IAI INVESTMENT FUNDS VI INC, 485APOS, 1996-05-30

IAI INVESTMENT FUNDS VI INC
485APOS, 1996-05-30

Previous: IAI INVESTMENT FUNDS VI INC, NSAR-B, 1996-05-30

Next: IAI INVESTMENT FUNDS VI INC, N-30D, 1996-05-30

As filed with the Securities and Exchange Commission on May 30, 1996

1933 Act Registration No. 33-40496
1940 Act Registration No. 811-5990

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.

Post-Effective Amendment No. 20 X
---
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 20 X
---

IAI INVESTMENT FUNDS VI, INC.
(Exact Name of Registrant as Specified in Charter)

3700 First Bank Place, P.O. Box 357
Minneapolis, Minnesota 55440
(Address of Principal Executive Offices) (Zip Code)

(612) 376-2700
(Registrant's Telephone Number, including Area Code)

Christopher J. Smith, Esq. Copy to:
3700 First Bank Place Michael J. Radmer, Esq.
P.O. Box 357 Dorsey & Whitney
Minneapolis, Minnesota 55440 220 South Sixth Street
(Name and Address of Agent for Service) Minneapolis, Minnesota 55402

It is proposed that this filing will become effective (check
appropriate box)

immediately upon filing pursuant to paragraph (b)
----
on (date) pursuant to paragraph (b)
----
60 days after filing pursuant to paragraph (a)(i)
----
X on August 1, 1996 pursuant to paragraph (a)(i)
----
75 days after filing pursuant to paragraph (a)(ii)
----
on (date) pursuant to paragraph (a)(ii) of Rule 485
----

If appropriate, check the following box:

this post-effective amendment designates a new effective
---- date for a previously filed post-effective amendment

Registrant has registered an indefinite number of securities under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940, as amended. Rule 24f-2 Notices were last filed with the Commission on
March 26, 1996.

<PAGE>

IAI INVESTMENT FUNDS VI, INC.

FORM N-1A
CROSS-REFERENCE SHEET

<TABLE>
<CAPTION>
Item Number Caption Prospectus Caption
<S> <C> <C>

1 Cover Page.................................... Cover Page of Prospectus

2 Synopsis...................................... Fund Expense Information

3 Condensed Financial Information............... Financial Highlights; Investment Performance

4 General Description of Registrant ............ Investment Objectives and Policies;
Description of Common Stock; Additional
Information

5 Management of the Fund........................ Fund Expense Information; Management;
Additional Information; Custodian, Transfer
Agent and Dividend Disbursing Agent

5A Management's Discussion of Fund Performance... Information is Contained in the Annual Report

6 Capital Stock and Other Securities............ Dividends, Distributions and Tax Status;
Description of Common Stock; Additional
Information

7 Purchase of Securities Being Offered.......... Computation of Net Asset Value and Pricing;
Purchase of Shares; Automatic Investment
Plan; Exchange Privilege; Automatic Exchange
Plan; Retirement Plans; Authorized Telephone
Trading

8 Redemption or Repurchase...................... Systematic Cash Withdrawal Plan; Redemption
of Shares; Authorized Telephone Trading

9 Pending Legal Proceedings..................... Not Applicable

<PAGE>

Item Number Caption Statement of Additional Information Caption

10 Cover Page.................................... Cover Page of Statement of Additional
Information

11 Table of Contents............................. Table of Contents

12 General Information and History............... Management

13 Investment Objectives and Policies............ Investment Objectives and Policies;
Investment Restrictions

14 Management of the Fund........................ Management

15 Control Persons and Principal
Holders of Securities....................... Management; Capital Stock

16 Investment Advisory and Other Services....... Management; Prior Agreements; Counsel and
Auditors; Custodian; Transfer Agent and
Dividend Disbursing Agent

17 Brokerage Allocation.......................... Portfolio Transactions and Allocation of
Brokerage

18 Capital Stock and Other Securities............ Capital Stock

19 Purchase, Redemption and Pricing Purchases and Redemptions In Kind;
of Securities Being Offered................... Net Asset Value and Public Offering Price

20 Tax Status.................................... Tax Status

21 Underwriters.................................. Prior Agreements

22 Calculation of Performance Data............... Investment Performance

23 Financial Statements.......................... Financial Statements

</TABLE>

<PAGE>

Prospectus Dated August 1, 1996

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

3700 First Bank Place
P.O. Box 357
Minneapolis, Minnesota 55440
Telephone 1-612-376-2700
1-800-945-3863

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

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

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

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

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

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

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

<PAGE>

This Prospectus sets forth concisely the information which a prospective
investor should know about each Fund before investing and it should be retained
for future reference. A "Statement of Additional Information" dated August 1,
1996, which provides a further discussion of certain areas in this Prospectus
and other matters which may be of interest to some investors, has been filed
with the Securities and Exchange Commission and is incorporated herein by
reference. For a free copy, call or write the Funds at the address or telephone
number shown on the inside back cover of this Prospectus.

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

2
<PAGE>

TABLE OF CONTENTS

Page

FUND EXPENSE INFORMATION......................................................4
FUND DIRECTORS................................................................5
FINANCIAL HIGHLIGHTS..........................................................6
INVESTMENT PERFORMANCE.......................................................13
INVESTMENT OBJECTIVES AND POLICIES...........................................13
CAPITAL APPRECIATION FUND...........................................13
EMERGING GROWTH FUND................................................14
GROWTH FUND.........................................................14
GROWTH AND INCOME FUND..............................................15
MIDCAP GROWTH FUND..................................................15
REGIONAL FUND.......................................................16
VALUE FUND..........................................................16
PORTFOLIO SECURITIES AND OTHER FUND INVESTMENT TECHNIQUES....................17
FUND RISK FACTORS............................................................19
Investment Restrictions.............................................21
MANAGEMENT...................................................................21
COMPUTATION OF NET ASSET VALUE AND PRICING...................................23
PURCHASE OF SHARES...........................................................23
RETIREMENT PLANS.............................................................24
AUTOMATIC INVESTMENT PLAN....................................................24
REDEMPTION OF SHARES.........................................................24
EXCHANGE PRIVILEGE...........................................................25
AUTOMATIC EXCHANGE PLAN......................................................26
AUTHORIZED TELEPHONE TRADING.................................................26
SYSTEMATIC CASH WITHDRAWAL PLAN..............................................26
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS......................................27
DESCRIPTION OF COMMON STOCK..................................................27
COUNSEL AND AUDITORS.........................................................28
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT......................28
ADDITIONAL INFORMATION.......................................................28

3
<PAGE>

FUND EXPENSE INFORMATION

Shareholder Transaction Expenses
<TABLE>
<CAPTION>
IAI IAI IAI IAI
Capital Emerging IAI Growth Midcap IAI IAI
Appreciation Growth Growth & Income Growth Regional Value
Fund Fund Fund Fund Fund Fund Fund
- --------------------- -------- -------- ------ ------- ------ ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>

Sales Load Imposed
on Purchases .. None None None None None None None
Sales Load Imposed on
Reinvested Dividends ..None None None None None None None
Redemption Fees .........None None None None None None None
Exchange Fees ...........None None None None None None None

</TABLE>

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

Management Fee 1.25%* 1.20% 1.25% 1.25% 1.25% 1.21% 1.25%
Rule 12b-1 Fee None None None None None None None
Other Expenses None None None None None None None
---- ---- ---- ---- ---- ---- ----
Total Fund Operating
Expenses 1.25%* 1.20% 1.25% 1.25% 1.25% 1.21% 1.25%
------ ------ ----- ----- ----- ------ -----
- --------------------
<FN>

* after voluntary fee waiver

Example:

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

4
<PAGE>

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

IAI Capital Appreciation Fund $ 13 $ 40 $ 69 $ 151
IAI Emerging Growth Fund $ 12 $ 38 $ 66 $ 145
IAI Growth Fund $ 13 $ 40 $ 69 $ 151
IAI Growth and Income Fund $ 13 $ 40 $ 69 $ 151
IAI Midcap Growth Fund $ 13 $ 40 $ 69 $ 151
IAI Regional Fund $ 12 $ 38 $ 66 $ 147
IAI Value Fund $ 13 $ 40 $ 69 $ 151

The purpose of the above table is to assist you in understanding the
various costs and expenses that an investor in a Fund will bear directly or
indirectly. Because of a change in each Fund's (except Capital Appreciation
Fund) fee structure effective April 1, 1996, the information in the table has
been restated to reflect each Fund's current fees. The example should not be
considered a representation of past or future expenses. Actual expenses may be
greater or less than those shown.

With respect to Capital Appreciation Fund, the Fund's investment
adviser has voluntarily agreed to waive the Management Fee in excess of 1.25% of
the Fund's average daily net assets until March 31, 1997. Absent such voluntary
waiver, the Fund would pay 1.40% of its average daily net assets as the
Management Fee.

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

FUND DIRECTORS

Madeline Betsch Richard E. Struthers

W. William Hodgson J. Peter Thompson

George R. Long Charles H. Withers

Noel P. Rahn

5
<PAGE>

FINANCIAL HIGHLIGHTS

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

CAPITAL APPRECIATION FUND
Period from
February 1, 1996***
to
March 31, 1996

Net asset value:
Beginning of period $10.00

Operations:
Net investment income ----
Net realized and unrealized gains 1.24
-----
Total from operations 1.24
-----

Net asset value:
End of period $11.24

Total investment return* 12.40%

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

Ratios:
Expenses to average daily net assets**** 1.25%**
Net investment income to average net assets**** 0.23%**
Portfolio turnover rate (excluding short-term securities) 1.20%
- ------------------------------------------------------------------------------

* 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 $827 in expenses for the period
ended March 31, 1996. If the Fund had been charged these expenses, the
ratio of expenses to average daily net assets would have been 1.40% and
the ratio of net investment income to average daily net assets would have
been .08%.

6
<PAGE>

EMERGING GROWTH FUND
<TABLE>
<CAPTION>
Period from
August 5, 1991***
Years ended March 31, to
-------------------------------- ------------
1996 1995 1994 1993 3/31/92
---- ---- ---- ----- ------------
<S> <C> <C> <C> <C> <C>
Net asset value:
Beginning of period $15.83 $15.20 $13.47 $11.91 $10.00
------ ------ ------ ------ ------

Operations:
Net investment income (loss) (.09) (.07) (.10) (.05) .01
Net realized and unrealized gains 8.77 1.42 2.18 2.37 1.91
----- ---- ---- ---- ----
Total from operations 8.68 1.35 2.08 2.32 1.92
---- ---- ---- ---- ----

Distributions to shareholders from:
Net investment income --- --- --- --- (.01)
Net realized gains (.43) (.72) (.35) (.76) ---
----- ----- ----- ----- ---
Total distributions (.43) (.72) (.35) (.76) (.01)
----- ----- ----- -----

Net asset value:
End of period $24.08 $15.83 $15.20 $13.47 $11.91
====== ====== ====== ====== ======

Total investment return* 55.20% 10.23% 15.43% 21.90% 19.23%

Net assets at end of period $653,888 $342,874 $225,510 $131,514 $38,110
(000's omitted)

Ratios:
Expenses to average net assets 1.24% 1.25% 1.25% 1.25% 1.25%**
Net investment income (loss)
to average net assets (0.52%) (0.54%) (.77%) (0.72%)0.14%**
Portfolio turnover rate
(excluding short-term securities) 62.8% 58.1% 76.3% 96.1% 126.6%
- -------------------------------------------------------------------------------
<FN>

7
<PAGE>

GROWTH FUND
<TABLE>
<CAPTION>
Period from Period from
August 1, 1994 August 6, 1993***
Year ended to to
March 31, 1996 March 31, 1995** July 31, 1994
---------------------------- ------------- --------------------
<S> <C> <C> <C>
Net asset value: Beginning of period $ 10.95 $ 9.87 $ 10.00
------ ----- ------

Operations:
Net investment income -- .04 .01
Net realized and unrealized
gains (losses) 1.93 1.07 (.13)
---- ---- -----
Total from operations 1.93 1.11 (.12)
---- ---- -----
Distributions to shareholders from:
Net investment income (.03) (.03) (.01)
Net realized gains (.96) -- --
----- --- ---
Total distributions (.99) (.03) (.01)
----- ----- -----

Net asset value:
End of period $ 11.89 $ 10.95 $ 9.87
====== ====== =====

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

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

Ratios:
Expenses to average net assets 1.25% 1.25%** 1.25%**
Net investment income (loss) to
average net assets (0.04%) 0.61%** 0.16%**
Portfolio turnover rate (excluding
short-term securities) 92.8% 68.7% 105.4%
- ----------------------------------------------------------------------------
<FN>

8
<PAGE>

GROWTH AND INCOME FUND

<TABLE>
<CAPTION>
Years ended March 31,
---------- --------- ---------- ---------- ---------- -------- ---------- --------- -------- ---------

1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value:
Beginning of
period $14.32 $13.91 $15.19 $14.73 $14.48 $15.47 $16.01 $14.80 $17.32 $16.09
-------- --------- ---------- ---------- ---------- --------- --------- --------- -------- ---------

Operations:
Net
investment
income .10 .12 .09 .07 .13 .29 .39 .31 .28 .33

Net realized
and unrealized
gains (losses) 2.86 1.04 .38 1.17 1.20 .72 2.26 2.23 (1.09) 3.07
--------- --------- -------- ---------- ---------- --------- --------- --------- -------- ---------
Total from
operations 2.96 1.16 .47 1.24 1.33 1.01 2.65 2.54 (.81) 3.40
--------- --------- -------- ---------- ---------- --------- --------- --------- -------- ---------

Distributions to
shareholders from:
Net investment
income (.13) (.10) (.06) (.07) (.14) (.30) (.43) (.23) (.37) (.37)
Net realized
gains (1.85) (.65) (1.69) (.71) (.94) (1.70) (2.76) (1.10) (1.34) (1.80)
---------- ---------- ---------- --------- --------- --------- -------- --------- --------- ---------
Total
distributions (1.98) (.75) (1.75) (.78) (1.08) (2.00) (3.19) (1.33) (1.71) (2.17)

---------- --------- ---------- ---------- ---------- --------- --------- --------- -------- ---------

Net asset value:
End of period $15.30 $14.32 $13.91 $15.19 $14.73 $14.48 $15.47 $16.01 $14.80 $17.32
========== ========= ========== ========== ========== ========= ========= ========= ======== =========

Total investment
return * 21.51% 8.92% 3.07% 9.04% 9.56% 7.42% 16.77% 18.06% (4.89%) 24.25%

Net assets at end
of period
(000's omitted) $84,662 $101,256 $119,102 $134,308 $113,324 $90,590 $76,484 $76,901 $83,290 $83,691

Ratios:
Expenses to
average net
assets 1.25% 1.25% 1.25% 1.25% 1.25% 1.05% 1.00% 0.90% 0.80% 0.80%

Net investment
income to average
net assets 0.62% 0.80% 0.60% 0.61% 1.03% 2.19% 2.10% 1.80% 1.70% 2.10%

Portfolio turnover
rate (excluding
short-term 89.1% 79.1% 205.6% 175.6% 210.1% 68.5% 66.2% 48.3% 35.8% 67.5%
securities)
- -------------------- ---------- --------- ---------- ---------- ---------- --------- --------- --------- -------- ---------
<FN>
* 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.

</FN>
</TABLE>
9
<PAGE>

MIDCAP GROWTH FUND

<TABLE>
<CAPTION>
Period from
April 10, 1992***
to
Years ended March 31, March 31, 1993
---------------------------------------------------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C> <C>
Net asset value:
Beginning of period $15.35 $13.67 $11.88 $10.00
------ ------ ------ ------

Operations:
Net investment income (loss) (.05) (.04) (.04) .02
Net realized and unrealized gains 3.50 2.35 1.99 1.89
---- ---- ---- ----
Total from operations 3.45 2.31 1.95 1.91
---- ---- ---- ----

Distributions to shareholders from:
Net investment income -- -- -- (.03)
Net realized gains (1.10) (.63) (.16) --
------ ----- ----- ----
Total distributions (1.10) (.63) (.16) (.03)
------ ----- ----- -----

Net asset value:
End of period $17.70 $15.35 $13.67 $11.88
======= ====== ====== ======

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

Net assets at end of period (000's omitted) $122,375 $88,075 $56,618 $22,070

Ratios:
Expenses to average net assets 1.25% 1.25% 1.25% 1.25%**
Net investment income to average net assets (0.36%) (0.33%) (0.45%) 0.24%**
Portfolio turnover rate (excluding short-term
securities) 29.8% 51.3% 49.7% 57.6%

- -----------------------------------------------------------------------------------------------------------------------
<FN>

10
<PAGE>

REGIONAL FUND
<TABLE>
<CAPTION>
Years ended March 31,
---------- -------- ---------- --------- --------- --------- -------- -------- ------- ---------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>

Net asset value:
Beginning of period $21.56 $20.94 $22.23 $21.29 $21.03 $18.95 $19.38 $17.11 $21.19 $23.44
--------- -------- ---------- --------- --------- --------- -------- -------- ------- ---------

Operations:
Net investment income .14 .17 .21 .21 .20 .35 .46 .36 .33 .36

Net realized and
unrealized gains
(losses) 5.77 1.84 .51 1.48 2.38 2.88 3.59 2.76 (.80) 4.26
---------- -------- ---------- --------- --------- --------- -------- -------- ------- ---------

Total from operations 5.91 2.01 .72 1.69 2.58 3.23 4.05 3.12 (.47) 4.62
---------- --------- --------- --------- --------- --------- -------- -------- ------- ---------

Distributions to
shareholders from:
Net investment income (.20) (.20) (.18) (.23) (.24) (.33) (.51) (.28) (.40) (.42)
Net realized gains (2.70) (1.19) (1.83) (.52) (2.08) (.82) (3.97) (.57) (3.21) (6.45)
---------- --------- --------- --------- -------- --------- ------- --------- ------- --------
Total distributions (2.90) (1.39) (2.01) (.75) (2.32) (1.15) (4.48) (.85) (3.61) (6.87)
---------- --------- --------- --------- -------- --------- ------- --------- -------- -------
Net asset value:
End of period $24.57 $21.56 $20.94 $22.23 $21.29 $21.03 $18.95 $19.38 $17.11 $21.19
========== ======== ========== ========= ========= ========= ======== ======== ======= =========

Total investment return* 28.62% 10.35% 3.26% 8.31% 12.77% 18.01% 21.66% 18.63% (1.40%) 25.57%

Net assets at end of
period (000's omitted $575,156 $523,364 $596,572 $659,904 $528,763 $284,054 $138,270 $102,425 $85,666 $101,949

Ratios:
Expenses to average
net assets 1.25% 1.23% 1.25% 1.25% 1.25% 1.01% 0.99% 1.00% 0.80% 0.80%

Net investment
income to average
net assets 0.58% 0.74% 0.94% 1.09% 1.20% 2.27% 2.31% 2.00% 1.60% 1.80%

Portfolio turnover
rate (excluding
short-term securities) 89.7% 150.0% 163.0% 139.7% 140.6% 168.7% 116.2% 93.7% 85.3% 132.5%

- -------------------------------------------------------------------------------------------------------------------------
<FN>

*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.
</FN>
</TABLE>

11
<PAGE>

VALUE FUND
<TABLE>
<CAPTION>
Years ended March 31,
----------- ---------- -------- --------- --------- -------- -------- -------- ------- ---------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value:
Beginning of period $11.17 $11.63 $11.63 $11.06 $10.46 $12.29 $13.14 $10.75 $12.51 $11.46

Operations:
Net investment income .08 .03 .05 .11 .12 .22 .19 .12 .12 .15
Net realized and
unrealized gains (losses) 2.19 .38 1.45 .56 1.08 .36 .11 2.46 (.04) 1.42
-------- --------- --------- -------- -------- -------- ------- --------- ------- -------
Total from operations 2.27 .41 1.50 .67 1.20 .58 1.30 2.58 .08 1.57
-------- --------- --------- -------- -------- -------- ------- --------- ------- -------
Distributions to
shareholders from:
Net investment income (.01) (.03) (.13) -- (.15) (.17) (.18) (.10) (.17) (.18)
Net realized gains (1.01) (.84) (1.37) (.10) (.45) (2.24) (1.97) (.09) (1.67) (.34)
-------- --------- --------- --------- -------- --------- ------- --------- ------- -------
Total distributions (1.02) (.87) (1.50) (.10) (.60) (2.41) (2.15) (.19) (1.84) (.52)
-------- --------- --------- --------- -------- --------- ------- --------- -------- -------
Net asset value:
End of period $12.42 $11.17 $11.63 $11.63 $11.06 $10.46 $12.29 $13.14 $10.75 $12.51
======== ========= ========= ========= ======== ========= ======= ========= ======== =======

Total investment return* 21.07% 3.88% 12.70% 6.20% 12.21% 6.19% 9.90% 24.18% 1.12% 14.22%

Net assets at end of
period (000's omitted) $42,009 $40,601 $35,28 $24,643 $32,246 $22,145 $25,913 $27,980 $20,464 $22,310

Ratios:
Expenses to average
net assets 1.25% 1.25% 1.25% 1.25% 1.25% 1.10% 1.00% 1.00% 1.00% 1.00%
Net investment
income to average
net assets 0.65% 0.31% 0.35% 0.68% 1.24% 2.00% 1.34% 1.00% 1.00% 1.30%
Portfolio turnover
rate (excluding
short-term securities) 73.4% 102.1% 191.9% 118.3% 125.4% 57.0% 70.3% 52.7% 62.5% 85.7%

- ---------------------------------------------------------------------------------------------------------------------------
<FN>
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of distributions at
net asset value.

</FN>
</TABLE>
12
<PAGE>

INVESTMENT PERFORMANCE

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

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

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

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

INVESTMENT OBJECTIVES AND POLICIES

CAPITAL APPRECIATION FUND

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

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

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

13
<PAGE>

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

EMERGING GROWTH FUND

Emerging Growth Fund closed to new investors on February 1, 1996.
Emerging Growth Fund's current shareholders may add to an existing account and
certain others may make an initial investment in the Fund. Emerging Growth Fund
may resume sales to new investors at some future date, but it has no present
intention to do so. See the section "Purchase of Shares" for more information on
who can purchase shares of Emerging Growth Fund.

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

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

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

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

GROWTH FUND

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

In general, Growth Fund concentrates on companies that have strong
management, leading market positions, strong balance sheets, and a well defined
strategy for future growth. In selecting investments for Growth Fund, IAI,
Growth Fund's investment adviser and manager, utilizes several valuation

14
<PAGE>

techniques to determine which stocks offer the best combination of intrinsic
value and earnings growth potential. The goal is to have an acceptable balance
of risk and reward in the portfolio.

Under normal circumstances, at least 65% of Growth Fund's assets will
be invested in growth-type securities. Growth Fund may also invest in government
securities, investment-grade corporate bonds and debentures, high-grade
commercial paper, preferred stocks, certificates of deposit or other securities
of U.S. and foreign issuers when IAI perceives an opportunity for capital growth
from such securities or so that Growth Fund may receive a return on its idle
cash. Growth Fund currently intends to limit its investments in debt securities
to securities of U.S. companies, the U.S. Government and foreign governments and
governmental entities. When IAI invests in such debt securities, investment
income will increase and may constitute a large portion of the return on Growth
Fund, and Growth Fund probably will not participate in market advances or
declines to the extent that it would if it were fully invested in equity
securities. In addition, Growth Fund may increase its cash position on a
temporary basis when IAI is unable to locate investment opportunities with
desirable risk/reward characteristics or to meet redemption requests or pay Fund
expenses.

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

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

GROWTH AND INCOME FUND

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

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

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

MIDCAP GROWTH FUND

The investment objective of Midcap Growth Fund is long-term capital
appreciation. Midcap Growth Fund is designed for investors seeking the
opportunity for substantial long-term growth who can accept above average stock
market risk and little or no current income. Midcap Growth Fund will pursue its
objective by investing in equity securities of medium-sized U.S. companies that
IAI, Midcap Growth Fund's investment adviser and manager, believes have

15
<PAGE>

above-average prospects for growth. Midcap Growth Fund's investment objective is
a fundamental policy and may not be changed without shareholder approval. There
can be no assurance that Midcap Growth Fund will achieve its investment
objective.

Midcap Growth Fund will invest at least 65% of the value of its total
assets in medium-sized companies that have a market capitalization between $500
million and $5 billion. Under normal market conditions, the weighted average
capitalization of Midcap Growth Fund's investment portfolio will range from $1
billion to $3 billion. In general, Midcap Growth Fund concentrates on companies
that have superior performance records, solid market positions, strong balance
sheets and a management team capable of sustaining growth. Investments in such
companies are generally considered to be less volatile than less capitalized
emerging companies. However, such companies may not generate the dividend income
of larger, more capitalized companies. Dividend income, if any, is a
consideration incidental to Midcap Growth Fund's objective of capital
appreciation.

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

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

REGIONAL FUND

The investment objective of Regional Fund is capital appreciation.
Regional Fund does not expect to provide significant current income to
investors. Regional Fund pursues its objective by investing at least 80% of its
equity investments in companies which have their headquarters in Minnesota,
Wisconsin, Iowa, Illinois, Nebraska, Montana, North Dakota or South Dakota (the
"Eight State Region"). Regional Fund's investment objective is a fundamental
policy and may not be changed without shareholder approval. There can be no
assurance that Regional Fund will achieve its investment objective.

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

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

VALUE FUND

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

16
<PAGE>

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

1. Equity securities of companies which have been unpopular for some
time but where, in the opinion of IAI, Value Fund's investment adviser
and manager, recent developments such as those listed below suggest the
possibility of improved operating results:

(a) a sale or termination of an unprofitable part of the company's
business;

(b) a change in the company's management or in management's
philosophy;

(d) the introduction of new products; or

(e) the prospect of an acquisition or merger.

2. Equity securities of companies which have experienced recent market
popularity but which, in the opinion of IAI, have temporarily fallen
out of favor for reasons that are considered nonrecurring or
short-term.

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

Although there is no formula as to the percentage of assets that may be
invested in any one type of security, Value Fund generally is primarily invested
in common stocks. Value Fund may also acquire preferred stocks, fixed income
securities, and securities convertible into or which carry warrants to purchase
common stocks, or other equity interests.

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

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

PORTFOLIO SECURITIES AND OTHER FUND INVESTMENT TECHNIQUES

Repurchase Agreements

Each Fund may invest in repurchase agreements relating to the
securities in which it may invest. In a repurchase agreement, a Fund buys a
security at one price and simultaneously agrees to sell it back at a higher
price. Delays or losses could result if the other party to the agreement
defaults or becomes bankrupt.

Borrowing

Each Fund may borrow from banks for temporary or emergency purposes or
through reverse repurchase agreements. If a Fund borrows money, its share price
may be subject to greater fluctuation until the borrowing is paid off. If a Fund
makes additional investments while borrowings are outstanding, this may be
considered a form of leverage.

17
<PAGE>

Illiquid Securities

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

Foreign Securities

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

Venture Capital

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

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

Leveraged Buyouts

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

18
<PAGE>

Adjusting Investment Exposure

Each Fund can use various techniques to increase or decrease its
exposure to changing security prices, interest rates, currency exchange rates,
commodity prices, or other factors that affect security values. These techniques
include buying and selling options and futures contracts, entering into currency
exchange contracts or swap agreements, purchasing indexed securities, and
selling securities short. Because some Fund assets may be invested in restricted
securities and thus may not be associated with short-term movement in the
financial markets, that portion of a Fund's assets may not be able to
participate in market movements. Each Fund may invest in futures contracts in
amounts corresponding to its investments in such restricted securities in order
to participate fully in market movements.

Temporary Defensive Position

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

Portfolio Turnover

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

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

FUND RISK FACTORS

Foreign Investment Risk Factors

Investments in foreign securities involve risks that are different in
some respects from investments in securities of U.S. issuers, such as the risk
of fluctuations in the value of the currencies in which they are denominated,
the risk of adverse political and economic developments and, with respect to
certain countries, the possibility of expropriation, nationalization or
confiscatory taxation or limitations on the removal of funds or other assets of
a Fund. Securities of some foreign companies are less liquid and more volatile
than securities of comparable domestic companies. There also may be less
publicly available information about foreign issuers than domestic issuers, and
foreign issuers generally are not subject to the uniform accounting, auditing
and financial reporting standards, practices and requirements applicable to
domestic issuers. Because a Fund can invest in securities denominated or quoted
in currencies other than the U.S. dollar, changes in foreign currency exchange
rates may affect the value of securities in the portfolio. Foreign currency
exchange rates are determined by forces of supply and demand in the foreign
exchange markets and other economic and financial conditions affecting the world
economy. A decline in the value of any particular currency against the U.S.
dollar will cause a decline in the U.S. dollar value of a Fund's holdings of
securities denominated in such currency and, therefore, will cause an overall
decline in a Fund's net asset value and net investment income and capital gains,

19
<PAGE>

if any, to be distributed in U.S. dollars to shareholders by a Fund. Delays may
be encountered in settling securities transactions in certain foreign markets,
and a Fund will incur costs in converting foreign currencies into U.S.
dollars. Custody charges are generally higher for foreign securities.

Risks of Transactions in Derivatives

IAI may use futures, options, swap and currency exchange agreements as
well as short sales to adjust the risk and return characteristics of each Fund's
portfolio of investments. If IAI judges market conditions incorrectly or employs
a strategy that does not correlate well with a Fund's investments, use of these
techniques could result in a loss, regardless of whether the intent was to
reduce risk or increase return. Use of these techniques may increase the
volatility of a Fund and may involve a small investment of cash relative to the
magnitude of risk assumed. In addition, these techniques could result in a loss
if the counterparty to the transaction is unable to perform as promised.
Moreover, a liquid secondary market for any futures or options contract may not
be available when a futures or options position is sought to be closed. Please
refer to the Statement of Additional Information which further describes these
risks.

Special Risk Factors Associated with Investing in Small Companies

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

Special Risk Factors Associated with Investing in Regional Fund

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

Special Risk Factors Associated with Investing in Value Fund

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

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

(b) a long delay before majority recognition of the accuracy of
IAI's judgment, in which case capital invested by Value Fund in an
individual security or group of securities may be nonproductive for an
extended period. Generally, it is expected that if a Value Fund
investment is "nonproductive" for more than two to three years, it will
be sold.

20
<PAGE>

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

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

Manager Risk

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

Investment Restrictions

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

MANAGEMENT

Capital Appreciation Fund (created November 8, 1995), Emerging Growth
Fund (created April 30, 1991) and Midcap Growth Fund (created February 7, 1992)
are separate portfolios represented by separate classes of common stock of IAI
Investment Funds VI, Inc. Growth Fund (created February 10, 1993) is a separate
portfolio represented by a separate class of common stock of IAI Investment
Funds II, Inc. Growth and Income Fund (created December 2, 1970) is a separate
portfolio represented by a separate class of common stock of IAI Investment
Funds VII, Inc. Regional Fund (created February 1, 1980) is a separate portfolio
represented by a separate class of common stock of IAI Investment Funds IV, Inc.
Value Fund (created August 7, 1987) is a separate portfolio represented by a
separate class of common stock of IAI Investment Funds VIII, Inc. Each of these
companies is a Minnesota corporation authorized to issue its shares of common
stock in more than one series. Under Minnesota law, each Fund's Board of
Directors is generally responsible for the overall operation and management of
such Fund. IAI serves as the investment adviser and manager of the Funds. IAI
also furnishes investment advice to other concerns including other investment
companies, pension and profit sharing plans, portfolios of foundations,
religious, educational and charitable institutions, trusts, municipalities and
individuals, having total assets in excess of $15 billion. IAI's ultimate
corporate parent is Lloyds TSB Group plc, a publicly-held financial services
organization headquartered in London, England. Lloyds TSB Group plc is one of
the largest personal and corporate financial services groups in the United
Kingdom and is engaged in a wide range of activities including commercial and
retail banking. The address of IAI is that of the Funds.

Effective April 1, 1996 (February 1, 1996 for Capital Appreciation
Fund), each Fund has entered into a written agreement with IAI (the "Management
Agreement"), under which IAI provides each Fund with investment advisory
services and is responsible for the overall management of each Fund's business
affairs subject to the authority of the Board of Directors. The Management
Agreement also provides that, except for brokerage commissions and other
expenditures in connection with the purchase and sale of portfolio securities,
interest and, in certain circumstances, taxes and extraordinary expenses, IAI
shall pay all of a Fund's operating expenses. As compensation under the
Management Agreement, Emerging Growth Fund, Midcap Growth Fund, Value Fund and

21
<PAGE>

Regional Fund will pay IAI a fee calculated at 1.25% on an annual basis, of its
average daily net assets, which fee declines to 1.10% as the amounts of assets
in each Fund grows. Growth Fund and Growth and Income Fund will pay IAI 1.25% of
its average daily net assets, which fee declines to 1.00% as the amount of
assets in each Fund grows. As compensation for the services provided, Capital
Appreciation Fund will pay IAI at the annual fee of 1.40% of the Fund's first
$250 million of average daily net assets, 1.35% of the Fund's next $250 million
of average daily net assets, and 1.30% of the Fund's average daily net assets in
excess of $500 million, less any fees and expenses the Fund pays to its
disinterested directors. Until March 31, 1997, IAI has voluntarily agreed to
waive the fee due from Capital Appreciation Fund in excess of 1.25% of the
Fund's average daily net assets. Because IAI is paying each Fund's operating
expenses, these fees represent each Fund's total expenses. With respect to
certain of the services for which it is responsible under the Management
Agreements, IAI may also pay qualifying broker-dealers, financial institutions
and other entities for providing such services to Fund shareholders.

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

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

Rick Leggott has responsibility for the management of Emerging Growth
Fund. Mr. Leggott is a Senior Vice President and has served as an equity
portfolio manager of IAI since 1987. Mr. Leggott has managed Emerging Growth
Fund since its inception.

Suzanne Zak and David McDonald have responsibility for the management
of Growth Fund. Ms. Zak is a Senior Vice President and has served as an equity
portfolio manager since joining IAI in 1992. Before joining IAI, Ms. Zak had
been a Managing Director of J & W Seligman from 1985 to 1992. Ms. Zak has
managed Growth Fund since April, 1996. Mr. McDonald has managed Growth Fund
since September 1994, when he joined IAI as a Vice President and equity
portfolio manager. Before joining IAI, Mr. McDonald was a Managing Director of
Wessels Arnold & Henderson from 1989 to 1994 and an Associate Portfolio Manager
with IDS Financial Services from 1986 to 1989.

Donald Hoelting has responsibility for the management of Growth and
Income Fund. Mr. Hoelting is a Vice President for IAI and has served as an
equity portfolio manager of IAI since joining IAI in April 1996. Prior to
joining IAI, Mr. Hoelting was Chief Investment Officer and Portfolio Manager for
Jefferson National Bank and Trust from 1989 to 1996.

Suzanne Zak has responsibility for the management of Midcap Growth
Fund. Ms. Zak has managed Midcap Growth Fund since its inception.

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

Douglas Platt and Donald Hoelting have responsibility for the
management of Value Fund. Mr. Platt has managed Value Fund since 1991. Mr. Platt
is a Senior Vice President and has served as a portfolio manager of IAI since
1967. Mr. Hoelting has managed the Fund since August 1996. Mr. Hoelting is a
Vice President for IAI and has served as an equity portfolio manager of IAI
since joining IAI in April 1996.

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

22
<PAGE>

Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc., IAI may consider sales of shares of a Fund as a
factor in the selection of broker-dealers to execute a Funds's securities
transactions.

COMPUTATION OF NET ASSET VALUE AND PRICING

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

A Fund's NAV is the value of a single share. The NAV is computed by
adding up the value of a Fund's investments, cash, and other assets, subtracting
its liabilities, and then dividing the result by the number of shares
outstanding.

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

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

PURCHASE OF SHARES

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

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

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

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

23
<PAGE>

To purchase shares, forward the completed application and a check
payable to "IAI Funds" to a Fund. Upon receipt, your account will be credited
with the number of full and fractional shares which can be purchased at the net
asset value next determined after receipt of the purchase order by a Fund.

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

Emerging Growth Fund closed to new investors on February 1, 1996.
Shareholders of Emerging Growth Fund as of such closing date may continue to add
to an account through the reinvestment of dividends and cash distributions on
any Emerging Growth Fund shares owned, through the purchase of additional Fund
shares, and through exchanges from other IAI Mutual Fund accounts. Shares of
Emerging Growth Fund may continue to be purchased by current and future
participants in certain retirement plans that offer the Emerging Growth Fund as
an investment option as of the closing date. Additionally, all current and
future employees of IAI, Emerging Growth Fund's investment adviser and manager,
as well as their immediate family members, may purchase shares of Emerging
Growth Fund for new and existing accounts. Emerging Growth Fund may resume sales
to new investors at some future date, but it has no present intention to do so.

All correspondence relating to purchase of shares should be directed to
the office of the Funds, P.O. Box 357, Minneapolis, Minnesota 55440, or, if
using overnight delivery, to 3700 First Bank Place, 601 Second Avenue South,
Minneapolis, Minnesota 55402. For assistance in completing the application
please contact IAI Mutual Fund Shareholder Services at 1-800-945-3863.

RETIREMENT PLANS

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

AUTOMATIC INVESTMENT PLAN

Investors may arrange to make regular investments of $100 or more per
Fund on a monthly or twice a month basis, effective as of the 4th and/or the
18th day of each month (or the next business day), through automatic deductions
from their checking or savings accounts. Such investors may, of course,
terminate their participation in the Automatic Investment Plans at any time upon
written notice to a Fund. Any changes or instructions to terminate existing
Automatic Investment Plan must be received 30 days preceding the day on which
the change or termination is to take place. Investors interested in
participating in the Automatic Investment Plan should complete the Automatic
Investment Plan application and return it to the Funds.

REDEMPTION OF SHARES

Registered holders of Fund shares may at any time require a Fund to
redeem their shares upon their written request. Shareholders may redeem shares
by phone, subject to a limit of $50,000, provided such shareholders have
authorized the Funds to accept telephone instructions.

Fund shareholders who redeem shares by presenting stock certificates
must endorse the back of the certificate with the signature of the person whose
name appears on the certificate.

24
<PAGE>

Redemption instructions must be signed by the person(s) in whose name
the shares are registered. If the redemption proceeds are to be paid or mailed
to any person other than the shareholder of record or if redemption proceeds are
in excess of $50,000, a Fund will require that the signature on the written
instructions be guaranteed by a participant in a signature guarantee program,
which may include certain national banks or trust companies or certain member
firms of national securities exchanges. (Notarization by a Notary Public is NOT
ACCEPTED.) If the shares are held of record in the name of a corporation,
partnership, trust or fiduciary, a Fund may require additional evidence of
authority prior to accepting a request for redemption. A Fund will not send
redemption proceeds until checks (including certified checks or cashiers checks)
received for the shares purchased have cleared.

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

Payment for shares redeemed will ordinarily be made within seven days
after a request for redemption has been made. Normally a Fund will mail payment
for shares redeemed on the business day following receipt of the redemption
request.

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

EXCHANGE PRIVILEGE

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

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

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

25
<PAGE>

AUTOMATIC EXCHANGE PLAN

Investors may arrange to make regular exchanges of $100 or more between
any of the IAI Mutual Funds on a monthly basis. Exchanges will take place at the
closing price of the fifth day of each month (or the next business day).
Shareholders are responsible for making sure sufficient shares exist in the Fund
account from which the exchange takes place. If there are not sufficient funds
in the Fund account to meet the requested exchange amount, the Automatic
Exchange Plan will be suspended. Shareholders may not close Fund accounts
through the Automatic Exchange Plan. Investors interested in participating in
the Automatic Exchange Plan should complete the Automatic Exchange Plan portion
of their application. For assistance in completing the application contact IAI
Mutual Fund Shareholder Services at 1-800-945-3863.

AUTHORIZED TELEPHONE TRADING

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

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

SYSTEMATIC CASH WITHDRAWAL PLAN

Each Fund has available a Systematic Cash Withdrawal Plan for any
investor desiring to follow a program of systematically withdrawing a fixed
amount of money from an investment in shares of a Fund. An investment of $10,000
is required to establish the plan. Payments under the plan will be monthly or
quarterly in amounts of $100 or more. Shares will be sold with the closing price
of the 15th of the applicable month (or the next business day). To provide funds
for payment, such Fund will redeem as many full and fractional shares as
necessary at the redemption price, which is net asset value.

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

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

26
<PAGE>

DIVIDENDS, DISTRIBUTIONS AND TAX STATUS

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

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

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

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

For federal income tax purposes, each Fund's income and short-term
capital gain distributions are taxed as dividends; long-term capital gain
distributions designated as capital gain dividends are taxed as long-term
capital gains regardless of the length of time the shareholder has held the
shares. Annually, IAI will send you and the IRS a statement showing the amount
of each taxable distribution you received in the previous year.

Upon redemption of shares of a Fund, the shareholder will generally
recognize a capital gain or loss equal to the difference between the amount
realized on the redemption and the shareholder's adjusted basis in such shares.
Such gain or loss will be long-term if the shares have been held for more than
one year. Under the Code, the deductibility of capital losses is subject to
certain limitations.

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

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

DESCRIPTION OF COMMON STOCK

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

The shares of each Fund have noncumulative voting rights, which means
that the holders of more than 50% of the shares voting for the election of
directors can elect 100% of the directors if they choose to do so. On some

27
<PAGE>

issues, such as the election of directors, all shares of each corporation vote
together as one series. On an issue affecting only a particular series, such as
voting on the management agreement, only the approval of the series is required
to make the agreement effective with respect to such series.

Annual or periodically scheduled regular meetings of shareholders will
not be held except as required by law. Minnesota corporation law does not
require an annual meeting; instead, it provides for the Board of Directors to
convene shareholder meetings when it deems appropriate. In addition, if a
regular meeting of shareholders has not been held during the immediately
preceding fifteen months, shareholders holding three percent or more of the
voting shares of a Fund may demand a regular meeting of shareholders of such
Fund by written notice of demand given to the chief executive officer or the
chief financial officer of such Fund. Within thirty days after receipt of the
demand by one of those officers, the Board of Directors shall cause a regular
meeting of shareholders to be called and held no later than ninety days after
receipt of the demand, all at the expense of such Fund. An annual meeting will
be held on the removal of a director or directors of such Fund if requested in
writing by holders of not less than 10% of the outstanding shares of such Fund.

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

COUNSEL AND AUDITORS

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

CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT

The Custodian for each Fund is Norwest Bank Minnesota, N.A., Norwest
Center, Sixth and Marquette, Minneapolis, Minnesota 55479. Norwest employs
foreign subcustodians and depositories, which were approved by the Funds' Board
of Directors in accordance with the rules and regulations of the Securities and
Exchange Commission, for the purpose of providing custodial services for a
Fund's assets held outside of the United States. For a listing of the
subcustodians and depositories currently employed by the Funds, see the
Statement of Additional Information. IAI acts as each Fund's transfer agent,
dividend disbursing agent and IRA Custodian, at P.O. Box 357, Minneapolis,
Minnesota.

ADDITIONAL INFORMATION

Each Fund sends to its shareholders a six-month unaudited and an annual
audited financial report, each of which includes a list of investment securities
held. To reduce the volume of mail you receive, only one copy of most Fund
reports, such as the Fund's Annual Report, may be mailed to your household (same
surname, same address). Please call IAI Mutual Fund Shareholder Services at
1-800-945-3863 if you wish to receive additional shareholder reports.

In the opinion of the staff of the Securities and Exchange Commission,
the use of this combined prospectus may possibly subject all Funds to a certain
amount of liability for any losses arising out of any statement or omission in
this Prospectus regarding a particular Fund. In the opinion of the Funds'
management, however, the risk of such liability is not materially increased by
use of a combined prospectus.

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

28
<PAGE>

Prospectus Dated August 1, 1996

IAI BALANCED FUND

3700 First Bank Place
P.O. Box 357
Minneapolis, Minnesota 55440
Telephone 1-612-376-2700
1-800-945-3863

IAI Balanced Fund's investment objective is to maximize total return to
investors. The Fund pursues its objective by investing in a broadly diversified
portfolio of stocks, bonds and short-term instruments.

This Prospectus sets forth concisely the information which a prospective
investor should know about the Fund before investing and it should be retained
for future reference. A "Statement of Additional Information" dated August 1,
1996, which provides a further discussion of certain areas in this Prospectus
and other matters which may be of interest to some investors, has been filed
with the Securities and Exchange Commission and is incorporated herein by
reference. For a free copy, call or write the Fund at the address or telephone
number shown on the inside back cover of this Prospectus.

<PAGE>

TABLE OF CONTENTS

FUND EXPENSE INFORMATION.....................................................3
FUND DIRECTORS...............................................................3
FINANCIAL HIGHLIGHTS...................................... .................4
INVESTMENT PERFORMANCE.......................................................5
INVESTMENT OBJECTIVE AND POLICIES............................................5
PORTFOLIO SECURITIES AND OTHER INVESTMENT TECHNIQUES.........................6
Portfolio Turnover..................................................8
FUND RISK FACTORS............................................................8
Investment Restrictions................................... .........10
MANAGEMENT...................................................................10
COMPUTATION OF NET ASSET VALUE AND PRICING...................................11
PURCHASE OF SHARES...........................................................11
RETIREMENT PLANS.............................................................12
AUTOMATIC INVESTMENT PLAN....................................................13
REDEMPTION OF SHARES.........................................................13
EXCHANGE PRIVILEGE.................................. ........................13
AUTOMATIC EXCHANGE PLAN......................................................14
AUTHORIZED TELEPHONE TRADING.................................................14
SYSTEMATIC CASH WITHDRAWAL PLAN..............................................15
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS......................................15
DESCRIPTION OF COMMON STOCK..................................................16
COUNSEL AND AUDITORS.........................................................16
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT......................16
ADDITIONAL INFORMATION.......................................................17

-2-
<PAGE>

FUND EXPENSE INFORMATION

Shareholder Transaction Expenses

Sales Load Imposed on Purchases ..................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None

Annual Fund Operating Expenses
______________________________________________________________________________
(as a percentage of average daily net assets)

Management Fee........................................................... 1.25%
Rule 12b-1 Fee......................................................... None
Other Expenses.......................................................... None
Total Fund Operating Expenses............................ ............ 1.25%

Example:
Based upon the levels of
Total Fund Operating Expenses 1 Year 3 Years 5 Years 10 Years
listed above, you would pay the ------ ------- ------- --------
following expenses on a $1,000 $ 13 $ 40 $ 69 $ 151
investment, assuming a five
percent annual return and
redemption at the end of each period.

The purpose of the above table is to assist you in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. Because of a change in the Fund's fee structure effective April 1,
1996, the information in the table has been restated to reflect the Fund's
current fees. The example should not be considered a representation of past or
future expenses. Actual expenses may be greater or less than those shown.

FUND DIRECTORS

Madeline Betsch Richard E. Struthers
W. William Hodgson J. Peter Thompson
George R. Long Charles H. Withers
Noel P. Rahn

-3-

<PAGE>

FINANCIAL HIGHLIGHTS

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

Period From
April 10, 1992***
to
Years ended March 31 March 31, 1993
-------------------- --------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C> <C>
Net asset value:
Beginning of period $10.57 $10.36 $10.89 $10.00
------ ------ ------ ------

Operations:
Net investment income .29 .29 .27 .18
Net realized and .97 .62 (.34) .84
unrealized gains (losses) --- --- ------ ---
Total from operations 1.26 .91 (.07) 1.02
---- --- ------ ---

Distributions to shareholders from:
Net investment income (.30) (.32) (.26) (.13)
Net realized gains --- (.38) (.20) ---
----- ----- ------ ---
Total distributions (.30) (.70) (.46) (.13)
----- ------ ----- -----

Net asset value:
End of period $11.53 10.57 $10.36 $10.89
------ ------ ------ -------

Total investment return* 12.09% 9.44% (.77%) 10.18%

Net assets at end of period $38,799 $41,419 $52,369 $70,068
(000's omitted)

Ratios:
Expenses to average net assets 1.25% 1.25% 1.25% 1.25%**
Net investment income to average
average net assets 2.48% 2.68% 2.35% 2.18%**
Portfolio turnover rate
(excluding short-term 193.8% 256.9% 211.9% 83.4%
securities)
- -------------------------------------------------------------------------------
<FN>
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of distributions at net
asset value.
** Annualized
*** Commencement of operations
</FN>
</TABLE>

-4-
<PAGE>

INVESTMENT PERFORMANCE

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

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

Yield refers to the income generated by an investment in the Fund over
a given period of time, expressed as an annual percentage rate. Yields are
calculated according to a standard that is required for all funds. Because this
difffers from other accounting methods, the quoted yield may not equal the
income actually paid to shareholders.

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

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

INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund is to maximize total return. The
Fund will seek to achieve its objective by investing in a broadly diversified
portfolio of stocks, bonds and short-term instruments. The Fund's investment
objective is a fundamental policy and may not be changed without shareholder
approval. There can be no assurance that the Fund will achieve its investment
objective.

In seeking to achieve its investment objective, Investment Advisers,
Inc. (IAI), the Fund's investment adviser and manager, allocates the Fund's
assets among the three classes of assets set forth above. Under normal market
conditions, the Fund holds between 25% and 75% of its assets in stocks and other
equity securities, between 25% and 75% of its assets in bonds and other fixed
income securities, and up to 50% of its assets in short-term instruments. The
Fund may also make other investments that do not fall within these classes.

The stock class includes equity securities of all types and consists
primarily of common stocks, securities convertible into common stocks, and
non-convertible preferred stocks. The bond class includes all varieties of
fixed-income instruments with maturities of more than one year and consists
primarily of investment grade bonds and other comparable fixed income
securities. Investment grade securities are those securities rated within the
four highest grades assigned by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Corporation ("S&P"). Although the Fund may also invest in
below investment grade securities (junk bonds), the Fund currently

-5-

<PAGE>

intends to limit such investments to less than 10% of its total assets and not
to invest in junk bonds rated lower than B by Moody's or S&P.

Securities rated in the medium to lower rating categories of nationally
recognized statistical rating organizations and unrated securities of comparable
quality are predominately speculative with respect to the capacity to pay
interest and repay principal in accordance with the terms of the security and
generally involve a greater volatility of price than securities in higher rating
categories. See "Investment Objectives and Policies" in and Appendix A to the
Statement of Additional Information for additional information regarding ratings
of debt securities. In purchasing such securities, the Fund will rely on IAI's
judgment, analysis and experience in evaluating the creditworthiness of an
issuer of such securities. IAI will take into consideration, among other things,
the issuer's financial resources, its sensitivity to economic conditions and
trends, its operating history, the quality of the issuer's management and
regulatory matters.

The short-term class includes all types of short-term instruments with
remaining maturities of one year or less and consists primarily of commercial
paper, bank certificates of deposit, bankers' acceptances, government
securities, repurchase agreements and other similar short-term instruments.
Short-term securities are only purchased if given one of the top two ratings by
a major ratings service or, if unrated, are of comparable quality as determined
by IAI. Within each of these classes, the Fund may invest in both domestic and
foreign securities.

IAI regularly reviews its allocation of the Fund's assets among the
three classes and gradually varies them over time to favor asset classes that,
in IAI's judgment, provide the most favorable total return outlook. Because the
Fund seeks to maximize total return over the long-term, it will not try to
pinpoint the precise moment when major reallocations are warranted. Rather, such
reallocations among asset classes will be made gradually over time and, under
normal conditions, a single reallocation decision will not involve more than 10%
of the Fund's total assets.

PORTFOLIO SECURITIES AND OTHER INVESTMENT TECHNIQUES

Repurchase Agreements

The Fund may invest in repurchase agreements relating to the securities
in which it may invest. In a repurchase agreement, the Fund buys a security at
one price and simultaneously agrees to sell it back at a higher price. Delays or
losses could result if the other party to the agreement defaults or becomes
bankrupt.

Borrowing

The Fund may borrow from banks for temporary or emergency purposes or
through reverse repurchase agreements. If the Fund borrows money, its share
price may be subject to greater fluctuation until the borrowing is paid off. If
the Fund makes additional investments while borrowings are outstanding, this may
be considered a form of leverage.

Illiquid Securities

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

Foreign Securities

The Fund may invest in securities of foreign issuers in accordance with its
investment objective and policies. In considering whether to purchase securities
of foreign issuers, IAI will consider the political and

-6-
<PAGE>

economic conditions in a country, the prospect for changes in the value of its
currency and the liquidity of the investment in that country's securities
markets. The Fund currently intends to limit its investment in foreign
securities denominated in foreign currency and not publicly traded in the United
States to no more than 10% of its total assets.
Venture Capital

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

In addition to investing in venture capital limited partnerships and
funds, the Fund may directly invest in early-stage, developing companies. The
risks associated with investing in these securities are substantially similar to
the risks set forth above. The Fund will typically purchase equity securities in
these early-stage, developing companies; however from time to time, the Fund may
purchase non-investment grade debt securities in the form of convertible notes.

Leveraged Buyouts

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

When-Issued Delayed Delivery Securities

The Fund may purchase portfolio securities on a when-issued or
delayed-delivery basis. When-issued and delayed-delivery transactions are
trading practices wherein payment for and delivery of the securities take place
at a future date. The market value of a security could change during this
period, which could affect the market value of the Fund's assets.

Zero Coupon Obligations

The Fund may also invest in zero coupon obligations of the U.S.
Government or its agencies, tax exempt issuers and corporate issuers, including
rights to stripped coupon and principal payments ("strips"). Zero coupon bonds
do not make regular interest payments; rather, they are sold at a discount from
face value. Principal and accreted discount (representing interest accrued but
not paid) are paid at maturity. Strips are debt securities that are stripped of
their interest after the securities are issued, but otherwise are comparable to
zero coupon bonds. The market value of strips and zero coupon bonds generally
fluctuates in response to changes in interest rates to a greater degree than do
interest-paying securities of comparable term and quality.

-7-
<PAGE>

Adjusting Investment Exposure

The Fund can use various techniques to increase or decrease its
exposure to changing security prices, interest rates, currency exchange rates,
commodity prices, or other factors that affect security values. These techniques
include buying and selling options and futures contracts, entering into currency
exchange contracts or swap agreements, purchasing indexed securities, and
selling securities short. Because some Fund assets may be invested in restricted
securities and thus may not be associated with short-term movements in the
financial markets, that portion of the Fund's assets may not be able to
participate in market movements. The Fund may invest in futures contracts in
amounts corresponding to its investments in such restricted securities in order
to participate fully in market movements.

Temporary Defensive Position

In unusual market conditions, when IAI believes a temporary defensive
position is warranted, the Fund may invest without limitation in
investment-grade fixed income securities, that is, securities rated within the
four highest grades assigned by Moody's or S&P, or money market securities
(including repurchase agreements). Money market securities will only be
purchased if they have been given one of the two top ratings by a major ratings
service or, if unrated, are of comparable quality as determined by IAI. If the
Fund maintains a temporary defensive position, investment income may increase
and may constitute a large portion of the Fund's return.

Portfolio Turnover

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

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

FUND RISK FACTORS
Interest Rate Risk

As a mutual fund investing in fixed-income securities, the Fund is
subject to interest rate risk. Interest rate risk is the potential for a decline
in bond prices due to rising interest rates. In general, bond prices vary
inversely with interest rates. When interest rates rise, bond prices generally
fall. Conversely, when interest rates fall, bond prices generally rise. The
change in price depends on several factors, including the bond's maturity date.
In general, bonds with longer maturities are more sensitive to changes in
interest rates than bonds with shorter maturities. In managing the Fund, IAI
will adjust the duration of the investment portfolio in response to economic and
market conditions. Duration is generally considered a better measure of interest
rate risk than is maturity. Duration is a measure of the expected change in
value of a fixed income security (or portfolio) for a given change in interest
rates. For example, if interest rates rise by one percent, the market value of a
security (or portfolio) having a duration of two generally will fall by
approximately two percent. In some situations, the standard duration calculation
does not properly reflect the interest rate risk of a security. In such
situations, IAI will use more sophisticated analytical techniques, such as
modeling principal and interest payments based upon historical experience or
expected volatility, to arrive at an effective duration that incorporates the
additional variables into the determination of interest rate risk. These
techniques may involve estimates of future economic parameters which may vary
from actual future outcomes. IAI anticipates the duration range of the Fixed
Income portion for the Fund to be 3.5 to 7 years. This range is merely an
expectation as of the date of this Prospectus, and may change due to market
conditions and other economic factors. Therefore, the expected duration range

-8-

<PAGE>

does not limit IAI in how it manages the Fund. These principals of interest rate
risk also apply to U.S. Treasury and U.S. Government agency securities. As with
other bond investments, U.S. Government securities will rise and fall in value
as interest rates change. A security backed by the U.S. Treasury or the full
faith and credit of the United States is guaranteed only as to the timely
payment of interest and principal when held to maturity. The current market
prices for such securities are not guaranteed and will fluctuate.

Credit Risk

The Fund is also subject to credit risk. Credit risk, also known as
default risk, is the possibility that a bond issuer will fail to make timely
payments of interest or principal to the Fund. The credit risk of the Fund
depends on the quality of its investments. Reflecting their higher risks,
lower-quality bonds generally offer higher yields (all other factors being
equal).

Call Risk

The Fund is also subject to call risk. Call risk is the possibility
that corporate bonds held by the Fund will be repaid prior to maturity. Call
provisions, common in many corporate bonds held by the Fund, allow bond issuers
to redeem bonds prior to maturity (at a specified price). When interest rates
are falling, bond issuers often exercise these call provisions, paying off bonds
that carry high stated interest rates and often issuing new bonds at lower
rates. For the Fund, the result would be that bonds with high interest rates are
"called" and must be replaced with lower-yielding instruments. In these
circumstances, the income of the Fund would decline.

Risks of Lower-Rated Debt Securities

The Fund may invest in debt securities commonly known as "junk" bonds.
Such securities are subject to higher risks and greater market fluctuations than
are lower-yielding, higher-rated securities. The price of junk bonds has been
found to be less sensitive to changes in prevailing interest rates than
higher-rated investments, but is likely to be more sensitive to adverse economic
changes or individual corporate developments. During an economic downturn or
substantial period of rising interest rates, highly leveraged issuers may
experience financial stress which would adversely affect their ability to
service their principal and interest payment obligations, to meet their
projected business goals or to obtain additional financing. If the issuers of a
fixed-income security owned by the Fund were to default, the Fund might incur
additional expenses to seek recovery. The risk of loss due to default by issuers
of junk bonds is significantly greater than that associated with higher-rated
securities because such securities generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness. In addition, periods
of economic uncertainty and change can be expected to result in an increased
volatility of market prices of junk bonds and a concomitant volatility in the
net asset value of a share of the Fund.

The secondary market for junk bonds is less liquid than the markets for
higher quality securities and, as such, may have an adverse effect on the market
prices of certain securities. The limited liquidity of the market may also
adversely affect the ability of the Fund to arrive at a fair value for certain
junk bonds at certain times and could make it difficult for the Fund to sell
certain securities. For a description of Moody's and S&P ratings, see Appendix A
to the Statement of Additional Information.

Foreign Investment Risk Factors

-9-

<PAGE>

rates may affect the value of securities in the portfolio. Foreign currency
exchange rates are determined by forces of supply and demand in the foreign
exchange markets and other economic and financial conditions affecting the world
economy. A decline in the value of any particular currency against the U.S.
dollar will cause a decline in the U.S. dollar value of the Fund's holdings of
securities denominated in such currency and, therefore, will cause an overall
decline in the Fund's net asset value and net investment income and capital
gains, if any, to be distributed in U.S. dollars to shareholders by the Fund.
Delays may be encountered in settling securities transactions in certain foreign
markets, and the Fund will incur costs in converting foreign currencies into U.S
dollars. Custody charges are generally higher for foreign securities.

Risks of Transactions in Derivatives

IAI may use futures, options, swap and currency exchange agreements as
well as short sales to adjust the risk and return characteristics of the Fund's
portfolio of investments. If IAI judges market conditions incorrectly or employs
a strategy that does not correlate well with the Fund's investments, use of
these techniques could result in a loss, regardless of whether the intent was to
reduce risk or increase return. Use of these techniques may increase the
volatility of the Fund and may involve a small investment of cash relative to
the magnitude of risk assumed. In addition, these techniques could result in a
loss if the counterparty to the transaction is unable to perform as promised.
Moreover, a liquid secondary market for any futures or options contract may not
be available when a futures or options position is sought to be closed. Please
refer to the Statement of Additional Information which further describes these
risks.

Manager Risk

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

Investment Restrictions

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

Please refer to the Statement of Additional Information for a further
discussion of the Fund's investment risks and investment restrictions.

MANAGEMENT

Balanced Fund was created on April 10, 1992, as a separate portfolio
represented by a separate class of common stock of IAI Investment Funds VI,
Inc., a Minnesota corporation, created on April 30, 1991. Under Minnesota law,
the Fund's Board of Directors is generally responsible for the overall operation
and management of the Fund. IAI serves as the investment adviser and manager of
the Fund pursuant to a written advisory agreement (the "Advisory Agreement").
IAI also furnishes investment advice to other concerns including other
investment companies, pension and profit sharing plans, portfolios of
foundations, religious, educational and charitable institutions, trusts,
municipalities and individuals, having total assets in excess of $15 billion.
IAI's ultimate corporate parent is Lloyds TSB Group plc, a publicly-held
financial services organization headquartered in London, England. Lloyds TSB
Group plc is one of the largest personal and corporate financial services groups
in the United Kingdom, and is engaged in a wide range of activities including
commercial and retail banking. The address of IAI is that of the Fund.

-10-

<PAGE>

Pursuant to a written agreement with the Fund (the "Management
Agreement"), IAI provides the Fund with investment advisory services and is
responsible for the overall management of the Fund's business affairs subject to
the authority of the Board of Directors. The Management Agreement also provides
that, except for brokerage commissions and other expenditures in connection with
the purchase and sale of portfolio securities, interest and, in certain
circumstances, taxes and extraordinary expenses, IAI shall pay all of the Fund's
operating expenses. As compensation under the Management Agreement, the Fund
will pay IAI a fee, calculated at 1.25%, at an annual rate, of the Fund's
average daily net assets, which fee declines to 1.10% of average daily net
assets as the Fund grows. Because IAI is paying Fund operating expenses, these
fees represent the Fund's total expenses. With respect to certain of the
services for which it is responsible under the Management Agreement, IAI may
also pay qualifying broker-dealers, financial institutions and other entities
for providing such services to Fund shareholders. IAI shall not be liable for
any loss suffered by the Fund in the absence of willful misfeasance, bad faith
or negligence in the performance of its duties and obligations.

The Fund is managed by a team of IAI investment professionals which is
responsible for making the day-to-day investment decisions for the Fund. The
teams managing the Fund are as follows.

Larry Hill, Donald Hoelting and Mark Simenstad have responsibility for
the management of the Fund. Mr. Hill is IAI's Chief Fixed Income Officer and a
member of the Board of Directors, and has served as a fixed income portfolio
manager since joining IAI in 1984. Mr. Hoelting has managed the Fund's equity
securities since April 1, 1996, when he joined IAI as Vice President and equity
portfolio manager. Before joining IAI, Mr. Hoelting was Chief Investment Officer
and Portfolio Manager for Jefferson National Bank and Trust from 1989 to 1996.
Mr. Simenstad has managed the Fund's fixed income securities since 1993. Mr.
Simenstad is a Vice President of IAI and has served as a fixed income portfolio
manager since joining IAI in 1993. Before joining IAI, Mr. Simenstad served as a
fixed income portfolio manager for Lutheran Brotherhood from 1983 to 1993.

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

COMPUTATION OF NET ASSET VALUE AND PRICING

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

The Fund's NAV is the value of a single share. The NAV is computed by
adding up the value of the Fund's investments, cash, and other assets,
subtracting its liabilities, and then dividing the result by the number of
shares outstanding.

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

The offering price (price to buy one share) and redemption price (price
to sell one share) are the Fund's NAV.
11

<PAGE>

PURCHASE OF SHARES

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

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

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

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

To purchase shares, forward the completed application and a check
payable to "IAI Funds" to the Fund. Upon receipt, your account will be credited
with the number of full and fractional shares which can be purchased at the net
asset value next determined after receipt of the purchase order by the Fund.

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

All correspondence relating to the purchase of shares should be
directed to the office of the Fund, P.O. Box 357, Minneapolis, Minnesota 55440
or, if using overnight delivery, to 3700 First Bank Place, 601 Second Avenue
South, Minneapolis, Minnesota 55402. For assistance in completing the
application please contact IAI Mutual Funds Shareholder Services at
1-800-945-3863.

RETIREMENT PLANS

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

-12-
<PAGE>

AUTOMATIC INVESTMENT PLAN

Investors may arrange to make regular investments of $100 or more per
Fund on a monthly or twice a month basis, effective as of the 4th and/or the
18th day of each month (or the next business day), through automatic deductions
from their checking or savings accounts. Such investors may, of course,
terminate their participation in the Automatic Investment Plan at any time upon
written notice to the Fund. Any changes or instructions to terminate existing
Automatic Investment Plans must be received 30 days preceding the date on which
the change or termination is to take place. Investors interested in
participating in the Automatic Investment plan should complete the Automatic
Investment Plan application and return it to the Fund.

REDEMPTION OF SHARES

Registered holders of Fund shares may at any time require the Fund to
redeem their shares upon their written request. Shareholders may redeem shares
by phone, subject to a limit of $50,000, provided such shareholders have
authorized the Fund to accept telephone instructions.

Fund shareholders who redeem shares by presenting stock certificates
must endorse the back of the certificate with the signature of the person whose
name appears on the certificate.

Redemption instructions must be signed by the person(s) in whose name
the shares are registered. If the redemption proceeds are to be paid or mailed
to any person other than the shareholder of record or if redemption proceeds are
in excess of $50,000, the Fund will require that the signature on the written
instructions be guaranteed by a participant in a signature guarantee program,
which may include certain national banks or trust companies or certain member
firms of national securities exchanges. (Notarization by a Notary Public is NOT
ACCEPTED.) If the shares are held of record in the name of a corporation,
partnership, trust or fiduciary, the Fund may require additional evidence of
authority prior to accepting a request for redemption. The Fund will not send
redemption proceeds until checks (including certified checks or cashiers checks)
received for the shares purchased have cleared.

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

Payment for shares redeemed will ordinarily be made within seven days
after a request for redemption has been made. Normally the Fund will mail
payment for shares redeemed on the business day following receipt of the
redemption request.

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

EXCHANGE PRIVILEGE

The Exchange Privilege enables shareholders to purchase, in exchange for
shares of the Fund, shares of other IAI Mutual Funds. These funds have different
investment objectives from the Fund. Shareholders may exchange shares of the
Fund for shares of another fund managed by IAI, provided that the fund whose
shares will be acquired is duly registered in the state of the shareholder's
residence and the shareholder otherwise satisfies the

-13-

<PAGE>

fund's purchase requirements. Although the Fund does not currently charge a
fee for use of the Exchange Privilege, it reserves the right to do so in the
future.

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

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

AUTOMATIC EXCHANGE PLAN

AUTHORIZED TELEPHONE TRADING

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

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

-14-

<PAGE>

SYSTEMATIC CASH WITHDRAWAL PLAN

The Fund has available a Systematic Cash Withdrawal Plan for any
investor desiring to follow a program of systematically withdrawing a fixed
amount of money from an investment in shares of the Fund. An investment of
$10,000 is required to establish the plan. Payments under the plan will be made
monthly or quarterly in amounts of $100 or more. Shares will be sold with the
closing price of the 15th of the applicable month (or the next business day). To
provide funds for payment, the Fund will redeem as many full and fractional
shares as necessary at the redemption price, which is net asset value.

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

DIVIDENDS, DISTRIBUTIONS AND TAX STATUS

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

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

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

For federal income tax purposes, the Fund's income and short-term
capital gain distributions are taxed as dividends; long-term capital gain
distributions designated as capital gain dividends are taxed as long-term
capital gains, regardless of the length of time the shareholder has held the
shares. Annually, IAI will send you and the IRS a statement showing the amount
of each taxable distribution you received in the previous year.

Upon redemption of shares of the Fund the shareholder will generally
recognize a capital gain or loss equal to the difference between the amount
realized on the redemption and the shareholder's adjusted basis in such

-15-

<PAGE>

shares. Such gain or loss will be long-term if the shares have been held
for more than one year. Under the Code, the deductibility of capital losses is
subject to certain limitations.

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

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

DESCRIPTION OF COMMON STOCK

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

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

Annual or periodically scheduled regular meetings of shareholders will
not be held except as required by law. Minnesota corporation law does not
require an annual meeting; instead, it provides for the Board of Directors to
convene shareholder meetings when it deems appropriate. In addition, if a
regular meeting of shareholders has not been held during the immediately
preceding fifteen months, shareholders holding three percent or more of the
voting shares of the Fund may demand a regular meeting of shareholders of the
Fund by written notice of demand given to the chief executive officer or the
chief financial officer of the Fund. Within thirty days after receipt of the
demand by one of those officers, the Board of Directors shall cause a regular
meeting of shareholders to be called and held no later than ninety days after
receipt of the demand, all at the expense of the Fund. An annual meeting will be
held on the removal of a director or directors of the Fund if requested in
writing by holders of not less than 10% of the outstanding shares of the Fund.

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

COUNSEL AND AUDITORS

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

CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT

The Custodian for the Fund is Norwest Bank Minnesota, N.A., Norwest Center,
Sixth and Marquette, Minneapolis, Minnesota 55479. Norwest employs foreign
subcustodians and depositories, which were approved by the Fund's Board of
Directors in accordance with the rules and regulations of the Securities and
Exchange Commission, for the purpose of providing custodial services for the
Fund's assets held outside the United States.

-16-

<PAGE>

For a listing of the subcustodians and depositories currently employed by the
Fund, see the Statement of Additional Information. IAI acts as the Fund's
transfer agent, dividend disbursing agent and IRA Custodian, at P.O. Box 357,
Minneapolis, Minnesota 55440.

ADDITIONAL INFORMATION

The Fund sends to its shareholders a six-month unaudited and an annual
audited financial report, each of which includes a list of investment securities
held. To reduce the volume of mail you receive, only one copy of most Fund
reports, such as the Fund's Annual Report, may be mailed to your household (same
surname, same address). Please call IAI Mutual Fund Shareholder Services at
1-800-945-3863 if you wish to receive additional shareholder reports.

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

-17-

<PAGE>
IAI CAPITAL APPRECIATION FUND
IAI EMERGING GROWTH FUND
IAI GROWTH FUND
IAI GROWTH AND INCOME FUND
IAI MIDCAP GROWTH FUND
IAI REGIONAL FUND
IAI VALUE FUND

Statement of Additional Information
dated August 1, 1996

This Statement of Additional Information is not a prospectus. This
Statement of Additional Information relates to a Prospectus dated August 1,
1996, and should be read in conjunction therewith. A copy of the Prospectus may
be obtained from the Fund at 3700 First Bank Place, P.O. Box 357, Minneapolis,
Minnesota 55440 (telephone: 1-612-376-2700 or 1-800-945-3863).

<PAGE>

TABLE OF CONTENTS

Page
INVESTMENT OBJECTIVES AND POLICIES............................................3
Repurchase Agreements................................................3
Reverse Repurchase Agreements........................................3
Securities of Foreign Issuers........................................3
Illiquid Securities..................................................4
Lending Portfolio Securities.........................................4
Swap Agreements......................................................4
Indexed Securities...................................................5
Foreign Currency Transactions........................................5
Limitations on Futures and Options Transactions......................6
Futures Contracts....................................................7
Futures Margin Payments..............................................7
Purchasing Put and Call Options......................................7
Writing Put and Call Options.........................................8
Combined Positions...................................................8
Correlation of Price Changes.........................................8
Liquidity of Options and Futures Contracts...........................9
OTC Options..........................................................9
Options and Futures Relating to Foreign Currencies...................9
Asset Coverage for Futures and Options Positions.....................9
INVESTMENT RESTRICTIONS......................................................10
Portfolio Turnover..................................................12
INVESTMENT PERFORMANCE.......................................................12
MANAGEMENT...................................................................14
History.............................................................18
Management Agreement................................................19
Allocation of Expenses..............................................22
Duration of Agreements..............................................23
CUSTODIAL SERVICE............................................................23
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE...........................27
CAPITAL STOCK................................................................28
NET ASSET VALUE AND PUBLIC OFFERING PRICE....................................32
PURCHASES AND REDEMPTIONS IN KIND............................................33
TAX STATUS...................................................................33
LIMITATION OF DIRECTOR LIABILITY.............................................34
FINANCIAL STATEMENTS.........................................................35
APPENDIX A - RATINGS OF DEBT SECURITIES....................................A-1

2
<PAGE>

INVESTMENT OBJECTIVES AND POLICIES

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

Repurchase Agreements

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

Reverse Repurchase Agreements

Each Fund may invest in reverse repurchase agreements. In a reverse
repurchase agreement, a Fund sells a portfolio instrument to another party, such
as a bank or broker-dealer, in return for cash and agrees to repurchase the
instrument at a particular price and time. While a reverse repurchase agreement
is outstanding, a Fund will maintain appropriate liquid assets in a segregated
custodial account to cover its obligation under the agreement. A Fund will enter
into reverse repurchase agreements only with parties whose creditworthiness has
been found satisfactory by IAI, the Fund's investment adviser and manager. As a
result, such transactions may increase fluctuations in the market value of a
Fund's assets and may be viewed as a form of leverage.

Securities of Foreign Issuers

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

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

3
<PAGE>

generally less government supervision and regulation of foreign stock exchanges,
brokers and listed companies than in the United States.

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

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

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

Illiquid Securities

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

Lending Portfolio Securities

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

Swap Agreements

4
<PAGE>

other factors such as security prices or inflation rates. Swap agreements can
take many different forms and are known by a variety of names. A Fund is not
limited to any particular form of swap agreement if IAI determines it is
consistent with such Fund's investment objective and policies.

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

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

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

Indexed Securities

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

The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies. IAI will use its judgment in determining whether indexed
securities should be treated as short-term instruments, bonds, stocks, or as a
separate asset class for purposes of a Fund's investment policies, depending on
the individual characteristics of the securities. Indexed securities may be more
volatile than the underlying instruments.

Foreign Currency Transactions

Each Fund may hold foreign currency deposits from time to time and may
convert dollars and foreign currencies in the foreign exchange markets. Currency
conversion involves dealer spreads and other costs, although commissions usually
are not charged. Currencies may be exchanged on a spot (i.e., cash) basis, or by
5
<PAGE>

entering into forward contracts to purchase or sell foreign currencies at a
future date and price. Forward contracts generally are traded in an interbank
market conducted directly between currency traders (usually large commercial
banks) and their customers. The parties to a forward contract may agree to
offset or terminate the contract before its maturity, or may hold the contract
to maturity and complete the contemplated currency exchange.

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

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

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

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

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

Limitations on Futures and Options Transactions

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

6
<PAGE>

The above limitation on a Fund's investments in futures contracts and
options, and such Fund's policies regarding futures contracts and options
discussed elsewhere in this Statement of Additional Information may be changed
as regulatory agencies permit.

Futures Contracts

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

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

Futures Margin Payments

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

Purchasing Put and Call Options

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

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

7
<PAGE>

increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to suffer
a loss if security prices do not rise sufficiently to offset the cost of the
option.

Writing Put and Call Options

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

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

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

Combined Positions

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

Correlation of Price Changes

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

Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match a Fund's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and

8
<PAGE>

futures and securities are traded, or from imposition of daily price fluctuation
limits or trading halts. A Fund may purchase or sell options and futures
contracts with a greater or lesser value than the securities it wishes to hedge
or intends to purchase in order to attempt to compensate for differences in
volatility between the contract and the securities, although this may not be
successful in all cases. If price changes in a Fund's options or futures
positions are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not offset by
gains in other investments.

Liquidity of Options and Futures Contracts

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

OTC Options

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

Options and Futures Relating to Foreign Currencies

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

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

Asset Coverage for Futures and Options Positions

Each Fund will comply with guidelines established by the Securities and
Exchange Commission with respect to coverage of options and futures strategies
by mutual funds, and if the guidelines so require will set aside appropriate
liquid assets in a segregated custodial account in the amount prescribed.
Securities held in a segregated account cannot be sold while the futures or
option strategy is outstanding, unless they are replaced with other suitable

9
<PAGE>

assets. As a result, there is a possibility that segregation of a large
percentage of a Fund's assets could impede portfolio management or a Fund's
ability to meet redemption requests or other current obligations.

INVESTMENT RESTRICTIONS

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

Each Fund may not:

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

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

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

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

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

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

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

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

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

10
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

11
<PAGE>

Portfolio Turnover

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

INVESTMENT PERFORMANCE

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

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

CTR = (ERV-P) 100
-------
P

Where: CTR = Cumulative total return;

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

P = initial payment of $1,000

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

P(1+T)n = ERV

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

T = average annual total return;

n = number of years; and

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

12
<PAGE>

The table below shows the yearly total return for the Funds for the
periods indicated:

<TABLE>

<CAPTION>
Total Return
---------------------------------------------------------------------------------------------------
Capital Emerging
Year Ended Appreciation Growth Growth Growth & Midcap Regional Value
12/31 Fund* Fund** Fund*** Income Fund Growth Fund**** Fund Fund*****
<S> <C> <C> <C> <C> <C> <C> <C>

1986 -- -- -- 13.1% -- 24.6% 1.9%
1987 -- -- -- 15.5% -- 5.3% 14.1%
1988 -- -- -- 8.5% -- 18.6% 24.3%
1989 -- -- -- 29.8% -- 31.3% 22.6%
1990 -- -- -- -6.7% -- -0.3% -11.5%
1991 -- 23.6% -- 26.7% -- 35.4% 19.8%
1992 -- 22.4% -- 4.0% 15.0% 3.5% 11.9%
1993 -- 14.76% 0.99% 9.98% 22.85% 8.96% 22.08%
1994 -- 0.19% 0.66% -4.77% 5.65% 0.68% -9.08%
1995 -- 49.55% 23.17% 27.14% 26.09% 32.64% 24.39%
- ----------------------------------------------
<FN>
* Commenced operations on February 1, 1996
** Commenced operations on August 5, 1991
*** Commenced operations on August 6, 1993
**** Commenced operations on April 10, 1992
</FN>
</TABLE>

The cumulative total return of Capital Appreciation Fund from inception
through March 31, 1996 was 12.40%.

The average annual total returns of Emerging Growth Fund for the fiscal
year ended March 31, 1996 and from inception through March 31, 1996 were 55.20%
and 25.40%, respectively.

The average annual total returns of Growth Fund for the fiscal year
ended March 31, 1996 and from inception through March 31, 1996 were 18.01% and
10.30%, respectively.

The average annual total returns of Growth and Income Fund for the one,
five and ten year periods ended March 31, 1996 were 21.51%, 10.26%, and 11.05%,
respectively.

The average annual total returns of Midcap Growth Fund for the fiscal
year ended March 31, 1996 and from inception through March 31, 1996 were 23.51%
and 19.25%, respectively.

The average annual total returns of Regional Fund for the one, five and
ten year periods ended March 31, 1996 were 28.62%, 12.35% and 14.21%,
respectively.

The average annual total returns of Value Fund for the one, five and
ten year periods ended March 31, 1996 were 21.07%, 11.05% and 10.95%,
respectively.

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

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

13
<PAGE>

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

MANAGEMENT

The names, addresses, positions and principal occupations of the directors and
executive officers of the Fund are given below.
<TABLE>
<CAPTION>
Name and Address Age Position Principal Occupation(s) During Past 5 Years
<S> <C> <C> <C>

Noel P. Rahn* 57 Chairman of the Noel P. Rahn has been Chief Executive Officer
3700 First Bank Place Board and a Director of IAI since 1974. Mr. Rahn is
P.O. Box 357 also Chairman of the other IAI Mutual Funds.
Minneapolis, Minnesota 55440

Richard E. Struthers* 44 President, Director Richard E. Struthers is Executive Vice
3700 First Bank Place President and a Director of IAI and has served
P.O. Box 357 IAI in many capacities since 1979. Mr.
Minneapolis, Minnesota 55440 Struthers is also President of the other IAI
Mutual Funds.

Madeline Betsch 53 Director Madeline Betsch, until April 1994, was
19 South 1st Street Executive Vice President, Director of Client
Minneapolis, Minnesota 55401 Services, of CME-KHBB Advertising since May
1985, and prior thereto was a Vice President
with Campbell-Mithun, Inc. (advertising
agency) since February 1977. Ms. Betsch
is currently retired.

14
<PAGE>

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

W. William Hodgson 71 Director W. William Hodgson served as information
1698 Dodd Road manager for the North Central Home Office of
Mendota Heights, Minnesota 55118 the Prudential Insurance Company of America
from 1961 until 1984; he is currently retired.

George R. Long 66 Director George R. Long has been Chairman of Mayfield
29 Las Brisas Way Corp. (financial consultants and venture
Naples, Florida 33963 capitalists) since 1973.

J. Peter Thompson 64 Director J. Peter Thompson has been a grain farmer in
Route 1 southwestern Minnesota since 1974. Prior to
Mountain Lake, Minnesota 56159 that, Mr. Thompson was employed by Paine
Webber, Jackson & Curtis, Incorporated, (a
diversified financial services concern), most
recently as Senior Vice President and General
Partner.

Charles H. Withers 69 Director Charles H. Withers was Editor of the Rochester
Rochester Post Bulletin Post-Bulletin, Rochester, Minnesota from 1960
P.O. Box 6118 through March 31, 1980; he is currently
Rochester, Minnesota 55903 retired.

Archie C. Black, III 34 Treasurer Archie C. Black is a Senior Vice President and
3700 First Bank Place Chief Financial Officer of IAI and has served
P.O. Box 357 IAI in several capacities since 1987. Mr.
Minneapolis, Minnesota 55440 Black is also Treasurer of the other IAI
Mutual Funds.

William C. Joas 33 Secretary William C. Joas is a Vice President of IAI and
3700 First Bank Place has served as an attorney for IAI since 1990.
P.O. Box 357 Mr. Joas is also Secretary of the other IAI
Minneapolis, Minnesota 55440 Mutual Funds.

Kirk Gove 34 Vice President, Kirk Gove is a Vice President of IAI. Prior
3700 First Bank Place Marketing to joining IAI in 1992, Mr. Gove served as an
P.O. Box 357 Associate Vice President of Dain Bosworth,
Minneapolis, Minnesota 55440 Incorporated (a diversified financial services
concern). Mr. Gove is also Vice President,
Marketing of the other IAI Mutual Funds.

Rick D. Leggott 38 Vice President, Rick Leggott is a Senior Vice President of IAI
3700 First Bank Place Investments and has served as a portfolio manager with IAI
P.O. Box 357 (Emerging Growth since 1987.
Minneapolis, Minnesota 55440 Fund)

15
<PAGE>

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

David McDonald 36 Vice President, David McDonald is a Vice President of IAI.
3700 First Bank Place Investments Prior to joining IAI in 1994, Mr. McDonald had
P.O. Box 357 (Growth Fund) been a Managing Director of Wessels Arnold &
Minneapolis, Minnesota 55440 Henderson (a brokerage firm) since 1989 and an
Associate Portfolio Manager with IDS Financial
Services (a diversified financial services
concern) from 1986 to 1989.

Donald Hoelting 36 Vice President, Donald Hoelting is a Vice President of IAI.
3700 First Bank Place Investments Prior to joining IAI in April 1996, Mr.
P.O. Box 357 (Growth and Income Hoelting was Chief Investment Officer and
Minneapolis, Minnesota 55440 Fund) Portfolio Manager for Jefferson National Bank
and Trust from 1986 to 1996.

Suzanne F. Zak 36 Vice President, Suzanne F. Zak is a Senior Vice President of
3700 First Bank Place Investments IAI. Prior to joining IAI in 1992, Ms. Zak
P.O. Box 357 (Growth Fund, and served as a Managing Director of J&W Seligman
Minneapolis, Minnesota 55440 Midcap Growth Fund) (a diversified financial services concern).
Ms. Zak is also Vice President, Investments of
the IAI Growth Fund and IAI Midcap Growth
Fund.

Martin J. Calihan 32 Vice President, Martin Calihan is a Vice President of IAI.
3700 First Bank Place Investments Prior to joining IAI in 1992, Mr. Calihan
P.O. Box 357 (Capital served as an equity analyst for Morgan Stanley
Minneapolis, Minnesota 55440 Appreciation Fund) Co. (a diversified financial services concern)
and State Street Research Management.

Mark Hoonsbeen 35 Vice President, Mark Hoonsbeen is a Vice President of IAI.
3700 First Bank Place Investments Prior to joining IAI in 1994, Mr. Hoonsbeen
P.O. Box 357 (Regional Fund) served as an equity portfolio manager for The
Minneapolis, Minnesota 55440 St. Paul Companies, Inc. (a diversified
financial services concern) from 1986 to
1994. Mr. Hoonsbeen is also a Vice President,
Investments of the Regional Portfolio of IAI
Retirement Funds, Inc.

Douglas R. Platt 54 Vice President, Douglas Platt is a Senior Vice President of
3700 First Bank Place Investments IAI and has served in various capacities since
P.O. Box 357 (Value Fund) 1967.
Minneapolis, Minnesota 55440

16
<PAGE>

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

Susan J. Haedt 34 Vice President, Susan J. Haedt is a Vice President of IAI and
3700 First Bank Place Director of Mutual Director of Fund Operations . Prior to
P.O. Box 357 Fund Operations joining IAI in 1992, Ms. Haedt served as a
Minneapolis, Minnesota 55440 Senior Manager at KPMG Peat Marwick LLP, (an
international tax, accounting and consulting
firm). Ms. Haedt is also Vice President,
Director of Operations of the other IAI Mutual
Funds.
<FN>

* Directors of the Funds who are interested persons (as that term is defined by
the Investment Company Act of 1940) of IAI and the Funds.
</FN>
</TABLE>

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

No compensation is paid by a Fund to any of its officers. As of January
1, 1996, directors who are not affiliated with IAI receive from the IAI Mutual
Funds a $15,000 annual retainer, $2,500 for each Board meeting attended, $3,600
for each Audit Committee meeting attended (as applicable) and $1,800 for each
Securities Valuation Committee meeting attended (as applicable). Each Fund will
pay, on a quarterly basis, its pro rata share of these fees based on its net
assets. Such unaffiliated directors also are reimbursed by the Funds for
expenses incurred in connection with attending meetings.

<TABLE>
<CAPTION>
Aggregate Compensation*
--------------------------------------------------------------------------------
Growth
Capital Emerging and Midcap
Appreciation Growth Growth Income Growth Regional Value
Name of Person, Position Fund Fund Fund Fund Fund Fund Fund

Betsch, Madeline - Director -- $4,180 $1,522 $1,819 $1,945 $4,128 $1,618

Hodgson, W. William - Director -- $4,180 $1,522 $1,819 $1,945 $4,128 $1,618

Long, George R. - Director -- $4,035 $1,303 $2,141 $2,242 $3,993 $1,980

Thompson, J. Peter - Director -- $4,180 $1,522 $1,819 $1,945 $4,128 $1,618

Withers, Charles W. - Director -- $4,035 $1,303 $2,141 $2,242 $3,993 $1,980
- ---------------------------------------------
<FN>
* For the fiscal year or period ended March 31, 1996.
</FN>
</TABLE>

17
<PAGE>

<TABLE>
<CAPTION>
Aggregate Compensation Projected Aggregate Compensation
from the from the
Name of Person, Position 18 IAI Mutual Funds* 19 IAI Mutual Funds**
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------
Betsch, Madeline - Director $28,725 $32,200

Hodgson, W. William - Director $28,725 $32,200

Long, George R. - Director $27,725 $32,200

Thompson, J. Peter - Director $28,725 $32,200

Withers, Charles H. - Director $27,725 $32,200
- -------------------------
<FN>
* From all Funds except Capital Appreciation Fund for the calendar year ended
December 31, 1995.
** For the calendar year ended December 31, 1996 and includes
Capital Appreciation Fund; provided that a Director misses no meetings; excludes
expenses incurred in connection with attending meetings.
</FN>

</TABLE>

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

IAI, the Fund's investment adviser, is an affiliate of the Hill Samuel
Group ("Hill Samuel"). Hill Samuel is an international merchant banking and
financial services firm headquartered in London, England. Hill Samuel owns
controlling interests in over seventy insurance, merchant banking, financial
services and shipping services subsidiaries located in Western Europe, Asia, the
United States, Australia, New Zealand and Great Britain. The principal offices
of Hill Samuel are located at 100 Wood Street, London EC2 P2AJ.

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

History

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

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

18
<PAGE>

IAI Series Fund, Inc. be renamed IAI Investment Funds VI, Inc. The investment
portfolio represented by Series A common shares is referred to as "IAI Emerging
Growth Fund."

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

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

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

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

Management Agreement

Effective April 1, 1996 (February 1, 1996 for Capital Appreciation
Fund), each Fund entered into new written agreement with IAI (the "Management
Agreement"). Pursuant to the Management Agreement between each Fund and IAI, IAI
has agreed to provide each Fund with investment advice, statistical and research
facilities, and certain equipment and services, including, but not limited to,
office space and necessary office facilities, equipment, and the services of
required personnel and, in connection therewith, IAI has the sole authority and
responsibility to make and execute investment decisions for a Fund within the
framework of such Fund's investment policies, subject to review by the directors
of the Funds. In addition, IAI has agreed to provide or arrange for the
provision of all required administrative, stock transfer, redemption, dividend
disbursing, accounting, and shareholder services including, without limitation,
the following: (1) the maintenance of a Fund's accounts, books and records; (2)
the calculations of the daily net asset value in accordance with a Fund's
current Prospectus and Statement of Additional Information; (3) daily and
periodic reports; (4) all information necessary to complete tax returns,
questionnaires and other reports requested by a Fund; (5) the maintenance of
stock registry records; (6) the processing of requested account registration
changes, stock certificate issuances and redemption requests; (7) the
administration of payments and dividends and distributions declared by a Fund;
(8) answering shareholder questions; (9) providing reports and other
information; and (10) other services designed to maintain shareholder accounts.
IAI may also pay qualifying broker-dealers, financial institutions and other
entities that provide such services. In return for such services, each Fund has
agreed to pay IAI an annual fee as a percentage of such Fund's average daily net
assets as set forth below:

19
<PAGE>

Capital Appreciation Fund
- -------------------------
Daily Net Assets Fee IAI Receives Annually

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

Growth Fund and Growth and Income Fund
- --------------------------------------
Daily Net Assets Fee IAI Receives Annually

For the first $100 million 1.25%
For the next $150 million 1.15%
For the next $250 million 1.10%
Above $500 million 1.00%

Emerging Growth Fund, Midcap Growth Fund, Value Fund, Regional Fund
- -------------------------------------------------------------------
Daily Net Assets Fee IAI Receives Annually

For the first $250 million 1.25%
For the next $250 million 1.20%
Above $500 million 1.10%

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

Prior Agreements

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

Under the Investment Advisory Agreements, Emerging Growth Fund, Midcap
Growth Fund, Regional Fund, and Value Fund paid IAI an advisory fee at an annual
rate of .75% of a Fund's average daily net assets of the first $200,000,000 in
assets, .70% for the next $300,000,000 in assets, and .65% for assets above
$500,000,000. Growth Fund and Growth and Income Fund had agreed to pay IAI an
advisory fee at an annual rate of .75% of a Fund's average daily net assets of
the first $100,000,000 in assets, .65% for the next $100,000,000 in assets, and
..55% for assets above $200,000,000. As of March 31, 1996, the net assets of each
Fund were as follows:

20
<PAGE>

Emerging Growth Fund $ 653,888,194
Growth Fund $ 17,079,469
Growth and Income Fund $ 84,661,597
Midcap Growth Fund $ 122,374,796
Regional Fund $ 575,156,486
Value Fund $ 42,009,492

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

Fiscal Year Ended March 31,
------------------ ----------------- -----------------
Fund 1994 1995 1996

Emerging Growth $1,456,386 $2,049,484 $3,570,424
Growth $ 55,580* $ 119,142** $ 154,947
Growth and Income $ 918,636 $ 827,288 $ 667,378
Midcap Growth $ 246,371 $ 543,698 $ 774,726
Regional $4,427,159 $3,866,797 $3,945,330
Value $ 171,561 $ 276,714 $ 316,540
- ------------------------
* For the period from August 6, 1993 (commencement of operations)
through July 31, 1994.
** For the period from August 1, 1994 through March 31, 1995.

With respect to Capital Appreciation Fund, IAI has voluntarily agreed
to waive its management fee which exceeds 1.25% of average daily net assets,
until March 31, 1997. Capital Appreciation Fund's net assets as of March 31,
1996 were $9,411,387. Capital Appreciation Fund paid IAI $6,898 in management
fees.

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

Pursuant to the expense limits, IAI has reimbursed advisory fees to the
following Funds for the fiscal years or periods noted: Growth Fund, for the
fiscal period August 6, 1993 to July 31, 1994 -- $29,939, and fiscal year end
March 31, 1996 -- $1,105; Midcap Growth Fund, for the fiscal period April 6,
1992 through March 31, 1993 -- $3,893, and for the fiscal year ended March 31,
1994 -- $11,397; and Value Fund, for the fiscal year ended March 31, 1994 --
$38,260.

With respect to the Administrative Agreements, each Fund paid IAI a
monthly fee at the annual rate of .20% of a Fund's average month-end net assets.
Pursuant to the Administrative Agreements for the fiscal year ended March 31,
1996, each Fund paid IAI the following fees:

Fund Amount
---- ------
Emerging Growth $ 991,550
Growth $ 41,614
Growth and Income $ 177,967
Midcap Growth $ 206,594
Regional $1,106,255
Value $ 84,411

Effective March 31, 1996, each Fund's, Plan of Distribution (the
"Plan") terminated. Prior to termination, the Fund had entered into a
Distribution and Shareholder Services Agreement (the "Agreement") with IAI
Securities, Inc. ("IAIS"). Pursuant to such Plan and Agreement, each Fund paid

21
<PAGE>

IAIS 0.25% of a Fund's average month-end net assets to cover expenses incurred
by IAIS in connection with the servicing of shareholder accounts and the
distribution of such Fund's shares, subject to the contractual expense
limitations discussed above. The net distribution fee paid by each Fund during
its fiscal year ended March 31, 1996 are listed below.

Fund Net 12b-1 Fee Fees Reimbursed by IAI*
---------------------------------------------------------------------
Emerging Growth $1,239,437 ----
Growth ---- $ 52,017
Growth and Income $ 181,742 $ 40,717
Midcap Growth $ 171,456 $ 86,786
Regional $1,382,819 ----
Value $ 56,469 $ 49,044
--------------------------
* Pursuant to the above-mentioned expense limitation.

Such distribution fees (along with amounts paid out of IAIS' own
assets) were utilized in connection with the distribution of each Fund's shares
as follows:

<TABLE>
<CAPTION>
Printing and mailing of
prospectuses to Payments to
other than current brokers or Direct payments to
Fund Advertising shareholders dealers sales personnel Other
- ---- ----------- ----------------------- ----------- ------------------ -----
<S> <C> <C> <C> <C> <C>
Emerging Growth $ 210,704 $ 148,732 $ 235,493 $ 532,958 $ 111,550
Growth -- -- -- -- --
Growth and Income $ 30,896 $ 21,809 $ 34,531 $ 78,149 16,357
Midcap Growth $ 29,148 $ 20,575 $ 32,577 $ 73,726 $ 15,430
Regional $ 235,079 $ 165,938 $ 262,736 $ 594,612 $ 124,454
Value $ 9,600 $ 6,776 $ 10,729 $ 24,282 $ 5,082

</TABLE>

Allocation of Expenses

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

22
<PAGE>

Duration of Agreements

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

CUSTODIAL SERVICE

The custodian for the Funds is Norwest Bank Minnesota, N.A. Norwest
Center, Sixth and Marquette, Minneapolis, MN 55479. Norwest has entered into an
agreement with Morgan Stanley Trust Company, 1 Pierrepont Plaza, Brooklyn, New
York ("Morgan Stanley") which enables the Funds to utilize the subcustodian and
depository network of Morgan Stanley. Such agreements, subcustodians and
depositories were approved by the Fund's Board of Directors in accordance with
the rules and regulations of the Securities and Exchange Commission, for the
purpose of providing custodial services for a Fund's assets held outside the
United States.

The following is a listing of the subcustodians and depositories
currently approved by each Fund's directors and the countries in which such
subcustodians and depositories are located:

BRANCHES OF THE CUSTODIAN
AND SUBCUSTODIAN BANKS

Argentina Citibank, N.A., Buenos Aires Branch

Australia Australia & New Zealand Banking Group, Ltd.

Austria Credit Austalt Bankverein

Bangladesh Standard Chartered Bank

Belgium Banque Bruxelles Lambert (BBL)

Botswana Barclays Bank of Botswana

Brazil Banco de Boston

Canada Toronto Dominion Bank

Chile Citibank, N.A., Santiago Branch

China Hong Kong & Shanghai Banking, Corp. Ltd.

Columbia Citibank, N.A./Cititrust Columbia S.A.

Cyprus Barclays Bank PLC

Czech Republic ING Bank

Denmark Den Danske Banke

23
<PAGE>

Finland Merita Bank

France Banque Indosuez

Germany Dresdner Bank, A.G.

Ghana Barclays Bank of Ghana

Greece Citibank, N.A., Athens Branch

Hong Kong Hong Kong & Shanghai Banking Corp. Ltd.

Hungary Citibank, N.A., Budapest Branch

India Standard Chartered Bank

Indonesia Hong Kong & Shanghai Banking Corp. Ltd.

Ireland Allied Irish Bank

Israel Bank Leumi

Italy Barclays Bank PLC

Japan The Mitsubishi Bank Limited

Jordan Arab Bank plc

Kenya Barclays Bank Kenya

Korea Standard Chartered Bank

Luxembourg Banque Bruxelles Lambert

Malaysia Oversea Chinese Banking Corporation

Mauritius Hong Kong and Shanghai Bank Corporation

Mexico Citibank, N.A., Mexico City Branch

Morocco Banque Commerciale du Maroc

Netherlands ABN Amro Bank

New Zealand Bank of New Zealand

Norway Den Norske Bank

Pakistan Standard Chartered Bank

Papua New Guinea Australia and New Zealand Banking Group

Peru Citibank N.A., Lima Branch

24
<PAGE>

Philippines Hong Kong & Shanghai Banking Corp. Ltd.

Poland Citibank Poland, S.A.

Portugal Banco Commercial Portugues

Singapore Oversea Chinese Banking Corporation

South Africa First National Bank of Southern Africa

Spain Banco Santader

Sri Lanka Hong Kong & Shanghai Banking, Corp. Ltd.

Swaziland Barclays Bank of Swaziland

Sweden Svenska Handelsbanken

Switzerland Bank Leu Ltd.

Taiwan Hong Kong & Shanghai Banking Corp. Ltd.

Thailand Standard Chartered Bank

Turkey Citibank, N.A., Istanbul Branch

United Kingdom Barclays Bank PLC

Uruguay Citibank, N.A., Montevideo Branch

Venezuela Citibank, N.A., Caracas Branch

Zambia Barclays Bank of Zambia

Zimbabwe Barclays Bank of Zimbabwe

DEPOSITORIES

Argentina Caja de Valores

Australia Clearing House Electronic Subregister
System

Austria Wertpapiersammelbank

Belgium Caisse Interprofessionelle de Depot et
de Titres

Botswana Stock Exchange Talisman System

Brazil Bolsa de Valores de Sao Paulo
Bolsa de Valores de Rio de Janeiro

Canada The Canadian Depository for Securities

25
<PAGE>

China Shangai Stock Exchange

Czech Republic Center for Securities (SCP)

Denmark Vaerdipapircentralen

France SICOVAM (Societe Interprofessionelle la
Compensacion des Valuers Mobilieres)
Societe de Compensacion des Marches
Conditionnels
Chambre de Compensation des Instruments
Financiers de Paris

Germany Deutscher Kassenverein AG

Greece Central Clearing Office of Athens Stock
Exchange

Hong Kong Hong Kong Securities Clearing Company

Ireland Stock Exchange Talisman System

Israel SECH

Italy Monte Titoli, S.p.A

Japan Japan Securities Depository Center

Korea The Korean Central Depository

Malaysia The Malaysian Central Depository

Mexico Instituto para el Deposito de Valores

Morocco Casablanca Stock Exchange

Netherlands NECIGEF (Nederlands Centraal Institut
voor Giraal Effectenverkeer B.V.

New Zealand Austraclear New Zealand System

Norway Verdipapirsentralen

Pakistan The Karachi Stock Exchange Clearinghouse

Papua New Guinea Clearing House Electronic Subregister
System

Poland National Depository of Securities

Portugal Lisbon Stock Exchange (SICOB system)
Oporto Stock Exchange (CAMBIUM system)

Singapore Central Depository Pte Ltd.

South Africa Central Depository (Pty) Ltd.

26
<PAGE>

Spain Servicio de Compensacion y Liquidacion de
Valores

Sri Lanka Central Depository System Piri Ltd.

Sweden Vardepapperscentralen

Switzerland SEGA (Schweizerische Effekten Giro A.G.)

Taiwan Taiwan Securities Depository Co.

Thailand Share Depository Center

United Kingdom Stock Exchange Talisman System

Zimbabwe Stock Exchange Talisman System

PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE

Most of each Fund's portfolio transactions are effected with dealers
without the payment of brokerage commissions but at a net price which usually
includes a spread or markup. In effecting such portfolio transactions on behalf
of a Fund, IAI seeks the most favorable net price consistent with the best
execution.

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

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

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

27
<PAGE>

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

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

Brokerage commissions, listed below, were paid by each Fund for the
fiscal year (or period) ended March 31, 1996. During that period, a percentage
of commissions were paid to brokerage firms that provided research services to
IAI, although the provision of such services was not necessarily a factor in the
placement of all such business with such firms.
Percentage of
Commissions to Brokers
Fund Amount of Commissions Providing Research
---- --------------------- ----------------------
1996 1995 1994 1996
---- ---- ---- ----
Capital Appreciation ---
Emerging Growth $ 844,250
Growth $ 93,542
Growth and Income $ 297,072
Midcap Growth $ 160,255
Regional $ 2,639,390
Value $ 245,263

CAPITAL STOCK

CAPITAL APPRECIATION FUND

IAI Capital Appreciation Fund is a separate portfolio of IAI Investment
Funds VI, Inc., a Minnesota corporation whose shares of common stock are
currently issued in seven series (Series A through G). Each share of a series is
entitled to participate pro rata in any dividends and other distributions of
such series and all shares of a series have equal rights in the event of
liquidation of that series. The Board of Directors of IAI Investment Funds VI,
Inc. is empowered under the Articles of Incorporation of such company to issue
other series of the company's common stock without shareholder approval. IAI
Investment Funds VI, Inc., has authorized 10,000,000,000 shares of $.01 par
value common stock to be issued as Series G common shares. The investment
portfolio represented by such shares is referred to as IAI Capital Appreciation
Fund. As of March 31, 1996, Capital Appreciation Fund had 837,675 shares
outstanding.

EMERGING GROWTH FUND

IAI Emerging Growth Fund closed to new investors on February 1, 1996.
IAI Emerging Growth Fund's current shareholders may add to an existing account
and certain others may make an initial investment in the Fund. IAI Emerging
Growth Fund may resume sales to new investors at some future date, but it has no
present plans to do so. See the Prospectus section "Purchase of Shares" for more
information on who can purchase shares of IAI Emerging Growth Fund.

IAI Emerging Growth Fund is a separate portfolio of IAI Investment
Funds VI, Inc., a Minnesota corporation whose shares of common stock are
currently issued in seven series (Series A through G). Each share of a series is
entitled to participate pro rata in any dividends and other distributions of
such series and all shares of a series have equal rights in the event of

28
<PAGE>

liquidation of that series. The Board of Directors of IAI Investment Funds VI,
Inc., is empowered under the Articles of Incorporation of such company to issue
other series of the company's common stock without shareholder approval. IAI
Investment Funds VI, Inc., has authorized 10,000,000,000 shares of $.01 par
value common stock to be issued as Series A common shares, the investment
portfolio represented by such shares is referred to as IAI Emerging Growth Fund.
As of March 31, 1996, Emerging Growth Fund had 27,152,554 shares outstanding.

As of July 11, 1996, no person held of record or, to the knowledge of
Emerging Growth Fund beneficially owned more than 5% of the outstanding shares
of Emerging Growth Fund, except as set forth in the following table:

- -------------------------------------------------------------------------------
Name and Address Number of Percent of
of Shareholder Shares Class
- -------------------------------------------------------------------------------

Charles Schwab & Co., Inc. 3,543,279.152 12.50
Attn: Mutual Funds Department
101 Montgomery Street
San Francisco, CA 94101

Thomson Consumer Electronics, Inc. 1,833,642.319 6.47
SAV Pl Salaried Employees 1-1-88
State Street Bank & Trust
P.O Box 1992
Boston, MA 02105-1992

In addition, as of July 11, 1996, Emerging Growth Fund's officers and
directors as a group owned less than 1% of Emerging Growth Fund's outstanding
shares.

GROWTH FUND

IAI Growth Fund is a separate portfolio of IAI Investment Funds II,
Inc., a Minnesota corporation whose shares of common stock are currently issued
in one series (Series A). Each share of a series is entitled to participate pro
rata in any dividends and other distributions of such series and all shares of a
series have equal rights in the event of liquidation of that series. The Board
of Directors of IAI Investment Funds II, Inc., is empowered under the Articles
of Incorporation of such company to issue other series of the company's common
stock without shareholder approval. IAI Investment Funds II, Inc., has
authorized 10,000,000,000 shares of $.01 par value common stock to be issued as
Series A common shares. The investment portfolio represented by such shares is
referred to as IAI Growth Fund. As of March 31, 1996, the Fund had 1,436,168
shares outstanding.

As of July 11, 1996, no person held of record or, to the knowledge of
Growth Fund, beneficially owned more than 5% of the outstanding shares of Growth
Fund, except as set forth in the following table:

Brothers of the Christian Schools 152,162.257 11.37
of the St. Louis District "Fund A"
2101 Rue de la Salle
Glencoe, MO 63038

Naeve Health Care Association 91,319.834 6.82%
Pension Account
404 Fountain Street
Albert Lea, MN 56007

29
<PAGE>

IAI Trust Company 73,139.198 5.47%
Aggressive Growth Portfolio
3700 First Bank Place
P.O. Box 357
Minneapolis, MN 55402

In addition, as of July 11, 1996, Growth Fund's officers and directors
as a group owned less than 1% of Growth Fund's outstanding shares.

GROWTH AND INCOME FUND

IAI Growth and Income Fund is a separate portfolio of IAI Investment
Funds VII, Inc., a Minnesota corporation whose shares of common stock are
currently issued in one series (Series A). Each share of a series is entitled to
participate pro rata in any dividends and other distributions of such series and
all shares of a series have equal rights in the event of liquidation of that
series. The Board of Directors of IAI Investment Funds VII, Inc., is empowered
under the Articles of Incorporation of such company to issue other series of the
company's common stock without shareholder approval. IAI Investment Funds VII,
Inc., has authorized 10,000,000,000 shares of $.10 par value common stock to be
issued as Series A common shares. The investment portfolio represented by such
shares is referred to as IAI Growth and Income Fund. As of March 31, 1996, the
Fund had 5,534,220 shares outstanding.

As of July 11, 1996, no person held of record or, to the knowledge of
Growth and Income Fund, beneficially owned more than 5% of the outstanding
shares of Growth and Income Fund, except as set forth in the following table:

Pentair, Inc. Retirement Savings 702,088.042 13.11
& Stock 401(k) Plan
1500 County Road B2 West
St. Paul, MN 55113-3105

In addition, as of July 11, 1996, Growth and Income Fund's officers and
directors as a group owned less than 1% of Growth and Income Fund's outstanding
shares.

MIDCAP GROWTH FUND

IAI Midcap Growth Fund is a separate portfolio of IAI Investment Funds
VI, Inc., a Minnesota corporation whose shares of common stock are currently
issued in seven series (Series A through G). Each share of a series is entitled
to participate pro rata in any dividends and other distributions of such series
and all shares of a series have equal rights in the event of liquidation of that
series. The Board of Directors of IAI Investment Funds VI, Inc., is empowered
under the Articles of Incorporation of such company to issue other series of the
company's common stock without shareholder approval. IAI Investment Funds VI,

30
<PAGE>

Inc., has authorized 10,000,000,000 shares of $.01 par value common stock to be
issued as Series C common shares, the investment portfolio represented by such
shares is referred to as IAI Midcap Growth Fund. As of March 31, 1996, Midcap
Growth Fund had 6,915,426 shares outstanding.

As of July 11, 1996, no person held of record or, to the knowledge of
Midcap Growth Fund beneficially owned more than 5% of the outstanding shares of
Midcap Growth Fund, except as set forth in the following table:

Charles Schwab & Co., Inc. 1,159,713.799 16.50
Attn: Mutual Funds Department
101 Montgomery Street
San Francisco, CA 94104

In addition, as of July 11, 1996, Midcap Growth Fund's officers and
directors as a group owned less than 1% of Midcap Growth Fund's outstanding
shares.

REGIONAL FUND

IAI Regional Fund is a separate portfolio of IAI Investment Funds IV,
Inc., a Minnesota corporation whose shares of common stock are currently issued
in one series (Series A). Each share of a series is entitled to participate pro
rata in any dividends and other distributions of such series and all shares of a
series have equal rights in the event of liquidation of that series. The Board
of Directors of IAI Investment Funds IV, Inc., is empowered under the Articles
of Incorporation of such company to issue other series of the company's common
stock without shareholder approval. IAI Investment Funds IV, Inc., has
authorized 10,000,000,000 shares of $.01 par value common stock to be issued as
Series A common shares. The investment portfolio represented by such shares is
referred to as IAI Regional Fund. As of March 31, 1996, Regional Fund had
23,413,088 shares outstanding.

As of July 11, 1996, no person held of record or, to the knowledge of
Regional Fund, beneficially owned more than 5% of the outstanding shares of
Regional Fund, except as set forth in the following table:

Charles Schwab & Co., Inc. 1,565,820.309 6.74
Attn: Mutual Funds Department
101 Montgomery Street
San Francisco, CA 94104

As of July 11, 1996, Regional Fund's officers and directors as a group
owned less than 1% of Regional Fund's outstanding shares.

VALUE FUND

IAI Value Fund is a separate portfolio of IAI Investment Funds VIII,
Inc. a Minnesota corporation whose shares of common stock are currently issued
in one series (Series A). Each share of a series is entitled to participate pro
rata in any dividends and other distributions of such series and all shares of a
series have equal rights in the event of liquidation of that series. The Board
of Directors of IAI Investment Funds VIII, Inc., is empowered under the Articles

31
<PAGE>

of Incorporation of such company to issue other series of the company's common
stock without shareholder approval. IAI Investment Funds VIII, Inc., has
authorized 10,000,000,000 shares of $.01 par value common stock to be issued as
Series A common shares. The investment portfolio represented by such shares is
referred to as IAI Value Fund. As of March 31, 1996, Value Fund had 3,381,894
shares outstanding.

As of July 11, 1996, no person held of record or, to the knowledge of
Value Fund, beneficially owned more than 5% of the outstanding shares of Value
Fund, except as set forth in the following table:

First Trust, N.A. Trustee for 300,805.661 9.11
NSP Retirement Savings Trust
P.O. Box 64010
St. Paul, MN 55164-0482

Charles Schwab & Co., Inc. 301,623.334 9.14
Attn: Mutual Funds Department
101 Montgomery Street
San Francisco, CA 94104

As of July 11, 1996, Value Fund's officers and directors as a group
owned less than 1% of Value Fund's outstanding shares.

NET ASSET VALUE AND PUBLIC OFFERING PRICE

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

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

On March 31, 1996, each Fund's net asset value and public offering
price per share were calculated as follows:

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

NAV = Net Assets ($9,411,387) = $11.24
-----------------------
Shares Outstanding (837,675)

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

NAV = Net Assets ($653,888,194) = $24.08
-------------------------
Shares Outstanding (27,152,554)

32
<PAGE>

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

NAV = Net Assets ($17,079,469) = $11.89
------------------------
Shares Outstanding (1,436,168)

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

NAV = Net Assets ($84,661,597) = $15.30
------------------------
Shares Outstanding (5,534,220)

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

NAV = Net Assets ($122,374,796) = $17.70
-------------------------
Shares Outstanding (6,915,426)

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

NAV = Net Assets ($575,156,486) = $24.57
-------------------------
Shares Outstanding (23,413,088)

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

NAV = Net Assets ($42,009,492) = $12.42
------------------------
Shares Outstanding (3,381,894)

PURCHASES AND REDEMPTIONS IN KIND

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

TAX STATUS

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

33
<PAGE>

domestic corporations, a portion of the Fund's dividends may not qualify for
this exclusion. Distributions designated as long-term capital gain distributions
will be taxable to the shareholder as long-term capital gains regardless of how
long the shareholder has held the shares. Such distributions will not be
eligible for the dividends received exclusion referred to above.

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

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

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

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

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

LIMITATION OF DIRECTOR LIABILITY

Under Minnesota law, each Fund's Board of Directors owes certain
fiduciary duties to the Fund and to its shareholders. Minnesota law provides
that a director "shall discharge the duties of the position of director in good
faith, in a manner the director reasonably believes to be in the best interest
of the corporation, and with the care an ordinarily prudent person in a like
position would exercise under similar circumstances." Fiduciary duties of a
director of a Minnesota corporation include, therefore, both a duty of "loyalty"
(to act in good faith and act in a manner reasonably believed to be in the best
interests of the corporation) and a duty of "care" (to act with the care an
ordinarily prudent person in a like position would exercise under similar

34
<PAGE>

circumstances). Minnesota law authorizes corporations to eliminate or limit the
personal liability of a director to the corporation or its shareholders for
monetary damages for breach of the fiduciary duty of "care." Minnesota law does
not, however, permit a corporation to eliminate or limit the liability of a
director (i) for any breach of the director's duty of "loyalty" to the
corporation or its shareholders, (ii) for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (iii) for
authorizing a dividend, stock repurchase or redemption or other distribution in
violation of Minnesota law or for violation of certain provisions of Minnesota
securities laws, or (iv) for any transaction from which the director derived an
improper personal benefit. The Articles of Incorporation of IAI Investment Funds
II, Inc., IAI Investment Funds IV, Inc., IAI Investment Funds VI, Inc., IAI
Investment Funds VII, Inc., and IAI Investment Funds VIII, Inc., limit the
liability of directors to the fullest extent permitted by Minnesota statutes,
except to the extent that such liability cannot be limited as provided in the
Investment Company Act of 1940 (which Act prohibits any provisions which purport
to limit the liability of directors arising from such directors' willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of their role as directors).

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

FINANCIAL STATEMENTS

The audited financial statements, included as part of the Funds' 1996
Annual Report to shareholders, are incorporated herein by reference. Such Annual
Report may be obtained by shareholders on request from the Funds at no charge.

35
<PAGE>

APPENDIX A - RATINGS OF DEBT SECURITIES

RATINGS BY MOODY'S

Corporate Bonds

Aaa. Bonds rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.

Aa. Bonds rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.

A. Bonds rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.

Baa. Bonds rated Baa are considered medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

Ba. Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate, and thereby
not well safeguarded during other good and bad times over the future.
Uncertainty of position characteristizes bonds in this class.

B. Bonds rated B generally lack characteristics of the
desirable investment. Assurances of interest and principal payment or
maintenance of other terms of the contract over any long period of time may be
small.

Caa. Bonds rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.

Ca. Bonds rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.

C. Bonds rated C are the lowest-rated class of bonds and
issued so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.

Conditional Ratings. The designation "Con." followed by a
rating indicates bonds for which the security depends upon the completion of
some act or the fulfillment of some condition. These are bonds secured by (a)
earnings of projects under construction, (b) earnings or projects unseasoned in
operating experience, (c) rentals which begin when facilities are completed, or
(d) payments to which some other limiting condition attaches. Parenthetical
rating denotes probable credit stature upon completion of construction or
elimination of basis of condition.

Note: Moody's applies numerical modifiers 1, 2, and 3 in the Aa and A
classifications of its corporate bond rating system. The modifier 1 indicates
that the security ranks in the higher end of its generic rating category; the

A-1
<PAGE>

modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic rating category. With respect to
municipal securities, those bonds in the Aa, A, Baa, Ba, and B groups which
Moody's believes possess the strongest investment attributes are designated by
the symbols Aa1, A1, Baa1, Ba1, and B1.

Commercial Paper

Moody's employs the following three designations, all judged
to be investment grade, to indicate the relative repayment capacity of rated
issuers:

Prime - 1 Superior ability for repayment of senior short-term
debt obligations

Prime - 2 Strong ability for repayment of senior short-term
debt obligations

Prime - 3 Acceptable ability for repayment of senior
short-term debt obligations

If an issuer represents to Moody's that its Commercial Paper
obligations are supported by the credit of another entity or entities, Moody's,
in assigning ratings to such issuers, evaluates the financial strength of the
indicated affiliated corporations, commercial banks, insurance companies,
foreign governments, or other entities, but only as one factor in the total
rating assessment.

RATINGS BY S&P

Corporate Bonds

AAA. Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.

AA. Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from the higher rated issues only in small
degree.

A. Debt rated A has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher-rated
categories.

BBB. Debt rated BBB is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher-rated categories.

BB. Debt rated BB has less near-term vulnerability to default
than other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments.

B. Debt rated B has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied BB-rating.

CCC. Debt rated CCC has a currently identifiable
vulnerability to default, and is dependent upon favorable business, financial,
and economic conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial or economic conditions,
it is not likely to have the capacity to pay interest and repay principal.

A-2
<PAGE>

CC. Debt rated CC is typically applied to debt subordinated
to senior debt which is assigned an actual or implied CCC debt rating.

C. The rating C typically applied to debt subordinated to
senior debt which assigned an actual or implied CCC-debt rating. The C rating
may be used to cover a situation where a bankruptcy petition has been filed but
debt service payments are continued.

C1. The rating C1 is reserved for income bonds on which no
interest is being paid.

D. Debt rated D is in payment default. The D rating category
is used when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S & P believes
that such payments will be made during such grace period. The D rating will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.

In order to provide more detailed indications of credit
quality, S&P's bond letter ratings described above (except for the AAA category)
may be modified by the addition of a plus or a minus sign to show relative
standing within the rating category.

Commercial Paper

A. This highest rating category indicates the greatest
capacity for timely payment. Issues in this category are further defined with
the designations 1, 2, and 3 to indicate the relative degree to safety.

A-1. This designation indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are designed A-1+.

A-2. Capacity for timely payments on issues with this
designation is satisfactory. However, the relative degree of safety is not as
high as for issues designed A-1.

A-3. Issues carrying this designation have adequate capacity
for timely repayment. They are, however, more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.

A-3
<PAGE>

IAI BALANCED FUND

Statement of Additional Information
dated August 1, 1996

This Statement of Additional Information is not a prospectus. This
Statement of Additional Information relates to a Prospectus dated August 1,
1996, and should be read in conjunction therewith. A copy of the Prospectus may
be obtained from the Fund, 3700 First Bank Place, P.O. Box 357, Minneapolis,
Minnesota 55440 (telephone: 1-612-376-2700 or 1-800-945-3863).

<PAGE>

TABLE OF CONTENTS

Page

INVESTMENT OBJECTIVE AND POLICIES............................................3
Repurchase Agreements...............................................3
Reverse Repurchase Agreements.......................................3
Securities of Foreign Issuers........................... ...........3
Illiquid Securities.................................................4
Lending Portfolio Securities......................... ..............4
Variable or Floating Rate Instruments...............................4
Delayed-Delivery Transactions.......................................5
Mortgage-Backed Securities..........................................5
Stripped Mortgage Backed Securities.................................5
Asset-Backed Securities.............................................5
Zero Coupon Bonds...................................................6
Lower-Rated Debt Securities.........................................6
Swap Agreements.....................................................7
Indexed Securities.................................... .............7
Loans and Other Direct Debt Instruments.............................8
Foreign Currency Transactions.......................................8
Limitations on Futures and Options Transactions.....................9
Futures Contracts...................................................10
Futures Margin Payments.............................................10
Purchasing Put and Call Options.....................................10
Writing Put and Call Options........................................11
Combined Positions..................................................11
Correlation of Price Changes........................................11
Liquidity of Options and Futures Contracts..........................12
OTC Options............................................ ............12
Options and Futures Relating to Foreign Currencies..................12
Asset Coverage for Futures and Options Positions........ ...........12
INVESTMENT RESTRICTIONS......................................................13
Portfolio Turnover..................................................14
INVESTMENT PERFORMANCE.......................................................15
MANAGEMENT...................................................................17
History.............................................................19
Management Agreement................................................20
Allocation of Expenses..............................................21
Duration of Agreements..............................................22
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE...........................26
CAPITAL STOCK................................................................26
NET ASSET VALUE AND PUBLIC OFFERING PRICE......................... ..........27
TAX STATUS...................................................................28
LIMITATION OF DIRECTOR LIABILITY.............................................29
FINANCIAL STATEMENTS............................................... .........29
Appendix A - Ratings Of Debt Securities.....................................A-I

<PAGE>

INVESTMENT OBJECTIVE AND POLICIES

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

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

Reverse Repurchase Agreements

The Fund may invest in reverse repurchase agreements. In a reverse
repurchase agreement, a fund sells a portfolio instrument to another party, such
as a bank or broker-dealer, in return for cash and agrees to repurchase the
instrument at a particular price and time. While a reverse repurchase agreement
is outstanding, the Fund will maintain appropriate liquid assets in a segregated
custodial account to cover its obligation under the agreement. The Fund will
enter into reverse repurchase agreements only with parties whose
creditworthiness has been found satisfactory by IAI, the Fund's investment
adviser and manager. As a result, such transactions may increase fluctuations in
the market value of the Fund's assets and may be viewed as a form of leverage.

Securities of Foreign Issuers

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

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

<PAGE>

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

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

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

The Fund may also invest up to 15% of its total assets in securities that
are considered illiquid because of the absence of a readily available market or
due to legal or contractual restrictions. However, certain restricted securities
that are not registered for sale to the general public that can be resold to
institutional investors may be considered liquid pursuant to guidelines adopted
by the Board of Directors. It is not possible to predict with assurance the
maintenance of an institutional trading market for such securities and the
liquidity of the Fund's investments could be impaired if trading declines.
Lending Portfolio Securities

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

Variable or Floating Rate Instruments

Such instruments (including notes purchased directly from issuers) bear
variable or floating interest rates and carry rights that permit holders to
demand payment of the unpaid principal balance plus accrued interest from the
issuers or certain financial intermediaries. Floating rate securities have
interest rates that change whenever there is a change in a designated base rate
while variable rate instruments provide for a specified periodic adjustment in
the interest rate. These formulas are designed to result in a market value for
the instrument that approximates its par value.

<PAGE>

Delayed-Delivery Transactions

The Fund may buy and sell securities on a delayed-delivery or when-issued
basis. These transactions involve a commitment by the Fund to purchase or sell
specific securities at a predetermined price or yield, with payment and delivery
taking place after the customary settlement period for that type of security
(and more than seven days in the future). Typically, no interest accrues to the
purchaser until the security is delivered. The Fund may receive fees for
entering into delayed-delivery transactions.

When purchasing securities on a delayed-delivery basis, the Fund assumes
the rights and risks of ownership, including the risk of price and yield
fluctuations. Because the Fund is not required to pay for securities until the
delivery date, these risks are in addition to the risks associated with the
Fund's other investments. If the Fund remains substantially fully invested at a
time when delayed delivery purchases are outstanding, the delayed-delivery
purchases may result in a form of leverage. When delayed-delivery purchases are
outstanding, the Fund will set aside appropriate liquid assets in a segregated
custodial account to cover its purchase obligations. When the Fund has sold a
security on a delayed-delivery basis, the Fund does not participate in further
gains or losses with respect to the security. If the other party to a
delayed-delivery transaction fails to deliver or pay for the securities, the
Fund could miss a favorable price or yield opportunity, or could suffer a loss.

The Fund may renegotiate delayed-delivery transactions after they are
entered into, and may sell underlying securities before they are delivered,
which may result in capital gains or losses.

Mortgage-Backed Securities

The Fund may purchase mortgage-backed securities issued by government and
non-government entities such as banks, mortgage lenders, or other financial
institutions. A mortgage-backed security may be an obligation of the issuer
backed by a mortgage or pool of mortgages or a direct interest in an underlying
pool of mortgages. Some mortgage-backed securities, such as collateralized
mortgage obligations or CMOs, make payments of both principal and interest at a
variety of intervals; others make semiannual interest payments at a
predetermined rate and repay principal at maturity (like a typical bond).
Mortgage-backed securities are based on different types of mortgages including
those on commercial real estate or residential properties. Other types of
mortgage-backed securities will likely be developed in the future, and the Fund
may invest in them if IAI determines they are consistent with the Fund's
investment objective and policies.

The value of mortgage-backed securities may change due to shifts in the
market's perception of issuers. In addition, regulatory or tax changes may
adversely affect the mortgage securities market as a whole. Non-government
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
government issues. Mortgage-backed securities are subject to prepayment risk.
Prepayment, which occurs when unscheduled or early payments are made on the
underlying mortgages, may shorten the effective maturities of these securities
and may lower their total returns.

Stripped Mortgage Backed Securities

Such securities are created when a U.S. government agency or a financial
institution separates the interest and principal components of a mortgage-backed
security and sells them as individual securities. The holder of the
"principal-only" security (PO) receives the principal payments made by the
underlying mortgage-backed security, while the holder of the "interest-only"
security (IO) receives interest payments from the same underlying security. The
prices of stripped mortgage-backed securities may be particularly affected by
changes in interest rates. As interest rates fall, prepayment rates tend to
increase, which tends to reduce prices of IOs and increase prices of POs. Rising
interest rates can have the opposite effect.

Asset-Backed Securities

Asset-backed securities represent interests in pools of consumer loans
(generally unrelated to mortgage loans) and most often are structured as
pass-through securities. Interest and principal payments alternately depend upon
payment of the underlying loans by individuals, although the securities may be
supported by letters of credit

5
<PAGE>

or other credit enhancements. The value of asset-backed securities may also
depend on the creditworthiness of the servicing agent for the loan pool, the
originator of the loans, or the financial institution providing the credit
enhancement.

Zero Coupon Bonds

Zero coupon bonds do not make interest payments; instead, they are sold at
a deep discount from their face value and are redeemed at face value when they
mature. Because zero coupon bonds do not pay current income, their prices can be
very volatile when interest rates change. In calculating its dividends, the Fund
takes into account as income a portion of the difference between a zero coupon
bond's purchase price and its face value.

A broker-dealer creates a derivative zero by separating the interest and
principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury Receipts) are
examples of derivative zeros.

The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and principal
components of an outstanding U.S. Treasury bond and selling them as individual
securities. Bonds issued by the Resolution Funding Corporation (REFCORP) and the
Financing Corporation (FICO) can also be separated in this fashion. Original
issue zeroes are zero coupon securities originally issued by the U.S.
government, a government agency, or a corporation in zero coupon form.

Lower-Rated Debt Securities

Balanced Fund may invest in lower-rated debt securities. Issuers of high
yield securities may be highly leveraged and may not have available to them more
traditional methods of financing. Therefore, the risks associated with acquiring
the securities of such issuers generally are greater than is the case with
higher rated securities. For example, during an economic downturn or a sustained
period of rising interest rates, issuers of high yield securities may be more
likely to experience financial stress, especially if such issuers are highly
leveraged. During such periods, such issuers may not have sufficient revenues to
meet their interest payment obligations. The issuer's ability to service its
debt obligations also may be adversely affected by specific issuer developments
or the issuer's inability to meet specific projected business forecasts or the
unavailability of additional financing. The risk of loss due to default by the
issuer is significantly greater for the holders of high yield securities because
such securities may be unsecured and may be subordinated to other creditors of
the issuer.

High yield securities frequently have call or redemption features which
would permit an issuer to repurchase the security from the Fund. If a call were
exercised by the issuer during a period of declining interest rates, the Fund
likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends to
shareholders.

The Fund may have difficulty disposing of certain high yield securities
because there may be a thin trading market for such securities. The secondary
trading market for high yield securities is generally not as liquid as the
secondary market for higher rated securities. Reduced secondary market liquidity
may have an adverse impact on market price and the Fund's ability to dispose of
particular issues when necessary to meet the Fund's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer.

Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. Factors adversely affecting
the market value of high yield securities are likely to adversely affect the
Fund's net asset value. In addition, the Fund may incur additional expenses to
the extent it is required to seek recovery upon a default on a portfolio holding
or participate in the restructuring of the obligation.

<PAGE>

Swap Agreements

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

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

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

Indexed Securities

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

<PAGE>

as a separate asset class for purposes of the Fund's investment
allocations, depending on the individual characteristics of the securities.
Indexed securities may be more volatile than the underlying instruments.

Loans and Other Direct Debt Instruments

Direct debt instruments are interests in amounts owed by a corporate,
governmental, or other borrower to lenders or lending syndicates (loans and loan
participations), to suppliers of goods or services (trade claims or other
receivables), or to other parties. Direct debt instruments are subject to the
Fund's policies regarding the quality of debt securities.

Purchasers of loans and other forms of direct indebtedness depend primarily
upon the creditworthiness of the borrower for payment of principal and interest.
Direct debt instruments may not be rated by any nationally recognized rating
service. If the Fund does not receive scheduled interest or principal payments
on such indebtedness, the Fund's share price and yield could be adversely
affected. Loans that are fully secured offer the Fund more protection than an
unsecured loan in the event of non-payment of scheduled interest or principal.
However, there is no assurance that the liquidation of collateral from a secured
loan would satisfy the borrower's obligation, or that the collateral can be
liquidated. Indebtedness of borrowers whose creditworthiness is poor involves
substantially greater risks, and may be highly speculative. Borrowers that are
in bankruptcy or restructuring may never pay off their indebtedness, or may pay
only a small fraction of the amount owed. Direct indebtedness of developing
countries will also involve a risk that the governmental entities responsible
for the repayment of the debt may be unable, or unwilling, to pay interest and
repay principal when due.

Investments in loans through direct assignment of a financial institution's
interests with respect to a loan may involve additional risks to the Fund. For
example, if a loan is foreclosed, the Fund could become part owner of any
collateral, and would bear the costs and liabilities associated with owning and
disposing of the collateral. In addition, it is conceivable that under emerging
legal theories of lender liability, the Fund could be held liable as a
co-lender. Direct debt instruments may also involve a risk of insolvency of the
lending bank or other intermediaries. Direct debt instruments that are not in
the form of securities may offer less legal protection to the Fund in the event
of fraud or misrepresentation. In the absence of definitive regulatory guidance,
the Fund relies on IAI's research in an attempt to avoid situations where fraud
or misrepresentation could adversely affect the Fund.

A loan is often administered by a bank or other financial institution that
acts as agent for all holders. The agent administers the terms of the loan, as
specified in the loan agreement. Unless, under the terms of the loan or other
indebtedness, the Fund has direct recourse against the borrower, it may have to
rely on the agent to apply appropriate credit remedies against a borrower. If
assets held by the agent for the benefit of the Fund were determined to be
subject to the claims of the agent's general creditors, the Fund might incur
certain costs and delays in rendering payment on the loan or loan participation
and could suffer a loss of principal or interest.

The Fund limits the amount of the assets that it invests in any one issuer
or in issuers within the same industry. For purposes of these limitations, the
Fund generally will treat the borrower as the "issuer" of indebtedness held by
the Fund. In the case of loan participations where a bank or other lending
institution serves as financial intermediary between the Fund and the borrower,
if the participation does not shift to the Fund the direct debtor/creditor
relationship with the borrower, SEC interpretations require the Fund, in
appropriate circumstances, to treat both the lending bank or other lending
institution and the borrower as "issuers" for the purpose of determining whether
the Fund has invested more than 5% of its total assets in a single issuer.
Treating a financial intermediary as an issuer of indebtedness may restrict the
Fund's ability to invest in indebtedness related to a single financial
intermediary, or a group of intermediaries engaged in the same industry, even if
the underlying borrowers represent many different companies and industries.

Foreign Currency Transactions

The Fund may hold foreign currency deposits from time to time and may
convert dollars and foreign currencies in the foreign exchange markets. Currency
conversion involves dealer spreads and other costs, although commissions usually
are not charged. Currencies may be exchanged on a spot (i.e., cash) basis, or by

<PAGE>

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

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

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

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

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

Limitations on Futures and Options Transactions

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

<PAGE>

The above limitation on the Fund's investments in futures contracts and
options, and the Fund's policies regarding futures contracts and options
discussed elsewhere in this Statement of Additional Information may be changed
as regulatory agencies permit.

Futures Contracts

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

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

Futures Margin Payments

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

Purchasing Put and Call Options

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

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

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

<PAGE>

Writing Put and Call Options

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

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

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

Combined Positions

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

Correlation of Price Changes

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

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

<PAGE>

other investments, the positions may fail to produce anticipated gains or
result in losses that are not offset by gains in other investments.

Liquidity of Options and Futures Contracts

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

OTC Options

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

Options and Futures Relating to Foreign Currencies

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

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

Asset Coverage for Futures and Options Positions

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

<PAGE>
INVESTMENT RESTRICTIONS

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

The Fund may not:

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

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

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

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

6. Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments. This restriction shall not prevent the Fund
from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business.
13

<PAGE>

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

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

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

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

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

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

Portfolio Turnover

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

<PAGE>
INVESTMENT PERFORMANCE

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

CTR = (ERV-P) 100
-----
P
Where: CTR = Cumulative total return;

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

P = initial payment of $1,000

P(1+T)n = ERV

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

T = average annual total return;

n = number of years; and

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

The Fund may quote yield figures from time to time. The "yield" is
computed by dividing the net investment income per share earned during a 30-day
period (using the average number of shares entitled to receive dividends) by the
net asset value per share on the last day of the period. The yield formula
provides for semiannual compounding which assumes that net investment income is
earned and reinvested at a constant rate and annualized at the end of a
six-month period.

The yield formula is as follows:

YIELD=2[(a-b + 1)6 -1]
---
cd

Where: a = dividends and interest earned during the period.

b = expenses accrued for the period (net of reimbursements).

<PAGE>

c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.

d = the net asset value of the Fund at the end of the period.

For the period from April 10, 1992 (commencement of operations) through
December 31, 1992, and for the years ending December 31, 1993, 1994, and 1995
the total return of the Fund was 8.9%, 4.99%, (1.45%), and 18.56%, respectively.
The average annual total returns of the Fund from inception of the Fund through
March 31, 1996 and for the fiscal year ended March 31, 1996 were 7.66% and
12.09%, respectively. For the thirty-day period ended March 31, 1996, the Fund's
yield was 2.94%.

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

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

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

<PAGE>

MANAGEMENT

The names, addresses, positions and principal occupations of the
directors and executive officers of the Fund are given below.
<TABLE>
<CAPTION>

Name and Address Age Position Principal Occupation(s) During Past 5 Years
- ---------------- --- -------- -------------------------------------------
<S> <C> <C> <C>

George R. Long 66 Director George R. Long has been Chairman of Mayfield
29 Las Brisas Way Corp. (financial consultants and venture
Naples, Florida 33963 capitalists) since 1973.

J. Peter Thompson 65 Director J. Peter Thompson has been a grain farmer in
Route 1 southwestern Minnesota since 1974. Prior to
Mountain Lake, Minnesota 56159 that, Mr. Thompson was employed by Paine
Webber, Jackson & Curtis, Incorporated, (a
diversified financial services concern), most
recently as Senior Vice President and General
Partner.

<PAGE>

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

Larry Hill 43 Vice President, Larry Hill is an Executive Vice President and
3700 First Bank Place Investments a Director of IAI and has served IAI in
P.O. Box 357 various capacities since 1984.
Minneapolis, Minnesota 55440

Donald Hoelting 35 Vice President, Donald Hoelting is a Vice President of IAI.
3700 First Bank Place Investments Prior to joining IAI in April 1996, Mr.
P.O. Box 357 (Balanced Fund) Hoelting was Chief Investment Officer and
Minneapolis, Minnesota 55440 portfolio manager for Jefferson National Bank
and Trust from 1989 to 1996.

Mark Simenstad 37 Vice President, Mark Simenstad is a Vice President of IAI.
3700 First Bank Place Investments Prior to joining IAI in 1993, Mr. Simenstad
P.O. Box 357 (Balanced Fund) was a fixed income portfolio manager for
Minneapolis, Minnesota 55440 Lutheran Brotherhood from 1983 to 1993.

Susan J. Haedt 34 Vice President, Susan J. Haedt is a Vice President of IAI and
3700 First Bank Place Director of Mutual Director of Fund Operations. Prior to
P.O. Box 357 Fund Operations joining IAI in 1992, Ms. Haedt served as a
Minneapolis, Minnesota 55440 Senior Manager at KPMG Peat Marwick LLP, (an
international tax, accounting and consulting
firm). Ms. Haedt is also Vice President,
Director of Operations of the other IAI Mutual
Funds.

<FN>
* Directors of the Funds who are interested persons (as that term is defined by
the Investment Company Act of 1940) of IAI and the Funds.
</FN>
</TABLE>

<PAGE>

Aggregate Compensation Aggregate Compensation Projected Aggregate
from Balanced Fund* from the Compensation from the 19
Name of Person, Position 18 IAI Mutual Funds** IAI Mutual Funds***
------------------------ ------------------- ---------------- --------------------
<S> <C> <C> <C>
Betsch, Madeline - Director $1,618 $28,725 $32,200

Hodgson, W. William - Director $1,618 $28,725 $32,200

Long, George R. - Director $1,980 $27,725 $32,200

Thompson, J. Peter - Director $1,618 $28,725 $32,200

Withers, Charles H. - Director $1,980 $27,725 $32,200
- -------------------------
<FN>
* For the fiscal year ended March 31, 1996.
** From all Funds except Capital Appreciation Fund for the calendar year ended
December 31, 1995. *** As of December 31, 1996 and includes Capital Appreciation
Fund; provided that a director misses no meetings; excludes expenses incurred in
connection with attending meetings.
</FN>
</TABLE>

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

IAI, the Fund's investment adviser, is an affiliate of the Hill Samuel
Group ("Hill Samuel"). Hill Samuel is an international merchant banking and
financial services firm headquartered in London, England. In addition to its
ownership of IAI, Hill Samuel owns controlling interests in over seventy
insurance, merchant banking, financial services and shipping services
subsidiaries located in Western Europe, Asia, the United States, Australia, New
Zealand and Great Britain. The principal offices of Hill Samuel are located at
100 Wood Street, London EC2 P2AJ.

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

History

The Fund is a separate portfolio of IAI Investment Funds VI, Inc., a
Minnesota corporation whose shares of common stock are currently issued in seven
series (Series A through G). On June 25, 1993, the Fund's shareholders approved
amended and restated Articles of Incorporation, which provided that the
registered

19
<PAGE>

investment company whose corporate name had been IAI Series Fund, Inc., be
renamed IAI Investment Funds VI, Inc. The investment portfolio represented by
Series E common shares is referred to as "IAI Balanced Fund."

On March 21, 1996, the shareholders of the Balanced Fund approved
IAI's proposal, effective April 1, 1996, to eliminate the Fund's Plan of
Distribution and corresponding underwriting agreement with IAI Securities, Inc.
and to replace the Fund's management and administrative agreements with a new
contract between the Fund and IAI. Under this new contract, IAI will provide, or
arrange for the provision of, all services required by the Fund in exchange for
one all-inclusive fee. The new contract is not intended to result in a fee
change. Because of these changes, this Statement of Additional Information has
been updated as set forth below.

Management Agreement

Effective April 1, 1996, the Fund entered into new written agreement
with IAI (the "Management Agreement"). Pursuant to the Management Agreement
between the Fund and IAI, IAI has agreed to provide the Fund with investment
advice, statistical and research facilities, and certain equipment and services,
including, but not limited to, office space and necessary office facilities,
equipment, and the services of required personnel and, in connection therewith,
IAI has the sole authority and responsibility to make and execute investment
decisions for the Fund within the framework of such Fund's investment policies,
subject to review by the directors of the Fund. In addition, IAI has agreed to
provide or arrange for the provision of all required administrative, stock
transfer, redemption, dividend disbursing, accounting, and shareholder services
including, without limitation, the following: (1) the maintenance of the Fund's
accounts, books and records; (2) the calculations of the daily net asset value
in accordance with the Fund's current Prospectus and Statement of Additional
Information; (3) daily and periodic reports; (4) all information necessary to
complete tax returns, questionnaires and other reports requested by the Fund;
(5) the maintenance of stock registry records; (6) the processing of requested
account registration changes, stock certificate issuances and redemption
requests; (7) the administration of payments and dividends and distributions
declared by the Fund; (8) answering shareholder questions; (9) providing reports
and other information; and (10) other services designed to maintain shareholder
accounts. IAI may also pay qualifying broker-dealers, financial institutions and
other entities that provide such services. In return for such services, the Fund
has agreed to pay IAI an annual fee as a percentage of such Fund's average daily
net assets as set forth below:

<TABLE>
<CAPTION>
Average Daily Net Assets Fee IAI Receives Annually
------------------------ -------------------------
<S> <C>
For the first $250 million 1.25%
For the next $250 million 1.20%
Above $500 million 1.10%
</TABLE>

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

Prior Agreements

Effective March 31, 1996, the Investment Advisory Agreement and
Administrative Agreement between the Fund and IAI were terminated and replaced
by the Management Agreement described above. The services provided by IAI under
each of these agreements are substantially similar in nature as those provided
under the new Management Agreement.

20
<PAGE>

Pursuant to the Investment Advisory Agreement, Balanced Fund had agreed
to pay IAI a monthly fee equivalent to an annual rate of .75% of the Fund's
average month-end net assets. As of March 31, 1996, the Fund had net assets of
$38,799,108. For the fiscal years ended March 31, 1994, 1995, and 1996, the Fund
paid IAI $489,813, $327,630, and $307,370, respectively, in advisory fees.
Balanced Fund's monthly payment of the advisory fee was suspended or reduced
(and reimbursement made by IAI if necessary) when it appeared that the amount of
expenses would exceed Balanced Fund's applicable expense limit (and after the
monthly payment of the distribution fee has been reduced to zero), as set forth
below. For the fiscal years ended March 31, 1994, 1995, and 1996, IAI was not
required to reimburse advisory fees pursuant to the expense limit.

With respect to the Administrative Agreement, Balanced Fund agreed to
pay IAI a monthly fee at the annual rate of .20% of its average month-end net
assets. For the fiscal year ended March 31, 1996, the Fund paid IAI $81,965
pursuant to the Administrative Agreement.

Effective March 31, 1996, Balanced Fund's Plan of Distribution (the
"Plan") terminated. Prior to termination, the Fund had entered into a
Distribution and Shareholder Services Agreement (the "Agreement") with IAI
Securities, Inc. ("IAIS"). Pursuant to such Plan and Agreement, Balanced Fund
paid IAIS 0.25% of the Fund's average month-end net assets to cover expenses
incurred by IAIS in connection with the servicing of shareholder accounts and
the distribution of such Fund's shares, subject to the contractual expense
limitations discussed above. The net distribution fee paid by Balanced Fund
during its fiscal year ended March 31, 1996 was $23,157. Such distribution fees
(along with amounts paid out of IAIS' own assets) were utilized in connection
with the distribution of the Fund's shares as follows:

Advertising.................................... $3,936.59

Printing and mailing of prospectuses to other
than current shareholders..................... $2,778.84

Payments to brokers or dealers................. $4,399.93

Direct payments to sales personnel............... $9,957.51

Other............................................ $2,084.13

Pursuant to the above mentioned expense limitation, IAI reimbursed the
Fund $39,650 in distribution fees for the fiscal year ended March 31, 1996.

Allocation of Expenses

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

21
<PAGE>

Duration of Agreements

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

BRANCHES OF THE CUSTODIAN
AND SUBCUSTODIAN BANKS

Argentina Citibank, N.A., Buenos Aires Branch

Australia Australia & New Zealand Banking Group, Ltd.

Austria Credit Austalt Bankverein

Bangladesh Standard Chartered Bank

Belgium Banque Bruxelles Lambert (BBL)

Botswana Barclays Bank of Botswana

Brazil Banco de Boston

Canada Toronto Dominion Bank

Chile Citibank, N.A., Santiago Branch

China Hong Kong & Shanghai Banking, Corp. Ltd.

Columbia Citibank, N.A./Cititrust Columbia S.A.

Cyprus Barclays Bank PLC

Czech Republic ING Bank

Denmark Den Danske Banke

Finland Merita Bank

France Banque Indosuez

Germany Dresdner Bank, A.G.

Ghana Barclays Bank of Ghana

Greece Citibank, N.A., Athens Branch

Hong Kong Hong Kong & Shanghai Banking Corp. Ltd.

Hungary Citibank, N.A., Budapest Branch

22
<PAGE>

India Standard Chartered Bank

Indonesia Hong Kong & Shanghai Banking Corp. Ltd.

Ireland Allied Irish Bank

Israel Bank Leumi

Italy Barclays Bank PLC

Japan The Mitsubishi Bank Limited

Jordan Arab Bank plc

Kenya Barclays Bank Kenya

Korea Standard Chartered Bank

Luxembourg Banque Bruxelles Lambert

Malaysia Oversea Chinese Banking Corporation

Mauritius Hong Kong and Shanghai Bank Corporation

Mexico Citibank, N.A., Mexico City Branch

Morocco Banque Commerciale du Maroc

Netherlands ABN Amro Bank

New Zealand Bank of New Zealand

Norway Den Norske Bank

Pakistan Standard Chartered Bank

Papua New Guinea Australia and New Zealand Banking Group

Peru Citibank N.A., Lima Branch

Philippines Hong Kong & Shanghai Banking Corp. Ltd.

Poland Citibank Poland, S.A.

Portugal Banco Commercial Portugues

Singapore Oversea Chinese Banking Corporation

South Africa First National Bank of Southern Africa

Spain Banco Santader

Sri Lanka Hong Kong & Shanghai Banking, Corp. Ltd.

23
<PAGE>

Swaziland Barclays Bank of Swaziland

Sweden Svenska Handelsbanken

Switzerland Bank Leu Ltd.

Taiwan Hong Kong & Shanghai Banking Corp. Ltd.

Thailand Standard Chartered Bank

Turkey Citibank, N.A., Istanbul Branch

United Kingdom Barclays Bank PLC

Uruguay Citibank, N.A., Montevideo Branch

Venezuela Citibank, N.A., Caracas Branch

Zambia Barclays Bank of Zambia

Zimbabwe Barclays Bank of Zimbabwe

DEPOSITORIES

Argentina Caja de Valores

Australia Clearing House Electronic Subregister System

Austria Wertpapiersammelbank

Belgium Caisse Interprofessionelle de Depot et de Titres

Botswana Stock Exchange Talisman System

Brazil Bolsa de Valores de Sao Paulo
Bolsa de Valores de Rio de Janeiro

Canada The Canadian Depository for Securities

China Shangai Stock Exchange

Czech Republic Center for Securities (SCP)

Denmark Vaerdipapircentralen

France SICOVAM (Societe Interprofessionelle la
Compensacion des Valuers Mobilieres)
Societe de Compensacion des Marches
Conditionnels
Chambre de Compensation des Instruments
Financiers de Paris

Germany Deutscher Kassenverein AG

Greece Central Clearing Office of Athens Stock Exchange

24
<PAGE>

Hong Kong Hong Kong Securities Clearing Company

Ireland Stock Exchange Talisman System

Israel SECH

Italy Monte Titoli, S.p.A

Japan Japan Securities Depository Center

Korea The Korean Central Depository

Malaysia The Malaysian Central Depository

Mexico Instituto para el Deposito de Valores

Morocco Casablanca Stock Exchange

Netherlands NECIGEF (Nederlands Centraal Institut
voor Giraal Effectenverkeer B.V.

New Zealand Austraclear New Zealand System

Norway Verdipapirsentralen

Pakistan The Karachi Stock Exchange Clearinghouse

Papua New Guinea Clearing House Electronic Subregister System

Poland National Depository of Securities

Portugal Lisbon Stock Exchange (SICOB system)
Oporto Stock Exchange (CAMBIUM system)

Singapore Central Depository Pte Ltd.

South Africa Central Depository (Pty) Ltd.

Spain Servicio de Compensacion y Liquidacion de
Valores

Sri Lanka Central Depository System Piri Ltd.

Sweden Vardepapperscentralen

Switzerland SEGA (Schweizerische Effekten Giro A.G.)

Taiwan Taiwan Securities Depository Co.

Thailand Share Depository Center

United Kingdom Stock Exchange Talisman System

Zimbabwe Stock Exchange Talisman System

25
<PAGE>

PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE

Many of the Fund's portfolio transactions are effected with dealers
without the payment of brokerage commissions but at a net price which usually
includes a spread or markup. In effecting such portfolio transactions on behalf
of the Fund, IAI seeks the most favorable net price consistent with the best
execution.

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

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

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

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

For the fiscal year ended March 31, 1994, 1995 and 1996, the Fund paid
$, $109,616, and $ ___, respectively, in brokerage commissions, approximately
57% of which was paid to brokerage firms that provided research services to IAI,
although the provision of such services was not necessarily a factor in the
placement of all of such business with such firms.
26
<PAGE>
CAPITAL STOCK

The Fund is a separate portfolio of IAI Investment Funds VI, Inc., a
Minnesota corporation whose shares of common stock are currently issued in seven
series (Series A through G). Each share of a series is entitled to participate
pro rata in any dividends and other distributions of such series and all shares
of a series have equal rights in the event of liquidation of that series. The
Board of Directors of IAI Investment Funds VI, Inc. is empowered under the
Articles of Incorporation of such company to issue other series of the company's
common stock without shareholder approval. IAI Investment Funds VI, Inc. has
authorized 10,000,000,000 shares of $.01 par value common stock to be issued as
Series E common shares. The investment portfolio represented by such shares is
referred to as IAI Balanced Fund. As of March 31, 1996, the Fund had 3,364,616
shares outstanding.

As of July __, 1996, no person held of record or, to the knowledge of
the Fund, beneficially owned more than 5% of the outstanding shares of the Fund,
except as set forth in the following table:

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

<S> <C> <C>
Pentair, Inc. Retirement Savings & Stock 938,367.414 28.04
401(k) Plan
1500 County Road B2 West
St. Paul, MN 55113-3105

First Trust NA Trustee 661,116.288 19.77
Professional Medical Associates, Ltd. 401(k)
P.O. Box 64010
St. Paul, MN 55164-0010

The John Roberts Company 171,042.680 5.12
401(k) Plan Segregated
9687 East River Road
Minneapolis, MN 55433

</TABLE>
In addition, as of July __, 1996, the Fund's officers and directors as a
group owned less than 1% of the ______ outstanding shares of the Fund.

NET ASSET VALUE AND PUBLIC OFFERING PRICE

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

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

<PAGE>

On March 31, 1996, the net asset value and public offering price per
share of the Fund was calculated as follows:

NAV = Net Assets ($38,799,108) = $11.53
------------------------
Shares Outstanding (3,364,616)

TAX STATUS

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

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

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

28
<PAGE>

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

LIMITATION OF DIRECTOR LIABILITY

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

FINANCIAL STATEMENTS

The financial statements, included as part of the Fund's 1996 Annual
Report to shareholders, are incorporated herein by reference. Such Annual Report
may be obtained by shareholders on request from the Fund at no charge.

29
<PAGE>

APPENDIX A

RATINGS OF DEBT SECURITIES

RATINGS BY MOODY'S

Corporate Bonds

Caa. Bonds rated Caa are of poor standing. Such issues
may be in default or there may be
present elements of danger with respect to principal or interest.

Ca. Bonds rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.

C. Bonds rated C are the lowest-rated class of bonds
and issued so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.

A-1

<PAGE>

Commercial Paper

Moody's employs the following three designations, all judged
to be investment grade, to indicate the relative repayment capacity of rated
issuers:

Prime - 1 Superior ability for repayment of senior
short-term debt obligations

Prime - 2 Strong ability for repayment of senior
short-term debt obligations

Prime - 3 Acceptable ability for repayment of senior
short-term debt obligations

RATINGS BY S&P

Corporate Bonds

AAA. Debt rated AAA has the highest rating assigned by
S&P. Capacity to pay interest and repay principal is extremely strong.

AA. Debt rated AA has a very strong capacity to pay
interest and repay principal and differs from the higher rated issues only
in small degree.

BBB. Debt rated BBB is regarded as having an adequate capacity
to pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.

A-2

<PAGE>

principal. In the event of adverse business, financial or economic
conditions, it is not likely to have the capacity to pay interest and repay
principal.

CC. Debt rated CC is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC debt rating.

C1. The rating C1 is reserved for income bonds on which no
interest is being paid.

Commercial Paper

A. This highest rating category indicates the
greatest capacity for timely payment. Issues in this category are further
defined with the designations 1, 2, and 3 to indicate the relative degree to
safety.

A-2. Capacity for timely payments on issues with this
designation is satisfactory. However, the relative degree of safety is not as
high as for issues designed A-1.

A-3

<PAGE>

PART C

Item 24. Financial Statements and Exhibits

(a) Financial Statements (Series A, C, E) (1)
(Series B, D) (2)
(Series F) (3)
(Series G) (4)
(b) Exhibits

(1A) Articles of Incorporation (5)

(1B) Certificate of Designation (Series C, D, E) (6)

(1C) Certificate of Designation (Series F) (7)

(1D) Certificate of Designation (Series G) (8)

(2) Bylaws (9)

(5) Management Agreement (Series A, B, C, D, G)

(6A) Dealer Sales Agreement (Series A, B, C, D, G)

(6B) Shareholder Services Agreement (Series A, B, C, D, G)

(8A) Custodian Agreement (Series A, B, C, D, E, F) (5)

(8B) Custodian Agreement (Series G) (9)

(11) Consent of Independent Auditors

(16) Calculation of Performance Data (6)

(99) Annual Report (10)
- -------------------

(1) Incorporated by reference to Post-Effective Amendment to Registrant's
Registration Statement on Form N-1A filed on July 31, 1995.

(2) Incorporated by reference to Post-Effective Amendment to Registrant's
Registration Statement on Form N-1A filed on March 30, 1995.

(3) Incorporated by reference to Post-Effective Amendment to Registrant's
Registration Statement on Form N-1A filed on June 1, 1995.

(4) To be filed by Post-Effective Amendment on or before February 1, 1996.

(5) Incorporated by reference to Post-Effective Amendment to Registrant's
Registration Statement on Form N-1A filed on June 3, 1993.

(6) Incorporated by reference to Post-Effective Amendment to Registrant's
Registration Statement on Form N-1A filed on February 7, 1992.

III-1

<PAGE>

(7) Incorporated by reference to Post-Effective Amendment to Registrant's
Registration Statement on Form N-1A filed on October 30, 1992.

(8) Incorporated by reference to Post-Effective Amendment to Registrant's
Registration Statement on Form N-1A filed on November 17, 1995.

(9) Incorporated by reference to Post-Effective Amendment to Registrant's
Registration Statement on Form N-1A filed on January 31, 1996.

(10) Incorporated by reference to the Annual Report filed electronically on
Form N-30D on March 30, 1996.

Item 25. Persons Controlled by or Under Common Control with Registrant.

See the sections of the Prospectus entitled "Management" and "Description
of Common Stock" and the section of the Statement of Additional Information
entitled "Management," filed as part of this Registration Statement.

Item 26. Number of Holders Securities.

Number of Record Holders
Portfolio Title of Class as of May 22, 1996
- --------- -------------- ------------------------
<S> <C> <C>
IAI Investment Funds VI, Inc. Common Stock (Series A) 7462
Common Stock (Series B) 566
Common Stock (Series C) 3957
Common Stock (Series D) 647
Common Stock (Series E) 125
Common Stock (Series F) 1550
Common Stock (Series G) 994

</TABLE>
III-2

<PAGE>

Item 27. Indemnification.

Incorporated by reference to Post-Effective Amendment to Registrant's
Registration Statement on Form N-1A filed on May 22, 1996.

Item 28. Business and Other Connections of Investment Adviser.

Information on the business of Investment Advisers, Inc. ("IAI") is
described in the Prospectus section "Management" and in Part B of this
Registration Statement in the section "Management."

The senior officers and directors of IAI and their titles are as
follows:

Name Title
---- -----
Jeffrey R. Applebaum Senior Vice President
Scott Allen Bettin Senior Vice President
Archie Campbell Black, III Senior Vice President/Treasurer
Iain D. Cheyne Director
Stephen C. Coleman Senior Vice President
Larry Ray Hill Executive Vice President
Richard A. Holway Senior Vice President
Irving Philip Knelman Executive Vice President/Director
Rick D. Leggott Senior Vice President
Kevin McKendry Director
Timothy A. Palmer Senior Vice President
Peter Phillips Director
Douglas Rugh Platt Senior Vice President
Noel Paul Rahn Chief Executive Officer/Director
James S. Sorenson Senior Vice President
R. David Spreng Senior Vice President
Christopher John Smith Senior Vice President/Secretary
Richard Edward Struthers Executive Vice President
Suzanne F. Zak Senior Vice President

All of such persons have been affiliated with IAI for more than two years
except Messrs. Cheyne, McKendry, Phillips and Sorenson. Prior to being appointed
to the Board in 1996, Mr. Cheyne was and remains General Manager of Corporate
Banking of Lloyds Bank plc, St. George's House, 6-8 Eastcheap, London, England
EC3M 1LL since 1972. Prior to being appointed to the Board in 1996, Mr. McKendry
was and remains Bank Counsel to Lloyds Bank Plc, P.O. Box 2008, One Seaport
Plaza, 199 Water Street, New York, NY 10038, since 1979. Prior to being
appointed to the Board in 1996, Mr. Phillips was and remains Executive Vice
President and General Manager of Lloyds Bank Plc, P.O. Box 2008, One Seaport
Plaza, 199 Water Street, New York, NY 10038, since 1993. Prior to becoming a
Senior Vice President of IAI in 1996, Mr. Sorenson was Vice President, Sales
Manager since the commencement of his employment with IAI in August 1994. Prior
thereto, Mr. Sorenson was Associate General Agent with Lutheran Brotherhood
since 1988.

Certain directors and officers of IAI are directors and/or officers of the
Registrant, as described in the section of the Statement of Additional
Information entitled "Management," filed as a part of this Registration
Statement.

The address of the officers and directors of IAI is that of IAI, which is
3700 First Bank Place, P. O. Box 357, Minneapolis, Minnesota 55440.

III-3

<PAGE>

Certain of the officers and directors of IAI also serve as officers and
directors of IAI International Ltd. Both IAI and IAI International are
wholly-owned subsidiaries of Hill Samuel Group BV, a London-based merchant
banking and financial services firm which, in turn, is owned by Lloyds TSB Group
plc, a publicly-held financial services organization based in London, England.
The senior officers and directors of IAI International and their titles are as
follows:

Name Title
- ---- -----

Noel Paul Rahn Chairman of the Board of Directors
Roy C. Gillson Chief Investment Officer/Director
Iain D. Cheyne Director
Irving Philip Knelman Director
Hilary Fane Deputy Chief Investment Officer/Director
Feidhlim O'Broin Associate Director

Certain of the officers and directors of IAI also serve as officers and
directors of IAI Trust Company, a wholly-owned subsidiary of IAI. The principal
officers and directors of IAI Trust Company and their titles are as follows:

Name Title
- ---- -----
Richard E. Struthers Chairman of the Board
Christopher J. Smith Director/Secretary
Archie C. Black Director/Treasurer

Item 29. Principal Underwriters

(a) Not applicable.

(b) Not applicable.

Item 30. Location of Accounts and Records.

The Custodian for Registrant is Norwest Bank Minnesota, N.A., Norwest
Center, Sixth & Marquette, Minneapolis, Minnesota 55479. The Custodian maintains
records of all cash transactions of Registrant. All other books and records of
Registrant, including books and records of Registrant's investment portfolios,
are maintained by IAI. IAI also acts as Registrant's transfer agent and dividend
disbursing agent, at 3700 First Bank Place, Minneapolis, Minnesota 55402.

Item 31. Management Services.

Not applicable.

Item 32. Undertakings.

(a) Not applicable.

(b) Registrant undertakes to file a post-effective amendment, using
financial statements which need not be certified, within four to six months from
the effective date of the registration of Registrant's Series G Common Stock.

(c) Registrant undertakes to furnish each person to whom a prospectus is
delivered a copy of its latest annual report to shareholders, upon request and
without change.

III-4

<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, Registrant certifies that it meets all of the
requirements for effectiveness of its Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(a) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Minneapolis, and State of Minnesota, on the 29th day of May, 1996.

IAI INVESTMENT FUNDS VI, INC.
(Registrant)

By /s/ Richard E. Struthers, President
-----------------------------------
Richard E. Struthers, President

Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated:

/s/ Richard E. Struthers President (principal May 29, 1996
- --------------------------------- executive officer) & Director
Richard E. Struthers

/s/ Archie C. Black III Treasurer (principal May 29, 1996
- --------------------------------- financial and accounting
Archie C. Black III officer)

Noel P. Rahn (1)
Director

Madeline Betsch (1)
Director

W. William Hodgson (1)
Director

George R. Long (1)
Director

J. Peter Thompson (1)
Director

Charles H. Withers (1)
Director

/s/ William C. Joas May 29, 1996
- ---------------------------------
William C. Joas,
Attorney-in-fact

(1) Registrant's directors executing Powers of Attorney dated August 18, 1993,
and filed with the Commission on February 7, 1994.

<PAGE>

MANAGEMENT AGREEMENT

This Agreement is made and entered into as of April 1, 1996 by and
between Investment Advisers, Inc., a Delaware corporation ("IAI"), and IAI
Investment Funds VI, Inc., a Minnesota corporation (the "Company"), on behalf of
IAI _______ Fund, the portfolio represented by the Company's Series __ Common
Shares (the "Fund").

1. ENGAGEMENT OF IAI; SERVICES.

(a) Investment Advisory Services. The Company hereby engages IAI on
behalf of the Fund, and IAI hereby agrees, pursuant to the terms and conditions
hereinafter set forth, to furnish the Fund continuously with investment
planning, to provide investment advice with regard to the Fund's portfolio, to
prepare and make available to the Fund necessary research and statistical data
in connection therewith, to supervise the acquisition and disposition of
specific securities by the Fund and to perform such other services as are
reasonably incidental to the foregoing duties as investment adviser for, and to
manage the investment of the assets of, the Fund. IAI covenants and agrees that,
in effecting acquisitions and dispositions of specific investments on behalf of
the Fund, IAI shall at all times be governed by the Fund's investment
objectives, restrictions and policies as delineated and limited by the
disclosures contained in the various documents filed with the Securities and
Exchange Commission on behalf of the Fund, as such documents may from time to
time be amended or supplemented. IAI shall report to the Company's Board of
Directors regularly at such times and in such detail as the Board may from time
to time determine appropriate, in order to permit the Board to determine the
adherence of IAI to the Fund's investment objectives, policies and limitations.

(b) Dividend Disbursing, Accounting, Administrative and Transfer
Agency Services. The Company on behalf of the Fund hereby engages IAI, and IAI
hereby agrees, to provide to the Fund with all dividend disbursing, accounting,
administrative and transfer agency services required by the Fund, including,
without limitation, the following services:

(1) The calculation of net asset value per share at such
times and in such manner as specified in the Fund's current Prospectus
and Statement of Additional Information and at such other times upon
which the parties hereto may from time to time agree. The pricing
services or other sources from which daily price quotations on
portfolio securities are to be obtained for purposes of calculating
the Fund's daily net asset value shall be paid for by IAI and approved
by the Company;

(2) Upon the receipt of funds for the purchase of Fund shares
or the receipt of redemption requests with respect to Fund shares
outstanding, the calculation of the number of shares to be purchased
or redeemed, respectively;

(3) Upon the Fund's distribution of dividends, (i) the
calculation of the amount of such dividends to be received per Fund
share, (ii) the calculation of the number of additional Fund shares to
be received by each Fund shareholder, other than any shareholder who
has elected to receive such dividends in cash, and (iii) the mailing
of payments with respect to such dividends to shareholders who have
elected to receive such dividends in cash;

(4) The provision of transfer agency services as described
below:

<PAGE>

(i) IAI shall make original issues of shares of the
Fund in accordance with the Fund's current Prospectus and
Statement of Additional Information and with instructions from
the Company;

(ii) Prior to the daily determination of net asset
value of the Fund, IAI shall process all purchase orders
received since the last determination of the Fund's net asset
value;

(iii) Transfers of shares shall be registered;

(iv) IAI will maintain stock registry records in the
usual form in which it will note the issuance, transfer and
redemption of Fund shares, and is also authorized to maintain
an account in which it will record the Fund shares and
fractions issued and outstanding from time to time for which
issuance of Fund share certificates is deferred; and

(v) IAI will, in addition to the aforementioned
duties and functions, perform the usual duties and functions
of a stock transfer agent for a registered investment
company;

(5) The creation and maintenance of such records relating to
the business of the Fund as the Company may from time to time
reasonably request;

(6) The preparation of tax forms, reports, notices, proxy
statements, proxies and other Fund shareholder communications, and the
mailing thereof to Fund shareholders; and

(7) The provision of such other dividend disbursing,
accounting, administrative, accounting and transfer agency services
upon which the parties hereto may from time to time agree.

(8) The Fund hereby authorizes IAI to contract with qualified
entities for the provision of any of the services to be performed
pursuant to this Section 1(b).

(c) Shareholder Services. The Company on behalf of the Fund hereby
engages, and IAI hereby agrees, to provide the Fund with all services to
shareholders not otherwise the subject of Section 1(b) above. These shareholder
services may include personal services provided to shareholders, such as
answering shareholder inquiries regarding a Fund and providing reports and other
information and services related to the maintenance of shareholder accounts. The
Fund hereby also authorizes IAI to contract with qualifying broker-dealers,
financial institutions and other such entities for the provision of such
services to Fund shareholders.

(d) Filings, Office Facilities, Equipment and Personnel. IAI shall, at
its own expense, file all documents with all relevant regulatory agencies and

2
<PAGE>

governmental authorities on the Company's behalf, furnish the Company and the
Fund with all office facilities, equipment and personnel necessary to discharge
its responsibilities and duties hereunder. IAI shall arrange, if requested by
the Company, for officers or employees of IAI to serve without compensation from
the Company as directors, officers, or employees of the Company if duly elected
to such positions by the shareholders or directors of the Company.

(e) Other Services. IAI shall, at its own expense, provide or arrange
for the provision of all services required by the Company on behalf of the Fund
not otherwise addressed in this Agreement.

(f) Books and Records. IAI hereby acknowledges that all records
pertaining to the services rendered hereunder are the sole and exclusive
property of the Company, and in the event that a transfer of any of the services
currently rendered hereunder to someone other than IAI should ever occur, IAI
will promptly, and at its own cost, take all steps necessary to segregate such
records and deliver them to the Company.

(g) No Separate Charges to Shareholders. IAI hereby covenants and
agrees that it will make no separate charge to any Fund shareholder or his
individual account for any services rendered to said shareholder, the Fund or
the Company unless such charge for special services is specifically approved by
the Board including a majority of the directors who are not "interested persons"
(as such term is defined in the Investment Company Act of 1940, as amended,
which act, as amended and together with all rules and regulations promulgated
thereunder, is hereinafter referred to as the "1940 Act") of IAI. No special
charge will be levied retroactively or without appropriate notice to affected
shareholders.

(h) Limitation of Liability. IAI, in carrying out and performing the
terms and conditions of this Agreement, shall incur no liability for its status
hereunder or for any actions taken or omitted in good faith and without
negligence. Without limitation of the foregoing:

(1) IAI may rely upon, and shall not be liable to any person
or party for any actions taken or omitted to be taken in good faith in
reliance upon, the advice of the Company, or of counsel, who may be
counsel for the Company or counsel for IAI, and upon statements of
accountants, brokers and other persons believed by IAI in good faith
to be expert in the matters upon which they are consulted; and

(2) IAI may rely upon, and shall not be liable to any person
or party for any actions taken or omitted to be taken in good faith in
reliance upon, any signature, instruction, request, letter of
transmittal, certificate, opinion of counsel, statement, instrument,
report, notice, consent, order or other paper or document that IAI in
good faith believes to be genuine and to have been signed, presented
or authorized by the purchaser, Company or other proper party or
parties.

2. COMPENSATION FOR SERVICES; ALLOCATION OF EXPENSES

(a) In payment for the services to be provided or arranged by IAI
hereunder, the Company (on behalf of the Fund) shall pay to IAI a fee based on
the Fund's average daily net assets (as determined in accordance with the
Company's Bylaws and with the Fund's Prospectus and Statement of Additional
Information, as the same may from time to time be amended or supplemented) as
set forth in Exhibit A attached hereto. This fee shall be paid to IAI on a
monthly basis not later than the tenth business day of the month following the
month in which the services were rendered and shall be prorated for any fraction
of a month at the commencement or termination of this Agreement.

(b) Except for brokerage commissions and other expenditures in
connection with the purchase and sale of portfolio securities, interest expense
and, subject to the specific approval of a majority of the directors of the
Company who are not "interested persons" (as defined in the 1940 Act) of IAI or
the Company, taxes and extraordinary expenses, IAI shall bear all of the Fund's
expenses; provided however, that IAI will either pay the fees and the ordinary
and reasonable expenses of the Fund's disinterested directors or reduce the fee
due under this Agreement by an equivalent amount paid by the Fund to such
directors.

3
<PAGE>

3. FREEDOM TO DEAL WITH THIRD PARTIES.

IAI shall be free to render services to others similar to those
rendered under this Agreement or of a different nature except as such services
may conflict with the services to be rendered or the duties to be assumed
hereunder.

4. EFFECTIVE DATE, DURATION, AMENDMENT AND TERMINATION OF AGREEMENT.

(a) Unless sooner terminated as hereinafter provided, this Agreement
shall continue in effect for a period more than two years from the date of its
execution but only as long as such continuance is specifically approved at least
annually by (i) the Board of Directors of the Company or by the vote of a
majority of the outstanding voting securities of the Fund, and (ii) by the vote
of a majority of the directors of the Company who are not parties to this
Agreement or "interested persons" (as defined in the 1940 Act) of IAI or of the
Company cast in person at a meeting called for the purpose of voting on such
approval.

(b) This Agreement may be terminated at any time, without the payment
of any penalty, by the Board of Directors of the Company or by the vote of a
majority of the outstanding voting securities of the Fund, or by IAI, upon 60
days' written notice to the other party.

(c) This Agreement shall automatically terminate in the event of its
"assignment" (as defined in the Investment Company Act of 1940, as amended).

(d) No amendment to this Agreement shall be effective until approved
by the vote of: (i) a majority of the directors of the Company who are not
parties to this Agreement or "interested persons" (as defined in the 1940 Act)
of IAI or of the Company cast in person at a meeting called for the purpose of
voting on such approval; and (ii) a majority of the outstanding voting
securities of the Fund.

(e) Wherever referred to in this Agreement, the vote or approval of
the holders of a majority of the outstanding voting securities or shares of the
Fund shall mean the lesser of (i) the vote of 67% or more of the voting
securities of the Fund present at a regular or special meeting of shareholders
duly called, if more than 50% of the Fund's outstanding voting securities are
present or represented by proxy, or (ii) the vote of more than 50% of the
outstanding voting securities of the Fund.

(f) To the extent the provisions of this Section 4 are based on
legislative or regulatory requirements in effect at the time of this Agreement's
initial approval by the Fund's Board of Directors and/or shareholders and any
such legislative or regulatory requirements change, the relevant provision of
this Section 4 will be deemed to have been so amended without further action by
the Fund's Board of Directors or its shareholders.

5. NOTICES.

Any notice under this Agreement shall be in writing, addressed,
delivered or mailed, postage prepaid, to the other party at such address as such
other party may designate in writing for receipt of such notice.

4
<PAGE>

6. REPRESENTATION.

IAI hereby represents that it will maintain registrations with and/or
approvals by all relevant governmental authorities necessary for the provision
of services pursuant to this Agreement.

7. INTERPRETATION; GOVERNING LAW.

This Agreement shall be subject to and interpreted in accordance with
all applicable provisions of law including, but not limited to, the 1940 Act. To
the extent that the provisions herein contained conflict with any such
applicable provisions of law, the latter shall control. The laws of the State of
Minnesota shall otherwise govern the construction, validity and effect of this
Agreement.

IN WITNESS WHEREOF, the Company and IAI have caused this Agreement to
be executed by their duly authorized officers as of the day and year first above
written.

IAI INVESTMENT FUNDS VI, INC.

By______________________________________
Richard E. Struthers, President

INVESTMENT ADVISERS, INC.

By______________________________________
Noel P. Rahn, Chief Executive Officer

<PAGE>

EXHIBIT A

IAI _________ FUND
FEE AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS

First $250 Million 1.25%

$250 - $500 Million 1.20%

Over $500 Million 1.10%

DEALER SALES AGREEMENT

Ladies and Gentlemen:

We invite you to join a selling group for the distribution of shares of those
mutual funds available to the public for which we serve as the investment
adviser (the "Funds"). Upon execution of this Agreement, you agree to
participate in the distribution of the Funds to the public subject to the terms
set forth herein.

1. In all sales of the Funds to the public, you shall act as dealer of your
own account and shall not be authorized to act as agent for the Funds, for any
other dealer, or for us.

2. All orders will be accepted only at the price, in the amount and subject
to the terms set forth in the then current Prospectuses and Statements of
Additional Information of the Funds. The procedure relating to the handling of
orders shall be subject to instructions which we shall forward to you from time
to time. Certificates representing shares of the Funds will not be issued.

3. You agree to provide distribution and marketing services in the
marketing of shares of the Funds and services to your customers who are Fund
shareholders. Such shareholder services may include personal services provided
to shareholders, such as answering shareholder inquiries regarding a Fund and
providing reports and other information, and services related to the maintenance
of shareholder accounts. For all services, we will pay you a fee, as established
by us from time to time. Such fee will be based upon the following percentages
of the average month-end or daily net assets of each Fund represented by shares
of the Fund owned, during the quarter for which payment is being made, by
customers for which you maintain a servicing relationship as evidenced by their
execution of such agreements as we may from time to time require. We
specifically reserve the right to discontinue paying fees with respect to those
assets for which such customer authorizations which we may require are not
provided.

<PAGE>

Fund Annual Fee*
-------------------------------------- -----------
Reserve Fund 0
Money Market Fund 0
Minnesota Tax Free Fund .10%
Bond Fund .15%
Government Fund .15%
Growth and Income Fund .25%
Regional Fund .25%
Value Fund .25%
Developing Countries Fund .25%
International Fund .25%
Midcap Growth Fund .25%
Balanced Fund .25%
Growth Fund .25%
Emerging Growth Fund .25%
Capital Appreciation Fund .25%
- ------------------------------
* as a % of average daily net assets or average month-end net assets as set
forth in a Fund's then-current prospectus.

Such fee will be paid on a quarterly basis and, subject to the last
sentence of this section 3, will be paid so long as the accounts of your clients
remain in the Funds and this Agreement and such other agreements as we may
require have not been terminated. Upon such termination, any such obligation to
pay such fee shall cease. You agree to furnish us or the Funds with such
information as may be reasonably requested with respect to such fees paid to you
pursuant to this Agreement.

4. If any Fund shares sold under the terms of this Agreement are
repurchased by the Funds or are tendered for redemption within seven business
days after confirmation of the original purchase, it is agreed that you shall
forfeit the right to receive the fees hereunder with respect to such shares.

5. No person is authorized to make any representations concerning the
Funds except those contained in the then current Prospectuses and in such
printed information as may be furnished for use as information supplemental to
the Prospectuses. Additional copies of the Prospectuses and any printed
information supplementing the Prospectuses will be supplied in reasonable
quantities upon request.

6. You acknowledge and agree that the Funds reserve the right, in their
sole discretion and without notice, to suspend sales or withdraw the offering of
shares of the Funds.

2
<PAGE>

7. This Agreement may be terminated by either party at any time upon
seven days' notice to the other party with or without cause. We reserve the
right to amend this Agreement at any time upon written notice.

8. You represent that you are a member in good standing of the National
Association of Securities Dealers, Inc. and agree that termination or suspension
of such membership shall automatically terminate this Agreement. You further
agree that you will immediately advise us of any such termination or suspension.
You also represent that you are authorized under relevant federal and state laws
and regulations to receive the fees payable hereunder and that you will
immediately advise us of any termination or suspension of such authorization.

9. You agree to indemnify and hold harmless the Funds and us from and
against any and all claims, liability, expense (including attorneys' fees) or
loss in the event that you, or any of your employees or agents, should violate
any law, rule or regulation or any provisions of this Agreement, including,
without limitation, any representations, verbal or otherwise, of any untrue or
alleged untrue statements of a material fact relating to the offer and sale of
the Funds. In the event we determine to refund any amounts paid by any investor
by reason of any such violation on your part, you shall return to us any fees
previously paid by us to you in connection with the transaction for which the
refund is made.

10. All communications to us should be sent to us at 3700 First Bank
Place, P.O. Box 357, Minneapolis, MN 55440. Any notice to you shall be duly
given if mailed or telegraphed to you at the address specified by you below.
This Agreement shall be governed by and construed in accordance with the laws of
the State of Minnesota.

The undersigned hereby accepts the offer set forth herein:

Investment Advisers, Inc.

By___________________________ By___________________________

Its___________________________ Its___________________________

Address Date of Acceptance_______, 19___

SHAREHOLDER SERVICE AGREEMENT

Ladies and Gentlemen:

We invite you to enter into an agreement with us for the servicing of
shareholders of, and the maintenance of shareholder accounts for those mutual
funds available to the public for which Investment Advisers, Inc., our
affiliate, serves as the investment adviser (the "Funds") and the shares of
which are offered to the public at net asset value, as described in the Funds'
Prospectuses. Subject to your acceptance of this Agreement, the terms and
conditions of this Agreement shall be as follows:

1. You shall provide shareholder services for certain shareholders of the
Funds who purchase shares of the Funds as a result of their
relationship to you. Such shareholder services may include personal
services provided to shareholders, such as answering shareholder
inquiries regarding a Fund and providing reports and other information,
and services related to the maintenance of shareholder accounts, to the
extent you are permitted by applicable statue, rule or regulation to
provide such information or services.

2. If shares of the Funds are to be purchased or held by you on behalf of
your clients:

(i) Such shares will be registered in your name or in the name of
your nominee. The client will be the beneficial owner of the
shares of the Funds purchased and held by you in accordance
with the client's instructions and the client may exercise
all rights of a shareholder of the Funds. You agree to
transmit to the Funds' transfer agent (Investment Advisers,
Inc.), in a timely manner, all purchase orders and redemption
requests of your clients and to forward to each client all
proxy statements, periodic shareholder reports and other
communications received from the Funds by you on behalf of
your clients. The Funds have agreed to pay all reasonable
out-of-pocket expenses actually incurred by you in connection
with the transfer by you of such proxy statements and reports
to your clients.

(ii) You agree to transfer to the Funds' transfer agent, on the
date such purchase orders are effective, federal funds in an
amount equal to the amount of all purchase orders placed by
you on behalf of your clients and accepted by the Funds. In
the event that the Funds fail to receive such federal funds
on such date (other than through fault of the Funds or their

<PAGE>

transfer agent), you shall indemnify the Funds against any
expense (including overdraft charges) incurred by the Funds
as a result of their failure to receive such federal funds.

(iii) You agree to make available to the Funds, upon the Funds'
request, such information relating to your clients who are
beneficial owners of shares of the Funds and their
transactions in shares of the Funds, as may be required by
applicable laws and regulations or as may be reasonably
requested by the Funds.

(iv) You agree to transfer record ownership of a client's shares
of the Funds to the client promptly upon the request of a
client. In addition, record ownership will be promptly
transferred to the client in the event that the person or
entity ceases to be your client.

3. You shall provide to us copies of the lists of members of your
organization and identify to us any publications and other facilities
of your organization for the placement of advertisements or promotional
materials and for sending information regarding the Funds to enable us
to solicit for sale and to sell shares to your members.

4. Neither you nor any of your employees or agents are authorized to make
any representation concerning the shares of the Funds except those
contained in the then current Prospectuses of the Funds, copies of
which will be supplied to you; and you shall have no authority to act
as agent for the Funds or for us. You agree to indemnify and hold
harmless the Funds, us, and Investment Advisers, Inc. from and against
any and all claims, liability, expense (including attorneys' fees) and
loss in the event that you, or any of your employees or agents, should
violate any law, rule, or regulation, or any provisions of this
Agreement and, in the event we determine to refund any amounts paid by
any investor by reason of any such violation on your part, you shall
return to us any fees previously paid by us to you in connection with
the transaction for which the refund is made.

5. In consideration for the services described herein, you shall be
entitled to receive from us such fees as established by us from time to
time as set forth on Exhibit A. Such fee will be based upon assets of
each Fund represented by shares of the Fund owned, during the quarter
for which payment is being made, by shareholders for which you maintain
a servicing relationship as evidenced by their execution of such
agreements as we may from time to time require. We specifically reserve
the right to discontinue paying fees with respect to those assets for
which such customer authorization which we may require is not provided.

Such fee will be paid on a quarterly basis and, subject to the last
sentence of this section, will be paid so long as the accounts for your
clients and this Agreement and such other agreements as we may require

2
<PAGE>

have not been terminated. Upon such termination any such obligation to
pay such fee shall cease. You agree to furnish us and the Funds with
any such information as may be reasonably requested with respect to
such fees paid to you pursuant to this Agreement.

6. You acknowledge and agree that the Funds reserve the right, in their
sole discretion and without notice, to suspend the sale of shares or
withdraw the sale of shares of the Funds.

7. This Agreement may be terminated by either party at any time upon seven
days notice to the other party with or without cause. We reserve the
right to amend this Agreement at any time upon written notice.

8. All communications to us should be sent to us at 3700 First Bank Place,
P.O. Box 357, Minneapolis, MN 55440. Any notice to you shall be duly
given if mailed or telegraphed to you at the address specified by you
below. This Agreement shall be governed by and construed under the laws
of the State of Minnesota.

The undersigned hereby accepts IAI Securities, Inc.
the offer set forth herein

By _____________________________

By___________________________ Its ____________________________

Its __________________________ Date of Acceptance______________

Address_______________________

_______________________

[LETTERHEAD OF KPMG PEAT MARWICK LLP]

Independent Auditors' Consent
-----------------------------

The Board of Directors
IAI Investment Funds II, Inc.
IAI Investment Funds IV, Inc.
IAI Investment Funds VI, Inc.
IAI Investment Funds VII, Inc.
IAI Investment Funds VIII, Inc.

We consent to the use of our reports incorporated herein by reference and to the
references to our Firm under the headings "FINANCIAL HIGHLIGHTS" and "COUNSEL
AND AUDITORS" in Part A of the Registration Statement.

/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP

Minneapolis, Minnesota
May 29, 1996