IAI INVESTMENT FUNDS VI INC, 497, 1999-08-06

IAI INVESTMENT FUNDS VI INC
497, 1999-08-06

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IAI MUTUAL FUNDS

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

PROSPECTUS August 1, 1999

As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the shares of this Fund, or determined if the
information in this prospectus is accurate or complete. Any statement to the
contrary is a criminal offense.

<PAGE>

TABLE OF CONTENTS

Page
----

Fund Summaries ............................................................. 3
Capital Appreciation Fund ............................................. 3
Emerging Growth Fund .................................................. 6
Growth Fund ........................................................... 9
Growth and Income Fund ................................................ 11
Midcap Growth Fund .................................................... 14
Regional Fund ......................................................... 17
Value Fund ............................................................ 20

Buying and Selling Shares .................................................. 23
How to Buy Shares ..................................................... 23
How to Sell Shares .................................................... 25
Exchange Privilege .................................................... 28
Authorized Telephone Trading .......................................... 28
Statements and Confirmations .......................................... 29
Shareholder Reports ................................................... 29

Dividend and Capital Gains Distributions ................................... 29

Taxes ...................................................................... 30
Taxes on Distributions ................................................ 30
Taxes on Transactions ................................................. 30

Fund Management ............................................................ 30
Investment Adviser .................................................... 30
Portfolio Managers .................................................... 31

More Information on Investment Strategies and Risks ........................ 32
Investment Strategies ................................................. 32
Risks ................................................................. 32

Financial Highlights ....................................................... 34

2
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FUND SUMMARIES

This section briefly describes the objectives, principal investment strategies
and principal risks of IAI Capital Appreciation Fund ("Capital Appreciation
Fund"), IAI Emerging Growth Fund ("Emerging Growth Fund"), IAI Growth Fund
("Growth Fund"), IAI Growth and Income Fund ("Growth and Income Fund"), IAI
Midcap Growth Fund ("Midcap Growth Fund"), IAI Regional Fund ("Regional Fund")
and IAI Value Fund ("Value Fund") ("the Funds"). It also provides you with
information on each Fund's performance and expenses. For further information on
the Funds, please read the section entitled "More Information on Investment
Strategies and Risks."

An investment in a Fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.

CAPITAL APPRECIATION FUND

OBJECTIVE

Capital Appreciation Fund has an objective of long-term capital appreciation.

PRINCIPAL INVESTMENT STRATEGIES

Capital Appreciation Fund invests primarily in common stocks of small emerging
U.S. companies that the Fund's adviser believes have above-average prospects for
growth. These companies are expected to show earnings growth over time that is
well above the growth rate of the overall economy and the rate of inflation. The
Fund invests at least 65% of its total assets in stocks of companies with market
capitalizations of $1 billion or less at the time of investment.

In general, the Fund will focus on companies with the following
characteristics:

* superior performance records;

* solid market positions;

* strong balance sheets; and

* management teams that, in the opinion of the Fund's adviser, are
capable of sustaining growth.

PRINCIPAL RISKS

You could lose money by investing in Capital Appreciation Fund. The principal
risks that could adversely affect the value of the Fund's shares and the total
return on your investment include:

* RISKS OF COMMON STOCKS. Common stocks may decline significantly in
price over short or extended periods of time. Price declines may occur
as a result of any of the following:

* MARKET RISK. The value of a company's stock may be affected
by changes in financial markets that are relatively unrelated
to the company itself, such as changes in interest rates,
changes in general economic conditions, changes in investor
perceptions of the market, or the outlook for overall
corporate profitability.

* SECTOR RISK. The stocks of companies within a certain
industry or sector of the economy can perform differently from
the overall stock market. This could be due to such factors as
increased production costs or changes in the regulatory or
competitive environment.

3
<PAGE>

* COMPANY RISK. The value of a company's stock may fall as a
result of factors directly relating to that company, such as
changes in corporate profitability due to the success or
failure of specific products or management strategies.

* RISKS OF INVESTING IN SMALL COMPANIES. Investing in small companies
involves greater risk than is customarily associated with investments
in larger, more established companies. Small companies are more likely
than larger companies to have limited product lines, markets or
financial resources, or to depend on a small, inexperienced management
group. The securities of small companies may have limited market
stability and may be subject to more abrupt or erratic market movements
than securities of larger, more established companies or the market
averages in general.

* RISKS OF GROWTH STOCKS. The Fund invests primarily in stocks of
companies that the Fund's adviser believes have above-average prospects
for growth. If the adviser incorrectly assesses a company's prospects
for growth, or if its judgment about how other investors will value the
company's growth is wrong, then the price of the company's stock may
decrease, or it may not increase to the level that the adviser had
anticipated.

FUND PERFORMANCE

The bar chart and table below provide you with information on the Fund's
volatility and performance. The bar chart shows how the Fund's performance has
varied from year to year. This information provides some indication of the risks
of investing in the Fund by showing changes in performance from year to year.
The table compares the Fund's average annual returns for one year and for the
period since the Fund's inception to that of a broad measure of market
performance. The Fund's past performance is not necessarily an indication of how
it will perform in the future.

ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR*

[BAR CHART]

1997 17.78%
1998 2.21%

- --------------
* The Fund's total return for the period from January 1, 1999 through June 30,
1999 was 4.30%.

Best Quarter: Quarter ended June 30, 1997 22.61%
Worst Quarter: Quarter ended September 30, 1998 (22.46)%

4
<PAGE>

AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98

SINCE INCEPTION
1 YEAR (2/1/96)
CAPITAL APPRECIATION FUND 2.21% 24.00%
RUSSELL 2500 GROWTH INDEX* 3.10% 11.04%
STANDARD & POOR'S 500 COMPOSITE INDEX** 28.57% 27.67%

- --------------------------
* The Russell 2500 Growth Index measures the performance of those companies in
the Russell 2500 Index with higher price-to-book values and higher
forecasted growth rates. The Russell 2500 Index is composed of the 2,500
smallest companies in the Russell 3000 Index, which measures the performance
of the 3,000 largest U.S. companies, based on total market capitalization.
The Russell 2500 Index represents approximately 22% of the total market
capitalization of the Russell 3000 Index.
** An unmanaged index of 500 common stocks chosen to reflect the industries of
the U.S. economy.

FEES AND EXPENSES

As an investor, you pay certain fees and expenses if you buy and hold shares of
the Fund. Shareholder fees are fees you pay directly when buying or selling
shares. Annual fund operating expenses are deducted from Fund assets.

SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)

Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED
FROM FUND ASSETS) (as a % of average net assets)

Management Fees 1.40%
Distribution and Service (12b-1) Fees None
Other Expenses* .01%
Total Annual Fund Operating Expenses 1.41%

- --------------------------
* "Other Expenses" consist solely of interest expense.

EXAMPLE

This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. It assumes that you invest
$10,000 in the Fund for the time periods indicated, that your investment has a
5% return each year and that the Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:

1 year $ 144
3 years $ 446
5 years $ 771
10 years $1,691

5
<PAGE>

EMERGING GROWTH FUND

OBJECTIVE

Emerging Growth Fund has an objective of long-term capital appreciation.

PRINCIPAL INVESTMENT STRATEGIES

Emerging Growth Fund invests primarily in common stocks of small emerging and
medium-sized U.S. companies that the Fund's adviser believes have above-average
prospects for growth. These companies are expected to show earnings growth over
time that is well above the growth rate of the overall economy and the rate of
inflation. The Fund invests at least 65% of its total assets in stocks of
emerging growth companies with market capitalizations of $2 billion or less at
the time of investment.

In general, the Fund will focus on companies with the following characteristics:

* superior performance records;

* solid market positions;

* strong balance sheets; and

* management teams that, in the opinion of the Fund's adviser, are
capable of sustaining growth.

PRINCIPAL RISKS

You could lose money by investing in Emerging Growth Fund. The principal risks
that could adversely affect the value of the Fund's shares and the total return
on your investment include:

* RISKS OF COMMON STOCKS. Common stocks may decline significantly in
price over short or extended periods of time. Price declines may occur
as a result of any of the following:

* RISKS OF INVESTING IN SMALL AND MEDIUM-SIZED COMPANIES. Investing in
small and medium-sized companies involves greater risk than is
customarily associated with investments in larger, more established
companies. Smaller companies are more likely than larger companies to
have limited product lines, markets or financial resources, or to
depend on a small, inexperienced management group. The securities of
smaller companies may have limited market stability and may be subject
to more abrupt or erratic market movements than securities of larger,
more established companies or the market averages in general.

6
<PAGE>

wrong, then the price of the company's stock may decrease, or it may
not increase to the level that the adviser had anticipated.

* RISKS OF THE TECHNOLOGY SECTOR. A significant portion of the Fund
currently is invested in the "electric technology" sector. Technology
is an extremely competitive industry where rapid new developments could
have a dramatic impact on a company's earnings growth potential. In
addition, many technology companies are sensitive to global and
domestic economic conditions and, for some companies, earnings growth
may be tied to product cycles within their specific industries. If
technology continues to advance at an accelerated rate and the number
of companies and product offerings continues to expand, these companies
could become increasingly sensitive to short product cycles and
aggressive pricing.

FUND PERFORMANCE

The bar chart and table below provide you with information on the Fund's
volatility and performance. The bar chart shows how the Fund's performance has
varied from year to year. This information provides some indication of the risks
of investing in the Fund by showing changes in performance from year to year.
The table compares the Fund's average annual returns for 1 and 5 years and for
the period since the Fund's inception to that of a broad measure of market
performance. The Fund's past performance is not necessarily an indication of how
it will perform in the future.

ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR*

[BAR CHART]

1992 22.45%
1993 14.76%
1994 0.19%
1995 49.55%
1996 6.95%
1997 -2.86%
1998 5.19%

- --------------
* The Fund's total return for the period from January 1, 1999 through June 30,
1999 was 18.99%.

Best Quarter: Quarter ended December 31, 1992 25.49%
Worst Quarter: Quarter ended March 31, 1997 (20.59)%

7
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AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98

SINCE INCEPTION
1 YEAR 5 YEARS (8/5/91)
EMERGING GROWTH FUND 5.19% 10.37% 15.15%
RUSSELL 2500 GROWTH INDEX* 3.10% 12.41% 13.13%
STANDARD & POOR'S 500 COMPOSITE INDEX** 28.57% 24.06% 19.71%

FEES AND EXPENSES

SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED
FROM FUND ASSETS) (as a % of average net assets)
Management Fees 1.25%
Distribution and Service (12b-1) Fees None
Other Expenses* .04%
Total Annual Fund Operating Expenses 1.29%

- --------------------------
* "Other Expenses" consist solely of interest expense.

EXAMPLE

1 year $ 131
3 years $ 409
5 years $ 708
10 years $1,556

8
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GROWTH FUND

OBJECTIVE

Growth Fund has an objective of long-term capital appreciation.

PRINCIPAL INVESTMENT STRATEGIES

Growth Fund invests primarily in common stocks of large, established companies
with earnings that the Fund's adviser expects will increase at an above average
rate. The Fund generally invests in companies with market capitalizations
ranging from $10 billion to over $100 billion at the time of investment.

Growth Fund focuses 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, the Fund's adviser uses several
valuation techniques to determine which stocks offer the best combination of
intrinsic value and earnings growth potential. The goal is to have an acceptable
balance of risk and reward in the Fund's portfolio.

PRINCIPAL RISKS

You could lose money by investing in Growth Fund. The principal risks that could
adversely affect the value of the Fund's shares and the total return on your
investment include:

* RISKS OF COMMON STOCKS. Common stocks may decline significantly in
price over short or extended periods of time. Price declines may occur
as a result of any of the following:

* RISKS OF GROWTH STOCKS. The Fund invests primarily in stocks of
companies with earnings that are expected to grow at an above average
rate. If the adviser incorrectly assesses a company's prospects for
growth, or if its judgment about how other investors will value the
company's growth is wrong, then the price of the company's stock may
decrease, or it may not increase to the level that the adviser had
anticipated.

9
<PAGE>

FUND PERFORMANCE

The bar chart and table below provide you with information on the Fund's
volatility and performance. The bar chart shows how the Fund's performance has
varied from year to year. This information provides some indication of the risks
of investing in the Fund by showing changes in performance from year to year.
The table compares the Fund's average annual returns for 1 and 5 years and for
the period since the Fund's inception to that of a broad measure of market
performance. The Fund's past performance is not necessarily an indication of how
it will perform in the future.

ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR*

[BAR CHART]

1994 0.66%
1995 23.17%
1996 15.35%
1997 19.16%
1998 26.53%

- --------------
* The Fund's total return for the period from January 1, 1999 through June 30,
1999 was 9.11%.

Best Quarter: Quarter ended December 31, 1998 27.00%
Worst Quarter: Quarter ended September 30, 1998 (13.74)%

AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98

SINCE INCEPTION
1 YEAR 5 YEARS (8/6/93)
GROWTH FUND 26.53% 16.61% 15.49%
STANDARD & POOR'S 500 COMPOSITE INDEX* 28.57% 24.06% 23.21%

- --------------------------
* An unmanaged index of 500 common stocks chosen to reflect the industries of
the U.S. economy.

10
<PAGE>

FEES AND EXPENSES

SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None

- ---------------------------
* "Other Expenses" consist solely of interest expense.

EXAMPLE

1 year $ 129
3 years $ 403
5 years $ 697
10 years $1,534

GROWTH AND INCOME FUND

OBJECTIVE

Growth and Income Fund has a primary objective of capital appreciation and a
secondary objective of income.

PRINCIPAL INVESTMENT STRATEGIES

Growth and Income Fund invests primarily in common stocks of U.S. companies. The
Fund generally invests in companies with market capitalizations of $10 billion
or more at the time of investment.

In selecting stocks for Growth and Income Fund, the dominant criteria is the
potential for long-term growth, although dividends are also a factor. The Fund's
adviser considers a number of factors, such as:

* product development and demand;

* superior performance records;

* management teams that the adviser believes are capable of sustaining
growth; and

* attractive market valuations.

11
<PAGE>

PRINCIPAL RISKS

You could lose money by investing in Growth and Income Fund. The principal risks
that could adversely affect the value of the Fund's shares and the total return
on your investment include:

* RISKS OF COMMON STOCKS. Common stocks may decline significantly in
price over short or extended periods of time. Price declines may occur
as a result of any of the following:

* RISKS OF GROWTH STOCKS. The Fund invests primarily in stocks of
companies that the Fund's adviser believes have the potential for
long-term growth. If the adviser incorrectly assesses a company's
prospects for growth, or if its judgment about how other investors will
value the company's growth is wrong, then the price of the company's
stock may decrease, or it may not increase to the level that the
adviser had anticipated.

FUND PERFORMANCE

The bar chart and table below provide you with information on the Fund's
volatility and performance. The bar chart shows how the Fund's performance has
varied from year to year. This information provides some indication of the risks
of investing in the Fund by showing changes in performance from year to year.
The table compares the Fund's average annual returns for 1, 5 and 10 years to
that of a broad measure of market performance. The Fund's past performance is
not necessarily an indication of how it will perform in the future.

12
<PAGE>

ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR*

[BAR CHART]

1989 29.81%
1990 -6.68%
1991 26.66%
1992 3.99%
1993 9.98%
1994 -4.77%
1995 27.14%
1996 20.21%
1997 23.92%
1998 15.00%

- --------------
* The Fund's return for the period from January 1, 1999 through June 30, 1999
was 9.09%.

Best Quarter: Quarter ended December 31, 1998 20.07%
Worst Quarter: Quarter ended September 30, 1998 (14.71)%

AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98

1 YEAR 5 YEARS 10 YEARS
GROWTH & INCOME FUND 15.00% 15.71% 13.79%
STANDARD & POOR'S 500 COMPOSITE INDEX* 28.57% 24.06% 19.21%

- --------------------------
* An unmanaged index of 500 common stocks chosen to reflect the industries of
the U.S. economy.

13
<PAGE>

FEES AND EXPENSES

SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None

- --------------------------
* "Other Expenses" consist solely of interest expense.

EXAMPLE

1 year $ 128
3 years $ 400
5 years $ 692
10 years $1,523

MIDCAP GROWTH FUND

OBJECTIVE

Midcap Growth Fund has an objective of long-term capital appreciation.

PRINCIPAL INVESTMENT STRATEGIES

Midcap Growth Fund invests primarily in common stocks of medium-sized U.S.
companies that the Fund's adviser believes have above-average prospects for
growth. These companies are expected to show earnings growth over time that is
well above the growth rate of the overall economy and the rate of inflation. The
Fund invests at least 65% of its total assets in stocks of companies with market
capitalizations between $1 billion and $8 billion. Under normal market
conditions, the weighted average market capitalization of the Fund's portfolio
will range from $3 billion to $6 billion.

In general, the Fund focuses on companies with the following
characteristics:

* superior performance records;

* solid market positions;

* strong balance sheets; and

14
<PAGE>

* management teams that the adviser believes are capable of sustaining
growth.

PRINCIPAL RISKS

You could lose money by investing in Midcap Growth Fund. The principal risks
that could adversely affect the value of the Fund's shares and the total return
on your investment include:

* RISKS OF COMMON STOCKS. Common stocks may decline significantly in
price over short or extended periods of time. Price declines may occur
as a result of any of the following:

* RISKS OF MEDIUM-SIZED COMPANIES. Medium-sized growth companies are
generally considered to be less volatile than smaller, emerging
companies. However, they may not generate the dividend income of larger
companies.

FUND PERFORMANCE

The bar chart and table below provide you with information on the Fund's
volatility and performance. The bar chart shows how the Fund's performance has
varied from year to year. This information provides some indication of the risks
of investing in the Fund by showing changes in performance from year to year.
The table compares the Fund's average annual returns for 1 and 5 years and for
the period since the Fund's inception to that of a broad measure of market
performance. The Fund's past performance is not necessarily an indication of how
it will perform in the future.

15
<PAGE>

ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR*

[BAR CHART]

1993 22.85%
1994 5.65%
1995 26.09%
1996 16.58%
1997 8.85%
1998 24.95%

- --------------
* The Fund's return for the period from January 1, 1999 through June 30, 1999
was 13.26%.

Best Quarter: Quarter ended December 31, 1998 31.97%
Worst Quarter: Quarter ended September 30, 1998 (12.73)%

AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98

SINCE INCEPTION
1 YEAR 5 YEARS (4/10/92)
MIDCAP GROWTH FUND 24.95% 16.13% 17.64%
S&P MID CAP 400 INDEX* 19.11% 18.84% 17.90%
STANDARD & POOR'S 500 COMPOSITE INDEX** 28.57% 24.06% 20.76%

- --------------------------
* An unmanaged index of 400 common stocks chosen to measure the performance
of the mid-sized company segment of the U.S. market.
** An unmanaged index of 500 common stocks chosen to reflect the industries of
the U.S. economy.

16
<PAGE>

FEES AND EXPENSES

SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED
FROM FUND ASSETS)(as a % of average net assets)
Management Fees 1.25%
Distribution and Service (12b-1) Fees None
Other Expenses* .09%
Total Annual Fund Operating Expenses 1.34%

- ------------------------
* "Other Expenses" consist solely of interest expense.

EXAMPLE

1 year $ 136
3 years $ 425
5 years $ 734
10 years $1,613

REGIONAL FUND

OBJECTIVE

Regional Fund has an objective of capital appreciation.

PRINCIPAL INVESTMENT STRATEGIES

Regional Fund invests primarily in common stocks of companies headquartered in
Minnesota, Wisconsin, Iowa, Illinois, Nebraska, Montana, North Dakota or South
Dakota. At least 65% of the Fund's equity investments will be in companies
headquartered in one of these states. Regional Fund invests in both nationally
recognized companies and in less well known companies that are newer or have
smaller capitalizations, but that appear to have the potential for capital
appreciation.

In selecting securities, the Fund's investment adviser considers a number of
factors, such as:

* product development and demand;

* superior performance records;

* management teams that the adviser believes are capable of sustaining
growth; and

17
<PAGE>

* attractive market valuations.

PRINCIPAL RISKS

You could lose money by investing in Regional Fund. The principal risks that
could adversely affect the value of the Fund's shares and the total return on
your investment include:

* RISKS OF COMMON STOCKS. Common stocks may decline significantly in
price over short or extended periods of time. Price declines may occur
as a result of any of the following:

* RISKS OF GEOGRAPHIC LIMITATION. The Fund's policy of investing
primarily in a certain geographic region means that it will be subject
to adverse economic, political or other developments in that region.
Moreover, because of this geographic limitation, the Fund may be less
diversified by industry and company than other funds with a similar
investment objective and no such geographic limitation.

FUND PERFORMANCE

The bar chart and table below provide you with information on the Fund's
volatility and performance. The bar chart shows how the Fund's performance has
varied from year to year. This information provides some indication of the risks
of investing in the Fund by showing changes in performance from year to year.
The table compares the Fund's average annual returns for 1, 5 and 10 years to
that of a broad measure of market performance. The Fund's past performance is
not necessarily an indication of how it will perform in the future.

18
<PAGE>

ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR*

[BAR CHART]

1989 31.27%
1990 -0.33%
1991 35.38%
1992 3.54%
1993 8.96%
1994 0.68%
1995 32.64%
1996 15.72%
1997 18.86%
1998 -1.37%

- --------------
* The Fund's return for the period from January 1, 1999 through June 30, 1999
was 3.96%.

Best Quarter: Quarter ended March 31, 1998 18.21%
Worst Quarter: Quarter ended September 30, 1998 (17.89)%

AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98

1 YEAR 5 YEARS 10 YEARS
REGIONAL FUND (1.37)% 12.62% 13.73%
STANDARD & POOR'S 500 COMPOSITE INDEX* 28.57% 24.06% 19.21%

- --------------------------
* An unmanaged index of 500 common stocks chosen to reflect the industries of
the U.S. economy.

19
<PAGE>

FEES AND EXPENSES

SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED
FROM FUND ASSETS) (as a % of average net assets)
Management Fees 1.23%
Distribution and Service (12b-1) Fees None
Other Expenses .02%
Total Annual Fund Operating Expenses 1.25%

- -------------------------
* "Other Expenses" consist solely of interest expense.

EXAMPLE

1 year $ 127
3 years $ 397
5 years $ 686
10 years $1,511

VALUE FUND

OBJECTIVE

Value Fund has an objective of long-term capital appreciation.

PRINCIPAL INVESTMENT STRATEGIES

Value Fund invests primarily in common stocks of U.S. companies that the Fund's
adviser believes are undervalued and offer opportunities for capital growth. For
example, the Fund may invest in common stocks of companies:

* which have been unpopular for some time, but where, in the opinion of
the Fund's adviser, recent developments suggest the possibility of
improved operating results;

* which the Adviser believes have temporarily fallen out of favor for
non-recurring or short-term reasons;

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

In selecting investments, the Fund focuses on companies with strong competitive
positions, high levels of discretionary cash flow, and solid financial
characteristics. The Fund generally invests in small companies with market
capitalizations of less than $1 billion at the time of purchase.

20
<PAGE>

PRINCIPAL RISKS

You could lose money by investing in Value Fund. The principal risks that could
adversely affect the value of the Fund's shares and the total return on your
investment include:

* RISKS OF COMMON STOCKS. Common stocks may decline significantly in
price over short or extended periods of time. Price declines may occur
as a result of any of the following:

* RISKS OF VALUE STOCKS. Value Fund invests primarily in common stocks
that the Fund's adviser believes are undervalued. In selecting these
securities, the Fund's adviser will be exercising opinions and
judgments which may be contrary to those of the majority of investors.
There is a risk that the judgment of the majority may be correct, in
which case the Fund may incur losses, or its profits may be limited.
Even if the adviser's judgment is correct, there may be a long delay
before the security increases in value, in which case capital invested
by the Fund may be nonproductive for an extended period of time. If an
investment is nonproductive for more than two to three years, it
generally will be sold.

FUND PERFORMANCE

The bar chart and table below provide you with information on the Fund's
volatility and performance. The bar chart shows how the Fund's performance has
varied from year to year. This information provides some indication of the risks
of investing in the Fund by showing changes in performance from year to year.
The table compares the Fund's average annual returns for 1, 5 and 10 years to
that of a broad measure of market performance. The Fund's past performance is
not necessarily an indication of how it will perform in the future.

21
<PAGE>

ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR*

[BAR CHART]

1989 22.56%
1990 -11.47%
1991 19.78%
1992 11.90%
1993 22.08%
1994 -9.08%
1995 24.39%
1996 21.87%
1997 19.60%
1998 -0.04%

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

* The Fund's return for the period from January 1, 1999 through June 30, 1999
was 19.61%.

Best Quarter: Quarter ended June 30, 1998 24.80%
Worst Quarter: Quarter ended September 30, 1998 (35.28)%

AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98

1 YEAR 5 YEARS 10 YEARS
VALUE FUND (0.04)% 10.50% 11.33%
RUSSELL 2500 INDEX* 0.38% 14.13% 14.61%
STANDARD & POOR'S 500 COMPOSITE INDEX** 28.57% 24.06% 19.21%

- -------------------------
* The Russell 2500 Growth Index measures the performance of those companies
in the Russell 2500 Index with higher price-to-book values and higher
forecasted growth rates. The Russell 2500 Index is composed of the 2,500
smallest companies in the Russell 3000 Index, which measures the
performance of the 3,000 largest U.S. companies, based on total market
capitalization. The Russell 2500 Index represents approximately 22% of the
total market capitalization of the Russell 3000 Index.
** An unmanaged index of 500 common stocks chosen to reflect the industries of
the U.S. economy.

22
<PAGE>

FEES AND EXPENSES

SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None

- -------------------------
* "Other Expenses" consists of interest expense equal to .03% and an expense
of .08% approved by the Board of Directors related to an independent
valuation of a restricted security.

EXAMPLE

1 year $ 138
3 years $ 431
5 years $ 745
10 years $1,635

BUYING AND SELLING SHARES

HOW TO BUY SHARES

You may purchase Fund shares either directly through the Funds or through
certain securities dealers. These dealers have the responsibility to promptly
transmit orders and may charge a processing fee.

MINIMUM INVESTMENTS

The Funds are members of the IAI Family of Funds, a family of mutual funds
advised by Investment Advisers, Inc. ("IAI"). The minimum initial investment to
establish an account with the IAI Family of Funds is $5,000 for a retail account
and $2,000 for an IRA account. In each case, your initial investment may be
allocated in any way you wish among the Funds and other funds in the IAI Family
of Funds, so long as no less than $1,000 is allocated to any one fund. Once you
have met the account minimum, subsequent purchases can be made for as little as
$100.

DETERMINING YOUR PURCHASE PRICE

Your purchase price will be equal to a Fund's net asset value ("NAV") per share
next calculated after you place your order in proper form. To make sure that
your order is in proper form, please follow the directions for purchasing shares
given below. No sales load or commission is charged when you purchase shares.
NAV is

23
<PAGE>

determined as of the close of regular trading on the New York Stock Exchange
(normally 3 p.m., central time) each day the exchange is open.

Each Fund's NAV per share 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 Funds value
investments for which market quotations are readily available at market value.
They value short-term investments maturing within 60 days at amortized cost,
which approximates market value. The Funds value all other investments and
assets at their fair value.

INVESTING BY MAIL

To invest by mail, send a completed, signed application and a check payable to
"IAI Funds" to one of the following addresses:

REGULAR MAIL OVERNIGHT MAIL
IAI Mutual Funds IAI Mutual Funds
c/o Firstar Mutual Fund Services, LLC c/o Firstar Mutual Fund Services, LLC
P.O. Box 701 615 E. Michigan Street, Third Floor
Milwaukee, WI 53201-0701 Milwaukee, WI 53202

Third party checks will not be accepted for initial account investments. After a
Fund receives your completed purchase order, your account will be credited with
the number of full and fractional shares that can be purchased at the next
determined net asset value.

For assistance in completing the application, please contact IAI Shareholder
Services at 1-800-945-3863.

INVESTING BY WIRE

If you have an account with a commercial bank that is a member of the Federal
Reserve System, you may purchase shares by requesting your bank to wire funds
to:

Firstar Bank Milwaukee, NA
777 E. Wisconsin Avenue
Milwaukee, WI 53202
ABA Number: 075000022
Credit: Firstar Mutual Fund Services, LLC
Account # 112-952-137
For further credit to IAI Mutual Funds
(Shareholder account #, shareholder name)

If you are purchasing by wire for a new account, you must do the following
before you wire funds:

* call IAI Shareholder Services at 1-800-945-3863 to advise them of
your investment;

* obtain instructions and an application form; and

* complete the application and send it to:

IAI Mutual Funds
c/o Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, WI 53201-0701

Your completed application must be received by a Fund before your wire is sent.

24
<PAGE>

Before initiating any subsequent wires, please call IAI Shareholder Services and
advise them of your name, account number and the name of the bank transmitting
the federal funds.

Wire orders to purchase shares of a Fund will be accepted only on days when your
bank, the Fund, the Fund's transfer agent and Firstar Bank Milwaukee, N.A. are
open for business. A wired purchase will be considered made when the wired
amount is received and the purchase is accepted by the Fund. The Fund must
receive payment before the close of business for the purchase to be credited to
your account on that day. Otherwise, your purchase will be processed the next
business day. The Fund may reject your wire order if it does not contain the
required information stated above. If the Fund rejects your wire order, your
money will be returned promptly, less any costs incurred by the Fund or the
Fund's transfer agent in rejecting the order. You must pay any charges assessed
by your bank for the wire service. Any delays that may occur in wiring federal
funds, including delays in processing by the banks, are not the responsibility
of the Fund or the Fund's transfer agent.

MAKING ADDITIONAL INVESTMENTS

You can make additional investments to your existing account by mail, by wire or
by exchanging shares of another fund in the IAI Family of Funds for Fund shares.
You can also make additional investments to your existing account directly from
your bank account by utilizing the Automated Clearing House (ACH) system. If you
did not establish this option when you opened your account, call IAI Shareholder
Services at 1-800-945-3863.

RETIREMENT PLANS

The Funds offer Individual Retirement Accounts (IRAs) and Roth IRAs. For further
information about such accounts, please call IAI 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. You are urged to consult an
attorney or tax adviser before establishing such a plan.

AUTOMATIC INVESTMENT PLAN

Following a minimum initial investment, you may arrange to make regular
investments of $100 or more each month through automatic deductions from your
checking or savings account. To participate in this program, simply complete the
Automatic Investment Plan portion of your application and return it to the Fund.
You can set up the Automatic Investment Plan if your financial institution is a
member of ACH. You will receive confirmations of all transactions and dividends
under the Plan. There is no fee for this service.

If you wish to change or terminate your participation in the Automatic
Investment Plan you must provide the Funds with written notice. Your
instructions must be received by 10 days prior to the date the change or
termination is to take place.

HOW TO SELL SHARES

You may redeem your shares of a Fund on any day the New York Stock Exchange is
open. The exchange is closed on weekends, national holidays and Good Friday.
Your redemption price will be the net asset value of your shares next determined
after your redemption request is received in proper form by the Fund. To make
sure that your request is in proper form, please follow the directions for
selling shares given below.

BY MAIL

If you redeem by mail, your redemption price will be equal to the Fund's net
asset value per share next determined following receipt by the Fund of your
written redemption request in the form shown below (and a properly endorsed
stock certificate if one has been issued).

To redeem by mail, send a written request to the Fund at one of the following
addresses:

25
<PAGE>

Your request should include the following information:

* name of the Fund;

* account number;

* dollar amount or number of shares to be redeemed;

* name on the account; and

* signatures of all registered account owners.

If you hold certificates for your shares, they must be included with your
request. They must be endorsed on the back with the signature of the person
whose name appears on the certificate and must be signature guaranteed.

Signatures on your written request must be guaranteed if:

* you would like the proceeds from the sale to be paid to someone other
than the shareholder of record; or

* you have changed your address over the telephone within the last 15
calendar days.

A signature guarantee assures that a signature is genuine and protects
shareholders from unauthorized account transfers. Banks, savings and loan
associations, trust companies, credit unions, broker-dealers and member firms of
a national securities exchange may guarantee signatures. NOTARIZATION BY A
NOTARY PUBLIC IS NOT ACCEPTED.

If Fund 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 redemption request.

To redeem money from your IRA account, an IRA Distribution Form must be
completed and returned to IAI. To receive a copy of the form, please call IAI
Shareholder Services at 1-800-945-3863.

BY PHONE

You may redeem shares by phone, subject to the following conditions:

* You must have completed the Telephone Options section of the account
application.

* Telephonic redemptions are limited to $50,000.

* Redemption proceeds must be made payable to the owner(s) of record
and delivered to the address of record.

* Telephone redemptions are not permitted for IRAs.

For assistance, please contact IAI Shareholder Services at 1-800-945-3863.

26
<PAGE>

PAYMENT OF REDEMPTION PROCEEDS

BY WIRE. When you redeem by telephone, you may have the proceeds wired to your
bank account if you provided the required information at the time you opened
your account. Wire redemption requests will only be processed on days your bank,
the Funds, the Funds' transfer agent and Firstar Bank Milwaukee, N.A. are open
for business. If you choose to have your redemption proceeds wired to your bank,
please note the following:

* A minimum amount of $1,000 is required to wire redemption proceeds.

* Proceeds will be wired on the next business day after your redemption
request.

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

To add the ability to receive proceeds by wire to your account, or to change
existing bank account information, please submit a letter of instruction,
including your bank information and a signature guarantee, to:

IAI Mutual Funds
c/o Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, WI 53201-0701

BY ACH. When you redeem by telephone, you may have the proceeds sent to your
bank account by an Automatic Clearing House transfer if you provided the
required information at the time you opened your account. Proceeds sent by ACH
transfer should be credited the second day after the redemption. ACH is an
automated method of initializing payments from, and receiving payments in, your
financial institution account. The ACH system is supported by over 20,000 banks,
savings banks and credit unions. For assistance, please contact IAI Shareholder
Services at 1-800-945-3863.

BY CHECK. Normally a Fund will mail payment for shares redeemed on the business
day following the receipt of your redemption request, although payment may be
made as late as seven days after your request. However, the Fund will not send
redemption proceeds until checks (including certified checks, cashiers checks or
automatic investment credits) received in payment for shares have cleared. This
may take up to 15 days from the date of purchase.

INVOLUNTARY REDEMPTIONS

If your account balance for any Fund falls below $500 as a result of selling or
exchanging shares, the Fund has the right to redeem your shares and send you the
proceeds. Before redeeming your account, the Fund will mail you a notice of its
intention to redeem, which will give you an opportunity to make an additional
investment. If you do not increase the value of your account to at least $500
within six months of the date the notice was mailed, the Fund may redeem your
account.

SYSTEMATIC CASH WITHDRAWAL PLAN

The Funds have a Systematic Cash Withdrawal Plan under which you may
automatically redeem a fixed dollar amount of Fund shares on either a monthly or
quarterly basis. Under the Systematic Cash Withdrawal Plan:

* Automatic redemptions must be for $100 or more.

* Shares will be redeemed at the net asset value determined on the day
of redemption (or the next business day).

* All income dividends and capital gains distributions must be
reinvested in Fund shares.

27
<PAGE>

* Confirmations of all transactions and distributions will be sent to
you quarterly.

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

EXCHANGE PRIVILEGE

You may exchange your Fund shares for shares of another fund in the IAI Family
of Funds if you satisfy that fund's purchase requirements.

The Funds generally limits exchanges to four per calendar year. This limit may
be modified for certain retirement plan accounts and for those participating in
the Automatic Exchange Plan described below. The Funds may change or cancel the
exchange privilege at any time.

When you exchange your Fund shares for shares of another fund in the IAI Family
of Funds the exchange is considered a sale of your Fund shares for federal
income tax purposes, and you may have a taxable capital gain or loss.

You may exchange shares by notifying the Funds in writing or, if you have
authorized the Funds to accept telephone instructions, by telephone. See "How to
Sell Shares -- By Telephone."

AUTOMATIC EXCHANGE PLAN

You may arrange to make regular exchanges of $100 or more between any of the
funds in the IAI Family of Funds on a monthly basis. Please note the following
about automatic exchanges:

* If you wish to participate in the Plan, you must complete the
Automatic Exchange Plan portion of your IAI Mutual Fund application.

* Exchanges will take place at the net asset value determined on the
day of the exchange (or the next business day).

* If you participate in the Automatic Exchange Plan you will receive
confirmations of all transactions and dividends.

* You may not close an account through the Automatic Exchange Plan.

AUTHORIZED TELEPHONE TRADING

As discussed above, you may exchange and redeem shares by telephone if you have
completed the Telephone Options section of the IAI Mutual Fund application.
Telephone redemptions are not permitted for IRAs.

Address changes may also be made over the telephone. During the 15 calendar days
following an address change by telephone, you may only redeem shares in your
account with a signature guaranteed letter of instruction.

The Funds and their agents will not be responsible for any losses that may
result from acting on telephone instructions that they reasonably believe to be
genuine. The Funds will follow reasonable procedures to confirm that
instructions received by telephone are genuine. These procedures include tape
recording all redemption and exchange requests.

28
<PAGE>

STATEMENTS AND CONFIRMATIONS

Whenever you buy or sell shares of a Fund, IAI will send you a confirmation
statement showing how many shares you bought or sold and at what price. You will
also receive a cumulative account statement quarterly and a transaction
statement annually. Please review carefully all of the information relating to
transactions on your statements and confirmations to ensure that your
instructions were acted on properly. Please notify the Funds immediately in
writing if there is an error. If you do not provide the Funds with notice of an
error within 60 days of non-automatic transactions, or within 60 days of the
date of your consolidated quarterly statement in the case of automatic
transactions, you will be deemed to have ratified the transaction.

SHAREHOLDER REPORTS

Shareholder reports will be sent to you semi-annually. These reports contain
financial information about the Funds, including a list of investment securities
held. To reduce the volume of mail you receive, only one copy of Fund reports
may be mailed to your household (same surname and address). Please call IAI
Shareholder Services at 1-800-945-3863 if you wish to receive additional
shareholder reports.

DIVIDEND AND CAPITAL GAINS DISTRIBUTIONS

The Funds pays dividends from net investment income semiannually and distribute
realized capital gains, if any, annually.

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 are
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; or

* CASH -- your income dividends and capital gain distributions will be
paid in cash.

If you elect to receive distributions in cash, they can be sent to you by 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.

If you do not select an option when you open your account, each Fund will
automatically reinvest all distributions in additional Fund shares.

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

Prior to purchasing shares of a Fund, you should consider the impact of dividend
or capital gains distributions which are expected to be announced, or which have
been announced but not paid. If you purchase shares shortly before the record
date for such a distribution, you will pay the full price for the shares and
then receive a portion of that price back shortly thereafter as a taxable
distribution.

29
<PAGE>

TAXES

Some of the common tax consequences of investing in the Funds are discussed
below. More information about taxes is in the Statement of Additional
Information. Because everyone's tax situation is unique, be sure to consult with
your tax adviser.

TAXES ON DISTRIBUTIONS

Each Fund pays its shareholders distributions from its net investment income and
any net capital gains that it has realized. For most investors, these
distributions will be taxable, whether paid in cash or reinvested (unless your
investment is in an IRA or other tax advantaged account).

Distributions paid from a Fund's net investment income and short-term capital
gains are taxable as ordinary income. Distributions paid from a Fund's long-term
capital gains are taxable as long-term gains, regardless of how long you have
held your shares. For Capital Appreciation Fund, Emerging Growth Fund, Growth
Fund and Midcap Growth Fund, distributions are expected to consist primarily of
capital gains.

Information about the tax status of each year's distributions will be mailed
annually.

TAXES ON TRANSACTIONS

The sale or exchange of Fund shares will be a taxable event for you and may
result in a capital gain or loss. The gain or loss will be considered long-term
if you have held your shares for more than one year. A gain or loss on shares
held for one year or less is considered short-term and is taxed at the same
rates as ordinary income.

FUND MANAGEMENT

INVESTMENT ADVISER

Investment Advisers, Inc. ("IAI") is the Funds' investment adviser. IAI, which
has been in the investment advisory business since 1947, 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.
IAI is located at 601 Second Avenue South, Suite 3600, Minneapolis, Minnesota
55402.

The Funds have entered into Management Agreements with IAI under which IAI
provides each Fund with investment advisory services and is responsible for
managing the Fund's business affairs, subject to the authority of the Board of
Directors. IAI also is responsible under the Management Agreements for providing
or arranging for the provision of all required administrative, stock transfer,
redemption, dividend disbursing, accounting and shareholder services. IAI may
directly or indirectly pay qualifying broker-dealers, financial institutions and
other entities for providing some of these services to Fund shareholders. The
Management Agreements require IAI to pay all of each Fund's operating expenses,
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. Each Fund pays IAI an annual
fee under its Management Agreement. The Funds paid the following management fees
to IAI for the fiscal year ended March 31, 1999:

30
<PAGE>

Advisory fee
as a % of average
Fund daily net assets
---- ----------------

Capital Appreciation Fund 1.40%
Emerging Growth Fund 1.25%
Growth Fund 1.25%
Growth and Income Fund 1.25%
Midcap Growth Fund 1.25%
Regional Fund 1.23%
Value Fund 1.25%

PORTFOLIO MANAGERS

The individuals listed below are responsible for making the day-to-day
investment decisions for the Funds:

CAPITAL APPRECIATION FUND, EMERGING GROWTH FUND AND MIDCAP GROWTH FUND. These
Funds are managed by a team of investment professionals comprised of Curt
McLeod, Scott Billeadeau, Robert Scott and Robert Mlarnik. Mr. McLeod is an IAI
Vice President and equity portfolio manager. Prior to joining IAI in 1997, Mr.
McLeod had been a portfolio manager with Piper Jaffray, Inc. since 1986. Mr.
Billeadeau is an IAI Vice President and equity portfolio manager. Prior to
joining IAI in July 1999, Mr. Billeadeau had been a Director and Senior
Portfolio Manager with TradeStreet Investment Associates since 1997, a Senior
Portfolio Manager with Bank of America Investment Management from 1991 until
1997, and a Senior Project Manager with American Express Financial Advisors from
1985 to 1991. Mr. Scott is an IAI Vice President and equity analyst and has
served IAI in various investment related capacities since 1994. Mr. Mlarnik is
an IAI Vice President and equity analyst. Prior to joining IAI in 1996, Mr.
Mlarnik was a Major in the United States Marine Corps. Although the team assumed
day-to-day management responsibility for the Funds in July 1999, Mr. McLeod has
had primary responsibility for Emerging Growth Fund since March 1998.

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

REGIONAL FUND. Julian "Bing" Carlin had responsibility for the management of
Regional Fund from its inception in 1980 through 1996, when he retired. In May
1999, Mr. Carlin rejoined IAI as Senior Vice President, and resumed management
of the Fund. Mr. Carlin has managed private client portfolios at Carlin Capital
Management since 1996, and continues to do so.

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

31
<PAGE>

MORE INFORMATION ON
INVESTMENT STRATEGIES AND RISKS

INVESTMENT STRATEGIES

The principal investment strategies of each Fund are summarized above under
"Fund Summaries." These are the strategies that IAI believes are most likely to
be important in trying to achieve the Funds' objectives. Of course, there is no
guarantee that any Fund will achieve its objective. Although not considered
principal investment strategies, you should be aware that the Funds may also use
strategies and invest in securities that are not described in this Prospectus,
but that are described in the Statement of Additional Information.

INVESTMENTS IN SECURITIES OF FOREIGN ISSUERS

Although none of the Funds invests in the securities of foreign issuers as a
principal investment strategy, each Fund may invest from time to time in
securities of foreign issuers which are either listed on a United States stock
exchange or represented by American Depositary Receipts.

TEMPORARY DEFENSIVE INVESTMENTS

In an attempt to respond to adverse market, economic, political or other
conditions, each Fund may temporarily invest without limit in investment-grade
fixed income securities or money market securities (including repurchase
agreements) rated in one of the top two categories by a major ratings service
or, if unrated, of comparable quality as determined by IAI. In addition, under
these circumstances, Midcap Growth Fund and Emerging Growth Fund may temporarily
invest without limit in common stocks of larger, more established companies.
Being invested in these securities may prevent a Fund from achieving its
investment objective.

PORTFOLIO TURNOVER

Fund managers may trade portfolio securities frequently, resulting, from time to
time, in an annual portfolio turnover rate of over 100%. Trading of securities
may produce capital gains, which are taxable to shareholders when distributed.
Active trading may also increase the amount of commissions or mark-ups to
broker-dealers that a Fund pays when it buys and sells securities, which could
decrease Fund performance. The "Financial Highlights" section of this prospectus
shows each Fund's historical portfolio turnover rates.

RISKS

In addition to the principal risks discussed in the Fund Summaries section, the
Funds also are subject to the following risks:

* MANAGER RISk. IAI manages the Funds 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, the Fund may fail to
achieve its stated objectives.

* INFLATION RISK. Even if the principal value of your investment in a Fund
remains constant or increases, its real value may be less in the future because
of inflation. Thus, as inflation occurs, the purchasing power of your Fund
shares may decline, even if their value in dollars increases.

* RISKS OF FOREIGN SECURITIES. Although none of the Funds does so as a principal
investment strategy, each Fund may invest in securities of foreign issuers which
are either listed on a United States stock exchange or represented by American
Depositary Receipts. Securities of foreign issuers, even when dollar-denominated
and publicly traded in the United States, may involve risks not associated with
the securities of domestic issuers. The values of the securities could be
adversely affected by currency fluctuations. In addition, for certain foreign
countries, political or

32
<PAGE>

social instability or diplomatic developments could adversely affect the
securities. There is also the risk of loss due to governmental actions such as a
change in tax statutes or the modification of individual property rights. In
addition, individual foreign economies may differ favorably or unfavorably from
the U.S. economy.

* YEAR 2000 ISSUES. Like all financial service providers, the Funds' investment
adviser, transfer agent, administrator and other third party service providers
utilize systems that may be affected by year 2000 transition issues and other
data related issues. These service providers of the Funds depend on the smooth
functioning of their computer systems. Many computer software systems in use
today cannot distinguish the year 2000 from the year 1900 because of the way
dates are encoded and calculated. That failure could have a negative impact on
handling securities trades, pricing and account services. IAI has been actively
working on necessary changes to its computer systems to deal with the year 2000
and expects that its systems will be adapted in time for that event, although
there cannot be assurance of success. Furthermore, the Funds' service providers
have advised the Funds that they have been actively working on necessary changes
to their computer systems to prepare for the year 2000. However, there can be no
assurance of success.

IAI is working with third parties to assess the adequacy of their compliance
efforts and is developing contingency plans intended to assure that third-party
noncompliance will not materially affect IAI's operations.

Companies, organizations, governmental entities and markets in which the Funds
invest will be affected by the year 2000 issue, but at this time the Funds
cannot predict the degree of impact. To the extent the effect is negative, the
Funds' returns could be adversely affected.

33
<PAGE>

FINANCIAL HIGHLIGHTS

The tables that follow present performance information about the Funds. This
information is intended to help you understand each Fund's financial performance
for the past five years or, if shorter, the period of the Fund's operations.
Some of this information reflects financial results for a single Fund share
outstanding for the entire period. The total returns in the table represent the
rate that you would have earned or lost on an investment in a Fund, assuming you
reinvested all of your dividends and distributions. This information has been
audited by KPMG LLP, independent auditors, whose report, along with the Funds'
financial statements, is included in the Funds' annual report, which is
available upon request.

IAI CAPITAL APPRECIATION FUND

<TABLE>
<CAPTION>
Period from
Years ended March 31, February 1,
---------------------------------------- 1996+ to
March 31,
1999 1998 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 17.96 $ 13.49 $ 11.24 $ 10.00
--------- --------- --------- ---------
OPERATIONS
Net investment income (loss) (0.19) (0.16) (0.09) --
Net realized and unrealized gains (losses) (3.02) 6.77 2.79 1.24
--------- --------- --------- ---------
TOTAL FROM OPERATIONS (3.21) 6.61 2.70 1.24
--------- --------- --------- ---------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gains (1.81) (2.14) (0.41) --
Tax return of capital -- -- (0.04) --
--------- --------- --------- ---------
TOTAL DISTRIBUTIONS (1.81) (2.14) (0.45) --
--------- --------- --------- ---------
NET ASSET VALUE
End of period $ 12.94 $ 17.96 $ 13.49 $ 11.24
========= ========= ========= =========
Total investment return* (19.11%) 52.46% 23.68% 12.40%
Net assets at end of period (000s omitted) $ 38,235 $ 65,955 $ 44,230 $ 9,411

RATIOS
Expenses to average net assets (including
interest expense)** 1.41% 1.43% 1.26% 1.25%***
Expenses to average net assets (excluding
interest expense)** 1.40% 1.40% 1.25% 1.25%***
Net investment income (loss) to average net (1.08%) (0.95%) (0.80%) 0.23%***
assets**
Portfolio turnover rate (excluding short-term
securities) 51.4% 75.6% 132.5% 1.2%
</TABLE>

- ---------------------------
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of all distributions at
net asset value.
** The Fund's adviser voluntarily waived $54,841 and $827 in expenses for the
year ended March 31, 1997 and the period ended March 31, 1996,
respectively. If the Fund had been charged these expenses, the ratio of
expenses to average daily net assets would have been 1.40% and 1.40%,
respectively, and the ratio of net investment income to average daily net
assets would have been (.95%) and .08%, respectively.
*** Annualized.
+ Commencement of operations.

34
<PAGE>

IAI EMERGING GROWTH FUND

<TABLE>
<CAPTION>
Years ended March 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 18.11 $ 15.85 $ 24.08 $ 15.83 $ 15.20
-------- -------- -------- -------- --------
OPERATIONS
Net investment income (loss) (0.15)+ (0.18)+ (0.20) (0.09) (0.07)
Net realized and unrealized gains (losses) 0.36 5.07 (4.52) 8.77 1.42
-------- -------- -------- -------- --------
TOTAL FROM OPERATIONS 0.21 4.89 (4.72) 8.68 1.35
-------- -------- -------- -------- --------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gains (5.01) (2.63) (3.51) (0.43) (0.72)
-------- -------- -------- -------- --------
TOTAL DISTRIBUTIONS (5.01) (2.63) (3.51) (0.43) (0.72)
-------- -------- -------- -------- --------
NET ASSET VALUE
End of period $ 13.31 $ 18.11 $ 15.85 $ 24.08 $ 15.83
======== ======== ======== ======== ========
Total investment return* 3.56% 33.37% (22.97%) 55.20% 10.23%
Net assets at end of period (000s omitted) $ 59,776 $161,912 $387,105 $653,888 $342,874

RATIOS
Expenses to average net assets
(including interest expense) 1.29% 1.25% 1.20% 1.24% 1.25%
Expenses to average net assets
(excluding interest expense) 1.25% 1.24% 1.19% 1.24% 1.25%
Net investment income (loss) to average
net assets (1.00%) (0.98%) (0.75%) (0.52%) (0.54%)
Portfolio turnover rate (excluding short-
term securities) 46.7% 41.0% 49.5% 62.8% 58.1%
</TABLE>

35
<PAGE>

IAI GROWTH FUND

<TABLE>
<CAPTION>
Period from Period from
Years ended March 31, Aug. 1, 1994 Aug. 6,
------------------------------------------------------ to March 31, 1993*** to
1999 1998 1997 1996 1995+ July 31, 1994
--------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 12.17 $ 9.92 $ 11.89 $ 10.95 $ 9.87 $ 10.00
--------- --------- --------- --------- --------- ---------
OPERATIONS
Net investment income
(loss) (0.05) -- (0.03) -- 0.04 0.01
Net realized and un-
realized gains (losses) 1.73 3.59 1.02 1.93 1.07 (0.13)
--------- --------- --------- --------- --------- ---------
TOTAL FROM OPERATIONS 1.68 3.59 0.99 1.93 1.11 (0.12)
--------- --------- --------- --------- --------- ---------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income -- -- -- (0.03) (0.03) (0.01)
Net realized gains (1.66) (1.34) (2.96) (0.96) -- --
--------- --------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (1.66) (1.34) (2.96) (0.99) (0.03) (0.01)
--------- --------- --------- --------- --------- ---------
NET ASSET VALUE
End of period $ 12.19 $ 12.17 $ 9.92 $ 11.89 $ 10.95 $ 9.87
========= ========= ========= ========= ========= =========
Total investment return* 14.94% 38.96% 8.42% 18.01% 11.24% (1.21%)
Net assets at end of period
(000s omitted) $ 14,355 $ 14,775 $ 11,747 $ 17,079 $ 26,794 $ 14,408

RATIOS
Expenses to average
net assets
(including interest 1.27% 1.25% 1.27% 1.25% 1.25%** 1.25%**
expense)
Expenses to average
net assets
(excluding interest 1.25% 1.25% 1.25% 1.25% 1.25%** 1.25%**
expense)
Net investment income
(loss) to average
net assets (0.36%) (0.02%) (0.25%) (0.04%) 0.61%** 0.16%**
Portfolio turnover rate
(excluding short-
term securities) 109.7% 87.3% 134.2% 92.8% 68.7% 105.4%
</TABLE>

- ----------------------------
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of all distributions at
net asset value.
** Annualized.
*** Commencement of operations.
+ Reflects fiscal year end change from July 31 to March 31.

36
<PAGE>

IAI GROWTH AND INCOME FUND

<TABLE>
<CAPTION>
Years ended March 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 19.72 $ 14.83 $ 15.30 $ 14.32 $ 13.91
-------- -------- -------- -------- --------
OPERATIONS
Net investment income 0.02+ 0.04+ 0.10 0.10 0.12
Net realized and unrealized gains 0.19 5.75 1.88 2.86 1.04
-------- -------- -------- -------- --------
TOTAL FROM OPERATIONS 0.21 5.79 1.98 2.96 1.16
-------- -------- -------- -------- --------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.02) -- (0.10) (0.13) (0.10)
Excess distribution from net
investment income -- (0.07) (0.10) -- --
Net realized gains (5.36) (0.83) (2.25) (1.85) (0.65)
-------- -------- -------- -------- --------
TOTAL DISTRIBUTIONS (5.38) (0.90) (2.45) (1.98) (0.75)
-------- -------- -------- -------- --------
NET ASSET VALUE
End of period $ 14.55 $ 19.72 $ 14.83 $ 15.30 $ 14.32
======== ======== ======== ======== ========
Total investment return* 1.52% 40.06% 13.34% 21.51% 8.92%
Net assets at end of period (000s omitted) $ 52,220 $ 96,754 $ 90,741 $ 84,662 $101,256

RATIOS
Expenses to average net assets
(including interest expense) 1.26% 1.27% 1.26% 1.25% 1.25%
Expenses to average net assets
(excluding interest expense) 1.25% 1.25% 1.25% 1.25% 1.25%
Net investment income to average
net assets 0.13% 0.21% 0.51% 0.62% 0.80%
Portfolio turnover rate (excluding short-
term securities) 66.1% 23.2% 51.2% 89.1% 79.1%
</TABLE>

- -------------------------
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of all distributions at
net asset value.
+ Calculated using average shares outstanding during the year.

37
<PAGE>

IAI MIDCAP GROWTH FUND

<TABLE>
<CAPTION>
Years ended March 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 15.91 $ 16.68 $ 17.70 $ 15.35 $ 13.67
-------- -------- -------- -------- --------
OPERATIONS
Net investment loss (0.12)+ (0.10) (0.08) (0.05) (0.04)
Net realized and unrealized gains 2.53 3.34 0.68 3.50 2.35
-------- -------- -------- -------- --------
TOTAL FROM OPERATIONS 2.41 3.24 0.60 3.45 2.31
-------- -------- -------- -------- --------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gains (4.00) (4.01) (1.62) (1.10) (0.63)
-------- -------- -------- -------- --------
TOTAL DISTRIBUTIONS (4.00) (4.01) (1.62) (1.10) (0.63)
-------- -------- -------- -------- --------
NET ASSET VALUE
End of period $ 14.32 $ 15.91 $ 16.68 $ 17.70 $ 15.35
======== ======== ======== ======== ========
Total investment return* 18.31% 22.21% 3.12% 23.51% 17.63%
Net assets at end of period (000s omitted) $ 39,431 $ 82,605 $128,259 $122,375 $ 88,075

RATIOS
Expenses to average net assets
(including interest expense) 1.34% 1.26% 1.25% 1.25% 1.25%
Expenses to average net assets
(excluding interest expense) 1.25% 1.25% 1.25% 1.25% 1.25%
Net investment loss to average
net assets (0.82%) (0.48%) (0.47%) (0.36%) (0.33%)
Portfolio turnover rate (excluding short-
term securities) 107.2% 106.8% 72.4% 29.8% 51.3%
</TABLE>

- ------------------------
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of all distributions at
net asset value.
+ Calculated using average shares outstanding during the year.

38
<PAGE>

IAI REGIONAL FUND

<TABLE>
<CAPTION>
Years ended March 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 26.35 $ 22.59 $ 24.57 $ 21.56 $ 20.94
--------- --------- --------- --------- ---------
OPERATIONS
Net investment income (loss) (0.06) (0.02) 0.03 0.14 0.17
Net realized and unrealized gains (losses) (1.81) 6.79 2.08 5.77 1.84
--------- --------- --------- --------- ---------
TOTAL FROM OPERATIONS (1.87) 6.77 2.11 5.91 2.01
--------- --------- --------- --------- ---------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- -- (0.04) (0.18) (0.20)
Excess distribution from net
investment income -- -- (0.06) (0.02) --
Net realized gains (3.23) (3.01) (3.99) (2.70) (1.19)
--------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (3.23) (3.01) (4.09) (2.90) (1.39)
--------- --------- --------- --------- ---------
NET ASSET VALUE
End of period $ 21.25 $ 26.35 $ 22.59 $ 24.57 $ 21.56
========= ========= ========= ========= =========
Total investment return* (7.74%) 31.55% 8.65% 28.62% 10.35%
Net assets at end of period (000s omitted) $ 275,678 $ 509,556 $ 498,178 $ 575,156 $ 523,364

RATIOS
Expenses to average net assets
(including interest expense) 1.25% 1.22% 1.21% 1.25% 1.23%
Expenses to average net assets
(excluding interest expense) 1.23% 1.22% 1.21% 1.25% 1.23%
Net investment income (loss) to average
net assets (0.21%) (0.05%) 0.14% 0.58% 0.74%
Portfolio turnover rate (excluding short-
term securities) 53.2% 46.0% 61.1% 89.7% 150.0%
</TABLE>

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

39
<PAGE>

IAI VALUE FUND

<TABLE>
<CAPTION>
Years ended March 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 12.71 $ 11.66 $ 12.42 $ 11.17 $ 11.63
-------- -------- -------- -------- --------
OPERATIONS
Net investment income (loss) (0.09)+ (0.03) 0.09 0.08 0.03
Net realized and unrealized gains 1.07 3.79 0.68 2.19 0.38
-------- -------- -------- -------- --------
TOTAL FROM OPERATIONS 0.98 3.76 0.77 2.27 0.41
-------- -------- -------- -------- --------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- (0.04) (0.12) (0.01) (0.03)
Excess distribution from net
investment income -- (0.07) -- -- --
Net realized gains (1.49) (2.60) (1.41) (1.01) (0.84)
-------- -------- -------- -------- --------
TOTAL DISTRIBUTIONS (1.49) (2.71) (1.53) (1.02) (0.87)
-------- -------- -------- -------- --------
NET ASSET VALUE
End of period $ 12.20 $ 12.71 $ 11.66 $ 12.42 $ 11.17
======== ======== ======== ======== ========
Total investment return* 8.47% 34.21% 5.85% 21.07% 3.88%
Net assets at end of period (000s omitted) $ 13,683 $ 26,739 $ 29,439 $ 42,009 $ 40,601
RATIOS
Expenses to average net assets
(including interest expense) 1.36%** 1.28% 1.25% 1.25% 1.25%
Expenses to average net assets
(excluding interest expense) 1.33%** 1.25% 1.25% 1.25% 1.25%
Net investment income (loss) to average
net assets (0.73%) (0.24%) 0.61% 0.65% 0.31%
Portfolio turnover rate (excluding short-
term securities) 8.2% 27.0% 61.3% 73.4% 102.1%
</TABLE>

- ---------------------------
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of all distributions at
net asset value.
** This ratio includes an 8 basis point expense approved by the Board of
Directors related to an independent valuation of a restricted security.
+ Calculated using average shares outstanding during the year.

40
<PAGE>

FOR MORE INFORMATION ABOUT THE IAI STOCK FUNDS

The Funds' statement of additional information ("SAI") and annual and
semi-annual reports to shareholders include additional information about the
Funds. The SAI provides more details about the Funds and their policies. A
current SAI is on file with the Securities and Exchange Commission (SEC) and is
incorporated into this prospectus by reference (which means that it is legally
considered part of this prospectus). Additional information about the Funds'
investments is available in the Funds' annual and semiannual reports to
shareholders. In the Funds' annual reports, you will find a discussion of the
market conditions and investment strategies that significantly affected each
Fund's performance during its last fiscal year. You may obtain free copies of
these materials by calling the Funds toll free at 1-800-945-3863.

You may also obtain copies by visiting the SEC's Public Reference Room in
Washington, DC or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009. For more information, call
1/800-SEC-0330.

Information about the Funds is also available on the Internet. Text only
versions of Fund documents can be viewed online or downloaded from the SEC's
Internet site at http://www.sec.gov.

SEC file numbers: 811-02147; 811-02996; 811-03004; 811-03767

<PAGE>

IAI MUTUAL FUNDS

IAI BALANCED FUND

PROSPECTUS August 1, 1999

<PAGE>

TABLE OF CONTENTS

Page
----

Fund Summary................................................................ 3
Objective.............................................................. 3
Principal Investment Strategies........................................ 3
Principal Risks........................................................ 4
Fund Performance....................................................... 5
Fees and Expenses...................................................... 6

Buying and Selling Shares................................................... 7
How to Buy Shares...................................................... 7
How to Sell Shares..................................................... 9
Exchange Privilege..................................................... 11
Authorized Telephone Trading........................................... 12
Statements and Confirmations........................................... 12
Shareholder Reports.................................................... 12

Dividend and Capital Gains Distributions.................................... 12

Taxes....................................................................... 13
Taxes on Distributions................................................. 13
Taxes on Transactions.................................................. 13

Fund Management............................................................. 14
Investment Adviser..................................................... 14
Portfolio Managers..................................................... 14

More Information on Investment Strategies and Risks......................... 14
Investment Strategies.................................................. 14
Effective Duration..................................................... 16
Temporary Defensive Investments........................................ 16
Portfolio Turnover..................................................... 16
Principal Risks........................................................ 16
Other Risks............................................................ 18

Financial Highlights........................................................ 20

2
<PAGE>

FUND SUMMARY

This section briefly describes the objective, principal investment strategies
and principal risks of IAI Balanced Fund ("the Fund"). It also provides you with
information on the Fund's performance and expenses. For further information on
the Fund, please read the section entitled "More Information on Investment
Strategies and Risks."

OBJECTIVE

The Fund's investment objective is to maximize total return.

PRINCIPAL INVESTMENT STRATEGIES

The Fund invests in a broadly diversified portfolio of stocks and debt
securities. The mix of securities will change based on existing and anticipated
market conditions. Although the Fund is not required to keep any specified
percentage of its assets in stocks or debt securities, generally between 50% and
70% of the Fund's assets will be invested in stocks.

The Fund's investments in common stocks are primarily in larger capitalization
companies (market capitalizations of at least $10 billion at the time of
purchase) that cover a broad range of industries. The Fund's investment adviser
focuses on companies that it believes have solid competitive advantages and high
financial quality at attractive fundamental valuations.

The Fund may invest in all types of debt securities. It will invest primarily in
investment grade securities, but may invest up to 10% of its total assets in
non-investment grade securities, or "junk bonds." However, the Fund will not
invest in junk bonds rated lower than B by Moody's Investors Service, Inc. or
Standard & Poor's Rating Services or, if unrated, judged to be of comparable
quality by the Fund's adviser.

The Fund's adviser employs a "top-down" approach in selecting debt securities
for the Fund. First, the adviser determines its economic outlook and the
direction in which it expects interest rates to move. Based on these factors,
the adviser adjusts the maturities of securities held by the Fund and determines
the Fund's sector allocation. Selections of individual securities that fall
within the appropriate parameters are based on the adviser's analysis of the
individual security and its relative value compared to other securities in the
marketplace. The Fund's adviser anticipates that the average effective duration
for the debt portion of the Fund will range from 3.5 to 7.5 years. This range
may change, however, due to market conditions and other economic factors. The
longer the Fund's effective duration, the more its net asset value can be
expected to change in response to interest rate changes. See "Principal Risks --
Interest Rate Risk."

The Fund may invest in both domestic and foreign equity and debt securities. The
Fund limits its investment in foreign securities denominated in foreign
currencies and not publicly traded in the United States to 25% of total assets.

The Fund may enter into futures contracts and options on those contracts, may
invest in options on securities and financial indexes, and may enter into
foreign currency transactions such as currency forward contracts. The Fund
intends to use these derivative instruments primarily for hedging purposes,
although it may use them for non-hedging purposes to a limited extent. To
generate additional income, the Fund may invest up to 10% of its net assets in
mortgage dollar roll transactions.

The Fund's adviser regularly reviews the allocation of Fund assets among stocks
and long-and short-term debt instruments. Because the Fund seeks to maximize
total return over the long-term, the adviser will not try to pinpoint the
precise moment when major reallocations are warranted. Rather, reallocations
among asset classes will be made gradually over time to favor asset classes
that, in the adviser's judgment, provide the most favorable total return
outlook. Normally, a single reallocation decision will not involve more than 10%
of the Fund's total assets.

PRINCIPAL RISKS

The principal risks that could adversely affect the value of the Fund's shares
and the total return on your investment include:

3
<PAGE>

* RISKS OF COMMON STOCKS. Common stocks may decline significantly in
price over short or extended periods of time. Price declines may occur
as a result of any of the following:

* INTEREST RATE RISK. Prices of the Fund's debt securities will
generally fall when interest rates rise. One measure of interest rate
risk is effective duration, explained under "More Information on
Investment Strategies and Risks -- Effective Duration." The longer the
Fund's effective duration, the greater its interest rate risk.

* INCOME RISK. The Fund's income could decline due to falling market
interest rates.

* CREDIT RISK. The Fund is subject to the risk that the issuers of debt
securities it holds will not make timely payments of interest or
principal on the securities. Securities rated the lowest investment
grade have speculative characteristics. In adverse economic or other
circumstances, issuers of these lower rated securities are more likely
to have difficulty making principal and interest payments than issuers
of higher rated securities. Non-investment grade securities are subject
to additional risk. See "Risks of Non-Investment Grade Securities"
below.

* RISKS OF NON-INVESTMENT GRADE SECURITIES. Non-investment grade
securities, or "junk bonds," generally have more volatile prices and
carry more risk to principal than investment grade securities.

* CALL RISK. The Fund is subject to the risk that, during periods of
falling interest rates, an issuer of debt securities will "call" -- or
repay -- its high-yielding bonds before their maturity date. The Fund
would then be forced to invest the unanticipated proceeds at lower
interest rates, resulting in a decline in the Fund's income.

* RISKS OF MORTGAGE- AND ASSET-BACKED SECURITIES. Falling interest
rates could cause faster than expected prepayments of the obligations
underlying the Fund's mortgage- and asset-backed securities. These
prepayments pass through to the Fund, which must reinvest them at a
time when interest rates on new investments are falling, reducing the
Fund's income. On the other hand, rising interest rates could cause
prepayments of the obligations to slow, which would lengthen the
duration of the Fund's mortgage- and asset-backed securities and cause
their prices to decline.

* RISKS OF FOREIGN SECURITIES. Investing in foreign securities
typically involves risks not associated with U.S. investing. Risks of
foreign investing include the risk that the Fund may experience a
decline in net asset value resulting from changes in exchange rates
between the U.S. dollar and foreign currencies, the risk of adverse
political and economic developments, and the possibility of
expropriation, nationalization or confiscatory taxation or limitations
on the removal of Fund assets.

* RISKS OF DERIVATIVE INSTRUMENTS. The use of derivative instruments
exposes the Fund to additional risks and transaction costs. Successful
use of these instruments depends on the adviser's ability to correctly
forecast the direction of market movements. The Fund's performance
could be worse than if the Fund had not used these instruments if the
adviser's judgment proves incorrect. In addition, even if the adviser's
forecast is

4
<PAGE>

correct, there may be an imperfect correlation between the price of
derivative instruments and movements in the prices of the securities,
interest rates or currencies being hedged.

* RISKS OF DOLLAR ROLL TRANSACTIONS. The use of mortgage dollar rolls
could increase the volatility of the Fund's share price. It could also
diminish the Fund's investment performance if the adviser does not
predict mortgage prepayments and interest rates correctly.

You can lose money by investing in the Fund. An investment in the Fund is not a
deposit of any bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.

FUND PERFORMANCE

The bar chart and table below provide you with information on the Fund's
volatility and performance. The bar chart shows how the Fund's performance has
varied from year to year. This information provides some indication of the risks
of investing in the Fund by showing changes in performance from year to year.
The table compares the Fund's average annual returns for 1 and 5 years and for
the period since the Fund's inception to that of a broad measure of market
performance. The Fund's past performance is not necessarily an indication of how
it will perform in the future.

ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR*

[BAR CHART]

1993 4.99%
1994 -1.45%
1995 18.56%
1996 14.75%
1997 25.70%
1998 17.66%

- --------------
* The Fund's return for the period from January 1, 1999 through June 30, 1999
was 3.16%.

Best Quarter: Quarter ended June 30, 1997 14.92%
Worst Quarter: Quarter ended September 30, 1998 (11.97%)

5
<PAGE>

AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98

SINCE INCEPTION
1 YEAR 5 YEARS (4/10/92)

BALANCED FUND 17.66% 14.67% 12.93%
STANDARD & POOR'S 500 COMPOSITE INDEX* 28.57% 24.06% 20.76%***
LEHMAN GOVERNMENT/CORPORATE BOND INDEX** 9.47% 7.30% 8.41%***

- ------------------------
* An unmanaged index of 500 common stocks chosen to reflect the industries of
the U.S. economy.
** An unmanaged index of Treasury securities, other securities issued or
guaranteed by the U.S. government or its agencies or instrumentalities, and
investment grade corporate obligations.
*** For the period from April 1, 1992 through December 31, 1998.

FEES AND EXPENSES

SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED
FROM FUND ASSETS)(as a % of average net assets)
Management Fees 1.25%
Distribution and Service (12b-1) Fees None
Other Expenses* 0.02%
Total Annual Fund Operating Expenses 1.27%

- --------------------------
* Expense approved by the Board of Directors related to an independent valuation
of a restricted security.

EXAMPLE

1 year $ 129
3 years $ 403
5 years $ 697
10 years $ 1,534

6
<PAGE>

BUYING AND SELLING SHARES

HOW TO BUY SHARES

You may purchase Fund shares either directly through the Fund or through certain
securities dealers. These dealers have the responsibility to promptly transmit
orders and may charge a processing fee.

MINIMUM INVESTMENTS

The Fund is a member of the IAI Family of Funds, a family of mutual funds
advised by Investment Advisers, Inc. ("IAI"). The minimum initial investment to
establish an account with the IAI Family of Funds is $5,000 for a retail account
and $2,000 for an IRA account. In each case, your initial investment may be
allocated in any way you wish among the Fund and other funds in the IAI Family
of Funds, so long as no less than $1,000 is allocated to any one fund. Once you
have met the account minimum, subsequent purchases can be made for as little as
$100.

DETERMINING YOUR PURCHASE PRICE

Your purchase price will be equal to the Fund's net asset value ("NAV") per
share next calculated after you place your order in proper form. To make sure
that your order is in proper form, please follow the directions for purchasing
shares given below. No sales load or commission is charged when you purchase
shares. NAV is determined as of the close of regular trading on the New York
Stock Exchange (normally 3 p.m., central time) each day the exchange is open.

The Fund's NAV per share 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 values
investments for which market quotations are readily available at market value.
It values short-term investments maturing within 60 days at amortized cost,
which approximates market value. It values all other investments and assets at
their fair value.

The Fund translates prices for its investments quoted in foreign currencies into
U.S. dollars at current exchange rates. As a result, changes in the value of
those currencies in relation to the U.S. dollar will affect the Fund's NAV.
Because foreign markets may be open at different times than the New York Stock
Exchange, the value of the Fund's shares may change on days when shareholders
are not able to buy or sell them. If events materially affecting the values of
the Fund's foreign investments occur between the close of foreign markets and
the close of regular trading on the New York Stock Exchange, these investments
will be valued at their fair value by the Fund's Board of Directors or its
delegates.

INVESTING BY MAIL

To invest by mail, send a completed, signed application and a check payable to
"IAI Funds" to the one of following addresses:

Third party checks will not be accepted for initial account investments. After
the Fund receives your completed purchase order, your account will be credited
with the number of full and fractional shares that can be purchased at the next
determined net asset value.

For assistance in completing the application, please contact IAI Shareholder
Services at 1-800-945-3863.

7
<PAGE>

INVESTING BY WIRE

If you have an account with a commercial bank that is a member of the Federal
Reserve System, you may purchase shares by requesting your bank to wire funds
to:

Firstar Bank Milwaukee, N.A.
777 E. Wisconsin Avenue
Milwaukee, WI 53202
ABA Number: 075000022
Credit: Firstar Mutual Fund Services, LLC
Account # 112-952-137
For further credit to IAI Mutual Funds
(Shareholder account #, shareholder name)

If you are purchasing by wire for a new account, you must do the following
before you wire funds:

* call IAI Shareholder Services at 1-800-945-3863 to advise them
of your investment;

* obtain instructions and an application form; and

* complete the application and send it to:

IAI Mutual Funds
c/o Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, WI 53201-0701

Your completed application must be received by the Fund before your wire is
sent.

Before initiating any subsequent wires, please call IAI Shareholder Services and
advise them of your name, account number and the name of the bank transmitting
the federal funds.

Wire orders will be accepted only on days when your bank, the Fund, the Fund's
transfer agent and Firstar Bank Milwaukee, N.A. are open for business. A wired
purchase will be considered made when the wired amount is received and the
purchase is accepted by the Fund. The Fund must receive payment before the close
of business for the purchase to be credited to your account on that day.
Otherwise, your purchase will be processed the next business day. The Fund may
reject your wire order if it does not contain the required information stated
above. If the Fund rejects your wire order, your money will be returned
promptly, less any costs incurred by the Fund or the Fund's transfer agent in
rejecting the order. You must pay any charges assessed by your bank for the wire
service. Any delays that may occur in wiring federal funds, including delays in
processing by the banks, are not the responsibility of the Fund or the Fund's
transfer agent.

MAKING ADDITIONAL INVESTMENTS

RETIREMENT PLANS

The Fund offers Individual Retirement Accounts (IRAs) and Roth IRAs. For further
information about such accounts, please call IAI Shareholder Services at
1-800-945-3863.

8
<PAGE>

AUTOMATIC INVESTMENT PLAN

If you wish to change or terminate your participation in the Automatic
Investment Plan you must provide the Fund with written notice. Your instructions
must be received by 10 days prior to the date the change or termination is to
take place.

HOW TO SELL SHARES

You may redeem your shares on any day the New York Stock Exchange is open. The
exchange is closed on weekends, national holidays and Good Friday. Your
redemption price will be the net asset value of your shares next determined
after your redemption request is received in proper form by the Fund. To make
sure that your request is in proper form, please follow the directions for
selling shares given below.

BY MAIL

To redeem by mail, send a written request to the Fund at one of the following
addresses:

Your request should include the following information:

* name of the Fund,

* account number,

* dollar amount or number of shares to be redeemed,

* name on the account, and,

* signatures of all registered account owners.

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<PAGE>

Signatures on your written request must be guaranteed if :

* you would like the proceeds from the sale to be paid to
someone other than the shareholder of record, or

* you have changed your address over the telephone within the
last 15 calendar days.

If Fund 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 redemption request.

To redeem money from your IRA account, an IRA Distribution Form must be
completed and returned to IAI. To receive a copy of the form, please call IAI
Shareholder Services at 1-800-945-3863.

BY PHONE

You may redeem shares by phone, subject to the following conditions:

* You must have completed the Telephone Options section of the
account application.

* Telephonic redemptions are limited to $50,000.

* Redemption proceeds must be made payable to the owner(s) of
record and delivered to the address of record.

* Telephone redemptions are not permitted for IRAs.

For assistance, please contact IAI Shareholder Services at 1-800-945-3863.

PAYMENT OF REDEMPTION PROCEEDS

BY WIRE. When you redeem by telephone, you may have the proceeds wired to your
bank account if you provided the required information at the time you opened
your account. Wire redemption requests will only be processed on days your bank,
the Fund, the Fund's transfer agent and Firstar Bank Milwaukee, N.A. are open
for business. If you choose to have your redemption proceeds wired to your bank,
please note the following:

* A minimum amount of $1,000 is required to wire redemption
proceeds.

* Proceeds will be wired on the next business day after your
redemption request.

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

IAI Mutual Funds
c/o Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, WI 53201-0701

10
<PAGE>

BY CHECK. Normally the Fund will mail payment for shares redeemed on the
business day following the receipt of your redemption request, although payment
may be made as late as seven days after your request. However, the Fund will not
send redemption proceeds until checks (including certified checks, cashiers
checks or automatic investment credits) received in payment for shares have
cleared. This may take up to 15 days from the date of purchase.

INVOLUNTARY REDEMPTIONS

If your account balance falls below $500 as a result of selling or exchanging
shares, the Fund has the right to redeem your shares and send you the proceeds.
Before redeeming your account, the Fund will mail you a notice of its intention
to redeem, which will give you an opportunity to make an additional investment.
If you do not increase the value of your account to at least $500 within six
months of the date the notice was mailed, the Fund may redeem your account.

SYSTEMATIC CASH WITHDRAWAL PLAN

The Fund has a Systematic Cash Withdrawal Plan under which you may automatically
redeem a fixed dollar amount of Fund shares on either a monthly or quarterly
basis. Under the Systematic Cash Withdrawal Plan:

* Automatic redemptions must be for $100 or more.

* Shares will be redeemed at the net asset value determined on
the day of redemption (or the next business day).

* All income dividends and capital gains distributions must be
reinvested in Fund shares.

* Confirmations of all transactions and distributions will be
sent to you quarterly.

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

EXCHANGE PRIVILEGE

You may exchange your Fund shares for shares of another fund in the IAI Family
of Funds if you satisfy that fund's purchase requirements.

The Fund generally limits exchanges to four per calendar year. This limit may be
modified for certain retirement plan accounts and for those participating in the
Automatic Exchange Plan described below. The Fund may change or cancel its
exchange privilege at any time.

You may exchange shares by notifying the Fund in writing or, if you have
authorized the Fund to accept telephone instructions, by telephone. See "How to
Sell Shares -- By Telephone."

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<PAGE>

AUTOMATIC EXCHANGE PLAN

You may arrange to make regular exchanges of $100 or more between any of the
funds in the IAI Family of Funds on a monthly basis. Please note the following
about automatic exchanges:

* If you wish to participate in the Plan, you must complete the
Automatic Exchange Plan portion of your IAI Mutual Fund
application.

* Exchanges will take place at the net asset value determined on
the day of the exchange (or the next business day).

* If you participate in the Automatic Exchange Plan you will
receive confirmations of all transactions and dividends.

* You may not close an account through the Automatic Exchange
Plan.

AUTHORIZED TELEPHONE TRADING

The Fund and its agents will not be responsible for any losses that may result
from acting on telephone instructions that they reasonably believe to be
genuine. The Fund will follow reasonable procedures to confirm that instructions
received by telephone are genuine. These procedures include tape recording all
redemption and exchange requests.

STATEMENTS AND CONFIRMATIONS

Whenever you buy or sell shares of the Fund, IAI will send you a confirmation
statement showing how many shares you bought or sold and at what price. You will
also receive a cumulative account statement quarterly and a transaction
statement annually. Please review carefully all of the information relating to
transactions on your statements and confirmations to ensure that your
instructions were acted on properly. Please notify the Fund immediately in
writing if there is an error. If you do not provide the Fund with notice of an
error within 60 days of non-automatic transactions, or within 60 days of the
date of your consolidated quarterly statement in the case of automatic
transactions, you will be deemed to have ratified the transaction.

SHAREHOLDER REPORTS

Shareholder reports will be sent to you semi-annually. These reports contain
financial information about the Fund, including a list of investment securities
held. To reduce the volume of mail you receive, only one copy of Fund reports
may be mailed to your household (same surname and address). Please call IAI
Shareholder Services at 1-800-945-3863 if you wish to receive additional
shareholder reports.

DIVIDEND AND CAPITAL GAINS DISTRIBUTIONS

The Fund pays dividends from net investment income semi-annually and distributes
realized capital gains, if any, annually.

When you open an account, you should specify on your application how you want to
receive your distributions. The Fund offers three options:

12
<PAGE>

* FULL REINVESTMENT -- your dividend and capital gain
distributions are 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; or

* CASH -- your income dividends and capital gain distributions
will be paid in cash.

If you do not select an option when you open your account, the Fund will
automatically reinvest all distributions in additional Fund shares.

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

Prior to purchasing shares of the Fund, you should consider the impact of
dividend or capital gains distributions which are expected to be announced, or
which have been announced but not paid. If you purchase shares shortly before
the record date for such a distribution, you will pay the full price for the
shares and then receive a portion of that price back shortly thereafter as a
taxable distribution.

TAXES

Some of the common tax consequences of investing in the Fund are discussed
below. More information about taxes is in the Statement of Additional
Information. Because everyone's tax situation is unique, be sure to consult with
your tax adviser.

TAXES ON DISTRIBUTIONS

The Fund pays its shareholders distributions from its net investment income and
any net capital gains that it has realized. For most investors, these
distributions will be taxable, whether paid in cash or reinvested (unless your
investment is in an IRA or other tax advantaged account).

Distributions paid from the Fund's net investment income and short-term capital
gains are taxable as ordinary income. Distributions paid from the Fund's
long-term capital gains are taxable as long-term gains, regardless of how long
you have held your shares.

Information about the tax status of each year's distributions will be mailed
annually.

TAXES ON TRANSACTIONS

13
<PAGE>

FUND MANAGEMENT

INVESTMENT ADVISER

Investment Advisers, Inc. ("IAI") is the Fund's investment adviser. IAI, which
has been in the investment advisory business since 1947, 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.
IAI is located at 601 Second Avenue South, Suite 3600, Minneapolis, Minnesota
55402.

The Fund has entered into a Management Agreement with IAI under which IAI
provides the Fund with investment advisory services and is responsible for
managing the Fund's business affairs, subject to the authority of the Board of
Directors. IAI also is responsible under the Management Agreement for providing
or arranging for the provision of all required administrative, stock transfer,
redemption, dividend disbursing, accounting and shareholder services. IAI may
directly or indirectly pay qualifying broker-dealers, financial institutions and
other entities for providing some of these services to Fund shareholders. The
Management Agreement requires IAI to pay all of the Fund's operating expenses,
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. The Fund pays IAI an annual fee
under the Management Agreement. During its most recent fiscal year, the Fund
paid IAI a management fee equal to 1.25% of the Fund's average daily net assets.

Pursuant to a Subadvisory Agreement, IAI has delegated its investment management
responsibilities with respect to the Fund's investments in securities of foreign
issuers to its affiliate, IAI International Ltd. As an affiliate of IAI, IAI
International receives no compensation under the Subadvisory Agreement.

PORTFOLIO MANAGERS

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
team leads are Larry Hill and Donald Hoelting. Mr. Hill is IAI's Chief Fixed
Income Officer and has served as a fixed income portfolio manager since joining
IAI in 1984. Mr. Hoelting joined IAI in April 1996 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.

Hilary Fane has responsibility for the fund's investments in securities of
foreign issuers. Ms. Fane is IAI International's Chief Investment Officer,
International Equities and a member of its Board of Directors. Ms. Fane has
served as a portfolio manager since joining IAI International in 1985.

MORE INFORMATION ON
INVESTMENT STRATEGIES AND RISKS

INVESTMENT STRATEGIES

The principal investment strategies of the Fund, which are summarized above
under "Fund Summary," are described in more detail below. These are the
strategies that IAI believes are most likely to be important in trying to
achieve the Fund's objective. Of course, there is no guarantee that the Fund
will achieve its objective. Although not considered principal investment
strategies, you should be aware that the Fund may also use strategies and invest
in securities that are not described in this Prospectus, but that are described
in the Statement of Additional Information.

The Fund invests in a broadly diversified portfolio of stocks and debt
instruments. The mix of securities will change based on existing and anticipated
market conditions.

The Fund's investments in common stocks are primarily common stocks of larger
capitalization companies. However, the Fund may also invest in common stocks of
smaller companies and it may invest in early-stage, developing companies, both
directly and through investments in venture capital limited partnerships and
investment funds.

14
<PAGE>

Debt securities in which the Fund invests may include:

* CORPORATE DEBT OBLIGATIONS. These are debt securities such as
bonds, debentures and notes issued by corporations for the
purpose of raising capital by borrowing. These securities
generally represent a promise by the corporation to make
periodic payments of interest and to repay principal on a
specified date.

* U.S. GOVERNMENT SECURITIES. The Fund may invest in U.S.
Treasury securities, and in other securities issued or
guaranteed by the U.S. government or its agencies or
instrumentalities.

* MORTGAGE-BACKED SECURITIES. The Fund may invest in
mortgage-backed securities issued by government and
non-government entities. These securities are secured by and
payable from pools of mortgage loans. The Fund's investments
in mortgage-backed securities may include collateralized
mortgage obligations (CMOs). These are derivative mortgage
securities secured by pools of mortgage loans or other
mortgage-backed securities.

* ASSET-BACKED SECURITIES. Asset-backed securities are bonds or
notes backed by loan paper (such as automobile loans or home
equity loans) or accounts receivable originated by banks,
credit card companies or other providers of credit.

* ZERO COUPON SECURITIES. These securities do not pay interest
currently. They are issued at deep discounts from their face
value and mature at their face value.

* PAYMENT-IN-KIND BONDS. These securities pay interest through
the issuance of additional securities, rather than paying
cash.

* SHORT-TERM DEBT SECURITIES. These investments may include bank
certificates of deposit, bankers' acceptances and commercial
paper.

Debt securities in which the Fund invests will primarily be rated investment
grade at the time of purchase or be unrated and judged by IAI to be of
comparable quality. Investment grade securities are rated within the four
highest grades assigned by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Rating Services ("S&P"). However, the Fund may invest up to
10% of its total assets in non-investment grade securities, or "junk bonds." The
Fund will not invest in junk bonds rated lower than B by Moody's or S&P or, if
unrated, judged to be of comparable quality by IAI. If a security is downgraded
to a rating below B or, if unrated, is no longer of a quality comparable to a
security rated B, as determined by IAI, the Fund may retain the security if IAI
believes it to be in the Fund's best interest. Commercial paper in which the
Fund invests must be rated at least Prime-2 by Moody's or A-2 by S&P or be
issued by companies having an outstanding unsecured debt issue currently rated A
or better by Moody's or S&P.

The Fund may enter into futures contracts on securities, financial indexes and
foreign currencies and options on those contracts, may invest in options on
securities and financial indexes, and may enter into foreign currency
transactions such as currency forward contracts. The Fund intends to use these
derivative instruments primarily to hedge the value of its portfolio against
potential adverse movements in securities prices, foreign currency markets or
interest rates. However, the Fund may also use derivative instruments for
non-hedging purposes such as seeking to increase the Fund's income or otherwise
seeking to enhance return, provided that no more than 5% of the Fund's assets
will be committed to initial margin deposits and option premiums on futures and
options contracts entered into for non-hedging purposes (not including any
options that are in-the-money).

To generate additional income, the Fund may invest up to 10% of its net assets
in mortgage dollar roll transactions. In this type of transaction, the Fund
sells mortgage-backed securities for delivery in the current month while
contracting with the same party to repurchase similar securities at a future
date.

15
<PAGE>

EFFECTIVE DURATION

The Fund anticipates that the average effective duration for the debt portion of
its portfolio will range from 3.5 to 7.5 years. Effective duration, one measure
of interest rate risk, measures how much the value of a security is expected to
change with a given change in interest rates. The longer a security's effective
duration, the more sensitive its price to changes in interest rates. For
example, if interest rates were to increase by one percentage point, the market
value of a bond with an effective duration of five years would decrease by 5%,
with all other factors being constant. Effective duration is based on
assumptions and subject to a number of limitations. It is most useful when
interest rate changes are small, rapid and occur equally in short-term and
long-term securities. In addition, it is difficult to calculate precisely for
bonds with prepayment options, such as mortgage-backed securities, because the
calculation requires assumptions about prepayment rates.

TEMPORARY DEFENSIVE INVESTMENTS

In an attempt to respond to adverse market, economic, political or other
conditions, the Fund may temporarily invest without limit in cash or cash
equivalents (in U.S. dollars or foreign currencies) and short-term securities,
including money market securities. Being invested in these securities may
prevent the Fund from achieving its investment objective.

PORTFOLIO TURNOVER

Fund managers actively trade portfolio securities, resulting in very high
portfolio turnover rates. Trading of securities may produce capital gains, which
are taxable to shareholders when distributed. Active trading may also increase
the amount of commissions or mark-ups to broker-dealers that the Fund pays when
it buys and sells securities, which could decrease Fund performance. The
"Financial Highlights" section of this prospectus shows the Fund's historical
portfolio turnover rates.

PRINCIPAL RISKS

The principal risks of investing in the Fund are described above under "Fund
Summary." More information about some of these risks is presented below.

* INTEREST RATE RISk. The Fund is subject to interest rate risk as a result of
its investments in debt securities. Debt securities will fluctuate in value with
changes in interest rates. In general, debt securities will increase in value
when interest rates fall and decrease in value when interest rates rise.
Longer-term debt securities are generally more sensitive to interest rate
changes. Securities which do not pay interest on a current basis, such as zero
coupon securities, may be highly volatile as interest rates rise or fall.
Payment-in-kind bonds, which pay interest in other securities rather than in
cash, also may be highly volatile.

* INCOME RISk. The Fund's income could decline due to falling market interest
rates. This is because, in a falling interest rate environment, the Fund
generally will have to invest the proceeds from sales of Fund shares, as well as
the proceeds from maturing portfolio securities (or portfolio securities that
have been called, see "Call Risk," or prepaid, see "Prepayment Risk") in
lower-yielding securities.

* CREDIT RISK. The Fund is subject to the risk that the issuers of debt
securities it holds will not make payments on the securities. There is also the
risk that an issuer could suffer adverse changes in financial condition that
could lower the credit quality of a security. This could lead to greater
volatility in the price of the security and the shares of the Fund. Also, a
change in the credit quality rating of a bond can affect the bond's liquidity
and make it more difficult for the Fund to sell. Securities rated the lowest
investment grade have speculative characteristics. In adverse economic or other
circumstances, issuers of these lower rated securities are more likely to have
difficulty making principal and interest payments than issuers of higher rated
securities. Non-investment grade securities are subject to additional risk. See
"Risks of Non-Investment Grade Securities" below. When the Fund purchases
unrated securities, it will depend on IAI's analysis of credit risk more heavily
than usual.

16
<PAGE>

* RISKS OF NON-INVESTMENT GRADE SECURITIES. The Fund may invest in
non-investment grade debt securities, which are commonly known as "junk bonds."
Although these securities usually offer higher yields than investment grade
securities, they also involve more risk. Junk bonds generally have more volatile
prices and carry more risk to principal than investment grade securities. Junk
bonds may be more susceptible to real or perceived adverse economic changes (for
instance, an economic downturn or prolonged period of rising interest rates),
political changes or adverse developments specific to the issuer. In addition,
the secondary trading market may be less liquid than the market for investment
grade securities. Adverse publicity and investor perceptions as well as new or
proposed laws also may have a greater negative impact on the market for junk
bonds.

* 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, 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. If bonds held by the Fund were called, the
Fund would most likely be forced to invest the unanticipated proceeds in
lower-yielding securities, resulting in a decline in the Fund's income.

* PREPAYMENT RISK. Mortgage-backed securities are secured by and payable from
pools of mortgage loans. Similarly, asset-backed securities are supported by
obligations such as automobile loans or home equity loans. These mortgages and
other obligations generally can be prepaid at any time without penalty. As a
result, mortgage- and asset-backed securities are subject to prepayment risk,
which is the risk that falling interest rates could cause prepayments of the
securities to occur more quickly than expected. This occurs because, as interest
rates fall, more homeowners refinance the mortgages underlying mortgage-backed
securities or prepay the debt obligations underlying asset-backed securities. If
the Fund holds these securities it must reinvest the prepayments at a time when
interest rates are falling, reducing the income of the Fund. In addition, when
interest rates fall, prices on mortgage- and asset-backed securities may not
rise as much as for other types of comparable debt securities because investors
may anticipate an increase in prepayments.

* EXTENSION RISk. Mortgage- and asset-backed securities also are subject to
extension risk, which is the risk that rising interest rates could cause
mortgages and other obligations underlying the securities to be prepaid more
slowly than expected, resulting in slower prepayments of the securities. This
would, in effect, convert a short- or medium-duration mortgage- or asset-backed
security into a longer-duration security, increasing its sensitivity to interest
rate changes and causing its price to decline.

* RISKS OF FOREIGN SECURITIES. Investments in foreign securities involve risks
that are different in some respects from investments in securities of U.S.
issuers. Because the 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 held by the Fund. 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 that currency and, therefore, will cause an overall
decline in the Fund's net asset value and net investment income and capital
gains, if any. Other risks include 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 the 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. 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 DOLLAR ROLL TRANSACTIONs. The Fund may enter into dollar roll
transactions. In a dollar roll transaction, the Fund sells mortgage-backed
securities for delivery in the current month while contracting with the same
party to repurchase similar securities at a future date. Because the Fund gives
up the right to receive principal and interest paid on the securities sold, a
mortgage dollar roll transaction will diminish the investment performance of the
Fund unless the difference between the price received for the securities sold
and the price to be paid for the securities to be purchased in the future, plus
any fee income received, exceeds any income, principal payments and appreciation
on the securities sold as part of the mortgage dollar roll. Whether mortgage
dollar rolls will benefit the Fund will depend upon IAI's

17
<PAGE>

ability to predict mortgage prepayments and interest rates. In addition, the use
of mortgage dollar rolls by the Fund increases the amount of the Fund's assets
that are subject to market risk, which could increase the volatility of the
Fund's share price.

* RISKS OF DERIVATIVE INSTRUMENTS. The use of derivative instruments exposes the
Fund to additional investment risks and transaction costs. Risks inherent in the
use of derivative instruments include:

* the risk that interest rates, securities prices and currency
markets will not move in the direction that IAI anticipates;

* an imperfect correlation between the price of derivative
instruments and movements in the prices of the securities,
interest rates or currencies being hedged;

* the possible absence of a liquid secondary market for any
particular instrument and possible exchange-imposed price
fluctuation limits, either of which may make it difficult or
impossible to close out a position when desired;

* leverage risk, which is the risk that adverse price movements
in an instrument can result in a loss substantially greater
than the Fund's initial investment in that instrument; and

* particularly in the case of privately negotiated instruments,
the risk that the counterparty will fail to perform its
obligations, which could leave the Fund worse off than if it
had not entered into the position.

If the Fund uses derivative instruments and if IAI's judgment proves incorrect,
the Fund's performance could be worse than if it had not used these instruments.

OTHER RISKS

In addition to the principal risks discussed above and in the Fund Summary
section, the Fund also is subject to the following 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 objectives.

* INFLATION RISK. Even if the principal value of your investment in the Fund, or
your income from that investment, remains constant or increases, their real
value may be less in the future because of inflation. Thus, as inflation occurs,
the purchasing power of your Fund shares and distributions may decline, even if
their value in dollars increases.

* YEAR 2000 ISSUES. Like all financial service providers, the Fund's investment
adviser, transfer agent, administrator and other third party service providers
utilize systems that may be affected by year 2000 transition issues and other
date related issues. These service providers of the Fund depend on the smooth
functioning of their computer systems. Many computer software systems in use
today cannot distinguish the year 2000 from the year 1900 because of the way
dates are encoded and calculated. That failure could have a negative impact on
handling securities trades, pricing and account services. IAI has been actively
working on necessary changes to its computer systems to deal with the year 2000
and expects that its systems will be adapted in time for that event, although
there cannot be assurance of success. Furthermore, the Fund's service providers
have advised the Fund that they have been actively working on necessary changes
to their computer systems to prepare for the year 2000. However, there can be no
assurance of success.

18
<PAGE>

Companies, organizations, governmental entities and markets in which the Fund
invests will be affected by the year 2000 issue, but at this time the Fund
cannot predict the degree of impact. To the extent the effect is negative, the
Fund's returns could be adversely affected.

19
<PAGE>

FINANCIAL HIGHLIGHTS

The table that follows presents performance information about the Fund. This
information is intended to help you understand the Fund's financial performance
for the past five years. Some of this information reflects financial results for
a single Fund share outstanding for the entire period. The total returns in the
table represent the rate that you would have earned or lost on an investment in
the Fund, assuming you reinvested all of your dividends and distributions. This
information has been audited by KPMG LLP, independent auditors, whose report,
along with the Fund's financial statements, is included in the Fund's annual
report, which is available upon request.

BALANCED FUND

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
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1999 1998 1997 1996 1995
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 12.76 $ 11.04 $ 11.53 $ 10.57 $ 10.36

OPERATIONS
Net investment income 0.28 0.25 0.37 0.29 0.29
Net realized and unrealized gains 0.93 2.84 1.60 0.97 0.62
-------------------------------------------------------------------
TOTAL FROM OPERATIONS 1.21 3.09 1.97 1.26 0.91
-------------------------------------------------------------------

DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.20) (0.28) (0.49) (0.30) (0.32)
Excess distribution from net investment income -- (0.09) -- -- --
Net realized gains (2.99) (1.00) (1.97) -- (0.38)
-------------------------------------------------------------------
TOTAL DISTRIBUTIONS (3.19) (1.37) (2.46) (0.30) (0.70)
-------------------------------------------------------------------

NET ASSET VALUE
End of period $ 10.78 $ 12.76 $ 11.04 $ 11.53 $ 10.57
===================================================================

Total investment return* 9.46% 29.14% 18.55% 12.09% 9.44%

Net assets at end of period (000's omitted) $ 25,396 $ 31,261 $ 32,822 $ 38,799 $ 41,419

RATIOS
Expenses to average net assets (including interest expense) 1.27%+ 1.28% 1.26% 1.25% 1.25%
Expenses to average net assets (excluding interest expense) 1.27%+ 1.25% 1.25% 1.25% 1.25%
Net investment income to average net assets 2.26% 2.57% 2.92% 2.48% 2.68%
Portfolio turnover rate (excluding short-term securities) 138.8% 237.0% 190.6% 193.8% 256.9%
</TABLE>

- ------------------------------------------------
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of all distributions at
net asset value.
+ This ratio includes a 2 basis point expense approved by the Board of
Directors related to an independent valuation of a restricted security.

20
<PAGE>

FOR MORE INFORMATION ABOUT IAI BALANCED FUND

The Fund's statement of additional information ("SAI") and annual and
semi-annual reports to shareholders include additional information about the
Fund. The SAI provides more details about the Fund and its policies. A current
SAI is on file with the Securities and Exchange Commission (SEC) and is
incorporated into this prospectus by reference (which means that it is legally
considered part of this prospectus). Additional information about the Fund's
investments is available in the Fund's annual and semiannual reports to
shareholders. In the Fund's annual report, you will find a discussion of the
market conditions and investment strategies that significantly affected the
Fund's performance during its last fiscal year. You may obtain free copies of
these materials by calling the Fund toll free at 1-800-945-3863.

Information about the Fund is also available on the Internet. Text only versions
of Fund documents can be viewed online or downloaded from the SEC's Internet
site at http://www.sec.gov.

SEC file number: 811 - 5990

21
<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, 1999

THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. THIS
STATEMENT OF ADDITIONAL INFORMATION RELATES TO A PROSPECTUS FOR THE FUNDS LISTED
ABOVE (THE "FUNDS") DATED AUGUST 1, 1999, AND SHOULD BE READ IN CONJUNCTION
THEREWITH. THE FINANCIAL STATEMENTS INCLUDED AS PART OF THE FUNDS' ANNUAL
REPORTS TO SHAREHOLDERS FOR THE FISCAL YEAR ENDED MARCH 31, 1999 ARE
INCORPORATED BY REFERENCE INTO THIS STATEMENT OF ADDITIONAL INFORMATION. COPIES
OF THE FUNDS' PROSPECTUS AND/OR ANNUAL REPORTS ARE AVAILABLE, WITHOUT CHARGE, BY
WRITING OR CALLING THE FUNDS' TRANSFER AGENT, FIRSTAR MUTUAL FUND SERVICES LLC,
P.O. BOX 701, MILWAUKEE, WISCONSIN 53201-0701 (TELEPHONE NUMBER 1-800-945-3863).

TABLE OF CONTENTS

Page

INVESTMENT OBJECTIVES, STRATEGIES AND RISKS............................... 2
INVESTMENT RESTRICTIONS................................................... 10
INVESTMENT PERFORMANCE.................................................... 12
MANAGEMENT................................................................ 15
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT................... 20
LEGAL COUNSEL............................................................. 20
AUDITORS.................................................................. 20
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE........................ 20
CAPITAL STOCK............................................................. 21
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES....................... 22
NET ASSET VALUE AND PUBLIC OFFERING PRICE................................. 25
PURCHASES AND REDEMPTIONS OF SHARES....................................... 26
TAX STATUS................................................................ 26
LIMITATION OF DIRECTOR LIABILITY.......................................... 27
SHAREHOLDER MEETINGS...................................................... 28
FINANCIAL STATEMENTS...................................................... 28

<PAGE>

INVESTMENT OBJECTIVES, STRATEGIES AND RISKS

Each 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") is a diversified series of an open-end,
management investment company. IAI Capital Appreciation Fund, IAI Emerging
Growth Fund and IAI Midcap Growth Fund are series of IAI Investment Funds VI,
Inc.; IAI Growth and Income Fund is a series of IAI Investment Funds VII, Inc.;
IAI Regional Fund is a series of IAI Investment Funds IV, Inc.; and IAI Value
Fund is a series of IAI Investment Funds VIII, Inc.

The investment objectives and principal investment strategies of the
Funds are discussed in the Prospectus under "Fund Summary" and "More Information
on Investment Strategies." The Funds' investment objectives may not be changed
without shareholder approval. 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 Funds' investment
strategies will be successful, or that their investment objectives will be
attained. Certain of the Funds' principal investment strategies are discussed in
more detail below. In addition, the Funds may also use strategies and invest in
securities that are not principal investment strategies and are not described in
the Prospectus. These strategies and securities are described below.

REPURCHASE AGREEMENTS

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

REVERSE REPURCHASE AGREEMENTS

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

BORROWING

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

2
<PAGE>

SECURITIES OF FOREIGN ISSUERS

Each Fund may invest in securities of foreign issuers, although none of
the Funds currently intends to invest in foreign securities denominated in
foreign currencies and not publicly traded in the United States as a principal
investment strategy. 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. Furthermore, volume and liquidity in most foreign securities
markets is less than in the United States and at times volatility of price can
be greater than in the United States.

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

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

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

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

VENTURE CAPITAL INVESTMENTS

Although the Funds no longer invest in these types of securities,
Emerging Growth Fund, Value Fund, Regional Fund and Growth and Income Fund hold
early-stage, developing companies, both directly and through venture capital
limited partnerships and investment funds. These investments account for a
relatively small percentage of each Fund's net assets (4.98%, 6.06%, 2.01% and
2.41%, respectively, as of the date of this Statement of Additional
Information). Early-stage companies 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. Both the
Funds' direct early-stage, developing company investments and their investments
in venture capital limited partnerships or investment funds lack liquidity and
are difficult to value. These investments may be difficult or impossible for a
Fund to sell at the time and the price that the Fund would like. A Fund may have
to lower the price, sell other securities instead or forego an investment
opportunity. Any of these could have a negative effect on the Fund's
performance. In addition, a Fund will have almost no control over the management
of the venture capital limited partnerships or investment funds it holds. If for
any reason the services of the general partners of a venture capital limited
partnership were to become unavailable, the limited partnership could be
adversely affected.

As a result of an earlier investment in an early-stage developing
company, Value Fund and Emerging Growth Fund held approximately 17% and 14%,
respectively, of their net assets in the common stock of Tut Systems,

3
<PAGE>

Inc. as of July 27, 1999. At the time of investment, Tut was a privately-held,
early-stage developing company. Tut conducted an initial public offering of its
securities in January 1999. Following this offering, there was a substantial
increase in the market price of Tut's securities, and therefore a substantial
increase in the percentage of each Fund's assets represented by Tut common
stock. As of July 27, 1999, agreements prohibiting the Funds from selling their
shares of Tut common stock expired and the Funds immediately disposed of a large
portion of their Tut holdings, reducing the holdings to the amount set forth in
the first sentence of this paragraph. Fund managers may retain or dispose of all
or some of the Funds' remaining shares of Tut, as they determine to be in the
best interests of shareholders. Tut designs, develops and markets advanced
communications products which enable high-speed data access over the copper
infrastructure of telephone companies, as well as the copper telephone wires in
homes, businesses and other buildings. Tut is subject to a number of significant
risks, including a history of net losses, a substantial accumulated deficit and
uncertainty of its future results. The markets in which Tut competes are
intensely competitive, continually evolving and subject to rapid technological
change, and Tut may not be able to successfully compete in these markets. In
addition, the market price of Tut common stock has been highly volatile, and
this volatility is likely to continue. Tut files reports, proxy statements and
other information with the Securities and Exchange Commission. These documents
may be inspected without charge at the public reference facilities maintained by
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the Commission located at
Seven World Trade Center, 13th Floor, New York, New York 10048 and Citicorp
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials may be obtained from the Public Reference Section of
the Commission, Room 1034, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and its public reference facilities in New York, New York, and
Chicago, Illinois, at prescribed rates. In addition, this information may be
accessed electronically by means of the Commission's home page on the Internet
(http://www.sec.gov).

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 that can be resold to
institutional investors may be considered liquid pursuant to guidelines adopted
by the Board of Directors. In the case of a Rule 144A Security, such security is
deemed to be liquid if:

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

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

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

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

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

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

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

4
<PAGE>

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

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

LENDING PORTFOLIO SECURITIES

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

SWAP AGREEMENTS

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

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

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.

5
<PAGE>

INDEXED SECURITIES

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

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

FOREIGN CURRENCY TRANSACTIONS

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

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

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 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

6
<PAGE>

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.

FUTURES CONTRACTS

Each Fund may enter into 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 may be used for hedging (i.e., to protect against adverse
future price movements in a Fund's portfolio securities, or in securities the
Fund intends to purchase). For example, a portfolio manager who thinks that the
stock market might decline could sell stock index futures to safeguard a Fund's
portfolio. If the market declines as anticipated, the value of stocks in the
Fund's portfolio would decrease, but the value of the Fund's futures contracts
would increase. Futures contracts may also be used to speculate on the market.
For example, a portfolio manager might buy stock index futures on the
expectation that the value of the particular index will rise, even though the
stocks comprising the index are unrelated to stocks held or intended to be
purchased by the Fund. Using futures for speculation, however, involves
significant risk since futures contracts are highly leveraged instruments. When
a portfolio manager enters into a futures contract, the manager needs to put up
only a small fraction of the value of the underlying contract as collateral, yet
gains or losses will be based on the full value of the contract.

The use of futures contracts would expose a Fund to additional
investment risks and transaction costs. Risks include: the risk that securities
prices will not move in the direction that IAI anticipates; an imperfect
correlation between the price of the futures contract and movements in the
prices of any securities being hedged; the possible absence of a liquid
secondary market for any particular futures contract and possible
exchange-imposed price fluctuation limits; and leverage risk, which is the risk
that adverse price movements in a futures contract can result in a loss
substantially greater than the Fund's initial investment in that contract.

7
<PAGE>

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 FCM's other customers, potentially resulting in losses to
such Fund.

PURCHASING PUT AND CALL OPTIONS

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

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

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

WRITING PUT AND CALL OPTIONS

Each Fund may write (i.e., sell) 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

8
<PAGE>

the option premium, a call writer mitigates the effects of a price decline. At
the same time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.

COMBINED POSITIONS

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

CORRELATION OF PRICE CHANGES

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

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

LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS

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

OTC OPTIONS

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

9
<PAGE>

OPTIONS AND FUTURES RELATING TO FOREIGN CURRENCIES

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

ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS

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

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. Each Fund intends to comply with Section 4.5 of
the regulations under the Commodity Exchange Act, which limits the extent to
which a Fund can commit assets to initial margin deposits and option premiums.

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

INVESTMENT RESTRICTIONS

The investment objectives and certain investment restrictions of the
Funds 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.

10
<PAGE>

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.

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

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

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

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

11
<PAGE>

10. Sell securities short, unless it owns or has the right to obtain,
at no added cost, 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.

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 in the Prospectus, or any
restriction set forth above under "Investment Restrictions" which involves a
maximum percentage of securities or assets (other than Restriction 4) shall not
be considered to be violated unless an excess over the percentage occurs
immediately after an acquisition of securities or utilization of assets and
results therefrom.

PORTFOLIO TURNOVER

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

INVESTMENT PERFORMANCE

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

12
<PAGE>

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.

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

<TABLE>
<CAPTION>
TOTAL RETURN
-----------------------------------------------------------------------------------------------
Capital Emerging Growth & Midcap
Year Ended Appreciation Growth Growth Income Growth Regional Value
12/31 Fund* Fund** Fund*** Fund Fund**** Fund Fund
- -------------- ------------- ----------- ---------- ----------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1986 -- -- -- 13.13% -- 24.63% 1.93%
1987 -- -- -- 15.52% -- 5.34% 14.09%
1988 -- -- -- 8.47% -- 18.58% 24.34%
1989 -- -- -- 29.81% -- 31.27% 22.56%
1990 -- -- -- (6.68%) -- (0.33%) (11.47%)
1991 -- 23.63% -- 26.66% -- 35.38% 19.78%
1992 -- 22.45% -- 3.99% 14.38% 3.54% 11.90%
1993 -- 14.76% 0.99% 9.98% 22.85% 8.96% 22.08%
1994 -- 0.19% 0.66% (4.77%) 5.65% 0.68% (9.08%)
1995 -- 49.55% 23.17% 27.14% 26.09% 32.64% 24.39%
1996 -- 6.95% 15.35% 20.21% 16.58% 15.72% 21.87%
1997 17.78% (2.86%) 19.16% 23.92% 8.85% 18.86% 19.60%
1998 2.21% 5.19% 26.53% 15.00% 24.95% (1.37)% (0.04)%
</TABLE>

- --------------------------------------------
* Commenced operations on February 1, 1996

13
<PAGE>

** Commenced operations on August 5, 1991
*** Commenced operations on August 6, 1993
**** Commenced operations on April 10, 1992

The average annual total returns of Capital Appreciation Fund for the
one year period ended March 31, 1999 and from inception on February 1, 1996
through March 31, 1999 were (19.11)% and 18.59%, respectively.

The average annual total returns of Emerging Growth Fund for the one
and five year periods ended March 31, 1999 and from inception on August 5, 1991
through March 31, 1999 were 3.56%, 12.72% and 15.69%, respectively.

The average annual total returns of Growth Fund for the one and five
year periods ended March 31, 1999 and from inception on August 6, 1993 through
March 31, 1999 were 14.94%, 18.29% and 15.39%, respectively.

The average annual total returns of Growth and Income Fund for the one,
five and ten year periods ended March 31, 1999 were 1.52%,16.36% and 12.66%,
respectively.

The average annual total returns of Midcap Growth Fund for the one and
five year periods ended March 31, 1999 and from inception on April 10, 1992
through March 31, 1999 were 18.31%, 16.72% and 17.07%, respectively.

The average annual total returns of Regional Fund for the one, five and
ten year periods ended March 31, 1998 were (7.74)%, 13.36% and 12.98%,
respectively.

The average annual total returns of Value Fund for the one, five and
ten year periods ended March 31, 1999 were 8.47%, 14.15% and 11.75%,
respectively.

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

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

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

14
<PAGE>

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
DIRECTORS AND EXECUTIVE OFFICERS

Under Minnesota law, the Board of Directors of the Funds is generally
responsible for the overall operation and management of the Funds.

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>
Madeline Betsch 56 Director Currently retired; until April 1994, was Executive
19 South 1st Street Vice President, Director of Client Services, of CME-
Minneapolis, Minnesota 55401 KHBB Advertising since May 1985, and prior thereto
was a Vice President with Campbell-Mithun, Inc.
(advertising agency) since February 1977.

W. William Hodgson 74 Director Currently retired; served as information manager for
1698 Dodd Road the North Central Home Office of the Prudential
Mendota Heights, Minnesota 55118 Insurance Company of America from 1961 until
1984.

George R. Long 69 Director Chairman of Mayfield Corp. (financial consultants
29 Las Brisas Way and venture capitalists) since 1973.
Naples, Florida 33963

J. Peter Thompson 68 Director Grain farmer in southwestern Minnesota since 1974.
Route 1 Prior to that, Mr. Thompson was employed by Paine
Mountain Lake, Minnesota 56159 Webber, Jackson & Curtis, Incorporated, (a
diversified financial services concern), most
recently as Senior Vice President and General Partner.

Charles H. Withers 72 Director Currently retired; was Editor of the Rochester Post-
Rochester Post Bulletin Bulletin, Rochester, Minnesota from 1960 through
P.O. Box 6118 March 31, 1980.
Rochester, Minnesota 55903

John A. Alexander 42 President Chief Operating officer of IAI since 1998. Prior to
601 Second Avenue South that time, Mr. Alexander served in various senior
Suite 3600 management capacities with Lloyds Bank plc since
Minneapolis, Minnesota 55402 1984.

David Koehler 62 Vice President Independent training and marketing consultant from
601 Second Avenue South 1993 to current. Prior to that time, Mr. Koehler was
Suite 3600 a partner at IAI Venture Capital Group.
Minneapolis, Minnesota 55402
</TABLE>

15
<PAGE>

<TABLE>
<S> <C> <C> <C>
Julian "Bing" Carlin 64 Vice President-- Senior Vice President of IAI since 1999. Prior
601 Second Avenue South IAI Regional thereto, Mr. Carlin was with IAI from 1974 until
Suite 3600 Fund 1996, when he retired. Mr. Carlin has managed
Minneapolis, Minnesota 55402 private client portfolios at Carlin Capital Management
since 1996, and continues to do so.

Paul H. Perseke 33 Treasurer Vice President of IAI. Prior to joining IAI in 1996,
601 Second Avenue South Mr. Perseke served as a Vice President and Manager
Suite 3600 of Finance and Planning at Dain Rauscher
Minneapolis, Minnesota 55402 Corporation from 1991 to 1996.

Michael J. Radmer 53 Secretary Partner since 1976 of Dorsey & Whitney LLP, a
220 South Sixth Street Minnesota based law firm which acts a General
Minneapolis, Minnesota 55402 Counsel to the Funds.
</TABLE>

Each of the directors and executive officers of the Funds also serves
in the same capacity for each of the other eight mutual funds for which IAI
serves as investment adviser (the "IAI Mutual Funds").

No compensation is paid by a Fund to any of its officers other than Mr.
Koehler. 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. Set forth below is
further information concerning compensation paid to Fund directors.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
DIRECTOR COMPENSATION FOR THE FISCAL YEAR ENDED MARCH 31, 1999
Capital Emerging Growth and Midcap
Appreciation Growth Growth Income Growth Regional Value
Name of Person, Position Fund Fund Fund Fund Fund Fund Fund
- ---------------------------- ------------ ---------- --------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Betsch, Madeline - Director $2,199 $3,779 $679 $3,154 $2,048 $16,075 $823

Hodgson, W. William - Director $2,199 $3,779 $679 $3,154 $2,048 $16,075 $823

Long, George R. - Director $2,080 $3,623 $634 $3,024 $1,955 $15,340 $786

Thompson, J. Peter - Director $2,199 $3,779 $679 $3,154 $2,048 $16,075 $823

Withers, Charles W. - Director $2,080 $3,623 $634 $3,024 $1,955 $15,340 $786
</TABLE>

16
<PAGE>

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

Betsch, Madeline - Director $37,200

Hodgson, W. William - Director $37,200

Long, George R. - Director $37,200

Thompson, J. Peter - Director $37,200

Withers, Charles H. - Director $37,200

- ----------------------
* From all Funds for the calendar year ended December 31, 1998; excludes
expenses incurred in connection with attending meetings.

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 acquiring 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.

INVESTMENT ADVISER

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

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

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%

17
<PAGE>

GROWTH FUND AND GROWTH AND INCOME FUND

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

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

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

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

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

Under the Management Agreements, 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. Each Management Agreement further provides that IAI will
either reimburse a Fund for the fees and expenses it pays to directors who are
not "interested persons" of such Fund or reduce its fee by an equivalent amount.
IAI is not liable for any loss suffered by a Fund in the absence of willful
misfeasance, bad faith or negligence in the performance of its duties and
obligations.

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

18
<PAGE>

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

FUND Net Assets Management Fee Waiver*
- ---- ---------- -------------- -------

Capital Appreciation
1999 $ 38,234,676 $ 718,181 $ 12,894
1998 $ 65,954,745 $ 882,553 $ 7,120
1997 $ 44,230,390 $ 457,148 $ 58,119**
Emerging Growth
1999 $ 59,775,737 $ 1,176,387 $ 22,284
1998 $ 161,911,963 $ 4,225,381 $ 39,273
1997 $ 387,105,076 $ 7,838,052 $ 57,662
Growth
1999 $ 14,354,692 $ 195,786 $ 3,958
1998 $ 14,774,513 $ 168,988 $ 1,573
1997 $ 11,746,813 $ 198,592 $ 1,400
Growth and Income
1999 $ 52,220,055 $ 941,776 $ 18,589
1998 $ 96,754,089 $ 1,272,892 $ 11,790
1997 $ 90,740,615 $ 1,095,339 $ 7,506
Midcap Growth
1999 $ 39,431,240 $ 629,647 $ 12,074
1998 $ 82,604,831 $ 1,327,988 $ 12,508
1997 $ 128,258,989 $ 1,731,272 $ 12,079
Regional
1999 $ 275,677,749 $ 4,694,445 $ 94,602
1998 $ 509,555,953 $ 6,500,728 $ 62,115
1997 $ 498,178,473 $ 6,841,491 $ 48,381
Value
1999 $ 13,683,043 $ 241,269 $ 4,849
1998 $ 26,739,125 $ 353,321 $ 3,301
1997 $ 29,438,781 $ 463,302 $ 3,220
- ---------------------------
* Resulting from IAI's reduction of its Management Fee in the amount
representing each Fund's pro rata payment of director's fees and expenses.
** Reflects $3,278 in director's fees and expenses waiver and $54,841 in
voluntary waived management fees.

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.

FUND ADMINISTRATION AND ACCOUNTING

Firstar Mutual Fund Service, LLC ("FMFS") provides administration and
accounting services to the Funds. Under a Fund Administration Servicing
Agreement between IAI and FMFS, FMFS provides to the Funds (i) general
management services; (ii) compliance services; (iii) financial reporting
services; and (iv) tax reporting services. Under a Fund Accounting Servicing
Agreement between IAI and FMFS, FMFS provides (i) portfolio accounting services;
(ii) expense accrual and payment services; (iii) Fund valuation and financial
reporting services; (iv) tax accounting services;

19
<PAGE>

and (v) compliance control services. Under each agreement, IAI is responsible
for paying all fees of FMFS. FMFS began providing administration and accounting
services to the Funds in April 1999.

LEGAL PROCEEDINGS

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

CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT

The custodian for the Funds is Firstar Bank Milwaukee, N.A., P.O. Box
701, Milwaukee, Wisconsin 53201-0701.

Firstar Mutual Fund Services, LLC acts as the Funds' transfer agent and
dividend disbursing agent. Firstar Trust Company acts as the Funds' IRA
Custodian. Firstar is located at P.O. Box 701, Milwaukee, Wisconsin 53201-0701

LEGAL COUNSEL

Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis, Minnesota
55402, acts as General Counsel to the Funds.

AUDITORS

KMPG LLP, 4200 Norwest Center, Minneapolis, Minnesota 55402, acts as
the Funds' independent auditors.

PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE

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

20
<PAGE>

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.

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

The following table sets forth brokerage commissions paid by each Fund
during the last three fiscal years ended March 31. The table also sets forth the
commissions paid by the Funds during their last fiscal year to brokerage firms
that provided research services to IAI. The provision of research services was
not necessarily a factor in the placement of all such business with such firms.

<TABLE>
<CAPTION>
Amount of Amount of
Transactions Commissions Paid to
Directed to Brokers Brokers Providing
Fund Amount of Commissions Providing Research Research
- --------------------- --------------------------------- ------------------- --------------------
1999 1998 1997 1999 1999
--------- --------- --------- ------------------- --------------------
<S> <C> <C> <C> <C> <C>
Capital Appreciation $ 95,209 $ 103,401 $ 149,330 $ 556,332 $ 792
Emerging Growth $ 69,929 $ 317,576 $ 319,557 $ 891,911 $ 1,560
Growth $ 41,665 $ 27,921 $ 61,891 $ 462,620 $ 497
Growth and Income $ 153,887 $ 95,401 $ 119,840 $ 3,998,238 $ 5,046
Midcap Growth $ 185,974 $ 362,190 $ 258,964 $ 10,838,623 $ 17,905
Regional $ 584,594 $ 647,569 $ 755,724 $ 11,199,752 $ 17,562
Value $ 22,806 $ 36,320 $ 75,650 $ -0- $ -0-
</TABLE>

CAPITAL STOCK

IAI Capital Appreciation Fund, IAI Emerging Growth Fund and IAI Midcap
Growth Fund are separate portfolios 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. Series A common shares are shares
of IAI Emerging Growth Fund, Series C common shares are shares of IAI Midcap
Growth Fund and Series G common shares are shares of IAI Capital Appreciation
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). On June 25, 1993, the Fund's
shareholders approved amended and restated Articles of Incorporation, which
provided that the registered

21
<PAGE>

investment company whose corporate name has been IAI Stock Fund, Inc., be
renamed IAI Investment Funds VII, Inc.

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). 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.

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). 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.

For each corporation, 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 each corporation is empowered under the Articles of
Incorporation of such company to issue other series of the company's common
stock without shareholder approval.

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

CAPITAL APPRECIATION FUND

As of July 2, 1999, no person held of record or, to the knowledge of
Capital Appreciation Fund beneficially owned more than 5% of the outstanding
shares of Capital Appreciation Fund, except as set forth in the following table:

Name and Address of Shareholder Number of Shares Percent of Class
- ----------------------------------------- ---------------- ----------------
* Mid-South Transportation Management 611,283.347 25.81%
Retirement Plan
1370 Levee Road
Memphis, TN 38108

Olcoba Company 224,301.216 9.47%
Attn: Trust Mutual Fund Specialist
PO Box 1000
Minneapolis, MN 55480

National Financial Services Corporation 207,021.794 8.74%
Attn: Reconciliation Department
PO Box 3908
New York, NY 10008-3908

Charles Schwab & Co., Inc. 173,505.047 7.32%
Attn: Mutual Funds Dept-Cap App Rein
101 Montgomery Street
San Francisco, CA 94104

* Control Person - owns greater than 25% of the Fund.

In addition, as of July 2, 1999, Capital Appreciation Fund's officers
and directors as a group owned less than 1% of Capital Appreciation Fund's
outstanding shares.

22
<PAGE>

EMERGING GROWTH FUND

As of July 2, 1999, 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 of Shareholder Number of Shares Percent of Class
- ----------------------------------------- ---------------- ----------------
* First Union National Bank Trust 1,269,647.415 27.71%
DSC Communication Contribution
1525 W WT Harris Blvd
Charlotte, NC 28262-8522

Charles Schwab & Co., Inc. 559,591.411 12.21%
Attn: Mutual Funds Dept-EMG Rein
101 Montgomery Street
San Francisco, CA 94104

* Control Person - owns greater than 25% of the Fund.

In addition, as of July 2, 1999, Emerging Growth Fund's officers and directors
as a group owned less than 1% of Emerging Growth Fund's outstanding shares.

GROWTH FUND

As of July 2, 1999, 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:

Name and Address of Shareholder Number of Shares Percent of Class
- ----------------------------------------- ---------------- ----------------
Waterous Company 112,815.592 9.40%
C/O Firstar Trust Company
PO Box 1787
Milwaukee, WI 53201-1787

Franc Strgar and Ljubica Strgar Trustees 73,109.052 6.09%
Strgar Family Trust U/T/A DTD 5-12-97
24350 North Whispering Ridge Way #43
Scottsdale, AZ 85255

In addition, as of July 2, 1999, Growth Fund's officers and directors as a
group owned less than 1% of Growth Fund's outstanding shares.

GROWTH AND INCOME FUND

As of July 2, 1999, 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:

Name and Address of Shareholder Number of Shares Percent of Class
- ----------------------------------------- ---------------- ----------------
Hawaiian Trust Company Limited Agent 218,591.885 6.11%
FSM National Government FBO Yap State
PO Box 1930
Honolulu, HI 96805-1930

Pacific Century Trust 210,976.438 5.90%
FSM Compact Funds
PO Box 1930
Honolulu, HI 96805-1930

23
<PAGE>

In addition, as of July 2, 1999, 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

As of July 2, 1999, 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:

Name and Address of Shareholder Number of Shares Percent of Class
- ----------------------------------------- ---------------- ----------------
Charles Schwab & Co., Inc. 473,011.420 17.03%
Attn: Mutual Funds Dept-MCP Rein
101 Montgomery Street
San Francisco, CA 94104

Olcoba Company 414,803.618 14.93%
Attn: Trust Mutual Fund Specialist
PO Box 1000
Minneapolis, MN 55480

In addition, as of July 2, 1999, Midcap Growth Fund's officers and
directors as a group owned less than 1% of Midcap Growth Fund's outstanding
shares.

REGIONAL FUND

As of July 2, 1999, 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:

Name and Address of Shareholder Number of Shares Percent of Class
- ----------------------------------------- ---------------- ----------------
Charles Schwab & Co., Inc. 965,464.696 8.09%
Attn: Mutual Funds Dept-Reg Rein
101 Montgomery Street
San Francisco, CA 94104

As of July 2, 1999, Regional Fund's officers and directors as a group
owned less than 1% of Regional Fund's outstanding shares.

VALUE FUND

As of July 2, 1999, 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:

Name and Address of Shareholder Number of Shares Percent of Class
- ----------------------------------------- ---------------- ----------------
Charles Schwab & Co., Inc. 97,977.177 10.11%
Attn: Mutual Funds Dept-Value Rein
101 Montgomery Street
San Francisco, CA 94104

As of July 2, 1999, Value Fund's officers and directors as a group
owned less than 1% of Value Fund's outstanding shares.

24
<PAGE>

NET ASSET VALUE AND PUBLIC OFFERING PRICE

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

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

On March 31, 1999, each Fund's net asset value and public offering
price per share were calculated as follows:

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

NAV = Net Assets ($38,234,676) = $12.94
------------------------------
Shares Outstanding (2,955,171)

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

NAV = Net Assets ($59,775,737) = $13.31
------------------------------
Shares Outstanding (4,490,202)

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

NAV = Net Assets ($14,354,692) = $12.19
------------------------------
Shares Outstanding (1,177,275)

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

NAV = Net Assets ($52,220,055) = $14.55
------------------------------
Shares Outstanding (3,589,734)

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

NAV = Net Assets ($39,431,240) = $14.32
------------------------------
Shares Outstanding (2,753,963)

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

NAV = Net Assets ($275,677,749) = $21.25
-------------------------------
Shares Outstanding (12,970,778)

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

NAV = Net Assets ($13,683,043) = $12.20
------------------------------
Shares Outstanding (1,121,174)

25
<PAGE>

PURCHASES AND REDEMPTIONS OF SHARES

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

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.

PURCHASES AND REDEMPTIONS IN KIND

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

TAX STATUS

Each Fund qualified during its last taxable year, and intends to
qualify during its current taxable year, as a Regulated Investment Company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code") If a
Fund so qualifies, it will not be subject to federal income tax on income that
it distributes to shareholders.

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

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

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

26
<PAGE>

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

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

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

LIMITATION OF DIRECTOR LIABILITY

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

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.

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SHAREHOLDER MEETINGS

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, for each of
IAI Investment Funds IV, Inc., IAI Investment Funds VI, Inc., IAI Investment
Funds VII, Inc and IAI Investment Funds VIII, Inc., 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
corporation may demand a regular meeting of shareholders by written notice of
demand given to the Chief Executive Officer or the Chief Financial Officer of
the corporations. 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 corporations. An annual meeting will be held on the
removal of a director or directors of a corporations if requested in writing by
holders of not less than 10% of the outstanding shares of the corporations.

FINANCIAL STATEMENTS

The audited financial statements as of March 31, 1999, as set forth in
the Funds' 1999 Annual Reports to shareholders, are incorporated herein by
reference. Such Annual Reports may be obtained by shareholders on request from
the Funds at no charge.

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IAI BALANCED FUND
A SERIES OF
IAI INVESTMENT FUNDS VI, INC.

STATEMENT OF ADDITIONAL INFORMATION
DATED AUGUST 1, 1999

THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. THIS
STATEMENT OF ADDITIONAL INFORMATION RELATES TO A PROSPECTUS FOR IAI BALANCED
FUND (THE "FUND") DATED AUGUST 1, 1999, AND SHOULD BE READ IN CONJUNCTION
THEREWITH. THE FINANCIAL STATEMENTS INCLUDED AS PART OF THE FUND'S ANNUAL REPORT
TO SHAREHOLDERS FOR THE FISCAL YEAR ENDED MARCH 31, 1999 ARE INCORPORATED BY
REFERENCE INTO THIS STATEMENT OF ADDITIONAL INFORMATION. COPIES OF THE FUND'S
PROSPECTUS AND/OR ANNUAL REPORT ARE AVAILABLE, WITHOUT CHARGE, BY WRITING OR
CALLING THE FUND'S TRANSFER AGENT, FIRSTAR MUTUAL FUND SERVICES, LLC, P.O. BOX
357, MILWAUKEE, WISCONSIN 53201-0701 (TELEPHONE: 1-800-945-3863).

TABLE OF CONTENTS

Page
----

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS................................. 2
INVESTMENT RESTRICTIONS.................................................... 17
INVESTMENT PERFORMANCE..................................................... 18
MANAGEMENT................................................................. 20
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT.................... 23
LEGAL COUNSEL.............................................................. 24
AUDITORS................................................................... 24
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE......................... 24
CAPITAL STOCK.............................................................. 25
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES........................ 25
NET ASSET VALUE AND PUBLIC OFFERING PRICE.................................. 26
PURCHASES AND REDEMPTIONS OF SHARES........................................ 26
TAX STATUS................................................................. 27
LIMITATION OF DIRECTOR LIABILITY........................................... 28
SHAREHOLDER MEETINGS....................................................... 29
FINANCIAL STATEMENTS....................................................... 29
APPENDIX A - RATINGS OF DEBT SECURITIES.................................... A-1

<PAGE>

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

IAI Balanced Fund (the "Fund") is a diversified series of IAI
Investment Funds VI, Inc., and open-end management investment company. The
investment objective and principal investment strategies of the Fund are
discussed in the Prospectus under "Fund Summary" and "More Information on
Investment Strategies." The Fund's investment objective may not be changed
without shareholder approval. 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 strategies
will be successful, or that its investment objective will be attained. Certain
of the Fund's principal investment strategies are discussed in more detail
below. In addition, the Fund may also use strategies and invest in securities
that are not principal investment strategies and are not described in the
Prospectus. These strategies and securities are described below.

REPURCHASE AGREEMENTS

The Fund may invest in repurchase agreements relating to the securities
in which it may invest. A repurchase agreement, which is functionally equivalent
to a loan by the Fund, involves the purchase of securities by the Fund 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 as a form of
borrowing. In a reverse repurchase agreement, the 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 Investment
Advisers, Inc. ("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. Presently, the Fund does not
intend to invest more than 5% of its net assets in reverse repurchase
agreements.

BORROWING

The Fund may borrow from banks (or through reverse repurchase
agreements) for temporary or emergency purposes. 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. The Fund currently has a line of
credit with a bank. To the extent funds are drawn against the line of credit,
securities are held in a segregated account. No compensating balances or
commitment fees are required under the line of credit. The Fund does not intend
its borrowings to exceed 5% of its net assets.

SECURITIES OF FOREIGN ISSUERS

The Fund may invest in 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 and auditing and financial reporting standards, practices and
requirements comparable to those applicable to United States companies.
Furthermore, volume and liquidity in most foreign bond

2
<PAGE>

markets is less than in the United States and at times volatility of price can
be greater than in the United States. There is generally less government
supervision of foreign bond markets, brokers and companies than in the United
States.

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.

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 the Fund's shareholders.
The expense ratio of the Fund should not be materially affected by the Fund's
investment in foreign securities.

U.S. GOVERNMENT SECURITIES

The Fund may invest in securities of, or guaranteed by, the United
States Government, its agencies or instrumentalities. These securities include:

1. United States Treasury obligations, such as Treasury Bills
(which have original maturities of one year or less), Treasury Notes
(which have original maturities of one to ten years) and Treasury Bonds
(which have original maturities generally greater than ten years);

2. obligations of United States government agencies and
instrumentalities which are secured by the full faith and credit of the
United States Treasury, such as Government National Mortgage
Association ("Ginnie Mae") modified pass-through certificates;

3. obligations which are secured by the right of the issuer to
borrow from the United States Treasury, such as securities issued by
the Federal Financing Bank or the United States Postal Service; and

4. obligations which are supported by the credit of the
government agency or instrumentality itself (but are not backed by the
full faith and credit of the United States Government) such as
securities of the Federal Home Loan Mortgage Corporation or the Federal
National Mortgage Association, including pass-through securities and
participation certificates thereof.

Guarantees as to the timely payment of principal and interest do not
extend to the value or yield of such securities nor do they extend to the value
of the Fund's shares. In the case of securities in which the Fund invests that
are not backed by the "full faith and credit" of the United States government,
the investor must look principally to the agency issuing or guaranteeing the
obligation for ultimate repayment and may not be able to assert a claim against
the United States government itself in the event the agency or instrumentality
does not meet its commitment.

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<PAGE>

The Fund's investments in U.S. government securities may include U.S.
Treasury inflation-protection securities. Inflation-protection securities are a
type of marketable book-entry security issued by the United States Department of
Treasury ("Treasury") with a nominal return linked to the inflation rate in
prices. Inflation-protection securities are auctioned and issued on a quarterly
basis on the 15th of January, April, July, and October. They have been issued as
10-year notes, with other maturities added thereafter. The index used to measure
inflation is the non-seasonally adjusted U.S. City Average All Items Consumer
Price Index for All Urban Consumers ("CPI-U").

The value of the principal is adjusted for inflation, and every six
months the security will pay interest, which is an amount equal to a fixed
percentage of the inflation-adjusted value of the principal. The final payment
of principal of the security will not be less than the original par amount of
the security at issuance.

The principal of the inflation-protection security is indexed to the
non-seasonally adjusted CPI-U. To calculate the inflation-adjusted principal
value for a particular valuation date, the value of the principal at issuance is
multiplied by the index ratio applicable to that valuation date. The index ratio
for any date is the ratio of the reference CPI applicable to such date to the
reference CPI applicable to the original issue date. Semiannual coupon interest
is determined by multiplying the inflation-adjusted principal amount by one-half
of the stated rate of interest on each interest payment date.

Inflation-adjusted principal or the original par amount, whichever is
larger, will be paid on the maturity date as specified in the applicable
offering announcement. If at maturity the inflation-adjusted principal is less
than the original principal value of the security an additional amount will be
paid at maturity so that the additional amount plus the inflation-adjusted
principal equals the original principal amount. Some inflation-protection
securities may be stripped into principal and interest components. In the case
of a stripped security, the holder of the stripped principal would receive this
additional amount. The final interest payment, however, will be based on the
final inflation-adjusted principal value, not the original par amount.

The reference CPI for the first day of any calendar month is the CPI-U
for the third preceding calendar month. (For example, the reference CPI for
December 1 is the CPI-U reported for September of the same year, which is
released in October.) The reference CPI for any other day of the month is
calculated by a linear interpolation between the reference CPI applicable to the
first day of the month and the reference CPI applicable to the first day of the
following month.

Any revisions the Bureau of Labor Statistics (or successor agency)
makes to any CPI-U number that has been previously released will not be used in
calculations of the value of outstanding inflation-protection securities. In the
case that the CPI-U for a particular month is not reported by the last day of
the following month, the Treasury will announce an index number based on the
last year-over-year CPI-U inflation rate available. Any calculations of the
Treasury's payment obligations on the inflation-protection security that need
that month's CPI-U number will be based on the index number that the Treasury
has announced. If the CPI-U is based to a different year, the Treasury will
continue to use the CPI-U series based on the base reference period in effect
when the security was first issued as long as that series continues to be
published. If the CPI-U is discontinued during the period the
inflation-protection security is outstanding, the Treasury will, in consultation
with the Bureau of Labor Statistics (or successor agency), determine an
appropriate substitute index and methodology for linking the discontinued series
with the new price index series.
Determinations of the Secretary of the Treasury in this regard are final.

Inflation-protection securities will be held and transferred in either
of two book-entry systems: the commercial book-entry system (TRADES) and
TREASURY DIRECT. The securities will be maintained and transferred at their
original par amount, i.e., not at their inflation-adjusted value. STRIPS
components will be maintained and transferred in TRADES at their value based on
the original par amount of the fully constituted security.

ILLIQUID SECURITIES

The 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

4
<PAGE>

pursuant to guidelines adopted by the Board of Directors. In the case of a Rule
144A Security, such security is deemed to be liquid if:

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

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

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

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

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

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

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

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

It is not possible to predict with assurance the maintenance of an
institutional trading market for such securities and the liquidity of 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, banks or other financial borrowers of securities.

5
<PAGE>

VARIABLE OR FLOATING RATE INSTRUMENTS

The Fund may purchase instruments with variable or floating interest
rates. 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.

WHEN-ISSUED/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.

No more than 20% of the Fund's net assets may be invested in
when-issued, delayed delivery or forward commitment transactions, and of such
20%, no more than one-half (i.e., 10% of the Fund's net assets) may be invested
in dollar rolls (described below).

DOLLAR ROLLS

In connection with its ability to purchase securities on a when-issued
or forward commitment basis, the Fund may enter into "dollar rolls" in which the
Fund sells securities for delivery in the current month and simultaneously
contracts with the same counterparty to repurchase similar (same type, coupon
and maturity) but not identical securities on a specified future date. The Fund
gives up the right to receive principal and interest paid on the securities
sold. However, the Fund would benefit to the extent of any difference between
the price received for the securities sold and lower forward price for the
futures purchase plus any fee income received. Unless such benefits exceed the
income and capital appreciation that would have been realized on the securities
sold as part of the dollar roll, the use of this technique will diminish the
investment performance of the Fund compared with what such performance would
have been without the use of dollar rolls. The Fund will hold and maintain in a
segregated account until the settlement date appropriate liquid assets in an
amount equal to the value of the when-issued or forward commitment securities.
The benefits derived from the use of dollar rolls may depend, among other
things, upon IAI's ability to predict interest rates correctly. There is no
assurance that dollar rolls can be successfully employed. In addition, the use
of dollar rolls by the Fund while remaining substantially fully invested
increases the amount of the Fund's assets that are subject to market risk to an
amount that is greater than the Fund's net asset value, which could result in
increased volatility of the price of the Fund's shares. No more than 10% of the
Fund's net assets may be invested in dollar rolls.

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<PAGE>

MORTGAGE-BACKED SECURITIES

The Fund may invest in mortgage-backed securities that are Agency
Pass-Through Certificates, Private Pass-Throughs or collateralized mortgage
obligations ("CMOs"), as defined and described below.

Agency Pass-Through Certificates are mortgage pass-through certificates
representing undivided interests in pools of residential mortgage loans.
Distribution of principal and interest on the mortgage loans underlying an
Agency Pass-Through Certificate is an obligation of or guaranteed by GNMA, FNMA
or FHLMC. GNMA is a wholly-owned corporate instrumentality of the United States
within the Department of Housing and Urban Development. The guarantee of GNMA
with respect to GNMA certificates is backed by the full faith and credit of the
United States, and GNMA is authorized to borrow from the United States Treasury
in an amount which is at any time sufficient to enable GNMA, with no limitation
as to amount, to perform its guarantee.

FNMA is a federally chartered and privately owned corporation organized
and existing under federal law. Although the Secretary of the Treasury of the
United States has discretionary authority to lend funds to FNMA, neither the
United States nor any agency thereof is obligated to finance FNMA's operations
or to assist FNMA in any other manner.

FHLMC is a federally chartered corporation organized and existing under
federal law, the common stock of which is owned by the Federal Home Loan Banks.
Neither the United States nor any agency thereof is obligated to finance FHLMC's
operations or to assist FHLMC in any other manner.

The mortgage loans underlying GNMA certificates are partially or fully
guaranteed by the Federal Housing Administration or the Veterans Administration,
while the mortgage loans underlying FNMA certificates and FHLMC certificates are
conventional mortgage loans which are, in some cases, insured by private
mortgage insurance companies. Agency Pass-Through Certificates may be issued in
a single class with respect to a given pool of mortgage loans or in multiple
classes.

The residential mortgage loans evidenced by Agency Pass-Through
Certificates and upon which CMOs are based generally are secured by first
mortgages on one- to four-family residential dwellings. Such mortgage loans
generally have final maturities ranging from 15 to 30 years and provide for
monthly payments in amounts sufficient to amortize their original principal
amounts by the maturity dates. Each monthly payment on such mortgage loans
generally includes both an interest component and a principal component, so that
the holder of the mortgage loans receives both interest and a partial return of
principal in each monthly payment. In general, such mortgage loans can be
prepaid by the borrowers at any time without any prepayment penalty. In
addition, many such mortgage loans contain a "due-on-sale" clause requiring the
loans to be repaid in full upon the sale of the property securing the loans.
Because residential mortgage loans generally provide for monthly amortization
and may be prepaid in full at any time, the weighted average maturity of a pool
of residential mortgage loans is likely to be substantially shorter than its
stated final maturity date. The rate at which a pool of residential mortgage
loans is prepaid may be influenced by many factors and is not predictable with
precision.

Private mortgage pass-through securities ("Private Pass-Throughs") are
structured similarly to GNMA, FNMA and FHLMC mortgage pass-through securities
and are issued by originators of and investors in mortgage loans, including
savings and loan associations, mortgage bankers, commercial banks, investment
banks and special purpose subsidiaries of the foregoing. These securities
usually are backed by a pool of conventional fixed rate or adjustable loans.
Since Private Pass-Throughs typically are not guaranteed by an entity having the
credit status of GNMA, FNMA or FHLMC, such securities generally are structured
with one or more types of credit enhancement. Such credit support falls into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provisions of advances, generally by the
entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches. The Fund will not pay any additional fees for such credit support,
although the existence of credit support may increase the price of a security.

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The ratings of securities for which third-party credit enhancement
provides liquidity protection or protection against losses from default are
generally dependent upon the continued creditworthiness of the enhancement
provider. The ratings of such securities could be subject to reduction in the
event of deterioration in the creditworthiness of the credit enhancement
provider even in cases where the delinquency and loss experience on the
underlying pool of assets is better than expected.

The Fund may invest in 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.

CMOs are debt obligations typically issued by a private special-purpose
entity and collateralized by residential or commercial mortgage loans or Agency
Pass-Through Certificates. Because CMOs are debt obligations of private
entities, payments on CMOs generally are not obligations of or guaranteed by any
governmental entity, and their ratings and creditworthiness typically depend,
among other factors, on the legal insulation of the issuer and transaction from
the consequences of a sponsoring entity's bankruptcy.

CMOs generally are issued in multiple classes, with holders of each
class entitled to receive specified portions of the principal payments and
prepayments and/or of the interest payments on the underlying mortgage loans.
These entitlements can be specified in a wide variety of ways, so that the
payment characteristics of various classes may differ greatly from one another.
For instance, holders may hold interests in CMO tranches called Z-tranches which
defer interest and principal payments until one or other classes of the CMO have
been paid in full. In addition, for example:

* In a sequential-pay CMO structure, one class is entitled to
receive all principal payments and prepayments on the
underlying mortgage loans (and interest on unpaid principal)
until the principal of the class is repaid in full, while the
remaining classes receive only interest; when the first class
is repaid in full, a second class becomes entitled to receive
all principal payments and prepayments on the underlying
mortgage loans until the class is repaid in full, and so
forth.

* A planned amortization class ("PAC") of CMOs is entitled to
receive principal on a stated schedule to the extent that it
is available from the underlying mortgage loans, thus
providing a greater (but not absolute) degree of certainty as
to the schedule upon which principal will be repaid.

* An accrual class of CMOs provides for interest to accrue and
be added to principal (but not be paid currently) until
specified payments have been made on prior classes, at which
time the principal of the accrual class (including the accrued
interest which was added to principal) and interest thereon
begins to be paid from payments on the underlying mortgage
loans.

* As discussed above with respect to pass-through
mortgage-backed securities, an interest-only class of CMOs
entitles the holder to receive all of the interest and none of
the principal on the underlying mortgage loans, while a
principal-only class of CMOs entitles the holder to receive
all of the principal payments and prepayments and none of the
interest on the underlying mortgage loans.

* A floating rate class of CMOs entitles the holder to receive
interest at a rate which changes in the same direction and
magnitude as changes in a specified index rate. An inverse
floating rate class of CMOs entitles the holder to receive
interest at a rate which changes in the opposite direction
from, and in the same magnitude as or in a multiple of,
changes in a specified index rate. Floating rate and inverse
floating rate classes also may be subject to "caps" and
"floors" on adjustments to the interest rates which they bear.

* A subordinated class of CMOs is subordinated in right of
payment to one or more other classes. Such a subordinated
class provides some or all of the credit support for the
classes that are senior to it by

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<PAGE>

absorbing losses on the underlying mortgage loans before the
senior classes absorb any losses. A subordinated class which
is subordinated to one or more classes but senior to one or
more other classes is sometimes referred to as a "mezzanine"
class. A subordinated class generally carries a lower rating
than the classes that are senior to it, but may still carry an
investment grade rating.

It generally is more difficult to predict the effect of changes in
market interest rates on the return on mortgage-backed securities than to
predict the effect of such changes on the return of a conventional fixed-rate
debt instrument, and the magnitude of such effects may be greater in some cases.
The return on interest-only and principal-only mortgage-backed securities is
particularly sensitive to changes in interest rates and prepayment speeds. When
interest rates decline and prepayment speeds increase, the holder of an
interest-only mortgage-backed security may not even recover its initial
investment. Similarly, the return on an inverse floating rate CMO is likely to
decline more sharply in periods of increasing interest rates than that of a
fixed-rate security. For these reasons, interest-only, principal-only and
inverse floating rate mortgage-backed securities generally have greater risk
than more conventional classes of mortgage-backed securities.

ASSET-BACKED SECURITIES

The Fund may invest in types of asset-backed securities which represent
forms of consumer credit such as automobile and credit card receivables,
manufactured (mobile) home loans, home improvement loans and home equity loans.
Asset-backed securities are generally privately issued and pass through cash
flows to investors. Interest and principal payments depend upon payment of the
underlying loans by individuals, although the securities may be supported by
letters of credit 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.

Generally, asset-backed securities include many of the risks associated
with mortgage-related securities. In general, however, the collateral supporting
asset-backed securities is of shorter maturity than mortgage loans and is less
likely to experience substantial prepayments. Asset-backed securities involve
certain risks that are not posed by mortgage-backed securities, resulting mainly
from the fact that asset-backed securities do not usually contain the complete
benefit of a security interest in the related collateral. For example, credit
card receivables generally are unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, including the
bankruptcy laws, some of which may reduce the ability to obtain full payment. In
the case of automobile receivables, due to various legal and economic factors,
proceeds for repossessed collateral may not always be sufficient to support
payments on these securities.

ZERO COUPON BONDS

The Fund may invest in 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.

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<PAGE>

PAYMENT-IN-KIND BONDS

The Fund may invest in bonds the interest on which may be paid in other
securities rather than cash (PIKs). Typically, during a specified term prior to
the bond's maturity, the issuer of a PIK may provide for the option or the
obligation to make interest payments in bonds, common stock or other instruments
(i.e., "in kind" rather than in cash). The type of instrument in which interest
may or will be paid would be known by the Fund at the time of investment. While
PIKs generate income for purposes of generally accepted accounting standards,
they do not generate cash flow and thus could cause the Fund to be forced to
liquidate securities at an inopportune time in order to distribute cash, as
required by the Internal Revenue Code.

LOWER-RATED DEBT SECURITIES

The Fund may invest in lower-rated debt securities ("junk bonds" or
"high yield 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.

SWAP AGREEMENTS

The Fund may engage in 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 objective 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.

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<PAGE>

The most significant factor in the performance of swap agreements is
the change in the specific interest rate, currency, or other factors that
determine the amounts of payments due to and from 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.

The Fund will maintain appropriate liquid assets in a segregated
custodial account to cover its current obligations under swap agreements. If the
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 the Fund's accrued
obligations under the swap agreement over the accrued amount the Fund is
entitled to receive under the agreement. If the 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 the Fund's accrued obligations under the agreement.

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.

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 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

The Fund may purchase 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 could 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

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<PAGE>

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
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.

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

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<PAGE>

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 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.

FUTURES CONTRACTS

The Fund may enter into 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.

The use of futures contracts would expose a Fund to additional
investment risks and transaction costs. Risks include: the risk that securities
prices or interest rates will not move in the direction that IAI anticipates; an
imperfect correlation between the price of the futures contract and movements in
the prices of any securities being hedged; the possible absence of a liquid
secondary market for any particular futures contract and possible
exchange-imposed price

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<PAGE>

fluctuation limits; and leverage risk, which is the risk that adverse price
movements in a futures contract can result in a loss substantially greater than
the Fund's initial investment in that contract.

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 FCM's other customers, potentially resulting in losses to
the Fund.

PURCHASING PUT AND CALL OPTIONS

The Fund may purchase 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.

WRITING PUT AND CALL OPTIONS

The Fund may write (i.e., sell) 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.

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<PAGE>

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 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

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 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

The 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

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<PAGE>

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

The 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.

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. 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.

The above limitations 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. With respect to positions in commodity futures or
commodity option contracts which do not come within the meaning and intent of
bona fide hedging in the CFTC rules, the aggregate initial margin and premiums
required to establish such positions will not exceed 5% of the liquidation value
of the Fund's portfolio, after taking into account unrealized profits and
unrealized losses on any such contracts it has entered into; and, provided
further, that in the case of an option that is in-the-money, such amount may be
excluded in computing such 5%.

16
<PAGE>

INVESTMENT RESTRICTIONS

The investment objective and certain investment policies and
restrictions of the Fund 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:

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.

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

17
<PAGE>

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.

Any of the Fund's investment policies set forth in the Prospectus, or
any restriction set forth above under "Investment Restrictions" which involves a
maximum percentage of securities or assets (other than Restriction 4) shall not
be considered to be violated unless an excess over the percentage occurs
immediately after an acquisition of securities or utilization of assets and
results therefrom.

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. The Fund's historical portfolio turnover
rates are set forth in the Prospectus section "Financial Highlights".

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, 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.

18
<PAGE>

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).

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, 1995, 1996,
1997 and 1998, the total return of the Fund was 8.90%, 4.99%, (1.45%), 18.56%,
14.75%, 25.70% and 17.66%, respectively. The average annual total returns of the
Fund from inception of the Fund through March 31, 1999 and for the one and five
year periods ended March 31, 1999 were 12.31%, 9.46% and 15.50%, respectively.
For the thirty-day period ended March 31, 1999, the Fund's yield was (0.28%).

19
<PAGE>

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) the 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 the 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 the Fund or the general economic business, investment, or
financial environment in which the Fund operates; (4) the effect of tax-deferred
compounding on the 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 the 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 the Fund invests may be
compared to relevant indices or surveys (e.g., S&P Industry Surveys) in order to
evaluate the Fund's historical performance or current or potential value with
respect to the particular industry or sector.

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

Under Minnesota law, the Board of Directors of the Fund is generally
responsible for the overall operation and management of the Fund 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>
Madeline Betsch 56 Director Currently retired; until April 1994, was Executive
19 South 1st Street Vice President, Director of Client Services, of CME-
Minneapolis, Minnesota 55401 KHBB Advertising since May 1985, and prior thereto
was a Vice President with Campbell-Mithun, Inc.
(advertising agency) since February 1977.

20
<PAGE>

<TABLE>
<CAPTION>
Name and Address Age Position Principal Occupation(s) During Past 5 Years
- ---------------- --- -------------------------------------------
<S> <C> <C> <C>
George R. Long 69 Director Chairman of Mayfield Corp. (financial consultants
29 Las Brisas Way and venture capitalists) since 1973.
Naples, Florida 33963

John A. Alexander 42 President Chief Operating Officer of IAI since 1998. Prior
601 Second Avenue South to that time, Mr. Alexander served in various
Suite 3600 senior management capacities with Lloyds Bank
Minneapolis, Minnesota 55402 plc since 1984.

David Koehler 62 Vice President Independent training and marketing consultant
601 Second Avenue South from 1993 to current. Prior to that time, Mr.
Suite 3600 Koehler was a partner at IAI Venture Capital
Minneapolis, Minnesota 55402 Group.

Paul H. Perseke 33 Treasurer Vice President of IAI. Prior to joining IAI in
601 Second Avenue South 1996, Mr. Perseke served as a Vice President and
Suite 3600 Manager of Finance and Planning at Dain
Minneapolis, Minnesota 55402 Rauscher Corporation from 1991 to 1996.

Michael J. Radmer 53 Secretary Partner since 1976 of Dorsey & Whitney LLP, a
220 South Sixth Street Minnesota based law firm which acts as General
Minneapolis, Minnesota 55402 Counsel to the Fund.
</TABLE>

Each of the directors and executive officers of the Fund also serves in
the same capacity for each of the 14 other mutual funds for which IAI serves as
investment adviser (the "IAI Mutual Funds").

No compensation is paid by the Fund to any of its officers other than
David Koehler. 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). The 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 Fund for
expenses incurred in connection with attending meetings. Certain information
regarding compensation paid to the directors is set forth below.

21
<PAGE>

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

Betsch, Madeline - Director $1,377 $37,200

Hodgson, W. William - Director $1,377 $37,200

Long, George R. - Director $1,296 $37,200

Thompson, J. Peter - Director $1,377 $37,200

Withers, Charles H. - Director $1,296 $37,200
- ----------------------------------
* For the fiscal year ended March 31, 1999.
** For the calendar year ended December 31, 1998; excludes expenses
incurred in connection with attending meetings.

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 acquiring
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.

INVESTMENT ADVISER

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

MANAGEMENT AGREEMENT. Pursuant to a Management Agreement dated April 1,
1996 between the Fund and IAI (the "Management Agreement"), IAI provides 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 the
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 the Fund's average daily net assets as set forth below:

Average 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%

22
<PAGE>

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 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.

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

Net Assets Management Fee Waiver*
---------- -------------- -------

1999 $ 25,395,975 $ 389,548 $ 8,045
1998 $ 31,260,556 $ 535,824 $ 4,922
1997 $ 32,821,552 $ 443,596 $ 3,028

- ---------------------
* Resulting from IAI's reduction of its management fee in the amount
representing the Fund's pro rata payment of director's fees and expenses.

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.

FUND ADMINISTRATION AND ACCOUNTING

Firstar Mutual Fund Service, LLC ("FMFS") provides administration and
accounting services to the Fund. Under a Fund Administration Servicing Agreement
between IAI and FMFS, FMFS provides to the Fund (i) general management services;
(ii) compliance services; (iii) financial reporting services; and (iv) tax
reporting services. Under a Fund Accounting Servicing Agreement between IAI and
FMFS, FMFS provides (i) portfolio accounting services; (ii) expense accrual and
payment services; (iii) Fund valuation and financial reporting services; (iv)
tax accounting services; and (v) compliance control services. Under each
agreement, IAI is responsible for paying all fees of FMFS. FMFS began providing
administration and accounting services to the Fund in April 1999.

CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT

The custodian for the Fund is Firstar Bank Milwaukee, N.A., P.O. Box
701, Milwaukee, Wisconsin 53201-0701.

Firstar Mutual Fund Services, LLC, acts as the Fund's transfer agent
and dividend disbursing agent. Firstar Trust Company acts as the Fund's IRA
custodian. Firstar is located at P.O. Box 701, Milwaukee, Wisconsin 53201-0701.

23
<PAGE>

LEGAL COUNSEL

Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis, Minnesota
55402, acts as General Counsel to the Fund.

AUDITORS

KMPG LLP, 4200 Norwest Center, Minneapolis, Minnesota 55402, acts as
the Funds' independent auditors.

PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE

In effecting portfolio transactions on behalf of the Fund, IAI seeks
the most favorable net price consistent with the best execution. Generally, 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 the Fund and one or more other accounts 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 Conduct of the National Association of
Securities Dealers, Inc. and subject to the policies set forth in the preceding
paragraphs and such other policies as the Board of Directors of the Fund may
determine, IAI may consider sales of shares of the Fund, or any IAI Mutual Fund,
as a factor in the selection of broker-dealers to execute the Fund's securities
transactions.

24
<PAGE>

The following table sets forth brokerage commissions paid by the Fund
during the indicated periods. The table also sets forth the amount of
transactions directed by the Fund during its last fiscal year to brokerage firms
that provided research services to IAI, and the commissions paid in connection
therewith. The provision of research services was not necessarily a factor in
the placement of all business with such firms.

<TABLE>
<CAPTION>
Amount of Transactions Amount of Commissions
Directed to Brokers Paid to Brokers
Amount of Commissions Providing Research Providing Research
- ------------------------------------------------------- ---------------------- ---------------------
Year Ended Year Ended Year Ended Year Ended Year Ended
March 31, 1999 March 31, 1999 March 31, 1999 March 31, 1999 March 31, 1999
- ----------------- ---------------- --------------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
$ 28,455 $ 14,123 $113,616 $716,944 $ 894
</TABLE>

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). 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 E common shares is referred to as "IAI Balanced Fund." 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.

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.

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of July 2, 1999, no person was a record holder or, to the knowledge
of the Fund, beneficial owner of more than 5% of the outstanding shares of the
Fund, except as set forth in the following table:

Name and Address of Shareholder Number of Shares Percent of Class
- ----------------------------------------- ---------------- ----------------
Charles Schwab & Co., Inc. 299,895.015 13.86%
Attn: Mutual Funds Dept-Bal Rein
101 Montgomery Street
San Francisco, CA 94104

Wausau Homes Inc. 205,019.841 9.48%
Attn: Marvin Schuette
PO Box 8005
Wausau, WI 54401-8005

Emjay Co 165,237.839 7.64%
FBO Wausau Homes Inc.
401K Plan
PO Box 17909
Milwaukee, WI 53217-0909

Norwest Bank MN NA 123,774.717 5.72%
FBO Berryman Products PSP
C/O Mutual Funds Processing
PO Box 1533
Minneapolis, MN 55480-1533

25
<PAGE>

Olcoba Company 111,296.961 5.14%
Attn: Trust Mutual Fund Specialist
PO Box 1000
Minneapolis, MN 55480

In addition, as of July 2, 1999, 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, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.

On March 31, 1999, the net asset value and public offering price per share of
the Fund was calculated as follows:

NAV = Net Assets ($25,395,975) = $10.78
------------------------
Shares Outstanding (2,354,785)

PURCHASES AND REDEMPTIONS OF SHARES

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

The 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.

PURCHASES AND REDEMPTIONS IN KIND

In extraordinary circumstances, Fund shares may be purchased 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 the market quotations are not available, by a method that IAI
believes accurately reflects fair value. In addition, securities accepted in
exchange are required to be liquid securities that are not restricted as to
transfer. Also in extraordinary circumstances, Fund shares may be redeemed in
exchange for readily marketable securities held by the 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.

26
<PAGE>

TAX STATUS

The Fund qualified during its last taxable year, and intends to qualify
during its current taxable year, as a Regulated Investment Company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). If
the Fund so qualifies, it will not be subject to federal income tax on income
that it distributes to shareholders.

Under 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.

Ordinarily, distributions and redemption proceeds earned by Fund
shareholders are not subject to withholding of federal income tax. However, the
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 the
Fund shareholder if, as is usually the case, Fund shares are a capital asset in
the hands of the 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, the 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,
the 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 the
Fund's policy not to distribute capital gains until capital loss carryovers, if
any, either are utilized or expire.

If the Fund invests in zero coupon obligations upon their issuance,
such obligations will have original issue discount in the hands of the Fund.
Generally, the original issue discount equals the difference between the "stated
redemption price at maturity" of the obligation and its "issue price" as those
terms are defined in the Code. If the Fund acquires an already issued zero
coupon bond from another holder, the bond will have original issue discount in
the Fund's hands, equal to the difference between the "adjusted issue price" of
the bond at the time the Fund acquires it (that is, the original issue price of
the bond plus the amount of original issue discount accrued to date) and its
stated redemption price at maturity. In each case, the Fund is required to
accrue as ordinary interest income a portion of such original issue discount
even though it receives no cash currently as interest payment on the obligation.
If the Fund invests in U.S. Treasury inflation-protection securities, it will be
required to treat as original issue discount any increase in the principal
amount of the securities that occurs during the course of its taxable year. If
the Fund purchases such inflation-protection securities that are issued in
stripped form either as stripped bonds or coupons, it will be treated as if it
had purchased a newly issued debt instrument having original issue discount.

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Because the Fund is required to distribute substantially all of its net
investment income in order to be taxed as a regulated investment company, it may
be required to distribute an amount greater than the total cash income the Fund
actually receives. Accordingly, in order to make the required distribution, the
Fund may be required to borrow or to liquidate securities.

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 the Fund's assets to be invested
in various countries is not known. Any amount of taxes paid by the Fund to
foreign countries will reduce the amount of income available to the Fund for
distributions to shareholders.

Some of the investment practices that may be employed by the Fund will
be subject to special provisions that, among other things, may defer the use of
certain losses of the Fund, affect the holding period of the securities held by
the Fund and affect the character of the gains or losses realized. These
provisions may also require the Fund to mark-to-market some of the positions in
its portfolio (i.e., treat them as closed out) or to accrue original issue
discount, both of which may cause the Fund to recognize income without receiving
cash with which to make distributions in amounts necessary to satisfy the
distribution requirements for qualification as a regulated investment company
and for avoiding income and excise taxes. Accordingly, in order to make the
required distributions, the Fund may be required to borrow or liquidate
securities. The Fund will monitor its transactions and may make certain
elections in order to mitigate the effect of these rules and prevent
disqualification of the Fund as a regulated investment company.

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).

28
<PAGE>

elimination or limitation of the availability of equitable relief, such as
injunctive or recessionary 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.

SHAREHOLDER MEETINGS

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 IAI Investment Funds VI, Inc. ("Investment Funds") may demand a
regular meeting of shareholders by written notice of demand given to the Chief
Executive Officer or the Chief Financial Officer of Investment Funds. 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
Investment Funds. An annual meeting will be held on the removal of a director or
directors of Investment Funds if requested in writing by holders of not less
than 10% of the outstanding shares of Investment Funds.

FINANCIAL STATEMENTS

The audited financial statements as of March 31, 1999, as set forth in
the Fund's 1999 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.

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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 characterizes 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
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.

A-1
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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.

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.

A-2
<PAGE>

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