<PAGE>
PRINCIPAL PROTECTION FUNDS
ANNUAL REPORT
IAI Reserve Fund
IAI Money Market Fund
January 31, 1996
[IAI LOGO]
MUTUAL FUNDS
<PAGE>
[PHOTO OF GLOBE]
<PAGE>
Table of Contents
-----------------
IAI Reserve Fund, IAI Money Market Fund
Annual Report
January 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Chairman's Letter....................... 2
Fund Managers' Reviews
IAI Reserve Fund....................... 4
IAI Money Market Fund.................. 6
Fund Portfolios
IAI Reserve Fund....................... 8
IAI Money Market Fund..................11
Notes to Fund Portfolios................13
Statements of Assets and Liabilities....14
Statements of Operations................15
Statements of Changes in Net Assets.....16
Financial Highlights
IAI Reserve Fund.......................18
IAI Money Market Fund..................19
Notes to Financial Statements...........20
Independent Auditors' Report............24
Federal Tax Information.................25
IAI Mutual Fund Family..................26
Distributor, Adviser, Custodian,
Legal Counsel, Independent Auditors,
Directors................Inside Back Cover
</TABLE>
<PAGE>
Chairman's Letter
-----------------
IAI Reserve Fund, IAI Money Market Fund
A great Time To Diversify
[PHOTO]
Noel P. Rahn,
Chairman
The year ended January 31, 1996 was one of the best periods in my memory for
U.S. stocks and bonds. The economy has been behaving just right; not too fast to
bring back inflation, and not too slow to bring on a recession. In addition,
American business is the most productive in the world. It's a perfect recipe for
continued success in the markets.
But just as the investment world was gloomy in 1994, let's not assume that
1995's performance is the norm either. As we've seen so far in 1996, stocks and
bonds can be volatile. That's particularly important to remember when prices are
high. One of the most important investment principles is diversification--not
putting all your eggs in one basket.
By investing in mutual funds, you have already taken a step toward
diversification. A typical mutual fund invests in dozens of securities, a much
more diversified portfolio than you can generally achieve on your own. But
another way to diversify is to broaden your investment horizon into areas that
haven't done quite as well. One example: international funds.
Developed and developing markets throughout the world have not matched the U.S.
economy during the past year. As a result, their securities markets have lagged
the United States. Since international markets largely move independently of the
United States, an investment overseas is considered an excellent way to
diversify a portfolio. This is particularly true when our markets are nearing or
achieving all-time highs.
If investing internationally is not for you, then there are other ways to
diversify your portfolio. If you've got mutual funds that invest in just one
type of investment objective, then you might want to consider broadening your
investment horizon. Of course, whether you focus on growth, income or a blend of
the two depends on your time horizon. If you're investing for a retirement
that's 30 years down the road, then you can afford to take more risk than if you
need the income from those investments right away.
Regardless of the time frame, the U.S. markets will continue to be impacted by
the performance of the economy, the outlook for inflation, and the level of
interest rates. Over the next six months, the presidential primary season will
also play a role. All of these events are truly unpredictable and uncontrollable
by the average investor. That makes investing a continuing challenge, and
another reason to stay diversified.
2
<PAGE>
Chairman's Letter
-----------------
IAI Money Market Fund, IAI Reserve Fund
Economic Outlook
Larry Hill, IAI's Chief Fixed Income Officer, provides his economic outlook
below, as published recently in the Adviser.
We believe that the bond market will continue to be volatile throughout 1996.
The economy, which began 1996 on a weak note, will likely perk up as we move
through the year. This perception of a stronger economy will cause fixed income
investors to be conservative in their investment approach. True, the first
quarter data may have been penalized by an unusually rough winter throughout the
U.S. We also think that the government-generated economic data for the first
quarter may be unreliable because of the federal government shutdowns that
occurred in December and January. Nevertheless, the rest of the year is likely
to appear strong in comparison.
We are also concerned that inflation, which has been running about 2.5% per
year, could begin to creep up later this year. One uncertainty is the
possibility that China will step up its demand for worldwide grain to feed 1.3
billion people who live in that country. That would put a severe strain on
agriculture prices. As we have seen, any signs of inflation or faster economic
growth creates volatility in the bond market.
Bonds offer two components of total return: coupon payments and changes in net
asset value caused by interest rate movements. Unlike 1995, when bond investors
earned most of their returns from rising net asset values, 1996 will likely be a
year of single-digit returns, primarily from coupon yields. Returns in the 5-7%
range are about average for bond returns during recent decades.
Please read the Fund Manager's Reviews, which follow this letter, for a detailed
perspective on the Funds' performance and our strategy going forward. We
appreciate your continued trust and confidence in IAI. If there is any way we
can serve you better, please let us know by calling our toll-free Investor
Services Hotline at 1-800-945-3863.
Sincerely,
/s/ Noel P. Rahn
Noel P. Rahn
Chairman
3
<PAGE>
Fund Managers' Review
---------------------
IAI Reserve Fund
IAI Reserve Fund
[PHOTO]
Timothy A. Palmer, CFA
IAI Reserve Fund Co-Manager
[PHOTO]
Livingston Douglas, CFA
IAI Reserve Fund Co-Manager
Fund Objectives
The IAI Reserve Fund's investment objective is to provide shareholders with high
levels of capital stability and liquidity, and, to the extent consistent with
these primary objectives, a high level of current income. The Fund pursues its
objective primarily through investment in a diversified portfolio of investment-
grade bonds and other debt securities of similar quality.
Fund Positioning for the Past Year
Interest rates at all maturity levels continued to fall. Between July 31, 1995
and January 31, 1996, the yield on one-year U.S. Treasury bills fell from 5.64%
to 4.89%. Since July 1995, the Federal Reserve Board has reduced the Federal
Funds rate, the amount banks charge each other for overnight loans, a total of
0.75%. The current Fed Funds rate is 5.25%, still high compared to inflation,
which is running at an annual rate of about 2.5%.
Although Wall Street has been focusing its attention on a variety of factors,
including budget talks in Washington, the Presidential primaries and debt
issuance, economic fundamentals will continue to be the most important factor
for the market. The level of economic activity and inflation data will continue
to drive Federal Reserve policy. Changes in market perception of these factors
have driven bond market returns over recent months.
The IAI Reserve Fund is comprised of a portfolio of bonds whose average maturity
and duration is about one year. Currently, we are employing a modified "barbell"
strategy--the portfolio includes a mix of bonds maturing in 2-3 years, a small
portion of bonds maturing in ten years, and money market instruments maturing in
30-60 days. At present, the Fund is avoiding one-year maturities, because these
securities offer the least attractive value in the market.
The Fund, which includes U.S. Treasuries, asset-backed securities, commercial
paper and corporate bonds, added to its position in mortgage-backed securities
with stable but short maturities. These mortgages offer protection in the event
of a temporary increase in interest rates. We continue to see value in corporate
bonds as we do not believe the economy is headed into a recession.
Fund Positioning Going Forward
Because the U.S. economy continues to grow slowly, and inflation has remained
low, we expect the Federal Reserve Board to continue to have a bias toward lower
short-term interest rates in 1996. However, we believe that interest rates on
longer-term securities are less likely to fall as far. In this environment we
are inclined to maintain our bias in favor of corporate notes over U.S.
Government issues. Although rates are unlikely to fall as much this year as in
1995, we expect short term bonds to perform well in 1996. Nonetheless, we will
remain on the watch for signs of a potential rekindling of inflation.
/S/ Timothy A. Palmer, CFA
Timothy A. Palmer, CFA
Fund Manager
4
<PAGE>
Fund Managers' Review
---------------------
IAI Reserve Fund
Value of $10,000 Investment+
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
IAI Salomon Brothers
Reserve One Year
Fund Treasury Bill Index
<S> <C> <C>
1/31/86 $10,040 $10,067
1/31/87 $10,558 $10,786
1/31/88 $11,201 $11,477
1/31/89 $11,963 $12,154
1/31/90 $12,985 $13,317
1/31/91 $14,100 $14,576
1/31/92 $15,122 $15,759
1/31/93 $15,661 $16,564
1/31/94 $16,201 $17,177
1/31/95 $16,679 $17,736
1/31/96 $17,804 $19,101
</TABLE>
Average Annual Returns+
Through 1/31/96
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
<S> <C> <C> <C>
IAI Reserve Fund 6.76% 4.78% 5.94%
Salomon Brothers One Year
Treasury Bill Index 7.70% 5.56% 6.69%
</TABLE>
/+ Past performance is not predictive of future performance./
Sectors
% of Portfolio as of 1/31/96
[PIE CHART APPEARS HERE]
U.S. Government......... 9%
Corporate............... 16%
U.S. Government Agency.. 5%
Asset-Backed............ 18%
U.S. Government
Agency Mortgage-Backed. 9%
Commercial Paper........ 43%
Effective Maturity
% of Portfolio as of 1/31/96
[GRAPH APPEARS HERE]
Years
0-1..................... 59%
1-3..................... 26%
3-5..................... 9%
5-10.................... 2%
10-20................... 4%
Note to Chairman's Letter & Fund Manager's Review
Performance data for the IAI Reserve Fund includes changes in share price and
reinvestment of dividends and capital gains. Past performance is not a guarantee
of future results. The Fund's investment return, yield and principal may
fluctuate so that, when redeemed, shares may be worth more or less than the
original cost. More complete information about the Fund, including charges and
expenses, is available in the prospectus. Please read the Fund's prospectus
carefully before investing. All indices cited are unmanaged, and are either
trademarks, registered trademarks or copyrights of their respective sponsoring
companies.
Credit Rating
% of Portfolio as of 1/31/96
U.S. Government 21%
Aaa............ 20%
Aa............. 42%
A.............. --%
Baa............ 17%
Non-Investment
Grade.......... --%
5
<PAGE>
Fund Manager's Review
---------------------
IAI Money Market Fund
IAI Money Market Fund
[PHOTO APPEARS HERE]
Timothy A. Palmer,
CFA
IAI Money Market
Fund Manager
"We have chosen to keep the portfolio's maturity relatively short."
Fund Objective
The Fund's investment objective is to provide shareholders with a high level of
current income consistent with the preservation of capital and liquidity. The
Fund's goal is to maintain a stable share price of $1.00.
The Fund pursues its objective by investing in a variety of high quality money
market securities, including the following:
. U.S. Treasury Bills
. U.S. Government short-term notes
. Commercial paper issued by large corporations
. Repurchase agreements
. CDs issued by large banks
Fund Positioning for the Past Year
Since July 1995, the Federal Reserve Board has reduced the Federal Funds rate a
total of 0.75%. The current Fed Funds rate is 5.25%, still relatively high in
relation to inflation, which is running at an annual rate of about 2.5%.
As a rule, money market yields track the movement of the Fed Funds rate. As the
Fed has cut rates over the past several months, money market rates have declined
as well. As of January 31, 1996, the IAI Money Market Fund's 7-day yield was
5.06%, down slightly from January 31, 1995 when it was 5.13%.
Typically, the strategy in a falling interest rate environment would be to try
to invest in longer-term money market securities, locking in higher interest
rates for a longer period of time. To some extent, we were able to do that with
two-month securities which we purchased prior to the February 1, 1996 cut in the
Fed Funds rate. For the most part, however, the money market yield curve has
been relatively flat or slightly inverted. That is, money market instruments
maturing in over several months do not offer higher yields than those securities
maturing in one month or less. As a result, we have chosen to keep the
portfolio's maturity relatively short as of January 31, 1996.
Fund Positioning Going Forward
Because the U.S. economy continues to grow slowly, we expect the Federal Reserve
Board to remain accomodative in 1996. The real interest rate of Fed Funds--the
current yield minus the inflation rate--continues to be higher than historical
norms. This, combined with a slow economy is likely to allow money market yields
to drift lower this year.
/s/Timothy A. Palmer
Timothy A. Palmer, CFA
Fund Manager
6
<PAGE>
Fund Manager's Review
---------------------
IAI Money Market Fund
Average Annual Returns/1/+
Through 1/31/96
<TABLE>
<CAPTION>
Since Inception
1 Year 1/05/93
===============================================================================
<S> <C> <C>
IAI Money Market Fund 5.46% 4.02%
...............................................................................
Lipper Money Market
Instrument Fund Average 5.27% 3.87%/2/
+ Past performance is not predictive of future performance.
/1/ Fees and expenses are currently being voluntarily waived to .50% of average
daily net assets.
/2/ Since 1/1/93
</TABLE>
Sectors Effective Maturity
% of Portfolio as of 1/31/96 % of Portfolio as of 1/31/96
[PIE CHART APPEARS HERE] [GRAPH APPEARS HERE]
37% U.S. Government Agency 0-1 Month 100%
63% Commercial Paper
Note to Chairman's Letter & Fund Manager's Review
Performance data for the IAI Money Market Fund assumes reinvestment of all
dividends. The IAI Money Market Fund is managed to maintain a stable share value
of $1.00 and historically has always achieved this objective. But, unlike bank
deposits and CDs, money market funds are not guaranteed, and there can be no
assurance that a stable share value will be maintained.
Past performance is not a guarantee of future results. More complete information
about the Fund, including charges and expenses, is available in the prospectus.
Please read the Fund's prospectus carefully before investing. All indices cited
are unmanaged, and are either trademarks, registered trademarks or copyrights of
their respective sponsoring companies.
7
<PAGE>
Fund Portfolio
--------------
IAI Reserve Fund
January 31, 1996
(percentage figures indicate percentage of total net assets)
U.S. Government Obligations -- 10.0%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Bills -- 0.9%
6.89% 02/08/96 $ 100,000 $ 99,900
5.12 04/25/96 400,000 (b) 395,436
----------
495,336
- ------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Note -- 9.1%
5.13 06/30/98 5,000,000 5,014,850
========================================================================================================================
Total Investments in U.S. Government Obligations
(Cost: $5,502,278)............................................................................................$5,510,186
========================================================================================================================
U.S. Government Agency Securities -- 5.4%
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal Home Loan Bank -- 5.4%
Federal Home Loan Bank (discount notes) 5.80% 02/01/96 $2,000,000 $2,000,000
5.35 03/06/96 1,000,000 994,947
----------
2,994,947
========================================================================================================================
Total Investments in U.S. Government Agency Securities
(Cost: $2,994,947)............................................................................................$2,994,947
========================================================================================================================
U.S. Government Agency Mortgage-backed Securities -- 9.1%
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation Gold -- 4.5%
5.50% 02/01/01 $2,500,000 $2,493,750
- ------------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association -- 4.6%
6.00 02/01/03 2,500,000 2,504,675
========================================================================================================================
Total Investments in U.S. Government Agency Mortgage-backed Securities
(Cost: $4,990,235)............................................................................................$4,998,425
========================================================================================================================
</TABLE>
See accompanying Notes to Fund Portfolios on page 13
8
<PAGE>
Fund Portfolio
--------------
IAI Reserve Fund
January 31, 1996
Corporate Bonds -- 17.2%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial -- 7.7%
Salomon (medium-term note) 5.32% 09/16/96 $2,200,000 $2,192,344
USF&G 7.00 05/15/98 2,000,000 2,052,080
----------
4,244,424
- ---------------------------------------------------------------------------------------
Industrial -- 5.7%
Cablevision 10.75 01/30/02 1,000,000 1,092,500
RJR Nabisco (medium-term note) 6.25 01/31/97 2,000,000 2,010,680
----------
3,103,180
- ---------------------------------------------------------------------------------------
Utilities -- 3.8%
GTE Hawaii 7.00 02/01/06 2,000,000 2,088,920
=======================================================================================
Total Investments in Corporate Bonds
(Cost: $9,252,099).......................................................... $9,436,524
======================================================================================
</TABLE>
Asset-Backed Securities -- 19.8%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Auto Loan Related -- 11.0%
Chase Manhattan Grantor Trust 95-B A 5.90% 11/15/01 $1,875,817 $ 1,891,199
General Motors Acceptance Corporation Grantor Trust 95-A A 7.15 03/15/00 2,574,725 2,627,379
Mitsubishi Auto Trust 93-1 A 4.00 11/16/98 1,573,461 1,559,191
-----------
6,077,769
- ------------------------------------------------------------------------------------------------------------
Credit Card -- 5.5%
Chase Manhattan Credit Card Master Trust 95-2 A 5.76(c) 08/15/01 1,500,000 1,500,000
Chemical Credit Card Master Trust 96-2 A 5.98 09/15/08 1,000,000 993,790
Dayton-Hudson Credit Card Master Trust 95-1 A 6.10 02/25/02 500,000 510,230
-----------
3,004,020
- ------------------------------------------------------------------------------------------------------------
Equipment Loan Related -- 3.3%
Case Equipment Loan Trust 95-B A2 5.95 09/15/00 1,800,000 1,807,308
============================================================================================================
Total Investments in Asset-Backed Securities
(Cost: $10,812,053)..............................................................................$10,889,097
============================================================================================================
</TABLE>
See accompanying Notes to Fund Portfolios on page 13
9
<PAGE>
Fund Portfolio
--------------
IAI Reserve Fund
January 31, 1996
Commercial Paper -- 47.0%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial Services - 12.9%
PHH 5.45% 02/14/96 $2,600,000 $ 2,594,883
Pitney Bowes Credit 5.40 02/28/96 2,500,000 2,489,875
University of Chicago 5.49 02/15/96 2,000,000 1,995,730
-----------
7,080,488
- ------------------------------------------------------------------------------------------
Financial -- 19.1%
Bell Atlantic Financial Services 5.45 02/13/96 2,500,000 2,495,458
CSW Credit 5.45 03/06/96 2,500,000 2,487,132
IBM Credit 5.45 02/23/96 3,000,000 2,990,008
Weyerhauser Mortgage 5.35 03/01/96 2,500,000 2,489,226
----------
10,461,824
- ------------------------------------------------------------------------------------------
Foods and Food Processing -- 4.5%
Sunkist Growers 5.50 02/02/96 2,500,000 2,499,618
- ------------------------------------------------------------------------------------------
Industrial -- 6.7%
Dupont 5.45 02/08/96 1,700,000 1,698,199
Sandoz 5.45 02/20/96 2,000,000 1,994,247
----------
3,692,446
- ------------------------------------------------------------------------------------------
Utilities -- 3.8%
Idaho Power 5.50 02/05/96 2,100,000 2,098,717
==========================================================================================
Total Investments in Commercial Paper
(Cost: $25,833,093)............................................................$25,833,093
==========================================================================================
Total Investments in Securities
(Cost: $59,384,705) (d)........................................................$59,662,272
==========================================================================================
Other Assets and Liabilities (net) -- (8.5%)...................................$(4,687,855)
==========================================================================================
Total Net Assets...............................................................$54,974,417
==========================================================================================
</TABLE>
See accompanying Notes to Fund Portfolios on page 13
10
<PAGE>
Fund Portfolio
--------------
IAI Money Market Fund
January 31, 1996
(percentage figures indicate percentage of total net assets)
U.S. Government Agency Securities -- 36.8%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal Farm Credit Bank -- 4.7%
Federal Farm Credit Bank (discount note) 5.43% 02/02/96 $1,300,000 $1,299,804
- --------------------------------------------------------------------------------------------
Federal Home Loan Bank -- 14.8%
Federal Home Loan Bank (discount notes) 5.80 02/01/96 500,000 500,000
5.40 02/26/96 1,060,000 1,056,025
5.50 02/28/96 1,000,000 995,875
5.35 03/06/96 1,500,000 1,492,421
----------
4,044,321
- ---------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation -- 17.3%
Federal Home Loan Mortgage Corporation
(discount notes) 5.50 02/01/96 1,000,000 1,000,000
5.39 02/13/96 2,400,000 2,395,688
5.40 02/20/96 1,355,000 1,351,138
----------
4,746,826
=============================================================================================
Total Investments in U.S. Government Agency Securities
(Cost: $10,090,951)...............................................................$10,090,951
=============================================================================================
</TABLE>
See accompanying Notes to Fund Portfolios on page 13
11
<PAGE>
Fund Portfolio
--------------
IAI Money Market Fund
January 31, 1996
Commercial Paper -- 63.2%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial Services -- 9.1%
PHH 5.47% 02/14/96 $1,500,000 $ 1,497,037
Pitney Bowes Credit 5.40 02/28/96 1,000,000 995,950
-----------
2,492,987
- ----------------------------------------------------------------------------------------
Electronic Technology - 10.9%
Emerson Electric 5.40 02/21/96 1,500,000 1,495,500
General Electric 5.40 03/08/96 1,500,000 1,491,900
-----------
2,987,400
- ----------------------------------------------------------------------------------------
Foods and Food Processing -- 14.6%
Cargill 5.47 02/05/96 1,500,000 1,499,088
Pepsico 5.40 03/01/96 1,000,000 995,650
Philip Morris 5.40 02/22/96 1,500,000 1,495,275
-----------
3,990,013
- ----------------------------------------------------------------------------------------
Industrial -- 9.1%
Dupont 5.45 02/08/96 1,500,000 1,498,411
Weyerhauser 5.35 03/01/96 1,000,000 995,690
-----------
2,494,101
- ----------------------------------------------------------------------------------------
Telecommunications -- 9.8%
AT&T 5.43 02/16/96 1,200,000 1,197,285
Southwestern Bell 5.40 02/27/96 1,500,000 1,494,150
-----------
2,691,435
- ----------------------------------------------------------------------------------------
Utilities -- 9.7%
Northern States Power 5.42 02/06/96 1,500,000 1,498,871
Wisconsin Electric Fuel 5.48 02/14/96 1,147,000 1,144,730
-----------
2,643,601
========================================================================================
Total Investments in Commercial Paper
(Cost: $17,299,537)..........................................................$17,299,537
========================================================================================
Total Investments in Securities
(Cost: $27,390,488) (d)......................................................$27,390,488
========================================================================================
Other Assets and Liabilities (net) -- 0.0%
...........................................................................$ 4,545
========================================================================================
Total Net Assets
...........................................................................$27,395,033
========================================================================================
</TABLE>
See accompanying Notes to Fund Portfolios on page 13
12
<PAGE>
Notes to Fund Portfolios
------------------------
IAI Reserve Fund, IAI Money Market Fund
January 31, 1996
(a)
Market value of securities is determined as described in Note 1 to the financial
statements, under "Security Valuation."
(b)
Security is partially pledged to cover initial margin on open futures contracts
(see Note 6 to the financial statements).
(c)
Interest rate varies to reflect current market conditions; rate shown is the
effective rate on January 31, 1996.
(d)
At January 31, 1996, the cost of securities for federal income tax purposes and
the aggregate gross unrealized appreciation and depreciation based on that cost
were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
IAI Reserve Fund IAI Money Market Fund
- ------------------------------------------------------------------------------
<S> <C> <C>
Cost for federal tax purposes $59,384,705 $27,390,488
=============================================
Gross unrealized appreciation $ 290,864 $ -
Gross unrealized depreciation (13,297) -
---------------------------------------------
Net unrealized appreciation $ 277,567 $ -
=============================================
</TABLE>
13
<PAGE>
Statements of Assets and Liabilities
------------------------------------
IAI Reserve Fund, IAI Money Market Fund
January 31, 1996
<TABLE>
<CAPTION>
IAI IAI Money
Reserve Fund Market Fund
===============================================================================================
<S> <C> <C>
Assets
Investments in securities, at market
(Cost: $59,384,705 and $27,390,488) (see Fund Portfolios) $59,662,272 $27,390,488
Cash in bank on demand deposit 133 112,609
Accrued interest receivable 311,843 --
Organization costs (Note 1) -- 20,176
Other 28,458 5,478
--------------------------
Total assets 60,002,706 27,528,751
--------------------------
Liabilities
Payable for investment securities purchased 4,990,234 --
Accrued investment advisory fees 24,663 --
Accrued dividend-disbursing, administrative, and accounting fees 9,680 --
Other accrued expenses 3,712 19,002
Dividends payable ($.0042 per share) -- 114,716
--------------------------
Total liabilities 5,028,289 133,718
--------------------------
Net assets applicable to outstanding capital stock $54,974,417 $27,395,033
==========================
Represented By:
Capital stock $ 54,948 $ 273,950
Additional paid-in capital 56,025,602 27,121,041
Undistributed net investment income 19,989 --
Accumulated net realized gains (losses) on investments (1,387,215) 42
Unrealized appreciation on investment securities 261,093 --
--------------------------
Total -- representing net assets applicable
to outstanding capital stock $54,974,417 $27,395,033
==========================
Shares of capital stock outstanding; authorized 10 billion
shares of $.01 par value stock 5,494,782 27,394,991
--------------------------
Net asset value per share of outstanding capital stock $ 10.00 $ 1.00
==========================
</TABLE>
See accompanying Notes to Financial Statements on page 20
14
<PAGE>
Statements of Operations
------------------------
IAI Reserve Fund, IAI Money Market Fund
Year Ended January 31, 1996
<TABLE>
<CAPTION>
IAI IAI Money
Reserve Fund Market Fund
==============================================================================================================
<S> <C> <C>
Net Investment Income
Income
Interest $4,776,626 $1,875,186
----------------------------------------
Total income 4,776,626 1,875,186
----------------------------------------
Expenses
Investment advisory fees 377,386 95,879
Distribution fees 75,477 --
Dividend-disbursing, administrative, and accounting fees 150,954 63,919
Legal fees -- 2,730
Custodian fees 1,660 1,230
Amortization of organization costs -- 10,541
Compensation of Directors 7,300 5,727
Audit fees 10,751 8,024
Printing and shareholder reporting 43,350 27,920
Registration fees 21,250 16,220
Other expenses 11,333 3,995
----------------------------------------
Total expenses 699,461 236,185
Less fees reimbursed by Advisers or Distributor (57,904) (76,386)
----------------------------------------
Net expenses 641,557 159,799
----------------------------------------
Net investment income 4,135,069 1,715,387
----------------------------------------
Net Realized and Unrealized Gains (Losses)
Net realized gains (losses) on:
Investment securities $ 496,749 $ 1,952
Futures contracts (652,109) --
---------- ----------
(155,360) 1,952
Net change in unrealized appreciation or depreciation on:
Investment securities 951,548 --
Futures contracts 30,589 --
---------- ----------
982,137 --
----------------------------------------
Net gain on investments 826,777 1,952
----------------------------------------
Net increase in net assets resulting
from operations $4,961,846 $1,717,339
========================================
</TABLE>
See accompanying Notes to Financial Statements on page 20
15
<PAGE>
Statements of Changes in Net Assets
-----------------------------------
IAI Reserve Fund, IAI Money Market Fund
<TABLE>
<CAPTION>
<S> <C>
- -----------------------------------------------------------------------------------------------------
Operations
Net investment income
Net realized gains (losses)
Net change in unrealized appreciation or depreciation
----------------------------------------
Net increase in net assets resulting from operations
----------------------------------------
Distributions to Shareholders From:
Net investment income
----------------------------------------
Total distributions
----------------------------------------
Capital Share Transactions (Note 4)
Net proceeds from sale of shares
Net asset value of shares issued to shareholders in
reinvestment of distributions
Cost of shares redeemed
----------------------------------------
Increase (decrease) in net assets from capital
share transactions
----------------------------------------
Total increase (decrease) in net assets
Net assets at beginning of period
----------------------------------------
Net assets at end of period
========================================
(including undistributed net investment income
of $19,989 and $33,609 for Reserve Fund)
</TABLE>
16
<PAGE>
IAI Reserve Fund IAI Money Market Fund
Period from Period from
Year ended April 1, 1994 to Year ended April 1, 1994 to
January 31, 1996 January 31, 1995 January 31, 1996 January 31, 1995
- ---------------------------------------------------------------------------
$ 4,135,069 $ 3,333,740 $ 1,715,387 $ 886,997
(155,360) (570,786) 1,952 3,441
982,137 (124,030) -- --
- ---------------------------------------------------------------------------
4,961,846 2,638,924 1,717,339 890,438
- ---------------------------------------------------------------------------
(4,076,189) (3,406,637) (1,715,387) (886,997)
- ---------------------------------------------------------------------------
(4,076,189) (3,406,637) (1,715,387) (886,997)
- ---------------------------------------------------------------------------
188,582,912 121,503,576 415,404,027 130,873,884
4,017,210 3,357,074 1,629,448 793,295
(215,784,491) (145,633,109) (422,815,177) (128,283,703)
- ---------------------------------------------------------------------------
(23,184,369) (20,772,459) (5,781,702) 3,383,476
- ---------------------------------------------------------------------------
(22,298,712) (21,540,172) (5,779,750) 3,386,917
77,273,129 98,813,301 33,174,783 29,787,866
- ---------------------------------------------------------------------------
$ 54,974,417 $ 77,273,129 $ 27,395,033 $ 33,174,783
===========================================================================
See accompanying Notes to Financial Statements on page 20
17
<PAGE>
Financial Highlights
--------------------
IAI Reserve Fund
Per share data for a share of capital stock outstanding throughout each period
and selected information for each period indicated are as follows:
<TABLE>
<CAPTION>
Year ended Period from Years ended March 31,
January 31, April 1, 1994 to ------------------------------
1996 January 31, 1995+ 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value
Beginning of period $ 9.89 $ 9.98 $ 10.10 $ 10.16 $ 10.17
-----------------------------------------------------------------
Operations
Net investment income .56 .40 .39 .36 .57
Net realized and unrealized gains (losses) .09 (.08) (.13) .02 .08
-----------------------------------------------------------------
Total from operations .65 .32 .26 .38 .65
-----------------------------------------------------------------
Distributions to Shareholders From:
Net investment income (.54) (.41) (.37) (.36) (.58)
Net realized gains -- -- (.01) (.08) (.08)
-----------------------------------------------------------------
Total distributions (.54) (.41) (.38) (.44) (.66)
-----------------------------------------------------------------
Net Asset Value
End of period $ 10.00 $ 9.89 $ 9.98 $ 10.10 $ 10.16
=================================================================
Total investment return* 6.76% 3.21% 2.60% 3.81% 6.54%
Net assets at end of period (000's omitted) $54,974 $ 77,273 $98,813 $82,085 $108,373
Ratios
Expenses to average net assets .85% .85%** .85% .85% .85%
Net investment income to average net assets 5.48% 4.77%** 3.95% 3.49% 5.63%
Portfolio turnover rate
(excluding short-term securities) 261.1% 170.0% 235.0% 538.7% 218.1%
</TABLE>
* Total investment return is based on the change in net asset value of a share
during the period and assumes reinvestment
**Annualized
+ Reflects fiscal year-end change from March 31 to January 31.
18
<PAGE>
Financial Highlights
--------------------
IAI Money Market Fund
Per share data for a share of capital stock outstanding throughout each period
and selected information for each period indicated are as follows:
<TABLE>
<CAPTION>
Year ended Period from Year ended Period from
January 31, April 1, 1994 to March 31, January 5, 1993***
1996 January 31, 1995+ 1994 to March 31, 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value
Beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------------------------------------------------------------
Operations
Net investment income .05 .03 .03 .01
---------------------------------------------------------------
Total from operations .05 .03 .03 .01
---------------------------------------------------------------
Distributions to Shareholders From:
Net investment income (.05) (.03) (.03) (.01)
---------------------------------------------------------------
Total distributions (.05) (.03) (.03) (.01)
---------------------------------------------------------------
Net Asset Value
End of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
===============================================================
Total investment return* 5.46% 3.47% 2.88% 2.85%**
Net assets at end of period (000's omitted) $27,395 $ 33,175 $29,788 $ 25,877
Ratios
Expenses to average daily net assets**** .50% .50%** .45% .29%**
Net investment income to average
daily net assets**** 5.34% 4.12%** 2.73% 2.96%**
</TABLE>
* Total investment return is based on the change in net asset value of a share
during the period and assumes reinvestment of all distributions at net asset
value.
** Annualized
*** Commencement of operations
****The Fund's adviser voluntarily waived $76,386, $81,895, $147,924 and $18,494
in expenses for the year ended January 31, 1996, the period ended January
31, 1995, the year ended March 31, 1994, and the period ended March 31,
1993, respectively. If the Fund had been charged for these expenses, the
ratio of expenses to average daily net assets would have been .74%, .88%,
.88% and .69%, respectively, and the ratio of net investment income to
average daily net assets would have been 5.10%, 3.74%, 2.30% and 2.56%,
respectively.
+ Reflects fiscal year-end change from March 31 to January 31.
19
<PAGE>
Notes to Financial Statements
-----------------------------
IAI Reserve Fund, IAI Money Market Fund
January 31, 1996
[1] Summary of Significant Accounting Policies
The IAI Mutual Funds are registered under the Investment Company Act of 1940 (as
amended) as diversified, open-end management investment companies, or series
thereof. IAI Reserve Fund (Reserve Fund) is a separate portfolio of IAI
Investment Funds V, Inc. IAI Money Market Fund (Money Market Fund) is a separate
portfolio of IAI Investment Funds VI, Inc. This report covers only the Reserve
Fund and Money Market Fund (the Funds). The funds' objectives are to provide
shareholders with a high level of current income consistent with the
preservation of capital and liquidity.
On November 9, 1994, the Board of Directors elected to change the fiscal year
end of the Funds from March 31 to January 31. Accordingly, these financial
statements include the ten-month period from April 1, 1994 to January 31, 1995.
Significant accounting policies followed by the Funds are summarized below:
Security Valuation
The values of debt securities for Reserve Fund are determined using pricing
services or prices quoted by independent brokers. Short-term securities with
maturities of 60 days or less from the date of acquisition are valued at
amortized cost. Short-term securities with maturities greater than 60 days from
the date of acquisition are marked-to-market on a daily basis.
Pursuant to Rule 2a-7 of the Investment Company Act of 1940 (as amended), all
securities in Money Market Fund are valued daily at amortized cost, which
approximates market value, in order to maintain a constant net asset value of $1
per share.
Repurchase Agreements
Securities pledged as collateral for repurchase agreements are held by the
custodian bank until maturity of the repurchase agreement. Provisions of the
agreement ensure that the market value of the collateral, including accrued
interest, is sufficient in the event of default; however, in the event of
default or bankruptcy by the other party to the agreement, realization of the
collateral may be delayed or limited.
Futures Contracts
In order to increase exposure to and hedge against changes in the market,
Reserve Fund may buy and sell futures contracts. The risks of entering into
futures contracts include the possibility that changes in the value of the
contract may not correlate with changes in the value of the underlying
securities. Futures contracts are valued at the settlement price of the exchange
on which they are traded.
Upon entering into a futures contract, Reserve Fund is required to deposit
either cash or securities, representing the initial margin, equal to a certain
percentage of the contract value. Subsequent changes in the value of the
contract, or variation margin, are recorded as unrealized gains and losses. The
variation margin is paid or received in cash daily by Reserve Fund. Reserve Fund
realizes a gain or loss when the contract is closed or expires.
Foreign Currency Translations and Foreign Currency Contracts
Reserve Fund may invest in foreign securities. The market value of securities
and other assets and liabilities denominated in foreign currencies is translated
daily into U.S. dollars at the closing rate of exchange. Purchases and sales of
securities, income and expenses are translated at the exchange rate on the
transaction date. Exchange gains (losses) may also be realized between the trade
and settlement dates on security and foreign currency contract transactions.
20
<PAGE>
Notes to Financial Statements
-----------------------------
IAI Reserve Fund, IAI Money Market Fund
January 31, 1996
[1] Summary of Significant Accounting Policies
(Cont.)
Reserve Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss from
investments.
Reserve Fund may enter into foreign currency exchange contracts for operational
purposes and to protect against adverse exchange rate fluctuations. The net U.S.
dollar value of foreign currency underlying all contractual commitments held by
Reserve Fund and the resulting unrealized appreciation or depreciation are
determined using foreign currency exchange rates from an independent pricing
service. Reserve Fund is subject to the credit risk that the other party will
not complete the obligations of the contract.
Federal Taxes
Since it is each Fund's policy to comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies and to distribute all
their taxable income to shareholders, no provision for income taxes is required.
In order to avoid the payment of any federal excise taxes, the Funds are
required to distribute substantially all of their net investment income and net
realized gains on a calendar year basis.
Net investment income and net realized gains may differ for financial statement
and tax purposes primarily because of the deferral of "wash sale" losses for tax
purposes. The character of distributions made during the year for net investment
income or net realized gains may also differ from its ultimate characterization
for tax purposes. On the statement of assets and liabilities, as a result of
permanent book-to-tax differences, undistributed net investment income and
accumulated net realized losses have been decreased by $72,500 for Reserve Fund.
For federal income tax purposes, Reserve Fund has a capital loss carryover of
approximately $1,404,000 at January 31, 1996 which, if not offset by subsequent
capital gains, will expire in 2002 and 2003. It is unlikely the Board of
Directors will authorize a distribution of any net realized gains until the
available capital loss carryover is offset or expires.
Security Transactions and Investment Income
The Funds record security transactions on trade date, the date the securities
are purchased or sold. Interest income is accrued daily. Reserve Fund amortizes
discount purchased on long-term bonds using the level yield method of
amortization. For Money Market Fund, discounts and premiums are accreted and
amortized, respectively, to interest income over the lives of the respective
securities. Security gains and losses are determined on the basis of identified
cost, which is the same basis used for federal income tax purposes.
Distributions to Shareholders
Distributions to Reserve Fund shareholders are recorded on the ex-dividend date.
Distributions from net investment income are paid monthly. For Money Market
Fund, distributions from net investment income are declared daily and paid on
the first business day of the following month. Capital gains for the Funds, if
any, are primarily distributed as of the end of the calendar year. Additional
capital gains distributions as needed to comply with federal tax regulations are
distributed during the year.
21
<PAGE>
Notes to Financial Statements
-----------------------------
IAI Reserve Fund, IAI Money Market Fund
January 31, 1996
[1] Summary of Significant Accounting Policies (Cont.)
Organization Costs
Organization costs are being amortized over 60 months on a straight-line basis.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported results of operations during the reporting period. Actual results
could differ from those estimates.
[2] Commitments and Contingencies
For purposes of obtaining certain types of insurance coverage for the Funds and
their officers and directors, the Funds are policyholders in an industry-
sponsored mutual insurance company (the Company). In connection with their
obligations as policyholders, the Funds have made payments to the Company which
have been capitalized. Also, the Funds are committed to make future capital
contributions, if requested by the Company.
Reserve Fund and Money Market Fund have available $15,000,000 and $9,000,000
lines of credit, respectively, with a bank at the prime interest rate. To the
extent funds are drawn against the line, securities are held in a segregated
account. No compensating balances or commitment fees are required under the line
of credit. There were no borrowings outstanding at January 31, 1996.
[3] Fees and Expenses
Under the terms of an investment advisory agreement, the Funds pay Investment
Advisers, Inc. (Advisers) a monthly management fee computed at an annual rate of
.50% of the average month-end net assets for Reserve Fund and .30% of average
daily net assets for Money Market Fund.
Each Fund also pays an annual fee to Advisers for acting as the Fund's dividend-
disbursing, administrative, and accounting services agent. The fee is computed
monthly on the average month-end net assets for Reserve Fund and average daily
net assets for Money Market Fund at an annual rate of .20%.
Reserve Fund has adopted a plan of distribution with IAI Securities, Inc.
(Distributor), the Fund's distributor. Under the Plan, Reserve Fund pays
Distributor a monthly fee to cover expenses incurred in the distribution and
promotion of Reserve Fund's shares. The fee is equal to an annual rate of .10%
of Reserve Fund's average month-end net assets.
In addition to the advisory, distribution, and the dividend-disbursing,
administrative, and accounting services fees, each Fund is responsible for
paying its operating expenses, including costs incurred in the purchase and sale
of assets. Advisers and Distributor have contractually agreed to reimburse
Reserve Fund to the extent total expenses, excluding costs incurred in the
purchase and sale of assets, exceed, on an annual basis, .85% of average month-
end net assets.
Additionally, Advisers has voluntarily agreed to waive fees and expenses for
Money Market Fund in excess of .50% of average daily net assets through June 30,
1996.
22
<PAGE>
Notes to Financial Statements
-----------------------------
IAI Reserve Fund, IAI Money Market Fund
January 31, 1996
[4] Capital Stock
The Funds each have authorized 10 billion shares of $.01 par value stock.
Transactions in shares of capital stock during the year ended January 31, 1996,
and the period ended January 31, 1995 were as follows:
<TABLE>
<CAPTION>
IAI Reserve Fund IAI Money Market Fund
- -------------------------------------------------------------------------------------------------------------------
Year ended Period from Year ended Period from
January 31, April 1, 1994 to January 31, April 1, 1994 to
1996 January 31,1995 1996 January 31,1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 18,896,381 12,212,854 415,404,027 130,873,884
Issued for reinvested distributions 403,515 338,618 1,629,448 793,295
Redeemed (21,617,432) (14,636,560) (422,815,177) (128,283,703)
-----------------------------------------------------------------
Increase (decrease) in shares outstanding (2,317,536) (2,085,088) (5,781,702) 3,383,476
=================================================================
</TABLE>
[5] Purchases and Sales of Securities
For the year ended January 31, 1996, purchases of securities and sales proceeds
for the Funds were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Purchases Sales
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
IAI Reserve Fund (excludes short-term securities) $ 93,627,209 $ 99,805,027
IAI Money Market Fund $1,042,638,714 $1,050,385,014
</TABLE>
[6] Open Futures Contracts
The financial futures contracts shown below were open as of January 31, 1996 for
the IAI Reserve Fund. The market value of securities deposited to cover initial
margin requirements for the open positions at January 31, 1996 was $98,859.
<TABLE>
<CAPTION>
Futures
- -----------------------------------------------------------------------------------------------------------------
Number of Expiration Market Unrealized
Type Contracts Month Position Value Gains (Losses)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
5 year U.S. Treasury Note 20 March 1996 Short $2,211,874 ($18,587)
10 year U.S. Treasury Note 10 March 1996 Short $1,148,438 2,113
--------------
($16,474)
</TABLE>
23
<PAGE>
Independent Auditors' Report
----------------------------
IAI Reserve Fund, IAI Money Market Fund
The Board of Directors and Shareholders
IAI Investment Funds V, Inc.
IAI Investment Funds VI, Inc.:
We have audited the accompanying statements of assets and liabilities, including
the fund portfolios of IAI Reserve Fund (a portfolio within IAI Investment Funds
V, Inc.) and IAI Money Market Fund (a portfolio within IAI Investment Funds VI,
Inc.) as of January 31, 1996, and the related statements of operations for the
year then ended, the statements of changes in net assets for the year then ended
and the period from April 1, 1994 to January 31, 1995, and the financial
highlights for the periods presented on pages 18 and 19 of the annual report.
These financial statements and the financial highlights are the responsibility
of the Funds' management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased but not received, we request confirmations
from brokers and where replies are not received, we carry out other appropriate
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of IAI
Reserve Fund and IAI Money Market Fund at January 31, 1996, the results of their
operations for the year then ended, and the changes in their net assets and the
financial highlights for the periods stated in the first paragraph above, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 8, 1996
24
<PAGE>
Federal Tax Information
-----------------------
IAI Reserve Fund, IAI Money Market Fund
We are required by federal tax regulations to provide shareholders with certain
information regarding dividend distributions paid during our fiscal year. The
figures provided are for information purposes only and should not be used for
reporting to federal or state revenue agencies. You will receive all necessary
tax information on Form 1099-DIV, Dividends and Distributions, in January of
each year.
(A) includes distribution of short-term capital gains, if any, which are taxable
as ordinary income.
IAI Reserve Fund
<TABLE>
<CAPTION>
--------------------------------
Payable Date Ordinary
Income (A)
--------------------------------
<S> <C>
February 1995 $.0400
March 1995 .0400
April 1995 .0435
May 1995 .0450
June 1995 .0480
July 1995 .0480
August 1995 .0480
September 1995 .0480
October 1995 .0400
November 1995 .0400
December 1995 .0823
January 1996 .0200
--------------------------------
$.5428
IAI Money Market Fund
--------------------------------
Payable Date Ordinary
Income (A)
--------------------------------
February 1995 $.0041
March 1995 .0047
April 1995 .0043
May 1995 .0049
June 1995 .0048
July 1995 .0043
August 1995 .0045
September 1995 .0042
October 1995 .0045
November 1995 .0043
December 1995 .0046
January 1996 .0042
--------------------------------
$.0534
</TABLE>
25
<PAGE>
IAI Mutual Fund Family
----------------------
TO DIVERSIFY YOUR PORTFOLIO, PLEASE CONSIDER ALL OF THE
MUTUAL FUNDS IN OUR FUND FAMILY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Secondary
IAI Fund Primary Objective Objective Portfolio Composition
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
IAI Developing Countries Fund Capital Appreciation -- Equity securities of companies in
developing countries
- -----------------------------------------------------------------------------------------------------------------------------------
IAI International Fund Capital Appreciation Income Equity securities of non-U.S. companies
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Emerging Growth Fund Capital Appreciation -- Common stocks of small to medium-sized
(closed to new investors emerging growth companies
as of 2/1/96)
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Capital Appreciation Fund Capital Appreciation -- Common stocks of medium-sized growth
companies
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Midcap Growth Fund Capital Appreciation -- Common stocks of medium-sized growth
companies
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Regional Fund Capital Appreciation -- Common stocks of Upper Midwest companies
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Growth Fund Capital Appreciation -- Common stocks with potential for
above-average growth and appreciation
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Value Fund Capital Appreciation -- Common stocks which are considered to be
undervalued
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Growth & Income Fund Capital Appreciation Income Common stocks with potential for long-term
appreciation, and common stocks that are
expected to produce income
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Balanced Fund Total Return Income Common stocks, investment grade bonds and
[Capital Appreciation + Income] short-term instruments
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Bond Fund Income Capital Preservation Investment grade bonds
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Minnesota Tax Free Fund Tax-free Income Capital Preservation Investment grade municipal bonds
[Exempt from Federal Income Taxes]
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Government Fund Income Capital Preservation U.S. Government securities
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Reserve Fund Stability/Liquidity Income The portfolio has a maximum average
maturity of 25 months, investing primarily
in investment grade bonds
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Money Market Fund Stability/Liquidity Income The portfolio's average dollar-weighted
maturity is less than 90 days, investing in
high quality, money market securities
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
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<PAGE>
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<PAGE>
DISTRIBUTOR
IAI SECURITIES, INC.
INVESTMENT ADVISER
AND MANAGER
INVESTMENT ADVISERS, INC.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
CUSTODIAN
Norwest Bank Minnesota, N.A.
Sixth and Marquette
Minneapolis, MN 55479
LEGAL COUNSEL
Dorsey & Whitney P.L.L.P.
220 South Sixth Street
Minneapolis, MN 55402
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
4200 Norwest Center
Minneapolis, MN 55402
DIRECTORS
Madeline Betsch
W. William Hodgson
George R. Long
Noel P. Rahn
Richard E. Struthers
J. Peter Thompson
Charles H. Withers
<PAGE>
[IAI LOGO]
MUTUAL FUNDS
3700 FIRST BANK PLACE, P.O. BOX 357, MINNEAPOLIS, MINNESOTA 55440-0357 USA
FAX 612.376.2737
800.945.3863
612.376.2700
