SEMI-ANNUAL
                                     REPORT
                                 October 30, 1998


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


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


                            [AAL MUTUAL FUNDS LOGO]


                                     


<PAGE>

[AAL Mutual Funds Letterhead]

October 30, 1998

Dear Shareholder:

We are pleased to provide you with the  updated  annual  report for The AAL U.S.
Government Zero Coupon Target Funds. In addition to the Target Funds,  which are
no  longer  open to  investors,  we also  offer  ten  other  diverse  portfolios
(available  in both  class A and B shares)  to help you plan for your  financial
future, including:

EQUITY-ORIENTED FUNDS

o  The AAL Small Cap Stock Fund -- Investing in Small Company Stocks

o  The AAL Mid Cap Stock Fund -- Investing in Mid-Sized Company Stocks

o  The AAL International Fund -- Investing in Foreign Stocks

o  The AAL Capital Growth Fund -- Investing in Large Company Stocks

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

o  The AAL Balanced Fund -- Investing in Stocks, Bonds and Money Market 
   Instruments
      
INCOME-ORIENTED FUNDS

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

o  The AAL Municipal Bond Fund -- Investing in Investment Grade Municipal Bonds 

o  The AAL Bond Fund -- Investing in Investment Grade Bonds

o  The AAL Money Market Fund -- Investing in Money Market Instruments
  

To invest in these Funds, you can either use new dollars to purchase shares,  or
you can use our exchange  privilege to exchange your current  Target Fund shares
for those of another Fund without  additional sales charge. For more information
about these Funds and the  exchange  privilege,  contact  your local  Registered
Representative   or  call  Capital   Connection(R)   at  800-553-6319  for  your
complimentary prospectus kit.

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

Sincerely,

/s/ Ronald G. Anderson

Ronald G. Anderson
President
<PAGE>


                             PORTFOLIO PERSPECTIVES

The  six-month  period  ending  October  30,  1998  was a good  one  for  bonds,
particularly  for U.S.  Treasury  bonds and the coupon and principal  strips off
those bonds.  The highlight for the six-month period was the August bond default
by the Russian government. The troubles in the Russian bond market, coupled with
the continued  decline in bond,  currency and equity markets in Southeast  Asia,
caused  investors to re-examine the risks  associated  with financial  assets in
those countries. Many investors concluded that higher returns were not worth the
risk,  and they began to look for safer  investments.  One of the few markets to
benefit from this was the U.S.  Treasury note and bond market,  because they are
considered the safest  investments in the world. U.S. Treasury notes having five
years to maturity had their yields decline from 5.6% at the end of April 1998 to
4.2% six  months  later.  No  other  class of bonds  kept  pace  with the  price
appreciation of U.S.  Treasuries during the period,  including  investment grade
corporate bonds,  mortgage-backed  bonds and high-yield  bonds. Even U.S. Agency
debenture  bonds  such  as  those  issued  by  the  Federal  National   Mortgage
Association  carrying  a  AAA  (the  highest  rating  given  by  the  Nationally
Recognized  Statistical  Rating  Agencies such as Moody's and Standard & Poor's)
under-performed U.S. Treasuries.
 
Michael R. Hilt 
Portfolio Manager

--------------------------------------------------------------------------------
                         VALUE OF A $10,000 INVESTMENT
                          Including 4.75% Sales Charge

                           [LINE CHART APPEARS HERE]

<TABLE>
<CAPTION>
TARGET FUND SERIES 2001       TARGET FUND SERIES 2006             
                                                             
          FROM INCEPTION                 FROM INCEPTION      
DATE      ENDING DOLLARS      DATE       ENDING DOLLARS      
------------------------      -------------------------      
<S>          <C>              <C>          <C>               
14-Nov-90     9,523.81        14-Nov-90     9,523.81         
30-Nov-90     9,676.19        30-Nov-90     9,733.33         
31-Dec-90     9,894.55        31-Dec-90    10,021.66         
31-Jan-91     9,913.78        31-Jan-91     9,915.87         
28-Feb-91     9,904.17        28-Feb-91     9,944.72         
29-Mar-91     9,856.09        29-Mar-91     9,887.01         
30-Apr-91     9,856.09        30-Apr-91     9,915.87         
31-May-91     9,740.70        31-May-91     9,704.28         
28-Jun-91     9,586.85        28-Jun-91     9,473.45         
31-Jul-91     9,683.01        31-Jul-91     9,579.25         
30-Aug-91    10,000.32        30-Aug-91     9,983.19         
30-Sep-91    10,365.72        30-Sep-91    10,406.37         
31-Oct-91    10,317.64        31-Oct-91    10,319.81         
30-Nov-91    10,413.80        30-Nov-91    10,310.19         
31-Dec-91    11,868.69        27-Dec-91    10,893.42         
31-Jan-92    11,247.84        31-Dec-91    11,957.50         
28-Feb-92    11,216.80        31-Jan-92    11,270.64         
31-Mar-92    10,989.15        28-Feb-92    11,176.98         
30-Apr-92    10,978.80        31-Mar-92    11,000.07         
31-May-92    11,175.41        30-Apr-92    10,843.96         
30-Jun-92    11,413.40        29-May-92    11,218.61         
31-Jul-92    11,879.04        30-Jun-92    11,301.86         
31-Aug-92    11,972.17        31-Jul-92    11,978.31         
30-Sep-92    12,282.60        31-Aug-92    12,019.94         
30-Oct-92    11,848.00        30-Sep-92    12,311.33         
30-Nov-92    11,641.05        30-Oct-92    11,666.11         
31-Dec-92    11,929.62        30-Nov-92    11,697.33         
31-Dec-92    12,702.84        31-Dec-92    12,149.47         
29-Jan-93    13,023.45        31-Dec-92    12,983.71         
26-Feb-93    13,532.01        29-Jan-93    13,328.91         
31-Mar-93    13,520.95        26-Feb-93    14,041.56         
30-Apr-93    13,543.06        31-Mar-93    13,919.08         
28-May-93    13,443.56        30-Apr-93    13,941.35         
30-Jun-93    13,841.56        28-May-93    13,907.94         
01-Jul-93    13,889.93        30-Jun-93    14,553.79         
30-Jul-93    14,033.81        01-Jul-93    14,544.37         
31-Aug-93    14,421.18        30-Jul-93    15,025.08         
30-Sep-93    14,520.79        31-Aug-93    15,572.87         
29-Oct-93    14,498.66        30-Sep-93    15,762.92         
30-Nov-93    14,000.61        29-Oct-93    15,762.92         
31-Dec-93    14,059.39        30-Nov-93    14,958.01         
31-Dec-93    14,861.31        31-Dec-93    15,941.32         
31-Jan-94    15,052.99        31-Jan-94    16,373.19         
28-Feb-94    14,362.96        28-Feb-94    15,268.10         
31-Mar-94    13,724.03        31-Mar-94    14,251.92         
29-Apr-94    13,468.47        29-Apr-94    13,921.66         
31-May-94    13,379.02        31-May-94    13,832.75         
30-Jun-94    13,225.68        30-Jun-94    13,515.19         
29-Jul-94    13,468.47        29-Jul-94    13,959.77         
31-Aug-94    13,353.46        31-Aug-94    13,769.23         
30-Sep-94    12,982.89        30-Sep-94    13,108.72         
31-Oct-94    12,803.99        31-Oct-94    12,918.18         
30-Nov-94    12,688.98        30-Nov-94    12,956.29         
30-Dec-94    13,362.06        30-Dec-94    13,840.93         
30-Dec-94    13,580.66        30-Dec-94    14,112.16         
31-Jan-95    13,788.74        31-Jan-95    14,431.63         
28-Feb-95    14,260.38        28-Feb-95    14,945.56         
31-Mar-95    14,232.64        31-Mar-95    14,959.45         
28-Apr-95    14,385.23        30-Apr-95    15,181.68         
31-May-95    15,148.19        31-May-95    16,542.90         
30-Jun-95    15,217.55        30-Jun-95    16,681.80         
31-Jul-95    14,981.73        31-Jul-95    16,237.32         
31-Aug-95    15,106.57        31-Aug-95    16,529.01         
29-Sep-95    15,175.93        29-Sep-95    16,779.03         
31-Oct-95    15,384.01        31-Oct-95    17,181.83         
30-Nov-95    15,605.96        30-Nov-95    17,626.31         
28-Dec-95    15,732.09        28-Dec-95    17,964.82         
29-Dec-95    16,679.50        29-Dec-95    19,063.04         
31-Jan-96    16,753.83        31-Jan-96    18,958.46         
29-Feb-96    16,248.39        29-Feb-96    17,837.98         
29-Mar-96    15,951.07        29-Mar-96    17,389.79         
30-Apr-96    15,683.48        30-Apr-96    16,926.66         
31-May-96    15,490.23        31-May-96    16,672.69         
28-Jun-96    15,638.89        28-Jun-96    16,971.48         
31-Jul-96    15,564.56        31-Jul-96    16,851.96         
30-Aug-96    15,445.63        30-Aug-96    16,538.23         
30-Sep-96    15,638.89        30-Sep-96    16,941.60         
31-Oct-96    15,965.94        31-Oct-96    17,584.01         
29-Nov-96    16,174.06        29-Nov-96    18,106.90         
30-Dec-96    15,953.65        30-Dec-96    17,725.83         
31-Dec-96    16,828.07        31-Dec-96    18,622.52         
31-Jan-97    16,780.31        31-Jan-97    18,413.45         
28-Feb-97    16,684.79        28-Feb-97    18,284.80         
31-Mar-97    16,398.22        31-Mar-97    17,721.95         
30-Apr-97    16,525.58        30-Apr-97    18,075.74         
30-May-97    16,589.26        30-May-97    18,156.15         
30-Jun-97    16,652.95        30-Jun-97    18,349.13         
31-Jul-97    17,003.20        31-Jul-97    19,281.86         
29-Aug-97    16,748.47        29-Aug-97    18,654.68         
30-Sep-97    16,875.83        30-Sep-97    19,040.64         
31-Oct-97    17,035.04        31-Oct-97    19,507.01         
28-Nov-97    16,971.36        28-Nov-97    19,507.01        
15-Dec-97    17,008.61        15-Dec-97    19,674.12 
31-Dec-97    18,041.22        31-Dec-97    20,844.65 
30-Jan-98    18,245.08        30-Jan-98    21,222.40 
27-Feb-98    18,092.19        27-Feb-98    20,982.01 
31-Mar-98    18,024.23        31-Mar-98    20,878.99 
30-Apr-98    18,024.23        30-Apr-98    20,827.48 
29-May-98    18,075.20        29-May-98    21,119.37 
30-Jun-98    18,092.19        30-Jun-98    21,308.25 
31-Jul-98    18,041.22        31-Jul-98    21,170.88 
31-Aug-98    18,347.01        31-Aug-98    21,995.06 
30-Sep-98    18,703.75        30-Sep-98    23,042.44 
30-Oct-98    19,539.87        30-Oct-98    23,912.85 
                             
</TABLE>



        Average Annual Total Returns -- Based on the Net Amount Invested
                             As of October 30, 1998

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

1-year                      9.36%             17.05%
5-year                      5.20%              7.71%
From Inception              9.44%             12.25%

Past performance is not an indication of future results.  Investment  return and
principal value will fluctuate,  and shares, when redeemed, may be worth more or
less than their original cost.



<PAGE>

Investment Objective

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

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


SCHEDULE OF INVESTMENTS AS OF OCTOBER 30, 1998
----------------------------------------------
<TABLE>
<CAPTION>

Principal                                              Yield to      Maturity        Market
Amount         Long-Term Obligations (100%)            Maturity      Date            Value
-------------------------------------------------------------------------------------------
<C>            <S>                                     <C>            <C>            <C>

               U.S. GOVERNMENT ZERO COUPON BONDS
               Separate Trading of Registered Interest
               and Principal of Securities
$1,856,000     (amortized cost basis $1,496,145)       4.38%          11/15/2001     $1,626,799

               TOTAL LONG-TERM INVESTMENTS
               (amortized cost basis $1,496,145)                                     $1,626,799

               OTHER ASSETS, LESS LIABILITIES (-5.5%)                                   (85,215)

               NET ASSETS (100.0%)                                                   $1,541,584

</TABLE>


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


SCHEDULE OF INVESTMENTS AS OF OCTOBER 30, 1998
--------------------------------------------
<TABLE>
<CAPTION>

Principal                                                 Yield to       Maturity       Market
Amount         Long-Term Obligations (104.6%)             Maturity       Date           Value
----------------------------------------------------------------------------------------------
<C>            <S>                                        <C>            <C>            <C>
               U.S. GOVERNMENT ZERO COUPON BONDS
               Separate Trading of Registered Interest
               and Principal of Securities
$2,516,000     (amortized cost basis $1,405,407)          4.66%          11/15/2006     $1,737,620

               TOTAL LONG-TERM INVESTMENTS
               (amortized cost basis $1,350,890)                                        $1,737,620

               OTHER ASSETS, LESS LIABILITIES (-5.5%)                                      (76,562)

               NET ASSETS (100.0%)                                                      $1,661,058


</TABLE>

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

<PAGE>

                       STATEMENT OF ASSETS AND LIABILITIES
                                  (unaudited)


<TABLE>
<CAPTION>

                The AAL U.S. Government Zero Coupon Target Funds
                                                                

 October 30, 1998                                              Series 2001   Series 2006
     ------------------------------------------------------------------------------------------
<S>                                                             <C>           <C>
ASSETS
  Investments, at value (Cost: $1,496,145 and $1,350,890, respectively)
  ............................................................  $1,626,799    $1,737,620
  Cash .......................................................         429         1,111
  Prepaid expenses ...........................................         863           936
  Receivable from affiliate ..................................          --            --
                                                                 ---------     ---------
  Total Assets ...............................................  $1,628,091    $1,739,667
                                                                 =========     =========

LIABILITIES
  Income distributions payable ...............................     $76,029    $   71,206
  Accrued expenses ...........................................      10,478         7,403
  Redemptions payable ........................................          --            --
                                                                 ---------     ---------
  Total Liabilities ..........................................      86,507        78,609
                                                                 ---------     ---------

NET ASSETS
  Trust capital (beneficial interest) ........................   1,405,103     1,260,203
  Accumulated undistributed net income (loss) ................         309           805
  Net unrealized appreciation on investments .................     130,654       386,730
  Accumulated net realized gain on investments ...............       5,518        13,320
                                                                 ---------     ---------
  Total Net Assets ...........................................  $1,541,584    $1,661,058
                                                                 ---------     ---------

  Total Liabilities and Capital ..............................  $1,628,091    $1,739,667
                                                                 =========     =========
  Shares of beneficial interest outstanding (unlimited number of
  shares authorized) .........................................     140,433       124,452
                                                                 =========     =========

  Net asset value per share ..................................  $    10.98    $    13.35
                                                                 =========     =========

  Maximum public offering price ..............................  $    11.53    $    14.02
                                                                 =========     =========
</TABLE>
     The accompanying notes to the financial  statements are an integral part of
     this statement.


<PAGE>


                            STATEMENT OF OPERATIONS
                                  (unaudited)
                    
                The AAL U.S. Government Zero Coupon Target Funds

                                                         Series        Series
For the Period Ended October 30, 1998                     2001          2006
-------------------------------------------------------------------------------

INVESTMENT INCOME
  Taxable interest ...................................  $  52,383   $  51,678
                                                          -------     -------
Total Investment Income                                 $  52,383   $  51,678 

EXPENSES
  Audit and legal fees ...............................      1,415       1,515
  Custodian fees .....................................         70          43
  Administrative service fees ........................      1,289       1,289
  Printing and postage expense .......................        331         491
  SEC and state registration fees ....................        804         808
  Transfer agent fees ................................        721         710
  Trustees fees and expenses .........................      2,249       2,249
  Shareholder maintenance fees........................         --          --
  Other Expenses......................................         31          31
                                                          -------     -------
Total Expenses .......................................      6,910       7,136
                                                          -------     -------
Less reimbursement from Adviser ......................         --          --
                                                          -------     -------
Total Net Expenses ...................................      6,910       7,136
                                                          -------     -------
Net Investment Income ................................     45,473      44,542
                                                          -------     -------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments .....................        941      10,508
Increase in unrealized appreciation on investments ...     50,792     141,603
                                                          -------     -------
Net Realized & Unrealized Gains on Investments .......     51,733     152,111
                                                          -------     -------
Net Increase in Net Assets Resulting from Operations..  $  97,206   $ 196,653
                                                          =======     =======

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

<PAGE>



                       STATEMENT OF CHANGES IN NET ASSETS
                                  (unaudited)
<TABLE>
<CAPTION>
                                                The AAL U.S. Government Zero Coupon
                                                ---------------------------------------------------
                                                Series 2001                 Series 2006
                                                ---------------------------------------------------
                                                Year          Period        Year          Period
                                                Ended         Ended         Ended         Ended
                                                4/30/98       10/30/98      4/30/98       10/30/98
                                                ---------------------------------------------------
<S>                                             <C>           <C>           <C>           <C>
OPERATIONS
Net investment income ...................       $ 101,780     $ 45,473      $   93,063    $  44,542      
Net realized gains on investments........          11,549          941           9,307       10,508
Increase (decrease) in unrealized                                     
 appreciation on investments ............          37,006       50,792         119,280      141,603
                                                   ------       ------         -------      -------
Net Increase in Net Assets                                            
 Resulting from Operations ................       150,335       97,206         221,650      196,653
                                                  -------       ------         -------      -------
Distributions to Shareholders                                         
Dividends from net investment income ......     (101,780)      (45,473)        (93,063)     (44,542)
Capital gains distributions ...............      (11,128)           --         (14,421)          --
                                                 --------      --------        --------     -------
Total Distributions to Shareholders .......     (112,908)      (45,473)       (107,484)     (44,542)
                                                ---------      --------        ---------    -------
Trust Shares Transactions                                             
Income dividends reinvested ...............        94,055           66          87,603           33 
Capital gains distributions reinvested.....        10,811           --          14,308           --
Redemption of trust shares ................     (328,111)      (35,211)        (53,002)    (107,031)
                                                 --------      --------        --------    --------
Net Increase (Decrease) in Trust Capital...     (223,245)      (35,145)         48,909     (106,998)
                                                   ------      --------         --------   --------
Net Increase (Decrease) in Net Assets .....     (185,818)       16,588         163,075       45,113
                                                                      
Net Assets Beginning of Period ............     1,710,814    1,524,996       1,452,870    1,615,945
                                                ---------    ---------       ---------    ---------
Net Assets End of Period ..................     1,524,996    1,541,584       1,615,945    1,661,058
                                                =========    =========       =========    =========
</TABLE>                                                              
                                                           
     The accompanying notes to the financial  statements are an integral part of
     this statement.


<PAGE>


                          NOTES TO FINANCIAL STATEMENTS

As of October 30, 1998

(A) ORGANIZATION

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

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

(B) SIGNIFICANT ACCOUNTING POLICIES

The Funds' principal accounting policies are:

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

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

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

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

<PAGE>

                  NOTES TO FINANCIAL STATEMENTS - (Continued)
                             AS OF OCTOBER 30, 1998

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

The Trust has entered into an  Investment  Advisory  Agreement  with AAL Capital
Management  Corporation (the "Adviser") under which the two separate Target Fund
portfolios pay a fee for investment  advisory services.  The annual rate of fees
under the  Investment  Advisory  Agreement are  calculated at: 0.50 of 1% of the
average  daily net assets of The AAL U.S.  Government  Zero Coupon  Target Funds
Series 2001 and Series 2006.  Payments under the Investment  Advisory  Agreement
were  discontinued  effective July 1, 1993. For the period May 1, 1995,  through
October 31, 1995, the Adviser entered into a sub-advisory  agreement with Duff &
Phelps  Investment  Management Co. (the  "Sub-Adviser").  The sub-advisory  fee,
which was paid by the Adviser, was equal to: 0.10 of 1% of the average daily net
assets for The AAL U.S. Government Zero Coupon Target Funds.  Effective November
1, 1995, the sub-advisory agreement was terminated.

The Trust has adopted a  distribution  plan (the "Plan")  pursuant to Rule 12b-1
under the Investment Company Act of 1940. The Plan authorizes the Trust to use a
portion  of its assets to  finance  certain  sales  activities  relating  to the
distribution  of shares  to  investors.  Payments  under the Plan are equal to a
maximum of 0.10 of 1% of average daily net assets.  Payments under the Plan were
discontinued effective July 1, 1993.

Trustees of the Trust not affiliated with AAL or the Adviser  received $8,555 in
fees for fiscal 1997-98 from the Target Funds. No remuneration  has been paid by
the  Trust to any of the  officers  or  affiliated  Trustees  of the  Trust.  In
addition,  the Trust reimbursed  unaffiliated  Trustees for reasonable  expenses
incurred in relation to attendance at the meetings.

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

The Adviser  voluntarily  has  reimbursed  The AAL U.S.  Government  Zero Coupon
Target Funds for all expenses in excess of 1% of average  daily net assets since
inception.

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


<PAGE>

                  NOTES TO FINANCIAL STATEMENTS - (Continued)
                             AS OF OCTOBER 30, 1998

(D)  SECURITY TRANSACTIONS
     During the year ended  April 30,  1998,  and the period  ended  October 30,
1998,  purchases and sales of securities other than short-term  obligations were
as follows:

                       Purchases                                Sales
                       ---------                                -----
                  4/30/98       10/30/98                4/30/98         10/30/98
                  -------       -------                 -------         -------
Series 2001         --            --                   $ 352,146        $ 39,242
Series 2006         --            --                      72,054         116,705


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

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

The gross unrealized  appreciation on investments at April 30, 1998, and October
30, 1998, were as follows:


<TABLE>
<CAPTION>
                                   4/30/98                                                 10/30/98
                                   -------                                                 --------
                                                     Net Unrealized                                         Net Unrealized
                    Appreciation   (Depreciation)    Appreciation           Appreciation   (Depreciation)   Appreciation
                    ------------   --------------    ------------           ------------   --------------   ------------
<S>                 <C>            <C>               <C>                    <C>            <C>              <C>

Series 2001         $ 79,862       $    --           $ 79,862               $130,654       --               $130,654
Series 2006          245,127            --            245,127                386,730       --                386,730
     
</TABLE>

(E)  TRUST TRANSACTIONS

Transactions in trust shares for the years ended April 30, 1998, and October 30,
1998, were as follows:

<TABLE>
<CAPTION>
                                               Series       2001                         Series 2006
                                               -----------------                         -----------------
                                               4/30/98            10/30/98               4/30/98            10/30/98
                                               -------            --------               -------            --------
<S>                                            <C>                <C>                    <C>                <C>
Shares purchased                                    --                --                     --                 --
Income dividends reinvested                      8,857                6                   7,232                  3
Capital gains reinvested                         1,019                --                  1,181                 --
Shares redeemed                                (30,893)           (3,309)                (4,504)            (8,763)
                                                -------           -------                -------            -------
Net Increase (Decrease) of Trust Shares        (21,017)           (3,303)                 3,909             (8,760)
                                                =======           =======                =======            =======
</TABLE>                                                                      

<PAGE>



                    FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>

                                          Series 2001                                                    
                         ---------------------------------------------------------------   
                           Year            Year          Year        Year       Period
                           Ended           Ended         Ended       Ended      Ended
Per Share Information      4/30/95         4/30/96       4/30/97     4/30/98    10/30/98
---------------------      -------         -------       -------     --------   --------
<S>                        <C>             <C>           <C>         <C>        <C>

Net asset value:           $10.54          $10.37        $10.55      $10.38     $10.61
   beginning of period

INCOME FROM INVESTMENT
  OPERATIONS
    
Net investment income      0.66            0.65          0.64        0.64       0.32

Net realized and 
  unrealized gain
  (loss) on investments     --             0.33          (0.07)      0.30       0.37 
                           -----           -----         ------      ------     ------

Total from Investment      
Operations                 0.66            0.98           0.57       0.94       0.69

 DISTRIBUTIONS FROM:      
                           -----           -----          -----      -----      -----
   Net investment income   (0.66)          (0.76)        (0.64)      (0.64)     (0.32)

   Net realized
   capital gains           (0.17)          (0.04)        (0.10)      (0.07)       --
                           ------          ------         -----      -----      ------

   Total Distributions     (0.83)          (0.80)        (0.74)      (0.71)     (0.32)
                           ------          ------         -----      -----      ------

Net increase (decrease) 
  in net
  asset value              (0.17)          0.18          (0.17)      0.23       0.37

Net asset value:
  end of period            $10.37          $10.55        $10.38      $10.61     $10.98
                           ======          ======        ======      =====      ======

Total return(d)            6.82%           9.23%         5.42%       9.17%      6.98%

Net assets:                
end of period              $1,754,517      $1,811,034    $1,710,814  $1,524,996 $1,541,584

Ratio of expenses to 
  average
  net assets(a)(b)         1.00%           1.00%         0.97%       0.77%      0.91%

Ratio of net investment
  income to average
  net assets(a)(c)         6.50%           5.84%         6.08%       6.16%      5.96%

Portfolio turnover rate    0.00%           0.00%         0.00%       0.00%      0.00%

</TABLE>

(a) Calculated on an annualized basis

(b)  Computed after giving effect to Advisor's expense  limitation  undertaking.
     If the Funds had paid all of their  expenses,  the ratio would have been as
     follows:

               Year      Year      Year      Year      Period    
               Ended     Ended     Ended     Ended     Ended     
               4/30/95   4/30/96   4/30/97   4/30/98   10/30/98  
               -------   -------   -------   --------  --------  
Series 2001    2.00%     1.74%     0.99%     0.84%     0.91%

Series 2006    2.49%     2.07%     1.17%     0.90%     0.90%

<PAGE>
                  FINANCIAL HIGHLIGHTS--CONTINUED

<TABLE>
<CAPTION>


                                                         Series 2006                    
                                        ----------------------------------------------------------- 
                                       Year          Year        Year       Year          Period
                                       Ended         Ended       Ended      Ended         Ended
Per Share Information                  4/30/95       4/30/96     4/30/97    4/30/98       10/30/98
---------------------                  -------       -------     -------    -------       ---------
<S>                                    <C>           <C>         <C>        <C>           <C>
                                       
Net asset value: beginning of period   $10.96        $10.93      11.33      $11.24        $12.13
                                       
                                       
INCOME FROM INVESTMENT                 
  OPERATIONS                           

Net investment income                  0.73          0.71        0.71       0.70          0.35
                                       
Net realized and unrealized gain       
  (loss) on investments                0.18          0.65        0.07       1.00          1.22
                                       -----         -----       -----      -----         ------
                                       
Total from Investment Operations       0.91          1.36        0.78       1.70          1.57
                                       
 DISTRIBUTIONS FROM:                  
                                       -----         -----       -----      -----         ------
   Net investment income               (0.73)        (0.87)      (0.71)     (0.70)        (0.35)
                                       
   Net realized                        
   capital gains                       (0.21)        (0.09)      (0.16)     (0.11)        --
                                       ------        ------      -----      -----         ------
                                       
   Total Distributions                 (0.94)        (0.96)      (0.87)     (0.81)        (0.35)
                                       ------        ------      -----      -----         ------
                                       
Net increase (decrease) in net         
  asset value                          (0.03)        0.40        (0.09)     0.89          1.22
                                       
Net asset value:                       
  end of period                        $10.93        $11.33      $11.24     $12.13        $13.35
                                       ======        ======      ======     =====         ======
                                       
Total return(d)                        9.05%         11.80%      6.84%      15.30%        12.94%
                                       
Net assets:                            
end of period                          $1,400,161    $1,479,703  $1,452,870 $1,615,945    $1,661,058
                                       
Ratio of expenses to average           
  net assets(a)(b)                     1.00%         1.00%       1.00%      0.82%         0.90%
                                       
Ratio of net investment                
  income to average                    
  net assets(a)(c)                     6.95%         5.83%       6.22%      6.03%         5.61%
                                       
Portfolio turnover rate                0.00%         0.00%       0.00%      0.00%         0.00%
                                        
</TABLE>

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

<TABLE>
                  Year      Year      Year        Year      Period
                  Ended     Ended     Ended       Ended     Ended     
                 4/30/95   4/30/96    4/30/97     4/30/98   10/30/98
                 -------   -------    -------     -------   --------
<S>              <C>       <C>        <C>         <C>       <C>
Series 2001      5.51%     5.10%      6.07%       6.10%     5.96%

Series 2006      5.46%     4.76%      6.04%       5.96%     5.61%
</TABLE>

(d) Total returns are based on net amount invested for a six-month period.


<PAGE>

[AAL Mutual Funds Letterhead]

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

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

CUSTODIAN
          Citibank, N.A.
          111 Wall Street
          New York, NY  10043

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

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

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


                                  [AAL LOGO]

                             The AAL Mutual Funds
                             ---------------------
               222 West College Avenue, Appleton, WI 54919-0007
                                 800-553-6319
                      World Wide Web: http://www.aal.org
                        e-mail address: aalcmc@aal.org