ARIEL GROWTH FUND, N-30B-2, 1998-08-28

ARIEL GROWTH FUND
N-30B-2, 1998-08-28

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[LOGO]

Quarterly Report
June 30, 1998

THE PATIENT INVESTOR

Ariel Appreciation Fund
Ariel Growth Fund
Ariel Premier Bond Fund

<PAGE>

THE TORTOISE AND THE HARE

One day a Hare was making fun of a Tortoise for being so slow upon his feet.
"Wait a bit," said the tortoise, "I'll run a race with you, and I'll wager that
I'll win." The Hare, who was much amused at the idea, said "Let's
try and see..." When the time came both started off together...The Hare nearly
turned a somersault in his haste, while the Tortoise began at a slow but steady
pace. Meanwhile the Tortoise kept plodding on...

<PAGE>

Ariel Investment Trust
307 North Michigan Avenue
Suite 500
Chicago, Illinois 60601
800.292.7435
312.726.0140
Fax 312.726.7473

TABLE OF CONTENTS

FOR MORE INFORMATION ABOUT THE ARIEL MUTUAL FUNDS INCLUDING
MANAGEMENT FEES AND EXPENSES, PLEASE SEE THE CURRENT PROSPECTUS WHICH MUST
PRECEDE OR ACCOMPANY THIS REPORT. DISTRIBUTED BY ARIEL DISTRIBUTORS, INC.

PERFORMANCE DATA PROVIDED REPRESENTS PAST PERFORMANCE AND IS NOT INDICATIVE OF
FUTURE RESULTS. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL
FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST.

<TABLE>
<CAPTION>
TABLE OF CONTENTS

<S> <C>
The Patient Investor 2
Company Updates 6
Ariel Equity Funds 10
Schedule of Equity Investments 12
Equity Statistical Summary 16
Ariel Bond Fund 18
Schedule of Bond Investments 20
Board of Trustees 24

</TABLE>

<PAGE>

SLOW AND STEADY WINS THE RACE.--AESOP
THE PATIENT INVESTOR-Registered Trademark-

DEAR FELLOW SHAREHOLDER: For the second quarter ending June 30, 1998, the Ariel
Growth Fund managed to avoid the carnage in the small-cap arena with a slight
loss of -0.7%. The mid-cap holdings of the Ariel Appreciation Fund fared even
better with a +2.0% gain. By comparison, the small and medium-sized companies of
the Russell 2500 Index fell -4.2% over the same three-month period while large
cap stocks continued their dominance--as evidenced by the +3.3% rise of the
Standard & Poor's 500 Index.

Adhering to a conservative and disciplined, "patient" investing strategy has
enabled the Ariel stock funds to avoid some of the areas that have hampered
other small and mid-cap managers in recent periods. As such, for the 12 months
ending June 30, 1998, the Growth and Appreciation Funds have risen +29.7% and
+34.4% respectively, during a time when the Russell 2500 has gained +18.1%. With
these one year returns, Lipper Analytical Services ranks the Ariel Growth Fund
35th out of 524 Small Company Funds--out of 284 offerings in the Mid-Cap
category, the Ariel Appreciation Fund ranks 17th.

PORTFOLIO COMINGS AND GOINGS

In the face of the growing popularity and subsequent share price appreciation of
a number of our long-time holdings, we continued to take profits in some of our
favorite companies including office furniture manufacturer, Herman Miller (OTC:
MLHR).

On a separate note, we exited Midas, Inc.--a spin-off of Pepsi bottler, Whitman
Corporation (NYSE: WH)--as we lacked enthusiasm for the long-term prospects of
the replacement muffler business. With this said, strong contributions from
Whitman's core business as well as eye-care provider, Allergan, Inc. (NYSE: AGN)
and toy manufacturer, Hasbro, Inc. (NYSE: HAS) have enhanced our results in
recent months. By contrast, children's book publisher, Golden Books Family
Entertainment (OTC: GBFE), and niche manufacturer, W.H. Brady Co. (OTC: BRCOA),
have languished and remain under intense review.

<PAGE>

ON A BROKEN CHAINSAW AND BURNT CHICKEN

After reading a spate of recent articles about hot stocks gone
cold--specifically, the sacking of mega-CEO, Al Dunlap, and the uncertain fate
of Sunbeam Corporation (NYSE: SOC) as well as the near fatal state of one-time
Wall Street darling, Boston Chicken (OTC: BOST), we again got to thinking about
the key ingredients of leadership. In so doing, we felt it worth revisiting some
of the qualities of good management exhibited by those who run companies in the
Ariel Mutual Fund stock portfolios.

Indeed, hindsight is twenty-twenty but we have always been skeptical of the
glamorized portrayals of the now infamous "Chainsaw Al." Although his merciless
cost cutting won national acclaim at Scott Paper Company and shares of Sunbeam
Corporation initially soared on the news of his arrival, we questioned how such
a vainglorious breed of "professional manager" could engender employee loyalty
and keep a dedicated team in place. Our misgivings were magnified after reading
a December 2, 1996 BUSINESSWEEK story entitled "Who is the real 'Chainsaw Al'?"
The piece revealed disturbing details of a man accused of emotional and physical
abuse by his first wife. A man too busy to attend the funerals of either his
mother or father. A man unwilling to pay his son's college tuition and for whom
he paid just $15 a week in child support. A man estranged from his only sibling
and unwilling to help his leukemia stricken niece. What's more, by his own
accounts, his relentless drive was borne of a childhood plagued by poverty and
uncertainty, yet family photos depict summer vacations to New England, Canada,
Florida and the New Jersey shore. And let's not forget the college graduation
presents--a Bonneville convertible and the trip to Europe.

Against this backdrop, we were not surprised to later learn of employee
defections and ethical questions surrounding suspicious accounting tactics,
inflated revenues and profits. Nor were we shocked by this year's rapid descent
of the one-time hot stock that plummeted from a high of $52 to just above $8 in
three short months. Why? Because Al Dunlap's strongest supporters could never be
found inside his corporate ranks, nor could he point to his customers. As long
as the stock went up, BUSINESSWEEK correctly surmised, "Dunlap's most devoted
fans resided on Wall Street." Even those on Wall Street who were suspicious
succumbed. As one analyst stated, "I didn't necessarily like him or trust him
but I thought my clients could make money on him. I knew they just had to get
out at the right time." If only it were so easy. Of course, by the time most
investors bailed out, it was too late.

And then there was Boston Chicken a.k.a. Boston Market. On its first day of
trading in November 1993, the stock was eaten up by gluttonous investors and
closed with an eye popping one-day return of 143%. With such a dramatic debut, a
cult following resulted. The Chicken (as it was dubbed on Wall Street) was
certain to be the next McDonald's. Restaurant analysts rebuffed the risks
inherent to owning an unproven "concept" stock selling at 78 times earnings. The
company's chief executive, Scott Beck, was held up as the "super"

<PAGE>

entrepreneur of the decade--lauded for his vision in having started five
different companies in 20 years including Blockbuster Entertainment. Because AT
ONE TIME Blockbuster had been successful, many assumed take home videos would
not be very different from take home food. But typical of our contrarian nature,
we reminded our readers in our June 1994 quarterly letter that "management's
'successful track record' [may have been] in renting movie videos, but it was
not competing against fast food giants like McDonald's and Kentucky Fried
Chicken." Fast forward to 1998 and the Chicken is on life support. The stock has
witnessed a dramatic descent from a $41 high to under $2 today. The super CEO
has quit, the company is laden with debt, its accounting practices have been
called into question and there are rumors of bankruptcy. In a recent interview
with THE DENVER POST, Beck attempted to explain the debacle. Amazingly, he
recounts, he "never intended to be in the restaurant business." Although the
company raised $54 million in 1994 from eager investors as a "restaurant," its
shareholders must have been astonished to learn the intention was for the
company to be a chain of grocery stores that specialized in pre-made meals for
working families too busy to cook. But because Wall Street liked the restaurant
story and the stock was going up, Beck says, "we just moved more and more in
that direction." One thing we can say is that his candor is refreshing--albeit
disturbing. He says he was surprised by the "sheer complexity" of the restaurant
business. Adding, "there are more variables and moving pieces than you can
imagine." In our view this should not come as a shock since he had no experience
in the business. Moreover, he admits, "There's a passion I've got for retail
that I've never had for restaurants and that's an issue because when you're not
passionate, it's not good." So, he left the company and gave up because, "we
didn't feel we had the energy, enthusiasm or credibility to lead it out of the
trough it's in." Instead of chickens, it's the shareholders who have been
roasted.

ON STRING TIES AND A WORKAHOLIC

When these tales of management woe are compared to the people who run the
companies in the Ariel Growth and Appreciation Fund portfolios, the intangible
qualities of leadership that are so very hard to explain are most effectively
demonstrated by example. A quick contrast of the Chief Executive Officers of two
portfolio favorites--Bob Evans Farms (OTC: BOBE) and Ecolab, Inc. (NYSE:
ECL)--with Al Dunlap and Scott Beck says it all.

Dan Evans began his career at the family company in 1956--dividing his days
between the slaughterhouse and the sausage production room. From this modest
start, he has ascended the company's leadership ranks and come to personify the
Bob Evans culture with his staple of string ties (required wear for all
management) and cowboy boots (he takes pride in the fact that he does not own
any shoes). To FINANCIAL WORLD he once noted, "he wouldn't dream of arriving to
work any later than 6:00 a.m. [and] spends 160 days a year travelling" to visit
his employees at their restaurants. He has never sold one share of his personal
holdings in Bob Evans. And the $14.6 million in stock he currently owns makes up
the vast majority of his net worth. "He may convey the impression that he's a
simple, down-to-

<PAGE>

earth country boy," once commented Jack Breen, chairman of paint manufacturer
Sherwin-Williams and former Bob Evans board member, "but he's as smart as they
come, he's a fierce competitor...and he's been a mentor to the young business
executives in the company." Not surprisingly, Bob Evans has gone from $15
million in sales to over $887 million under his leadership. Against this
backdrop, it's easy to understand the familiar company slogan, "We do it right
or we don't do it."

Where Dan Evans "eats, sleeps and dreams sausages," Ecolab Chief Executive
Officer Al Schuman lives to clean. His hobbies are listed as "work, fishing and
tennis." In that order. A 1995 profile in NATION'S RESTAURANT NEWS detailed how
this "self proclaimed workaholic" grew Ecolab from "a small family-run business
to a powerhouse" that commands dominant market share in cleaning and maintenance
products for the hospitality and institutional markets. He has dedicated 41
years to doing so and still works like he's got something to prove. As Ecolab
board Chairman and Chief Financial Officer, Michael Shannon, once commented,
"Al's always thinking about what the customer wants, and he's never satisfied
with the current state of affairs." His compulsion to succeed and passion for
the business dates back to his earliest days at the company when, at his own
initiative, he spent every Saturday for two years at the home of his
supervisor--sharpening his knowledge of the company's products and honing his
sales techniques. Despite his burning "ambitions to climb through the company's
executive ranks," he did not skyrocket to success and then flameout like Dunlap
and Beck. Instead, Schuman paid his dues and slowly but steadily ascended the
corporate ladder. Fifteen years after joining Ecolab, he was named Vice
President; twenty years later, he earned the titles of President and Chief
Operating Officer; and in 1995, he got the top job. When describing his success,
he notes, "It's important that I grew up with this company. If I say, 'Let's do
something,' people don't second-guess me. They don't say, 'That guy was building
airplanes eight years ago. What the hell does he know.'"

Although the industries may differ substantially, there are a number of common
threads in the Dan Evans and Al Schuman stories. Both individuals are focused
and have patiently spent decades working to do one thing well. As a result, they
have continued to improve their own management skills; their products have only
gotten better and better; and they have been able to attract people who also see
their vision and are thereby able to embrace a clear mission. In today's world
of hot stocks, mega-mergers and professional managers, these CEOs are a rare and
precious breed.

As always, we appreciate the opportunity to serve you and welcome any comments
or suggestions you may have.

Sincerely,

/s/ John W. Rogers, Jr. /s/ Eric T. McKissack

John W. Rogers, Jr. Eric T. McKissack, CFA
Portfolio Manager Portfolio Manager
Ariel Growth Fund Ariel Appreciation Fund

<PAGE>

[LOGO]
INTERFACE
2859 PACES FERRY RD.
SUITE 2000
ATLANTA, GA 30339
(770) 437-6800

COMPANY

INTERFACE, INC. (NASDAQ: IFSIA) has continued to post very impressive growth in
revenue, earnings and levels of profitability over the past several quarters as
the company continues to benefit from a robust office real estate environment
and internally driven initiatives. We forecast revenues over $1.3 billion and
operating profit of $120 million in 1998, up from $800 million and $58 million
in 1995. Earnings grew 45% in 1996 and 29% in 1997. We forecast another 29%
growth in 1998 and 20% in 1999. Interface has increased its dominance in its
core carpet tile product and is recognized as one of the most respected
suppliers of floor coverings by the interior design community. The company has
also been very aggressive in establishing global account relationships with
Fortune 500 firms to become exclusive providers for their carpeting needs
worldwide. Interface has also been very successful in making niche acquisitions
to supplement its strong internal growth.

We have had a number of opportunities over the past several months to visit
various levels of Interface's management. This management team has instilled a
team-oriented, employee empowered corporate culture with goals that are in sync
with those of management and shareholder bases. Interface has also been
revolutionary in changing its manufacturing processes to have the least possible
impact on the environment. The company's "Quest" and "War-on-Waste" cost cutting
programs have become a core part of the Interface culture and continue to drive
improving margins and returns. Management and employee compensation are directly
tied to the performance of these programs. We forecast operating margins to be
over 9% in 1998 and approximately 10% in 1999. This compares to about 7% three
years ago.

Interface has been one of our best performing securities during 1997 and the
first half of 1998. Wall Street has finally begun to realize the quality of the
Interface franchise, its management, earnings potential and its future growth
opportunities. Despite the healthy increase in the stock price, we believe that
Interface remains an excellent core holding in our portfolio and at $20.19
offers exceptional value selling at 17 times next year's estimated earnings and
7 times cash flow.

<PAGE>

UPDATES

THE CLOROX COMPANY (NYSE: CLX)

<TABLE>
<CAPTION>
Forward Price/ Market
FY June Sales EPS Earnings Ratio Price Capitalization
- ------- ----- --- -------------- ----- --------------

We recently sold our last shares of Clorox at approximately $94 per share. Our
initial recommendation to buy the stock was in August, 1985 at a per share price
of $10. Over our holding period, the investment performed quite well--better
than 20% annually.

Despite its brand name, when we first purchased Clorox, it was not well known.
The company had a small portfolio of respected consumer brands and a number of
businesses that did not fit. Over our holding period, under-performing assets
were sold, attractive acquisitions consummated (Pine-Sol dilutable cleaner,
S.O.S. steel wool soap pads, and Armor All protectants), and core brands (Clorox
bleach, Formula 409 cleaning products, Kingsford Charcoal, and Hidden Valley
salad dressing) were strengthened. In addition, an intense review of expenses
led to more than $100 million in annual cost savings. Return on average equity
rose from 18% to 26% over the period.

The management team is highly regarded for its accomplishments and considered to
be one of the very best in the industry. As the company has grown and its track
record lengthened, it has gained more visibility in the investment community.
When we purchased the shares it was not widely followed by Wall Street analysts
and was selling at just 11.4 times forward earnings. Today, the stock is very
popular among investors and the multiple has almost tripled. Over our holding
period, the multiple averaged approximately 15-18 times. While the company
continues to perform well and we are as enthusiastic about its future prospects
as ever, we have sold the stock because of its rich valuation. As committed and
disciplined value investors, we buy stocks when they are misunderstood or their
strengths are not reflected in their share price. When all of the possible good
news is reflected in the share price and the stock becomes richly valued, we
sell rather than get caught up in the enthusiasm of the moment. Clorox is a
company that we would gladly own again in our portfolios, but only at much lower
prices.

CLOROX
1221 BROADWAY
OAKLAND, CA 94612
(510) 271-7000

<PAGE>

COMPANY

CNI
200 E. Van Buren St.
Phoenix, AZ 85004
(602)444-8000

CENTRAL NEWSPAPERS (NYSE: ECP) ## After reporting advertising revenue growth of
13% in 1997 and investors subsequently witnessing a 70% return in its stock,
Central Newspapers appears to be taking a breather so far this year. Although we
have witnessed a modest decline in share price, our long-term outlook on the
industry remains favorable. We expect Central to report a solid second half
given the outlook for favorable advertising comparisons, an improvement in
newsprint prices and a possible repurchase of a 'significant' number of shares.

Difficult advertising revenue comparisons in the first half of 1998 limited
results as Central reported relatively flat operating earnings per share of
$1.65 versus $1.64. Despite this slowdown in revenue, however, both the Phoenix
and Indianapolis economies remain quite healthy. Furthermore, sound circulation
gains at the ARIZONA REPUBLIC should soon lead to advertising rate increases.
Revenue comparisons should begin to ease in the third quarter as the company
cycles through last year's aggressive retail campaigns from two major department
stores in Indianapolis.

Although Central is currently experiencing higher year-to-year newsprint price
comparisons, we also expect this situation to ease in the second half.
Management and industry participants indicated additional imports and depressed
exports are allowing extra capacity to remain in the market. Thus, companies are
expecting flat to slightly down newsprint prices, from current levels, for the
remainder of 1998.

Although Central was not active in the first half of the year, the company spent
nearly $30 million to purchase more than 450,000 shares in early July. Even with
this expenditure, Central still holds approximately $50 million in cash with no
debt. Furthermore, in mid-June, Central announced talks with the Nina Mason
Pulliam Charitable Trust to repurchase a significant portion of the 5.45 million
shares held by the Trust. If the company does reach an agreement, we believe a
large share repurchase would be highly accretive to our 1999 earnings estimates.

We find Central's current valuation very compelling as the stock is inexpensive
on an absolute and relative basis. While Central trades at approximately 7x our
calendar 1999 enterprise value to operating cash flow estimate, the industry is
trading at a multiple closer to 9x. Thus, we recommend purchase of Central
Newspapers at current levels.

<PAGE>

UPDATES

SPECIALTY EQUIPMENT COS. (OTC: SPEQ) Fundamentals at Specialty Equipment remain
strong as the company benefits from continued growth in the foodservice and
beverage industries. Specialty recently reported solid fiscal year January 1998
operating results as revenues increased 8%, an improvement from the 2% growth
rate the prior year. Operating cash flow rose a modest 2% as lower-margin
beverage cooler revenues and expenses related to the Gamko acquisition
negatively impacted profit margins. Reported earnings per share, before an
extraordinary item, increased 9% to $1.86. We believe Specialty is poised to
report another record year in operating results in fiscal 1999 as first quarter
revenues and operating cash flow, respectively, increased 17% and 12%. Reported
earnings per share came in at $0.47 versus $0.41. Based on several recent
meetings with management and leading competitors, we feel these favorable trends
should continue for the foreseeable future. Increased demand for the company's
Beverage-Air display coolers and contribution from Gamko, an international
manufacturer of commercial refrigeration equipment, were the primary drivers
behind the growth. Bottling companies for the major soft-drink firms continue to
drive demand for Beverage-Air merchandisers as these players, primarily PepsiCo
and Coca-Cola, focus their marketing attention towards increasing
point-of-purchase "cold" servings.

Specialty continues to generate strong cash flow. As such, its balance sheet has
strengthened considerably since our initial recommendation in May 1995. To
enhance shareholder value, the company has elected to reduce net outstanding
debt, repurchase stock and explore niche acquisitions. Specialty's net
outstanding debt stood at $131 million at April 1998 compared to $192 million at
January 1995. This improvement came despite the company's $8 million share
repurchases over the last nine months and it's allocation of $21 million for the
Gamko acquisition in August 1997.

Currently trading at $22.63, Specialty is one of Ariel's most attractive stocks
on nearly all valuation measures. We recommend investors purchase shares as we
approximate the company's private market value to be $35 per share.

[LOGO]
1245 CORPORATE BLVD.
SUITE 401
AURORA, IL 60504
(630) 585-5111

<PAGE>

TEN LARGEST HOLDINGS
as of June 30, 1998

1 INTERFACE, INC.
World's leading manufacturer and marketer of carpet tiles

2 HASBRO, INC.
Leading toy manufacturer

3 FIRST BRANDS CORP.
Manufacturer and marketer of consumer products for home and automobile
markets

4 SPECIALTY EQUIPMENT
Manufacturer of commercial and institutional food service equipment

5 MBIA, INC.
Leading insurer of municipal bonds

6 CENTRAL NEWSPAPERS, INC.
Leading media company with daily newspapers in Phoenix and Indianapolis

7 ROUSE CO.
Retail mall developer

8 ECOLAB, INC.
Leading developer and marketer of premium cleaning and sanitizing products
and services for the hospitality markets

9 MCCORMICK & CO.
World's largest spice company

10 WHITMAN CORP.
Pepsi Co's largest independent domestic bottler

ARIEL EQUITY FUNDS

ARIEL GROWTH FUND

Inception November 6, 1986

ARIEL GROWTH FUND SEEKS LONG-TERM CAPITAL APPRECIATION BY INVESTING IN
UNDERVALUED COMPANIES IN CONSISTENT INDUSTRIES THAT SHOW STRONG POTENTIAL FOR
GROWTH BUT DOES SO AT A HIGHER RISK THAN THE ARIEL APPRECIATION FUND. THE FUND
LOOKS FOR ISSUERS THAT PROVIDE QUALITY PRODUCTS OR SERVICES. TO CAPTURE
ANTICIPATED GROWTH, THE FUND GENERALLY HOLDS INVESTMENTS FOR A RELATIVELY LONG
PERIOD, USUALLY THREE TO FIVE YEARS. THE FUND INVESTS IN COMPANIES WITH MARKET
CAPITALIZATIONS UNDER $1.5 BILLION WITH AN EMPHASIS ON SMALLER CAPITALIZATION
(SMALL CAP) STOCKS.

AVERAGE ANNUAL TOTAL RETURN AS OF JUNE 30, 1998

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1 Year 3 Year 5 Year Life of Fund
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ARIEL GROWTH FUND +29.7% +26.3% +18.4% +15.9%
</TABLE>

Total return does not reflect a maximum 4.75% sales load that was charged prior
to July 15, 1994.

[CHART]

ARIEL GROWTH FUND
PORTFOLIO COMPOSITION
<S> <C>
Health Care 3.4%
Technology 3.8%
Financial Services 9.2%
Producer Durables 9.4%
Consumer Staples 11.7%
Utilities 3.4%
Cash 0.8%
Consumer Discretionary & Services 35.1%
Materials and Processing 23.1%
</TABLE>

[CHART]

S&P 500
PORTFOLIO COMPOSITION
<S> <C>
Autos and Transportation 3.3%
Producer Durables 3.5%
Materials and Processing 4.7%
Other 5.6%
Integrated Oils 6.5%
Utilities 10.0%
Consumer Staples 10.1%
Other Energy 1.3%
Financial Services 18.3%
Technology 13.0%
Health Care 12.1%
Consumer Discretionary & Services 11.6%
</TABLE>

[GRAPH]

Comparison of change in value of $10,000 invested in Ariel Growth Fund and
comparable indices*

<TABLE>

<S> <C> <C>
Ariel Growth Fund Nov 86 $10,000
Dec 86 $10,203
Dec 87 $11,367
Dec 88 $15,905
Dec 89 $19,900
Dec 90 $16,699
Dec 91 $22,163
Dec 92 $24,763
Dec 93 $26,924
Dec 94 $25,786
Dec 95 $30,562
Dec 96 $37,747
Dec 97 $51,502
Jun 98 $55,841

S&P 500 Nov 86 $10,000
Dec 86 $9,745
Dec 87 $10,256
Dec 88 $11,960
Dec 89 $15,749
Dec 90 $15,260
Dec 91 $19,910
Dec 92 $21,427
Dec 93 $23,587
Dec 94 $23,897
Dec 95 $32,878
Dec 96 $40,426
Dec 97 $53,914
Jun 98 $63,463

Russell 2500 Nov 86 $10,000
Dec 86 $9,737
Dec 87 $9,281
Dec 88 $11,391
Dec 89 $13,604
Dec 90 $11,580
Dec 91 $16,988
Dec 92 $19,738
Dec 93 $23,002
Dec 94 $22,759
Dec 95 $29,975
Dec 96 $35,680
Dec 97 $44,370
Jun 98 $46,881
</TABLE>

<PAGE>

ARIEL APPRECIATION FUND

Inception December 1, 1989

ARIEL APPRECIATION FUND ALSO PURSUES LONG-TERM CAPITAL APPRECIATION BY INVESTING
IN UNDERVALUED FIRMS WITH GROWTH POTENTIAL. LIKE ARIEL GROWTH FUND, THIS FUND
SEEKS OUT ISSUERS THAT PROVIDE QUALITY PRODUCTS OR SERVICES. TO CAPTURE
ANTICIPATED GROWTH, THE FUND WILL ALSO HOLD INVESTMENTS FOR A RELATIVELY LONG
PERIOD - USUALLY THREE TO FIVE YEARS. THE FUND INVESTS IN SMALL AND MIDSIZE
COMPANIES WITH MARKET CAPITALIZATIONS FROM $200 MILLION TO $5 BILLION, WITH AN
EMPHASIS ON MEDIUM CAPITALIZATION (MID CAP) STOCKS.

AVERAGE ANNUAL TOTAL RETURN AS OF JUNE 30, 1998

ARIEL APPRECIATION FUND +34.4% +29.2% +19.5% +15.6%
</TABLE>

Total return does not reflect a maximum 4.75% sales load that was charged prior
to July 15, 1994.

[CHART]

ARIEL APPRECIATION FUND
PORTFOLIO COMPOSITION
<S> <C>
Cash 3.0%
Utilities 4.4%
Health Care 6.2%
Producer Durables 8.0%
Consumer Staples 9.9%
Financial Services 13.1%
Technology 2.4%
Consumer Discretionary & Services 36.4%
Materials and Processing 16.5%
</TABLE>

[CHART]

S&P 500
PORTFOLIO COMPOSIITON
<S> <C>
Autos and Transportation 3.3%
Producer Durables 3.5%
Materials and Processing 4.7%
Other 5.6%
Integrated Oils 6.5%
Utilities 10.0%
Consumer Staples 10.1%
Other Energy 1.3%
Financial Services 18.3%
Technology 13.0%
Health Care 12.1%
Consumer Discretionary & Services 11.6%
</TABLE>

[GRAPH]

Comparison of change in value of 10,000 invested in Ariel Appreciation Fund and
comparable indices*

<TABLE>

<S> <C> <C>
Ariel Appreciation Fund Dec 89 $10,000
Dec 90 $9,902
Dec 91 $13,184
Dec 92 $14,930
Dec 93 $16,115
Dec 94 $14,763
Dec 95 $18,330
Dec 96 $22,677
Dec 97 $31,283
Jun 98 $34,809

S&P 500 Dec 89 $10,000
Dec 90 $9,922
Dec 91 $12,945
Dec 92 $13,932
Dec 93 $15,336
Dec 94 $15,539
Dec 95 $21,378
Dec 96 $26,286
Dec 97 $35,056
Jun 98 $41,265

Russell 2500 Dec 89 $10,000
Dec 90 $8,554
Dec 91 $12,549
Dec 92 $14,580
Dec 93 $16,992
Dec 94 $16,812
Dec 95 $22,142
Dec 96 $26,356
Dec 97 $32,776
Jun 98 $34,630
</TABLE>

TEN LARGEST HOLDINGS
as of June 30, 1998

1 HASBRO, INC.
Leading toy manufacturer

2 MBIA, INC.
Leading insurer of municipal bonds

3 CENTURY TELEPHONE ENTERPRISES
Diversified telecommunications company

4 ALLERGAN INC.
Leading provider of specialty eyecare products

5 FIRST BRANDS CORP.
Manufacturer and marketer of consumer products for home and automobile
markets

6 SPECIALTY EQUIPMENT
Manufacturer of commercial and institutional food service equipment

7 ROUSE CO.
Retail mall developer

8 HARTE-HANKS COMMUNICATIONS
Diversified communications company

9 WHITMAN CORP.
Pepsi Co's largest independent domestic bottler

10 NORTHERN TRUST CORP.
Chicago-based bank holding company

<PAGE>

SCHEDULE OF INVESTMENTS

ARIEL GROWTH FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 1998 (UNAUDITED)

Number COMMON STOCKS-99.16% Cost Market Value
of Shares
<S> <C> <C> <C>
CONSUMER DISCRETIONARY--35.11%
886,010 American Media, Inc., Class A* $7,762,944 $5,869,816
214,133 Bob Evans Farms, Inc. 2,733,800 4,536,943
137,700 Central Newspapers, Inc., Class A 3,997,847 9,604,575
394,700 First Brands Corp. 7,128,135 10,114,187
512,400 Golden Books* 5,632,708 1,969,538
275,700 Hasbro, Inc. 4,481,448 10,838,456
200,600 Lee Enterprises 5,552,216 6,143,375
205,200 Leggett & Platt, Inc. 1,071,207 5,130,000
195,200 Libbey, Inc. 7,303,618 7,478,600
105,000 Omnicom Group, Inc. 749,753 5,236,875
------- ---------
46,413,676 66,922,365
---------- ----------

CONSUMER STAPLES--11.70%
220,100 Longs Drug Stores, Inc. 4,316,111 6,355,388
225,000 McCormick & Co., Inc. 5,335,755 8,036,719
344,800 Whitman Corp. 5,500,501 7,908,850
---------- ----------
15,152,367 22,300,957
---------- ----------

</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Number COMMON STOCKS-99.16% (cont) Cost Market Value
of Shares

<S> <C> <C> <C>
FINANCIAL SERVICES --9.15%
27,200 Arthur J. Gallagher & Co. $908,305 $1,217,200
130,200 MBIA, Inc. 4,202,961 9,748,725
83,000 Northern Trust Corp. 1,447,989 6,328,750
3,900 T. Rowe Price Associates 7,130 146,494
----- -------
6,566,385 17,441,169
--------- ----------

HEALTH CARE--3.38%
138,900 Allergan, Inc. 4,364,705 6,441,487
--------- ---------

MATERIALS AND PROCESSING--23.18%
211,500 Brady (WH) Co. 5,851,934 5,882,344
285,800 Ecolab, Inc. 2,117,657 8,859,800
143,900 Hunt Mfg. Co. 1,916,478 3,408,631
547,400 Interface, Inc., Class A 4,269,388 11,050,637
296,300 Rouse Co. 5,134,962 9,314,931
357,150 Shorewood Packaging Corp.* 2,681,490 5,669,756
--------- ---------
21,971,909 44,186,099
---------- ----------

PRODUCER DURABLES--9.40%
168,120 General Binding Corp. 3,019,066 6,188,918
102,850 Hussman International, Inc. 1,355,034 1,909,153
434,100 Specialty Equipment Cos., Inc.* 5,523,313 9,821,513
--------- ---------
9,897,413 17,919,584
--------- ----------

<CAPTION>
Number COMMON STOCKS-99.16% (cont) Cost Market Value
of Shares

TECHNOLOGY--3.82%
288,100 Littelfuse, Inc.* 7,344,468 7,274,525
--------- ---------

UTILITIES--3.42%
141,900 Century Telephone Enterprises $3,181,661 $6,509,662
--------- ---------
Total Common Stocks 114,892,584 188,995,848
----------- -----------

<CAPTION>
Principal REPURCHASE
Amount AGREEMENT-0.74%

$1,401,131 State Street Bank & Trust
Company Repurchase Agreement,
4.75%, dated 6/30/98, repurchase
price $1,401,315 maturing 7/1/98
(collateralized by U.S. Treasury
Bond, 9.875%, 11/15/15) 1,401,131 1,401,131
--------- ---------

Total Repurchase Agreement 1,401,131 1,401,131
--------- ---------

Total Investments-99.90% $116,293,715 190,396,979
------------
------------

Other Assets less Liabilities-0.10% 196,465
-------

NET ASSETS-100.00% $190,593,444
------------
------------
</TABLE>

*Non-income producing

<PAGE>

ARIEL APPRECIATION FUND

SCHEDULE OF INVESTMENTS
JUNE 30, 1998 (UNAUDITED)

<TABLE>
<CAPTION>
Number COMMON STOCKS-96.99% Cost Market Value
of Shares

<S> <C> <C> <C>
CONSUMER DISCRETIONARY--36.41%
145,900 Bob Evans Farms, Inc. $2,837,068 $3,091,256
190,600 Carnival Cruise Lines, Inc. 1,459,798 7,552,525
91,800 Central Newspapers, Inc., Class A 5,056,141 6,403,050
4,190 Choicepoint Inc.* 33,284 212,119
399,300 First Brands Corp. 8,937,769 10,232,063
374,750 Harte-Hanks Communications 2,239,400 9,673,234
329,700 Hasbro, Inc. 5,763,878 12,961,331
107,200 Houghton Mifflin Co. 2,268,388 3,403,600
219,200 Lee Enterprises 6,039,403 6,713,000
307,720 Leggett & Platt, Inc. 1,876,028 7,693,000
218,600 Libbey, Inc. 8,109,286 8,375,113
160,300 Omnicom Group, Inc. 1,565,730 7,994,963
54,500 Tribune Co. 2,194,328 3,750,281
--------- ---------
48,380,501 88,055,535
---------- ----------

CONSUMER STAPLES--9.89%
225,840 Longs Drug Stores, Inc. 4,114,765 6,521,130
216,255 McCormick & Co., Inc. 5,185,410 7,724,358
421,600 Whitman Corp. 6,830,933 9,670,450
--------- ---------
16,131,108 23,915,938
---------- ----------

<CAPTION>
Number COMMON STOCKS-96.99% (cont) Cost Market Value
of Shares

FINANCIAL SERVICES--13.14%
91,700 Equifax, Inc. $1,904,985 $3,329,856
34,500 Arthur J. Gallagher & Co. 1,156,293 1,543,875
143,900 MBIA, Inc. 5,463,512 10,774,513
116,800 MBNA Corp. 899,280 3,854,400
114,700 Northern Trust Corp. 2,386,266 8,745,875
94,000 T. Rowe Price Associates 681,500 3,530,875
------- ---------
12,491,836 31,779,394
---------- ----------

HEALTH CARE--6.18%
223,200 Allergan, Inc. 7,601,291 10,350,900
182,000 Sybron Corp.* 1,050,861 4,595,500
--------- ---------
8,652,152 14,946,400
--------- ----------

MATERIALS & PROCESSING--16.52%
275,000 Brady (WH) Co. 6,904,296 7,648,438
129,600 Ecolab, Inc. 1,601,491 4,017,600
79,500 Hunt Corp. 1,853,717 1,883,156
212,200 Interface, Inc., Class A 4,200,440 4,283,788
254,500 Morton International, Inc. 7,463,539 6,362,500
309,900 Rouse Co. 4,393,037 9,742,481
379,215 Shorewood Packaging Corp.* 2,666,047 6,020,038
--------- ---------
29,082,567 39,958,001
---------- ----------

<PAGE>

Number COMMON STOCKS-96.99% (cont) Cost Market Value
of Shares
<C> <S> <C> <C>

PRODUCER DURABLES--8.04%
129,305 General Binding Corp. $2,131,765 $4,760,040
122,450 Hussman International, Inc. 1,646,582 2,272,978
45,000 Pitney-Bowes, Inc. 802,490 2,165,625
452,100 Specialty Equipment Cos., Inc.* 5,960,590 10,228,762
--------- ----------
10,541,427 19,427,405
---------- ----------

TECHNOLOGY--2.39%
229,200 Littelfuse, Inc.* 5,926,859 5,787,300
--------- ---------

UTILITIES--4.42%
232,950 Century Telephone Enterprises 5,105,899 10,686,581
--------- ----------
Total Common Stocks 136,312,349 234,556,554
---------- ----------

Principal REPURCHASE
Amount AGREEMENT-2.64% Cost Market Value

<C> <S> <C> <C>
$6,391,348 State Street Bank & Trust
Company Repurchase Agreement,
4.75%, dated 6/30/98, repurchase
price $6,392,191 maturing 7/1/98
(collateralized by U.S. Treasury
Bond, 7.25%, 5/15/16) $6,391,348 $6,391,348
---------- ----------

Total Repurchase Agreement 6,391,348 6,391,348
--------- ---------

Total Investments-99.63% $142,703,697 240,947,902
------------
------------

Other Assets less Liabilities-0.37% 883,139
-------

NET ASSETS-100.00% $241,831,041
------------
------------
</TABLE>

*Non-income producing

<PAGE>

EQUITY STATISTICAL SUMMARY

ARIEL GROWTH
(UNAUDITED)

EARNINGS PER SHARE
52 - WEEK -------------------------
RANGE 1997 1998
TICKER PRICE -------------------- ACTUAL ESTIMATED
COMPANY SYMBOL 6/30/98 LOW HIGH CALENDAR CALENDAR

<S> <C> <C> <C> <C> <C> <C>
Golden Books Family Entertainment GBFE 3.84 3.63 12.63 (2.59) (2.19)
Hunt Corp. HUN 23.69 18.75 25.19 1.22 1.42
American Media, Inc. ENQ 6.63 5.88 9.06 0.27 0.32
Shorewood Packaging Corp. SWD 15.88 12.92 18.92 0.97 1.04
Specialty Equipment Cos. SPEQ 22.63 14.50 24.00 1.86 2.16
General Binding Corp. GBND 36.81 25.50 37.50 1.80 1.80
Littelfuse, Inc. LFUS 25.25 19.75 35.50 1.07 1.08
W.H. Brady Co. BRCOA 27.81 24.75 35.75 1.50 1.45
Libbey, Inc. LBY 38.31 32.25 42.25 2.30 2.67
Arthur J. Gallagher & Co. AJG 44.75 33.56 46.56 2.75 2.95
Bob Evans Farms, Inc. BOBE 21.19 16.25 22.50 1.04 1.29
Hussmann International HSM 18.56 13.50 20.13 1.01 1.18
First Brands Corp. FBR 25.63 20.25 28.50 1.38 1.42
Interface, Inc. IFSIA 20.19 11.06 22.88 0.77 1.00
Longs Drug Stores Corp. LDG 28.88 23.88 33.63 1.51 1.62
Lee Enterprises LEE 30.63 24.88 33.88 1.29 1.43
Central Newspapers, Inc. ECP 69.75 61.63 76.88 3.31 3.65
Rouse Company RSE 34.44 27.19 35.69 2.47 2.76
Whitman Corp. WH 22.94 15.56 23.75 0.46 0.62
McCormick & Company, Inc. MCCRK 35.72 22.75 35.81 1.26 1.46
Allergan Inc. AGN 46.38 29.75 47.56 1.57 1.95
Ecolab, Inc. ECL 31.00 21.28 33.00 1.00 1.15
Century Telephone Enterprises CTL 45.88 22.04 49.94 1.64 1.90
T. Rowe Price Associates TROW 37.56 25.00 39.63 1.13 1.38
Leggett & Platt, Inc. LEG 25.00 19.25 28.34 1.08 1.24
Hasbro, Inc. HAS 39.31 25.75 40.63 1.69 1.87
MBIA Inc. MBI 74.88 55.75 80.94 4.05 4.60
Omnicom Group, Inc. OMC 49.88 30.75 50.00 1.37 1.62
Northern Trust Corp. NTRS 76.25 47.25 79.38 2.65 3.08
</TABLE>

<TABLE>
<CAPTION>
1997 1998 MARKET
P/E P/E CAP.
COMPANY CALENDAR CALENDAR ($MM)

<S> <C> <C> <C>
Golden Books Family Entertainment NM NM 105
Hunt Corp. 19.4 16.7 268
American Media, Inc. 24.6 20.7 282
Shorewood Packaging Corp. 16.4 15.3 430
Specialty Equipment Cos. 12.2 10.5 496
General Binding Corp. 20.5 20.5 580
Littelfuse, Inc. 23.6 23.4 599
W.H. Brady Co. 18.5 19.2 625
Libbey, Inc. 16.7 14.3 674
Arthur J. Gallagher & Co. 16.3 15.2 761
Bob Evans Farms, Inc. 20.4 16.4 882
Hussmann International 18.4 15.7 943
First Brands Corp. 18.6 18.0 1,016
Interface, Inc. 26.4 20.3 1,054
Longs Drug Stores Corp. 19.1 17.8 1,123
Lee Enterprises 23.7 21.4 1,372
Central Newspapers, Inc. 21.1 19.1 1,759
Rouse Company 12.7 11.4 2,160
Whitman Corp. 49.9 37.0 2,331
McCormick & Company, Inc. 28.3 24.5 2,625
Allergan Inc. 29.5 23.8 3,047
Ecolab, Inc. 31.0 27.0 3,993
Century Telephone Enterprises 28.0 24.1 4,203
T. Rowe Price Associates 33.2 27.2 4,868
Leggett & Platt, Inc. 23.1 20.2 4,905
Hasbro, Inc. 23.3 21.0 5,224
MBIA Inc. 18.5 16.3 7,308
Omnicom Group, Inc. 36.4 30.8 8,490
Northern Trust Corp. 28.8 24.8 8,503
</TABLE>

Note: All earnings per share numbers are fully diluted. Such numbers are from
continuing operations and are adjusted for non-recurring items.
The Rouse Company numbers are before depreciation and deferred taxes.
NM = Not Meaningful.

<PAGE>

ARIEL APPRECIATION
(UNAUDITED)

EARNINGS PER SHARE
52 - WEEK -------------------------
RANGE 1997 1998
TICKER PRICE -------------------- ACTUAL ESTIMATED
COMPANY SYMBOL 6/30/98 LOW HIGH CALENDAR CALENDAR

<S> <C> <C> <C> <C> <C> <C>
Hunt Corp. HUN 23.69 18.75 25.19 1.22 1.42
Shorewood Packaging Corp. SWD 15.88 12.92 18.92 0.97 1.04
Specialty Equipment Cos. SPEQ 22.63 14.50 24.00 1.86 2.16
General Binding Corp. GBND 36.81 25.50 37.50 1.80 1.80
Littelfuse, Inc. LFUS 25.25 19.75 35.50 1.07 1.08
W.H. Brady Co. BRCOA 27.81 24.75 35.75 1.50 1.45
Libbey, Inc. LBY 38.31 32.25 42.25 2.30 2.67
ChoicePoint, Inc. CPS 50.63 30.75 58.75 1.92 2.30
Arthur J. Gallagher & Co. AJG 44.75 33.56 46.56 2.75 2.95
Bob Evans Farms, Inc. BOBE 21.19 16.25 22.50 1.04 1.29
Hussmann International HSM 18.56 13.50 20.13 1.01 1.18
Houghton Mifflin Company HTN 31.75 26.75 40.25 1.51 1.27
First Brands Corp. FBR 25.63 20.25 28.50 1.38 1.42
Interface, Inc. IFSIA 20.19 11.06 22.88 0.77 1.00
Longs Drug Stores Corp. LDG 28.88 23.88 33.63 1.51 1.62
Lee Enterprises LEE 30.63 24.88 33.88 1.29 1.43
Central Newspapers, Inc. ECP 69.75 61.63 76.88 3.31 3.65
Harte-Hanks Communications HHS 25.81 14.50 25.81 0.57 0.83
Rouse Company RSE 31.44 27.19 35.69 2.47 2.76
Whitman Corp. WH 22.94 15.56 23.75 0.46 0.62
Sybron International Corp. SYB 25.25 19.50 29.13 0.85 1.02
McCormick & Company, Inc. MCCRK 35.72 22.75 35.81 1.26 1.46
Allergan Inc. AGN 46.38 29.75 47.56 1.57 1.95
Morton International MII 25.00 24.81 35.88 1.55 1.74
Ecolab, Inc. ECL 31.00 21.28 33.00 1.00 1.15
Century Telephone Enterprises CTL 45.88 22.04 49.94 1.64 1.90
T. Rowe Price Associates TROW 37.56 25.00 39.63 1.13 1.38
Leggett & Platt, Inc. LEG 25.00 19.25 28.34 1.08 1.24
Hasbro, Inc. HAS 39.31 25.75 40.63 1.69 1.87
Equifax, Inc. EFX 36.31 28.50 40.69 1.29 1.48
MBIA Inc. MBI 74.88 55.75 80.94 4.05 4.60
Tribune Company TRB 68.81 48.31 72.38 2.30 2.60
Omnicom Group, Inc. OMC 49.88 30.75 50.00 1.37 1.62
Northern Trust Corp. NTRS 76.25 47.25 79.38 2.65 3.08
Pitney Bowes Inc. PBI 48.13 35.03 52.19 1.80 2.05
MBNA Corp. KRB 33.06 24.50 38.75 1.15 1.43
Carnival Corp. CCL 39.63 20.69 40.06 1.13 1.35
</TABLE>

<TABLE>
<CAPTION>
1997 1998 MARKET
P/E P/E CAP.
COMPANY CALENDAR CALENDAR ($MM)

Hunt Corp. 19.4 16.7 268
Shorewood Packaging Corp. 16.4 15.3 430
Specialty Equipment Cos. 12.2 10.5 496
General Binding Corp. 20.5 20.5 580
Littelfuse, Inc. 23.6 23.4 599
W.H. Brady Co. 18.5 19.2 625
Libbey, Inc. 16.7 14.3 674
ChoicePoint, Inc. 26.4 22.0 739
Arthur J. Gallagher & Co. 16.3 15.2 761
Bob Evans Farms, Inc. 20.4 16.4 882
Hussmann International 18.4 15.7 943
Houghton Mifflin Company 21.0 25.0 965
First Brands Corp. 18.6 18.0 1,016
Interface, Inc. 26.4 20.3 1,054
Longs Drug Stores Corp. 19.1 17.8 1,123
Lee Enterprises 23.7 21.4 1,372
Central Newspapers, Inc. 21.1 19.1 1,759
Harte-Hanks Communications 45.3 31.1 1,899
Rouse Company 12.7 11.4 2,160
Whitman Corp. 49.9 37.0 2,331
Sybron International Corp. 29.7 24.8 2,540
McCormick & Company, Inc. 28.3 24.5 2,625
Allergan Inc. 29.5 23.8 3,047
Morton International 16.1 14.4 3,193
Ecolab, Inc. 31.0 27.0 3,993
Century Telephone Enterprises 28.0 24.1 4,203
T. Rowe Price Associates 33.2 27.2 4,868
Leggett & Platt, Inc. 23.1 20.2 4,905
Hasbro, Inc. 23.3 21.0 5,224
Equifax, Inc. 28.1 24.5 5,370
MBIA Inc. 18.5 16.3 7,308
Tribune Company 29.9 26.5 8,402
Omnicom Group, Inc. 36.4 30.8 8,490
Northern Trust Corp. 28.8 24.8 8,503
Pitney Bowes Inc. 26.7 23.5 13,168
MBNA Corp. 28.7 23.1 16,570
Carnival Corp. 35.1 29.4 23,592
</TABLE>

<PAGE>

ARIEL PREMIER BOND

DEAR FELLOW SHAREHOLDER: For the quarter ending June 30, 1998, the Ariel
Premier Bond Fund Institutional Class returned +2.36%, the Investor Class +2.17%
and the Lehman Brothers Aggregate Index gained +2.34% for the same period. The
Institutional Class quarterly performance ranks in the top 20% and year-to-date
performance in the top quartile of its peers among Morningstar, Inc.'s
High-Quality Corporate Bond Fund universe while the Investor Class ranks in the
top-third.

The bond market continued its extraordinary performance during the second
quarter as yields fell and the yield curve flattened, leaving long Treasury
rates at 35-year lows. A resurgence of concern regarding Asian economic
conditions, particularly in Japan, was the primary factor driving valuations.
Confidence that the U.S. economy will slow as a result of feedback from Asia
contributed to the enthusiasm for U.S. fixed income securities.

Perhaps the most striking characteristic of rate levels at quarter end is the
divergence between the expectations embedded in yields and the behavior of the
corresponding fundamental variables--namely, inflation, fed policy and economic
growth. For example, despite rising core inflation the market continues to price
inflation to fall; and in the face of the Fed's leaning toward tightening, the
expected Funds rate today is roughly 125 basis points below the actual Funds
rate. Finally, as the economy continues to outperform even the most optimistic
growth prognostications, forecasts of a weaker U.S. economy abound.

It is our view that the underlying momentum of the domestic economy will weather
any short-term effects from Asia, and inflation will continue to rise.
Eventually, the Fed will need to raise rates to reduce the stimulus that low
interest rates are providing to the economy.

The Fund's defensive position is evidenced through its duration--which is
currently 3/4 years shorter than the Lehman Aggregate Index. The Fund's exposure
to mortgage and corporate securities is roughly equal to the market. Asset
backed securities, held in lieu of short duration Governments, represent the
Fund's primary active exposure and source of incremental yield relative to the
benchmark.

As a result of the recent market performance, it is our view that the risk in
bonds has become more one-sided as expectations move further away from the
performance of economic fundamentals. Uncertainty regarding the outcome of Asia
and Japan is not reflected in U.S. equity valuations, but the domestic bond
market appears to have priced a particularly bad outcome. As 30-year yields
approach the yield on cash reserves, the cost of being defensive has declined.
Patience and a defensive posture toward interest rates through this period
should ultimately be rewarded.

We are grateful for your confidence and welcome any comments or questions you
may have.

Sincerely,

/s/ John W. Rogers, Jr. /s/ Kenneth R. Meyer

John W. Rogers, Jr. Kenneth R. Meyer
President President
Ariel Capital Management, Inc. Lincoln Capital Management Company

<PAGE>

ARIEL PREMIER BOND FUND

Institutional Class Inception
October 1, 1995

Investor Class Inception
February 1, 1997

AVERAGE ANNUAL TOTAL RETURN AS OF JUNE 30, 1998

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
2Q98 1 Year Life of Fund
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ARIEL PREMIER BOND FUND, INST. CL. +2.4% +9.9% +7.2%
ARIEL PREMIER BOND FUND, INV. CL. +2.2% +8.9% +8.2%
</TABLE>

[CHART]

ARIEL PREMIER BOND FUND PORTFOLIO COMPOSITION
<S> <C>
Government & Agency 15.0%
Corporate 15.1%
Mortgage-Backed 15.2%
Asset-Backed 35.4%
Other Assets & Cash 19.3%
</TABLE>

[GRAPH]

Comparison of change in value of $10,000 invested in Ariel Premier Bond Fund,
Inv. Cl. and comparable indices*

<TABLE>
<CAPTION>
Ariel Premier Bond Fund, Inv. Cl.
<S> <C>
Feb 97 $10,000
Mar 97 $9,930
Apr 97 $10,020
May 97 $10,060
Jun 97 $10,265
Jul 97 $10,516
Aug 97 $10,443
Sep 97 $10,573
Oct 97 $10,715
Nov 97 $10,743
Dec 97 $10,786
Mar 98 $10,944
Jun 98 $11,099

<CAPTION>
Lehman Aggregate
<S> <C>
Feb 97 $10,000
Mar 97 $9,914
Apr 97 $10,062
May 97 $10,158
Jun 97 $10,279
Jul 97 $10,556
Aug 97 $10,467
Sep 97 $10,622
Oct 97 $10,773
Nov 97 $10,823
Dec 97 $10,932
Mar 98 $11,102
Jun 98 $11,361

</TABLE>

[CHART]

LEHMAN AGGREGATE BOND INDEX PORTFOLIO COMPOSITION
<S> <C>
Corporate 20.7%
Mortgage-Backed 30.2%
Asset-Backed 1.0%
Government & Agency 48.1%
</TABLE>

[GRAPH]

Comparison of change in value of $1,000,000 invested in Ariel Premier Bond Fund,
Inst. Cl. and comparable indices*

<TABLE>
<CAPTION>
Ariel Premier Bond Fund, Inst. Cl.
<S> <C>
Oct 95 $1,000,000
Dec 95 $1,035,122
Mar 96 $1,009,187
Jun 96 $1,018,867
Sep 96 $1,039,607
Dec 96 $1,067,709
Mar 97 $1,063,762
Jun 97 $1,101,562
Sep 97 $1,135,857
Dec 97 $1,165,544
Mar 98 $1,182,644
Jun 98 $1,201,292

<CAPTION>
Lehman Aggregate
<S> <C>
Oct 95 $1,000,000
Dec 95 $1,042,614
Mar 96 $1,024,120
Jun 96 $1,029,953
Sep 96 $1,048,996
Dec 96 $1,080,467
Mar 97 $1,074,420
Jun 97 $1,113,997
Sep 97 $1,151,139
Dec 97 $1,184,769
Mar 98 $1,203,205
Jun 98 $1,231,317
</TABLE>

ARIEL PREMIER BOND FUND SEEKS TO MAXIMIZE TOTAL RETURN THROUGH A COMBINATION OF
INCOME AND CAPITAL APPRECIATION BY INVESTING IN HIGH-QUALITY FIXED INCOME
SECURITIES. THE FUND MAY INVEST IN INVESTMENT-GRADE BONDS INCLUDING U.S.
GOVERNMENT (AND GOVERNMENT AGENCY) SECURITIES, CORPORATE BONDS, MORTGAGE-RELATED
SECURITIES AND ASSET-BACKED SECURITIES. UNDER NORMAL CONDITIONS, AT LEAST 80% OF
THE FUNDS ASSETS WILL BE INVESTED IN FIXED INCOME SECURITIES RATED A OR BETTER
BY THE RECOGNIZED RATING AGENCIES. ARIEL PREMIER BOND FUND WILL NOT INVEST IN
"JUNK BONDS" OR OTHER LOW-RATED SECURITIES.

*Statistics represent past performance which is not indicative of future
results. The Lehman Brothers Aggregate Bond Index is composed of securities from
Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed Securities
Index, and the Asset-Backed Securities Index. Total return comprises price
appreciation/depreciation and income as a percentage of the original investment.
An investor cannot invest directly in an index.

19
<PAGE>

ARIEL PREMIER BOND FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 1998 (UNAUDITED)

Par Value ASSET-BACKED SECURITIES-35.41% Cost Market Value

<C> <S> <C> <C>
$2,630,000 American Express, 971A,
6.40%, 4/15/2005 $2,631,998 $2,690,095
700,000 Americredit Auto Receivables,
6.06%, 12/12/2002 699,884 702,205
1,000,000 Associates Manufactured Housing,
972A-3, 6.275%, 3/15/2028 999,704 1,004,440
650,000 BEA, 98-A2-A,
0.00%, 2/15/2006+ 626,440 633,750
950,000 Capital Equipment Receivables
Trust, 6.28%, 2/15/2000 954,526 954,532
1,000,000 Chase Credit Card 96C 3A,
7.04%, 2/15/2005 1,030,784 1,033,590
70,000 Circuit City Credit Card,
1995-1A, 6.375%, 8/15/2005 69,233 70,840
1,200,000 Citibank Credit Card,
0.00%, 8/15/2006 819,325 831,504
400,000 CSFB 97-C1 A1C, 7.24%, 4/20/2007 414,159 425,184
2,000,000 EQCC Home Equity, 973-A9
6.57%, 2/15/2029 1,983,860 2,018,520
2,900,000 Fannie Mae, 6.45%, 8/17/2013 2,936,161 2,959,334
1,170,000 Finger Hut, 96-1A, 6.45%, 2/20/2002 1,176,384 1,175,043
1,800,000 First Omni, 96-AA, 6.65%, 9/15/2003 1,826,293 1,852,326
1,822,017 Fleetwood, 97BA, 6.40%, 5/15/2013 1,819,533 1,838,744

Par Value ASSET-BACKED SECURITIES-35.41% (cont) Cost Market Value

<C> <S> <C> <C>
$500,000 Green Tree Financial, 98-A4,
6.09%, 7/1/2010 $499,943 $500,235
60,000 Green Tree Financial, 1995-1 A5,
8.40%, 6/15/2025 65,837 63,923
1,065,000 GS Mortgage Securities Corp.,
6.86%, 7/13/2030 1,098,831 1,102,275
952,879 IMC Excess Cash,
7.41%, 11/26/2028+ 952,844 947,820
1,450,000 J.C. Penney Master Credit Card Trust,
1990-C1, 9.625%, 6/30/2000 1,533,339 1,562,448
2,500,000 MBNA Master Credit Card, 95DA,
6.05%, 11/15/2002 2,491,186 2,516,750
380,000 MBNA Master Credit Card II 971A,
6.55%, 1/15/2007 383,143 394,011
1,133,304 Merrill Lynch Mortgage Investors, Inc.,
1995-C2-A1, Floating Rate, 6/15/2021 1,148,528 1,161,808
300,000 The Money Store, 1996-1 A3,
6.85%, 12/20/2002 299,966 307,356
550,000 The Money Store, 1997-A A3,
6.675%, 4/15/2012 549,837 552,310
300,000 The Money Store, 1996-B A6,
7.38%, 5/15/2017 299,955 306,504
1,000,000 The Money Store, 1996-B A9,
8.14%, 10/15/2027 1,061,511 1,073,760
141,800 Olympic Auto Receivables,
1995-EA4, 5.85%, 3/15/2001 140,803 141,937
650,000 Premier Auto Trust 9,
5.88%, 12/8/2001 649,900 651,762
1,440,000 Prime, 95-1A, 6.75%, 11/15/2005 1,446,089 1,486,915

<PAGE>

Par Value ASSET-BACKED SECURITIES-35.41% (cont) Cost Market Value

<C> <S> <C> <C>
$252,777 Private Label Credit Card,
1994-2A, 7.80%, 9/20/2003 $257,308 $256,572
1,759,726 Railcar Leasing, 6.75%, 7/15/2006 1,759,089 1,790,522
210,498 Salomon Brothers, 96LB2A3,
6.875%, 10/25/2026 210,486 210,320
940,000 Salomon Brothers Mortgage Sec.,
97 6A3, 6.76%, 12/25/2027 938,833 952,107
45,000 Sears Credit Account, 96-1A,
6.20%, 2/16/2006 44,214 45,423
440,000 Sears Credit Account, 96-2A,
6.50%, 10/15/2003 438,092 442,561
2,005,000 Sears Credit Account, 96-4A,
6.45%, 10/16/2006 2,001,179 2,033,832
420,000 Standard Credit Card Master -
Citibank, 94-4A, 8.25%, 11/7/2003 442,589 448,917
2,300,000 Standard Credit Card Master -
Citibank, 951A, 8.25%, 1/7/2007 2,492,246 2,582,141
1,400,000 Team Fleet Financial Co.,
97-1A, 7.35%, 5/15/2003+ 1,399,196 1,450,344
550,000 Thirteen Affiliates, 976C1 A2,
6.602%, 11/15/2007+ 550,000 563,750
300,000 UCFC, 96 CA 3,
7.15%, 12/15/2013 299,956 305,661
1,560,000 Union Acceptance Corp., 97AA2,
6.375%, 10/8/2003 1,572,083 1,578,455
1,880,000 World Financial, 96-AA,
6.70%, 2/15/2004 1,888,599 1,923,296
397,956 World Omni Auto Lease,
1996-BA3, 6.25%, 11/15/2002 397,437 399,560

Par Value ASSET-BACKED SECURITIES-35.41% (cont) Cost Market Value

<C> <S> <C> <C>
$2,200,000 World Omni Auto Lease, 97B3,
6.18%, 11/25/2003 $2,199,786 $2,203,080
1,000,000 World Omni Auto Lease,
6.177%, 8/12/2005+ 1,000,000 1,008,130
--------- ---------
Total Asset-Backed Securities 48,501,089 49,154,592
---------- ----------
<CAPTION>
CORPORATE DEBT-15.13%
<C> <S> <C> <C>
500,000 Abbey National PLC,
6.70%, 6/29/2049 499,160 503,750
445,000 American General Inst.,
7.57%, 12/1/2045+ 465,148 478,931
550,000 American Stores, 8.00%, 6/1/2026 605,668 622,875
570,000 Archer Daniels II, 6.95%, 12/15/2097 567,635 601,350
275,000 Bank of America Capital II,
8.00%, 12/15/2026 271,265 303,531
185,000 Bayer Corporation, 6.65%, 2/15/2028+ 184,025 192,400
260,000 Bellsouth Telecom,
6.375%, 6/1/2028 257,085 258,375
550,000 Bestfoods,
5.60%, 10/15/2097 424,418 466,812
500,000 Boston Scientific, 6.625%, 3/15/2005 499,754 496,875
325,000 Chrysler Corp., 7.40%, 8/1/2097 334,980 349,375
575,000 Coca-Cola Enterprises,
6.750%, 1/15/2038 565,836 580,750
1,575,000 Consumers Energy CMS,
6.20%, 5/1/2008+ 1,556,120 1,571,063
625,000 Dana Corp., 7.00%, 3/15/2028 620,906 646,094

<PAGE>

Par Value CORPORATE DEBT-15.13% (cont) Cost Market Value

<C> <S> <C> <C>
$515,000 FedEx, 7.60%, 7/1/2097 $540,543 $567,787
850,000 GTE California, 6.75%, 5/15/2027 845,722 856,375
275,000 J.C. Penney Co., 7.625%, 3/1/2097 269,473 302,844
95,000 JP Morgan Capital Trust I,
7.54%, 1/15/2027 95,000 101,294
710,000 Lincoln National Corp.,
7.00%, 3/15/2018 708,363 725,975
610,000 Mirage Resorts, 7.25%, 8/1/2017 606,789 623,725
300,000 News America Holdings,
7.25%, 5/18/2018+ 297,971 307,875
650,000 Peco Energy Co., 7.38%, 4/6/2028 650,000 668,687
1,400,000 Philip Morris, 7.125%, 8/15/2002 1,391,579 1,443,750
1,000,000 PSI Energy, 7.25%, 3/15/2028 999,013 1,016,250
1,450,407 Railcar Trust, 1992-1A,
7.75%, 6/1/2004 1,506,321 1,529,222
1,000,000 Safeco Capital Trust,
8.072%, 7/15/2037 1,000,000 1,080,000
805,000 Suntrust Cap II, 7.90%, 6/15/2027 809,673 887,512
525,000 Time Warner Enterprise,
8.375%, 7/15/2033 586,723 630,000
1,025,000 Tyco International Group,
6.25%, 6/15/2003 1,019,955 1,019,875
595,000 Tyco International Group,
7.00%, 6/15/2028 590,712 600,206
1,250,000 Union Planters, 6.50%, 3/15/2018 1,241,386 1,256,250
280,000 Zurich Capital Trust,
8.376%, 6/1/2037+ 294,952 318,500
------- -------
Total Corporate Debt 20,306,175 21,008,308
---------- ----------

Par Value U.S. GOVERNMENT AGENCIES-17.14% Cost Market Value
<C> <S> <C> <C>
MORTGAGE-BACKED SECURITIES--15.24%

$1,386,415 Freddie Mac, 6.50%, 11/1/2025 $1,309,643 $1,392,044
3,683,542 Freddie Mac, 6.50%, 2/1/2026 3,565,930 3,684,685
5,098,751 Freddie Mac, Gold, 6.50%, 3/1/2026 4,825,210 5,098,670
407,888 Freddie Mac, Gold, 6.50%, 4/1/2026 376,556 407,758
722,206 Freddie Mac, Gold, 6.50%, 5/1/2026 666,720 721,975
39,611 Fannie Mae, 7.00%, 10/1/2023 38,944 40,367
1,694,984 Fannie Mae, 6.50%, 4/1/2024 1,617,314 1,694,442
396,795 Fannie Mae, 7.00%, 5/1/2024 390,102 403,862
438,520 Fannie Mae, 6.50%, 11/1/2025 403,110 438,245
1,465,733 Fannie Mae, 6.50%, 1/1/2026 1,421,440 1,463,902
5,813,750 Fannie Mae, 6.50%, 5/1/2026 5,483,539 5,806,484
--------- ---------
20,098,508 21,152,434
---------- ----------

OTHER AGENCY ISSUES--1.90%

250,000 Government Trust Certificate,
Aid Israel, 5.70%, 2/15/2003 249,380 250,000
1,350,680 Government Trust Certificate, Israel
Trust, Series 2E, 9.40%, 5/15/2002 1,426,527 1,397,954
953,134 Pemex Exp Trust, 7.66%, 8/15/2001 975,606 984,836
------- -------
2,651,513 2,632,790
--------- ---------

Total U.S. Government Agencies 22,750,021 23,785,224
---------- ----------
</TABLE>

<PAGE>

Par Value U.S. GOVERNMENT OBLIGATIONS-13.01% Cost Market Value
<C> <S> <C> <C>
$560,000 U.S. Treasury Bond,
13.875%, 5/15/2011 $844,065 $849,458
3,975,000 U.S. Treasury Bond,
8.125%, 8/15/2019 4,755,246 5,123,855
8,825,000 U.S. Treasury Note,
7.50%, 10/31/1999 8,968,609 9,043,330
2,000,000 U.S. Treasury Note,
6.25%, 6/30/2002 2,044,105 2,048,820
470,000 U.S. Treasury Note,
7.50%, 2/15/2005 517,715 519,876
450,000 U.S. Treasury Note,
6.50%, 5/15/2005 445,981 474,885
------- -------
Total U.S. Government
Obligations 17,575,721 18,060,224
---------- ----------
<CAPTION>
COMMERCIAL PAPER-17.24%
<C> <S> <C> <C>
3,000,000 Atlantic Richfield Co.,
5.51%, 7/20/98 2,991,276 2,991,276
3,000,000 Bell Atlantic Network,
5.51%, 7/14/98 2,994,031 2,994,031
3,000,000 CIESCO LP, 5.50%, 7/17/98 2,992,666 2,992,666
3,000,000 Ford Motor Credit Co.,
5.51%, 7/14/98 2,994,031 2,994,031
3,000,000 Gannett Co., 5.48%, 7/21/98 2,990,867 2,990,867

Par Value COMMERCIAL PAPER-17.24% (cont) Cost Market Value
<C> <S> <C> <C>
$3,000,000 Lucent Technologies,
5.48%, 7/14/98 $2,994,063 $2,994,063
3,000,000 Metlife Funding, 5.56%, 8/10/98 2,981,467 2,981,467
3,000,000 Norwest Corporation,
5.50%, 7/20/98 2,991,291 2,991,291
--------- ---------
Total Commercial Paper 23,929,692 23,929,692
---------- ----------

<CAPTION>
REPURCHASE AGREEMENT-1.93%
<C> <S> <C> <C>
2,683,869 State Street Bank & Trust
Company Repurchase Agreement,
4.75%, 6/30/98, repurchase price
$2,684,223, maturing 7/1/98
(collateralized by U.S. Treasury
Bond, 7.25%, 5/15/2016 2,683,869 2,683,869
--------- ---------

Total Repurchase Agreement 2,683,869 2,683,869
--------- ---------

Total Investments-99.86% $135,746,567 138,621,909
------------
------------

Other Assets and Cash less
Liabilities-0.14% 187,600
-------

NET ASSETS-100.00% $138,809,509
------------
------------
</TABLE>

+ SEC Rule 144A restriction

23
<PAGE>

BOARD OF TRUSTEES

BERT N. MITCHELL, C.P.A. Bert is founder, chairman and CEO of Mitchell & Titus,
LLP, the nation's largest minority-owned accounting firm. He holds B.B.A.,
M.B.A. and Honorary Doctorate degrees from the Baruch School of Business of the
City University of New York, where he has also been a member of the accounting
faculty. Bert is also a graduate of the Owner-President Management Program of
the Harvard Business School. Bert is active in community affairs, philanthropy
and politics.

MARIO L. BAEZA Chairman and CEO of Latin America Equity Partners, L.P., Mario is
widely regarded as a preeminent expert in business and legal issues in Latin
America. He received a B.A. from Cornell University and a J.D. from Harvard Law
School, where he later taught.

JAMES W. COMPTON Jim serves as the President and CEO of the Chicago Urban
League, which has worked to eliminate racial discrimination and segregation
since 1916. He has a B.A. degree from Morehouse College. Jim serves on the board
of directors of Commonwealth Edison Company and Unicom Corp.

WILLIAM C. DIETRICH, C.P.A. Bill is Chief Financial Officer for Streamline
Mid-Atlantic, Inc., a retailer and service company providing home delivery of
groceries, related products and various consumer services directly to the home.
He has a B.A. from Georgetown University. Bill serves on the board and program
staff of the Shalem Institute, an internationally known ecumenical organization.

ROYCE N. FLIPPIN, JR. Director of program advancement for the Massachusetts
Institute of Technology, Royce is also president of Flippin Associates, a
broad-based consulting firm providing strategic and implementation services in
the management of critical needs for the public and private sectors. He earned
his B.A. from Princeton University and an M.B.A. from Harvard Business School.
Royce is on the board of several corporations and non-profit institutions.

JOHN G. GUFFEY Currently, John is treasurer of Silby, Guffey & Co., Inc., a
venture capital firm investing in early stage companies in the health care and
environmental industries. John has a B.S. from the University of Pennsylvania's
Wharton School. He does volunteer work and holds directorships with various
local and national non-profit organizations.

MELLODY HOBSON As senior vice president and director of marketing, Mellody
oversees the servicing of Ariel Capital Management Inc.'s institutional clients,
as well as the marketing of the Ariel Mutual Funds. She received a B.A. from
Princeton University's Woodrow Wilson School. She serves as a Director of the
Chicago Public Library as well as the Civic Federation of Chicago. Mellody works
with a variety of civic institutions, including those affiliated with Princeton.

CHRISTOPHER G. KENNEDY Chris is executive vice president of Merchandise Mart
Properties, Inc. which manages, among other prime properties, The Merchandise
Mart; The Washington Design Center; and New York's Decoration and Design
Building. He earned his B.A. from Boston College and his M.B.A. at the J.L.
Kellogg Graduate School of Management at Northwestern University. Chris serves
on the board of directors of the Chicago Convention & Tourism Bureau;
Boston-based Citizens Energy Corp. and Citizens Corp.; and the Greater Chicago
Food Depository.

ERIC T. MCKISSACK, CFA In the capacity of vice chairman and co-chief investment
officer of Ariel Capital Management, Inc., Eric is responsible for co-managing
client and mutual fund portfolios. He received a B.S. in both Management and
Architecture from the Massachusetts Institute of Technology and he earned his
M.B.A. from the University of California at Berkeley. He is also a Chartered
Financial Analyst. Eric serves on a variety of civic and corporate boards.

<PAGE>

and on...and on. Soon the Hare was so far ahead he thought he might as well have
a rest, so down he lay and fell fast asleep...as the Tortoise plodded on...and
on. Suddenly the Hare woke up with a start. What was the time? Where was the
Tortoise? He dashed on at his fastest pace...only to find that the Tortoise had
already won the race.
Slow and Steady Wins the Race

<PAGE>

ARIEL MUTUAL FUNDS
Ariel Investment Trust
307 North Michigan Avenue
Suite 500
Chicago, Illinois 60601

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