Institutional Shares
Registration No. 33-12911
As filed on June 25, 1998                              Registration No. 811-5075

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549

                                    FORM N-1A

             REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

   
                         Post-Effective Amendment No. 27
                                     and/or
    

               REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
                                   ACT OF 1940
   
                                Amendment No. 29
                        (Check appropriate box or boxes)
    

                              THE AAL MUTUAL FUNDS
               (Exact name of registrant as specified in charter)

                              222 West College Ave.
                         Appleton, Wisconsin 54919-0007
               (Address of Principal Executive Offices) (Zip Code)

        Registrant's Telephone Number, including Area Code (414)734-5721
                                 Robert G. Same
                                    Secretary
                              The AAL Mutual Funds
                             222 West College Avenue
                             Appleton, WI 54919-0007
                     (Name and Address of Agent for Service)

Approximate date of proposed public offering:  As soon as practicable  after the
effective date of the registration statement.

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

   
o  immediately  upon filing  pursuant to paragraph  (b) of Rule 485 
X  on July 1, 1998,  pursuant to paragraph (b) of Rule 485 
o  60 days after filing  pursuant to paragraph (a)(1) of Rule 485 
o  on _______________,  pursuant to paragraph (a)(1) of Rule 485 
o  75 days after filing pursuant to paragraph (a)(2) of Rule 485 
    
==========================================
Registrant  has  previously  registered  an  indefinite  number of its shares of
beneficial  interest pursuant to Rule 24f-2 under the Investment  Company Act of
1940. Registrant filed under Rule 24f-2 on June 24, 1997.
==========================================
                           Page 1 of pages ___.
                           Exhibit index is located at Page

<PAGE>


Cross Reference Sheet for
The AAL Mutual Funds
Institutional Shares
<TABLE>
<CAPTION>
<S>    <C>   <C>                                                           <C> 

N-1A Item No.
Part A                                                                     Location
Item   1     Cover Page                                                    Cover Page
Item   2     Synopsis                                                      Prospectus Summary
Item   3     Financial Highlights                                          The Funds' Financial Highlights
Item   4     General Description of Registrant                             Cover Page; Prospectus Summary and the Funds' Investment 
                                                                           Objectives and Investment Policies
Item   5     Management of the Fund                                        Board of Trustees; and Management of the Trust
Item   5A    Management's Discussion of Fund Performance                   Annual Report
Item   6     Capital Stock and Other Securities                            Organization and Description of Shares
Item   7     Purchase of Securities Being Offered                          Buying Institutional Shares in the Funds; Dividends, 
                                                                           Distributions and Taxes; and Organization and Description
                                                                           of Shares
Item   8     Redemption or Repurchase                                      Selling (Redeeming) Shares
Item   9     Pending Legal Proceedings                                     Not Applicable

Item   10    Cover Page                                                    Cover Page
Item   11    Table of Contents                                             Table of Contents
Item   12    General Information and History                               Not Applicable
Item   13    Investment Objectives and Policies                            Investment Objectives and Investment Policies; Additional
                                                                           Investment Factors and Risks Regarding the Funds; and 
                                                                           Investment Restrictions
Item   14    Management of the Funds                                       Investment Advisory Services and Distributor
Item   15    Control Persons and Principal Holders of Securities           Investment Advisory Services
Item   16    Investment Advisory and Other Services                        Investment Advisory Services and Distributor
Item   17    Brokerage Allocation                                          Portfolio Transactions
Item   18    Capital Stock and Other Securities                            General
Item   19    Purchase, Redemption and Pricing of Securities Being 
             Offered                                                       Purchases and Redemptions; Pricing Considerations
Item   20    Tax Status                                                    Tax Status, Dividends and
                                                                           Distributions
Item   21    Underwriters                                                  Distributor
Item   22    Calculation of Performance Data                               Calculation of Yield and Total Return
Item   23    Financial Statements                                          Financial Statements

Item   24    Information  required  to be  included in Part C is set forth
             under  the  appropriate  Item,  so  numbered  in  Part C to  this
             Registration Statement
</TABLE>

            
<PAGE>




                              THE AAL MUTUAL FUNDS

                                   PROSPECTUS

                              INSTITUTIONAL SHARES



The AAL  Mutual  Funds  (the  "Funds")  are a series  of  separate  mutual  fund
portfolios within a single Trust, each with a specific investment objective. The
Funds offer  investment  opportunities  to eligible  Lutherans  (including their
families and their  enterprises) and to members and employees of Aid Association
for Lutherans ("AAL").  This prospectus  describes  Institutional shares for the
following Funds:

EQUITY-ORIENTED FUNDS

THE AAL SMALL CAP STOCK FUND
Investing in Small Company Stocks

THE AAL MID CAP STOCK FUND
Investing in Mid-Sized Company Stocks

THE AAL INTERNATIONAL FUND
Investing in Foreign Stocks

THE AAL CAPITAL GROWTH FUND
Investing in Large Company Stocks

   
THE AAL EQUITY INCOME FUND
Investing in Income-Producing Equity Securities
    

THE AAL BALANCED FUND
Investing in Stocks, Bonds and Money Market Instruments

INCOME-ORIENTED FUNDS

THE AAL HIGH YIELD BOND FUND
Investing in Below Investment Grade Bonds

THE AAL HIGH YIELD BOND FUND INVESTS  PRIMARILY IN LOWER-RATED  BONDS,  COMMONLY
KNOWN AS "JUNK  BONDS." JUNK BONDS ARE SUBJECT TO GREATER LOSS OF PRINCIPAL  AND
INTEREST. YOU SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN
THIS FUND. SEE "THE AAL HIGH YIELD BOND  FUND--INVESTMENT  FACTORS AND THE RISKS
INVOLVED."

   
THE AAL MUNICIPAL BOND FUND
Investing in Investment Grade Municipal Bonds
    

THE AAL BOND FUND
Investing in Investment Grade Bonds

THE AAL MONEY MARKET FUND
Investing in Money Market Instruments

THE U.S.  GOVERNMENT  NEITHER  INSURES NOR GUARANTEES YOUR INVESTMENT IN THE AAL
MONEY MARKET FUND. ALSO, WE (THE AAL MUTUAL FUNDS) DO NOT GIVE YOU ANY ASSURANCE
THAT WE WILL BE ABLE TO  MAINTAIN  A NET ASSET  VALUE OF $1.00 PER SHARE FOR THE
FUND.

   
The  prospectus  sets  forth   concisely  the   information   about  the  Funds'
Institutional shares that you ought to know before investing.  Read it carefully
and keep it for  future  reference.  You can  find  more  detailed  information,
including investment policies, techniques, restrictions and the risks associated
with them,  in the Statement of Additional  Information  ("SAI"),  dated July 1,
1998.  The SAI has  been  filed  with the  Securities  and  Exchange  Commission
("SEC").  The SAI, along with the most recent AAL Mutual Funds Annual Report are
incorporated  in this  prospectus  by reference  (which means that it is legally
considered  part of this  prospectus  even  though  you will not find it printed
here).  You can obtain a copy of the SAI and a copy of the annual report free by
calling 800-553-6319 or writing The AAL Mutual Funds at 222 West College Avenue,
Appleton,  Wisconsin  54919-0007.  The  Telecommunications  Device  for the Deaf
("TDD")  number  is  800-684-3416.  Class A and  Class B  shares  for the  Funds
described  in  this  prospectus  are  described  in a  separate  prospectus.  In
addition, The AAL U.S. Government Zero Coupon Target Funds, Series 2001 and 2006
are described in a separate prospectus and are closed to additional investments.
    

LIKE ALL MUTUAL FUND SHARES,  NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR
ANY STATE SECURITIES COMMISSION HAVE APPROVED OR DISAPPROVED THESE SECURITIES OR
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.  ANY  REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.

Table of Contents/Information

PROSPECTUS SUMMARY.....................................

READING THE PROSPECTUS.................................

THE AAL SMALL CAP STOCK FUND...........................
  Expense Summaries and Example........................
  Financial Highlights.................................

THE AAL MID CAP STOCK FUND.............................
  Expense Summaries and Example........................
  Financial Highlights.................................

THE AAL INTERNATIONAL FUND.............................
  Expense Summaries and Example........................
  Financial Highlights.................................

THE AAL CAPITAL GROWTH FUND............................
  Expense Summaries and Example........................
  Financial Highlights.................................

THE AAL EQUITY INCOME FUND.............................
  Expense Summaries and Example........................
  Financial Highlights.................................

   
THE AAL BALANCED FUND..................................
  Expense Summaries and Example........................
  Financial Highlights  ...............................
    

THE AAL HIGH YIELD BOND FUND...........................
  Expense Summaries and Example........................
  Financial Highlights.................................

THE AAL MUNICIPAL BOND FUND............................
  Expense Summaries and Example........................
  Financial Highlights.................................

THE AAL BOND FUND......................................
  Expense Summaries and Example........................
  Financial Highlights.................................

THE AAL MONEY MARKET FUND..............................
  Expense Summaries and Example........................
  Financial Highlights.................................

ADDITIONAL INVESTMENT FACTORS AND RISKS REGARDING
THE FUNDS..............................................

RISKS OF INVESTING IN FOREIGN SECURITIES...............

INVESTMENT RESTRICTIONS................................

BOARD OF TRUSTEES......................................

MANAGEMENT OF THE TRUST................................

BUYING INSTITUTIONAL SHARES IN THE FUNDS...............

SELLING (REDEEMING) YOUR INSTITUTIONAL SHARES..........

EXCHANGE PRIVILEGE.....................................

NET ASSET VALUE (NAV)..................................

DIVIDENDS, DISTRIBUTIONS AND TAXES.....................

SHAREHOLDER MAINTENANCE AGREEMENT......................

YIELD AND PERFORMANCE INFORMATION......................

TRANSFER AGENT, CUSTODIANS AND INDEPENDENT
ACCOUNTANTS............................................

ORGANIZATION AND DESCRIPTION OF SHARES.................

ASSET ALLOCATION.......................................

QUESTIONS..............................................

GLOSSARY OF IMPORTANT TERMS............................

APPENDIX: SECURITIES RATINGS...........................

Prospectus Summary

ORGANIZATION OF THE AAL MUTUAL FUNDS

   
AAL Capital Management  Corporation ("AAL CMC"), which is a Delaware corporation
organized  in  1986,  is the  investment  adviser  ("Adviser")  and  Distributor
("Distributor")  for the Funds.  As the  Adviser,  AAL CMC makes the  investment
decisions for the Funds. As the Distributor,  AAL CMC sells the Funds' shares to
investors. As of June 5, 1998, AAL CMC managed about $5.2 billion for the Funds.

AAL owns the  outstanding  stock in AAL CMC by  holding  all of the stock of AAL
Holdings,  Inc.,  which  holds  all of the  outsanding  stock  of CMC.  AAL is a
non-profit,  non-stock  membership  organization,  licensed  to do business as a
fraternal  benefit  society.  AAL has a mission of bringing  Lutherans and their
families together to pursue quality living through financial security, volunteer
action and help for others.  AAL has over 1.7 million  members and is one of the
world's  largest  fraternal  benefit  societies  in  terms  of  assets  and life
insurance in force. AAL ranks in the top two percent of all life insurers in the
U.S.  in terms of ordinary  life  insurance  (nearly $82 billion in force).  AAL
offers  life,  health and  disability  income  insurance  and fixed and variable
annuities to its members. Members belong to one of over 9,750 local AAL branches
throughout the U.S.
    

READING THE PROSPECTUS

References to "you" and "your" in the prospectus refer to prospective  investors
or  shareholders.  References  to "we," "us" or "our"  refer to the Trust or the
Funds  and  Fund  management  (the  Adviser  and/or   Sub-Adviser  for  The  AAL
International Fund), Distributor,  Administrator, Transfer Agent and Custodians)
generally.

We  have  placed  a  glossary  defining  important  terms  at the  end  of  this
prospectus.  If you are  unsure of the  meaning  of any term in the  prospectus,
please  check the  glossary.  We also have an  Appendix to the  prospectus  that
describes the Nationally Recognized Statistical Rating Organizations  ("NRSROs")
and their ratings for bonds and other debt and money market instruments.  If you
are  unsure of a rating as  described  in the  prospectus,  please  refer to the
Appendix.

THE FUNDS

In  the  prospectus,   we  provide  you  with  information  on:  the  investment
objectives,  policies and risks of  investing in the Funds,  how to buy and sell
Institutional  shares,  management and services  provided to the Funds and other
information.  For more information on the Funds' risks,  please remember to read
"Additional  Investment  Factors and Risks  Involved" after reading the separate
Fund  descriptions.  The table on page three  summarizes the Funds available for
your  investment.  The prospectus  describes a separate class of shares for each
Fund,  "Institutional"  shares,  for Lutheran  organizations or enterprises with
minimum initial investment in the Funds of $500,000.  We designed  Institutional
shares to give Lutheran  organizations and enterprises  (non-natural persons) or
financial  institutions  acting in a fiduciary  or agency  capacity  for them, a
convenient means of accumulating an interest in The AAL Mutual Funds. We did not
design  Institutional  shares  for  individuals,   their  individual  retirement
accounts  or trusts  designed  for the  benefit  of  individuals.  Investors  in
Institutional  shares  purchase  shares at net asset  value.  They  neither  pay
initial sales charges, redemption fees nor "12b-1 distribution or service fees."

We also offer Class A and Class B shares of the Funds.  We describe  Class A and
Class B shares  in a  separate  prospectus.  Investors  in Class A shares of the
Funds pay a sales charge  immediately  upon purchase  (front-end  sales charge).
Investors  in Class B shares pay a sales  charge when they redeem Class B shares
held for less than five years (contingent  deferred sales charge).  In addition,
investors  pay  "12b-1  fees" for Class A and  Class B  shares.  12b-1  fees are
ongoing  asset based fees that we charge for these shares  pursuant to a plan to
cover the costs of certain activities related to the distribution and service of
these shares.  The performance of the Funds' Class A, Class B and  Institutional
shares  will vary  based on  differences  in sales  charges  and fees.  For more
information on, and a prospectus for, the Funds' Class A and Class B shares, you
may call the Mutual Funds Service Center at 800-553-6319.


<TABLE>
<CAPTION>
<S>                 <C>                           <C>                                <C>
   
                    PRIMARY OBJECTIVE             PRIMARY INVESTMENTS                PRIMARY RISKS*
--------------------------------------------------------------------------------------------------------------------------
THE AAL
SMALL CAP           Long-Term Capital Growth      Small Company Stocks               Financial and Market
STOCK FUND
--------------------------------------------------------------------------------------------------------------------------

THE AAL             Long-Term Capital Growth      Mid-Sized Company Stocks           Financial and Market
MID CAP
STOCK FUND
--------------------------------------------------------------------------------------------------------------------------
    

THE AAL             Long-Term Capital Growth      Foreign Stocks                     Financial, Market and
INTERNATIONAL                                                                        Foreign Investment
FUND
--------------------------------------------------------------------------------------------------------------------------

THE AAL             Long-Term Capital Growth      Large Company Stocks               Financial and Market
CAPITAL
GROWTH FUND
--------------------------------------------------------------------------------------------------------------------------

THE AAL             Current Income,               Income-Producing Securities        Financial, Market and
EQUITY INCOME       Long-Term Income Growth,                                         Interest Rate
FUND                and Capital Growth
--------------------------------------------------------------------------------------------------------------------------

THE AAL             Long-Term Total Return        Stocks, Bonds and Money            Financial, Market,
BALANCED                                          Market Instruments                 Interest Rate, and
FUND                                                                                 Credit
--------------------------------------------------------------------------------------------------------------------------

THE AAL             High Current Income and       Below Investment Grade Bonds       Interest Rate,
HIGH YIELD          Secondarily Capital Growth                                       Credit, and Market
BOND FUND
--------------------------------------------------------------------------------------------------------------------------

THE AAL             Current Income Exempt         Investment Grade                   Interest Rate and
MUNICIPAL           from Federal Taxes            Municipal Bonds                    Credit
BOND FUND           Consistent with
                    Capital Preservation
--------------------------------------------------------------------------------------------------------------------------
THE AAL             Current Income Consistent     Investment Grade Bonds             Interest Rate and
BOND FUND           with Capital Preservation                                        Credit
--------------------------------------------------------------------------------------------------------------------------

THE AAL             Current Income Consistent     Money Market Instruments           Interest Rate and
MONEY               with Liquidity and                                               Credit
MARKET FUND         Capital Preservation
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

                         *YOUR GUIDE TO RISK DISCLOSURE
----------------------------------------------------------------------

Credit Risk...........................................................     Pages

Financial Risk........................................................     Pages

Foreign Investment Risk...............................................     Page

Interest Rate Risk....................................................     Pages

Market Risk...........................................................     Pages




The AAL Small Cap Stock Fund
===============================================================================

INVESTMENT OBJECTIVE
-------------------------------------------------------------------------------

The AAL  Small  Cap Stock  Fund  seeks  long-term  capital  growth by  investing
primarily in a diversified portfolio of common stocks and securities convertible
into common stocks,  of small  companies.  By small companies we mean those with
market capitalizations of less than $1 billion.

INVESTMENT POLICIES
-------------------------------------------------------------------------------
   
Under normal circumstances, we invest at least 65% of the Fund's total assets in
stocks, not including convertible securities, of small companies.  Generally, we
focus on companies with market capitalizations  ranging from $30 million to $600
million.  Small companies tend to be substantially  less-seasoned than companies
listed in the  Standard & Poor's  ("S&P") 500 ("S&P  500(R)") or the S&P MidCap
400 Index. Small-cap companies trade in the  over-the-counter  market as well as
on U.S. securities exchanges such as the New York Stock Exchange ("NYSE").

We may invest the remaining 35% of the Fund's total assets in any combination of
additional  small-cap  stocks,   larger-capitalization   stocks  and  securities
convertible into such stocks. We look for small companies  (including  companies
initially offering their stocks to the public) that, in our opinion:
    

1)   are in their early stages of development or positioned in new and emerging 
     industries;
2)   have an opportunity for rapid growth;
3)   have capable management; and
4)   are financially sound.

Generally, the investing public does not know as much about or follow the stocks
of small companies as compared to stocks of larger companies. As a result, small
company stocks may provide greater opportunities for long-term capital growth as
a result of the relative inefficiencies in the marketplace.

We tend to sell the stocks of  companies  when we think  that other  investments
offer better opportunities. This tendency may, from time to time, cause the Fund
to have short-term gains or losses.

ANNUAL ADVISORY FEE
-------------------------------------------------------------------------------

   
     0.75 of 1% on the first $200 million
     0.65 of 1% on average daily net assets over $200 million
    

PORTFOLIO MANAGER
-------------------------------------------------------------------------------

Kevin  Schmitting,  CFA, has managed the day-to-day Fund  investments  since its
inception  on July 1, 1996.  Mr.  Schmitting  also managed The AAL Mid Cap Stock
Fund from November 1, 1995,  through March 17, 1997.  Prior to November 1, 1995,
Mr. Schmitting served as investment director and in other investment  capacities
for the State of Wisconsin  Investment  Board  beginning in 1984 through October
1995.

INVESTMENT FACTORS AND RISKS INVOLVED
-------------------------------------------------------------------------------

Financial Risk:  Small,  less-established  companies may have  relatively  lower
revenues,  limited product lines,  lack of management depth and a lower share of
the market for their products or services than larger companies. Stocks of these
companies  present a greater  risk of losing  value than stocks of larger,  more
established companies.

   
Market Risk:  Over time, the stock market tends to move in cycles,  with periods
when  stock  prices  rise  generally  and  periods  when  stock  prices  decline
generally. Historically, small-capitalization stocks have experienced more price
volatility than mid-size and  large-capitalization  stocks.  Some of the reasons
they have greater volatility include:
    

1)  less certain growth prospects of small firms;
2)  lower degree of liquidity in the markets for such stocks; and
3)  greater sensitivity of small companies to changing economic conditions.

   
As a result,  the value of the Fund's investments tends to increase and decrease
substantially more than the stock market in general,  as measured by the S&P 500
(R). You could lose money investing in the Fund.
    

EXPENSE SUMMARIES AND EXAMPLE
-------------------------------------------------------------------------------

The following  expense  summaries and example should assist you in understanding
the various recurring and  non-recurring  costs and expenses you may directly or
indirectly incur with your investment in Institutional  shares for The AAL Small
Cap Stock Fund.

SHAREHOLDER TRANSACTION EXPENSES

Shareholder transaction expenses are charges you pay when you buy or sell shares
of the  Fund.  You do not pay any  charges  when  you buy or sell  Institutional
shares of the Fund.

SHAREHOLDER                        INSTITUTIONAL
TRANSACTION EXPENSES               SHARES
--------------------------------------------------------------------
Maximum sales charge               None
imposed on purchases (as a
percentage of offering price)
--------------------------------------------------------------------
Maximum sales charge               None
imposed on reinvested
dividends (as a percentage of
net asset value)
--------------------------------------------------------------------
Maximum deferred sales             None
charge (as a percentage of
net asset value)
--------------------------------------------------------------------
Redemption  fee  (The  Funds       None   
currently   charge  $12.00  
for  each  wire
redemption.)
--------------------------------------------------------------------
Exchange fee                       None
========================================


ANNUAL FUND OPERATING EXPENSES

   
The  following  table  reflects  annual   operating   expenses  for  the  Fund's
Institutional shares. Annual operating expenses include a management fee paid to
the  Adviser  and  other  expenses  for  maintaining   shareholder  records  and
furnishing  shareholder  services,  statements and financial reports.  Operating
expenses are expressed as a percentage of the Fund's  average net assets for the
fiscal year ended April 30, 1998.
    

ANNUAL FUND OPERATING              INSTITUTIONAL
EXPENSES (AS A PERCENTAGE          SHARES
OF AVERAGE NET ASSETS)
---------------------------------------------

   
Management fee                     0.75%
---------------------------------------------
12b-1 distribution and             None
service fees
---------------------------------------------
Other expenses                     0.44%
=============================================
Total Fund Operating Expense       1.19%
=============================================
    

EXPENSE EXAMPLE

The following  expense example shows the cumulative  expenses  attributable to a
hypothetical  $1,000 investment with an annual return of 5% compounded  annually
for the years shown.

EXPENSE                    INSTITUTIONAL
EXAMPLE                    SHARES
----------------------------------------------
   
After 1 year                  $12
----------------------------------------------
After 3 years                 $38
----------------------------------------------
After 5 years                 $67
----------------------------------------------
After 10 years                $147
    
===================================

You should use the expense  example for  comparison  purposes  only. It does not
represent the Fund's actual expenses and returns,  either past or future. Actual
expenses may be greater or less than those shown.

   
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------------------

The  financial   highlights   table  covers  The  AAL  Small  Cap  Stock  Fund's
Institutional  shares for the period shown.  The information is based on a share
of beneficial interest outstanding  throughout the applicable period. You should
read the table in conjunction with the Fund's  financial  statements and related
notes,  all of which have been  audited by the Fund's  independent  accountants,
Price  Waterhouse LLP. At your request,  we will provide you,  without charge, a
copy of The AAL Mutual Funds  Annual  Report,  dated April 30, 1998,  containing
these  financial  statements and a more detailed  discussion and analysis of the
Fund's performance.
    


<TABLE>
<CAPTION>
                     INCOME FROM INVESTMENT                             LESS DISTRIBUTIONS                         
                     OPERATIONS 

Share Class          NAV:     Net         Net          Total from   Dividends    Distribution       Total        
and Periods          Start    Investment  Realized     Investment   from Net     from Net           Dividends    
                     of       Income      and Un-      Operations   Investment   Realized           and          
                     Period   (Loss)      realized                  Income       Gain on            Distributions
                                          Gain(Loss)                             on Investments                          
Institutional
shares                                                                                                        
<S>                  <C>      <C>         <C>          <C>          <C>          <C>                <C>     
Period from
29-Dec-97 to
30-Apr-98           $12.45    -$0.006     $1.426       $1.420       $0.000       $0.000             $0.000    
                    

                                                                    SUPPLEMENTAL DATA
                                                                    AND RATIOS

                     NAV:     Total       Net Assets   Ratio of     Ratio of     Portfolio          Average   
                     End of   Return      at End of    Net          Net          Turnover           Commission
                     Period   for         Period       Operating    Investment   Rate               Paid per  
                              Period                   Expenses     Income(Loss)                    Share     
                              (1)                      to Average   to Average   
                                                       Net Assets*  Net Assets* 
                                                       (2)          (2)         
Period from
29-Dec-97 to 
30-Apr-98            $13.87   11.41%      $417,383     1.19%        -0.39%       105.60%            $0.0570    
</TABLE>


*    If the Fund had paid all of its  expenses  for  Institutional  shares,  the
     ratios would be as follows:

Ratio of net operating expenses to average net assets (2): 1.19%.
Ratio of net investment income (loss) to average net assets (2): -.39%.

(1)  Total return assumes  reinvestment of all dividends and distributions.  The
     aggregate (not annualized)  total return is shown for periods less than one
     year.

(2)  For periods less than one year, both the ratio of net operating expenses to
     average net assets and the ratio of net investment income (loss) to average
     net assets are calculated on an annualized basis.




The AAL Mid Cap Stock Fund
================================================================================

INVESTMENT OBJECTIVE
-------------------------------------------------------------------------------

The AAL Mid Cap Stock Fund seeks long-term capital growth by investing primarily
in a diversified  portfolio of common stocks,  and securities  convertible  into
common stocks, of mid-sized companies. By mid-sized companies we mean those with
market capitalizations ranging from $100 million to $5 billion.

INVESTMENT POLICIES
-------------------------------------------------------------------------------

Under normal circumstances, we invest at least 65% of the Fund's total assets in
stocks, not including convertible securities, of mid-sized companies. Generally,
we focus on companies with market  capitalizations  ranging from $400 million to
$3.5  billion.  Mid-sized  companies  tend to be smaller and less  seasoned than
companies  listed  in  the  S&P  500(R).   These  companies  may  trade  in  the
over-the-counter market as well as on U.S. national securities exchanges.

   
We may invest the remaining 35% of the Fund's total assets in any combination of
additional   mid-cap   stocks,   larger-capitalization   stocks  and  securities
convertible into such stocks.
    

We look for mid-sized  companies  (including  companies initially offering their
stocks to the public) that, in our opinion:

   
1)  have prospects for growth in their sales and earnings;
2)  are in an industry with a good economic outlook;
3)  have higher-quality management and more management depth than small 
    companies; and
4)  have a strong financial position.
    

We usually  pick  companies  in the middle  stages of their  development.  These
companies tend to have established a record of  profitability  and possess a new
technology, unique product or market niche.

We tend to sell stocks of companies when we think other investments offer better
opportunities.  Due to this  policy,  the  Fund  may  from  time  to  time  have
short-term gains or losses.

ANNUAL ADVISORY FEE
--------------------------------------------------------------------------------

     0.75 of 1% on the first $200 million
     0.65 of 1% on average daily net assets over $200 million

PORTFOLIO MANAGER
--------------------------------------------------------------------------------

Michael R. Hochholzer,  CFA, has managed the day-to-day Fund  investments  since
March 1997.  Prior to managing the Fund, Mr.  Hochholzer  served as a securities
analyst and portfolio  manager for Aid  Association  for  Lutherans,  the parent
company of AAL Capital Management Corporation from 1989.

INVESTMENT FACTORS AND RISKS INVOLVED
--------------------------------------------------------------------------------

Financial  Risk:  Stocks of  mid-sized  companies  may present a greater risk of
losing value than stocks of larger, more established companies,  but may present
less risk than stocks of smaller  companies.  Mid-sized  companies  tend to have
relatively  smaller revenues,  narrower product lines, less management depth and
smaller  shares  of the  market  for  their  products  or  services  than  large
companies.

Market Risk:  Over time, the stock market tends to move in cycles,  with periods
when  stock  prices  rise  generally  and  periods  when  stock  prices  decline
generally.  Due to the tendency for mid-cap stocks to have less liquidity in the
market than large  company  stocks,  the value of the Fund's  investments  might
increase and decrease more than the stock market in general,  as measured by the
S&P 500(R). You could lose money investing in the Fund.

EXPENSE SUMMARIES AND EXAMPLE
--------------------------------------------------------------------------------

The following  expense  summaries and example should assist you in understanding
the various recurring and  non-recurring  costs and expenses you may directly or
indirectly  incur with your investment in  Institutional  shares for The AAL Mid
Cap Stock Fund.

SHAREHOLDER TRANSACTION EXPENSES

Shareholder transaction expenses are charges you pay when you buy or sell shares
of the  Fund.  You do not pay any  charges  when  you buy or sell  Institutional
shares of the Fund.

SHAREHOLDER                        INSTITUTIONAL
TRANSACTION EXPENSES               SHARES
-------------------------------------------------------------------

Maximum sales charge               None
imposed on purchases (as a
percentage of offering price)
-------------------------------------------------------------------
Maximum sales charge               None
imposed on reinvested
dividends (as a percentage of
net asset value)
-------------------------------------------------------------------
Maximum deferred sales             None
charge (as a percentage of
net asset value)
-------------------------------------------------------------------
Redemption  fee  (The  Funds       None   
currently   charge  $12.00  
for  each  wire
redemption.)
-------------------------------------------------------------------
Exchange fee                       None
====================================================


ANNUAL FUND OPERATING EXPENSES

   
The  following  table  reflects  annual   operating   expenses  for  the  Fund's
Institutional shares. Annual operating expenses include a management fee paid to
the  Adviser  and  other  expenses  for  maintaining   shareholder  records  and
furnishing  shareholder  services,  statements and financial reports.  Operating
expenses are expressed as a percentage of the Fund's  average net assets for the
fiscal year ended April 30, 1998.
    

ANNUAL FUND OPERATING                       INSTITUTIONAL
EXPENSES (AS A PERCENTAGE                   SHARES
OF AVERAGE NET ASSETS)
---------------------------------------------------------------------
   
Management fee                               0.68%
---------------------------------------------------------------------
12b-1 distribution and service fees          None
---------------------------------------------------------------------
Other expenses                               0.18%
====================================================
Total Fund Operating Expenses                0.86%
    
====================================================

EXPENSE EXAMPLE

The following  expense example shows the cumulative  expenses  attributable to a
hypothetical  $1,000 investment with an annual return of 5% compounded  annually
for the years shown.

EXPENSE                       INSTITUTIONAL
EXAMPLE                       SHARES
----------------------------------------------------------------------
   
After 1 year                       $9
----------------------------------------------------------------------
After 3 years                      $28
----------------------------------------------------------------------
After 5 years                      $49
----------------------------------------------------------------------
After 10 years                     $108
    
=========================================

You should use the expense  example for  comparison  purposes  only. It does not
represent the Fund's actual expenses and returns,  either past or future. Actual
expenses may be greater or less than those shown.

   
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
The financial highlights table covers The AAL Mid Cap Stock Fund's Institutional
shares for the period shown.  The  information is based on a share of beneficial
interest outstanding throughout the applicable period. You should read the table
in conjunction  with the Fund's  financial  statements and related notes, all of
which have been audited by the Fund's independent accountants,  Price Waterhouse
LLP. At your request,  we will provide you,  without  charge,  a copy of The AAL
Mutual Funds Annual Report,  dated April 30, 1998,  containing  these  financial
statements   and  a  more  detailed   discussion  and  analysis  of  the  Fund's
performance.
    


<TABLE>
<CAPTION>
                     INCOME FROM INVESTMENT                             LESS DISTRIBUTIONS                         
                     OPERATIONS 

Share Class          NAV:     Net         Net          Total from   Dividends    Distribution       Total        
and Periods          Start    Investment  Realized     Investment   from Net     from Net           Dividends    
                     of       Income      and Un-      Operations   Investment   Realized           and          
                     Period   (Loss)      realized                  Income       Gain on            Distributions
                                          Gain(Loss)                             on Investments                          
Institutional
shares                                                                                                        
<S>                  <C>      <C>         <C>          <C>          <C>          <C>                <C>     
Period from
29-Dec-97 to
30-Apr-98            $14.40   $0.002      $1.558       $1.560       $0.000       $0.000             $0.000   
                    

                                                                    SUPPLEMENTAL DATA
                                                                    AND RATIOS

                     NAV:     Total       Net Assets   Ratio of     Ratio of     Portfolio          Average   
                     End of   Return      at End of    Net          Net          Turnover           Commission
                     Period   for         Period       Operating    Investment   Rate               Paid per  
                              Period                   Expenses     Income(Loss)                    Share     
                              (1)                      to Average   to Average   
                                                       Net Assets*  Net Assets* 
                                                       (2)          (2)         
Period from
29-Dec-97 to 
30-Apr-98            $15.96   10.83       $1,164,361   0.86%        0.18%        104.73%            $0.0600
</TABLE>


*If  the Fund had paid all of its expenses for Institutional  shares, the ratios
     would be as follows:

Ratio of net operating expenses to average net assets(2):  .86%.
Ratio of net investment income (loss) to average net assets (2):  .18%.

(1)  Total return assumes  reinvestment of all dividends and distributions.  The
     aggregate (not annualized)  total return is shown for periods less than one
     year.

(2)  For periods less than one year, both the ratio of net operating expenses to
     average net assets and the ratio of net investment income (loss) to average
     net assets are calculated on an annualized basis.




The AAL International Fund
================================================================================

INVESTMENT OBJECTIVE
--------------------------------------------------------------------------------

The Fund seeks long-term capital growth by investing  primarily in a diversified
portfolio of foreign stocks.

INVESTMENT POLICIES
--------------------------------------------------------------------------------

Under normal circumstances, we invest at least 65% of the Fund's total assets in
foreign stocks primarily  traded in at least three countries,  not including the
United  States.  We may not invest more than 25% of the Fund's assets in any one
country.  We do not have any other  limitations on how much of its assets it may
invest in securities primarily traded in any one country.

We focus on stocks  primarily  trading in the United  Kingdom,  Western  Europe,
Australia, Far East, Latin America and Canada. Many of these markets are mature,
while others are emerging (for example, Indonesia and Argentina). We do not have
any  limits on the extent to which we can  invest in either  mature or  emerging
markets.  We may  invest  up to 100% of the  Fund's  total  assets  in  emerging
markets.  We have listed the  countries and their  classifications  as mature or
emerging in the Statement of Additional  Information.  From time to time, we may
invest in  securities  trading  in other  countries  not  listed  here or in the
Statement of Additional Information.

Typically, we consider an issuer as domiciled in a particular country if it:

1) is incorporated under the laws of that country;
2) has at least 50% of the value of its assets  located in that  country;  or 
3) derives at least 50% of its income from operations or sales in that country.

For issuers that do not meet the above domicile criterion,  we make a good-faith
determination  based  on  such  factors  as the  location  of  issuer's  assets,
personnel, sales and earnings.

We may  invest  the  remaining  35% of the Fund's  total  assets in:  additional
foreign stocks; U.S. stocks; structured notes and/or preferred stocks; and up to
20% of the  Fund's  total  assets in U.S.  and  foreign  bonds  and  other  debt
obligations,  including  lower-rated debt,  commonly referred to as "junk bonds"
(i.e.,  securities  rated BB or lower by S&P or Ba or lower by Moody's  Investor
Services, Inc. ("Moody's")) and unrated securities.

We do not place any  restrictions on the debt ratings of securities  acquired or
the portion of the Fund's assets we may invest in a particular  rating  category
for the Fund.

Pending the  investment  of cash from new sales or to meet  ordinary  daily cash
needs,  we may hold  cash  temporarily  (U.S.  dollars,  foreign  currencies  or
multinational foreign currency units) for the Fund. We may invest any portion of
the Fund's total assets in money market instruments.

ANNUAL ADVISORY FEE
--------------------------------------------------------------------------------

     0.80 of 1% on average daily net assets

ANNUAL SUB-ADVISORY FEE
--------------------------------------------------------------------------------

     0.55 of 1% on average daily net assets (payable from the 0.80% Annual 
     Advisory Fee paid to the Adviser)

SUB-ADVISER
--------------------------------------------------------------------------------

We have hired a sub-adviser  ("Sub-Adviser"),  Societe Generale Asset Management
Corp.  ("SoGen"),  who,  under our direction and control,  makes the  day-to-day
investment decisions for the Fund. SoGen, 1221 Avenue of the Americas, New York,
NY 10020, is a registered investment adviser that is indirectly owned by Societe
Generale, one of France's largest banks. Under the Sub-Advisory  Agreement,  the
Sub-Adviser for the Fund,  subject to our (the Adviser and Board of Trustees for
the Fund) direction and control determines which securities to purchase and sell
for the Fund,  arranges the purchases and sales for the Fund,  and renders other
assistance to us in formulating and implementing the investment  program for the
Fund.

PORTFOLIO MANAGER
--------------------------------------------------------------------------------

Jean-Marie  Eveillard  has managed the  day-to-day  Fund  investments  since its
inception on August 1, 1995. Mr.  Eveillard has served as SoGen's  President and
Director since April 1990.

Investment Factors and Risks Involved
--------------------------------------------------------------------------------

Foreign  Investment  Risk:  In addition to the risks of  investing  in stocks of
different  sized  companies,  as  highlighted  in our other stock fund offerings
(financial and market risks),  investors face particular  risks  associated with
foreign  investing.  Foreign  investment  risks  include  currency,   liquidity,
political,  economic  and  market  risks,  as  well  as  risks  associated  with
governmental  regulation and nonuniform corporate disclosure  standards.  We may
invest  from 0% to 100% of the Fund's net assets in emerging  growth  countries,
which may entail more risk than investing in mature  countries.  The greater the
percentage of net assets the Fund invests in emerging countries, the greater the
risks to your investment.
You may lose money investing in this Fund.

EXPENSE SUMMARIES AND EXAMPLE
--------------------------------------------------------------------------------

The following  expense  summaries and example should assist you in understanding
the various recurring and  non-recurring  costs and expenses you may directly or
indirectly  incur  with your  investment  in  Institutional  shares  for The AAL
International Fund.

SHAREHOLDER TRANSACTION EXPENSES

Shareholder transaction expenses are charges you pay when you buy or sell shares
of the  Fund.  You do not pay any  charges  when  you buy or sell  Institutional
shares of the Fund.

SHAREHOLDER                             INSTITUTIONAL
TRANSACTION EXPENSES                    SHARES
------------------------------------------------------------
Maximum sales charge                    None
imposed on purchases (as a
percentage of offering price)
------------------------------------------------------------
Maximum sales charge                    None
imposed on reinvested
dividends (as a percentage of
net asset value)
------------------------------------------------------------
Maximum deferred sales                  None
charge (as a percentage of
net asset value)
------------------------------------------------------------
Redemption  fee  (The  Funds            None   
currently   charge  $12.00  
for  each  wire
redemption.)
------------------------------------------------------------
Exchange fee                            None
===================================================

ANNUAL FUND OPERATING EXPENSES

   
The  following  table  reflects  annual   operating   expenses  for  the  Fund's
Institutional shares. Annual operating expenses include a management fee paid to
the  Adviser  and  other  expenses  for  maintaining   shareholder  records  and
furnishing  shareholder  services,  statements and financial reports.  Operating
expenses are expressed as a percentage of the Fund's  average net assets for the
fiscal year ended April 30, 1998.  On December 1, 1997,  we reduced the advisory
fee for this Fund. 
    

ANNUAL FUND OPERATING                       INSTITUTIONAL
EXPENSES (AS A PERCENTAGE                   SHARES
OF AVERAGE NET ASSETS)
-----------------------------------------------------------------------
   
Management fee                               0.80%
-----------------------------------------------------------------------
12b-1 distribution and service fees          None
-----------------------------------------------------------------------
Other expenses                               0.39%
====================================================
Total Fund Operating Expenses                1.19%
    
====================================================

EXPENSE EXAMPLE

The following  expense example shows the cumulative  expenses  attributable to a
hypothetical  $1,000 investment with an annual return of 5% compounded  annually
for the years shown.

EXPENSE                       INSTITUTIONAL
EXAMPLE                       SHARES
----------------------------------------------------------
   
After 1 year                       $12
----------------------------------------------------------
After 3 years                      $38
----------------------------------------------------------
After 5 years                      $67
----------------------------------------------------------
After 10 years                     $147
    
----------------------------------------------------------

You should use the expense  example for  comparison  purposes  only. It does not
represent the Fund's actual expenses and returns,  either past or future. Actual
expenses may be greater or less than those shown.

   
FINANCIAL HIGHLIGHTS

The financial highlights table covers The AAL International Fund's Institutional
shares for the period shown.  The  information is based on a share of beneficial
interest outstanding throughout the applicable period. You should read the table
in conjunction  with the Fund's  financial  statements and related notes, all of
which have been audited by the Fund's independent accountants,  Price Waterhouse
LLP. At your request,  we will provide you,  without  charge,  a copy of The AAL
Mutual Funds Annual Report,  dated April 30, 1998,  containing  these  financial
statements   and  a  more  detailed   discussion  and  analysis  of  the  Fund's
performance.
    


<TABLE>
<CAPTION>
                     INCOME FROM INVESTMENT                             LESS DISTRIBUTIONS                         
                     OPERATIONS 

Share Class          NAV:     Net         Net          Total from   Dividends    Distribution       Total        
and Periods          Start    Investment  Realized     Investment   from Net     from Net           Dividends    
                     of       Income      and Un-      Operations   Investment   Realized           and          
                     Period   (Loss)      realized                  Income       Gain on            Distributions
                                          Gain(Loss)                             on Investments                          
Institutional
shares                                                                                                        
<S>                  <C>      <C>         <C>          <C>          <C>          <C>                <C>     
Period from
29-Dec-97 to
30-Apr-98            $10.11   $0.027      $1.033       $1.060       $0.000       $0.000             $0.000    
                    

                                                                    SUPPLEMENTAL DATA
                                                                    AND RATIOS

                     NAV:     Total       Net Assets   Ratio of     Ratio of     Portfolio          Average   
                     End of   Return      at End of    Net          Net          Turnover           Commission
                     Period   for         Period       Operating    Investment   Rate               Paid per  
                              Period                   Expenses     Income(Loss)                    Share     
                              (1)                      to Average   to Average   
                                                       Net Assets*  Net Assets* 
                                                       (2)          (2)         
Period from
29-Dec-97 to 
30-Apr-98            $11.17   10.48%      $460,269     1.19%        2.38%        19.90%             $0.0090
</TABLE>


*If  the Fund had paid all of its expenses for Institutional  shares, the ratios
     would be as follows:

Ratio of net operating expenses to average net assets (2):  1.19%.
Ratio of net investment income (loss) to average net assets (2):  2.38%.

(1)  Total return assumes  reinvestment of all dividends and distributions.  The
     aggregate (not annualized)  total return is shown for periods less than one
     year.

(2)  For periods less than one year, both the ratio of net operating expenses to
     average net assets and the ratio of net investment income (loss) to average
     net assets are calculated on an annualized basis.




The AAL Capital Growth Fund
================================================================================

INVESTMENT OBJECTIVE
--------------------------------------------------------------------------------

The AAL  Capital  Growth  Fund  seeks  long-term  capital  growth  by  investing
primarily in a diversified portfolio of common stocks and securities convertible
into common stocks.

INVESTMENT POLICIES
--------------------------------------------------------------------------------

Under normal circumstances, we invest at least 65% of the Fund's total assets in
common stocks,  not including  convertible  securities.  Generally,  we focus on
dividend-paying stocks issued by companies with earnings growth per share higher
than earnings growth per share of the S&P 500(R).  In selecting  stocks, we look
for quality, operating growth predictability and financial strength.

We may invest the remaining 35% of the Fund's total assets in additional  common
stocks,  preferred  stocks  and  bonds.  The Fund  does not  invest in bonds for
capital growth or for long time periods. We limit our investments in convertible
securities to no more than 5% of the Fund's net assets.

ANNUAL ADVISORY FEE
--------------------------------------------------------------------------------

     0.70 of 1% on the first $250 million
     0.65 of 1% on the next $250 million
     0.575 of 1% on the next $500 million
     0.50 of 1% on average daily net assets over $1 billion

PORTFOLIO MANAGER
--------------------------------------------------------------------------------

Frederick L. Plautz has managed the day-to-day Fund  investments  since November
1, 1995.  Prior to managing the Fund,  Mr. Plautz  served as vice  president and
portfolio manager for Federated Investors from 1990 through October 1995.

INVESTMENT FACTORS AND RISKS INVOLVED
--------------------------------------------------------------------------------

Financial Risk: Many factors affect an individual company's performance, such as
management  or the demand for a  company's  products  or  services  and  company
performance affects the value of stocks in the Fund's portfolio.

Market Risk:  Over time, the stock market tends to move in cycles,  with periods
when  stock  prices  rise  generally  and  periods  when  stock  prices  decline
generally.  The value of the Fund's  investments  may increase and decrease more
than the stock market in general,  as measured by the S&P 500(R). You could lose
money investing in the Fund.

EXPENSE SUMMARIES AND EXAMPLE
--------------------------------------------------------------------------------

The following  expense  summaries and example should assist you in understanding
the various recurring and  non-recurring  costs and expenses you may directly or
indirectly  incur  with your  investment  in  Institutional  shares  for The AAL
Capital Growth Fund.

SHAREHOLDER TRANSACTION EXPENSES

Shareholder transaction expenses are charges you pay when you buy or sell shares
of the  Fund.  You do not pay any  charges  when  you buy or sell  Institutional
shares of the Fund.

SHAREHOLDER                             INSTITUTIONAL
TRANSACTION EXPENSES                    SHARES
------------------------------------------------------------
Maximum sales charge                    None
imposed on purchases (as a
percentage of offering price)
------------------------------------------------------------
Maximum sales charge                    None
imposed on reinvested
dividends
------------------------------------------------------------
Maximum deferred sales charge           None
------------------------------------------------------------
Redemption  fee  (The  Funds            None   
currently   charge  $12.00  
for  each  wire
redemption.)
------------------------------------------------------------
Exchange fee                            None
===============================================

ANNUAL FUND OPERATING EXPENSES

   
The  following  table  reflects  annual   operating   expenses  for  the  Fund's
Institutional shares. Annual operating expenses include a management fee paid to
the  Adviser  and  other  expenses  for  maintaining   shareholder  records  and
furnishing  shareholder services,  statements and, financial reports.  Operating
expenses are expressed as a percentage of the Fund's  average net assets for the
fiscal year ended April 30, 1998 .
    

ANNUAL FUND OPERATING                   INSTITUTIONAL
EXPENSES (AS A PERCENTAGE               SHARES
OF AVERAGE NET ASSETS)
------------------------------------------------------
   
Management fee                               0.55%
------------------------------------------------------
12b-1 distribution and service fees          None
------------------------------------------------------
Other expenses                               0.03%
===============================================
     Total Fund Operating Expenses           0.58%
    
===============================================

EXPENSE EXAMPLE

The following  expense example shows the cumulative  expenses  attributable to a
hypothetical  $1,000 investment with an annual return of 5% compounded  annually
for the years shown.

EXPENSE                       INSTITUTIONAL
EXAMPLE                       SHARES
-------------------------------------------------------
   
After 1 year                       $6
-------------------------------------------------------
After 3 years                      $19
-------------------------------------------------------
After 5 years                      $33
-------------------------------------------------------
After 10 years                     $74
    
=========================================

You should use the expense  example for  comparison  purposes  only. It does not
represent the Fund's actual expenses and returns,  either past or future. Actual
expenses may be greater or less than those shown.

   
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------

The   financial   highlights   table  covers  The  AAL  Capital   Growth  Fund's
Institutional  shares for the period shown.  The information is based on a share
of beneficial interest outstanding  throughout the applicable period. You should
read the table in conjunction with the Fund's  financial  statements and related
notes,  all of which have been  audited by the Fund's  independent  accountants,
Price  Waterhouse LLP. At your request,  we will provide you,  without charge, a
copy of The AAL Mutual Funds  Annual  Report,  dated April 30, 1998,  containing
these  financial  statements and a more detailed  discussion and analysis of the
Fund's performance.
    


<TABLE>
<CAPTION>
                     INCOME FROM INVESTMENT                             LESS DISTRIBUTIONS                         
                     OPERATIONS 

Share Class          NAV:     Net         Net          Total from   Dividends    Distribution       Total        
and Periods          Start    Investment  Realized     Investment   from Net     from Net           Dividends    
                     of       Income      and Un-      Operations   Investment   Realized           and          
                     Period   (Loss)      realized                  Income       Gain on            Distributions
                                          Gain(Loss)                             on Investments                          
Institutional
shares                                                                                                        
<S>                  <C>      <C>         <C>          <C>          <C>          <C>                <C>     
Period from
29-Dec-97 to
30-Apr-98            $26.05   $0.015      $3.605       $3.620       $0.000       $0.000             $0.000   
                    

                                                                    SUPPLEMENTAL DATA
                                                                    AND RATIOS

                     NAV:     Total       Net Assets   Ratio of     Ratio of     Portfolio          Average   
                     End of   Return      at End of    Net          Net          Turnover           Commission
                     Period   for         Period       Operating    Investment   Rate               Paid per  
                              Period                   Expenses     Income(Loss)                    Share     
                              (1)                      to Average   to Average   
                                                       Net Assets*  Net Assets* 
                                                       (2)          (2)         
Period from
29-Dec-97 to 
30-Apr-98            $29.67   13.90%      $2,985,982   0.58%        0.52%        17.96%             $0.0540
</TABLE>


*    If the Fund had paid all of its  expenses  for  Institutional  shares,  the
     ratios would be as follows:

Ratio of net operating expenses to average net assets(2):  .58%.
Ratio of net investment income (loss) to average net assets (2):  .52%.

(1)  Total return assumes  reinvestment of all dividends and distributions.  The
     aggregate (not annualized)  total return is shown for periods less than one
     year.

(2)  For periods less than one year, both the ratio of net operating expenses to
     average net assets and the ratio of net investment income (loss) to average
     net assets are calculated on an annualized basis.




AAL Equity Income Fund

INVESTMENT OBJECTIVE
--------------------------------------------------------------------------------

The AAL Equity Income Fund seeks  current  income,  long-term  income growth and
capital   growth  by  investing   primarily  in  a   diversified   portfolio  of
income-producing equity securities.  By "income-producing equity securities," we
mean equity securities,  including  securities  exchangeable or convertible into
equity  securities,  that offer dividend yields that exceed the average dividend
yields on stocks comprising the S&P 500(R).

INVESTMENT POLICIES
--------------------------------------------------------------------------------

Under normal circumstances, we invest at least 65% of the Fund's total assets in
income-producing  equity  securities.  We may invest the remainder of the Fund's
total  assets,  in whole  or in  part,  in  additional  income-producing  equity
securities, bonds and commercial paper.

In selecting equity securities for the Fund, we look for companies that:

1)    have a good growth rate and return on capital;
2)    have favorable aspects for future growth and dividends;
3)    are financially sound;
4)    have high-quality management; and
5)    are in a favorable competitive environment.

We buy bonds, including convertible  securities,  if, at the time of purchase at
least two NRSROs  have rated them  investment  grade;  or, if  unrated,  we have
determined them to be of investment  grade. We may invest up to 5% of the Fund's
total assets in such securities rated below investment  grade. We buy commercial
paper rated in the top two categories by an NRSRO. We may buy unrated commercial
paper, if we determine the commercial paper is investment grade.

Although we do not intend to do so at this time,  we may invest up to 15% of the
Fund's net assets in  securities  located  outside  the United  States.  Without
regard to the 15% limitation,  we may invest in foreign securities  domestically
through depository  receipts (i.e.,  American  Depository Receipts ("ADRs")) and
securities of foreign issuers traded on a U.S. national  securities  exchange or
the NASDAQ National Market System.

We expect to realize  income from  dividends  earned on equity  investments  and
interest earned on debt securities.  We seek capital  appreciation by attempting
to select  income-producing  equity  securities that we believe are under-priced
relative to the securities of companies with comparable fundamentals.

ANNUAL ADVISORY FEE
--------------------------------------------------------------------------------

     0.50 of 1% on the first $250 million
     0.45 of 1% on average daily net assets over $250 million

PORTFOLIO MANAGER
--------------------------------------------------------------------------------

Lewis Alexander Bohannon, CFA, has managed the day-to-day Fund investments since
November 1, 1995. From 1980 through 1994, Mr. Bohannon was at Cigna Corporation,
serving as managing director and portfolio manager from 1990 to 1994.

INVESTMENT FACTORS AND RISKS INVOLVED
--------------------------------------------------------------------------------

Although we intend to diversify the Fund's investments in securities across many
different  industries,  income-producing  equity  securities  tend  to  be  more
prevalent  in some market  sectors  than others.  The higher  dividend  yielding
securities  included  in the S&P  500(R)  are found  primarily  in the  services
(communications and retail), energy, utilities,  financial services and consumer
noncyclical and cyclical market  sectors.  Accordingly,  our investments for the
Fund may tend to emphasize certain market sectors more than others.

Financial   Risk:  The  market   sectors  in  which   companies  tend  to  issue
income-producing  equity  securities  usually have high operating,  interest and
other regulatory expenses, such as the public utilities industry.  Also, some of
these sectors are maturing,  meaning that growth is peaking.  Companies in these
market  sectors often use their profits or paying higher  dividends  rather than
reinvesting for company growth. As a result,  income-producing equity securities
typically  have lower capital growth  potential than equity  securities in other
sectors.  Capital growth for many  income-producing  equity securities typically
corresponds to the company's  competitive position, in particular its capability
to capture market share from its competitors.

Interest Rate Risk:  Like bonds,  changes in the level of interest  rates affect
the value of  income-producing  equity securities and the value of the Fund as a
whole.

Market Risk:  Market cycles affect all equity securities over time, with periods
when  stock  prices  rise  generally  and  periods  when  stock  prices  decline
generally.  However,  income-producing  equity securities may rise less and fall
less than the market as a whole because of the higher income  component of these
securities. You still could lose money investing in the Fund.


EXPENSE SUMMARIES AND EXAMPLE
--------------------------------------------------------------------------------

The following  expense  summaries and example should assist you in understanding
the various recurring and  non-recurring  costs and expenses you may directly or
indirectly incur with your investment in Institutional shares for The AAL Equity
Income Fund.

SHAREHOLDER TRANSACTION EXPENSES

Shareholder transaction expenses are charges you pay when you buy or sell shares
of the  Fund.  You do not pay any  charges  when  you buy or sell  Institutional
shares of the Fund.

SHAREHOLDER                             INSTITUTIONAL
TRANSACTION EXPENSES                    SHARES
-------------------------------------------------------------
Maximum sales charge                         None
imposed on purchases (as a
percentage of offering price)
-------------------------------------------------------------
Maximum sales charge                         None
imposed on reinvested
dividends (as a percentage of
net asset value)
-------------------------------------------------------------
Maximum deferred sales                       None
charge (as a percentage of
net asset value)
-------------------------------------------------------------
Redemption  fee  (The  Funds                 None   
currently   charge  $12.00  
for  each  wire
redemption.)
-------------------------------------------------------------
Exchange fee                                 None
===============================================

ANNUAL FUND OPERATING EXPENSES

   
The  following  table  reflects  annual   operating   expenses  for  the  Fund's
Institutional shares. Annual operating expenses include a management fee paid to
the  Adviser  and  other  expenses  for  maintaining   shareholder  records  and
furnishing  shareholder  services,  statements and financial reports.  Operating
expenses are expressed as a percentage of the Fund's  average net assets for the
fiscal year ended April 30, 1998.
    

ANNUAL FUND OPERATING                        INSTITUTIONAL
EXPENSES (AS A PERCENTAGE                    SHARES
OF AVERAGE NET ASSETS)
---------------------------------------------------------------------
   
Management fee                                    0.51%
---------------------------------------------------------------------
12b-1 distribution and service fees               None
---------------------------------------------------------------------
Other expenses                                    0.17%
===================================================
Total Fund Operating Expenses                     0.68%
    
===================================================

EXPENSE EXAMPLE

The following  expense example shows the cumulative  expenses  attributable to a
hypothetical  $1,000 investment with an annual return of 5% compounded  annually
for the years shown.

EXPENSE                       INSTITUTIONAL
EXAMPLE                       SHARES
-------------------------------------------------
   
After 1 year                       $7
-------------------------------------------------
After 3 years                      $22
-------------------------------------------------
After 5 years                      $39
-------------------------------------------------
After 10 years                     $86
    
===============================================

You should use the expense  example for  comparison  purposes  only. It does not
represent the Fund's actual expenses and returns,  either past or future. Actual
expenses may be greater or less than those shown.

   
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------

The financial highlights table covers The AAL Equity Income Fund's Institutional
shares for the period shown.  The  information is based on a share of beneficial
interest outstanding throughout the applicable period. You should read the table
in conjunction  with the Fund's  financial  statements and related notes, all of
which have been audited by the Fund's independent accountants,  Price Waterhouse
LLP. At your request,  we will provide you,  without  charge,  a copy of The AAL
Mutual Funds Annual Report,  dated April 30, 1998,  containing  these  financial
statements   and  a  more  detailed   discussion  and  analysis  of  the  Fund's
performance.
    


<TABLE>
<CAPTION>
                     INCOME FROM INVESTMENT                             LESS DISTRIBUTIONS                         
                     OPERATIONS 

Share Class          NAV:     Net         Net          Total from   Dividends    Distribution       Total        
and Periods          Start    Investment  Realized     Investment   from Net     from Net           Dividends    
                     of       Income      and Un-      Operations   Investment   Realized           and          
                     Period   (Loss)      realized                  Income       Gain on            Distributions
                                          Gain(Loss)                             on Investments                          
Institutional
shares                                                                                                        
<S>                  <C>      <C>         <C>          <C>          <C>          <C>                <C>     
Period from
29-Dec-97 to
30-Apr-98            $13.14   $0.077      $1.160       $1.237       -$0.057      $0.000             -$0.057    
                   

                                                                    SUPPLEMENTAL DATA
                                                                    AND RATIOS

                     NAV:     Total       Net Assets   Ratio of     Ratio of     Portfolio          Average   
                     End of   Return      at End of    Net          Net          Turnover           Commission
                     Period   for         Period       Operating    Investment   Rate               Paid per  
                              Period                   Expenses     Income(Loss)                    Share     
                              (1)                      to Average   to Average   
                                                       Net Assets*  Net Assets* 
                                                       (2)          (2)         
Period from
29-Dec-97 to 
30-Apr-98            $14.32   9.34%       $7,087,176   0.68%        2.10%        64.00%             $0.0600
</TABLE>


*    If the Fund had paid all of its  expenses  for  Institutional  shares,  the
     ratios would be as follows:

Ratio of net operating expenses to average net assets (2):  .68%.
Ratio of net investment income (loss) to average net assets (2):  2.10%.

(1)  Total return assumes  reinvestment of all dividends and distributions.  The
     aggregate (not annualized)  total return is shown for periods less than one
     year.

(2)  For periods less than one year, both the ratio of net operating expenses to
     average net assets and the ratio of net investment income (loss) to average
     net assets are calculated on an annualized basis




The AAL Balanced Fund
================================================================================

INVESTMENT OBJECTIVE
--------------------------------------------------------------------------------

The AAL Balanced Fund seeks  long-term  total return  through a balance  between
income and the potential for long-term capital growth by investing  primarily in
a diversified portfolio of common stocks, bonds and money market instruments. We
select these  investments  consistent  with the  investment  policies of The AAL
Capital Growth, Bond and Money Market Funds, respectively.

INVESTMENT POLICIES
--------------------------------------------------------------------------------

Under  normal  circumstances,  we invest 50 to 60% of the Fund's total assets in
common stocks, 30 to 40% in fixed-income securities and 0 to 20% in money market
instruments.  We will,  however,  at all times maintain an investment mix within
the following ranges:

 1)   35 to 75% common stocks;
 2)   25 to 50% in fixed-income securities; and
 3)   0 to 40% in money market instruments.

We select  investments  for The AAL Balanced Fund in the following  three market
sectors:

1)   common stocks, including the securities in which The AAL Capital Growth 
     Fund may invest;
2)   bonds and other debt  securities with  maturities  generally  exceeding one
     year, including securities in which The AAL Bond Fund may invest; and
3)   money market instruments and other debt securities with maturities 
     generally not exceeding 397 days, including the securities in which The 
     AAL Money Market Fund may invest.

We  periodically  review and adjust the mix of  investments  among three  market
sectors  to  capitalize  on  potential  variations  in returns  produced  by the
interaction of changing  financial markets and economic  conditions.  Changes in
the  investment  mix may occur several times within a year or over several years
depending on market and economic conditions.

ANNUAL ADVISORY FEE
--------------------------------------------------------------------------------

     0.60 of 1% on average daily net assets

PORTFOLIO MANAGERS
--------------------------------------------------------------------------------

Frederick L. Plautz, manager of The AAL Capital Growth Fund and Michael R. Hilt,
manager of The AAL Bond and Money  Market  Funds,  serve as  co-managers  of the
Fund.

INVESTMENT FACTORS AND RISKS INVOLVED
--------------------------------------------------------------------------------

STOCK INVESTMENTS

Financial Risk: Many factors affect an individual company's performance, such as
management  or the demand for a  company's  products  or  services  and  company
performance affects the value of stocks in the Fund's portfolio.

Market Risk:  Over time, the stock market tends to move in cycles,  with periods
when  stocks  prices rise  generally  and periods  when  stocks  prices  decline
generally.  The value of the Fund's  investments  may increase or decrease  more
than the stock  market in general,  as  measured  by the S&P 500(R).  Because we
invest 35 to 75% of the Fund's assets in stocks,  fluctuating  stock prices will
have a significant  impact on the Fund's value (the price of the Fund's shares).
You could lose money investing in the Fund.

BOND AND MONEY MARKET INSTRUMENT INVESTMENTS

Interest  Rate Risk:  Changes in interest  rate levels affect the value of bonds
and money market  instruments  in the  portfolio  and the value of the Fund as a
whole.

Credit Risk: The creditworthiness of bond issuers will affect the value of their
bonds and money market instruments,  which may decline during the Fund's holding
periods and affect the value of the Fund as a whole.

ASSET ALLOCATION

We may  shift  the  portfolio's  asset mix of  stocks,  bonds  and money  market
instruments based on existing or anticipated market conditions.  The returns you
receive will depend on how we have allocated the Fund's investments across these
asset  categories.  As the  allocation  fluctuates  over time your  returns will
fluctuate.

The Fund seeks total return, consisting of capital appreciation,  current income
and long-term  income growth,  by following an asset  allocation  strategy.  The
Fund, however, may not achieve as high a level of either capital appreciation or
income as a Fund that has only one of these as a primary objective.

EXPENSE SUMMARIES AND EXAMPLE
--------------------------------------------------------------------------------

The following  expense  summaries and example should assist you in understanding
the various recurring and  non-recurring  costs and expenses you may directly or
indirectly  incur  with your  investment  in  Institutional  shares  for The AAL
Balanced Fund.

SHAREHOLDER TRANSACTION EXPENSES

Shareholder transaction expenses are charges you pay when you buy or sell shares
of the  Fund.  You do not pay any  charges  when  you buy or sell  Institutional
shares of the Fund.

SHAREHOLDER                             INSTITUTIONAL
TRANSACTION EXPENSES                    SHARES
----------------------------------------------------------
Maximum sales charge                         None
imposed on purchases (as a
percentage of offering price)
----------------------------------------------------------
Maximum sales charge                         None
imposed on reinvested
dividends (as a percentage of
net asset value)
----------------------------------------------------------
Maximum deferred sales                       None
charge (as a percentage of
net asset value)
----------------------------------------------------------
Redemption  fee  (The  Funds                 None   
currently   charge  $12.00  
for  each  wire
redemption.)
----------------------------------------------------------
Exchange fee                                 None
===================================================

ANNUAL FUND OPERATING EXPENSES

   
The  following  table  reflects  annual   operating   expenses  for  the  Fund's
Institutional shares. Annual operating expenses include a management fee paid to
the  Adviser  and  other  expenses  for  maintaining   shareholder  records  and
furnishing  shareholder  services,  statements and financial reports.  Operating
expenses are expressed as a percentage of the Fund's  average net assets for the
period ended April 30, 1998.
    

ANNUAL FUND OPERATING                       INSTITUTIONAL
EXPENSES (AS A PERCENTAGE                   SHARES
OF AVERAGE NET ASSETS)
----------------------------------------------------------------
   
Management fee                                    0.60%
----------------------------------------------------------------
12b-1 distribution and service fees               None
----------------------------------------------------------------
Other expenses                                    1.35%
===================================================
Total Fund Operating Expenses                     1.95%
    
===================================================

EXPENSE EXAMPLE

The following  expense example shows the cumulative  expenses  attributable to a
hypothetical  $1,000 investment with an annual return of 5% compounded  annually
for the years shown.

EXPENSE                             INSTITUTIONAL
EXAMPLE                             SHARES
---------------------------------------------------------------------
   
After 1 year                                $20
---------------------------------------------------------------------
After 3 years                               $63
---------------------------------------------------------------------
After 5 years                               $108
---------------------------------------------------------------------
After 10 years                              $234
    
=========================================

You should use the expense  example for  comparison  purposes  only. It does not
represent the Fund's actual expenses and returns,  either past or future. Actual
expenses may be greater or less than those shown.

   
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------

The  financial  highlights  table covers The AAL Balanced  Fund's  Institutional
shares for the period shown.  The  information is based on a share of beneficial
interest outstanding throughout the applicable period. You should read the table
in conjunction  with the Fund's  financial  statements and related notes, all of
which have been audited by the Fund's independent accountants,  Price Waterhouse
LLP. At your request,  we will provide you,  without  charge,  a copy of The AAL
Mutual Funds Annual Report,  dated April 30, 1998,  containing  these  financial
statements   and  a  more  detailed   discussion  and  analysis  of  the  Fund's
performance.
    


<TABLE>
<CAPTION>
                     INCOME FROM INVESTMENT                             LESS DISTRIBUTIONS                         
                     OPERATIONS 

Share Class          NAV:     Net         Net          Total from   Dividends    Distribution       Total        
and Periods          Start    Investment  Realized     Investment   from Net     from Net           Dividends    
                     of       Income      and Un-      Operations   Investment   Realized           and          
                     Period   (Loss)      realized                  Income       Gain on            Distributions
                                          Gain(Loss)                             on Investments                          
Institutional
shares                                                                                                        
<S>                  <C>      <C>         <C>          <C>          <C>          <C>                <C>     
Period from
29-Dec-97 to
30-Apr-98            $10.00   $0.042      $0.775       $0.817       -$0.027      $0.000             -$0.027    

 
                                                                    SUPPLEMENTAL DATA
                                                                    AND RATIOS

                     NAV:     Total       Net Assets   Ratio of     Ratio of     Portfolio          Average   
                     End of   Return      at End of    Net          Net          Turnover           Commission
                     Period   for         Period       Operating    Investment   Rate               Paid per  
                              Period                   Expenses     Income(Loss)                    Share     
                              (1)                      to Average   to Average   
                                                       Net Assets*  Net Assets* 
                                                       (2)          (2)         
Period from
29-Dec-97 to 
30-Apr-98            $10.79   8.17%       $1,076,355   1.95%        1.73%        11.52%             $0.0300
</TABLE>


*    If the Fund had paid all of its  expenses  for  Institutional  shares,  the
     ratios would be as follows:

Ratio of net operating expenses to average net assets (2):  1.95%.
Ratio of net investment income (loss) to average net assets (2):  1.73%.

(1)  Total return assumes  reinvestment of all dividends and  distributions  The
     aggregate (not annualized)  total return is shown for periods less than one
     year.

(2)  For periods less than one year, both the ratio of net operating expenses to
     average net assets and the ratio of net investment income (loss) to average
     net assets are calculated on an annualized basis




The AAL High Yield Bond Fund
================================================================================


INVESTMENT OBJECTIVE
--------------------------------------------------------------------------------

The AAL High Yield Bond Fund seeks high current income and  secondarily  capital
growth by investing  primarily  in a  diversified  portfolio of high risk,  high
yield bonds  commonly  referred to as "junk bonds." The Fund  actively  seeks to
achieve the secondary objective of capital growth to the extent it is consistent
with the primary objective of high current income.

INVESTMENT POLICIES
--------------------------------------------------------------------------------

Under normal circumstances, we invest at least 65% of the Fund's total assets in
high yield  bonds.  By high yield  bonds,  we mean debt  securities  rated below
investment  grade by a NRSRO,  such as Ba or lower by  Moody's or BB or lower by
S&P, or, if unrated, of comparable quality as we determine.  Please refer to the
Appendix  for  information  on NRSROs and their credit  ratings.  We define high
yield bonds to include:  fixed,  variable,  floating rate and deferred  interest
debt   obligations;   zero   coupon   bonds;   pay-in-kind   bonds;   asset  and
mortgage-backed debt obligations;  structured debt obligations;  and convertible
bonds.

We invest the remaining 35% of the Fund's total assets in any combination of:

1)   additional high yield bonds;
2)   investment grade bonds;
3)   common and preferred stocks (including structured preferred stocks); and
4)   securities issued or guaranteed by the U.S. government, its agencies or 
     instrumentalities ("U.S. Government Obligations").

We may invest up to 20% of the Fund's net assets in bonds of foreign issuers.

In evaluating the quality of a particular  high yield bond for investment in the
Fund,  we do  not  rely  exclusively  on  ratings  assigned  by the  NRSROs.  In
appropriate  circumstances,  we perform our own credit analysis. We consider the
issuer's:

1)   financial resources;
2)   operating history;
3)   sensitivity to economic conditions and trends;
4)   management's abilities;
5)   debt maturity schedules;
6)   borrowing requirements; and
7)   relative values based on anticipated cash flow, interest and asset 
     coverages and earnings prospects.

We attempt  to  identify  those  issuers of high  yield  bonds  whose  financial
condition is adequate to meet future obligations, has improved or is expected to
improve in the future.  However, we do not have restrictions on the rating level
of the securities in the Fund's  portfolio and may purchase and hold  securities
in default.

ANNUAL ADVISORY FEE
--------------------------------------------------------------------------------

     0.60 of 1% on average daily net assets

PORTFOLIO MANAGER
--------------------------------------------------------------------------------

Dave  Carroll,  CFA,  has  managed the  day-to-day  Fund  investments  since its
inception  on January  8,  1997.  Prior to  managing  the Fund,  he served as an
analyst and trader for Cargill Financial Services from January through September
1996.  From 1986 to August 1995 he was a second  vice  president  and  portfolio
manager for Fortis Advisers, Inc.

INVESTMENT FACTORS AND RISKS INVOLVED
--------------------------------------------------------------------------------

Interest  Rate Risk:  Changes in interest  rate  levels  affect the value of the
bonds in the portfolio and the value of the Fund as a whole.

Credit  Risk:  The primary  risk of  investing  in the high yield  sector is the
credit risk.  Bonds rated below  investment  grade have greater risks of default
than investment grade bonds and, may in fact, be in default.

Market Risk: Frequently,  high yield bonds have a less liquid resale market than
the market for investment grade bonds. In some cases, these bonds have no resale
market at all. As a result, we may have difficulty valuing portfolio securities,
choosing the securities to sell to meet  redemption  requests  and/or selling or
disposing of portfolio securities on favorable terms.

The high yield market has in the past, and may in the future,  experience market
risk due to adverse publicity and investor perceptions,  whether or not based on
fundamental analysis, decreasing market values and liquidity,  especially on the
lesser  traded  issues.  In the past,  Congress has  attempted  restricting  the
advantages of high yield bonds and similar attempts could occur in the future.

   
The monthly weighted average  composition of the Fund's portfolio for the period
from  inception on January 8, 1997,  through the end of the fiscal year on April
30, 1998, was:
    

INVESTMENT GRADE                    PERCENTAGE
                                    OF PORTFOLIO
-----------------------------------------------------
   
BB                                  24%
-----------------------------------------------------
B                                   73%
-----------------------------------------------------
CCC                                 3%
-----------------------------------------------------
CC                                  0%
-----------------------------------------------------
C                                   0%
-----------------------------------------------------
D                                   0%
-----------------------------------------------------
Non-rated                           0%
----------------------------------------------------
===============================

Total                               100%
    
===============================

EXPENSE SUMMARIES AND EXAMPLE
--------------------------------------------------------------------------------

The following  expense  summaries and example should assist you in understanding
the various recurring and  non-recurring  costs and expenses you may directly or
indirectly incur with your investment in  Institutional  shares for The AAL High
Yield Bond Fund.

SHAREHOLDER TRANSACTION EXPENSES

Shareholder transaction expenses are charges you pay when you buy or sell shares
of the  Fund.  You do not pay any  charges  when  you buy or sell  Institutional
shares of the Fund.

SHAREHOLDER                             INSTITUTIONAL
TRANSACTION EXPENSES                    SHARES
--------------------------------------------------------------
Maximum sales charge                         None
imposed on purchases (as a
percentage of offering price)
--------------------------------------------------------------
Maximum sales charge                         None
imposed on reinvested
dividends (as a percentage of
net asset value)
--------------------------------------------------------------
Maximum deferred sales                       None
charge (as a percentage of
net asset value)
--------------------------------------------------------------
Redemption  fee  (The  Funds                 None   
currently   charge  $12.00  
for  each  wire
redemption.)
--------------------------------------------------------------
Exchange fee                                 None
===============================================

ANNUAL FUND OPERATING EXPENSES

   
The  following  table  reflects  annual   operating   expenses  for  the  Fund's
Institutional shares. Annual operating expenses include a management fee paid to
the  Adviser  and  other  expenses  for  maintaining   shareholder  records  and
furnishing  shareholder  services,  statements and financial reports.  Operating
expenses are expressed as a percentage of the Fund's  average net assets for the
fiscal year ended April 30, 1998.
    

ANNUAL FUND OPERATING                   INSTITUTIONAL
EXPENSES (AS A PERCENTAGE               SHARES
OF AVERAGE NET ASSETS)
-----------------------------------------------------------------
   
Management fee                               0.60%
-----------------------------------------------------------------
12b-1 distribution and service fees          None
-----------------------------------------------------------------
Other expenses                               0.15%
==============================================
Total Fund Operating Expenses                0.75%
    
==============================================

EXPENSE EXAMPLE

The following  expense example shows the cumulative  expenses  attributable to a
hypothetical  $1,000 investment with an annual return of 5% compounded  annually
for the years shown.

EXPENSE                  INSTITUTIONAL
EXAMPLE                  SHARES
---------------------------------------------------
   
After 1 year               $8
---------------------------------------------------
After 3 years              $24
---------------------------------------------------
After 5 years              $43
---------------------------------------------------
After 10 years             $95
    
==============================

You should use the expense  example for  comparison  purposes  only. It does not
represent the Fund's actual expenses and returns,  either past or future. Actual
expenses may be greater or less than those shown.

   
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------

The  financial   highlights   table  covers  The  AAL  High  Yield  Bond  Fund's
Institutional  shares for the period shown.  The information is based on a share
of beneficial interest outstanding  throughout the applicable period. You should
read the table in conjunction with the Fund's  financial  statements and related
notes,  all of which have been  audited by the Fund's  independent  accountants,
Price  Waterhouse LLP. At your request,  we will provide you,  without charge, a
copy of The AAL Mutual Funds  Annual  Report,  dated April 30, 1998,  containing
these  financial  statements and a more detailed  discussion and analysis of the
Fund's performance.
    


<TABLE>
<CAPTION>


                     INCOME FROM INVESTMENT                             LESS DISTRIBUTIONS                         
                     OPERATIONS 

Share Class          NAV:     Net         Net          Total from   Dividends    Distribution       Total        
and Periods          Start    Investment  Realized     Investment   from Net     from Net           Dividends    
                     of       Income      and Un-      Operations   Investment   Realized           and          
                     Period   (Loss)      realized                  Income       Gain on            Distributions
                                          Gain(Loss)                             on Investments                          
Institutional
shares                                                                                                        
<S>                  <C>      <C>         <C>          <C>          <C>          <C>                <C>     
Period from
29-Dec-97 to
30-Apr-98            $10.29   $0.312      $0.020       $0.332       -$0.312      $0.000             -$0.312    
                   

                                                                    SUPPLEMENTAL DATA
                                                                    AND RATIOS

                     NAV:     Total       Net Assets   Ratio of     Ratio of     Portfolio          
                     End of   Return      at End of    Net          Net          Turnover           
                     Period   for         Period       Operating    Investment   Rate               
                              Period                   Expenses     Income(Loss)                    
                              (1)                      to Average   to Average   
                                                       Net Assets*  Net Assets* 
                                                       (2)          (2)         
Period from
29-Dec-97 to 
30-Apr-98            $10.31   3.28%       $178,730      0.75%       9.53%        112.37%
</TABLE>


*    If the Fund had paid all of its  expenses  for  Institutional  shares,  the
     ratios would be as follows:

Ratio of net operating expenses to average net assets (2): .75%.
Ratio of net investment income (loss) to average net assets (2): 9.53%.

(1)  Total return assumes  reinvestment of all dividends and distributions.  The
     aggregate (not annualized)  total return is shown for periods less than one
     year.

(2)  For periods less than one year, both the ratio of net operating expenses to
     average net assets and the ratio of net investment income (loss) to average
     net assets are calculated on an annualized basis




The AAL Municipal Bond Fund
================================================================================

INVESTMENT OBJECTIVE
--------------------------------------------------------------------------------

The AAL  Municipal  Bond Fund seeks a high level of current  income  exempt from
federal  income  taxes,   consistent  with  capital  preservation  by  investing
primarily in a diversified portfolio of municipal securities.

INVESTMENT POLICIES
--------------------------------------------------------------------------------

Under normal  circumstances,  we invest at least 80% of the Fund's net assets in
municipal  bonds where the income is exempt from federal  income tax. Of the 80%
invested  in  municipal  bonds,  we invest  at least 75% of them in bonds  rated
within the three highest rating categories assigned by at least one NRSRO at the
time of purchase.

State and local  governments and  municipalities  issue municipal bonds to raise
money for a variety of public purposes,  including  general  financing for state
and local governments or financing for specific projects or public facilities. A
municipality may issue municipal bonds in anticipation of future revenues from a
specific  municipal  project (revenue bonds), or backed by the full taxing power
of a municipality (general obligation bonds), or from the revenues of a specific
project on the credit of a private organization  (industrial development bonds).
Federal law generally  exempts the interest paid on municipal bonds from federal
income taxes.

We may invest 25% or more of the Fund's total assets in  industrial  development
bonds.  The Fund  tries  not to  invest  more  than 25% of its  total  assets in
municipal  bonds that are so  closely  related  that an  economic,  business  or
political development affecting one bond could also affect the others.

We may purchase certain  tax-exempt  bonds that involve a private  purpose.  The
interest paid on these  private  activity  bonds are subject to the  alternative
minimum tax ("AMT  paper").  We limit our  purchases  of AMT paper to 25% of the
Fund's total assets.

ANNUAL ADVISORY FEE
--------------------------------------------------------------------------------

     0.50 of 1% on the first $250 million
     0.45 of 1% on average daily net assets over $250 million.

PORTFOLIO MANAGER
--------------------------------------------------------------------------------

Duane A.  McAllister,  CFA, has managed the day-to-day  Fund  investments  since
April 1994. Prior to joining AAL Capital  Management  Corporation on November 1,
1995,  he managed  the Fund while  serving  as vice  president  of Duff & Phelps
Investment Management Co. For the five-year period before managing the Fund, Mr.
McAllister  managed portfolios for the Northern Trust Company and First National
Bank and Trust in Rockford, Illinois.

INVESTMENT FACTORS AND RISKS INVOLVED
--------------------------------------------------------------------------------

Interest  Rate Risk:  Changes in interest  rate  levels  affect the value of the
bonds in the portfolio and the value of the Fund as a whole.

Credit Risk: The creditworthiness of bond issuers will affect the value of their
bond,  which may decline during the Fund's holding  periods and affect the value
of the Fund as a whole.

Tax Rates:  Changes in  federal  income tax rates may affect  both the net asset
value and the Fund's taxable equivalent interest.

EXPENSE SUMMARIES AND EXAMPLE
--------------------------------------------------------------------------------

The following  expense  summaries and example should assist you in understanding
the various recurring and  non-recurring  costs and expenses you may directly or
indirectly  incur  with your  investment  in  Institutional  shares  for The AAL
Municipal Bond Fund.

SHAREHOLDER TRANSACTION EXPENSES

Shareholder transaction expenses are charges you pay when you buy or sell shares
of the  Fund.  You do not pay any  charges  when  you buy or sell  Institutional
shares of the Fund.

SHAREHOLDER                             INSTITUTIONAL
TRANSACTION EXPENSES                    SHARES
---------------------------------------------------------------
Maximum sales charge                         None
imposed on purchases (as a
percentage of offering price)
---------------------------------------------------------------
Maximum sales charge                         None
imposed on reinvested
dividends (as a percentage of
net asset value)
---------------------------------------------------------------
Maximum deferred sales                       None
charge (as a percentage of
net asset value)
---------------------------------------------------------------
Redemption  fee  (The  Funds                 None   
currently   charge  $12.00  
for  each  wire
redemption.)
---------------------------------------------------------------
Exchange fee                                 None
===============================================

ANNUAL FUND OPERATING EXPENSES

   
The  following  table  reflects  annual   operating   expenses  for  the  Fund's
Institutional shares. Annual operating expenses include a management fee paid to
the  Adviser  and  other  expenses  for  maintaining   shareholder  records  and
furnishing  shareholder  services,  statements and financial reports.  Operating
expenses are expressed as a percentage of the Fund's  average net assets for the
fiscal year ended April 30, 1998.  On September 1, 1997, we reduced the advisory
fee for this Fund.
    

ANNUAL FUND OPERATING                   INSTITUTIONAL
EXPENSES (AS A PERCENTAGE               SHARES
OF AVERAGE NET ASSETS)
--------------------------------------------------------------
   
Management fee                               0.48%
--------------------------------------------------------------
12b-1 distribution and service fees          None
--------------------------------------------------------------
Other expenses                               0.12%
===============================================
Total Fund Operating Expenses                0.60%
     
===============================================

EXPENSE EXAMPLE

The following  expense example shows the cumulative  expenses  attributable to a
hypothetical  $1,000 investment with an annual return of 5% compounded  annually
for the years shown.

EXPENSE                  INSTITUTIONAL
EXAMPLE                  SHARES
---------------------------------------------------
   
After 1 year               $6
---------------------------------------------------
After 3 years              $20
---------------------------------------------------
After 5 years              $34
---------------------------------------------------
After 10 years             $77
    
==============================

You should use the expense  example for  comparison  purposes  only. It does not
represent the Fund's actual expenses and returns,  either past or future. Actual
expenses may be greater or less than those shown.

   
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------

The  financial   highlights   table  covers  The  AAL   Municipal   Bond  Fund's
Institutional  shares for the period shown.  The information is based on a share
of beneficial interest outstanding  throughout the applicable period. You should
read the table in conjunction with the Fund's  financial  statements and related
notes,  all of which have been  audited by the Fund's  independent  accountants,
Price  Waterhouse LLP. At your request,  we will provide you,  without charge, a
copy of The AAL Mutual Funds  Annual  Report,  dated April 30, 1998,  containing
these  financial  statements and a more detailed  discussion and analysis of the
Fund's performance.
    


<TABLE>
<CAPTION>
                     INCOME FROM INVESTMENT                             LESS DISTRIBUTIONS                         
                     OPERATIONS 

Share Class          NAV:     Net         Net          Total from   Dividends    Distribution       Total        
and Periods          Start    Investment  Realized     Investment   from Net     from Net           Dividends    
                     of       Income      and Un-      Operations   Investment   Realized           and          
                     Period   (Loss)      realized                  Income       Gain on            Distributions
                                          Gain(Loss)                             on Investments                          
Institutional
shares                                                                                                        
<S>                  <C>      <C>         <C>          <C>          <C>          <C>                <C>     
Period from
29-Dec-97 to
30-Apr-98            $11.59   $0.180      -$0.190      -$0.010      -$0.180      $0.000             -$0.180    

 
                                                                    SUPPLEMENTAL DATA
                                                                    AND RATIOS

                     NAV:     Total       Net Assets   Ratio of     Ratio of     Portfolio          
                     End of   Return      at End of    Net          Net          Turnover           
                     Period   for         Period       Operating    Investment   Rate               
                              Period                   Expenses     Income(Loss)                    
                              (1)                      to Average   to Average   
                                                       Net Assets*  Net Assets* 
                                                       (2)          (2)         
Period from
29-Dec-97 to 
30-Apr-98            $11.40   -0.09%      $50,091      0.60%        4.79%        139.18%
</TABLE>


*    If the Fund had paid all of its  expenses  for  Institutional  shares,  the
     ratios would be as follows:

Ratio of net operating expenses to average net assets (2): .60%.
Ratio of net investment income (loss) to average net assets (2):  4.79%.

(1)  Total return assumes  reinvestment of all dividends and distributions.  The
     aggregate (not annualized)  total return is shown for periods less than one
     year.

(2)  For periods less than one year, both the ratio of net operating expenses to
     average net assets and the ratio of net investment income (loss) to average
     net assets are calculated on an annualized basis.




The AAL Bond Fund
================================================================================

INVESTMENT OBJECTIVE
--------------------------------------------------------------------------------

The AAL Bond Fund seeks a high level of current income,  consistent with capital
preservation  by investing  primarily in a  diversified  portfolio of investment
grade bonds.

INVESTMENT POLICIES
--------------------------------------------------------------------------------
Under  normal  circumstances,  we invest at least 65% of the Fund's total assets
in:

 1)  bonds of U.S. and foreign issuers payable in U.S. dollars rated within the
     four highest rating categories by at
     least two NRSROs at the time of purchase.
 2)  bonds or other securities issued or guaranteed by the U.S. government,  its
     agencies or instrumentalities,  primarily those securities supported by the
     full faith and credit of the U.S. Treasury.

We may invest the remaining 35% of the Fund's total assets in:

 1)  privately issued or guaranteed mortgage-related securities rated within the
     four highest categories by at least two NRSROs or unrated  mortgage-related
     securities,  if we determine at the time of purchase these  securities have
     credit equal to these ratings;
 2)  commercial  paper in the highest rating category by an NRSRO, or commercial
     paper issued or guaranteed by a corporation who has outstanding  debt rated
     in the two highest categories by an NRSRO at the time of purchase;
 3)  bank obligations,  including repurchase  agreements,  of banks having total
     assets in excess of $1 billion;  and 4)  corporate  obligations,  including
     variable  rate  master  notes,  rated in the two highest  categories  by an
     NRSRO, or issued by a corporation  whose  outstanding  debt has an equal or
     better rating at the time of purchase.

Although we have no  restrictions  on the maturity of the debt securities in the
portfolio,  generally  we  maintain a weighted  average  effective  maturity  of
between 5 and 10 years.  We use the  effective  maturity  of a debt  security in
calculating  weighted  average  effective  maturity,  which  takes into  account
projected  prepayments,  call dates,  put dates and sinking funds,  if any, that
reduce the stated maturity date on the bond.

We  anticipate  that during  normal  market  conditions  the  average  portfolio
maturity of the Fund will not exceed 20 years.  We use the stated final maturity
date of a security in calculating average maturity, notwithstanding earlier call
dates and possible prepayments.

ANNUAL ADVISORY FEE
--------------------------------------------------------------------------------

     0.50 of 1% on the first $250 million
     0.45 of 1% on average daily net assets over $250 million

PORTFOLIO MANAGER
--------------------------------------------------------------------------------

Michael R. Hilt, CFA, has managed the day-to-day Fund investments since November
1, 1995.  From April 1994  through  August  1995,  Mr. Hilt served as  portfolio
manager and  quantitative  analyst for Conseco  Capital  Management,  Inc.  From
August  1992  through  April  1994,  he  served  as  a  portfolio   manager  and
quantitative  analyst for PPM America,  Inc. Mr. Hilt also manages The AAL Money
Market Fund.

INVESTMENT FACTORS AND RISKS INVOLVED
--------------------------------------------------------------------------------

Interest  Rate Risk:  Changes in interest  rate  levels  affect the value of the
bonds in the portfolio and the value of the Fund as a whole.

Credit Risk: The creditworthiness of bond issuers will affect the value of their
bonds,  which may decline during the Fund's holding periods and affect the value
of the Fund as a whole.

EXPENSE SUMMARIES AND EXAMPLE
--------------------------------------------------------------------------------

The following  expense  summaries and example should assist you in understanding
the various recurring and  non-recurring  costs and expenses you may directly or
indirectly incur with your investment in  Institutional  shares for The AAL Bond
Fund.

SHAREHOLDER TRANSACTION EXPENSES

Shareholder transaction expenses are charges you pay when you buy or sell shares
of the  Fund.  You do not pay any  charges  when  you buy or sell  Institutional
shares of the Fund.

SHAREHOLDER                             INSTITUTIONAL
TRANSACTION EXPENSES                    SHARES
--------------------------------------------------------------
Maximum sales charge                         None
imposed on purchases (as a
percentage of offering price)
--------------------------------------------------------------
Maximum sales charge                         None
imposed on reinvested
dividends (as a percentage of
net asset value)
--------------------------------------------------------------
Maximum deferred sales                       None
charge (as a percentage of
net asset value)
--------------------------------------------------------------
Redemption  fee  (The  Funds                 None   
currently   charge  $12.00  
for  each  wire
redemption.)
--------------------------------------------------------------
Exchange fee                                 None
===============================================

ANNUAL FUND OPERATING EXPENSES

   
The  following  table  reflects  annual   operating   expenses  for  the  Fund's
Institutional shares. Annual operating expenses include a management fee paid to
the Adviser and service  fees and other  expenses  for  maintaining  shareholder
records and furnishing  shareholder services,  statements and financial reports.
Operating  expenses  are  expressed as a  percentage  of the Fund's  average net
assets for the fiscal  year ended  April 30,  1998.  On  September  1, 1997,  we
reduced the advisory fee for this Fund.
    

ANNUAL FUND OPERATING               INSTITUTIONAL
EXPENSES (AS A PERCENTAGE           SHARES
OF AVERAGE NET ASSETS)
-------------------------------------------------------------
   
Management fee                          0.48%
-------------------------------------------------------------
12b-1 distribution None                 None
service fees
-------------------------------------------------------------
Other expenses                          0.08%
==============================================
Total Fund Operating Expenses           0.56%
    
==============================================

EXPENSE EXAMPLE

The following  expense example shows the cumulative  expenses  attributable to a
hypothetical  $1,000 investment with an annual return of 5% compounded  annually
for the years shown.

EXPENSE                  INSTITUTIONAL
EXAMPLE                  SHARES
--------------------------------------------------
   
After 1 year               $6
--------------------------------------------------
After 3 years              $18
--------------------------------------------------
After 5 years              $32
--------------------------------------------------
After 10 years             $71
    
================================================================================

You should use the expense  example for  comparison  purposes  only. It does not
represent the Fund's actual expenses and returns,  either past or future. Actual
expenses may be greater or less than those shown.

   
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------

The financial  highlights table covers The AAL Bond Fund's  Institutional shares
for the period shown. The information is based on a share of beneficial interest
outstanding  throughout  the  applicable  period.  You should  read the table in
conjunction with the Fund's financial statements and related notes, all of which
have been audited by the Fund's independent  accountants,  Price Waterhouse LLP.
At your request,  we will provide you,  without charge, a copy of The AAL Mutual
Funds Annual Report, dated April 30, 1998, containing these financial statements
and a more detailed discussion and analysis of the Fund's performance.
    


<TABLE>
<CAPTION>
                    INCOME FROM INVESTMENT                             LESS DISTRIBUTIONS                         
                     OPERATIONS 

Share Class          NAV:     Net         Net          Total from   Dividends    Distribution       Total        
and Periods          Start    Investment  Realized     Investment   from Net     from Net           Dividends    
                     of       Income      and Un-      Operations   Investment   Realized           and          
                     Period   (Loss)      realized                  Income       Gain on            Distributions
                                          Gain(Loss)                             on Investments                          
Institutional
shares                                                                                                        
<S>                  <C>      <C>         <C>          <C>          <C>          <C>                <C>     
Period from
29-Dec-97 to         
30-Apr-98            $10.06    $0.197     -$0.070      $0.127       -$0.197      $0.000             -$0.197     

                
                                                                    SUPPLEMENTAL DATA
                                                                    AND RATIOS

                     NAV:     Total       Net Assets   Ratio of     Ratio of     Portfolio          
                     End of   Return      at End of    Net          Net          Turnover           
                     Period   for         Period       Operating    Investment   Rate               
                              Period                   Expenses     Income(Loss)                    
                              (1)                      to Average   to Average   
                                                       Net Assets*  Net Assets* 
                                                       (2)          (2)         
Period from
29-Dec-97 to 
30-Apr-98            $9.99    1.24%       $29,249,736  0.56%        6.29%        483.76%
</TABLE>


*    If the Fund had paid all of its  expenses  for  Institutional  shares,  the
     ratios would be as follows:

Ratio of net operating expenses to average net assets (2):  .56%.
Ratio of net investment income (loss) to average net assets (2):  6.29%.

(1)  Total return assumes  reinvestment of all dividends and distributions.  The
     aggregate (not annualized)  total return is shown for periods less than one
     year.

(2)  For periods less than one year, both the ratio of net operating expenses to
     average net assets and the ratio of net investment income (loss) to average
     net assets are calculated on an annualized basis




THE AAL MONEY MARKET FUND
================================================================================

INVESTMENT OBJECTIVE
--------------------------------------------------------------------------------

The AAL Money Market Fund seeks a high level of current income,  consistent with
liquidity  and the  preservation  of  capital,  by  investing  in a  diversified
portfolio of high-quality, short-term money market instruments.

INVESTMENT POLICIES
--------------------------------------------------------------------------------

We invest in short-term money market instruments for the Fund, such as:

 1)  obligations issued or guaranteed by the U.S. government, its agencies or 
     instrumentalities;
 2)  certificates of deposit,  bankers  acceptances  and similar  obligations of
     U.S.  banks,  savings  associations,  foreign  branches  of U.S.  banks and
     domestic branches of foreign banks, which have total assets of more than $1
     billion at the time of purchase, and who are members of the Federal Deposit
     Insurance Corporation ("FDIC");
 3)  commercial paper that at the time of purchase is defined as "First Tier" or
     "Second Tier" by the  Investment  Company Act of 1940, as long as we do not
     invest more than 5% of the Fund's  total  assets in Second Tier  commercial
     paper; and
 4)  corporate  obligations,  including  variable  rate master notes that at the
     time of purchase are in one of the two highest  categories of a NRSRO,  or,
     if  unrated,  issued by a  corporation  with  outstanding  debt that has an
     equivalent or better rating at the time of purchase.

We make  investments for the Fund consistent with Rule 2a-7 under the Investment
Company Act of 1940. As such,  we invest in  securities  maturing in 397 days or
less and maintain a dollar-weighted  average portfolio maturity of not more than
90 days. By limiting the maturity of the Fund's  investments,  we seek to lessen
the changes in asset values caused by fluctuations in short-term interest rates.
To the extent it is practical, we try to maintain a constant net asset value per
share of $1.00 for the Fund.

We may purchase participation interests (interests in securities held by others)
in securities we are authorized to invest for the Fund as described above.

The U.S. government neither insures nor guarantees the investments in this Fund.

ANNUAL ADVISORY FEE
--------------------------------------------------------------------------------

     0.50 of 1% on the first $500 million
     0.45 of 1% on average daily net assets over $500 million

PORTFOLIO MANAGER
--------------------------------------------------------------------------------

Michael R. Hilt, CFA, has managed the day-to-day Fund investments since November
1, 1995.  From April 1994  through  August  1995,  Mr. Hilt served as  portfolio
manager and  quantitative  analyst for Conseco  Capital  Management,  Inc.  From
August  1992  through  April  1994,  he  served  as  a  portfolio   manager  and
quantitative analyst for PPM America, Inc.

INVESTMENT FACTORS AND RISKS INVOLVED
--------------------------------------------------------------------------------

Interest Rate Risk: Changes in interest rate levels affect the yield.

Credit  Risk:  The Fund  carries  the risk  that  the  creditworthiness  of some
securities issuers may decline during the Fund's holding period.

EXPENSE SUMMARIES AND EXAMPLE
--------------------------------------------------------------------------------

   
The following  expense  summaries and example should assist you in understanding
the various recurring and  non-recurring  costs and expenses you may directly or
indirectly incur with your investment in The AAL Money Market Fund.
    

SHAREHOLDER TRANSACTION EXPENSES
--------------------------------------------------------------------------------

Shareholder transaction expenses are charges you pay when you buy or sell shares
of the  Fund.  You do not pay any  charges  when  you buy or sell  Institutional
shares of the Fund.

SHAREHOLDER                             INSTITUTIONAL
TRANSACTION EXPENSES                    SHARES
------------------------------------------------------------------
Maximum sales charge                         None
imposed on purchases (as a
percentage of offering price)
------------------------------------------------------------------
Maximum sales charge                         None
imposed on reinvested
dividends (as a percentage of
net asset value)
------------------------------------------------------------------
Maximum deferred sales                       None
charge (as a percentage of
net asset value)
------------------------------------------------------------------
Redemption  fee  (The  Funds                 None   
currently   charge  $12.00  
for  each  wire
redemption.)
------------------------------------------------------------------
Exchange fee                                 None
==============================================

ANNUAL FUND OPERATING EXPENSES

   
The  following  table  reflects  annual   operating   expenses  for  the  Fund's
Institutional  shares.  Operating  expenses are expressed as a percentage of the
Fund's  average  net assets for the fiscal  year ended  April 30,  1998 . Annual
operating  expenses  include  a  management  fee paid to the  Adviser  and other
expenses  for  maintaining   shareholder  records  and  furnishing   shareholder
services,  statements and financial  reports.  We are waiving 0.225 of 1% of the
0.50 of 1% maximum  advisory fee we could charge for the Fund.  As a result,  we
are  charging  a 0.275  of 1%  management  fee.  Percentages  shown  for  "Other
Expenses"  are based on amounts  incurred in the prior fiscal year.  Without the
expense  waiver,  "Total Fund Operating  Expenses" were 1.43%. We anticipate the
waiver continuing through the fiscal year end.
    

ANNUAL FUND OPERATING               INSTITUTIONAL
EXPENSES (AS A PERCENTAGE           SHARES
OF AVERAGE NET ASSETS)
--------------------------------------------------------------
Management fee                          0.28%
(after fee waiver)
--------------------------------------------------------------
12b-1 distribution and     
service fees                            None
--------------------------------------------------------------
   
Other expenses                          0.39%
==============================================
Total Fund Operating Expenses           0.67%
(after fee waiver)
    
==============================================

EXPENSE EXAMPLE

The following  expense example shows the cumulative  expenses  attributable to a
hypothetical  $1,000 investment with an annual return of 5% compounded  annually
for the years shown.

EXPENSE                  INSTITUTIONAL
EXAMPLE                  SHARES
--------------------------------------
   
After 1 year               $7
--------------------------------------
After 3 years              $22
--------------------------------------
After 5 years              $38
--------------------------------------
After 10 years             $85
    
--------------------------------------------------------------------------------

You should use the expense  example for  comparison  purposes  only. It does not
represent the Fund's actual expenses and returns,  either past or future. Actual
expenses may be greater or less than those shown.

   
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------

The financial  highlights table covers The AAL Money Market Fund's Institutional
shares for the period shown.  The  information is based on a share of beneficial
interest outstanding throughout the applicable period. You should read the table
in conjunction  with the Fund's  financial  statements and related notes, all of
which have been audited by the Fund's independent accountants,  Price Waterhouse
LLP. At your request,  we will provide you,  without  charge,  a copy of The AAL
Mutual Funds Annual Report,  dated April 30, 1998,  containing  these  financial
statements   and  a  more  detailed   discussion  and  analysis  of  the  Fund's
performance.
    


<TABLE>
<CAPTION>
                     INCOME FROM INVESTMENT                             LESS DISTRIBUTIONS                         
                     OPERATIONS 

Share Class          NAV:     Net         Net          Total from   Dividends    Distribution       Total        
and Periods          Start    Investment  Realized     Investment   from Net     from Net           Dividends    
                     of       Income      and Un-      Operations   Investment   Realized           and          
                     Period   (Loss)      realized                  Income       Gain on            Distributions
                                          Gain(Loss)                             on Investments                          
Institutional
shares                                                                                                        
<S>                  <C>      <C>         <C>          <C>          <C>          <C>                <C>     
Period from
29-Dec-97 to         
30-Apr-98            $1.00    $0.017      $0.000       $0.017       -$0.017      $0.000             -$0.017     


                
                                                                    SUPPLEMENTAL DATA
                                                                    AND RATIOS

                     NAV:     Total       Net Assets   Ratio of     Ratio of     Portfolio          
                     End of   Return      at End of    Net          Net          Turnover           
                     Period   for         Period       Operating    Investment   Rate               
                              Period                   Expenses     Income(Loss)                    
                              (1)                      to Average   to Average   
                                                       Net Assets*  Net Assets* 
                                                       (2)          (2)         
Period from
29-Dec-97 to 
30-Apr-98            $1.00    1.67%       $234,492     0.67%        5.11%        N/A
</TABLE>


*    If the Fund had paid all of its  expenses  for  Institutional  shares,  the
     ratios would be as follows:

Ratio of net operating expenses to average net assets (2):  1.43%.
Ratio of net investment income (loss) to average net assets (2):  4.36%.

(1)  Total return assumes  reinvestment of all dividends and distributions.  The
     aggregate (not annualized)  total return is shown for periods less than one
     year.

(2)  For periods less than one year, both the ratio of net operating expenses to
     average net assets and the ratio of net investment income (loss) to average
     net assets are calculated on an annualized basis.




ADDITIONAL INVESTMENT FACTORS AND RISKS REGARDING THE FUNDS
================================================================================

TEMPORARY DEFENSIVE PURPOSES
--------------------------------------------------------------------------------

We have a  temporary  defensive  position  policy that allows us to invest up to
100% of a Fund's total assets in cash and short-term  money market  obligations,
including  tax-exempt  money  market  funds and  investment  grade  fixed-income
securities  when  significant  adverse  market,  economic,  political  or  other
circumstances  require  immediate  action  to avoid  losses.  Primarily,  we may
purchase the following types of securities for temporary defensive purposes:

n securities  issued or  guaranteed  by the U.S.  government  or its agencies or
instrumentalities;  n  commercial  paper  rated at the time of  purchase  in the
highest rating category by NRSROs; and n bank obligations,  including repurchase
agreements, of banks having total assets in excess of $1 billion.

We may invest up to 100% of The AAL  International  Fund's  total assets in U.S.
securities or in securities  primarily traded in one or more foreign  countries,
or in debt securities to a greater extent than 20%.

INTEREST RATE RISK
--------------------------------------------------------------------------------

For The AAL Balanced,  High Yield Bond,  Municipal  Bond,  Bond and Money Market
Funds and,  to some  extent,  The AAL Equity  Income  Fund,  you can expect that
interest  rate  changes  will  significantly  impact upon the value of your Fund
investments.  Interest  rates are  influenced  by supply  and  demand as well as
economic monetary policies.  In general,  a decline in prevailing  interest rate
levels  generally will increase the value of the  securities,  particularly  the
bonds,  held in a Fund's  portfolio and vice versa.  As a result,  interest rate
fluctuations  will affect a Fund's net asset values but not the income  received
from its existing  portfolio.  However,  changes in the prevailing interest rate
level will affect the yield on subsequently purchased securities. Because yields
on the  securities  available  for purchase by the Funds will vary over time, we
cannot assure a specific yield on a Fund's shares.

Longer-term  bonds are more sensitive to interest rate changes than shorter-term
bonds, reflecting the greater risk of holding these bonds for a longer period of
time.  Longer-term  bond prices increase more  dramatically  when interest rates
fall and  decrease  more  dramatically  when  interest  rates  rise.  Prices  of
short-term debt, such as money market  instruments,  are less price sensitive to
interest rate changes because of their short durations. Securities that pay high
dividends,  like bonds,  are more  sensitive to interest  rate levels than other
equity securities that pay low dividends.

INVESTING IN BONDS VERSUS INVESTING IN A MUTUAL FUND
--------------------------------------------------------------------------------

Investing  in a  mutual  fund  that  owns  bonds is not the  same as  buying  an
individual  bond. Both bonds and funds owning bonds offer regular income.  While
individual  bonds can offer a fixed amount of regular income until  maturity,  a
mutual fund  portfolio  may  include a  constantly  changing  pool of bonds with
differing  interest rates and maturity  prices.  Both share prices and dividends
may fluctuate in a mutual fund owning bonds.

INVESTMENT GRADE AND MEDIUM GRADE BOND INVESTMENTS
--------------------------------------------------------------------------------

We may purchase investment grade bonds for The AAL International, Equity Income,
Balanced,  High  Yield  Bond,  Municipal  Bond and Bond  Funds.  A debt or other
fixed-income  security is considered  investment grade if it is rated investment
grade by a NRSRO,  such as BBB or better by Duff and  Phelps  Credit  Rating Co.
("D&P") and  Standard & Poor's  Corporation  ("S&P") or Baa or better by Moody's
Investors  Services,  Inc.  ("Moody's").  Securities rated in the fourth highest
category,  such as BBB by D&P or S&P or Baa by Moody's,  are  considered  medium
grade  bonds and have more  sensitivity  to  economic  changes  and  speculative
characteristics.  If a bond in a Fund  has  lost its  rating  or has its  rating
reduced,  the Fund  does not have to sell the  security,  but the  Adviser  will
consider  the lost or reduced  rating in  determining  whether  that Fund should
continue to hold the bond.

HIGH YIELD BOND INVESTMENTS
--------------------------------------------------------------------------------

We may invest in high yield bonds for The AAL  International (up to 20% of total
assets),  Equity  Income (up to 5% of total  assets)  and High Yield Bond Funds.
Credit  Risk:  The primary  risk of  investing  in the high yield  sector is the
credit risk.  Bonds rated below  investment  grade have greater risks of default
than investment grade bonds (including  medium grade bonds) and, may in fact, be
in default.  Issuers of high yield bonds  usually do not have strong  historical
financial  conditions,  requiring  them to offer higher yields to compensate for
the  greater  risk of default on the payment of interest  and  principal.  These
bonds have speculative  characteristics or are speculative.  As a result,  their
market values are less sensitive to interest rate changes on a short-term basis,
but more  sensitive to adverse  economic  developments  or individual  corporate
developments because of their lower credit quality.  During an economic downturn
or period of rising interest rates,  issuers of lower-rated  bonds may have more
difficulty meeting their principal and interest payment obligations or obtaining
additional  financing to make the interest  payments on their debt. When issuers
have difficulty meeting projected goals or obtaining additional  financing,  the
default rate on high yield bonds will likely rise.

Market Risk: Frequently,  high yield bonds are less liquid than investment grade
bonds.  In some cases,  these  bonds have no resale  market at all. As a result,
these  bonds are more  difficult  to price  accurately  and are subject to price
volatility. We may experience difficulty in valuing the high yield securities in
these  portfolios  or  purchasing  or  disposing  of  them on  favorable  terms,
particularly  during adverse market or economic  conditions.  In the event of an
illiquid  market or in the absence of readily  available  market  quotations for
certain  high yield bonds in the Funds'  portfolios,  our  judgment  will play a
greater role in valuing the securities.

CONVERTIBLE BONDS
--------------------------------------------------------------------------------

Except  for The AAL Money  Market  Fund,  we may  invest in  convertible  bonds,
subject to any  restrictions on the quality of bonds in which a Fund may invest.
We also may retain any stocks  received upon  conversion that do not fall within
the Fund's investment parameters to:

1)   permit orderly disposition;
2)   establish a long-term  holding basis for Federal  income tax purposes;  or 
3)   seek capital growth.

Convertible  bonds are often rated below  investment  grade or not rated because
they fall below debt  obligations and just above equities in order of preference
or priority on the issuer's  balance  sheet.  Hence,  an issuer with  investment
grade  senior  debt may issue  convertible  securities  with  ratings  less than
investment grade debt.

MORTGAGE-BACKED SECURITIES
--------------------------------------------------------------------------------

For The AAL Balanced, Bond and High Yield Bond Funds, we may invest in mortgage-
backed  securities  with  amortizing  payments  consisting  of both interest and
principal and  prepayment  privileges  (the ability to prepay the principal or a
portion thereof without penalty). Mortgaged-backed securities represent interest
in  pools  of  mortgage   loans  made  by  lenders  such  as  savings  and  loan
institutions, mortgage bankers, commercial banks and others. Various government,
government-related and private organizations combine these mortgages for sale to
investors  (i.e.,  the  Government   National  Mortgage   Association   ("GNMA")
guarantees and issues mortgage-backed  securities).  Mortgage-backed  securities
generally  provide for a "pass  through" of monthly  payments made by individual
borrowers  on their  residential  mortgage  loans,  net of any fees  paid to the
issuer or guarantor of the  securities.  The yield on these  securities  applies
only to the unpaid  principal  balance.  We reinvest  the  periodic  payments of
principal and interest and prepayments,  if any, in securities at the prevailing
market interest rates. The prevailing rates may be higher or lower than the rate
on  the  original  investment.  During  periods  of  declining  interest  rates,
prepayment  of  mortgages   underlying   mortgage-backed   securities   tend  to
accelerate.  Accordingly,  any prepayments on mortgage-backed securities that we
hold for a Fund  reduce our  ability to  maintain  positions  in  high-yielding,
mortgage-backed  securities and reinvest the principal at comparable  yields for
the Fund. If we buy any mortgage-backed  securities for a Fund at a premium, the
Fund  receives  prepayments,  if any, at par or stated  value,  which lowers the
return on the Fund.

PORTFOLIO TURNOVER
--------------------------------------------------------------------------------

   
We expect The AAL Small Cap Stock,  Mid Cap Stock,  High Yield  Bond,  Municipal
Bond and Bond Funds to have portfolio  turnover greater than 100%, and the other
Funds to have a  portfolio  turnover  of less than 100%.  We do not  calculate a
portfolio  turnover  rate for The AAL Money  Market  Fund  because  of the short
maturities  of its  investments.  Due to the high  volume of buying and  selling
activity  in a  portfolio  with  turnover  in  excess  of 100%,  we may pay more
commissions  for a  Fund.  We  also  may  realize  more  taxable  gains  than in
portfolios  with less  turnover,  which may  result in an  increase  in a Fund's
expenses  and  lower  returns  for  shareholders.  We may  trade for a Fund at a
portfolio rate significantly exceeding 100% (i.e., 400% or more for The AAL Bond
Fund),  when we believe the  benefits of  short-term  investments  outweigh  any
increase  in  transactions  costs or  capital  gains.  For more  information  on
transaction  expenses and taxes,  please refer to sections  entitled  "Portfolio
Transactions," "Dividends, Distributions, and Taxes," and "Yield and Performance
Information."
    

REPURCHASE AGREEMENTS AND BORROWING
--------------------------------------------------------------------------------

To earn income on available  cash or for temporary  defensive  purposes,  we may
invest in repurchase agreements for the Funds. We must hold an amount of cash or
government  securities at least equal to the market value of the securities held
pursuant to the  agreement.  In the event of a bankruptcy  or other default of a
seller of a  repurchase  agreement,  we may  experience  delays and  expenses in
liquidating  the  securities,  declines  in the  securities'  value  and loss of
interest for a Fund.

We may borrow  money,  but only from banks and only for  temporary  or emergency
purposes.  We may not  borrow  more than 10% of a Fund's  net assets and we must
repay any amount we borrow for a Fund before we can buy additional securities.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
--------------------------------------------------------------------------------

To ensure the  availability  of suitable  securities,  we may buy when-issued or
delayed delivery securities for The AAL International,  Equity Income, Balanced,
Bond, Municipal Bond, High Yield Bond and Money Market Funds. Generally, we will
not pay for  when-issued  securities  or start  earning  interest  until we have
received  the  underlying  securities  for the  Funds.  We do not  speculate  in
when-issued  securities  for the Funds.  We  purchase  the  securities  with the
expectation of acquiring the underlying  securities when delivered.  However, we
sell when-issued  securities before the settlement date when we believe it is in
the best interest of a Fund.

LENDING PORTFOLIO SECURITIES
--------------------------------------------------------------------------------

To generate  additional  income, we may from time to time lend securities from a
Fund's portfolios to brokers,  dealers and financial  institutions such as banks
and trust companies.  You will find a full  explanation of portfolio  securities
lending and the restrictions thereon in the Statement of Additional Information.
Presently, we do not intend to lend portfolio securities for the Funds.

ILLIQUID AND RESTRICTED SECURITIES
--------------------------------------------------------------------------------

Except  for The AAL Money  Market  Fund,  we may hold up to 15% of a Fund's  net
assets in  illiquid  securities.  We may hold up to 10% of The AAL Money  Market
Fund's  net  assets  in  restricted  and  other  illiquid  securities.  Illiquid
securities  are  securities  we believe  cannot be sold within seven days in the
normal course of business at approximately the amount at which we have valued or
priced the  securities for a Fund,  including  securities we acquired in private
placements that have restrictions on their resale ("restricted securities").  We
deem time deposits and  repurchase  agreements  maturing in more than seven days
illiquid. Because an active market may not exist for illiquid securities, we may
experience  delays and additional cost when trying to sell illiquid  securities.
For more information on restricted and other illiquid  securities  regarding The
AAL Money Market Fund, please refer to the Statement of Additional  Information,
"Privately Issued Securities:  The AAL Money Market Fund." The Board of Trustees
has established  procedures for determining the liquidity of Fund securities and
has delegated the day-to-day liquidity determinations to the Adviser.

Subject  to the  limitations  for  illiquid  investments  stated  above,  we may
purchase liquid restricted  securities eligible for resale under Rule 144A under
the  Securities  Act of  1933  (the  "Act"),  without  regard  to the 15% or 10%
limitation.  Rule 144A permits certain qualified  institutional  buyers, such as
the Funds, to trade in privately placed securities not registered under the Act.
Institutional  markets for restricted  securities  have developed as a result of
Rule  144A,  providing  both  readily   ascertainable  market  values  for  144A
securities and the ability to liquidate these investments to satisfy  redemption
orders.  However,  an  insufficient  number of  qualified  institutional  buyers
interested  in  purchasing  certain  Rule 144A  securities  held by a Fund could
adversely  affect  their  marketability,  causing us to sell the  securities  at
unfavorable prices.

VARIABLE RATE DEMAND NOTES
--------------------------------------------------------------------------------

All of the Funds may purchase  variable  rate  securities.  The AAL Money Market
Fund may purchase  variable rate securities (the yields will vary in relation to
changes in  specific  money  market  rates,  such as the prime rate) with actual
maturities of 397 days or more,  but only under  conditions  established  by the
Securities  and  Exchange  Commission  rules that permit such  securities  to be
considered  as having  maturities  of less than 397 days. We intend to invest in
these  longer-term  variable rate  securities  only when, in our view, we may be
able to take  advantage  of the  higher  yield  that is  usually  paid on  these
securities  over  other  short-term  securities,  and it  appears to us that the
variable rates on these  securities may reduce the  fluctuations in market value
typical of longer-term securities. We also may purchase variable rate securities
with a put option,  which may further reduce the risk of  fluctuations in market
value.

STRUCTURED SECURITIES
--------------------------------------------------------------------------------

The AAL  International  Fund may invest in  structured  notes  and/or  preferred
stocks. These securities have a value (i.e., principal amount at maturity and/or
coupons or dividend amounts) linked to currencies,  interest rates, commodities,
indices or other  financial  indicators.  Typically,  these  securities are debt
securities or deposits whose value at maturity (i.e., principal value) or coupon
rate is  determined  by reference to a specific  instrument  or  statistic.  For
example,  gold structured securities may provide for maturity values that depend
on the price of gold, resulting in securities whose prices tend to rise and fall
together with gold prices.  These securities involve additional risk,  including
structures  that may reduce the coupons and/or  dividend  amounts to zero or the
redemption  amounts payable at maturity as a result of a decline in the value of
the underlying  instrument.  Structured securities may have more volatility than
the price of the underlying instrument.

FUTURES CONTRACTS AND OPTIONS
--------------------------------------------------------------------------------

Except for The AAL Money  Market  Fund,  we may engage in  options,  futures and
options on futures transactions for the Funds, but only for bona fide hedging or
other  permissible  risk management  purposes.  Generally,  we do not make these
investments  if the initial  margin  deposits  and premiums  paid for  unexpired
options exceed 5% of a Fund's total assets.
In addition, we do not:

n commit more than 25% of a Fund's net assets to such instruments; n commit more
than 25% of a Fund's net assets to covered options;  or n commit more than 5% of
a Fund's net assets to the premiums for put or call options.

Our options  transactions and short sale transactions only consist of techniques
to hedge an unrealized gain on portfolio securities, such as:

 1)  selling short against the box,  which involves  selling short  securities a
     Fund already owns for delivery at a later date;
 2)  purchasing covered put options on portfolio securities,  which allows us to
     sell a Fund's  securities  to the  writer  (seller)  of the option at a set
     price on or before the expiration date of the option;
 3)  selling  covered  call  options,  which  allows the  holder of the  options
     written by us for a Fund to purchase  securities  at a set price before the
     expiration date; and
 4) entering into closing transactions with respect to such options.

If we  sell a  security  short  against  the  box  for a  Fund,  we may  protect
unrealized  gains,  but we may lose the opportunity to profit on such securities
for the Fund if the price  rises.  When we  purchase  covered  put options for a
Fund, we pay the premiums for the options.  We receive  premiums for a Fund when
we write (sell)  covered call  options.  The premiums we receive for a Fund from
writing  (selling) covered call options may be completely or partially offset by
any declines in the prices of the underlying securities.

Also, we may purchase stock index options, write covered stock index options and
enter into closing transactions on these options.

We deal only in  exchange-traded or  over-the-counter  options on securities and
stock indexes.

Our futures  transactions for the Funds may include instruments such as interest
rate and  index  futures  contracts  and  options  thereon.  We may use  futures
transactions for several reasons, including:

 1)   hedging unrealized portfolio gains;
 
 2)  minimizing adverse principal fluctuations in a Fund's debt and fixed-income
     securities; or

 3)  as a means of adjusting exposure to various markets.

Our ability to use futures and options  transactions  successfully  depends upon
our skill for predicting the level and direction of the securities,  options and
futures markets,  interest rates and other factors. An incorrect  prediction may
make the  implementation  of the  hedging  strategy in  furtherance  of a Fund's
investment objectives difficult. For example,  significant differences may exist
between the securities and the options and futures  markets that could result in
an imperfect  correlation  between them.  Also,  an incorrect  prediction on the
changes in the level and  direction  of interest  rates could cause us to have a
lower  return  for the Fund than it would have had if we had not  attempted  the
hedging transaction.  In the absence of the ability to hedge,  however, we might
take portfolio actions in anticipation of the same market movements with similar
investment results, but, presumably, at greater transaction costs.

FOREIGN CURRENCY TRANSACTIONS
--------------------------------------------------------------------------------

Foreign  securities have currency risk, meaning the risk that changes in foreign
currency  exchange rates and exchange control  regulations will affect favorably
or  unfavorably  the  U.S.  dollar  value of these  securities  (and any  income
generated thereon).  To manage this risk and facilitate the purchase and sale of
foreign  securities for a Fund, we may engage in foreign  currency  transactions
involving:

(1)  the  purchase  and sale of  forward  foreign  currency  exchange  contracts
     (agreements to exchange one currency for another at a future date);
 
(2)  options on foreign currencies;
 
(3)  currency futures contracts; or

(4)  options on currency futures contracts.

Although  we use  foreign  currency  transactions  to  protect  against  adverse
currency movements, they involve the risk that we may not accurately predict the
currency  movements,  which could adversely affect a Fund's total return. We set
forth further information on foreign securities and currency transactions in the
Statement of Additional Information.

FOREIGN SECURITIES
--------------------------------------------------------------------------------

The AAL Capital  Growth (up to 10% of net  assets),  Mid Cap Stock (up to 10% of
net assets),  Small Cap Stock (up to 10% of net assets),  International,  Equity
Income  and  Balanced  (common  stock  portion)  Funds  may  invest  in  foreign
securities  domestically through depository receipts (i.e.,  American Depository
Receipts  ("ADRs")) and securities of foreign issuers traded on a U.S.  national
securities exchange or the NASDAQ National Market System. The AAL Balanced (bond
portion),  Bond and High  Yield  Bond  Funds  may  invest up to 20% of their net
assets in debt securities of foreign  issuers that are payable in U.S.  dollars.
The AAL International  Fund and The AAL Equity Income Fund (up to 15% of its net
assets) may invest in foreign securities  primarily trading in countries outside
the United  States.  Foreign  securities  may  present a greater  degree of risk
(including  risks related to tax provisions or  appropriation of assets) than do
securities of domestic issuers.

FOREIGN INVESTING EXPENSES
--------------------------------------------------------------------------------

Investing in foreign securities costs more than investing in U.S. securities due
generally to higher  transaction  costs, such as the commissions paid per share.
As a  result,  Funds  that  invest in  foreign  securities  tend to have  higher
expenses,  particularly funds that invest primarily in foreign securities (i.e.,
The AAL International  Fund). In addition to higher commissions,  they generally
have higher  advisory and custodial fees.  However,  you may find investing in a
fund that purchases foreign securities a more efficient way to invest in foreign
securities  than investing in individual  foreign  securities.  Higher  expenses
attributable to a Fund that invests in foreign securities does not mean that the
Fund has higher expenses than other funds with similar  investment  policies and
percentages of assets invested in foreign securities.

RISKS OF INVESTING IN FOREIGN SECURITIES
================================================================================

CURRENCY RISK
--------------------------------------------------------------------------------

Even  though  a Fund  may hold  securities  denominated  or  traded  in  foreign
currencies,  we measure a Fund's performance in terms of U.S. dollars, which may
subject the Fund to foreign  currency  risk.  Foreign  currency risk is the risk
that the U.S.  dollar  value of foreign  securities  (and any  income  generated
therefrom) held by a Fund may be affected favorably or unfavorably by changes in
foreign currency exchange rates and exchange control regulations. Therefore, the
net asset value of a Fund may go up or down as the value of the dollar  rises or
falls compared to a foreign currency.

LIQUIDITY RISK
--------------------------------------------------------------------------------

Foreign  markets or exchanges tend to have less trading volume than the New York
Stock Exchange or other domestic stock exchanges or markets, meaning the foreign
market may have less  liquidity.  The lower  liquidity  in a foreign  market can
affect our ability to purchase or sell blocks of securities  and obtain the best
price in the foreign  market for a Fund.  Foreign  markets  tend to have greater
spreads between bid and asked prices,  trading  interruptions or suspensions and
brokerage and other transaction costs. Settlement practices vary from country to
country  and many  foreign  markets  have  longer  settlement  periods for their
securities in comparison to domestic  securities.  These differing practices may
cause us to lose  opportunities for favorable  purchases  elsewhere and interest
income.  Also,  foreign  markets  may  trade on days when the Funds do not value
their  portfolios.  This means that a Fund's Net Asset  Value can change on days
when a shareholder  cannot  access his or her account.  We may incur extra costs
for a Fund when  involved in currency  hedging.  For  example,  restrictions  on
converting a foreign  currency into U.S.  dollars may adversely affect the value
of a Fund.

POLITICAL, ECONOMIC AND MARKET RISKS
--------------------------------------------------------------------------------

The degree of political and economic  stability  varies from country to country.
If a country  expropriates money from foreigners or nationalizes an industry,  a
Fund  may  lose  some  or all of any  particular  investment  in  that  country.
Individual  foreign  economies may vary favorably or  unfavorably  from the U.S.
economy  in such  areas as growth of gross  national  product,  inflation  rate,
savings, balance of payments and capital investment,  which may affect the value
of a Fund's investment in any foreign country.

GOVERNMENTAL REGULATION
--------------------------------------------------------------------------------

Many foreign  countries do not subject their markets to the same degree and type
of laws  and  regulations  that  cover  the U.S.  markets.  Also,  many  foreign
governments impose  restrictions on investments in their capital markets as well
as taxes  or other  restrictions  on  repatriation  of  investment  income.  The
regulatory  differences  in some foreign  countries make investing or trading in
their markets more difficult and risky.

NON-UNIFORM CORPORATE DISCLOSURE STANDARDS
--------------------------------------------------------------------------------

Many countries have laws making information on publicly-traded  companies, banks
and   governments   unavailable,   more  difficult  to  obtain,   incomplete  or
unavailable.  The lack of  uniform  accounting  standards  and  practices  among
countries impairs the ability of investors to compare common valuation measures,
such as price/earnings ratios, as applied to securities of different countries.

INVESTMENT RESTRICTIONS
================================================================================

In addition to specific  investment  restrictions  described in the SAI,  only a
vote of the majority of the outstanding shares can change:

     the investment objective of a Fund;

     the policies on borrowing and lending securities;

     the restriction on concentrating  investments in a single  industry,  which
     limits a Fund from  investing  more than 25% of its net assets  (25% of the
     total assets for The AAL International,  Small Cap Stock, Balanced and High
     Yield Bond Funds) in any single  industry.  This restriction does not apply
     to securities issued or guaranteed by the U.S. government,  its agencies or
     instrumentalities; and

     the restriction  requiring issuer  diversification  by limiting a Fund from
     investing more than 5% of its net assets in a single issuer, except that up
     to 25% of its net assets may be invested without regard to this limitation.
     This restriction  does not apply to securities  issued or guaranteed by the
     U.S. government, its agencies or instrumentalities.

With the exception of the fundamental  investment  policy requiring us to invest
at  least  80%  of The  AAL  Municipal  Bond  Fund's  net  assets  in  municipal
securities,  the Board of Trustees may change any of the Funds' other investment
policies without shareholder  approval.  For example,  the Board of Trustees may
change the policies regarding specific investments,  discussed above (other than
the  policies  on  borrowing  and  securities  lending).   We  have  included  a
description of all of the investment restrictions applicable to the Funds in the
Statement of Additional Information.

Board of Trustees
================================================================================

Our Board of  Trustees*  decides  matters of  general  policy  and  reviews  the
activities  of the Adviser and the officers who conduct and  supervise the daily
business operations of the Funds.

The Trustees, their business addresses and principal occupations during the past
five years are:

JOHN H. PENDER,**
P. O. Box 250
Dunbar, WV 25064
DOB 5/25/30

Chairman of the Board of Trustees and from 1987  through May 1996,  President of
the Funds;  Prior to 1996,  Senior Vice President and Chief Investment  Officer,
Aid Association  for Lutherans  (fraternal  benefit  society) and prior to 1992,
Treasurer

F. GREGORY CAMPBELL
2001 Alford Park Drive
Kenosha, WI 53140
DOB 12/16/39

Trustee;  President of Carthage College, Kenosha, WI; Director, Kenosha Hospital
and  Medical  Center;   Chairman,   WI  Assoc.   of  Independent   Colleges  and
Universities;  Board Member, Kenosha Area Development; and Board Member, Prairie
High School

RICHARD L. GADY
One Central Park Plaza
Omaha, NE 68102
DOB 2/28/43

Trustee; and Vice President,  Public Affairs and Chief Economist,  ConAgra, Inc.
(a food and agriculture corporation)

D. W. RUSSLER
P. O. Box 84
Minocqua, WI 54548
DOB 10/28/28

Trustee;   from  1984  through  1988,   Senior  Vice   President,   Finance  and
Administration, NCR Corporation; Director, Capital Markets Assurance Corporation
(reinsurance);  and  Member,  Advisory  Board --  Saratoga  Partners  II and III
(corporate buy-out limited partnership)

LAWRENCE M. WOODS
P. O. Box 1860
Worland, WY 82401
DOB 4/14/32

Trustee;  and Former  Executive  Vice  President and  Director,  Mobil Oil Corp.
(international oil company)

RONALD G. ANDERSON**
4321 North Ballard Road
Appleton, WI 54919
DOB 10/2/48

Trustee and  President;  Senior Vice  President  and CFO,  Aid  Association  for
Lutherans; President, AAL Capital Management Corporation; Director, General Re -
CKAG Reinsurance and Investment S.ar.L.  (Luxembourg  reinsurance  corporation);
and From 1991 through  1996,  Chairman,  General Re Financial  Products and from
1995  through  1996,  Vice  President  Corporate  Development,  General Re (both
reinsurance)

JOHN O. GILBERT**
4321 North Ballard Road
Appleton, WI 54949
DOB 8/30/42

Trustee;  President and Chief Executive Officer,  Aid Association for Lutherans;
Regent, Luther College; Director, Life Office Management Association, Inc.

*    All of the Trustees except for Mr. Pender are Directors of the AAL Variable
     Product Series Fund, Inc.

**   Denotes an  "interested  person" of the Funds as defined in the  Investment
     Company Act of 1940.


MANAGEMENT OF THE TRUST
================================================================================

THE ADVISER
--------------------------------------------------------------------------------

Under an  Investment  Advisory  Agreement  with the  Trust,  and  subject to the
supervision  of the Funds'  Board of  Trustees,  we, as the  Adviser  (AAL CMC),
manage the investment and  reinvestment of the Funds' assets,  provide the Funds
with  personnel,  facilities,  and  administrative  services,  and supervise the
Funds'  daily  business  affairs.   We  formulate  and  implement  a  continuous
investment  program  for  the  Funds  consistent  with  each  Fund's  investment
objectives, policies and restrictions.

We provide  office space as well as executive and other  personnel to the Funds.
In  addition  to  investment  advisory  fees,  each Fund  incurs  the  following
expenses: legal, auditing and accounting expenses;  trustees' fees and expenses;
insurance premiums; brokers' commissions;  taxes and governmental fees; expenses
of  issuing  and  redeeming  shares;   organizational   expenses;   expenses  of
registering or qualifying shares for sale;  postage and printing for reports and
notices to  shareholders;  fees and  disbursements of the Custodian and Transfer
Agent;   certain   expenses  with  respect  to   membership   fees  of  industry
associations; and any extraordinary expenses, such as litigation expenses.

We have engaged  Societe  Generale Asset  Management  Corp.,  1221 Avenue of the
Americas,  New York, NY 10020, to act as Sub-Adviser  for The AAL  International
Fund.  The  Sub-Adviser  has  registered  as an  investment  adviser  under  the
securities  laws.  Societe  Generale,  which is one of France's  largest  banks,
indirectly owns the  Sub-Adviser.  Pursuant to the Sub-Advisory  Agreement,  the
Sub-Adviser,  subject to the direction of the Adviser and the Board of Trustees,
determines the securities that The AAL International Fund purchases or sells and
renders other  assistance to the Adviser in  formulating  and  implementing  the
investment program for the Fund.

   
YEAR 2000

Year 2000 is  approaching  and we are addressing  potential  problems that could
affect our systems and systems of those of The AAL Mutual  Funds' other  service
providers,  such as the Funds'  transfer  agent,  Firstar  Trust  Company.  Many
computer systems in use today cannot  distinguish  between the year 2000 and the
year 1900 because of the way the software encodes and calculates  dates. We have
formed a committee  that is  reviewing  our systems as well as actively  working
with the AAL Mutual  Funds'  other  service  providers  to address the Year 2000
problem.  At this time,  however,  we cannot  assure  that  these  steps will be
sufficient to avoid any adverse impact on the Funds.
    

PORTFOLIO TRANSACTIONS

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


As the Adviser (AAL CMC), we direct the placement of orders for the purchase and
sale of the Funds'  portfolio  securities.  In directing  orders,  we consider a
number of factors to attain what we believe is the best combination of price and
execution for the Funds, including: when we believe that more than one broker or
dealer is capable of providing the best  combination of price and execution in a
transaction.  Normally,  we  select a broker or dealer  who  furnishes  research
services.

As the Adviser, we may have other clients for which we are making investment and
order  placement  decisions  similar  to the  Funds.  When  making  simultaneous
purchases or sales for the Funds and another client, if any, our decisions could
have a detrimental effect on the price or volume of the securities  purchased or
sold  for the  Funds.  In  other  cases,  simultaneous  purchases  or  sales  of
securities  for the Funds and our other clients could provide the Funds with the
ability to  participate in volume  transactions  that may cost less per share or
unit traded than smaller transactions.

--------------------------------------------------------------------------------
BUYING INSTITUTIONAL SHARES IN THE FUNDS

   
You purchase Institutional shares in a Fund at net asset value (purchase price).
Your initial minimum  purchase must be at least  $500,000,  with a minimum of at
least $50,000 in any one Fund account. You can combine all your Class A, Class B
and Institutional shares for purposes of meeting the $500,000 minimum purchase.

Registered  Representatives may receive compensation up to but not exceeding .50
of 1% of amounts invested.

PURCHASE PRICE

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

We determine a Fund's net asset value (NAV) per share once daily at the close of
trading on the New York Stock Exchange (NYSE) (normally 3:00 p.m. Central Time).
If our Transfer  Agent  receives your order in proper form prior to the close of
trading on the NYSE you will recieve that day's price.  If not, you will receive
the price when it is next  calculated.  The share  price  (net  asset  value per
share) will  decline on the record  dates when The AAL Small Cap Stock;  Mid Cap
Stock;  International;   Capital  Growth;  Equity  Income;  and  Balanced  Funds
distribute  dividends.  Capital gains reduce the share price of all Funds by the
amount of the  distribution.  If you buy shares before the ex-date  ("buying the
dividend"), you will pay the full price for shares and then receive a portion of
the price back as a taxable distribution.
    

OPENING AN ACCOUNT
--------------------------------------------------------------------------------

   
Please  contact  the  Mutual  Funds  Service  Center,  Institutional  Sales,  at
800-553-6319,  ext.  3131 (The  Telecommunications  Device for the Deaf (TDD) is
800-684-3416)  for  help  on  opening  an  institutional   account   (purchasing
Institutional  shares). We need to determine eligibility for Institutional share
purchases in advance.
    

BUYING OR SELLING SHARES BY WIRE
--------------------------------------------------------------------------------

   
If  your   organization's  or  enterprise's  bank  is  a  member  of  or  has  a
corresponding  relationship  with a member of the Federal Reserve  System,  your
organization or enterprise can buy or sell Institutional  shares of the Funds by
wire transfer. When placing your order, the following steps apply:

         1.   Call AAL Capital  Management  Corporation at 800-553-6319 (The AAL
              Mutual  Funds  Service  Center  (Service  Center)) and provide the
              following information:

                          your account registration;

                          the name of the Fund(s) in which you want to invest;

                          your address;

                          your tax identification number;

                          the dollar amount;

                          the name of the wiring bank; and

                          the  name and telephone number of the person at your 
                          bank who we can contact about your purchase.

         We must  receive  your  wire  order  before  the  closing  of the  NYSE
         (normally 3:00 p.m. Central Time) to receive that day's price.

         2.    Instruct your bank to use the following  instructions when wiring
               funds:

                  WIRE TO:  FIRSTAR BANK MILWAUKEE, N. A.  ABA #075000022

                  CREDIT:  FIRSTAR TRUST COMPANY ACCOUNT 112-952-137

                  FURTHER CREDIT:  NAME OF FUND (SHAREHOLDER ACCOUNT NUMBER)
                  (SHAREHOLDER REGISTRATION)

         Please  call  (800)  553-6319  prior to  sending  the wire to  obtain a
         confirmation  number and to ensure  prompt  and  accurate  handling  of
         funds.

         The  Fund  and  its  transfer  agent  are  not   responsible   for  the
         consequences  of delays  resulting from the banking or Federal  Reserve
         Wire system or from incomplete wiring instructions.

         3.    Complete The AAL Mutual Funds Application and mail it immediately
               to:

                  The AAL Mutual Funds
                  Institutional Sales
                  222 West College Ave.
                  P. O. Box 8004
                  Appleton, WI 54913-8004.
    


ACCOUNTS FOR RETIREMENT SAVINGS

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

AAL members,  their  enterprises and Lutheran  organizations may establish their
pension, profit sharing and 401(k) plans.

A third party  maintenance  fee may apply to some  retirement  accounts.  Please
review plan documents for more information.

The Mutual Funds  Service  Center  (800-553-6319)  will provide you with all the
materials,  documents and forms you need, and will work with you in establishing
your retirement plan.

AUTOMATIC INVESTMENT PLANS
--------------------------------------------------------------------------------

The Capital  Builder Plan allows you to transfer money every month from your AAL
Money Market Fund Account into another AAL Mutual Funds  Account.  The following
rules and/or guidelines apply:

     You can select the transaction  date. If you don't select the date, we will
     automatically  transfer  the  money  from your  account  on the 15th of the
     month;
     
     To start the plan, you must notify us in writing at least 24 hours prior to
     the  transaction  date.  You must have all account  owners sign the Capital
     Builder Plan Card; and
     
     To stop or change the amount of your plan, you must tell us at least 24 
     hours  prior to the transaction date.

SHARE CERTIFICATES
--------------------------------------------------------------------------------

We will not issue share certificates for the Funds' Institutional shares.

OTHER INFORMATION
--------------------------------------------------------------------------------

The U.S.  Postal  Service or  private  delivery  services  are not agents of the
Funds,  the  Distributor,  or the Transfer Agent. We do not legally receive your
purchase application or your request for redemption when you deposit them in the
mail, send them with a private  delivery service or when you deposit them in our
Post Office Box. We must have  physical  possession  of your request to consider
your request  received.  Current law will  determine the legal effect of posting
for deadline purposes.

We reserve the right to suspend the  offering of shares for a period of time and
the right to reject any specific purchase of shares.

SELLING (REDEEMING) YOUR INSTITUTIONAL SHARES
--------------------------------------------------------------------------------

Your Lutheran  organization  or  enterprise  can sell its shares on any business
day. When you sell your shares you receive the net asset value per share.  If we
receive your request in good order before the close of the NYSE  (normally  3:00
p.m. Central Time) the organization or enterprise will receive that day's price.
If we receive your redemption  request in good order on a holiday,  weekend or a
day the NYSE is closed,  we will process the  transaction  on the next  business
day.

You must have your signature guaranteed if you want:

1)   to sell shares with a value of more than $100,000;
2)   the proceeds  sent to an address  other than the one listed for your 
     account; or 
3)   You want the check payable to someone other than the account owner(s).

       

THE AAL MONEY MARKET FUND CHECKS
--------------------------------------------------------------------------------

You can write  checks on your AAL Money Market Fund  account,  if you complete a
check writing  signature card and agreement.  You can request checks on your AAL
Mutual Funds  Application  or in writing.  We do not charge a fee for  supplying
your checks. The following rules and/or guidelines apply:

     The checks you write on The AAL Money  Market Fund must be for $500 or more
     (Because the Fund is not a bank, some features,  such as stop payment,  are
     not available);

     Our Transfer Agent may impose reasonable fees for each check that is 
     returned;
 
     We do not return your canceled checks. For a fee, our Transfer Agent will 
     send a copy of your check to you at your request;

     Unless you purchased  shares by bank wire,  you must wait 12 days after you
     purchase  The AAL Money  Market Fund shares to write  checks  against  that
     purchase; and
   
     You need a written  request--NOT A CHECK--to close an AAL Money Market Fund
     account.  Your written request will require a signature  guarantee to close
     accounts over $100,000.
    

SYSTEMATIC WITHDRAWAL
--------------------------------------------------------------------------------

You can have money automatically withdrawn from your AAL Mutual Funds account(s)
on a regular basis by using our systematic  withdrawal plan. The plan allows you
to receive funds or pay a bill at regular intervals.  The following rules and/or
guidelines apply:

     You can select the  date(s) on which the money is  withdrawn.  If you don't
     select the  date(s),  we will  withdraw the money  automatically  from your
     account on the 15th of the month:

     To start the plan or change the payee(s),  you must notify us in writing at
     least 13 business days prior to the first  withdrawal and you must have all
     account owner(s) sign the appropriate form;

     To stop or change your plan,  you must  notify us at least 5 business  days
     prior to the next  withdrawal;  and n Because  of sales  charges,  you must
     consider  carefully the costs of frequent  investments  in and  withdrawals
     from your account. 

EXCHANGE PRIVILEGE
================================================================================

You may exchange  Institutional  shares in an AAL Mutual Fund for  Institutional
shares in another AAL Mutual Fund. The $50,000  minimum  investment  rules apply
when you open a new account by exchanging shares. You may have a taxable gain or
loss as a result of an exchange.  We reserve the right to end this  privilege if
your enterprise or organization  makes more than 12 exchanges in a year. We also
reserve  the right to  change  or end this  privilege  upon 60 days  notice,  or
suspend this  privilege  without  notice when economic or market changes make it
difficult to carry out such transactions.

BY MAIL
--------------------------------------------------------------------------------

Please include the following in your request:

      name(s) of the account owner(s);
      account number(s)
      amount of shares (or dollar amount) you want to exchange;
      the name of the Fund you are exchanging into; and
      signatures of all account owners.

BY TELEPHONE
--------------------------------------------------------------------------------

The guidelines for exchanging by telephone are:

     You can  exchange  shares by calling  the  Mutual  Fund  Service  Center at
     800-553-6319;  When you call us, Mutual Fund Service  Representatives  will
     ask for a form of personal identification to confirm your identity; and

     If we receive  your  request,  in good order,  before the close of the NYSE
     (normally 3:00 p.m. Central Time), you will receive that day's price.

NET ASSET VALUE (NAV)
================================================================================

We  compute  the net asset  value of a Fund  share by adding up the value of the
individual  Fund's  assets  (i.e.,  stocks and bonds in the  Fund's  portfolio),
subtracting the Fund's  liabilities and dividing the balance by the total number
of shares  outstanding.  We compute  the net asset value of a Fund at the end of
the day after trading on the NYSE closes  (normally 3:00 p.m.  Central Time). We
do not  calculate the net asset value for the Funds on the days when the NYSE is
not open.

We value (or price)  securities  owned by a Fund at current  market  value.  For
securities with readily  available market  quotations,  we use the quotations to
price the security.  If a security does not have a readily available  quotation,
we value the security as  determined  in good faith by or under the direction of
the Board of  Trustees.  The Board of  Trustees  may  approve the use of pricing
services to assist us in the determination of net asset values.

We value all  securities  held by The AAL  Money  Market  Fund and money  market
instruments with a remaining maturity of 60 days or less held by the other Funds
on an amortized cost basis. We comply with SEC  requirements for the use of this
valuation  method.  For The AAL Money  Market Fund,  this method of  calculation
facilitates,  but does not  assure,  maintaining  a constant  net asset value of
$1.00 per share.

DIVIDENDS, DISTRIBUTIONS AND TAXES
================================================================================

As the Funds, we try to qualify annually for, and elect tax treatment applicable
to, a regulated  investment  company under  Subchapter M of the Internal Revenue
Code ("Code"). Pursuant to the requirements of the Code, we intend to distribute
substantially  all of the Funds' net investment  income and net realized capital
gains, if any, less any available  capital loss carryover,  to our  shareholders
annually.  We do this to avoid  paying  income tax on the Funds' net  investment
income and net realized  capital gains or being subject to a federal  excise tax
on  undistributed  net investment  income and net realized gains.  Annually,  we
intend  to  comply  with  all of the  requirements  to  qualify  as a  regulated
investment  company  for each Fund.  We  provide  you with full  information  on
dividends and capital gains distributions for each Fund on an annual basis.

Below, we provide you with a general  description of the  distribution  policies
and some of the tax consequences for the Funds' shareholders.  You should always
check with your tax adviser to determine whether any dividends and distributions
paid to you by a Fund are subject to any taxes, including state and local taxes.

THE AAL SMALL CAP STOCK, MID CAP STOCK,  INTERNATIONAL,  CAPITAL GROWTH,  EQUITY
INCOME,   BALANCED,   HIGH   YIELD   BOND,   BOND   AND   MONEY   MARKET   FUNDS
--------------------------------------------------------------------------------

The dividends from net investment  income of each of these Funds,  including net
short-term capital gains, are taxable as ordinary income to shareholders whether
paid in additional  shares or in cash.  Any long-term  and  medium-term  capital
gains  distributed to shareholders are taxable as capital gains to shareholders,
whether they receive them in cash or in additional shares, and regardless of the
length of time a shareholder has owned the shares.

We  distribute  substantially  all net  investment  income and any net  realized
capital gains, if any, for the Funds as follows:

FUND                          DIVIDENDS           CAPITAL
                              (IF ANY)            GAINS
                                                  (IF ANY)
--------------------------------------------------------------------------------
The AAL                       annually            annually
Small Cap Stock Fund
--------------------------------------------------------------------------------
The AAL                       annually            annually
Mid Cap Stock Fund
--------------------------------------------------------------------------------
The AAL                       annually            annually
International Fund
--------------------------------------------------------------------------------
The AAL                       semi-annually       annually
Capital Growth Fund
--------------------------------------------------------------------------------
The AAL                       quarterly           annually
Equity Income Fund  
--------------------------------------------------------------------------------
The AAL                       quarterly           annually
Balanced Fund
--------------------------------------------------------------------------------
The AAL                       monthly             annually
High Yield Bond Fund
--------------------------------------------------------------------------------
The AAL                       monthly             annually
Municipal Bond Fund
--------------------------------------------------------------------------------
The AAL                       monthly             annually
Bond Fund
--------------------------------------------------------------------------------
The AAL                       monthly             annually
Money Market Fund

The AAL High Yield Bond,  Municipal  Bond,  Bond and Money  Market  Funds accrue
income dividends daily.


THE AAL MUNICIPAL BOND FUND
--------------------------------------------------------------------------------

Dividends  derived from the interest earned on municipal  securities  constitute
"exempt interest dividends" and are generally not subject to federal income tax.
We accrue dividends daily and pay these dividends  monthly for The AAL Municipal
Bond Fund.  We pay the capital  gains for the Fund at least  annually.  Realized
capital gains on municipal  securities  are subject to federal income tax. Thus,
shareholders will be subject to taxation at ordinary rates on the dividends they
receive that are derived from net short-term capital gains. Distributions of net
long-term capital gains will be taxable as long-term capital gains regardless of
the length of time a shareholder  holds them.  We may, for  temporary  defensive
purposes,  invest in short-term taxable securities for the Fund. Shareholders of
this Fund are  subject to federal  income  tax at  ordinary  rates on any income
dividends they receive that are derived from interest on taxable securities.

For  shareholders  who are  receiving  Social  Security  benefits,  the  federal
government  requires you to add  tax-exempt  income,  including  exempt-interest
dividends  from this  Fund,  to your  taxable  income in  determining  whether a
portion of your Social Security  benefits will be subject to federal income tax.
The Internal  Revenue  Code  provides  that every person  required to file a tax
return  must  report,   solely  for  informational   purposes,   the  amount  of
exempt-interest  dividends  received  from us for the Funds  during the  taxable
year.

TAX CONSIDERATIONS
--------------------------------------------------------------------------------

Federal law requires us to withhold 31% of a shareholder's  reportable  payments
(which include dividends,  capital gain  distributions and redemption  proceeds)
for those who have not  properly  certified  that the Social  Security  or other
taxpayer  identification  number they  provided is correct and that he or she is
not subject to backup  withholding.  We do not provide  information on state and
local tax consequences of owning shares in the Funds.

REINVESTMENT OF FUND DISTRIBUTIONS
--------------------------------------------------------------------------------

You can reinvest all of your income dividends and/or capital gains distributions
into the Funds at net asset value. You also can have your  distributions paid in
cash.  When you receive a distribution  you may have to pay taxes whether or not
you  reinvested  them or had them paid out to you in cash. If you have requested
cash distributions and we cannot locate you, we will reinvest your dividends.

SHAREHOLDER MAINTENANCE AGREEMENT
================================================================================

   
The Board of  Trustees  authorizes  us to contract  with AAL Capital  Management
Corporation for certain shareholder maintenance services. AAL Capital Management
Corporation  receives an annual fee for providing  these  services.  This fee is
based upon,  and limited by, the  difference  between the current  account  fees
charged and the normal  full-service  fee  schedule  published  by our  Transfer
Agent. It also includes  reimbursement for out-of-pocket costs including postage
and telephone charges.  This account differential,  including  reimbursement for
expenses, is currently $4.30 per account per year.
    

YIELD AND PERFORMANCE INFORMATION
================================================================================

From time to time,  we  calculate  and  advertise  performance  information  for
different  historical  periods  of time,  by  quoting  yields  or total  returns
designed  to inform you of the  performance  of a Fund.  Whenever  we  advertise
performance,   we  include  standardized  yield  and  total  return  information
calculated in accordance with methods established by the Securities and Exchange
Commission. We may include other total return calculations,  if we feel that you
would  find  such  total  return  calculations  useful  in  evaluating  a Fund's
investment  performance.   We  base  yields  and  total  returns  on  historical
performance.  You should not use such historical  performance  information as an
indication of future performance. Your investment return and the principal value
of your  investments  (except for The AAL Money Market Fund, for which we intend
to maintain at a constant $1.00 net asset value) will fluctuate. At the time you
sell  (redeem)  your  investment,  its value may be worth more or less than your
original cost.

STANDARDIZED YIELD AND TOTAL RETURNS
--------------------------------------------------------------------------------

Whenever  we  advertise  performance,  we include  standardized  yield and total
return  quotations  calculated in accordance  with rules of the  Securities  and
Exchange Commission, in the manner described in the following paragraphs.

THE AAL MONEY MARKET FUND -- STANDARDIZED YIELD AND STANDARDIZED EFFECTIVE YIELD
--------------------------------------------------------------------------------

We may advertise a standardized yield and a standardized effective yield for The
AAL Money Market Fund. We base both yield figures on historical  earnings and do
not intend for these figures to indicate future performance.

The  standardized  yield  of the  Fund  refers  to the  income  generated  by an
investment in the Fund over the seven-day period shown in the advertisement. The
income, less expenses, is then annualized, which means that the amount of income
generated by the  investment  during that week is assumed to be  generated  each
week  over a  52-week  period  and is shown  as a  percentage  of the  beginning
investment value.

We calculate the standardized effective yield similarly but, when annualized, we
assume that any income earned by the Fund is  reinvested.  The  effective  yield
will be slightly higher than the yield because of the compounding  effect of the
assumed reinvestment.

THE AAL SMALL CAP STOCK, MID CAP STOCK,  INTERNATIONAL,  CAPITAL GROWTH,  EQUITY
INCOME,  BALANCED, HIGH YIELD BOND, MUNICIPAL BOND AND BOND FUNDS - STANDARDIZED
CURRENT YIELD
--------------------------------------------------------------------------------

Except for The AAL Money Market Fund,  we may advertise a  standardized  current
yield based on income  generated by an  investment  in a particular  Fund over a
30-day  period.  We state the 30-day period in the  advertisement.  We determine
income  earned on debt  obligations  by applying a calculated  yield-to-maturity
percentage to the obligations held during the period. We determine income earned
from  stocks  by  using  the  stated  annual  dividend  rate  applied  over  the
performance  period.  Then, we annualize the income  earned.  We assume that the
amount of income  generated during the 30-day period is generated and reinvested
monthly to  provide a  six-month  return  which we then  annualize.  We show the
return as a percentage of the maximum  offering  price per share on the last day
of the period.

THE AAL MUNICIPAL BOND FUND -- STANDARDIZED TAX EQUIVALENT YIELD
--------------------------------------------------------------------------------

For The AAL Municipal Bond Fund, we may advertise a standardized  tax equivalent
yield,  which  illustrates  the yield that would be required on a fully  taxable
investment  to result in the same net income to an investor  in the Fund,  after
payment of federal  taxes at the stated  rate.  We compute the yield by dividing
the portion of the Fund's current yield that is tax-exempt by one minus a stated
federal  income tax rate, and then adding the quotient to the value of any yield
of the Fund that is not tax exempt.

THE AAL SMALL CAP STOCK, MID CAP STOCK,  INTERNATIONAL,  CAPITAL GROWTH,  EQUITY
INCOME,  BALANCED, HIGH YIELD BOND, MUNICIPAL BOND AND BOND FUNDS - STANDARDIZED
AVERAGE ANNUAL TOTAL RATE OF RETURN
--------------------------------------------------------------------------------

We may  advertise  for each of The AAL Mutual Funds (except The AAL Money Market
Fund) a  standardized  average  annual  total rate of return  for one,  five and
ten-year  periods,  or so much  thereof as a Fund has been in  existence  (since
inception).  The standardized  average annual total rate of return is the change
in redemption  value of shares  purchased with an assumed initial  investment of
$1,000 assuming the reinvestment of dividends and capital gains distributions.

OTHER TOTAL RETURNS
--------------------------------------------------------------------------------

If we believe it would be useful in  evaluating  performance,  we may  advertise
total  returns for a Fund in another way than the  Standardized  Average  Annual
Total Rate of Return or the other measures of return described above.

We have provided more  information on yield and  performance in the Statement of
Additional Information.

TRANSFER AGENT, CUSTODIANS AND INDEPENDENT ACCOUNTANTS
================================================================================

Transfer Agent
--------------------------------------------------------------------------------
Firstar Trust Company
P. O. Box 2981
615 E. Michigan Street
Milwaukee, WI 53201-2981

Custodian (except for The AAL International Fund)
--------------------------------------------------------------------------------
Firstar Trust Company
P. O. Box 2981
615 E. Michigan Street
Milwaukee, WI 53201-2981

Custodian for The AAL International Fund
--------------------------------------------------------------------------------
The Chase Manhattan Bank, N. A.
Chase Metro Tech Center
Brooklyn, NY 11245

Independent Accountants
--------------------------------------------------------------------------------
Price Waterhouse LLP
100 E. Wisconsin Avenue, Suite 1500
Milwaukee, WI 53202

ORGANIZATION AND DESCRIPTION OF SHARES
================================================================================

The AAL Mutual Funds or "Trust" is a diversified open-end management  investment
company  registered under the Investment  Company Act of 1940. Each of the Funds
is a  separate  series  of a  Massachusetts  Business  Trust  organized  under a
Declaration  of Trust dated March 13, 1987.  The  Declaration  of Trust provides
that each  shareholder  shall be deemed to have agreed to be bound by its terms.
The  Declaration of Trust may be amended by a vote of  shareholders or the Board
of Trustees.  The Trust may issue an  unlimited  number of shares in one or more
series  as the  Board of  Trustees  may  authorize.  Currently,  the  Board  has
authorized twelve series. This prospectus describes Institutional shares for ten
series of the  Trust.  Class A and  Class B shares  for these  same  series  are
described  in a separate  prospectus.  Each Fund's  classes of shares  represent
interests in the assets of the Fund and have identical dividend, liquidation and
other rights.  The separate  share  classes have the same terms and  conditions,
except each Class A and B share bears its separate  distribution and shareholder
servicing expenses. At the Trustees' discretion,  each class may pay a different
share of other  expenses,  not  including  advisory or  custodial  fees or other
expenses  related to the management of the Trust's assets,  if each class incurs
the  expenses  in  different  amounts,  or if a  class  receives  services  of a
different kind or to a different degree than the other class. The Funds allocate
all other  expenses  to each  class on the basis of the net asset  value of that
class in relation to the net asset value of the particular  Fund.  Institutional
shares (and Class A and B shares) have identical  voting rights except that each
class has  exclusive  voting  rights on any  matter  submitted  to  shareholders
relating solely to the class. In addition, Institutional shares (and Class A and
Class  B  shares)  have  separate  voting  rights  on any  matter  submitted  to
shareholders  where the  interests of one class differ from the interests of the
other class. Matters submitted to shareholder vote must be approved by each Fund
separately except:

     1)   when required otherwise by the 1940 Act; or
     2)   when the Trustees determine that the matter does not affect all Funds:
          then, only the shareholders of the affected Funds may vote.

Shares are freely transferable,  entitled to dividends declared by the Trustees,
and receive the assets of their respective Fund in the event of liquidation. The
Trust generally holds annual  shareholder  meetings only when required by law or
at the  written  request  of  shareholders  owning at least  10% of the  Trust's
outstanding  shares.  Shareholders may remove Trustees from office by votes cast
in person or by proxy at a shareholders meeting.

Under  Massachusetts  law,  shareholders  of a business trust may, under certain
circumstances,  be held  personally  liable  for the  obligations  of the Trust.
However, the Declaration of Trust disclaims shareholder,  Trustee and/or officer
liability  for acts on behalf of the  Trust or for  Trust  obligations  that are
binding  only on the assets and  property of the Trust.  The Funds  include this
disclaimer in each agreement,  obligation,  or contract entered into or executed
by the Trust or the Board. The Declaration of Trust provides for indemnification
out of the Trust's  assets for all losses and expenses of any  shareholder  held
personally  liable for the  obligations of the Trust.  The risk of a shareholder
incurring  financial loss on account of shareholder  liability is remote because
it is limited  to  circumstances  where the Trust  itself is unable to meets its
obligations.

ASSET ALLOCATION (DIVERSIFICATION)
================================================================================

You should not  consider  an  investment  in any one Fund a complete  investment
program. Like most investors, you should hold a number of different investments,
each with a  different  level of risk,  such as common  stocks,  bonds and money
market  certificates.  You may  want  to meet  your  goal of  diversifying  your
investments by purchasing  shares in a number of different Funds,  each of which
has a different investment strategy and level of risk.

QUESTIONS
================================================================================

If you have  questions,  contact  the  Mutual  Fund  Service  Center by  calling
800-553-6319 or writing us at:

THE AAL MUTUAL FUNDS
222 WEST COLLEGE AVENUE
APPLETON, WI 54919-0007.

Glossary of Important Terms
================================================================================

   
AMERICAN DEPOSITORY RECEIPTS (ADRs): Depository receipts are receipts evidencing
ownership in the underlying shares of a foreign company.  Generally,  U.S. banks
and trusts issue American  depository  receipts  (ADRs) and American  depository
shares (ADSs). They hold the foreign company securities  underlying the receipts
in their vaults. In addition to the underlying securities,  the receipts entitle
the  shareholder to all dividends and capital  gains.  The bank or trust company
issuing the receipts may have  denominated the receipts in a currency other than
the currency underlying the foreign security.  U.S. and European banks and trust
companies usually issue global depository receipts (GDRs), which are receipts in
the  shares  of a  global  offering  of a  foreign  issuer  who has  issued  two
securities simultaneously in two markets, usually publicly in a non-U.S. markets
and privately in the U.S. market.  European banks and trust companies  generally
issue  European  depository   receipts  (EDRs),   sometimes  called  continental
depository  receipts (CDRs) when issued in bearer form, which evidence ownership
in foreign securities.
    

AMORTIZED: Paying the principal on a debt by installments;  an accounting method
that provides for the gradual decline in the value of an asset.

ANNUALIZED:  Calculated to represent a year; a statement produced by calculating
financial results for periods other than a complete year.

ASSET-BACKED SECURITIES:  SEE MORTGAGE AND ASSET-BACKED SECURITIES, BELOW.

   
BOND: In general,  a bond is an  interest-bearing  debt security,  or discounted
government  or corporate  security,  that requires the issuer to pay a specified
amount of interest for a specified time,  usually a number of years,  then repay
the bondholder the face amount of the bond at maturity.
    

BUSINESS DAY: Any day the New York Stock Exchange  (NYSE) are open for business.
A business  day normally  begins at 8:00 a.m.  Central Time when the NYSE opens,
and usually ends at 3:00 p.m. Central Time when the NYSE closes.

CALL OPTION:  A contract giving the owner the right to buy 100 shares of a stock
at a predetermined price any time up to a predetermined expiration date.

CAPITAL  GAIN OR LOSS: A capital gain or loss equals the increase or decrease in
the value of a security  over the  original  purchase  price.  A gain or loss is
REALIZED  when the security that has increased or decreased in value is sold. An
UNREALIZED  GAIN or LOSS  occurs  when the  value  of a  security  increases  or
decreases  but the security is not sold. If a security is held for more than the
applicable  capital  gains tax  holding  period and then sold at a profit,  that
profit is a REALIZED  LONG-TERM OR MEDIUM-TERM  CAPITAL GAIN. If it is sold at a
profit  before the  applicable  period,  that  profit is a  REALIZED  SHORT-TERM
CAPITAL GAIN.

CHARTERED FINANCIAL ANALYST (CFA):  Designation earned by financial analysts who
pass  examinations in economics,  financial  accounting,  portfolio  management,
security analysis and standards of conduct.

COLLATERAL:  Something  of value  --such  as real  estate,  stocks  and bonds --
pledged to secure a debt.

COMMERCIAL PAPER:  Short-term,  unsecured debt obligations  issued by businesses
and sold at a discount but redeemed at pay within 2 to 270 days.

COMPOUND INTEREST:  Interest paid upon interest; interest that is calculated and
credited daily, weekly,  monthly,  quarterly,  semi-annually or annually on both
the principal and the already credited interest.

CONVERTIBLE  BONDS:  Bonds that convert or exchange into stocks or carry with it
the right to  acquire  stocks  evidenced  by  warrants  attached  to the bond or
acquired as part of the unit with the bonds.

COVERED  OPTION:  Option  contract  where the purchase or seller of the contract
owns or has the rights to purchase the shares underlying the option.

CREDIT RISK: The fundamental risk of investing that the issuer of a security may
not be able to meet its obligations to its investors, usually used in describing
the  fundamental  risk of debt  securities.  Nationally  recognized  statistical
rating organizations  (NRSROs) rate debt securities on the ability of the issuer
to pay the interest and principal on the debt issued.

DEBT  SECURITIES:  Bonds and other  debt  instruments  used by issuers to borrow
money from  investors.  The issuer pays the investor a fixed or variable rate of
interest, and must repay the amount borrowed at maturity.

DEFERRED INTEREST BONDS:  Bonds that an issuer issues at a significant  discount
from face value and does not begin  paying  interest  on the bonds for a delayed
period of time. The discount approximates the total amount of interest the bonds
will accrue and compound over the period until the first  interest  accrual date
at a rate of interest  reflecting the market rate of the security at the time of
issuance.

DELAYED DELIVERY SECURITIES: Refers to the delivery of securities later than the
scheduled  date.  A contract  calling for delayed  delivery,  known as "seller's
option," is usually agreed to by both parties to a trade.

   
DEPOSITORY RECEIPTS:  See American Depository Receipts (ADRs).
    

EQUITY:  Ownership interest in a company; stocks represents the equity or amount
of ownership you have in the company issuing the stocks.

FACE VALUE:  See Par.

FDIC:  The Federal  Deposit  Insurance  Corporation  is an agency of the federal
government that guarantees  individual  deposits up to $100,000 at participating
banks and savings and loan associations.

FINANCIAL  RISK:  The  fundamental  risk of how a  company  will  perform  after
analyzing its balance  sheet and income  statements to forecast its future stock
price movements. Fundamental analysts consider past records of assets, earnings,
sales,  product,  management  and markets in  predicting  future trends in these
indicators  of a  company's  success or  failure.  There is a risk that  factors
affecting a company's  performance  will change,  causing the company's stock to
under-perform.

FLOATING RATE BONDS:  See Variable or Floating Rate Bonds.

403(B)(7)  RETIREMENT  PLAN:  A personal  retirement  savings  program that lets
employees of certain tax-exempt  organizations or school systems and educational
institutions contribute a portion of their earnings,  usually by salary deferral
agreement,  into a special  mutual  fund  account.  Contributions  are made on a
pre-tax  basis and benefit from  tax-deferred  build up of income.  The right to
withdraw  funds is limited by law and  amounts  withdrawn  are subject to income
taxes.

FUTURES  CONTRACT:  Agreement to buy or sell a specific amount of a commodity or
financial instrument at a particular price on a stipulated future date.

GENERAL OBLIGATION BONDS:  Municipal bonds secured by the issuer's pledge of its
credit and taxing power for the payment of principal and interest.

INDUSTRIAL  DEVELOPMENT  BONDS:  Municipal bonds (usually  revenue  bonds),  the
credit quality of which is normally  directly  related to the credit standing of
the industrial user involved or of the issuer of any credit  enhancement such as
an insurance policy or letter of credit.

INFLATION  RISK:  The risk  that a rise in the  level of  prices  for  goods and
services  (inflation)  will  decrease  the value of your  money in terms of your
investments or the income from your investments.

INTEREST: The payment borrowers (i.e., bond issuers) make to lenders (i.e., bond
holders) for the use of their money,  usually  expressed as a percentage  of the
amount  borrowed (the  principal).  Usually  interest is expressed as a rate per
period of time, typically one year, in which case it is called an annual rate of
interest.

INTEREST  RATE RISK:  The risk that a rise in the level of  interest  rates will
reduce the market value (price) of securities  held,  particularly  bonds,  in a
Fund's  portfolio.  Typically,  a bond pays a fixed rate of interest (called the
"coupon").  When interest rates rise in the economy the value of the coupon (the
amount of money received on the bond  periodically)  falls in  comparison.  As a
result,  the price of the bond  declines.  In general,  a decline in  prevailing
interest rate levels  increases the value of the  securities,  particularly  the
bonds,  held in a Fund's  portfolio and vice versa.  Interest rate  fluctuations
affect a Fund's net asset values but not the income  received  from its existing
portfolio  because  the income  paid on the bonds or other  securities  does not
change. However,  changes in prevailing interest rates will affect the yields on
subsequently purchased securities.

INVESTMENT GRADE: A bond or other fixed-income security is considered investment
grade if it is rated investment  grade by a NRSRO,  such as BBB or better by D&P
or S&P or Baa or better by Moody's. See the Appendix.

LIQUIDITY: The ease and speed at which an investor or holder of the security can
sell or otherwise convert the security into cash.

MARGIN:  Amount a customer deposits with a broker when borrowing from the broker
to buy securities.

MARKET  CAPITALIZATION:  The value of a corporation as determined by multiplying
the current market price of a share of common stock by the number of shares held
by shareholders.  Thus, if a corporation has one million shares  outstanding and
the market price of a share is $10, the market capitalization of the corporation
is $10 million.

MARKET RISK:  Refers to the tendency of security  prices to move  together.  The
risk that a broad market downturn will affect investments in a particular field.
Market  Value:  The price at which an  investor  can buy or sell a security at a
given time in an open market.

MATURITY: The date on which the principal of a debt obligation,  such as a bond,
comes due and must be repaid.

MONEY MARKET  INSTRUMENT:  Short-term,  liquid debt,  such as Treasury bills and
commercial  paper.  The issuers sell these  instruments at a discount but redeem
them at par. See Commercial Paper.

MORTGAGE AND  ASSET-BACKED  SECURITIES:  Typically these  securities  consist of
interest in pools of mortgages or consumer loans that provide  monthly  payments
consisting of both interest and principal payments.  In effect, these securities
"pass  through" the monthly  payments that  individual  borrowers  make on their
mortgages or consumer loans net of any fees paid to the issuers or guarantors of
such  securities.  Mortgage  backed  and/or  asset-backed  securities  may  make
additional payments due to principal prepayments made on the mortgages or loans,
refinancing  or  foreclosures  on  the  underlying   property.   Mortgage-backed
securities also may include debt obligations collateralized by mortgage loans or
mortgage   pass-through   securities   ("CMOs")  and  stripped   mortgage-backed
securities,  as well as other  types  of  mortgage-backed  securities.  For more
information  on  mortgage-backed  securities,  please refer to the  Statement of
Additional Information.

MUNICIPAL BONDS: Debt obligations  issued by or on behalf of state  governments,
U.S.  territories or  possessions,  the District of Columbia and their political
subdivisions,  agencies  and  instrumentalities.   Generally,  the  interest  on
municipal bonds is exempt from federal income tax.

MUTUAL FUND: Also called an open-end investment company. People invest by buying
shares in the mutual fund, thereby pooling  shareholders' money and allowing the
fund to invest in a number of securities.  The fund distributes any profits from
these investments,  after expenses, to the fund's shareholders.  Although shares
in the fund are sold publicly,  they are not traded on an open exchange  because
the fund will buy and sell shares to meet investor demand. Since the company can
issue more shares, the company's capitalization is not fixed but open.

NATIONALLY  RECOGNIZED  STATISTICAL RATING ORGANIZATION  (NRSRO): A company that
assesses  the quality and  potential  performance  of bonds,  commercial  paper,
preferred  and common  stocks and  municipal  short-term  issues,  and rates the
probability  that the  issuer  of the debt  will  meet  the  scheduled  interest
payments and repay the  principal.  Ratings are  published by such  companies as
Moody's Investors Service (Moody's), Standard & Poor's Corporation (S&P), Duff &
Phelps, Inc. (D&P) and Fitch Investor Services, Inc. (Fitch).

PAR:  The  stated  principal  value of a bond or the  stated  value per share of
stock.  The par  value of  stock  usually  is only  used to  calculate  fees for
incorporation.  Typically bonds have a principal value of $1,000.00.  A security
selling at its face value is said to be  selling  at "par".  A security  selling
below  its face  value  is said to be  selling  below  par or at a  discount.  A
security  selling  above its face value is said to be selling  above par or at a
premium.

PRINCIPAL:  Face  value of an  obligation  (such as a bond or loan) that must be
repaid at maturity.  Portfolio:  Combined holding of more than one stock,  bond,
commodity,  real  estate  investment,  cash  equivalent  or  other  asset  by an
individual or  institutional  investor.  The purpose of a portfolio is to reduce
risk by diversification.

PORTFOLIO:  Combined holding of more than one stock bond, commodity, real estate
investment,  cash  equivalent or other asset by an  individual or  institutional
investor. The purpose of a portfolio is to reduce risk by diversification.

PREFERRED  STOCKS:  Stocks  with a fixed  dividend  that must be paid before the
dividends of common stocks are paid.

PUBLIC UTILITIES:  A privately owned company that is involved in the generation,
transmission or distribution of electricity,  gas, energy,  water and telephone,
telegraph,  satellite,  microwave  and other  communication  facilities  for the
public benefit.

PUT OPTION: A contract giving the owner the right to sell 100 shares of stock at
a predetermined price any time up to a predetermined expiration date.

QUALIFIED  RETIREMENT  PLANS:  Retirement plans established and maintained by an
employer for the benefit of its employees that must comply with special  federal
tax and labor laws and  regulations.  Some of the more common types of qualified
plans are pension,  profit  sharing and 401(k) plans. A 401(k) plan also permits
employees to make contributions to the plan through salary deferrals.

RECORD DATE: Date on which a shareholder  must officially own shares in order to
be entitled to a dividend.  Regulated Investment Company:  Term used by Internal
Revenue Code to define a mutual fund.

REPURCHASE  AGREEMENT:  Agreement between a seller and a buyer,  usually of U.S.
government securities, whereby the seller agrees to repurchase the securities at
an agreed upon price and, usually, at a stated time.

REVENUE  BONDS:  Municipal  bonds that usually are payable only from the revenue
derived from a particular facility or class of facilities, or in some cases from
the proceeds of a special excise tax or other specific revenue source.

RISK: The possibility that you may lose all or part of your investment, that the
value of your  investment  will decrease,  or that you will receive little or no
return on your  investment.  There  are many  kinds of risks in  investing.  See
Credit Risk, Foreign Risk, Inflation Risk, Interest Rate Risk and Market Risk.

SEC:  The U.S. Securities and Exchange Commission.

SECURITIES:   Financial   instruments,   usually  stocks,  bonds,  money  market
instruments  or mutual fund shares issued by  corporations,  municipalities  and
state, local or national  governments or investment companies to raise or borrow
money or give the  public  an  opportunity  to  participate  in the  growth of a
company.

   
STANDARD & POOR'S  INDEX:  Also known as the STANDARD & POOR'S 500 (S&P 500(R));
Standard & Poor's Corporation ("S&P") is a subsidiary of McGraw-Hill, Inc. which
provides  a number of  investor  services.  The S&P 500 (R) is a measure  of the
changes in stock  market  conditions  based on the  average  performance  of 500
widely held common stocks.  The S&P 500(R) is considered the benchmark for large
stock investors.
    

   
S&P  SMALLCAP  600 INDEX (S&P  SMALLCAP):  Introduced  in October  1994 to track
small-cap stocks.  It contains  companies chosen by a committee at S&P for their
size, industry  characteristics and liquidity.  None of the companies in the S&P
SmallCap overlap with the S&P 500(R) or S&P MidCap.  However,  some companies in
the S&P SmallCap are larger than the S&P MidCap or S&P 500 (R).

S&P MIDCAP 400 INDEX (S&P MIDCAP):  Contains  companies chosen by a committee at
S&P for their mid-cap size and industry  characteristics.  None of the companies
in the S&P MidCap overlap with the S&P 500(R) or S&P SmallCap. Some companies in
the S&P  MidCap,  however,  are larger  than those in the S&P 500(R) and smaller
than  those in the S&P  SmallCap.  This is a function  of the normal  drift that
takes place in any index as some companies' stock prices appreciate and those of
others depreciate.
    

STOCKS:  See Equity.

Structured  Securities:  Securities that have a value (i.e., principal amount at
maturity  and/or coupons or dividend  amounts)  linked to  currencies,  interest
rates,  commodities,  indices or other financial  indicators.  Typically,  these
securities  are debt  securities  or deposits  whose  value at  maturity  (i.e.,
principal  value)  or coupon  rate is  determined  by  reference  to a  specific
instrument or statistic. For example, gold structured securities may provide for
maturity values that depend on the price of gold,  resulting in securities whose
prices tend to rise and fall together with gold prices. These securities involve
additional  risk,  including  structures  that may  reduce  the  coupons  and/or
dividend  amounts to zero or the  redemption  amounts  payable at  maturity as a
result  of a  decline  in the  value of the  underlying  instrument.  Structured
securities may have more volatility than the price of the underlying instrument.

TOTAL RETURN:  The  combination  of the price change of an  investment  plus any
income (or other  distributions),  expressed as a percentage gain or loss in the
investment's value.

TRANSFER  AGENT:  An agent  appointed  by a mutual fund to maintain  shareholder
records and issue share certificates.

TRUST: An arrangement that permits one party,  the Trustee,  to hold legal title
of and control property for the benefit of another party, the beneficiary.

TURNOVER:  Also called the Portfolio Turnover Rate; the percentage change in the
assets  held by a mutual  fund  due to its  purchases  and  sales.  A  portfolio
turnover  rate of 100% means  that the Fund has  purchased  and sold  securities
equal to 100% of the Fund's total net asset value for the year.

12B-1 DISTRIBUTION FEE: The fee a mutual fund charges  shareholders to cover the
expenses  the fund  has for  shareholder  service,  advertising,  promoting  and
selling  shares in the fund,  also  called  distribution  fee.  The Funds do not
charge 12b-1 fees for Institutional shares.

VARIABLE OR FLOATING RATE BONDS: Variable or floating rate debt obligations 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  instruments  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. The interest rate formulas are designed to result in a market
value for the instruments that approximate their par values, reducing the effect
of changing market conditions on their underlying market values.

VARIABLE RATE MASTER DEMAND NOTES: Unsecured obligations,  redeemable on notice,
that permit investment of varying amounts at varying interest rates according to
an agreement with the issuer.

VOLATILITY: The measure of the rise and fall of a security's price over a stated
period of time.

WHEN-ISSUED  SECURITIES:  The term refers to a  transaction  made  conditionally
because the security,  although authorized,  has not yet been issued. New issues
of stocks and bonds,  stocks  that have split and  Treasury  securities  are all
traded on a when issued basis.

YIELD: The income generated by an investment (from dividends or interest) over a
given period of time, expressed as a percentage of either cost or current price.

ZERO COUPON BONDS:  Bonds that the issuer issues at a significant  discount from
face value.  The  discount  approximates  the total amount of interest the bonds
will accrue and compound over the period until  maturity  reflecting  the market
rate of the security at the time of issuance.

APPENDIX: SECURITY RATINGS
================================================================================

RATINGS IN GENERAL
--------------------------------------------------------------------------------

A Nationally  Recognized  Statistical  Rating  Organization's  ("NRSRO")  rating
represents  the  organization's  opinion  on the  credit  quality  a  particular
security.  The ratings are general and do not portray absolute  standards on the
creditworthiness of an issuer. We continuously  monitor the ratings given by the
NRSROs on the securities in a Funds' portfolios as part of our ongoing effort to
monitor the Funds' debt quality.  Individual analysts give different  weightings
to  the  various  factors  involved  in  credit  analysis.  A  rating  is  not a
recommendation to purchase, sell or hold a security. A rating does not take into
account market value or suitability for a particular  investor.  When a security
has received a rating from more than one service,  the Funds' Adviser and/or the
Sub-Adviser for The AAL International Fund evaluates each rating  independently.
Rating organizations base their ratings on current information  furnished by the
issuer  or  obtained  from  other  sources  they   consider   reliable.   Rating
organizations  may change,  suspend or withdraw their ratings due to changes in,
unavailability of, such information or for other reasons.

   
The Funds have provided the following rating  characteristics  used by two major
NRSROs,  Moody's  Investors  Service,  Inc.  ("Moody's")  and  Standard & Poor's
Corporation ("S&P").
    

BOND RATINGS
================================================================================

--------------------------------------------------------------------------------
MOODY'S RATING SCALE DEFINITIONS
--------------------------------------------------------------------------------

Aaa:  Bonds that are 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
edged." 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 that are rated Aa are judged to be of high  quality by all  standards.
Together  with the Aaa group they  comprise what are general known as high grade
bonds.  They are rated lower than the best bonds  because  margins of protection
may not be as large as Aaa securities or fluctuations of protective elements may
be of  greater  amplitude  or there  may be other  elements  present  that  make
long-term risk appear somewhat larger than the Aaa securities.

A: Bonds that are 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 susceptibility to impairment some time in the future.

Baa: Bonds that are 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  that 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  both  good  and bad  times  over the  future.  Uncertainty  of  position
characterizes bonds in this class.

B:  Bonds  that are rated B  generally  lack  characteristics  of the  desirable
investment.  Assurance of interest and principal  payments or of  maintenance of
other terms of the contract over a long period of time may be small.

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

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

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

Note:  Moody's applies  numerical  modifiers,  1, 2 and 3 in each generic rating
classification  from Aa to B. The modifier 1 indicates that the company 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 company ranks in the
lower end of its generic rating category.

STANDARD & POOR'S ("S&P") RATING SCALE DEFINITIONS
--------------------------------------------------------------------------------

AAA:  Debt rated  "AAA" has the  highest  rating  assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.

AA: Debt rated "AA" has very strong capacity to pay interest and repay principal
and differs from the higher-rated issues only in small degrees.

A: Debt  rated "A" has  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" has 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, B, CC, C, C: Debt rated  "BB",  "B",  "CCC",  "CC" and "C" is  regarded,  on
balance,  as predominantly  speculative with respect to capacity to pay interest
and  repay  principal  in  accordance  with the  terms of the  obligation.  "BB"
indicates  the  lowest  degree  of  speculation  and "C" the  highest  degree of
speculation.  While  such debt will  likely  have some  quality  and  protective
characteristics,  these are  outweighed  by large  uncertainties  or major  risk
exposures to adverse conditions.

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 that could lead to inadequate
capacity  to meet timely  interest  and  principal  payments.  The "BBB"  rating
category is also used for debt  subordinated  to senior debt that is assigned an
actual or implied "BBB-" rating.

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  likely will impair capacity or willingness to
pay  interest  and  repay  principal.  The "B"  rating  is also  used  for  debt
subordinated  to senior  debt that is  assigned  an  actual or  implied  "BB" or
"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.  The "CCC" rating category is also
used for debt  subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.

CC: The rating "CC" is  typically  applied to debt  subordinated  to senior debt
that is assigned an actual or implied "CCC" rating.

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

CI: The rating "CI" is reserved for income bonds on which no interest is 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 such payments will
be made  during  such grace  period.  The "D" rating  also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.

NR:  Indicates  that  no  public  rating  has  been  requested,  that  there  is
insufficient  information  on which to base a rating,  or that S&P does not rate
the particular type of obligation as a matter of policy.

Plus (+) or Minus (-):  The  ratings  from "AA" to "CCC" may be  modified by the
addition  of a plus or minus  sign to show  relative  standing  within the major
category.

   
COMMERCIAL PAPER RATINGS
    
--------------------------------------------------------------------------------

MOODY'S COMMERCIAL PAPER RATINGS
--------------------------------------------------------------------------------

Moody's commercial paper ratings are opinions of the ability to repay punctually
promissory   obligations.   Moody's   employs  the  following   three   category
designations,  all judged to be  investment  grade,  to  indicate  the  relative
repayment capacity of rated issuers:

PRIME 1: Highest quality;
PRIME 2: Higher quality; and
PRIME 3: High quality.

S&P'S COMMERCIAL PAPER RATINGS
--------------------------------------------------------------------------------

A Standard & Poor's ("S&P")  commercial paper rating is a current  assessment of
the  likelihood  of timely  payment.  Ratings are graded  into four  categories,
ranging from "A" for the highest quality obligations to "D" for the lowest.

A: Issues  assigned the highest rating  category,  A, are regarded as having the
greatest  capacity for timely  payment.  Issues in this category are  delineated
with the numbers "1", "2" and "3" to indicate the relative degree of safety.

A-1: The  designation A-1 indicates that the degree of safety  regarding  timely
payment is either  overwhelming or very strong.  A "+" designation is applied to
those issues rated "A-1" that possess extremely strong safety characteristics.

A-2: Capacity for timely payment on issues with the designation "A-2" is strong.
However,  the relative degree of safety is not as high as for issues  designated
A-1.

A-3: Issues carrying the designation A-3 have a satisfactory capacity for timely
payment.  They are,  however,  somewhat more vulnerable to the adverse effect of
changes in circumstances than obligations carrying the higher designations.

OTHER RATINGS
================================================================================

MOODY'S MUNICIPAL NOTE RATINGS
--------------------------------------------------------------------------------

MIG 1: This designation  category denotes best quality.  There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.

MIG 2: This designation category denotes high quality. Margins of protection are
ample although not so large as in the preceding group.

MIG 3:  This  designation  category  denotes  favorable  quality.  All  security
elements are accounted for but there is lacking the  undeniable  strength of the
preceding  grades.  Liquidity and cash flow  protection may be narrow and market
access for refinancing is likely to be less well established.

MOODY'S RATINGS OF THE DEMAND FEATURES ON VARIABLE RATE DEMAND SECURITIES
--------------------------------------------------------------------------------

Moody's may assign a separate  rating to the demand  feature of a variable  rate
demand security. Such a rating may include:

VMIG  1:  This  designation  denotes  best  quality.  There  is  present  strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.

VMIG 2: This designation  denotes high quality.  Margins of protection are ample
although not so large as in the preceding group.

VMIG 3: This designation  denotes favorable  quality.  All security elements are
accounted  for but there is lacking the  undeniable  strength  of the  preceding
grades.  Liquidity and cash flow  protection may be narrow and market access for
refinancing is likely to be less well established.

S&P NOTE RATINGS
--------------------------------------------------------------------------------

SP-1:  Notes rated SP-1 have very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming safety characteristics
are designated as SP-1+.

SP-2: Notes rated SP-2 have satisfactory capacity to pay principal and interest.
Notes due in three years or less normally receive a note rating.  Notes maturing
beyond  three years  normally  receive a bond  rating,  although  the  following
criteria are used in making that assessment:  (1) the amortization schedule (the
larger the final  maturity  relative  to other  maturities,  the more likely the
issue  will be  rated  as a note);  (2) and the  source  of  payment  (the  more
dependent  the issue is on the market for its  refinancing,  the more  likely it
will be rated as a note).

S&P RATINGS OF THE DEMAND FEATURES ON VARIABLE RATE DEMAND SECURITIES
--------------------------------------------------------------------------------

S&P assigns dual ratings to all long-term debt issues that have as part of their
provisions  a demand  feature.  The first rating  addresses  the  likelihood  of
repayment of principal and interest as due, and the second rating addresses only
the demand  feature.  The  long-term  debt rating  symbols are used for bonds to
denote the  long-term  maturity  and the  commercial  paper  rating  symbols are
usually  used to denote the put  (demand)  options  (i.e.,  AAA/A-1+).  Normally
demand notes receive note rating symbols  combined with commercial paper symbols
(i.e., SP-1+/ A-1+).


<PAGE>



                              The AAL Mutual Funds
                             222 West College Avenue
                             Appleton, WI 54919-0007
                     Telephone (920) 734-7633, 800-553-5319
                                TDD 800-684-3416

                       STATEMENT OF ADDITIONAL INFORMATION
   
                              Institutional Shares
                               Dated July 1, 1998
    

Equity-Oriented Funds

The AAL Small Cap Stock Fund:
Investing In Small Company Stocks

The AAL Mid Cap Stock Fund:
Investing In Mid-Sized Company Stocks

The AAL International Fund:
Investing In Foreign Stocks

The AAL Capital Growth Fund:
Investing In Large Company Stocks

The AAL Equity Income Fund:
Investing in Income-Producing Equity Securities

The AAL Balanced Fund
Investing in Common Stocks, Bonds and Money Market Instruments

Income-Oriented Funds

The AAL High Yield Bond Fund:
Investing in Below Investment Grade Bonds

The AAL Municipal Bond Fund:
Investing In Investment Grade Municipal Securities

The AAL Bond Fund:
Investing In Investment Grade Bonds

The AAL Money Market Fund:
 Investing in Money Market Instruments

   
This  statement  of  additional  information  is not a  prospectus.  It provides
additional  information on the securities offered in the prospectus.  You should
read the statement of additional  information in conjunction with The AAL Mutual
Funds prospectus,  Institutional shares, dated July 1, 1998, and any supplements
thereto. You may obtain a prospectus at no charge by writing or telephoning your
AAL Capital Management Corporation ("AAL CMC") Registered  Representative or The
AAL Mutual Funds ("Funds" or "Trust") at the address and telephone number above.
We have described the Funds' Class A and Class B shares in a separate prospectus
and statement of  additional  information.  We also have  described The AAL U.S.
Government  Zero Coupon Target Fund,  Series 2001,  and The AAL U.S.  Government
Zero Coupon Target Fund, Series 2006, in a separate  prospectus and statement of
additional information.
    

Reading this Statement of Additional Information

As in the prospectus,  references to "you" and "your" in the prospectus refer to
prospective  investors or shareholders.  References to "we," "us" or "our" refer
to the Trust or the Funds and Fund  management  (the adviser and/or  sub-adviser
for The AAL International Fund, distributor,  administrator,  transfer agent and
custodians) generally.  We placed a glossary defining important terms at the end
of the prospectus. If you are unsure of the meaning of any term in the statement
of additional information,  please check the glossary in the prospectus. We also
have  an  appendix  to  the  prospectus  that  describes  nationally  recognized
statistical  rating  organizations  ("NRSROs")  and their  ratings for bonds and
other debt and money market instruments.  If you are unsure of a rating,  please
refer to the  Appendix in the  prospectus.  Terms not  otherwise  defined in the
statement of additional information have the same meaning as in the prospectus.

Table of Contents

     Investment Objectives and Policies....................................   --

     Investment Techniques..................................................  --

     Investment Restrictions................................................  --

     Purchases, Redemptions; Pricing Considerations ..........................--

     Compensation of the Board of Trustees....................................--

     Investment Advisory Services............................................ --

     Distributor............................................................. --

     Distribution Plan....................................................... --

     Portfolio Transactions.................................................. --

     Dividends, Distributions and Taxes...................................... --

     Calculation of Yield and Total Return................................... --

     General................................................................. --

     Shareholder Maintenance Agreement....................................... --

     Independent Accountants................................................. --

     Financial Statements.................................................... --


     Investment Objectives and Policies

The following  information  supplements our discussion of the Funds'  investment
objectives  and  policies  described in the  prospectus.  In pursuing the Funds'
objectives,  we invest as described  below and employ the investment  techniques
described  in the  prospectus  and  elsewhere in this  Statement  of  Additional
Information.  Except for The AAL Balanced and High Yield Bond Funds, each Fund's
investment  objective  is a  fundamental  policy.  As  such,  only a  vote  of a
"majority  of  outstanding  voting  securities"  can change a Fund's  investment
objective.  A majority  means the  approval of the lesser of: (1) 67% or more of
the  voting  securities  at a  meeting  if the  holders  of more than 50% of the
outstanding  voting securities of a Fund are present or represented by proxy; or
(2) more than 50% of the outstanding voting securities of a Fund.

The AAL Small Cap Stock Fund:  Investing In Small Company Stocks

This Fund seeks capital growth by investing primarily in a diversified portfolio
of common stocks, and securities  convertible into common stocks, of small-sized
companies with a market capitalization of less than $1 billion. The Fund focuses
on  companies  with a market  capitalization  of between  $30  million  and $600
million.

The AAL Mid Cap Stock Fund:  Investing In Mid-Sized Company Stocks

This Fund seeks capital growth by investing primarily in a diversified portfolio
of common stocks,  and securities  convertible into common stocks,  of mid-sized
companies with a market  capitalization  of between $100 million and $5 billion.
The Fund  focuses on  companies  with a market  capitalization  of between  $400
million and $3.5 billion.

The AAL International Fund:  Investing In Foreign Stocks

This Fund seeks capital growth by investing primarily in a diversified portfolio
of foreign stocks.

The AAL Capital Growth Fund:  Investing In Large Company Stocks

This Fund seeks long-term capital growth by investing in a diversified portfolio
of common stocks and securities convertible into common stocks.

The AAL Equity Income Fund:  Investing In Income-Producing Equity Securities

This Fund seeks current  income,  long-term  income growth and capital growth by
investing  primarily  in a  diversified  portfolio  of  income-producing  equity
securities.

The AAL  Balanced  Fund:  Investing  in Common  Stocks,  Bonds and Money  Market
Instruments

This Fund seeks  long-term total return through a balance between income and the
potential for long-term  capital growth by investing  primarily in a diversified
portfolio of common stocks,  bonds and money market instruments.  We will select
these  investments  consistent  with the investment  policies of The AAL Capital
Growth, Bond and Money Market Funds, respectively.

The AAL High Yield Bond Fund:  Investing in Below Investment Grade Bonds

This Fund seeks high current income and secondarily  capital growth by investing
primarily in a diversified  portfolio of high risk, high yield bonds (also known
as "junk bonds").

The AAL Municipal Bond Fund:  Investing In Investment Grade Municipal Securities

This Fund seeks a high  level of  current  income  that is exempt  from  federal
income taxes, consistent with preservation of capital, by investing primarily in
a diversified portfolio of municipal bonds.

The AAL Bond Fund:  Investing In Investment Grade Bonds

This Fund seeks a high level of current income,  consistent with preservation of
capital, by investing  primarily in a diversified  portfolio of investment grade
bonds and other debt securities.

The AAL Money Market Fund:  Investing In Money Market Instruments

This  Fund  seeks  a high  level  of  current  income  consistent  with  capital
preservation   and  liquidity  by  investing  in  a  diversified   portfolio  of
high-quality, short-term money market instruments.

Investment Techniques

We  may  use  the  techniques  described  in the  prospectus  and  statement  of
additional Information in pursuing the Funds' investment objectives.

Lending Portfolio Securities

Subject to the fundamental  investment  restriction (4) listed under "Investment
Restrictions,"   page  __,  we  may  lend  a  Fund's  portfolio   securities  to
broker-dealers and financial institutions, such as banks and trust companies. As
the adviser, we will monitor the  creditworthiness of any firm with which a Fund
engages in securities lending  transactions.  We would  continuously  secure the
loan by collateral in cash or cash  equivalents  maintained (on a current basis)
in an amount equal to or greater than the market value of the securities loaned.
We would continue to receive the equivalent of the interest or dividends paid by
the  issuer to the Fund on the  securities  loaned.  We would also  receive  any
additional  returns,  such as a fixed fee or a percentage of the collateral.  We
would have the right to call the loan and obtain  the  securities  loaned at any
time on notice of not more than five business days. Generally, we would not have
the right to vote the Fund's loaned securities during the existence of the loan.
However, we would call the loan to permit voting if, in our judgment, a material
event  requiring a shareholder  vote would  otherwise occur before the repayment
date.

In the event of the borrower's  default or bankruptcy,  we could experience both
delays in liquidating  the loan  collateral or recovering the loaned  securities
and  losses for a Fund.  For  example,  during the period  when we would seek to
enforce the Fund's rights to the loaned securities, the collateral's value could
decline.  We might  receive  subnormal  levels of  income or no income  from the
loaned  securities.  We also would  incur the  expense of  enforcing  the Fund's
rights to the loaned securities.

Repurchase Agreements

We maintain  procedures for evaluating  and monitoring the  creditworthiness  of
firms with which we enter into  repurchase  agreements for the Funds. We may not
invest more than 10% of a Fund's net assets in repurchase agreements maturing in
more than seven days.

When-Issued and Delayed Delivery Securities

   
We may purchase  securities on a  when-issued  or  delayed-delivery  basis for a
Fund,  as described in the  prospectus.  We only  purchase on a  when-issued  or
delayed delivery basis with the intention of actually  acquiring the securities,
including long-term when-issued securities. However, we may sell such securities
before settlement date if we deem it advisable for investment reasons.
    

At the time of  purchase we identify  liquid  assets  having a value at least as
great  as the  purchase  price.  We have the  custodian  hold  these  securities
identified throughout the period of the obligation.  Purchasing on a when-issued
or delayed  basis as we have  described  may increase the Fund's net asset value
fluctuation or volatility.

Rated Securities

If a NRSRO reduces or eliminates its rating of a Fund  security,  we do not have
to sell the security.  However,  we consider such fact in determining whether we
should  continue to hold the  security  for the Fund.  For The AAL Money  Market
Fund, we sell downgraded  commercial paper to the extent required to comply with
Rule 2a-7 under the Investment Company Act of 1940 (the "Act").

At times a NRSRO changes its ratings for debt  securities as a result of changes
at the  organization or in its rating system.  When this happens,  we attempt to
use  comparable  NRSRO ratings in reassessing  investments  for a Fund in accord
with its investment policies..

High Yield Bond Market -- The AAL  International,  Equity  Income and High Yield
Bond Funds

We may invest in high risk, high yield bonds for The AAL  International,  Equity
Income and High Yield Bond  Funds.  We  normally  invest at least 65% of The AAL
High  Yield  Bond  Fund's  total  assets  in such  securities.  As stated in the
prospectus,  investing in high yield bonds involves  market risk. The market for
high yield  bonds has  existed for many years and has  weathered  downturns.  In
particular  during  the late  1980s  and  early  1990s,  the high  yield  market
experienced a significant downturn. Many corporations had dramatically increased
their  use of  high  yield  bonds  to fund  highly  leveraged  acquisitions  and
restructuring.  As a result,  from 1989 to 1991, the percentage of lower-quality
securities  that defaulted rose  significantly  above previous  default  levels.
After this period, default rates decreased.

We may invest in lower-rated  asset and  mortgage-backed  securities for The AAL
High Yield Bond Fund. These securities include interests in pools of lower-rated
bonds,   consumer   loans  or  mortgages,   or  complex   instruments   such  as
collateralized  mortgage  obligations  ("CMOs")  and  stripped   mortgage-backed
securities  (the separate income or principal  components).  Changes in interest
rates, the market's  perception of the issuers and the  creditworthiness  of the
parties  involved may  significantly  affect the value of these  bonds.  Some of
these securities may have structures that makes their reaction to interest rates
and other factors difficult to predict,  causing high volatility in their market
value.  These bonds also carry  prepayment  risk.  During  periods of  declining
interest  rates,   prepayment  of  the  loans  and  mortgages  underlying  these
securities tend to accelerate.  Investors tend to refinance their mortgages (pay
the old  mortgage  off with a new  mortgage at a lower rate) to lower  payments.
Accordingly,  any  prepayment  on the existing  securities  we hold for the Fund
reduces our  ability to maintain  positions  in  high-yielding,  mortgage-backed
securities and reinvest the principal at comparable yields.

Certain high yield bonds carry particular  market risks.  Zero coupon,  deferred
interest  and  payment-in-kind  ("PIK")  bonds  issued  at  deep  discounts  may
experience  greater  volatility  in  market  value.  Asset  and  mortgage-backed
securities,  including  CMOs,  in  addition  to  greater  volatility,  may carry
prepayment risks.

CMOs and  Multi-Class  Pass-Through  Securities -- The AAL Balanced,  High Yield
Bond and Bond Funds

We may invest in  mortgage-backed  securities,  including  CMOs and  multi-class
pass-through  securities.  CMOs and multi-class pass-through securities are debt
instruments  issued by special  purpose  entities  secured by pools of  mortgage
loans or other mortgage-backed  securities.  Multi-class pass-through securities
are  interests in a trust  composed of mortgage  loans or other  mortgage-backed
securities.  Payments of  principal  and interest on the  underlying  collateral
provide the money to pay debt service on the CMO or make scheduled distributions
on the multi-class  pass-through security.  Multi-class pass-through securities,
CMOs, and classes thereof  (including those discussed below) are examples of the
types of financial instruments commonly referred to as "derivatives."

A CMO  contains a series of bonds or  certificates  issued in multiple  classes.
Each CMO class (referred to as "tranche") has a specified coupon rate and stated
maturity or final  distribution  date. When people start prepaying the principal
on the collateral  underlying a CMO (such as mortgages  underlying a CMO),  some
classes  may retire  substantially  earlier  than the stated  maturity  or final
distribution dates. The issuer structures a CMO to pay or accrue interest on all
classes on a monthly,  quarterly or semi-annual  basis.  The issuer may allocate
the principal and interest on the underlying mortgages among the classes in many
ways. In a common  structure,  the issuer applies the principal  payments on the
underlying mortgages to the classes according to scheduled cash flow priorities.

There are many classes of CMOs.  Interest only classes ("IOs") entitle the class
shareholders to receive distributions consisting solely or primarily of all or a
portion of the interest in an  underlying  pool of mortgages or  mortgage-backed
securities ("mortgage assets"). Principal only classes ("POs") entitle the class
shareholders to receive distributions consisting solely or primarily of all or a
portion of the  underlying  pool of  mortgage  assets.  In  addition,  there are
"inverse  floaters," which have coupon rates that move in the reverse  direction
to an applicable index, and accrual (or "Z") bonds (described below).

At any one time, we may not invest more than 7.5% of a Fund's net assets in IOs,
POs, inverse floaters or accrual bonds individually or more than 15% in all such
obligations combined.

Inverse  floating  CMO  classes  are  typically  more  volatile  than  fixed  or
adjustable  rate CMO classes.  We would only invest in inverse  floating CMOs to
protect  against  a  reduction  in the  income  earned on  investments  due to a
predicted  decline in interest rates. In the event interest rates increased,  we
would lose money on  investments  in inverse  floating CMO classes.  An interest
rate  increase  would cause the coupon rate on an inverse CMO class to decrease,
and, like other mortgage-backed securities, the value would decrease as interest
rates increase.

Cash flow and yields on IO and PO classes are  extremely  sensitive to principal
payment  rates  (including  prepayments)  on the  underlying  mortgage  loans or
mortgage-backed  securities.  For example, rapid or slow principal payment rates
may adversely affect the yield to maturity of IO or PO bonds,  respectively.  If
the underlying  mortgage assets experience greater than anticipated  prepayments
of principal, the holder of an IO bond may incur substantial losses in value due
to the  lost  interest  stream  even if the IO  bond  has a AAA  rating.  If the
underlying  mortgage assets  experience  slower than anticipated  prepayments of
principal,  the PO bond  will  incur  substantial  losses  in value  due to lost
prepayments.  Rapid or slow  principal  payment  rates  may cause IO and PO bond
holders  to incur  substantially  more  losses in market  value than if they had
invested  in  traditional  mortgage-backed  securities.  On the other  hand,  if
interest  rates rise,  the value of an IO might  increase and  partially  offset
other bond value  declines in a Fund's  portfolio.  If interest  rates fall, the
value of a PO might increase  offsetting  lower  reinvestment  rates in a Fund's
portfolio.

An accrual or Z bondholder  does not receive cash payments  until one or more of
the other  classes  have  received  their full  payments on the  mortgage  loans
underlying the CMO. During the period when the Z bondholders do not receive cash
payments, interest accrues on the Z class at a stated rate. The accrued interest
is added to the amount of principal due to the Z class.  After the other classes
have received their payments in full, the Z class begins receiving cash payments
until it receives its full amount of principal  (including the accrued  interest
added to the principal amount) and interest at the stated rate.  Generally,  the
date when cash payments begin on the Z class depends on the  prepayment  rate of
the mortgage loans  underlying the CMO. A faster  prepayment  rate results in an
earlier  commencement of cash payments on the Z class.  Like a zero coupon bond,
during its accrual period the Z class has the advantage of eliminating  the risk
of  reinvesting  interest  payments at lower rates  during a period of declining
interest  rates.  Like a zero coupon  bond,  the market  value of a Z class bond
fluctuates  more  widely with  changes in  interest  rates than would the market
value of bond from a class that pays interest currently. Changing interest rates
influence  prepayment  rates. As noted above,  such changes in prepayment  rates
affect  the date at which  cash  payments  begin on a Z  tranche,  which in turn
influences its market value.

Structured Securities -- The AAL International and High Yield Bond Funds

We  may  invest  in  structured  notes  and/or  preferred  stocks  for  The  AAL
International  and High Yield Bond Funds.  The issuer of a  structured  security
links the security's  coupon,  dividend or redemption amount at maturity to some
sort of financial  indicator.  Such financial indicators can include currencies,
interest rates,  commodities and indices. The coupon, dividend and/or redemption
amount at maturity may increase or decrease depending on the value of the linked
or underlying instrument.

Investments in structured  securities  involve certain risks. In addition to the
normal  credit  and  interest  rate risks  inherent  with a debt  security,  the
redemption  amount may increase or decrease as a result of price  changes in the
underlying  instrument.  Depending  on how the issuer  links the  coupon  and/or
dividend to the underlying instrument, the amount of the dividend may be reduced
to zero. Any further declines in the value of the underlying instrument may then
reduce the redemption  amount at maturity.  Structured  securities may have more
volatility than the price of the underlying instrument.

Variable Rate Demand Notes

We may purchase  variable rate, master demand notes for the Funds. The notes are
unsecured instruments that permit the amount of the debt to vary and provide for
periodic  adjustments in the interest rate.  Variable rate,  master demand notes
normally  do not trade and do not have a  secondary  market.  However,  the note
holder may demand principal  payment at any time.  Except for The AAL High Yield
Bond  Fund,  we  purchase  notes  rated  only in one of the two  highest  rating
categories  by a NRSRO.  We also may purchase  notes for a Fund where the issuer
has a received a rating in the top two categories for a class of short term debt
obligations  comparable in priority and security with the notes. If an issuer of
a variable rate, master demand note defaults on its payment  obligation,  we may
not be able to dispose of the note due to the absence of a secondary  market. As
a result,  we might  suffer a loss for a Fund to the extent of the  default.  We
invest in variable  rate master  demand notes for a Fund only when we believe it
involves minimal credit risk.

In some  instances,  we may purchase  variable rate securities for The AAL Money
Market Fund with actual maturities greater than or equal to 397 days. Generally,
a money  market fund is limited to  investments  with  maturities  less than 397
days.  Variable rate, money market  securities have yields that vary in relation
to changes in specific  money market rates,  such as the prime rate. To purchase
variable rate money market instruments with maturities greater than 397 days, we
must be able to consider these securities as having  maturities of less than 397
days pursuant to  Securities  and Exchange  Commission  ("SEC")  rules.  We only
invest in these  longer-term,  variable rate securities for the Fund when we can
take  advantage  of the higher  yield  paid on them as  compared  to  short-term
securities.  We only  invest  when it appears to us that the  variable  rates on
these  securities  may  reduce  the  fluctuations  in market  value  typical  of
longer-term  securities.  We may purchase  variable rate  securities  with a put
option for a Fund. The put option may reduce the risk of  fluctuations in market
value,  because the put option allows us to sell the security back to the issuer
at a set price.

Portfolio  Turnover -- The AAL Small Cap Stock, Mid Cap Stock,  High Yield Bond,
Municipal Bond and Bond Funds

As noted in the  prospectus,  portfolio  turnover  rates in  excess  of 100% may
increase brokerage and other trading expenses we incur for a Fund.

   
For the fiscal year ended April 30, 1998,  we had  portfolio  turnover  rates of
105.60%  and 104.73%  for The AAL Small Cap Stock and Mid Cap Stock  Funds.  The
rates  reflected our growth  investment  styles for the Funds. We also purchased
stocks in initial  public  offerings  and sold them  shortly  thereafter.  Stock
prices in initial public  offerings tend to appreciate or decline  significantly
after the offering and then level off in price.
    
The rates also reflect the volatility of small and mid cap stock prices.

   
We had portfolio  turnover  rates for The AAL  Municipal  Bond and Bond Funds of
139.18%  and  483.76%.  The rate  for The AAL  Bond  Fund  reflects  our  active
selection of the individual bonds that we believe provide the best income within
the Fund's  investment  parameters at any one time For The AAL Bond Fund, we may
have a portfolio  turnover rate for the next fiscal year in excess of 300%,  and
as high as 600% or more.  Our  turnover  rate for The AAL  Municipal  Bond  also
reflects our active  selection of the individual  bonds that we believe  provide
the best income and chance for capital appreciation and, thus, preservation,  at
any one time. We try to exploit pricing  inefficiencies  we believe exist in the
municipal securities market.
    

We may have  portfolio  turnover  in excess of 100% for The AAL High  Yield Bond
Fund, which began  operations on January 8, 1997. In seeking its objectives,  we
buy or sell  portfolio  securities  whenever the portfolio  manager  believes it
appropriate.  Generally,  how long we have owned the  security for the Fund does
not  influence  the  portfolio  manager's  decision  on when we will  trade  the
security. From time to time, we will buy securities intending to seek short-term
trading profits.  As a result, The AAL High Yield Bond Fund's portfolio turnover
rate may be  higher  than  that of other  mutual  funds  in this  category.  The
turnover rate is not a limiting  factor when  considering a change in the Fund's
portfolio.

Options and Futures

The following sections pertain to options and futures.  Except for The AAL Money
Market  Fund,  we  may  engage  in  options,  futures  and  options  on  futures
transactions  for the Funds.  We may engage in options and futures  transactions
for bona fide hedging or other  permissible risk management  reasons  (including
enhancing returns for a Fund). When entering into these transactions,  we follow
the SEC and the Commodities  Futures  Trading  Commission  requirements  and set
aside  liquid  assets  in a  separate  account  to  secure  a  Fund's  potential
obligations under such contracts. We cannot sell securities held in a segregated
account while the futures or options strategy is outstanding,  unless we replace
such assets 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 our ability to meet redemption requests or other obligations for a
Fund.

We may try to  enhance  returns  or hedge  against a  decline  in the value of a
Fund's  securities  by writing  (selling)  and  purchasing  options  and futures
contracts.  For  example,  during a neutral  or  declining  market,  we may gain
additional income by writing options and receiving  premiums for a Fund. When we
write (sell) covered call options for a Fund, we forgo the opportunity to profit
from increases in the market value of the underlying securities above the sum of
the options'  premium and the exercise  price.  On the other hand, we reduce the
amount of any decline in the value of the underlying securities to the extent of
the premium we receive from writing the call for a Fund. During a rising market,
we may gain incremental  income by purchasing call options and futures contracts
for a Fund.

We also may use  options  and  futures  to hedge  against an  anticipated  price
increase in a security we plan to buy for a Fund.

If new types of options and futures contracts become available,  we may use them
for the Funds. Prior to their use, however,  we must obtain a determination from
the Funds' Board of Trustees that their use would be consistent  with the Fund's
investment objectives and policies.

     Options on Securities and Indexes

An option  contract on a security (or index)  gives the holder,  in return for a
premium,  the right to buy from (call) or sell to (put) the option writer of the
underlying  security (or cash value of underlying index) at a specified exercise
price at any time during the option term.

Upon  exercise of a call  option,  the writer  (seller)  has the  obligation  to
deliver the  underlying  security to the  holder;  provided  the holder pays the
exercise price. Upon exercise of a put option,  the writer has the obligation to
pay the holder the exercise price upon delivery of the underlying security.

Upon the  exercise  of an index  options,  the  writer  must pay the  difference
between the cash value of the index and the  exercise  price  multiplied  by the
specified multiplier for the index option. (An index is a statistical  composite
that measures  changes in the economy or financial  market,  usually  reflecting
specified  facets  of a  particular  securities  market,  a  specific  group  of
financial instruments, securities or economic indicators.).

   
Options and futures  exist on debt,  equity,  indexes  and other  securities  or
instruments. They may take the form of standardized contracts traded on national
securities exchanges,  boards of trade or similar entities.  They also may trade
in the over-the-counter market. Some debt instruments, such as bonds, trade with
cash put options,  which generally allow the holder to sell the security back to
the  issuer at a  specified  price  for a  specified  amount of time.  
    

When we write options, we may only write "covered" calls or puts for a Fund.

A call option for a Fund is covered if we hold the security  underlying the call
for the Fund.  Also a call  option for a Fund is covered if we have an  absolute
and immediate right to acquire the security for the Fund without additional cash
consideration  upon  conversion  or  exchange  of other  securities  held in the
portfolio.  If additional cash  consideration is required,  we hold cash or cash
equivalents in such an amount in a segregated account with the Fund's custodian.
An index call  option is covered  if we hold cash or cash  equivalents  with the
Fund's  custodian  equal to the contract value. A written call option is covered
if we hold a call option on the same security or index under two conditions. The
first condition is where the exercise price of the call purchased is equal to or
less than the exercise price of the call written. The second conditions is where
the exercise  price of the call  purchased is greater than the exercise price of
the call  written;  provided  that we maintain  the  difference  with the Fund's
custodian in cash or cash equivalents in a segregated account.

A put option on a security  or an index is covered if we  maintain  cash or cash
equivalents equal to the exercise price in a segregated  account with the Fund's
custodian.  A put  option is covered  if we hold a put on the same  security  or
index as the put written under two conditions.  The first condition is where the
exercise  price of the put is equal to or greater than the exercise price of the
put written. The second condition is where the exercise price of the put is less
than the exercise  price of the put written;  provided we maintain  cash or cash
equivalents with the Fund's custodian in a segregated account.

Prior to the expiration or exercise of an option, we may close the option out by
entering  into  an  offsetting  transaction.   We  would  affect  an  offsetting
transaction  for a Fund by  purchasing  or selling an option of the same  series
(type,  exchange,  underlying security or index, exercise price and expiration).
Due to market factors,  we may not be able to affect a closing  purchase or sale
at the time we would like to for a Fund.

We realize a capital gain from a closing purchase transaction if the premium for
purchasing the closing option is less than the premium received from writing the
option.  If the premium for  purchasing the closing option is more, we realize a
capital  loss  for  the  Fund.  If the  premium  received  from a  closing  sale
transaction  is more than the premium paid to purchase the option,  we realize a
capital gain for the Fund. If the premium is less, we realize a capital loss for
the Fund.

If an option we write for a Fund expires unexercised,  we realize a capital gain
equal to the premium  received.  If an option we  purchased  for a Fund  expires
unexercised,  we  realize a capital  loss  equal to the  premium we paid for the
option.

The principal factors affecting the market value of a put or call option include
supply and demand,  interest  rates,  the current market price of the underlying
security  or  index  in  relation  to the  exercise  price  of the  option,  the
volatility of the underlying  security or index and the time remaining until the
expiration date.

We record a premium  paid for an option  purchased by us for a Fund as an asset.
We record  the  premium  received  for an option  written  by us for a Fund as a
deferred  liability.  We  mark-to-market  the  value of an option  purchased  or
written  on a daily  basis  at the  closing  price on the  exchange  on which it
traded.  If the option was not traded on an exchange or a closing  price was not
available,  we would value the option at the mean between the last bid and asked
prices.

     Risks Associated with Options on Securities and Indexes

Options  transactions have risks. A decision as to whether,  when and how we use
options  involves the exercise of skill and judgment.  For example,  significant
differences  could exist  between  the market for the  underlying  security  (or
index) and the market for the  overlying  options.  These  differences,  such as
differences  in the way the  underlying  securities  are trading and the way the
options on the securities are trading,  could result in an imperfect correlation
between the markets. As a result, we might not be able to achieve our objectives
in an options  transaction for the Fund.  Market behavior and unexpected  events
may hinder our otherwise  well-conceived  options  transactions  we have entered
into for a Fund.

We cannot  assure you that a liquid  market will exist when we seek to close out
an  option  position  for a Fund.  If we could  not  close  out an option we had
purchased for a Fund, we would have to exercise the option to realize any profit
or let the option  expire  worthless.  If we could not close out a covered  call
option that we had written for a Fund, we could not sell the underlying security
unless the option had expired not exercised.

When we write a covered  call  option for a Fund,  we forgo the  opportunity  to
profit from increases in the covering  security's  market value above the sum of
the premium and the call's exercise price.

If the exchange (or Board of Trade)  suspends  trading in an option we purchased
for a Fund, we cannot enter into a closing transaction during the suspension. If
the exchange imposes restrictions on the option's exercise, we might not be able
to exercise an option we have purchased for a Fund.  Except to the extent that a
call  option on an index  written  by a Fund is covered by an option on the same
index  purchased  by a Fund,  movements  in the index may  result in a loss to a
Fund. Such losses may be mitigated by changes in the value of a Fund's portfolio
securities during the period the option was outstanding.

     Futures Contracts and Options on Futures Contracts

In addition to foreign  currency futures  contracts,  which we discuss below, we
may enter into interest rate and index  futures  contracts.  An interest rate or
index futures contract provides for the future sale by one party and purchase by
another  party of a specified  quantity of a  financial  instrument  or the cash
value of an index at a specified price and time. A futures  contract on an index
is an agreement by which two parties agree to take or make delivery of an amount
of cash equal to the  difference  between the closing  value of the index on the
contract's  last  trading  day and  the  original  price  entered  into  for the
contract. Although the index's value may reflect the value of certain underlying
securities, the party responsible for delivery delivers cash (not the underlying
securities).

A public market exists in futures contracts covering a number of indexes as well
as other financial  instruments.  Such instruments include: U.S. Treasury bonds;
U.S. Treasury notes; GNMA certificates;  three-month U.S. Treasury bills; 90-day
commercial paper; bank certificates of deposit;  and Eurodollar  certificates of
deposit.  Boards of trade and other  issuers may develop and trade other futures
contracts.  As with options, if new types of futures contracts become available,
we may use them for the Funds.  Prior to their use,  however,  we must  obtain a
determination  from the  Funds'  Board  of  Trustees  that  their  use  would be
consistent with the Fund's investment objectives and policies.

We may purchase and write call and put futures  options for a Fund.  Our ability
to write call and put futures, however, depends on whether the Commodity Futures
Trading  Commission grants certain  regulatory relief (such as an exemption from
being considered a commodities pool operator).

Options  on  futures  possess  many of the same  characteristics  as  options on
securities and indexes.  A futures option gives the holder the right,  in return
for the premium paid, to assume a long position  (call) or short  position (put)
in a futures  contract  at a  specified  exercise  price at any time  during the
period of the option. Upon exercise of a call option, the holder acquires a long
position in the futures  contract and the writer is assigned the opposite  short
position. In the case of a put option, the opposite is true.

As long as  regulatory  authorities  require,  we limit our use of  futures  and
options on futures to hedging  transactions.  We might use futures  contracts to
hedge  against  anticipated  interest  rate changes we believe  might  adversely
affect  either the value of a Fund's  securities  or the price of  securities we
intend to purchase for a Fund. Our hedging strategy may include sales of futures
contracts to offset the effect of expected interest rate increases.  It also may
include purchases of futures contracts to offset the effect of expected interest
rate  declines.  Although  we could  use  other  techniques  to  reduce a Fund's
exposure  to  interest  rate  fluctuations,  we may be  able to  hedge a  Fund's
exposure  more  effectively  and  perhaps at a lower cost by using  futures  and
options on futures.

The success of any hedging technique depends on our ability to correctly predict
changes in the level and direction of interest rates and other  factors.  Should
our predictions prove incorrect,  the Fund's return might be lower than it would
have been had we not tried the hedging strategy.  However, in the absence of the
ability to hedge, we might have to take portfolio actions in anticipation of the
same market  movements with similar  investment  results at potentially  greater
transaction costs.

We only enter into  standardized  futures or options on futures  contracts  that
trade on U.S. exchanges,  boards of trade, or similar entities, or are quoted on
an automated quotation system.

When we  purchase or sell a futures  contract  for a Fund,  we deposit  with the
custodian (or broker,  if legally  permitted) a specified amount of cash or U.S.
government  securities  ("initial  margin").  The  exchange or board of trade on
which the futures contract trades sets the margin requirement.  The exchange may
modify the margin requirement during the term of a futures contract. The initial
margin is in the  nature of a  performance  bond or good  faith  deposit  on the
futures  contract.  The  custodian  or broker  returns the margin to a Fund upon
termination  of  the  contract,  assuming  we  have  fulfilled  all  contractual
obligations  for the  Fund.  We expect to earn  interest  income on the  initial
margin  deposit  for a Fund.  We value a futures  contract  held for a Fund on a
daily basis at the official settlement price of the exchange on which it trades.
Each day a we pay or receive cash for the Fund, called "variation margin," equal
to the daily change in value of the futures  contract.  This process is known as
"marking to market."  Variation margin does not represent a borrowing or loan by
us for a Fund, but is instead a settlement  between a Fund and the broker of the
amount one would owe the other if the futures  contract  expired.  In  computing
daily net asset value, we mark-to-market a Fund's open futures positions.

We are  required to deposit and  maintain  margin on any put and call options on
futures  contracts  that we have written for a Fund.  Such margin  deposits vary
depending  on the nature of the  underlying  futures  contract  (and the related
initial  margin  requirements),  the option's  current  market and other futures
positions we hold for the Fund.

Some  futures  contracts  call for making or taking  delivery of the  underlying
securities.  Generally we would close out these obligations prior to delivery by
making  offsetting  purchases  or  sales of  matching  futures  contracts  (same
exchange,  underlying  security or index, and delivery month).  If an offsetting
purchase  price is less than the original sale price,  we realize a capital gain
for the Fund.  If the  offsetting  purchase  price is more, we realize a capital
loss for the Fund.  Conversely,  if an  offsetting  sale  price is more than the
original purchase price, we realize a capital gain for a Fund. If the offsetting
sale price is less,  we realize a capital  loss for a Fund.  We must include the
transaction costs in calculating a gain or loss on the offsetting transactions.

     Risks Associated with Futures

There are several risks  associated with using futures  contracts and options on
futures as hedging  techniques.  Our purchase or sale of a futures  contract may
result in losses in excess of the amount we invested in the futures contract for
a Fund. We cannot  guarantee  how price  movements in the market for the hedging
vehicle and market for the  underlying  portfolio  securities  being hedged will
correlate.  Significant  differences  exist between the  securities  and futures
markets that could result in an imperfect  correlation.  These differences could
cause a given  hedging  strategy we have  entered into for a Fund to not achieve
its objectives.  The degree of imperfect  correlation  depends on  circumstances
such as the variations in the  speculative  market demand for the futures and/or
futures options contracts used to hedge the underlying portfolio  securities.  A
decision as to whether, when and how we hedge involves the exercise of skill and
judgment.  Our hedges may be  unsuccessful  to some degree because of unexpected
market behavior or interest rate trends.

Futures  exchanges may limit the amount of price  fluctuation  in a contract for
trading in a single day. An exchange  establishes  a daily limit on the amount a
contract's  price may vary either up or down from the previous day's  settlement
price.  Once the futures  contract  trades above or below the daily  limit,  the
exchange stops trading beyond the limit. The daily limit governs price movements
during a  particular  trading  day but does not limit  potential  losses for the
contract holders. The daily limit may prevent us from being able to liquidate an
unfavorable  position for a Fund. For example,  futures prices have occasionally
moved to the daily limit for several  consecutive trading days with little or no
trading,  thereby preventing prompt liquidation of positions and subjecting some
holders of futures contracts to substantial losses.

We cannot  assure a liquid market will exist at a time when we seek to close out
a futures or futures  options  position for a Fund.  If a liquid  market did not
exist,  we would have to continue  meeting  margin  requirements  until we could
close the position.  We also cannot assure that an active  secondary market will
develop or  continue to exist for the  futures  and  futures  options  discussed
above.

     Limitations on Options and Futures

We do not enter into an open  futures  contract  position or purchase an option:
the initial  margin  deposit plus the premiums paid less the amount by which any
such position is "in the money" exceeds 5% of a Fund's net assets. A call option
is "in the money" if the value of the  futures  contract  that is the subject of
the option  exceeds the  exercise  price.  A put option is "in the money" if the
exercise price exceeds the value of the futures  contract that is the subject of
the option.

When purchasing a futures  contract or writing a put on a futures  contract,  we
must maintain with the Fund's custodian (or broker,  if legally  permitted) cash
or cash  equivalents  (including  any margin)  equal to the market value of such
contract. When writing a call option on a futures contract, we maintain with the
Fund's  custodian cash or cash  equivalents  (including any margin) equal to the
amount such option is in the money until the option  expires or we have  entered
into an offsetting transaction closing out the option for the Fund.

We may not  maintain  open short  positions in futures  contracts,  call options
written on futures  contracts or call options written on indexes for a Fund, if,
in the  aggregate,  the  market  value of all such open  positions  exceeds  the
current value of the Fund's portfolio. In valuing the portfolio, we have to take
into account  unrealized  gains and losses on the open  positions and adjust for
the historical relative volatility of the relationship between the portfolio and
the positions. To the extent we have written call options on specific securities
in a  Fund's  portfolio,  we  deduct  the  value of  those  securities  from the
portfolio's current market value.

We  avoid  being  deemed a  "commodity  pool  operator"  by  complying  with the
Commodity  Futures  Trading  Commission  Rules.  As such,  we do not invest in a
commodity  contract for a Fund where the  "underlying  commodity  value" of each
long position at any time exceeds the sum of:

     (1)  the value of the Fund's short-term U.S. debt obligations or other U.S.
          dollar denominated,  high-quality  short-term money market instruments
          and  cash  that we have  set  aside  for the  Fund in an  identifiable
          manner, plus any funds deposited as margin on the contract;

     (2)  unrealized appreciation on the contract held by the broker; and

     (3)  cash proceeds from existing investments due in not more than 30 days.

"Underlying  commodity  value" means the size of the contract  multiplied by the
daily settlement price of the contract.


     Taxation of Options and Futures

If we  exercise a call option for a Fund,  we add the premium  paid for the call
option to the cost of the security  purchased.  If we exercise a put option,  we
deduct the  premium  paid for the put option from the  proceeds of the  security
sold.  For index  options and futures,  which are cash settled,  the  difference
between the cash  received at exercise and the premium paid is a capital gain or
loss.

Our entry into  closing  purchase  transactions  for a Fund results in a capital
gain or loss.  If an option was "in the money"  when we wrote it and we held the
security  covering  the  option for more than one year  before  writing it for a
Fund, any loss realized in a closing purchase transaction would be long-term for
federal tax purposes.  The holding period of the securities  covering an "in the
money" option does not include the time period the option was outstanding.

When we hold a futures  contract  for a Fund until  delivery,  we will realize a
capital gain or loss on the futures contract.  The capital gain or loss is equal
to the  difference  between  the price at the time we entered  into the  futures
contract  for the Fund and the  settlement  price on the earlier of the delivery
notice date or  expiration  date.  If we deliver  securities  for a Fund under a
futures  contract,  we  realize  a  capital  gain or loss  for the Fund on those
securities.

For Federal  income tax  purposes,  we generally  recognize a Fund's  yearly net
realized  gains and  losses on its  options,  futures  and  options  on  futures
positions  ("year-end mark to market").  Generally,  any gain or loss recognized
with respect to such  positions  (either by year-end mark to market or by actual
closing of the  positions) is considered to be 60% long term and 40% short term,
without regard to the holding periods of the contracts.  However, in the case of
positions classified as part of a "mixed straddle," we may defer the recognition
of losses on  certain  positions  (including  options,  futures  and  options on
futures  positions,  the  related  securities  and certain  successor  positions
thereto)  to a later  taxable  year for a Fund.  Selling  futures  contracts  or
writing  call options (or call options on futures) or buying put options (or put
options on futures) for the purposes of hedging against an anticipated change in
the value of a Fund's securities may affect the securities' holding period.

We  distribute  any  recognized  net  capital  gains for a Fund,  including  any
recognized  net  capital  gains  (including  year-end  mark-to-market  gains) on
options and futures transactions for federal income tax purposes. We combine and
distribute a Fund's  capital gains on its options and futures  transactions  and
its  capital  gains on other  investments.  We also advise  shareholders  on the
nature of these distributions for a Fund.

   
     Federal Tax Treatment of Forward  Foreign Exchange Contracts

We may  enter  into  forward  foreign  exchange  contracts  for a Fund  that the
Internal Revenue Service will treat as Section 1256 contracts or straddles under
the Internal Revenue Code.

We must consider  these Section 1256  contracts as having been closed at the end
of a Fund's  fiscal  year and we must  recognize  any  gains or  losses on these
contracts  for tax purposes at that time.  The IRS  characterizes  such gains or
losses from the normal  closing or settlement of such  transactions  as ordinary
gain or loss. We are required to distribute  any net gains on such  transactions
to the Fund's  shareholders  even if we have not actually closed the transaction
and received cash to pay for the distribution.

We may consider forward foreign exchange  contracts that offset a foreign dollar
denominated bond or currency position as straddles for tax purposes. Considering
these  contracts  as  straddles  allows us to defer a loss on any  position in a
straddle to the extent of unrealized gain in an offsetting position.

For a Fund  to  continue  qualifying  for  federal  income  tax  treatment  as a
regulated  investment  company,  it must derive at least 90% of its gross income
from qualifying income (i.e., dividends,  interest, income derived from loans of
securities  and gains from the sale of  securities or  currencies).  Pending tax
regulations could limit the extent that net gains realized from options, futures
or foreign forward  exchange  contracts on currencies are qualifying  income for
purposes of 90% requirement. In addition, a Fund's realized gains on the sale or
other disposition of securities,  including options,  futures or foreign forward
exchange  contracts  on  securities  or  securities  indexes and, in some cases,
currencies  held for less than  three  months is limited to less than 30% of the
Fund's annual gross income. To avoid realizing  excessive gains on securities or
currencies  held for less than three  months,  we may have to defer  closing out
some options,  futures or foreign forward exchange contracts. We anticipate that
the  unrealized  gains on Section  1256  options,  futures and  forward  foreign
exchange  contracts  we have held for a Fund for less than  three  months at the
Fund's  fiscal  year  end,  and for  which we have to  recognize  gains  for tax
purposes,  will be considered  gains on securities or currencies  held for three
months or greater for purposes of the 30% test.
    

Foreign Securities

     The AAL Small Cap Stock, Mid Cap Stock,  Capital Growth,  Balanced and Bond
     Funds

We may invest in foreign  securities  trading  domestically  through  depository
receipts or on a U.S. national securities exchange or Nasdaq National Market for
The AAL Small Cap  Stock,  Mid Cap Stock and  Capital  Growth  Funds.  We do not
intend to invest more than 10% of their net assets in such  foreign  securities.
We may invest up to 20% of The AAL Bond Fund's net assets in debt  securities of
foreign issuers payable in U.S. dollars. We may invest in foreign securities for
The AAL Balanced Fund to the extent The AAL Capital  Growth and Bond Funds allow
investments in foreign securities for the common stock and fixed-income  sectors
of the Fund,  respectively.  Foreign  securities may present a greater degree of
risk  (including  risks relating to tax provisions or  expropriation  of assets)
than do securities of domestic issuers.

     Foreign  Securities - The AAL  International,  Equity Income and High Yield
     Bond Funds

We normally invest at least 65% of The AAL International  Fund's total assets in
foreign  securities  primarily  trading in at least 3 different  countries,  not
including the U.S.

We may  invest up to 15% of The AAL Equity  Income  Fund's net assets in foreign
securities.  We also may  invest  in  foreign  securities  trading  domestically
through  depository  receipts and securities of foreign issuers traded on a U.S.
national securities exchange or Nasdaq National Market without regard to the 15%
limitation.  For purposes of diversification  for a Fund, we consider depository
receipts as investments in the underlying stocks.

We may invest up to 15% of The AAL High Yield Bond  Fund's net assets in foreign
bonds.  At this time, we intend to limit our foreign bond purchases for the Fund
to those trading in the U.S.

Foreign  investing  involves  risks in  addition  to the risks  inherent in U.S.
investing.  Foreign countries tend to disseminate less public  information about
their issuers.  Many foreign countries do not subject their companies to uniform
accounting,  auditing and financial  reporting  standards.  The value of foreign
investments may rise or fall because of changes in currency exchange rates. As a
result,  we may incur  costs in  converting  securities  denominated  in foreign
currencies  into U.S.  dollars  for a Fund.  Dividends  and  interest on foreign
securities  may be subject to foreign  withholding  taxes,  which would reduce a
Fund's income without providing a tax credit to shareholders. When necessary, we
may have more difficulty obtaining and enforcing judgments in foreign countries.
We also would  incur more  expense.  Even  though we mainly  intend to invest in
securities  trading  in  stable  and  developed  countries,  we  still  face the
possibility of expropriation,  confiscatory taxation, nationalization,  currency
blockage or political or social  instability  that could affect  investments  in
such countries.

We may invest in American Depository Receipts ("ADRs") for The AAL International
and Equity Income Funds without limit. ADR facilities may be either  "sponsored"
or  "un-sponsored."  While sponsored and unsponsored ADR facilities are similar,
distinctions  exist  between  the rights and  duties of ADR  holders  and market
practices.  Sponsored  facilities  have  the  backing  or  participation  of the
underlying   foreign   issuers.   Un-sponsored   facilities   do  not  have  the
participation by or consent of the issuer of the deposited shares.  Un-sponsored
facilities usually request a letter of non-objection from the issuer.

Holders of un-sponsored ADRs generally bear all the costs of such facility.  The
costs  of the  facility  can  include  deposit  and  withdrawal  fees,  currency
conversion and other service fees. The  depository of an  un-sponsored  facility
may not have a duty to distribute shareholder  communications from the issuer or
to pass  through  voting  rights.  Issuers of  un-sponsored  ADRs do not have an
obligation to disclose  material  information  about the foreign  issuers in the
U.S. As a result,  the value of the  un-sponsored ADR may not correlate with the
value of the  underlying  security  trading  abroad or any material  information
about the security or the issuer disseminated abroad.

Sponsored  facilities  enter into an  agreement  with the  issuer  that sets out
rights  and  duties  of the  issuer,  the  depository  and the ADR  holder.  The
sponsored  agreement  also  allocates  fees among the  parties.  Most  sponsored
agreements  provide that the depository  will  distribute  shareholder  notices,
voting instructions and other  communications.  The AAL International and Equity
Income Funds may invest in sponsored and un-sponsored ADRs.

For The AAL International  Fund, we also may hold foreign securities in the form
of American Depository Shares ("ADSs"),  Global Depository Receipts ("GDRs") and
European  Depository  Receipts  ("EDRs"),  or other securities  convertible into
foreign  securities.  These receipts may not be denominated in the same currency
as the underlying securities. Generally, American banks or trust companies issue
ADRs and ADSs, which evidence ownership of underlying foreign  securities.  GDRs
represent global offerings where an issuer issues two securities  simultaneously
in two markets,  usually publicly in a non-U.S. market and privately in the U.S.
market.  EDRs (sometimes called  Continental  Depository  Receipts ("CDRs")) are
similar to ADRs, but usually issued in Europe. Typically issued by foreign banks
or trust  companies,  EDRs and CDRs  evidence  ownership of foreign  securities.
Generally,  ADRs  and ADSs in  registered  form  trade  in the  U.S.  securities
markets,  GDRs in the U.S.  and European  markets,  and EDRs and CDRs (in bearer
form) in European markets. For diversification purposes, we consider investments
in ADRs, ADSs,  GDRs, EDRs and CDRs as investments in the underlying  stocks for
the Fund.

     Classification of Foreign Markets -- The AAL International Fund

Investors often classify foreign markets as mature or emerging. The countries in
which we may invest for The AAL International Fund are classified as follows.

Mature:   Australia,   Austria,   Belgium,  Canada,  Denmark,  Finland,  France,
          Germany, Hong Kong, Ireland,  Italy, Japan,  Luxembourg,  Netherlands,
          New Zealand, Norway,  Singapore,  Spain, Sweden,  Switzerland,  United
          Kingdom and United States.

Emerging: Argentina,  Brazil,  Chile,  China, Czech Republic,  Ecuador,  Greece,
          Hungary, India, Indonesia,  Jamaica, Kenya, Israel, Jordan,  Malaysia,
          Mexico, Morocco, Nigeria, Pakistan,  People's Republic of China, Peru,
          Philippines,  Poland,  South Africa,  South Korea, Sri Lanka,  Taiwan,
          Thailand, Turkey, Uruguay, Venezuela and Vietnam.

We may invest in securities of additional  countries when such  investments  are
consistent with the Fund's objective and policies.

Foreign Currency Transactions

     Foreign Currency Spot Transactions and Forward Contracts

To manage the currency risk accompanying  investments in foreign  securities and
to  facilitate  the  purchase and sale of foreign  securities,  we may engage in
foreign currency transactions on a spot (cash) basis for the Funds. We invest at
the spot rate prevailing in the foreign currency  exchange  market.  We also may
enter into  contracts  to purchase or sell foreign  currencies  at a future date
("forward foreign currency" contracts or "forward" contracts).

A forward contract involves an obligation to purchase or sell a specific foreign
currency at a future date at a set price. Forward contracts principally trade in
the  inter-bank  market and are  conducted  directly  between  currency  traders
(usually  large  commercial  banks)  and their  customers.  A  forward  contract
generally has no deposit requirement and no commissions are charged at any stage
for trades.

Whenever  we intend to  purchase  or sell a  security  denominated  in a foreign
currency  for a Fund,  we may want to "lock  in" the  U.S.  dollar  price of the
security.  We can protect a Fund by  entering  into a forward  contract  for the
purchase  or sale of a fixed  amount  of U.S.  dollars  equal to the  amount  of
foreign currency involved in the underlying security transaction. With a forward
contract,  we can protect the Fund  against a possible  loss  resulting  from an
adverse  change in the  relationship  between  the U.S.  dollar and the  subject
foreign currency between the date the security is purchased or sold and the date
on which the payment is made or received.

We may use  forward  contracts  for a Fund  when we  believe  that a  particular
foreign currency may suffer a substantial  decline against the U.S.  dollar.  In
this situation, we would enter into a forward contract to sell a fixed amount of
the  foreign  currency  approximating  the  value  of some or all of the  Fund's
portfolio securities denominated in such foreign currency.  We, however,  cannot
precisely  match the forward  contract  amounts and the value of the  securities
involved.  The  securities'  values change as a consequence of market  movements
between  the  date we  entered  into the  forward  contract  for the  underlying
currency and the date it matures.

Due to the fact that  movement in the  short-term  currency  market is extremely
difficult to predict,  successful  execution of a short-term hedging strategy is
highly uncertain.  Therefore, we do not enter into forward contracts or maintain
a net exposure to such contracts where  completion  would obligate us to deliver
foreign currency in excess of the value of the Fund's securities or other assets
denominated  in that  currency.  Under  normal  circumstances,  we consider  the
long-term prospects for a particular currency. We incorporate the prospects into
our overall long-term diversification strategies. However, we believe that it is
important to have the  flexibility to enter into such forward  contracts when we
determine that it is in the Fund's best interest.

At the maturity of a forward  contract for a Fund,  we may either:  (1) sell the
portfolio  securities and make delivery of the foreign  currency;  or (2) retain
the securities and terminate our  contractual  obligation to deliver the foreign
currency by purchasing an "offsetting"  contract  obligating us to purchase,  on
the same maturity date, the same amount of foreign currency.

If we retain the portfolio  securities  and engage in an offsetting  transaction
for the Fund,  we will incur a gain or a loss to the extent  that there has been
movement in forward contract prices. If we enter into an offsetting transaction,
we may subsequently  enter into a forward contract to sell the foreign currency.
Should  forward  prices decline during the period when we entered into a forward
contract to sell a foreign  currency and the date we entered into an  offsetting
contract  to buy a foreign  currency,  we will  realize a gain to the extent the
price of the  currency we agreed to sell  exceeds  the price of the  currency we
agreed to buy.  Should  forward  prices  increase,  we will suffer a loss to the
extent that the price of the  currency we agreed to buy exceeds the price of the
currency  we  agreed to sell for a Fund.  We may not be able to hedge  against a
currency  devaluation  at a price  above the level  where the market  itself has
anticipated the currency's devaluation.

A foreign  currency  hedge  transactions  does not protect  against or eliminate
fluctuations in the prices of particular  portfolio  securities.  For example, a
foreign  currency hedge  transaction does not prevent a security's price decline
due to an issuer's deteriorating credit situation.  We also cannot forecast with
precision  the  market  value  of  securities  at the  expiration  of a  forward
contract.  Accordingly,  we may have to purchase  additional foreign currency on
the spot market (and bear the expense of such purchase) if: (1) the market value
of the Fund's securities are less than the amount of the foreign currency we are
obligated  to  deliver  for the  Fund;  and (2) we made a  decision  to sell the
foreign  securities and make delivery of the foreign currency upon expiration of
the  contract  for the  Fund.  Conversely,  we may have to sell some of a Fund's
foreign  currency  received upon the sale of a portfolio  security if the market
value of the Fund's  securities  exceed the  amount of foreign  currency  we are
obligated  to deliver for the Fund.  We limit our  dealings  in forward  foreign
currency exchange contracts for a Fund to the transactions described above.

Although we value the Funds'  assets daily in terms of U.S.  dollars,  we do not
intend to convert their holdings of foreign  currencies  into U.S.  dollars on a
daily  basis.  From time to time,  however,  we will  convert  a Fund's  foreign
currency holdings into U.S. dollars.  There are costs associated with converting
foreign  currencies  into U.S.  dollars and you should be award of these  costs.
Although  foreign  exchange  dealers  do not charge a fee for  conversion,  they
realize a profit based on the difference  (the  "spread")  between the prices at
which they are buying and selling various  currencies.  Thus, a dealer may offer
to sell a foreign currency to us for a Fund at one rate, while offering a lesser
rate of exchange  should we desire to resell that currency to the dealer for the
Fund.

     Options and Futures Relating to Foreign Currencies

We may  purchase  and sell  currency  futures and  purchase  and write  currency
options  to  increase  or  decrease  a  Fund's  exposure  to  different  foreign
currencies.  We also may purchase and write currency options in conjunction with
the currency futures or forward  contracts of the Fund's other series.  The uses
and risks of currency  options and futures are similar to options and futures on
securities or indices, as discussed above.

Currency futures  contracts are similar to forward foreign  currency  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  generally is either a foreign
currency or a currency futures contract. The purchaser of a currency call option
obtains  the right to purchase  the  underlying  currency.  The  purchaser  of a
currency put option obtains the right to sell the underlying currency.

Currency futures and options values correlate with exchange rates.  However, the
futures  and  options  values do not reflect  other  factors  affecting a Fund's
investment  value.  A currency  hedge,  for example,  should  protect a Japanese
Yen-denominated security from a decline in the Yen. The currency hedge, however,
will not protect the particular  Fund's Yen  denominated  investments  against a
price decline in the Yen denominated  security  resulting from  deterioration in
the issuers' creditworthiness. Because the value of a Fund's foreign-denominated
investments  change in response to many factors  other than exchange  rates,  we
have  difficulty  matching the exact value of any hedge in currency  options and
futures to the value of our foreign investments for a Fund overtime.

Privately Issued Securities:  The AAL Money Market Fund

We may invest in securities issued by major  corporations  without  registration
under the  Securities  Act of 1933 for The AAL Money  Market Fund in reliance on
certain  exemptions,  including the "private  placement"  exemption  afforded by
Section 4(2) of that Act.  Section 4(2) paper is  restricted  as to  disposition
under the federal  securities  laws in that any resale must be made in an exempt
transaction.  This paper  normally  is resold to other  institutional  investors
through or with the  assistance of  investment  dealers who make a market in it,
thus providing liquidity. In our opinion (as the Adviser), Section 4(2) paper is
no  less  liquid  or  salable  than   commercial   paper  issued  without  legal
restrictions  on  disposition.  However,  should we deem that section 4(2) paper
issue is illiquid, we would purchase such security for a Fund only in accordance
with our limitations on illiquid securities.  See "Additional Investment Factors
and Risks  Regarding  the Funds -- Illiquid and  Restricted  Securities"  in the
prospectus.

Variable  Rate  Demand   Notes--The   AAL  Small  Cap  Stock,   Mid  Cap  Stock,
International,  Capital Growth, Equity Income,  Balanced,  High Yield Bond, Bond
and Money Market Funds

We may purchase  variable  rate master demand notes for The AAL Small Cap Stock,
Mid Cap Stock,  International,  Capital Growth,  Equity Income,  Balanced,  High
Yield Bond, Bond and Money Market Funds.  Variable rate, master demand notes are
unsecured  instruments  that  permit  the  indebtedness  thereunder  to vary and
provide for period  adjustments in the interest rate. The extent to which we can
purchase these securities for the Funds listed is subject to Rule 2a-7 under the
Investment  Company Act of 1940.  These notes normally do not trade and there is
no  secondary  market  for the  notes.  However,  we may  demand  payment of the
principal  for a Fund at any time.  We limit our  purchases  of  variable  rate,
master  demand  notes for a Fund to those:  (1) rated in one of the two  highest
rating categories by a NRSRO; or (2) that have been issued by an issuer that has
received  a rating  from the  requisite  NRSRO  in the top two  categories  with
respect to a class of short-term debt obligations that is comparable in priority
and security with the instrument. If an issuer of a variable rate, master demand
note defaulted on its payment obligation, we might not be able to dispose of the
note for a Fund due to the absence of a secondary market. We might suffer a loss
to the extent of the  default  for the Fund.  We only  invest in  variable  rate
master demand notes only when we deem them to involve minimal credit risk.

Investments In Other Investment Companies

Due to the administration  and distribution  expenses of managing a mutual fund,
our investments in other investment  companies (mutual funds,  which are limited
by  fundamental  investment  restriction  14  below)  may  cause us to  increase
payments of such expenses for a Fund.

Investment Restrictions

We operate under the  following  investment  restrictions.  For any Fund, we may
not:

     (1)  invest  more  than 5% of its net  assets  (or 5% of The AAL  Small Cap
     Stock,  International,  Balanced or High Yield Bond Funds'  total  assets),
     taken at value at the time of each investment, in the securities (including
     repurchase  agreements) of any one issuer (for this purpose,  the issuer(s)
     of a debt  security  being  deemed to be only the entity or entities  whose
     assets or revenues are subject to the principal and interest obligations of
     the  security),  except  that up to 25% of Fund's net assets (or 25% of The
     AAL Small Cap Stock,  International,  Balanced  or High  Yield Bond  Funds'
     total  assets)  may be  invested  without  regard  to this  limitation  and
     provided that such  restrictions  shall not apply to obligations  issued or
     guaranteed by the U.S. government or any agency or instrumentality thereof;

     (2) purchase  securities  on margin,  except for use of  short-term  credit
     necessary for clearance of purchases and sales of portfolio securities, but
     we may make margin  deposits in connection  with  transactions  in options,
     futures and options on futures for a Fund;

     (3) make short sales of securities or maintain a short position,  or write,
     purchase, or sell puts, calls, straddles, spreads, or combinations thereof,
     except for the  described  transactions  in  options,  futures,  options on
     futures and short sales against the box;

     (4) make loans to other persons, except that we reserves freedom of action,
     consistent with a Fund's other investment  policies and restrictions and as
     described in the prospectus  and this statement of additional  information,
     to:  (a)  invest  in debt  obligations,  including  those  that are  either
     publicly  offered  or of a  type  customarily  purchased  by  institutional
     investors,  even though the purchase of such debt obligations may be deemed
     the making of loans;  (b) enter into  repurchase  agreements;  and (c) lend
     portfolio securities, provided we may not loan securities for a Fund if, as
     a result,  the aggregate value of all securities loaned would exceed 33% of
     its total assets (taken at market value at the time of such loan);

     (5) issue senior securities or borrow, except that we may borrow for a Fund
     in amounts not in excess of 10% of its net assets,  taken at current value,
     and then  only from  banks as a  temporary  measure  for  extraordinary  or
     emergency  purposes  (we will not  borrow  money for the Funds to  increase
     income,  but only to meet redemption  requests that otherwise might require
     untimely  dispositions of portfolio  securities;  interest paid on any such
     borrowing will reduce a Fund's net income);

     (6) mortgage,  pledge,  hypothecate or in any manner transfer,  as security
     for  indebtedness,  any securities owned or held by a Fund except as may be
     necessary in connection with and subject to the limits in restriction (5);

     (7)  underwrite  any  issue of  securities,  except to the  extent  that we
     purchase securities directly from an issuer thereof in accord with a Fund's
     investment  objectives and policies may be deemed to be  underwriting or to
     the extent that in connection with the disposition of portfolio  securities
     we may be deemed an underwriter for the Fund under federal securities laws;

     (8)  purchase  or sell real  estate,  or real  estate  limited  partnership
     interests  provided that we may invest in securities  for a Fund secured by
     real estate or interests therein or issued by companies that invest in real
     estate or interests therein;

     (9) purchase or sell commodities or commodity  contracts,  except that a we
     may purchase or sell futures and options thereon for hedging purposes for a
     Fund as described this statement of additional information;

     (10) invest more than 25% of a Fund's net assets (or 25% or more of The AAL
     Small Cap Stock,  International,  Balanced or High Yield Bond Funds'  total
     assets),  taken  at  current  value  at the  time  of each  investment,  in
     securities of non-governmental  issuers whose principal business activities
     are in the  same  industry  (or 25% or more of The  AAL  Small  Cap  Stock,
     International,  Balanced  or High Yield Bond  Funds'  total  assets) in any
     single  industry  or issuer  (except the U.S.  government  or any agency or
     instrumentality thereof);

     (11) invest in oil, gas or mineral related programs or leases except as may
     be included in the definition of public  utilities,  although we may invest
     in securities of enterprises engaged in oil, gas or mineral exploration for
     a Fund;

     (12) invest in repurchase agreements maturing in more than seven days or in
     other securities with legal or contractual  restrictions on resale if, as a
     result  thereof,  more than 10% of a Fund's  net  assets  (taken at current
     value at the time of such investment) would be invested in such securities;

     (13) except for The AAL High Yield Bond Fund,  invest in any security if as
     a result a Fund  would  have more  than 5% of its net  assets  invested  in
     securities of companies which, together with any predecessors, have been in
     continuous operation for less than three years;

     (14) purchase  securities of other  investment  companies,  if the purchase
     would  cause  more than 10% of the value of a Fund's  net assets (or 10% of
     the value of The AAL Small Cap Stock, International, Balanced or High Yield
     Bond Funds' total assets),  to be invested in investment company securities
     provided that: (a) no investment  will be made in the securities of any one
     investment company if immediately after such investment more than 3% of the
     outstanding  voting  securities of such company would be owned by a Fund or
     more than 5% of the value of a Fund's net assets (or 5% of the value of The
     AAL Small Cap Stock,  International,  Balanced  or High  Yield Bond  Funds'
     total assets) would be invested in such  company;  and (b) no  restrictions
     shall apply to a purchase of  investment  company  securities in connection
     with a merger, consolidation acquisition or reorganization; or

     (15)  purchase  more than 10% of the  outstanding  voting  securities of an
     issuer or invest for the purpose of exercising control or management.

Each of the  above  restrictions  (1)  through  (15),  as  well  as each  Fund's
investment objective,  except for The AAL Balanced and High Yield Bond Funds, is
a fundamental policy.

Purchases and Redemptions; Pricing Considerations

We  determine  the Funds' net asset value only on the days on which the New York
Stock Exchange  ("NYSE") is open for trading.  That NYSE is regularly  closed on
Saturdays and Sundays and on New Years' Day, the third Monday in February,  Good
Friday,  the last Monday in May,  Independence Day, Labor Day,  Thanksgiving and
Christmas.  If one of these  holidays  falls on a Saturday  or Sunday,  the NYSE
closes on the preceding Friday or the following Monday, respectively.

We  determine  the net asset value for a Fund by adding up the value of a Fund's
assets,  subtracting  the Fund's  liabilities,  and  dividing the balance by the
total number of shares outstanding.  In determining the current market value for
securities  traded or listed on an  exchange,  we use the last sale price on the
exchange where the securities  primarily trade. For securities that have readily
available  market  quotations,  we  use  an  over-the-counter  or  exchange  bid
quotation. When a Fund holds securities or other assets that do not have readily
available  market  quotations  or are  restricted,  we value them at fair market
value,  as we  determine  in good  faith  under  the  direction  of our Board of
Trustees.  We may use pricing services in determining the current or fair market
value  of  securities  held in the  Funds'  portfolios.  We value  money  market
instruments  with a remaining  maturity of 60 days or less on an amortized costs
basis.  We  comply  with the SEC's  requirements  for  using an  amortized  cost
valuation method.

Many long-term corporate bonds and notes,  certain preferred stocks,  tax-exempt
securities and foreign securities do not have reliable market quotations and are
not considered to be readily available for purchase or sale.

To determine the current or fair market value for debt  securities,  we may, and
generally  will,  use a pricing  service or  services  approved  by the Board of
Trustees.  A pricing  service  generally  will determine  valuations  based upon
normal,  institutional-size  trading  units  of  such  securities  using  market
transactions  for  comparable   securities  and  various  relationships  between
securities generally recognized by institutional traders.

We generally price foreign  securities in terms of U.S.  dollars at the official
exchange rate.  Alternatively,  we may price these  securities at the average of
the  current  bid and asked  price of such  currencies  against  the dollar last
quoted by a major bank.  The bank must be a regular  participant  in the foreign
exchange market. We also may price foreign  securities on the basis of a pricing
service  that takes into  account the quotes  provided by a number of such major
banks.  If management does not have any of these  alternatives  available or the
alternatives do not provide a suitable method for converting a foreign  currency
into  U.S.  dollars,  the Board of  Trustees  in good  faith  will  establish  a
conversion rate for such currency.

Generally, U.S. government securities and other fixed income securities complete
trading  at  various  times  prior to the close of the  NYSE.  For  purposes  of
computing net asset value,  we use the market value of any such securities as of
the time their  trading day ends.  Occasionally,  events  affecting the value of
such securities may occur between the times these markets close and the time the
NYSE closes.  We generally will not reflect these events in the computation of a
Fund's net asset value, unless they are material.  If there is a material event,
we will value such securities at their fair value as determined in good faith by
the Board of Trustees.

Foreign  securities  do no trade on all the days when the NYSE is open.  Foreign
securities  also may trade on Saturdays and other days when NYSE is not open and
when  we do not  calculate  the  Funds'  net  asset  values.  We  value  foreign
securities  primarily listed and/or traded in foreign markets at the price as of
the close on its primary market.  Unless we determine  (under the supervision of
the Board of Trustees) that material events have occurred affecting the value of
a Fund's foreign  securities  between the time the foreign  securities'  primary
market closed and NYSE's close, we will not reflect the change in the Fund's net
asset value. As a result, trading on days when a Fund is not accepting purchases
or redemptions may significantly affect a Fund's net asset value.

We intend to pay all  redemptions  in cash.  We are  obligated to redeem  shares
solely in cash up to the lesser of  $250,000 or one percent of the net assets of
a Fund during any 90-day  period for any one  shareholder.  However,  we may pay
redemptions in excess of such limit in whole or part by a  distribution  in kind
of  securities.  If and to the  extent  we  redeem  shares  in kind,  you,  as a
redeeming  shareholder  might incur  brokerage  fees in selling  the  securities
received.

We reserve the right for each Fund to suspend or postpone redemptions during any
period when: (a) trading on the NYSE is restricted, as determined by the SEC, or
that the NYSE is closed for other than customary  weekend and holiday  closings;
(b) the SEC has by order  permitted  such  suspension;  or (c) an emergency,  as
determined by the SEC, exists,  making disposal of a Fund's portfolio securities
or valuation of its net assets not reasonably practicable.

The AAL Money Market Fund-Amortized Cost Valuation

We value The AAL Money Market Fund's portfolio  securities on the basis of their
amortized cost.  Amortized cost is an approximation of market value, whereby the
difference  between  acquisition  cost and value at maturity is  amortized  on a
straight-line  basis over the remaining  life of the  instrument.  The effect of
changes in the market  value of a security as a result of  fluctuating  interest
rates is not taken into  account.  The  amortized  cost method of valuation  may
result in the value of a security  being higher or lower than its actual  market
value. In addition,  if a large number of redemptions  take place at a time when
interest rates have  increased,  we may have to sell portfolio  securities for a
Fund prior to maturity and at a less desirable price.

Although  we  cannot  assure  you that we will be able to do so, we will use our
best efforts to maintain a net asset value of $1.00 per share for  purchases and
redemptions of The AAL Money Market Fund. The Board of Trustees has  established
procedures for this purpose. These procedures require us to review the extent of
any deviation in the Fund's net asset value per share, based on available market
quotations, from the $1.00 amortized cost per share. Should the deviation exceed
1/2 of 1% for the Fund, the Board of Trustees will promptly  consider whether we
should initiate efforts to eliminate or reduce material dilution or other unfair
results to shareholders.  Such action may include  redemption of shares in kind,
selling  portfolio  securities  prior  to  maturity,   reducing  or  withholding
dividends,  and  utilizing  a net asset value per share as  determined  by using
available market  quotations.  We maintain a  dollar-weighted  average portfolio
maturity of 90 days or less for the Fund. We also do not purchase any instrument
deemed to have a remaining  maturity  greater than 397 days. We limit  portfolio
investments,  including  repurchase  agreements,  to  those  dollar  denominated
instruments that the Board of Trustees  determines  present minimal credit risks
pursuant to our advise as the Adviser.  We also comply with the SEC requirements
on the quality of certain portfolio  securities for money market funds using the
amortized  cost method of  valuation.  We also comply with the SEC reporting and
record keeping  procedures  regarding  money market funds.  We cannot assure you
that we can  maintain a  constant  net asset  value at all  times.  In the event
amortized cost ceases to represent  fair value,  the Board of Trustees will take
appropriate action.

Compensation of the Board of Trustees

   
The Funds do not make payments to any of the officers for services to the Trust.
The Funds,  however, pay the independent Trustees (those who are not officers or
employees of AAL CMC or the Aid Association for Lutherans ("AAL")) an annual fee
of $25,000. The Funds assess these fees ratably to each series of the AAL Mutual
Funds.  The Funds  reimburse  the Trustees  for any  expenses  they may incur by
reason of  attending  such  meetings or in  connection  with  services  they may
perform for The AAL Mutual Funds.  For the fiscal year ended April 30, 1998, the
Funds paid an aggregate of $85,751 in Trustees' fees and expenses.
    

<TABLE>
<CAPTION>
Name of                Capacities              Aggregate               Pension or            Estimated            Total
Person                 in which                Remuneration            Retirement            Annual               Compensation
                       Remuneration                                    Benefits              Benefits             from
                       Received                                        Accrued               Upon                 Registrant
                                                                       During                Retirement           and Fund
                                                                       Last                                       Complex Paid
                                                                       Fiscal Year                                to Trustees*
   
<S>                    <C>                     <C>                     <C>                   <C>                  <C>
Ronald G.              Trustee                 -                       -                     -                    -
Anderson
dob 10/2/48

John H. Pender         Trustee                 -                       -                     -                    -
dob 5/25/30

Richard L.             Trustee                 -                       -                     -                    -
Gunderson **
dob 6/14/33

John O. Gilbert**      Trustee                 -                       -                     -                    -
dob 8/30/42

F. Gregory             Trustee                 $19,500                 -                     -                    $25,000
Campbell
dob 2/16/39

R. W. Russler          Trustee                 $19,500                 -                     -                    $25,000
dob 10/28/28

Richard L. Gady        Trustee                 $19,500                 -                     -                    $25,000
dob 2/28/43

Lawrence M.            Trustee                 $19,500                 -                     -                    $25,000
Woods dob
4/14/32

*    The Fund complex includes the AAL Variable Product Series Fund, Inc.

**   As of January 1, 1998, Mr. Gunderson retired from the Board of Trustees and
     Mr. Gilbert joined the Board of Trustees.
</TABLE>
    

Investment Advisory Services

Please refer to our  description  of the adviser,  advisory  agreement  and fees
under  "Management of the Trust" in the  prospectus.  We have  incorporated  the
prospectus herein by reference.

The  following  executive  officers  of the  Trust  also  serve as  officers  or
directors of the adviser, AAL CMC, as shown:

<TABLE>
<CAPTION>
<S>                                       <C>
Ronald G. Anderson                        President; Director and President of AAL Capital Management Corporation since
222 West College Avenue                   2/26/97
Appleton, WI 54919-0007
dob 10/2/48

Robert G. Same                            Secretary; Director since 1987, Executive Vice President since 2/14/97, and
222 West College Avenue                   Secretary of AAL Capital Management Corporation since 1987
Appleton, WI 54919-0007

   
Terrance P. Gallagher                     Treasurer; Director and Chief Financial Officer of AAL Capital Management
222 West College Avenue                   Corporation since 1994, Comptroller since 1992 and Senior Vice President since 1996
Appleton, WI 54919-0007
dob 9/20/58
    
</TABLE>

The adviser,  AAL CMC,  furnishes and pays for all office space and  facilities,
equipment and clerical personnel necessary for carrying out the adviser's duties
under  the  advisory  agreement.  The  adviser  also  pays all  compensation  of
Trustees,  officers and employees of the Trust who are the adviser's  affiliated
persons.  All costs and expenses not expressly  assumed by the adviser under the
advisory  agreement  are paid by the Funds,  including,  but not limited to: (a)
interest and taxes;  (b)  brokerage  commissions;  (c) insurance  premiums;  (d)
compensation  and expenses of the Funds'  Trustees  other than those  affiliated
with the  adviser;  (e) legal and audit  expenses;  (f) fees and expenses of the
Trust's  custodian and transfer agent; (g) expenses  incident to the issuance of
the Trust's shares,  including stock  certificates and issuance of shares on the
payment of, or reinvestment of, dividends; (h) fees and expenses incident to the
registration  under Federal or state securities laws of the Trust or its shares;
(i) expenses of  preparing,  printing and mailing  reports and notices and proxy
material to the  Trust's  shareholders;  (j) all other  expenses  incidental  to
holding  meetings of the Trust's  shareholders;  (k) dues or  assessments  of or
contributions  to the Investment  Company  Institute or its successor,  or other
industry organizations;  (l) such non-recurring expenses as may arise, including
litigation affecting the Trust and the legal obligations that the Trust may have
to  indemnify  its  officers and  Trustees  with  respect  thereto;  and (m) all
expenses that the Trust agrees to bear in any  distribution  agreement or in any
plan adopted by the Trust pursuant to Rule 12b-1 under the Act.

   
The adviser may waive its advisory  fees for,  assume or reimburse  the expenses
of, any Fund at any time.  As of September 1, 1997,  the adviser is waiving .225
of 1% of its .50 of 1%  maximum  advisory  fee for The AAL  Money  Market  Fund.
Effectively,  the  adviser is charging  only a 0.275 of 1% advisory  fee for the
Fund. The adviser is reimbursing The AAL High Yield Bond Fund expenses in excess
of  1.00%,  1.75%  and  .75%  for  Class A,  Class B and  Institutional  shares,
respectively.  Any fee  waivers or expense  assumptions  the  adviser  makes are
voluntary. The adviser may discontinue any fee waivers or expense reimbursements
at any time.  The Funds have paid  advisory  fees net of  reimbursements  to the
adviser, for the past three fiscal years ended April 30, 1998, as follows:
    

<TABLE>
<CAPTION>
         For the Year Ended        April 30, 1996      April 30, 1997      April 30, 1998

   
<S>                                <C>                 <C>                 <C>     
Small Cap Stock Fund               N/A                 $159,016            $690,590

Mid Cap Stock Fund                 $2,207,510          $3,188,294          $4,070,582

International Fund                 $183,656            $873,585            $1,280,101

Capital Growth Fund                $7,332,620          $9,121,422          $12,742,588

Equity Income Fund                 $445,179            $643,863            $809,833

Balanced Fund                      N/A                 N/A                 $27,618

High Yield Bond Fund               N/A                 $60,205             $522,217

Municipal Bond Fund                $2,215,237          $2,153,751          $2,163,729

Bond Fund                          $2,410,603          $2,214,486          $1,921,733

Money Market Fund                  $448,619            $780,148            $1,088,957
    
</TABLE>


From the  adviser's  advisory  fees, it pays the  sub-advisory  fees for The AAL
International  Fund in accordance  with the formula set forth in the prospectus.
Prior to November 1, 1995,  we paid  sub-advisory  fees from the  advisory  fees
received for The AAL Mid Cap Stock,  Capital  Growth,  Equity Income,  Municipal
Bond, Bond and Money Market Funds.

The advisory agreement and sub-advisory agreement for The AAL International Fund
provide  that  subject  to  Section  36 of the  Act,  neither  the  adviser  nor
sub-Adviser shall be liable to the Trust for any error of judgment or mistake of
law or for any loss arising out of any  investment or for any act or omission in
the  management  of the  Trust and the  performance  of their  duties  under the
advisory agreement except for willful misfeasance, bad faith or gross negligence
in the  performance of their duties or by reason of reckless  disregard of their
obligations and duties under the agreements.

The Trust has  agreed to use its best  efforts  to change its name if we, as the
adviser (AAL CMC) cease to act as such with respect to the Funds.  The continued
use of the Trust's present name (The AAL Mutual Funds) would create confusion in
the context of the Adviser (AAL CMC) or AAL's business.

The  investment  advisory  agreement  was  approved  by the  Board of  Trustees,
including a majority of the Trustees who were not interested persons (as defined
in the Act) of any party to the  agreement on August 21, 1990,  and was approved
by the shareholders of The AAL Municipal Bond Fund on November 27, 1990, and The
AAL Capital  Growth,  Bond and Money Market  Funds on December  20, 1990.  After
December 20, 1990, the advisory agreement was approved for:

     The AAL Mid Cap Stock Fund by the Board of  Trustees on May 18,  1993,  and
     the sole shareholder on June 30, 1993;

     The AAL Equity  Income Fund by the Board of Trustees on February  24, 1994,
     and the sole shareholder on March 18, 1994;

     The AAL  International  Fund by the Board of Trustees on May 23, 1995,  and
     the sole shareholder on July 31, 1995;

     The AAL Small Cap Stock Fund by the Board of Trustees on February 23, 1996,
     and the sole shareholder on July 1, 1996;

     The AAL High Yield Bond Fund by the Board of Trustees on May 29, 1996,  and
     the sole shareholder on January 8, 1997; and

     The AAL Balanced  Fund by the Board of Trustees on November  19, 1997,  and
     the sole shareholder on January 2, 1998.

On  October  16,  1995,  the  Board  of  Trustees  terminated  the  sub-advisory
agreements (effective November 1, 1995) with, and approved the assumption of the
duties by us (as the adviser)  of, the  sub-advisers,  Duff & Phelps  Investment
Management Co., and Pilgrim Baxter & Associates Ltd., for The AAL Mid Cap Stock,
Capital Growth, Equity Income,  Municipal Bond, Bond and Money Market Funds. The
Board of Trustees also approved reductions in the advisory fees for these Funds.

On May 23, 1995, the Board of Trustees, including a majority of the Trustees who
were  not  interested  persons  (as  defined  in the  Act) of any  party  to the
agreement  approved the current  sub-advisory  agreement  with Societe  Generale
Asset Management Corp. ("SoGen") for The AAL International Fund.

The advisory  agreement and sub-advisory  agreement will continue in effect from
year to year only so long as such  continuances  are  specifically  approved  at
least annually by the Board of Trustees.  The vote for approval must include the
approval  of a majority  of the  Trustees  who are not  interested  persons  (as
defined in the Act).  The advisory and  sub-advisory  agreements  are terminable
upon assignment.  The advisory  agreement is also terminable at any time without
penalty by the Board of  Trustees or by vote of the holders of a majority of the
outstanding  voting  securities of the Trust. With respect to a particular Fund,
the advisory or sub-advisory  agreement,  if any, is terminable by the vote of a
majority of the  outstanding  shares of such Fund. The adviser may terminate the
agreement on 60 days written notice to the Trust.

Distributor

The  distributor,  AAL CMC,  is the  exclusive  underwriter  for the Funds.  The
distributor has a written distribution  agreement with the Funds, dated June 15,
1987,  as  amended.  The  distributor  offers  the  Funds'  shares for sale on a
continuous basis through its field sales force.

   
The  public  offering  price of a Fund's  Institutional  shares is the net asset
value next computed.  An investor can combine Class A, Class B and Institutional
shares for purposes of qualifying for the $500,000 minimum purchase  requirement
for  Institutional  shares.  The Funds began  offering  Institutional  shares on
December 29, 1997.

The distributor does not receive compensation in connection with redemptions and
repurchases or brokerage commissions for Institutional shares.

The amount of underwriting  commissions received and retained by the distributor
for the period from  December  29, 1997  through the fiscal year ended April 30,
1998 were as follows:

                              Institutional Shares

For the Fiscal Year Ended          Aggregate Commissions    Retained Commissions
From 12/29/97 through April
30, 1998                                   $0                       $0
    

General

The distributor,  AAL CMC, acts as exclusive  underwriter for the Fund's Class A
and Class B shares and two  additional  series of The AAL Mutual Funds:  The AAL
U.S.  Government  Zero  Coupon  Target  Fund,  Series  2001;  and The  AAL  U.S.
Government Zero Coupon Target Fund, Series 2006.

Portfolio Transactions

AAL CMC, as the adviser, and SoGen, as the sub-adviser for The AAL International
Fund,  direct the  placement  of orders for the  purchase and sale of the Funds'
portfolio securities.

The securities  transaction  costs for each Fund consist  primarily of brokerage
commissions or dealer or underwriter spreads. Bonds and money market instruments
generally trade on a net basis and do not involve either  brokerage  commissions
or transfer taxes.

Occasionally,  we, as the adviser,  purchase securities directly from the issuer
for a Fund. For securities traded primarily in the  over-the-counter  market, we
deal with the sellers who make a market in the securities directly unless we can
find better prices and execution available  elsewhere.  Such dealers usually act
as principals for their own account. In placing portfolio transactions,  we seek
the best combination of price and execution.

In determining  which brokers provide best  execution,  we look primarily at the
prices quoted by the brokers.  Normally, we place orders with the broker who has
the  most  favorable  prices.   Ordinarily,  we  expect  to  execute  securities
transactions  in the  primary  markets.  In  assessing  the best net  price,  we
consider  all  relevant  factors.  The  relevant  factors  include the  security
market's  breadth,  the  security's  price,  the  broker or  dealer's  financial
condition and execution capability and the reasonableness of the commission,  if
any (for the specific  transaction and on a continuing  basis).  Although we are
the sole  distributors  for the Funds'  shares,  we (as the  adviser) may in the
future consider the willingness of particular  brokers to sell the Funds' shares
as a factor in the selection of brokers for the Funds'  portfolio  transactions.
However  our  selection  would  still be subject to the  overall  best price and
execution standard.

   
Assuming equal  execution  capabilities,  we may take into  consideration  other
factors in selecting brokers or dealers. We may consider "brokerage and research
services"  (as those  terms  are  defined  in  Section  28(e) of the  Securities
Exchange  Act of 1934),  statistical  quotations  (specifically  the  quotations
necessary  to  determine  the Funds'  net asset  values,  and other  information
provided  to us or the  sub-adviser  for The AAL  International  Fund (or  their
affiliates).  We may also cause a Fund to pay to a broker or dealer who provides
such  brokerage  and research  services a commission  for  executing a portfolio
transaction  which is in excess of the amount of  commission  another  broker or
dealer would have charged for effecting that transaction.  We must determine, in
good faith,  however,  that such  commission  was  reasonable in relation to the
value of the brokerage and research  services  provided.  The commission must be
reasonable  in  terms  of that  particular  transaction  or in  terms of all the
accounts over which we, as an adviser,  exercise  investment  discretion.  It is
possible  that  certain  of  the  services  received  by  us  attributable  to a
particular  transaction benefit one or more other accounts for which we exercise
investment discretion. The Funds paid $3,143,251,  $4,205,263 and $ 1,697,844 in
brokerage  commissions  in each of past three  fiscal  years ending on April 30,
1998, 1997 and 1996, respectively.
    

Dividends, Distributions and Taxes

     The AAL Small Cap Stock,  Mid Cap  Stock,  International,  Capital  Growth,
     Equity Income, Balanced, High Yield Bond, Bond and Money Market Funds

Except for The AAL Municipal Bond Fund, any dividends from net investment income
and  short-term  capital  gains   (collectively   "income  dividends")  that  we
distribute to you from the Funds are taxable to you as ordinary  income  whether
we have paid these  distributions  in cash or additional  shares.  Any long-term
capital gains ("capital gains distributions") that we distribute to you from the
Funds are taxable to you as long-term  capital  gains whether we have paid these
distributions in cash or additional shares.  Long-term capital gains are treated
as long-term  capital gains  regardless of the length of time you have owned the
shares. We distribute  substantially all of the Funds' net investment income and
net realized  long-term  capital gains to avoid the imposition of federal income
and excise tax liability.  We pay any dividends for The AAL Small Cap Stock, Mid
Cap Stock and  International  Funds  annually.  We pay any dividends for The AAL
Capital  Growth Fund  semi-annually  and we pay any dividends for the AAL Equity
Income and Balanced Funds  quarterly.  We accrue income  dividends daily and pay
any dividends  monthly for The AAL High Yield Bond, Bond and Money Market Funds.
We expect to distribute any capital gains annually for these Funds.

     The AAL Municipal Bond Fund

For The AAL  Municipal  Bond  Fund,  we accrue any  income  dividends  daily and
distribute any net investment income in monthly dividends. We distribute any net
realized  capital gains at least annually.  Dividends  derived from the interest
earned  on  municipal   securities   constitute   "exempt-interest   dividends."
Generally,  exempt-interest  dividends  are not  subject to federal  income tax.
Distributions  of net realized capital gains (whether from tax-exempt or taxable
securities) are taxable to shareholders. We report the federal income tax status
of all distributions to shareholders annually. In the report, we allocate income
dividends  between  tax-exempt and taxable income (if any) in approximately  the
same proportions as the Fund's total income during the year. Accordingly, income
derived  from each of these  sources by the Fund may vary  substantially  in any
particular  distribution  period from the  allocation  reported to  shareholders
annually.

You may not be able to deduct any interest  expense you incur on money  borrowed
to purchase or carry  shares of the Fund for federal  income tax  purposes.  You
also may be  subject  to state  and local  taxes on  dividends  from this  Fund,
including those which are exempt from federal income tax.

If you or your  entity are  "substantial  users" (or  persons who are related to
"substantial  users") of facilities financed by industrial revenue bonds, you or
your entity should consult your tax advisers before purchasing shares of The AAL
Municipal Bond Fund. The term "substantial user" is defined generally to include
a  "nonexempt  person"  who  regularly  uses in  trade or  business  a part of a
facility financed from the proceeds of industrial development revenue bonds.

The 1986 Tax Reform Act subjects  tax-exempt  interest  attributable  to certain
"private  activity  bonds" to the individual and corporate  alternative  minimum
tax. Such tax-exempt  interest includes,  in the case of a regulated  investment
company  receiving   interest  on  such  bonds,  a  proportionate  part  of  the
exempt-interest  dividends  paid by that  company.  We limit our  investment  in
private  activity  bonds  to no more  than  20% of the  Fund's  assets.  Certain
corporate  shareholders  may be  subject to a federal  "environmental"  tax with
respect to their receipt of dividends and distributions.

The AAL International Fund -- Foreign Withholding Tax

We may be subject to income and  withholding  taxes on income and gains  derived
from The AAL International  Fund's  investments  outside the U.S. Our payment of
such foreign taxes reduces the yield on  investments  for the Fund. Tax treaties
between  certain  countries  and the U.S. may reduce or eliminate  these foreign
withholding taxes. If more than 50% of the Fund's total asset value at the close
of any taxable year consists of foreign corporate stocks or other securities, we
may elect (for U.S.  federal  income tax purposes) to treat any foreign  country
income  or  withholding  taxes we have paid on behalf of the Fund as paid by the
Fund's shareholders.  The foreign income or withholding taxes must be those that
could be treated as income taxes under U.S. income tax principles.  For any year
we make such an election for the Fund,  the  shareholder  must include as income
(in addition to taxable  dividends  received) his pro rata share of such foreign
income and withholding  taxes.  The shareholder is entitled,  subject to certain
limitations,  to credit his  portion of these  foreign  taxes  against  his U.S.
federal  income tax due or deduct it (as an  itemized  deduction)  from his U.S.
taxable income.  Generally, this foreign tax credit is subject to the limitation
that it may not exceed the shareholder's U.S.
tax attributable to his foreign source taxable income.

If we make the pass through election  described above, the Fund's foreign income
flows through to the  shareholders.  The Internal Revenue Service will not treat
certain gains from the sale of securities and currency  fluctuations  as foreign
source taxable income.  In addition,  this foreign tax credit limitation must be
applied  separately to certain categories of foreign source income, one of which
is foreign source "passive  income." For this purpose,  foreign "passive income"
includes dividends,  interest, capital gains and certain foreign currency gains.
As a consequence,  certain  shareholders  may not be able to claim a foreign tax
credit for the full amount of their  proportionate share of the foreign tax paid
by the Fund.

Corporations  and  individuals can use the foreign tax credit to offset only 90%
of any alternative  minimum tax (as computed under the Code for purposes of this
limitation) imposed upon them. If we do not make the pass through election,  the
foreign  taxes  we  pay  for  the  Fund  will  reduce  the  Fund's  income.  Any
distributions we make for the Fund will be treated as U.S. source income.

We will  notify  each  shareholder  within 60 days after the close of the Fund's
taxable year whether, pursuant to the election described above, we will make the
pass through  election  and treat any foreign  taxes paid by the Fund as paid by
its  shareholders for that year. If we make the pass through  election,  we will
designate the  shareholder's  portion of the foreign taxes paid to such country.
We also will  designate the portion of the Fund's  dividends  and  distributions
that represent income derived from sources within such country.

Our investments in certain foreign  corporations  that generate  largely passive
investment  type income,  or that hold a significant  percentage of assets which
generate passive income ("passive foreign investment  companies" or "PFICs") are
subject to special tax rules.  These  special tax rules are  designed to prevent
deferral of U.S.  taxation on the Fund's  share of the PFIC's  earnings.  In the
absence of certain  elections to report these  earnings on a current  basis,  we
would  have to  report  certain  "excess  distributions"  and any gain  from the
disposition  of PFIC's stock as ordinary  income.  We would have to report these
excess  distributions  and gains as  ordinary  income  regardless  of whether we
actually  received any  distributions  from the PFIC.  We would have to allocate
this ordinary  income ratably  throughout the holding period for the stocks.  We
would have to pay taxes for the Fund on any amounts allocable to a prior taxable
year at the highest  applicable  tax rate from that year.  We also would have to
increase this rate by an interest  charge  determined as though the amounts were
an  underpayment  of the tax for that year. We would have to include the amounts
allocated  to the year of the  distribution  or  disposition  in the  Fund's net
investment  income for that  year.  To the extent  the  amounts  allocated  were
distributed as a dividend to  shareholders  such amounts would not be taxable to
the Fund.

Summary

We have only provided you with a summary of certain tax considerations generally
affecting the Funds and  shareholders.  We urge you to consult your tax advisors
with specific  reference to your own tax  situations,  including state and local
tax liability.

Calculation of Yield and Total Return

From time to time we  advertise  the  yields  and total  returns  for the Funds'
shares for various periods of investment.  We always include uniform performance
calculations based on standardized methods established by the SEC, which reflect
the  front-end  sales charge on a Class A share and the CDSC on a Class B share.
We do not impose sales charges or Rule "12b-1 fees" on Institutional  shares. We
also may include other total return  information  without giving effect to sales
charges.  Yields and total returns are calculated  based on historical  earnings
and  appreciation.  We do not intend any yield or total return  calculations  to
indicate  future  performance.  You should consider  performance  information in
light  of:  the   particular   Fund's   investment   objectives   and  policies;
characteristics and quality of the Fund's portfolio  securities;  and the market
conditions during the applicable period. You should not consider the performance
information  as a  representation  of what may be achieved  in the future.  When
comparing any such  performance  information to published  performance  data for
alternative investments, you should consider the differences in the methods used
in calculating performance  information,  and the impact of taxes on alternative
investments in addition to the factors listed.

Standardized Performance Information

Average Annual Total Return. For each of the Funds,  except The AAL Money Market
Fund, we compute the standardized  average annual total return for Institutional
shares by finding the average annual compounded rates of return for these shares
over the 1, 5 and 10 year periods (or the portion  thereof during which the Fund
has been in  existence)  that would equate the initial  amount  invested in each
class to the ending redeemable value according to the following formula:

                  T = (ERV/P)^(1/n) - 1

     Where:

                  T =           average annual total return for the class;

                  n =           number of years and portion of a year;

                  ERV           = ending  redeemable value for the class (of the
                                hypothetical  $1,000  payment) at the end of the
                                1, 5 and 10 year periods,  or fractional portion
                                thereof,  after  deduction of all  non-recurring
                                charges  for the class  (i.e.,  CDSC for Class B
                                shares, none for Institutional shares), assuming
                                redemption at the end of the period;

                  P             =  $1,000  (the  hypothetical   initial  payment
                                before  deduction of the maximum  sales load, if
                                any); and

                  ^ =           raised to the power of.

      Return for Institutional Shares for the Period from Inception through
      the Fiscal Year Ended April 30, 1998, Based on Gross Amount Invested

The AAL Mutual Fund                               Return for the Period
and Inception Date                                Since Inception

   
Small Cap Stock                                   11.41%
12/29/97

Mid Cap Stock                                     10.83%
12/29/97

International                                     10.48%
12/29/97

Capital Growth                                    13.90%
12/29/97

Equity Income                                     9.34%
12/29/97

Balanced                                          8.17%

High Yield Bond                                   3.28%

Municipal                                         -.09%

Bond                                              1.24%

There is no  standardized  average annual return  information  for the one-year,
five-year and 10-year periods based on gross amount  invested for  Institutional
shares. Institutional shares first became available to investors on December 29,
1997.  The returns  reflect the period from  December 29, 1997 through April 30,
1998  and are not  annualized  because  Institutional  shares  have  not been in
existence for more than one year. For annual return  information  for the Fund's
Class A and  Class B shares  based  on gross  amount  invested,  please  see the
separate prospectus and statement of additional information.
    

Current Yield.  We base current yield  quotations for the Funds,  except The AAL
Money
   
Market Fund, on a 30-day (or one-month)  period. We compute the current yield by
dividing the net  investment  income per share for each class earned  during the
period  by  the  maximum   offering  price  per  (i.e.,   net  asset  value  for
Institutional  shares)  share  for each  class  on the  last day of the  period,
according to the following formula:
    

                  Yield  2[((a - b)/(cd) + 1)^6 - 1]

     where:

                  a =    dividends and interest earned by the Class during the 
                         period;

                  b =    expenses  accrued  by the  Class for the  period  (net 
                         of reimbursements);

                  c      = the average  daily number of shares  outstanding  for
                         the Class  during  the  period  they were  entitled  to
                         receive dividends; and

                  d =    the maximum  offering price per share for the Class on 
                         the last day of the period.

                  ^ =    to the power of.

   
For  purposes  of this  calculation,  we  determine  the  income  earned on debt
obligations  by  applying  a  calculated  yield-to-maturity  percentage  to  the
obligations  held  during  the  period.  We  calculate  the  interest  earned on
mortgage-backed  securities by using the coupon rate and principal  amount after
adjustment  for a monthly pay down.  We determine the income earned on stocks by
using the stated annual dividend rate applied over the performance  period.  The
current  yields  for The AAL  Small Cap  Stock,  Mid Cap  Stock,  International,
Capital Growth,  Equity Income,  Balanced,  High Yield Bond,  Municipal Bond and
Bond Funds for the 30-day period ended April 30, 1998 for  Institutional  shares
were:
    

                              The AAL Mutual Funds
                           Institutional Share Yields
                           30-day period ended 4/30/98

   
Small Cap Stoc      -.40%                    Balanced            1.86%

Mid Cap Stock       .17%                     High Yield Bond     8.64%

International       4.35%                    Municipal Bond      4.46%

Capital Growth      .81%                     Bond                5.76%

Equity Income       .89%
    

When we are advertising yield for a Fund, we will not advertise a one-month or a
30-day  period  that  ends  more  than 45 days  before  the  date on  which  the
advertisement is published.

Tax Equivalent  Yield. We calculate a tax equivalent yield for The AAL Municipal
Bond Fund based on a 30-day (or one-month) period for  Institutional  shares. We
compute the tax equivalent yield by dividing the portion of the Fund's yield for
the share class (computed as described  above) that is tax-exempt by one minus a
stated  income tax rate and adding the quotient to the portion of the yield that
is not tax exempt. The formula for computation of the tax equivalent yield is:

                  X = ( N/1-F) + T

     Where:

                  N =  % of yield for the class derived from tax-exempt income;

                  F =  federal income tax rate; and

                  T =  % of yield for the class derived from taxable income.

   
The AAL  Municipal  Bond  Fund's  tax  equivalent  yield at 31% tax rate for the
30-day period ended April 30, 1998, for Institutional shares was 6.46%.
    

Current and Effective  Yield - The AAL Money Market Fund. We may quote a current
or effective  yield for The AAL Money Market  Fund's  Institutional  shares from
time-to-time.  The current yield is an annualized  yield based on the net change
in account value for each class for a seven-day  period.  The effective yield is
an annualized  yield based on a daily  compounding of the current yield for each
share class.  We compute  these yields by first  determining  the "Net Change in
Account  Value" for each share class for a  hypothetical  account having a share
balance of one share at the beginning of a seven-day period ("Beginning  Account
Value"),  excluding  capital  changes.  The Net Change in Account  Value  always
equals the total dividends declared with respect to the account.  We compute the
yields for each share class as follows:

     Current Yield = Net Change in Account Value Per Class   365
                     -------------------------------------   ---
                       Beginning Account Value Per Class     x 7

     Effective Yield = [1 + Net Change in Account Value Per Class]  365/7 - 1

   
For the  seven-day  period  ended April 30, 1998,  The AAL Money  Market  Fund's
current  and  effective  yields for  Institutional  shares were 4.78% and 4.90%,
respectively.
    

Normal changes in income earned and expenses affect the Fund's yield.  Also, any
efforts we undertake to restrict or supplement the Fund's  dividends to maintain
its net asset  value at $1.00  will  affect the  Fund's  yield.  (See "Net Asset
Value" in the prospectus and in this statement of additional  information.)  Any
portfolio  changes we make due to net purchases or  redemptions  will affect the
Fund's yield. Accordingly,  the Fund's yield may vary from day to day. The yield
stated for a  particular  past period is not a  representation  as to its future
yield.  We do not  guarantee  the Fund's  yield and the Fund's  principal is not
insured.  Although  there is no assurance  that we will be able to do so, we use
our best efforts to maintain a net asset value of $1.00 per share for the Fund.

Other Performance Information

We  may  from  time  to  time  include  in  the  Funds'  sales   literature  and
advertisements:  (1) total return quotations computed for different time periods
or by a method that differs from the computations described in the section above
for a Fund's shares;  (2) calculations of the growth of an investment (or series
of investments),  at various assumed interest rates and compounding, to show the
effect of the length of time, interest rate and/or tax deferral on an investment
for a Fund's shares;  (3) illustrate the concepts of asset  allocation by use of
hypothetical  case studies using various risk levels and life cycles, as well as
illustrating   the  effect  of  various  tax  brackets  and  tax   deferrals  on
hypothetical  systematic  investing  for a Fund's  shares;  and (4)  performance
relative to the performance of other investments such as stocks,  bonds,  closed
end funds,  certificates  of  deposit,  as well as various  indices  such as the
Consumer  Price Index and indices  generated by lbbotson & Associates  and Chase
Global Data and Research Products for a Fund's shares.

Average  Annual  Total  Return.  Except for The AAL Money  Market  Fund,  we may
advertise an average annual total return  calculation  for a Fund's shares,  for
any  appropriate  time period,  based upon the value of a net  investment in the
Fund for the class.  For  Institutional  shares  there would not be a difference
between the net returns and the gross (or standardized) returns. The calculation
would be the same because  Institutional  shares do not have sales charges.  For
Class A and Class B shares the  difference  between net return and gross returns
would be the  calculation  after  deducting the maximum sales charge for Class A
shares and the CDSC for Class B shares. We advertise average annual total return
for net amount invested according to the following formula:

                  T =    (ERV/P)^(1/n)-1

     where:

                  T =           average annual total return for the class;

                  n =           number of years and portion of a year;

                  ERV =         ending  redeemable value for the class (of the
                                hypothetical  $1,000  investment)  at the end of
                                any period  after  deducting  all  non-recurring
                                charges  (CDSC  for  Class B  shares,  none  for
                                Institutional shares) assuming redemption at the
                                end of the period;

                  P =           $1,000   (the   hypothetical   initial   net
                                investment after deduction of the sales load, if
                                any).

                  ^ =           raised to the power of.

         Return for Institutional Shares for the Period from Inception,
      12/29/97, through the Fiscal Year Ended April 30, 1998, Based on Net
                                 Amount Invested

The AAL Mutual Fund                               Return for the Period Since
and Inception Date for                            Inception
Institutional Shares

   
Small Cap Stock                                   11.41%
12/29/97

Mid Cap Stock                                     10.83%
12/29/97

International                                     10.48%
12/29/97

Capital Growth                                    13.90%
12/29/97

Equity Income                                     9.34%
12/29/97

Balanced                                          8.17%
12/29/97

High Yield Bond                                   3.28%
12/29/97

Municipal                                         -.09%
12/29/97

Bond                                              1.24%
12/29/97

There is no average annual return  information  for the one-year,  five-year and
10-year  periods  based  on  net  amount  invested  for  Institutional   shares.
Institutional  shares first became  available to investors on December 29, 1997.
The returns reflect the period from December 29, 1997 through April 30, 1998 and
are not annualized because  Institutional  shares have not been in existence for
more than one year.  For annual  return  information  for the Fund's Class A and
Class B shares based on net amount invested,  please see the separate prospectus
and statement of additional information.
    

Performance  information  for the  Funds'  shares  may be  compared  to  various
unmanaged indexes, such as Morgan Stanley's EAFE and World, Dow Jones Industrial
and Averages,  the S&P 500(R), S&P MidCap, S&P Small Cap or Lehman Brothers High
Yield Index,  Lehman Brothers Aggregate or other Lehman Bond Indexes, as well as
indices of similar  mutual  funds,  and various  foreign  country  and  currency
indices.  The Funds may  include  in their  advertising  rankings  published  by
recognized  statistical  services  or  publishers  such as  Morningstar,  Lipper
Analytical  Services,   Inc.,  Weisenberger  Investment  Companies  Services  or
rankings shares published by other comparable national services that rank mutual
funds.  They  also  may use  information  from  publications  such as  Barron's,
Business Week, The Economist,  Financial  World,  Forbes,  Fortune,  Kiplinger's
Personal  Finance,  Money,  Smart Money,  the Star,  The Wall Street  Journal or
Worth,  and  from  videotapes  of  television  shows  and  interviews  involving
investment  experts,  including  employees of the adviser and/or sub-adviser for
The AAL International Fund. Advertisements may depict performance graphically.

General

The AAL Mutual  Funds'  Declaration  of Trust  permits the  Trustees to issue an
unlimited  number of full and  fractional  shares of  beneficial  interest.  The
Declaration  also  permits  the  Trustees to divide or combine the shares into a
greater or lesser number of shares without  thereby  changing the  proportionate
beneficial  interest in a Fund.  Pursuant to this  authority,  the Trustees have
issued Class A, Class B and Institutional  shares for the Funds,  except for The
AAL U.S.  Government Zero Coupon Target Funds,  Series 2001 and 2006. Each class
share represents an interest in a Fund proportionately  equal to the interest of
each other share in its class.  If the Trust  liquidated the Funds' shares,  all
shareholders  of a Fund  would  share pro rata in its net  assets  for the class
available for distribution to shareholders.  If the Board deems it advisable and
in the best interests of shareholders,  it may create  additional share classes.
These share  classes may differ from each other only as to  dividends  or, as is
the case with the  Funds,  as to assets and  liabilities.  Where  share  classes
differ in regards to assets and liabilities,  the different classes are referred
to as the different  series of the Funds (i.e., The AAL Bond Fund is a series of
The AAL Mutual Funds).  Within each series,  the different classes of shares are
referred  to  as  different  share  classes,  such  as  Class  A,  Class  B  and
Institutional  shares.  Shares of each  series are  entitled to vote as a series
only to the extent required by the '40 Act or as permitted by the Trustees.  The
Trustees  allocate  income and operating  expenses  among the  different  Funds'
series and classes of shares fairly.

As of April 30, 1998,  the Trust's  officers and Trustees  owned less than 1% of
the shares of any Funds.  As of April 30, 1998,  the following  account  holders
held in excess of 5% of the following Funds' shares:

                                                  Ownership
Shareholder                                       Percentage

LCMS Foundation

   
     The AAL Bond Fund                              7.58%
    

Except for the  election  of  Trustees  and  ratification  of the  selection  of
accountants,   any  matter  that  the  Funds  are  required  to  submit  to  the
shareholders  for a vote is not deemed to be  effective  unless  approved by the
holders of a  "majority"  (as defined in the Rule) of the voting  securities  of
each Series affected by the matter.

The custodian for The AAL Small Cap Stock, Mid Cap Stock, Capital Growth, Equity
Income,  Balanced,  High Yield Bond, Municipal Bond, Bond and Money Market Funds
is Firstar Trust Company  ("Firstar").  The custodian for The AAL  International
Fund is The Chase  Manhattan  Bank, N. A. The  custodians  are  responsible  for
holding the Funds' assets.

Administrative Services Agreement

AAL CMC provides certain administrative,  accounting and pricing services to the
Funds.  These  administrative  services include  calculating the daily net asset
value per class share;  maintaining original entry documents and books of record
and general ledgers;  posting cash receipts and disbursements;  reconciling bank
account  balances  monthly;  recording  purchases and sales based on sub-adviser
communications  (SoGen's  communications  regarding The AAL International Fund);
and  preparing  monthly and annual  summaries  to assist in the  preparation  of
financial  statements  of, and  regulatory  reports  for,  the Funds.  Formerly,
Firstar,  provided these administrative  services.  However, the Funds' Trustees
and shareholders  approved an administrative  services agreement with AAL CMC to
provide these administrative services for the Funds. The Administrative Services
Agreement  was approved by a majority of the Trustees of the Funds,  including a
majority of the Trustees who are not  interested  persons of the Funds or of the
Adviser and was approved by the  shareholders  of The AAL Municipal Bond Fund on
November 27, 1990 and of The AAL Capital Growth,  Bond and Money Market Funds on
December 20, 1990. The Board of Trustees  approved the addition of the following
Funds to this agreement on the following dates:

     The AAL Mid Cap Stock Fund on May 18, 1993;  The AAL Equity  Income Fund on
     February  24, 1994;  The AAL  International  Fund on May 23, 1995;  The AAL
     Small Cap Stock Fund on February 28, 1996;  The AAL High Yield Bond Fund on
     May 29, 1996; and The AAL Balanced Fund on November 19, 1997.

The  principal  motivation  for having AAL CMC,  as the  adviser  for the Funds,
provide these services was cost. AAL CMC has agreed to provide these services at
rates  that  would not exceed the rates  charged  by  unaffiliated  vendors  for
similar services. The initial rate of payment for these services was $25,000 per
Fund per year, plus the cost of outside pricing  services but only to the extent
AAL CMC is not voluntarily absorbing any expenses of that Fund. The annual rates
of payment approved by the Trustees presently are:

     The AAL Small Cap Stock Fund - $40,000 The AAL Mid Cap Stock Fund - $40,000
     The AAL International  Fund - $45,000 The AAL Capital Growth Fund - $40,000
     The AAL Equity  Income Fund - $40,000 The AAL  Balanced  Fund - $40,000 The
     AAL High Yield Bond Fund - $40,000  The AAL  Municipal  Bond Fund - $40,000
     The AAL Bond Fund - $40,000 The AAL Money Market Fund - $40,000
     The AAL U. S. Government Zero Coupon Target Fund Series 2001 - $2,500
     The AAL U. S. Government Zero Coupon Target Fund Series 2006 - $2,500

The  agreement  continues in effect from year to year, as long as it is approved
at  least  annually  by  the  Funds'  Board  of  Trustees  or by a  vote  of the
outstanding  voting  securities of the Funds. In either case, the agreement must
also be approved at least  annually  by a majority of the  Trustees  who are not
parties to the agreement or interested  persons of any such party. The agreement
terminates  automatically  if either party assigns the agreement.  The agreement
also  terminates  without  penalty  by  either  party on  60-days'  notice.  The
agreement  provides that neither AAL CMC nor its  personnel  shall be liable for
any error of judgment  or mistake of law or for any loss  arising out of any act
or omission in the  execution  and the  discharge of its  obligations  under the
agreement, except for willful misfeasance,  bad faith or gross negligence in the
performance  of  their  duties  or by  reason  of  reckless  disregard  of their
obligations and duties under the agreement.

Shareholder Maintenance Agreement

The Board of Trustees  authorized the Funds to contract with AAL CMC for certain
shareholder  maintenance  services,  effective April 1, 1995. These  shareholder
services  include  answering  customer   inquiries   regarding  account  status,
explaining and assisting  customers  with the exercise of their account  options
and facilitating shareholder telephone transaction requests.

   
The annual fee payable to AAL CMC for  providing  such  shareholder  services is
based upon,  and limited by, the  difference  between the current  account  fees
actually charged by Firstar Trust Company,  as transfer and dividend  disbursing
agent,  and the normal  full-service  fee schedule  published  by Firstar  Trust
Company.  The annual  fee is also  based on  reimbursement  for  certain  actual
out-of-pocket  costs  including  postage and  telephone  charges.  This  account
differential,  including reimbursement for expenses, is at an annualized rate of
$4.30 per account, effective June 1, 1998. The shareholder maintenance agreement
continues  in  effect  from  year to year,  as long as it is  approved  at least
annually by the Funds' Board of Trustees or by a vote of the outstanding  voting
securities of the Funds. In either case, the agreement must be approved annually
by a majority of the Trustees who are not parties to the agreement or interested
persons of any such party.  The  agreement  terminates  automatically  if either
party assigns the agreement.  The agreement also  terminates  without penalty by
either party on 60-days notice.  The Agreement provides that neither the Adviser
nor its personnel shall be liable for any error of judgment or mistake of law or
for  any  loss  arising  out of any act or  omission  in the  execution  and the
discharge  of  its   obligations   under  the  Agreement,   except  for  willful
misfeasance, bad faith or gross negligence in the performance of their duties or
by reason of  reckless  disregard  of their  obligations  and  duties  under the
Agreement.  These fees are not currently assessed against the Fund but may be in
the future.
    

Independent Accountants

The Trust's independent accountants,  Price Waterhouse LLP ("Price Waterhouse"),
examine the Funds' annual financial statements. Price Waterhouse also assists in
the  preparation of certain reports to the SEC and reviews the Trust's state and
federal tax returns.

Financial Statements

   
The  financial   statements,   notes  to  financial  statements  and  report  of
independent  accountants  for  the  Funds  included  in  the  Annual  Report  to
Shareholders  of the  Trust,  for the year  ended  April 30,  1998,  are  hereby
incorporated by reference.
    


<PAGE>



                              THE AAL MUTUAL FUNDS
                                     PART C
                              Institutional Shares
                                OTHER INFORMATION

Item 24.        Financial Statements and Exhibits

     (a) Financial Statements:  The AAL Mutual Funds ("Trust") has filed audited
financial statements for the Trust for the fiscal year ended April 30, 1998, for
the following  series:  The AAL Small Cap Stock,  Mid Cap Stock,  International,
Capital Growth, Equity Income,  Balanced,  High Yield Bond, Municipal Bond, Bond
and Money Market Funds;  and The AAL U.S.  Government  Zero Coupon Target Funds,
Series 2001 and 2006,  contained in the Annual Reports for April 30, 1998, which
are  incorporated  by  reference  into  this  Post-Effective  Amendment  to this
Registration  Statement.  The AAL U. S.  Government  Zero Coupon  Target  Funds,
Series 2001 and 2006 and Class A and Class B shares for The AAL Small Cap Stock,
Mid Cap Stock,  International,  Capital Growth,  Equity Income,  Balanced,  High
Yield Bond,  Municipal  Bond,  Bond and Money  Market  Funds are  contained in a
separate prospectuses. The Trust has closed The AAL U. S. Government Zero Coupon
Target Funds, Series 2001 and 2006, to new investors.

     (b)  Exhibits:  Except as noted  below,  all  required  exhibits  have been
previously  filed  and are  incorporated  by  reference  from  the  Registrant's
Registration Statement on Form N-1A (File No. 33-12911), as amended:

(10) Opinion and Consent of Counsel;

(11) Consent of Independent Auditors;

(16) Schedules for Computations of Performance for Institutional  Shares for The
     AAL Small Cap Stock, Mid Cap Stock,  International,  Capital Growth, Equity
     Income, Balanced, High Yield Bond, Municipal Bond, and Money Market Funds;

(17) Financial Data Schedule (included as Exhibit 27).

Item 25.        Persons Controlled by or under Common Control with Registrant

AAL Capital Management  Corporation (the "Adviser" and "Distributor" for The AAL
Mutual Funds ("Trust")) was organized in 1986 as a Delaware corporation,  all of
the shares of which are owned by AAL Holdings Inc., a wholly-owned subsidiary of
the Aid  Association  for  Lutherans  ("AAL").  AAL is a  non-profit,  non-stock
membership organization,  licensed to do business as a fraternal benefit society
in all  states.  Under  an  Investment  Advisory  Agreement  and a  Distribution
Agreement with the Trust,  and subject to the supervision of the Funds' Board of
Trustees,  AAL Capital Management  Corporation provides the investment advisory,
administrative, shareholder, distribution and other services for the Funds.

Item 26.        Number of Holders of Securities

On June 1, 1998, the following  indicates the number of record  shareholders  of
each series of the Registrant:

                                   Class A            Class B            Class I

The AAL Small Cap Stock Fund -     28,420              5,874               3
The AAL Mid Cap Stock Fund -       87,795              5,477               7
The AAL International Fund -       29,334              3,369               4
The AAL Capital Growth Fund -      180,675             13,501              8
The AAL Equity Income Fund -       22,049              1,316               5
The AAL Balanced Fund -            4,189               624                 3
The AAL High Yield Bond Fund -     8,124               1,420               3
The AAL Municipal Bond Fund -      17,410              409                 1
The AAL Bond Fund -                25,997              321                 1
The AAL Money Market Fund -        28,953              223                 4
The AAL U.S. Government Zero Coupon Target Funds, Series 2001 - 210;and
The AAL U.S. Government Zero Coupon Target Funds, Series 2006 - 218.

Item 27.        Indemnification

Under Section 12 of Article Seven of the Registrant's  Declaration of Trust, the
Trust may not  indemnify  any trustee,  officer or employee for expenses  (e.g.,
attorney's  fees,  judgments,  fines and  settlement  amounts)  incurred  in any
threatened,  pending or completed  action,  if there has been an adjudication of
liability  against  such person based on a finding of willful  misfeasance,  bad
faith,  gross negligence or reckless disregard of such person's duties of office
("disability conduct").

The Trust shall indemnify its trustees,  officers or employees for such expenses
whether or not there is an adjudication of liability, if, pursuant to Investment
Company  Act Release  11330,  a  determination  is made that such person was not
liable by reason of disabling conduct by: (i) final decision of the court before
which the proceeding was brought;  or (ii) in the absence of such a decision,  a
reasonable  determination,  based on  factual  review,  that the  person was not
liable  for  reasons  of  such  conduct  is  made  by:  (a) a  majority  vote of
disinterested, non-party Trustees; or (b) independent legal counsel in a written
opinion.

Advancement of expenses  incurred in defending such actions may be made pursuant
to Release  11330,  provided  that the person  undertakes  to repay the  advance
unless  it  is   ultimately   determined   that  such   person  is  entitled  to
indemnification  and one or more of the  following  conditions  is met:  (1) the
person  provides  security for the  undertaking;  (2) the  registrant is insured
against  losses arising by reason of any lawful  advances;  or (3) a majority of
disinterested  non-party  Trustees  or  independent  legal  counsel in a written
opinion  determines,  based on review of readily  available facts, that there is
reason  to  believe   the  person   ultimately   will  be  found   entitled   to
indemnification.

Insofar as indemnification  for liabilities  arising under the Securities Act of
1933  may  be  permitted  to  trustees,  officers  and  controlling  persons  of
Registrant  pursuant to the foregoing  provision,  or otherwise,  Registrant has
been advised that in the opinion of the Securities and Exchange  Commission such
indemnification  is  against  public  policy  as  expressed  in that Act and is,
therefore,  unenforceable. In the event that a claim for indemnification against
such liabilities  (other than the payment by Registrant of expenses  incurred or
paid by a trustee, officer or controlling person of Registrant in the successful
defense of any action, suit or proceeding) is asserted by such trustees, officer
or  controlling  person in  connection  with the  securities  being  registered,
Registrant  will,  unless in the  opinion  of its  counsel  the  matter has been
settled by controlling precedent,  submit to a court of appropriate jurisdiction
the question  whether such  indemnification  by it is against  public  policy as
expressed  in the Act and will be  governed  by the final  adjudication  of such
issue.

Item 28.        Business and other Connections of the Investment Adviser.

AAL Capital Management  Corporation is the investment adviser ("Adviser") of the
Registrant.  Societe  Generale Asset Management Corp. is the sub-adviser for The
AAL International Fund. For information as to the business, profession, vocation
or employment of a substantial nature of the Adviser, reference is made to Parts
A and B of  this  Registration  Statement  and  to  Form  ADV  filed  under  the
Investment Advisers Act of 1940 by the Adviser.

Item 29.        Principal Underwriters

                (a)          None

                (b)


<TABLE>
<CAPTION>
<S>                            <C>                                 <C> 
Name and Principal             Positions and                       Positions and Offices
Business                       Offices with                        with Registrant
                               Underwriter

Ronald G. Anderson             Chairman of the                     Trustee and President
222 W. College Ave.            Board of Directors
Appleton, WI 54919             and President

Robert G. Same                 Executive Vice President,           Secretary and
222 W. College Ave.            Secretary and Director              Vice President
Appleton, WI 54919

Terrance P. Gallagher          Senior Vice President,              Treasurer
222 W. College Ave.            CFO, Treasurer
Appleton, WI 54919             and Director

Robert Roth                    Senior Vice                         None
222 W. College Ave.            President and
Appleton, WI 54919             Director

James H. Abitz                 Director                            None
222 W. College Ave.
Appleton, WI 54919

Woodrow E. Eno                 Director                            None
222 W. College Ave.
Appleton, WI 54919

Jerome Laubenstein             Director                            None
4321 N. Ballard Rd.
Appleton, WI 54919

Steven Weber                   Director                            None
4321 N. Ballard Rd.
Appleton, WI 54919

Roger Johnson                  Director                            None
4321 N. Ballard Rd
Appleton, WI 54919

Anthony De Angelis             Vice President                      None
222 West College Ave.
Appleton, WI 54919

Kenneth E. Podell              Assistant                           None
222 West College Ave.          Secretary
Appleton, WI 54919

Paul Stadler                   Vice President                      None
222 West College Ave.
Appleton, WI 54919

Lori Richardson                Vice President                      None
222 West College Ave.
Appleton, WI 54919

Jeffrey Verhagen               Vice President                      None
222 West College Ave.
Appleton, WI 54919

Charles D. Gariboldi, Jr.      Assistant Vice President            Assistant Treasurer
222 West College Ave.
Appleton, WI 54919

Charles Friedman               Assistant Vice President            None
222 West College Ave.
Appleton, WI 5491 9

Joseph Wreschnig               Assistant Vice President            Assistant Secretary
222 West College Ave.          and Assistant Secretary
Appleton, WI 54919

Wendy Schmidt                   Assistant Vice President           None
222 West College Ave.
Appleton, WI 54919

Cindy Haas                     Assistant Vice President            None
222 West College Ave.
Appleton, WI 54919
</TABLE>




Item 30.        Location of Accounts and Records.

The accounts,  books and other documents required to be maintained by Registrant
pursuant to Section  31(a) of The  Investment  Company Act of 1940 and the rules
promulgated  thereunder are in the possession of the Registrant and Registrant's
Custodian as follows:  all documents  required to be maintained by Rule 31a-1(b)
will be maintained by Registrant,  except that records required to be maintained
by paragraph (2)(iv) of Rule 31a-1(b) will be maintained by the Custodian.

Item 31.        Management Services

                Not applicable

Item 32.        Undertakings

     1. The  Registrant  undertakes  that,  at the  request of the  shareholders
holding 10% or more of the outstanding shares of the Registrant,  the Registrant
will hold a special  meeting  for the  purpose of  considering  the removal of a
trustee  from  office,  and  the  Registrant  will  cooperate  with  and  assist
shareholders  of record who notify the Registrant  that they wish to communicate
with the other  shareholders for the purpose of obtaining  signatures to request
such a meeting,  all pursuant to and in  accordance  with  Section  16(c) of the
Investment Company Act, as amended.

     2.  Registrant  undertakes  to  furnish a copy of the  Registrant's  latest
annual report to shareholders,  upon request and without charge,  to each person
to whom a prospectus is delivered.

<PAGE>


SIGNATURES

     Pursuant  to  the  requirements  of the  Securities  Act of  1933  and  the
Investment Company Act of 1940, the Registrant  certifies that this filing meets
the requirements of Rule 485(b) under the Securities Act of 1933 and that it has
duly caused this  amendment  to its  Registration  Statement to be signed on its
behalf by the undersigned,  thereto duly authorized, in the City of Appleton and
State of Wisconsin, on the 1st day of June, 1998.

THE AAL MUTUAL FUNDS



---------------------------------------------------
Ronald G. Anderson, President

     Pursuant to the  requirements of the Securities Act of 1933, this amendment
to the Registration  Statement has been signed below by the following persons in
the capacities and on the date indicated.

/s/ John H. Pender*                  Trustee                    June 1, 1998
---------------------------------
John H. Pender

/s/ John O. Gilbert                  Trustee                    June 1, 1998
---------------------------------
  John O. Gilbert

/s/ Richard L. Gady*                 Trustee                    June 1, 1998
---------------------------------
Richard L. Gady

/s/ D. W. Russler*                   Trustee                    June 1, 1998
---------------------------------
D. W. Russler

/s/ Lawrence M. Woods*               Trustee                    June 1, 1998
---------------------------------
Lawrence M. Woods

/s/ F. Gregory Campbell*             Trustee                    June 1, 1998
---------------------------------
F. Gregory Campbell

                                     Principal                  June 1, 1998
---------------------------------    Financial and
Terrance P. Gallagher                Accounting Officer

                                     Trustee and                June 1, 1998
---------------------------------    President
Ronald G. Anderson, Trustee


*Pursuant to Powers of Attorney


<PAGE>


POWER OF ATTORNEY

KNOW ALL MEN BY THESE  PRESENT  that the person whose  signature  appears below
authorizes Ronald G. Anderson or John O. Gilbert to act as attorney-in-fact  and
agent, with full power of substitution and re-substitution,  for such person and
in such person's name,  place and stead, in any and all capacities,  to sign any
or all amendments) to the Registration  Statement on Form N-1A of The AAL Mutual
Funds, and to file the same, with all exhibits  thereto,  and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said  attorney-in-fact and agent full power and authority to do and perform each
and every act and thing  requisite  and necessary to be done for all intents and
purposes  as such  person  might or could do in  person,  hereby  ratifying  and
confirming  that  said   attorney-in-fact   and  agent,  or  his  substitute  or
substitutes, may lawfully do or cause to be done by virtue thereof.

/s/ John H. Pender
---------------------
John H. Pender
as Trustee, but not
individually

<PAGE>


POWER OF ATTORNEY

KNOW ALL MEN BY THESE  PRESENT  that the person whose  signature  appears below
authorizes Ronald G. Anderson or John O. Gilbert to act as attorney-in-fact  and
agent, with full power of substitution and re-substitution,  for such person and
in such person's name,  place and stead, in any and all capacities,  to sign any
or all amendments) to the Registration  Statement on Form N-1A of The AAL Mutual
Funds, and to file the same, with all exhibits  thereto,  and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said  attorney-in-fact and agent full power and authority to do and perform each
and every act and thing  requisite  and necessary to be done for all intents and
purposes  as such  person  might or could do in  person,  hereby  ratifying  and
confirming  that  said   attorney-in-fact   and  agent,  or  his  substitute  or
substitutes, may lawfully do or cause to be done by virtue thereof.

/s/ D. W. Russler
---------------------
D. W. Russler
as Trustee, but not
individually

<PAGE>


POWER OF ATTORNEY

KNOW ALL MEN BY THESE  PRESENT  that the person whose  signature  appears below
authorizes Ronald G. Anderson or John O. Gilbert to act as attorney-in-fact  and
agent, with full power of substitution and re-substitution,  for such person and
in such person's name,  place and stead, in any and all capacities,  to sign any
or all amendments) to the Registration  Statement on Form N-1A of The AAL Mutual
Funds, and to file the same, with all exhibits  thereto,  and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said  attorney-in-fact and agent full power and authority to do and perform each
and every act and thing  requisite  and necessary to be done for all intents and
purposes  as such  person  might or could do in  person,  hereby  ratifying  and
confirming  that  said   attorney-in-fact   and  agent,  or  his  substitute  or
substitutes, may lawfully do or cause to be done by virtue thereof.

/s/ F. Gregory Campbell
---------------------
F. Gregory Campbell
as Trustee, but not
individually

<PAGE>


POWER OF ATTORNEY

KNOW ALL MEN BY THESE  PRESENT  that the person whose  signature  appears below
authorizes Ronald G. Anderson or John O. Gilbert to act as attorney-in-fact  and
agent, with full power of substitution and re-substitution,  for such person and
in such person's name,  place and stead, in any and all capacities,  to sign any
or all amendments) to the Registration  Statement on Form N-1A of The AAL Mutual
Funds, and to file the same, with all exhibits  thereto,  and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said  attorney-in-fact and agent full power and authority to do and perform each
and every act and thing  requisite  and necessary to be done for all intents and
purposes  as such  person  might or could do in  person,  hereby  ratifying  and
confirming  that  said   attorney-in-fact   and  agent,  or  his  substitute  or
substitutes, may lawfully do or cause to be done by virtue thereof.

/s/ Richard L. Gady
---------------------
Richard L. Gady
as Trustee, but not
individually

<PAGE>


POWER OF ATTORNEY

KNOW ALL MEN BY THESE  PRESENT  that the person whose  signature  appears below
authorizes Ronald G. Anderson or John O. Gilbert to act as attorney-in-fact  and
agent, with full power of substitution and re-substitution,  for such person and
in such person's name,  place and stead, in any and all capacities,  to sign any
or all amendments) to the Registration  Statement on Form N-1A of The AAL Mutual
Funds, and to file the same, with all exhibits  thereto,  and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said  attorney-in-fact and agent full power and authority to do and perform each
and every act and thing  requisite  and necessary to be done for all intents and
purposes  as such  person  might or could do in  person,  hereby  ratifying  and
confirming  that  said   attorney-in-fact   and  agent,  or  his  substitute  or
substitutes, may lawfully do or cause to be done by virtue thereof.

/s/ Lawrence M. Woods
---------------------
Lawrence M. Woods
as Trustee, but not
individually

<PAGE>


POWER OF ATTORNEY

KNOW ALL MEN BY THESE  PRESENT  that the person whose  signature  appears below
authorizes John O. Gilbert to act as attorney-in-fact and agent, with full power
of substitution and re-substitution,  for such person and in such person's name,
place and stead,  in any and all  capacities,  to sign any or all amendments) to
the Registration Statement on Form N-1A of The AAL Mutual Funds, and to file the
same, with all exhibits  thereto,  and other documents in connection  therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent  full power and  authority  to do and  perform  each and every act and
thing  requisite  and  necessary to be done for all intents and purposes as such
person might or could do in person,  hereby  ratifying and confirming  that said
attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or
cause to be done by virtue thereof.

/s/ F. Ronald G. Anderson
---------------------
Ronald G. Anderson
as Trustee, but not
individually

<PAGE>


POWER OF ATTORNEY

KNOW ALL MEN BY THESE  PRESENT  that the person whose  signature  appears below
authorizes  Ronald G. Anderson to act as  attorney-in-fact  and agent, with full
power of substitution and re-substitution,  for such person and in such person's
name, place and stead, in any and all capacities, to sign any or all amendments)
to the Registration  Statement on Form N-1A of The AAL Mutual Funds, and to file
the  same,  with  all  exhibits  thereto,  and  other  documents  in  connection
therewith,  with the  Securities  and Exchange  Commission,  granting  unto said
attorney-in-fact  and agent full power and  authority to do and perform each and
every act and thing  requisite  and  necessary  to be done for all  intents  and
purposes  as such  person  might or could do in  person,  hereby  ratifying  and
confirming  that  said   attorney-in-fact   and  agent,  or  his  substitute  or
substitutes, may lawfully do or cause to be done by virtue thereof.

/s/ John O. Gilbert
---------------------
John O. Gilbert
as Trustee, but not
individually

<PAGE>


Exhibit Index

Item 24

(b)(10) Opinion and Consent of Counsel;

(b)(11) Consent of Independent Auditors;

(b)(16) Schedules for Computations of Performance for  Institutional  shares for
     The AAL Small Cap Stock,  Mid Cap  Stock,  International,  Capital  Growth,
     Equity Income,  Balanced,  High Yield Bond,  Municipal Bond, Bond and Money
     Market Funds; and

27  Financial Data Schedule.