Note, VRN 5.180%, due 1/2/07	$	115,000		115

Total Short-Term Investment—0.6% (cost $115)				115


*Repurchase Agreement*
Investors Bank & Trust Company, 5.01% dated 12/29/2006, due 1/2/2007, repurchase price $381, collateralized by SBA Pool # 503480		381,194		381

Total Repurchase Agreement—1.9% (cost $381)				381

Total Investments—100.0% (cost $17,464)				20,185
Cash and other assets less liabilities—(0.0)%				6

Net assets—100.0%			$	20,191

See accompanying Notes to Financial Statements.

16 Annual Report

December 31, 2006

LOGO

Karl W. Brewer

LOGO

Colin J. Williams

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 MANAGERS

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 14.12% total return (Class N Shares) for the 12 months ended December 31, 2006. By comparison, the Fund’s benchmark, the Russell 2000^® Growth Index, gained 13.35%.

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

The US stock market turned in strong results across styles and market capitalizations during calendar year 2006. However, the market’s return was far from consistent throughout the year—and can be dissected into three distinct time periods. We witnessed a strong first few months of the year in part due to a better than expected earnings season reported during January and February. In early May, however, hawkish Federal Reserve comments about the likelihood of further interest rate hikes sent the market into a sharp three month correction. Then, as the Fed was seeing signs of moderating economic growth and contained inflation, they held interest rates steady at their August meeting. Helping the Fed’s decision was easing energy prices—a downward pressure on inflation. The potential end to interest rate increases marked a sea change in sentiment from the tough summer months and served as the catalyst for a sustained rally through year end.

The negative headlines of 2006 included a slowing housing market, a troubled auto industry, the continued war in Iraq and corporate stock options backdating. These were outweighed by the positive effects of lower energy prices, an end to a two year interest rate tightening cycle and an abundance of merger and acquisition activity that kept the equity market strong to close 2006. For the year overall, the market was led by Consumer Staples and Materials. These two sectors are more heavily weighted in the value benchmarks—influencing value’s outperformance over growth. Energy gave up its market leadership during the year while the predominantly growth sectors of Information Technology and Health Care disappointed compared to their typical strength in market rallies.

The market’s bias against the smaller end of the small cap growth market during 2006 was a slight headwind for the Fund. Despite this, the Fund outperformed the benchmark with superior stock selection over the year. The majority of the outperformance came from stocks within the Information Technology and Health Care sectors. On the downside, stock selection in the Industrials and Services sector was a drag on relative performance.

What were among the weakest performing investments for the Fund?

Two of the weakest performing stocks in the Fund during the period were Telik and SIRVA. Telik is a biopharmaceutical company. The company received negative data out of three Phase III FDA trials and the stock market sold off accordingly. However, the company has ongoing clinical trials and continues to seek a commercialized product with its proprietary technology.

December 31, 2006

William Blair Funds 17

SIRVA is an industrial company operating in the global relocation services market. The negative residential housing market trends affected the company’s primary business line and the stock sold off after the company missed earnings expectations in August. We sold the position due to our negative outlook for the company going forward.

What were among the best performing investments for the Fund?

Two of the strongest contributors to performance during the period were Nuance Communications and Kanbay International. Nuance Communications is a leader in the speech recognition market. We have talked about this stock in the past as the business momentum, and therefore stock appreciation, has been strong for the last year and a half. Nuance made an acquisition during the year, Dictaphone, which moved them into the medical dictation market. Speech recognition continues to evolve with demand coming from an increasing number of end markets—from cell phones to airline reservation systems.

Kanbay is a company that offers information technology consulting and technology integration solutions. The company’s acquisition of Adjoined Consulting is performing well, and Kanbay continues to benefit from the trend to outsource IT consulting services to India. These two factors helped drive growth in the stock price during the third quarter. In late October, the company again turned in strong earnings and revenue growth and at the same time announced that it was being acquired. The premium was roughly 15% above the previous day’s close and up over 100% from the stock’s summer bottom.

What is your current outlook?

We are four plus years into the current bull market—a great run by historical comparison. Bond investors have moved 10-year Treasury bond yields well below short term rates, suggesting they think the Fed may have to lower interest rates in the future in response to weakening economic activity. For now, the stock market is suggesting otherwise—that the Fed is orchestrating the ideal balance between economic growth and low inflation. Over the last few years, corporate earnings growth has been very robust at a consistent double digit annual pace. While earnings growth remains healthy and stock valuations reasonable, a slower and more sustainable level of earnings growth should be expected in the coming years. We expect investors to look for more durable business models that can grow despite the macro environment—a dynamic that should benefit our quality growth style of investing. From our perspective, stock picking will become increasingly crucial to investment success as the easy money made over the last few years of broad-based earnings growth is most likely behind us.

Is there any other news with respect to the Fund?

As previously disclosed, Colin Williams was promoted to co-portfolio manager of the Fund during the second quarter of 2006. Colin has worked on the Fund as a research analyst for the past four years. He joins Karl Brewer who has been a portfolio manager on the Fund since its inception. The Fund holds a number illiquid securities totaling roughly 1.5% of assets. Shares of Kona Grill, a restaurant company, were purchased in two private transactions during 2006. Shares of Zila Inc., a pharmaceutical company, were acquired through a Private Investment in Public Equity (PIPE) transaction in November. During December, we received warrants to purchase shares of Think Partnership that, if exercised, are currently not freely tradable. The Fund’s Pricing Committee and Valuation Committee are currently pricing the Kona Grill and Zila, Inc. securities at fair value. The Fund’s Pricing Committee is currently pricing the Think Partnership warrants at fair value.

18 Annual Report

December 31, 2006

Small Cap Growth Fund

Performance Highlights (unaudited)

LOGO

Average Annual Total Return at 12/31/2006


	1 Year		3 Year		5 Year		Since Inception(a)
Small Cap Growth Fund Class N	14.12	%	13.68	%	14.50	%	18.89	%
Small Cap Growth Fund Class I	14.42		13.98		14.79		19.17
Russell 2000^® Growth Index	13.35		10.51		6.93		0.50
Russell 2000^® Index	18.37		13.56		11.39		8.51

(a)

For the period from December 27, 1999 to December 31, 2006.

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.

Sector Diversification (unaudited)

LOGO

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

December 31, 2006

William Blair Funds 19

Small Cap Growth Fund

Portfolio of Investments, December 31, 2006 (all dollar amounts in thousands)


Issuer	Shares	Value

*Common Stocks*
Information Technology—30.2%
*Access Integrated Technologies, Inc.	1,530,387	$	13,345
*DTS, Inc.	730,155		17,662
*eCollege.com	746,570		11,684
*Euronet Worldwide, Inc.	556,830		16,532
*F5 Networks, Inc.	331,882		24,629
*J2 Global Communications, Inc.	946,007		25,779
*Nuance Communications, Inc.	2,207,998		25,304
*Optimal Group, Inc.†	2,150,379		20,472
Patni Computer Systems Limited—ADR	687,390		14,009
*PDF Solutions, Inc.	1,276,203		18,441
*Rackable Systems	679,167		21,034
*Silicon Labratories, Inc.	719,006		24,913
*Skillsoft, plc—ADR	1,868,117		11,601
*Stratasys, Inc.	590,537		18,549
*Think Partnership, Inc.	4,627,970		15,087
*Ultimate Software Group, Inc.	736,538		17,132
*ValueClick, Inc.	758,307		17,919
*Volterra Semiconductor Corporation	1,842,933		27,644
*WebEx Communications, Inc.	619,117		21,601
*WNS Holdings Limited—ADR	570,982		17,757

			381,094

Health Care—27.6%
*Air Methods Corporation	367,540		10,262
*American Medical Systems Holdings, Inc.	1,157,284		21,433
*Axcan Pharma, Inc.†	1,068,541		15,216
*CryoLife, Inc.	688,326		5,266
*DJO, Inc.	656,387		28,106
*Healthways, Inc.	584,771		27,899
*Hythiam, Inc.	1,924,639		17,784
*Integra Lifesciences Holdings Corporation	681,070		29,007
*Kensey Nash Corporation	427,849		13,605
*Kyphon, Inc.	583,390		23,569
*Lifecore Biomedical, Inc.	1,117,713		19,929
*Providence Service Corp.	548,734		13,790
*PSS World Medical, Inc.	628,544		12,275
*Psychiatric Solutions, Inc.	426,598		16,006
*Quidel Corporation	1,001,153		13,636
*Sangamo Biosciences, Inc.	910,443		6,009
*Santarus, Inc.	3,588,835		28,100
*Surmodics, Inc.	587,112		18,271
*Telik, Inc.	2,093,121		9,272
*Trinity Biotech plc—ADR	95,627		819
*Zila, Inc.	2,580,537		6,555
Zila, Inc.* (restricted)	4,732,351		10,953

			347,762

Consumer Discretionary—20.3%
*4 Kids Entertainment, Inc.	696,575		12,691
*AFC Enterprises, Inc.	718,882		12,703
*BUCA, Inc.	200,068		962
*Century Casinos, Inc.	1,546,133		17,255
*Coinstar, Inc.	785,317		24,007
DeVry, Inc.	401,196		11,234
*DG Fastchannel, Inc	971,150		13,091
*Duckwall-ALCO Stores, Inc.	325,133		12,680
*Jarden Corporation	690,613		24,027
*Jos. A. Bank Clothiers, Inc.	371,136		10,893
*Kona Grill, Inc.	329,595		6,730
Kona Grill, Inc.* (restricted)	435,134		7,188


Issuer	Shares or Principal Amount		Value

*Common Stocks—(continued)*
Consumer Discretionary—(continued)
*Laureate Education, Inc.		981,351	$	47,723
*Lions Gate Entertainment Corporation†		1,409,202		15,121
Standard Pacific Corp.		246,850		6,613
Strayer Education, Inc.		115,694		12,269
*ValueVision Media, Inc., Class “A”		1,618,354		21,265

				256,452

Industrials & Services—7.5%
*Corrections Corporation of America		275,212		12,448
*FirstService Corporation†		484,434		11,191
Frozen Food Express Industries, Inc.		894,816		7,695
*GEO Group, Inc.		327,485		12,287
*InnerWorkings, Inc.		349,860		5,584
*Kforce, Inc.		899,771		10,950
*Lecg Corporation		779,234		14,400
*NCI Building Systems, Inc.		252,512		13,068
*On Assignment, Inc.		617,450		7,255

				94,878

Energy—6.3%
*Carrizo Oil & Gas, Inc.		428,802		12,444
*Comstock Resources, Inc.		417,149		12,957
*Hornbeck Offshore Services, Inc.		559,172		19,962
*Petrohawk Energy Corporation		1,400,614		16,107
*TETRA Technologies, Inc.		695,920		17,802

				79,272

Financials—4.8%
*Marlin Business Services Corp.		756,915		18,189
Midwest Banc Holdings, Inc.		331,051		7,862
National Financial Partners Corporation		400,878		17,627
*Signature Bank New York		545,846		16,910

				60,588

Consumer Staples—0.5%
*Overhill Farms, Inc.		1,903,720		5,464

Total Common Stock—97.2% (Total cost $1,079,331)				1,225,510


*Investment in Warrants*
Think Partnership, Inc., 2011, $2.50*		1,424,000		1,082
Think Partnership, Inc., 2011, $3.05*		448,409		—
Think Partnership, Inc., 2011, $4.00*		224,205		—
Zila, Inc., 2011, $2.21*		2,271,528		227

Total Investment in Warrants—0.1% (cost $0)				1,309


*Investment in Affiliate*
William Blair Ready Reserves		9,894,269		9,894

Total Investment in Affiliate—0.8% (cost $9,894)				9,894


*Short-Term Investments*
American Express Demand Note, VRN 5.176%, due 1/2/07	$	828,000		828
Prudential Funding Demand Note, VRN 5.180%, due 1/2/07		147,000		147

Total Short-Term Investments—0.1% (cost $975)				975

See accompanying Notes to Financial Statements.

20 Annual Report

December 31, 2006

Small Cap Growth Fund

Portfolio of Investments, December 31, 2006 (all dollar amounts in thousands)


Issuer	Principal Amount		Value

*Repurchase Agreement*
Investors Bank & Trust Company, 5.01% dated 12/29/2006, due 1/2/2007, repurchase price $15,608, collateralized by FNMA Pool #826907	$	15,598,964	$	15,599

Total Repurchase Agreement—1.2% (cost $15,599)				15,599

Total Investments—99.4% (cost $1,105,799)				1,253,287
Cash and other assets, less liabilities—0.6%				7,887

Net assets—100.0%			$	1,261,174

*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. These holdings represent 1.54% of the Fund’s net assets at December 31, 2006. These securities were also deemed illiquid pursuant to Liquidity Procedures approved by the Board of Trustees. Additional information on each restricted illiquid security is as follows:


Security	Acquisition Date	Acquisition Cost (in thousands)
Kona Grill, Inc.	8/4/2006 & 11/16/2006	$	6,391
Zila, Inc.	11/15/2006		8,282
Zila, Inc. warrants	11/15/2006		—
Think Partnership, Inc. warrants	3/22/2006 & 12/29/2006		—

If a Fund’s portfolio holding represents ownership of 5% or more of the voting securities of a company, the company is deemed to be an affiliate as defined in the Investment Company Act of 1940. The Small Cap Growth Fund had the following transactions during the year ended December 31, 2006 with affiliated companies:


	Share Activity				Year Ended December 31, 2006
					(in thousands)
Security Name	Balance 12/31/2005	Purchases	Sales	Balance 12/31/2006	Value		Dividends Included in Income
4 Kids Entertainment, Inc.	466,935	229,640	—	696,575	$	12,691	$	—
Access Integrated Technologies, Inc.	444,977	1,085,410	—	1,530,387		13,345		—
Century Casinos, Inc.	956,611	589,522	—	1,546,133		17,255		—
DG Fastchannel, Inc	—	971,150	—	971,150		13,091		—
Duckwall-ALCO Stores, Inc.	—	352,833	27,700	325,133		12,680		—
Frozen Food Express Industries, Inc.	483,765	411,051	—	894,816		7,695		27
Kona Grill, Inc.	—	764,729	—	764,729		13,918		—
Lifecore Biomedical, Inc.	319,389	798,324	—	1,117,713		19,929		—
Marlin Business Services Corp.	—	756,915	—	756,915		18,189		—
Optimal Group, Inc.	782,973	1,915,574	548,168	2,150,379		20,472		—
Overhill Farms, Inc.	1,684,600	219,120	—	1,903,720		5,464		—
Santarus, Inc.	974,738	2,614,097	—	3,588,835		28,100		—
Stratasys, Inc.	—	590,537	—	590,537		18,549		—
Volterra Semiconductor Corporation	1,466,807	832,006	455,880	1,842,933		27,644		—
Zila, Inc.	1,965,922	5,346,966	—	7,312,888		17,508		—

					$	246,530

See accompanying Notes to Financial Statements.

December 31, 2006

William Blair Funds 21

LOGO

Harvey H. Bundy, III

LOGO

Robert C. Lanphier, IV

LOGO

David P. Ricci

MID CAP GROWTH FUND

The Mid Cap Growth Fund primarily invests in a diversified portfolio of common stocks of medium-sized domestic growth companies.

AN OVERVIEW FROM THE PORTFOLIO MANAGERS

We are pleased to have the Mid Cap Growth Fund become the newest addition to the William Blair Fund Family and would like to thank our shareholders for investing with us.

We are enthusiastic about the opportunities available to us as the managers of the Mid Cap Fund. The Mid Cap Growth Fund will invest at least 80% of its assets in companies with market capitalizations between $1.5 billion and $14 billion at the time of the Fund’s investment, and will seek stocks of companies that are expected to experience solid growth in earnings. Such companies generally will exhibit superior business fundamentals, including leadership in their field, distinctive attributes that cannot easily be duplicated by competitors, quality products or services, distinctive marketing and distribution, value to customer, conservative financial policies and accounting practices and strong management.

How did the Fund perform since inception through the end of 2006? How did the Fund’s performance compare to its benchmark?

The Mid Cap Growth Fund posted a 4.60% total return (Class N Shares) for the 11-month period ended December 31, 2006. By comparison, the Fund’s benchmark, the Russell Midcap Growth Index, returned 4.28% during the period.

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

Since inception on February 1, 2006, the Fund’s outperformance has come mostly from stock selection within the Information Technology sector. Energy and Financials stock selection

22 Annual Report

December 31, 2006

were both positive contributors as well, while the Industrials sector was the main source of negative relative performance for the Fund.

What were among the weakest performing investments for the Fund?

Two of the weakest performing stocks in the Fund during the period were Jabil Circuit and Getty Images. Jabil Circuit operates in the electronic manufacturing services industry. It is the outsourced manufacturer of choice for various technology, industrial, medical and consumer companies around the globe. The company has had a proven track record of meeting earnings expectations. However, in June the company announced some operational issues that would affect earnings negatively. After further analysis we felt revenues were on track and the operational issues were being corrected. However, during the fourth quarter the Company experienced another operational hiccup that put pressure on the stock once again. We still feel this is a solid growth company and is trading at an attractive valuation.

Getty Images has the largest digital library of stock photographs used by many publishers, advertisers and others looking for digital photographs. The company has seen increased competition in the low-end photograph market. One competitor’s low cost solution is changing the dynamics in the industry and has hurt Getty’s previously dominant market position. Sales growth has deteriorated and without the visibility of forward earnings, we have decided to liquidate the position.

What were among the best performing investments for the Fund?

Two of the strongest contributors to performance during the period were Intercontinental Exchange and CarMax. Intercontinental Exchange is a rapidly growing electronic exchange for various energy futures and physical commodity contracts. The company has benefited from the volatility in the energy markets as various market participants seek to speculate, invest, or hedge using energy derivatives traded on its exchange. The company also announced the acquisition of the New York Board of Trade during September, diversifying its product mix to commodities outside of energy. The company went public late last year and the gradual realization of the company’s true earnings potential has served as a catalyst for the stock throughout 2006.

CarMax is a specialty retailer operating in the highly fragmented used car market. The company buys, reconditions and sells used cars at their used car superstores as well as offering financing options, extended service plans and repair services. We have talked about CarMax in past letters and the fourth quarter was just a continuation of strength for the stock and for the fundamentals of the company. CarMax continues to see strong same store sales growth due to management execution and a healthy used car market—despite the new car market woes. During 2006, the company also finalized the successor to their outgoing CEO. This served as another catalyst as the uncertainty did not sit well with investors in 2005.

What is your current outlook?

December 31, 2006

William Blair Funds 23

Mid Cap Growth Fund

Performance Highlights (unaudited)

LOGO

Average Annual Total Return at 12/31/2006


	Since Inception(a)
Mid Cap Growth Fund Class N	4.60	%
Mid Cap Growth Fund Class I	4.90
Russell Midcap^® Growth Index	4.28

(a)

For the period from February 1, 2006 (Commencement of Operations) to December 31, 2006.

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 and medium capitalization companies involves special risks, including higher volatility and lower liquidity. Mid Cap stocks are also more sensitive to purchase/sale transactions and changes in the issuer’s financial condition. 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 Mid Cap Growth Index is an index that is constructed to provide a comprehensive and unbiased barometer of the mid-cap growth market.

Sector Diversification (unaudited)

LOGO

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

24 Annual Report

December 31, 2006

Mid Cap Growth Fund

Portfolio of Investments, December 31, 2006 (all dollar amounts in thousands)


Issuer	Shares	Value

*Common Stocks*
Information Technology—28.6%
*Activision, Inc.	30,005	$	517
*Cognizant Technology Solutions, Class “A”	2,480		191
*F5 Networks, Inc.	7,049		523
*FLIR Systems, Inc.	10,670		340
*Intuit, Inc.	13,745		419
*Iron Mountain, Inc.	10,255		424
*J2 Global Communications, Inc.	15,765		430
Jabil Circuit, Inc.	20,960		515
Maxim Integrated Products, Inc.	9,695		297
Microchip Technology, Inc.	8,040		263
*Network Appliance, Inc.	11,071		435
Paychex, Inc.	18,700		739
*ValueClick, Inc.	11,420		270
*WebEx Communications, Inc.	7,005		244

			5,607

Health Care—19.5%
C.R. Bard, Inc.	5,220		433
*Express Scripts, Inc., Class “A”	5,862		420
*Healthways, Inc.	8,245		393
*IDEXX Laboratories, Inc.	2,610		207
*Integra LifeSciences Holdings Corporation	7,425		316
*Kyphon, Inc.	7,779		314
*MedImmune, Inc.	14,240		461
*Patterson Companies, Inc.	8,125		289
Pharmaceutical Product Development, Inc.	16,720		539
*ResMed, Inc.	9,360		461

			3,833

Consumer Discretionary—15.3%
*CarMax, Inc.	4,330		232
*Dick’s Sporting Goods, Inc.	3,850		189
*Lamar Advertising Company, Class “A”	3,410		223
*Laureate Education, Inc.	11,315		550
*Life Time Fitness, Inc.	8,885		431
*O’Reilly Automotive, Inc.	9,648		309
PetSmart, Inc.	6,350		183
Strayer Education, Inc.	2,610		277
*Tractor Supply Company	9,981		446
Weight Watchers International, Inc.	3,300		174

			3,014

Industrials & Services—12.9%
Corporate Executive Board Company	4,380		384
Fastenal Company	16,460		591
Graco, Inc.	8,355		331
*Monster Worldwide, Inc.	7,230		337
Robert Half International, Inc.	8,805		327
Rockwell Collins, Inc.	8,815		558

			2,528

*Non-income producing securities

VRN = Variable Rate Note

† = U.S. listed foreign security


Issuer	Shares or Principal Amount		Value

*Common Stocks—(continued)*
Energy—7.6%
*Grant Prideco, Inc.		6,650	$	264
Smith International, Inc.		12,225		502
*Southwestern Energy Company		7,075		248
*Ultra Petroleum Corp.†		3,840		183
XTO Energy Corporation		6,110		288

				1,485

Financials—5.0%
*Affiliated Managers Group, Inc.		1,975		208
*IntercontinentalExchange, Inc.		2,953		318
Investors Financial Services Corporation		10,680		456

				982

Materials—2.0%
Airgas, Inc.		9,905		401

Total Common Stock—90.9% (cost $16,786)				17,850


*Investment in Affiliate*
William Blair Ready Reserves		104,424		104

Total Investment in Affiliate—0.5% (cost $104)				104


*Short-Term Investment*
Prudential Funding Demand Note, VRN 5.180%, due 1/2/07	$	225,000		225

Total Short-Term Investment—1.1% (cost $225)				225


*Repurchase Agreement*
Investors Bank & Trust Company, 5.01% dated 12/29/2006, due 1/2/2007, repurchase price $465, collateralized by SBA Pool # 503775		464,750		465

Total Repurchase Agreement—2.4% (cost $465)				465

Total Investments—94.9% (cost $17,580)				18,644
Cash and other assets, less liabilities—5.1%				995

Net assets—100%			$	19,639

See accompanying Notes to Financial Statements.

December 31, 2006

William Blair Funds 25

LOGO

Karl W. Brewer

LOGO

Harvey H. Bundy, III

LOGO

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 9.68% total return (Class N Shares) for the 12 months ended December 31, 2006. By comparison, the Fund’s benchmark, the Russell 2500^TM Growth Index, gained 12.26%.

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

The Fund’s higher allocation to growth oriented stocks compared to the Russell 2500^TM Growth Index was a sizeable performance detractor relative to the benchmark during 2006 as the market was biased against higher growth stocks. Stock selection also detracted from performance. This was most pronounced in the Industrials and Consumer Discretionary sectors while stock selection in the Information Technology sector was the largest positive contributor to relative performance.

What were among the weakest performing investments for the Fund?

Two of the weakest performing stocks in the Fund during the period were Telik and Getty Images. Telik is a biopharmaceutical company. The company received negative data out of three Phase III FDA trials and the stock sold off accordingly. Although the company has ongoing clinical trials and continues to seek a commercialized product, we decided to liquidate the position after this negative announcement.

26 Annual Report

December 31, 2006

What were among the best performing investments for the Fund?

Two of the strongest contributors to performance during the period were Intercontinental Exchange and ValueClick. Intercontinental Exchange is a rapidly growing electronic exchange for various energy futures and physical commodity contracts. The company has benefited from the volatility in the energy markets as various market participants seek to speculate or invest in, or hedge using, energy derivatives traded on its exchange. The company also announced the acquisition of the New York Board of Trade during September, diversifying its product mix to commodities outside of energy. The company went public late last year and the gradual realization of the company’s true earnings potential has served as a catalyst for the stock throughout 2006.

ValueClick operates in the online advertising space. The stock was a solid contributor to the Fund for the fourth quarter as well as 2006 as a whole. The company reported solid earnings growth throughout the year—despite pessimism toward the overall online advertising space by some larger competitors such as Yahoo!. The fourth quarter catalyst, specifically, was its better than expected earnings and forward earnings guidance in early November.

What is your current outlook?

December 31, 2006

William Blair Funds 27

Small-Mid Cap Growth Fund

Performance Highlights (unaudited)

LOGO

Average Annual Total Return at 12/31/2006


	1 Year		3 Year		Since Inception(a)
Small-Mid Cap Growth Fund Class N	9.68	%	11.28	%	11.00	%
Small-Mid Cap Growth Fund Class I	9.95		11.55		11.27
Russell 2500^™ Growth Index	12.26		11.64		11.36

(a)

For the period from December 29, 2003 to December 31, 2006.

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 and medium capitalization companies involves special risks, including higher volatility and lower liquidity. Mid cap stocks are also more sensitive to purchase/sale transactions and changes in the issuer’s financial condition. 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.

Sector Diversification (unaudited)

LOGO

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

28 Annual Report

December 31, 2006

Small-Mid Cap Growth Fund

Portfolio of Investments, December 31, 2006 (all dollar amounts in thousands)


Issuer	Shares	Value

*Common Stocks*
Information Technology—24.5%
*Activision, Inc.	135,579	$	2,337
*Euronet Worldwide, Inc.	73,375		2,179
*F5 Networks, Inc.	28,130		2,088
*Intuit, Inc.	51,635		1,575
*Iron Mountain, Inc.	54,114		2,237
*J2 Global Communications, Inc.	81,200		2,213
Jabil Circuit, Inc.	94,615		2,323
Microchip Technology, Inc.	32,845		1,074
*Nuance Communications, Inc.	143,235		1,642
*PDF Solutions, Inc.	64,800		936
*Ultimate Software Group, Inc.	52,200		1,214
*ValueClick, Inc.	56,957		1,346
*WebEx Communications, Inc.	47,040		1,641

			22,805

Health Care—20.7%
C.R.Bard, Inc.	15,170		1,259
*DJO, Inc.	53,320		2,283
*Healthways, Inc.	47,665		2,274
*Integra LifeSciences Holdings Corporation	45,680		1,945
*Kyphon, Inc.	54,665		2,208
*Patterson Companies, Inc.	42,540		1,511
Pharmaceutical Product Development, Inc.	75,905		2,446
*PSS World Medical, Inc.	75,315		1,471
*ResMed, Inc.	37,515		1,846
*Santarus, Inc.	87,600		686
*Surmodics, Inc.	40,165		1,250

			19,179

Consumer Discretionary—19.2%
*CarMax, Inc.	43,800		2,349
*Coinstar, Inc.	51,958		1,588
*Guitar Center, Inc.	24,885		1,131
*Jarden Corporation	41,420		1,441
*Lamar Advertising Company, Class “A”	21,460		1,403
*Laureate Education, Inc.	54,689		2,660
*Life Time Fitness, Inc.	47,465		2,303
*O’Reilly Automotive, Inc.	58,790		1,885
Strayer Education, Inc.	14,540		1,542
*Tractor Supply Company	16,415		734
Weight Watchers International, Inc.	15,400		809

			17,845

Industrials & Services—16.1%
*Beacon Roofing Supply, Inc.	123,389		2,322
Corporate Executive Board Company	21,280		1,866
*Corrections Corporation of America	26,600		1,203
Fastenal Company	80,175		2,877
Graco, Inc.	28,225		1,118
*Kforce, Inc.	88,215		1,074

*Non-income producing securities

VRN = Variable Rate Note

† = U.S. listed foreign security


Issuer	Shares or Principal Amount	Value

*Common Stocks—(continued)*
Industrials & Services—(continued)
*Monster Worldwide, Inc.	43,600	$	2,033
Rockwell Collins, Inc.	38,595		2,443

			14,936

Energy—6.8%
*Grant Prideco, Inc.	39,300		1,563
Smith International, Inc.	55,670		2,286
*Southwestern Energy Company	36,760		1,288
*Ultra Petroleum Corp.†	24,350		1,163

			6,300

Financials—6.8%
*Affiliated Managers Group, Inc.	13,900		1,461
*IntercontinentalExchange, Inc.	13,360		1,441
Investors Financial Services Corporation	45,670		1,949
*Signature Bank New York	46,470		1,440

			6,291

Materials—2.3%
Airgas, Inc.	52,110		2,112

Total Common Stock—96.4% (cost $77,831)			89,468


*Investment in Affiliate*
William Blair Ready Reserves	1,310,875		1,311

Total Investment in Affiliate—1.4% (cost $1,311)			1,311


*Short-Term Investment*
Prudential Funding Demand Note, VRN 5.180%, due 1/2/07	$786,000		786

Total Short-Term Investment—0.9% (cost $786)			786


*Repurchase Agreement*
Investors Bank & Trust Company, 5.01% dated 12/29/2006, due 1/2/2007, repurchase price $548, collateralized by SBA Pool #503904	547,617		548

Total Repurchase Agreement—0.6% (cost $548)			548

Total Investments—99.3% (cost $80,476)			92,113
Cash and other assets, less liabilities—0.7%			653

Net assets—100%		$	92,766

See accompanying Notes to Financial Statements.

December 31, 2006

William Blair Funds 29

INTERNATIONAL MARKETS OVERVIEW

There was a tale of three international equity markets in 2006. The first four months of 2006 prolonged the momentum of 2005 as global growth remained strong, energy and commodities prices rose, and investors continued to search for returns in areas such as emerging markets equity and small cap stocks. However, markets retreated during the second quarter as concerns about potential global inflationary pressures, monetary policy tightening (and uncertainty as to the duration and size of further tightening moves and their impact on the US consumer in particular), and higher valuations in a number of the recent strong markets such as emerging markets and small cap came to the forefront of investor psychology. The correction in equity markets during May and most of June was broad based and non-discriminatory, although the stocks that were the prime beneficiaries of the strong global growth trends over the past several years did suffer more than their more defensive-oriented counterparts as investors withdrew liquidity and invested in “safe havens.” These concerns abated during July, when it became clear that while global growth was slowing, an imminent global recession was not occurring.

As a result, international equity markets rebounded beginning in July, and ended the year up 27.16%, as reflected by the MSCI All-Country World ex-U.S. Index. Within international markets, emerging markets were up 32.59%, as measured by the MSCI Emerging Markets Index, despite their mid-year decline, outpacing the MSCI EAFE Index, which rose 26.86%. Developed small cap stocks underperformed their larger cap counterparts during the year, rising 19.82% as measured by the MSCI World Ex-U.S. Small Cap Index, due largely to negative Japanese small cap stock performance.

2007 Outlook

The consensus view of growth, inflation, interest rates and profits has been a moving target all year long. Overheating concerns gave way to slowdown fears in the first half, only for markets to settle down to a more moderate and balanced view of global economic prospects in the wake of the Federal Reserve pause in August.

Today, the US still looks likely to slow (although the tone of fear about the housing market may be softening) and China continues to restrain investment growth (although tightening remains selective in its application and limited in its effectiveness); at the same time, Europe and Japan give increasing evidence of being on track toward solid expansion, and the runaway commodity boom seems to have slowed before doing irreparable damage to the global cycle.

In the context of a view that an ‘intracyclical’ deceleration in growth will prove to be basically benign (i.e., no significant deterioration in employment conditions or credit quality), a number of factors emerge (or re-emerge) that suggest a relatively strong environment for equity returns:

•

Globalization

For multinational corporations—and that really includes any company with a cross-border supply chain or customer base—globalization has meant two things: a wider range of opportunities for profit enhancement, and increased exposure to high-growth end markets. Both factors continue to have a positive influence on long term earnings potential.

•

Corporate Governance and Performance

The vast majority of listed companies, particularly those with some scale and diversity of operations, see themselves as having an opportunity to improve profit margins, capital productivity, or both. Increasingly, firms benchmark profitability against the best in their peer group, and boards expect progress toward that goal. Competitive improvements in Information Technology (IT), logistics, marketing methods, sourcing, and production can all combine to raise the bar for growth for the market as a whole.

30 Annual Report

December 31, 2006

•

Cash Flow

In the wake of the 2000-2001 slowdown, corporations have raised the burden of proof on investment spending plans. IT, equipment, and facilities spending all face greater scrutiny in an effort to improve the productivity of cash flow. In effect, there is increased competition between capital spending, acquisitions, and share buybacks as alternatives to enhance returns, and this competition provides an opportunity for optimizing potential earnings growth.

•

Valuation

While multiples have contracted around the world, the global median return on equity (ROE) has risen by three percentage points, from 12.8% to 15.8%, in the last two years. Accordingly, free cash flow yields have risen (on the same basis) from 1.1% to 2.7% over the last five years. Even allowing for some cyclical easing of profitability in a slowdown, the combination of enhanced growth opportunities and greater free cash flow yields argues for sustainable improvement in expected returns from equities.

Comment on Style Performance

Since the end of the tech bubble market of the 1990s, there has been a pronounced and consistent relative style performance advantage of value over growth. As the excesses of the previous cycle unwound, there was a natural tendency for the defensive characteristics of value stocks to dominate, but even after the markets turned upward in late 2002 and 2003, the value performance edge persisted.

While there are elements of cyclicality in risk preference and relative valuation between growth and value stocks, there has clearly been more to the rotation than investor sentiment. Changes in the pattern of growth and returns across sectors have been of primary importance in establishing market leadership and redefining growth and value.

Four key sectors have seen significant shifts in their prospects for growth, sustainable returns and risk. Emerging as global growth sectors are Financials and Industrials and Services, while the ‘classic’ growth sectors of IT and Health Care show increasing signs of maturation. These relative shifts reflect globalization and a shift toward developing economies as the engine of economic growth worldwide. This evolution is more than simply cyclical; it will have lasting implications for investment strategy for growth and value investors alike, and has already changed our own portfolio structure and outlook.

December 31, 2006

William Blair Funds 31

LOGO

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

See page 30 for the International Markets Overview.

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

The International Growth Fund posted a 23.06% gain (Class N Shares) for the 12 months ended December 31, 2006. By comparison, the Fund’s benchmark, the Morgan Stanley Capital International (MSCI) All Country World (ACWI) ex-US Index, rose 27.16%.

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

Despite strong absolute performance, the Fund underperformed the Index during 2006, due to second quarter underperformance, coupled with the Fund’s quality growth focus. Value outperformed growth by over 6% during the year, with sectors such as Materials and Utilities, areas where the Fund was underweighted, significantly outpacing the more traditional growth areas of Consumer, Health Care and IT, areas where the Fund was overweighted relative to the Index. The Fund’s results during 2006, returning 23.06% (N Shares) were due largely to strong stock selection in Consumer Staples, Energy, Financials, Information Technology (IT), and Telecommunication Services. Consumer Staples stock selection was enhanced by strong performance in Emerging Asia and Latin America, while Energy stock selection was positive across most regions, due to the Fund’s focus on alternative energy companies, energy services, and exploration and production companies with strong production growth. Financials stock selection was enhanced from developed Asia, Europe ex-UK and emerging Asia holdings, while emerging Asia and Latin American IT stocks bolstered that sector’s performance. The Telecommunication Services holdings, which significantly outperformed their counterparts within the Index, as they were largely focused in the emerging markets, where subscriber growth continues to accelerate.

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

As of year end, the Fund was focused on Consumer, Industrials, and IT stocks, at the expense of Materials, Telecommunication Services, and Energy. Financials, which maintained the highest absolute weighting in the Fund, were underweighted relative to the Index. From a regional perspective, the Fund was underweighted in most developed markets, particularly Japan, and overweighted in Latin America and emerging Asia.

32 Annual Report

December 31, 2006

International Growth Fund

Performance Highlights (unaudited)

LOGO

Average Annual Total Return at 12/31/2006


	1 Year		3 Year		5 Year		10 Year		Since Inception
International Growth Fund Class N	23.06	%	21.05	%	16.43	%	14.94	%	—	%
International Growth Fund Class I	23.35		21.37		16.72		—		13.23	(a)
MSCI All Country World Ex-US Index	27.16		21.81		16.87		8.59		13.30	(a)
Lipper International Index	25.89		19.98		15.14		8.77		—

(a)

For the period from October 1, 1999 to December 31, 2006.

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 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.

Sector Diversification (unaudited)

LOGO

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

December 31, 2006

William Blair Funds 33

International Growth Fund

Portfolio of Investments, December 31, 2006 (all dollar amounts in thousands)


Issuer	Shares	Value

*Common Stocks—Europe—35.5%*
Austria—1.3%
Erste Bank (Commercial banks)	458,592	$	35,113
Raiffeisen International Bank (Commercial banks)	309,154		47,009

			82,122

Belgium—0.4%
InBev NV (Beverages)	385,200		25,346

France—11.4%
April Group S.A. (Insurance)	203,139		9,777
BNP Paribas (Commercial banks)	668,300		72,704
Capgemini S.A. (IT services)	759,300		47,506
Essilor International (Health care equipment & supplies)	462,400		49,643
Eurazeo (Diversified financial services)	239,240		34,149
Group Danone (Food products)	601,700		90,991
Iliad S.A. (Internet software & services)	268,950		23,245
Klepierre (Real estate investment trusts)	138,500		26,110
L’Oreal S.A. (Personal products)	1,205,800		120,534
LVMH Moet Hennessey Louis Vuitton SA (Textiles, apparel & luxury goods)	718,100		75,541
*Orpea (Health care providers & services)	187,312		17,719
*S.O.I.T.E.C. (Semiconductors & semiconductor equipment)	773,400		27,338
Veolia Environnement (Multi-utilities)	1,166,700		88,977
Vinci S.A. (Construction & engineering)	254,900		32,488

			716,722

Germany—3.3%
Bijou Brigitte (Textiles, apparel & luxury goods)	66,750		13,136
CTS Eventim AG (Media)	198,703		7,648
E.ON AG (Electrical utilities)	482,100		65,105
*Patrizia Immobilien AG (Real estate management & development)	23,100		688
*Q-Cells AG (Electrical equipment)	494,420		22,136
*Qiagen NV (Life science tools & services)	1,227,600		18,849
SAP AG (Software)	1,202,400		63,767
Solarworld AG (Electrical equipment)	218,900		13,642
*Wire Card AG (Commercial services & supplies)	138,200		1,428

			206,399

Greece—1.7%
Coca-Cola Hellenic Bottling S.A. (Beverages)	845,571		32,991
EFG Eurobank (Commercial banks)	1,004,200		36,282
National Bank of Greece (Commercial banks)	797,252		36,568

			105,841

Ireland—2.7%
Anglo Irish Bank plc (Commercial banks)	3,014,700		62,425
IAWS Group plc (Food products)	754,300		19,322
Kingspan Group plc (Building products)	1,517,100		40,225
*Ryanair Holdings plc—ADR (Airlines)	416,900		33,977
United Drug plc (Health care providers & services)	2,625,500		13,795

			169,744


Issuer	Shares	Value

*Common Stocks—Europe—35.5%—(continued)*
Italy—3.6%
Azimut Holding SpA (Capital markets)	1,481,600	$	19,785
Banca Italease (Diversified financial services)	430,000		24,960
Credito Emiliano SpA (Commercial banks)	1,379,400		19,487
Luxottica Group SpA (Textiles, apparel & luxury goods)	1,834,700		56,239
Saipem SpA (Energy equipment & services)	3,255,600		84,471
Tod’s SpA (Textiles, apparel & luxury goods)	246,700		19,840

			224,782

Luxembourg—0.3%
*Gagfah S.A. (Real estate management & development)	555,600		17,624

Netherlands—1.1%
Royal Numico N.V. (Food products)	832,200		44,689
*Tomtom NV (Software)	541,400		23,311

			68,000

Norway—0.5%
*Acergy S.A. (Energy equipment & services)	1,482,100		28,275

Spain—1.8%
*Grifols S.A. (Biotechnology)	2,046,412		27,242
Industria De Textile (Specialty retail)	1,384,300		74,466
*Tecnicas Reunidas S.A. (Construction & engineering)	327,800		12,577

			114,285

Sweden—1.5%
Ericsson (LM) (Communications equipment)	11,325,000		45,540
*Modern Times Group (Media)	387,300		25,375
Nobia AB (Specialty retail)	594,650		22,820

			93,735

Switzerland—5.9%
ABB Ltd. (Electrical equipment)	7,514,900		134,573
*EFG International (Capital markets)	789,700		29,736
Kuehne & Nagel International AG (Marine)	652,440		47,398
Nobel Biocare Holdings AG (Health care equipment & supplies)	109,950		32,432
*Partners Group Global Opporunites, Ltd. (Capital markets)	217,278		26,219
Roche Holdings AG (Pharmaceuticals)	420,100		75,162
SGS S.A. (Commercial services & supplies)	18,710		20,786

			366,306


*United Kingdom—16.2%*
Amlin plc (Insurance)	766,000		4,865
BG Group plc (Oil, gas & consumable fuels)	6,098,200		82,923
*Cairn Energy plc (Oil, gas & consumable fuels)	817,900		28,732
Capita Group plc (Commercial services & supplies)	5,501,500		65,231

See accompanying Notes to Financial Statements.

34 Annual Report

December 31, 2006

International Growth Fund

Portfolio of Investments, December 31, 2006 (all dollar amounts in thousands)


Issuer	Shares	Value

*Common Stocks—United Kingdom—16.2%—(continued)*
Carphone Warehouse Group plc (Specialty retail)	4,517,180	$	27,682
Detica Group plc (IT services)	1,274,400		9,144
HBOS plc (Commercial banks)	5,728,800		126,645
Homeserve plc (Commercial services & supplies)	442,300		16,340
Man Group plc (Capital markets)	6,837,500		69,792
Michael Page International (Commercial services & supplies)	4,473,200		39,508
Northern Rock plc (Thrifts & mortgage finance)	2,826,900		64,997
Reckitt Benckiser plc (Household products)	2,377,100		108,437
*Rolls-Royce Group plc (Aerospace & defense)	11,858,249		103,628
Rotork plc (Electronic equipment & instruments)	1,301,364		21,260
RPS Group plc (Commercial services & supplies)	2,545,600		13,435
Serco Group (Commercial services & supplies)	4,877,209		36,383
Tesco plc (Food & staples retailing)	15,690,400		123,993
Tullow Oil plc (Oil, gas & consumable fuels)	2,909,190		22,613
Ultra Electronic Holdings plc (Aerospace & defense)	986,800		20,929
Victrex plc (Chemicals)	611,700		9,608
VT Group plc (Aerospace & defense)	2,016,000		18,721

			1,014,866


*Japan—14.0%*
Aeon Mall Co., Ltd. (Real estate management & development)	501,900		28,341
Canon, Inc. (Office electronics)	1,677,500		94,443
Chiyoda Corp. (Construction & engineering)	1,138,600		22,258
*DeNA Co., Ltd. (Internet & catalog retail)	5,283		17,309
Denso Corporation (Auto components)	2,975,000		117,961
En-Japan Inc. (Commercial services & supplies)	433		2,074
Honeys Company, Ltd. (Specialty retail)	370,400		13,759
Hoya Corporation (Electronic equipment & instruments)	740,500		28,862
Joint Corporation (Real estate management & development)	634,400		24,395
*Jupiter Telecommunications Co., Ltd. (Media)	21,743		17,526
*K.K. DaVinci Advisors (Real estate management & development)	18,402		18,238
Kenedix, Inc. (Real estate management & development)	2,981		13,448
Keyence Corporation (Electronic equipment & instruments)	279,200		68,917
Komatsu Ltd. (Machinery)	2,206,800		44,665
MISUMI Group, Inc. (Trading companies & distributors)	838,200		16,006
Nakanishi Inc. (Health care equipment & supplies)	140,300		17,214


Issuer	Shares	Value

*Common Stocks—Japan—14.0%—(continued)*
Nitori Company Ltd. (Specialty retail)	409,920	$	17,741
Orix Corporation (Consumer finance)	401,500		116,432
Park 24 Co., Ltd. (Commercial services & supplies)	1,282,900		16,402
Sharp Corp. (Household durables)	2,242,700		38,561
Suruga Bank (Commercial banks)	3,945,000		48,857
Yamada Denki Company (Specialty retail)	312,180		26,498
Yamaha Motor Company (Automobiles)	2,177,900		68,460

			878,367


*Emerging Asia—12.2%*
China—3.1%
China Life Insurance Co. (Insurance)	3,955,000		13,500
China Mengniu Dairy Co. (Food products)	7,979,000		20,908
China Vanke Company Ltd. (Real estate management & development)	13,087,900		25,075
*Focus Media Holding Ltd.—ADR (Media)	326,900		21,703
*Foxconn International (Communications equipment)	3,820,000		12,459
Fu Ji Food & Catering (Hotels, restaurants & leisure)	6,424,000		16,567
Hopson Development Holdings Ltd. (Real estate management & development)	5,655,000		15,985
Lee and Man Paper Manufacturing Ltd. (Containers & packaging)	5,454,000		13,370
Li Ning Co. Ltd. (Leisure equipment & products)	9,334,000		14,924
Parkson Retail Group Ltd. (Multiline retail)	3,268,000		16,163
Ports Design Limited (Textiles, apparel & luxury goods)	6,067,000		13,254
Wumart Stores, Inc., Class “H” (Food & staples retailing)**	13,480,000		8,665

			192,573

India —3.7%
Bharat Heavy Electricals Ltd. (Electrical equipment)	637,700		33,032
*Bharti Airtel Ltd. (Wireless telecommunication services)	1,788,200		25,457
Dabur India Ltd. (Personal products)	5,358,300		17,746
HDFC Bank (Commercial banks)	630,300		15,124
Hindustan Lever Ltd. (Household durables)	2,691,000		13,159
Housing Development Finance Corp. (Thrifts & mortgage finance)	673,600		24,693
Infosys Technologies, Ltd. (IT services)	1,178,148		59,539
Maruti Udyog Ltd. (Automobiles)	931,400		19,511
Suzlon Energy Ltd. (Electrical equipment)	689,100		20,297

			228,558

Indonesia—1.1%
PT Bank Rakyat Indonesia (Commercial banks)	36,379,500		20,868
*PT Kalbe Farma Tbk (Pharmaceuticals)	22,828,700		3,030
PT Telekomunikasi Tbk (Diversified telecommunication services)	42,346,500		47,728

			71,626

See accompanying Notes to Financial Statements.

December 31, 2006

William Blair Funds 35

International Growth Fund

Portfolio of Investments, December 31, 2006 (all dollar amounts in thousands)


Issuer	Shares	Value

*Common Stocks—Emerging Asia—12.2%—(continued)*
Malaysia—0.6%
Bumiputra Commerce Holdings Bhd (Commercial banks)	13,921,100	$	30,500
Transmile Group Bhd (Air freight & logistics)	2,555,400		10,306

			40,806

South Korea—1.8%
*NHN Corp. (Internet software & services)	311,820		37,928
Samsung Electronics Co. (Semiconductors & semiconductor equipment)	77,180		50,631
*Shinsegae Co. Ltd. (Food & staples retailing)	43,060		26,821

			115,380

Taiwan—1.9%
High Tech Computer Corporation (Computers & peripherals)	679,800		13,408
*Himax Technologies, Inc.—ADR (Semiconductors & equipment)	927,400		4,424
Hon Hai Precision Industry (Electronic equipment & instruments)	8,909,780		63,394
Largan Precision Co. Ltd. (Leisure equipment & products)	807,450		15,531
Mediatek Inc. (Semiconductors & semiconductor equipment)	2,376,450		24,473

			121,230


*Asia—8.1%*
Australia—3.2%
Allco Finance Group, Limited (Capital markets)	2,763,604		28,049
Macquarie Bank, Ltd. (Capital markets)	1,668,700		103,719
Seek Ltd. (Commercial services & supplies)	4,228,163		19,588
United Group Ltd. (Construction & engineering)	1,958,500		21,542
WorleyParsons, Ltd. (Energy equipment & services)	1,528,400		25,667

			198,565

Hong Kong—2.1%
Esprit Holdings Ltd. (Specialty retail)	5,969,500		66,491
Li & Fung Ltd. (Distributors)	21,765,200		67,577

			134,068

Singapore—2.8%
Capital and, Ltd. (Real estate management & development)	26,246,000		105,617
Goodpack Ltd. (Air freight & logistics)	7,256,000		7,280
Osim International Ltd. (Specialty retail)	14,315,240		13,041
Raffles Education Corp. Ltd. (Diversified consumer services)	11,779,000		13,584
Singapore Exchange, Ltd. (Diversified financial services)	9,054,000		33,427

			172,949


Issuer	Shares	Value

*Common Stocks—Emerging Latin America—5.7%*
Brazil—2.0%
Companhia de Concessoes Rodoviarias (Transportation infrastructure)	1,900,700	$	25,666
Cyrela Brazil Realty S.A. (Household durables)	1,477,200		14,098
Gol Linhas Aereas Inteligentes S.P—ADR (Airlines)	526,200		15,086
Localiza Rent a Car S.A. (Road & rail)	503,300		15,135
Lojas Renner S.A. (Multiline retail)	1,123,500		16,144
Natura Cosmeticos S.A. (Personal products)	1,235,400		17,434
Submarino S.A. (Internet & catalog retail)	636,400		20,848

			124,411

Chile—0.6%
*Cencosud S.A.—ADR 144A (Specialty retail)	721,730		33,866
S.A.C.I. Falabella (Multiline retail)	457,196		1,606

			35,472

Columbia—0.3%
Bancolombia S.A.—ADR (Commercial banks)	664,200		20,690

Mexico—2.5%
America Movil S.A. (Wireless telecommunication services)	20,172,600		45,488
*Desarrolladora Homex S.A.—ADR (Household durables)	327,400		19,340
Grupo Aeropuertario Del-ADR (Transportation infrastructure)	262,800		10,299
*Urbi Desarrollos Urbanos S.A. (Household durables)	8,358,600		30,175
Walmart de Mexico (Food & staples retailing)	12,131,200		53,374

			158,676

Panama—0.3%
Copa Holdings S.A., Class “A” (Airlines)†	369,900		17,223


*Canada—3.0%*
*Gildan Activewear, Inc. (Textiles, apparel & luxury goods)	401,600		18,765
Manulife Financial Corp. (Insurance)	1,353,100		45,658
Ritchie Brothers Auctioneers, Inc. (Commercial services & supplies)†	214,900		11,506
Shoppers Drug Mart Corp. (Food & staples retailing)	1,363,800		58,580
Suncor Energy, Inc. (Oil, gas & consumable fuels)	658,500		51,832

			186,341


*Emerging Europe, Mid-East, Africa—2.4%*
Czech Republic—0.2%
*Central European Media Enterprises Ltd. Class “A” (Media)†	177,000		12,390

See accompanying Notes to Financial Statements.

36 Annual Report

December 31, 2006

International Growth Fund

Portfolio of Investments, December 31, 2006 (all dollar amounts in thousands)


Issuer	Shares or Principal Amount		Value

*Common Stocks—Emerging Europe, Mid-East, Africa—2.4% —(continued)*
Kazakhstan—0.5%
*Kazkommertsbank—GDR 144A (Commercial banks)		1,452,951	$	33,563

Russia—0.7%
*CTC Media, Inc. (Media)†		775,352		18,616
Sberbank—CLS (Commercial banks)†		8,050		27,773

				46,389

South Africa—1.0%
Naspers Ltd. (Media)		749,990		17,778
Sasol Ltd. (Oil, gas, and consumable fuels)		588,800		21,680
Truworths International Ltd. (Specialty retail)		4,763,400		21,742

				61,200

Total Common Stock—97.1% (cost $4,475,419)				6,084,524


*Preferred Stock*
Brazil—1.1%
Banco Itau Holding (Commercial banks)		799,300		28,957
Petroleo Brasileiro S.A. (Oil, gas & consumable fuels)		1,740,700		40,574

				69,531

Total Preferred Stock—1.1% (cost $42,788)				69,531


*Investment in Affiliate*
William Blair Ready Reserves Fund		637,242		637

Total Investment in Affiliate—0.0% (cost $637)				637


*Short-Term Investments*
American Express Demand Note, VRN 5.176% due 1/2/07	$	13,186,000		13,186
Prudential Funding Demand Note, VRN 5.180% due 1/2/07		13,186,000		13,186

Total Short-Term Investments—0.4% (cost $26,372)				26,372


*Repurchase Agreement*
Investors Bank & Trust Company, 5.01% dated 12/29/2006, due 1/2/2007, repurchase price $28,743, collateralized by FN, Pool# 735342		28,726,865		28,727

Total Repurchase Agreement—0.5% (cost $28,727)				28,727

Total Investments—99.1% (cost $4,573,943)				6,209,791
Cash and other assets, less liabilities—0.9%				57,335

Net assets—100.0%			$	6,267,126

* Non-income producing securities

ADR = American Depository Receipt

GDR = Global Depository Receipt

VRN = Variable Rate Note

† = U.S. listed foreign security

** Fair valued pursuant to Valuation Procedures adopted by the Board of Trustees. This holding represents 0.14% of the Fund’s net assets at December 31, 2006. This security is also deemed illiquid pursuant to Liquidity Procedures adopted by the Board of Trustees.

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, 2006 the Fund’s Portfolio of Investments includes the following industry categories:


Financials		25.8%
Consumer Discretionary		18.6%
Industrials and Services		16.0%
Consumer Staples		12.7%
Information Technology		11.7%
Energy		6.3%
Health Care		4.1%
Utilities		2.5%
Telecommunication Services		1.9%
Materials		0.4%

		100.0%

At December 31, 2006 the Fund’s Portfolio of Investments includes the following currency categories:


Euro		27.6%
British Pound Sterling		16.5%
Japanese Yen		14.3%
Swiss Franc		6.0%
Hong Kong Dollar		5.0%
United States Dollar		4.6%
Indian Rupee		3.7%
Australian Dollar		3.2%
Brazilian Real		2.9%
Canadian Dollar		2.8%
Singapore Dollar		2.8%
Mexico Nuevo Peso		2.1%
Taiwan Dollar		1.9%
South Korean Won		1.9%
Swedish Krona		1.5%
Indonesian Rupiah		1.2%
All other currencies		2.0%

		100.0%

See accompanying Notes to Financial Statements.

December 31, 2006

William Blair Funds 37

LOGO

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

See page 30 for the International Markets Overview.

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

The International Equity Fund posted a 19.96% gain (Class N Shares) for the 12 months ended December 31, 2006. By comparison, the Fund’s benchmark, the Morgan Stanley Capital International (MSCI) All Country World (ACWI) ex-US Index, rose 27.16%.

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

Despite strong absolute performance, the Fund underperformed the Index during 2006. This underperformance was due largely to second quarter results. The Fund’s quality growth focus hampered relative performance during the quarter, due both to value domination during 2006, as value outperformed growth by over 6% during the year, coupled with the negative “quality” effect as quality companies underperformed by even a wider margin during the year. The portfolio’s significant underweighting of Materials and Utilities, two of the strongest performing sectors during the year, in favor of Consumer, IT and Health Care, sectors that underperformed, also hampered results. The Fund’s results during 2006, returning 19.96%, were due largely to strong stock selection in Consumer Staples, Energy, Financials, Information Technology (IT), and Telecommunication Services. Specifically, the Fund’s overweighting and stock selection within Latin American Consumer Staples stocks added value, as did the Fund’s overweighting in UK Consumer Staples companies. Energy stock selection was bolstered by the Fund’s Europe performance, while Financials stock selection was strong across most regions, coupled with regional positioning. Within IT, the Fund’s weighting in Europe ex-UK companies added value, coupled with the focus on Taiwanese consumer electronics and IT outsourcing companies. During the year, the Fund’s Telecommunications Services allocation was largely focused on emerging markets companies that have benefited from accelerating subscriber growth in Latin America and Asia.

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

As of year end, the Fund was focused on Consumer, Industrials, and Information Technology (IT) stocks, at the expense of Materials, Telecommunication Services, and Energy. Financials, which maintained the highest absolute weighting in the Fund, was underweighted relative to the Index. From a regional perspective, the Fund was underweighted in most developed markets, particularly Japan, and overweighted in Latin America.

38 Annual Report

December 31, 2006

International Equity Fund

Performance Highlights (unaudited)

LOGO

Average Annual Total Return at 12/31/2006


	1 Year		Since Inception(a)
International Equity Fund Class N	19.96	%	18.06	%
International Equity Fund Class I	20.22		18.43
MSCI All Country World Ex-US	27.16		25.80
Lipper International Index	25.89		—

(a)

For the period from May 24, 2004 to December 31, 2006.

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. From time to time the investment advisor may waive fees or reimburse expenses for the Fund. Without these waivers, performance would be lower. 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 Lipper International Index is a composite of international growth mutual funds.

Sector Diversification (unaudited)

LOGO

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

December 31, 2006

William Blair Funds 39

International Equity Fund

Portfolio of Investments, December 31, 2006 (all dollar amounts in thousands)


Issuer	Shares	Value

*Common Stocks—Europe—39.4%*
Austria—1.7%
Erste Bank (Commercial banks)	36,232	$	2,774
Raiffeisen International Bank (Commercial banks)	14,600		2,220

			4,994

Belguim—0.4%
InBev N.V. (Beverages)	18,500		1,217

France—14.7%
BNP Paribas (Commercial banks)	48,370		5,262
Capgemini S.A. (IT services)	37,300		2,334
Essilor International (Health care equipment & supplies)	27,500		2,952
Eurazeo (Diversified financial services)	17,900		2,555
Groupe Danone (Food products)	49,800		7,531
Iliad S.A. (Internet software & services)	11,500		994
L’Oreal S.A. (Personal products)	81,200		8,117
LVMH Moet Hennessey Louis Vuitton SA (Textiles, apparel & luxury goods)	48,400		5,091
Veolia Environnement (Multi-utilities)	69,000		5,262
Vinci S.A. (Construction & engineering)	27,600		3,518

			43,616

Germany—2.7%
Bijou Brigitte (Textiles, apparel & luxury goods)	2,380		469
E.ON AG (Electric utilities)	37,900		5,118
SAP AG (Software)	45,500		2,413

			8,000

Greece—1.0%
National Bank of Greece (Commercial banks)	64,160		2,943

Ireland—1.5%
Anglo Irish Bank plc (Commercial banks)	165,300		3,423
IAWS Group plc (Food products)	37,600		963

			4,386

Italy—3.3%
Luxottica Group SpA (Textiles, apparel & luxury goods)	163,200		5,003
Saipem SpA (Energy equipment & services)	189,100		4,906

			9,909

Netherlands—1.3%
Royal Numico N.V. (Food products)	40,400		2,169
*Tomtom NV (Software)	39,500		1,701

			3,870

Norway—0.4%
*Acergy S.A. (Energy equipment & services)	70,700		1,349

Spain—1.9%
Industria De Textile (Specialty retail)	103,300		5,557

Sweden—1.5%
Ericsson LM (Communications equipment)	850,000		3,418
*Modern Times Group (Media)	15,600		1,022

			4,440


Issuer	Shares	Value

*Common Stocks—Europe—39.4%—(continued)*
Switzerland—9.0%
ABB Ltd. (Electrical equipment)	505,500	$	9,052
*EFG International (Capital markets)	44,600		1,680
Kuehne & Nagel International AG (Marine)	31,300		2,274
Nestle S.A. (Food products)	14,110		5,005
Nobel Biocare Holding AG (Health care equipment & supplies)	5,290		1,560
Roche Holdings AG (Pharmaceuticals)	28,350		5,072
SGS S.A. (Commercial services & supplies)	2,030		2,255

			26,898

*United Kingdom—18.1%*
BG Group plc (Oil, gas & consumable fuels)	498,600		6,780
*Cairn Energy plc (Oil, gas & consumable fuels)	48,900		1,718
Capita Group plc (Commercial services & supplies)	265,100		3,143
Carphone Warehouse Group plc (Specialty retail)	217,300		1,332
HBOS plc (Commercial banks)	359,700		7,952
Man Group plc (Capital markets)	330,700		3,375
Northern Rock plc (Thrift & mortgage finance)	161,600		3,716
Reckitt Benckiser plc (Household products)	151,700		6,920
*Rolls-Royce Group plc (Aerospace & defense)	660,900		5,776
Rotork plc (Electronic equipment & instruments)	62,400		1,019
Standard Chartered plc (Commercial banks)	125,400		3,653
Tesco plc (Food & staples retailing)	992,900		7,846
Tullow Oil plc (Oil, gas & consumable fuels)	102,700		798

			54,028

*Japan—15.7%*
Aeon Mall Co., Ltd. (Real Estate management & development)	35,900		2,027
Canon, Inc. (Office electronics)	107,400		6,047
Denso Corporation (Auto components)	167,300		6,634
FANUC Ltd. (Machinery)	30,800		3,023
Honeys Company, Ltd. (Specialty retail)	18,200		676
Hoya Corporation (Electronic equipment & instruments)	67,400		2,627
*Jupiter Telecommunications Co., Ltd. (Media)	1,898		1,530
*K.K. DaVinci Advisors (Real Estate management & development)	761		754
Keyence Corporation (Electronic equipment & instruments)	13,480		3,327
Komatsu Ltd. (Machinery)	144,100		2,916
Orix Corporation (Consumer finance)	27,800		8,062
Sharp Corporation (Household durables)	153,000		2,631
Suruga Bank Ltd. (Commercial banks)	153,000		1,895
Yamada Denki Co., Ltd. (Specialty retail)	14,800		1,256
Yamaha Motor. Co., Ltd. (Automobiles)	105,900		3,329

			46,734


*Emerging Asia—7.7%*
China—1.0%
*Focus Media Holding Ltd.—ADR (Media)	20,300		1,348
*Foxconn International (Communications equipment)	275,000		897
Hopson Development Holding Ltd. (Real estate management & development)	252,000		712

			2,957

See accompanying Notes to Financial Statements.

40 Annual Report

December 31, 2006

International Equity Fund

Portfolio of Investments, December 31, 2006 (all dollar amounts in thousands)


Issuer	Shares	Value

*Common Stocks—Emerging Asia—7.7%—(continued)*
India—3.8%
Bharat Heavy Electricals Ltd. (Electrical equipment)	41,300	$	2,139
*Bharti Airtel Limited (Wireless telecommunication services)	156,973		2,235
Infosys Technologies Ltd. (IT services)	69,100		3,492
Suzlon Energy Ltd. (Electrical equipment)	58,000		1,708
Vedanta Resources Plc (Metals & mining)	71,000		1,691

			11,265

Indonesia—0.9%
PT Bank Rakyat Indonesia (Commercial banks)	2,508,000		1,439
PT Telekomunikasi Indonesia TbK (Diversified telecommunication services)	1,117,500		1,259

			2,698

South Korea—0.7%
Samsung Electronics Co. (Semiconductors & semiconductor equipment)	3,370		2,211

Taiwan—1.3%
High Tech Computer Corp. (Computers & peripherals)	12,000		236
Hon Hai Precision Industry Corp. (Electronic equipment & instruments)	512,117		3,644

			3,880


*Asia—6.7%*
Australia—2.4%
Allco Finance Group Limited (Capital markets)	135,400		1,374
Macquarie Bank Ltd. (Capital markets)	90,600		5,632

			7,006

Hong Kong—2.4%
Esprit Holdings Ltd. (Specialty retail)	292,500		3,258
Li & Fung Ltd. (Distributors)	1,257,200		3,903

			7,161

Singapore—1.9%
Capitaland, Ltd. (Real estate management & development)	1,435,000		5,775


*Emerging Latin America—5.5%*
Brazil—1.4%
Companhia de Concessoes Rodoviarias (Transportation infrastructure)	95,400		1,288
Gol-Linhas Aereas Inteligentes S.A.—ADR (Airlines)	25,100		720
Localiza Rent a Car S.A. (Road & rail)	19,800		595
Natura Cosmeticos S.A. (Personal products)	105,400		1,487

			4,090

Chile—0.5%
*Cencosud S.A.—ADR 144A (Specialty retail)	33,300		1,563


Issuer	Shares or Principal Amount		Value

*Common Stocks—Emerging Latin America—5.5%—(continued)*
Columbia—0.4%
Bancolumbia S.A.—ADR (Commercial banks)		41,400	$	1,290

Mexico—3.2%
America Movil S.A. (Wireless telecommunications services)		1,906,900		4,300
Walmart de Mexico (Food & staples retailing)		1,185,900		5,218

				9,518


*Canada—3.3%*
Manulife Financial Corporation (Insurance)		131,100		4,424
Shoppers Drug Mart Corporation (Food & staples retailing)		64,000		2,749
Suncor Energy, Inc. (Oil, gas & consumable fuels)		32,600		2,566

				9,739


*Emerging Europe, Mid-East, Africa—0.9%*
Russia—0.2%
*CTC Media, Inc. (Media)†		24,200		581

South Africa—0.7%
Naspers Ltd. (Media)		40,200		953
Sasol ASA (Oil, gas & consumable fuels)		27,499		1,012

				1,965

Total Common Stock—97.3% (cost $235,777)				289,640


*Preferred Stocks*
Brazil—1.3%
Banco Itau S.A. (Commercial banks)		56,200		2,036
Petroleo Brasileiro S.A. (Oil, gas & consumable fuels)		86,000		2,005

				4,041

Total Preferred Stocks—1.3% (cost $2,664)				4,041


*Investment in Affiliate*
William Blair Ready Reserves Fund		5,158,100		5,158

Total Investment in Affiliate—1.7% (cost $5,158)				5,158


*Short-Term Investments*
American Express Demand Note, VRN, 5.176%, due 1/2/07	$	93,000		93
Prudential Funding Demand Note, VRN, 5.180%, due 1/2/07		1,072,000		1,072

Total Short-Term Investments—0.4% (cost $1,165)				1,165

See accompanying Notes to Financial Statements.

December 31, 2006

William Blair Funds 41

International Equity Fund

Portfolio of Investments, December 31, 2006 (all dollar amounts in thousands)


Issuer	Principal Amount		Value

*Repurchase Agreement*
Investors Bank & Trust Company, 5.01% dated 12/29/2006, due 1/2/2007, repurchase price $2,264, collateralized by SBA Pool #506103	$	2,262,336	$	2,262

Total Repurchase Agreement—0.8% (cost $2,262)				2,262

Total Investments—101.5% (cost $247,026)				302,266
Liabilities plus cash and other assets—(1.5%)				(4,550	)

Net assets—100.0%			$	297,716

*Non-income producing securities

ADR = American 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.

At December 31, 2006 the Fund’s Portfolio of Investments includes the following industry categories:


Financials		25.5%
Consumer Staples		16.8%
Consumer Discretionary		15.7%
Industrials and Services		13.1%
Information Technology		11.7%
Energy		7.2%
Utilities		3.5%
Health Care		3.3%
Telecommunication Services		2.6%
Materials		0.6%

		100.0%

At December 31, 2006 the Fund’s Portfolio of Investments includes the following currency categories:


Euro		28.8%
British Pound Sterling		19.0%
Japanese Yen		15.9%
Swiss Franc		9.2%
Canadian Dollar		3.3%
Indian Rupee		3.3%
Mexico Nuevo Peso		3.2%
Hong Kong Dollar		3.0%
Brazilian Real		2.5%
Australian Dollar		2.4%
Singapore Dollar		2.0%
United States Dollar		1.9%
Swedish Krona		1.5%
Taiwan Dollar		1.3%
Other Currencies		2.7%

		100.0%

See accompanying Notes to Financial Statements.

42 Annual Report

December 31, 2006

LOGO

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

See page 30 for the International Markets Overview.

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

The International Small Cap Growth Fund posted a 20.32% increase (Class N Shares) for the 12 months ended December 31, 2006. By comparison, the Fund’s benchmark, the Morgan Stanley Capital International (MSCI) World Small Cap ex-U.S. Index gained 19.82%.

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

The Fund had strong absolute and relative results during 2006, returning 20.32%, due largely to strong stock selection across most sectors. In particular, stock selection in Consumer, Health Care, Industrials and Telecommunication Services added value. Within Consumer Discretionary, the portfolio’s weightings in developed Asia and Europe enhanced results, as did Chinese stock performance, coupled with Latin America stock selection. Within Health Care, the Fund’s weighting and stock selection in Europe ex-UK stocks added value, while Industrials stock selection was enhanced by European (including UK) weightings and stock selection. Stock selection was also strong in Europe ex-UK, while the Fund’s emerging markets allocation, and lower Japanese weighting were also additive to results. Sector positioning detracted from performance during the period, as did stock selection in Energy, Financials and Materials.

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

As of year end, the Fund was focused on the Consumer, Financials, and Industrials and Services sectors. Information Technology (IT) and Energy were the most underweighted relative to the Index. Regionally, the Fund was underweighted in most developed markets, with the exception of Europe ex-UK, due to the emerging markets allocation.

December 31, 2006

William Blair Funds 43

International Small Cap Growth Fund

Performance Highlights (unaudited)

LOGO

Average Annual Total Return at 12/31/2006


	1 Year		Since Inception(a)
International Small Cap Growth Fund Class N	20.32	%	28.78	%
International Small Cap Growth Fund Class I	20.68		29.11
MSCI World Ex-US Small Cap Index	19.82		27.41

(a)

For the period from November 1, 2005 (Commencement of Operations) to December 31, 2006.

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. From time to time, the investment advisor may waive fees or reimburse expenses for the Fund. Without these waivers, performance would be lower. 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) 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) World Ex-US Small Cap Index is an unmanaged index that is designed to measure equity performance of small cap stocks in developed and emerging markets.

Sector Diversification (unaudited)

LOGO

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

44 Annual Report

December 31, 2006

International Small Cap Growth Fund

Portfolio of Investments, December 31, 2006 (all dollar amounts in thousands)


Issuer	Shares	Value

*Common Stocks—Europe—37.4%*
France—4.2%
April Group S.A. (Insurance)	46,882	$	2,256
*Orpea (Heath care providers & services)	28,863		2,730
*S.O.I.T.E.C. (Semiconductors & semiconductor equipment)	135,300		4,783

			9,769

Germany—8.6%
Bijou Brigitte (Apparel & luxury goods)	8,100		1,594
*Colonia Real Estate AG (Real estate management and development)	49,000		2,348
CTS Eventim AG (Media)	69,000		2,656
MTU Aero Engines Holding AG (Aerospace & defense)	108,814		5,068
*Patrizia Immobilien AG (Real estate management & development)	4,200		125
*Q-Cells AG (Electrical equipment)	55,880		2,502
*Qiagen NV (Lifesciences tools & services)	200,073		3,072
Solarworld AG (Electrical equipment)	38,031		2,370
*Wire Card AG (Commercial services & supplies)	25,600		264

			19,999

Ireland—6.1%
IAWS Group plc (Food products)	193,340		4,953
Kingspan Group plc (Building products)	181,090		4,802
*Norkom Group plc (Software)	229,400		614
United Drug plc (Heath care providers & services)	696,880		3,661

			14,030

Italy—6.8%
Azimut Holdings SpA (Capital markets)	346,717		4,630
Banca Italease (Diversified financial services)	115,800		6,722
Credito Emiliano SpA (Commercial banks)	159,372		2,251
Tod’s SpA (Textiles, apparel & luxury goods)	27,500		2,212

			15,815

Norway—1.8%
*Acergy S.A. (Energy equipment & services)	213,900		4,081

Spain—3.3%
*Grifols S.A. (Biotechnolgy)	402,403		5,357
*Tecnicas Reunidas S.A. (Construction & engineering)	61,700		2,367

			7,724

Sweden—4.3%
Hemtex AB (Specialty retail)	54,700		1,117
*Modern Times Group (Media)	71,200		4,665
Nobia AB (Specialty retail)	92,400		3,546
*Tradedoubler AB (Internet software & services)	22,500		670

			9,998

Switzerland—2.3%
*Partners Group Global Opportunities, Ltd. (Capital markets)	43,771		5,282


*Japan—19.5%*
Aeon Mall Co., Ltd. (Real estate management & development)	81,000		4,574
Chiyoda Corp. (Construction & engineering)	114,000		2,229
*DeNA Co., Ltd. (Internet & catalog retail)	719		2,356
En-Japan Inc. (Commercial services & supplies)	431		2,064


Issuer	Shares	Value

*Common Stocks—Japan—19.5%—(continued)*
Honeys Company, Ltd. (Specialty retail)	54,400	$	2,021
Joint Corporation (Real estate management & development)	112,620		4,330
*K.K. DaVinci Advisors (Real estate management & development)	4,343		4,304
Kenedix, Inc. (Real estate management & development)	935		4,218
MISUMI Group, Inc. (Trading companies & distributors)	195,700		3,737
Nakanishi Inc. (Health care equipment & supplies)	28,600		3,509
Nitori Company Ltd. (Specialty retail)	49,500		2,142
Park 24 Co., Ltd. (Commercial services & supplies)	240,500		3,075
Suruga Bank (Commercial banks)	533,000		6,601

			45,160

*United Kingdom—14.8%*
Accident Exchange Group plc (Commercial services & supplies)	301,274		2,276
Amlin plc (Insurance)	111,700		709
*Ceres Power Holdings plc (Electrical equipment)	395,200		1,694
Detica Group plc (IT services)	356,200		2,556
Homeserve plc (Commercial services & supplies)	94,280		3,483
Mears Group plc (Construction & engineering)	348,500		2,474
Michael Page International (Commercial services & supplies)	581,770		5,138
Rotork plc (Electronic equipement & instruments)	144,150		2,355
RPS Group plc (Commercial services & supplies)	460,400		2,430
Serco Group plc (Commercial services & supplies)	653,040		4,871
Ultra Electronic Holdings plc (Aerospace & defense)	102,750		2,179
Victrex plc (Chemicals)	134,450		2,112
VT Group plc (Aerospace & defense)	231,150		2,147

			34,424


*Emerging Asia—6.6%*
China—2.8%
Ctrip.com International, Ltd.—ADR (Hotels, restaurants & leisure)	20,020		1,251
*Focus Media Holdings—ADR (Media)	36,900		2,450
Li Ning Co. Ltd. (Leisure equipment & products)	848,873		1,357
Ports Design Limited (Textiles, apparel & luxury goods)	690,500		1,508

			6,566

India—2.3%
ABB Ltd. India (Electrical equipment)	13,100		1,101
Financial Technologies, Ltd. (Diversified financial services)	52,400		2,098
*Inox Leisure, Ltd. (Media)	333,579		1,085
Pantaloon Retail India, Ltd. (Multiline retail)	107,850		996

			5,280

South Korea—0.5%
Hana Tour Service Inc. (Hotels, restaurants & leisure)	15,000		1,138

See accompanying Notes to Financial Statements.

December 31, 2006

William Blair Funds 45

International Small Cap Growth Fund

Portfolio of Investments, December 31, 2006 (all dollar amounts in thousands)


Issuer	Shares	Value

*Common Stocks—Emerging Asia—6.6%—(continued)*
Taiwan—1.0%
Largan Precision Co., Ltd. (Leisure equipment & products)	119,300	$	2,295


*Asia—11.8%*
Australia—6.9%
Allco Finance Group, Limited (Capital markets)	452,265		4,590
Seek Limited (Commercial services & supplies)	815,980		3,780
United Group, Ltd. (Construction & engineering)	292,570		3,218
WorleyParsons, Ltd. (Energy equipment & supplies)	267,820		4,498

			16,086

Singapore—4.9%
Goodpack Ltd. (Air freight & logistics)	1,718,000		1,724
Osim International Ltd. (Specialty retail)	1,932,400		1,760
Petra Foods, Ltd. (Food products)	223,000		262
Raffles Education Corp. Ltd. (Diversifed consumer services)	2,560,000		2,952
Singapore Exchange, Ltd. (Diversified financial services)	1,245,000		4,596

			11,294


*Emerging Latin America—2.0%*
Brazil—1.0%
Cyrela Brazil Realty S.A. (Household durables)	110,100		1,051
Submarino S.A. (Internet & catalog retail)	35,900		1,176

			2,227

Mexico—1.0%
*Urbi Desarrollos Urbanos S.A. (Household durables)	672,100		2,426


*Emerging Europe, Mid-East, Africa—1.3%*
Czech Republic—0.5%
*Central European Media Enterprises Ltd., Class “A” (Media)†	16,000		1,120


Issuer	Shares or Principal Amount		Value

*Common Stocks—Emerging Europe, Mid-East, Africa—1.3%—(continued)*
Russia—0.8%
*CTC Media, Inc. (Media)†		79,738	$	1,915


*Canada—1.3%*
*Gildan Activewear, Inc. (Textiles, apparel & luxury goods)		41,900		1,958
Richie Bros. Auctioneers Incorporated† (Commercial services & supplies)		20,000		1,071

				3,029

Total Common Stock—94.7% (cost $189,217)				219,658


*Investment in Affiliate*
William Blair Ready Reserves Fund		5,228,467		5,228

Total Investment in Affiliate—2.3% (cost $5,228)

*Short-Term Investments*
American Express Demand Note, VRN 5.176%, due 1/2/07	$	1,074,000		1,074

Prudential Funding Demand Note, VRN 5.180%, due 1/2/07		5,397,000		5,397

Total Short-term Investments—2.8% (cost $6,471)				6,471


*Repurchase Agreement*
Investors Bank & Trust Company, 5.01% dated 12/29/2006, due 1/2/2007, repurchase price $339, collateralized by SBA Pool # 504705		338,909		339

Total Repurchase Agreement—0.1% (cost $339)				339

Total Investments—99.9% (cost $201,255)				231,696
Cash and other assets, less liabilities—0.1%				273

Net assets—100.0%			$	231,969

*Non-income producing securities

ADR = American Depository Receipt

GDR = Global Depository Receipt

VRN = Variable Rate Note

† = U.S. listed foreign security

At December 31, 2006 the Fund’s Portfolio of Investments includes the following industry categories:


Industrials and Services		30.1%
Financials		27.1%
Consumer Discretionary		22.2%
Health Care		8.3%
Information Technology		5.0%
Energy		3.9%
Consumer Staples		2.4%
Materials		1.0%

		100.0%

At December 31, 2006 the Fund’s Portfolio of Investments includes the following currency categories:


Euro		30.7%
Japanese Yen		20.5%
British Pound Sterling		15.7%
Australian Dollar		7.3%
Signapore Dollar		5.1%
Swedish Krona		4.6%
United States Dollar		3.6%
Swiss Franc		2.4%
Indian Rupee		2.4%
Norwegian Krone		1.9%
Hong Kong Dollar		1.3%
Mexican Neuvo Peso		1.1%
New Taiwan Dollar		1.0%
Brazilian Real		1.0%
All other currencies		1.4%

		100.0%

See accompanying Notes to Financial Statements.

46 Annual Report

December 31, 2006

LOGO

W. George Greig

LOGO

Todd M. McClone

LOGO

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

See page 30 for the International Markets Overview.

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

The Emerging Markets Growth Fund posted a 37.90% increase (Class N Shares) for the 12 months ended December 31, 2006. By comparison, the Fund’s benchmark, the Morgan Stanley Capital International (MSCI) Emerging Markets Index, gained 32.59%.

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

The Fund had strong absolute and relative results during 2006, returning 37.90%, due largely to strong stock selection across regions and most sectors. In particular, stock selection in Consumer, Energy, Financials, Industrials, and Materials added value. Within Consumer, the Fund’s Emerging Asia Discretionary holdings added the most value, coupled with the overweighting in this area. In addition, strong stock selection across regions within Consumer Staples was additive to results. Within Energy, the Fund’s Emerging Markets Europe, Mid-East and Africa (EMEA) holdings added value. The Fund’s Financials stocks were driven largely by China and India holdings. Industrial stock selection was augmented by Latin American airlines and toll road company performance, while Materials stock selection added value solely to Chinese exposure. From a regional perspective, the Fund’s overweighting in the strongest performing Latin America region at the expense of the weaker EMEA region added value. The Fund’s underweighting in Materials, Financials, Telecommunication Services and Utilities was a detractor from results, as these were the strongest sectors during the period.

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

As of year end, the Fund was focused on Consumer and Industrials, with a significant, albeit underweighted, position in Financials as well. Materials and Energy were the most underweighted. Regionally, the Fund was underweighted in EMEA and overweighted in Latin America.

December 31, 2006

William Blair Funds 47

Emerging Markets Growth Fund

Performance Highlights (unaudited)

LOGO

Average Annual Total Return at 12/31/2006


	1 Year		Since Inception(a)
Emerging Markets Growth Fund Class N	37.90	%	53.65	%
Emerging Markets Growth Fund Class I	38.07		53.92
MSCI Emerging Markets Index	32.59		40.84

(a)

For the period from June 6, 2005 (Commencement of Operations) to December 31, 2006.

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. From time to time, the investment advisor may waive fees or reimburse expenses for the Fund. Without these waivers, performance would be lower. 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) 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) Emerging Markets Index is an index that is designed to measure equity performance in the global emerging markets.

Sector Diversification (unaudited)

LOGO

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

48 Annual Report

December 31, 2006

Emerging Markets Growth Fund

Portfolio of Investments, December 31, 2006 (all dollar amounts in thousands)


Issuer	Shares	Value

*Common Stocks—Emerging Asia—50.5%*
China—15.9%
China Life Insurance Co. (Insurance)	2,586,100	$	8,827
China Mengniu Dairy Co. Ltd. (Food products)	3,077,000		8,063
China Mobile Ltd. (Wireless telecommunication services)	2,730,300		23,535
China Vanke Company Ltd. (Real estate management & development)	10,212,000		19,565
Ctrip.com International Ltd.—ADR (Hotels, restaurants, & leisure)	142,700		8,916
*Focus Media Holding Ltd.—ADR (Media)	126,400		8,392
*Foxconn International (Communications equipment)	2,433,000		7,935
Fu Ji Food and Catering Services Holdings Ltd (Hotels, restaurants, & leisure)	1,685,000		4,346
Hopson Development Holdings Ltd. (Real estate management)	2,970,000		8,395
Lee and Man Paper Manufacturing Ltd. (Containers & packaging)	5,160,000		12,650
Li Ning Co. Ltd (Leisure equipment & products)	2,902,000		4,640
Parkson Retail Group Ltd. (Multiline retail)	808,400		3,998
Ports Design Ltd. (Textiles, apparel & luxury goods)	2,099,500		4,586
Wumart Stores, Inc., Class “H” (Food & staples retailing)**	8,680,000		5,580

			129,428

India—17.7%
ABB Ltd. India (Electrical equipment)	92,100		7,739
Bharat Heavy Electricals, Ltd. (Electrical equipment)	401,400		20,792
*Bharti Airtel Ltd. (Wireless telecommunication services)	1,670,500		23,782
Dabur India Ltd. (Personal products)	1,124,400		3,724
Financial Technologies, Ltd. (Diversified financial services)	91,810		3,677
HDFC Bank (Commercial banks)	159,200		3,820
Hindustan Lever Ltd. (Household products)	1,390,300		6,799
Housing Development Finance Corp. (Thrifts & mortgage finance)	338,500		12,409
Infosys Technologies, Ltd. (IT services)	467,200		23,610
*Inox Leisure Ltd. (Media)	1,105,300		3,595
Maruti Udyog Ltd. (Automobiles)	566,700		11,871
Pantaloon Retail India Ltd. (Multiline retail)	444,700		4,106
Shopper’s Stop Ltd. (Multiline retail)	264,960		4,035
Suzlon Energy Ltd. (Electrical equipment)	244,800		7,210
Vedanta Resources Plc (Metals & mining)	271,100		6,457

			143,626

Indonesia—3.0%
PT Bank Rakyat Indonesia (Commercial banks)	13,614,000		7,809
*PT Kalbe Farma Tbk (Pharmaceuticals)	5,702,700		757
PT Telekomunikasi Tbk (Diversified telecommunication services)	13,731,500		15,477

			24,043

Malaysia—2.8%
Bumiputra Commerce Holding Bhd (Commercial banking)	7,473,900		16,375
Transmile Group Bhd (Air freight & logisitics)	1,645,700		6,637

			23,012


Issuer	Shares	Value

*Common Stocks—Emerging Asia—50.5%—(continued)*
South Korea—4.7%
Hana Tour Service (Hotels, restaurants, & leisure)	63,900	$	4,847
*NHN Corporation (Internet software & services)	54,600		6,641
Samsung Electronics Co. (Semiconductors & equipment)	29,460		19,326
*Shinsegae Co. Ltd. (Food & staples retailing)	12,170		7,581

			38,395

Taiwan—6.4%
High Tech Computer Corporation (Computers & peripherals)	170,800		3,369
Hon Hai Precision Industry (Electronic equipment & instruments)	3,227,528		22,964
*Himax Technologies, Inc.—ADR (Semiconductors & equipment)	816,500		3,895
Johnson Health Tech Company Ltd. (Leisure equipment & products)	59,000		432
Largan Precision Co. Ltd. (Leisure equipment & products)	757,550		14,571
Mediatek Inc. (Semiconductors & equipment)	691,040		7,117

			52,348


*Emerging Latin America—27.3%*
Brazil—9.7%
Companhia de Concessoes Rodoviarias (Transportation infrastructure)	1,210,900		16,351
Cyrela Brazil Realty S.A. (Household durables)	1,558,900		14,878
Gol Linhas Aereas Inteligentes S.P—ADR (Airlines)	135,900		3,896
Localiza Rent a Car S.A. (Road & rail)	557,900		16,778
Lojas Renner S.A. (Multiline retail)	327,800		4,710
Natura Cosmeticos S.A. (Personal products)	581,100		8,200
Submarino S.A. (Internet & catalog retail)	305,200		9,998
*Totvs S.A. (Software)	177,600		3,931

			78,742

Chile—3.1%
*Cencosud S.A.—ADR 144A (Specialty retail)	286,800		13,458
S.A.C.I. Falabella S.A. (Multiline retail)	3,469,694		12,190

			25,648

Columbia—1.4%
Bancolombia S.A.—ADR (Commercial banks)	357,900		11,149

Mexico—12.0%
Alsea S.A.B. de C.V. (Hotels, restaurants, & leisure)	727,800		3,967
America Movil S.A. (Wireless telecommunication services)	10,596,200		23,894
*Desarrolladora Homex S.A. de C.V.—ADR (Household durables)	171,100		10,107
Grupo Financiero Banorte S.A. de C.V. (Commercial banks)	3,948,600		15,439
Grupo Aeropuertario Del—ADR (Transportation infrastructure)	195,100		7,646
*Urbi Desarrollos Urbanos S.A. (Household durables)	2,558,300		9,236
Walmart de Mexico (Food & staples retailing)	6,214,600		27,342

			97,631

See accompanying Notes to Financial Statements.

December 31, 2006

William Blair Funds 49

Emerging Markets Growth Fund

Portfolio of Investments, December 31, 2006 (all dollar amounts in thousands)


Issuer	Shares	Value

*Common Stocks—Emerging Latin America—27.3%—(continued)*
Panama—1.1%
Copa Holdings S.A., Class “A” (Airlines)†	190,100	$	8,851


*Emerging Europe, Mid-East, Africa—15.6%*
Czech Republic—0.9%
*Central European Media Enterprises Ltd., Class “A” (Media)†	104,200		7,294

Kazakhstan—2.1%
*Kazkommertsbank—GDR 144A (Commercial banks)	744,326		17,194

Russia—5.6%
*CTC Media, Inc. (Media)†	352,545		8,464
*Magnit—CLS (Multiline retail)†	111,200		3,970
Novatek OAO—GDR 144A (Oil, gas, & consumable fuels)	312,800		19,863
Sberbank—CLS (Commercial banks)†	3,900		13,455

			45,752

South Africa—5.9%
Naspers Ltd. (Media)	849,266		20,131
Sasol Ltd. (Oil, gas, and consumable fuels)	437,000		16,091
Truworths International Ltd. (Specialty retail)	2,622,327		11,969

			48,191

Turkey—1.1%
Bim Birlesik Magazalar A.S. (Food & staples retailing)	172,700		9,150

Total Common Stock—93.4% (cost $592,116)			760,454


Issuer	Shares or Principal Amout		Value

*Preferred Stock*
Brazil—5.2%
Banco Itau Holding (Commercial banks)		443,000	$	16,049
Petroleo Brasileiro S.A. (Oil, gas & consumable fuels)		1,108,700		25,843

Total Preferred Stock—5.2% (cost $32,704)				41,892


*Investment in Affiliate*
William Blair Ready Reserves Fund		1,265,478		1,265

Total Investment in Affiliate—0.2% (cost $1,265)				1,265


*Short-Term Investments*
American Express Demand Note, VRN 5.176% due 1/2/07	$	1,875,000		1,875
Prudential Funding Demand Note, VRN 5.180% due 1/2/07		1,876,000		1,876

Total Short-Term Investments—0.5% (cost $3,751)				3,751


*Repurchase Agreement*
Investors Bank & Trust Company, 5.01% dated 12/29/2006, due 1/2/2007, repurchase price $6,033, collateralized by SBA, Pool# 506352		6,029,442		6,029

Total Repurchase Agreement—0.7% (cost $6,029)				6,029

Total Investments—100.0% (cost $635,865)				813,391
Cash and other assets, less liabilities—0.0%				258

Net assets—100.0%			$	813,649

* Non-income producing securities

ADR = American Depository Receipt

GDR = Global Depository Receipt

VRN = Variable Rate Note

† = U.S. listed Foreign Security

**Fair valued pursuant to Valuation Procedures adopted by the Board of Trustees. This holding represents 0.69% of the Fund’s net assets at December 31, 2006. This security is also deemed illiquid pursuant to Liquidity Procedures adopted by the Board of Trustees.

At December 31, 2006 the Fund’s Portfolio of Investments includes the following industry categories:


Consumer Discretionary		26.0%
Finance		19.2%
Information Technology		12.3%
Industrials & Services		12.0%
Telecommunication Services		10.8%
Consumer Staples		9.5%
Energy		7.7%
Materials		2.4%
Health Care		0.1%

		100.0%

At December 31, 2006 the Fund’s Portfolio of Investments includes the following currency categories:


United States Dollar		18.3%
Indian Rupee		17.1%
Brazilian Real		14.5%
Hong Kong Dollar		14.0%
Mexico Nuevo Peso		10.0%
Taiwan Dollar		6.0%
South African Rand		6.0%
South Korean Won		4.8%
Indonesian Rupiah		3.0%
Malaysian Ringgit		2.9%
Chilean Peso		1.5%
Turkish Lira		1.1%
British Pound Sterling		0.8%

		100.0%

See accompanying Notes to Financial Statements.

50 Annual Report

December 31, 2006

LOGO

Chad M. Kilmer

LOGO

Mark T. Leslie

LOGO

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.

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 Value Discovery Fund posted a 21.78% increase on a total return basis (Class N shares) for the 12 months ended December 31, 2006. By comparison, the Russell 2000^® Value Index gained 23.48%, while the Russell 2000^® Index rose 18.37%.

What were the most significant factors impacting Fund performance?

The year 2006 was very satisfying for the Value Discovery Fund. The absolute return was rewarding to shareholders and the Fund ranked in the 10^th percentile in the Fund’s peer group, the Morningstar Small Value Category. (The Fund’s Class N shares actual rank and number of Funds in the Small Value Category for the one-, three-, five-, and 10-year periods ended December 31, 2006 was as follows: 34/387, 233/304, 162/220 and 22/71.) While the Fund nearly matched the Russell 2000 Value benchmark on a gross basis, it lagged by roughly 1.30% after fees. We characterize the latter as only somewhat disappointing as, per Prudential Equity Research, only 5.9% of small cap value Funds topped the benchmark and the average Fund trailed by almost 7.0%. Trailing the benchmark is frustrating and, while we had plenty of company, we take solace in the fact that the Fund generated a fairly respectable return in an environment that clearly did not favor active managers.

Several factors led to the Fund finishing better than more than 90% of all Small Cap Value Funds in 2006. As you may recall, the Fund’s management team has been strengthened considerably over the past eighteen months. With the additions of Mark Leslie in July 2005 and Chad Kilmer in March 2006, the Fund is now managed by a senior three person team with considerable small cap value experience and significantly more horsepower than previously existed. This team upgrade manifested itself in a variety of ways, some of which are difficult to quantify, but one clear outcome was a reduction in problem stocks and sectors. In the prior two years, the Fund had its share of good performers but those were offset by having more than its share of challenging stocks and sectors. Consider the following:

•

The difference between the contributions of the best 10 stocks versus the negative contribution of the 10 worst stocks in 2006 was a positive 3.85%. In 2005 it was only 0.88% despite a greater contribution from the ten best in 2005 versus 2006.

•

In 2006, the Fund had only one sector with a negative contribution greater than 1.0% (Technology -1.26%). In 2005, the Fund had only two sectors with negative contributions greater than 1.00% but they cumulatively detracted 6.13% In 2004, the Fund had four sectors with negative contributions of greater than 1.0%, cumulatively detracting 6.23% of performance.

The above statistics combined with the bottom-line improvement in performance versus the peer group and the Fund’s benchmark are quantifiable but they stem from qualitative moves made by the team. The most significant would be an overall better balance between fundamentals and valuation than in prior years. We have clearly upgraded the portfolio in this regard and performance reflects it. We have significantly upgraded our screening process to

December 31, 2006

William Blair Funds 51

balance these factors as well. In the past, valuation was perhaps overemphasized to the detriment of fundamentals. Again, much of this is difficult to precisely quantify but we believe the results speak volumes.

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

Looking at the drivers of performance in 2006, three sectors really stood out, driven by excellent stock selection. The Consumer Discretionary sector added 2.02% to performance relative to the benchmark, driven by four stocks that added 0.40% or more: Casual Male Retail Group (+140% total return, +0.93% contribution), Navigant International (+49% total return, +0.51% contribution), Ameristar Casinos (+52% total return, +0.42% contribution), and Interface (45% total return, +0.40% contribution). The Industrial and Services sector also witnessed superior stock selection, contributing 1.33% to performance relative to the benchmark. Three stocks contributed greater than 50 basis points to performance: General Cable (+58% total return, +0.67% contribution), Saia (+53% total return, +0.58% contribution) and Teletech (+98% total return, +0.58% contribution). Health Care also delivered healthy returns, contributing 0.80% relative to the benchmark. CNS was the best stock in the sector (+35% total return, +0.64% contribution).

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

On the negative side, as mentioned earlier, Information Technology was the only sector to cost performance greater than 1.0%, detracting 1.26% relative to the benchmark. Two stocks were the primary culprits: Bisys Group (-23% total return, -1.29% contribution) and Plantronics (-39% total return, -0.66% contribution). Materials and Financials were also sub par for the year with Materials detracting 0.90% and Financials detracting 0.51%. Underperformance in Materials was not driven by any significant negative contributions. In fact, the worst stock penalized returns by only 0.02%. Underperformance was much more a function of what the Fund did not own versus what it did, primarily metals. Two stocks detracted greater than 0.60% in Financials: Quanta Capital (-53% total return, -0.87% contribution) and Commercial Capital Bancorp (-17% total return, -0.64% contribution).

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

We are four plus years into the current bull market—a great run by historical comparison. Bond investors have moved 10-year Treasury bond yields well below short term rates, suggesting they think the Fed may have to lower interest rates in the future in response to weakening economic activity. For now, the stock market is suggesting otherwise—that the Fed is orchestrating the ideal balance between economic growth and low inflation. Over the last few years, corporate earnings growth has been very robust at a consistent double digit annual pace. While earnings growth remains healthy and stock valuations reasonable, a slower and more sustainable level of earnings growth should be expected in the coming years. From our perspective, stock picking will become increasingly crucial to investment success as the easy money made over the last few years of broad-based earnings growth is most likely behind us.

Going forward, given our focus on adding value via stock selection as opposed to making large sector bets, the Fund continues to be closely aligned to the benchmark from a sector weighting perspective. We will continue to emphasize a healthy balance between valuation and fundamentals and are confident that we have built a team that can deliver solid results over the long term. We appreciate your continued confidence.

52 Annual Report

December 31, 2006

Value Discovery Fund

Performance Highlights (unaudited)

LOGO

Average Annual Total Return at 12/31/2006


	1 Year		3 Year		5 Year		10 Year		Since Inception
Value Discovery Fund Class N	21.78	%	11.10	%	11.27	%	12.99	%	—
Value Discovery Fund Class I	22.10		11.32		11.53		—		14.58	(a)
Russell 2000^® Index	18.37		13.56		11.39		9.44		10.14	(a)
Russell 2000^® Value Index	23.48		16.48		15.37		13.27		15.80	(a)

(a)

For the period from October 1, 1999 (Commencement of the Class) to December 31, 2006.

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^® Index is the Fund’s primary benchmark. The Russell 2000^® Index is an 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.

Sector Diversification (unaudited)

LOGO

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

December 31, 2006

William Blair Funds 53

Value Discovery Fund

Portfolio of Investments, December 31, 2006 (all dollar amounts in thousands) (unaudited)


Issuer	Shares	Value

*Common Stocks*
Financials—32.9%
*Argonaut Group, Inc.	68,475	$	2,387
Boston Private Financial Holdings, Inc.	87,305		2,463
BRT Realty Trust	62,305		1,723
Chittenden Corporation	55,035		1,689
Citizens Banking Corporation	109,975		2,914
Cogdell Spencer, Inc.	102,710		2,208
*Community Bancorp	62,900		1,899
*CompuCredit Corporation	66,780		2,659
Donegal Group, Inc., Class “A”	83,301		1,632
Equity Inns, Inc.	205,699		3,283
First Midwest Bancorp Incorporated	88,480		3,422
FirstMerit Corporation	123,410		2,979
Jones Lang LaSalle, Inc	22,385		2,063
Kite Realty Group Trust	157,250		2,928
Mid-American Apartment Communities, Inc.	54,740		3,133
*PMA Capital Corporation, Class “A”	176,260		1,625
*RAM Holdings, Ltd.†	173,670		2,482
Umpqua Holdings Corporation	110,770		3,260
*Western Alliance Bancorp	47,475		1,651
Winston Hotels, Inc.	140,730		1,865

			48,265

Information Technology—14.3%
Adtran Incorporated	90,965		2,065
*Anixter International, Inc.	42,895		2,329
*Bisys Group, Inc.	165,610		2,138
*Entegris, Inc.	250,405		2,710
*Mastec Incorporated	62,616		723
*MICROS Systems, Inc.	44,390		2,339
*Parametric Technology Corporation	126,100		2,272
*Progress Software Corporation	68,575		1,915
*Semitool, Inc.	136,269		1,814
*Sybase, Inc.	107,585		2,657

			20,962

Consumer Discretionary—13.0%
*Aeropostale, Inc.	47,275		1,459
*AFC Enterprises, Inc.	84,415		1,492
Ameristar Casinos, Inc.	68,980		2,121
BorgWarner, Inc.	32,245		1,903
*Cavco Industries, Inc.	27,170		952
Christopher & Banks Corporation	84,895		1,584
Entercom Communications Corporation	64,590		1,820
*Interface Incorporated, Class “A”	194,670		2,768
Ruby Tuesday, Inc.	70,165		1,925
Wolverine World Wide, Inc.	107,685		3,071

			19,095

Industrials & Services—12.1%
Acuity Brands, Inc.	43,185		2,247
CLARCOR, Inc.	69,865		2,362
*EMCOR Group, Inc.	29,860		1,698
*Esco Technologies, Inc.	56,730		2,578
*Genlyte Group, Inc.	21,200		1,656
*K&F Industries Holdings, Inc.	40,905		929
*Labor Ready, Inc.	94,350		1,730
Tal International Group, Inc.	89,970		2,401
*Teletech Holdings, Inc.	91,465		2,184

			17,785


Issuer	Shares or Principal Amount		Value

*Common Stocks—(continued)*
Materials—6.8%
Arch Chemicals, Inc.		71,260	$	2,374
*Claymont Steel Holdings, Inc.		46,975		864
Silgan Holdings, Inc.		59,315		2,605
Spartech Corporation		57,210		1,500
Texas Industries, Inc.		40,090		2,575

				9,918

Health Care—6.4%
*Magellan Health Services		49,465		2,138
*Matrixx Initiatives, Inc.		90,470		1,441
*Pediatrix Medical Group		43,990		2,151
*Varian, Inc.		51,950		2,327
Vital Signs, Inc.		26,530		1,324

				9,381

Utilities—4.8%
Avista Corp		70,665		1,789
Cleco Corporation		63,895		1,612
Northwest Natural Gas Company		42,595		1,808
South Jersey Industries, Inc.		55,335		1,849

				7,058

Energy—4.8%
*Forest Oil Corporation		46,875		1,532
*Goodrich Petroleum Corporation		35,250		1,275
*Petrohawk Energy Corporation		132,468		1,523
RPC, Inc.		99,862		1,686
St. Mary Land & Exploration Company		26,675		983

				6,999

Consumer Staples—3.2%
J&J Snack Foods		48,170		1,994
*Playtex Products, Inc.		192,480		2,770

				4,764

Total Common Stock—98.3% (cost $131,247)				144,227


*Investment in Affiliate*
William Blair Ready Reserves Fund		502,074		502

Total Investment in Affiliate—0.3% (cost $502)				502


*Short-Term Investment*
Prudential Funding Demand Note, VRN 5.180%, due 1/2/07	$	14,000		14

Total Short-Term Investment—0.0% (cost $14)				14

Repurchase Agreement
Investors Bank & Trust Company, 5.01% dated 12/29/2006, due 1/2/2007, repurchase price $1,750, collateralized by SBA Pool # 506704		1,749,233		1,749
Total Repurchase Agreement—1.2% (Cost $1,749)				1,749

Total Investments—99.8% (cost $133,512)				146,492
Cash and other assets, less liabilities—0.2%				285

Net assets—100.0%			$	146,777

* Non-income producing

† = U.S. listed foreign security

VRN = Variable Rate Note

See accompanying Notes to Financial Statements.

54 Annual Report

December 31, 2006

LOGO

James S. Kaplan

LOGO

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

The Income Fund posted a 4.25% gain on a total return basis (Class N Shares) for the year ended December 31, 2006. By comparison, the Fund’s benchmark, the Lehman Intermediate Government/Credit Bond Index, increased 4.07%, while the Fund’s peer group, the Morningstar Short-term Bond Category, rose 4.01%.

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

Three major factors were behind the performance of the fixed-income markets during the course of the year: the consideration by investors during the final months of the year that the Federal Reserve’s next move would be to lower, rather than to raise, interest rates; the dominance of global liquidity and foreign demand for U.S. fixed-income securities, and a general decrease in investors’ risk aversion.

Through the end of the third quarter, interest rates across the interest rate yield curve had increased roughly 0.10% since the beginning of the year. During the third quarter, though, the bond market staged a significant rally, essentially erasing the losses sustained earlier in the year. However, the market got a little too optimistic regarding potential rate cuts and by the end of the fourth quarter, rates had risen 0.30% to 0.40%

For example, the yield on 2-year Treasury notes increased 0.13% during the fourth quarter, while the yield on 10-year Treasury securities increased 0.07%. For the one-year period, the yield on 2-year Treasury notes increased 0.41% to finish the year at 4.81%, while the yield on 10-year Treasury securities increased 0.31% to end the year at 4.70%. The interest rate yield curve steepened slightly toward the end of the first quarter, continued to flatten again in the second quarter, finished the third quarter very inverted, and remained that way through the end of the year.

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

In the latter part of the fourth quarter, it is not unusual for the fixed-income markets to have their own version of the historical “January effect” typically seen in the equity markets—whereby there is a general rise in the prices of non-Treasury securities. However, that effect this year was exacerbated once investors realized that the Federal Reserve’s two-year campaign to raise interest rates could be over. In particular, October and November were extremely strong months for the Mortgage- and Asset-backed sectors of the bond market.

Nearly half of the excess returns for the Mortgage-backed, Asset-backed and Corporate Bond sectors of the Lehman Aggregate Bond Index (an index reflecting broad fixed-income market performance) during 2006 were generated in the fourth quarter.

December 31, 2006

William Blair Funds 55

Throughout the year, there was consistent demand on the part of investors for Mortgage- and Asset-backed securities, which continue to provide a safe haven for those investors seeking excess returns versus U.S. Treasury securities. Some of this demand reflected the continued strong appetite for U.S. securities on the part of foreign investors.

The catch words in the Corporate bond market were “shareholder rewards” as investors warily watched for signs that private equity investors were about to launch leveraged buyouts (LBOs) of publicly-traded companies. The most notable of these transactions was the $36 billion leveraged buyout of Equity Office Properties, which was the largest LBO in history.

Private equity investors have been purchasing investment grade-rated companies with a minimum amount of equity, then “leveraging up” the company by issuing more debt which in turn finances the LBO. While shareholders potentially reap the rewards from these types of transactions, bondholders may suffer as the company takes on more debt and the company’s credit ratings decrease.

This acquisition activity built over the course of the year, with growing numbers of buyers taking public companies in unrelated industries private. Risk premiums for securities of firms deemed to be acquisition targets have increased.

Although the LBO activity was not a widespread contagion in the Corporate bond market, exposure to names perceived as targets weighed on investment portfolios. With these considerations in mind, throughout 2006 we were extremely cautious as we managed the Corporate bond portion of the Fund’s portfolio. Our ability to weigh these issues—and avoid getting caught up by this speculative activity—benefited the Fund.

For example, at the end of 2005 we had sold Comcast, a company in the Fund’s portfolio that we believed fit the profile of an LBO target, with a flat share price, modest growth rate and stable cash flow. However, during 2006 Comcast’s stock price advanced, alleviating concerns it might be an acquisition target. We thought the relative valuation of the company remained attractive, and we thought the company’s risk potential had decreased. Consequently, we reestablished a position in the company in November. Conversely, we sold Fortune Brands, a company we believe has a strong growth profile, but believe that the company may continue to be acquisitive or engage in some other activity resulting in higher leverage and a weaker credit profile.

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

As we have stated, within the Mortgage-, Asset-backed and Corporate bond sectors of the fixed-income markets, it has become a very security-specific trading environment.

Relying on an investment strategy of merely selecting bonds based on such criteria as type and ratings is not enough to ensure success. The current environment requires an analysis of each bond’s individual structure—because some lower-rated bonds may look more attractive and creditworthy as investment candidates than higher-rated bonds.

We are being particularly judicious in monitoring the Asset-backed and Mortgage-backed positions in our portfolio, making sure the assumptions about each bond remain the same as when they were first purchased. The housing market has slumped, and some borrowers may experience stress, but we do not see the market collapsing.

There has been a fair amount of coverage in the financial media about several bond issuers in the sub-prime lending area going out of business. We eliminated two Asset-backed positions from the Fund’s portfolio based on our analysis that the risk assumptions for certain securities might not be met. We nonetheless remain committed to this sector, viewing our sales as the normal result of closely monitoring this sector of the market.

56 Annual Report

December 31, 2006

We think that the current market environment within the Corporate bond market will be sustained into 2007. Fundamental considerations for U.S. companies, including earnings growth, remain favorable. There should be plenty of liquidity to support the current level of supply and LBO transactions. We will use our Corporate bond positions to add incremental yield to the Fund’s portfolio, but will do so cautiously.

The markets have acknowledged that the Federal Reserve’s campaign to raise interest rates could be over, but there is no consensus within the market as to when the Federal Reserve might begin to lower interest rates.

The rate of job growth and inflation will dictate the Fed’s next move. We remain in the camp of market observers that believe the Fed will be able to engineer a gradual slowing of economic growth, or “soft landing” that does not cause undue damage, triggering a recession. But we think an interest rate cut by the Fed is not going to happen anytime soon.

In such an environment, the risk of prepayments in the Mortgage-backed market is benign. We believe a trading range, in turn, would be beneficial for Mortgage-backed securities.

We will remain patient investors during 2007, and do not expect the Fund’s sector allocations to change much. As we stated, we intend to focus on the structure and characteristics of individual issues, and evaluate opportunities as they arise on a security-by-security basis.

December 31, 2006

William Blair Funds 57

Income Fund

Performance Highlights (unaudited)

LOGO

Average Annual Total Return at 12/31/2006


	1 Year		3 Year		5 Year		10 Year		Since Inception
Income Fund Class N	4.25	%	2.85	%	4.01	%	5.23	%	—	%
Income Fund Class I	4.33		3.01		4.15		—		5.28	(a)
Lehman Intermediate Government Credit Bond Index	4.07		2.89		4.52		5.80		5.72	(a)

(a)

For the period from October 1, 1999 to December 31, 2006.

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, 2006. 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)

LOGO

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

58 Annual Report

December 31, 2006

Income Fund

Portfolio of Investments, December 31, 2006 (all amounts in thousands)


Issuer	Principal Amount		Value

*U.S. Government and U.S. Government Agency—51.1%*
U.S. Treasury—4.4%
U.S. Treasury Note, 6.500%, due 2/15/10	$	8,500	$	8,929
U.S. Treasury Note, 4.750%, due 5/15/14		2,000		2,005
U.S. Treasury Note, 5.125%, due 5/15/16		2,060		2,122

Total U.S. Treasury Obligations		12,560		13,056

Government National Mortgage Association (GNMA)—1.7%
#780405, 9.500%, due 11/15/17		591		630
#589335, 6.500%, due 10/15/22		2,042		2,097
#357322, 7.000%, due 9/15/23		166		172
#616250, 6.000%, due 2/15/24		1,581		1,605
#2002-48, Tranche 0B, 6.000%, due 5/16/30		643		644

Total Government National Mortgage Association		5,023		5,148

Small Business Administration—0.0%
Receipt for Multiple Originator Fees, #3, 0.821%, due 11/01/08 (Interest Only) WAC		—		18

Federal Home Loan Mortgage Corp. (FHLMC)—20.0%
#1417, Tranche SA, 11.326%, due 11/15/07, VRN		281		283
#G10067, 7.000%, due 1/1/08		155		155
#G10147, 8.500%, due 2/1/08		14		14
#1601, Tranche PJ, 6.000%, due 10/15/08, VRN		782		781
#1612, Tranche SE, 8.100%, due 11/15/08, VRN		403		407
#G90028, 7.000%, due 5/17/09		227		228
#E80050, 6.000%, due 10/1/09		405		407
#G90019, 7.500%, due 12/17/09		303		306
7.000%, due 3/15/10		5,950		6,309
#E65418, 7.000%, due 8/1/10		188		189
#G10457, 7.000%, due 2/1/11		351		360
#E00436, 7.000%, due 6/1/11		382		392
#G10708, 6.500%, due 8/1/12		226		231
#E91999, 5.000%, due 10/1/12		950		942
#G11218, 7.000%, due 10/1/12		98		101
#E96147, 5.000%, due 5/1/13		1,287		1,277
#E95846, 4.500%, due 5/1/13		1,199		1,176
#G10839, 5.500%, due 10/1/13		1,174		1,178
#E72924, 7.000%, due 10/1/13		1,036		1,064
#E00639, 5.000%, due 3/1/14		1,659		1,640
#J02572, 7.500%, due 6/1/14		1,762		1,818
#E81697, 8.000%, due 5/1/15		2,261		2,383
#E81703, 7.000%, due 5/1/15		923		949
#E81908, 8.500%, due 12/1/15		118		125
#G11688, 7.000%, due 2/1/16		703		722
#J02184, 8.000%, due 4/1/16		1,747		1,834
#G12258, 6.000%, due 8/1/16		2,617		2,655
#G90022, 8.000%, due 9/17/16		665		697
#G11702, 7.500%, due 12/1/16		685		710
#G11486, 7.500%, due 4/1/17		819		849
#E90398, 7.000%, due 5/1/17		1,233		1,265
#M30028, 5.500%, due 5/1/17		320		324
#G11549, 7.000%, due 7/1/17		734		754
#G90027, 6.000%, due 11/17/17		1,254		1,268
#G11756, 7.000%, due 12/1/17		1,244		1,279
#G11725, 5.500%, due 11/1/18		2,101		2,105
#G30254, 6.500%, due 5/1/19		2,514		2,585
#G30255, 7.000%, due 7/1/21		917		951


Issuer	Principal Amount		Value

*Federal Home Loan Mortgage Corp. (FHLMC)—(continued)*
#G30268, 7.000%, due 7/1/21	$	1,840	$	1,902
#J02986, 6.500%, due 7/1/21		2,736		2,795
#G30239, 7.000%, due 8/1/21		1,583		1,638
#C67537, 9.500%, due 8/1/21		200		214
#G18137, 6.500%, due 8/1/21		3,959		4,044
#G30243, 6.000%, due 12/1/21		1,774		1,801
#D95621, 6.500%, due 7/1/22		3,073		3,149
#G02183, 6.500%, due 3/1/30		2,010		2,059
#A45790, 7.500%, due 5/1/35		1,041		1,082

Total FHLMC Mortgage Obligations		57,903		59,397

Federal National Mortgage Association (FNMA)—25.0%
#545560, 8.000%, due 5/1/07		77		77
#1992-192, Tranche SC, 6.430%, due 11/25/07, VRN		127		127
#93-196, Tranche SA, 9.960%, due 10/25/08, VRN		284		293
#1993-221, Tranche SG, 3.556%, due 12/25/08, VRN		223		221
#765396, 5.500%, due 1/1/09		192		191
#2002-27, Tranche SW, 4.220%, due 5/25/2009 VRN		1,150		1,134
#695512, 8.000%, due 9/1/10		351		359
#725479, 8.500%, due 10/1/10		601		613
#255056, 5.000%, due 12/1/10		1,660		1,657
6.250%, due 2/1/11		6,775		7,061
#313816, 6.000%, due 4/1/11		461		466
#577393, 10.000%, due 6/1/11		215		229
#577395, 10.000%, due 8/1/11		794		850
#254705, 5.500%, due 3/1/13		1,615		1,618
#254788, 6.500%, due 4/1/13		577		589
#725315, 8.000%, due 5/1/13		646		672
#190539, 6.000%, due 1/1/14		424		431
#806463, 7.000%, due 3/1/14		684		704
#593561, 9.500%, due 8/1/14		384		412
#535560, 7.000%, due 8/1/14		1,071		1,103
#567027, 7.000%, due 9/1/14		1,653		1,701
#567026, 6.500%, due 10/1/14		1,525		1,562
#458124, 7.000%, due 12/15/14		400		412
#745459, 7.000%, due 2/1/15		918		945
#598453, 7.000%, due 6/1/15		377		382
#576554, 8.000%, due 1/1/16		1,671		1,757
#576553, 8.000%, due 2/1/16		2,526		2,676
#555747, 8.000%, due 5/1/16		497		517
#735569, 8.000%, due 10/1/16		2,491		2,592
#725410, 7.500%, due 4/1/17		1,562		1,619
#643217, 6.500%, due 6/1/17		378		387
#679247, 7.000%, due 8/1/17		1,668		1,731
#682075, 5.500%, due 11/1/17		1,086		1,089
#662925, 6.000%, due 12/1/17		1,559		1,584
#251960, 6.000%, due 9/1/18		597		606
#740847, 6.000%, due 10/1/18		1,345		1,364
#852864, 7.000%, due 7/1/20		3,445		3,542
#458147, 10.000%, due 8/15/20		989		1,101
#835563, 7.000%, due 10/1/20		1,360		1,409
#893325, 7.000%, due 9/1/21		3,444		3,536
#735367, 6.000%, due 3/1/22		2,450		2,485
#735574, 8.000%, due 3/1/22		1,018		1,080
#735104, 7.000%, due 5/1/22		2,519		2,612
#725927, 7.000%, due 8/1/22		2,002		2,072

See accompanying Notes to Financial Statements.

December 31, 2006

William Blair Funds 59

Income Fund

Portfolio of Investments, December 31, 2006 (all amounts in thousands)


Issuer	NRSRO Rating		Principal Amount		Value

*Federal National Mortgage Association (FNMA)—(continued)*
#679253, 6.000%, 10/1/22			$	1,902	$	1,929
#735137, 6.500%, due 11/1/22				1,312		1,348
#254633, 6.000%, due 1/1/2023				693		702
#1993-19, Tranche SH, 11.234%, due 4/25/23, VRN				11		14
#254797, 5.000%, due 6/1/23				2,502		2,438
#745633, 6.500%, due 7/1/24				3,094		3,177
#806458, 8.000%, due 6/1/28				1,371		1,450
#880155, 8.500%, due 7/1/29				1,600		1,720
#797846, 7.000%, due 3/1/32				1,806		1,859
#745519, 8.500%, due 5/1/32				1,000		1,075
#654674, 6.500%, due 9/1/32				347		355
#733897, 6.500%, due 12/1/32				543		558

Total FNMA Mortgage Obligations				71,972		74,193

Collateralized Mortgage Obligations—24.5%
Security National Mortgage Loan Trust, 2006-3A, Tranche M2, 7.500%, due 2/25/10*	A			1,000		988
Countrywide Alternative Loan Trust, 2003-11T1, Tranche M, 4.750%, due 7/25/18	AA	+		1,766		1,714
ABFS, 2002-2, Tranche A6, 5.850%, due 3/15/19	AAA			577		576
RALI, 2004-QS16, Tranche 2M1, 5.000%, due 12/25/19	AA			1,675		1,626
RALI, 2004-QS16, Tranche 2M3, 5.000%, due 12/25/19	BBB			283		265
RALI, 2005-QS14, Tranche 1M1, 5.250%, due 9/25/20	AA			982		960
RALI, 2005-QS14, Tranche 1M2, 5.250%, due 9/25/20	A			309		298
RALI, 2006-QS2, Tranche IIM1, 5.500%, due 2/25/21	AA			1,083		1,070
RALI, 2006-QS2, Tranche IIM2, 5.500%, due 2/25/21	A			506		493
RALI, 2006-QS6, Tranche 2M1, 6.000%, due 6/25/21	AA			528		532
RALI, 2006-QS6, Tranche 2M2, 6.000%, due 6/25/21	A			418		414
First Plus, 1997-4, Tranche M1, 7.640%, due 9/11/23	AA			1,660		1,691
First Plus, 1997-4, Tranche M2, 7.830%, due 9/11/23	A			350		353
First Plus, 1997-4, Tranche A8, 7.810%, due 9/11/23	AAA			194		201
First Plus, 1998-2, Tranche M2, 8.010%, due 5/10/24	A			216		218
First Plus, 1998-3, Tranche M2, 7.920%, due 5/10/24, VRN	A			587		592
Bear Stearns ABS, 2001-A, Tranche M1, 7.540%, due 2/15/31	A			1,167		1,170
Delta Funding Home Equity Loan Trust, 2000-4, Tranche M1, 7.650%, due 2/15/31	AA	+		2,048		2,043
Structured Asset Securities Corp., 2005-SC1, Tranche 1A2, 10.276%, due 5/25/31, VRN*	AAA			2,240		2,401
Aames Mortgage Trust, 2001-1, Tranche M2, 7.588%, due 6/25/31	A			1,216		1,226


Issuer	NRSRO Rating	Principal Amount		Value

*Collateralized Mortgage Obligations—(continued)*
Conseco Finance, 2001-B, Tranche 1M1 7.272%, due 6/15/32	AA	$	829	$	831
Security National Mortgage Loan Trust, 2004-1A, Tranche M2, 6.750%, due 06/25/32*	A		1,600		1,608
Structured Assets Security Corporation, 2002-13, Tranche B1, 6.750%, due 7/25/32, VRN	AAA		2,550		2,551
Structured Assets Security Corporation, 2002-17, Tranche B3, 6.089%, due 9/25/32, VRN	A		1,846		1,831
LSSCO, 2004-2, Tranche M1, 6.292%, due 2/28/33, VRN*	AA		1,118		1,118
LSSCO, 2004-2, Tranche M2, 6.292%, due 2/28/33, VRN*	A		857		850
ABFS, 2002-2, Tranche A-7, 5.215%, due 7/15/33, VRN	AAA		80		80
ABFS, 2002-3, Tranche M1, 5.402%, due 9/15/33, VRN	AA		1,500		1,489
Residential Asset Mortgage Products, 2003-RS9, Tranche MI1, 5.800%, due 10/25/33	AA		310		307
Residential Asset Mortgage Products, 2003-RS9, Tranche MI2, 6.300%, due 10/25/33	A		2,057		2,040
ACE, 2004-SD1, Tranche M3, 8.100%, due 11/25/33, VRN	BBB		2,099		2,041
Residential Asset Mortgage Products, 2003-RS11, Tranche MI1, 5.597%, due 12/25/33 VRN	AA		2,400		2,389
Deutsche Mortgage Securities, Inc., 2004-2, Tranche M1, 5.090%, due 1/25/34	AA		2,055		2,028
GRP Real Estate Asset Trust, 2004-2, Tranche A, 4.210%, due 7/25/34*	A		73		73
FHASI, 2004-AR4, Tranche 3A1, 4.584%, due 8/25/34, VRN	AAA		1,557		1,534
RAAC, 2005-SP1, Tranche M1, 5.505%, due 9/25/34, VRN	AA		2,593		2,506
Security National Mortgage Loan Trust, 2004-2A, Tranche M2, 6.352%, due 11/25/34*	A		2,200		2,140
GRP Real Estate Asset Trust, 2005-1 Tranche A, 4.850%, due 1/25/35*	A		427		427
Security National Mortgage Loan Trust, 2005-1A, Tranche M2, 6.530%, due 2/25/35*	A		1,475		1,454
Security National Mortgage Loan Trust, 2005-1A, Tranche B1, 7.450%, due 2/25/35*	BBB		950		926
Structured Asset Securities Corp., 2005-9XS, Tranche 1A2B, 6.500%, due 6/25/35	AAA		3,435		3,436
SACO, 2005-WM2, Tranche B2, 6.500%, due 7/25/35	BBB		3,017		2,961
Security National Mortgage Loan Trust, 2005-2A, Tranche B1, 7.750%, due 2/25/36*	BBB		1,550		1,509
Security National Mortgage Loan Trust, 2005-2A, Tranche M2, 7.321%, due 2/25/36*	A		2,075		2,055

See accompanying Notes to Financial Statements.

60 Annual Report

December 31, 2006

Income Fund

Portfolio of Investments, December 31, 2006 (all amounts in thousands)


Issuer	NRSRO Rating		Principal Amount		Value

*Collateralized Mortgage Obligations—(continued)*
ACE, 2006-SL4, Tranche M6, 6.500%, due 9/25/36	A		$	2,100	$	2,061
Security National Mortgage Loan Trust, 2006-1A, Tranche M2, 7.500%, due 9/25/36*	A			2,195		2,183
Security National Mortgage Loan Trust, 2006-2A, Tranche M2, 7.500%, due 10/25/36*	A			600		597
Blackrock Capital Finance, 1997-R1 WAC, 1.824%, due 3/25/37, VRN*	AAA			359		367
Statewide Mortgage Loan Trust, 2006-1A, Tranche A2, 7.660%, due 7/25/37*	AAA			2,638		2,753
Mid-State Trust 2004-1, Tranche A, 6.005%, due 8/15/37	AAA			4,117		4,181
ACE, 2005-SN1, Tranche M1, 5.520%, due 11/25/39, VRN	AA	+		1,075		1,058
ACE, 2005-SN1, Tranche M2, 5.770%, due 11/25/39, VRN	A	+		625		614
ACE, 2005-SD3, Tranche M2, 7.100%, due 8/25/45, VRN	A	+		1,895		1,908

Total Collateralized Mortgage Obligations				73,062		72,737

Corporate Obligations—23.6%
Philips Petroleum, 8.750%, due 5/25/10	A	-		3,600		3,989
Residential Capital Corporation, 6.375%, due 6/30/10	BBB			3,000		3,035
HSBC Finance Corporation, 8.000%, due 7/15/10	AA	-		2,450		2,661
Boeing Capital Corporation, 7.375%, due 9/27/10	A	+		2,549		2,733
Goldman Sachs Group, Inc., 6.600%, due 1/15/12	AA	-		3,050		3,224
Lehman Brothers Holdings, Inc. 6.625%, due 1/18/12	A	+		2,650		2,800
National Rural Utility Cooperative, 7.250%, due 3/1/12	A			3,025		3,287
Valero Energy Corporation, 6.875%, due 4/15/12	BBB			2,065		2,183
General Electric Capital Corporation, 6.000%, due 6/15/12	AAA			2,650		2,743
Citigroup, Inc., 5.625%, due 8/27/12	A+			2,675		2,714
SLM Corporation, 5.125%, due 8/27/12	A			2,050		2,014
Cox Communications, Inc., 7.125%, due 10/1/12	BBB-			2,425		2,585
Kroger Company, 5.500%, due 2/1/13	BBB			3,000		2,968
Ohio Power Company, 5.500%, due 2/15/13	A3			1,900		1,896


Issuer	NRSRO Rating	Principal Amount		Value

*Corporate Obligations—(continued)*
American Movil SA, 5.500%, due 3/1/14	A3	$	3,000	$	2,933
Bank of America Corporation, 5.375%, due 6/15/14	AA-		2,325		2,324
SBC Communications, Inc., 5.100%, due 9/15/14	A		3,000		2,913
Codelco, Inc.—144A, 4.750%, due 10/15/14*	A		2,815		2,676
United Technologies Corporation, 4.875%, due 5/1/15	A+		2,725		2,627
Johnson Controls, Inc., 5.500%, due 1/15/16	A-		2,925		2,868
Comcast Corporation, 5.900%, due 3/15/16	BBB+		3,075		3,084
Omnicom Group, Inc., 5.900%, due 4/15/16	A-		3,000		3,032
Sabmiller PLC, 6.500%, due 7/1/16	BBB+		3,100		3,234
Western Union Co., 5.930%, due 10/1/16	A-		2,900		2,872
Ras Laffan Lng II, 5.298%, due 9/30/20*	A+		3,000		2,874

Total Corporate Obligations			68,954		70,269

Total Long Term Investments—99.2% (Cost $298,822)			289,474		294,818


*Repurchase Agreement*
Investors Bank & Trust Company, 5.01% dated 12/29/2006, due 1/2/2007, repurchase price $142, collateralized by FH Pool #789456	A+		142		142

Total Repurchase Agreement—0.1% (Cost $142)			142		142

Total Investments—99.3% (Cost $298,964)		$	289,616		294,960

Cash and other assets, less liabilities—0.7%					2,117

Net Assets—100%				$	297,077

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 9.1% of the net assets at December 31, 2006.

See accompanying Notes to Financial Statements.

December 31, 2006

William Blair Funds 61

LOGO

James S. Kaplan

LOGO

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 2006.

The Federal Reserve raised the federal funds rate on overnight loans between banks by 0.25% four times during the first half of the year; on January 31—which was also Federal Reserve Board Chairman Alan Greenspan’s last day as chairman—and subsequently on March 28, May 10 and June 29. The last rate increase was the seventeenth consecutive rate hike by the Federal Reserve, and brought the federal funds rate to 5.25%. However, this two-year campaign of measured rate increases ended at the Federal Reserve’s September 20, 2006 meeting, when the Fed chose not to raise interest rates further. Since that time, there have been four consecutive meetings without a rate hike.

Heightened concern about the harsher-than-expected housing slump was an important factor in the Federal Reserve’s decision to hold interest rates steady following their mid-December meeting.

Minutes released of the Fed Reserve’s deliberations disclosed the Fed’s concerns about the downturn in the real estate market even as the Fed reiterated their primary goal of ensuring that inflation remained under control.

In its December 12th policy statement, the Fed did not speculate about a rate cut. Rather, policymakers adhered to previous language about the possibility of a rate increase, which most Fed watchers viewed as unlikely.

Many money market observers have interpreted the Fed’s policy decisions as a sign that the Fed believes that inflation will remain under control as the economy gradually slows. This in turn, will bring about the “soft-landing”—a moderating inflation rate without an increase in unemployment—that the Fed has been attempting to engineer. We would describe ourselves as being in this particular “camp”—we believe the Fed will be able to engineer a gradual slowing of economic growth, or “soft landing” that does not cause undue damage, triggering a recession. But we do not believe an interest rate cut by the Fed is going to happen anytime soon.

We presently 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.)

The current inverted shape of the interest rate yield curve has decreased investment opportunities in the secondary fixed-rate market, but we do not see this as a particularly troubling development.

At December 31, 2006, the Fund’s Average Maturity was approximately 52.3 days, compared to 59.4 days at June 30, 2006 and 58.6 days at December 31, 2005.

The return for the 12 months ended December 31, 2006, of the Fund’s Class N Shares was 4.47%, versus the 4.22% return of the Fund’s benchmark, the AAA-Rated Money Market Funds Average. Total assets were $1.20 billion, compared to $1.16 billion at June 30, 2006 and $1.09 billion at December 31, 2005.

62 Annual Report

December 31, 2006

Ready Reserves Fund

Performance Highlights (unaudited)

The Fund’s 7 day yield on December 31, 2006 was 4.74%.

Average Annual Total Returns—Class N Shares year ending December 31, 2006.


	1 Year		3 Year		5 Year		10 Year
Ready Reserves Fund	4.47	%	2.62	%	1.96	%	3.39	%
AAA Rated Money Market Funds	4.22		2.47		1.85		3.39

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, 2006. 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)

LOGO

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

December 31, 2006

William Blair Funds 63

Ready Reserves Fund

Portfolio of Investments, December 31, 2006 (all amounts in thousands)


Issuer	Principal Amount		Amortized Cost
Mortage-Backed Securities—1.0%
Federal Home Loan Bank (FHLB), 2.600%-5.350%, 3/30/07-11/21/07	$	5,978	$	5,994
Federal Home Loan Mortgage Corp. (FHLMC), 4.125%-4.800%, 2/20/07-4/12/07		5,990		5,997

Total Mortgage-Backed Securities		11,968		11,991

Canadian Fixed Rate Notes—0.7%
Province of Quebec, 7.000%, 1/30/07		8,956		8,909

Total Canadian Fixed Rate Notes		8,956		8,909

Fixed Rate Notes—30.7%
American Honda Finance Corp, 5.406%-5.514%, 1/16/07-3/8/07		24,835		24,828
American General Finance Corp, 5.750%, 3/15/07		7,435		7,429
Berkshire Hathaway, 3.400%, 7/2/07		16,161		16,268
B.P. Argentina, 6.750%, 2/1/07		1,999		1,978
B.P. Canada Finance, 3.375%, 10/31/07		8,085		8,112
B.P. Capital PLC, 2.625%, 3/15/07		11,080		11,224
B.P. Company North America, 6.500%, 8/1/07		2,875		2,869
Caterpillar Financial Services, 2.625%-5.386%, 1/30/07-6/15/07		40,522		40,801
Chevron Corporation, 3.500%-7.090%, 2/1/07-9/17/07		14,917		14,955
GE Capital Corp, 2.850%-8.750%, 1/5/07-8/15/07		28,548		28,577
Gillette Company, 3.500%-4.125%, 8/30/07-10/15/07		20,075		20,135
IBM Corporation, 6.450%, 8/1/07		1,600		1,600
Kimberly-Clark Corp, 7.100%, 8/1/07		5,875		5,847
National Rural Utility Coop, 3.625%-6.500%, 3/1/07-4/10/07		19,891		19,862
Paccar Financial Corporation, 5.294%, 1/16/07		9,997		10,000
Pfizer, Inc., 2.500%, 3/15/07		14,413		14,683
Procter and Gamble Corporation, 4.750%, 6/15/07		14,088		14,134
SLM Corporation, 5.497%-5.625%, 1/25/07-4/10/07		23,915		23,905
Toyota Motor Credit, 2.700%-5.650%, 1/15/07-1/30/07		12,996		13,023
US Bancorp, 2.400%-5.100%, 02/01/07-8/23/07		32,749		32,915
Wal-Mart Stores, 4.375%-5.260%, 3/28/07-7/12/07		28,492		28,562
Wells Fargo Financial, 3.750%-6.750%, 2/15/07-10/15/07		24,876		24,851

Total Fixed Rate Notes		365,424		366,558


Issuer	Principal Amount		Amortized Cost
Variable Rate Notes—10.5%
American General Finance Corp, 5.426%-5.470%, 4/5/07-6/27/07	$	17,513	$	17,507
Berkshire Hathaway, 5.420%, 1/11/08		15,437		15,436
General Electric Capital Corporation, 5.425%-5.430%, 6/22/07-1/3/08		14,549		14,548
IBM Corporation, 5.363%, 6/28/07		10,805		10,803
Paccar Financial Corporation, 5.274%, 7/16/07		14,994		14,995
SLM Corp, 5.597%, 7/25/07		7,897		7,896
Toyota Motor Credit, 5.327%-5.346%, 7/2/07-10/15/07		28,406		28,405
US Bank, 5.383%-5.402%, 3/23/07-9/28/07		5,834		5,833
Wells Fargo Financial, 5.423%, 9/28/07		10,011		10,008

Total Variable Rate Notes		125,446		125,431

Asset-Backed Commercial Paper—55.5%
Alpine Securitization Corporation, 5.260%, 1/3/07-1/11/07		20,000		19,982
Amsterdam Funding Corporation, 5.25%-5.260%, 1/12/07-1/19/07		35,000		34,923
CAFCO, L.L.C., 5.270%-5.280%, 1/5/07-2/8/07		43,945		43,855
Chariot Funding, L.L.C., 5.270%-5.320%, 1/9/07-2/7/07		48,570		48,372
Ciesco, L.L.C., 5.260%-5.270%, 1/4/07-1/9/07		32,275		32,244
CRC Funding, L.L.C., 5.260%, 1/8/07-1/23/07		36,818		36,729
Daimler Chrysler Revolving Auto, 5.260%-5.270%, 1/3/07-1/18/07		35,000		34,935
FCAR Owner Trust, 5.260-5.290%, 1/10/07-1/19/07		35,000		34,945
Jupiter Securitization Co. L.L.C., 5.250%-5.270%, 1/17/07-2/5/07		26,380		26,283
Kittyhawk Funding, 5.260%, 1/23/07		10,000		9,968
New Center Asset Trust, 5.250%-5.260%, 1/5/07-1/24/07		50,000		49,865
Old Line Funding, 5.260%-5.270%, 1/8/07-1/12/07		14,292		14,271
Park Avenue Receivables, 5.260%-5.270%, 1/22/07-2/16/07		33,316		33,137
Ranger Funding, 5.260%-5.280%, 1/2/07-2/8/07		40,000		39,760
Sheffield Receivables, 5.260%-5.280%, 1/31/07-2/15/07		35,000		34,878
Thames Asset Global Securitization, 5.250%-5.280%, 1/25/07-2/12/07		37,650		37,451
Thunder Bay Funding, 5.260%-5.280%, 1/2/07-2/9/07		49,631		49,533
Variable Funding, 5.250%, 2/1/07-2/5/07		45,000		44,786
Wal-Mart Funding, 5.260%, 1/26/07		10,000		9,963
Windmill Funding Corporation, 5.240%-5.270%, 1/4/07-1/29/07		28,478		28,410

Total Asset-Backed Commercial Paper		666,355		664,290

See accompanying Notes to Financial Statements.

64 Annual Report

December 31, 2006

Ready Reserves Fund

Portfolio of Investments, December 31, 2006 (all amounts in thousands)


Issuer	Principal Amount		Amortized Cost
Demand Notes—1.7%
American Express Corporation, VRN, 5.176%, 1/2/07	$	9,348	$	9,348
Prudential Funding, VRN, 5.180%, 1/2/07		10,783		10,783

Total Demand Notes		20,131		20,131

Total Investments—100.1% (cost $1,197,310)	$	1,198,280		1,197,310

Liabilities, plus cash and other assets—(0.1)%				(1,717	)

Net assets—100.0%			$	1,195,593

Portfolio Weighted Average Maturity				52.3 Days

VRN = Variable Rate Note

See accompanying Notes to Financial Statements.

December 31, 2006

William Blair Funds 65

Statements of Assets and Liabilities

December 31, 2006 (all dollar amounts in thousands)


	Growth Fund		Tax- Managed Growth Fund			Large Cap Growth Fund
*Assets*
Investments in securities, at cost	$	199,534	$	7,307		$	17,410
Investments in Affiliated Fund, at cost		2,574		106			54


Investments in securities, at value	$	262,125	$	9,432		$	20,131
Investments in Affiliated Fund, at value		2,574		106			54
Receivable for fund shares sold		788		3			21
Receivable for investment securities sold		—		259			—
Receivable from Advisor		—		3			—
Dividend and interest receivable		117		8			14

Total assets		265,604		9,811			20,220
*Liabilities*
Payable for investment securities purchased		—		140			—
Payable for fund shares redeemed		812		—			—
Management fee payable		185		—			8
Distribution fee payable		12		—			2
Other accrued expenses		70		27			19

Total liabilities		1,079		167			29

Net Assets	$	264,525	$	9,644		$	20,191

*Capital*
Composition of Net Assets
Par value of shares of beneficial interest	$	23	$	1		$	3
Capital paid in excess of par value		196,096		8,549			22,614
Accumulated net investment income (loss)		—		—			—
Accumulated realized gain (loss)		5,815		(1,031	)		(5,147	)
Net unrealized appreciation (depreciation) of investments and foreign currencies		62,591		2,125			2,721

Net Assets	$	264,525	$	9,644		$	20,191


Class N Shares
Net Assets	$	58,602	$	1,095		$	10,495
Shares Outstanding		5,131,665		100,038			1,524,924
Net Asset Value Per Share	$	11.42	$	10.94		$	6.88
Class I Shares
Net Assets	$	205,923	$	8,549		$	9,696
Shares Outstanding		17,655,001		766,943			1,387,101
Net Asset Value Per Share	$	11.66	$	11.15		$	6.99

See accompanying Notes to Financial Statements.

66 Annual Report

December 31, 2006

Statements of Operations

For the Year Ended December 31, 2006 (all dollar amounts in thousands)


	Growth Fund			Tax- Managed Growth Fund			Large Cap Growth Fund
*Investment income*
Dividends	$	1,510		$	62		$	150
Less foreign tax withheld		(26	)		(1	)		(3	)
Dividend Income from Affiliated Fund		28			11			10
Interest		224			19			20

Total income		1,736			91			177
*Expenses*
Investment advisory fees		1,894			69			147
Distribution fees		125			1			24
Custodian fees		79			39			44
Transfer agent fees		135			8			12
Professional fees		32			26			23
Registration fees		28			27			27
Other expenses		95			5			2

Total expenses before waiver		2,388			175			279
Less expenses waived or absorbed by the Advisor		—			(69	)		(72	)

Net expenses		2,388			106			207

Net investment income (loss)		(652	)		(15	)		(30	)
Net realized and unrealized gain (loss) on investments and other assets and liabilities
Net realized gain (loss) on investments		31,916			765			223

Change in net unrealized appreciation (depreciation) on investments and other assets and liabilities		(1,057	)		12			1,019

Net increase (decrease) in net assets resulting from operations	$	30,207		$	762		$	1,212

See accompanying Notes to Financial Statements.

December 31, 2006

William Blair Funds 67

Statements of Changes in Net Assets

For the Years Ended December 31, 2006 and 2005 (all amounts in thousands)


	Growth Fund						Tax- Managed Growth Fund						Large Cap Growth Fund
	2006			2005			2006			2005			2006			2005
*Operations*
Net investment income (loss)	$	(652	)	$	(987	)	$	(15	)	$	(32	)	$	(30	)	$	(21	)
Net realized gain (loss) on investments, foreign currency transactions and other assets and liabilities		31,916			27,667			765			90			223			79
Change in net unrealized appreciation (depreciation) on investments, and other assets and liabilities		(1,057	)		(3,560	)		12			703			1,019			593

Net increase (decrease) in net assets resulting from operations		30,207			23,120			762			761			1,212			651
*Distributions to shareholders from*
Net investment income		—			—			—			—			—			—
Net realized gain		(27,315	)		(8,977	)		—			—			—			—

		(27,315	)		(8,977	)		—			—			—			—
*Capital stock transactions*
Net proceeds from sale of shares		33,215			19,807			1,445			1,775			4,950			11,656
Shares issued in reinvestment of income dividends and capital gain distributions		25,204			8,262			—			—			—			—
Less cost of shares redeemed		(50,345	)		(64,159	)		(378	)		(568	)		(2,859	)		(1,836	)

Net increase (decrease) in net assets resulting from capital share transactions		8,074			(36,090	)		1,067			1,207			2,091			9,820

Increase (decrease) in net assets		10,966			(21,947	)		1,829			1,968			3,303			10,471
Net assets
Beginning of year		253,559			275,506			7,815			5,847			16,888			6,417

End of year	$	264,525		$	253,559		$	9,644		$	7,815		$	20,191		$	16,888

Undistributed net investment income (loss) at the end of the year	$	(653	)	$	(1	)	$	(15	)	$	—		$	(30	)	$	—

See accompanying Notes to Financial Statements.

68 Annual Report

December 31, 2006

Statements of Assets and Liabilities

December 31, 2006 (all dollar amounts in thousands)


	Small Cap Growth Fund		Mid Cap Growth Fund			Small-Mid Cap Growth Fund
*Assets*
Investments in securities, at cost	$	866,857	$	17,476		$	79,165
Investments in Affiliated Companies, at cost		229,048		—			—
Investments in Affiliated Fund, at cost		9,894		104			1,311


Investments in securities, at value	$	996,863	$	18,540		$	90,802
Investments in Affiliated Companies, at value		246,530		—			—
Investments in Affiliated Fund, at value		9,894		104			1,311
Receivable for fund shares sold		10,374		974			325
Receivable for investment securities sold		8,288		40			423
Receivable from Advisor		—		5			—
Dividend and interest receivable		157		5			18

Total assets		1,272,106		19,668			92,879
*Liabilities*
Payable for investment securities purchased		7,620		2			—
Payable for fund shares redeemed		1,804		—			7
Management fee payable		1,178		—			73
Distribution fee payable		151		1			3
Other accrued expenses		179		26			30

Total liabilities		10,932		29			113

Net Assets	$	1,261,174	$	19,639		$	92,766

*Capital*
Composition of Net Assets
Par value of shares of beneficial interest	$	49	$	2		$	7
Capital paid in excess of par value		1,096,613		18,760			80,288
Accumulated net investment income (loss)		—		—			—
Accumulated realized gain (loss)		17,024		(187	)		834
Net unrealized appreciation (depreciation) of investments and foreign currencies		147,488		1,064			11,637

Net Assets	$	1,261,174	$	19,639		$	92,766


Class N Shares
Net Assets	$	708,113	$	5,481		$	14,235
Shares Outstanding		27,863,637		524,041			1,098,167
Net Asset Value Per Share	$	25.41	$	10.46		$	12.96
Class I Shares
Net Assets	$	553,061	$	14,158		$	78,531
Shares Outstanding		21,321,170		1,349,752			6,014,386
Net Asset Value Per Share	$	25.94	$	10.49		$	13.06

See accompanying Notes to Financial Statements.

December 31, 2006

William Blair Funds 69

Statements of Operations

For the Year Ended December 31, 2006 (all dollar amounts in thousands)


	Small Cap Growth Fund			Mid Cap Growth Fund(a)			Small-Mid Cap Growth Fund
*Investment income*
Dividends	$	1,641		$	57		$	298
Dividends from Affiliated Companies		27			—			—
Dividend Income from Affiliated Fund		573			5			35
Interest		1,599			20			97

Total income		3,840			82			430
*Expenses*
Investment advisory fees		12,197			109			825
Distribution fees		1,610			11			32
Custodian fees		192			55			60
Transfer agent fees		840			19			34
Professional fees		52			22			29
Registration fees		83			33			33
Other expenses		267			5			14

Total expenses before waiver		15,241			254			1,027
Less expenses waived or absorbed by the Advisor		—			(110	)		(59	)

Net expenses		15,241			144			968

Net investment income (loss)		(11,401	)		(62	)		(538	)
Net realized and unrealized gain (loss) on investments, foreign currency transactions and other assets and liabilities
Net realized gain (loss) on investments		117,178			(187	)		4,908
Net realized gain (loss) on investments in Affiliated Companies		(371	)		—			—

Total net realized gain (loss)		116,807			(187	)		4,908
Change in net unrealized appreciation (depreciation) on investments and other assets and liabilities		27,043			1,064			3,169

Net increase (decrease) in net assets resulting from operations	$	132,449		$	815		$	7,539

(a)

For the period from February 1, 2006 (Commencement of Operations) to December 31, 2006.

See accompanying Notes to Financial Statements.

70 Annual Report

December 31, 2006

Statements of Changes in Net Assets

For the Years Ended December 31, 2006 and 2005 (all amounts in thousands)


	Small Cap Growth Fund						Mid Cap Growth Fund(a)			Small-Mid Cap Growth Fund
	2006			2005			2006			2006			2005
*Operations*
Net investment income (loss)	$	(11,401	)	$	(8,349	)	$	(62	)	$	(538	)	$	(382	)
Net realized gain (loss) on investments, foreign currency transactions and other assets and liabilities		116,807			48,921			(187	)		4,908			1,453
Change in net unrealized appreciation (depreciation) on investments, foreign currency transactions and other assets and liabilities		27,043			(35,365	)		1,064			3,169			6,094

Net increase (decrease) in net assets resulting from operations		132,449			5,207			815			7,539			7,165
*Distributions to shareholders from*
Net investment income		—			—			—			—			—
Net realized gain		(78,266	)		(71,631	)		—			(4,404	)		(495	)

		(78,266	)		(71,631	)		—			(4,404	)		(495	)
*Capital stock transactions*
Net proceeds from sale of shares		590,073			345,073			21,378			24,304			43,370
Shares issued in reinvestment of income dividends and capital gain distributions		73,523			69,879			—			3,992			457
Less cost of shares redeemed		(288,343	)		(287,999	)		(2,554	)		(8,876	)		(6,260	)

Net increase (decrease) in net assets resulting from capital stock transactions		375,253			126,953			18,824			19,420			37,567

Increase (decrease) in net assets		429,436			60,529			19,639			22,555			44,237
Net assets
Beginning of year		831,738			771,209			—			70,211			25,974

End of year	$	1,261,174		$	831,738		$	19,639		$	92,766		$	70,211

Undistributed net investment income (loss) at the end of the year	$	(11,401	)	$	—		$	(62	)	$	(538	)	$	—

(a)

For the period from February 1, 2006 (Commencement of Operations) to December 31, 2006.

See accompanying Notes to Financial Statements.

December 31, 2006

William Blair Funds 71

Statements of Assets and Liabilities

December 31, 2006 (all dollar amounts in thousands)


	International Growth Fund			International Equity Fund			International Small Cap Growth Fund			Emerging Markets Growth Fund
*Assets*
Investments in securities, at cost	$	4,573,306		$	241,868		$	196,027		$	634,600
Investments in Affiliated Fund, at cost		637			5,158			5,228			1,265


Investments in securities, at value	$	6,209,154		$	297,108		$	226,468		$	812,126
Investments in Affiliated Fund, at value		637			5,158			5,228			1,265
Cash		—			—			—			150
Foreign currency, at value (cost $1,173, $29, $1,447, and $8,232, respectively)		1,174			27			1,444			8,184
Receivable for fund shares sold		27,666			1,028			165			1,106
Receivable for investment securities sold		75,605			110			467			2,180
Receivable from Advisor		—			36			—			22
Dividend and interest receivable		6,311			300			183			547

Total assets		6,320,547			303,767			233,955			825,580
*Liabilities*
Payable for investment securities purchased		35,438			1,654			1,688			10,869
Payable for fund shares redeemed		10,980			4,140			2			97
Management fee payable		5,261			240			203			693
Distribution and shareholder administration fee payable		863			8			15			45
Other accrued expenses		879			9			78			227

Total liabilities		53,421			6,051			1,986			11,931

Net Assets	$	6,267,126		$	297,716		$	231,969		$	813,649

*Capital*
Composition of Net Assets
Par value of shares of beneficial interest	$	225		$	20		$	17		$	42
Capital paid in excess of par value		4,583,709			243,967			200,077			617,443
Accumulated net investment income (loss)		(124,368	)		(4,627	)		(137	)		(492	)
Accumulated realized gain (loss)		171,664			3,118			1,575			19,184
Net unrealized appreciation (depreciation) of investments and foreign currencies		1,635,896			55,238			30,437			177,472

Net Assets	$	6,267,126		$	297,716		$	231,969		$	813,649


Class N Shares
Net Assets	$	4,191,967		$	36,926		$	17,015		$	57,882
Shares Outstanding		151,353,637			2,427,471			1,272,295			2,980,882
Net Asset Value Per Share	$	27.70		$	15.21		$	13.37		$	19.42
Class I Shares
Net Assets	$	2,075,159		$	260,790		$	68,461		$	202,394
Shares Outstanding		73,836,365			17,030,637			5,105,901			10,392,630
Net Asset Value Per Share	$	28.10		$	15.31		$	13.41		$	19.47

See accompanying Notes to Financial Statements.

72 Annual Report

December 31, 2006

Statements of Operations

For the Year Ended December 31, 2006 (all dollar amounts in thousands)


	International Growth Fund			International Equity Fund			International Small Cap Growth Fund			Emerging Markets Growth Fund
*Investment income*
Dividends	$	86,322		$	3,960		$	1,235		$	6,186
Less foreign tax withheld		(6,999	)		(355	)		(105	)		(453	)
Dividend Income from Affiliated Fund		915			51			20			102
Interest		5,929			438			312			765

Total income		86,167			4,094			1,462			6,600
*Expenses*
Investment advisory fees		54,257			2,668			1,269			5,363
Distribution fees		9,241			78			30			99
Shareholder administration fees		—			—			63			180
Custodian fees		2,933			268			253			832
Transfer agent fees		2,993			196			21			68
Professional fees		155			47			35			41
Registration fees		225			64			73			104
Other expenses		1,533			19			19			82

Total expenses before waiver		71,337			3,340			1,763			6,769
Less expenses waived or absorbed by the Advisor		—			(302	)		(80	)		(380	)

Net expenses		71,337			3,038			1,683			6,389

Net investment income (loss)		14,830			1,056			(221	)		211
Net realized and unrealized gain (loss) on investments, foreign currency transactions and other assets and liabilities
Net realized gain (loss) on investments		731,341			5,767			3,035			26,278
Net realized gain (loss) on foreign currency translation and other assets and liabilities		(18,138	)		(896	)		(736	)		(3,285	)

Total net realized gain (loss)		713,203			4,871			2,299			22,993
Change in net unrealized appreciation (depreciation) on investments and other assets and liabilities		398,415			38,016			26,158			147,786

Net increase (decrease) in net assets resulting from operations	$	1,126,448		$	43,943		$	28,236		$	170,990

See accompanying Notes to Financial Statements.

December 31, 2006

William Blair Funds 73

Statements of Changes in Net Assets

For the Years Ended December 31, 2006 and the 2005 (all amounts in thousands)


	International Growth Fund						International Equity Fund									International Small Cap Growth Fund						Emerging Markets Growth Fund
	2006			2005			2006			2005			2006			2005(a)			2006			2005(b)
*Operations*
Net investment income (loss)	$	14,830		$	8,479		$	1,056		$	(46	)	$	(221	)	$	(6	)	$	211		$	69
Net realized gain (loss) on investments, foreign currency transactions and other assets and liabilities		713,203			286,812			4,871			(2,648	)		2,299			355			22,993			1,535
Change in net unrealized appreciation (depreciation) on investments, foreign currency translation and other assets and liabilities		398,415			457,704			38,016			16,797			26,158			4,279			147,786			29,686

Net increase (decrease) in net assets resulting from operations		1,126,448			752,995			43,943			14,103			28,236			4,628			170,990			31,290
*Distributions to shareholders from*
Net investment income		(81,288	)		(21,550	)		(4,187	)		—			(106	)		(6	)		(405	)		—
Net realized gain		(590,410	)		(254,334	)		(456	)		—			(877	)		—			(4,544	)		(1,169	)

		(671,698	)		(275,884	)		(4,643	)		—			(983	)		(6	)		(4,949	)		(1,169	)
*Capital stock transactions*
Net proceeds from sale of shares		1,785,719			1,424,671			137,733			196,067			172,153			46,006			529,925			224,893
Shares issued in reinvestment of income dividends and capital gain distributions		633,412			246,145			4,390			—			868			6			4,687			1,122
Less cost of shares redeemed		(1,157,832	)		(598,284	)		(61,417	)		(42,149	)		(18,839	)		(100	)		(136,352	)		(6,788	)

Net increase (decrease) in net assets resulting from capital stock transactions		1,261,299			1,072,532			80,706			153,918			154,182			45,912			398,260			219,227

Increase (decrease) in net assets		1,716,049			1,549,643			120,006			168,021			181,435			50,534			564,301			249,348
Net assets
Beginning of year		4,551,077			3,001,434			177,710			9,689			50,534			—			249,348			—

End of year	$	6,267,126		$	4,551,077		$	297,716		$	177,710		$	231,969		$	50,354		$	813,649		$	249,348

Undistributed net investment income (loss) at the end of the year	$	(106,979	)	$	(40,521	)	$	(3,731	)	$	(600	)	$	(426	)	$	(99	)	$	(516	)	$	(322	)

(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.

74 Annual Report

December 31, 2006

Statements of Assets and Liabilities

December 31, 2006 (all dollar amounts in thousands)


	Value Discovery Fund		Income Fund			Ready Reserves Fund
*Assets*
Investments in securities, at cost	$	133,010	$	298,964		$	1,197,310
Investments in Affiliated Fund, at cost		502		—			—


Investments in securities, at value	$	145,990	$	294,960		$	1,197,310
Investments in Affiliated Fund, at value		502		—			—
Cash		—		—			1
Receivable for fund shares sold		3,992		839			—
Receivable for investment securities sold		726		—			—
Receivable from Advisor		—		58			—
Dividend and interest receivable		179		2,854			5,651

Total assets		151,389		298,711			1,202,962
*Liabilities*
Payable for investment securities purchased		4,211		—			6,074
Payable for fund shares redeemed		252		1,461			—
Management fee payable		49		87			231
Distribution fee payable		48		11			353
Shareholder services fee payable		—		—			—
Dividend payable		—		—			619
Other accrued expenses		52		75			92

Total liabilities		4,612		1,634			7,369

Net Assets	$	146,777	$	297,077		$	1,195,593

*Capital*
Composition of Net Assets
Par value of shares of beneficial interest	$	9	$	29		$	929
Capital paid in excess of par value		131,506		321,169			1,195,609
Accumulated net investment income (loss)		11		—			81
Accumulated realized gain (loss)		2,271		(20,117	)		(1,026	)
Net unrealized appreciation (depreciation) of investments and foreign currencies		12,980		(4,004	)		—

Net Assets	$	146,777	$	297,077		$	1,195,593


Class N Shares
Net Assets	$	97,791	$	89,959		$	1,195,593
Shares Outstanding		6,011,762		9,238,661			1,195,647,351
Net Asset Value Per Share	$	16.27	$	9.74		$	1.00
Class I Shares
Net Assets	$	48,986	$	207,118
Shares Outstanding		2,967,590		21,371,722
Net Asset Value Per Share	$	16.51	$	9.69

See accompanying Notes to Financial Statements.

December 31, 2006

William Blair Funds 75

Statements of Operations

For the Year Ended December 31, 2006 (all dollar amounts in thousands)


	Value Discovery Fund			Income Fund			Ready Reserves Fund
*Investment income*
Dividends	$	953		$	—		$	—
Dividend Income from Affiliated Fund		17			—			—
Interest		65			16,094			58,681

Total income		1,035			16,094			58,681
*Expenses*
Investment advisory fees		834			1,531			2,820
Distribution fees		80			141			—
Shareholder services fees		—			—			4,096
Custodian fees		115			117			190
Transfer agent fees		42			105			28
Professional fees		37			35			45
Registration fees		53			31			32
Other expenses		48			90			173

Total expenses before waiver		1,209			2,050			7,384
Less expenses waived or absorbed by the Advisor		(310	)		(58	)		—

Net expenses		899			1,992			7,384

Net investment income (loss)		136			14,102			51,297
Net realized and unrealized gain (loss) on investments, and other assets and liabilities
Net realized gain (loss) on investments		16,215			(1,052	)		—

Change in net unrealized appreciation (depreciation) on investments and other assets and liabilities		760			(202	)		—

Net increase (decrease) in net assets resulting from operations	$	17,111		$	12,848		$	51,297

See accompanying Notes to Financial Statements.

76 Annual Report

December 31, 2006

Statements of Changes in Net Assets

For the Years Ended December 31, 2006 and 2005 (all amounts in thousands)


	Value Discovery Fund						Income Fund						Ready Reserves Fund
	2006			2005			2006			2005			2006			2005
*Operations*
Net investment income (loss)	$	136		$	(48	)	$	14,102		$	12,852		$	51,297		$	27,823
Net realized gain (loss) on investments, foreign currency transactions and other assets and liabilities		16,215			39,004			(1,052	)		(1,052	)		—			—
Change in net unrealized appreciation (depreciation) on investments and other assets and liabilities		760			(49,149	)		(202	)		(6,151	)		—			—

Net increase (decrease) in net assets resulting from operations		17,111			(10,193	)		12,848			5,649			51,297			27,823
*Distributions to shareholders from*
Net investment income		(129	)		—			(16,500	)		(16,070	)		(51,297	)		(27,823	)
Net realized gain		(15,001	)		(24,647	)		—			—			—			—

		(15,130	)		(24,647	)		(16,500	)		(16,070	)		(51,297	)		(27,823	)
*Capital stock transactions*
Net proceeds from sale of shares		100,537			19,288			61,832			95,102			1,030,633			1,131,031
Shares issued in reinvestment of income dividends and capital gain distributions		14,164			24,267			13,061			12,541			51,002			27,698
Less cost of shares redeemed		(40,344	)		(184,452	)		(84,660	)		(80,810	)		(977,896	)		(1,159,815	)

Net increase (decrease) in net assets resulting from capital stock transactions		74,357			(140,897	)		(9,767	)		26,833			103,739			(1,086	)

Increase (decrease) in net assets		76,338			(175,737	)		(13,419	)		16,412			103,739			(1,086	)
Net assets
Beginning of year		70,439			246,176			310,496			294,084			1,091,854			1,092,940

End of year	$	146,777		$	70,439		$	297,077		$	310,496		$	1,195,593		$	1,091,854

Undistributed net investment income (loss) at the end of the year	$	10		$	3		$	(2,398	)	$	—		$	81		$	81

See accompanying Notes to Financial Statements.

December 31, 2006

William Blair Funds 77

Notes to Financial Statements

(1) Significant Accounting Policies

The following is a summary of the Funds’ significant accounting policies in effect during the period covered by the financial statements, which are in accordance with U.S. generally accepted accounting principles.

(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 fifteen 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
Mid Cap Growth		Institutional International Equity
Small-Mid Cap Growth		Emerging Markets Growth
Value Discovery		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.

78 Annual Report

December 31, 2006

(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 Portfolios 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 Portfolios 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 compares 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.

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 the Pricing or Valuation Committee, in accordance with the Fund’s Valuation Procedures approved by the Board of Trustees. As of December 31, 2006, there were securities held in Small Cap Growth, International Growth, International Equity, International Small Cap Growth and the Emerging Markets Growth Portfolios requiring fair valuation pursuant to the Fund’s valuation procedures. Securities held in the Ready Reserves Fund are valued at amortized cost, which approximates market value.

(d) Investment income and 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 translations 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, 2006. 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, 2006, the Income Portfolio recognized a reduction of interest income and a reduction of net realized loss of $2,315 (in thousands). This reclassification has no effect on the net asset value of the Portfolio.

Security and shareholder transactions are accounted for no later than one business day following the trade date. However, for financial reporting purposes, security and shareholder transactions are accounted for on the trade date of the last business day of the reporting period. Realized gains and losses from securities transactions are recognized on the basis of high cost lot sell selection.

Awards from class action litigation may be recorded as a reduction of cost. If the Funds no longer own the applicable securities, the proceeds are recorded as realized gains.

(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

December 31, 2006

William Blair Funds 79

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 or exchanges within 60 days of purchase. For both Class N and Class I shares, the William Blair domestic equity funds assess a 1% redemption fee on shares sold or exchanged that have been owned 60 days or less and the William Blair international funds assess a 2% redemption fee on shares sold or exchanged that have been owned 60 days or less as disclosed within the Funds’ Prospectus. The redemption fees collected by the Fund are netted against the amount of Redemptions for presentation on the Statement of Changes in Net Assets.

For the year ended December 31, 2006, the redemption fees collected by the Portfolios were as follows (in thousands):


	Redemption Fees
Growth	$	1
Tax-Managed Growth		—
Large Cap Growth		—
Small Cap Growth		52
Mid Cap Growth Fund		—
Small Mid-Cap Growth		4
International Growth		152
International Equity		28
International Small Cap Growth		3
Emerging Markets Growth		8
Value Discovery		5

Dividends from net investment income, if any, of the Growth, Tax-Managed Growth, Large Cap Growth, Small Cap Growth, Mid 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.

(f) 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 values of foreign investments, open foreign currency forward contracts, and cash denominated in foreign currencies are translated into U.S. dollars using a spot market rate of exchange as of the time of the determination of each Portfolio’s NAV, typically 4:00 p.m. Eastern time on days when there is regular trading on the New York Stock Exchange. Payables and receivables for securities transactions, dividends, interest income and tax reclaims are translated into U.S. dollars using a spot market rate of exchange as of 4:00 p.m. Eastern time. Settlement of purchases and sales and dividend and interest receipts are translated into U.S. dollars using a spot market rate of exchange as of 11:00 a.m. Eastern time.

The 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. For tax purposes these foreign currency gains and losses are treated as ordinary income.

(g) 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

80 Annual Report

December 31, 2006

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, 2006.

(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 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 $83,007, $3,835, $— and $—, respectively (in thousands) in 2006, 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, 2006, were as follows (in thousands):


Portfolio	Cost of Investments		Gross Unrealized Appreciation		Gross Unrealized Depreciation		Net Unrealized Appreciation/ (Depreciation)
Growth	$	202,259	$	64,280	$	1,840	$	62,440
Tax-Managed Growth		7,413		2,140		15		2,125
Large Cap Growth		17,505		3,026		346		2,680
Small Cap Growth		1,109,713		170,213		26,639		143,574
Mid Cap Growth		17,612		1,432		400		1,032
Small-Mid Cap Growth		80,652		12,806		1,345		11,461
International Growth		4,724,612		1,502,662		17,435		1,485,227
International Equity		253,942		49,054		732		48,322
International Small Cap Growth		202,266		31,673		2,247		29,426
Emerging Markets Growth		641,493		175,190		3,346		171,844
Value Discovery		133,760		13,948		1,216		12,732
Income		298,964		1,366		5,370		(4,004	)
Ready Reserves		1,197,310		—		—		—

December 31, 2006

William Blair Funds 81

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 generally 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, 2006, 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	$	653		$	(653	)	$	0
Tax-Managed Growth		15			—			(15	)
Large Cap Growth		30			—			(30	)
Small Cap Growth		11,401			(11,401	)		—
Mid Cap Growth		62			—			(62	)
Small-Mid Cap Growth		538			(538	)		—
International Growth		(17,389	)		17,389			—
International Equity		(896	)		896			—
International Small Cap Growth		289			(289	)		—
Emerging Markets Growth		24			(22	)		(2	)
Value Discovery		1			(1,934	)		1,933
Income		2,398			(2,315	)		(83	)
Ready Reserves		—			1			(1	)

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 2006 and 2005 was as follows (in thousands):


	Distributions Paid In 2006				Distributions Paid In 2005
Portfolio	Ordinary Income		Long-Term Capital Gains		Ordinary Income		Long-Term Capital Gains
Growth	$	4,799	$	22,516	$	—	$	8,977
Tax-Managed Growth		—		—		—		—
Large Cap Growth		—		—		—		—
Small Cap Growth		—		78,266		11,335		60,296
Mid Cap Growth		—		—
Small-Mid Cap Growth		506		3,898		—		495
International Growth		90,245		581,453		21,550		254,334
International Equity		4,187		456		—		—
International Small Cap Growth		983		—		6		—
Emerging Markets Growth		1,585		3,364		1,169		—
Value Discovery		2,395		12,735		—		24,647
Income		16,500		—		16,070		—
Ready Reserves		51,297		—		27,823		—

82 Annual Report

December 31, 2006

As of December 31, 2006, 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	$	1,311	$	—	$	4,655	$	62,440
Tax-Managed Growth		—		1,031		—		2,125
Large Cap Growth		—		5,106		—		2,680
Small Cap Growth		1,774		—		19,164		143,574
Mid Cap Growth		—		155		—		1,032
Small-Mid Cap Growth		39		—		971		11,461
International Growth		27,392		—		170,573		1,485,227
International Equity		1,822		—		3,585		48,322
International Small Cap Growth		856		137		1,730		29,426
Emerging Markets Growth		5,520		503		19,303		171,844
Value Discovery		1,529		—		999		12,732
Income		—		20,117		—		(4,004	)
Ready Reserves		81		1,026		—		—

At December 31, 2006, 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	2007		2008		2009		2010		2011		2012		2013		2014		Total
Growth	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Tax-Managed Growth		—		—		—		554		468		—		—		—		1,022
Large Cap Growth		—		41		2,714		1,582		769		—		—		—		5,106
Small Cap Growth		—		—		—		—		—		—		—		—		—
Mid Cap Growth		—		—		—		—		—		—		—		155		155
Small-Mid Cap Growth		—		—		—		—		—		—		—		—		—
International Growth		—		—		—		—		—		—		—		—		—
International Equity		—		—		—		—		—		—		—		—		—
International Small Cap Growth		—		—		—		—		—		—		—		—		—
Emerging Markets Growth		—		—		—		—		—		—		—		—		—
Value Discovery		—		—		—		—		—		—		—		—		—
Income		1,249		3,292		—		1,692		1,582		4,431		3,398		4,138		19,782
Ready Reserves		51		24		—		930		—		21		—		—		1,026

For the period November 1, 2006 through December 31, 2006, the following Portfolios incurred net realized capital or foreign currency losses. Each Portfolio intends to treat this loss as having occurred in fiscal year 2007 for Federal income tax purposes (in thousands):


Portfolio	Capital Amount		Currency Amount
Growth	$	—	$	—
Tax-Managed Growth		9		—
Large Cap Growth		—		—
Small Cap Growth		—		—
Mid Cap Growth		—		—
Small-Mid Cap Growth		—		—
International Growth		—		—
International Equity		—		—
International Small Cap Growth		—		137
Emerging Markets Growth		—		503
Value Discovery		—		—
Income		335		—
Ready Reserves		—		—

December 31, 2006

William Blair Funds 83

(i) Repurchase Agreements

The Portfolios may enter into repurchase agreements with its custodian, Investors Bank & Trust Company, whereby the Portfolios acquire ownership of a debt security and the custodian agrees, at the time of sale, to repurchase the debt security from the Portfolios at a mutually agreed upon time and price. The Portfolios’ policy is to take possession of the debt security as collateral under the repurchase agreements. The Portfolios minimize credit risk by monitoring credit exposure to the custodian and by monitoring the collateral value on an ongoing basis.

(j) 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) New Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (FASB) released FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Fund’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is required for fiscal years beginning after December 15, 2006. Recent SEC guidance allows implementing FIN 48 in fund NAV calculations as late as the fund’s last NAV calculation in the first required financial statement reporting period. As a result, the Funds will incorporate FIN 48 in their semi annual reports on June 30, 2007.

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement on Financial Accounting Standards No. 157, “Fair Value Measurements” (FAS 157). This standard clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Management is currently evaluating the impact that FAS 157 will have on the Funds’ financial statements.

(3) 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, clerical, bookkeeping and administrative 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	%
Mid Cap Growth	0.95	%	Emerging Markets Growth	1.10	%
Small-Mid Cap Growth	1.00	%
Value Discovery	1.10	%

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	%
			Next $2 billion	0.225	%
*Management fee also includes a charge of 5% of gross income.			In excess of $2.5 billion	0.200	%

84 Annual Report

December 31, 2006

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, 2007, 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, 2006		Effective May 1, 2006		Through April 30, 2006		Effective May 1, 2006
Tax-Managed Growth	1.53	%	1.40	%	1.28	%	1.15	%
Large Cap Growth	1.25	%	1.23	%	1.00	%	0.98	%
Small Cap Growth	1.50	%	1.50	%	1.25	%	1.25	%
Mid Cap Growth Fund	1.40	%	1.40	%	1.15	%	1.15	%
Small-Mid Cap Growth	1.40	%	1.37	%	1.15	%	1.12	%
International Growth	1.48	%	1.45	%	1.23	%	1.20	%
International Equity	1.48	%	1.45	%	1.23	%	1.20	%
International Small Cap Growth	1.65	%	1.65	%	1.40	%	1.40	%
Emerging Markets Growth	1.65	%	1.65	%	1.40	%	1.40	%
Value Discovery	1.34	%	1.34	%	1.09	%	1.09	%
Income Fund	0.75	%	0.75	%	N/A		N/A

For a period of three years subsequent to the Commencement of Operations of the Mid Cap Growth, 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, 2006 is $110 (in thousands) for the Mid Cap Growth Portfolio, $190 for the Small-Mid Cap Growth Portfolio, $546 for the International Equity Portfolio, $134 for the International Small Cap Growth Portfolio and $541 for the Emerging Markets Growth Portfolio.

For the year ended December 31, 2006, 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	$	1,894	$	—	$	1,894	$	—
Tax-Managed Growth		69		69		—		—
Large Cap Growth		147		72		75		—
Small Cap Growth		12,197		—		12,197		—
Mid Cap Growth		109		109		—		1
Small-Mid Cap Growth		825		59		766		—
International Growth		54,257		—		54,257		—
International Equity		2,668		267		2,401		35
International Small Cap Growth		1,269		80		1,189		—
Emerging Markets Growth		5,363		357		5,006		—
Value Discovery		834		310		524		—
Income		1,531		—		1,531		—
Ready Reserves		2,820		—		2,820		—

(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.

December 31, 2006

William Blair Funds 85

Distribution fees incurred by the Portfolios to the Company, for the year ended December 31, 2006, were as follows (in thousands):


Portfolio	Gross Distribution Fees		Fee Waiver		Net Distribution Fee
Growth	$	125	$	—	$	125
Tax-Managed Growth		1		—		1
Large Cap Growth		24		—		24
Small Cap Growth		1,610		—		1,610
Mid Cap Growth		11		—		11
Small-Mid Cap Growth		32		—		32
International Growth		9,241		—		9,241
International Equity		78		—		78
International Small Cap Growth		30		—		30
Emerging Markets Growth		99		23		76
Value Discovery		80		—		80
Income		141		58		83

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, 2006, the following fees were incurred (in thousands):


Ready Reserves		$	4,096

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, 2006, the following fees were incurred (in thousands):


International Small Cap Growth	$	63
Emerging Markets Growth		180

(c) Trustees Fees

The Portfolios incurred fees of $221 (in thousands) to non-interested trustees of the Fund for the year ended December 31, 2006. Interested trustees are not compensated by the Fund.

(d) Investments in Affiliated Portfolio

Until June 20, 2006 pursuant to an Exemptive Order granted by the Securities and Exchange Commission in January, 2001, and since June 20, 2006 pursuant to the rules of the 1940 Act, 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, 2006 are listed below. Distributions received from Ready Reserves are reflected as dividend income from affiliated Fund 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, 2006 (in thousands):


Portfolio	Purchases		Sales Proceeds		Fees Waived		Dividend Income		Value		Percent of Net Assets
Growth	$	7,467	$	5,617	$	4	$	28	$	2,574	1.0	%
Tax-Managed Growth		1,384		1,641		1		11		106	1.1
Large Cap Growth		3,823		4,193		1		10		54	0.2
Small Cap Growth		36,313		37,421		75		573		9,894	0.8
Mid Cap Growth		723		619		1		5		104	0.5
Small-Mid Cap Growth		3,230		3,931		5		35		1,311	1.4
International Growth		95,414		123,455		124		915		637	—
International Equity		9,544		5,946		7		51		5,158	1.7
International Small Cap Growth		7,473		2,655		3		20		5,228	2.3
Emerging Markets Growth		7,516		10,072		14		102		1,265	0.2
Value Discovery		2,427		1,998		2		17		502	0.3

86 Annual Report

December 31, 2006

(4) Investment Transactions

Investment transactions, excluding money market instruments, for the year ended December 31, 2006 were as follows (in thousands):


Portfolio	Purchases		Sales
Growth	$	152,548	$	170,587
Tax-Managed Growth		4,644		3,411
Large Cap Growth		11,590		9,484
Small Cap Growth		1,413,763		1,121,995
Mid Cap Growth		23,508		6,535
Small-Mid Cap Growth		69,332		55,020
International Growth		4,398,784		3,792,228
International Equity		276,286		196,306
International Small Cap Growth		277,747		134,994
Emerging Markets Growth		928,614		532,078
Value Discovery		186,046		126,389
Income		98,815		109,368

(5) 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.

(6) Fund Share Transactions

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


	Sales (Dollars)
	Year Ended December 31, 2006						Year Ended December 31, 2005
Portfolio	Class N		Class I		Total		Class N		Class I		Total
Growth	$	25,590	$	7,625	$	33,215	$	10,753	$	9,054	$	19,807
Tax-Managed Growth		735		710		1,445		113		1,662		1,775
Large Cap Growth		2,079		2,871		4,950		7,918		3,738		11,656
Small Cap Growth		327,203		262,870		590,073		236,433		108,640		345,073
Mid Cap Growth (a)		7,132		14,246		21,378		—		—		—
Small Mid-Cap Growth		3,522		20,782		24,304		5,104		38,266		43,370
International Growth		1,221,792		563,927		1,785,719		1,066,440		358,231		1,424,671
International Equity		23,189		114,544		137,733		18,044		178,024		196,068
International Small Cap Growth (b)		17,783		51,330		69,113		2,422		11,684		14,106
Emerging Markets Growth (c)		35,769		147,530		183,299		20,123		31,981		52,104
Value Discovery		88,879		11,658		100,537		1,656		17,632		19,288
Income (d)		32,007		29,825		61,832		57,943		37,159		95,102
Ready Reserves		1,030,633		—		1,030,633		1,131,031		—		1,131,031

(a)

For the period from February 1, 2006 (Commencement of Operations) to December 31, 2006.

(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.

December 31, 2006

William Blair Funds 87


	Reinvested Distributions (Dollars)
	Year Ended December 31, 2006									Year Ended December 31, 2005
Portfolio	Class N			Class I			Total			Class N			Class I			Total
Growth	$	5,960		$	19,244		$	25,204		$	1,778		$	6,484		$	8,262
Tax-Managed Growth		—			—			—			—			—			—
Large Cap Growth		—			—			—			—			—			—
Small Cap Growth		43,585			29,938			73,523			42,338			27,541			69,879
Mid Cap Growth (a)		—			—			—			—			—			—
Small Mid-Cap Growth		645			3,347			3,992			77			380			457
International Growth		439,429			193,983			633,412			170,874			75,271			246,145
International Equity		504			3,886			4,390			—			—			—
International Small Cap Growth (b)		71			204			275			—			—			—
Emerging Markets Growth (c)		322			1,039			1,361			104			160			264
Value Discovery		9,410			4,754			14,164			5,835			18,431			24,266
Income		4,314			8,747			13,061			4,620			7,921			12,541
Ready Reserves		51,002			—			51,002			27,698			—			27,698

	Redemptions (Dollars)
	Year Ended December 31, 2006									Year Ended December 31, 2005
Portfolio	Class N			Class I			Total			Class N			Class I			Total
Growth	$	24,102		$	26,243		$	50,345		$	14,242		$	49,911		$	64,153
Tax-Managed Growth		34			344			378			8			554			562
Large Cap Growth		516			2,343			2,859			185			1,647			1,832
Small Cap Growth		193,966			94,377			288,343			214,257			73,727			287,984
Mid Cap Growth (a)		1,913			641			2,554			—			—			—
Small Mid-Cap Growth		1,816			7,060			8,876			2,617			3,636			6,253
International Growth		927,830			230,002			1,157,832			477,866			120,404			598,270
International Equity		11,966			49,451			61,417			1,207			40,936			42,143
International Small Cap Growth (b)		5,184			1,990			7,174			—			100			100
Emerging Markets Growth (c)		11,956			14,058			26,014			1,024			605			1,629
Value Discovery		14,585			25,759			40,344			18,736			165,704			184,440
Income		46,237			38,423			84,660			40,325			40,480			80,805
Ready Reserves		977,896			—			977,896			1,159,815			—			1,159,815

	Net Change in Net Assets relating to Fund Share Activity (Dollars)
	Period Ended December 31, 2006									Year Ended December 31, 2005
Portfolio	Class N			Class I			Total			Class N			Class I			Total
Growth	$	7,448		$	626		$	8,074		$	(1,711	)	$	(34,373	)	$	(36,084	)
Tax-Managed Growth		701			366			1,067			105			1,108			1,213
Large Cap Growth		1,563			528			2,091			7,733			2,091			9,824
Small Cap Growth		176,822			198,431			375,253			64,514			62,454			126,968
Mid Cap Growth (a)		5,219			13,605			18,824			—			—			—
Small Mid-Cap Growth		2,351			17,069			19,420			2,564			35,010			37,574
International Growth		733,391			527,908			1,261,299			759,448			313,098			1,072,546
International Equity		11,727			68,979			80,706			16,837			137,088			153,925
International Small Cap Growth (b)		12,670			49,544			62,214			2,422			11,584			14,006
Emerging Markets Growth (c)		24,135			134,511			158,646			19,203			31,536			50,739
Value Discovery		83,704			(9,347	)		74,357			(11,245	)		(129,641	)		(140,886	)
Income		(9,916	)		149			(9,767	)		22,238			4,600			26,838
Ready Reserves		103,739			—			103,739			(1,086	)		—			(1,086	)

(a)

For the period from February 1, 2006 (Commencement of Operations) to December 31, 2006.

(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.

88 Annual Report

December 31, 2006


	Sales (Shares)
	Period Ended December 31, 2006			Year Ended December 31, 2005
Portfolio	Class N	Class I	Total	Class N	Class I	Total
Growth	2,121	632	2,753	992	846	1,838
Tax-Managed Growth	73	67	140	11	168	179
Large Cap Growth	314	430	744	1,273	597	1,870
Small Cap Growth	12,763	10,023	22,786	9,448	4,272	13,720
Mid Cap Growth (a)	710	1,412	2,122	—	—	—
Small Mid-Cap Growth	267	1,562	1,829	450	3,393	3,843
International Growth	44,607	20,102	64,709	45,004	15,184	60,188
International Equity	1,691	8,196	9,887	1,550	14,844	16,394
International Small Cap Growth (b)	1,449	4,109	5,558	235	1,153	1,388
Emerging Markets Growth (c)	2,209	8,482	10,691	1,604	2,731	4,335
Value Discovery	5,250	689	5,939	78	829	907
Income	3,289	3,073	6,362	5,777	3,717	9,494
Ready Reserves	1,030,633	—	1,030,633	1,131,031	—	1,131,031

	Reinvested Distributions (Shares)
	Period Ended December 31, 2006			Year Ended December 31, 2005
Portfolio	Class N	Class I	Total	Class N	Class I	Total
Growth	518	1,639	2,157	155	555	710
Tax-Managed Growth	—	—	—	—	—	—
Large Cap Growth	—	—	—	—	—	—
Small Cap Growth	1,713	1,152	2,865	1,752	1,121	2,873
Mid Cap Growth (a)	—	—	—	—	—	—
Small Mid-Cap Growth	49	253	302	6	30	36
International Growth	16,102	7,005	23,107	6,912	3,007	9,919
International Equity	34	257	291	—	—	—
International Small Cap Growth (b)	5	15	20	—	—	—
Emerging Markets Growth (c)	17	55	72	7	12	19
Value Discovery	581	289	870	390	1,218	1,608
Income	445	904	1,349	464	796	1,260
Ready Reserves	51,002	—	51,002	27,698	—	27,698

	Redemptions (Shares)
	Period Ended December 31, 2006			Year Ended December 31, 2005
Portfolio	Class N	Class I	Total	Class N	Class I	Total
Growth	2,024	2,182	4,206	1,313	4,632	5,945
Tax-Managed Growth	3	32	35	—	59	59
Large Cap Growth	76	349	425	30	264	294
Small Cap Growth	7,637	3,603	11,240	8,709	2,954	11,663
Mid Cap Growth (a)	186	62	248	—	—	—
Small Mid-Cap Growth	138	522	660	234	303	537
International Growth	34,003	8,346	42,349	20,661	5,142	25,803
International Equity	909	3,555	4,464	104	3,398	3,502
International Small Cap Growth (b)	417	161	578	—	10	10
Emerging Markets Growth (c)	775	840	1,615	81	47	128
Value Discovery	900	1,600	2,500	892	7,748	8,640
Income	4,755	3,959	8,714	4,028	4,056	8,084
Ready Reserves	977,896	—	977,896	1,159,815	—	1,159,815

(a)

For the period from February 1, 2006 (Commencement of Operations) to December 31, 2006.

(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, 2006

William Blair Funds 89


	Net Change in Shares Outstanding relating to Fund Share Activity (Shares)
	Period Ended December 31, 2006						Year Ended December 31, 2005
Portfolio	Class N		Class I		Total		Class N		Class I		Total
Growth	615		89		704		(166	)	(3,231	)	(3,397	)
Tax-Managed Growth	70		35		105		11		109		120
Large Cap Growth	238		81		319		1,243		333		1,576
Small Cap Growth	6,839		7,572		14,411		2,491		2,439		4,930
Mid Cap Growth (a)	524		1,350		1,874		—		—		—
Small Mid-Cap Growth	178		1,293		1,471		222		3,120		3,342
International Growth	26,706		18,761		45,467		31,255		13,049		44,304
International Equity	816		4,898		5,714		1,446		11,446		12,892
International Small Cap Growth (b)	1,037		3,963		5,000		235		1,143		1,378
Emerging Markets Growth (c)	1,451		7,697		9,148		1,530		2,696		4,226
Value Discovery	4,931		(622	)	4,309		(424	)	(5,701	)	(6,125	)
Income	(1,021	)	18		(1,003	)	2,213		457		2,670
Ready Reserves	103,739		—		103,739		(1,086	)	—		(1,086	)

(a)

For the period from February 1, 2006 (Commencement of Operations) to December 31, 2006.

(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.

90 Annual Report

December 31, 2006

Financial Highlights

Growth Fund


	Class N
	Years Ended December 31,
	2006			2005			2004			2003			2002
Net asset value, beginning of year	$	11.33		$	10.70		$	9.97		$	8.06		$	10.87
Income (loss) from investment operations:
Net investment income (loss)		(0.06	)		(0.06	)		(0.06	)		(0.06	)		(0.07	)
Net realized and unrealized gain (loss) on investments		1.48			1.11			0.79			1.97			(2.74	)

Total from investment operations		1.42			1.05			0.73			1.91			(2.81	)
Less distributions from:
Net investment income		—			—			—			—			—
Net realized gain		1.33			0.42			—			—			—

Total distributions		1.33			0.42			—			—			—

Net asset value, end of year	$	11.42		$	11.33		$	10.70		$	9.97		$	8.06

Total return (%)		12.42			9.75			7.32			23.70			(25.85	)
Ratios to average daily net assets (%):
Expenses		1.17			1.15			1.17			1.19			1.19
Net investment income (loss)		(0.49	)		(0.60	)		(0.60	)		(0.67	)		(0.73	)

	Class I
	Years Ended December 31,
	2006			2005			2004			2003			2002
Net asset value, beginning of year	$	11.52		$	10.84		$	10.08		$	8.12		$	10.93
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		1.49			1.14			0.80			2.00			(2.76	)

Total from investment operations		1.47			1.10			0.76			1.96			(2.81	)
Less distributions from:
Net investment income		—			—			—			—			—
Net realized gain		1.33			0.42			—			—			—

Total distributions		1.33			0.42			—			—			—

Net asset value, end of year	$	11.66		$	11.52		$	10.84		$	10.08		$	8.12

Total return (%)		12.64			10.08			7.54			24.14			(25.71	)
Ratios to average daily net assets (%):
Expenses		0.89			0.90			0.92			0.94			0.94
Net investment income (loss)		(0.20	)		(0.35	)		(0.35	)		(0.42	)		(0.48	)



	Years Ended December 31,
	2006		2005		2004		2003		2002
Supplemental data for all classes:
Net assets at end of year (in thousands)	$	264,525	$	253,599	$	275,506	$	281,654	$	255,625
Portfolio turnover rate (%)		61		54		35		45		29

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

December 31, 2006

William Blair Funds 91

Financial Highlights

Tax-Managed Growth Fund


	Class N
	Years Ended December 31,
	2006			2005			2004			2003			2002
Net asset value, beginning of year	$	10.11		$	8.99		$	8.41		$	6.86		$	9.07
Income (loss) from investment operations:
Net investment income (loss)		(0.04	)		(0.07	)		(0.08	)		(0.07	)		(0.06	)
Net realized and unrealized gain (loss) on investments		0.87			1.19			0.66			1.62			(2.15	)

Total from investment operations		0.83			1.12			0.58			1.55			(2.21	)
Less distributions from:
Net investment income		—			—			—			—			—
Net realized gain		—			—			—			—			—

Total distributions		—			—			—			—			—

Net asset value, end of year	$	10.94		$	10.11		$	8.99		$	8.41		$	6.86

Total return (%)		8.21			12.46			6.90			22.59			(24.37	)
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		1.44			1.53			1.54			1.49			1.36
Expenses, before waivers and reimbursements		2.24			2.55			2.26			2.26			2.22
Net investment income (loss), net of waivers and reimbursements		(0.41	)		(0.76	)		(0.92	)		(0.91	)		(0.72	)
Net investment income (loss), before waivers and reimbursements		(1.21	)		(1.78	)		(1.64	)		(1.68	)		(1.58	)

	Class I
	Years Ended December 31,
	2006			2005			2004			2003			2002
Net asset value, beginning of year	$	10.27		$	9.10		$	8.50		$	6.92		$	9.12
Income (loss) from investment operations:
Net investment income (loss)		(0.02	)		(0.05	)		(0.06	)		(0.05	)		(0.04	)
Net realized and unrealized gain (loss) on investments		0.90			1.22			0.66			1.63			(2.16	)

Total from investment operations		0.88			1.17			0.60			1.58			(2.20	)
Less distributions from:
Net investment income		—			—			—			—			—
Net realized gain		—			—			—			—			—

Total distributions		—			—			—			—			—

Net asset value, end of year	$	11.15		$	10.27		$	9.10		$	8.50		$	6.92

Total return (%)		8.57			12.86			7.06			22.83			(24.12	)
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		1.19			1.28			1.29			1.24			1.11
Expenses, before waivers and reimbursements		1.99			2.30			2.01			2.01			1.97
Net investment income (loss), net of waivers and reimbursements		(0.16	)		(0.51	)		(0.67	)		(0.66	)		(0.47	)
Net investment income (loss), before waivers and reimbursements		(0.96	)		(1.53	)		(1.39	)		(1.43	)		(1.33	)



	Years Ended December 31,
	2006		2005		2004		2003		2002
Supplemental data for all classes:
Net assets at end of year (in thousands)	$	9,644	$	7,815	$	5,847	$	6,871	$	5,303
Portfolio turnover rate (%)		42		25		31		37		44

(a)

Rates are annualized for periods that are less than a year.

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

92 Annual Report

December 31, 2006

Financial Highlights

Large Cap Growth Fund


	Class N
	Years Ended December 31,
	2006			2005			2004			2003			2002
Net asset value, beginning of year	$	6.47		$	6.24		$	5.93		$	4.80		$	6.72
Income (loss) from investment operations:
Net investment income (loss)		(0.02	)		(0.02	)		(0.04	)		(0.04	)		(0.04	)
Net realized and unrealized gain (loss) on investments		0.43			0.25			0.35			1.17			(1.88	)

Total from investment operations		0.41			0.23			0.31			1.13			(1.92	)
Less distributions from:
Net investment income		—			—			—			—			—
Net realized gain		—			—			—			—			—

Total distributions		—			—			—			—			—

Net asset value, end of year	$	6.88		$	6.47		$	6.24		$	5.93		$	4.80

Total return (%)		6.34			3.69			5.23			23.54			(28.57	)
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		1.24			1.28			1.38			1.42			1.36
Expenses, before waivers and reimbursements		1.63			2.08			2.29			2.39			2.45
Net investment income (loss), net of waivers and reimbursements		(0.29	)		(0.37	)		(0.63	)		(0.76	)		(0.71	)
Net investment income (loss), before waivers and reimbursements		(0.68	)		(1.17	)		(1.54	)		(1.73	)		(1.80	)

	Class I
	Years Ended December 31,
	2006			2005			2004			2003			2002
Net asset value, beginning of year	$	6.56		$	6.31		$	5.99		$	4.82		$	6.74
Income (loss) from investment operations:
Net investment income (loss)		—			(0.01	)		(0.02	)		(0.03	)		(0.03	)
Net realized and unrealized gain (loss) on investments		0.43			0.26			0.34			1.20			(1.89	)

Total from investment operations		0.43			0.25			0.32			1.17			(1.92	)
Less distributions from:
Net investment income		—			—			—			—			—
Net realized gain		—			—			—			—			—

Total distributions		—			—			—			—			—

Net asset value, end of year	$	6.99		$	6.56		$	6.31		$	5.99		$	4.82

Total return (%)		6.55			3.96			5.34			24.27			(28.49	)
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		0.99			1.03			1.13			1.17			1.11
Expenses, before waivers and reimbursements		1.38			1.83			2.04			2.14			2.20
Net investment income (loss), net of waivers and reimbursements		(0.04	)		(0.12	)		(0.38	)		(0.51	)		(0.46	)
Net investment income (loss), before waivers and reimbursements		(0.43	)		(0.92	)		(1.29	)		(1.48	)		(1.55	)


	Years Ended December 31,
	2006		2005		2004		2003		2002
Supplemental data for all classes:
Net assets at end of year (in thousands)	$	20,191	$	16,888	$	6,417	$	5,519	$	5,469
Portfolio turnover rate (%)		53		53		39		33		52

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

December 31, 2006

William Blair Funds 93

Financial Highlights

Small Cap Growth Fund


	Class N
	Years Ended December 31,
	2006			2005			2004			2003			2002
Net asset value, beginning of year	$	23.76		$	25.72		$	21.83		$	13.72		$	16.58
Income (loss) from investment operations:
Net investment income (loss)		(0.29	)		(0.30	)		(0.30	)		(0.21	)		(0.19	)
Net realized and unrealized gain (loss) on investments		3.65			0.64			6.20			8.68			(2.67	)

Total from investment operations		3.36			0.34			5.90			8.47			(2.86	)
Less distributions from:
Net investment income		—			—			—			—			—
Net realized gain		1.71			2.30			2.01			0.36			—

Total distributions		1.71			2.30			2.01			0.36			—

Net asset value, end of year	$	25.41		$	23.76		$	25.72		$	21.83		$	13.72

Total return (%)		14.12			1.18			27.24			61.88			(17.25	)
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		1.48			1.49			1.49			1.55			1.56
Expenses, before waivers and reimbursements		1.48			1.49			1.46			1.52			1.62
Net investment income (loss), net of waivers and reimbursements		(1.14	)		(1.23	)		(1.27	)		(1.22	)		(1.31	)
Net investment income (loss), before waivers and reimbursements		(1.14	)		(1.23	)		(1.24	)		(1.19	)		(1.37	)

	Class I
	Years Ended December 31,
	2006			2005			2004			2003			2002
Net asset value, beginning of year	$	24.16		$	26.04		$	22.03		$	13.82		$	16.65
Income (loss) from investment operations:
Net investment income (loss)		(0.22	)		(0.25	)		(0.24	)		(0.18	)		(0.16	)
Net realized and unrealized gain (loss) on investments		3.71			0.67			6.26			8.75			(2.67	)

Total from investment operations		3.49			0.42			6.02			8.57			(2.83	)
Less distributions from:
Net investment income		—			—			—			—			—
Net realized gain		1.71			2.30			2.01			0.36			—

Total distributions		1.71			2.30			2.01			0.36			—

Net asset value, end of year	$	25.94		$	24.16		$	26.04		$	22.03		$	13.82

Total return (%)		14.42			1.48			27.54			62.15			(17.00	)
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		1.21			1.24			1.24			1.35			1.31
Expenses, before waivers and reimbursements		1.21			1.24			1.21			1.28			1.37
Net investment income (loss), net of waivers and reimbursements		(0.87	)		(0.98	)		(1.02	)		(1.02	)		(1.06	)
Net investment income (loss), before waivers and reimbursements		(0.87	)		(0.98	)		(0.99	)		(0.95	)		(1.12	)


	Years Ended December 31,
	2006		2005		2004		2003		2002
Supplemental data for all classes:
Net assets at end of year (in thousands)	$	1,261,174	$	831,738	$	771,209	$	518,824	$	78,581
Portfolio turnover rate (%)		105		80		109		103		133

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

94 Annual Report

December 31, 2006

Financial Highlights

Mid Cap Growth Fund


	Class N
	Period Ended
	12/31/2006(a)
Net asset value, beginning of period	$	10.00
Income (loss) from investment operations:
Net investment income (loss)		(0.07	)
Net realized and unrealized gain (loss) on investments		0.53

Total from investment operations		0.46
Less distributions from:
Net investment income		—
Net realized gain		—

Total distributions		—

Net asset value, end of period	$	10.46

Total return (%) (c)		4.60
Ratios to average daily net assets (%) (b):
Expenses, net of waivers and reimbursements		1.40
Expenses, before waivers and reimbursements		2.35
Net investment income (loss), net of waivers and reimbursements		(0.70	)
Net investment income (loss), before waivers and reimbursements		(1.65	)

	Class I
	Period Ended
	12/31/2006(a)
Net asset value, beginning of period	$	10.00
Income (loss) from investment operations:
Net investment income (loss)		(0.04	)
Net realized and unrealized gain (loss) on investments		0.53

Total from investment operations		0.49
Less distributions from:
Net investment income		—
Net realized gain		—

Total distributions		—

Net asset value, end of period	$	10.49

Total return (%) (c)		4.90
Ratios to average daily net assets (%) (b):
Expenses, net of waivers and reimbursements		1.15
Expenses, before waivers and reimbursements		2.10
Net investment income (loss), net of waivers and reimbursements		(0.43	)
Net investment income (loss), before waivers and reimbursements		(1.38	)

	Period Ended
	12/31/2006(a)
Supplemental data for all classes:
Net assets at end of period (in thousands)	$	19,639
Portfolio turnover rate (%) (b)		56

(a)

For the period from February 1, 2006 (Commencement of Operations) to December 31, 2006.

(b)

Rates are annualized for periods that are less than a year.

(c)

Total return is not annualized for periods that are less than a year.

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

December 31, 2006

William Blair Funds 95

Financial Highlights

Small-Mid Cap Growth Fund


	Class N
	Years Ended December 31,
	2006			2005			2004			2003(a)
Net asset value, beginning of year	$	12.40		$	11.28		$	9.94		$	10.00
Income (loss) from investment operations:
Net investment income (loss)		(0.11	)		(0.11	)		(0.13	)		—
Net realized and unrealized gain (loss) on investments		1.32			1.32			1.47			(0.06	)

Total from investment operations		1.21			1.21			1.34			(0.06	)
Less distributions from:
Net investment income		—			—			—			—
Net realized gain		0.65			0.09			—			—

Total distributions		0.65			0.09			—			—

Net asset value, end of year	$	12.96		$	12.40		$	11.28		$	9.94

Total return (%)		9.68			10.72			13.48			(0.60	)
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		1.38			1.45			1.54			1.54	(b)
Expenses, before waivers and reimbursements		1.45			1.54			2.14			1.54	(b)
Net investment income (loss), net of waivers and reimbursements		(0.86	)		(0.97	)		(1.26	)		(1.54	)(b)
Net investment income (loss), before waivers and reimbursements		(0.93	)		(1.06	)		(1.86	)		(1.54	)(b)

	Class I
	Years Ended December 31,
	2006			2005			2004			2003(a)
Net asset value, beginning of year	$	12.46		$	11.30		$	9.94		$	10.00
Income (loss) from investment operations:
Net investment income (loss)		(0.08	)		(0.08	)		(0.11	)		—
Net realized and unrealized gain (loss) on investments		1.33			1.33			1.47			(0.06	)

Total from investment operations		1.25			1.25			1.36			(0.06	)
Less distributions from:
Net investment income		—			—			—			—
Net realized gain		0.65			0.09			—			—

Total distributions		0.65			0.09			—			—

Net asset value, end of year	$	13.06		$	12.46		$	11.30		$	9.94

Total return (%)		9.95			11.05			13.68			(0.60	)
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		1.13			1.20			1.29			1.29	(b)
Expenses, before waivers and reimbursements		1.20			1.29			1.89			1.29	(b)
Net investment income (loss), net of waivers and reimbursements		(0.61	)		(0.72	)		(1.01	)		(1.29	)(b)
Net investment income (loss), before waivers and reimbursements		(0.68	)		(0.81	)		(1.61	)		(1.29	)(b)


	Years Ended December 31,
	2006		2005		2004		2003
Supplemental data for all classes:
Net assets at end of year (in thousands)	$	92,766	$	70,211	$	25,974	$	3,673
Portfolio turnover rate (%)		68		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.

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

96 Annual Report

December 31, 2006

Financial Highlights

International Growth Fund


	Class N
	Years Ended December 31,
	2006		2005		2004			2003		2002
Net asset value, beginning of year	$	25.22	$	22.09	$	18.65		$	13.13	$	15.48
Income (loss) from investment operations:
Net investment income (loss) (a)		0.05		0.15		(0.02	)		0.02		(0.05	)
Net realized and unrealized gain (loss) on investments		5.71		4.60		3.47			5.52		(2.30	)

Total from investment operations		5.76		4.75		3.45			5.54		(2.35	)
Less distributions from:
Net investment income		0.37		0.11		0.01			0.02		—
Net realized gain		2.91		1.51		—			—		—

Total distributions		3.28		1.62		0.01			0.02		—

Net asset value, end of year	$	27.70	$	25.22	$	22.09		$	18.65	$	13.13

Total return (%)		23.06		21.65		18.48			42.21		(15.18	)
Ratios to average daily net assets (%):
Expenses		1.42		1.42		1.47			1.50		1.51
Net investment income (loss)		0.19		0.16		(0.16	)		0.05		(0.36	)


	Class I
	Years Ended December 31,
	2006		2005		2004		2003		2002
Net asset value, beginning of year	$	25.55	$	22.34	$	18.85	$	13.27	$	15.60
Income (loss) from investment operations:
Net investment income (loss) (a)		0.13		0.27		0.01		0.09		(0.01	)
Net realized and unrealized gain (loss) on investments		5.78		4.61		3.53		5.54		(2.32	)

Total from investment operations		5.91		4.88		3.54		5.63		(2.33	)
Less distributions from:
Net investment income		0.45		0.16		0.05		0.05		—
Net realized gain		2.91		1.51		—		—		—

Total distributions		3.36		1.67		0.05		0.05		—

Net asset value, end of year	$	28.10	$	25.55	$	22.34	$	18.85	$	13.27

Total return (%)		23.35		22.00		18.79		42.42		(14.94	)
Ratios to average daily net assets (%):
Expenses		1.11		1.17		1.22	��	1.25		1.26
Net investment income (loss)		0.45		0.41		0.09		0.30		(0.11	)


			Years Ended December 31,
	2006		2005		2004		2003		2002
Supplemental data for all classes:
Net assets at end of year (in thousands)	$	6,267,126	$	4,551,077	$	3,001,434	$	1,899,699	$	778,788
Portfolio turnover rate (%)		72		70		79		57		73

(a)

Excludes $0.42, $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 2006, 2005, 2004, 2003 and 2002, respectively.

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

December 31, 2006

William Blair Funds 97

Financial Highlights

International Equity Fund


	Class N
	Years Ended December 31,
	2006		2005			2004(a)
Net asset value, beginning of year	$	12.86	$	11.33		$	10.00
Income (loss) from investment operations:
Net investment income (loss) (b)		0.04		(0.01	)		(0.04	)
Net realized and unrealized gain (loss) on investments		2.52		1.54			1.37

Total from investment operations		2.56		1.53			1.33
Less distributions from:
Net investment income		0.19		—			—
Net realized gain		0.02		—			—

Total distributions		0.21		—			—

Net asset value, end of year	$	15.21	$	12.86		$	11.33

Total return (%)		19.96		13.50			13.30
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		1.46		1.48			1.50	(c)
Expenses, before waivers and reimbursements		1.56		1.81			2.96	(c)
Net investment income (loss), net of waivers and reimbursements		0.26		(0.33	)		(0.77	)(c)
Net investment income (loss), before waivers and reimbursements		0.16		(0.66	)		(2.23	)(c)


	Class I
	Years Ended December 31,
	2006		2005			2004(a)
Net asset value, beginning of year	$	12.94	$	11.37		$	10.00
Income (loss) from investment operations:
Net investment income (loss) (b)		0.06		(0.01	)		(0.01	)
Net realized and unrealized gain (loss) on investments		2.55		1.58			1.38

Total from investment operations		2.61		1.57			1.37
Less distributions from:
Net investment income		0.22		—			—
Net realized gain		0.02		—			—

Total distributions		0.24		—			—

Net asset value, end of year	$	15.31	$	12.94		$	11.37

Total return (%)		20.22		13.81			13.70
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		1.21		1.23			1.25	(c)
Expenses, before waivers and reimbursements		1.35		1.56			2.71	(c)
Net investment income (loss), net of waivers and reimbursements		0.46		(0.08	)		(0.52	)(c)
Net investment income (loss), before waivers and reimbursements		0.32		(0.41	)		(1.98	)(c)


	Years Ended December 31,
	2006		2005		2004
Supplemental data for all classes:
Net assets at end of year (in thousands)	$	297,716	$	177,710	$	9,689
Portfolio turnover rate (%)		83		127		108	(c)

(a)

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

(b)

Excludes $0.22, $0.33 and $0.02 of PFIC mark to market which is treated as ordinary income for Federal tax purposes for the years 2006, 2005 and 2004, respectively.

(c)

Rates are annualized for periods that are less than a year.

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

98 Annual Report

December 31, 2006

Financial Highlights

International Small Cap Growth Fund


	Class N
	Years Ended December 31,
		2006			2005(a)
Net asset value, beginning of year		$	11.16		$	10.00
Income (loss) from investment operations:
Net investment income (loss) (b)			(0.05	)		(0.01	)
Net realized and unrealized gain (loss) on investments			2.32			1.17

Total from investment operations			2.27			1.16
Less distributions from:
Net investment income			0.01			—
Net realized gain			0.05			—

Total distributions			0.06			—

Net asset value, end of year		$	13.37		$	11.16

Total return (%)			20.32			11.60
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements			1.65			1.65	(c)
Expenses, before waivers and reimbursements			1.71			2.57	(c)
Net investment income (loss), net of waivers and reimbursements			(0.40	)		(0.40	)(c)
Net investment income (loss), before waivers and reimbursements			(0.46	)		(1.32	)(c)

	Class I
	Years Ended December 31,
		2006			2005(a)
		(unaudited)
Net asset value, beginning of year		$	11.16		$	10.00
Income (loss) from investment operations:
Net investment income (loss) (b)			(0.03	)		—
Net realized and unrealized gain (loss) on investments			2.34			1.16

Total from investment operations			2.31			1.16
Less distributions from:
Net investment income			0.01			—
Net realized gain			0.05			—

Total distributions			0.06			—

Net asset value, end of year		$	13.41		$	11.16

Total return (%)			20.68			11.60
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements			1.40			1.40	(c)
Expenses, before waivers and reimbursements			1.46			2.32	(c)
Net investment income (loss), net of waivers and reimbursements			(0.25	)		(0.15	)(c)
Net investment income (loss), before waivers and reimbursements			(0.31	)		(1.07	)(c)



	Years Ended December 31,
		2006		2005(a)
Supplemental data for all classes:
Net assets at end of year (in thousands)		$	231,969	$	50,534
Portfolio turnover rate (%)			109		127	(c)

(a)

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

(b)

Excludes $0.00 and $0.11 of PFIC mark to market which is treated as ordinary income for Federal tax purposes for the years ended 2006 and 2005, respectively.

(c)

Rates are annualized for periods that are less than a year.

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

December 31, 2006

William Blair Funds 99

Financial Highlights

Emerging Markets Growth Fund


	Class N
	Years Ended December 31,
	2006			2005(a)
Net asset value, beginning of year	$	14.17		$	10.00
Income (loss) from investment operations:
Net investment income (loss) (b)		(0.04	)		(0.01	)
Net realized and unrealized gain (loss) on investments		5.41			4.26

Total from investment operations		5.37			4.25
Less distributions from:
Net investment income		0.01			—
Net realized gain		0.11			0.08

Total distributions		0.12			0.08

Net asset value, end of year	$	19.42		$	14.17

Total return (%)		37.90			42.52
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		1.65			1.55	(c)
Expenses, before waivers and reimbursements		1.78			1.91	(c)
Net investment income (loss), net of waivers and reimbursements		(0.22	)		(0.11	)(c)
Net investment income (loss), before waivers and reimbursements		(0.35	)		(0.47	)(c)


	Class I
	Years Ended December 31,
	2006			2005(a)
Net asset value, beginning of year	$	14.19		$	10.00
Income (loss) from investment operations:
Net investment income (loss) (b)		(0.01	)		0.01
Net realized and unrealized gain (loss) on investments		5.41			4.26

Total from investment operations		5.40			4.27
Less distributions from:
Net investment income		0.01			—
Net realized gain		0.11			0.08

Total distributions		0.12			0.08

Net asset value, end of year	$	19.47		$	14.19

Total return (%)		38.07			42.72
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		1.40			1.40	(c)
Expenses, before waivers and reimbursements		1.47			1.76	(c)
Net investment income (loss), net of waivers and reimbursements		(0.06	)		0.04	(c)
Net investment income (loss), before waivers and reimbursements		(0.13	)		(0.32	)(c)


	Years Ended December 31,
	2006		2005(a)
Supplemental data for all classes:
Net assets at end of year (in thousands)	$	813,649	$	249,348
Portfolio turnover rate (%)		113		77	(c)

(a)

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

(b)

Excludes $0.00 and $0.11 of PFIC mark to market which is treated as ordinary income for Federal tax purposes for years ended 2006 and 2005, respectively.

(c)

Rates are annualized for periods that are less than a year.

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

100 Annual Report

December 31, 2006

Financial Highlights

Value Discovery Fund


	Class N
	Years Ended December 31,
	2006			2005			2004			2003			2002
Net asset value, beginning of year	$	14.95		$	22.70		$	22.68		$	16.28		$	18.23
Income (loss) from investment operations:
Net investment income (loss)		0.03			(0.02	)		(0.01	)		(0.06	)		(0.03	)
Net realized and unrealized gain (loss) on investments		3.22			0.14			2.68			6.46			(1.92	)

Total from investment operations		3.25			0.12			2.67			6.40			(1.95	)
Less distributions from:
Net investment income		0.01			—			—			—			—
Net realized gain		1.92			7.87			2.65			—			—

Total distributions		1.93			7.87			2.65			—			—

Net asset value, end of year	$	16.27		$	14.95		$	22.70		$	22.68		$	16.28

Total return (%)		21.78			0.49			12.05			39.31			(10.70	)
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		1.34			1.34			1.34			1.49			1.53
Expenses, before waivers and reimbursements		1.75			1.64			1.48			1.58			1.53
Net investment income (loss), net of waivers and reimbursements		0.21			(0.22	)		(0.06	)		(0.30	)		(0.16	)
Net investment income (loss), before waivers and reimbursements		(0.20	)		(0.52	)		(0.20	)		(0.39	)		(0.16	)

	Class I
	Years Ended December 31,
	2006			2005			2004			2003			2002
Net asset value, beginning of year	$	15.12		$	22.82		$	22.76		$	16.31		$	18.19
Income (loss) from investment operations:
Net investment income (loss)		0.03			—			0.01			(0.03	)		0.01
Net realized and unrealized gain (loss) on investments		3.30			0.17			2.70			6.48			(1.89	)

Total from investment operations		3.33			0.17			2.71			6.45			(1.88	)
Less distributions from:
Net investment income		0.02			—			—			—			—
Net realized gain		1.92			7.87			2.65			—			—

Total distributions		1.94			7.87			2.65			—			—

Net asset value, end of year	$	16.51		$	15.12		$	22.82		$	22.76		$	16.31

Total return (%)		22.10			0.70			12.18			39.55			(10.34	)
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		1.09			1.14			1.23			1.33			1.34
Expenses, before waivers and reimbursements		1.50			1.39			1.23			1.33			1.34
Net investment income (loss), net of waivers and reimbursements		0.16			(0.02	)		0.05			(0.14	)		0.03
Net investment income (loss), before waivers and reimbursements		(0.25	)		(0.27	)		0.05			(0.14	)		0.03


	Years Ended December 31,
	2006		2005		2004		2003		2002
Supplemental data for all classes:
Net assets at end of year (in thousands)	$	146,777	$	70,439	$	246,176	$	237,111	$	190,802
Portfolio turnover rate (%)		162		125		50		51		20

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

December 31, 2006

William Blair Funds 101

Financial Highlights

Income Fund


	Class N
	Years Ended December 31,
	2006			2005			2004			2003			2002
Net asset value, beginning of year	$	9.83		$	10.19		$	10.43		$	10.62		$	10.34
Income (loss) from investment operations:
Net investment income (loss) (a)		0.44			0.47			0.52			0.40			0.55
Net realized and unrealized gain (loss) on investments		(0.04	)		(0.30	)		(0.26	)		(0.02	)		0.25

Total from investment operations		0.40			0.17			0.26			0.38			0.80
Less distributions from:
Net investment income		0.49			0.53			0.50			0.57			0.52
Net realized gain		—			—			—			—			—

Total distributions		0.49			0.53			0.50			0.57			0.52

Net asset value, end of year	$	9.74		$	9.83		$	10.19		$	10.43		$	10.62

Total return (%)		4.25			1.71			2.61			3.68			7.91
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		0.74			0.73			0.78			0.77			0.81
Expenses, before waivers and reimbursements		0.80			0.73			0.78			0.77			0.81
Net investment income (loss), net of waivers and reimbursements		4.54			4.09			4.12			4.09			5.23
Net investment income (loss) before waivers and reimbursements		4.48			4.09			4.12			4.09			5.23
	Class I
	Years Ended December 31,
	2006			2005			2004			2003			2002
Net asset value, beginning of year	$	9.82		$	10.15		$	10.40		$	10.62		$	10.35
Income (loss) from investment operations:
Net investment income (loss) (a)		0.45			0.52			0.59			0.43			0.57
Net realized and unrealized gain (loss) on investments		(0.04	)		(0.33	)		(0.31	)		(0.04	)		0.24

Total from investment operations		0.41			0.19			0.28			0.39			0.81
Less distributions from:
Net investment income		0.54			0.52			0.53			0.61			0.54
Net realized gain		—			—			—			—			—

Total distributions		0.54			0.52			0.53			0.61			0.54

Net asset value, end of year	$	9.69		$	9.82		$	10.15		$	10.40		$	10.62

Total return (%)		4.33			1.92			2.79			3.76			8.04
Ratios to average daily net assets (%):
Expenses		0.62			0.58			0.63			0.62			0.66
Net investment income (loss)		4.66			4.24			4.27			4.24			5.38


	Years Ended December 31,
	2006	2005	2004	2003	2002
Supplemental data for all classes:
Net assets at end of year (in thousands)	$297,077	$310,496	$294,084	$265,062	$196,136
Portfolio turnover rate (%)	33	41	43	36	66

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

102 Annual Report

December 31, 2006

Financial Highlights

Ready Reserves Fund


	Class N
	Years Ended December 31,
	2006			2005		2004		2003		2002
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)		0.04			0.03		0.01		0.01		0.01

Total from investment operations		0.04			0.03		0.01		0.01		0.01
Less distributions from:			��
Net investment income		0.04			0.03		0.01		0.01		0.01

Total distributions		0.04			0.03		0.01		0.01		0.01

Net asset value, end of year	$	1.00		$	1.00	$	1.00	$	1.00	$	1.00

Total return (%)		4.47			2.62		0.80		0.66		1.28
Ratios to average daily net assets (%)
Expenses		0.63			0.64		0.65		0.66		0.67
Net investment income (loss)		4.38			2.57		0.80		0.66		1.28
Supplemental data:
Net assets at end of year (in thousands)	$	1,195,593		$	1,091,854	$	1,092,940	$	1,153,932	$	1,324,001

(a)

Rates are annualized for periods that are less than a year.

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

December 31, 2006

William Blair Funds 103

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, Mid 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”) (thirteen of the Portfolios constituting the William Blair Funds) as of December 31, 2006, 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, 2006, 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, 2006, 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.

LOGO

Chicago, Illinois

February 12, 2007

104 Annual Report

December 31, 2006

Trustees and Officers (Unaudited). The trustees and officers of the William Blair Funds as of December 31, 2006, their year of birth, 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 Year of Birth	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, 1934*	Chairman of the Board of Trustees	Since 1987	Principal, William Blair & Company, L.L.C.; Partner, APM Limited Partnership	15	Trustee Emeritus, Chicago Child Care Society, a non-profit organization; Trustee Emeritus Kalamazoo College

Michelle Seitz, 1965*	Trustee	Since 2002	Principal, William Blair & Company, L.L.C.	15	N/A
Non-Interested Trustees
Theodore A. Bosler, 1934	Trustee	Since 1997	Retired Principal and Vice President, Lincoln Capital Management	15	Desert Foothills Land Trust, Institute of Chartered Financial Analysts, and Thresholds.

Ann P. McDermott, 1939	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	15	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, 1946	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	15	American Student Assistance Corp.; Amica Mutual Insurance Company;

John B. Schwemm, 1934	Trustee	Since 1990	Retired Chairman and Chief Executive Officer, R.R. Donnelley & Sons Company	15	USG Corp., building material manufacturer, and Walgreen Co.

Donald L. Seeley, 1944	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	15	Warnaco Group, Inc. intimate apparel, sportswear, and swimwear manufacturer. Center for Furniture Craftmanship (not-for-profit)

Robert E. Wood II, 1938	Trustee	Since 1999	Retired Executive Vice President, Morgan Stanley Dean Witter	15	Chairman, Add-Vision, Inc. manufacturer of surface animation systems, and Micro-Combustion, LLC

December 31, 2006

William Blair Funds 105


Name and Year of Birth	Position(s) Held with Fund	Term of Office and Length of Time Served(1)	Principal Occupation(s) During Past 5 Years	Other Directorships Held by Trustee/Officer
Officers
Marco Hanig, 1958	President	Since 1999	Principal, William Blair & Company, L.L.C.	Chicago Scores

Karl W. Brewer, 1966	Senior Vice President	Since 2000	Principal, William Blair & Company, L.L.C.	N/A

Harvey H. Bundy, III, 1944	Senior Vice President	Since 2003	Principal, William Blair & Company, L.L.C.	N/A

Mark A. Fuller, III, 1957	Senior Vice President	Since 1993	Principal, William Blair & Company, L.L.C.	Partner, Fulsen Howney Partners

James S. Golan, 1961	Senior Vice President	Since 2005	Principal, William Blair & Company, L.L.C.	N/A

W. George Greig, 1952	Senior Vice President	Since 1996	Principal, William Blair & Company, L.L.C.	N/A

Michael A. Jancosek, 1959	Senior Vice President Vice President	Since 2004 2000-2004	Principal, William Blair & Company L.L.C. Associate, William Blair & Company, L.L.C.	N/A

John F. Jostrand, 1954	Senior Vice President	Since 1999	Principal, William Blair & Company, L.L.C.	N/A

James S. Kaplan, 1960	Senior Vice President Vice President	Since 2004 1995-2004	Principal, William Blair & Company, L.L.C. Associate, William Blair & Company, L.L.C.	N/A

Robert C. Lanphier, IV, 1956	Senior Vice President	Since 2003	Principal, William Blair & Company, L.L.C.	Chairman, AG. Med, Inc.

Todd M. McClone, 1968	Senior Vice President Vice President	Since 2006 2005-2006	Principal, William Blair & Company, L.L.C. Associate, William Blair & Company, L.L.C.	N/A N/A

David S. Mitchell, 1960	Senior Vice President Vice President	Since 2004 2003-2004	Principal, William Blair & Company, L.L.C. Associate, William Blair & Company, L.L.C.	N/A

Gregory J. Pusinelli, 1958	Senior Vice President	Since 1999	Principal, William Blair & Company, L.L.C.	N/A

David P. Ricci, 1958	Senior Vice President	Since 2006	Principal, William Blair & Company, L.L.C.	N/A

Norbert W. Truderung, 1952	Senior Vice President	Since 1992	Principal, William Blair & Company, L.L.C.	N/A

Jeffrey A. Urbina, 1955	Senior Vice President	Since 1998	Principal, William Blair & Company, L.L.C.	N/A

106 Annual Report

December 31, 2006


Name and Year of Birth	Position(s) Held with Fund	Term of Office and Length of Time Served(1)	Principal Occupation(s) During Past 5 Years	Other Directorships Held by Trustee/Officer
Christopher T. Vincent, 1956	Senior Vice President Vice President	Since 2004 2002-2004	Principal, William Blair & Company, L.L.C. Associate, William Blair & Company, L.L.C.; former Managing Director/Senior Portfolio Manager, Zurich Scudder Investments	Uhlich Children’s Home

Richard W. Smirl, 1967	Chief Compliance Officer	Since 2004	Associate, William Blair & Company, L.L.C.; former Chief Legal Officer, Strong Capital Management	N/A

David C. Fording, 1967	Vice President	Since 2006	Associate, William Blair & Company,; former Portfolio Manager, TIAA-CREF	N/A

Chad M. Kilmer, 1975	Vice President	Since 2006	Associate, William Blair & Company,; former analyst and Portfolio Manager U.S. Bancorp Asset Management and analyst Gabelli Woodland Partners.	N/A

Mark T. Leslie, 1967	Vice President	Since 2005	Associate, William Blair & Company, L.L.C. formerly, U.S. Bancorp Asset Management	N/A

Colin J. Williams, 1975	Vice President	Since 2006	Associate William Blair & Company, L.L.C.; formerly, Andersen Consulting; Allegiance Healthcare	N/A

Terence M. Sullivan, 1944	Vice President and Treasurer	Since 1997	Associate, William Blair & Company, L.L.C.	N/A

Colette M. Garavalia, 1961	Secretary	Since 2000	Associate, William Blair & Company, L.L.C.	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, principal underwriter and distributor.

(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, 2006

William Blair Funds 107

(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.

Shareholder Meeting Results

A Special Meeting of Shareholders (the “Meeting”) of the Fund was held on November 30, 2006 at the offices of the Fund, 222 West Adams Street, Chicago, Illinois 60606. At the Meeting, the following matter was voted upon by shareholders (the resulting votes are presented below).

1. Election of Trustees. (“Number of Votes” represents all Portfolios of the Fund.)


	Number of Votes:
Trustee	For	Withhold
Frederick Conrad Fischer	1,425,457,809.64	2,021,812.06
Ann P. McDermott	1,425,077,600.17	2,402,021.53
Phillip O. Peterson*	1,426,061,038.41	1,418,583.29
Donald J. Reaves	1,425,552,754.75	1,926,866.95
Donald L. Seeley	1,425,445.801.20	2,033,820.50
Michelle R. Seitz	1,426,053,294.98	1,426,326.72
Thomas J. Skelly*	1,426,143,800.45	1,335,821.25
Robert E. Wood II	1,425,504,578.55	1,975,043.15

*	Messrs. Peterson and Skelly became Trustees of the Trust on February 15, 2007 upon the retirement of Trustees Bosler and Schwemm.

108 Annual Report

December 31, 2006

Useful Information About Your Report (unaudited)

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

Expense Example

As a shareholder of a Portfolio, 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 fees (for Class N of Ready Reserves Fund), shareholder administration fees (for Class N and Class I shares of International Small Cap Growth Fund and Emerging Markets Growth Fund) and other Portfolio expenses. The example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. To do so, compare the Portfolio’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, 2006 to December 31, 2006.

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 Portfolio’s actual expense ratio and an assumed rate of return of 5% per year before expenses. This is not the Portfolio’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 Portfolio 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 or account fees were included, your costs would have been higher.

December 31, 2006

William Blair Funds 109

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 7/1/2006		Ending Account Value 12/31/2006		Expenses Paid during Period(a)		Annualized Expense Ratio
Growth Fund
Class N—actual return	$	1,000.00	$	1,098.00	$	6.19	1.17	%
Class N—hypothetical 5% return		1,000.00		1,019.31		5.96	1.17
Class I—actual return		1,000.00		1,098.80		4.71	0.89
Class I—hypothetical 5% return		1,000.00		1,020.72		4.53	0.89
Tax-Managed Growth Fund
Class N—actual return		1,000.00		1,066.30		7.50	1.44
Class N—hypothetical 5% return		1,000.00		1,017.95		7.32	1.44
Class I—actual return		1,000.00		1,068.00		6.20	1.19
Class I—hypothetical 5% return		1,000.00		1,019.21		6.06	1.19
Large Cap Growth Fund
Class N—actual return		1,000.00		1,073.30		6.48	1.24
Class N—hypothetical 5% return		1,000.00		1,018.95		6.31	1.24
Class I—actual return		1,000.00		1,075.40		5.18	0.99
Class I—hypothetical 5% return		1,000.00		1,020.21		5.04	0.99
Small Cap Growth Fund
Class N—actual return		1,000.00		1,078.10		7.75	1.48
Class N—hypothetical 5% return		1,000.00		1,017.74		7.53	1.48
Class I—actual return		1,000.00		1,079.90		6.34	1.21
Class I—hypothetical 5% return		1,000.00		1,019.11		6.16	1.21
Mid Cap Growth Fund
Class N—actual return		1,000.00		1,049.10		7.23	1.40
Class N—hypothetical 5% return		1,000.00		1,018.15		7.01	1.40
Class I—actual return		1,000.00		1,051.10		5.95	1.15
Class I—hypothetical 5% return		1,000.00		1,019.41		5.76	1.15
Small-Mid Cap Growth Fund
Class N—actual return		1,000.00		1,043.80		7.11	1.38
Class N—hypothetical 5% return		1,000.00		1,018.25		7.02	1.38
Class I—actual return		1,000.00		1,045.80		5.83	1.13
Class I—hypothetical 5% return		1,000.00		1,019.51		5.75	1.13
International Growth Fund
Class N—actual return		1,000.00		1,161.50		7.74	1.42
Class N—hypothetical 5% return		1,000.00		1,018.05		7.22	1.42
Class I—actual return		1,000.00		1,163.00		6.05	1.11
Class I—hypothetical 5% return		1,000.00		1,019.61		5.65	1.11
International Equity Fund
Class N—actual return		1,000.00		1,146.20		7.90	1.46
Class N—hypothetical 5% return		1,000.00		1,017.85		7.43	1.46
Class I—actual return		1,000.00		1,147.20		6.55	1.21
Class I—hypothetical 5% return		1,000.00		1,019.11		6.16	1.21
International Small Cap Growth Fund
Class N—actual return		1,000.00		1,108.80		8.77	1.65
Class N—hypothetical 5% return		1,000.00		1,016.89		8.39	1.65
Class I—actual return		1,000.00		1,110.30		7.45	1.40
Class I—hypothetical 5% return		1,000.00		1,018.15		7.12	1.40

110 Annual Report

December 31, 2006


	Beginning Account Value 7/1/2006	Ending Account Value 12/31/2006		Expenses Paid during Period(a)		Annualized Expense Ratio
Emerging Markets Growth Fund
Class N—actual return	1,000.00	$	1,302.70	$	9.58	1.65
Class N—hypothetical 5% return	1,000.00		1,016.89		8.39	1.65
Class I—actual return	1,000.00		1,302.70		8.13	1.40
Class I—hypothetical 5% return	1,000.00		1,018.15		7.12	1.40
Value Discovery Fund
Class N—actual return	1,000.00		1,121.80		7.17	1.34
Class N—hypothetical 5% return	1,000.00		1,018.45		6.82	1.34
Class I—actual return	1,000.00		1,123.00		5.83	1.09
Class I—hypothetical 5% return	1,000.00		1,019.71		5.55	1.09
Income Fund
Class N—actual return	1,000.00		1,040.10		3.81	0.74
Class N—hypothetical 5% return	1,000.00		1,021.48		3.77	0.74
Class I—actual return	1,000.00		1,040.90		3.19	0.62
Class I—hypothetical 5% return	1,000.00		1,022.08		3.16	0.62
Ready Reserves Fund
Class N—actual return	1,000.00		1,023.90		3.21	0.63
Class N—hypothetical 5% return	1,000.00		1,022.03		3.21	0.63

(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.)

December 31, 2006

William Blair Funds 111

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 S. 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

Todd M. McClone, Senior Vice President

David S. Mitchell, Senior Vice President

Gregory J. Pusinelli, Senior Vice President

David P. Ricci, Senior Vice President

Norbert W. Truderung, Senior Vice President

Jeffrey A. Urbina, Senior Vice President

Christopher T. Vincent, Senior Vice President

Richard W. Smirl, Chief Compliance Officer

David C. Fording, Vice President

Chad M. Kilmer, Vice President

Mark T. Leslie, Vice President

Colin J. Williams, Vice President

Terence M. Sullivan, Vice President and Treasurer

Colette M. Garavalia, Secretary

Investment Advisor

William Blair & Company, L.L.C.

Independent Registered Public Accounting Firm

Ernst & Young LLP

Legal Counsel

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

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)

112 Date of First Use August, 2006

LOGO

Table of Contents


International Markets Overview		2

Institutional International Growth Fund
An Overview from the Portfolio Manager		4
Portfolio of Investments		6

Institutional International Equity Fund
An Overview from the Portfolio Manager		10
Portfolio of Investments		12

International Small Cap Growth Fund
An Overview from the Portfolio Manager		15
Portfolio of Investments		17

Emerging Markets Growth Fund
An Overview from the Portfolio Managers		19
Portfolio of Investments		21

Financial Statements		23

Notes to Financial Statements		26

Report of Independent Registered Public Accounting Firm		35

Fund Expense Information		41

Board of Trustees and Officers		42

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, 2006

William Blair Funds 1

International Markets Overview

As a result, international equity markets rebounded beginning in July, and ended the year up 27.16%, as reflected by the MSCI All-Country World ex-U.S. Index. Within international markets, emerging markets were up 32.59%, as measured by the MSCI Emerging Markets Index, despite their mid-year decline, outpacing the MSCI EAFE Index, which rose 26.86%. Within developed markets, Europe, Pacific ex-Japan, and the UK were the strongest regions, each up over 30%, while Japan was the laggard, returning only 6.33% during the year. Developed small cap stocks underperformed their larger cap counterparts during the year, rising 19.82% as measured by the MSCI World Ex-U.S. Small Cap Index, due largely to negative Japanese small cap stock performance.

2007 Outlook

•

Globalization

•

Corporate Governance and Performance

The vast majority of listed companies, particularly those with some scale and diversity of operations, see themselves as having an opportunity to improve profit margins, capital

2 Annual Report

December 31, 2006

productivity, or both. Increasingly, firms benchmark profitability against the best in their peer group, and boards expect progress toward that goal. Competitive improvements in Information Technology (IT), logistics, marketing methods, sourcing, and production can all combine to raise the bar for growth for the market as a whole.

•

Cash Flow

•

Valuation

Comment on Style Performance

December 31, 2006

William Blair Funds 3

LOGO

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

See page 2 for the International Markets Overview.

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

The Institutional International Growth Fund posted a 23.45% gain for the 12 months ended December 31, 2006. By comparison, the Fund’s benchmark, the Morgan Stanley Capital International (MSCI) All Country World (ACWI) ex-US Index, rose 27.16%.

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

Despite strong absolute performance, the Fund underperformed the Index during 2006, due to second quarter underperformance, coupled with the Fund’s quality growth focus. Value outperformed growth by over 6% during the year, with sectors such as Materials and Utilities, areas where the Fund was underweighted, significantly outpacing the more traditional growth areas of Consumer, Health Care and IT, areas where the Fund was overweighted relative to the Index. The Fund’s results during 2006, returning 23.45% were due largely to strong stock selection in Consumer Staples, Energy, Financials, Information Technology (IT), and Telecommunication Services. Consumer Staples stock selection was enhanced by strong performance in Emerging Asia and Latin America, while Energy stock selection was positive across most regions, due to the Fund’s focus on alternative energy companies, energy services, and exploration and production companies with strong production growth. Financials stock selection was enhanced from developed Asia, Europe ex-UK and emerging Asia holdings, while emerging Asia and Latin American IT stocks bolstered that sector’s performance. The Telecommunication Services holdings, significantly outperformed their counterparts within the Index, as they were largely focused in the emerging markets, where subscriber growth continues to accelerate.

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

4 Annual Report

December 31, 2006

Institutional International Growth Fund

Performance Highlights (unaudited)

LOGO

Average Annual Total Return at 12/31/2006


	1 Year		3 Year		Since Inception(a)
Institutional International Growth Fund	23.45	%	21.43	%	22.26	%
MSCI All Country World Ex-US Index	27.16		21.81		23.28

(a)

For the period from July 26, 2002 (Commencement of Operations) to December 31, 2006.

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 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.

Sector Diversification (unaudited)

LOGO

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

December 31, 2006

William Blair Funds 5

Institutional International Growth Fund

Portfolio of Investments, December 31, 2006 (all dollar amounts in thousands)


Issuer	Shares	Value


*Common Stocks—Europe—35.6%*
Austria—1.3%
Erste Bank (Commercial banks)	138,904	$	10,636
Raiffeisen International Bank (Commercial banks)	93,600		14,232

			24,868

Belgium—0.4%
InBev NV (Beverages)	117,500		7,731

France—11.5%
April Group S.A. (Insurance)	62,000		2,984
BNP Paribas (Commercial banks)	202,450		22,024
Capgemini S.A. (IT services)	229,500		14,359
Essilor International (Health care equipment & supplies)	139,900		15,019
Eurazeo (Diversified financial services)	71,925		10,267
Group Danone (Food products)	179,200		27,099
Iliad S.A. (Internet software & services)	81,300		7,027
Klepierre (Real estate investment trusts)	41,570		7,837
L’Oreal S.A. (Personal products)	363,600		36,346
LVMH Moet Hennessey Louis Vuitton SA (Textiles, apparel & luxury goods)	217,900		22,922
*Orpea (Health care providers & services)	56,633		5,357
*S.O.I.T.E.C. (Semiconductors & semiconductor equipment)	235,900		8,339
Veolia Environnement (Multi-utilities)	352,700		26,898
Vinci S.A.(Construction & engineering)	77,300		9,852

			216,330

Germany—3.3%
Bijou Brigitte (Textiles, apparel & luxury goods)	20,550		4,044
CTS Eventim AG (Media)	60,100		2,313
E.ON AG (Electrical utilities)	146,480		19,782
*Patrizia Immobilien AG (Real estate management & development)	7,300		218
*Q-Cells AG (Electrical equipment)	149,520		6,694
*Qiagen NV (Life science tools & services)	371,100		5,698
SAP AG (Software)	363,100		19,256
Solarworld AG (Electrical equipment)	66,400		4,138
*Wire Card AG (Commercial services & supplies)	41,900		433

			62,576

Greece—1.7%
Coca-Cola Hellenic Bottling S.A. (Beverages)	255,500		9,969
EFG Eurobank (Commercial banks)	303,060		10,950
National Bank of Greece (Commercial banks)	241,226		11,064

			31,983

Ireland—2.7%
Anglo Irish Bank plc (Commercial banks)	916,000		18,968
IAWS Group plc (Food products)	230,400		5,902
Kingspan Group plc (Building products)	458,700		12,162
*Ryanair Holdings plc—ADR (Airlines)	125,300		10,212
United Drug plc (Health care providers & services)	793,700		4,170

			51,414

Italy—3.6%
Azimut Holding SpA (Capital markets)	445,800		5,953
Banca Italease (Diversified financial services)	129,600		7,523


Issuer	Shares	Value


*Common Stocks—Europe—35.6%—(continued)*
Italy—3.6%—(continued)
Credito Emiliano SpA (Commercial banks)	417,000	$	5,891
Luxottica Group SpA (Textiles, apparel & luxury goods)	556,600		17,061
Saipem SpA (Energy equipment & services)	985,200		25,562
Tod’s SpA (Textiles, apparel & luxury goods)	74,900		6,024

			68,014

Luxembourg—0.3%
*Gagfah S.A. (Real estate management & development)	170,200		5,399

Netherlands—1.1%
Royal Numico N.V. (Food products)	253,800		13,629
*Tomtom NV (Software)	164,300		7,074

			20,703

Norway—0.5%
*Acergy S.A. (Energy equipment & services)	444,900		8,487

Spain—1.8%
*Grifols S.A. (Biotechnology)	618,700		8,236
Industria De Textile (Specialty retail)	418,300		22,502
*Tecnicas Reunidas S.A. (Construction & engineering)	99,300		3,810

			34,548

Sweden—1.5%
Ericsson (LM) (Communications equipment)	3,427,000		13,781
*Modern Times Group (Media)	117,850		7,721
Nobia AB (Specialty retail)	179,750		6,898

			28,400

Switzerland—5.9%
ABB Ltd. (Electrical equipment)	2,266,000		40,578
*EFG International (Capital markets)	237,300		8,935
Kuehne & Nagel International AG (Marine)	198,400		14,413
Nobel Biocare Holdings AG (Health care equipment & supplies)	33,250		9,808
*Partners Group Global Opporunites, Ltd. (Capital markets)	66,050		7,970
Roche Holdings AG (Pharmaceuticals)	127,300		22,776
SGS S.A. (Commercial services & supplies)	5,700		6,333

			110,813


*United Kingdom—16.3%*
Amlin plc (Insurance)	231,100		1,468
BG Group plc (Oil, gas & consumable fuels)	1,845,320		25,093
*Cairn Energy plc (Oil, gas & consumable fuels)	249,500		8,765
Capita Group plc (Commercial services & supplies)	1,668,500		19,783
Carphone Warehouse Group plc (Specialty retail)	1,367,000		8,377
Detica Group plc (IT services)	385,300		2,764
HBOS plc (Commercial banks)	1,727,400		38,187
Homeserve plc (Commercial services & supplies)	132,600		4,899

See accompanying Notes to Financial Statements.

6 Annual Report

December 31, 2006

Institutional International Growth Fund

Portfolio of Investments, December 31, 2006 (all dollar amounts in thousands)


Issuer	Shares	Value


*Common Stocks—United Kingdom—16.3%—(continued)*
United Kingdom—(continued)
Man Group plc (Capital markets)	2,076,000	$	21,190
Michael Page International (Commercial services & supplies)	1,353,600		11,955
Northern Rock plc (Thrifts & mortgage finance)	857,200		19,709
Reckitt Benckiser plc (Household products)	708,950		32,341
*Rolls-Royce Group plc (Aerospace & defense)	3,586,100		31,339
Rotork plc (Electronic equipment & instruments)	389,300		6,360
RPS Group plc (Commercial services & supplies)	768,400		4,055
Serco Group (Commercial services & supplies)	1,466,100		10,937
Tesco plc (Food & staples retailing)	4,731,200		37,388
Tullow Oil plc (Oil, gas & consumable fuels)	879,480		6,836
Ultra Electronic Holdings plc (Aerospace & defense)	296,500		6,288
Victrex plc (Chemicals)	184,900		2,904
VT Group plc (Aerospace & defense)	604,100		5,610

			306,248


*Japan—14.2%*
Aeon Mall Co., Ltd. (Real estate management & development)	153,100		8,645
Canon, Inc. (Office electronics)	499,500		28,122
Chiyoda Corp. (Construction & engineering)	346,800		6,780
*DeNA Co., Ltd. (Internet & catalog retail)	1,617		5,298
Denso Corporation (Auto components)	897,100		35,571
En-Japan Inc. (Commercial services & supplies)	135		647
Honeys Company, Ltd. (Specialty retail)	112,000		4,160
Hoya Corporation (Electronic equipment & instruments)	225,500		8,789
Joint Corporation (Real estate management & development)	191,800		7,375
*Jupiter Telecommunications Co., Ltd. (Media)	6,605		5,324
*K.K. DaVinci Advisors (Real estate management & development)	5,634		5,584
Kenedix, Inc. (Real estate management & development)	897		4,047
Keyence Corporation (Electronic equipment & instruments)	84,489		20,855
Komatsu Ltd. (Machinery)	670,400		13,569
MISUMI Group, Inc. (Trading companies & distributors)	254,400		4,858
Nakanishi Inc. (Health care equipment & supplies)	42,500		5,214
Nitori Company Ltd. (Specialty retail)	122,980		5,322
Orix Corporation (Consumer finance)	121,100		35,118
Park 24 Co., Ltd. (Commercial services & supplies)	384,900		4,921
Sharp Corp. (Household durables)	678,100		11,659
Suruga Bank (Commercial banks)	1,198,000		14,837
Yamada Denki Company (Specialty retail)	94,500		8,021
Yamaha Motor Company (Automobiles)	656,700		20,642

			265,358


Issuer	Shares	Value


*Common Stocks—(continued)*

*Emerging Asia—12.7%*
China—3.1%
China Life Insurance Co. (Insurance)	1,193,000	$	4,072
China Mengniu Dairy Co. (Food products)	2,433,000		6,376
China Vanke Company Ltd. (Real estate management & development)	3,984,200		7,633
*Focus Media Holding Ltd.—ADR (Media)	100,300		6,659
*Foxconn International (Communications equipment)	1,156,800		3,773
Fu Ji Food & Catering (Hotels, restaurants & leisure)	1,819,000		4,691
Hopson Development Holdings Ltd. (Real estate management & development)	1,723,000		4,870
Lee and Man Paper Manufacturing Ltd. (Containers & packaging)	1,542,000		3,780
Li Ning Co. Ltd. (Leisure equipment & products)	2,860,000		4,573
Parkson Retail Group Ltd. (Multiline retail)	1,008,500		4,988
Ports Design Limited (Textiles, apparel & luxury goods)	1,890,500		4,130
Wumart Stores, Inc., Class “H” (Food & staples retailing)**	4,200,000		2,700

			58,245

India—3.8%
Bharat Heavy Electricals Ltd. (Electrical equipment)	197,100		10,209
*Bharti Airtel Ltd. (Wireless telecommunication services)	541,100		7,703
Dabur India Ltd. (Personal products)	1,641,400		5,436
HDFC Bank (Commercial banks)	193,100		4,633
Hindustan Lever Ltd. (Household durables)	832,400		4,071
Housing Development Finance Corp. (Thrifts & mortgage finance)	208,100		7,629
Infosys Technologies, Ltd. (IT services)	365,056		18,448
Maruti Udyog Ltd. (Automobiles)	287,500		6,023
Suzlon Energy Ltd. (Electrical equipment)	212,800		6,268

			70,420

Indonesia—1.2%
PT Bank Rakyat Indonesia (Commercial banks)	11,051,000	$	6,339
*PT Kalbe Farma Tbk (Pharmaceuticals)	7,229,200		959
PT Telekomunikasi Tbk (Diversified telecommunication services)	12,843,500		14,476

			21,774

Malaysia—0.7%
Bumiputra Commerce Holdings Bhd (Commercial banks)	4,301,800		9,425
Transmile Group Bhd (Air freight & logistics)	796,300		3,212

			12,637

South Korea—1.9%
*NHN Corp. (Internet software & services)	96,320		11,716
Samsung Electronics Co. (Semiconductors & semiconductor equipment)	23,580		15,469
*Shinsegae Co. Ltd. (Food & staples retailing)	13,310		8,290

			35,475

See accompanying Notes to Financial Statements.

December 31, 2006

William Blair Funds 7

Institutional International Growth Fund

Portfolio of Investments, December 31, 2006 (all dollar amounts in thousands)


Issuer	Shares	Value


*Common Stocks—Emerging Asia—12.7%—(continued)*
Taiwan—2.0%
High Tech Computer Corporation (Computers & peripherals)	205,600	$	4,055
*Himax Technologies, Inc.—ADR (Semiconductors & semiconductor equipment)	289,000		1,379
Hon Hai Precision Industry (Electronic equipment & instruments)	2,696,506		19,186
Largan Precision Co. Ltd. (Leisure equipment & products)	249,100		4,791
Mediatek Inc. (Semiconductors & equipment)	735,120		7,570

			36,981


*Asia—8.2%*
Australia—3.2%
Allco Finance Group, Limited (Capital markets)	838,172		8,507
Macquarie Bank, Ltd. (Capital markets)	506,000		31,451
Seek Ltd. (Commercial services & supplies)	1,294,900		5,999
United Group Ltd. (Construction & engineering)	592,100		6,513
WorleyParsons, Ltd. (Energy equipment & services)	459,800		7,721

			60,191

Hong Kong—2.2%
Esprit Holdings Ltd. (Specialty retail)	1,812,500		20,189
Li & Fung Ltd. (Distributors)	6,591,800		20,466

			40,655

Singapore—2.8%
Capitaland, Ltd. (Real estate management & development)	7,913,800		31,846
Goodpack Ltd. (Air freight & logistics)	2,239,000		2,246
Osim International Ltd. (Specialty retail)	4,299,640		3,917
Raffles Education Corp. Ltd. (Diversified consumer services)	3,561,000		4,107
Singapore Exchange, Ltd. (Diversified financial services)	2,738,000		10,109

			52,225


*Emerging Latin America—5.8%*
Brazil—2.0%
Companhia de Concessoes Rodoviarias (Transportation infrastructure)	582,700		7,868
Cyrela Brazil Realty S.A. (Household durables)	455,700		4,349
Gol Linhas Aereas Inteligentes S.P—ADR (Airlines)	159,500		4,573
Localiza Rent a Car S.A. (Road & rail)	142,400		4,282
Lojas Renner S.A. (Multiline retail)	346,200		4,975
Natura Cosmeticos S.A. (Personal products)	379,300		5,353
Submarino S.A.(Internet & catalog retail)	193,100		6,326

			37,726

Chile—0.6%
*Cencosud S.A.—ADR 144A (Specialty retail)	221,200		10,380
S.A.C.I. Falabella (Multiline retail)	145,000		509

			10,889


Issuer	Shares	Value


Common Stocks—Emerging Latin America—5.8%—(continued)
Columbia—0.3%
Bancolombia S.A.—ADR (Commercial banks)	205,100	$	6,389

Mexico—2.6%
America Movil S.A. (Wireless telecommunication services)	6,233,500		14,056
*Desarrolladora Homex S.A.—ADR (Household durables)	101,300		5,984
Grupo Aeropuertario Del—ADR (Transportation infrastructure)	81,900		3,210
*Urbi Desarrollos Urbanos S.A. (Household durables)	2,553,100		9,217
Walmart de Mexico (Food & staples retailing)	3,748,700		16,493

			48,960

Panama—0.3%
Copa Holdings S.A., Class “A” (Airlines)†	113,300		5,275


*Canada—3.0%*
*Gildan Activewear, Inc. (Textiles, apparel & luxury goods)	120,500		5,631
Manulife Financial Corp. (Insurance)	408,000		13,767
Ritchie Brothers Auctioneers, Inc. (Commercial services & supplies)†	66,700		3,571
Shoppers Drug Mart Corp. (Food & staples retailing)	415,100		17,830
Suncor Energy, Inc.(Oil, gas & consumable fuels)	199,300		15,687

			56,486


*Emerging Europe, Mid-East, Africa—2.5%*
Czech Republic—0.2%
*Central European Media Enterprises Ltd. Class “A” (Media)†	54,100		3,787

Kazakhstan—0.5%
*Kazkommertsbank—GDR 144A (Commercial banks)	443,163		10,237

Russia—0.8%
*CTC Media, Inc. (Media)†	236,802		5,686
Sberbank—CLS (Commercial banks)	2,500		8,625

			14,311

South Africa—1.0%
Naspers Ltd. (Media)	227,800		5,400
Sasol Ltd. (Oil, gas, and consumable fuels)	180,400		6,643
Truworths International Ltd. (Specialty retail)	1,445,400		6,597

			18,640

Total Common Stock—98.3% (cost $1,331,009)			1,844,175


*Preferred Stock*
Brazil—1.1%
Banco Itau Holding (Commercial banks)	245,200		8,883
Petroleo Brasileiro S.A. (Oil, gas & consumable fuels)	534,200		12,452

			21,335

Total Preferred Stock—1.1% (cost $11,310)			21,335

See accompanying Notes to Financial Statements.

8 Annual Report

December 31, 2006

Institutional International Growth Fund

Portfolio of Investments, December 31, 2006 (all dollar amounts in thousands)


Issuer	Shares or Principal Amount		Value

*Investment in Affiliate*
William Blair Ready Reserves Fund		52,033	$	52

Total Investment in Affiliate—0.0% (cost $52)				52


*Short-Term Investments*
American Express Demand Note, VRN 5.176% due 1/2/07	$	2,387,000		2,387
Prudential Funding Demand Note, VRN 5.180% due 1/2/07		653,000		653

Total Short-term Investments—0.2% (cost $3,040)				3,040

Total Investments—99.6% (cost $1,345,411)				1,868,602
Cash and other assets, less liabilities—0.4%				6,739

Net assets—100.0%			$	1,875,341

* Non-income producing securities

ADR = American Depository Receipt

GDR = Global Depository Receipt

VRN = Variable Rate Note

† = U.S. listed foreign security

**	Fair valued pursuant to Valuation Procedures adopted by the Board of Trustees. This holding represents 0.14% of the Fund’s net assets at December 31, 2006. This security was also deemed illiquid pursuant to Liquidity Procedures approved by the Board of Trustees.

At December 31, 2006 the Fund’s Portfolio of Investments includes the following industry categories:


Financials		25.8%
Consumer Discretionary		18.6%
Industrials & Services		16.0%
Consumer Staples		12.7%
Information Technology		11.7%
Energy		6.3%
Health Care		4.1%
Utilities		2.5%
Telecommunication Services		1.9%
Materials		0.4%

		100.0%

At December 31, 2006 the Fund’s Portfolio of Investments includes the following currency categories:


Euro		27.5%
British Pound Sterling		16.4%
Japanese Yen		14.2%
Swiss Franc		5.9%
Hong Kong Dollar		4.9%
United States Dollar		4.6%
Indian Rupee		3.8%
Australian Dollar		3.2%
Brazilian Real		2.9%
Canadian Dollar		2.8%
Singapore Dollar		2.8%
Mexico Nuevo Peso		2.1%
Taiwan Dollar		1.9%
South Korean Won		1.9%
Swedish Krone		1.5%
Indonesian Rupiah		1.2%
South African Rand		1.0%
All other currencies		1.4%

		100.0%

See accompanying Notes to Financial Statements.

December 31, 2006

William Blair Funds 9

LOGO

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

See page 2 for the International Markets Overview.

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

The Institutional International Equity Fund posted a 20.22% gain for the 12 months ended December 31, 2006. By comparison, the Fund’s benchmark, the Morgan Stanley Capital International (MSCI) All Country World (ACWI) ex-US Index, rose 27.16%.

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

Despite strong absolute performance, the Fund underperformed the Index during 2006. This underperformance was due largely to second quarter results. The Fund’s quality growth focus hampered relative performance during the quarter, due both to value domination during 2006, as value outperformed growth by over 6% during the year, coupled with the negative “quality” effect as quality companies underperformed by even a wider margin during the year. The portfolio’s significant underweighting of Materials and Utilities, two of the strongest performing sectors during the year, in favor of Consumer, IT and Health Care, sectors that underperformed, also hampered results. The Fund’s results during 2006, returning 20.22%, were due largely to strong stock selection in Consumer Staples, Energy, Financials, Information Technology (IT), and Telecommunication Services. Specifically, the Fund’s overweighting and stock selection within Latin American Consumer Staples stocks added value, as did the Fund’s overweighting in UK Consumer Staples companies. Energy stock selection was bolstered by the Fund’s Europe performance, while Financials stock selection was strong across most regions, coupled with regional positioning. Within IT, the Fund’s weighting in Europe ex-UK companies added value, coupled with the focus on Taiwanese consumer electronics and IT outsourcing companies. During the year, the Fund’s Telecommunications Services allocation was largely focused on emerging markets companies that have benefited from accelerating subscriber growth in Latin America and Asia.

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

10 Annual Report

December 31, 2006

Institutional International Equity Fund

Performance Highlights (unaudited)

LOGO

Average Annual Total Return at 12/31/2006


	1 Year		Since Inception(a)
Institutional International Equity Fund	20.22	%	19.52	%
MSCI All Country World Ex-US Index	27.16		23.18

(a)

For the period from December 1, 2004 (Commencement of Operations) to December 31, 2006.

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 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.

Sector Diversification (unaudited)

LOGO

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

December 31, 2006

William Blair Funds 11

Institutional International Equity Fund

Portfolio of Investments, December 31, 2006 (all dollar amounts in thousands)


Issuer	Shares	Value


*Common Stocks Europe—38.8%*
Austria—1.6%
Erste Bank (Commercial banks)	71,666	$	5,487
Raiffeisen International Bank (Commercial banks)	28,900		4,395

			9,882

Belguim—0.4%
InBev N.V. (Beverages)	36,800		2,421

France—14.5%
BNP Paribas (Commercial banks)	95,860		10,428
Capgemini S.A. (IT services)	73,800		4,617
Essilor International (Health care equipment & supplies)	54,400		5,840
Eurazeo (Diversified financial services)	35,445		5,060
Groupe Danone (Food products)	98,800		14,941
Iliad S.A. (Internet software & services)	22,800		1,971
L’Oreal S.A. (Personal products)	160,900		16,084
LVMH Moet Hennessey Louis Vuitton SA (Textiles, apparel & luxury goods)	95,900		10,088
Veolia Environnement (Multi-utilities)	136,600		10,418
Vinci S.A. (Construction & engineering)	55,000		7,010

			86,457

Germany—2.6%
Bijou Brigitte (Textiles, apparel & luxury goods)	4,690		923
E.ON AG (Electric utilities)	75,200		10,155
SAP AG (Software)	90,200		4,784

			15,862

Greece—1.0%
National Bank of Greece (Commercial banks)	127,830		5,863

Ireland—1.4%
Anglo Irish Bank plc (Commercial banks)	326,700		6,765
IAWS Group plc (Food products)	75,200		1,926

			8,691

Italy—3.3%
Luxottica Group SpA (Textiles, apparel & luxury goods)	323,500		9,916
Saipem SpA (Energy equipment & services)	374,000		9,704

			19,620

Netherlands—1.3%
Royal Numico N.V. (Food products)	80,000		4,296
*Tomtom NV (Software)	78,100		3,363

			7,659

Norway—0.5%
*Acergy S.A. (Energy equipment & services)	140,000		2,671

Spain—1.8%
Industria De Textile (Specialty retail)	204,800		11,017

Sweden—1.5%
Ericsson LM (Communications equipment)	1,686,000		6,780
*Modern Times Group (Media)	31,000		2,031

			8,811


Issuer	Shares	Value


*Common Stocks—Europe—38.8%—(continued)*
Switzerland—8.9%
ABB Ltd. (Electrical equipment)	1,002,100	$	17,945
*EFG International (Capital markets)	88,400		3,329
Kuehne & Nagel International AG (Marine)	62,100		4,512
Nestle S.A. (Food products)	27,950		9,914
Nobel Biocare Holding AG (Health care equipment & supplies)	10,500		3,097
Roche Holdings AG (Pharmaceuticals)	56,100		10,037
SGS S.A. (Commercial services & supplies)	4,020		4,466

			53,300


*United Kingdom—17.9%*
BG Group plc (Oil, gas & consumable fuels)	988,300		13,439
*Cairn Energy plc (Oil, gas & consumable fuels)	97,100		3,411
Capita Group plc (Commercial services & supplies)	525,500		6,231
Carphone Warehouse Group plc (Specialty retail)	432,700		2,652
HBOS plc (Commercial banks)	713,000		15,762
Man Group plc (Capital markets)	655,600		6,692
Northern Rock plc (Thrift & mortgage finance)	325,500		7,484
Reckitt Benckiser plc (Household products)	300,600		13,713
*Rolls-Royce Group plc (Aerospace & defense)	1,312,700		11,471
Rotork plc (Electronic equipment & instruments)	123,700		2,021
Standard Chartered plc (Commercial banks)	248,500		7,239
Tesco plc (Food & staples retailing)	1,968,300		15,554
Tullow Oil plc (Oil, gas & consumable fuels)	206,100		1,602

			107,271


*Japan—15.5%*
Aeon Mall Co., Ltd. (Real estate management & development)	70,700		3,992
Canon, Inc. (Office electronics)	212,900		11,986
Denso Corporation (Auto components)	331,600		13,148
FANUC Ltd. (Machinery)	61,100		5,996
Honeys Company, Ltd. (Specialty retail)	36,100		1,341
Hoya Corporation (Electronic equipment & instruments)	133,600		5,207
*Jupiter Telecommunications Co., Ltd. (Media)	3,851		3,104
*K.K. DaVinci Advisors (Real estate management & development)	1,507		1,494
Keyence Corporation (Electronic equipment & instruments)	26,810		6,618
Komatsu Ltd. (Machinery)	284,000		5,748
Orix Corporation (Consumer finance)	55,150		15,993
Sharp Corporation (Household durables)	304,000		5,227
Suruga Bank Ltd. (Commercial banks)	303,000		3,753
Yamada Denki Co., Ltd. (Specialty retail)	209,900		6,598
Yamaha Motor. Co., Ltd. (Automobiles)	29,000		2,462

			92,667


*Emerging Asia—7.6%*
China—1.0%
*Focus Media Holding Ltd.—ADR (Media)	40,000		2,656

See accompanying Notes to Financial Statements.

12 Annual Report

December 31, 2006

Institutional International Equity Fund

Portfolio of Investments, December 31, 2006 (all dollar amounts in thousands)


Issuer	Shares	Value


*Common Stocks—Emerging Asia—7.6%—(continued)*
China—(continued)
*Foxconn International (Communications equipment)	545,000	$	1,777
Hopson Development Holding Ltd. (Real estate management & development)	498,000		1,408

			5,841

India—3.7%
Bharat Heavy Electricals Ltd. (Electrical equipment)	81,700		4,232
*Bharti Airtel Limited (Wireless telecommunication services)	312,631		4,451
Infosys Technologies Ltd. (IT services)	136,700		6,908
Suzlon Energy Ltd. (Electrical equipment)	114,900		3,384
Vedanta Resources Plc (Metals & mining)	140,300		3,342

			22,317

Indonesia—0.9%
PT Bank Rakyat Indonesia (Commercial banks)	4,972,000		2,852
PT Telekomunikasi Indonesia Tbk (Diversified telecommunication services)	2,218,500		2,500

			5,352

South Korea—0.7%
Samsung Electronics Co. (Semiconductors & semiconductor equipment)	6,680		4,382

Taiwan—1.3%
High Tech Computer Corp. (Computers & peripherals)	24,200		478
Hon Hai Precision Industry Corp. (Electronic equipment & instruments)	1,016,880		7,235

			7,713


*Asia—6.6%*
Australia—2.3%
Allco Finance Group Limited (Capital markets)	267,800		2,718
Macquarie Bank Ltd. (Capital markets)	180,500		11,219

			13,937

Hong Kong—2.4%
Esprit Holdings Ltd. (Specialty retail)	579,500		6,455
Li & Fung Ltd. (Distributors)	2,491,100		7,734

			14,189

Singapore—1.9%
Capitaland, Ltd. (Real estate management & development)	2,843,900		11,444


*Emerging Latin America—5.5%*
Brazil—1.4%
Companhia de Concessoes Rodoviarias (Transportation infrastructure)	190,300		2,570
Gol-Linhas Aereas Inteligentes S.A.—ADR (Airlines)	50,200		1,439
Localiza Rent a Car S.A. (Road & rail)	39,200		1,179
Natura Cosmeticos S.A. (Personal products)	207,500		2,928

			8,116


Issuer	Shares or Principal Amount		Value


Common Stocks—Emerging Latin America—5.5%—(continued)
Chile—0.5%
*Cencosud S.A.—ADR 144A (Specialty retail)		67,500	$	3,167

Columbia—0.4%
Bancolumbia S.A.—ADR (Commercial banks)		82,100		2,557

Mexico—3.2%
America Movil S.A. (Wireless telecommunications services)		3,780,100		8,524
Walmart de Mexico (Food & staples retailing)		2,350,800		10,343

				18,867

*Canada—3.2%*
Manulife Financial Corporation (Insurance)		260,400		8,787
Shoppers Drug Mart Corporation (Food & staples retailing)		127,500		5,476
Suncor Energy, Inc. (Oil, gas & consumable fuels)		64,400		5,069

				19,332


*Emerging Europe, Mid-East, Africa—0.9%*
Russia—0.2%
*CTC Media, Inc. (Media)†		47,800		1,148

South Africa—0.7%
Naspers Ltd. (Media)		80,990		1,920
Sasol ASA (Oil, gas & consumable fuels)		54,500		2,007

				3,927

Total Common Stock—96.0% (cost $478,338)				574,481


*Preferred Stocks*
Brazil—1.3%
Banco Itau S.A. (Commercial banks)		111,400		4,036
Petroleo Brasileiro S.A. (Oil, gas & consumable fuels)		169,600		3,953

				7,989

Total Preferred Stocks—1.3% (cost $5,677)				7,989


*Investment in Affiliate*
William Blair Ready Reserves Fund		4,005,631		4,006

Total Investment in Affiliate—0.7% (cost $4,006)				4,006


*Short-Term Investments*
American Express Demand Note, VRN, 5.176%, due 1/2/07	$	3,857,000		3,857
Prudential Funding Demand Note, VRN, 5,180%, due 1/2/07		6,241,000		6,241

Total Short-Term Investments—1.7% (cost $10,098)				10,098

See accompanying Notes to Financial Statements.

December 31, 2006

William Blair Funds 13

Institutional International Equity Fund

Portfolio of Investments, December 31, 2006 (all dollar amounts in thousands)


Issuer	Principal Amount		Value

*Repurchase Agreement*
Investors Bank & Trust Company, 5.01% dated 12/29/2006, due 1/2/2007, repurchase price $4,682, collateralized by SBA Pool #505911	$	4,678,968	$	4,679

Total Repurchase Agreement—0.8% (cost $4,679)				4,679

Total Investments—100.5% (cost $502,798)				601,253
Liabilities plus cash and other assets—(0.5%)				(2,878	)

Net assets—100.0%			$	598,375

* 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 pursuant to Valuation Procedures adopted by the Board of Trustees.

At December 31, 2006 the Fund’s Portfolio of Investments includes the following industry categories:


Financials		25.5%
Consumer Staples		16.7%
Consumer Discretionary		15.7%
Industrials and Services		13.1%
Information Technology		11.7%
Energy		7.2%
Utilities		3.5%
Health Care		3.3%
Telecommunication Services		2.7%
Materials		0.6%

		100.0%

At December 31, 2006 the Fund’s Portfolio of Investments includes the following currency categories:


Euro		28.8%
British Pound Sterling		19.0%
Japanese Yen		15.9%
Swiss Franc		9.2%
Canadian Dollar		3.3%
Indian Rupee		3.3%
Mexico Nuevo Peso		3.2%
Hong Kong Dollar		3.0%
Brazilian Real		2.5%
Australian Dollar		2.4%
Singapore Dollar		2.0%
United States Dollar		1.9%
Swedish Krona		1.5%
Taiwan Dollar		1.3%
Other Currencies		2.7%

		100.0%

See accompanying Notes to Financial Statements.

14 Annual Report

December 31, 2006

LOGO

Jeffery 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

See page 2 for the International Markets Overview.

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

The International Small Cap Growth Fund posted a 20.86% increase (Institutional Class Shares) for the 12 months ended December 31, 2006. By comparison, the Fund’s benchmark, the Morgan Stanley Capital International (MSCI) World Small Cap ex-U.S. Index gained 19.82%.

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

The Fund had strong absolute and relative results during 2006, returning 20.86%, due largely to strong stock selection across most sectors. In particular, stock selection in Consumer, Health Care, Industrials and Telecommunication Services added value. Within Consumer Discretionary, the portfolio’s weightings in developed Asia and Europe enhanced results, as did Chinese stock performance, coupled with Latin America stock selection. Within Health Care, the Fund’s weighting and stock selection in Europe ex-UK stocks added value, while Industrials stock selection was enhanced by European (including UK) weightings and stock selection. Stock selection was also strong in Europe ex-UK, while the Fund’s emerging markets allocation, and lower Japanese weighting were also additive to results. Sector positioning detracted from performance during the period, as did stock selection in Energy, Financials and Materials.

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

December 31, 2006

William Blair Funds 15

International Small Cap Growth Fund

Performance Highlights (unaudited)

LOGO

Average Annual Total Return at 12/31/2006


	1 Year		Since Inception(a)
International Small Cap Growth Fund Institutional Class	20.86	%	29.29	%
MSCI WLD EX-US Small Cap Index	19.82		27.41

(a)

For the period from November 1, 2005 (Commencement of Operations) to December 31, 2006.

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.

Sector Diversification (unaudited)

LOGO

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

16 Annual Report

December 31, 2006

International Small Cap Growth Fund

Portfolio of Investments, December 31, 2006 (all dollar amounts in thousands)


Issuer	Shares	Value

*Common Stocks—Europe—37.4%*
France—4.2%
April Group S.A. (Insurance)	46,882	$	2,256
*Orpea (Heath care providers & services)	28,863		2,730
*S.O.I.T.E.C. (Semiconductors & semiconductor equipment)	135,300		4,783

			9,769

Germany—8.6%
Bijou Brigitte (Apparel & luxury goods)	8,100		1,594
*Colonia Real Estate AG (Real estate management and development)	49,000		2,348
CTS Eventim AG (Media)	69,000		2,656
MTU Aero Engines Holding AG (Aerospace & defense)	108,814		5,068
*Patrizia Immobilien AG (Real estate management & development)	4,200		125
*Q-Cells AG (Electrical equipment)	55,880		2,502
*Qiagen NV (Lifesciences tools & services)	200,073		3,072
Solarworld AG (Electrical equipment)	38,031		2,370
*Wire Card AG (Commercial services & supplies)	25,600		264

			19,999

Ireland—6.1%
IAWS Group plc (Food products)	193,340		4,953
Kingspan Group plc (Building products)	181,090		4,802
*Norkom Group plc (Software)	229,400		614
United Drug plc (Heath care providers & services)	696,880		3,661

			14,030

Italy—6.8%
Azimut Holdings SpA (Capital markets)	346,717		4,630
Banca Italease (Diversified financial services)	115,800		6,722
Credito Emiliano SpA (Commercial banks)	159,372		2,251
Tod’s SpA (Textiles, apparel & luxury goods)	27,500		2,212

			15,815

Norway—1.8%
*Acergy S.A. (Energy equipment & services)	213,900		4,081

Spain—3.3%
*Grifols S.A. (Biotechnolgy)	402,403		5,357
*Tecnicas Reunidas S.A. (Construction & engineering)	61,700		2,367

			7,724

Sweden—4.3%
Hemtex AB (Specialty retail)	54,700		1,117
*Modern Times Group (Media)	71,200		4,665
Nobia AB (Specialty retail)	92,400		3,546
*Tradedoubler AB (Internet software & services)	22,500		670

			9,998

Switzerland—2.3%
*Partners Group Global Opportunities, Ltd. (Capital markets)	43,771		5,282


*Japan—19.5%*
Aeon Mall Co., Ltd. (Real estate management & development)	81,000		4,574
Chiyoda Corp. (Construction & engineering)	114,000		2,229
*DeNA Co., Ltd. (Internet & catalog retail)	719		2,356
En-Japan Inc. (Commercial services & supplies)	431		2,064


Issuer	Shares	Value

*Common Stocks—Japan—19.5%—(continued)*
Honeys Company, Ltd. (Specialty retail)	54,400	$	2,021
Joint Corporation (Real estate management & development)	112,620		4,330
*K.K. DaVinci Advisors (Real estate management & development)	4,343		4,304
Kenedix, Inc. (Real estate management & development)	935		4,218
MISUMI Group, Inc. (Trading companies & distributors)	195,700		3,737
Nakanishi Inc. (Health care equipment & supplies)	28,600		3,509
Nitori Company Ltd. (Specialty retail)	49,500		2,142
Park 24 Co., Ltd. (Commercial services & supplies)	240,500		3,075
Suruga Bank (Commercial banks)	533,000		6,601

			45,160

*United Kingdom—14.8%*
Accident Exchange Group plc (Commercial services & supplies)	301,274		2,276
Amlin plc (Insurance)	111,700		709
*Ceres Power Holdings plc (Electrical equipment)	395,200		1,694
Detica Group plc (IT services)	356,200		2,556
Homeserve plc (Commercial services & supplies)	94,280		3,483
Mears Group plc (Construction & engineering)	348,500		2,474
Michael Page International (Commercial services & supplies)	581,770		5,138
Rotork plc (Electronic equipement & instruments)	144,150		2,355
RPS Group plc (Commercial services & supplies)	460,400		2,430
Serco Group plc (Commercial services & supplies)	653,040		4,871
Ultra Electronic Holdings plc (Aerospace & defense)	102,750		2,179
Victrex plc (Chemicals)	134,450		2,112
VT Group plc (Aerospace & defense)	231,150		2,147

			34,424


*Emerging Asia—6.6%*
China—2.8%
Ctrip.com International, Ltd.—ADR (Hotels, restaurants & leisure)	20,020		1,251
*Focus Media Holdings—ADR (Media)	36,900		2,450
Li Ning Co. Ltd. (Leisure equipment & products)	848,873		1,357
Ports Design Limited (Textiles, apparel & luxury goods)	690,500		1,508

			6,566

India—2.3%
ABB Ltd. India (Electrical equipment)	13,100		1,101
Financial Technologies, Ltd. (Diversified financial services)	52,400		2,098
*Inox Leisure, Ltd. (Media)	333,579		1,085
Pantaloon Retail India, Ltd. (Multiline retail)	107,850		996

			5,280

South Korea—0.5%
Hana Tour Service Inc. (Hotels, restaurants & leisure)	15,000		1,138

See accompanying Notes to Financial Statements.

December 31, 2006

William Blair Funds 17

International Small Cap Growth Fund

Portfolio of Investments, December 31, 2006 (all dollar amounts in thousands)


Issuer	Shares	Value

*Common Stocks—Emerging Asia—6.6%—(continued)*
Taiwan—1.0%
Largan Precision Co. Ltd. (Leisure equipment & products)	119,300	$	2,295


*Asia—11.8%*
Australia—6.9%
Allco Finance Group, Limited (Capital markets)	452,265		4,590
Seek Limited (Commercial services & supplies)	815,980		3,780
United Group, Ltd. (Construction & engineering)	292,570		3,218
WorleyParsons, Ltd. (Energy equipment & supplies)	267,820		4,498

			16,086

Singapore—4.9%
Goodpack Ltd. (Air freight & logistics)	1,718,000		1,724
Osim International Ltd. (Specialty retail)	1,932,400		1,760
Petra Foods, Ltd. (Food products)	223,000		262
Raffles Education Corp. Ltd. (Diversified consumer services)	2,560,000		2,952
Singapore Exchange, Ltd. (Diversified financial services)	1,245,000		4,596

			11,294


*Emerging Latin America—2.0%*
Brazil—1.0%
Cyrela Brazil Realty S.A. (Household durables)	110,100		1,051
Submarino S.A. (Internet & catalog retail)	35,900		1,176

			2,227

Mexico—1.0%
*Urbi Desarrollos Urbanos S.A. (Household durables)	672,100		2,426


*Emerging Europe, Mid-East, Africa—1.3%*
Czech Republic—0.5%
*Central European Media Enterprises Ltd., Class “A” (Media)†	16,000		1,120


Issuer	Shares or Principal Amount		Value

*Common Stocks—Emerging Europe, Mid-East, Africa—1.3%—(continued)*
Russia—0.8%
*CTC Media, Inc. (Media)†		79,738	$	1,915


*Canada—1.3%*
*Gildan Activewear, Inc. (Textiles, apparel & luxury goods)		41,900		1,958
Richie Bros. Auctioneers Incorporated† (Commercial services & supplies)		20,000		1,071

				3,029

Total Common Stock—94.7% (cost $189,217)				219,658


*Investment in Affiliate*
William Blair Ready Reserves Fund		5,228,467		5,228

Total Investment in Affiliate—2.3% (cost $5,228)

*Short-Term Investments*
American Express Demand Note, VRN 5.176%, due 1/2/07	$	1,074,000		1,074

Prudential Funding Demand Note, VRN 5.180%, due 1/2/07		5,397,000		5,397

Total Short-term Investments—2.8% (cost $6,471)				6,471


*Repurchase Agreement*
Investors Bank & Trust Company, 5.01% dated 12/29/2006, due 1/2/2007, repurchase price $339, collateralized by SBA Pool # 504705		338,909		339

Total Repurchase Agreement—0.1% (cost $339)				339

Total Investments—99.9% (cost $201,255)				231,696
Cash and other assets, less liabilities—0.1%				273

Net assets—100.0%			$	231,969

*Non-income producing securities

ADR = American Depository Receipt

GDR = Global Depository Receipt

VRN = Variable Rate Note

† = U.S. listed foreign security

At December 31, 2006 the Fund’s Portfolio of Investments includes the following industry categories:


Industrials and Services		30.1%
Financials		27.1%
Consumer Discretionary		22.2%
Health Care		8.3%
Information Technology		5.0%
Energy		3.9%
Consumer Staples		2.4%
Materials		1.0%

		100.0%

At December 31, 2006 the Fund’s Portfolio of Investments includes the following currency categories:


Euro		30.7%
Japanese Yen		20.5%
British Pound Sterling		15.7%
Australian Dollar		7.3%
Singapore Dollar		5.1%
Swedish Krona		4.6%
United States Dollar		3.6%
Swiss Franc		2.4%
Indian Rupee		2.4%
Norwegian Krone		1.9%
Hong Kong Dollar		1.3%
Mexican Neuvo Peso		1.1%
New Taiwan Dollar		1.0%
Brazilian Real		1.0%
Canadian Dollar		0.9%
All other currencies		0.5%

		100.0%

See accompanying Notes to Financial Statements.

18 Annual Report

December 31, 2006

LOGO

W. George Greig

LOGO

Todd M. McClone

LOGO

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

See page 2 for the International Markets Overview.

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

The Emerging Markets Growth Fund posted a 38.49% increase (Institutional Class Shares) for the 12 months ended December 31, 2006. By comparison, the Fund’s benchmark, the Morgan Stanley Capital International (MSCI) Emerging Markets Index, gained 32.59%.

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

The Fund had strong absolute and relative results during 2006, returning 38.49%, due largely to strong stock selection across regions and most sectors. In particular, stock selection in Consumer, Energy, Financials, Industrials, and Materials added value. Within Consumer, the Fund’s Emerging Asia Discretionary holdings added the most value, coupled with the overweighting in this area. In addition, strong stock selection across regions within Consumer Staples was additive to results. Within Energy, the Fund’s Emerging Markets Europe, Mid-East and Africa (EMEA) holdings added value. The Fund’s Financials stocks were driven largely by China and India holdings. Industrial stock selection was augmented by Latin American airlines and toll road company performance, while Materials stock selection added value solely to Chinese exposure. From a regional perspective, the Fund’s overweighting in the strongest performing Latin America region at the expense of the weaker EMEA region added value. The Fund’s underweighting in Materials, Financials, Telecommunication Services and Utilities was a detractor from results, as these were the strongest sectors during the period.

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

December 31, 2006

William Blair Funds 19

Emerging Markets Growth Fund

Performance Highlights (unaudited)

LOGO

Average Annual Total Return at 12/31/2006


	1 Year		Since Inception(a)
Emerging Markets Growth Fund Institutional Class	38.49	%	54.27	%
MSCI Emerging Markets Index	32.59		40.84

(a)

For the period from June 6, 2005 (Commencement of Operations) to December 31, 2006.

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 Index is an index that is designed to measure equity performance in the global emerging markets.

Sector Diversification (unaudited)

LOGO

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

20 Annual Report

December 31, 2006

Emerging Markets Growth Fund

Portfolio of Investments, December 31, 2006 (all dollar amounts in thousands)


Issuer	Shares	Value

*Common Stocks—Emerging Asia—50.5%*
China—15.9%
China Life Insurance Co. (Insurance)	2,586,100	$	8,827
China Mengniu Dairy Co. Ltd. (Food products)	3,077,000		8,063
China Mobile Ltd. (Wireless telecommunication services)	2,730,300		23,535
China Vanke Company Ltd. (Real estate management & development)	10,212,000		19,565
Ctrip.com International Ltd.—ADR (Hotels, restaurants, & leisure)	142,700		8,916
*Focus Media Holding Ltd.—ADR (Media)	126,400		8,392
*Foxconn International (Communications equipment)	2,433,000		7,935
Fu Ji Food and Catering Services Holdings Ltd (Hotels, restaurants, & leisure)	1,685,000		4,346
Hopson Development Holdings Ltd. (Real estate management)	2,970,000		8,395
Lee and Man Paper Manufacturing Ltd. (Containers & packaging)	5,160,000		12,650
Li Ning Co. Ltd (Leisure equipment & products)	2,902,000		4,640
Parkson Retail Group Ltd. (Multiline retail)	808,400		3,998
Ports Design Ltd. (Textiles, apparel & luxury goods)	2,099,500		4,586
Wumart Stores, Inc., Class “H” (Food & staples retailing)**	8,680,000		5,580

			129,428

India—17.7%
ABB Ltd. India (Electrical equipment)	92,100		7,739
Bharat Heavy Electricals, Ltd. (Electrical equipment)	401,400		20,792
*Bharti Airtel Ltd. (Wireless telecommunication services)	1,670,500		23,782
Dabur India Ltd. (Personal products)	1,124,400		3,724
Financial Technologies, Ltd. (Diversified financial services)	91,810		3,677
HDFC Bank (Commercial banks)	159,200		3,820
Hindustan Lever Ltd. (Household products)	1,390,300		6,799
Housing Development Finance Corp. (Thrifts & mortgage finance)	338,500		12,409
Infosys Technologies, Ltd. (IT services)	467,200		23,610
*Inox Leisure Ltd. (Media)	1,105,300		3,595
Maruti Udyog Ltd. (Automobiles)	566,700		11,871
Pantaloon Retail India Ltd. (Multiline retail)	444,700		4,106
Shopper’s Stop Ltd. (Multiline retail)	264,960		4,035
Suzlon Energy Ltd. (Electrical equipment)	244,800		7,210
Vedanta Resources Plc (Metals & mining)	271,100		6,457

			143,626

Indonesia—3.0%
PT Bank Rakyat Indonesia (Commercial banks)	13,614,000		7,809
*PT Kalbe Farma Tbk (Pharmaceuticals)	5,702,700		757
PT Telekomunikasi Tbk (Diversified telecommunication services)	13,731,500		15,477

			24,043

Malaysia—2.8%
Bumiputra Commerce Holding Bhd (Commercial banking)	7,473,900		16,375
Transmile Group Bhd (Air freight & logisitics)	1,645,700		6,637

			23,012


Issuer	Shares	Value

*Common Stocks—Emerging Asia—50.5%—(continued)*
South Korea—4.7%
Hana Tour Service (Hotels, restaurants, & leisure)	63,900	$	4,847
*NHN Corporation (Internet software & services)	54,600		6,641
Samsung Electronics Co. (Semiconductors & equipment)	29,460		19,326
*Shinsegae Co. Ltd. (Food & staples retailing)	12,170		7,581

			38,395

Taiwan—6.4%
High Tech Computer Corporation (Computers & peripherals)	170,800		3,369
Hon Hai Precision Industry (Electronic equipment & instruments)	3,227,528		22,964
*Himax Technologies, Inc.—ADR (Semiconductors & equipment)	816,500		3,895
Johnson Health Tech Company Ltd. (Leisure equipment & products)	59,000		432
Largan Precision Co. Ltd. (Leisure equipment & products)	757,550		14,571
Mediatek Inc. (Semiconductors & equipment)	691,040		7,117

			52,348


*Emerging Latin America—27.3%*
Brazil—9.7%
Companhia de Concessoes Rodoviarias (Transportation infrastructure)	1,210,900		16,351
Cyrela Brazil Realty S.A. (Household durables)	1,558,900		14,878
Gol Linhas Aereas Inteligentes S.P—ADR (Airlines)	135,900		3,896
Localiza Rent a Car S.A. (Road & rail)	557,900		16,778
Lojas Renner S.A. (Multiline retail)	327,800		4,710
Natura Cosmeticos S.A. (Personal products)	581,100		8,200
Submarino S.A. (Internet & catalog retail)	305,200		9,998
*Totvs S.A. (Software)	177,600		3,931

			78,742

Chile—3.1%
*Cencosud S.A.—ADR 144A (Specialty retail)	286,800		13,458
S.A.C.I. Falabella S.A. (Multiline retail)	3,469,694		12,190

			25,648

Columbia—1.4%
Bancolombia S.A.—ADR (Commercial banks)	357,900		11,149

Mexico—12.0%
Alsea S.A.B. de C.V. (Hotels, restaurants, & leisure)	727,800		3,967
America Movil S.A. (Wireless telecommunication services)	10,596,200		23,894
*Desarrolladora Homex S.A. de C.V.—ADR (Household durables)	171,100		10,107
Grupo Financiero Banorte S.A. de C.V. (Commercial banks)	3,948,600		15,439
Grupo Aeropuertario Del—ADR (Transportation infrastructure)	195,100		7,646
*Urbi Desarrollos Urbanos S.A. (Household durables)	2,558,300		9,236
Walmart de Mexico (Food & staples retailing)	6,214,600		27,342

			97,631

See accompanying Notes to Financial Statements.

December 31, 2006

William Blair Funds 21

Emerging Markets Growth Fund

Portfolio of Investments, December 31, 2006 (all dollar amounts in thousands)


Issuer	Shares	Value

*Common Stocks—Emerging Latin America—27.3%—(continued)*
Panama—1.1%
Copa Holdings S.A., Class “A” (Airlines)†	190,100	$	8,851


*Emerging Europe, Mid-East, Africa—15.6%*
Czech Republic—0.9%
*Central European Media Enterprises Ltd., Class “A” (Media)†	104,200		7,294

Kazakhstan—2.1%
*Kazkommertsbank—GDR 144A (Commercial banks)	744,326		17,194

Russia—5.6%
*CTC Media, Inc. (Media)†	352,545		8,464
*Magnit—CLS (Multiline retail)†	111,200		3,970
Novatek OAO—GDR 144A (Oil, gas, & consumable fuels)	312,800		19,863
Sberbank—CLS (Commercial banks)†	3,900		13,455

			45,752

South Africa—5.9%
Naspers Ltd. (Media)	849,266		20,131
Sasol Ltd. (Oil, gas, and consumable fuels)	437,000		16,091
Truworths International Ltd. (Specialty retail)	2,622,327		11,969

			48,191

Turkey—1.1%
Bim Birlesik Magazalar A.S. (Food & staples retailing)	172,700		9,150

Total Common Stock—93.4% (cost $592,116)			760,454


Issuer	Shares or Principal Amount		Value

*Preferred Stock*
Brazil—5.2%
Banco Itau Holding (Commercial banks)		443,000	$	16,049
Petroleo Brasileiro S.A. (Oil, gas & consumable fuels)		1,108,700		25,843

Total Preferred Stock—5.2% (cost $32,704)				41,892


*Investment in Affiliate*
William Blair Ready Reserves Fund		1,265,478		1,265

Total Investment in Affiliate—0.2% (cost $1,265)				1,265


*Short-Term Investments*
American Express Demand Note, VRN 5.176% due 1/2/07	$	1,875,000		1,875
Prudential Funding Demand Note, VRN 5.180% due 1/2/07		1,876,000		1,876

Total Short-Term Investments—0.5% (cost $3,751)				3,751


*Repurchase Agreement*
Investors Bank & Trust Company, 5.01% dated 12/29/2006, due 1/2/2007, repurchase price $6,033, collateralized by SBA, Pool# 506352		6,029,442		6,029

Total Repurchase Agreement—0.7% (cost $6,029)				6,029

Total Investments—100.0% (cost $635,865)				813,391
Cash and other assets, less liabilities—0.0%				258

Net assets—100.0%			$	813,649

* 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.

**	Fair valued pursuant to Valuation Procedures adopted by the Board of Trustees. This holding represents 0.69% of the Fund’s net assets at December 31, 2006. This security was also deemed illiquid pursuant to Liquidity Procedures approved by the Board of Trustees.

At December 30, 2006 the Fund’s Portfolio of Investments includes the following industry categories:


Consumer Discretionary		26.0%
Finance		19.2%
Information Technology		12.3%
Industrials & Services		12.0%
Telecommunication Services		10.8%
Consumer Staples		9.5%
Energy		7.7%
Materials		2.4%
Health Care		0.1%

		100.0%

At December 31, 2006 the Fund’s Portfolio of Investments includes the following currency categories:


United States Dollar		18.3%
Indian Rupee		17.1%
Brazilian Real		14.5%
Hong Kong Dollar		14.0%
Mexico Nuevo Peso		10.0%
Taiwan Dollar		6.0%
South African Rand		6.0%
South Korean Won		4.8%
Indonesian Rupiah		3.0%
Malaysian Ringgit		2.9%
Chilean Peso		1.5%
Turkish Lira		1.1%
British Pound Sterling		0.8%

		100.0%

See accompanying Notes to Financial Statements.

22 Annual Report

December 31, 2006

Statements of Assets and Liabilities

December 31, 2006 (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	$	1,345,359		$	498,792		$	196,027		$	634,600
Investments in Affiliated Fund, at cost		52			4,006			5,228			1,265


Investments in securities, at value	$	1,868,550		$	597,247		$	226,468		$	812,126
Investments in Affiliated Fund, at value		52			4,006			5,228			1,265
Cash		—			—			—			150
Foreign currency, at value (cost $225, $—, $1,447, and $8,232, respectively)		220			—			1,444			8,184
Receivable for fund shares sold		—			—			165			1,106
Receivable for investment securities sold		25,399			251			467			2,180
Receivable from Advisor		—			—			—			22
Dividend and interest receivable		1,901			572			183			547

Total assets		1,896,122			602,076			233,955			825,580
*Liabilities*
Payable for investment securities purchased		18,536			3,146			1,688			10,869
Payable for fund shares redeemed		537			—			2			97
Management fee payable		1,510			457			203			693
Distribution and shareholder administration fee payable		—			—			15			45
Other accrued expenses		198			98			78			227

Total liabilities		20,781			3,701			1,986			11,931

Net Assets	$	1,875,341		$	598,375		$	231,969		$	813,649

*Capital*
Composition of Net Assets
Par value of shares of beneficial interest	$	97		$	42		$	17		$	42
Capital paid in excess of par value		1,327,571			500,179			200,077			617,443
Accumulated net investment income (loss)		(40,814	)		(6,711	)		(137	)		(492	)
Accumulated realized gain (loss)		65,290			6,413			1,575			19,184
Net unrealized appreciation (depreciation) of investments and foreign currencies		523,197			98,452			30,437			177,472

Net Assets	$	1,875,341		$	598,375		$	231,969		$	813,649


Net Assets	$	1,875,341		$	598,375
Shares Outstanding		96,733,139			41,925,377
Net Asset Value Per Share	$	19.39		$	14.27
Institutional Share Class
Net Assets	$	—		$	—		$	146,493		$	553,373
Shares Outstanding		—			—			10,909,674			28,325,003
Net Asset Value Per Share	$	—		$	—		$	13.43		$	19.54

See accompanying Notes to Financial Statements.

December 31, 2006

William Blair Funds 23

Statements of Operations

For the Year Ended December 31, 2006 (all dollar amounts in thousands)


	Institutional International Growth Fund			Institutional International Equity Fund			International Small Cap Growth Fund			Emerging Markets Growth Fund
*Investment income*
Dividends	$	27,968		$	6,184		$	1,235		$	6,186
Less foreign tax withheld		(2,282	)		(539	)		(105	)		(453	)
Dividend Income from Affiliated Fund		226			72			20			102
Interest		1,305			800			312			765

Total income		27,217			6,517			1,462			6,600
*Expenses*
Investment advisory fees		16,294			4,068			1,269			5,363
Distribution fees		—			—			30			99
Shareholder administration fees		—			—			63			180
Custodian fees		1,123			366			253			832
Transfer agent fees		42			12			21			68
Professional fees		66			45			35			41
Registration fees		54			46			73			104
Other expenses		260			49			19			82

Total expenses before waiver		17,839			4,586			1,763			6,769
Less expenses waived or absorbed by the Advisor		—			(94	)		(80	)		(380	)

Net expenses		17,839			4,492			1,683			6,389

Net investment income (loss)		9,378			2,025			(221	)		211
Net realized and unrealized gain (loss) on investments, foreign currency transactions and other assets and liabilities
Net realized gain (loss) on investments		273,673			9,483			3,035			26,278
Net realized gain (loss) on foreign currency transactions and other assets and liabilities		(5,753	)		(1,660	)		(736	)		(3,285	)

Total net realized gain (loss)		267,920			7,823			2,299			22,993
Change in net unrealized appreciation (depreciation) on investments, foreign currency translation and other assets and liabilities		91,778			72,424			26,158			147,786

Net increase (decrease) in net assets resulting from operations	$	369,076		$	82,272		$	28,236		$	170,990

See accompanying Notes to Financial Statements.

24 Annual Report

December 31, 2006

Statements of Changes in Net Assets

For the Years Ended December 31, 2006 and 2005 (all amounts in thousands)


	Institutional International Growth Fund						Institutional International Equity Fund						International Small Cap Growth Fund						Emerging Markets Growth Fund
	2006			2005			2006			2005			2006			2005(a)			2006			2005(b)
*Operations*
Net investment income (loss)	$	9,378		$	6,765		$	2,025		$	257		$	(221	)	$	(6	)	$	211		$	69
Net realized gain (loss) on investments, foreign currency transactions and other assets and liabilities		267,920			110,297			7,823			(1,426	)		2,299			355			22,993			1,535
Change in net unrealized appreciation (depreciation) on investments, foreign currency translation and other assets and liabilities		91,778			167,187			72,424			25,499			26,158			4,279			147,786			29,686

Net increase (decrease) in net assets resulting from operations		369,076			284,249			82,272			24,330			28,236			4,628			170,990			31,290
*Distributions to shareholders from*
Net investment income		(32,267	)		(11,444	)		(6,495	)		(442	)		(106	)		(6	)		(405	)		—
Net realized gain		(217,683	)		(112,356	)		(1,892	)		(3	)		(877	)		—			(4,544	)		(1,169	)

		(249,950	)		(123,800	)		(8,387	)		(445	)		(983	)		(6	)		(4,949	)		(1,169	)
*Capital stock transactions*
Net proceeds from sale of shares		144,396			114,081			281,476			201,804			172,153			46,006			529,925			224,893
Shares issued in reinvestment of income dividends and capital gain distributions		244,472			120,609			7,436			383			868			6			4,687			1,122
Less cost of shares redeemed		(188,067	)		(63,161	)		(15,351	)		(2,527	)		(18,839	)		(100	)		(136,352	)		(6,788	)

Net increase (decrease) in net assets resulting from capital stock transactions		200,801			171,529			273,561			199,660			154,182			45,912			398,260			219,227

Increase (decrease) in net assets		319,927			331,978			347,446			223,545			181,435			50,534			564,301			249,348
Net assets
Beginning of year	$	1,555,414		$	1,223,436		$	250,929		$	27,384		$	50,534		$	—		$	249,348		$	—

End of year	$	1,875,341		$	1,555,414		$	598,375		$	250,929		$	231,969		$	50,534		$	813,649		$	249,348

Undistributed net investment income (loss) at the end of the year	$	(37,438	)	$	(14,549	)	$	(5,051	)	$	(581	)	$	(426	)	$	(99	)	$	(516	)	$	(322	)

*Capital stock transactions in dollars*
Sales													$	103,040		$	31,900		$	346,626		$	172,789
Reinvested distributions														593			6			3,326			858
Redemptions														(11,665	)		—			(110,338	)		(5,159	)

Net change in net assets relating to fund share activity													$	91,968		$	31,906		$	239,614		$	168,488

*Capital stock transactions in shares*
Shares sold		7,491			6,656			21,737			18,357			8,638			3,150			20,905			13,777
Shares issued in reinvestment of income dividends or capital gain distributions		12,799			6,798			527			32			45			—			176			62
Less shares redeemed		(9,426	)		(3,750	)		(1,172	)		(240	)		(923	)		—			(6,095	)		(500	)

Net change in shares outstanding		10,864			9,704			21,092			18,149			7,760			3,150			14,986			13,339

(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.

December 31, 2006

William Blair Funds 25

Notes to Financial Statements

(1) Significant Accounting Policies

The following is a summary of the Fund’s significant accounting policies in effect during the period covered by the financial statements, which are in accordance with U.S. generally accepted accounting principles.

(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 fifteen 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
Mid Cap Growth		International Small Cap Growth
Small-Mid Cap Growth		Emerging Markets Growth
Value Discovery		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 Classes 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

26 Annual Report

December 31, 2006

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.

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 the Pricing Committee or Valuation Committee, in accordance with the Fund’s Valuation Procedures approved by the Board of Trustees. As of December 31, 2006, 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 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 translation 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.

Awards from class action litigation may be recorded as a reduction of cost. If the Funds no longer own the applicable securities, the proceeds are recorded as realized gains.

(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.

(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. The values of foreign investments, open foreign currency forward contracts, and cash denominated in foreign currencies are translated into U.S. dollars using a spot market rate of exchange as of the time of the determination of each Fund’s NAV typically 4:00 p.m. Eastern time on days when there is regular trading on the New York Stock Exchange. Payables and receivables for securities transactions, dividends, interest income and tax reclaims are translated into U.S. dollars using a spot market rate of exchange as of 4:00 p.m. Eastern time. Settlement of purchases and sales and dividend and interest receipts are translated into U.S. dollars using a spot market rate of exchange as of 11:00 a.m. Eastern time.

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. For tax purposes, the foreign currency gains and losses are treated as ordinary income.

December 31, 2006

Annual Report 27

(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 $25,722, $7,000, $— and $—, respectively (in thousands) in 2006, 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, 2006 were as follows (in thousands):


Portfolio	Cost of Investments		Gross Unrealized Appreciation		Gross Unrealized Depreciation		Net Unrealized Appreciation / (Depreciation)
Institutional International Growth	$	1,394,360	$	479,698	$	5,450	$	474,248
Institutional International Equity		512,715		90,137		1,602		88,535
International Small Cap Growth		202,266		31,673		2,247		29,426
Emerging Markets Growth		641,493		175,190		3,346		171,844

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 generally 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, 2006, 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	$	(3,376	)	$	3,376		$	—
Institutional International Equity		(1,660	)		1,660			—
International Small Cap Growth		289			(289	)		—
Emerging Markets Growth		24			(22	)		(2	)


	Distributions Paid In 2006				Distributions Paid In 2005
Portfolio	Ordinary Income		Long-Term Capital Gains		Ordinary Income		Long-Term Capital Gains
Institutional International Growth	$	48,076	$	201,874	$	14,610	$	109,190
Institutional International Equity		6,495		1,892		445		—
International Small Cap Growth		983		—		6		—
Emerging Markets Growth		1,585		3,364		1,169		—

As of December 31, 2006, 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	$	8,636	$	—	$	64,789	$	474,248
Institutional International Equity		4,100		—		5,519		88,535
International Small Cap Growth		856		137		1,730		29,426
Emerging Markets Growth		5,520		503		19,303		171,844

28 Annual Report

December 31, 2006

At December 31, 2006, the Portfolios, have no unused capital loss carryforwards available for Federal income tax purposes to be applied against future capital gains, if any.


Portfolio	Currency Loss
Institutional International Growth	$	—
Institutional International Equity		—
International Small Cap Growth		137
Emerging Markets Growth		503

(h) Repurchase Agreements

(i) Use of Estimates

(2) New Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (FASB) released FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Fund’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is required for fiscal years beginning after December 15, 2006. Recent SEC guidance allows implementing FIN 48 in fund NAV calculations as late as the fund’s last NAV calculation in the first required financial statement reporting period. As a result, the funds will incorporate FIN 48 in their semi-annual report on June 30, 2007.

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

December 31, 2006

William Blair Funds 29

All of the Portfolios, except Institutional International Growth Fund, 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, 2007, if total expenses of the Institutional International Equity Portfolios exceed 1.10% of average daily net assets or 1.25% of average daily net assets for the Institutional Share Classes 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 Portfolio, the Company is entitled to reimbursement from the 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, 2006 is $323, $134 and $541 (in thousands) for 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, 2006, 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	$	16,294	$	—	$	16,294	$	—
Institutional International Equity		4,068		94		3,974		—
International Small Cap Growth		1,269		80		1,189		—
Emerging Markets Growth		5,363		357		5,006		—

(b) Trustees Fees

The Portfolios incurred fees of $34 (in thousands) to non-interested trustees of the Fund for the year ended December 31, 2006. Interested trustees are not compensated by the Fund.

(c) Investments in Affiliated Portfolio

Until June 20, 2006, pursuant to an Exemptive Order granted by the Securities and Exchange Commission in January, 2001, and since June 20, 2006 pursuant to the rules of the 1940 Act, 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 the Portfolio for the year ended December 31, 2006 are listed below. Distributions received from Ready Reserves are reflected as dividend income from affiliated Fund 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, 2006 (in thousands):


Portfolio	Purchases		Sales Proceeds		Fees Waived		Dividend Income		Value		Percent of Net Assets
Institutional International Growth	$	18,847	$	19,874	$	29	$	226	$	52	—	%
Institutional International Equity		6,158		2,245		9		72		4,006	0.7
International Small Cap Growth		7,473		2,655		3		20		5,228	2.3
Emerging Markets Growth		7,516		10,072		14		102		1,265	0.2

(4) Investment Transactions

Investment transactions, excluding money market instruments, for the year ended December 31, 2006, were as follows (in thousands):


Portfolio	Purchases		Sales
Institutional International Growth	$	1,270,814	$	1,304,391
Institutional International Equity		575,348		311,754
International Small Cap Growth		277,747		134,994
Emerging Markets Growth		928,614		532,078

(5) 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

30 Annual Report

December 31, 2006

Financial Highlights

Institutional International Growth Fund

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.



	Years Ended December 31,
	2006		2005		2004		2003		2002(a)
Net asset value, beginning of year	$	18.11	$	16.06	$	13.60	$	9.57	$	10.00
Income from investment operations:
Net investment income (b)		0.11		0.09		0.03		0.07		—
Net realized and unrealized gain (loss) on investments		4.09		3.53		2.44		3.99		(0.43	)

Total from investment operations		4.20		3.62		2.47		4.06		(0.43	)
Less distributions from:
Net investment income		0.38		0.15		0.01		0.03		—
Net realized gain		2.54		1.42		—		—		—

Total distributions		2.92		1.57		0.01		0.03		—

Net asset value, end of year	$	19.39	$	18.11	$	16.06	$	13.60	$	9.57

Total return (%)		23.45		22.76		18.15		42.47		(4.27	)
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		1.03		1.05		1.10		1.10		1.10	(c)
Expenses, before waivers and reimbursements		1.03		1.05		1.11		1.16		1.29	(c)
Net investment income (loss), net of waivers and reimbursements		0.54		0.52		0.18		0.37		(0.05	)(c)
Net investment income (loss), before waivers and reimbursements		0.54		0.52		0.17		0.31		(0.24	)(c)


	Years Ended December 31,
	2006		2005		2004		2003		2002
Supplemental data:
Net assets at end of year (in thousands)	$	1,875,341	$	1,555,414	$	1,223,436	$	477,511	$	149,848
Portfolio turnover rate (%)		74		74		72		56		59	(c)

(a)

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

(b)

Excludes $0.29, $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 2006, 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, 2006

William Blair Funds 31

Financial Highlights

Institutional International Equity Fund



	Years Ended December 31,
	2006		2005		2004(a)
Net asset value, beginning of year	$	12.04	$	10.20	$	10.00
Income from investment operations:
Net investment income (b)		0.07		—		—
Net realized and unrealized gain (loss) on investments		2.37		1.86		0.20

Total from investment operations		2.44		1.86		0.20
Less distributions from:
Net investment income		0.16		0.02		—
Net realized gain		0.05		—		—

Total distributions		0.21		0.02		—

Net asset value, end of year	$	14.27	$	12.04	$	10.20

Total return (%)		20.22		18.26		2.00
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		1.10		1.10		1.10	(c)
Expenses, before waivers and reimbursements		1.12		1.35		2.46	(c)
Net investment income (loss), net of waivers and reimbursements		0.50		0.31		(0.21	)(c)
Net investment income (loss), before waivers and reimbursements		0.48		0.06		(1.57	)(c)


	Years Ended December 31,
	2006		2005		2004
Supplemental data:
Net assets at end of year (in thousands)	$	598,375	$	250,929	$	27,384
Portfolio turnover rate (%)		79		84		45	(c)

(a)

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

(b)

Excludes $0.23, $0.27 and $0.01 of PFIC mark to market which is treated as ordinary income for Federal tax purposes for the years 2006, 2005 and 2004, respectively.

(c)

Rates are annualized for periods that are less than a year.

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

32 Annual Report

December 31, 2006

Financial Highlights

International Small Cap Growth Fund

Institutional Share Class



	Years Ended December 31,
	2006			2005(a)
Net asset value, beginning of year	$	11.16		$	10.00
Income from investment operations:
Net investment income (b)		(0.01	)		—
Net realized and unrealized gain on investments		2.34			1.16

Total from investment operations		2.33			1.16
Less distributions from:
Net investment income		0.01			—	(c)
Net realized gain		0.05			—

Total distributions		0.06			—

Net asset value, end of year	$	13.43		$	11.16

Total return (%)		20.86			11.62
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		1.25			1.25	(d)
Expenses, before waivers and reimbursements		1.31			2.17	(d)
Net investment income (loss), net of waivers and reimbursements		(0.12	)		0.00	(d)
Net investment income (loss), before waivers and reimbursements		(0.18	)		(0.92	)(d)

	Years Ended December 31,
	2006			2005(a)
Supplemental data for all classes:
Net assets at end of year (in thousands)	$	231,969		$	50,534
Portfolio turnover rate (%)		109			127	(d)

(a)

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

(b)

Excludes $0.00, $0.11 of PFIC mark to market which is treated as ordinary income for Federal tax purposes, for the years ended 2006 and 2005, respectively.

(c)

Distribution less than $0.01 per share.

(d)

Rates are annualized for periods that are less than a year.

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

December 31, 2006

William Blair Funds 33

Financial Highlights

Emerging Markets Growth Fund

Institutional Share Class



	Years Ended December 31,
	2006		2005(a)
Net asset value, beginning of year	$	14.20	$	10.00
Income from investment operations:
Net investment income (b)		0.02		0.01
Net realized and unrealized gain on investments		5.44		4.27

Total from investment operations		5.46		4.28
Less distributions from:
Net investment income		0.01		—
Net realized gain		0.11		0.08

Total distributions		0.12		0.08

Net asset value, end of year	$	19.54	$	14.20

Total return (%)		38.49		42.82
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements		1.25		1.25	(c)
Expenses, before waivers and reimbursements		1.32		1.61	(c)
Net investment income (loss), net of waivers and reimbursements		0.09		0.19	(c)
Net investment income (loss), before waivers and reimbursements		0.02		(0.17	)(c)

	Year Ended December 31,
	2006		2005(a)
Supplemental data for all classes:
Net assets at end of year (in thousands)	$	813,649	$	249,348
Portfolio turnover rate (%)		113		77	(c)

(a)

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

(b)

Excludes $0.00 and $0.11 of PFIC mark to market which is treated as ordinary income for Federal tax purposes, for the years ended 2006 and 2005, respectively.

(c)

Rates are annualized for periods that are less than a year.

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

34 Annual Report

December 31, 2006

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, 2006, 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.

LOGO

Chicago, Illinois

February 12, 2007

December 31, 2006

William Blair Funds 35

Trustees and Officers. (Unaudited) The trustees and officers of the William Blair Funds as of December 31, 2006, their year of birth, 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 Year of Birth	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, 1934*	Chairman of the Board of Trustees	Since 1987	Principal, William Blair & Company, L.L.C.; Partner, APM Limited Partnership	15	Trustee Emeritus, Chicago Child Care Society, a non-profit organization; Trustee Emeritus, Kalamazoo College

Michelle Seitz, 1965*	Trustee	Since 2002	Principal, William Blair & Company, L.L.C.	15	N/A
Non-Interested Trustees
Theodore A. Bosler, 1934	Trustee	Since 1997	Retired Principal and Vice President, Lincoln Capital Management	15	Desert Foothills Land Trust; Institute of Chartered Financial Analysts; and Thresholds

Ann P. McDermott, 1939	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	15	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, 1946	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	15	American Student Assistance Corp.; Amica Mutual Insurance Company;

John B. Schwemm, 1934	Trustee	Since 1990	Retired Chairman and Chief Executive Officer, R.R. Donnelley & Sons Company	15	USG Corp., building material manufacturer, and Walgreen Co. (retail drugstores)

Donald L. Seeley, 1944	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	15	Warnaco, Group Inc., intimate apparel, sportswear and swimwear manufacturer; Center for Furniture Craftmanship (not-for-profit)

Robert E. Wood II, 1938	Trustee	Since 1999	Retired Executive Vice President, Morgan Stanley Dean Witter	15	Chairman, Add-Vision, Inc. manufacturer of surface animation systems, and Micro-Combustion, LLC

36 Annual Report

December 31, 2006


Name and Year of Birth	Position(s) Held with Fund	Term of Office and Length of Time Served(1)	Principal Occupation(s) During Past 5 Years	Other Directorships Held by Trustee/Officer
Officers
Marco Hanig, 1958	President	Since 1999	Principal, William Blair & Company, L.L.C.	Chicago Scores

Karl W. Brewer, 1966	Senior Vice President	Since 2000	Principal, William Blair & Company, L.L.C.	N/A

Harvey H. Bundy, III, 1944	Senior Vice President	Since 2003	Principal, William Blair & Company, L.L.C.	N/A

Mark A. Fuller, III, 1957	Senior Vice President	Since 1993	Principal, William Blair & Company, L.L.C.	Partner, Fulsen Howney Partners

James S. Golan, 1961	Senior Vice President	Since 2005	Principal, William Blair & Company, L.L.C.	N/A

W. George Greig, 1952	Senior Vice President	Since 1996	Principal, William Blair & Company, L.L.C.	N/A

Michael A. Jancosek, 1959	Senior Vice President Vice President	Since 2004 2000-2004	Principal, William Blair & Company L.L.C. Associate, William Blair & Company, L.L.C.	N/A

John F. Jostrand, 1954	Senior Vice President	Since 1999	Principal, William Blair & Company, L.L.C.	N/A

James S. Kaplan, 1960	Senior Vice President Vice President	Since 2004 1995-2004	Principal, William Blair & Company, L.L.C. Associate, William Blair & Company, L.L.C.	N/A

Robert C. Lanphier, IV, 1956	Senior Vice President	Since 2003	Principal, William Blair & Company, L.L.C.	Chairman, AG. Med, Inc.

Todd M. McClone, 1968	Senior Vice President Vice President	Since 2006 2005-2006	Principal, William Blair & Company, L.L.C. Associate, William Blair & Company, L.L.C.	N/A

David S. Mitchell, 1960	Senior Vice President Vice President	Since 2004 2003-2004	Principal, William Blair & Company, L.L.C. Associate, William Blair & Company, L.L.C.	N/A

Gregory J. Pusinelli, 1958	Senior Vice President	Since 1999	Principal, William Blair & Company, L.L.C.	N/A

David P. Ricci, 1958	Senior Vice President	Since 2006	Principal, William Blair & Company, L.L.C.	N/A

Norbert W. Truderung, 1952	Senior Vice President	Since 1992	Principal, William Blair & Company, L.L.C.	N/A

Jeffrey A. Urbina, 1955	Senior Vice President	Since 1998	Principal, William Blair & Company, L.L.C.	N/A

December 31, 2006

William Blair Funds 37


Name and Year of Birth	Position(s) Held with Fund	Term of Office and Length of Time Served(1)	Principal Occupation(s) During Past 5 Years	Other Directorships Held by Trustee/Officer
Christopher T. Vincent, 1956	Senior Vice President Vice President	Since 2004 2002-2004	Principal, William Blair & Company, L.L.C. Associate, William Blair & Company, L.L.C.; former Managing Director/Senior Portfolio Manager, Zurich Scudder Investments	Uhlich Children’s Home

Richard W. Smirl, 1967	Chief Compliance Officer	Since 2004	Associate, William Blair & Company, L.L.C.; former Chief Legal Officer, Strong Capital Management	N/A

David C. Fording, 1967	Vice President	Since 2006	Associate, William Blair & Company, L.L.C.; former Portfolio Manager, TIAA-CREF	N/A

Chad M. Kilmer, 1975	Vice President	Since 2006	Associate, William Blair & Company, L.L.C.; former analyst and Portfolio Manager, US Bancorp Asset Management, and analyst Gabelli Woodland Partners.	N/A

Mark T. Leslie, 1967	Vice President	Since 2005	Associate, William Blair & Company, L.L.C.; former Portfolio Manager, U.S. Bancorp Asset Management	N/A

Colin J. Williams, 1975	Vice President	Since 2006	Associate, William Blair & Company, L.L.C.; formerly Andersen Consulting and Allegiance Healthcare	N/A

Terence M. Sullivan, 1944	Vice President and Treasurer	Since 1997	Associate, William Blair & Company, L.L.C.	N/A

Colette M. Garavalia, 1961	Secretary	Since 2000	Associate, William Blair & Company, L.L.C.	N/A

(1)

38 Annual Report

December 31, 2006

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, the William Blair International Small Cap Growth 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

Shareholder Meeting Results

1. Election of Trustees. (“Number of Votes” represents all Portfolios of the Fund.)


	Number of Votes:
Trustee	For	Withhold
Frederick Conrad Fischer	1,425,457,809.64	2,021,812.06
Ann P. McDermott	1,425,077,600.17	2,402,021.53
Phillip O. Peterson*	1,426,061,038.41	1,418,583.29
Donald J. Reaves	1,425,552,754.75	1,926,866.95
Donald L. Seeley	1,425,445,801.20	2,033,820.50
Michelle R. Seitz	1,426,053,294.98	1,426,326.72
Thomas J. Skelly*	1,426,143,800.45	1,335,821.25
Robert E. Wood II	1,425,504,578.55	1,975,043.15

*	Messrs. Peterson and Skelly became Trustees of the Trust on February 15, 2007 upon the retirement of Trustees Bosler and Schwemm.

December 31, 2006

William Blair Funds 39

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 Portfolio, you incur ongoing costs, including management fees and other Portfolio 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 Portfolio’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, 2006 to December 31, 2006.

Actual Expenses

Hypothetical Example for Comparison Purposes

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.

40 Annual Report

December 31, 2006

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 7/1/2006		Ending Account Value 12/31/2006		Expenses Paid during Period(a)		Annualized Expense Ratio

Institutional International Growth Fund
Actual return	$	1,000.00	$	1,164.50	$	5.62	1.03	%
Hypothetical 5% return		1,000.00		1,020.01		5.24	1.03


Institutional International Equity Fund
Actual return		1,000.00		1,148.70		5.96	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		1,000.00		1,111.00		6.65	1.25
Hypothetical 5% return		1,000.00		1,018.90		6.36	1.25


Emerging Markets Growth Fund Institutional Share Class
Actual return		1,000.00		1,304.90		7.26	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).

December 31, 2006

William Blair Funds 41

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 S. 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

Todd M. McClone, Senior Vice President

David S. Mitchell, Senior Vice President

Gregory J. Pusinelli, Senior Vice President

David P. Ricci, Senior Vice President

Norbert W. Truderung, Senior Vice President

Jeffrey A. Urbina, Senior Vice President

Christopher T. Vincent, Senior Vice President

Richard W. Smirl, Chief Compliance Officer

David C. Fording, Vice President

Chad M. Kilmer, Vice President

Mark T. Leslie, Vice President

Colin J. Williams, Vice President

Terence M. Sullivan, Vice President and Treasurer

Colette M. Garavalia, Secretary

Investment Advisor

William Blair & Company, L.L.C.

Independent Registered Public Accounting Firm

Ernst & Young LLP

Legal Counsel

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

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)

42 Date of First Use August 2006

LOGO

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 waivers 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, 2005 and 2006, Ernst & Young, LLP, the Registrant’s principal accountant (“E&Y), billed the Registrant $280,800 and $360,000, 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, 2005 and 2006, E&Y billed the Registrant $27,700 and $0, 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 the fiscal years ended December 31, 2005 and 2006, E&Y provided no audit-related services to William Blair & Company L.L.C., the Registrant’s investment adviser (“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, 2005 and 2006, E&Y billed the Registrant $69,850 and $76,550, 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 the fiscal years ended December 31, 2005 and 2006, 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, 2005 and 2006, E&Y did not bill the Registrant for products and services other than the services reported above. For the fiscal years ended December 31, 2005 and 2006, 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. 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. The Chairman of the Audit Committee may grant the pre-approval referenced above for non-prohibited and non-audit services. 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, 2005 and 2006, E&Y billed the Registrant $69,850 and $76,550, respectively, in non-audit fees (tax services). For the same periods, E&Y billed William Blair and its control affiliates $8,600 and $6,800, 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.

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) 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 26, 2007

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 26, 2007


		/s/ Terence M. Sullivan

By:

Terence M. Sullivan

Treasurer

(Chief Financial Officer)

Date: February 26, 2007

William Blair Funds N-CSRCertified annual shareholder report (management investment company)