EQUITY FUNDS
SEMI-ANNUAL REPORT
IAI GROWTH AND INCOME FUND,
IAI REGIONAL FUND, IAI VALUE FUND
SEPTEMBER 30, 1998
(UNAUDITED)
[LOGO]
IAI
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
SEMI-ANNUAL REPORT
SEPTEMBER 30, 1998
(UNAUDITED)
President's Letter............................. 2
Fund Managers' Reviews
IAI GROWTH AND INCOME FUND................. 4
IAI REGIONAL FUND.......................... 6
IAI VALUE FUND............................. 8
Fund Portfolios
IAI GROWTH AND INCOME FUND................ 10
IAI REGIONAL FUND......................... 13
IAI VALUE FUND............................ 17
Notes to Fund Portfolios...................... 19
Statements of Assets and Liabilities.......... 26
Statements of Operations...................... 28
Statements of Cash Flows...................... 30
Statements of Changes in Net Assets........... 32
Financial Highlights
IAI GROWTH AND INCOME FUND................ 34
IAI REGIONAL FUND......................... 35
IAI VALUE FUND............................ 36
Notes to Financial Statements................. 37
IAI Mutual Fund Family........................ 42
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors...................... Inside Back Cover
<PAGE>
PRESIDENT'S LETTER
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
WHAT'S RIGHT WITH THIS MARKET
[PHOTO]
ROY C. GILLSON
PRESIDENT
The stock market has been on a roller coaster of late, and that naturally makes
people uneasy. But if you're a long-term investor, then I would argue that there
are a lot more good things influencing the market than bad things.
True, U.S. corporate earnings are flattening out, and that's putting a damper on
the stock market. When you buy a stock, you're buying a future stream of
dividends as well as a stronger company because most of the profits are being
reinvested. After double-digit growth during much of the 1990s, profits in 1998
are growing in the low single digits. A major reason why profits are sluggish is
the economic and currency turmoil in Asia, which hurts U.S. companies doing
business there.
Another reason for sluggish profit growth is the great job that Corporate
America has done to become more efficient. After years of cost-cutting, there
isn't much cutting left to do. To enhance profits, companies must either boost
prices or sell more products and services. But with inflation at virtually zero,
it's tough to raise prices. So, profit growth must come through increased unit
volume.
And that's where the good news is likely to begin. Even with the dampening
effects of Asia, the U.S. economy is still basically healthy, making it possible
for U.S. corporations to sell more products and services here at home. True,
we're losing business in Asia, because the dollar is so strong compared to their
currencies. But what we're losing in Asia, we're gaining in Europe, as that
region of the world begins to enjoy U.S.-style prosperity. Europe will look even
stronger once the Euro, the Continent's single currency, begins to replace 11
currencies on January 1, 1999.
Asia has helped keep inflation worries away, and that has kept interest rates
low. Recently, the 30-year Treasury bond yield reached its lowest level ever, as
global investors buy our securities for the greatest safety and liquidity.
Partly because of our low inflation environment, worldwide demand for U.S.
stocks and bonds continues to be strong.
Even if 1998 turns out to be a mediocre year for stocks, let's not feel too
sorry for ourselves. The Dow Jones Industrial Average has more than doubled
since 1995 and virtually tripled since the beginning of this decade. Where was
the Dow in 1982? 800! Has your house gone up by a factor of ten in fifteen
years? Probably not. The point is that markets do not go up in a straight line,
and there is bound to be volatility. But if you're an investor for the long
term, then you should be able to step back and see the good in this market.
2
<PAGE>
PRESIDENT'S LETTER
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
ECONOMIC OUTLOOK
A summary of economic outlook as provided by Larry Hill, IAI's Chief Fixed
Income Officer, follows.
Growth in the U.S. economy is likely to slow in the months ahead, but it is hard
to become too negative on the outlook for the coming year. Although past
performance does not guarantee future success, there is little evidence of a
recession on the horizon. A modest slowdown is more likely, with real growth
dropping to about 2.5% for 1999. Inflation should continue to drift downward.
In general, the world has built excess capacity. Even in the United States,
which is one of the best performing economies, capacity utilization rates are
below peak levels and credit is readily available to make further productive
investments. Although labor markets are tight and employment costs are rising,
inflation is not a near-term threat.
To be sure, the economy is losing some of its forward momentum. The
manufacturing sector is clearly showing signs of weakness. This sector is
directly exposed to the global glut of commodity goods. With weakness overseas,
exports are slowing while imports are rising. Layoff announcements have
picked-up, and consumer confidence has dropped sharply in response to stock
market volatility. Disposable income is still growing, but at a slower pace.
Corporate profits are also being squeezed, which is likely to reduce capital
spending plans for next year. These indicators all point to slower growth ahead.
Yet, growing evidence of economic deterioration--if this occurs--will prompt
further rate reduction. Having taken the first step to ease in three years, the
Fed is now sensitive to overseas conditions and the fluid economic environment.
If the economy appears to be stumbling, the Fed has plenty of room to drop rates
and will do so with little hesitation. Likewise, renewed turmoil in the markets
will also prompt Fed action. Thus our outlook for no recession is driven by our
confidence that the Fed can and will act if necessary.
Fed diligence is also a key ingredient for the markets. Subdued inflation and
the prospect for further cuts in short rates--if need be--will provide good
support for bonds. Stock prices remain trapped in a tug-of-war between feeble
earnings and favorable liquidity. The stock market will be pulled up and down
until one force overcomes the other and sets the next trend.
Please read the Fund Managers' Reviews, which follow this letter, for a detailed
perspective on Fund performance and our strategy going forward. We appreciate
your continued trust and confidence in IAI. If there is any way we can serve you
better, please let us know by calling our toll-free Investor Services Hotline at
1-800-945-3863.
SINCERELY,
/S/ ROY C. GILLSON
Roy C. Gillson
President
3
<PAGE>
FUND MANAGER'S REVIEW
IAI GROWTH AND INCOME FUND
IAI GROWTH AND INCOME FUND
[PHOTO]
DONALD J. HOELTING, CFA
IAI GROWTH AND INCOME FUND MANAGER
TOP FIVE COMMON
STOCK SECTORS
% OF NET ASSETS AS OF 9/30/98
[BAR CHART]
FINANCIAL 15.1%
PROCESS INDUSTRIES 11.9%
CONSUMER DURABLES 11.9%
CONSUMER NON-DURABLES 10.1%
HEALTH TECHNOLOGY 7.2%
*PERCENTAGE OF NET ASSETS AS OF 9/30/98
HOW HAS THE FUND PERFORMED?
The Fund underperformed its benchmark, the S&P 500 Index, over the six months
ended September 30, 1998, with a return of (14.23%) compared to (6.98%). The
Fund's performance was negatively impacted by overweightings in the two worst
performing sectors, consumer cyclicals and financials.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
Among the Fund's most successful positions were Philip Morris (3.26%)*, Intel
(2.46%)* and Federal Home Loan Mortgage Corporation (4.25%)*. Philip Morris
gained on news that the company may reach a settlement with state attorney
generals. Intel continues to dominate the rapidly growing market for
microprocessors, while Freddie Mac continues to prosper in the low interest rate
environment.
The financials sector was hit hard due to fears of a global recession.
Lagging positions in that sector include Berkshire Hathaway (5.02%)*, SLM
Holding (2.68%)* and American Express (1.98%)*. Parametric Technology (1.54%)*,
lost ground after the company lowered future growth expectations. 800-JR Cigar
(3.24%)*, declined after reporting lower earnings due to disappointing retail
sales.
WERE THERE ANY SIGNIFICANT CHANGES?
Merck & Company (2.29%)*, Sigma-Aldrich (2.19%)* and United Healthcare (1.83%)*
were added to the Fund during the period. Merck & Company is the nation's
leading pharmaceuticals producer and one of the world's top three drug
companies. Sigma-Aldrich sells chemicals used in research and development to
hospitals, universities and laboratories. United Healthcare is a high quality
managed health care company which saw its stock price decline after canceling
merger plans with Humana, making it attractive based on our valuation
methodology.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
A correction in stock prices occurred over the period out of concern that a
global slowdown will spread to the United States.
WHAT IS YOUR OUTLOOK FOR THE FUND?
Over the upcoming period, stocks will most likely continue to decline due to tax
loss selling and continued concern over a global economic slowdown. Valuation
levels remain high, although a number of quality stocks are beginning to look
attractive based on the Fund's valuation methodology. The recent volatility
provides opportunities for the Fund to buy high quality companies, with strong
balance sheets and high levels of free cashflow, at attractive prices.
4
<PAGE>
FUND MANAGER'S REVIEW
IAI GROWTH AND INCOME FUND
VALUE OF $10,000 INVESTMENT+
[PLOT POINT GRAPH]
IAI GROWTH & INCOME FUND S&P 500 INDEX
----------------------- -------------
10/01/88 $10,000 $10,000
03/31/89 11,243 11,026
03/31/90 13,128 13,127
03/31/91 14,102 15,017
03/31/92 15,451 16,675
03/31/93 16,848 19,221
03/31/94 17,364 19,498
03/31/95 18,912 22,537
03/31/96 22,975 29,781
03/31/97 26,039 35,719
03/31/98 36,476 52,906
09/30/98 31,284 49,215
AVERAGE ANNUAL RETURNS+
THROUGH 9/30/98
6 Months* 1 Year 5 Years 10 Years
- -------------------------------------------------------------------------------
IAI GROWTH AND INCOME FUND (14.23%) (4.63%) 11.90% 12.08%
- -------------------------------------------------------------------------------
S&P 500 Index (6.98%) 9.04% 19.91% 17.29%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* NOT ANNUALIZED
TOP TEN HOLDINGS**
% of Net Assets
------------------
Issue Sector 9/30/98 3/31/98
- --------------------------------------------------------------------------------
Berkshire Hathaway Class A Process Industries 5.02 4.17
Federal Home Loan Mortgage
Corporation Financial 4.25 3.79
Philip Morris Consumer Non-Durables 3.26 2.68
800 - JR Cigar Consumer Non-Durables 3.24 1.80
Wal-Mart Stores Retail Trade 3.07 2.96
Tyco International Producer Manufacturing 2.68 3.07
SLMHolding Financial 2.68 3.25
ServiceMaster Health Services 2.51 --
SmithKline Beecham ADR Health Technology 2.46 2.61
Intel Electronic Technology 2.46 2.08
- --------------------------------------------------------------------------------
TOTAL 31.63 26.41
** EXCLUDES U.S. TREASURY AND GOVERNMENT OBLIGATIONS
NOTE TO PRESIDENT'S LETTER & FUND MANAGER'S REVIEW
PERFORMANCE DATA FOR THE IAI GROWTH AND INCOME FUND INCLUDES CHANGES IN SHARE
PRICE AND REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. PAST PERFORMANCE IS
NOT A GUARANTEE OF FUTURE RESULTS. THE FUND'S INVESTMENT RETURN, YIELD AND
PRINCIPAL MAY FLUCTUATE SO THAT, WHEN REDEEMED, SHARES MAY BE WORTH MORE OR LESS
THAN THE ORIGINAL COST. MORE COMPLETE INFORMATION ABOUT THE FUND, INCLUDING
CHARGES AND EXPENSES, IS AVAILABLE IN THE PROSPECTUS. PLEASE READ THE FUND'S
PROSPECTUS CAREFULLY BEFORE INVESTING. ALL INDICES CITED ARE UNMANAGED, AND ARE
EITHER TRADEMARKS, REGISTERED TRADEMARKS OR COPYRIGHTS OF THEIR RESPECTIVE
SPONSORING COMPANIES.
5
<PAGE>
FUND MANAGER'S REVIEW
IAI REGIONAL FUND
IAI REGIONAL FUND
[PHOTO]
MARK C. HOONSBEEN, CFA
IAI REGIONAL FUND MANAGER
TOP FIVE COMMON
STOCK SECTORS
% OF NET ASSETS AS OF 9/30/98
[BAR CHART]
HEALTH TECHNOLOGY 11.8%
PRODUCER MANUFACTURING 9.7%
FINANCIAL 9.1%
UTILITIES 7.2%
RETAIL TRADE 7.2%
*PERCENTAGE OF NET ASSETS AS OF 9/30/98
HOW HAS THE FUND PERFORMED?
The IAI Regional Fund, amid a broad based market sell-off, lost (18.73%) for the
six months ended September 30, 1998. In comparison, the S&P 500 Index lost
(6.98%).
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
Amoco Corporation (2.68%)*, an international oil exploration company, was the
biggest contributor to the Fund's performance as it agreed to be acquired by
British Petroleum (0.00%)* at a very attractive price. Great Plains Software
(1.11%)*, a developer of enterprise wide software, also performed strongly
during the quarter. Recovery Engineering (0.65%)*, United Healthcare (0.00%)*,
Advanced Fibre (0.00%)*, and Ciena (0.00%)* were the biggest disappointments.
WERE THERE ANY SIGNIFICANT CHANGES?
Several new positions were added to the Fund. We purchased Dean Foods (1.56%)*,
Whitman Corporation (0.47%)*, Horace Mann Educators (0.89%)*, and Surmodics
(0.13%)*. We eliminated several companies according to our strict sell
discipline.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
The stocks of the very largest companies continued to post the best relative
results during the period. The S&P 500 Index, reflecting large stock
performance, fell 10% in the third quarter, the S&P 400 Midcap Index, a measure
of midcap stock results, lost 14.5%, and small cap stocks, as measured by the
Russell 2000 Index, declined 20.2%. About 60% of the Fund is invested in small
and midcap stocks which had a significant effect on the Fund's relative
performance.
WHAT IS YOUR OUTLOOK FOR THE FUND?
Money is earned in the stock market by buying companies that build up economic
value by reinvesting in their businesses for future growth. Current valuations
of smaller and midcap stocks imply that expectations are very low. We continue
to hold high quality companies with strong prospects for the future. When the
market leadership shifts, the positive fundamentals of the companies in our Fund
should shine through.
6
<PAGE>
FUND MANAGER'S REVIEW
IAI REGIONAL FUND
VALUE OF $10,000 INVESTMENT+
[PLOT POINT GRAPH]
IAI REGIONAL FUND S&P 500 INDEX
---------------- -------------
10/01/88 $10,000 $10,000
03/31/89 11,069 11,026
03/31/90 13,466 13,127
03/31/91 15,889 15,017
03/31/92 17,920 16,675
03/31/93 19,410 19,221
03/31/94 20,043 19,498
03/31/95 22,116 22,537
03/31/96 28,446 29,781
03/31/97 30,907 35,719
03/31/98 40,658 52,906
09/30/98 33,046 49,215
AVERAGE ANNUAL RETURNS+
THROUGH 9/30/98
6 Months* 1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
IAI REGIONAL FUND (18.73%) (18.05%) 9.80% 12.70%
- --------------------------------------------------------------------------------
S&P 500 Index (6.98%) 9.04% 19.91% 17.29%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* NOT ANNUALIZED
TOP TEN HOLDINGS**
% of Net Assets
------------------
Issue Sector 9/30/98 3/31/98
- --------------------------------------------------------------------------------
Abbott Laboratories Health Technology 2.84 1.63
Amoco Energy Minerals 2.68 1.43
ReliaStar Financial Financial 2.61 2.04
Ameritech Utilities 2.61 1.80
Snap-On Consumer Durables 2.39 2.34
Diametrics Medical Health Technology 2.38 2.53
ABC Rail Products Producer Manufacturing 2.35 1.70
Galileo International Commercial Services 2.29 1.20
Walgreen Retail Trade 2.13 1.13
Medtronic Health Technology 2.06 --
- --------------------------------------------------------------------------------
TOTAL 24.34 15.80
** EXCLUDES U.S. TREASURY AND GOVERNMENT OBLIGATIONS
NOTE TO PRESIDENT'S LETTER & FUND MANAGER'S REVIEW
PERFORMANCE DATA FOR THE IAI REGIONAL FUND INCLUDES CHANGES IN SHARE PRICE AND
REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. PAST PERFORMANCE IS NOT A
GUARANTEE OF FUTURE RESULTS. THE FUND'S INVESTMENT RETURN, YIELD AND PRINCIPAL
MAY FLUCTUATE SO THAT, WHEN REDEEMED, SHARES MAY BE WORTH MORE OR LESS THAN THE
ORIGINAL COST. MORE COMPLETE INFORMATION ABOUT THE FUND, INCLUDING CHARGES AND
EXPENSES, IS AVAILABLE IN THE PROSPECTUS. PLEASE READ THE FUND'S PROSPECTUS
CAREFULLY BEFORE INVESTING. ALL INDICES CITED ARE UNMANAGED, AND ARE EITHER
TRADEMARKS, REGISTERED TRADEMARKS OR COPYRIGHTS OF THEIR RESPECTIVE SPONSORING
COMPANIES.
7
<PAGE>
FUND MANAGER'S REVIEW
IAI VALUE FUND
[PHOTO]
DONALD J. HOELTING, CFA
IAI VALUE FUND MANAGER
TOP FIVE COMMON
STOCK SECTORS
% OF NET ASSETS AS OF 9/30/98
[BAR CHART]
PRODUCER MANUFACTURING 10.6%
COMMERCIAL SERVICES 8.8%
FINANCIAL 8.7%
CONSUMER DURABLES 7.0%
HEALTH SERVICES 5.9%
*PERCENTAGE OF NET ASSETS AS OF 9/30/98
IAI VALUE FUND HOW HAS THE FUND PERFORMED?
For the six months ended September 30, 1998, the Fund outperformed one of its
benchmarks, the Russell 2500 Index, with a return of (19.23%) versus (22.44%),
respectively. The Fund underperformed its other benchmark, the S&P 500 Index,
which returned (6.98%).
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
Phoenix International (3.69%)*, which makes banking client server software, was
the strongest contributor to performance. Nordson, an international designer and
manufacturer of application systems for adhesives and sealants, and LifeUSA
Holding (2.37%)*, a financial and marketing services company, also contributed
to performance.
During the period, the Fund's Board of Directors approved four downward
repricings of one privately-held security using fair value methodology. The
repricings had a significant negative effect on the Fund's net asset value and
reflected the eventual postponement of the security's initial public offering
(IPO) due to volatile capital markets. Privately-held, early-stage companies are
generally risky investments. The Fund remains susceptible to risks associated
with the Fund's large investment in this security (approximately 21% of the
Fund's total assets), the Fund's large total investment in privately-held
securities (approximately 35% of the Fund's total assets) and the Fund's
potential inability to sell the security until sometime in 1999.
Friedman, Billings, Ramsey Group (1.05%)*, 800-JR Cigar (3.03%)* and
Building One Services (1.31%)* also detracted from performance. Friedman,
Billings, Ramsey Group is a regional securities firm that experienced a
disappointing third quarter due to the weak IPOmarket. 800-JR Cigar declined
after reporting lower earnings due to disappointing retail sales. Building One
Services is a facilities services company that maximizes management efficiency
in building operations and maintenance.
WERE THERE ANY SIGNIFICANT CHANGES?
St. John Knits (0.97%)* and Towne Services (1.26%)* were added to the Fund. St.
John Knits designs and manufactures women's clothing, while Towne Services
designs products that convert credit transactions into automated virtual credit
card accounts. The IAI Value Fund remains closed to new investors.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUNDS
PERFORMANCE?
A correction in stock prices occurred this period out of concern that a global
slowdown will spread to the United States.
WHAT IS YOUR OUTLOOK FOR THE FUND?
Over the upcoming period, stocks will most likely continue to decline due to tax
loss selling and continued concern over a global economic slowdown. Valuation
levels remain high, although a number of quality stocks are beginning to look
attractive based on our valuation methodology. The recent volatility provides
opportunities for the Fund to buy high quality companies at attractive prices.
8
<PAGE>
FUND MANAGER'S REVIEW
IAI VALUE FUND
VALUE OF $10,000 INVESTMENT+
[PLOT POINT GRAPH]
IAI VALUE FUND RUSSELL 2500 INDEX S&P 500 INDEX
-------------- ------------------ -------------
10/01/88 10,000 10,000 10,000
03/31/89 11,303 10,759 11,026
03/31/90 12,423 11,596 13,127
03/31/91 13,193 12,739 15,017
03/31/92 14,804 15,532 16,675
03/31/93 15,722 18,126 19,221
03/31/94 17,718 19,721 19,498
03/31/95 18,406 21,429 22,537
03/31/96 22,281 27,820 29,781
03/31/97 23,587 30,235 35,719
03/31/98 31,658 42,893 52,906
09/30/98 25,570 33,268 49,215
AVERAGE ANNUAL RETURNS+
THROUGH 9/30/98
6 Months* 1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
IAI VALUE FUND (19.23%) (16.87%) 8.13% 9.84%
- -------------------------------------------------------------------------------
Russell 2500 Index (22.44%) (16.42%) 10.92% 12.77%
- -------------------------------------------------------------------------------
S&P 500 Index (6.98%) 9.04% 19.91% 17.29%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* NOT ANNUALIZED
TOP TEN HOLDINGS**
% of Net Assets
---------------
Issue Sector 9/30/98 3/31/98
- -------------------------------------------------------------------------------
PathNet(1) Electronic Technology 21.29 5.70
Tut Systems(1) Electronic Technology 7.25 3.93
Phoenix International Commercial Services 3.69 2.02
Pizza Inn Retail Trade 3.40 2.75
Scientific Games Commercial Services 3.39 2.95
800 - JR Cigar Consumer Non-Durables 3.03 2.69
Holophane Producer Manufacturing 2.89 3.07
Leucadia National Financial 2.67 3.34
Intellon(1) Electronic Technology 2.57 1.39
Rayovac Producer Manufacturing 2.49 1.85
- -------------------------------------------------------------------------------
TOTAL 52.67 29.69
** EXCLUDES U.S. TREASURY AND GOVERNMENT OBLIGATIONS
(1) DENOTES RESTRICTED SECURITY WHICH IS INCLUDED IN "OTHER SECURITIES" IN THE
FUND PORTFOLIO
NOTE TO PRESIDENT'S LETTER & FUND MANAGER'S REVIEW
PERFORMANCE DATA FOR THE IAI VALUE FUND INCLUDES CHANGES IN SHARE PRICE AND
REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. PAST PERFORMANCE IS NOT A
GUARANTEE OF FUTURE RESULTS. THE FUND'S INVESTMENT RETURN, YIELD AND PRINCIPAL
MAY FLUCTUATE SO THAT, WHEN REDEEMED, SHARES MAY BE WORTH MORE OR LESS THAN THE
ORIGINAL COST. MORE COMPLETE INFORMATION ABOUT THE FUND, INCLUDING CHARGES AND
EXPENSES, IS AVAILABLE IN THE PROSPECTUS. PLEASE READ THE FUND'S PROSPECTUS
CAREFULLY BEFORE INVESTING. ALL INDICES CITED ARE UNMANAGED, AND ARE EITHER
TRADEMARKS, REGISTERED TRADEMARKS OR COPYRIGHTS OF THEIR RESPECTIVE SPONSORING
COMPANIES.
9
<PAGE>
FUND PORTFOLIO
IAI GROWTH AND INCOME FUND
SEPTEMBER 30, 1998
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
COMMON STOCKS 83.0%
Market
Quantity Value (a)
- -------------------------------------------------------------------
CONSUMER DURABLES - 11.9%
Callaway Golf 46,900 $ 507,106
Department 56 (b) 61,400 1,657,800
Eastman Kodak 18,800 1,453,475
Harley-Davidson 39,800 1,169,125
Mattel 37,100 1,038,800
Polaris Industries 43,100 1,336,100
Sturm, Ruger & Company 82,000 1,281,250
-----------
8,443,656
- -------------------------------------------------------------------
CONSUMER NON-DURABLES - 10.1%
800 - JR Cigar (b) 07,500 2,308,438
Gillette 12,700 485,775
Nike Class B 35,100 1,292,119
Philip Morris 50,300 2,316,943
UST 26,600 786,363
-----------
7,189,638
- -------------------------------------------------------------------
CONSUMER SERVICES - 1.6%
Walt Disney 45,700 1,156,781
- -------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 3.6%
3Com (b) 26,700 802,669
Intel 20,400 1,749,300
-----------
2,551,969
- -------------------------------------------------------------------
ENERGY MINERALS - 4.3%
British Petroleum ADR 15,491 1,351,590
Exxon 24,700 1,733,631
-----------
3,085,221
- -------------------------------------------------------------------
Financial - 15.1%
American Express 18,200 1,412,775
Federal Home Loan
Mortgage Corporation 61,200 3,025,575
Leucadia National 32,300 946,794
Norwest 43,300 1,550,681
PMI Group 13,300 608,475
SLM Holding 58,750 1,905,703
United Asset Management 60,700 1,305,050
-----------
10,755,053
- -------------------------------------------------------------------
Market
Quantity Value (a)
- -------------------------------------------------------------------
HEALTH SERVICES - 6.8%
First Health Group (b) 71,000 $1,721,750
ServiceMaster 81,550 1,783,906
United Healthcare 37,300 1,305,500
------------
4,811,156
- -------------------------------------------------------------------
HEALTH TECHNOLOGY - 7.2%
American Home Products 30,100 1,576,488
Merck & Company 12,600 1,632,488
SmithKline Beecham ADR 31,958 1,749,701
Surmodics (b) 8,168 62,790
Symphonix Devices (b) 27,500 103,125
------------
5,124,592
- -------------------------------------------------------------------
INDUSTRIAL SERVICES - 2.0%
Nabors Industries (b) 94,800 1,439,775
- -------------------------------------------------------------------
NON-ENERGY MINERALS - 1.2%
Nucor 21,300 865,313
- -------------------------------------------------------------------
PROCESS INDUSTRIES - 11.9%
Berkshire Hathaway Class A (b) 60 3,576,000
CBS 51,300 1,244,025
General Electric 14,900 1,185,481
Schweitzer-Mauduit International 41,600 904,800
Sigma-Aldrich 54,000 1,559,250
------------
8,469,556
- -------------------------------------------------------------------
PRODUCER MANUFACTURING - 2.7%
Tyco International 34,500 1,906,125
- -------------------------------------------------------------------
RETAIL TRADE - 3.1%
Wal-Mart Stores 40,000 2,185,000
- -------------------------------------------------------------------
TECHNOLOGY SERVICES - 1.5%
Parametric Technology (b) 109,200 1,098,825
===================================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $49,457,417)....................................$ 59,082,660
===================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 19
10
<PAGE>
FUND PORTFOLIO
IAI GROWTH AND INCOME FUND
SEPTEMBER 30, 1998
(UNAUDITED)
OTHER SECURITIES - 3.9%
Market
Quantity Value (a)
- -------------------------------------------------------------------
COMMON STOCKS - 0.2%
Advanced Recognition
Technologies (b) 2,109 $ 1,242
GalaGen (b)(d) 54,168 88,348
MatrixOne Class A (b) 12,243 71,009
Oren (b) 24 5
PACE Health
Management Systems (b)(d) 121,220 7,152
------------
167,756
- -------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS - 1.2%
Advanced Recognition
Technologies Series A (b) 19,119 11,255
Advanced Recognition
Technologies Series B (b) 74,871 44,077
Advanced Recognition
Technologies Series C (b) 8,005 4,713
MatrixOne Series D (b) 14,964 86,791
Myriad UltraSound
Systems Series A (b) 13,068 16,531
Myriad UltraSound
Systems Series B (b) 14,491 18,331
Myriad UltraSound
Systems Series C (b) 14,351 18,154
Oren Series I (b) 132 210
Oren Series K (b) 220 352
Oren Series L (b) 256 307
ServiceSoft Series F (b) 5,414 6,929
Tut Systems Series D (b)(d) 222,222 666,668
------------
874,318
- -------------------------------------------------------------------
Ownership Market
Percentage (c) Value (a)
- -------------------------------------------------------------------
LIMITED PARTNERSHIPS - 2.5%
Alta Berkeley III, foreign (b) 1.78% $ 380,476
Ampersand Specialty
Materials & Chemicals II (b) 1.82 557,670
Broad Street Investment Fund I (b) 0.29 4,927
South Street Corporate
Recovery Fund I (b) 1.44 229,601
Vanguard Associates II (b) 3.72 70,406
Vanguard Associates III (b) 6.55 494,294
------------
1,737,374
- -------------------------------------------------------------------
Market
Quantity (c) Value (a)
- -------------------------------------------------------------------
WARRANTS - 0.0%
Myriad UltraSound Systems, $1.27,
03/06/99 1,577 --
Myriad UltraSound Systems, $1.27,
06/15/99 457 --
------------
--
===================================================================
TOTAL INVESTMENTS IN OTHER SECURITIES
(COST: $2,744,933).....................................$ 2,779,448
===================================================================
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $52,202,350)....................................$ 61,862,108
===================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 19
11
<PAGE>
FUND PORTFOLIO
IAI GROWTH AND INCOME FUND
SEPTEMBER 30, 1998
(UNAUDITED)
SHORT-TERM SECURITIES - 10.2%
Principal Market
Rate Maturity Amount Value (a)
- --------------------------------------------------------------------------------
COMMERCIAL PAPER - 10.2%
Associates (FINANCIAL) 5.73% 10/01/98 $ 3,640,000 $ 3,640,000
Duke Power (UTILITIES) 5.75 10/01/98 3,640,000 3,640,000
------------
7,280,000
================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $7,280,000)..................................................$ 7,280,000
================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $59,482,350) (E).............................................$ 69,142,108
================================================================================
OTHER ASSETS AND LIABILITIES (NET) - 2.9%
.................................................................$ 2,032,930
================================================================================
TOTAL NET ASSETS
.................................................................$ 71,175,038
================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 19
12
<PAGE>
FUND PORTFOLIO
IAI REGIONAL FUND
SEPTEMBER 30, 1998
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
COMMON STOCKS - 83.7%
Market
Quantity Value (a)
- -------------------------------------------------------------------
COMMERCIAL SERVICES - 4.6%
G & K Services Class A 36,400 $ 1,706,250
Galileo International 204,800 7,731,200
HA-LO Industries (b) 165,100 4,829,175
Manpower 61,000 1,246,687
NEI WebWorld (b) 134,703 58,933
------------
15,572,245
- -------------------------------------------------------------------
CONSUMER DURABLES - 5.8%
Excelsior-Henderson
Motorcycle Manufacturing (b) 290,000 2,138,750
ITI Technologies (b) 272,200 6,532,800
Newell 62,200 2,865,088
Snap-On 261,800 8,066,712
------------
19,603,350
- -------------------------------------------------------------------
CONSUMER NON-DURABLES - 3.8%
Dean Foods 119,900 5,275,600
Hormel Foods 99,200 2,684,600
Tootsie Roll Industries 141,800 4,998,450
------------
12,958,650
- -------------------------------------------------------------------
CONSUMER SERVICES - 1.5%
Caliber Learning Network (b) 100,000 606,250
Lodgenet Entertainment (b)(d) 617,200 4,358,975
------------
4,965,225
- -------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 3.7%
Aetrium (b) 276,400 1,209,250
Digi International (b) 149,400 1,830,150
FSI International (b) 236,900 1,243,725
Norstan (b) 147,700 2,584,750
Sundstrand 118,500 5,495,438
------------
12,363,313
- -------------------------------------------------------------------
ENERGY MINERALS - 2.7%
Amoco 168,200 9,061,774
- -------------------------------------------------------------------
Market
Quantity Value (a)
- -------------------------------------------------------------------
FINANCIAL - 9.1%
Allstate 138,300 $ 5,765,380
Heller Financial (b) 155,100 3,722,400
Horace Mann Educators 100,000 3,000,000
Household International 104,400 3,915,000
Norwest 118,200 4,233,038
ReliaStar Financial 226,100 8,817,900
TCF Financial 70,500 1,401,187
------------
30,854,905
- -------------------------------------------------------------------
HEALTH SERVICES - 3.2%
Patterson Dental (b) 134,650 4,982,050
ServiceMaster 262,200 5,735,625
------------
10,717,675
- -------------------------------------------------------------------
HEALTH TECHNOLOGY - 11.8%
Abbott Laboratories 220,600 9,582,314
Baxter International 95,000 5,652,500
CardioGenesis (b) 210,800 447,950
Cerus (b) 105,800 1,613,450
CIMA Labs (b) 441,000 1,267,875
Diametrics Medical (b) 1,609,300 8,046,500
Medtronic 120,100 6,950,788
Northfield Laboratories (b) 442,800 4,206,600
Possis Medical (b) 296,200 1,647,612
Surmodics (b) 56,252 432,436
------------
39,848,025
- -------------------------------------------------------------------
PROCESS INDUSTRIES - 5.7%
AptarGroup 128,400 2,921,100
Berkshire Hathaway Class A (b) 100 5,960,000
Northland Cranberries Class A 457,800 4,606,612
Valspar 149,200 4,466,675
Whitman 100,000 1,593,750
------------
19,548,137
- -------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 19
13
<PAGE>
FUND PORTFOLIO
IAI REGIONAL FUND
SEPTEMBER 30, 1998
(UNAUDITED)
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- -------------------------------------------------------------------
PRODUCER MANUFACTURING - 9.7%
ABC Rail Products (b)(d) 497,300 $ 7,956,800
HON Industries 80,600 1,904,175
IDEX 134,000 3,559,375
Illinois Tool Works 99,500 5,422,750
Pentair 153,700 4,956,825
Rayovac (b) 236,600 4,051,775
Recovery Engineering (b) 263,200 2,204,300
Zebra Technologies Class A (b) 82,400 2,760,400
------------
32,816,400
- -------------------------------------------------------------------
RETAIL TRADE - 7.2%
Casey's General Stores 382,300 5,734,500
Dayton Hudson 106,000 3,789,500
Lands' End (b) 144,300 2,669,550
Sears, Roebuck & Company 75,700 3,344,994
Video Update Class A (b)(d) 1,474,700 1,566,868
Walgreen 163,000 7,182,188
------------
24,287,600
- -------------------------------------------------------------------
TECHNOLOGY SERVICES - 5.8%
Anicom (b) 342,992 2,315,196
Great Plains Software (b) 79,700 3,765,825
Platinum Technology (b) 371,000 6,678,000
Richardson Electronics 255,600 1,789,200
Secure Computing (b) 499,300 4,899,380
------------
19,447,601
- -------------------------------------------------------------------
TRANSPORTATION - 1.9%
C.H. Robinson Worldwide 248,100 4,993,013
Hub Group Class A (b) 81,500 1,283,625
------------
6,276,638
- -------------------------------------------------------------------
Market
Quantity Value (a)
- -------------------------------------------------------------------
UTILITIES - 7.2%
Ameritech 186,000 $ 8,811,750
Minnesota Power & Light 66,000 2,908,125
Northern States Power 234,000 6,566,625
Unicom 86,000 3,214,250
Wisconsin Energy 92,200 2,910,065
------------
24,410,815
===================================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $284,619,886)...................................$282,732,353
===================================================================
OTHER SECURITIES - 6.7%
Market
Quantity Value (a)
- -------------------------------------------------------------------
COMMON STOCKS - 0.2%
AccessLine Technologies Class A (b) 41,666 $ 418
Aclara BioSciences (b) 4,383 701
Advanced Recognition
Technologies (b) 2,315 1,363
Anglo Chinese Investment
Company, foreign (b)(d) 1,600 249,584
GalaGen (b)(d) 291,733 475,817
Oren (b) 27 5
PACE Health Management
Systems (b)(d) 340,705 19,760
Pacific Monolithics (b) 9,865 100
------------
747,748
- -------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 19
14
<PAGE>
FUND PORTFOLIO
IAI REGIONAL FUND
SEPTEMBER 30, 1998
(UNAUDITED)
OTHER SECURITIES (CONT.)
Market
Quantity Value (a)
- -------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS - 1.4%
AccessLine Technologies Series A (b) 71,420 $ 714
Advanced Recognition
Technologies Series A (b) 20,985 12,354
Advanced Recognition
Technologies Series B (b) 82,181 48,380
Advanced Recognition
Technologies Series C (b) 8,787 5,173
Intellon Series A (b) 600,000 1,116,000
Intellon Series B (b) 192,921 358,833
Myriad UltraSound Systems
Series A (b) 14,344 18,145
Myriad UltraSound Systems
Series B (b) 15,905 20,120
Myriad UltraSound Systems
Series C (b) 15,752 19,926
Oren Series I (b) 145 232
Oren Series K (b) 242 387
Oren Series L (b) 281 337
PACE Health Management
Systems Series A (b)(d) 125,000 62,500
ServiceSoft Series F (b) 5,941 7,605
Tut Systems Series D (b)(d) 478,416 1,435,248
Tut Systems Series E (b)(d) 217,391 652,173
Tut Systems Series F (b)(d) 260,000 780,000
Tut Systems Series G (b)(d) 78,980 236,940
------------
4,775,067
- -------------------------------------------------------------------
Ownership Market
Percentage (c) Value (a)
- -------------------------------------------------------------------
LIMITED PARTNERSHIPS - 5.1%
Agio Capital Partners I (b) 10.66% $ 633,218
Alta Berkeley III, foreign (b) 3.55 760,973
Ampersand Specialty
Materials & Chemicals II (b) 2.72 836,491
Anglo Chinese Selections (b) 2.80 534,000
Conrad/Collins Merchant
Banking Fund (b) 8.45 52,873
Greenwich Street
Capital Partners (b) 3.00 6,815,885
Pathfinder Venture
Capital Fund III (b) 3.99 782,730
South Street Corporate
Recovery Fund I (b) 3.08 491,981
South Street Leveraged
Corporate Recovery Fund I (b) 3.85 131,649
Spectrum Equity Investors (b) 2.76 3,059,928
Spell Capital Partners (b) 4.00 48
Vanguard Associates II (b) 3.72 70,406
Vanguard Associates III (b) 6.20 499,715
Vanguard Associates IV (b) 9.44 2,404,585
------------
17,074,482
- -------------------------------------------------------------------
Principal Market
Rate Maturity Amount (c) Value (a)
- -------------------------------------------------------------------
CONVERTIBLE DEBENTURES - 0.0%
Air Communications Series B (b)(d)
10.00% 02/28/97 $ 258,332 --
- -------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 19
15
<PAGE>
FUND PORTFOLIO
IAI REGIONAL FUND
SEPTEMBER 30, 1998
(UNAUDITED)
OTHER SECURITIES (CONT.)
Market
Quantity Value (a)
- -------------------------------------------------------------------
CALL OPTIONS - 0.0%
GalaGen, $11.07, 03/27/01 (d) 541 $ --
- -------------------------------------------------------------------
WARRANTS - 0.0%
AccessLine Technologies, $0.0,
06/03/99 10,713 --
GalaGen, $11.07, 06/16/99 (d) 5,687 --
GalaGen, $11.07, 03/24/00 (d) 2,256 --
GalaGen, $11.07, 07/09/00 (d) 1,805 --
GalaGen, $7.00, 01/29/01 (d) 7,500 --
Intellon, $2.50, 03/23/99 90,000 --
Myriad UltraSound, $1.27, 03/06/99 1,731 --
Myriad UltraSound, $1.27, 06/15/99 501 --
PACE Health Management
Systems, $4.12, 01/31/00 (d) 21,820 --
Market
Quantity Value (a)
- -------------------------------------------------------------------
PACE Health Management
Systems, $0.50, 07/07/02 (d) 62,500 --
PACE Health Management
Systems, $3.00, 08/31/05 (d) 35,000 $ --
-----------
--
===================================================================
TOTAL INVESTMENTS IN OTHER SECURITIES
(COST: $16,634,062)....................................$ 22,597,297
===================================================================
TOTAL INVESTMENTS IN LONG-TERM
SECURITIES
(COST: $301,253,948)...................................$305,329,650
===================================================================
SHORT-TERM SECURITIES - 8.2%
Principal Market
Rate Maturity Amount Value (a)
- --------------------------------------------------------------------------------
COMMERCIAL PAPER - 8.2%
Associates (FINANCIAL) 5.73% 10/01/98 $12,600,000 $ 12,600,000
Duke Power (UTILITIES) 5.75 10/01/98 15,125,000 15,125,000
-------------
27,725,000
================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $27,725,000)................................................$ 27,725,000
================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $328,978,948) (E)...........................................$ 333,054,650
================================================================================
OTHER ASSETS AND LIABILITIES (NET) 1.4%
...................................................................$ 4,830,963
================================================================================
TOTAL NET ASSETS
...................................................................$ 337,885,613
================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 19
16
<PAGE>
FUND PORTFOLIO
IAI VALUE FUND
SEPTEMBER 30, 1998
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
COMMON STOCKS - 62.5%
Market
Quantity Value (a)
- -------------------------------------------------------------------
COMMERCIAL SERVICES - 8.8%
NEI WebWorld (b) 134,703 $ 58,933
Phoenix International (b) 28,550 535,313
Scientific Games (b) 25,100 491,018
Towne Services (b) 33,300 183,150
------------
1,268,414
- -------------------------------------------------------------------
CONSUMER DURABLES - 7.0%
Department 56(b) 12,500 337,500
Polaris Industries 10,300 319,300
Sturm, Ruger & Company 22,700 354,688
------------
1,011,488
- -------------------------------------------------------------------
CONSUMER NON-DURABLES - 5.2%
800 - JR Cigar (b) 39,500 439,437
St. John Knits 8,700 140,288
Swisher International Class A (b) 30,000 180,000
------------
759,725
- -------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 2.1%
Black Box (b) 12,800 310,400
- -------------------------------------------------------------------
FINANCIAL - 8.7%
Friedman, Billings, Ramsey
Group Class A (b) 28,700 152,469
Leucadia National 13,200 386,925
LifeUSA Holding 26,132 342,983
United Asset Management 12,200 262,300
Wilshire Real Estate
Investment Trust 11,300 115,824
------------
1,260,501
- -------------------------------------------------------------------
HEALTH SERVICES - 5.9%
First Health Group(b) 12,900 312,825
M/A/R/C 15,450 212,437
Trigon Healthcare (b) 10,600 328,600
------------
853,862
- -------------------------------------------------------------------
HEALTH TECHNOLOGY - 1.2%
Surmodics (b) 22,580 173,584
- -------------------------------------------------------------------
Market
Quantity Value (a)
- -------------------------------------------------------------------
INDUSTRIAL SERVICES - 3.8%
Nabors Industries (b) 15,000 $ 227,812
Petroleum Geo-Services ADR (b) 11,600 184,150
R&B Falcon (b) 11,900 142,800
------------
554,762
- -------------------------------------------------------------------
NON-ENERGY MINERALS - 2.2%
Nucor 7,700 312,813
- -------------------------------------------------------------------
PROCESS INDUSTRIES - 3.4%
Building One Services (b) 15,300 189,338
Schweitzer-Mauduit International 14,100 306,675
------------
496,013
- -------------------------------------------------------------------
PRODUCER MANUFACTURING - 10.6%
CompX International Class A (b) 10,200 175,950
Holophane (b) 17,100 418,950
NCI Building Systems (b) 14,700 291,243
Nordson 6,100 286,700
Rayovac (b) 21,100 361,337
------------
1,534,180
- -------------------------------------------------------------------
RETAIL TRADE - 3.4%
Pizza Inn 101,100 492,863
- -------------------------------------------------------------------
TECHNOLOGY SERVICES - 0.2%
Audre Recognition Systems (b) 1,263,250 29,607
===================================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $10,650,453)....................................$ 9,058,212
===================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 19
17
<PAGE>
FUND PORTFOLIO
IAI VALUE FUND
SEPTEMBER 30, 1998
(UNAUDITED)
OTHER SECURITIES - 34.7%
Market
Quantity Value (a)
- -------------------------------------------------------------------
COMMON STOCKS - 0.0%
Advanced Recognition Technologies (b) 720 $ 423
Oren (b) 8 2
Pacific Monolithics (b) 9,865 99
------------
524
- -------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS - 31.4%
Advanced Recognition
Technologies Series A (b) 6,529 3,844
Advanced Recognition
Technologies Series B (b) 25,569 15,052
Advanced Recognition
Technologies Series C (b) 2,734 1,610
Intellon Series A (b) 200,000 372,000
Myriad UltraSound
Systems Series A (b) 4,463 5,646
Myriad UltraSound
Systems Series B (b) 4,949 6,260
Myriad UltraSound
Systems Series C (b) 4,901 6,200
Oren Series I (b) 45 72
Oren Series K (b) 75 120
Oren Series L (b) 87 104
PathNet Series A (b) 100,000 2,155,860
PathNet Series B (b) 43,153 930,318
ServiceSoft Series F (b) 1,850 2,367
Tut Systems Series D (b) (d) 350,319 1,050,958
------------
4,550,411
- -------------------------------------------------------------------
Ownership Market
Percentage (c) Value (a)
- -------------------------------------------------------------------
LIMITED PARTNERSHIPS - 3.3%
Ampersand Specialty
Materials & Chemicals II (b) 0.91% $ 278,836
Conrad/Collins Merchant
Banking Fund (b) 8.45 52,873
South Street Leveraged
Corporate Recovery Fund I (b) 1.10 37,616
Vanguard Associates III (b) 1.42 110,449
------------
479,774
- -------------------------------------------------------------------
Market
Quantity Value (a)
- -------------------------------------------------------------------
WARRANTS - 0.0%
Intellon, $2.50, 03/23/99 30,000 --
Myriad UltraSound, $1.27, 03/06/99 538 --
Myriad UltraSound, $1.27, 06/15/99 156 --
------------
--
===================================================================
TOTAL INVESTMENTS IN OTHER SECURITIES
(COST: $1,337,552).....................................$ 5,030,709
===================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $11,988,005) (E)................................$ 14,088,921
===================================================================
OTHER ASSETS AND LIABILITIES (NET)-2.8%................$ 405,724
===================================================================
TOTAL NET ASSETS
.......................................................$ 14,494,645
===================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 19
18
<PAGE>
NOTES TO FUND PORTFOLIO
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
SEPTEMBER 30, 1998
(UNAUDITED)
(a)
Market value of securities is determined as described in Note 1 to the financial
statements, under "Security Valuation."
(b)
Currently non-income producing security.
(c)
Restricted securities generally must be registered with the Securities and
Exchange Commission under the Securities Act of 1933 prior to being sold to the
public. For each restricted security issue held at September 30, 1998, the Fund
held no unrestricted securities of the same issuer as of either the date the
purchase price was agreed to or the date the Fund first obtained an enforceable
right to obtain the securities. Information concerning each restricted security
held at September 30, 1998 is shown on pages 21-25.
(d)
Investment represents five percent or more of the outstanding voting securities
of the issuer, and is therefore an affiliate, as defined in the Investment
Company Act of 1940, at September 30, 1998. A summary of transactions during the
period with affiliated issuers of the Funds follows:
<TABLE>
<CAPTION>
IAI GROWTH AND INCOME FUND AFFILIATED ISSUERS
- ----------------------------------------------------------------------------------------------
PURCHASES SALES REALIZED INVESTMENT
-------------------------------------------------
ISSUER QUANTITY COST QUANTITY PROCEEDS GAIN (LOSS) INCOME
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GalaGen Options 05/22/98 -- $ 0 1,625 $ -- $ -- $ --
</TABLE>
19
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
IAI REGIONAL FUND AFFILIATED ISSUERS
- ------------------------------------------------------------------------------------------------------------------
PURCHASES SALES REALIZED INVESTMENT
-------------------------------------------------
ISSUER QUANTITY COST QUANTITY PROCEEDS GAIN (LOSS) INCOME
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ABC Rail Products 12,900 $195,381 -- $ -- $ -- $ --
*Aetrium -- $ -- 197,100 $ 1,501,239 $ (2,339,142) $ --
Galagen Options 05/22/98 -- $ -- 6,500 $ -- $ -- $ --
Lodgenet Entertainment 88,200 $976,583 -- $ -- $ -- $ --
PACE Health Management
Systems Warrants 07/07/02 -- $ -- 62,500 $ -- $ -- $ --
*Recovery Engineering 28,100 $485,936 -- $ -- $ -- $ --
Video Update Class A 138,100 $409,906 -- $ -- $ -- $ --
</TABLE>
DURING THE SIX MONTHS ENDED SEPTEMBER 30, 1998:
* SECURITIES THAT WERE AFFILIATED DURING THE SIX MONTH PERIOD ENDING ON 9/30/98
BUT NOT AT 9/30/98.
(e)
At September 30, 1998, the cost of securities for federal in come tax purposes
and the aggregate gross unrealized appreciation and depreciation based on that
cost were as follows:
<TABLE>
<CAPTION>
IAI GROWTH AND INCOME FUND IAI REGIONAL FUND IAI VALUE FUND
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cost for federal tax purposes $ 60,509,254 $ 336,110,956 $ 12,236,693
===========================================================
Gross unrealized appreciation $ 16,148,677 $ 47,480,081 $ 5,016,023
Gross unrealized depreciation (7,515,823) (50,536,387) (3,163,795)
-----------------------------------------------------------
Net unrealized appreciation
(depreciation) $ 8,632,854 $ (3,056,306) $ 1,852,228
===========================================================
</TABLE>
20
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
SEPTEMBER 30, 1998
(UNAUDITED)
RESTRICTED SECURITIES
IAI GROWTH AND INCOME FUND
COMMON STOCKS
Security Acquisition Date Cost
- --------------------------------------------------------
Advanced Recognition
Technologies 06/16/97 $ 47
GalaGen 02/26/93 300,000
11/29/93 150,031
MatrixOne Class A 10/20/88 139,353
09/29/92 1,545
Oren 06/16/97 5
PACE Health
Management Systems 01/11/94 499,996
CONVERTIBLE PREFERRED STOCKS
Security Acquisition Date Cost
- --------------------------------------------------------
Advanced Recognition
Technologies Series A 06/16/97 $ 7,208
Advanced Recognition
Technologies Series B 06/16/97 14,845
Advanced Recognition
Technologies Series C 06/16/97 4,713
MatrixOne Series D 10/20/88 179,842
Myriad Ultrasound Systems
Series A 06/16/97 6,743
Myriad Ultrasound Systems
Series B 06/16/97 16,375
Myriad Ultrasound Systems
Series C 06/16/97 18,154
Oren Series I 06/16/97 211
Oren Series K 06/16/97 352
Oren Series L 06/16/97 307
ServiceSoft Series F 06/16/97 52,494
Tut Systems Series D 02/17/94 200,147
LIMITED PARTNERSHIPS
Security Acquisition Date Cost
- --------------------------------------------------------
Alta Berkeley III, foreign 09/25/96 $ 46,010
06/06/97 23,135
11/05/97 23,396
07/27/98 22,647
Ampersand Specialty Materials
& Chemicals II 12/05/96 28,848
03/05/98 100,000
Broad Street Investment
Fund I 05/08/91 9,008
South Street Corporate
Recovery Fund I 10/03/95 --
Vanguard Associates II 12/10/84 89,887
10/31/86 138,197
Vanguard Associates III 02/28/91 26,809
01/10/92 305,250
01/11/93 305,250
09/30/93 34,128
WARRANTS
Security Acquisition Date Cost
- --------------------------------------------------------
Myriad Ultrasound Systems
03/06/99 10/15/96 $ --
Myriad Ultrasound Systems
06/15/99 10/15/96 --
21
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
SEPTEMBER 30, 1998
(UNAUDITED)
RESTRICTED SECURITIES
IAI REGIONAL FUND
COMMON STOCKS
Security Acquisition Date Cost
- ------------------------------------------------------
AccessLine Technologies
Class A 06/30/94 $ 209,009
Aclara BioSciences 12/30/97 --
Advanced Recognition
Technologies 06/16/97 52
Anglo Chinese Investment
Company, foreign 12/27/90 157,263
02/07/94 343,001
02/09/94 6,311
GalaGen 02/26/93 1,200,000
11/29/93 200,126
06/17/94 351,839
03/22/95 133,236
07/07/95 104,684
12/14/95 125,002
Oren 06/16/97 5
PACE Health
Management Systems 01/11/94 750,000
01/31/95 201,525
04/27/95 150,625
06/20/95 75,000
09/17/96 212,502
Pacific Monolithics 04/24/85 24,999
08/06/85 75,000
08/19/86 47,989
CONVERTIBLE PREFERRED STOCKS
Security Acquisition Date Cost
- ------------------------------------------------------
AccessLine Technologies
Series A 06/03/94 $ 499,940
Advanced Recognition
Technologies Series A 06/16/97 7,912
Advanced Recognition
Technologies Series B 06/16/97 16,294
Advanced Recognition
Technologies Series C 06/16/97 5,173
Intellon Series A 03/24/94 600,489
Intellon Series B 04/03/96 358,892
Myriad Ultrasound Systems
Series A 06/16/97 7,403
Myriad Ultrasound Systems
Series B 06/16/97 17,973
Myriad Ultrasound Systems
Series C 06/16/97 19,926
Oren Series I 06/16/97 231
Oren Series K 06/16/97 387
Oren Series L 06/16/97 337
PACE Health Management
Systems Series A 02/19/98 125,000
ServiceSoft Series F 06/16/97 57,621
Tut Systems Series D 02/17/94 400,293
04/08/94 30,575
Tut Systems Series E 12/21/94 250,563
Tut Systems Series F 07/30/96 325,095
Tut Systems Series G 12/16/97 236,981
22
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
SEPTEMBER 30, 1998
(UNAUDITED)
RESTRICTED SECURITIES
IAI REGIONAL FUND (CONT.)
LIMITED PARTNERSHIPS
Security Acquisition Date Cost
- ------------------------------------------------------
Agio Capital Partners I 01/26/96 $ 75,000
01/03/97 300,000
10/15/97 300,000
Alta Berkeley III, foreign 09/25/96 92,022
06/06/97 46,273
11/05/97 46,793
07/27/98 45,293
Ampersand Specialty
Materials & Chemicals II 12/05/96 43,270
03/05/98 150,000
Anglo Chinese Selections 12/27/90 1,042,724
Conrad/Collins Merchant
Banking Fund 05/11/89 218,574
Greenwich Street
Capital Partners 04/28/97 1,070,379
08/22/97 351,787
12/12/97 82,319
01/02/98 1,718,344
01/15/98 1,080,130
Pathfinder Venture
Capital Fund III 10/29/92 91,677
04/20/93 100,000
08/24/93 100,000
03/24/94 100,000
12/08/94 100,000
11/01/95 50,000
08/14/96 50,000
09/17/97 50,000
Security Acquisition Date Cost
- ------------------------------------------------------
South Street Corporate
Recovery Fund I 10/03/95 $ --
South Street Leveraged
Corporate Recovery Fund I 10/03/95 --
Spectrum Equity Investors 02/12/97 87,136
02/26/97 150,000
05/05/97 120,000
06/10/97 75,000
09/30/97 75,000
12/09/97 60,000
01/20/98 180,000
07/24/98 90,000
Spell Capital Partners 10/17/97 20,000
Vanguard Associates II 12/10/84 89,887
10/31/86 138,197
Vanguard Associates III 02/28/91 25,360
01/10/92 288,750
01/11/93 288,750
09/30/93 32,284
Vanguard Associates IV 07/26/96 21,500
23
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
SEPTEMBER 30, 1998
(UNAUDITED)
RESTRICTED SECURITIES
IAI REGIONAL FUND (CONT.)
CONVERTIBLE DEBENTURES
Security Acquisition Date Cost
- ------------------------------------------------------
Air Communications
Series B 02/28/97 11/21/95 $ 75,000
11/30/95 50,000
02/26/96 50,000
03/22/96 58,333
05/21/96 16,666
06/25/96 8,333
CALL OPTIONS
Security Acquisition Date Cost
- ------------------------------------------------------
GalaGen 03/27/01 12/26/96 $ --
12/26/97 --
WARRANTS
Security Acquisition Date Cost
- ------------------------------------------------------
AccessLine Technologies
06/03/99 06/03/94 $ --
GalaGen 06/16/99 12/05/94 --
GalaGen 03/24/00 04/13/95 --
GalaGen 07/09/00 07/07/95 --
GalaGen 01/29/01 01/30/96 --
Intellon 03/23/99 04/12/94 --
Myriad Ultrasound Systems
03/06/99 10/15/96 --
Myriad Ultrasound Systems
06/15/99 10/15/96 --
PACE Health Management
Systems 01/31/00 03/30/95 --
PACE Health Management
Systems 07/07/02 02/19/98 --
PACE Health Management
Systems 08/31/05 01/16/96 28
24
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
SEPTEMBER 30, 1998
(UNAUDITED)
RESTRICTED SECURITIES
IAI VALUE FUND
COMMON STOCKS
Security Acquisition Date Cost
- ------------------------------------------------------
Advanced Recognition
Technologies 06/16/97 $ 16
Oren 06/16/97 2
Pacific Monolithics 04/24/85 24,999
08/06/85 75,000
08/19/86 47,990
CONVERTIBLE PREFERRED STOCKS
Security Acquisition Date Cost
- ------------------------------------------------------
Advanced Recognition
Technologies Series A 06/16/97 $ 2,461
Advanced Recognition
Technologies Series B 06/16/97 5,069
Advanced Recognition
Technologies Series C 06/16/97 1,610
Intellon Series A 03/24/94 200,163
Myriad Ultrasound Systems
Series A 06/16/97 2,303
Myriad Ultrasound Systems
Series B 06/16/97 5,592
Myriad Ultrasound Systems
Series C 06/16/97 6,200
Oren Series I 06/16/97 72
Oren Series K 06/16/97 120
Oren Series L 06/16/97 105
Security Acquisition Date Cost
- ------------------------------------------------------
PathNet Series A 08/28/95 $ 50,567
02/09/96 50,033
PathNet Series B 08/05/96 70,078
12/23/96 33,562
ServiceSoft Series F 06/16/97 17,928
Tut Systems Series D 02/17/94 300,220
04/08/94 15,288
LIMITED PARTNERSHIPS
Security Acquisition Date Cost
- ------------------------------------------------------
Ampersand Specialty Materials
& Chemicals II 12/05/96 $ 14,425
03/05/98 50,000
Conrad/Collins Merchant
Banking Fund 05/11/89 218,574
South Street Leveraged
Corporate Recovery Fund I 10/03/95 --
Vanguard Associates III 02/28/91 5,796
01/10/92 66,000
01/11/93 66,000
09/30/93 7,379
WARRANTS
Security Acquisition Date Cost
- ------------------------------------------------------
Intellon 03/23/99 04/12/94 $ --
Myriad Ultrasound Systems
03/06/99 10/15/96 --
Myriad Ultrasound Systems
06/15/99 10/15/96 --
25
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
IAI GROWTH AND INCOME FUND
- ---------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Investments in securities of unaffiliated issuers, at market
(Cost: $58,332,176, $298,520,842, $11,672,497, respectively) $68,379,940
Investments in securities of affiliated issuers, at market
(Cost: $1,150,174, $30,458,106, $315,508) 762,168
-----------
TOTAL INVESTMENTS IN SECURITIES (SEE FUND PORTFOLIOS) 69,142,108
Cash in bank on demand deposit 1,859,771
Receivable for investment securities sold 36,965
Receivable for Fund shares sold --
Dividends and accrued interest receivable 88,363
Other assets (Note 2) 49,398
-----------
TOTAL ASSETS 71,176,605
-----------
LIABILITIES
Payable for investment securities purchased --
Payable for Fund shares purchased --
Other accrued expenses 1,567
-----------
TOTAL LIABILITIES 1,567
-----------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $71,175,038
===========
REPRESENTED BY:
Capital stock $ 48,161
Additional paid-in capital 51,604,820
Undistributed (overdistributed) net investment income 81,433
Accumulated net realized gains 9,780,866
Unrealized appreciation on investment securities 9,659,758
-----------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCk $71,175,038
===========
Shares of capital stock outstanding;
authorized 10 billion shares each of $.01 par value stock 4,816,081
-----------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 14.78
===========
</TABLE>
26 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 37
<PAGE>
<TABLE>
<CAPTION>
IAI REGIONAL FUND IAI VALUE FUND
- ---------------------------------------
<S> <C>
$ 315,259,985 $ 13,037,963
17,794,665 1,050,958
--------------------------------------
333,054,650 14,088,921
299,708 382,413
2,992,276 19,824
1,258,331 --
313,620 8,102
47,262 10,948
--------------------------------------
337,965,847 14,510,208
--------------------------------------
49,016 --
28,102 --
3,116 15,563
--------------------------------------
80,234 15,563
--------------------------------------
$ 337,885,613 $ 14,494,645
======================================
$ 180,527 $ 14,718
312,734,585 11,620,597
(342,811) (88,275)
21,237,610 846,689
4,075,702 2,100,916
--------------------------------------
$ 337,885,613 $ 14,494,645
======================================
18,052,704 1,471,832
--------------------------------------
$ 18.72 $ 9.85
======================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 37 27
<PAGE>
STATEMENTS OF OPERATIONS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
SIX MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
IAI GROWTH AND INCOME FUND
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
NET INVESTMENT INCOME
INCOME
Dividends (net of foreign income taxes withheld of $3,520, $0 and $0, respectively) $ 416,678
Interest 202,743
-------------
TOTAL INCOME 619,421
-------------
EXPENSES
Management fees 537,963
Compensation of Directors 8,005
Interest 25
Other expenses --
-------------
TOTAL EXPENSES 545,993
Less fees reimbursed by Advisers (8,005)
-------------
NET EXPENSES 537,988
-------------
NET INVESTMENT INCOME (LOSS) 81,433
-------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on investment securities
(including $0, ($2,339,142) and $0, respectively, from affiliated issuers) 11,203,062
Net change in unrealized appreciation or depreciation on
investment securities (23,482,909)
-------------
NET LOSS ON INVESTMENTS (12,279,847)
-------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (12,198,414)
=============
</TABLE>
28 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 37
<PAGE>
<TABLE>
<CAPTION>
IAI REGIONAL FUND IAI VALUE FUND
- --------------------------------------------
<S> <C>
$ 1,942,497 $ 62,904
483,958 16,823
---------------------------------------
2,426,455 79,727
---------------------------------------
2,722,800 148,859
41,941 2,347
13,324 4,273
3,149 14,871
---------------------------------------
(41,941) (2,347)
---------------------------------------
2,739,273 168,003
---------------------------------------
(312,818) (88,276)
---------------------------------------
28,369,240 1,146,144
(111,396,916) (3,806,132)
---------------------------------------
(83,027,676) (2,659,988)
---------------------------------------
$ (83,340,494) $ (2,748,264)
=======================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 37 29
<PAGE>
STATEMENTS OF CASH FLOWS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
SIX MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
IAI GROWTH AND INCOME FUND
- -----------------------------------------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM OPERATING EXPENSES:
Interest and dividend income $ 619,421
Net expenses (537,988)
-------------
NET INVESTMENT INCOME (LOSS) 81,433
-------------
Adjustments to reconcile net investment income (loss) to net cash provided
(used) by operating activities:
Change in dividend and interest receivable and other assets 17,661
Net amortization of bond discount (198,057)
-------------
(180,396)
-------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (98,963)
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments 28,778,965
Purchases of investments (10,296,388)
Net purchases of short-term securities (3,038,003)
-------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 15,444,574
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of shares 8,608,716
Net asset value of shares issued in reinvestment of distributions 10,952,465
Cost of shares redeemed (21,608,069)
Distributions paid to shareholders (11,333,749)
-------------
NET CASH USED BY FINANCING ACTIVITIES (13,380,637)
-------------
NET INCREASE IN CASH 1,964,974
CASH AT BEGINNING OF YEAR (105,203)
-------------
CASH AT END OF YEAR $ 1,859,771
=============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 37
30
<PAGE>
<TABLE>
<CAPTION>
IAI REGIONAL FUND IAI VALUE FUND
- -----------------------------------------
<S> <C>
$ 2,426,455 $ 79,727
(2,739,273) (168,003)
-------------------------------------
(312,818) (88,276)
-------------------------------------
921,754 21,622
(476,009) (14,080)
-------------------------------------
445,745 7,542
-------------------------------------
132,927 (80,734)
-------------------------------------
184,534,970 9,936,665
(94,361,851) (957,018)
81,458 1,003,625
-------------------------------------
90,254,577 9,983,272
-------------------------------------
57,684,450 1,918,860
57,189,240 1,097,134
(145,539,128) (11,369,325)
(58,884,994) (1,142,885)
-------------------------------------
(89,550,432) (9,496,216)
-------------------------------------
837,072 406,322
(537,364) (23,909)
-------------------------------------
$ 299,708 $ 382,413
=====================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 37
31
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
<TABLE>
<CAPTION>
IAI GROWTH AND INCOME FUND
Six months ended Year ended
September 30, March 31,
1998 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(UNAUDITED)
OPERATIONS
Net investment income (loss) $ 81,433 $ 213,332
Net realized gains 11,203,062 12,514,136
Net change in unrealized appreciation or depreciation (23,482,909) 20,456,069
--------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (12,198,414) 33,183,537
--------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income -- --
Excess distribution from net investment income -- (435,034)
From net realized gains (11,333,749) (5,032,645)
--------------------------------
TOTAL DISTRIBUTIONS (11,333,749) (5,467,679)
--------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 8,608,716 28,554,909
Net asset value of shares issued in reinvestment of distributions 10,952,465 5,141,082
Cost of shares redeemed (21,608,069) (55,398,375)
--------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS (2,046,888) (21,702,384)
--------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (25,579,051) 6,013,474
NET ASSETS AT BEGINNING OF PERIOD 96,754,089 90,740,615
--------------------------------
NET ASSETS AT END OF PERIOD $ 71,175,038 $ 96,754,089
================================
INCLUDING UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME OF: $81,433 $ --
================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 37
32
<PAGE>
<TABLE>
<CAPTION>
IAI REGIONAL FUND IAI VALUE FUND
Six months ended Year ended Six months ended Year ended
September 30, March 31, September 30, March 31,
1998 1998 1998 1998
- -------------------------------------------------------------------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
$ (312,818) $ (261,126) $ (88,276) $ (68,894)
28,369,240 82,083,27 11,146,144 5,223,885
(111,396,916) 63,099,012 (3,806,132) 3,182,298
----------------------------------------------------------------------
(83,340,494) 144,921,157 (2,748,264) 8,337,289
----------------------------------------------------------------------
-- -- -- (101,383)
-- (103,657) -- (154,746)
(58,884,994) (62,593,794) (1,142,885) (5,085,482)
----------------------------------------------------------------------
(58,884,994) (62,697,451) (1,142,885) (5,341,611)
----------------------------------------------------------------------
58,933,138 40,997,659 1,918,860 11,799,492
57,189,240 61,044,640 1,097,134 5,078,750
(145,567,230) (172,888,525) (11,369,325) (22,573,576)
----------------------------------------------------------------------
(29,444,852) (70,846,226) (8,353,331) (5,695,334)
----------------------------------------------------------------------
(171,670,340) 11,377,480 (12,244,480) (2,699,656)
509,555,953 498,178,473 26,739,125 29,438,781
----------------------------------------------------------------------
$ 337,885,613 $ 509,555,953 $ 14,494,645 $ 26,739,125
======================================================================
$ (342,811) $ (29,993) $ (88,275) $ 1
======================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 37
33
<PAGE>
FINANCIAL HIGHLIGHTS
IAI REGIONAL FUND
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
AND SELECTED INFORMATION FOR EACH PERIOD INDICATED ARE AS FOLLOWS:
<TABLE>
<CAPTION>
Years ended March 31,
Six months ended --------------------------------------------------
September 30, 1998 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
NET ASSET VALUE
Beginning of period $ 19.72 $ 14.83 $ 15.30 $ 14.32 $ 13.91 $ 15.19
-----------------------------------------------------------------
OPERATIONS
Net investment income 0.02 0.04+ 0.10 0.10 0.12 0.09
Net realized and unrealized gains (losses) (2.46) 5.75 1.88 2.86 1.04 0.38
-----------------------------------------------------------------
TOTAL FROM OPERATIONS (2.44) 5.79 1.98 2.96 1.16 0.47
-----------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income -- -- (0.10) (0.13) (0.10) (0.06)
Excess distribution from
net investment income -- (0.07) (0.10) -- -- --
From net realized gains (2.50) (0.83) (2.25) (1.85) (0.65) (1.69)
-----------------------------------------------------------------
TOTAL DISTRIBUTIONS (2.50) (0.90) (2.45) (1.98) (0.75) (1.75)
-----------------------------------------------------------------
NET ASSET VALUE
End of period $ 14.78 $ 19.72 $ 14.83 $ 15.30 $ 14.32 $ 13.91
=================================================================
Total investment return* (14.23%) 40.06% 13.34% 21.51% 8.92% 3.07%
Net assets at end of period (000's omitted) $71,175 $96,754 $90,741 $84,662 $101,256 $119,102
RATIOS
Expenses to average net assets
(including interest expense) 1.25%*** 1.27% 1.26% 1.25% 1.25% 1.25%
Expenses to average net assets
(excluding interest expense) 1.25%*** 1.25% 1.25% 1.25% 1.25% 1.25%
Net investment income to
average net assets 0.19%*** 0.21% 0.51% 0.62% 0.80% 0.60%
Average brokerage commission rate** 0.0600 $0.0599 $0.0623 n/a n/a n/a
Portfolio turnover rate
(excluding short-term securities) 13.2% 23.2% 51.2% 89.1% 79.1% 205.6%
</TABLE>
* TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A SHARE
DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AT NET ASSET
VALUE.
** BEGINNING IN FISCAL 1997, THE FUND IS REQUIRED TO DISCLOSE AN AVERAGE
BROKERAGE COMMISSION RATE.
+ CALCULATED USING AVERAGE SHARES OUTSTANDING DURING THE YEAR.
*** ANNUALIZED
34
<PAGE>
FINANCIAL HIGHLIGHTS
IAI REGIONAL FUND
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
AND SELECTED INFORMATION FOR EACH PERIOD INDICATED ARE AS FOLLOWS:
<TABLE>
<CAPTION>
Years ended March 31,
Six months ended -------------------------------------------------------------
September 30, 1998 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
NET ASSET VALUE
Beginning of period $ 26.35 $ 22.59 $ 24.57 $ 21.56 $ 20.94 $ 22.23
-----------------------------------------------------------------------------
OPERATIONS
Net investment income (loss) (0.02) (0.02) 0.03 0.14 0.17 0.21
Net realized and unrealized gains (losses) (4.38) 6.79 2.08 5.77 1.84 0.51
-----------------------------------------------------------------------------
TOTAL FROM OPERATIONS (4.40) 6.77 2.11 5.91 2.01 0.72
-----------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income -- -- (0.04) (0.18) (0.20) (0.18)
Excess distribution from net
investment income -- -- (0.06) (0.02) -- --
From net realized gains (3.23) (3.01) (3.99) (2.70) (1.19) (1.83)
-----------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (3.23) (3.01) (4.09) (2.90) (1.39) (2.01)
-----------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 18.72 $ 26.35 $ 22.59 $ 24.57 $ 21.56 $ 20.94
=============================================================================
Total investment return* (18.73%) 31.55% 8.65% 28.62% 10.35% 3.26%
Net assets at end of period
(000's omitted) $337,886 $509,556 $498,178 $575,156 $523,364 $596,572
RATIOS
Expenses to average net assets
(including interest expense) 1.24%*** 1.22% 1.21% 1.25% 1.23% 1.25%
Expenses to average net assets
(excluding interest expense) 1.23%*** 1.22% 1.21% 1.25% 1.23% 1.25%
Net investment income to
average net assets (0.14%)*** (0.05 0.14% 0.58% 0.74% 0.94%
Average brokerage commission rate** $ 0.0596 $ 0.0590 $ 0.0581 n/a n/a n/a
Portfolio turnover rate
(excluding short-term securities) 22.5% 46.0% 61.1% 89.7% 150.0% 163.0%
</TABLE>
* TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A SHARE
DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AT NET ASSET
VALUE.
** BEGINNING IN FISCAL 1997, THE FUND IS REQUIRED TO DISCLOSE AN AVERAGE
BROKERAGE COMMISSION RATE.
*** ANNUALIZED
35
<PAGE>
FINANCIAL HIGHLIGHTS
IAI VALUE FUND
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
AND SELECTED INFORMATION FOR EACH PERIOD INDICATED ARE AS FOLLOWS:
<TABLE>
<CAPTION>
Years ended March 31,
Six months ended ----------------------------------------------------------
September 30, 1998 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
NET ASSET VALUE
Beginning of period $ 12.71 $ 11.66 $ 12.42 $ 11.17 $ 11.63 $ 11.63
--------------------------------------------------------------------------
OPERATIONS
Net investment income (loss) (0.06) (0.03) 0.09 0.08 0.03 0.05
Net realized and unrealized gains (losses) (2.16) 3.79 0.68 2.19 0.38 1.45
--------------------------------------------------------------------------
TOTAL FROM OPERATIONS (2.22) 3.76 0.77 2.27 0.41 1.50
--------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income -- (0.04) (0.12) (0.01) (0.03) (0.13)
Excess distribution from
net investment income -- (0.07) -- -- -- --
From net realized gains (0.64) (2.60) (1.41) (1.01) (0.84) (1.37)
--------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.64) (2.71) (1.53) (1.02) (0.87) (1.50)
--------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 9.85 $ 12.71 $ 11.66 $ 12.42 $ 11.17 $ 11.63
==========================================================================
Total investment return* (19.23%) 34.21% 5.85% 21.07% 3.88% 12.70%
Net assets at end of period (000's omitted) $14,495 $26,739 $29,439 $42,009 $40,601 $35,282
RATIOS
Expenses to average net assets
(including interest expense) 1.41%***+ 1.28% 1.25% 1.25% 1.25% 1.25%
Expenses to average net assets
(excluding interest expense) 1.37%***+ 1.25% 1.25% 1.25% 1.25% 1.25%
Net investment income to
average net assets (0.74%)*** (0.24%) 0.61% 0.65% 0.31% 0.35%
Average brokerage commission rate** $ 0.0597 $ 0.0591 $0.0600 n/a n/a n/a
Portfolio turnover rate
(excluding short-term securities) 3.9% 27.0% 61.3% 73.4% 102.1% 191.9%
</TABLE>
* TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A
SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AT
NET ASSET VALUE.
** BEGINNING IN FISCAL 1997, THE FUND IS REQUIRED TO DISCLOSE AN AVERAGE
BROKERAGE COMMISSION RATE.
*** ANNUALIZED
+ THIS RATIO INCLUDES A 12 BASIS POINT EXTRAORDINARY EXPENSE RELATED TO AN
INDEPENDENT VALUATION OF A RESTRICTED SECURITY.
36
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
SEPTEMBER 30, 1998
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The IAI Mutual Funds are registered under the Investment Company Act of 1940 (as
amended) as diversified, open-end management investment companies, or series
thereof. IAI Growth and Income Fund (Growth and Income Fund) is a separate
portfolio of IAI Investment Funds VII, Inc., IAI Regional Fund (Regional Fund)
is a separate portfolio of IAI Investment Funds IV, Inc. and IAI Value Fund
(Value Fund) is a separate portfolio of IAI Investment Funds VIII, Inc. The
Funds have a primary objective of long-term appreciation through investments in
equity securities.
As of May 12, 1998, Value Fund was temporarily closed to new purchases (other
than systematic purchases). Value Fund's Board of Directors and Advisers
determined it to be in the best interest of the Fund's shareholders to close the
Fund due to an investment in a restricted security. Closing the Fund was
intended to protect existing shareholders by preventing individuals from
speculating on short-term purchases and sales of the Fund's shares.
Significant accounting policies followed by the Funds are summarized below:
SECURITY VALUATION
Portfolio securities are valued at the close of the New York Stock Exchange on
each trading day. Listed and unlisted securities for which such information is
regularly reported are valued at the last sale price of the day or, in the
absence of sales, at values based on the closing bid or the last sale price on
the prior trading day. Long-term and short-term "non-money market" debt
securities are valued by a portfolio pricing service. Securities which cannot be
valued by the portfolio pricing service are valued using dealer-supplied
valuations, or are valued under consistently applied procedures established by
the Board of Directors to determine fair value in good faith. Short-term "money
market type" debt securities having a remaining maturity of 60 days or less at
acquisition are valued at cost adjusted for amortization to maturity of any
premium or discount.
Restricted securities for which there is no public market are valued at fair
value in good faith under procedures established by the Board of Directors. Such
procedures consider various factors including, but not limited to, the cost of
the security at date of purchase, the current financial statements of the issuer
and special reports prepared by analysts, the size of the position held, recent
purchases or sales of securities of the company, prices and public trading
activity of comparable companies, the nature and duration of restrictions on
disposition, pending public offerings with respect to the security, changes in
economic conditions and industry developments affecting the issuer, and other
relevant matters. Restricted securities represent $2,779,448 (3.9% of net
assets) for Growth and Income Fund, $22,597,297 (6.7% of net assets) for
Regional Fund and $5,030,709 (34.7% of net assets) for Value Fund. Because of
the inherent uncertainty of valuation, those estimated values may differ
significantly from the values that would have been used had a ready market for
the securities existed, and the differences could be material.
FUTURES AND OPTIONS CONTRACTS
In order to increase exposure to and hedge against changes in the market, the
Funds may buy and sell futures contracts and options. The risks of entering into
futures and option contracts include the possibility that changes in the value
of these contracts may not correlate with changes in the underlying security.
Futures contracts are valued at the settlement price of the exchange on which
they are traded. Upon entering into a futures contract, a Fund is required to
deposit either cash or securities, representing the initial margin, equal to a
certain percentage of the contract value. Subsequent changes in the value of the
contract, or variation margin, are recorded daily as unrealized gains or losses.
The variation margin is paid or received in cash daily by the Fund. The Fund
realizes a gain or loss when the contract is closed or expires.
37
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
SEPTEMBER 30, 1998
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Options traded on an exchange are valued using the last sale price, and those
traded over-the-counter are valued using dealer-supplied valuations, resulting
in unrealized appreciation or depreciation being recorded. The Fund will realize
a gain or loss upon expiration or closing of the option transaction.
When an option is exercised, the proceeds on sales for a written call option,
the purchase cost for a written put option or the cost of a security for a
purchased put or call option is adjusted by the amount of premium received or
paid.
FEDERAL TAXES
Since it is each Fund's policy to comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies and to distribute all
of its taxable income to its shareholders, no provision for income taxes is
required. In order to avoid the payment of any federal excise taxes, each Fund
is required to distribute substantially all of its net investment income and net
realized gains on a calendar year basis. Distributions in excess of book basis
net investment income (but which are not tax returns of capital) are presented
as "excess distributions" in the statement of changes in net assets and the
financial highlights.
Net investment income and net realized gains differ for financial statement and
tax purposes primarily because of recognition of limited partnership income and
the deferral of "wash sale" losses for tax purposes. The character of
distributions made during the year from net investment income or net realized
gains may also differ from its ultimate characterization for tax purposes.
SECURITY TRANSACTIONS AND INVESTMENT INCOME
The Funds record security transactions on trade date, the date the securities
are purchased or sold. Dividend income is recorded on the ex-dividend date.
Interest income is recorded on the accrual basis. The Funds amortize discount
purchased on long-term bonds using the level yield method of amortization.
Security gains and losses are determined on the basis of identified cost, which
is the same basis used for federal income tax purposes. The Funds use the equity
method of accounting for limited partnerships.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders are recorded on the ex-dividend date.
Distributions from net investment income are made semi-annually. Capital gains,
if any, are primarily distributed as of the end of the calendar year. Additional
capital gains distributions as needed to comply with federal tax regulations are
distributed during the year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts in the financial statements. Actual results could
differ from those estimates.
38
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
SEPTEMBER 30, 1998
(UNAUDITED)
[2] COMMITMENTS AND CONTINGENCIES
INSURANCE
For purposes of obtaining certain types of insurance coverage for the Funds and
its officers and directors, the Funds are policyholders in an industry-sponsored
mutual insurance company (the Company). In connection with their obligations as
policyholders, the Funds are committed to make future capital contributions, if
requested by the Company.
LINE OF CREDIT
At September 30, 1998, Growth and Income Fund, Regional Fund, and Value Fund had
available lines of credit of $13,383,000, $15,000,000 and $3,780,000,
respectively, with a bank at the prime interest rate.
To the extent funds are drawn against the line, securities
are held in a segregated account. No compensating balances or commitment fees
are required under the line of credit.There were no borrowings outstanding for
the Funds at September 30, 1998.
LITIGATION
In July 1998, a lawsuit was filed against Value Fund, Advisers and certain of
their officers and directors relating to the pricing of a restricted security
held by the Fund. No significant loss to the Fund is anticipated by management.
LIMITED PARTNERSHIP COMMITMENTS
At September 30, 1998, the Funds are committed to invest additional amounts in
certain limited partnership investments held, as follows:
LIMITED PARTNERSHIP INVESTMENT COMMITMENTS
- --------------------------------------------------------------------------------
GROWTH AND INCOME FUND REGIONAL FUND
- --------------------------------------------------------------------------------
Agio Capital Partners I L.P. $ -- $ 825,000
Alta Berkeley III L.P. 10,000 21,000
Greenwich Street Capital Partners L.P. -- 335,000
Pathfinder Venture Capital Fund III L.P. -- 50,000
Spectrum Equity Investors L.P. -- 138,000
Spell Capital Partners -- 980,000
- --------------------------------------------------------------------------------
Total commitments $ 10,000 $2,349,000
================================================================================
Default by a limited partner of payment of a properly requested capital
contribution, other than default due to a legal determination that such
contribution need not be made, would result in forfeiture of such limited
partner's interest in any future profits and loss in the partnership and removal
from the limited partnership.
The Funds' management intends to finance the aforementioned commitments with
available cash or with proceeds from the sale of investments in short-term
securities. Each Fund maintains in a segregated account an amount equal to its
aggregate unpaid commitments.
39
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
SEPTEMBER 30, 1998
(UNAUDITED)
[3] FEES AND EXPENSES
Under the terms of each Fund's Management Agreement, Investment Advisers, Inc.
(Advisers) is required to pay for all expenses of each Fund, except certain
costs (primarily those incurred in the purchase and sale of assets, taxes,
interest and extraordinary expenses), in return for each Fund paying an all
inclusive management fee (unified fee) to Advisers. The fee is equal to an
annual rate of 1.25%declining to 1.10% (1.00% for Growth and Income Fund) of
average daily net assets. This fee is paid monthly. The Management Agreements
further provide that Advisers will either reimburse the Funds for the fees and
expenses it pays to Directors who are not "interested persons" of the Funds or
reduce its fee by an equivalent amount.
[4] CAPITAL STOCK
The Funds each have authorized 10 billion shares of $.01 par value stock.
Transactions in shares of capital stock during the periods indicated were as
follows.
<TABLE>
<CAPTION>
GROWTH AND INCOME FUND REGIONAL FUND VALUE FUND
- ---------------------------------------------------------------------------------------------------------
Six months Year Six months Year Six months Year
ended ended ended ended ended ended
September 30, March 31, September 30, March 31, September 30, March 31,
1998 1998 1998 1998 1998 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SOLD 512,111 1,648,867 2,635,562 1,624,442 145,741 893,948
ISSUED FOR REINVESTED
DISTRIBUTIONS 632,725 301,798 2,553,091 2,517,461 72,418 418,236
REDEEMED (1,234,047) (3,162,668) (6,470,383) (6,858,737) (849,862) (1,732,928)
--------------------------------------------------------------------------------
INCREASE (DECREASE) IN
SHARES OUTSTANDING (89,211) (1,212,003) (1,281,730) (2,716,834) (631,703) (420,744)
--------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
SEPTEMBER 30, 1998
(UNAUDITED)
[5] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF SECURITIES
For the six months ended September 30, 1998, purchases of securities and sales
proceeds, other than investments in short-term securities, for the Funds were as
follows:
Purchases Sales
- --------------------------------------------------------
GROWTH AND INCOME FUND $ 10,296,388 $ 28,815,930
REGIONAL FUND $ 92,816,004 $183,843,943
VALUE FUND $ 881,449 $ 9,574,314
RESTRICTED SECURITIES
Included in the Funds' portfolios of investments in securities at September 30,
1998 are issues which generally cannot be offered for sale to the public without
first being registered under the Securities Act of 1933 ("restricted
securities"). Such securities are generally illiquid.
Each Fund limits investments in securities which are not readily marketable to
15% of its net assets at the time of purchase. This limitation does not include
Rule 144A securities that have been determined to be liquid based upon
guidelines approved by the Funds' Board of Directors.
At September 30, 1998, 34.7% of Value Fund's net assets were invested in
restricted securities. At September 30, 1998, Advisers were actively seeking
liquidation opportunities which would reduce the percentage of the Fund's
investment portfolio comprised of restricted securities. Advisers, under the
direction of the Board of Directors, intends to pursue such opportunities when
deemed in the best interest of the shareholders.
41
<PAGE>
IAI MUTUAL FUND FAMILY
<TABLE>
<CAPTION>
TO DIVERSIFY YOUR PORTFOLIO, PLEASE CONSIDER ALL OF THE MUTUAL FUNDS IN OUR FUND FAMILY
SECONDARY
IAI FUND PRIMARY OBJECTIVE OBJECTIVE PORTFOLIO COMPOSITION
..................................................................................................................................
<S> <C> <C> <C>
IAI INTERNATIONAL FUND Capital Appreciation Income Equity securities of non-U.S. companies
- ----------------------------------------------------------------------------------------------------------------------------------
IAI EMERGING GROWTH FUND Capital Appreciation -- Common stocks of small- to medium-sized
emerging growth companies
- ----------------------------------------------------------------------------------------------------------------------------------
IAI CAPITAL Capital Appreciation -- Common stocks of small- to medium-sized
APPRECIATION FUND growth companies
- ----------------------------------------------------------------------------------------------------------------------------------
IAI MIDCAP GROWTH FUND Capital Appreciation -- Common stocks of medium-sized growth companies
- ----------------------------------------------------------------------------------------------------------------------------------
IAI REGIONAL FUND Capital Appreciation -- Common stocks of Upper Midwest companies
- ----------------------------------------------------------------------------------------------------------------------------------
IAI GROWTH FUND Capital Appreciation -- Common stocks with potential for above-average
growth and appreciation
- ----------------------------------------------------------------------------------------------------------------------------------
IAI VALUE FUND Capital Appreciation -- Common stocks which are considered to be
undervalued
- ----------------------------------------------------------------------------------------------------------------------------------
IAI GROWTH AND INCOME FUND Capital Appreciation Income Common stocks with potential for long-term
appreciation, and common stocks that are expected
to produce income
- ----------------------------------------------------------------------------------------------------------------------------------
IAI BALANCED FUND Total Return Income Common stocks, investment-grade bonds and
[CAPITAL APPRECIATION + INCOME] short-term instruments
- ----------------------------------------------------------------------------------------------------------------------------------
IAI BOND FUND Income Capital Preservation Investment-grade bonds
- ----------------------------------------------------------------------------------------------------------------------------------
IAI MONEY MARKET FUND Stability/Liquidity Income The portfolio's average dollar-weighted maturity
is less than 90 days, investing in high quality,
money market securities
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE>
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<PAGE>
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<PAGE>
INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
http://www.iaifunds.com
CUSTODIAN
Norwest Bank Minnesota, N.A.
Sixth and Marquette
Minneapolis, MN 55479
LEGAL COUNSEL
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, MN 55402
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
4200 Norwest Center
Minneapolis, MN 55402
DIRECTORS
Madeline Betsch
W. William Hodgson
George R. Long
J. Peter Thompson
Charles H. Withers
<PAGE>
[LOGO] IAI
MUTUAL FUNDS
P.O. BOX 357, MINNEAPOLIS, MINNESOTA 55440-0357 USA FAX 612.376.2737
800.945.3863
612.376.2700
