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1998 ANNUAL REPORT
IDS
Discovery
Fund
(prospectus enclosed)
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The goal of IDS Discovery Fund, Inc. is long-term growth of capital. The
Fund invests primarily in common stocks of small- and medium-size growth
companies.
(This annual report includes a prospectus that describes in detail the Fund's
objective, investment policies, risks, sales charges, fees and other matters of
interest. Please read the prospectus carefully before you invest or send money.)
American Express Financial Advisors
Distributed by American Express Financial Advisors Inc.
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Your piece of
the future
Glance through current business magazine and newspaper articles on the
fastest- growing companies in America -- and you'll find many of the stocks
that Discovery Fund owns. The Fund seeks small to medium-size firms at the
forefront of rapidly growing markets or industries. From high-tech
companies in computer networking or biotechnology to firms that have found
new ways to make, manage or market traditional products and services, these
are the companies that are creating jobs and reshaping U.S. industry today.
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Contents
1998 annual report
From the chairman 4
From the portfolio manager 4
The Fund's ten largest holdings 6
Making the most of the Fund 7
The Fund's long-term performance 8
Independent auditors' report 9
Financial statements 10
Notes to financial statements 13
Investments in securities 23
IDS mutual funds 28
Federal income tax information 32
1998 prospectus
The Fund in brief 3p
Goal 3p
Investment policies and risks 3p
Manager and distributor 3p
Portfolio manager 3p
Alternative purchase arrangements 3p
Sales charge and Fund expenses 4p
Performance 6p
Financial highlights 6p
Total returns 8p
Investment policies and risks 10p
Facts about investments and their risks 10p
Alternative investment option 15p
Valuing Fund shares 15p
How to purchase, exchange or redeem shares 16p
Alternative purchase arrangements 16p
How to purchase shares 19p
How to exchange shares 22p
How to redeem shares 23p
Reductions and waivers of the sales charge 28p
Special shareholder services 33p
Services 33p
Quick telephone reference 33p
Distributions and taxes 34p
Dividend and capital gain distributions 34p
Reinvestments 34p
Taxes 35p
How to determine the correct TIN 37p
How the Fund is organized 38p
Shares 38p
Voting rights 38p
Shareholder meetings 39p
Board members and officers 39p
Investment manager 41p
Administrator and transfer agent 42p
Distributor 42p
About American Express Financial Corporation 44p
General information 44p
Year 2000 45p
Appendix 46p
Descriptions of derivative instruments 46p
The purpose of this annual report is to tell investors how the Fund
performed.
(icon of) One open book inside of another
The prospectus, which is bound into the middle of this annual report,
describes the Fund in detail.
(This annual report is not part of the prospectus.)
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To our shareholders
From the chairman
If you're an experienced investor, you know that the past few years have
been unusually strong in many financial markets. Perhaps just as important,
history shows that bull markets don't last forever. Though often
unpredictable, declines -- whether they're brief or long-lasting, moderate
or substantial -- are always a possibility.
We saw evidence of that last October, when financial turmoil in Southeast
Asia sparked a sharp decline in worldwide stock markets, including the U.S.
The potential for such volatility reinforces the need for investors to
review periodically their long-term goals and examine whether their
investment program remains on track to achieving them. Your quarterly
investment statements are one part of that monitoring process. The other is
a meeting with your American Express financial advisor. That becomes even
more important if there's a major change in your financial situation or in
the financial markets.
William R. Pearce
(picture of) William R. Pearce
William R. Pearce
Chairman of the board
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From the portfolio manager
Small- and mid-capitalization stocks struggled for much of the past 12
months, as a volatile investment environment continued to drive investors
to the perceived safety of brand-name, large-cap issues. As a result, IDS
Discovery Fund's Class A share finished its fiscal year -- August 1997
through July 1998 -- with a loss of 2.4%.
The period began on a very positive note, however, as small-cap stocks,
which had trailed their large-cap cousins for much of the past few years,
rallied strongly. In fact, the Fund gained approximately 11% in August and
September of last year.
The fast start proved to be short-lived, however, as October brought a
financial crisis in Southeast Asia that sent shock waves throughout the
world. Particularly affected were stocks of companies in technology-related
businesses, which can derive a substantial portion of their revenues from
Asian economies, and energy services -- two sectors that comprised a
substantial portion of the Fund's assets. As investors shifted money into
the perceived safe haven provided by liquid, large-cap U.S. stocks and
bonds, the small-cap sector lost ground through the winter.
The roller coaster headed back up in February and March, though, allowing
the Fund to recoup the previous months' decline. But it quickly reversed
direction again, wiping out that gain and putting the Fund into negative
territory for the fiscal year.
To illustrate the difficulty of the environment, the Russell 2000, an index
commonly used as a proxy for the performance of small-cap stocks, declined
nearly 19% from late April through July.
Consistent consumer staples
The Fund's most consistent performers were its investments in
consumer-staple stocks, including food/beverage and health care, and
financial services, including banks and insurance. The former group
benefited from relatively predictable earnings growth, while the latter was
boosted by a substantial decline in long-term interest rates.
Technology-related stocks, on the other hand, were terrifically volatile,
as investor sentiment swung back and forth with every bit of news regarding
the Asian situation, as well as the investment environment here at home.
As for changes to the Fund's holdings, I avoided stocks with high
price/earnings ratios, which appeared most vulnerable to decline. In
keeping with that strategy, I also trimmed the Fund's holdings among
technology stocks. Concurrently, I added some stocks of what I believe are
promising companies that became available at lower prices. Lastly, I kept
the portfolio essentially fully invested (cash reserves of 5% or less) -- a
strategy that, while it results in greater short-term price volatility, I
believe provides the opportunity for greater gain over the long term.
Looking toward the current fiscal year, the small- and mid-cap stock
universe boasts unusually attractive valuations compared with large-cap
issues. Eventually, that should result in favorable relative performance
for smaller stocks. At present (mid-August), the biggest hurdle is
uncertainty about the economy and corporate profits. As for the Fund, I
intend to keep it essentially fully invested so that it will be in position
to benefit from potential upturns.
Kurt Winters
(picture of) Kurt Winters
Kurt Winters
Portfolio manager
(This annual report is not part of the prospectus.)
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Class A
12-month performance
(All figures per share)
Net asset value (NAV)
July 31, 1998 $11.18
July 31, 1997 $13.02
Decrease $ 1.84
Distributions
Aug. 1, 1997 - July 31, 1998
From income $ 1.01
From capital gains $ 0.55
Total distributions $ 1.56
Total return* -2.4%**
Class B
12-month performance
(All figures per share)
Net asset value (NAV)
July 31, 1998 $10.90
July 31, 1997 $12.82
Decrease $ 1.92
Distributions
Aug. 1, 1997 - July 31, 1998
From income $ 1.01
From capital gains $ 0.55
Total distributions $ 1.56
Total return* -3.2%**
Class Y
12-month performance
(All figures per share)
Net asset value (NAV)
July 31, 1998 $11.20
July 31, 1997 $13.03
Decrease $ 1.83
Distributions
Aug. 1, 1997 - July 31, 1998
From income $ 1.01
From capital gains $ 0.55
Total distributions $ 1.56
Total return* -2.3%**
*The prospectus discusses the effect of sales charges, if any, on the
various classes.
**The total return is a hypothetical investment in the Fund with all
distributions reinvested.
(This annual report is not part of the prospectus.)
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The Fund's ten largest holdings
Percent Value
(of Fund's net assets) (as of July 31, 1998)
Meyer (Fred) 3.14% $34,148,438
Allied Waste Inds 3.12 33,900,000
Quorum Health Group 2.84 30,931,249
U.S. Foodservice 2.70 29,378,125
Watson Pharmaceuticals 2.59 28,203,125
OfficeMax 2.54 27,668,750
ADC Telecommunications 2.54 27,637,500
Finova Group 2.24 24,375,000
Platinum Technology 1.96 21,325,780
AccuStaff 1.95 21,262,500
For further detail about these holdings, please refer to the section
entitled "Investments in securities" herein.
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The ten holdings listed here make up 25.62% of the Fund's net assets
(This annual report is not part of the prospectus.)
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Making the most of the Fund
Build your assets systematically
One of the best ways to invest in the Fund is by dollar-cost averaging -- a
time-tested strategy that can make market fluctuations work for you. To
dollar-cost average, simply invest a fixed amount of money regularly.
You'll automatically buy more shares when the Fund's share price is low,
fewer shares when it is high.
Using this strategy does not ensure a profit or avoid a loss if the market
declines, and requires that you be able to keep on investing on a regular
basis, even when the price of your shares falls or the market declines.
Investing in this manner can be an effective way to accumulate shares to
meet your long-term goals.
How dollar-cost averaging works
Month Amount Per-share Number of shares purchased
invested market price
Jan $100 $20 5.00 XXXXX
Feb 100 18 5.56 XXXXXx
March 100 17 5.88 XXXXXx
April 100 15 6.67 XXXXXXx
May 100 16 6.25 XXXXXXx
June 100 18 5.56 XXXXXx
July 100 17 5.88 XXXXXx
Aug 100 19 5.26 XXXXXx
Sept 100 21 4.76 XXXXx
Oct 100 20 5.00 XXXXX
(footnotes to table) By investing an equal number of dollars each month...
(arrow in table pointing to April) you automatically buy more shares when the
per share market price is low...
(arrow in table pointing to September) and fewer shares when the per share
market price is high.
You have paid an average price of only $17.91 per share over the 10 months,
while the average market price actually was $18.10.
Three ways to benefit from a mutual fund:
o your shares increase in value when the Fund's investments do well
o you receive capital gains when the gains on investments sold by the Fund
exceed losses
o you receive income when the Fund's stock dividends, interest and
short-term gains exceed its expenses.
All three make up your total return. And you potentially can increase your
investment if, like most investors, you reinvest your dividends and capital
gain distributions to buy additional shares of the Fund or another fund.
(This annual report is not part of the prospectus.)
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The Fund's long-term performance
Assumes: oHolding period from 8/1/88 to 7/31/98. oReturns do not reflect
taxes payable on distributions. oReinvestment of all income and capital
gain distributions for the Fund, with a value of $17,257. Also see
"Performance" in the Fund's current prospectus.
The Standard & Poor's 500 Stock Index, an unmanaged list of larger stocks,
is frequently used as a general measure of market performance. However, the
S&P 500 companies are generally larger than those in which Discovery Fund
invests.
The Lipper Small Cap Fund Index includes 30 funds that are generally
similar to Discovery Fund, although some funds in the index may have
somewhat different investment policies or objectives.
How your $10,000 has grown in IDS Discovery Fund
$50,000
$40,000
$33,130
$30,000 Discovery Fund
Class A
$20,000
S&P 500
Stock Index
Lipper Small
$10,000 Cap Fund Index
$9,500
88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98
Average annual total return
(as of July 31, 1998)
1 year Since 5 years 10 years
inception*
Class A -7.30% --% +10.11% +12.73.%
Class B -6.56% +14.37% --% --%
Class Y -2.34% +16.02% --% --%
*Inception date was March 20, 1995.
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On the graph above you can see how the Fund's total return compared to two
widely cited performance indexes, the S&P 500 and the Lipper Small Cap Fund
Index. In comparing Discovery Fund (Class A) to the two indexes, you should
take into account the fact that the Fund's performance reflects the maximum
sales charge of 5%, while such charges are not reflected in the performance
of the indexes.
Your investment and return values fluctuate so that your shares, when
redeemed, may be worth more or less than the original cost. Average annual
total return figures reflect the impact of the applicable sales charge up
to a maximum of 5%. This was a period of widely fluctuating security
prices. Past performance is no guarantee of future results.
(This annual report is not part of the prospectus.)
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The financial statements contained in Post-Effective Amendment #35 to
Registration Statement No. 2-72174 filed on or about September 25, 1998, are
incorporated herein by reference.
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IDS mutual funds
Global/International funds
Funds in this group seek capital growth and/or income by investing primarily in
foreign securities. Foreign investments may be subject to currency fluctuations
and political and economic risks of the countries in which the investments are
made. They are high risk mutual funds with a potential for high reward.
IDS Emerging Markets Fund
Invests in a Portfolio comprised primarily of stocks of companies in developing
countries throughout the world that are believed to offer growth potential.
Seeks to provide long-term growth of capital.
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IDS Global Growth Fund
Invests in a Portfolio comprised primarily of stocks of companies throughout the
world that are positioned to meet market needs in a changing world economy.
These companies offer above-average potential for long-term growth.
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IDS International Fund
Invests primarily in common stocks of foreign companies that offer potential for
superior growth. The Fund may invest up to 20% of its assets in the U.S. market.
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IDS Global Balanced Fund
Invests in stocks and bonds in, for the most part, major markets throughout the
world, including the U.S. Seeks to provide a balance of growth of capital and
current income.
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IDS Global Bond Fund
Invests in a Portfolio comprised primarily of debt securities of U.S. and
foreign issuers to seek high total return through income and growth of capital.
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Growth funds
Funds in this group seek capital growth, primarily from common stocks. They are
high risk mutual funds with a potential for high reward.
IDS Precious Metals Fund
Invests primarily in the securities of foreign or domestic companies that
explore for, mine and process or distribute gold and other precious metals. A
highly aggressive and speculative fund that seeks long-term growth of capital.
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IDS Discovery Fund
Invests in small- and medium-size, growth-oriented companies emphasizing
technological innovation and productivity enhancement. Buys and holds larger
growth-oriented stocks.
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IDS Small Company Index Fund
Invests in all or a representative group of the equity securities comprising the
S&P SmallCap 600 Index, as it strives to provide long-term capital appreciation.
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IDS Strategy Aggressive Fund
Invests primarily in common stocks of companies that are selected for their
potential for above-average growth. Above-average means that their growth
potential is better, in the opinion of the portfolio's investment manager, than
the S&P 500 Stock Index.
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IDS Research Opportunities Fund
Invests in a Portfolio comprised primarily of equity securities of companies
included in the S&P 500 Stock Index that are believed to have strong growth
potential. The Portfolio is managed using a research methodology by the Research
Department of AEFC. Goal is long-term appreciation.
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IDS Growth Fund
Invests in a Portfolio comprised primarily of companies that have above-average
potential for long-term growth as a result of new management, marketing
opportunities or technological superiority.
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IDS New Dimensions Fund
Invests in a Portfolio comprised primarily of companies with significant growth
potential due to superiority in technology, marketing or management. The Fund
frequently changes its industry mix.
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IDS Progressive Fund
Invests primarily in undervalued common stocks. The Fund holds stocks for the
long term with the goal of capital growth.
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Growth & income funds
These funds focus on securities of medium to large, well-established companies
that offer long-term growth of capital and reasonable income from dividends and
interest. Foreign investments may be subject to currency fluctuations and
political and economic risks of the countries in which the investments are made.
IDS Equity Select Fund
Invests primarily in a combination of moderate growth stocks that generaly pay
dividends and bonds. Seeks growth of capital and income.
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IDS Blue Chip Advantage Fund
Invests in selected stocks from a major market index. Securities purchased are
those recommended by our research analysts as the best from each industry
represented on the index. Offers potential for long-term growth as well as
dividend income.
(icon of) ribbon
IDS Managed Allocation Fund
Invests in a Portfolio comprised primarily of U.S. equity securities, U.S. and
foreign debt securities, foreign equity securities and money market instruments.
The Fund provides diversification among these major investment categories and
has a target mix that represents the way the Fund's investments will be
allocated over the long term. Seeks maximum total return.
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IDS Stock Fund
Invests in a Portfolio comprised primarily of common stock of companies
representing many sectors of the economy. Seeks current income and growth of
capital.
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IDS Equity Value Fund
Invests primarily in undervalued common stocks that offer potential for growth
of capital and income.
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IDS Utilities Income Fund
Invests primarily in the stocks of public utility companies to seek high current
income and growth of income and capital with reduced volatility.
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IDS Diversified Equity Income Fund
Invests in a Portfolio comprised primarily in high-yielding common stocks to
seek high current income and, secondarily, to benefit from the growth potential
offered by stock investments.
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IDS Mutual
Invests in a Portfolio that seeks to balance between common stocks and senior
securities (preferred stocks and bonds). Seeks a balance of growth of capital
and current income.
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Income funds
The funds in this group invest their assets primarily in corporate bonds or
government securities to seek interest income. Secondary objective is capital
growth. Risk varies by bond quality.
IDS Extra Income Fund
Invests in a Portfolio comprised mainly of long-term, high-yielding corporate
fixed-income securities in the lower rated, higher risk bond categories to seek
high current income. Secondary objective is capital growth.
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IDS Bond Fund
Invests mainly in corporate bonds, at least 50% in the higher rated, lower risk
bond categories, or the equivalent, and in government bonds.
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IDS Selective Fund
Invests in a Portfolio comprised primarily of high-quality corporate bonds and
other highly rated debt instruments including government securities and
short-term investments. Seeks current income and preservation of capital.
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IDS Federal Income Fund
Invests in a Portfolio comprised primarily of securities issued or guaranteed as
to the timely payment of principal and interest by the U.S. government, its
agencies and instrumentalities. Seeks a high level of current income and safety
of principal consistent with its type of investments.
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Tax-exempt income funds
These funds provide tax-free income by investing in municipal bonds. The income
is generally free from federal income tax, but a portion of the income may be
subject to state and local taxes. Risk varies by bond quality.
IDS Tax-Exempt Bond Fund
Invests mainly in bonds and notes of state or local government units, with at
least 75% in the four highest rated, lowest risk bond categories.
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IDS Insured Tax-Exempt Fund
Invests primarily in municipal securities that are insured as to the timely
payment of principal and interest. The insurance feature minimizes credit risk
of the Fund but does not guarantee the market value of the Fund's shares.
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IDS State Tax-Exempt Funds
(CA, MA, MI, MN, NY, OH)
Invests primarily in high- and medium-grade municipal securities to provide
income to residents of each respective state that is exempt from federal, state
and local income taxes. (New York is the only state that is exempt at the local
level.)
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IDS High Yield Tax-Exempt Fund
Invests in a Portfolio comprised primarily of medium- and lower-quality
municipal bonds and notes. Lower-quality securities generally involve greater
risk of principal and income.
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IDS Intermediate Tax-Exempt Fund
Invests in mainly investment-grade bonds and other debt securities with
intermediate-term maturities issued by state and local government units. Goal is
to seek a high level of current income exempt from federal taxes.
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Money market funds
These money market funds have three main goals: conservation of capital,
constant liquidity and the highest possible current income consistent with these
objectives. An investment in these funds is neither insured nor guaranteed by
the U.S. government, and there can be no assurance that these funds will be able
to maintain a stable net asset value of $1.00 per share. Very limited risk.
IDS Cash Management Fund
Invests in such money market securities as high quality commercial paper,
bankers' acceptances, certificates of deposit (CDs) and other bank securities.
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IDS Tax-Free Money Fund
Invests primarily in short-term bonds and notes issued by state and local
governments to seek high current income exempt from federal income taxes.
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For more complete information about any of these funds, including charges and
expenses, you can obtain a prospectus by contacting your financial advisor or
writing to American Express Shareholder Service, P.O. Box 534, Minneapolis, MN
55440-0534. Read it carefully before you invest or send money.
<PAGE>
Federal income tax information
IDS Discovery Fund, Inc.
The Fund is required by the Internal Revenue Code of 1986 to tell its
shareholders about the tax treatment of the dividends it pays during its
fiscal year. The dividends listed below were reported to you on Form
1099-DIV, Dividends and Distributions, last January. Shareholders should
consult a tax advisor on how to report distributions for state and local
purposes.
IDS Discovery Fund, Inc.
Fiscal year ended July 31, 1998
Class A
Income distribution
taxable as dividend income, 7.45% qualifying for deduction by
corporations.
Payable date Per share
Dec. 29, 1997 $1.00511
Capital gain distribution taxable as long-term capital gain.
Payable date Per share
Dec. 29, 1997 $0.55435
Total distributions $1.55946
The distributions of $1.55946 per share, payable Dec. 29, 1997, consisted
of $1.00511 from net short-term capital gains and $0.55435 from net
long-term capital gains.
The long-term capital gains distribution is divided into two rate
categories: 28% - $0.21625 and 20% - $0.33810.
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Class B
Income distribution
taxable as dividend income, 7.45% qualifying for deduction by
corporations.
Payable date Per share
Dec. 29, 1997 $1.00511
Capital gain distribution taxable as long-term capital gain.
Payable date Per share
Dec. 29, 1997 $0.55435
Total distributions $1.55946
The distributions of $1.55946 per share, payable Dec. 29, 1997, consisted
of $1.00511 from net short-term capital gains and $0.55435 from net
long-term capital gains.
The long-term capital gains distribution is divided into two rate
categories: 28% - $0.21625 and 20% - $0.33810.
Class Y
Income distribution
taxable as dividend income, 7.45% qualifying for deduction by
corporations.
Payable date Per share
Dec. 29, 1997 $1.00511
Capital gain distribution taxable as long-term capital gain.
Payable date Per share
Dec. 29, 1997 $0.55435
Total distributions $1.55946
The distributions of $1.55946 per share, payable Dec. 29, 1997, consisted
of $1.00511 from net short-term capital gains and $0.55435 from net
long-term capital gains.
The long-term capital gains distribution is divided into two rate
categories: 28% - $0.21625 and 20% - $0.33810.
(This annual report is not part of the prospectus.)
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Quick telephone reference*
American Express Redemptions and exchanges, National/Minnesota
Financial Advisors dividend payments or 800-437-3133
Telephone Transaction reinvestments and automatic
Service payment arrangements Mpls./St. Paul area:
671-3800
TTY Service For the hearing impaired 800-846-4852
American Express Automated account information 800-862-7919
Financial Advisors (TouchTone(R) phones only),
Easy Access Line including current fund prices
and performance, account values
and recent account transactions
*You may experience delays when call volumes are high.
AMERICAN EXPRESS Financial Advisors
IDS Discovery Fund
IDS Tower 10
Minneapolis, MN 55440-0010
<PAGE>
STATEMENT OF DIFFERENCES
Difference Description
1) The layout is different 1) Some of the layout in the
throughout the annual report. annual report to
shareholders is in two
columns.
2) Headings. 2) The headings in the
annual report are
placed in a blue strip
at the top of the page.
3) There are pictures, icons 3) Each picture, icon and
and graphs throughout the graph is described in
annual report. parentheses.
4) Footnotes for charts and 4) The footnotes for each
graphs are described at chart or graph are typed
the left margin. below the description of
the chart or graph.