IAI INVESTMENT FUNDS VII INC
497, 1998-08-04
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                              DOMESTIC EQUITY FUNDS

                                   PROSPECTUS

                      
                          IAI CAPITAL APPRECIATION FUND,
                    IAI EMERGING GROWTH FUND, IAI GROWTH FUND,
               IAI GROWTH AND INCOME FUND, IAI MIDCAP GROWTH FUND,
                        IAI REGIONAL FUND, IAI VALUE FUND

                                 AUGUST 1, 1998
                                  


                                     [LOGO]
                                  MUTUAL FUNDS
<PAGE>
 TABLE OF CONTENTS

<TABLE>
<CAPTION>
<S>                                                                         <C>
FUND EXPENSE INFORMATION.....................................................4
FUND DIRECTORS...............................................................4
FINANCIAL HIGHLIGHTS.........................................................5
INVESTMENT OBJECTIVES AND POLICIES...........................................12
         CAPITAL APPRECIATION FUND...........................................12
         EMERGING GROWTH FUND................................................12
         GROWTH FUND.........................................................13
         GROWTH AND INCOME FUND..............................................14
         MIDCAP GROWTH FUND..................................................14
         REGIONAL FUND.......................................................15
         VALUE FUND..........................................................15
PORTFOLIO SECURITIES AND OTHER FUND INVESTMENT TECHNIQUES....................16
FUND RISK FACTORS............................................................18
MANAGEMENT...................................................................20
INVESTMENT PERFORMANCE.......................................................22
COMPUTATION OF NET ASSET VALUE AND PRICING...................................23
PURCHASE OF SHARES...........................................................24
RETIREMENT PLANS.............................................................25
AUTOMATIC INVESTMENT PLAN....................................................25
REDEMPTION OF SHARES.........................................................25
EXCHANGE PRIVILEGE...........................................................26
AUTOMATIC EXCHANGE PLAN......................................................27
AUTHORIZED TELEPHONE TRADING.................................................27
SYSTEMATIC CASH WITHDRAWAL PLAN..............................................27
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS......................................28
DESCRIPTION OF COMMON STOCK..................................................29
COUNSEL AND AUDITORS.........................................................29
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT......................29
ADDITIONAL INFORMATION.......................................................2930
</TABLE>
<PAGE>
                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund


PROSPECTUS DATED AUGUST 1, 1998

IAI Capital Appreciation Fund ("Capital Appreciation Fund"), IAI Emerging Growth
Fund ("Emerging Growth Fund"), and IAI Midcap Growth Fund ("Midcap Growth Fund")
are  separate  portfolios  of IAI  Investment  Funds VI,  Inc.  IAI Growth  Fund
("Growth  Fund") is a separate  portfolio of IAI  Investment  Funds II, Inc. IAI
Regional Fund ("Regional Fund") is a separate  portfolio of IAI Investment Funds
IV, Inc.  IAI Growth and Income Fund  ("Growth  and Income  Fund") is a separate
portfolio of IAI  Investment  Funds VII, Inc., and IAI Value Fund ("Value Fund")
is a  separate  portfolio  of IAI  Investment  Funds  VIII,  Inc.  Each of these
companies is an open-end diversified management investment company authorized to
issue its share of common  stock in more than one series.  Investment  Advisers,
Inc. ("IAI") serves as each Fund's investment adviser and manager.

Capital   Appreciation   Fund's   investment   objective  is  long-term  capital
appreciation.  Capital  Appreciation  Fund pursues its  investment  objective by
investing   primarily  in  equity   securities  of  U.S.   companies  that  have
above-average prospects for growth.

Emerging Growth Fund pursues its objective of long-term capital  appreciation by
investing  primarily in equity  securities of small- and medium-sized  companies
that are in the early stages of their life cycles and which have demonstrated or
have the potential for above-average capital growth.

Growth Fund's  investment  objective is long-term capital  appreciation.  Growth
Fund  pursues its  objective  by investing  primarily  in equity  securities  of
established companies that are expected to increase earnings at an above-average
rate.

Growth and Income Fund's primary investment  objective is capital  appreciation,
with income being its  secondary  objective.  Growth and Income Fund pursues its
objectives by investing primarily in equity securities which offer the potential
for capital appreciation and secondarily by investing in income-producing equity
securities.

Midcap Growth Fund's  investment  objective is long-term  capital  appreciation.
Midcap Growth Fund pursues its  investment  objective by investing  primarily in
equity  securities  of  medium-sized  U.S.  companies  that  have  above-average
prospects for growth.

Regional  Fund  pursues its  objective of capital  appreciation  by investing at
least 80% of its equity  investments in companies which have their  headquarters
in Minnesota,  Wisconsin,  Iowa, Illinois,  Nebraska,  Montana,  North Dakota or
South Dakota.

Value Fund pursues its investment  objective of long-term  capital  appreciation
primarily by investing in securities  believed by  management to be  undervalued
and which are considered to offer unusual opportunities for capital growth.

2
<PAGE>
                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund

This  Prospectus  sets  forth  concisely  the  information  which a  prospective
investor should know about each Fund before  investing and it should be retained
for future reference.  A "Statement of Additional  Information"  dated August 1,
1998,  which provides a further  discussion of certain areas in this  Prospectus
and other  matters  which may be of interest to some  investors,  has been filed
with the  Securities  and  Exchange  Commission  and is  incorporated  herein by
reference.  For a free copy, call or write the Funds at the address or telephone
number shown on the inside back cover of this Prospectus.

THESE  SECURITIES  HAVE NOT BEEN APPROVED OR  DISAPPROVED  BY THE SECURITIES AND
EXCHANGE  COMMISSION OR ANY STATE  SECURITIES  COMMISSION NOR HAS THE SECURITIES
AND  EXCHANGE  COMMISSION  OR ANY STATE  SECURITIES  COMMISSION  PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.


SHARES  OF THE FUNDS ARE NOT  DEPOSITS  OR  OBLIGATIONS  OF,  OR  GUARANTEED  OR
ENDORSED BY, ANY FINANCIAL  INSTITUTION,  ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE  CORPORATION,  THE  FEDERAL  RESERVE  BOARD OR ANY OTHER  AGENCY,  AND
INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.

                                                                               3
<PAGE>
                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund


                            FUND EXPENSE INFORMATION

<TABLE>
<CAPTION>
<S>                                     <C>            <C>          <C>        <C>            <C>           <C>        <C>
SHAREHOLDER TRANSACTION EXPENSES                                                                   
- -------------------------------------------------------------------------------------------------------------------------------
                                            IAI            IAI                                 
                                          Capital       Emerging     IAI          IAI           IAI          IAI       IAI
                                        Appreciation     Growth     Growth      Growth and     Midcap      Regional    Value
                                            Fund          Fund       Fund      Income Fund   Growth Fund     Fund      Fund      
- ----------------------------------------------------------------------------------------- -------------- ----------- --------
Sales Load Imposed on Purchases             None          None       None         None          None         None      None
Sales Load Imposed on
  Reinvested Dividends                      None          None       None         None          None         None      None
Redemption Fees*                            None          None       None         None          None         None      None
Exchange Fees                               None          None       None         None          None         None      None
- --------------------------------------
*  Each Fund charges a $10.00 fee for the payment of redemption proceeds by wire.
</TABLE>

<TABLE>
<CAPTION>
<S>                                      <C>           <C>           <C>         <C>           <C>           <C>        <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily net assets)
- ----------------------------------------------------------------------------------------------------------------------------------
                                            IAI            IAI                                  
                                          Capital       Emerging      IAI           IAI          IAI           IAI        IAI
                                        Appreciation     Growth      Growth      Growth and     Midcap       Regional    Value
                                            Fund          Fund        Fund       Income Fund  Growth Fund      Fund       Fund
- ---------------------------------------------------------------------------------------------------------------------------------

Management Fee                             1.40%          1.24%       1.25%        1.25%        1.25%          1.22%     1.25%
Interest Expense                           0.03%          0.01%       0.00%        0.02%        0.01%          0.00%      0.03%
Rule 12b-1 Fee                             None           None        None         None         None           None      None
Other Expenses                             None           None        None         None         None           None      None
                                           ---            ---         ---          ---           ---           ---       ---
Total Fund Operating Expenses              1.43%          1.25%       1.25%        1.27%        1.26%          1.22%     1.28%

- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

4 - 5
<PAGE>
                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund


EXAMPLE:

Based upon the levels of Total Fund Operating  Expenses listed above,  you would
pay the  following  expenses  on a $1,000  investment,  assuming a five  percent
annual return and redemption at the end of each period:

<TABLE>
<CAPTION>
         <S>                                          <C>      <C>      <C>     <C>                                                 

                                                      1 Year   3 Years  5 Years 10 Years
                                                      ------   ------   ------- --------

         IAI Capital Appreciation Fund                $ 15      $ 45     $ 78    $ 171
         IAI Emerging Growth Fund                     $ 13      $ 40     $ 69    $ 151
         IAI Growth Fund                              $ 13      $ 40     $ 69    $ 151
         IAI Growth and Income Fund                   $ 13      $ 40     $ 70    $ 153
         IAI Midcap Growth Fund                       $ 13      $ 40     $ 69    $ 152
         IAI Regional Fund                            $ 12      $ 39     $ 67    $ 148
         IAI Value Fund                               $ 13      $ 41     $ 70    $ 155

</TABLE>


The  purpose of the above  table is to assist you in  understanding  the various
costs and expenses that an investor in a Fund will bear directly or  indirectly.
The  example  should  not be  considered  a  representation  of past  or  future
expenses. Actual expenses may be greater or less than those shown.


Further  information  concerning  fees  paid by each  Fund is set  forth  in the
section "Management" and in the Statement of Additional Information.

                                 FUND DIRECTORS

                                 Madeline Betsch
                               W. William Hodgson
                                 George R. Long
                                J. Peter Thompson
                               Charles H. Withers

6
<PAGE>

                      (This page intentionally left blank)

                                                                               7
<PAGE>
                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund


FINANCIAL HIGHLIGHTS

The following information has been audited by KPMG Peat Marwick LLP, independent
auditors,  whose report is included in the Funds' Annual Reports.  The Financial
Highlights section of each Annual Report is incorporated by reference in (and is
a part of) the Statement of Additional  Information.  Such Annual Reports may be
obtained by shareholders on request from the Funds at no charge.

<TABLE>
<CAPTION>
<S>                                                         <C>              <C>              <C>
CAPITAL APPRECIATION FUND


                                                                                                 
                                                             Years ended March 31,                Period from
                                                         -------------------------------      February 1, 1996(1)      
                                                              1998            1997             to March 31, 1996
- -------------------------------------------------------- -------------------------------    -------------------------
NET ASSET VALUE
  Beginning of period                                         $13.49         $11.24                  $10.00
                                                         ------------------------------     ------------------------


OPERATIONS
  Net investment income (loss)                                 (0.16)         (0.09)                   --
  Net realized and unrealized gains                             6.77           2.79                    1.24
                                                         -------------------------------    ------------------------
Total from operations                                           6.61           2.70                    1.24
                                                         -------------------------------    ------------------------

DISTRIBUTIONS TO SHAREHOLDERS FROM:
  Net realized gains                                           (2.14)         (0.41)                    --
  Tax return of capital                                          ---          (0.04)                    --
                                                         -------------------------------    ------------------------
                                                      
Total distributions                                            (2.14)         (0.45)                    --
                                                         -------------------------------    -------------------------

Net asset value
  End of period                                              $17.96          $13.49                   $11.24
                                                         ==============================      =========================

Total investment return*                                      52.46%          23.68%                   12.40%

Net assets at end of period (000's omitted)                  $65,955         $44,230                   $9,411

RATIOS
  Expenses to average daily net assets 
    (including interest expense)**                             1.43%           1.26%                    1.25%***
  Expenses to average net assets 
    (excluding interest expense)**                             1.40%           1.25%                    1.25%***
  Net investment income (loss) to average net assets**        (0.95%)         (0.80%)                   0.23%***
  Average brokerage commission rate ****                      $0.0595         $0.0576                    N/A
  Portfolio turnover rate                                     75.6%          132.5%                     1.2%
     (excluding short-term securities)
- --------------------------------------------------------------------------------------------------------------------

*       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.
**      The Fund's  adviser  voluntarily  waived $54,841 and $827 in expenses for
         the  year-ended  March 31,  1997 and the  period  ended  March 31,  1996,
         respectively.  If the Fund had been charged these expenses,  the ratio of
         expenses  to average  daily net  assets  would have been 1.40% and 1.40%,
         respectively, and the ratio of net investment income to average daily net
         assets would have been (0.95%) and 0.08%, respectively.
***     Annualized.
****    Beginning  in fiscal  1997,  the Fund is  required  to disclose an average
         brokerage commission rate.
(1)     Commencement of operations

</TABLE>

8 - 9                                   
<PAGE>

                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund

<TABLE>
<CAPTION>
<S>                                     <C>       <C>         <C>          <C>         <C>         <C>          <C>
EMERGING GROWTH FUND  
                                                                                                               
                                                                                                                   Period from
                                                              Years ended March 31,                            August 5, 1991 (1)
                                      ------------------------------------------------------------------------   to March 31,
                                        1998       1997        1996        1995        1994        1993              1992
                                        ----       ----        ----        ----        ----        -----             ----
NET ASSET VALUE
   Beginning of period                  $15.85    $24.08      $15.83      $15.20      $13.47      $11.91            $10.00
                                       ------------------------------------------------------------------------------------
OPERATIONS
   Net investment income (loss)         (0.18)+    (0.20)      (0.09)      (0.07)      (0.10)      (0.05)             0.01
   Net realized and unrealized                                                 
    gains (loss)                         5.07      (4.52)       8.77        1.42        2.18        2.37              1.91
                                       ------------------------------------------------------------------------------------
Total from operations                    4.89      (4.72)       8.68        1.35        2.08        2.32              1.92
                                      -------------------------------------------------------------------------------------

DISTRIBUTIONS TO SHAREHOLDERS FROM:
   Net investment income                 ---       ---           ---         ---         ---        ---              (0.01)
   Net realized gains                   (2.63)     (3.51)      (0.43)      (0.72)      (0.35)      (0.76)             ---
                                      -------------------------------------------------------------------------------------
 Total distributions                    (2.63)     (3.51)      (0.43)      (0.72)      (0.35)      (0.76)            (0.01)
                                      ======================================================================================
Net asset value
   End of period                       $18.11     $15.85      $24.08      $15.83      $15.20      $13.47            $11.91
                                      =======================================================================================

Total investment return*                33.37%   (22.97%)      55.20%      10.23%      15.43%      21.90%            19.23%
                                                                                                        
Net assets at end of period           $161,912  $387,105     $653,888    $342,874    $225,510    $131,514           $38,110
   (000's omitted)                                                                            

RATIOS
    Expenses to average net assets      
     (including interest expense)       1.25%      1.20%       1.24%        1.25%       1.25%       1.25%            1.25%**
    Expenses to average net assets
     (excluding interest expense)       1.24%      1.19%       1.24%        1.25%       1.25%       1.25%            1.25%**
    Net investment income (loss)
      to average net assets            (0.98%)    (0.75%)     (0.52%)      (0.54%)     (0.77%)     (0.72%)           0.14%**
   Average brokerage                                                                                
      commission rate***               $0.0554    $0.0571       N/A          N/A          N/A        N/A             N/A
   Portfolio turnover rate                                                                                       
      (excluding short-term            41.0%      49.5%       62.8%         58.1%        76.3%      96.1%          126.6%
      securities)                                                                                
- ---------------------------------------------------------------------------------------------------------------------------
*       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.
**     Annualized
***    Beginning in fiscal 1997, the Fund is required to disclose an average
         brokerage commission rate.
(1)    Commencement of operations
+       Calculated using average shares outstanding during the year.

</TABLE>

10 - 11
                                      

<PAGE>

                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund


<TABLE>
<CAPTION>
<S>                                          <C>              <C>               <C>        <C>               <C>
GROWTH FUND



                                                                                            Period from       Period from
                                                                                           August 1, 1994    August 6, 1993(2)
                                            ------------------------------------------     to March 31,       to July 31,
                                                   1998           1997          1996           1995(1)          1994
                                             ----------------------------------------    -------------     -----------
NET ASSET VALUE
  Beginning of period                              $9.92         $11.89         $10.95         $9.87           $10.00
                                             --------------------------------------------------------------------------

OPERATIONS
  Net investment income (loss)                      ---           (0.03)         ---            0.04             0.01        
  Net realized and unrealized gains (losses)        3.59           1.02          1.93           1.07            (0.13)   
                                             ---------------------------------------------------------------------------
Total from operations                               3.59           0.99          1.93           1.11            (0.12)
                                             ---------------------------------------------------------------------------

DISTRIBUTIONS TO SHAREHOLDERS FROM:
  Net investment income                              ---            ---         (0.03)          (0.03)          (0.01)     
  Net realized gains                               (1.34)         (2.96)        (0.96)           ---              ---      
                                             ----------------------------------------------------------------------------
Total distributions                                (1.34)         (2.96)        (0.99)          (0.03)          (0.01)    
                                             ----------------------------------------------------------------------------
NET ASSET VALUE
  End of period                                   $12.17          $9.92        $11.89          $10.95           $9.87
                                             ============================================================================

Total investment return*                          38.96%          8.42%         18.01%          11.24%          (1.21%)

Net assets at end of period (000's omitted)     $14,775         $11,747        $17,079         $26,794         $14,408

RATIOS
  Expenses to average net assets 
   (including interest expense)                   1.25%           1.27%          1.25%          1.25%**         1.25%**
  Expenses to average net assets
   (excluding interest expense)                   1.25%           1.25%          1.25%          1.25%**         1.25%**
  Net investment income (loss)
    to average net assets                        (0.02%)         (0.25%)        (0.04%)         0.61%**         0.16%**
  Average brokerage commission rate***           $0.0593         $0.0588          N/A            N/A              N/A
  Portfolio turnover rate
    (excluding short-term securities)             87.3%         134.2%          92.8%          68.7%           105.4%
- -------------------------------------------------------------------------------------------------------------------------
*       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.
**      Annualized
***     Beginning in fiscal 1997, the Fund is required to disclose an average brokerage commission rate.
(1)     Reflects fiscal year end change from July 31 to March 31.
(2)     Commencement of operations
</TABLE>

12 - 13
<PAGE>
                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund


<TABLE>
<CAPTION>
<S>                       <C>       <C>        <C>       <C>      <C>     <C>       <C>      <C>       <C>      <C>          
GROWTH AND INCOME FUND
                                                           Years ended March 31,
                          --------------------------------------------------------------------------------------------

                          1998       1997       1996      1995     1994    1993     1992      1991      1990     1989
                          ----       ----       ----      ----     ----    ----     ----      ----      ----     ----

NET ASSET VALUE
  Beginning of period   $14.83     $15.30     $14.32    $13.91    $15.19   $14.73   $14.48  $15.47    $16.01    $14.80
                        -----------------------------------------------------------------------------------------------

OPERATIONS
  Net investment income   
   (loss)                 0.04+      0.10       0.10      0.12      0.09     0.07     0.13    0.29      0.39      0.31  
  Net realized and
   unrealized gains       5.75       1.88       2.86      1.04      0.38     1.17     1.20    0.72      2.26      2.23
                        ------------------------------------------------------------------------------------------------
Total from operations     5.79       1.98       2.96      1.16      0.47     1.24     1.33    1.01      2.65      2.54    
                        -------------------------------------------------------------------------------------------------

DISTRIBUTIONS TO
  SHAREHOLDERS FROM:
 Net investment income      --      (0.10)     (0.13)     (0.10)   (0.06)   (0.07)   (0.14)  (0.30)    (0.43)    (0.23)
  Excess distribution
  from net investment  
  income                 (0.07)     (0.10)      ----       ----     ----     ----      ----    ----     ----
 Net realized gains      (0.83)     (2.25)     (1.85)     (0.65)   (1.69)   (0.71)   (0.94)  (1.70)    (2.76)    (1.10)
                         ------------------------------------------------------------------------------------------------
Total distributions      (0.90)     (2.45)     (1.98)     (0.75)   (1.75)   (0.78)   (1.08)  (2.00)    (3.19)    (1.33)
                        -------------------------------------------------------------------------------------------------
NET ASSET VALUE
  End of period         $19.72     $14.83     $15.30     $14.32    $13.91  $15.19   $14.73  $14.48    $15.47    $16.01
                        ==================================================================================================

Total investment        
 return*                40.06%      13.34%     21.51%      8.92%     3.07%   9.04%   9.56%    7.42%    16.77%    18.06%
                                                   
Net assets at end of
  period 
  (000's omitted)      $96,754    $90,741    $84,662   $101,256   $119,102  $134,308 $113,324  $90,590 $76,484  $76,901

RATIOS
  Expenses to average
   net assets (including
   interest expense)     1.25%       1.25%      1.25%      1.25%    1.25%   1.25%   1.25%     1.05%    1.00%     0.90%
  Expenses to average
   net assets (excluding
   interest expense)     1.25%       1.25%      1.25%      1.25%    1.25%   1.25%   1.25%     1.05%    1.00%     0.90%
  Net investment income
   to average net        0.21%       0.51%     0.62%       0.80%    0.60%   0.61%   1.03%     2.19%    2.10%     1.80%
   assets

Average brokerage
  commission rate**     $0.0599    $0.0623       N/A       N/A      N/A      N/A      N/A      N/A      N/A      N/A

Portfolio turnover
rate (excluding
short-term securities)  23.2%      51.2%      89.1%     79.1%     205.6%   175.6%   210.1%    68.5%     66.2%   48.3%
- ----------------------- ---------- ---------- --------- --------- -------- -------- ------- --------- --------- --------
   *   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.

</TABLE>

14 - 15
                                     
<PAGE>
                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund



<TABLE>
<CAPTION>
<S>                                         <C>        <C>       <C>          <C>        <C>    <C>
MIDCAP GROWTH FUND
                                                                                                  Period from
                                                                                                April 10, 1992(1)
                                                             Years ended March 31,                 to March 31,
                                          ----------------------------------------------------  ----------------
                                             1998       1997      1996      1995      1994          1993
                                             ----       ----      ----      ----      ----          ----

NET ASSET VALUE
   Beginning of period                      $16.68    $17.70     $15.35     $13.67     $11.88      $10.00
                                          ----------------------------------------------------------------------

OPERATIONS
   Net investment income (loss)              (0.10)    (0.08)     (0.05)     (0.04)     (0.04)       0.02
   Net realized and unrealized gains          3.34      0.68       3.50       2.35       1.99        1.89
                                          ---------------------------------------------------------------------
Total from operations                         3.24      0.60       3.45       2.31       1.95        1.91
                                          ---------------------------------------------------------------------

DISTRIBUTIONS TO SHAREHOLDERS FROM:
   Net investment income                      ---       ---         ---       ---        ---        (0.03)
   Net realized gains                        (4.01)    (1.62)      (1.10)    (0.63)     (0.16)       ---
                                          ---------------------------------------------------------------------
Total distributions                          (4.01)    (1.62)      (1.10)    (0.63)     (0.16)      (0.03)
                                          =====================================================================
NET ASSET VALUE
   End of period                            $15.91    $16.68      $17.70    $15.35     $13.67      $11.88
                                          =====================================================================

Total investment return*                    22.21%     3.12%      23.51%     17.63%     16.40%      19.09%

Net assets at end of period 
 (000's omitted)                           $82,605   $128,259    $122,375   $88,075   $56,618     $22,070
                                              
RATIOS
  Expenses to average net assets
   (including interest expense)             1.26%      1.25%       1.25%     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 (loss)
   to average net assets                   (0.48%)    (0.47%)     (0.36%    (0.33%)     (0.45%)     0.24%**
  Average brokerage commission rate***     $0.0595    $0.0593       N/A       N/A          N/A        N/A
  Portfolio turnover rate
   (excluding short-term securities)       106.8%     72.4%        29.8%      51.3%      49.7%       57.6%
- ---------------------------------------------------------------------------------------------------------------
*    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.
**   Annualized
***  Beginning  in fiscal  1997,  the Fund is  required  to  disclose an average
       brokerage commission rate.
(1)  Commencement of operations

</TABLE>
16 - 17

<PAGE>
                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund
<TABLE>
<CAPTION>
<S>                       <C>       <C>       <C>       <C>       <C>     <C>      <C>        <C>       <C>     <C>     
REGIONAL FUND
                                                           Years ended March 31,
                         ---------------------------------------------------------------------------------------------

                          1998       1997       1996      1995     1994    1993     1992      1991      1990     1989
                          ----       ----       ----      ----     ----    ----     ----      ----      ----     ----

NET ASSET VALUE
  Beginning of period    $22.59     $24.57     $21.56    $20.94   $22.23  $21.29   $21.03    $18.95    $19.38    $17.11
                        -----------------------------------------------------------------------------------------------

OPERATIONS
  Net investment income
   (loss)                (0.02)       0.03       0.14      0.17    0.21     0.21     0.20      0.35      0.46      0.36
  Net realized and
  unrealized gains        6.79        2.08       5.77      1.84    0.51     1.48     2.38      2.88      3.59      2.76
                        ------------------------------------------------------------------------------------------------
Total from operations     6.77        2.11       5.91      2.01    1.72     1.69     2.58      3.23      4.05      3.12
                        ------------------------------------------------------------------------------------------------

DISTRIBUTIONS TO
SHAREHOLDERS FROM:
 Net investment income    ---        (0.04)     (0.18)    (0.20)  (0.18)   (0.23)   (0.24)   (0.33)     (0.51)   (0.28)
 Excess distribution
  from net investment                
  income                  ---        (0.06)     (0.02)      ---     ---      ---      ---      ---        ---      ---   
  Net realized gains    (3.01)       (3.99)     (2.70)    (1.19)  (1.83)   (0.52)   (2.08)  (0.82)      (3.97)   (0.57)
                        ------------------------------------------------------------------------------------------------
                        
Total distributions     (3.01)       (4.09)     (2.90)    (1.39)  (2.01)   (0.75)   (2.32)  (1.15)      (4.48)   (0.85)
                        -------------------------------------------------------------------------------------------------

NET ASSET VALUE
  End of period        $26.35       $22.59     $24.57    $21.56  $20.94   $22.23   $21.29  $21.03      $18.95    $19.38
                        =================================================================================================

Total investment                                
return*                 31.55%        8.65%     28.62%    10.35%    3.26%   8.31%   12.77%  18.01%      21.66%    18.63%

Net assets at end of
  period (000's       $509,556   $498,178    $575,156   $523,364 $596,572  $659,904 $528,763 $284,054  $138,270   $102,245
  omitted)

RATIOS
  Expenses to average
   net assets (including
   interest expense)     1.22%        1.21%      1.25%      1.23%    1.25%    1.25%  1.25%     1.01%      0.99%    1.00%
  Expenses to average
   net assets (excluding
   interest expense)     1.22%        1.21%      1.25%      1.23%    1.25%    1.25%  1.25%     1.01%      0.99%    1.00%
               
Net investment income
  to average net       (0.05%)       0.14%      0.58%      0.74%    0.94%    1.09%  1.20%     2.27%      2.31%    2.00%
  assets                

Average brokerage
  commission rate**   $0.0590      $0.0581       N/A        N/A       N/A      N/A     N/A      N/A       N/A     N/A

Portfolio turnover
rate (excluding
short-term securities) 46.0%       61.1%        89.7%    150.0%    163.0%   139.7%   140.6%    168.7%    116.2%  93.7%
- ------------------------------------------------------------------------------------------------------------------------

   *   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.

</TABLE>

18 - 19
<PAGE>

                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund

<TABLE>
<CAPTION>
<S>                      <C>       <C>        <C>       <C>       <C>     <C>      <C>      <C>       <C>       <C>
VALUE FUND
                                                         Years ended March 31,
                        -----------------------------------------------------------------------------------------------

                          1998       1997       1996      1995     1994    1993     1992      1991      1990     1989
                          ----       ----       ----      ----     ----    ----     ----      ----      ----     ----

NET ASSET VALUE
  Beginning of period    $11.66    $12.42     $11.17    $11.63    $11.63   $11.06   $10.46  $12.29    $13.14    $10.75
                        ----------------------------------------------------------------------------------------------

OPERATIONS
  Net investment income
   (loss)                (0.03)      0.09       0.08      0.03      0.05     0.11     0.12    0.22      0.19      0.12
  Net realized and
  unrealized gains        3.79       0.68       2.19      0.38     1.45      0.56     1.08    0.36      0.11      2.46
                         ----------------------------------------------------------------------------------------------
Total from operations     3.76       0.77       2.27      0.41     1.50      0.67     1.20    0.58      1.30      2.58
                        -----------------------------------------------------------------------------------------------

DISTRIBUTIONS TO
SHAREHOLDERS FROM:
  Net investment income  (0.04)     (0.12)     (0.01)    (0.03)   (0.13)     ---    (0.15)   (0.17)     (0.18)   (0.10)
  Excess distribution 
   from net investment
   income                (0.07)       ---        ---      ---       ---      ---      ---      ---        ---      ---
  Net realized gains     (2.60)     (1.41)     (1.01)    (0.84)   (1.37)    (0.10)  (0.45)   (2.24)     (1.97)   (0.09)
                         -----------------------------------------------------------------------------------------------
Total distributions      (2.71)     (1.53)     (1.02)    (0.87)   (1.50)    (0.10)  (0.60)   (2.41)     (2.15)   (0.19)
                        ------------------------------------------------------------------------------------------------

NET ASSET VALUE
  End of period         $12.71     $11.66     $12.42    $11.17    $11.63   $11.63   $11.06  $10.46     $12.29   $13.14
                        ================================================================================================

Total investment         34.21%      5.85%     21.07%     3.88%    12.70%    6.20%   12.21%   6.91%      9.90%   24.18%
return*                                                 

Net assets at end of
  period (000's         $26,739    $29,439    $42,009   $40,601   $35,282   $24,643  $32,236  $22,145   $25,913  $27,980
  (omitted)

RATIOS
  Expenses to average
   net assets (including
   interest expense)     1.28%     1.25%      1.25%      1.25%    1.25%    1.25%  1.25%     1.10%     1.00%     1.00%
  Expenses to average
   net assets (excluding
   interest expense)     1.25%     1.25%      1.25%      1.25%    1.25%    1.25%  1.25%     1.10%     1.00%     1.00%

Net investment income
  to average net        (0.24%)     0.61%      0.65%      0.31%    0.35%    0.68%  1.24%     2.00%     1.34%     1.00%
  assets                

Average brokerage
  commission rate**     $0.0591    $0.0600      N/A       N/A       N/A      N/A      N/A      N/A       N/A      N/A

Portfolio turnover
rate (excluding
short-term securities)   27.0%     61.3%       73.4%    102.1%    191.9%   118.3%   125.4%    57.0%     70.3%   52.7%
- -------------------------------------------------------------------------------------------------------------------------

   *     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.

</TABLE>

20 - 21
                                       
<PAGE>
IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund



INVESTMENT OBJECTIVES
AND POLICIES

CAPITAL APPRECIATION FUND

The  investment  objective of Capital  Appreciation  Fund is  long-term  capital
appreciation.  Capital  Appreciation  Fund is designed for investors seeking the
opportunity for substantial  long-term growth who can accept above average stock
market  risk and little or no current  income.  Capital  Appreciation  Fund will
pursue  its  objective  by  investing  primarily  in equity  securities  of U.S.
companies that IAI, believes have  above-average  prospects for growth.  Capital
Appreciation Fund's investment  objective is a fundamental policy and may not be
changed  without  shareholder  approval.  There can be no assurance that Capital
Appreciation Fund will achieve its investment objective.

In general,  Capital  Appreciation  Fund will concentrate on companies that have
superior performance records, solid market positions,  strong balance sheets and
a management  team capable of sustaining  growth.  Although IAI expects  Capital
Appreciation Fund will invest primarily in the common stocks of smaller emerging
and mid-sized companies,  generally companies that have a market  capitalization
less than $5 billion,  it may invest in the  securities of companies of any size
that offer  strong  earnings  growth  potential.  In addition to common  stocks,
Capital Appreciation Fund may also invest in securities  convertible into common
stocks,  nonconvertible preferred stocks and nonconvertible debt securities when
IAI believes that these securities offer opportunities for capital appreciation.
Current income will not be a substantial factor in the selection of securities.

Capital  Appreciation Fund may invest in other securities and may employ certain
other investment  techniques,  as described in the section "Portfolio Securities
and Other Fund Investment  Techniques."  Please see the Prospectus section "Fund
Risk Factors" and the Statement of Additional  Information  section  "Investment
Objectives and Policies" for a discussion of the risks associated with investing
in Capital Appreciation Fund.


EMERGING GROWTH FUND

The  investment   objective  of  Emerging  Growth  Fund  is  long-term   capital
appreciation.  Emerging  Growth  Fund is  designed  for  investors  seeking  the
opportunity for substantial  long-term growth who can accept above average stock
market risk and little or no current  income.  Emerging  Growth Fund will pursue
its  objective  by  investing  primarily  in equity  securities  of  small-  and
medium-sized  companies  that are in the early  stages of their life  cycles and
which have  demonstrated or have the potential for above average capital growth.
Emerging Growth Fund's investment  objective is a fundamental policy and may not
be changed without shareholder approval. There can be no assurance that Emerging
Growth Fund will achieve its investment objective.

Emerging  Growth  Fund's  policy is to invest  in equity  securities,  including
convertible securities,  of companies that IAI, believes are in the early stages


22
<PAGE>
                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund



of their life cycles and have  demonstrated  or have the potential to experience
rapid growth in earnings and/or revenues  ("emerging growth  companies").  Under
normal market  conditions,  Emerging Growth Fund will invest at least 65% of the
value of its total  assets in  emerging  growth  companies  that are of small to
medium  size  (revenue  of $500  million  or less at the  time of  acquisition).
Emerging  growth  companies are generally  expected to show earnings growth over
time that is well above the growth rate of the  overall  economy and the rate of
inflation,  and have  products,  management and market  opportunities  which are
usually necessary to become more widely recognized as growth companies. Emerging
Growth  Fund may also  invest in more  established  companies  that may  receive
greater  market  recognition  or  otherwise  offer strong  capital  appreciation
potential due to their relative market  position,  the strength of their balance
sheet, changes in management or other similar opportunities.

Although Emerging Growth Fund's portfolio generally consists primarily of common
stocks,  Emerging Growth Fund may invest in securities  convertible  into common
stocks, nonconvertible preferred stocks and nonconvertible debt securities.

Emerging Growth Fund may invest in other securities and may employ certain other
investment  techniques,  as described in the section  "Portfolio  Securities and
Other Fund Investment  Techniques." Please see the Prospectus section "Fund Risk
Factors"  and  the  Statement  of  Additional  Information  section  "Investment
Objectives and Policies" for a discussion of the risks associated with investing
in Emerging Growth Fund.


GROWTH FUND

The  investment  objective  of Growth Fund is  long-term  capital  appreciation.
Growth Fund is designed for investors  seeking the  opportunity  for significant
long-term  growth who can accept  above  average  market  risk with little or no
current  income.  Growth Fund pursues its  objective  by investing  primarily in
equity  securities  of  established  companies  that are  expected  to  increase
earnings at an above  average  rate.  Growth  Fund's  investment  objective is a
fundamental policy and may not be changed without  shareholder  approval.  There
can be no assurance that Growth Fund will achieve its investment objective.

In general,  Growth Fund concentrates on companies that have strong  management,
leading market positions, strong balance sheets, and a well defined strategy for
future growth.  In selecting  investments for Growth Fund, IAI, utilizes several
valuation  techniques to determine  which stocks offer the best  combination  of
intrinsic value and earnings growth potential. The goal is to have an acceptable
balance of risk and reward in the portfolio.

Under  normal  circumstances,  at least 65% of Growth  Fund's net assets will be
invested in  growth-type  securities.  Growth Fund may also invest in government
securities,   investment-grade   corporate  bonds  and  debentures,   high-grade
commercial paper, preferred stocks,  certificates of deposit or other securities
of U.S. and foreign issuers when IAI perceives an opportunity for capital growth
from such  securities  or so that  Growth  Fund may receive a return on its idle

                                                                              23
<PAGE>
                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund


cash.  Growth Fund currently intends to limit its investments in debt securities
to securities of U.S. companies, the U.S. Government and foreign governments and
governmental  entities.  When IAI  invests in such debt  securities,  investment
income will increase and may  constitute a large portion of the return on Growth
Fund,  and Growth  Fund  probably  will not  participate  in market  advances or
declines  to the  extent  that it  would if it were  fully  invested  in  equity
securities.  In  addition,  Growth  Fund may  increase  its cash  position  on a
temporary  basis  when IAI is  unable to locate  investment  opportunities  with
desirable risk/reward characteristics or to meet redemption requests or pay Fund
expenses.

In considering whether to purchase securities of foreign issuers,  IAI considers
the political and economic conditions in a country,  the prospect for changes in
the value of its currency and the liquidity of the  investment in that country's
securities markets. If appropriate,  IAI may purchase foreign securities through
dollar-denominated  American  Depository  Receipts  ("ADRs") which are issued by
domestic banks and publicly  traded in the United States.  SFuch  investments do
not involve the same currency and liquidity  risks as securities  denominated in
foreign currency.

Growth  Fund may  invest  in  other  securities  and may  employ  certain  other
investment  techniques,  as described in the section  "Portfolio  Securities and
Other Fund Investment  Techniques." Please see the Prospectus section "Fund Risk
Factors"  and  the  Statement  of  Additional  Information  section  "Investment
Objectives and Policies" for a discussion of the risks associated with investing
in Growth Fund.

GROWTH AND INCOME FUND

The  primary  investment   objective  of  Growth  and  Income  Fund  is  capital
appreciation,  with income being its secondary objective. Growth and Income Fund
pursues its objectives by investing  primarily in equity  securities which offer
the  potential  for  capital   appreciation  and  secondarily  by  investing  in
income-producing   equity  securities.   Growth  and  Income  Fund's  investment
objectives are fundamental  policies and may not be changed without  shareholder
approval. There can be no assurance that Growth and Income Fund will achieve its
investment objectives.

Growth and Income  Fund  invests  primarily  in common  stocks and may invest in
securities convertible into common stocks,  nonconvertible  preferred stocks and
nonconvertible debt securities. In selecting investments, Growth and Income Fund
considers a number of factors, such as product development and demand, operating
ratios, utilization of earnings for expansion, management abilities, analyses of
intrinsic values,  market action and overall economic and political  conditions.
Dividend income is a consideration secondary to Growth and Income Fund's primary
objective of capital appreciation.

Growth and Income  Fund may invest in other  securities  and may employ  certain
other investment  techniques,  as described in the section "Portfolio Securities
and Other Fund Investment  Techniques."  Please see the Prospectus section "Fund


24
<PAGE>

                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund


Risk Factors" and the Statement of Additional  Information  section  "Investment
Objectives and Policies" for a discussion of the risks associated with investing
in Growth and Income Fund.

MIDCAP GROWTH FUND

The   investment   objective  of  Midcap   Growth  Fund  is  long-term   capital
appreciation.   Midcap  Growth  Fund  is  designed  for  investors  seeking  the
opportunity for substantial  long-term growth who can accept above average stock
market risk and little or no current income.  Midcap Growth Fund will pursue its
objective by investing in equity securities of medium-sized U.S.  companies that
IAI,  believes have  above-average  prospects  for growth.  Midcap Growth Fund's
investment  objective  is a  fundamental  policy and may not be changed  without
shareholder  approval.  There can be no assurance  that Midcap  Growth Fund will
achieve its investment objective.


Under normal  circumstances,  Midcap Growth Fund will invest at least 65% of the
value  of its  total  assets  in  medium-sized  companies  that  have  a  market
capitalization   between  $1  billion  and  $8  billion.   Under  normal  market
conditions,   the  weighted  average  capitalization  of  Midcap  Growth  Fund's
investment  portfolio  will range from $3 billion  to $6  billion.  In  general,
Midcap Growth Fund  concentrates  on companies  that have  superior  performance
records,  solid market  positions,  strong balance sheets and a management  team
capable of  sustaining  growth.  Investments  in such  companies  are  generally
considered  to be  less  volatile  than  less  capitalized  emerging  companies.
However,  such  companies may not generate the dividend  income of larger,  more
capitalized companies. Dividend income, if any, is a consideration incidental to
Midcap Growth Fund's objective of capital appreciation.


Midcap Growth Fund invests primarily in common stocks. However, it may invest in
securities convertible into common stocks,  nonconvertible  preferred stocks and
nonconvertible  debt  securities when IAI believes that these  securities  offer
opportunities for capital appreciation. Current income will not be a substantial
factor in the selection of securities.

Midcap Growth Fund may invest in other  securities  and may employ certain other
investment  techniques,  as described in the section  "Portfolio  Securities and
Other Fund Investment  Techniques." Please see the Prospectus section "Fund Risk
Factors"  and  the  Statement  of  Additional  Information  section  "Investment
Objectives and Policies" for a discussion of the risks associated with investing
in Midcap Growth Fund.

REGIONAL FUND

The investment objective of Regional Fund is capital appreciation. Regional Fund
does not expect to provide  significant  current  income to investors.  Regional
Fund pursues its  objective by investing at least 80% of its equity  investments
in  companies  which have their  headquarters  in  Minnesota,  Wisconsin,  Iowa,
Illinois,  Nebraska,  Montana,  North  Dakota or South  Dakota (the "Eight State
Region").  Regional Fund's investment  objective is a fundamental policy and may


                                                                              25
<PAGE>
IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund


not be changed  without  shareholder  approval.  There can be no assurance  that
Regional Fund will achieve its investment objective.

Regional  Fund  invests  primarily  in  common  stocks  but may also  invest  in
securities convertible into common stocks,  nonconvertible preferred stocks, and
nonconvertible debt securities.  In selecting investments for Regional Fund, IAI
considers a number of factors, such as product development and demand, operating
ratios, utilization of earnings for expansion, management abilities, analyses of
intrinsic values,  market action and overall economic and political  conditions.
Along with investments in nationally recognized companies, Regional Fund invests
in companies  which are not as well known because they are newer or have a small
capitalization,  but which offer the  potential  for capital  appreciation.  The
prices of stocks of such  companies  are more  volatile than prices of stocks of
mature  companies.  All  investments are subject to the market risks inherent in
any investment in equity securities.

Regional  Fund may  invest in other  securities  and may  employ  certain  other
investment  techniques,  as described in the section  "Portfolio  Securities and
Other Fund Investment  Techniques." Please see the Prospectus section "Fund Risk
Factors"  and  the  Statement  of  Additional  Information  section  "Investment
Objectives and Policies" for a discussion of the risks associated with investing
in Regional Fund.

VALUE FUND


Value Fund generally  closed to new investors on May 12, 1998.  Shareholders  of
Value Fund as of such closing date may continue to add to an account through the
reinvestment of dividends and cash distributions on any Value Fund shares owned,
through an existing systematic purchase or exchange plan, or through an existing
retirement plan allocation.  No changes in these plans or allocations having the
effect of  increasing  current  purchases of Value Fund shares will be permitted
while the Fund is closed.

Value Fund invests from time to time  directly in  privately  held,  early-stage
developing  companies.   One  such  company  (the  "Venture  Company")  filed  a
registration statement in May 1998 with the SEC for the purposes of offering its
securities for public sale,  also known as an initial public  offering or "IPO".
Using a fair value  methodology  based on information  available at that time to
IAI, the Fund's  investment  adviser and manager,  the Fund's Board of Directors
approved a  substantial  increase  in the  valuation  of the  Venture  Company's
securities.  This  valuation  has had several  effects,  including a substantial
increase in the Fund's net asset value.  Some of these  effects,  however,  have
resulted in increased risks associated with investing in Value Fund.  Certain of
these risks  results  from the large  percentage  of the Value Fund's net assets
invested in the Venture Company (approximately 23% as of July 16, 1998).

Subsequent to that initial  filing,  on July 16, 1998, the Venture Company filed
an amended registration  statement containing new information about the expected
price range at which its securities would be offered for sale at the time of the
IPO.  Based on this new  information,  consistent  with its fair  value  pricing
methodology,  the Fund's Board of Directors approved a decrease in the valuation
of the Venture Company's securities.  Even with this decrease in valuation,  the
Fund's  investment in the Venture Company  continues to present increased risks,
as discussed elsewhere.

The Venture  Company intends to become a leading  provider of high quality,  low
cost,  long haul  telecommunications  capacity to second and third tier  markets
throughout  the  United  States   primarily  by  upgrading   existing   wireless
infrastructure to develop a state-of-the-art, digital SONET network. The Venture
Company believes there is a substantial market opportunity  available to it, and
that it will enjoy various competitive advantages.

However,  the Value Fund  investment  in the  Venture  Company is subject to the
significant  risks of investing in small and  early-stage  developing  companies
described in the sections "Venture Capital" and "Special Risk Factors Associated
with Investing in Small  Companies".  The  investment in the Venture  Company is
also  subject to other  significant  risk  factors  including:  (1) its  limited
history  of  operations,  operating  losses  and  negative  cash  flow;  (2) its
significant  capital   requirements  and  uncertainty  of  obtaining  additional
financing;  (3) its substantial use of leverage,  and its ability to service its
current and substantial additional  indebtedness;  (4) its ability to timely and
cost-effectively  complete its digital network, and sell a substantial amount of
its  capacity;  (5)  its  ability  to  maintain  and  add  additional  long-term
contractual  relationships  with  various  entities  to enable it to deploy  its
network;  (6) its  ability  to manage  its future  anticipated  growth;  (7) its
dependence  on key  personnel;  (8) its ability to  successfully  compete in the
highly  competitive  telecommunications  industry,  where price  competition has
generally been intense and is expected to increase; (9) its substantial reliance
on a single  supplier of  telecommunications  equipment;  (10) the  existence of
various  technical   limitations  on  its  network;   (11)  the  risk  of  rapid
technological changes in the telecommunications  industry; (12) the existence of
substantial  regulation by federal, state and local governmental agencies of its
digital network;  (13) the possibility  that wireless  equipment may pose health
risks to humans due to radio frequency emissions; (14) the fact that the Venture
Company does not expect to pay cash dividends for the  foreseeable  future;  and
(15) the risk that the IPO will not occur.

As of July 16, 1998, approximately 35% of the Value Fund's assets were illiquid.
Since market  quotations for such  securities are not readily  available,  these
securities are valued using a "fair value"  methodology.  The Venture  Company's
securities held by the Value Fund will be subject to substantial restrictions on
sale even after the  Venture  Company's  IPO,  because the  underwriters  of the
Venture  Company's  IPO have  requested,  and the Fund has agreed not to sell or
otherwise  transfer  the  Venture  Company's  stock  during the  180-day  period
following the effective date of the IPO.


The investment objective of Value Fund is long-term capital appreciation.  Value
Fund does not expect to provide significant  current income to investors.  Value
Fund pursues its  objective  primarily by  investing in  securities  believed by
management  to  be  undervalued  and  which  are  considered  to  offer  unusual
opportunities  for  capital  growth.  Value  Fund's  investment  objective  is a
fundamental policy and may not be changed without  shareholder  approval.  There
can be no assurance that Value Fund will achieve its investment objective.

The following are typical,  but not exclusive,  examples of investments that are
considered for Value Fund:

1. Equity  securities of companies  which have been  unpopular for some time but
where,  in the opinion of IAI recent  developments  suggest the  possibility  of
improved operating results.

2. Equity securities of companies which IAI believes have temporarily fallen out
of favor for non-recurring or short-term reasons.

3. Equity  securities  of  companies  which  appear  undervalued  in relation to
securities of other companies in the same industry.

In selecting  these  securities,  Value Fund  focuses on  companies  with strong
competitive  positions,  high levels of discretionary cash flow, solid financial
characteristics  and market  capitalizations  of typically  less than $1 billion
(also known as "small cap" stocks).

Although there is no formula as to the percentage of assets that may be invested
in any one type of  security,  Value Fund  generally  is  primarily  invested in

26
<PAGE>
                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund


common  stocks.  Value Fund may also  acquire  preferred  stocks,  fixed  income
securities,  and securities convertible into or which carry warrants to purchase
common stocks, or other equity interests.

IAI makes portfolio decisions based on its own research analysis supplemented by
research  information  provided by other sources. The basic orientation of Value
Fund's investment policies is such that many of the portfolio securities may not
be recommended by most research analysts.

Value  Fund  may  invest  in  other  securities  and may  employ  certain  other
investment  techniques,  as described in the section  "Portfolio  Securities and
Other Fund Investment  Techniques." Please see the Prospectus section "Fund Risk
Factors"  and  the  Statement  of  Additional  Information  section  "Investment
Objectives and Policies" for a discussion of the risks associated with investing
in Value Fund.

PORTFOLIO SECURITIES 
AND OTHER FUND 
INVESTMENT TECHNIQUES

REPURCHASE AGREEMENTS


Each  Fund is  permitted  to  invest  in  repurchase  agreements.  A  repurchase
agreement is a contract by which a Fund  acquires  the  security  ("collateral")
subject to the  obligation of the seller to  repurchase  the security at a fixed
price and date. A repurchase agreement may be construed as a loan under relevant
law.  The  Funds  may enter  into  repurchase  agreements  with  respect  to any
securities which they may acquire consistent with their investment  policies and
restrictions.  The Funds'  custodian  will hold the  securities  underlying  any
repurchase  agreement  in a  segregated  account.  In  investing  in  repurchase
agreements,  the Funds'  risk is limited to the ability of the seller to pay the
agreed-upon price at the maturity of the repurchase agreement. In the opinion of
IAI,  such  risk  is not  material,  since  in the  event  of  default,  barring
extraordinary circumstances,  the Funds would be entitled to sell the underlying
securities or otherwise  receive adequate  protection  under federal  bankruptcy
laws for their interest in such securities. However, to the extent that proceeds
from any sale upon a default are less than the repurchase price, the Funds could
suffer a loss.  In  addition,  the Funds may incur  certain  delays in obtaining
direct ownership of the collateral.


BORROWING

Each Fund may borrow from banks (or through reverse  repurchase  agreements) for
temporary or emergency purposes. If a Fund borrows money, its share price may be
subject to greater  fluctuation until the borrowing is paid off. If a Fund makes
additional investments while borrowings are outstanding,  this may be considered
a form of leverage. The Funds currently have a line of credit with a bank at the
prime  interest  rate. To the extent funds are drawn against the line of credit,
securities  are  held in a  segregated  account.  No  compensating  balances  or
commitment fees are required under the line of credit. Each Fund does not intend
its borrowings to exceed 5% of its net assets.

                                                                              27
<PAGE>
                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund


ILLIQUID SECURITIES

Each  Fund  may  invest  up to 15% of its net  assets  in  securities  that  are
considered  illiquid because of the absence of a readily available market or due
to legal or contractual  restrictions.  However,  certain restricted  securities
that are not registered for sale to the general public but that can be resold to
institutional  investors may be considered liquid pursuant to guidelines adopted
by the Board of Directors.  The institutional  trading market is relatively new,
and the  liquidity of the Fund's  investments  could be impaired if trading does
not develop or declines.

FOREIGN SECURITIES

Each Fund may invest in  securities of foreign  issuers in  accordance  with its
investment objective and policies. In considering whether to purchase securities
of foreign issuers, IAI will consider the political and economic conditions in a
country, the prospect for changes in the value of its currency and the liquidity
of the  investment  in that  country's  securities  markets.  Each of Growth and
Income,  Emerging  Growth,  Midcap  Growth,  Regional and Value Funds  currently
intends to limit its  investment in foreign  securities  denominated  in foreign
currency and not publicly traded in the United States to no more than 10% of the
value of its total  assets.  Each of Capital  Appreciation  Fund and Growth Fund
intends to limit its  investment  in such  securities to no more than 15% of the
value of its total assets.

VENTURE CAPITAL

Each Fund may invest in venture capital limited partnerships and venture capital
funds  which,  in  turn,  invest  principally  in  securities  of  early  stage,
developing  companies.  Investments in venture capital limited  partnerships and
venture  capital  funds  present a number of risks  not  found in  investing  in
established  enterprises including the facts that such a partnership's or fund's
portfolio will be composed  almost  entirely of early-stage  companies which may
lack depth of management and sufficient resources,  which may be marketing a new
product for which there is no  established  market,  and which may be subject to
intense  competition from larger companies.  Any investment in a venture capital
limited  partnership  or  venture  capital  fund  will lack  liquidity,  will be
difficult  to  value,  and a Fund will not be  entitled  to  participate  in the
management  of the  partnership  or fund.  If for any reason the services of the
general  partners  of a  venture  capital  limited  partnership  were to  become
unavailable, such limited partnership could be adversely affected.

In addition to investing in venture  capital  limited  partnerships  and venture
capital funds, a Fund may directly invest in early-stage,  developing companies.
The risks  associated  with  investing  in these  securities  are  substantially
similar to the risks set forth  above.  A Fund will  typically  purchase  equity
securities  in these  early-stage,  developing  companies;  however from time to
time, a Fund may purchase  non-investment  grade debt  securities in the form of
convertible  notes.  Capital  Appreciation  Fund currently  intends to limit its
investments  in  securities  described in this section to no more than 5% of its
net assets.

28
<PAGE>
                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund


LEVERAGED BUYOUTS

Each Fund may invest in leveraged  buyout limited  partnerships and funds which,
in turn, invest in leveraged buyout transactions ("LBOs"). An LBO, generally, is
an acquisition of an existing  business by a newly formed  corporation  financed
largely with debt assumed by such newly  formed  corporation  to be later repaid
with funds  generated from the acquired  company.  Since most LBOs are by nature
highly leveraged (typically with debt to equity ratios of approximately 9 to 1),
equity  investments  in LBOs may  appreciate  substantially  in value given only
modest growth in the earnings or cash flow of the acquired business. Investments
in LBO partnerships and funds, however,  present a number of risks.  Investments
in LBO limited  partnerships  and funds will normally lack  liquidity and may be
subject to intense  competition  from other LBO limited  partnerships and funds.
Additionally,  if the cash  flow of the  acquired  company  is  insufficient  to
service the debt assumed in the LBO, the LBO limited  partnership  or fund could
lose all or part of its investment in such acquired company.

ADJUSTING INVESTMENT EXPOSURE

Each  Fund  may,  but is not  required  to,  utilize  various  other  investment
strategies as described  below to hedge  various  market risks (such as currency
exchange rates and broad or specific market movements),  or to enhance potential
gain. These strategies may be executed through the use of derivative  contracts.
Such strategies are generally accepted as a part of modern portfolio  management
and are  regularly  utilized  by  many  mutual  funds  and  other  institutional
investors.  Techniques and  instruments  may change over time as new instruments
and strategies are developed or regulatory changes occur.

In the course of pursuing these investment  strategies,  a Fund may purchase and
sell  exchange-listed and  over-the-counter  put and call options on securities,
purchase and sell financial  futures  contracts and options  thereon,  and enter
into various currency transactions such as currency forward contracts,  currency
futures contracts, currency swaps or options on currencies or currency futures.

There is no limit on the  amount  on Fund  assets  that can be used for  hedging
purposes,  i.e., to attempt to protect  against  possible  changes in the market
value of securities held in or to be purchased for a Fund's portfolio  resulting
from securities  markets or currency  exchange rate  fluctuations,  to protect a
Fund's unrealized gains in the value of its portfolio securities,  to facilitate
the sale of such securities for investment purposes,  or to establish a position
in the derivatives  markets as a temporary  substitute for purchasing or selling
particular securities.  Some may also be used to enhance potential gain although
no more than 5% of a Fund's net  assets  will be  committed  to  techniques  and
instruments  entered  into  for  non-hedging  purposes.  Any  or  all  of  these
investment techniques may be used at any time and in any combination,  and there
is no particular  strategy  that  dictates the use of one technique  rather than

                                                                              29
<PAGE>
                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund


another,  as use of any  technique  or  instruments  is a function  of  numerous
variables  including market  conditions.  The ability of a Fund to utilize these
techniques and instruments  successfully will depend on IAI's ability to predict
pertinent market movements,  which cannot be assured. Each Fund will comply with
applicable   regulatory   requirements  when   implementing   these  strategies,
techniques and instruments.  Such techniques and instruments involving financial
futures and options  thereon  will be  purchased,  sold or entered into only for
bona fide hedging,  risk management or portfolio management purposes and not for
speculative purposes.

TEMPORARY DEFENSIVE 
POSITION

In unusual market conditions,  when IAI believes a temporary  defensive position
is warranted,  each Fund may invest without limitation in investment-grade fixed
income  securities,  that is,  securities  rated within the four highest  grades
assigned by Moody's Investors Service, Inc. or Standard & Poor's Corporation, or
money  market  securities  (including  repurchase   agreements).   Money  market
securities  will only be  purchased  if they have been  given one of the two top
ratings by a major ratings service or, if unrated,  are of comparable quality as
determined  by IAI.  Midcap  Growth and Emerging  Growth  Funds,  for  temporary
defensive  purposes,  may also invest  without  limitation  in common  stocks of
larger,  more established  companies.  If a Fund maintains a temporary defensive
position, investment income may increase and may constitute a large portion of a
Fund's return.

PORTFOLIO TURNOVER

The Funds will dispose of securities  without  regard to the time they have been
held when such action  appears  advisable  to  management  either as a result of
securities  having reached a price  objective,  or by reason of developments not
foreseen  at the  time of the  investment  decision.  Since  investment  changes
usually will be made without reference to the length of time a security has been
held, a significant number of short-term transactions may result. Accordingly, a
Fund's  annual  portfolio  turnover  rate  cannot  be  anticipated  and  may  be
relatively high. High turnover rates (100% or more), such as Midcap Growth Fund,
experienced in its most recent fiscal year,  increase  transaction costs and may
increase taxable capital gains. The Funds' historical  portfolio  turnover rates
are set forth in the section "Financial Highlights."


Further  information  regarding  these and other  securities  and  techniques is
contained in the Statement of Additional Information.

FUND RISK FACTORS

FOREIGN INVESTMENT 
RISK FACTORS

Investments  in foreign  securities  involve  risks that are  different  in some
respects from  investments  in securities of U.S.  issuers,  such as the risk of
fluctuations in the value of the currencies in which they are  denominated,  the
risk of adverse political and economic developments and, with respect to certain
countries,  the possibility of  expropriation,  nationalization  or confiscatory
taxation  or  limitations  on the  removal  of funds or other  assets of a Fund.

30
<PAGE>
                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund


Securities  of some foreign  companies  are less liquid and more  volatile  than
securities of  comparable  domestic  companies.  There also may be less publicly
available  information about foreign issuers than domestic issuers,  and foreign
issuers  generally  are not  subject to the  uniform  accounting,  auditing  and
financial reporting standards, practices and requirements applicable to domestic
issuers.  Because  a Fund can  invest  in  securities  denominated  or quoted in
currencies  other than the U.S.  dollar,  changes in foreign  currency  exchange
rates may affect the value of  securities  in the  portfolio.  Foreign  currency
exchange  rates are  determined  by forces of supply and  demand in the  foreign
exchange markets and other economic and financial conditions affecting the world
economy.  A decline in the value of any  particular  currency  against  the U.S.
dollar  will cause a decline in the U.S.  dollar  value of a Fund's  holdings of
securities  denominated in such currency and,  therefore,  will cause an overall
decline in a Fund's net asset value and net investment income and capital gains,
if any, to be distributed in U.S. dollars to shareholders by a Fund.  Delays may
be encountered in settling  securities  transactions in certain foreign markets,
and a Fund will incur costs in converting  foreign currencies into U.S. dollars.
Custody charges are generally higher for foreign securities.

RISKS ASSOCIATED WITH 
ADJUSTING INVESTMENT 
EXPOSURE

The techniques and instruments  described in the section  "Adjusting  Investment
Exposure",  including  derivative  contracts,  have risks  associated  with them
including  possible default by the other party to the  transaction,  illiquidity
and, to the extent IAI's view as to certain market  movements is incorrect,  the
risk that the use of such  techniques  and  instruments  could  result in losses
greater  than if they had not been used.  Use of put and call options may result
in losses to a Fund,  force the sale or  purchase  of  portfolio  securities  at
inopportune  times or for prices  higher  than (in the case of put  options)  or
lower  than (in the case of call  options),  current  market  values,  limit the
amount of  appreciation a Fund can realize on its investments or cause a Fund to
hold a security it might  otherwise sell. The use of currency  transactions  can
result in a Fund incurring  losses as a result of a number of factors  including
the imposition of exchange controls,  suspension of settlements or the inability
to deliver or  receive a  specified  currency.  The use of options  and  futures
transactions entails certain other risks. In particular,  the variable degree of
correlation  between price movements of futures contracts and price movements in
the related portfolio  position of a Fund creates the possibility that losses on
the  hedging  instrument  may be  greater  than  gains in the  value of a Fund's
position.  In  addition,  futures and  options  markets may not be liquid in all
circumstances and certain  over-the-counter  options may not have markets.  As a
result, in certain markets,  a Fund might not be able to close out a transaction
without  incurring  substantial  losses,  if at all. Although the use of futures
contracts and options  transactions for hedging should tend to minimize the risk
of loss due to a decline in the value of the hedged  position,  at the same time

                                                                              31
<PAGE>
                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund


they tend to limit any  potential  gain which  might  result from an increase in
value of such position.  Finally,  the daily variation  margin  requirements for
futures contracts would create a greater ongoing  potential  financial risk than
would  purchases  of options,  where the  exposure is limited to the cost of the
initial premium.  Losses resulting from the use of these techniques would reduce
net asset value, and possibly income, and such losses can be greater than if the
techniques and instruments had not been utilized.

SPECIAL RISK FACTORS 
ASSOCIATED WITH INVESTING 
IN SMALL COMPANIES

Investing  in  small  companies   involves  greater  risk  than  is  customarily
associated with  investments in larger,  more  established  companies due to the
greater business risks of small size,  limited markets and financial  resources,
narrow  product  lines  and  the  frequent  lack of  depth  of  management.  The
securities of small companies are often traded  over-the-counter  and may not be
traded in volumes typical on a national securities exchange.  Consequently,  the
securities  of small  companies  may have limited  market  stability  and may be
subject to more abrupt or erratic market  movements  than  securities of larger,
more established companies or the market averages in general.  Therefore, shares
of Capital Appreciation, Emerging Growth, and Value Funds are subject to greater
fluctuation  in value than  shares of a  conservative  equity  fund or of a fund
which invests entirely in more established  stocks.  Capital  Appreciation Fund,
Emerging  Growth Fund, and Value Fund will each attempt to reduce the volatility
of its share price by  diversifying  its  investments  among many  companies and
different industries.

SPECIAL RISK FACTORS 
ASSOCIATED WITH INVESTING 
IN REGIONAL FUND

The  objective of capital  appreciation  along with the policy of  concentrating
equity  investments  in the Eight State Region means that the assets of Regional
Fund will generally be subject to greater risk than may be involved in investing
in  securities  which do not have  appreciation  potential  or which  have  more
geographic  diversity.  For  example,  Regional  Fund's net asset value could be
adversely  affected by  economic,  political,  or other  developments  having an
unfavorable impact upon the Eight State Region; moreover,  because of geographic
limitation,  Regional Fund may be less  diversified by industry and company than
other  funds  with  a  similar  investment  objective  and  no  such  geographic
limitation.

SPECIAL RISK FACTORS 
ASSOCIATED WITH INVESTING 
IN VALUE FUND

In  selecting  securities  judged  to be  undervalued,  IAI  will be  exercising
opinions  and  judgments  which  may be  contrary  to those of the  majority  of
investors.  In certain  instances,  such opinions and judgments will involve the
risks of either:

(a) a correct judgment by the majority,  in which case losses may be incurred or
profits may be limited; or

(b) a long delay before majority  recognition of the accuracy of IAI's judgment,
in which case capital invested by Value Fund in an individual  security or group

32
<PAGE>
                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund


of securities may be  nonproductive  for an extended  period.  Generally,  it is
expected that if a Value Fund investment is "nonproductive" for more than two to
three years, it will be sold.

In many instances, the selection of undervalued securities for purchase by Value
Fund may involve  limited  risk of capital  loss  because  such lack of investor
recognition  is already  reflected in the price of the securities at the time of
purchase.

It is anticipated that some of the portfolio securities of Value Fund may not be
widely  traded,  and  that  Value  Fund's  position  in such  securities  may be
substantial in relation to the market for the securities.  Accordingly, it would
under  certain  circumstances  be  difficult  for Value  Fund to dispose of such
portfolio  securities at prevailing  market prices in order to meet redemptions.
Value Fund may,  when  management  deems it  appropriate,  maintain a reserve in
liquid assets which it considers adequate to meet anticipated redemptions.

MANAGER RISK

IAI  manages  each  Fund  according  to  the  traditional  methods  of  "active"
investment management,  which involve the buying and selling of securities based
upon economic,  financial and market analysis and investment  judgment.  Manager
risk refers to the possibility that IAI may fail to execute a Fund's  investment
strategy  effectively.  As a  result,  a Fund may  fail to  achieve  its  stated
objective.

INVESTMENT RESTRICTIONS

Each Fund is subject to  certain  other  investment  policies  and  restrictions
described  in the  Statement  of  Additional  Information,  some  of  which  are
fundamental and may not be changed  without the approval of the  shareholders of
the Fund.  Each Fund is a diversified  investment  company and has a fundamental
policy  that,  with respect to 75% of its total  assets,  it may not invest more
than 5% of its total assets in any one issuer.  Each Fund,  also as  fundamental
policies,  may not invest 25% or more of its assets in any one  industry and may
borrow only for  temporary  or  emergency  purposes  in an amount not  exceeding
one-third  of its total  assets.  Please refer to the  Statement  of  Additional
Information for a further discussion of each Fund's investment restrictions.

MANAGEMENT

Capital  Appreciation  Fund  (created  November 8, 1995),  Emerging  Growth Fund
(created  April 30, 1991) and Midcap Growth Fund (created  February 7, 1992) are
separate  portfolios  represented  by  separate  classes of common  stock of IAI
Investment Funds VI, Inc. Growth Fund (created  February 10, 1993) is a separate
portfolio  represented  by a separate  class of common  stock of IAI  Investment
Funds II, Inc.  Growth and Income Fund (created  December 2, 1970) is a separate
portfolio  represented  by a separate  class of common  stock of IAI  Investment
Funds VII, Inc. Regional Fund (created February 1, 1980) is a separate portfolio
represented by a separate class of common stock of IAI Investment Funds IV, Inc.

                                                                              34
<PAGE>
                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund


Value Fund (created  August 7, 1987) is a separate  portfolio  represented  by a
separate class of common stock of IAI Investment  Funds VIII, Inc. Each of these
companies is a Minnesota  corporation  authorized  to issue its shares of common
stock in more  than one  series.  Under  Minnesota  law,  each  Fund's  Board of
Directors is generally  responsible for the overall  operation and management of
such Fund.  IAI serves as the investment  adviser and manager of the Funds.  IAI
also furnishes  investment  advice to other concerns  including other investment
companies,   pension  and  profit  sharing  plans,  portfolios  of  foundations,
religious,  educational and charitable institutions,  trusts, municipalities and
individuals,  having  total  assets  in excess of $11  billion.  IAI's  ultimate
corporate  parent is Lloyds TSB Group plc, a  publicly-held  financial  services
organization  headquartered in London,  England.  Lloyds TSB Group plc is one of
the largest  personal  and  corporate  financial  services  groups in the United
Kingdom and is engaged in a wide range of activities  including  commercial  and
retail banking. The address of IAI is that of the Funds.


Each  Fund has  entered  into a  written  agreement  with  IAI (the  "Management
Agreement"),  under  which  IAI  provides  each Fund  with  investment  advisory
services and is responsible  for the overall  management of each Fund's business
affairs  subject to the  authority  of the Board of  Directors.  The  Management
Agreement  also  provides  that,  except  for  brokerage  commissions  and other
expenditures in connection  with the purchase and sale of portfolio  securities,
interest and, in certain  circumstances,  taxes and extraordinary  expenses, IAI
shall pay all of a Fund's operating expenses.  The Management  Agreement further
provides that IAI will either reimburse a Fund for the fees and expenses it pays
to directors who are not "interested persons" of a Fund or reduce its fee by the
equivalent amount.  Because IAI is paying each Fund's operating expenses,  these
fees  represent  each  Fund's  total  expenses.  With  respect to certain of the
services for which it is responsible  under the Management  Agreements,  IAI may
also  pay,  directly  or  indirectly,   qualifying   broker-dealers,   financial
institutions   and  other   entities  for   providing   such  services  to  Fund
shareholders.


Pursuant to the Management  Agreement,  each Fund paid the following  Management
Fee for the fiscal year ended March 31, 1998.

               Capital Appreciation Fund              1.40%
               Emerging Growth Fund                   1.24%
               Growth Fund                            1.25%
               Growth and Income Fund                 1.25%
               Midcap Growth Fund                     1.25%
               Regional Fund                          1.22%
               Value Fund                             1.25%


Each  Fund  is  managed  by a team  of IAI  investment  professionals  which  is
responsible  for making the day-to-day  investment  decisions for such Fund. The
team leads for each Fund are as follows:

Martin Calihan has  responsibility  for the  management of Capital  Appreciation

34
<PAGE>
                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund


Fund.  Mr.  Calihan is a Vice  President and has served as an equity analyst for
IAI since 1992.  Before  joining  IAI,  Mr.  Calihan was an equity  analyst with
Morgan  Stanley and Company from 1991 to 1992,  and with State  Street  Research
management from 1990 to 1991. Mr. Calihan has managed Capital  Appreciation Fund
since its inception.

Curt McLeod has  responsibility  for the management of IAI Emerging Growth Fund.
Mr.  McLeod,  an IAI Vice  President  and  equity  portfolio  manager,  has been
responsible for management of the Fund since March 1998 and has been involved in
the  management of the Fund since  joining IAI in May 1997.  Prior to that time,
Mr. McLeod had been employed as a portfolio manager by Piper Jaffray, Inc. since
1986.

Mark Hoonsbeen has responsibility for the management of Regional Fund and Midcap
Growth Fund.  Mr.  Hoonsbeen is a Vice  President and has managed  Regional Fund
since he joined IAI in 1994 and Midcap Growth Fund since February  1997.  Before
joining IAI, Mr.  Hoonsbeen  served as an equity  portfolio  manager for the St.
Paul Companies Inc. from 1986 to 1994.

Mr.  Hoonsbeen and David  McDonald  have  responsibility  for the  management of
Growth Fund. Mr.  McDonald has managed Growth Fund since September 1994, when he
joined IAI as a Vice President and equity portfolio manager. Before joining IAI,
Mr. McDonald was a Managing  Director of Wessels Arnold & Henderson from 1989 to
1994 and an Associate Portfolio Manager with IDS Financial Services from 1986 to
1989. Mr. Hoonsbeen has managed Growth Fund since February 1997.

Donald Hoelting has  responsibility for the management of Growth and Income Fund
and Value Fund.  Mr.  Hoelting  has managed  each Fund since  August  1996.  Mr.
Hoelting is a Vice  President and has served as an equity  portfolio  manager of
IAI since  joining IAI in April 1996.  Prior to joining  IAI,  Mr.  Hoelting was
Chief Investment  Officer and Portfolio Manager for Jefferson  National Bank and
Trust from 1986 to 1996.

R.  David  Spreng  has been  responsible  for  Fund  investments  in  restricted
securities, including equity and limited partnership interests in privately-held
companies and investment  partnerships,  since 1993. Mr. Spreng is a Senior Vice
President and has served IAI in several capacities since 1989.


The  Funds and IAI have  adopted  a Code of  Ethics,  which  restricts  personal
investing  practices  by  employees  of IAI  and  its  affiliates.  Among  other
provisions,   the  Code  of  Ethics  requires  that  employees  with  access  to
information  about the purchase or sale of securities  in the Funds'  portfolios
obtain  preclearance before executing personal trades. With respect to portfolio
managers  and  other  investment   personnel,   the  Code  of  Ethics  prohibits
acquisition  of  securities  in an initial  public  offering,  as well as profit
derived from the purchase and sale of the same security within 60 calendar days.
These provisions are designed to ensure that the interests of Fund  shareholders
come before the interests of the people who manage the Funds.


Consistent  with the Rules of Conduct of the National  Association of Securities
Dealers,  Inc.,  IAI may  consider  sales of shares of a Fund,  or any other IAI

                                                                              35
<PAGE>
                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund


Mutual Fund, as a factor in the selection of  broker-dealers to execute a Fund's
securities transactions.

INVESTMENT 
PERFORMANCE

From time to time the Funds may advertise  performance  data including  monthly,
quarterly,  yearly or  cumulative  total return and average  annual total return
figures.  All such figures are based on historical  earnings and performance and
are not intended to be indicative of future  performance.  The investment return
on and principal  value of an investment  in a Fund will  fluctuate,  so that an
investor's shares, when redeemed,  may be worth more or less than their original
cost.

Total  return  is the  change in value of an  investment  in a Fund over a given
period,  assuming  reinvestment of any dividends from ordinary income or capital
gains.  A cumulative  total return  reflects  actual  performance  over a stated
period of time. An average annual total return is a hypothetical  rate of return
that, if achieved annually, would have produced the same cumulative total return
if performance had been constant over the entire period.

For  additional  information  regarding  the  calculation  of such total  return
figures,   see   "Investment   Performance"   in  the  Statement  of  Additional
Information. Further information about the performance of each Fund is contained
in each Fund's  Annual  Report to  shareholders  which may be  obtained  without
charge from each Fund.

Comparative performance information may be used from time to time in advertising
or marketing a Fund's shares,  including data on the performance of other mutual
funds,  indexes or averages of other mutual funds,  indexes of related financial
assets or data, and other competing  investment and deposit  products  available
from or through other financial institutions.  The composition of these indexes,
averages or products differs from that of the Funds. The comparison of a Fund to
an alternative  investment  should be made with  consideration of differences in
features  and  expected  performance.  A Fund  may  also  note  its  mention  in
newspapers,  magazines,  or other media from time to time.  The Funds  assume no
responsibility for the accuracy of such data. For additional  information on the
types of indexes,  averages and periodicals  that might be utilized by the Funds
in advertising and sales literature, see the section "Investment Performance" in
the Statement of Additional Information.

COMPUTATION OF NET 
ASSET VALUE AND 
PRICING

Each Fund is open for business each day the New York Stock Exchange  ("NYSE") is
open.  IAI normally  calculates a Fund's net asset value per share ("NAV") as of
the close of business of the NYSE, normally 3 p.m. Central time.

A Fund's NAV is the value of a single  share.  The NAV is  computed by adding up
the value of a Fund's  investments,  cash,  and other  assets,  subtracting  its

36
<PAGE>
                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund


liabilities, and then dividing the result by the number of shares outstanding.

A Fund's investments with remaining maturities of 60 days or less at the initial
purchase  date  may be  valued  on the  basis of  amortized  cost.  This  method
minimizes the effect of changes in a security's  market value.  Other  portfolio
securities and assets are valued primarily on the basis of market quotations or,
if quotations are not readily available, by a method that the Board of Directors
believes  accurately  reflects fair value.  Foreign securities are valued on the
basis of quotations  from the primary  market in which they are traded,  and are
translated  from the local  currency into U.S.  dollars  using current  exchange
rates.

The offering price (price to buy one share) and redemption  price (price to sell
one share) are a Fund's NAV.

PURCHASE OF SHARES

Each Fund offers its shares  continually to the public at the net asset value of
such shares.  Shares may be purchased  directly  from a Fund or through  certain
security  dealers who have  responsibility  to promptly  transmit orders and may
charge a processing fee, provided that the Fund whose shares are being purchased
is duly registered in the state of the purchaser's  residence,  if required, and
the purchaser  otherwise  satisfies the Fund's purchase  requirements.  No sales
load or commission is charged in connection with the purchase of Fund shares.

Shares  may be  purchased  for cash or in  exchange  for  securities  which  are
permissible  investments  of  a  Fund,  subject  to  IAI's  discretion  and  its
determination  that  the  securities  are  acceptable.  Securities  accepted  in
exchange  will be  valued  on the  basis of  market  quotations  or,  if  market
quotations are not available,  by a method that IAI believes accurately reflects
fair value.  In  addition,  securities  accepted in exchange  are required to be
liquid securities that are not restricted as to transfer.

The minimum initial investment to establish a retail account with the IAI Mutual
Funds is $5,000. Such initial investment may be allocated among a Fund and other
IAI Mutual Funds as desired,  provided  that no less than $1,000 is allocated to
any one fund.  The  minimum  initial  investment  for IRA  accounts  is  $2,000,
provided  that the minimum  amount that may be  allocated to one fund is $1,000.
Once the account  minimum has been met,  subsequent  purchases  can be made in a
Fund for $100 or more.  Such minimums may be waived for  participants in the IAI
Investment Club.

Investors may satisfy the minimum investment requirement by participating in the
STAR Program.  Participation in the STAR Program requires an initial  investment
of $1,000 per Fund and a commitment  to invest an aggregate of $5,000  within 24
months. If a STAR Program  participant does not invest an aggregate of $5,000 in
the IAI Mutual  Funds  within 24 months,  IAI may,  at its  option,  redeem such
shareholder's  interest  and remit such  amount to the  shareholders.  Investors
wishing to  participate  in the STAR Program should contact the Fund to obtain a
STAR Program application.


                                                                              37
<PAGE>
                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund


To purchase  shares,  forward the completed  application  and a check payable to
"IAI  Funds" to a Fund.  Third party  checks  will not be  accepted  for initial
account investments. Upon receipt, your account will be credited with the number
of full and fractional shares which can be purchased at the net asset value next
determined after receipt of the purchase order by a Fund.

Purchases of shares are subject to acceptance or rejection by a Fund on the same
day the purchase order is received and are not binding until so accepted.  It is
the policy of the Funds and the  Underwriter  to keep  confidential  information
contained  in the  application  and  regarding  the  account of an  investor  or
potential investor in a Fund.

All  correspondence  relating to  purchase  of shares  should be directed to the
office of the IAI Mutual Funds, P.O. Box 357, Minneapolis,  Minnesota 55440, or,
if  using  overnight   delivery,   to  601  Second  Avenue  South,  Suite  3600,
Minneapolis,  Minnesota  55402.  For  assistance in completing  the  application
please contact IAI Mutual Fund Shareholder Services at 1-800-945-3863.


BANK WIRE PURCHASES

Shares may be  purchased  by having your bank wire  federal  funds (funds of the
Federal Reserve System) to Norwest Bank Minnesota.

Wire orders will be accepted only on days your bank, the transfer  agent, a Fund
and Norwest Bank  Minnesota are open for business.  The payment must be received
by a Fund before the close of business to be credited to your  account that day.
Otherwise,  it will be processed  the next  business day. The wire purchase will
not be  considered  made until the wired  amount is received and the purchase is
accepted by such Fund. If the wire order does not contain the information stated
below,  such Fund may reject it.  Any  delays  that may occur in wiring  federal
funds,  including delays in processing by the banks, are not the  responsibility
of such Fund or the transfer agent.

You must pay any charges  assessed by your bank for the wire service.  If a wire
order is rejected,  all money  received by the Fund,  less any costs incurred by
the Fund or the transfer agent in rejecting it, will be returned promptly.

If the wire order is for a new account, you should call IAI Shareholder Services
at  1-800-945-3863  to advise  them of the  investment  and to obtain an account
number and  instructions.  The wire should be sent to:  Norwest Bank  Minnesota,
Routing Number 091000019,  Minneapolis,  Minnesota,  Credit to: IAI Mutual Funds
Account Number 6355002264. It should state the following:

     "For further credit to personal  account # ______ (your account number) for
______________ (your name) and __________________ (Fund name)."

A completed application must be sent to and received by the Fund before the wire
is sent.

If the wire order is an addition to an existing  account,  the wire must include
the  information  required  above for the new  accounts.  As soon as the wire is

38
<PAGE>
                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund


sent, you should call IAI Shareholder  Services,  as described above, and advise
them of your name, your account number and the name of the bank transmitting the
federal funds.

RETIREMENT PLANS

Shares  of the  Funds  may  be an  appropriate  investment  medium  for  various
retirement plans.  Persons desiring information about establishing an Individual
Retirement  Account  (IRA) (for  employed  persons  and their  spouses) or other
retirement  plans  should  contact  IAI  Mutual  Fund  Shareholder  Services  at
1-800-945-3863.  All retirement  plans involve a long-term  commitment of assets
and are subject to various legal  requirements and  restrictions.  The legal and
tax  implications  may vary  according to the  circumstances  of the  individual
investor.  Therefore,  you are urged to consult  with an attorney or tax advisor
prior to the establishment of such a plan.

AUTOMATIC 
INVESTMENT PLAN

Investors may arrange to make regular  investments of $100 or more per Fund on a
monthly or twice a month  basis,  effective as of the 4th and/or the 18th day of
each month (or the next business day),  through automatic  deductions from their
checking or savings  accounts.  Such investors may, of course,  terminate  their
participation in the Automatic  Investment Plans at any time upon written notice
to  a  Fund.  Any  changes  or  instructions  to  terminate  existing  Automatic
Investment  Plan must be received  by the last  business  day of the  preceeding
month in which the change or termination is to take place.  Investors interested
in participating in the Automatic  Investment Plan should complete the Automatic
Investment Plan portion of their application and return it to the Funds.


REDEMPTION OF 
SHARES

Registered holders of Fund shares may at any time require a Fund to redeem their
shares upon their written request. All correspondence relating to the redemption
of shares  should be directed to the office of IAI Mutual  Funds,  P.O. Box 357,
Minneapolis,  Minnesota 55440.  Shareholders may redeem shares by phone, subject
to a limit of $50,000,  provided such  shareholders have authorized such Fund to
accept  telephone  instructions.  For  assistance in redeeming  shares by phone,
please contact the IAI Mutual Funds Shareholder Services at 1-800-945-3863.

Certificates  presented  for  redemption  must be  endorsed on the back with the
signature  of the person  whose  name  appears  on the  certificate  and must be
signature guaranteed. If no certificate has been issued, redemption instructions
must be signed by the person(s) in whose name the shares are registered.  If the
redemption  proceeds  are to be paid or  mailed  to any  person  other  than the
shareholder of record or if redemption proceeds are in excess of $50,000, a Fund
will require that the signature on the written  instructions  be guaranteed by a
participant in a signature guarantee program, which may include certain national
banks or  trust  companies  or  certain  member  firms  of  national  securities
exchanges.  (Notarization by a Notary Public is NOT ACCEPTED.) If the shares are

                                                                              39
<PAGE>
                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund


held of record in the name of a corporation,  partnership, trust or fiduciary, a
Fund may require  additional  evidence of authority prior to accepting a request
for redemption.

For shareholders who established receiving proceeds by Federal Funds Wire at the
time they opened  their  account,  telephone  instructions  will be accepted for
redemption of amounts up to $50,000 ($1,000  Minimum) and proceeds will be wired
on the next  business day to a  pre-designated  bank  account.  Wire  redemption
requests  will only be processed  on days your bank,  the  transfer  agent,  the
Portfolios and Norwest Bank Minnesota are open for business.

In order to add this feature to an existing  account or to change  existing bank
account information,  please submit a letter of instructions including your bank
information  to IAI  Shareholder  Services at the address  listed in the section
"Additional  Information."  The letter must be signed by all registered  owners,
and their signatures must be guaranteed.

Your  account  will be charged a fee of $10 each time  redemption  proceeds  are
wired to your bank.  Your bank may also charge you a fee for receiving a Federal
Funds Wire.

Neither  the  transfer  agent nor any of the Funds  can be  responsible  for the
efficiency of the Federal Funds wire system or the shareholder's bank.

The  redemption  proceeds  received by the  investor  are based on the net asset
value next determined after  redemption  instructions in good order are received
by a Fund.  Since the value of shares redeemed is based upon the value of a Fund
investment  at the time of  redemption,  it may be more or less  than the  price
originally paid for the shares.


If  redemptions  of  Fund  shares  are  arranged  and  settlement  is made at an
investor's  election through a member of the National  Association of Securities
Dealers,  Inc.  or another  financial  intermediary,  such  entity  may,  at its
discretion, charge a fee for that service.

Payment for shares  redeemed  will  ordinarily be made within seven days after a
request  for  redemption  has been made.  Normally a Fund will mail  payment for
shares redeemed on the business day following receipt of the redemption request.
A Fund will not send  redemption  proceeds  until  checks  (including  certified
checks or cashiers  checks)  received in payment for shares have cleared,  which
may take up to ten days or more.

Following a  redemption  or transfer  request,  if the value of a  shareholder's
interest in a Fund falls below $500, such Fund reserves the right to redeem such
shareholder's entire interest and remit such amount. Such a redemption will only
be effected  following:  (a) a  redemption  or transfer by a  shareholder  which
causes the value of such shareholder's interest in such Fund to fall below $500;
(b) the mailing by such Fund to such  shareholder  of a notice of  intention  to
redeem;  and (c) the  passage  of at  least  six  months  from  the date of such
mailing,  during which time the investor  will have the  opportunity  to make an
additional  investment  in such Fund to  increase  the value of such  investor's
account to at least $500.

40
<PAGE>
                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund


Each Fund  reserves  the right,  if  conditions  exist which make cash  payments
undesirable,  to honor any request for redemption or repurchase  order by making
payment in whole or in part in readily  marketable  securities  chosen by a Fund
and valued as they are for purposes of  computing  the Fund's net asset value (a
redemption-in-kind).  If payment is made in securities,  a shareholder may incur
transaction expenses in converting these securities to cash.


EXCHANGE PRIVILEGE

The Exchange Privilege enables shareholders to purchase,  in exchange for shares
of a Fund,  shares  of other  IAI  Mutual  Funds.  These  funds  have  different
investment objectives from the Funds. Shareholders may exchange shares of a Fund
for shares of another fund  managed by IAI  provided  that the fund whose shares
will be acquired is duly registered in the state of the shareholder's  residence
and the  shareholder  otherwise  satisfies  the  fund's  purchase  requirements.
Although  the IAI  Mutual  Funds  do not  currently  charge a fee for use of the
Exchange Privilege, they reserve the right to do so in the future.

Because excessive trading can hurt Fund performance and shareholders, there is a
limit of four  exchanges  out of each IAI  Mutual  Fund  per  calendar  year per
account. Accounts under common ownership or control, including accounts with the
same taxpayer  identification  number,  will be counted together for purposes of
the four  exchange  limit.  Each  Fund  reserves  the  right to  temporarily  or
permanently  terminate  the Exchange  Privilege of any investor who exceeds this
limit.  The limit may be  modified  for certain  retirement  plan  accounts,  as
required by the applicable  plan document  and/or  relevant  Department of Labor
regulations,  and for  Automatic  Exchange  Plan  participants.  Each  Fund also
reserves the right to refuse or limit exchange  purchases by any investor if, in
IAI's  judgment,  such Fund would be unable to invest the money  effectively  in
accordance  with its  investment  objectives  and policies,  or would  otherwise
potentially be adversely affected.

Fund shareholders  wishing to exercise the Exchange  Privilege should notify the
Fund in writing or, provided such  shareholders have authorized a Fund to accept
telephone  instructions,  by telephone.  At the time of the exchange, if the net
asset value of the shares  redeemed in  connection  with the exchange is greater
than the  investor's  cost, a taxable  capital gain will be realized.  A capital
loss will be realized if at the time of the  exchange the net asset value of the
shares  redeemed in the  exchange is less than the  investor's  cost.  Each Fund
reserves the right to terminate or modify the Exchange Privilege in the future.

AUTOMATIC 
EXCHANGE PLAN

Investors  may arrange to make regular  exchanges of $100 or more between any of
the IAI  Mutual  Funds on a monthly  basis.  Exchanges  will  take  place at the
closing  price  of the  fifth  day of each  month  (or the next  business  day).
Shareholders are responsible for making sure sufficient shares exist in the Fund
account from which the exchange takes place.  If there are not sufficient  funds



                                                                              41
<PAGE>
                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund


in the Fund  account  to meet  the  requested  exchange  amount,  the  Automatic
Exchange  Plan  will be  suspended.  Shareholders  may not close  Fund  accounts
through the Automatic  Exchange Plan.  Investors  participating in the Automatic
Exchange  Plan will receive  quarterly  confirmations  of all  transactions  and
dividends.  Investors interested in participating in the Automatic Exchange Plan
should complete the Automatic  Exchange Plan portion of their  application.  For
assistance in completing  the  application  contact IAI Mutual Fund  Shareholder
Services at 1-800-945-3863.


AUTHORIZED 
TELEPHONE TRADING

Investors can transact  account  exchanges and  redemptions via the telephone by
completing  the  Authorized  Telephone  Trading  section of the IAI Mutual  Fund
application and returning it to a Fund.  Investors  requesting telephone trading
privileges will be provided with a personal  identification  number ("PIN") that
must accompany any  instructions by phone.  Shares will be redeemed or exchanged
at the next  determined  net asset  value.  Telephone  redemption  proceeds  are
subject to a $50,000  limit and must be made  payable to the  owner(s) of record
and delivered to the address of record.

In order to confirm that telephone  instructions  for  redemptions and exchanges
are genuine,  the Funds have established  reasonable  procedures,  including the
requirement  that  a  personal   identification   number   accompany   telephone
instructions.  If a Fund or the transfer agent fails to follow these procedures,
such  Fund  may  be  liable  for  losses  due  to   unauthorized  or  fraudulent
instructions.  To the extent these reasonable  procedures are followed,  none of
the Funds,  their transfer agent, IAI, or any affiliated  broker/dealer  will be
liable for any loss,  injury,  damage,  or expense  for  acting  upon  telephone
instructions  believed to be genuine,  and will otherwise not be responsible for
the authenticity of any telephone instructions,  and, accordingly,  the investor
bears the risk of loss  resulting  from  telephone  instructions.  All telephone
redemptions and exchange requests will be tape recorded.  Telephone  redemptions
are not permitted for IRAs. For redemptions from these accounts,  please contact
IAI Mutual Fund Shareholder Services at 1-800-945-3863 for instructions.

SYSTEMATIC CASH 
WITHDRAWAL PLAN

Each Fund has  available a  Systematic  Cash  Withdrawal  Plan for any  investor
desiring to follow a program of  systematically  withdrawing  a fixed  amount of
money from an  investment in shares of a Fund.  Payments  under the plan will be
monthly or  quarterly  in amounts of $100 or more.  Shares will be sold with the
closing price of the 15th of the applicable month (or the next business day). To
provide  funds for  payment,  such Fund will redeem as many full and  fractional
shares as  necessary at the  redemption  price,  which is net asset  value.  The
holder of a Systematic Cash  Withdrawal Plan must have income  dividends and any
capital  gains  distributions  reinvested in full and  fractional  shares at net
asset value.

Payments under this plan,  unless pursuant to a retirement  plan,  should not be

42
<PAGE>
                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund


considered  income.  Withdrawal  payments may exceed dividends and distributions
and, to this extent,  there will be a reduction  in the  investor's  equity.  An
investor should also understand that this plan cannot insure profit, nor does it
protect against any loss in a declining market.  Careful consideration should be
given to the amount withdrawn each month.  Excessive withdrawals could lead to a
serious  depletion of equity,  especially  during  periods of  declining  market
values.  Fund  management  will be available  for  consultation  in this matter.
Investors  participating  in a  Systematic  Cash  Withdrawal  Plan will  receive
quarterly confirmations of all transactions and dividends.


Plan  application  forms are  available  through  the  Funds.  If you would like
assistance in completing  the  application  contact IAI Mutual Fund  Shareholder
Services at 1-800-945-3863.

DIVIDENDS, 
DISTRIBUTIONS 
AND TAX STATUS

The  policy  of the  Funds  is to  pay  dividends  from  net  investment  income
semiannually  and to make  distributions  of  realized  capital  gains,  if any,
annually.  However,  provisions in the Internal Revenue Code of 1986, as amended
(the "Code"),  may result in additional net investment  income and capital gains
distributions  by a Fund.  When you open an account,  you should specify on your
application  how you want to receive your  distributions.  The Funds offer three
options: Full Reinvestment--your dividend and capital gain distributions will be
automatically  reinvested  in  additional  shares  of the  Fund;  Capital  Gains
Reinvestment--your  capital gain distributions will be automatically reinvested,
but your income  dividend  distributions  will be paid in cash;  and  Cash--your
income  dividends  and  capital  gain   distributions  will  be  paid  in  cash.
Distributions  taken in cash can be sent via check or  transferred  directly  to
your  account at any bank,  savings and loan or credit union that is a member of
the Automated  Clearing House (ACH) network.  Unless  directed  otherwise by the
shareholder,  each Fund will automatically  reinvest all such distributions into
full and fractional shares at net asset value.

The Funds' Directed  Dividend service allows you to invest your dividends and/or
capital gain  distributions  directly into another IAI Mutual Fund.  Contact IAI
Mutual Fund Shareholder Services at 1-800-945-3863 for details.

Each Fund intends to qualify for tax purposes as a regulated  investment company
under Subchapter M of the Internal Revenue Code during the current taxable year.
If so qualified,  each Fund will not be subject to federal  income tax on income
that it distributes to its shareholders.

Distributions  are  subject to federal  income  tax,  and may also be subject to
state or local taxes. If you live outside the United States,  your distributions
could also be taxed by the country in which you reside.  Your  distributions are
taxable  when they are paid,  whether you take them in cash or reinvest  them in
additional shares.

For federal income tax purposes,  each Fund's income and short-term capital gain

                                                                              42
<PAGE>
                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund


distributions  are taxed as  dividends;  long-term  capital  gain  distributions
designated  as capital  gain  dividends  are taxed as  long-term  capital  gains
regardless of the length of time for which the shares have been held.  Long-term
capital gains are currently subject to a maximum federal income tax rate of 20%.

Upon redemption of shares of a Fund, the shareholder will generally  recognize a
capital gain or loss equal to the difference  between the amount realized on the
redemption and the  shareholder's  adjusted  basis in such shares.  Such gain or
loss will be long-term  gain or loss if the shares were held more than one year.
For shareholders who are individuals,  estates, or trusts, the gain or loss will
be considered  long-term (20% gain) if the  shareholder  has held the sahres for
more than 18 months  and  mid-term  (28% gain) if the  shareholder  has held the
shares for more than one year but not more than 18 months.  Under the Code,  the
deductibility of capital losses is subject to certain limitations.

Annually,  IAI will send you and the IRS a statement  showing the amount of each
taxable distribution you received in the previous year. Whenever you sell shares
of a Fund,  IAI will send you a confirmation  statement  showing how many shares
you sold and at what price. You will also receive an account statement quarterly
and a consolidated  transaction statement annually.  However, it is up to you or
your tax preparer to determine whether this sale resulted in a capital gain and,
if so, the amount of tax to be paid.  Be sure to keep your  account  statements;
the information they contain will be essential in calculating the amount of your
capital gains.

The foregoing  relates to federal income taxation as in effect as of the date of
this  Prospectus.  For a more  detailed  discussion  of the  federal  income tax
consequences of investing in shares of a Fund, see "Tax Status" in the Statement
of Additional Information.

DESCRIPTION OF 
COMMON STOCK

All  shares of each Fund have  equal  rights  as to  redemption,  dividends  and
liquidation,  and will be fully paid and nonassessable when issued and will have
no preemptive or conversion rights.

The shares of each Fund have noncumulative  voting rights,  which means that the
holders of more than 50% of the shares  voting for the election of directors can
elect 100% of the directors if they choose to do so. On some issues, such as the
election  of  directors,  all shares of each  corporation  vote  together as one
series.  On an issue affecting only a particular  series,  such as voting on the
management  agreement,  only the  approval of the series is required to make the
agreement effective with respect to such series.

Annual or periodically  scheduled  regular meetings of shareholders  will not be
held except as required by law.  Minnesota  corporation  law does not require an
annual  meeting;  instead,  it provides  for the Board of  Directors  to convene
shareholder  meetings  when it deems  appropriate.  In  addition,  if a  regular
meeting  of  shareholders  has not been held  during the  immediately  preceding
fifteen months,  shareholders holding three percent or more of the voting shares
of a Fund may demand a regular  meeting of  shareholders of such Fund by written
notice of demand  given to the chief  executive  officer or the chief  financial
officer of such Fund.  Within  thirty days after receipt of the demand by one of
those  officers,  the  Board of  Directors  shall  cause a  regular  meeting  of

44
<PAGE>
                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund


shareholders  to be called and held no later than ninety  days after  receipt of
the demand,  all at the expense of such Fund. An annual  meeting will be held on
the removal of a director or  directors  of such Fund if requested in writing by
holders of not less than 10% of the outstanding shares of such Fund.

The shares of each Fund are  transferable  by endorsement of the  certificate if
held by the shareholder, or if the certificate is held by a Fund, by delivery to
such Fund of transfer instructions. Transfer instructions or certificates should
be  delivered to the office of a Fund.  Each Fund is not bound to recognize  any
transfer  until it is recorded on the stock  transfer  books  maintained by such
Fund.

COUNSEL AND 
AUDITORS

The firm of Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis, Minnesota
55402, provides legal counsel for the Funds. KPMG Peat Marwick LLP, 4200 Norwest
Center,  Minneapolis,  Minnesota 55402,  serves as independent  auditors for the
Funds.

CUSTODIAN, 
TRANSFER 
AGENT AND DIVIDEND 
DISBURSING AGENT

The Custodian for each Fund is Norwest Bank  Minnesota,  N.A.,  Norwest  Center,
Sixth and  Marquette,  Minneapolis,  Minnesota  55479.  IAI acts as each  Fund's
transfer agent,  dividend  disbursing agent and IRA Custodian,  at P.O. Box 357,
Minneapolis, Minnesota.


ADDITIONAL
INFORMATION

Each Fund sends to its shareholders a six-month  unaudited and an annual audited
financial report,  each of which includes a list of investment  securities held.
You  will  also  receive  an  account  statement  quarterly  and a  consolidated
transaction  statement  and  updated  prospectus  annually.  Please  read  these
materials carefully as they will help you understand each Fund and your account.
To reduce the volume of mail you  receive,  only one copy of most Fund  reports,
such as the Fund's Annual Report, may be mailed to your household (same surname,
same   address).   Please   call  IAI  Mutual  Fund   Shareholder   Services  at
1-800-945-3863 if you wish to receive additional shareholder reports.

Carefully review all the information relating to transactions on your statements
and  confirmations  to ensure  that your  instructions  were acted on  properly.
Please  notify us  immediately  in writing if there is an error.  If you fail to
provide  notification of an error with reasonable  promptness,  i.e.,  within 30
days of  non-automatic  transactions  or  within  30  days  of the  date of your
consolidated quarterly statement, in the case of automatic transactions, we will
deem you to have ratified the transaction.

In the opinion of the staff of the Securities and Exchange  Commission,  the use
of this combined  prospectus may possibly  subject all Funds to a certain amount
of  liability  for any losses  arising out of any  statement or omission in this
Prospectus regarding a particular Fund. In the opinion of the Funds' management,

                                                                              45
<PAGE>
                                IAI MUTUAL FUNDS
                             ----------------------
            IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
      IAI Growth Fund, IAI Growth and Income Fund, IAI Midcap Growth Fund,
                       IAI Regional Fund, IAI Value Fund


however,  the risk of such  liability  is not  materially  increased by use of a
combined prospectus.


The investment advisory, transfer agency and administrative services provided to
the Funds by IAI depend on the smooth functioning of its computer systems.  Many
computer software systems in use today cannot distinguish the year 2000 from the
year 1900  because of the way dates are encoded  and  calculated.  That  failure
could have a negative impact on handling securities trades,  pricing and account
services.  IAI has been  actively  working on necessary  changes to its computer
systems to deal with the year 2000 and expects  that its systems will be adapted
in time for that event, although there cannot be assurance of success.

Shareholder  inquiries  should be directed to a Fund at the telephone  number or
mailing address listed on the inside back cover of this Prospectus.

46
<PAGE>
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<PAGE>
                      (This page intentionally left blank)
<PAGE>

                                    TO OPEN

                                   AN ACCOUNT


                                 1.800.945.863


                                  612.376.2700


                                   PO BOX 357

                           MINNEAPOLIS, MN 55440-0357


                                   OVERNIGHT

                                    DELIVERY

                                    ADDRESS


                            601 Second Avenue South

                                   Suite 3600

                             Minneapolis, MN 55042
<PAGE>

                                     [LOGO]

                                  MUTUAL FUNDS

              P.O. BOX 357, MINNEAPOLIS, MINNESOTA 55440-0357 USA
                                FAX 612.376.2737

                                  800.945.3863
                                  612.376.2700
<PAGE>

                                                          
                          

                         IAI CAPITAL APPRECIATION FUND
                            IAI EMERGING GROWTH FUND
                                 IAI GROWTH FUND
                           IAI GROWTH AND INCOME FUND
                             IAI MIDCAP GROWTH FUND
                                IAI REGIONAL FUND
                                 IAI VALUE FUND

                       Statement of Additional Information
                              dated August 1, 1998


This Statement of Additional Information is not a prospectus.  This Statement of
Additional  Information relates to a Prospectus dated August 1, 1998, and should
be read in conjunction  therewith. A copy of the Prospectus may be obtained from
the  Fund  at  P.O.   Box  357,   Minneapolis,   Minnesota   55440   (telephone:
1-612-376-2700 or 1-800-945-3863).


                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
<S>                                                                                                 <C>   
INVESTMENT OBJECTIVES AND POLICIES...................................................................2
INVESTMENT RESTRICTIONS..............................................................................10
INVESTMENT PERFORMANCE...............................................................................12
MANAGEMENT...........................................................................................14
CUSTODIAL SERVICE....................................................................................21
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE...................................................21
CAPITAL STOCK........................................................................................22
NET ASSET VALUE AND PUBLIC OFFERING PRICE............................................................27
PURCHASES AND REDEMPTIONS IN KIND....................................................................28
TAX STATUS...........................................................................................28
LIMITATION OF DIRECTOR LIABILITY.....................................................................29
FINANCIAL STATEMENTS.................................................................................30
</TABLE>

<PAGE>


                       INVESTMENT OBJECTIVES AND POLICIES

     The investment  objectives and policies of IAI Capital  Appreciation  Fund,
IAI Emerging  Growth  Fund,  IAI Growth  Fund,  IAI Growth and Income Fund,  IAI
Midcap  Growth Fund,  IAI Regional  Fund and IAI Value Fund (the  "Funds"),  are
summarized on the front page of the Prospectus and in the text of the Prospectus
under "Investment Objectives and Policies." Investors should understand that all
investments have risks. There can be no guarantee against loss resulting from an
investment  in  the  Funds,  and  there  can be no  assurance  that  the  Fund's
investment policies will be successful, or that its investment objective will be
attained. Certain of the investment practices of the Funds are further explained
below.

REPURCHASE AGREEMENTS

     Each Fund may invest in repurchase agreements relating to the securities in
which it may invest. A repurchase  agreement involves the purchase of securities
with the condition that, after a stated period of time, the original seller will
buy back the securities at a  predetermined  price or yield. A Fund's  custodian
will have custody of, and will hold in a segregated account, securities acquired
by such Fund under a repurchase agreement or other securities as collateral.  In
the case of a security registered on a book entry system, the book entry will be
maintained  in a Fund's  name or that of its  custodian.  Repurchase  agreements
involve certain risks not associated with direct investments in securities.  For
example, if the seller of the agreement defaults on its obligation to repurchase
the  underlying  securities  at a time  when  the  value of the  securities  has
declined,  a Fund may incur a loss upon disposition of such  securities.  In the
event that  bankruptcy  proceedings  are commenced with respect to the seller of
the  agreement,  a Fund's  ability to dispose of the  collateral  to recover its
investment may be restricted or delayed.  While  collateral will at all times be
maintained  in an amount  equal to the  repurchase  price  under  the  agreement
(including  accrued  interest due  thereunder),  to the extent proceeds from the
sale of collateral  were less than the  repurchase  price, a Fund could suffer a
loss.

REVERSE REPURCHASE AGREEMENTS

     Each  Fund  may  invest  in  reverse  repurchase  agreements  as a form  of
borrowing.  In  a  reverse  repurchase  agreement,  a  Fund  sells  a  portfolio
instrument to another party, such as a bank or broker-dealer, in return for cash
and agrees to repurchase the instrument at a particular  price and time. While a
reverse repurchase  agreement is outstanding,  a Fund will maintain  appropriate
liquid assets in a segregated  custodial  account to cover its obligation  under
the agreement.  A Fund will enter into reverse  repurchase  agreements only with
parties  whose  creditworthiness  has  been  found  satisfactory  by  Investment
Advisers,  Inc. ("IAI"), the Fund's investment adviser and manager. As a result,
such  transactions  may  increase  fluctuations  in the market value of a Fund's
assets  and may be viewed  as a form of  leverage.  Presently,  the Funds do not
intend  to  invest  more  than  5% of  its  net  assets  in  reverse  repurchase
agreements.

SECURITIES OF FOREIGN ISSUERS

     Investing  in  foreign  securities  may  result in  greater  risk than that
incurred by investing in domestic  securities.  There is generally less publicly
available  information  about foreign issuers  comparable to reports and ratings
that are published about companies in the United States.  Also,  foreign issuers
are  not  subject  to  uniform  accounting,  auditing  and  financial  reporting
standards,  practices and requirements  comparable to those applicable to United
States companies.

                                       2
<PAGE>


     It is  contemplated  that most  foreign  securities  will be  purchased  in
over-the-counter markets or on stock exchanges located in the countries in which
the respective  principal  offices of the issuers of the various  securities are
located,  if that is the  best  available  market.  Foreign  stock  markets  are
generally  not as developed or  efficient as those in the United  States.  While
growing in volume, they usually have substantially less volume than the New York
Stock  Exchange,  and  securities of some foreign  companies are less liquid and
more volatile than securities of comparable United States companies.  Similarly,
volume and  liquidity  in most  foreign  bond markets is less than in the United
States  and at times  volatility  of price  can be  greater  than in the  United
States.  Commissions  on foreign  stock  exchanges  are  generally  higher  than
commissions  on United  States  exchanges,  although  the Fund will  endeavor to
achieve the most favorable net results on its portfolio  transactions.  There is
generally less government supervision and regulation of foreign stock exchanges,
brokers and listed companies than in the United States.

     With respect to certain  foreign  countries,  there is the  possibility  of
adverse changes in investment or exchange control regulations,  expropriation or
confiscatory taxation,  limitations on the removal of funds or other assets of a
Fund,  political or social instability,  or diplomatic  developments which could
affect  United  States  investments  in those  countries.  Moreover,  individual
foreign  economies may differ  favorably or unfavorably  from the United States'
economy in such respects as growth of gross national product, rate of inflation,
capital  reinvestment,   resource   self-sufficiency  and  balance  of  payments
position.

     IAI is not  aware  at  this  time of the  existence  of any  investment  or
exchange control regulations which might substantially  impair the operations of
a  Fund  as  described  in the  Prospectus  and  this  Statement  of  Additional
Information.  It should be noted,  however,  that this situation could change at
any time.

     The dividends and interest payable on certain of a Fund's foreign portfolio
securities may be subject to foreign  withholding  taxes,  thus reducing the net
amount  of income  available  for  distribution  to a Fund's  shareholders.  The
expense  ratio  of a Fund  should  not be  materially  affected  by such  Fund's
investment in such foreign securities.

ILLIQUID SECURITIES

     Each Fund may also  invest up to 15% of its net assets in  securities  that
are considered  illiquid because of the absence of a readily available market or
due to legal or contractual restrictions. However, certain restricted securities
that are not  registered  for sale to the  general  public that can be resold to
institutional  investors may be considered liquid pursuant to guidelines adopted
by the Board of Directors. In the case of a Rule 144A Security, such security is
deemed to be liquid if:

     (1) IAI reasonably expects to be able to resell the security to a qualified
institutional  buyer, as defined in paragraph  (a)(1) of Rule 144A, who is aware
of  the  Fund's  reliance  upon  Rule  144A  in  selling  the  security  without
registration, as required by paragraph (d)(2) of Rule 144A;

     (2) the  Rule  144A  Security  is not (a) of the same  class as  securities
listed on any  national  securities  exchange or quoted in NASDAQ as  determined
under  paragraph  (d)(3)(i)  of Rule  144A,  or (b) a security  of a  registered
investment company (other than a closed-end investment company); and

     (3) the issuer (a) is a foreign government  eligible to register securities
under  Schedule B of the  Securities  Act of 1933,  (b) is a company  that files
periodic  reports under the Securities  Act of 1934 on Forms 8-K, 10-Q,  10-K or
20-F or provides information under Rule 12g3-2(b) thereunder,  or (c) has agreed
in writing to provide the holder and any prospective  purchaser of the Rule 144A
Security  with  reasonably  current  financial  information  as  required  under
paragraph (d)(4)(i) of Rule 144A.

                                       3
<PAGE>

     Other  securities  are  deemed  to be  liquid  if IAI  determines  that the
security can be disposed of within seven days in the ordinary course of business
at  approximately  the amount at which the Funds have valued the  instrument for
purposes of calculating a Fund's net asset value. In making this  determination,
IAI will consider such factors as may be relevant to a Fund's ability to dispose
of the security,  including  but not limited to, the following  factors (none of
which, standing alone, would necessarily be determinative):

     1. the frequency of trades and quotes for the security;

     2. the number of dealers  willing to purchase or sell the  security and the
number of potential purchasers;

     3. dealer undertakings to make a market in the security; and

     4. the  nature of the  security  and the nature of the  marketplace  trades
(e.g.,  the time  needed to dispose of the  security,  the method of  soliciting
offers and the mechanics of transfer).

     It is  not  possible  to  predict  with  assurance  the  maintenance  of an
institutional  trading market for such  securities and the liquidity of a Fund's
investments could be impaired if trading declines.

LENDING PORTFOLIO SECURITIES

     In  order to  generate  additional  income,  each  Fund may lend  portfolio
securities to broker-dealers,  banks or other financial borrowers of securities.
As with other extensions of credit, there are risks of delay in recovery or even
loss of rights in the  collateral  should the  borrower of the  securities  fail
financially.  However,  a Fund  will only  enter  into  loan  arrangements  with
broker-dealers,  banks  or  other  institutions  which  IAI has  determined  are
creditworthy under guidelines established by the Fund's Board of Directors. Each
Fund may also  experience  a loss if,  upon the  failure of a borrower to return
loaned  securities,  the  collateral is not  sufficient in value or liquidity to
cover the value of such loaned securities  (including accrued interest thereon).
However,  a Fund will  receive  collateral  in the form of cash,  United  States
Government securities,  certificates of deposit or other high-grade,  short-term
obligations or  interest-bearing  cash equivalents equal to at least 102% of the
value  of  the  securities  loaned.  The  value  of  the  collateral  and of the
securities  loaned  will be marked to market on a daily  basis.  During the time
portfolio  securities are on loan, the borrower pays a Fund an amount equivalent
to any  dividends or interest paid on the  securities  and a Fund may invest the
cash collateral and earn additional  income or may receive an agreed upon amount
of interest income from the borrower.  However,  the amounts  received by a Fund
may be reduced by finders'  fees paid to  broker-dealers  and related  expenses.
Presently,  the Funds do not  intend  to lend more than 5% of its net  assets to
broker-dealers, banks, or other financial borrowers of securities.

SWAP AGREEMENTS

     Swap  agreements can be  individually  negotiated and structured to include
exposure  to a variety of  different  types of  investments  or market  factors.
Depending on their structure,  swap agreements may increase or decrease a Fund's
exposure to long- or short-term interest rates (in the U.S. or abroad),  foreign
currency  values,  mortgage  securities,  corporate  borrowing  rates,  or other
factors such as security  prices or inflation  rates.  Swap  agreements can take
many different  forms and are known by a variety of names. A Fund is not limited
to any particular form of swap agreement if IAI determines it is consistent with
such Fund's investment objective and policies.

     Swap  agreements will tend to shift a Fund's  investment  exposure from one
type of  investment  to  another.  For  example,  if a Fund  agrees to  exchange
payments in dollars for payments in foreign  currency,  the swap agreement would
tend to  decrease a Fund's  exposure to U.S.  interest  rates and  increase  its
exposure to foreign currency and interest rates. Depending on how they are used,
swap  agreements  may  increase or decrease the overall  volatility  of a Fund's
investments and its share price.

                                       4
<PAGE>

     The most  significant  factor in the  performance of swap agreements is the
change in the specific interest rate, currency,  or other factors that determine
the amounts of payments due to and from a Fund.  If a swap  agreement  calls for
payments by a Fund,  such Fund must be prepared to make such  payments when due.
In addition,  if the counterparty's  creditworthiness  declines,  the value of a
swap agreement would be likely to decline,  potentially  resulting in losses.  A
Fund expects to be able to eliminate its exposure under swap  agreements  either
by assignment  or other  disposition,  or by entering  into an  offsetting  swap
agreement with the same party or a similar creditworthy party.

     Each Fund will maintain appropriate liquid assets in a segregated custodial
account to cover its current obligations under swap agreements. If a Fund enters
into a swap  agreement  on a net basis,  it will  segregate  assets with a daily
value at least equal to the  excess,  if any,  of a Fund's  accrued  obligations
under the swap  agreement  over the  accrued  amount  such Fund is  entitled  to
receive  under the  agreement.  If a Fund enters into a swap  agreement on other
than a net basis, it will segregate assets with a value equal to the full amount
of such Fund's accrued obligation under the agreement.

INDEXED SECURITIES

     Each Fund may purchase securities whose prices are indexed to the prices of
other  securities,  securities  indexes,  currencies,  precious  metals or other
commodities,  or other financial indicators.  Indexed securities typically,  but
not always,  are debt  securities or deposits  whose value at maturity or coupon
rate  is  determined  by  reference  to  a  specific  instrument  or  statistic.
Gold-indexed  securities,  for example,  typically  provide for a maturity value
that depends on the price of gold,  resulting in a security whose price tends to
rise and fall together with gold prices.  Currency-indexed  securities typically
are short to intermediate-term debt securities whose maturity values or interest
rates are determined by reference to the values of one or more specified foreign
currencies, and may offer higher yields than U.S. dollar-denominated  securities
of  equivalent  issuers.   Currency-indexed  securities  may  be  positively  or
negatively  indexed;  that  is,  their  maturity  value  may  increase  when the
specified  currency  value  increases,  resulting  in a security  that  performs
similarly  to a  foreign-denominated  instrument,  or their  maturity  value may
decline when foreign  currencies  increase,  resulting in a security whose price
characteristics   are   similar   to  a  put   on   the   underlying   currency.
Currency-indexed  securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.

     The  performance  of indexed  securities  depends to a great  extent on the
performance  of the security,  currency,  or other  instrument to which they are
indexed,  and may also be  influenced  by interest  rate changes in the U.S. and
abroad.  At the same time,  indexed  securities  are subject to the credit risks
associated  with the  issuer of the  security,  and  their  values  may  decline
substantially if the issuer's creditworthiness  deteriorates.  Recent issuers of
indexed  securities  have  included  banks,   corporations,   and  certain  U.S.
government  agencies.  IAI will use its judgment in determining  whether indexed
securities should be treated as short-term  instruments,  bonds, stocks, or as a
separate asset class for purposes of a Fund's investment policies,  depending on
the individual characteristics of the securities. Indexed securities may be more
volatile than the underlying instruments.  Presently, the Funds do not intend to
invest more than 5% of its net assets in Indexed Securities.

FOREIGN CURRENCY TRANSACTIONS

     Each  Fund may hold  foreign  currency  deposits  from time to time and may
convert dollars and foreign currencies in the foreign exchange markets. Currency
conversion involves dealer spreads and other costs, although commissions usually
are not charged. Currencies may be exchanged on a spot (i.e., cash) basis, or by
entering  into forward  contracts to purchase or sell  foreign  currencies  at a
future date and price.  Forward  contracts  generally are traded in an interbank
market  conducted  directly  between  currency traders (usually large commercial
banks)  and their  customers.  The  parties to a forward  contract  may agree to
offset or terminate the contract  before its maturity,  or may hold the contract
to maturity and complete the contemplated currency exchange.

     Such Funds may use currency forward  contracts to manage currency risks and
to facilitate  transactions  in foreign  securities.  The  following  discussion
summarizes  the  principal  currency  management  strategies  involving  forward
contracts that could be used by the Funds.

                                       5
<PAGE>

     In connection with purchases and sales of securities denominated in foreign
currencies,  a Fund may enter into currency forward  contracts to fix a definite
price for the purchase or sale in advance of the trade's  settlement  date. This
technique  is  sometimes  referred to as a  "settlement  hedge" or  "transaction
hedge."  IAI  expects to enter into  settlement  hedges in the normal  course of
managing a Fund's  foreign  investments.  A Fund  could also enter into  forward
contracts  to purchase  or sell a foreign  currency  in  anticipation  of future
purchases or sales of securities  denominated in foreign  currency,  even if the
specific investments have not yet been selected by IAI.

     Each Fund may also use forward  contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. For example, if a
Fund owned  securities  denominated  in pounds  sterling,  it could enter into a
forward  contract  to sell pounds  sterling in return for U.S.  dollars to hedge
against possible declines in the pound's value. Such a hedge, sometimes referred
to as a  "position  hedge,"  would tend to offset  both  positive  and  negative
currency  fluctuations but would not offset changes in security values caused by
other factors.  A Fund could also hedge the position by selling another currency
expected to perform similarly to the pound sterling -- for example,  by entering
into a forward  contract to sell  Deutschemarks  or European  Currency  Units in
return for U.S. dollars.  This type of hedge,  sometimes referred to as a "proxy
hedge,"  could offer  advantages in terms of cost,  yield,  or  efficiency,  but
generally  would not hedge  currency  exposure as  effectively as a simple hedge
into U.S.  dollars.  Proxy hedges may result in losses if the  currency  used to
hedge does not perform  similarly to the currency in which the hedged securities
are denominated.

     Under certain conditions,  SEC guidelines require mutual funds to set aside
appropriate  liquid assets in a segregated  custodial  account to cover currency
forward  contracts.  As required  by SEC  guidelines,  each Fund will  segregate
assets to cover currency forward contracts, if any, whose purpose is essentially
speculative.  Each Fund will not  segregate  assets to cover  forward  contracts
entered into for hedging purposes, including settlement hedges, position hedges,
and proxy hedges.

     Successful use of forward currency  contracts will depend on IAI's skill in
analyzing and predicting  currency values.  Forward  contracts may substantially
change a Fund's  investment  exposure to changes in currency exchange rates, and
could  result  in  losses  to a  Fund  if  currencies  do  not  perform  as  IAI
anticipates.  For  example,  if a  currency's  value rose at a time when IAI had
hedged a Fund by selling that currency in exchange for dollars,  such Fund would
be unable to participate in the currency's appreciation.  If IAI hedges currency
exposure  through proxy hedges,  a Fund could realize  currency  losses from the
hedge and the security  position at the same time if the two  currencies  do not
move in tandem.  Similarly,  if IAI  increases  a Fund's  exposure  to a foreign
currency,  and that currency's  value  declines,  such Fund will realize a loss.
There is no  assurance  that IAI's use of  forward  currency  contracts  will be
advantageous  to a Fund or  that  it will  hedge  at an  appropriate  time.  The
policies described in this section are non-fundamental policies of the Funds.

LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS

     Each  Fund  has  filed a  notice  of  eligibility  for  exclusion  from the
definition of the term  "commodity  pool  operator"  with the Commodity  Futures
Trading Commission (CFTC) and the National Futures  Association,  which regulate
trading in the futures  markets,  before  engaging in any  purchases or sales of
futures contracts or options on futures  contracts.  Each Fund intends to comply
with Section 4.5 of the  regulations  under the Commodity  Exchange  Act,  which
limits the extent to which a Fund can commit assets to initial  margin  deposits
and option premiums.

     The above  limitation  on a Fund's  investments  in futures  contracts  and
options,  and such  Fund's  policies  regarding  futures  contracts  and options
discussed  elsewhere in this Statement of Additional  Information may be changed
as regulatory agencies permit. With respect to positions in commodity futures or
commodity  option  contracts  which do not come within the meaning and intent of
bona fide hedging in the CFTC rules,  the aggregate  initial margin and premiums
required  to  establish  such  positions  will not  exceed  five  percent of the
liquidation  value of the  qualifying  entity's  portfolio,  after  taking  into
account  unrealized  profits and unrealized  losses on any such contracts it has
entered  into;  and,  provided  further,  that in the case of an option  that is
in-the-money amount may be excluded in computing such 5 percent.

                                       6
<PAGE>

FUTURES CONTRACTS

     When a Fund purchases a futures contract, it agrees to purchase a specified
underlying  instrument at a specified  future date.  When a Fund sells a futures
contract,  it agrees to sell the  underlying  instrument  at a specified  future
date.  The price at which the  purchase and sale will take place is fixed when a
Fund enters into the contract.  Some currently  available  futures contracts are
based on specific securities, such as U.S. Treasury bonds or notes, and some are
based on  indexes  of  securities  prices,  such as the  Standard  & Poor's  500
Composite Stock Price Index (S&P 500).  Futures can be held until their delivery
dates,  or can be  closed  out  before  then if a  liquid  secondary  market  is
available.

     The value of a futures  contract  tends to increase  and decrease in tandem
with the  value of its  underlying  instrument.  Therefore,  purchasing  futures
contracts will tend to increase a Fund's exposure to positive and negative price
fluctuations  in the  underlying  instrument,  much as if it had  purchased  the
underlying  instrument  directly.  When a Fund  sells  a  futures  contract,  by
contrast,  the value of its  futures  position  will tend to move in a direction
contrary to the  market.  Selling  futures  contracts,  therefore,  will tend to
offset  both  positive  and  negative  market  price  changes,  much  as if  the
underlying instrument had been sold.

FUTURES MARGIN PAYMENTS

     The purchaser or seller of a futures contract is not required to deliver or
pay for the underlying instrument unless the contract is held until the delivery
date.  However,  both the purchaser and seller are required to deposit  "initial
margin" with a futures  broker,  known as a futures  commission  merchant (FCM),
when the contract is entered into.  Initial margin  deposits are typically equal
to a percentage of the contract's value. If the value of either party's position
declines,  that party will be required  to make  additional  "variation  margin"
payments  to settle the change in value on a daily  basis.  The party that has a
gain may be  entitled to receive  all or a portion of this  amount.  Initial and
variation margin payments do not constitute  purchasing securities on margin for
purposes of a Fund's investment  limitations.  In the event of the bankruptcy of
an FCM that  holds  margin  on behalf of a Fund,  such Fund may be  entitled  to
return of margin  owed to it only in  proportion  to the amount  received by the
FMC's other customers, potentially resulting in losses to such Fund.

PURCHASING PUT AND CALL OPTIONS

     By  purchasing  a put  option,  a Fund  obtains  the  right  (but  not  the
obligation) to sell the option's underlying  instrument at a fixed strike price.
In return for this right,  a Fund pays the current  market  price for the option
(known  as the  option  premium).  Options  have  various  types  of  underlying
instruments,  including specific  securities,  indexes of securities prices, and
futures  contracts.  A Fund may  terminate  its  position in a put option it has
purchased by allowing it to expire or by exercising the option. If the option is
allowed  to  expire,  a Fund will lose the  entire  premium  it paid.  If a Fund
exercises the option, it completes the sale of the underlying  instrument at the
strike price. A Fund may also terminate a put option  position by closing it out
in the  secondary  market at its current  price,  if a liquid  secondary  market
exists.

     The buyer of a typical  put option can expect to realize a gain if security
prices fall substantially.  However,  if the underlying  instrument's price does
not fall enough to offset the cost of  purchasing  the  option,  a put buyer can
expect to suffer a loss (limited to the amount of the premium paid, plus related
transaction costs).

     The  features  of call  options  are  essentially  the same as those of put
options,  except  that the  purchaser  of a call  option  obtains  the  right to
purchase,  rather than sell,  the underlying  instrument at the option's  strike
price.  A call buyer  typically  attempts  to  participate  in  potential  price
increases  of the  underlying  instrument  with risk  limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to suffer
a loss if  security  prices do not rise  sufficiently  to offset the cost of the
option.

                                       7
<PAGE>

WRITING PUT AND CALL OPTIONS

     When a Fund  writes  a put  option,  it  takes  the  opposite  side  of the
transaction from the option's  purchaser.  In return for receipt of the premium,
such Fund  assumes  the  obligation  to pay the  strike  price for the  option's
underlying  instrument if the other party to the option  chooses to exercise it.
When  writing an option on a futures  contract a Fund would be  required to make
margin payments to an FCM as described above for futures  contracts.  A Fund may
seek to  terminate  its  position in a put option it writes  before  exercise by
closing  out the option in the  secondary  market at its current  price.  If the
secondary  market is not liquid for a put  option a Fund has  written,  however,
such Fund must  continue to be prepared to pay the strike price while the option
is  outstanding,  regardless  of price  changes,  and must continue to set aside
assets to cover its  position.  If  security  prices  rise,  a put writer  would
generally expect to profit,  although its gain would be limited to the amount of
the premium it received.

     If security  prices remain the same over time, it is likely that the writer
will also  profit,  because it should be able to close out the option at a lower
price.  If security  prices fall,  the put writer would expect to suffer a loss.
This loss should be less than the loss from purchasing the underlying instrument
directly,  however,  because the premium  received for writing the option should
mitigate the effects of the decline.

     Writing a call  option  obligates  a Fund to sell or deliver  the  option's
underlying  instrument,  in return for the strike  price,  upon  exercise of the
option.  The  characteristics  of writing  call  options are similar to those of
writing put  options,  except  that  writing  calls  generally  is a  profitable
strategy  if prices  remain  the same or fall.  Through  receipt  of the  option
premium,  a call writer  mitigates the effects of a price  decline.  At the same
time,  because  a call  writer  must  be  prepared  to  deliver  the  underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.

COMBINED POSITIONS

     A Fund may purchase and write options in combination with each other, or in
combination  with  futures or forward  contracts,  to adjust the risk and return
characteristics of the overall position.  For example, a Fund may purchase a put
option and write a call option on the same  underlying  instrument,  in order to
construct a combined position whose risk and return  characteristics are similar
to selling a futures contract.  Another possible combined position would involve
writing a call  option at one strike  price and buying a call  option at a lower
price,  in order to reduce the risk of the written call option in the event of a
substantial price increase.  Because combined options positions involve multiple
trades,  they result in higher  transaction  costs and may be more  difficult to
open and close out.

CORRELATION OF PRICE CHANGES

     Because there are a limited number of types of exchange-traded  options and
futures contracts,  it is likely that the standardized  contracts available will
not match a Fund's current or anticipated investments exactly. A Fund may invest
in options and futures  contracts  based on securities  with different  issuers,
maturities,  or other  characteristics from the securities in which it typically
invests,  which  involves a risk that the options or futures  position  will not
track the performance of such Fund's other investments.

     Options  and  futures  prices  can also  diverge  from the  prices of their
underlying  instruments,  even if the  underlying  instruments  match  a  Fund's
investments  well.  Options and futures  prices are  affected by such factors as
current and anticipated  short-term interest rates, changes in volatility of the
underlying instrument,  and the time remaining until expiration of the contract,
which may not affect  security  prices the same way.  Imperfect  correlation may
also result from differing  levels of demand in the options and futures  markets
and the  securities  markets,  from  structural  differences  in how options and
futures and securities are traded, or from imposition of daily price fluctuation
limits or  trading  halts.  A Fund may  purchase  or sell  options  and  futures
contracts  with a greater or lesser value than the securities it wishes to hedge
or intends to  purchase in order to attempt to  compensate  for  differences  in
volatility  between the contract and the  securities,  although  this may not be
successful  in all  cases.  If price  changes  in a Fund's  options  or  futures
positions are poorly  correlated with its other  investments,  the positions may
fail to  produce  anticipated  gains or result in losses  that are not offset by
gains in other investments.

                                       8
<PAGE>

LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS

     There  is no  assurance  a  liquid  secondary  market  will  exist  for any
particular  options or futures contract at any particular time. Options may have
relatively low trading volume and liquidity if their strike prices are not close
to the  underlying  instrument's  current  price.  In  addition,  exchanges  may
establish daily price fluctuation limits for options and futures contracts,  and
may halt  trading if a contract's  price moves upward or downward  more than the
limit in a given day. On volatile trading days when the price  fluctuation limit
is reached or a trading  halt is  imposed,  it may be  impossible  for a Fund to
enter into new  positions  or close out  existing  positions.  If the  secondary
market for a  contract  is not liquid  because  of price  fluctuation  limits or
otherwise,  it could prevent prompt  liquidation of unfavorable  positions,  and
potentially  could require a Fund to continue to hold a position  until delivery
or expiration  regardless of changes in its value. As a result,  a Fund's access
to other  assets  held to cover its options or futures  positions  could also be
impaired.

OTC OPTIONS

     Each Fund may engage in OTC options  transactions.  Unlike  exchange-traded
options,  which are  standardized  with  respect to the  underlying  instrument,
expiration date,  contract size, and strike price, the terms of over-the-counter
options  (options not traded on  exchanges)  generally are  established  through
negotiation  with the other  party to the  option  contract.  While this type of
arrangement allows a Fund greater  flexibility to tailor an option to its needs,
OTC options generally involve greater credit risk than exchange-traded  options,
which are guaranteed by the clearing  organization  of the exchanges  where they
are traded.

OPTIONS AND FUTURES RELATING TO FOREIGN CURRENCIES

     Currency  futures  contracts  are  similar  to  forward  currency  exchange
contracts,   except  that  they  are  traded  on  exchanges   (and  have  margin
requirements)  and are  standardized as to contract size and delivery date. Most
currency  futures  contracts call for payment or delivery in U.S.  dollars.  The
underlying  instrument  of a currency  option may be a foreign  currency,  which
generally is purchased  or delivered in exchange for U.S.  dollars,  or may be a
futures contract. The purchaser of a currency call obtains the right to purchase
the underlying  currency,  and the purchaser of a currency put obtains the right
to sell the underlying currency.

     The uses and risks of  currency  options and futures are similar to options
and futures  relating to securities or indexes,  as discussed  above. A Fund may
purchase and sell currency  futures and may purchase and write currency  options
to increase or decrease its exposure to different foreign currencies. A Fund may
also purchase and write currency  options in conjunction with each other or with
currency futures or forward  contracts.  Currency futures and options values can
be expected to correlate with exchange rates,  but may not reflect other factors
that affect the value of a Fund's  investments.  A currency hedge,  for example,
should  protect a  yen-denominated  security from a decline in the yen, but will
not protect a Fund against a price decline  resulting from  deterioration in the
issuer's  creditworthiness.  Because  the value of a Fund's  foreign-denominated
investments  changes in response to many factors other than exchange  rates,  it
may not be possible  to match the amount of currency  options and futures to the
value of a Fund's investments exactly over time.

ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS

     Each Fund will comply with  guidelines  established  by the  Securities and
Exchange  Commission with respect to coverage of options and futures  strategies
by mutual funds,  and if the  guidelines  so require will set aside  appropriate
liquid  assets in a  segregated  custodial  account  in the  amount  prescribed.
Securities  held in a  segregated  account  cannot be sold while the  futures or
option  strategy is  outstanding,  unless they are replaced with other  suitable
assets.  As a  result,  there  is a  possibility  that  segregation  of a  large
percentage  of a Fund's  assets could impede  portfolio  management  or a Fund's
ability to meet redemption requests or other current obligations.

                                       9
<PAGE>


                             INVESTMENT RESTRICTIONS

     As indicated in the  Prospectus,  each Fund is subject to certain  policies
and  restrictions  which  are  "fundamental"  and  may  not be  changed  without
shareholder  approval.  Shareholder  approval  consists  of the  approval of the
lesser of (i) more than 50% of the outstanding  voting  securities of a Fund, or
(ii) 67% or more of the voting securities present at a meeting if the holders of
more than 50% of the  outstanding  voting  securities  of a Fund are  present or
represented  by proxy.  Limitations  1 through  8 below are  deemed  fundamental
limitations.  The  remaining  limitations  set forth  below  serve as  operating
policies  of each  Fund and may be  changed  by the Board of  Directors  without
shareholder approval.

     Each Fund may not:

     1. Purchase the  securities of any issuer if such purchase  would cause the
Fund to fail to meet the  requirements  of a  "diversified  company"  as defined
under the Investment Company Act of 1940, as amended (the "1940 Act").

     As  currently  defined  in the  1940  Act,  "diversified  company"  means a
management company which meets the following  requirements:  at least 75% of the
value of its  total  assets is  represented  by cash and cash  items  (including
receivables),  Government  securities,  securities of other investment companies
and other securities for the purposes of this calculation  limited in respect of
any one  issuer to an amount  not  greater  in value than 5% of the value of the
total assets of such management company and not more than 10% of the outstanding
voting securities of such issuer.

     2.  Purchase  the   securities  of  any  issuer  (other  than   "Government
securities" as defined under the 1940 Act) if, as a result, more than 25% of the
value  of the  Fund's  total  assets  would be  invested  in the  securities  of
companies whose principal business activities are in the same industry.

     For  purposes  of  applying  this  restriction,  a Fund  will not  purchase
securities,  as defined above,  such that 25% or more of the value of the Fund's
total  assets are  invested  in the  securities  of  companies  whose  principal
business activities are in the same industry.

     3. Issue any senior securities,  except as permitted by the 1940 Act or the
Rules and Regulations of the Securities and Exchange Commission.

     4. Borrow  money,  except from banks for  temporary or  emergency  purposes
provided that such  borrowings may not exceed 33-1/3% of the value of the Fund's
net assets (including the amount  borrowed).  Any borrowings that come to exceed
this  amount  will be reduced  within  three  days (not  including  Sundays  and
holidays) to the extent  necessary to comply with the 33-1/3%  limitation.  This
limitation  shall not  prohibit  the Fund from  engaging  in reverse  repurchase
agreements,  making  deposits  of assets to margin  or  guarantee  positions  in
futures,   options,  swaps  or  forward  contracts,  or  segregating  assets  in
connection with such agreements or contracts.

     To the extent the Fund engages in reverse  repurchase  agreements,  because
such transactions are considered  borrowing,  reverse repurchase  agreements are
included in the 33-1/3% limitation.

     5. Act as an  underwriter  of  securities of other  issuers,  except to the
extent that in connection with the disposition of portfolio  securities the Fund
may be deemed to be an underwriter under applicable laws.

     6. Purchase or sell real estate unless acquired as a result of ownership of
securities or other  instruments.  This  restriction  shall not prevent the Fund
from  investing  in  securities  or other  instruments  backed by real estate or
securities of companies engaged in the real estate business.

                                       10
<PAGE>


     7.  Purchase  or sell  commodities  other than  foreign  currencies  unless
acquired as a result of  ownership  of  securities.  This  limitation  shall not
prevent the Fund from purchasing or selling options,  futures, swaps and forward
contracts  or from  investing  in  securities  or other  instruments  backed  by
commodities.

     For purposes of applying this restriction, "commodities" shall be deemed to
include commodity contracts.

     8. Make loans to other persons except to the extent not  inconsistent  with
the 1940  Act or the  Rules  and  Regulations  of the  Securities  and  Exchange
Commission.  This  limitation  does not apply to purchases of commercial  paper,
debt  securities  or  repurchase  agreements,  or to the  lending  of  portfolio
securities.

     9.  Purchase  securities  on margin,  except  that the Fund may obtain such
short-term  credits as may be necessary  for the clearance of purchases or sales
of securities and provided that margin payments in connection with  transactions
in  options,  futures,  swaps  and  forward  contracts  shall  not be  deemed to
constitute purchasing securities on margin.

     10.  Sell  securities  short,  unless  it owns or has the  right to  obtain
securities  equivalent  in kind and amount to the  securities  sold  short,  and
provided that  transactions in options,  swaps and forward futures contracts are
not deemed to constitute selling securities short.

     For purposes of applying this restriction,  a Fund will not sell securities
short  except to the extent that it  contemporaneously  owns or has the right to
obtain, at no added cost, securities identical to those sold short.

     11.   Except  as  part  of  a  merger,   consolidation,   acquisition,   or
reorganization,  invest  more than 5% of the  value of its  total  assets in the
securities  of any one  investment  company or more than 10% of the value of its
total assets,  in the  aggregate,  in the  securities of two or more  investment
companies, or acquire more than 3% of the total outstanding voting securities of
any one investment company.

         12.  Mortgage,  pledge or  hypothecate  its assets except to the extent
necessary to secure  permitted  borrowings.  This  limitation  does not apply to
reverse  repurchase  agreements or in the case of assets  deposited to margin or
guarantee positions in futures, options, swaps or forward contracts or placed in
     a segregated account in connection with such contracts.

     13.  Participate  on a joint or a joint and several basis in any securities
trading account.

     14. Invest more than 15% of its net assets in illiquid investments.

     15. Invest directly in interests (including  partnership interests) in oil,
gas or other mineral  exploration or development leases or programs,  except the
Fund may purchase or sell securities issued by corporations engaging in oil, gas
or other mineral exploration or development business.

     Any of a Fund's investment  policies set forth under "Investment  Objective
and  Policies"  in the  Prospectus,  or any  restriction  set forth  above under
"Investment  Restrictions"  which involves a maximum percentage of securities or
assets (other than  Restriction 4) shall not be considered to be violated unless
an  excess  over the  percentage  occurs  immediately  after an  acquisition  of
securities  or  utilization  of assets and results  therefrom.  With  respect to
Restriction  14, a Fund is under a continuing  obligation to ensure that it does
not violate  the  maximum  percentage  either by  acquisition  or by virtue of a
decrease in the value of the Fund's liquid assets.

                                       11
<PAGE>
PORTFOLIO TURNOVER

     The  portfolio  turnover  rate is  calculated  by  dividing  the  lesser of
purchases or sales of portfolio securities for the particular fiscal year by the
monthly average of the value of portfolio  securities owned by a Fund during the
same fiscal year. "Portfolio securities" for purposes of this calculation do not
include securities with a maturity date of less than twelve (12) months from the
date of investment.  A 100% portfolio turnover rate would occur, for example, if
the lesser of the value of  purchases  or sales of  portfolio  securities  for a
particular  year  were  equal to the  average  monthly  value  of the  portfolio
securities  owned during such year. Each Fund's  historical  portfolio  turnover
rates are set forth in the Prospectus section "Financial Highlights".

                             INVESTMENT PERFORMANCE

     Advertisements  and  other  sales  literature  for each  Fund may  refer to
monthly,  quarterly,  yearly,  cumulative and average annual total return.  Each
such  calculation  assumes all  dividends  and capital  gain  distributions  are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus,  and includes all recurring fees, such as investment advisory
and management fees,  charged as expenses to all shareholder  accounts.  Each of
monthly,  quarterly  and yearly  total  return is computed in the same manner as
cumulative total return, as set forth below.

     Cumulative  total  return is  computed by finding  the  cumulative  rate of
return over the period  indicated  in the  advertisement  that would  equate the
initial  amount  invested  to the  ending  redeemable  value,  according  to the
following formula:

<TABLE>
<CAPTION>
                         <S>      <C>      <C>
                           
                          CTR      =            (ERV-P) 100
                                                 -----
                                                    P

         Where:            CTR      =       Cumulative total return;

                           ERV      =       ending redeemable value at the 
                                            end of the period of a hypothetical
                                            $1,000 payment made at the beginning 
                                            of such period; and

                           P        =       initial payment of $1,000
</TABLE>


     Average  annual  total  return is computed  by finding  the average  annual
compounded rates of return over the periods indicated in the advertisement  that
would  equate  the  initial  amount  invested  to the ending  redeemable  value,
according to the following formula:

<TABLE>
<CAPTION>
                           <S>       <C>    <C>

                           P(1+T)n   =      ERV

         Where:            P        =       a hypothetical initial payment
                                            of $1,000;

                           T        =       average annual total return;

                           n        =       number of years; and

                           ERV      =       ending redeemable value at the 
                                            end of the period of a hypothetical
                                            $1,000 payment made at the beginning 
                                            of such period.
</TABLE>

                                       12
<PAGE>


     The table below shows the yearly total return for the Funds for the periods
indicated:
<TABLE>
<CAPTION>
  <S>           <C>              <C>        <C>           <C>              <C>                  <C>           <C>          

                                                          Total Return
                --------------- ------------ ----------- ---------------- --------------------- ----------- --------------
                   Capital       Emerging
  Year Ended     Appreciation     Growth       Growth       Growth &             Midcap          Regional         Value
    12/31            Fund*        Fund**      Fund***      Income Fund      Growth Fund****        Fund           Fund
    -----       -    -----        ------      -------      -----------      ---------------        ----           ----

     1986             --            --           --           13.10%               --             24.60%          1.90%
     1987             --            --           --           15.50%               --              5.30%         14.10%
     1988             --            --           --            8.50%               --             18.60%         24.30%
     1989             --            --           --           29.80%               --             31.30%         22.60%
     1990             --            --           --           (6.70%)              --             (0.30%)       (11.50%)
     1991             --          23.60%         --           26.70%               --              35.40%        19.80%
     1992             --          22.40%         --            4.00%            15.00%              3.50%        11.90%
     1993             --          14.76%       0.99%           9.98%            22.85%              8.96%        22.08%
     1994             --           0.19%       0.66%          (4.77%)            5.65%              0.68%        (9.08%)
     1995             --          49.55%      23.17%          27.14%            26.09%             32.64%        24.39%
     1996             --           6.95%      15.35%          20.21%            16.58%             15.72%        21.87%
     1997           17.78%        (2.86%)     19.16%          23.92%             8.85%             18.86%        19.60%
- ---------------------------------------------------
*        Commenced operations on February 1, 1996
**       Commenced operations on August 5, 1991
***      Commenced operations on August 6, 1993
****     Commenced operations on April 10, 1992
</TABLE>

     The average annual total returns of Capital  Appreciation  Fund for the one
year period ended March 31, 1998 and from inception  through March 31, 1998 were
52.46% and 41.55%, respectively.

     The average  annual total  returns of Emerging  Growth Fund for the one and
five year periods ended March 31, 1998 and from inception through March 31, 1998
were 33.37%, 15.20% and 17.63%, respectively.

     The  average  annual  total  returns of Growth Fund for the one year period
ended March 31, 1998 and from  inception  through March 31, 1998 were 38.96% and
15.49%, respectively.

     The  average  annual  total  returns of Growth and Income Fund for the one,
five and ten year periods  ended March 31, 1998 were 40.06%,  66.71% and 14.37%,
respectively.

     The average annual total returns of Midcap Growth Fund for the one and five
year periods ended March 31, 1998 and from inception through March 31, 1998 were
22.21%, 16.34% and 16.87%, respectively.

     The average annual total returns of Regional Fund for the one, five and ten
year periods ended March 31, 1998 were 31.55%, 15.94% and 15.86%, respectively.

     The average  annual total  returns of Value Fund for the one,  five and ten
year periods ended March 31, 1998 were 34.21%, 15.03% and 13.27%, respectively.


     In advertising and sales literature,  each Fund may compare its performance
with that of other  mutual  funds,  indexes or averages of other  mutual  funds,
indexes of related financial assets or data, and other competing  investment and
deposit  products  available from or through other financial  institutions.  The
composition of these indices,  averages or products differs from that of a Fund.
The  comparison  of a Fund to an  alternative  investment  should  be made  with
consideration of differences in features and expected performance.

                                       13
<PAGE>

     The indexes and averages  noted below will be obtained  from the  indicated
sources or reporting services, which the Fund believes to be generally accurate.
Each Fund may also note its  mention in  newspapers,  magazines,  or other media
from time to time. However, such Fund assumes no responsibility for the accuracy
of such data.

     For example,  (1) a Fund's  performance or P/E ratio may be compared to any
one or a combination of the following: (i) the Standard & Poor's 500 Stock Index
and Dow Jones Industrial Average so that you may compare the Fund's results with
those of a group  of  unmanaged  securities  widely  regarded  by  investors  as
representative of the U.S. stock market in general;  (ii) other groups of mutual
funds,  including  the IAI Funds,  tracked by: (A) Lipper  Analytical  Services,
Inc.,  a widely  used  independent  research  firm which ranks  mutual  funds by
overall performance,  investment objectives, and assets; (B) Morningstar,  Inc.,
another widely used  independent  research firm which rates mutual funds; or (C)
other financial or business publications, which may include, but are not limited
to, Business Week,  Money Magazine,  Forbes and Barron's,  which provide similar
information;  (iii) the Value Line Index and the  Standard & Poor's Value Index;
(iv) the Callan Midcap Index, the Russell Midcap Index and the Standard & Poor's
Midcap Index;  (v) the Russell 2500 Index, the Russell 2000 Growth Index and the
Russell 1000 Growth Index;  (vi) the Standard & Poor's  Growth Index;  and (vii)
the performance of U.S.  government and corporate bonds, notes and bills; (viii)
IAI  Regional  Index,  an  unmanaged  index  of the  stocks  of the 300  largest
companies  (by  market  capitalization)  located in the Eight  State  Region (as
defined  in the  Prospectus).  (The  purpose  of these  comparisons  would be to
illustrate  historical  trends  in  different  market  sectors  so as  to  allow
potential  investors  to  compare  different  investment  strategies.);  (2) the
Consumer Price Index (measure for inflation) may be used to assess the real rate
of return from an  investment  in a Fund;  (3) other U.S. or foreign  government
statistics  such  as  GNP,  and net  import  and  export  figures  derived  from
governmental publications,  e.g., The Survey of Current Business, may be used to
illustrate  investment  attributes of a Fund or the general  economic  business,
investment, or financial environment in which such Fund operates; (4) the effect
of tax-deferred  compounding on a Fund's  investment  returns,  or on returns in
general, may be illustrated by graphs,  charts, etc. where such graphs or charts
would compare,  at various points in time, the return from an investment in such
Fund (or returns in general) on a tax-deferred  basis (assuming  reinvestment of
capital  gains and dividends and assuming one or more tax rates) with the return
on a taxable  basis;  and (5) the sectors or  industries in which a Fund invests
may be compared to relevant indices or surveys (e.g.,  S&P Industry  Surveys) in
order to evaluate a Fund's historical  performance or current or potential value
with respect to the particular industry or sector.

                                   MANAGEMENT

The names,  addresses,  positions and principal occupations of the directors and
executive officers of the Fund are given below.
<TABLE>
<CAPTION>
<S>                                      <C>    <C>                  <C>
Name and Address                         Age    Position             Principal Occupation(s) During Past 5 Years
- ----------------                         ---    --------             -------------------------------------------
Madeline Betsch                          55     Director             Currently   retired;   until  April  1994,  was
19 South 1st Street                                                  Executive  Vice  President,  Director of Client
Minneapolis, Minnesota 55401                                         Services,  of  CME-KHBB  Advertising  since May
                                                                     1985, and prior thereto was a Vice President
                                                                     with Campbell-Mithun, Inc. (advertising agency)
                                                                     since February 1977.

W. William Hodgson                       73     Director             Currently   retired;   served  as   information
1698 Dodd Road                                                       manager  for the North  Central  Home Office of
Mendota Heights, Minnesota 55118                                     the  Prudential  Insurance  Company  of America
                                                                     from 1961 until 1984.

George R. Long                           68     Director             Chairman   of   Mayfield    Corp.    (financial
29 Las Brisas Way                                                    consultants  and  venture   capitalists)  since
Naples, Florida 33963                                                1973.

                                       14
<PAGE>

Name and Address                         Age    Position             Principal Occupation(s) During Past 5 Years
- ----------------                         ---    --------             -------------------------------------------

J. Peter Thompson                        67     Director             Grain farmer in  southwestern  Minnesota  since
Route 1                                                              1974.   Prior  to  that,   Mr.   Thompson   was
Mountain Lake, Minnesota 56159                                       employed  by Paine  Webber,  Jackson  & Curtis,
                                                                     Incorporated, (a diversified financial services
                                                                     concern), most recently as Senior Vice President
                                                                     and General Partner.

Charles H. Withers                       71     Director             Currently retired;  was Editor of the Rochester
Rochester Post Bulletin                                              Post-Bulletin,  Rochester,  Minnesota from 1960
P.O. Box 6118                                                        through March 31, 1980.
Rochester, Minnesota 55903

David Koehler                            61     Vice President       Independent training and marketing consultant from
601 Second Avenue South                                              1993 to current.  Prior to that time, Mr. Koehler was
P.O. Box 357                                                         a partner at IAI Venture Capital Group.
Minneapolis, Minnesota 55402

Irving P. "Kip" Knelman                  50     President            Chief Executive Officer and Director of IAI.  Mr.
601 Second Avenue South                                              Knelman has served in various capacitis since joining
P.O. Box 357                                                         the firm in 1975.  Mr. Knelman is also President of the
Minneapolis, Minnesota 55402                                         other IAI Mutual Funds and of LifeUSA Funds, Inc.

William C. Joas                          35     Secretary            Vice  President  of IAI  and has  served  as an
601 Second Avenue South                                              attorney  for IAI since 1990.  Mr. Joas is also
P.O. Box 357                                                         Secretary  of the other IAI Mutual Funds and of
Minneapolis, Minnesota 55440                                         LifeUSA Funds, Inc.

Susan J. Haedt                           36     Treasurer            Vice  President  of IAI  and  Director  of Fund
601 Second Avenue South                                              Operations.  Prior to joining  the IAI in 1992,
P.O. Box 357                                                         Ms.  Haedt  served as a Senior  Manager at KPMG
Minneapolis, Minnesota 55440                                         Peat  Marwick  LLP,  (an   international   tax,
                                                                     accounting and consulting  firm).  Ms. Haedt is
                                                                     also  Treasurer  of the other IAI Mutual  Funds
                                                                     and of LifeUSA Funds, Inc.
</TABLE>


     Each Fund has  agreed to  reduced  initial  subscription  requirements  for
employees  and  directors  of the  Fund  or IAI,  their  spouses,  children  and
grandchildren.  With respect to such persons,  the minimum initial investment in
one or more of the IAI Family of Funds is $500; provided that the minimum amount
that can be allocated to any one of the Funds is $250. Subsequent  subscriptions
are limited to a minimum of $100 for each of the Funds.

     No compensation is paid by a Fund to any of its officers.  As of January 1,
1997,  directors  who are not  affiliated  with IAI receive  from the IAI Mutual
Funds a $15,000 annual retainer,  $2,500 for each Board meeting attended, $3,600
for each Audit  Committee  meeting  attended (as applicable) and $1,800 for each
Securities Valuation Committee meeting attended (as applicable).  Each Fund will
pay,  on a  quarterly  basis,  its pro rata share of these fees based on its net
assets.  Such  unaffiliated  directors  also are  reimbursed  by the  Funds  for
expenses  incurred in connection  with attending  meetings.  Effective  February
1998,  the  directors  have agreed that the position of Board Chair shall rotate
from  director  to director  on a  quarterly  basis.  Set forth below is further
information concerning compensation paid to Fund directors.

                                       15
<PAGE>
<TABLE>
<CAPTION>
    <S>                              <C>             <C>        <C>         <C>       <C>          <C>         <C>

                                               Director Compensation for the Fiscal Year Ended March 31, 1998

                                     ---------------------------------------------------------------------------------
                                                                             Growth
                                        Capital       Emerging                and       Midcap
                                      Appreciation     Growth      Growth    Income     Growth     Regional     Value
     Name of Person, Position             Fund          Fund        Fund       Fund      Fund        Fund       Fund
     ------------------------             ----          ----        ----       ----      ----        ----       ----

Betsch, Madeline - Director             $ 1,043      $  6,115      $ 312    $ 1,740    $ 1,891     $ 12,276    $ 649

Hodgson, W. William - Director          $ 1,043      $  6,115      $ 312    $ 1,740    $ 1,891     $ 12,276    $ 649

Long, George R. - Director              $ 1,070      $  6,516      $ 308    $ 1,849    $ 2,013     $ 12,211    $ 653

Thompson, J. Peter - Director           $ 1,043      $  6,115      $ 312    $ 1,740    $ 1,891     $ 12,276    $ 649

Withers, Charles W. -Director           $ 1,070      $  6,516      $ 308    $ 1,849    $ 2,013     $ 12,211    $ 653
</TABLE>

<TABLE>
<CAPTION>
         <S>                                                        <C>


                                                                   Aggregate Compensation
                                                                          from the
         Name of Person, Position                                      IAI Mutual Funds*
         ------------------------                                   -------------------

         Betsch, Madeline  -  Director                                     $37,200

         Hodgson, W. William  - Director                                   $37,200

         Long, George R.  -  Director                                      $37,200

         Thompson, J. Peter  -  Director                                   $37,200

         Withers, Charles H.  -  Director                                  $37,200
         -------------------------
         * From all  Funds  for the  calendar  year  ended  December  31,  1997;
excludes expenses incurred in connection with attending meetings.
</TABLE>


     The Board of Directors for each of the Funds has approved a Code of Ethics.
The Code permits  access persons to engage in personal  securities  transactions
subject to  certain  policies  and  procedures.  Such  procedures  prohibit  the
acquiring of any  securities in an initial  public  offering.  In addition,  all
securities  acquired through private  placement must be pre-cleared.  Procedures
have been  adopted  which  implement  blackout  periods for  certain  securities
transactions,  as  well  as a ban  on  short-term  trading  profits.  Additional
policies  prohibit the receipt of gifts in certain  instances.  Procedures  have
been implemented to monitor employee trading.  Access persons of the Adviser are
required  to certify  annually  that they have read and  understood  the Code of
Ethics.  An  annual  report  is  provided  to  the  Funds'  Board  of  Directors
summarizing   existing   procedures,   identifying   material   violations   and
recommending any changes needed.

     IAI's ultimate  corporate  parent is Lloyds TSB Group plc ("Lloyds TSB"), a
publicly-held financial services organization  headquartered in London, England.
Lloyds TSB is one of the  largest  personal  and  corporate  financial  services
groups in the United  Kingdom,  engaged in a wide range of activities  including
commercial and retail banking.  The principal  offices of Lloyds TSB are located
at St. George's House, 6 - 8 Eastcheap, London, EC3M 1LL.

                                       16
<PAGE>

   
     On July 14,  1998,  David S. Lo and  Lih-Lih C. Lo filed a lawsuit  against
Investment  Advisers,  Inc. and IAI Investment Funds VIII, Inc. in United States
District Court for the Southern District of California, alleging various actions
related to a pricing  issue in the IAI Value  Fund.  At this time,  IAI does not
believe  that such  litigation  will have a material  impact on IAI or IAI Value
Fund.

    

HISTORY

     Capital  Appreciation Fund is a separate  portfolio of IAI Investment Funds
VI, Inc.,  a Minnesota  corporation  whose shares of common stock are  currently
issued in seven series (Series A through G). On June 25, 1993, the corporation's
shareholders  approved  amended and restated  Articles of  Incorporation,  which
provided that the registered  investment  company whose  corporate name had been
IAI Series Fund,  Inc., be renamed IAI Investment  Funds VI, Inc. The investment
portfolio  represented  by Series G common shares is referred to as "IAI Capital
Appreciation Fund."

     Emerging  Growth Fund is a separate  portfolio of IAI Investment  Funds VI,
Inc., a Minnesota  corporation whose shares of common stock are currently issued
in seven series (Series A through G). On June 25, 1993, the Fund's  shareholders
approved amended and restated Articles of Incorporation, which provided that the
registered  investment  company whose  corporate  name had been IAI Series Fund,
Inc.  be  renamed  IAI  Investment  Funds  VI,  Inc.  The  investment  portfolio
represented  by Series A common  shares is referred to as "IAI  Emerging  Growth
Fund."

     Growth and Income Fund is a separate portfolio of IAI Investment Funds VII,
Inc., a Minnesota  corporation whose shares of common stock are currently issued
in one series  (Series A). On June 25, 1993,  the Fund's  shareholders  approved
amended  and  restated  Articles  of  Incorporation,  which  provided  that  the
registered  investment  company  whose  corporate  name has been IAI Stock Fund,
Inc.,  be renamed  IAI  Investment  Funds VII,  Inc.  The  investment  portfolio
represented  by Series A common  shares is referred to as "IAI Growth and Income
Fund",  which name better  reflects the investment  objectives of the investment
portfolio.

     Midcap  Growth Fund is a separate  portfolio  of IAI  Investment  Funds VI,
Inc., a Minnesota  corporation whose shares of common stock are currently issued
in seven series (Series A through G). On June 25, 1993, the Fund's  shareholders
approved amended and restated Articles of Incorporation, which provided that the
registered  investment  company whose  corporate  name had been IAI Series Fund,
Inc.,  be  renamed  IAI  Investment  Funds VI,  Inc.  The  investment  portfolio
represented  by Series C common  shares is  referred  to as "IAI  Midcap  Growth
Fund."

     Regional Fund is a separate  portfolio of IAI Investment  Funds IV, Inc., a
Minnesota  corporation  whose shares of common stock are currently issued in one
series (Series A). On June 28, 1993, the Fund's  shareholders  approved  amended
and restated  Articles of  Incorporation,  which  provided  that the  registered
investment  company whose  corporate name had been IAI Regional  Fund,  Inc., be
renamed IAI Investment  Funds IV, Inc. The investment  portfolio  represented by
Series A common shares is referred to as "IAI Regional Fund."

     Value Fund is a separate  portfolio of IAI Investment  Funds VIII,  Inc., a
Minnesota  corporation  whose shares of common stock are currently issued in one
series (Series A). On June 25, 1993, the Fund's  shareholders  approved  amended
and restated  Articles of  Incorporation,  which  provided  that the  registered
investment  company  whose  corporate  name had been IAI Value  Fund,  Inc.,  be
renamed IAI Investment Funds VIII, Inc. The investment portfolio  represented by
Series A common shares is referred to as "IAI Value Fund."


MANAGEMENT AGREEMENT

     Effective April 1, 1996 (February 1, 1996 for Capital  Appreciation  Fund),
each  Fund  entered  into a new  written  agreement  with IAI  (the  "Management
Agreement").  Pursuant to the Management  Agreement dated April 1, 1996 and last
approved  by the  Board on  November  4,  1997,  IAI  provides  each  Fund  with
investment advice,  statistical and research  facilities,  and certain equipment
and services,  including,  but not limited to, office space and necessary office
facilities, equipment, and the services of required personnel and, in connection
therewith,  IAI has the sole  authority and  responsibility  to make and execute
investment  decisions for a Fund within the framework of such Fund's  investment
policies,  subject to review by the directors of the Funds. In addition, IAI has
agreed to provide or arrange for the  provision of all required  administrative,
stock transfer,  redemption,  dividend disbursing,  accounting,  and shareholder
services including,  without limitation, the following: (1) the maintenance of a
Fund's accounts,  books and records; (2) the calculations of the daily net asset
value in accordance with a Fund's current Prospectus and Statement of Additional

                                       17
<PAGE>

Information;  (3) daily and periodic reports;  (4) all information  necessary to
complete tax returns,  questionnaires and other reports requested by a Fund; (5)
the  maintenance  of stock  registry  records;  (6) the  processing of requested
account  registration  changes,   stock  certificate  issuances  and  redemption
requests;  (7) the  administration  of payments and dividends and  distributions
declared by a Fund; (8) answering shareholder  questions;  (9) providing reports
and other information;  and (10) other services designed to maintain shareholder
accounts. IAI may also pay qualifying broker-dealers, financial institutions and
other  entities that provide such services.  In return for such  services,  each
Fund has agreed to pay IAI an annual fee as a percentage of such Fund's  average
daily net assets as set forth below:
<TABLE>
<CAPTION>
                           <S>                               <C>

                                             CAPITAL APPRECIATION FUND
                                             -------------------------

                           Daily Net Assets                   Fee IAI Receives Annually
                           ----------------                   -------------------------

                           For the first $250 million                      1.40%
                           For the next $250 million                       1.35%
                           Above $500 million                              1.30%


                                      GROWTH FUND AND GROWTH AND INCOME FUND
                                      --------------------------------------

                           Daily Net Assets                   Fee IAI Receives Annually
                           ----------------                   -------------------------

                           For the first $100 million                      1.25%
                           For the next $150 million                       1.15%
                           For the next $250 million                       1.05%
                           Above $500 million                              1.00%


                        EMERGING GROWTH FUND, MIDCAP GROWTH FUND, VALUE FUND, REGIONAL FUND
                        -------------------------------------------------------------------

                           Daily Net Assets                   Fee IAI Receives Annually
                           ----------------                   -------------------------

                           For the first $250 million                      1.25%
                           For the next $250 million                       1.20%
                           Above $500 million                              1.10%
</TABLE>


     Under the Management Agreement,  except for brokerage commissions and other
expenditures in connection  with the purchase and sale of portfolio  securities,
interest  expense,  and,  subject to the specific  approval of a majority of the
disinterested  directors of a Fund, taxes and  extraordinary  expenses,  IAI has
agreed to pay all of a Fund's other costs and expenses,  including, for example,
costs  incurred  in the  purchase  and sale of  assets,  taxes,  charges  of the
custodian of a Fund's  assets,  costs of reports and proxy material sent to Fund
shareholders,  fees paid for independent accounting and legal services, costs of
printing  Prospectuses  for Fund  shareholders  and registering a Fund's shares,
postage, insurance premiums, and costs of attending investment conferences.  The
Management  Agreement further provides that IAI will either reimburse a Fund for
the fees and expenses it pays to directors who are not  "interested  persons" of
such Fund or reduce its fee by an equivalent  amount.  IAI is not liable for any
loss  suffered  by a Fund in the  absence of willful  misfeasance,  bad faith or
negligence in the performance of its duties and obligations.

     IAI has also  voluntarily  undertaken  to pay all expenses of promoting the
sale of Fund shares and may make  payments to  selected  broker-dealer  firms or
institutions  which were  instrumental in the  acquisition of Fund  shareholders
and/or which perform services for shareholder accounts.

                                       18
<PAGE>


     The following table contains relevant information concerning fees each Fund
paid under the Management Agreement for the fiscal year ended March 31.

<TABLE>
<CAPTION>
          <S>                        <C>                  <C>
          FUND                       NET ASSETS           MANAGEMENT FEE           WAIVER*
          ----                       ----------           --------------           -------

          Capital Appreciation
            1998                     $   65,954,745       $    882,553             $   7,120
            1997                     $   44,230,390       $    457,148             $  58,119**

          Emerging Growth
            1998                     $ 161,911,963        $ 4,225,381              $  39,273
            1997                     $ 387,105,076        $ 7,838,052              $  57,662

          Growth
            1998                     $   14,774,513       $    168,988             $    1,573
            1997                     $   11,746,813       $    198,592             $    1,400

          Growth and Income
            1998                     $   96,754,089       $ 1,272,892              $   11,790
            1997                     $   90,740,615       $ 1,095,339              $    7,506

          Midcap Growth
            1998                     $   82,604,831       $ 1,327,988              $  12,508
            1997                     $ 128,258,989        $ 1,731,272              $  12,079

          Regional
            1998                     $ 509,555,953        $ 6,500,728              $  62,115
            1997                     $ 498,178,473        $ 6,841,491              $  48,381

          Value
            1998                     $   26,739,125       $    353,321             $    3,301
            1997                     $   29,438,781       $    463,302             $    3,220
          --------------------------
         *    Resulting  from IAI's  reduction of its  Management  Fee in the
               amount  representing each Fund's pro rata payment of director's
               fees and expenses.
         **   Reflects  $3,278 in director's  fees and expenses  waiver
               and $54,841 in voluntary waived management fees.
</TABLE>

     For the fiscal period from February 1, 1996  (commencement  of  operations)
through  March 31,  1996,  Capital  Appreciation  Fund paid IAI $6,898 under the
Management  Agreement and IAI waived $828  pursuant to the fee waiver  mentioned
above.

PRIOR AGREEMENTS

     Effective   March  31,  1996,   the  Investment   Advisory   Agreement  and
Administrative Agreement between each Fund (excluding Capital Appreciation Fund,
which  commenced  operations  February  1,  1996)  and IAI were  terminated  and
replaced by the Management  Agreement  described above. The services provided by
IAI under each of these agreements are substantially  similar in nature as those
provided under the new Management Agreement.

                                       18
<PAGE>

     Under the Investment  Advisory  Agreements,  Emerging  Growth Fund,  Midcap
Growth Fund,  Regional Fund, and Value Fund each paid IAI a monthly advisory fee
calculated  at an annual  rate of .75% of the  first  $200  million  of a Fund's
average month-end net assets,  .70% for the next $300,000,000 in net assets, and
 .65% for net assets above  $500,000,000.  Growth Fund and Growth and Income Fund
had agreed to pay IAI a monthly  advisory  fee  calculated  at an annual rate of
 .75% of the first $100  million in average  daily net assets,  .65% for the next
$100,000,000 in net assets, and .55% for net assets above $200,000,000.

     Advisory  fees were paid by each Fund for the fiscal  years (or periods) as
follows:

<TABLE>
<CAPTION>
           <S>                                  <C>

                                               Fiscal Year Ended March 31, 1996
                                          --------------------------------------
           Fund                                           
           ----                                     
           Emerging Growth Fund                       $ 3,570,424
           Growth Fund                                $   154,947*
           Growth and Income Fund                     $   667,378
           Midcap Growth Fund                         $   774,726
           Regional Fund                              $ 3,945,330
           Value Fund                                 $   316,540
           -----------------------------
         * Pursuant  to  the  expense  limit  discussed   below,  IAI
           reimbursed $1,108 in advisory fees to Growth Fund.
</TABLE>

     Each Fund's  monthly  payment of the advisory fee was  suspended or reduced
(and  reimbursement  made by IAI, if necessary) when it appeared that the amount
of expenses  would exceed such Fund's  applicable  expense  limit (and after the
monthly payment of the  distribution fee has been reduced to zero), as set forth
below.

ALLOCATION OF EXPENSES

     Prior to the termination of the Advisory and  Administrative  Agreements on
March 31, 1996 (with the  exception of Capital  Appreciation  Fund) as discussed
above, each Fund paid all its other costs and expenses,  including, for example,
costs incurred in the purchase and sale of assets,  interest,  taxes, charges of
the custodian of a Fund's  assets,  costs of reports and proxy  material sent to
Fund  shareholders,  fees paid for  independent  accounting and legal  services,
costs of printing  Prospectuses  for Fund  shareholders and registering a Fund's
shares,  postage,  fees to directors who are not "interested persons" of a Fund,
distribution  expenses  pursuant  to  the  Fund's  Rule  12b-1  plan,  insurance
premiums,  costs of attending investment  conferences and such other costs which
may be designated as extraordinary.  Under the prior agreements,  IAI reimbursed
each Fund for expenses (other than brokerage  commissions and other expenditures
in  connection  with the  purchase and sale of  portfolio  securities,  interest
expense,   and,  subject  to  the  specific   approval  of  a  majority  of  the
disinterested  directors  of a Fund,  taxes and  extraordinary  expenses)  which
exceeded  1.25%  per year of the  average  month-end  net  assets of a Fund (the
"expense  limit").  Certain state securities  commissions may impose  additional
limitations  on certain of a Fund's  expenses,  and IAI may be  required by such
state  commissions to reimburse a Fund for expenses in excess of any limitations
as a  requirement  to selling  shares of such Fund in those  states.  IAI is not
liable for any loss  suffered by a Fund in the  absence of willful  misfeasance,
bad faith, or negligence in the performance of its duties and obligations.

                                       20
<PAGE>

DURATION OF AGREEMENTS

     Each Management Agreement will terminate  automatically in the event of its
assignment.  In  addition,  each  Agreement  is  terminable  at any time without
penalty by the Board of Directors of a Fund or by vote of a majority of a Fund's
outstanding  voting  securities on not more than 60 days' written notice to IAI,
and by IAI on 60 days' notice to a Fund. Each Agreement shall continue in effect
from year to year only so long as such  continuance is specifically  approved at
least  annually  by  either  the  Board of  Directors  of a Fund or by vote of a
majority of the  outstanding  voting  securities,  provided that in either event
such continuance is also approved by the vote of a majority of directors who are
not parties to the  Agreement  or  interested  persons of such  parties  cast in
person at a meeting called for the purpose of voting on such approval.

                                CUSTODIAL SERVICE

     The custodian for the Funds is Norwest Bank Minnesota, N.A. Norwest Center,
Sixth  and  Marquette,  Minneapolis,  MN  55479.  Norwest  has  entered  into an
agreement with Morgan Stanley Trust Company, 1 Pierrepont Plaza,  Brooklyn,  New
York ("Morgan  Stanley") which enables the Funds to utilize the subcustodian and
depository network of Morgan Stanley.

               PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE

     In effecting portfolio transactions on behalf of a Fund, IAI seeks the most
favorable net price consistent with the best execution.  Generally,  a Fund must
deal with brokers.  IAI selects and (where  applicable)  negotiates  commissions
with the  brokers  who  execute  the  transactions  for such Fund.  The  primary
criteria  for the  selection  of a broker is the ability of the  broker,  in the
opinion of IAI, to secure  prompt  execution  of the  transactions  on favorable
terms,  including the reasonableness of the commission and considering the state
of the market at the time. In selecting a broker,  IAI may consider whether such
broker  provides  brokerage and research  services (as defined in the Securities
Exchange Act of 1934).  IAI may direct Fund  transactions to brokers who furnish
research services to IAI. Such research  services include advice,  both directly
and in writing, as to the value of securities, the advisability of investing in,
purchasing  or  selling  securities,  and  the  availability  of  securities  or
purchasers or sellers of securities,  as well as analyses and reports concerning
issues, industries, securities, economic factors and trends, portfolio strategy,
and the performance of accounts.  By allocating  brokerage  business in order to
obtain  research  services  for IAI, a Fund  enables IAI to  supplement  its own
investment   research  activities  and  allows  IAI  to  obtain  the  views  and
information of  individuals  and research  staffs of many  different  securities
research  firms prior to making  investment  decisions for a Fund. To the extent
such commissions are directed to brokers who furnish  research  services to IAI,
IAI receives a benefit,  not capable of  evaluation in dollar  amounts,  without
providing  any  direct  monetary  benefit  to a  Fund  from  these  commissions.
Generally a Fund pays higher than the lowest commission rates available.

     IAI believes that most research  services  obtained by it generally benefit
one or more of the  investment  companies  or other  accounts  which it manages.
Normally research services obtained through commissions paid by the managed fund
investing in common stocks and managed accounts investing in common stocks would
primarily benefit the fund and accounts.

     There is no formula  for the  allocation  by IAI of each  Fund's  brokerage
business to any broker-dealers for brokerage and research services. However, IAI
will  authorize a Fund to pay an amount of commission for effecting a securities
transaction  in excess of the amount of  commission  another  broker  would have
charged only if IAI  determines  in good faith that such amount of commission is
reasonable  in  relation to the value of the  brokerage  and  research  services
provided by such broker viewed in terms of either that particular transaction or
IAI's  overall  responsibilities  with  respect to the  accounts  as to which it
exercises investment discretion.

                                       21
<PAGE>
     Although investment  decisions for a Fund are made independently from other
accounts as to which IAI gives investment  advice,  it may occasionally  develop
that the same  security is suitable for more than one account.  If and when more
than  one  account  simultaneously  purchase  or sell  the  same  security,  the
transactions  will be  averaged  as to  price  and  allocated  as to  amount  in
accordance  with  arrangements  equitable  to each Fund and such  accounts.  The
simultaneous  purchase  or sale  of the  same  securities  by a Fund  and  other
accounts may have  detrimental  effects on a Fund,  as they may affect the price
paid or received by a Fund or the size of the position obtainable by a Fund.

     Consistent  with the  Rules  of  Conduct  of the  National  Association  of
Securities Dealers,  Inc. and subject to the policies set forth in the preceding
paragraphs  and such other  policies as the Board of  Directors  of the Fund may
determine,  IAI may consider  sales of shares of a Fund, or any other IAI Mutual
Fund,  as a factor in the  selection  of  broker-dealers  to execute  the Fund's
securities transactions.

     Brokerage commissions,  listed below, were paid by each Fund for the fiscal
years (or  periods)  ended March 31.  During  these  periods,  a  percentage  of
commissions were paid to brokerage firms that provided research services to IAI,
although the  provision of such  services  was not  necessarily  a factor in the
placement of all such business with such firms.

<TABLE>
<CAPTION>
<S>                        <C>             <C>             <C>                <C>
                                                                                  Percentage of
                                                                              Commissions to Brokers
    Fund                                     Amount of Commissions             Providing Research
    ----                                     ---------------------              ------------------
                                1998            1997            1996               1998
                                ----            ----            ----               ----

Capital Appreciation       $ 103,401       $    450,843     $     12,833           1.23%      
Emerging Growth            $ 317,576       $  1,475,305     $    213,296           0.85%    
Growth                     $  27,921       $     71,142     $     63,748           1.55%  
Growth and Income          $  95,401       $    131,490     $    279,469           0.42%    
Midcap Growth              $ 362,190       $    361,584     $    108,321           0.36%   
Regional                   $ 647,569       $  1,684,845     $  1,116,117           2.02%   
Value                      $  36,320       $    195,811     $    107,946           5.32%  
</TABLE>

                                  CAPITAL STOCK

CAPITAL APPRECIATION FUND

     IAI Capital  Appreciation  Fund is a separate  portfolio of IAI  Investment
Funds VI,  Inc.,  a  Minnesota  corporation  whose  shares  of common  stock are
currently issued in seven series (Series A through G). Each share of a series is
entitled to  participate  pro rata in any dividends and other  distributions  of
such  series  and all  shares  of a series  have  equal  rights  in the event of
liquidation of that series.  The Board of Directors of IAI Investment  Funds VI,
Inc. is empowered under the Articles of  Incorporation  of such company to issue
other series of the company's  common stock without  shareholder  approval.  IAI
Investment  Funds VI, Inc.,  has  authorized  10,000,000,000  shares of $.01 par
value  common  stock to be  issued  as Series G common  shares.  The  investment
portfolio  represented by such shares is referred to as IAI Capital Appreciation
Fund.  As of March 31, 1998,  Capital  Appreciation  Fund had  3,671,893  shares
outstanding.

                                       22
<PAGE>

     As of June 30,  1998,  no person  held of record  or, to the  knowledge  of
Capital  Appreciation  Fund  beneficially  owned more than 5% of the outstanding
shares of Capital Appreciation Fund, except as set forth in the following table:
<TABLE>
<CAPTION>
<S>                                        <C>                      <C>
- -----------------------------------------------------------------------------------
 Name and Address                            Number of              Percent of
  of Shareholder                              Shares                  Class
- ------------------------------------------------------------------------------------

Charles Schwab & Co. Inc.                   823,115.703               21.41%
SPL Custody A/C for Excl Benefit of Cust.
Attn: Mutual Funds Dept-Cap App Reim
101 Montgomery Street
San Francisco, CA 94104

Marquette Trust Company as TTEE             207,725.645                5.40%
fbo Investment Advisers, Inc.
Profit Sharing & Pension Plan
PO Box 1000
Minneapolis, MN 55480-1000
</TABLE>

     In addition,  as of July 1, 1998, Capital  Appreciation Fund's officers and
directors  as a  group  owned  less  than  1%  of  Capital  Appreciation  Fund's
outstanding shares.

EMERGING GROWTH FUND

     IAI Emerging  Growth Fund is a separate  portfolio of IAI Investment  Funds
VI, Inc.,  a Minnesota  corporation  whose shares of common stock are  currently
issued in seven series  (Series A through G). Each share of a series is entitled
to participate pro rata in any dividends and other  distributions of such series
and all shares of a series have equal rights in the event of liquidation of that
series.  The Board of Directors of IAI  Investment  Funds VI, Inc., is empowered
under the Articles of Incorporation of such company to issue other series of the
company's common stock without  shareholder  approval.  IAI Investment Funds VI,
Inc., has authorized  10,000,000,000 shares of $.01 par value common stock to be
issued as Series A common shares, the investment  portfolio  represented by such
shares is  referred  to as IAI  Emerging  Growth  Fund.  As of March  31,  1998,
Emerging Growth Fund had 8,942,643 shares outstanding.

     As of June 30,  1998,  no person  held of record  or, to the  knowledge  of
Emerging Growth Fund beneficially  owned more than 5% of the outstanding  shares
of Emerging Growth Fund, except as set forth in the following table:

<TABLE>
<CAPTION>
<S>                                         <C>                        <C>
- -----------------------------------------------------------------------------------
 Name and Address                            Number of                  Percent of
  of Shareholder                               Shares                      Class
- -----------------------------------------------------------------------------------

Perkin-Elmer Master Trust                   1,059,081.727                  12.56%
State Street Bank & Trust Co TTEE  
PO Box 1992
Boston, MA 02105-1992

Corestate Bank MA                           1,045,390.509                  12.40%
fbo DSC Communications
PO Box 7829
Philadelphia, PA 19101

US Bank MA Custodian                          635,206.000                   7.54%
fbo Polaris Industries LP 401(k)
Retirement Plan AC 31201353
PO Box 64010
St. Paul, MN 55164-0010

Mid-South Transportation Mgmt.                608,275.440                   7.22%
Retirement Plan
Attn:  Mrs. Rosa Mahler
1370 Levee Road
Memphis, TN 38108

Charles Schwab & Co. Inc.                     734,558.402                   8.71%
SPL Custody A/C for Exc. Bnft of Cust.
Attn:  Mutual Funds Dept. - EMG Reim
101 Montgomery St
San Francisco, CA 94104
 </TABLE>


                                       23
<PAGE>



     In  addition,  as of July 1, 1998,  Emerging  Growth  Fund's  officers  and
directors as a group owned less than 1% of Emerging  Growth  Fund's  outstanding
shares.

GROWTH FUND

     IAI Growth Fund is a separate portfolio of IAI Investment Funds II, Inc., a
Minnesota  corporation  whose shares of common stock are currently issued in one
series (Series A). Each share of a series is entitled to participate pro rata in
any dividends and other  distributions of such series and all shares of a series
have  equal  rights in the event of  liquidation  of that  series.  The Board of
Directors of IAI Investment  Funds II, Inc., is empowered  under the Articles of
Incorporation  of such  company to issue other  series of the  company's  common
stock  without  shareholder  approval.   IAI  Investment  Funds  II,  Inc.,  has
authorized  10,000,000,000 shares of $.01 par value common stock to be issued as
Series A common shares. The investment  portfolio  represented by such shares is
referred to as IAI Growth  Fund.  As of March 31, 1998,  the Fund had  1,213,638
shares outstanding.

     As of June 30,  1998,  no person  held of record  or, to the  knowledge  of
Growth Fund, beneficially owned more than 5% of the outstanding shares of Growth
Fund, except as set forth in the following table:

<TABLE>
<CAPTION>
<S>                                          <C>                        <C>
- ------------------------------------------------------------------------------------
 Name and Address                            Number of                  Percent of
  of Shareholder                               Shares                      Class
- ------------------------------------------------------------------------------------

Resources Trust Co.                         146,068.249                     10.51%
fbo Customers of Ian
8051 E. Maplewood 
Englewood, CO 80111 
</TABLE>

     In addition,  as of July 1, 1998, Growth Fund's officers and directors as a
group owned less than 1% of Growth Fund's outstanding shares.


GROWTH AND INCOME FUND

     IAI Growth and Income Fund is a separate  portfolio of IAI Investment Funds
VII,  Inc., a Minnesota  corporation  whose shares of common stock are currently
issued  in one  series  (Series  A).  Each  share of a  series  is  entitled  to
participate pro rata in any dividends and other distributions of such series and
all shares of a series  have equal  rights in the event of  liquidation  of that
series.  The Board of Directors of IAI Investment  Funds VII, Inc., is empowered
under the Articles of Incorporation of such company to issue other series of the
company's common stock without shareholder  approval.  IAI Investment Funds VII,
Inc., has authorized  10,000,000,000 shares of $.10 par value common stock to be
issued as Series A common shares. The investment  portfolio  represented by such
shares is referred to as IAI Growth and Income Fund.  As of March 31, 1998,  the
Fund had 4,905,292 shares outstanding.

                                       24
<PAGE>

     As of June 30,  1998,  no person  held of record  or, to the  knowledge  of
Growth  and Income  Fund,  beneficially  owned  more than 5% of the  outstanding
shares of Growth and Income Fund, except as set forth in the following table:

<TABLE>
<CAPTION>
<S>                                 <C>                               <C>
- -----------------------------------------------------------------------------------
 Name and Address                   Number of                          Percent of
  of Shareholder                     Shares                              Class
- -----------------------------------------------------------------------------------

Minneapolis Local 386 Acct #A        282,058.952                         5.50%
Drywall Finishing Industry PNS FD
Attn:  Al Gibney
312 Central Ave, Ste 346
Minneapolis, MN 55414
</TABLE>


     In  addition,  as of July 1, 1998,  Growth and Income  Fund's  officers and
directors as a group owned approximately  180,763 shares,  representing 3.53% of
Growth and Income Fund's outstanding shares.

MIDCAP GROWTH FUND

     IAI Midcap Growth Fund is a separate  portfolio of IAI Investment Funds VI,
Inc., a Minnesota  corporation whose shares of common stock are currently issued
in seven  series  (Series A through  G).  Each share of a series is  entitled to
participate pro rata in any dividends and other distributions of such series and
all shares of a series  have equal  rights in the event of  liquidation  of that
series.  The Board of Directors of IAI  Investment  Funds VI, Inc., is empowered
under the Articles of Incorporation of such company to issue other series of the
company's common stock without  shareholder  approval.  IAI Investment Funds VI,
Inc., has authorized  10,000,000,000 shares of $.01 par value common stock to be
issued as Series C common shares, the investment  portfolio  represented by such
shares is referred to as IAI Midcap  Growth Fund.  As of March 31, 1998,  Midcap
Growth Fund had 5,190,944 shares outstanding.

     As of June 30,  1998,  no person  held of record  or, to the  knowledge  of
Midcap Growth Fund beneficially  owned more than 5% of the outstanding shares of
Midcap Growth Fund, except as set forth in the following table:

<TABLE>
<CAPTION>
<S>                                         <C>                       <C>
- -----------------------------------------------------------------------------------
Name and Address                               Number of              Percent of
  of Shareholder                                Shares                  Class
- ----------------------------------------------------------------------------------

Charles Schwab & Co., Inc.                    577,261.437               13.52%
SPL Custody A/C for Exc, Bnft of Cust.
Attn:  Mutual Funds Department - MCP Reim.
101 Montgomery Street
San Francisco, CA 94104
</TABLE>


     In addition, as of July 1, 1998 Midcap Growth Fund's officers and directors
as a group owned less than 1% of Midcap Growth Fund's outstanding shares.

                                       25
<PAGE>

REGIONAL FUND

     IAI Regional Fund is a separate portfolio of IAI Investment Funds IV, Inc.,
a Minnesota corporation whose shares of common stock are currently issued in one
series (Series A). Each share of a series is entitled to participate pro rata in
any dividends and other  distributions of such series and all shares of a series
have  equal  rights in the event of  liquidation  of that  series.  The Board of
Directors of IAI Investment  Funds IV, Inc., is empowered  under the Articles of
Incorporation  of such  company to issue other  series of the  company's  common
stock  without  shareholder  approval.   IAI  Investment  Funds  IV,  Inc.,  has
authorized  10,000,000,000 shares of $.01 par value common stock to be issued as
Series A common shares. The investment  portfolio  represented by such shares is
referred  to as IAI  Regional  Fund.  As of March 31,  1998,  Regional  Fund had
19,334,434 shares outstanding.

     As of June 30,  1998,  no person  held of record  or, to the  knowledge  of
Regional  Fund,  beneficially  owned more than 5% of the  outstanding  shares of
Regional Fund, except as set forth in the following table:

<TABLE>
<CAPTION>
<S>                                       <C>                           <C>
- -------------------------------------------------------------------------------------
 Name and Address                         Number of                     Percent of
  of Shareholder                            Shares                        Class
- -------------------------------------------------------------------------------------

Charles Schwab & Co., Inc.                 1,642,068.147                    8.11%
SPL Custody A/C for Exc. Bnft of Cust.
Attn:  Mutual Funds Department - REG REIN
101 Montgomery Street
San Francisco, CA  94104
</TABLE>


     As of July 1, 1998, Regional Fund's officers and directors as a group owned
less than 1% of Regional Fund's outstanding shares.


VALUE FUND

     IAI Value Fund is a separate portfolio of IAI Investment Funds VIII, Inc. a
Minnesota  corporation  whose shares of common stock are currently issued in one
series (Series A). Each share of a series is entitled to participate pro rata in
any dividends and other  distributions of such series and all shares of a series
have  equal  rights in the event of  liquidation  of that  series.  The Board of
Directors of IAI Investment Funds VIII, Inc., is empowered under the Articles of
Incorporation  of such  company to issue other  series of the  company's  common
stock  without  shareholder  approval.  IAI  Investment  Funds VIII,  Inc.,  has
authorized  10,000,000,000 shares of $.01 par value common stock to be issued as
Series A common shares. The investment  portfolio  represented by such shares is
referred to as IAI Value Fund.  As of March 31, 1998,  Value Fund had  2,103,535
shares outstanding.

     As of June 30, 1998, no person held of record or, to the knowledge of Value
Fund,  beneficially  owned more than 5% of the outstanding shares of Value Fund,
except as set forth in the following table:

<TABLE>
<CAPTION>
<S>                                        <C>                       <C>
- ------------------------------------------------------------------------------------
 Name and Address                          Number of                 Percent of
  of  Shareholder                           Shares                     Class
- ------------------------------------------------------------------------------------

Charles Schwab & Co., Inc.                  210,913.302                 11.42%
SPL Custody A/C for Excl Bnft. of Cust.
Attn:  Mutual Funds Department - VALUE REIN
101 Montgomery Street
San Francisco, CA 94104
</TABLE>

     As of July 1, 1998,  Value Fund's  officers and  directors as a group owned
less than 1% of Value Fund's outstanding shares.

                                       26
<PAGE>

                    NET ASSET VALUE AND PUBLIC OFFERING PRICE

     The portfolio securities in which each Fund invests fluctuate in value, and
hence, for each Fund, the net asset value per share also fluctuates.

     The net asset value per share of a Fund is determined  once daily  normally
as of the close of trading on the New York Stock  Exchange,  normally  3:00 p.m.
Central time, on each business day on which the New York Stock  Exchange is open
for trading,  and may be determined on additional  days as required by the Rules
of the  Securities  and  Exchange  Commission.  The New York Stock  Exchange  is
closed, and the net asset value per share of the Fund is not determined,  on the
following  national  holidays:  New Year's Day,  Martin  Luther  King,  Jr. Day,
Presidents'  Day,  Good  Friday,  Memorial  Day,  Independence  Day,  Labor Day,
Thanksgiving Day, and Christmas Day.

     On March 31, 1998,  each Fund's net asset value and public  offering  price
per share were calculated as follows:

         Capital Appreciation Fund
         -------------------------

         NAV = Net Assets ($65,954,745)               =  $17.96
               ------------------------------
               Shares Outstanding (3,671,893)


         Emerging Growth Fund
         --------------------

         NAV = Net Assets ($161,911,963)            =    $18.11
               -----------------------------
               Shares Outstanding (8,942,643)


         Growth Fund
         -----------

         NAV = Net Assets ($14,774,513)             =    $12.17
               -------------------------------
               Shares Outstanding (1,213,638)

         
         Growth and Income Fund
         ----------------------

         NAV = Net Assets ($96,754,089)            =    $19.72
               --------------------------------
               Shares Outstanding (4,905,292)

     
        Midcap Growth Fund
        ------------------

         NAV = Net Assets ($82,604,831)             =   $15.91
               --------------------------------
               Shares Outstanding (5,190,944)


         Regional Fund
         -------------

         NAV = Net Assets ($509,555,953)           =    $26.35
               --------------------------------
               Shares Outstanding (19,334,434)


         Value Fund
         ----------

         NAV = Net Assets ($26,739,125)             =   $12.71
               ---------------------------------
               Shares Outstanding (2,103,535)


                                       27
<PAGE>

     Each Fund has  authorized  one or more  brokers  to  accept  on its  behalf
purchase  and  redemption  orders and such brokers are  authorized  to designate
other  intermediaries  to  accept  purchase  and  redemption  orders on a Fund's
behalf. Each Fund will be deemed to have received a purchase or redemption order
when an authorized  broker or, if applicable,  a broker's  authorized  designee,
accepts the order.  In such  circumstances,  customer orders will be priced at a
Fund's NAV next computed after they are accepted by an authorized  broker or the
broker's authorized designee.


                        PURCHASES AND REDEMPTIONS IN KIND

     In extraordinary circumstances, Fund shares may be purchased for cash or in
exchange for securities which are permissible  investments of a Fund, subject to
IAI's  discretion and its  determination  that the  securities  are  acceptable.
Securities  accepted  in  exchange  will  be  valued  on  the  basis  of  market
quotations,  or if the market quotations are not available, by a method that IAI
believes  accurately  reflects fair value. In addition,  securities  accepted in
exchange  are required to be liquid  securities  that are not  restricted  as to
transfer.  Also in extraordinary  circumstances,  Fund shares may be redeemed in
exchange for readily marketable  securities held by a Fund.  Securities redeemed
in  exchange  will be valued on the  basis of  market  quotations,  or if market
quotations are not available,  by a method that IAI believes accurately reflects
fair value.

                                   TAX STATUS

     The tax status of the Funds and  distributions  of the Funds are summarized
in the Prospectus under "Dividends, Distributions and Tax Status."

     Under  the  Internal  Revenue  Code  of  1986,  as  amended  (the  "Code"),
individual  shareholders  may not  exclude  any amount of  distributions  from a
Fund's  gross  income that is derived from  dividends;  corporate  shareholders,
however,  are permitted to deduct 70% of qualifying dividend  distributions from
domestic  corporations.  Such a deduction by a corporate shareholder will depend
upon the  portion  of a Fund's  gross  income  that is  derived  from  dividends
received from domestic  corporations.  Since it is anticipated that a portion of
the net  investment  income of each Fund may  derive  from  sources  other  than
dividends from domestic corporations, a portion of each Fund's dividends may not
qualify for this exclusion.  Distributions  designated as long-term capital gain
distributions  generally will be taxable to the shareholder as long-term capital
gains  regardless  of how  long  the  shareholder  has  held  the  shares.  Such
distributions will not be eligible for the dividends received exclusion referred
to above.

     Ordinarily,   distributions   and  redemption   proceeds   earned  by  Fund
shareholders are not subject to withholding of federal income tax. However, each
Fund is required to withhold 31% of a shareholder's distributions and redemption
proceeds upon the occurrence of certain events  specified in Section 3406 of the
Code and regulations promulgated thereunder. These events include the failure of
a  Fund  shareholder  to  supply  the  Fund  with  such  shareholder's  taxpayer
identification  number,  and the failure of a Fund  shareholder who is otherwise
exempt from  withholding to properly  document such  shareholder's  status as an
exempt recipient. Additionally,  distributions may be subject to state and local
income taxes,  and the treatment  thereunder  may differ from the federal income
tax consequences discussed above.

     If Fund  shares are sold or  otherwise  disposed of more than one year from
the date of  acquisition,  the difference  between the price paid for the shares
and the sales  price will  result in  long-term  capital  gain or loss to a Fund
shareholder  if, as is usually the case,  Fund shares are a capital asset in the
hands of a Fund shareholder at that time. However,  under a special provision in
the  Code,  if Fund  shares  with  respect  to which a  long-term  capital  gain
distribution  has been,  or will be,  made are held for six months or less,  any
loss on the sale or other  disposition of such shares will be long-term  capital
loss to the extent of such distribution.


                                       28
<PAGE>

     Under the Code,  each Fund will be subject to a  non-deductible  excise tax
equal to 4% of the  excess,  if any,  of the  amount of  investment  income  and
capital gains required to be distributed  pursuant to the Code for each calendar
year over the amount  actually  distributed.  In order to avoid this excise tax,
each Fund  generally  must declare  dividends by the end of each  calendar  year
representing 98% of the Fund's ordinary income for such calendar year and 98% of
its capital gain net income, if any, for the twelve-month  period ending October
31 of the same  calendar  year.  The  excise  tax is not  imposed,  however,  on
undistributed income that is already subject to corporate income tax. It is each
Fund's policy not to distribute capital gains until capital loss carryovers,  if
any, either are utilized or expire.

     Income  received from sources  within  foreign  countries may be subject to
withholding and other taxes imposed by such countries.  Tax conventions  between
certain  countries and the United States may reduce or eliminate such taxes.  It
is impossible to determine the effective  rate of foreign tax applicable to such
income in advance since the precise  amount of a Fund's assets to be invested in
various  countries  is not known.  Any amount of taxes paid by a Fund to foreign
countries will reduce the amount of income available to a Fund for distributions
to shareholders.

     The foregoing is a general and abbreviated summary of the Code and Treasury
regulations  in  effect  as of the  date  of each  Fund's  Prospectus  and  this
Statement of Additional Information. The foregoing relates solely to the federal
income tax law applicable to "U.S.  persons," i.e., U.S.  citizens and residents
and U.S. domestic corporations,  partnerships,  trusts and estates. Shareholders
who are not U.S.  persons are encouraged to consult a tax adviser  regarding the
income tax consequences of acquiring shares of a Fund.


                        LIMITATION OF DIRECTOR LIABILITY

     Under Minnesota law, each Fund's Board of Directors owes certain  fiduciary
duties  to the Fund  and to its  shareholders.  Minnesota  law  provides  that a
director "shall  discharge the duties of the position of director in good faith,
in a manner the director  reasonably  believes to be in the best interest of the
corporation,  and with the care an ordinarily  prudent person in a like position
would exercise under similar circumstances." Fiduciary duties of a director of a
Minnesota  corporation include,  therefore,  both a duty of "loyalty" (to act in
good faith and act in a manner  reasonably  believed to be in the best interests
of the  corporation)  and a duty of "care"  (to act with the care an  ordinarily
prudent person in a like position  would exercise under similar  circumstances).
Minnesota  law  authorizes  corporations  to  eliminate  or limit  the  personal
liability  of a director to the  corporation  or its  shareholders  for monetary
damages  for breach of the  fiduciary  duty of "care."  Minnesota  law does not,
however,  permit a corporation to eliminate or limit the liability of a director
(i) for any breach of the director's duty of "loyalty" to the corporation or its
shareholders,  (ii)  for acts or  omissions  not in good  faith or that  involve
intentional  misconduct or a knowing  violation of law, (iii) for  authorizing a
dividend,  stock repurchase or redemption or other  distribution in violation of
Minnesota  law or for violation of certain  provisions  of Minnesota  securities
laws, or (iv) for any  transaction  from which the director  derived an improper
personal  benefit.  The Articles of  Incorporation  of IAI Investment  Funds II,
Inc.,  IAI  Investment  Funds IV,  Inc.,  IAI  Investment  Funds VI,  Inc.,  IAI
Investment  Funds VII,  Inc.,  and IAI Investment  Funds VIII,  Inc.,  limit the
liability of directors to the fullest  extent  permitted by Minnesota  statutes,
except to the extent  that such  liability  cannot be limited as provided in the
Investment Company Act of 1940 (which Act prohibits any provisions which purport
to limit  the  liability  of  directors  arising  from such  directors'  willful
misfeasance,  bad faith,  gross negligence,  or reckless disregard of the duties
involved in the conduct of their role as directors).

                                       29
<PAGE>

     Minnesota  law  does  not  eliminate  the  duty of  "care"  imposed  upon a
director.  It only authorizes a corporation to eliminate  monetary liability for
violations of that duty. Minnesota law, further,  does not permit elimination or
limitation  of liability of "officers"  of the  corporation  for breach of their
duties as officers  (including  the liability of directors who serve as officers
for  breach  of their  duties  as  officers.)  Minnesota  law  does  not  permit
elimination  or  limitation of the  availability  of equitable  relief,  such as
injunctive  or  rescissionary  relief.  Further,  Minnesota  law does not permit
elimination or limitation of a director's  liability under the Securities Act of
1933 or the Securities  Exchange Act of 1934, and it is uncertain whether and to
what extent the elimination of monetary  liability would extend to violations of
duties imposed on directors by the Investment  Company Act of 1940 and the rules
and regulations adopted under such Act.

                              FINANCIAL STATEMENTS

     The  audited  financial  statements,  included  as part of the Funds'  1998
Annual Report to shareholders, are incorporated herein by reference. Such Annual
Report may be obtained by shareholders on request from the Funds at no charge.



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