ANNUAL
                                     REPORT
                                 April 30, 1997


                                     THE AAL
                                 U.S. GOVERNMENT
                                   ZERO COUPON
                                   TARGET FUNDS
                              Series 2001 and 2006


                                     


<PAGE>

[AAL Mutual Funds Letterhead]

June 15, 1997

Dear AAL Target Funds Shareholder:

We are pleased to provide you with the updated annual report for The AAL U.S.
Government Zero Coupon Target Funds.

In addition to the Target Funds, which are no longer open to investors,  we also
offer nine other diverse portfolios (available in both class A and B shares) to
help you plan for your financial future, including:

GROWTH

o  The AAL Capital Growth Fund for long term capital growth

o  The AAL Mid Cap Stock Fund for long term capital growth

o  The AAL Small Cap Stock Fund for long term capital growth

o  The AAL International Fund for long-term capital growth

o  The AAL Utilities Fund for current income, long-term growth of income and
   capital growth
      
INCOME

o  The AAL Bond Fund for high current income

o  The AAL Municipal Bond Fund for high current income exempt from federal 
   income taxes

o  The AAL High Yield Bond Fund for high current income and secondarily capital 
   growth  

o  The AAL Money Market Fund for high  current  income, liquidity and 
   preservation of capital
  

To invest in these Funds, you can either use new dollars to purchase shares,  or
you can use our exchange  privilege to exchange your current  Target Fund shares
for those of another Fund--at no additional cost to you.

For more information about these Funds and the exchange privilege,  contact your
local  Registered  Representative  or call our Mutual Fund Service  Center at
800-553-6319 for your complimentary prospectus kit.

Thank you again for your continued  confidence in The AAL Mutual Funds.  We look
forward to serving you again in the near future.

Sincerely,

/s/ Ronald G. Anderson

Ronald G. Anderson
President
AAL Capital Management Corporation

<PAGE>


                         PORTFOLIO MANAGER'S DISCUSSION

The year ended  April 30, 1997 was a non-event  for  investors  who held The AAL
U.S.  Government  Zero Coupon Target Funds because  interest rates ended up near
where they started.  However,  rates,  as measured by the 10-year U.S.  Treasury
note, fluctuated from a high of 7.10% to a low of nearly 6.00%. April 1996 began
with  interest  rates  yielding  6.70%.  The next few months  were  filled  with
economic  reports  giving mixed  signals  about the direction of the economy and
Federal Reserve  monetary policy,  and rates stayed fairly constant.  During the
months of September,  October and  November,  market  participants  believed the
economy was slowing down and that the Fed would  decrease  rates,  or, at worst,
leave present rates unchanged. This belief contributed to a decline in the yield
on the 10-year U.S. Treasury note to almost 6.00%.  Since that time, the economy
seems to have  accelerated.  In the first  quarter of 1997,  the Gross  Domestic
Product showed an annualized  growth of 5.60%.  This,  combined with April's low
4.9% unemployment rate, helped drive rates back up to 6.70% by the end of April.

 
Michael Hilt Portfolio Manager AAL Capital Management Corporation

--------------------------------------------------------------------------------
VALUE OF A $10,000 INVESTMENT 


[CHART APPEARS HERE]

TARGET FUND SERIES 2001 - $16,843
TARGET FUND SERIES 2006 - $18,418
LEHMAN BROS. AGGREGATE BOND INDEX - $16,884


      Average Annual Total Returns -- Based on the Gross Amount Invested
                              As of April 30, 1997

               PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS

                       The AAL U.S. Government Zero Coupon
                         Target Fund        Target Fund
                         Series 2001        Series 2006
                         ------------       -------------

1-year                    .38%              1.73%
5-year                   7.49%              9.64%
From Inception           8.40%              9.91%



<PAGE>

The Funds Seek: High investment return from U.S.  government  securities that
provide  investors  with a reasonable assurance that they will receive a target
dollar amount predictable at the time of investment.

                             The AAL U.S. Government
                            Zero Coupon Target Fund:
                                   Series 2001
                                   -----------


SCHEDULE OF INVESTMENTS AS OF APRIL 30, 1997
--------------------------------------------
<TABLE>
<CAPTION>

Principal                                              Yield to      Maturity        Market
Amount         Long-Term Obligations (100.0%)          Maturity      Date            Value
-------------------------------------------------------------------------------------------
<C>            <S>                                     <C>            <C>            <C>

               U.S. GOVERNMENT ZERO COUPON BONDS
               Separate Trading of Registered Interest
               and Principal of Securities
$2,345,000     (amortized cost basis $1,708,177)       6.53%          11/15/2001     $1,751,033

</TABLE>


                             The AAL U.S. Government
                            Zero Coupon Target Fund:
                                   Series 2006
                                   -----------


SCHEDULE OF INVESTMENTS AS OF APRIL 30, 1997
--------------------------------------------
<TABLE>
<CAPTION>

Principal                                                 Yield to       Maturity       Market
Amount         Long-Term Obligations (100.0%)             Maturity       Date           Value
----------------------------------------------------------------------------------------------
<C>            <S>                                        <C>            <C>            <C>
               U.S. GOVERNMENT ZERO COUPON BONDS
               Separate Trading of Registered Interest
               and Principal of Securities
$2,832,000     (amortized cost basis $1,362,394)          6.86%          11/15/2006     $1,488,241

</TABLE>

         The accompanying notes are an integral part of this schedule.

<PAGE>

                       STATEMENT OF ASSETS AND LIABILITIES


<TABLE>
<CAPTION>

                                                                The AAL U.S. Government
                                                                -----------------------
                                                                Target Fund   Target Fund
 April 30, 1997                                                 Series 2001   Series 2006
     ------------------------------------------------------------------------------------------
<S>                                                             <C>           <C>
ASSETS
  Investments, at value (Cost: $1,708,177 and $1,362,394 respectively)
  ............................................................  $1,751,033    $1,488,241
  Prepaid expenses ...........................................         309           310
  Receivable from Affiliate ..................................       3,510         2,866
  Cash .......................................................       4,894           229
                                                                 ---------     ---------
  Total Assets ...............................................  $1,759,746    $1,491,646
                                                                 =========     =========

LIABILITIES
  Income distributions payable ...............................     $34,396    $   28,871
  Accrued expenses ...........................................      14,536         9,905
                                                                 ---------     ---------
  Total Liabilities ..........................................      48,932        38,776
                                                                 ---------     ---------

NET ASSETS
  Trust capital (beneficial interest) ........................   1,663,493     1,318,292
  Accumulated undistributed net income (loss) ................         309           805
  Net unrealized appreciation on investments .................      42,856       125,847
  Accumulated net realized gain on investments ...............       4,156         7,926
                                                                 ---------     ---------
          Total Net Assets ...................................  $1,710,814    $1,452,870
                                                                 ---------     ---------

          Total Liabilities and Capital ......................  $1,759,746    $1,491,646
                                                                 =========     =========
  Shares of beneficial interest outstanding (unlimited number of
  shares authorized) .........................................     164,753       129,303
                                                                 =========     =========

  Net Asset Value Per Share ..................................  $    10.38    $    11.24
                                                                 =========     =========

  Maximum Public Offering Price ..............................  $    10.90    $    11.80
                                                                 =========     =========
</TABLE>
The  accompanying  notes to financial  statements  are an integral  part of this
statement.


<PAGE>


                            STATEMENT OF OPERATIONS
                    
                                                        The AAL U.S. Government
                                                        -----------------------
                                                         Target        Target
                                                          Fund          Fund
                                                         Series        Series
For the Year Ended April 30, 1997                         2001          2006
-------------------------------------------------------------------------------

INVESTMENT INCOME
  Taxable interest ...................................  $ 122,349   $ 105,286
                                                          -------     -------
Total Investment Income                                 $ 122,349   $ 105,286 

EXPENSES
  Audit and legal fees ...............................      5,316       5,267
  Custodian fees .....................................        263         179
  Administrative service fees ........................      2,905       2,924
  Printing and postage expense .......................      1,168       1,129
  S.E.C. and state registration fees .................      2,107       2,207
  Transfer agent fees ................................      1,545       1,585
  Trustees fees and expenses .........................      3,580       3,580
  Shareholder maintenance fee ........................         58          59
  Other expenses .....................................        170         166
                                                          -------     -------
    Total expenses ...................................     17,112      17,096
                                                          -------     -------
    Less reimbursement from Adviser ..................       (280)     (2,503)
                                                          -------     -------
    Total net expenses ...............................     16,832      14,593
                                                          -------     -------
Net Investment Income ................................    105,517      90,693
                                                          -------     -------
Realized and Unrealized Gain on Investments
  Net realized gain on investments ...................     12,745      20,903
  Decrease in unrealized appreciation on investments .    (24,902)    (16,062)
                                                          -------     -------
Net Realized and Unrealized Gains on Investments .....    (12,157)      4,841
                                                          -------     -------
Net Increase in Net Assets Resulting From Operations..  $  93,360   $  95,534
                                                          =======     =======

The  accompanying  notes to financial  statements  are an integral  part of this
statement.

<PAGE>



                       STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
                                                The AAL U.S. Government Zero Coupon
                                                ---------------------------------------------------
                                                Target Fund Series 2001     Target Fund Series 2006
                                                -----==--------------------------------------------
                                                Year          Year          Year          Year
                                                Ended         Ended         Ended         Ended
                                                4/30/96       4/30/97       4/30/96       4/30/97
                                                ---------------------------------------------------
<S>                                             <C>           <C>           <C>          <C>
Operations
  Net investment income ...................     $  109,062    $  105,517    $  90,289    $  90,693
  Net realized gain on investments ........         11,450        12,745       16,358       20,903
  Increase (decrease) in unrealized
   appreciation on investments ............         40,152      (24,902)       59,474     (16,062)
                                                   -------        ------       ------       ------
Net increase in net assets
 resulting from operations ................        160,664        93,360      166,121       95,534
                                                   -------       -------      -------      -------
Distributions to Shareholders
  Dividends from net investment income ....      (128,425)     (105,517)    (110,055)     (90,693)
  Capital gains distributions .............        (6,784)      (16,021)     (11,663)     (20,439)
                                                 ---------     ---------     --------    ---------
Total distributions to shareholders .......      (135,209)     (121,538)    (121,718)    (111,132)
                                                 ---------     ---------    ---------    ---------
Trust Shares Transactions
  Income dividends reinvested .............        123,680        92,532      107,009       88,242
  Capital gains distributions reinvested...          6,654        14,602       11,579       20,277
  Redemption of trust shares ..............       (99,272)     (179,176)     (83,449)    (119,754)
                                                 ---------      --------     --------     --------
Net increase (decrease) in trust capital...         31,062      (72,042)       35,139     (11,235)
                                                  --------        ------       ------       ------
Net increase (decrease) in net assets .....         56,517     (100,220)       79,542     (26,833)
Net assets beginning of period ............      1,754,517     1,811,034    1,400,161    1,479,703
                                                 ---------     ---------    ---------    ---------
Net assets end of period ..................    $ 1,811,034   $ 1,710,814  $ 1,479,703  $ 1,452,870
                                                 =========     =========    =========    =========
</TABLE>

The  accompanying  notes to financial  statements  are an integral  part of this
statement.


<PAGE>


                          NOTES TO FINANCIAL STATEMENTS


(A) ORGANIZATION

The AAL Mutual Funds (the  "Trust") was  organized as a  Massachusetts  Business
Trust on March 31, 1987, and is registered as an open-end diversified management
company under the Investment Company Act of 1940. The Trust commenced operations
on July 16, 1987, and currently consists of The AAL Capital Growth, Mid Cap
Stock, Small Cap Stock,  International,  Utilities,  Bond,  Municipal Bond, High
Yield Bond,  Money Market,  and U.S.  Government  Zero Coupon  Target  Funds.The
eleven AAL Mutual Funds are collectively referred to as the "Funds".

        On November 14, 1990, The AAL U.S.  Government Zero Coupon Target Funds
Series 2001 and 2006 commenced operations. Effective June 1, 1993, the Board of
Trustees  of The AAL Mutual  Funds  closed The AAL U.S.  Government  Zero Coupon
Target  Funds  Series  2001 and 2006  to new  shareholders  and to  additional
purchases of shares by existing shareholders.

(B) SIGNIFICANT ACCOUNTING POLICIES

            The Funds' principal accounting policies are:

            Valuation - Securities traded on national  securities  exchanges are
valued at last reported  sales prices.  All other  securities  are valued at the
latest bid quotation if such quotations are readily available.  Otherwise,  such
securities  are  valued  at a fair  value  as  determined  in good  faith by the
Investment Adviser under supervision of the Board of Trustees.

            Federal  Income  Taxes - The  Funds'  policy is to  comply  with the
requirements  of the  Internal  Revenue Code which are  applicable  to regulated
investment companies and to distribute substantially all of their taxable income
to their shareholders. The Funds accordingly paid no Federal income taxes and no
Federal income tax provision was required.

            Distributions to Shareholders - Net investment income is distributed
to each shareholder as a dividend.  Dividends from the Target Funds are declared
daily and distributed annually. Net realized gains from securities transactions,
if any, are distributed at least annually in the calendar year.

            Other  -  For  financial  statement  purposes,  investment  security
transactions  are accounted for on trade date.  Interest income is recognized on
an accrual basis.  Discount is amortized over the life of the respective  bonds.
Realized   gains  or  losses  on  sales  are   determined  on  a  specific  cost
identification   basis.  In  accordance  with  Generally   Accepted   Accounting
Principles,  the funds met the  requirements of Statement of Position 93-2 which
requires that permanent  financial reporting and tax differences be reclassified
to trust capital.
       
         Use of Estimates-The  preparation of financial statements in conformity
with  generally  accepted  accounting  principles  requires  management  to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting period. Actual results could differ from these estimates.

<PAGE>

                  NOTES TO FINANCIAL STATEMENTS - (Continued)

(C) INVESTMENT ADVISORY MANAGEMENT FEES AND TRANSACTIONS WITH RELATED PARTIES

The Trust has entered into an  Investment  Advisory  Agreement  with AAL Capital
Management  Corporation (the "Adviser") under which the two separate Target Fund
portfolios pay a fee for investment  advisory services.  The annual rate of fees
under the  Investment  Advisory  Agreement are  calculated  at: .50 of 1% of the
average  daily net assets of The AAL U.S.  Government  Zero Coupon Target Funds,
Series 2001 and Series 2006.  Payments under the Investment  Advisory  Agreement
were waived effective July 1, 1993. For the period May 1, 1995,  through October
31, 1995, the Adviser  entered into a sub-advisory  agreement with Duff & Phelps
Investment  Management Co. (the "Sub-Adviser").  The sub-advisory fee, which was
paid by the Adviser, was equal to: .10 of 1% of the average daily net assets for
The AAL  U.S. Government Zero Coupon Target Funds.  Effective  November 1, 1995,
the agreement was terminated.

          The Trust has entered into an Administrative  Services  Agreement with
the  Adviser  pursuant  to which the  Adviser  provides  certain  administrative
services.  For the year ended,  April 30, 1997, the Adviser received $2,500 from
both The AAL U.S.  Government Zero Coupon Target Funds Series 2001 and 2006. The
Trust has also  contracted with AAL Capital  Management  Corporation for certain
shareholder  maintenance  services,  effective April 1, 1995. These  shareholder
services   include,   pre-processing   and  quality  control  of  new  accounts,
shareholder  correspondence,  account response and answering  customer inquiries
regarding  account  status,  options  and  facilitating   shareholder  telephone
transactions. Fees charged to the Funds under terms of the contract approximated
$4.08 per shareholder account for the year ended April 30, 1997.

         The Trust has adopted a distribution plan ("The Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940. The Plan authorizes the Trust to
use a portion of its assets to finance certain sales activities  relating to the
distribution  of shares  to  investors.  Payments  under The Plan are equal to a
maximum of .10 of 1% of the average  daily net assets.  Payments  under The Plan
were waived effective July 1, 1993.

         Trustees of the Trust not affiliated with AAL or the Adviser receive an
annual  fee of $1,000  and $250 from the  Target  Funds for each  meeting of the
Board of Trustees or Committee thereof,  attended. No remuneration has been paid
by the Trust to any of the  officers or  affiliated  Trustees  of the Trust.  In
addition,  the Trust reimbursed  unaffiliated  Trustees for reasonable  expenses
incurred in relation to attendance at the meetings.

         Each Fund is charged for those expenses that are directly  attributable
to it, such as advisory,  custodian and certain  shareholder service fees, while
other  expenses  that cannot be directly  attributable  to a Fund are  allocated
among the Funds in proportion to the net assets of the respective Fund.

     The  Adviser  reimburses  the Funds for  annual  expenses  in excess of the
lowest  expense   limitation   imposed  by  the  states.   In  addition  to  the
reimbursement  required under the  Investment  Advisory  Agreement,  the Adviser
voluntarily has reimbursed The AAL U.S.  Government Zero Coupon Target Funds for
all expenses in excess of 1% of average daily net assets since inception.

         AAL  is  the  ultimate  parent  company  for  AAL  Capital   Management
Corporation.


<PAGE>



                  NOTES TO FINANCIAL STATEMENTS - (Continued)

(D)  SECURITY TRANSACTIONS
         During the years ended April 30, 1996,  and April 30,  1997,  purchases
and sales of securities other than short-term obligations were as follows:

                       Purchases                                Sales
                       ---------                                -----
                  4/30/96       4/30/97                 4/30/96          4/30/97
                  -------       -------                 -------          -------
Target Fund 2001    --            --                   $117,412        $ 216,105
Target Fund 2006    --            --                    105,398          139,852


          All purchases and sales of The AAL U.S.  Government Zero Coupon Target
Funds were in U.S. government obligations.

         Cost of investments is substantially  the same for financial  reporting
purposes and Federal income tax purposes.

         The gross unrealized appreciation on investments at April 30, 1996, and
April 30, 1997, were as follows:


<TABLE>
<CAPTION>
                                   4/30/96                                                 4/30/97
                                   -------                                                 -------
                                                                                                            Net Unrealized
                    Appreciation   (Depreciation)    Appreciation           Appreciation   (Depreciation)   Appreciation
                    ------------   --------------    ------------           ------------   --------------   ------------
<S>                 <C>            <C>               <C>                    <C>            <C>              <C>

Target Fund 2001   $ 67,758        --                $ 67,758               $ 47,476       (4,620)          $ 42,856
Target Fund 2006    141,909        --                 141,909                126,592         (745)           125,847

</TABLE>

(E)  TRUST TRANSACTIONS

          Transactions  in trust  shares for the years  ended April 30, 1996 and
April 30, 1997 were as follows:

<TABLE>
<CAPTION>
                                               Target  Fund 2001                        Target  Fund 2006
                                               -----------------                        -----------------
                                               4/30/96            4/30/97               4/30/96            4/30/97
                                               -------            -------               -------            -------
<S>                                            <C>                <C>                   <C>                <C>
Shares Purchased                               --                 --                    --                 --
Income dividends reinvested                     11,023               8,754                8,386               7,626
Capital gains reinvested                           589               1,374                  902               1,734
Shares redeemed                                (9,140)            (17,084)              (6,842)            (10,601)
                                               -------             -------              -------             -------
Net increase (decrease) of trust shares          2,472             (6,956)                2,446             (1,241)
                                                ======              ======               ======              ======
</TABLE>

<PAGE>



                    FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>

                                          Target Fund 2001                                                    
                         ----------------------------------------------------   
                           Period       Year           Year           Year            Year            Year          Year 
                           Ended        Ended          Ended          Ended           Ended           Ended         Ended
Per Share Information      4/30/91      4/30/92        4/30/93        4/30/94         4/30/95         4/30/96       4/30/97
---------------------      -------      -------        -------        -------         -------         -------       -------
<S>                        <C>          <C>            <C>            <C>             <C>             <C>           <C>

Net asset value:           $10.00       $10.25         $10.61         $12.25          $10.54          $10.37        $10.55  
   Beginning of Period

Income from Investment
  Operations
    Net investment income  0.444        0.772          0.741          0.700           0.663           0.647         0.639

Net realized and unrealized gain
  (loss) on investments    0.250        0.360          1.679          (0.623)         0.000           0.335         (0.068)
                           -----        -----          -----          ------          -----           -----   

Total from Investment               
Operations                 0.694        1.132          2.420          0.077           0.663           0.982         0.571     

 Distributions from:      
                           -----        -----          -----          -----           -----           -----   
   Net investment income   (0.444)      (0.772)        (0.741)        (0.700)         (0.663)         (0.761)       (0.639) 

   Net realized
   capital gains(d)        --           --             (0.039)        (1.087)         (0.170)         (0.041)       (0.102) 
                           -----        ------         ------         -----           ------          ------    

   Total distributions     (0.444)      (0.772)        (0.780)        (1.787)         (0.833)         (0.802)       (0.741) 
                           ------       ------         ------         ------          ------          ------    

Net increase (decrease) in net
  asset value              0.250        0.360          1.640          (1.710)         (0.170)         0.180         (0.170)  

Net asset value:
  End of period            $10.25       $10.61         $12.25         $10.54          $10.37          $10.55        $10.38
                           ======       ======         ======         ======          ======          ======        ======

Total Return(e)            6.97%        10.76%         23.27%         (0.34%)         6.82%           9.23%         5.42%

Supplemental Data & Ratios

Net Assets,                                        
End of Period              $668,211     $1,494,818     $2,760,499     $1,824,482      $1,754,517      $1,811,034    $1,710,814  

Ratio of expenses to average
  net assets(a)(b)         1.00%        1.00%          1.00%          1.00%           1.00%           1.00%         0.97% 

Ratio of net investment
  income to average
  net assets(a)(c)         10.21%       7.19%          6.38%          5.74%           6.50%           5.84%         6.08% 

Portfolio Turnover Rate    0.00%        2.93%          2.79%          1.65%           0.00%           0.00%         0.00%

</TABLE>
<PAGE>

(a) Calculated on an annualized basis.
(b) Computed after giving effect to Adviser's expense limitation undertaking.
    If the Funds had paid all of their expenses, the ratio would have been as
    follows:
<TABLE>
<CAPTION>
                                                     Year      Year      Year      Year      Year      Year      Year
                                                     Ended     Ended     Ended     Ended     Ended     Ended     Ended
                                                    4/30/91   4/30/92   4/30/93   4/30/94   4/30/95   4/30/96    4/30/97
                                                    -------   -------   -------   -------   -------   -------    -------
<S>                                                 <C>       <C>       <C>       <C>       <C>       <C>        <C>
The AAL U.S. Government Zero Coupon
Target Fund Series 2001                             13.27%    7.32%     4.60%     2.33%     2.00%     1.74%      0.99

The AAL U.S. Government Zero Coupon
Target Fund Series 2006                             17.44%   10.36%     6.19%     6.19%     2.49%     2.07%      1.17%   
</TABLE>


<PAGE>

                  FINANCIAL HIGHLIGHTS--CONTINUED

<TABLE>
<CAPTION>


                                                         Target Fund 2006                    
                                        ---------------------------------------------------- 
                                       Period        Year          Year           Year          Year          Year        Year
                                       Ended         Ended         Ended          Ended         Ended         Ended       Ended
Per Share Information                  4/30/91       4/30/92       4/30/93        4/30/94       4/30/95       4/30/96     4/30/97
---------------------                  -------       -------       -------        -------       -------       -------     -------
<S>                                    <C>           <C>           <C>            <C>           <C>           <C>         <C>
                                                                                     
Net asset value: Beginning of Period   $10.00        $10.31        $10.42         $12.52        $10.96        $10.93      11.33
                                                                
                                                                                     
Income from Investment                                                               
  Operations                                                                         
    Net investment income              0.473         0.824         0.795          0.740         0.734         0.711       0.708
                                                                                     
Net realized and unrealized gain                                                     
  (loss) on investments                0.310         0.116         2.114          (0.567)       0.184         0.648       0.075
                                       -----         -----         -----          ------        -----         -----       -----
                                                                                     
Total from Investment Operations       0.783         0.940         2.909          0.173         0.918         1.359       0.783 
                                                                                     
 Distributions from:                  
                                       -----         -----         -----          -----         -----         ----- 
   Net investment income               (0.473)       (0.824)       (0.795)        (0.740)       (0.734)       (0.865)     (0.708)  
                                                                                     
   Net realized                                                                      
   capital gains(d)                    --            (0.006)       (0.014)        (0.993)       (0.214)       (0.094)     (0.165)
                                       ------        ------        ------         ------        ------        ------ 
                                                                                     
   Total distributions                 (0.473)       (0.830)       (0.809)        (1.733)       (0.948)       (0.959)     (0.873)
                                       ------        ------        ------         ------        ------        ------  
                                                                                     
Net increase (decrease) in net                                                       
  asset value                          0.310         0.110         2.100          (1.560)       (0.030)       0.400       (0.090)
                                                                                     
Net asset value:                                                                     
  End of period                        $10.31        $10.42        $12.52         $10.96        $10.93        $11.33      $11.24
                                       ======        ======        ======         ======        ======        ======      ======
                                                                                     
Total Return(e)                        7.86%         8.73%         28.44%         0 .18%        9.05%         11.80%      6.84%
                                                                                     
Supplemental Data & Ratios                                                           
                                                                                     
Net Assets,                                
End of Period                          $451,758      $1,066,266    $1,951,566     $1,364,890    $1,400,161    $1,479,703  $1,452,870
                                                                                     
Ratio of expenses to average                                                         
  net assets(a)(b)                     1.00%         1.00%         1.00%          1.00%         1.00%         1.00%       1.00%
                                                                                     
Ratio of net investment                                                              
  income to average                                                                  
  net assets(a)(c)                     10.70%        7.68%         6.79%          5.86%         6.95%         5.83%       6.22%
                                                                                     
Portfolio Turnover Rate                2.78%         2.31%         5.44%          1.05%         0.00%         0.00%       0.00%
                                        
</TABLE>

(c) If the Funds had paid all of their expenses the ratio would have been as
    follows:


<PAGE>



<TABLE>
                                                     Year      Year      Year      Year      Year      Year      Year
                                                     Ended     Ended     Ended     Ended     Ended     Ended     Ended
                                                    4/30/91   4/30/92   4/30/93   4/30/94   4/30/95   4/30/96    4/30/97
                                                    -------   -------   -------   -------   -------   -------    -------
<S>                                                 <C>       <C>       <C>       <C>       <C>       <C>        <C>
The AAL U.S. Government Zero Coupon
Target Fund Series 2001                             (2.06%)    0.87%    2.78%     4.41%     5.51%     5.10%      6.07%

The AAL U.S. Government Zero Coupon
Target Fund Series 2006                             (5.75%)   (1.68%)   1.60%     3.72%     5.46%     4.76%      6.04%
</TABLE>

(d) 100% of distributions from net realized capital gains during the fiscal year
    ended April 30, 1997, were long term.

(e) Total returns are based on net amount invested for a one year period.



<PAGE>



                        REPORT OF INDEPENDENT ACCOUNTANTS

                            100 East Wisconsin Avenue
                                   Suite 1500
                               Milwaukee, WI 53202
                             Telephone 414-276-9500

                                     [LOGO]



Price Waterhouse LLP

To the Shareholders and Trustees of The AAL Mutual Funds

In our opinion, the accompanying statement of assets and liabilities,  including
the schedules of  investments,  and the related  statements of operations and of
changes  in net assets  and the  financial  highlights  present  fairly,  in all
material respects, the financial position of The AAL U.S. Government Zero Coupon
Target Fund  Series 2001 and The AAL U.S.  Government Zero Coupon Target Fund
Series  2006 (two of the  portfolios  constituting  The AAL  Mutual  Funds,  the
"Funds") at April 30, 1997, the results of each of their operations for the year
then ended, the changes in each of their net assets for each of the two years in
the period then ended and the financial  highlights for the year ended April 30,
1997, and the other periods indicated,  in conformity with generally accepted
accounting  principles.  These  financial  statements  and financial  highlights
(hereafter referred to as "financial  statements") are the responsibility of the
Funds'  management;  our  responsibility  is to  express  an  opinion  on  these
financial  statements  based on our  audits.  We  conducted  our audits of these
financial  statements in accordance with generally  accepted auditing  standards
which require that we plan and perform the audit to obtain reasonable  assurance
about whether the financial  statements  are free of material  misstatement.  An
audit includes examining,  on a test basis,  evidence supporting the amounts and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.  We believe that our audits,  which included
confirmation  of  securities  at April  30,  1997,  by  correspondence  with the
custodian, provide a reasonable basis for the opinion expressed above.



/s/ Price Waterhouse LLP

May 22, 1997

<PAGE>
[AAL Mutual Funds Letterhead]

BOARD OF TRUSTEES
         John H. Pender
         Chairman of the Board
         Richard L. Gady
         Lawrence M. Woods
         D.W. Russler
         F. Gregory Campbell
         Richard L. Gunderson
         Ronald G. Anderson
OFFICERS
         Ronald G. Anderson
         President
         Robert G. Same
         Vice President & Secretary
         Terrance P. Gallagher
         Treasurer
         Charles D. Gariboldi, Jr.
         Assistant Treasurer
         Joseph F. Wreschnig
         Assistant Secretary

INVESTMENT ADVISER AND DISTRIBUTOR
         AAL Capital  Management Corporation
         222 West College Avenue
         Appleton, WI 54919-0007

CUSTODIAN, TRANSFER AGENT
AND  DISBURSING AGENT
         Firstar Trust Company
         615 East Michigan Street
         P.O. Box 2981
         Milwaukee, WI  53201-2981

LEGAL COUNSEL
         Quarles & Brady
         411 East Wisconsin Avenue
         Milwaukee, WI  53202

INDEPENDENT ACCOUNTANTS
         Price Waterhouse LLP
         100 East Wisconsin Avenue, Suite 1500
         Milwaukee, WI  53202