FIRST AMERICAN INVESTMENT FUNDS INC, 497, 1997-08-05

FIRST AMERICAN INVESTMENT FUNDS INC
497, 1997-08-05

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FIRST AMERICAN INVESTMENT FUNDS, INC.

INSTITUTIONAL CLASS

OREGON INTERMEDIATE TAX CALIFORNIA INTERMEDIATE TAX
FREE FUND FREE FUND

MICRO CAP VALUE FUND

PROSPECTUS

AUGUST 5, 1997

[LOGO]
FIRST AMERICAN FUNDS
THE POWER OF DISCIPLINED INVESTING

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FIRST AMERICAN INVESTMENT FUNDS, INC.
Oaks, Pennsylvania 19456

INSTITUTIONAL CLASS PROSPECTUS

The shares described in this Prospectus represent interests in First American
Investment Funds, Inc., which consists of mutual funds with several different
investment portfolios and objectives. This Prospectus relates to the Class C
Shares of the following funds (the "Funds"):

* OREGON INTERMEDIATE TAX FREE FUND * CALIFORNIA INTERMEDIATE TAX FREE FUND

* MICRO CAP VALUE FUND

Class C Shares of the Funds are offered through banks and certain other
institutions for the investment of their own funds and funds for which they act
in a fiduciary, agency or custodial capacity.

SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, INCLUDING FIRST BANK NATIONAL ASSOCIATION AND ANY OF ITS
AFFILIATES, NOR ARE THEY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. AN INVESTMENT IN THE FUNDS
INVOLVES INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL, DUE TO
FLUCTUATIONS IN EACH FUND'S NET ASSET VALUE.

This Prospectus concisely sets forth information about the Funds that a
prospective investor should know before investing. It should be read and
retained for future reference.

A Statement of Additional Information dated August 5, 1997 for the Funds has
been filed with the Securities and Exchange Commission and is incorporated in
its entirety by reference in this Prospectus. To obtain copies of the Statement
of Additional Information at no charge, or to obtain other information or make
inquiries about the Funds, call (800) 637-2548 or write SEI Investments
Distribution Co., Oaks, Pennsylvania 19456.

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

The date of this Prospectus is August 5, 1997.

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TABLE OF CONTENTS

PAGE
----
SUMMARY 4

FEES AND EXPENSES 6
Class C Share Fees and Expenses 6
Information Concerning Fees and
Expenses 7

THE FUNDS 8

INVESTMENT OBJECTIVES AND POLICIES 8
Oregon Intermediate Tax Free Fund and
California Intermediate Tax Free Fund 9
Micro Cap Value Fund 10
Risks to Consider 11

MANAGEMENT 14
Investment Adviser 14
Portfolio Managers 15
Custodian 16
Administrator 16
Transfer Agent 17

DISTRIBUTOR 17

PURCHASES AND REDEMPTIONS OF SHARES 17
Share Purchases and Redemptions 17
What Shares Cost 18
Exchanging Securities for Fund Shares 19
Certificates and Confirmations 19
Dividends and Distributions 19
Exchange Privilege 20

INCOME TAXES 21

TAX FREE FUNDS: TAX-EXEMPT
VS. TAXABLE INCOME 24

FUND SHARES 24

CALCULATION OF PERFORMANCE DATA 25

PERFORMANCE INFORMATION FOR SUCCESSORS
TO COMMON TRUST FUNDS 27

SPECIAL INVESTMENT METHODS 28
Municipal Bonds and Other Municipal
Obligations 28
Temporary Taxable Investments 30
Repurchase Agreements 30
Inverse Floating Rate Obligations 31
When-Issued and Delayed-Delivery
Transactions 31
Lending of Portfolio Securities 31
Options Transactions 32
Cash Items 34
Fixed Income Securities 35
Foreign Securities 35
Portfolio Transactions 36
Portfolio Turnover 37
Investment Restrictions 37
Information Concerning Compensation
Paid to First Trust National
Association and its Affiliates 38

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SUMMARY

First American Investment Funds, Inc. ("FAIF") is an open-end investment company
which offers shares in several different mutual funds. This Prospectus provides
information with respect to the Class C Shares of the following funds (the
"Funds"):

OREGON INTERMEDIATE TAX FREE FUND has an objective of providing current income
which is exempt from both federal income tax and Oregon state income tax to the
extent consistent with preservation of capital. Under normal market conditions,
this Fund invests at least 80% of its net assets in municipal obligations, the
interest on which is exempt from federal and Oregon income tax. No more than 20%
of the securities owned by this Fund will generate income that is subject to the
federal alternative minimum tax. Under normal market conditions, the weighted
average maturity of the securities held by this Fund will range from 3 to 10
years.

CALIFORNIA INTERMEDIATE TAX FREE FUND has an objective of providing current
income which is exempt from both federal income tax and California state income
tax to the extent consistent with preservation of capital. Under normal market
conditions, this Fund invests at least 80% of its net assets in municipal
obligations, the interest on which is exempt from federal and California income
tax. No more than 20% of the securities owned by this Fund will generate income
that is subject to the federal alternative minimum tax. Under normal market
conditions, the weighted average maturity of the securities held by this Fund
will range from 3 to 10 years.

MICRO CAP VALUE FUND has an objective of capital appreciation. Under normal
market conditions, the Fund invests at least 65% of its total assets in equity
securities of very small-capitalization companies (those with market
capitalizations of less than $500 million). In selecting equity securities, the
Fund's adviser utilizes a value-based selection discipline, investing in equity
securities it believes are undervalued relative to other securities at the time
of purchase.

INVESTMENT ADVISER First Bank National Association (the "Adviser") serves as
investment adviser to each of the Funds. See "Management."

DISTRIBUTOR; ADMINISTRATOR SEI Investments Distribution Co. (the "Distributor")
serves as the distributor of the Funds' shares. SEI Financial Management
Corporation (the "Administrator") serves as the administrator of the Funds. See
"Management" and "Distributor."

ELIGIBLE INVESTORS; OFFERING PRICES Class C Shares are offered through banks and
certain other institutions for the investment of their own funds and funds for
which they act in a fiduciary, agency or custodial capacity. Class C Shares are
sold at net asset value without any front-end or deferred sales charges. See
"Purchases and Redemptions of Shares."

EXCHANGES Class C Shares of any Fund may be exchanged for Class C Shares of
other funds in the First American family at the shares' respective net

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asset values with no additional charge. See "Purchases and Redemptions of Shares
- -- Exchange Privilege."

REDEMPTIONS Shares of each Fund may be redeemed at any time at their net asset
value next determined after receipt of a redemption request by the Funds'
transfer agent, with no additional charge. See "Purchases and Redemptions of
Shares."

RISKS TO CONSIDER Each of Oregon Intermediate Tax Free Fund and California
Intermediate Tax Free Fund (collectively, the "Tax Free Funds") is subject to
(i) interest rate risk (the risk that increases in market interest rates will
cause declines in the value of debt securities held by a Fund); (ii) credit risk
(the risk that the issuers of debt securities held by a Fund default in making
required payments); and (iii) call or prepayment risk (the risk that a borrower
may exercise the right to prepay a debt obligation before its stated maturity,
requiring a Fund to reinvest the prepayment at a lower interest rate).

In addition, the value of municipal obligations held by the Tax Free Funds may
be adversely affected by local political and economic conditions and
developments in the states and political subdivisions which issue the
obligations. Investors should note in this regard that Oregon Intermediate Tax
Free Fund and California Intermediate Tax Free Fund invest primarily in
municipal obligations of issuers located in Oregon and California, respectively.
The Tax Free Funds also may, in order to attempt to reduce risk, invest in
exchange traded put and call options on interest rate futures contracts and on
interest rate indices. See "Investment Objectives and Policies -- Risks to
Consider -- Tax Free Funds" and "Special Investment Methods."

Micro Cap Value Fund is subject to the risk of generally adverse equity markets.
Investors also should recognize that market prices of equity securities
generally, and of particular companies' equity securities, frequently are
subject to greater volatility than prices of fixed income securities.

Because Micro Cap Value Fund is actively managed, its performance will reflect
in part the ability of the Adviser to select securities which are suited to
achieving its investment objectives. Due to its active management, this Fund
could underperform other mutual funds with similar investment objectives or the
market generally.

In addition, (i) Micro Cap Value Fund is subject to risks associated with
investing in very small-capitalization companies; and (ii) this Fund may invest
a specified portion of its assets in securities of foreign issuers which are
listed on a United States stock exchange or represented by American Depositary
Receipts. See "Investment Objectives and Policies -- Risks to Consider -- Micro
Cap Value Fund" and "Special Investment Methods."

SHAREHOLDER INQUIRIES Any questions or communications regarding the Funds or a
shareholder account should be directed to the Distributor by calling (800)
637-2548, or to the financial institution which holds shares on an investor's
behalf.

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FEES AND EXPENSES

CLASS C SHARE FEES AND EXPENSES

OREGON CALIFORNIA
INTERMEDIATE INTERMEDIATE MICRO CAP
TAX FREE FUND TAX FREE FUND VALUE FUND

SHAREHOLDER TRANSACTION EXPENSES

Maximum sales load imposed on
purchases None None None
Maximum sales load imposed on
reinvested dividends None None None
Deferred sales load None None None
Redemption fees None None None
Exchange fees None None None

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

Investment advisory fees
(after voluntary fee waivers)(1) 0.43% 0.00% 0.63%
Rule 12b-1 fees None None None
Other expenses
(after reimbursements)(1) 0.27% 0.70% 0.27%
Total fund operating expenses
(after voluntary fee waivers and
reimbursements)(1) 0.70% 0.70% 0.90%

EXAMPLE(2)

You would pay the following expenses on a $1,000 investment, assuming (i) a 5%
annual return, and (ii) redemption at the end of each time period:

1 year $ 7 $ 7 $ 9
3 years $ 22 $ 22 $ 29

(1) The Adviser intends to waive a portion of its fees and/or reimburse
expenses on a voluntary basis, and the amounts shown reflect these
waivers and reimbursements as of the date of this Prospectus. The
Adviser intends to maintain such waivers and reimbursements in effect
though September 30, 1998 but reserves the right to discontinue such
waivers and reimbursements at any time in its sole discretion. Absent
any fee waivers or reimbursements, investment advisory fees for each
Fund as an annualized percentage of average daily net assets would be
0.70%; other expenses calculated on such basis would be 0.27% for
Oregon Intermediate Tax Free Fund, 0.71% for California Intermediate
Tax Free Fund and 0.27% for Micro Cap Value Fund; and total fund
operating expenses calculated on such basis would be 0.97% for Oregon
Intermediate Tax Free Fund, 1.41% for California Intermediate Tax Free
Fund and 0.97% for Micro Cap Value Fund. "Other expenses" includes an
administration fee and is based on estimated amounts for the current
fiscal year.

(2) Absent the fee waivers and reimbursements referred to in (1) above, the
dollar amounts for the 1- and 3-year periods would be as follows:
Oregon Intermediate Tax Free Fund, $10 and $31; California Intermediate
Tax Free Fund, $14 and $45; and Micro Cap Value Fund, $10 and $31.

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INFORMATION CONCERNING FEES AND EXPENSES

The purpose of the preceding tables is to assist the investor in understanding
the various costs and expenses that an investor in a Fund may bear directly or
indirectly. THE EXAMPLES CONTAINED IN THE TABLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN. The information set forth in the foregoing tables and
examples relates only to the Class C Shares of the Funds. The Funds also expect
to offer Class A and, in the case of Micro Cap Value Fund, Class B Shares which
are subject to the same expenses and, in addition, to a front-end or contingent
deferred sales load and certain shareholder servicing expenses.

The examples in the above tables are based on annual Fund operating expenses
after voluntary fee waivers and expense reimbursements by the Adviser. Although
the Adviser intends to maintain such waivers in effect through September 30,
1998, any such waivers are voluntary and may be discontinued at any time. Prior
to fee waivers, investment advisory fees accrue at the annual rate as a
percentage of average daily net assets of 0.70% for each of the Funds. "Other
expenses" in the tables are based on estimates.

Other expenses include fees paid by each Fund to the Administrator for providing
various services necessary to operate the Funds. These include shareholder
servicing and certain accounting and other services. The Administrator provides
these services for a fee calculated at an annual rate of 0.12% of average daily
net assets of each Fund subject to a minimum of $50,000 per Fund per fiscal
year; provided, that to the extent that the aggregate net assets of all First
American funds exceed $8 billion, the percentage stated above is reduced to
0.105%. Other expenses of the Funds also includes the cost of maintaining
shareholder records, furnishing shareholder statements and reports, and other
services. Investment advisory fees, administrative fees and other expenses are
reflected in the Funds' daily dividends and are not charged to individual
shareholder accounts.

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THE FUNDS

FAIF is an open-end management investment company which offers shares in several
different mutual funds (collectively, the "FAIF Funds"), each of which evidences
an interest in a separate and distinct investment portfolio. Shareholders may
purchase shares in each FAIF Fund through several separate classes which provide
for variations in distribution costs, shareholder servicing fees, voting rights
and dividends. Except for these differences among classes, each share of each
FAIF Fund represents an undivided proportionate interest in that fund. FAIF is
incorporated under the laws of the State of Maryland, and its principal offices
are located at Oaks, Pennsylvania 19456.

This Prospectus relates only to the Class C Shares of the Funds named on the
cover hereof. Information regarding the Class A and, in the case of Micro Cap
Value Fund, Class B Shares of these Funds and regarding the Class A, Class B and
Class C Shares of the other FAIF Funds is contained in separate prospectuses
that may be obtained from FAIF's Distributor, SEI Financial Services Company,
Oaks, Pennsylvania, 19456, or by calling (800) 637-2548. The Board of Directors
of FAIF may authorize additional series or classes of common stock in the
future.

INVESTMENT OBJECTIVES AND POLICIES

This section describes the investment objectives and policies of the Funds.
There is no assurance that any of these objectives will be achieved. The Funds'
investment objectives are not fundamental and therefore may be changed without a
vote of shareholders. Such changes could result in a Fund having investment
objectives different from those which shareholders considered appropriate at the
time of their investment in a Fund. Shareholders will receive written
notification at least 30 days prior to any change in a Fund's investment
objectives. Micro Cap Value Fund is a diversified investment company, as defined
in the Investment Company Act of 1940 (the "1940 Act"). Oregon Intermediate Tax
Free Fund and California Intermediate Tax Free Fund are nondiversified
investment companies under the 1940 Act.

If a percentage limitation on investments by a Fund stated below or in the
Statement of Additional Information is adhered to at the time of an investment,
a later increase or decrease in percentage resulting from changes in asset
values will not be deemed to violate the limitation except in the case of the
limitation on illiquid investments. A Fund which is limited to investing in
securities with specified ratings is not required to sell a security if its
rating is reduced or discontinued after purchase, but the Fund may consider
doing so. However, in no event will more than 5% of any Fund's net assets be

<PAGE>

invested in non-investment grade securities. Descriptions of the rating
categories of Standard & Poor's Corporation ("Standard & Poor's") and Moody's
Investors Service, Inc. ("Moody's") are contained in the Statement of Additional
Information.

When the term "equity securities" is used in this Prospectus, it refers to
common stock and securities which are convertible into or exchangeable for, or
which carry warrants or other rights to acquire, common stock.

This section also contains information concerning certain investment risks borne
by Fund shareholders under the heading "-- Risks to Consider." Further
information concerning the securities in which the Funds may invest and related
matters is set forth under "Special Investment Methods."

OREGON INTERMEDIATE TAX FREE FUND AND
CALIFORNIA INTERMEDIATE TAX FREE FUND

OBJECTIVES. Oregon Intermediate Tax Free Fund has an objective of providing
current income which is exempt from both federal income tax and Oregon state
income tax to the extent consistent with preservation of capital. California
Intermediate Tax Free Fund has an objective of providing current income which is
exempt from both federal income tax and California state income tax to the
extent consistent with preservation of capital.

INVESTMENT POLICIES. Under normal market conditions, each of these Funds invests
at least 80% of its net assets in municipal bonds and other municipal
obligations of the state referred to in its title, the interest on which is, in
the opinion of bond counsel to the issuer, exempt from federal income tax and
that state's income tax. No more than 20% of the securities owned by either of
these Funds will generate income that is an item of tax preference for the
purpose of the federal alternative minimum tax. Municipal obligations generating
income subject to taxation under the federal alternative minimum tax rules will
not be counted as tax exempt obligations for purposes of the 80% test. See
"Income Taxes." The types of municipal bonds and other municipal obligations in
which these Funds may invest are described under "Special Investment Methods --
Municipal Bonds and Other Municipal Obligations."

Under normal market conditions, the weighted average maturity of the securities
held by each of these Funds will range from 3 to 10 years.

Each of these Funds may purchase obligations which are rated (without regard to
insurance) no lower than BBB by Standard & Poor's or Baa by Moody's, or which
have been assigned an equivalent rating by another nationally recognized
statistical rating organization, or which are of comparable quality in the
judgment of the Adviser. Each of these Funds also may purchase municipal notes
which are rated no lower than SP-1 by Standard & Poor's or

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MIG/VMIG-1 by Moody's or which have been assigned an equivalent rating by
another nationally recognized statistical rating organization. Unrated
securities will not exceed 10% in the aggregate of the value of the total assets
of either of these Funds.

While the assets of each of these Funds ordinarily will be invested in municipal
obligations, on occasion either Fund may temporarily hold short-term securities,
other than municipal obligations, the income from which is taxable. Temporary
taxable investments would be held solely for the purpose of managing exceptional
in-flows and out-flows of cash or for temporary defensive purposes to preserve
existing portfolio values. Under normal circumstances, a Fund may not invest
more than 20% of its assets in investments other than municipal obligations.
However, in periods of adverse markets when a temporary defensive position to
protect capital is deemed advisable and practicable, a Fund may have more than
20% (and up to 100%) of its assets in temporary taxable investments or cash. The
types of investments which are permitted for these purposes are described under
"Special Investment Methods -- Temporary Taxable Investments."

Each of these Funds also may temporarily invest in shares of investment
companies which invest primarily in short-term municipal obligations with
maturities not exceeding 13 months. Investments of these types are also subject
to the advisory fee. Such investments may include tax free money market funds
advised by the Adviser. Income from these investments is normally exempt from
federal income tax but may not be exempt from the applicable state tax. Where
the income from these investments is exempt from both federal income tax and the
applicable state tax, the investments will be counted as tax exempt obligations
for purposes of the 80% test described above.

Each of these Funds also may (i) in order to attempt to reduce risk, invest in
exchange traded put and call options on interest rate futures contracts and on
interest rate indices; (ii) purchase securities on a when-issued or
delayed-delivery basis; (iii) engage in the lending of portfolio securities; and
(iv) invest up to 5% of its net assets in inverse floating rate municipal
obligations. For information about these investment methods, restrictions on
their use, and certain associated risks, see the related headings under "Special
Investment Methods."

MICRO CAP VALUE FUND

OBJECTIVES. Micro Cap Value Fund has an objective of capital appreciation.

INVESTMENT POLICIES. Under normal market conditions, Micro Cap Value Fund
invests at least 65% of its total assets in equity securities of very small-
capitalization companies. For these purposes, very small-capitalization
companies are deemed those with market capitalizations of less than $500

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million. In selecting equity securities, the Adviser utilizes a value-based
selection descipline, investing in equity securities it believes are undervalued
relative to other securities at the time of purchase. In assessing relative
value, the Adviser will consider such factors as ratios of market price to book
value, market price to earnings, and market price to assets; estimated earnings
growth rate; cash flow; and liquidation value.

The Fund also may invest up to 35% of its total assets in the aggregate in
equity securities of issuers with a market capitalization of $500 million or
more and in fixed income securities of the kinds described under "Special
Investment Methods -- Foreign Securities."

Subject to the limitations stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts. For
information about these kinds of investments and certain associated risks, see
"Special Investment Methods -- Foreign Securities."

In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund; (iv) purchase securities on a when-issued
or delayed-delivery basis; and (v) engage in the lending of portfolio
securities. For information about these investment methods, restrictions on
their use, and certain associated risks, see the related headings under "Special
Investment Methods."

For temporary defensive purposes during times of unusual market conditions, the
Fund may without limitation hold cash or invest in cash items of the kinds
described under "Special Investment Methods -- Cash Items." The Fund also may
invest not more than 35% of its total assets in cash and cash items in order to
utilize assets awaiting normal investment.

RISKS TO CONSIDER

TAX FREE FUNDS. An investment in either of the Tax Free Funds involves certain
risks. These include the following:

INTEREST RATE RISK. Interest rate risk is the risk that the value of a
fixed-rate debt security will decline due to changes in market interest rates.
Because the Tax Free Funds invest in fixed-rate debt securities, they are
subject to interest rate risk. In general, when interest rates rise, the value
of a fixed-rate debt security declines. Conversely, when interest rates decline,
the value of a fixed-rate debt security generally increases. Thus, shareholders
in these Funds bear the risk that increases in market interest rates will cause
the value of their Fund's portfolio investments to decline.

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In general, the value of fixed-rate debt securities with longer maturities is
more sensitive to changes in market interest rates than the value of such
securities with shorter maturities. Thus, the net asset value of a Fund which
invests in securities with longer weighted average maturities should be expected
to have greater volatility in periods of changing market interest rates than
that of a Fund which invests in securities with shorter weighted average
maturities.

Although the Adviser may engage in transactions intended to hedge the value of
the Funds' portfolios against changes in market interest rates, there is no
assurance that such hedging transactions will be undertaken or will fulfill
their purpose. See "Special Investment Methods -- Options Transactions."

CREDIT RISK. Credit risk is the risk that the issuer of a debt security will
fail to make payments on the security when due. Because the Tax Free Funds
invest in debt securities, they are subject to credit risk.

As described under "Special Investment Methods -- Municipal Bonds and Other
Municipal Obligations," the revenue bonds and municipal lease obligations in
which these Funds invest may entail greater credit risk than the general
obligation bonds in which they invest. This is the case because revenue bonds
and municipal lease obligations generally are not backed by the faith, credit or
general taxing power of the issuing governmental entity. In addition, as
described under that section, municipal lease obligations also are subject to
nonappropriation risk, which is a type of nonpayment risk. Investors also should
note that even general obligation bonds of the states and their political
subdivisions are not free from the risk of default.

The ratings and certain other requirements which apply to the Tax Free Funds'
permitted investments, as described elsewhere in this Prospectus, are intended
to limit the amount of credit risk undertaken by these Funds. Nevertheless,
shareholders in the Funds bear the risk that payment defaults could cause the
value of their Fund's portfolio investments to decline. Investors also should
note that the Funds can invest in municipal obligations rated as low as BBB by
Standard & Poor's or Baa by Moody's, or which have been assigned an equivalent
rating by another nationally recognized statistical rating organization, or
which are of comparable quality in the judgment of the Adviser. Although these
rating categories are investment grade, obligations with these ratings are
viewed as having speculative characteristics and carry a somewhat higher risk of
default than obligations rated in the higher investment grade categories.

<PAGE>

than that of the called bonds. Call risk is the risk that bonds will be called
during a period of declining market interest rates so that such refinancings may
take place.

If a bond held by a Tax Free Fund is called during a period of declining
interest rates, the Fund probably will have to reinvest the proceeds received by
it at a lower interest rate than that borne by the called bond, thus resulting
in a decrease in the Fund's income. To the extent that these Funds invest in
callable bonds, Fund shareholders bear the risk that reductions in income will
result from the call of bonds.

STATE AND LOCAL POLITICAL AND ECONOMIC CONDITIONS. The value of municipal
obligations owned by the Tax Free Funds may be adversely affected by local
political and economic conditions and developments. Adverse conditions in an
industry significant to a local economy could have a correspondingly adverse
effect on the financial condition of local issuers. Other factors that could
affect tax-exempt obligations include a change in the local, state or national
economy, demographic factors, ecological or environmental concerns, statutory
limitations on the issuer's ability to increase taxes and other developments
generally affecting the revenues of issuers (for example, legislation or court
decisions reducing state aid to local governments or mandating additional
services).

Oregon Intermediate Tax Free Fund and California Intermediate Tax Free Fund each
will invest primarily in municipal obligations issued by the state and its
political subdivisions named in its title. For this reason, the municipal
obligations held by these Funds will be particularly affected by local
conditions in those states. A more detailed description of the factors affecting
Oregon and California issuers of municipal obligations is set forth in the
Statement of Additional Information.

OTHER. Investors also should review "Special Investment Methods" for information
concerning risks associated with certain investment techniques which may be
utilized by the Tax Free Funds.

MICRO CAP VALUE FUND.
An investment in Micro Cap Value Fund involves certain risks. These include the
following:

EQUITY SECURITIES GENERALLY. Market prices of equity securities generally, and
of particular companies' equity securities, frequently are subject to greater
volatility than prices of fixed income securities. Market prices of equity
securities as a group have dropped dramatically in a short period of time on
several occasions in the past, and they may do so again in the future. Micro Cap
Value Fund is subject to the risk of generally adverse equity markets.

VERY SMALL-CAPITALIZATION COMPANIES. Micro Cap Value Fund emphasizes investments
in companies with very small market capitalizations. The equity

<PAGE>

securities of such companies frequently have experienced greater price
volatility in the past than those of larger-capitalization companies, and they
may be expected to do so in the future. In addition, such companies may be at an
earlier stage of their development and followed by fewer investors than small-,
mid- or large-capitalization companies, thus increasing the potential for
volatility in their market prices.

ACTIVE MANAGEMENT. Micro Cap Value Fund is actively managed by the Adviser. The
performance of this Fund therefore will reflect in part the ability of the
Adviser to select securities which are suited to achieving the Fund's investment
objective. Due to its active management, this Fund could underperform other
mutual funds with similar investment objectives or the market generally.

OTHER. Investors also should review "Special Investment Methods" for information
concerning risks associated with certain investment techniques which may be
utilized by Micro Cap Value Fund.

MANAGEMENT

The Board of Directors of FAIF has the primary responsibility for overseeing the
overall management and electing the officers of FAIF. Subject to the overall
direction and supervision of the Board of Directors, the Adviser acts as
investment adviser for and manages the investment portfolios of FAIF.

INVESTMENT ADVISER

First Bank National Association, 601 Second Avenue South, Minneapolis, Minnesota
55480, acts as the Funds' investment adviser through its First Asset Management
group. The Adviser has acted as an investment adviser to FAIF since its
inception in 1987 and has acted as investment adviser to First American Funds,
Inc. since 1982 and to First American Strategy Funds, Inc. since 1996. As of
December 31, 1996, the Adviser was managing accounts with an aggregate value of
approximately $35 billion, including mutual fund assets in excess of $12
billion. First Bank System, Inc., 601 Second Avenue South, Minneapolis,
Minnesota 55480, is the holding company for the Adviser.

Each of the Funds has agreed to pay the Adviser monthly fees calculated on an
annual basis equal to 0.70% of its average daily net assets. The Adviser may, at
its option, waive any or all of its fees, or reimburse expenses, with respect to
any Fund from time to time. Any such waiver or reimbursement is voluntary and
may be discontinued at any time. The Adviser also may absorb or reimburse
expenses of the Funds from time to time, in its discretion, while retaining the
ability to be reimbursed by the Funds for such amounts prior to the end of the
fiscal year. This practice would have the effect of lowering a

<PAGE>

Fund's overall expense ratio and of increasing yield to investors, or the
converse, at the time such amounts are absorbed or reimbursed, as the case may
be.

The Glass-Steagall Act generally prohibits banks from engaging in the business
of underwriting, selling or distributing securities and from being affiliated
with companies principally engaged in those activities. In addition,
administrative and judicial interpretations of the Glass-Steagall Act prohibit
bank holding companies and their bank and nonbank subsidiaries from organizing,
sponsoring or controlling registered open-end investment companies that are
continuously engaged in distributing their shares. Bank holding companies and
their bank and nonbank subsidiaries may serve, however, as investment advisers
to registered investment companies, subject to a number of terms and conditions.

Although the scope of the prohibitions and limitations imposed by the
Glass-Steagall Act has not been fully defined by the courts or the appropriate
regulatory agencies, the Funds have received an opinion from their counsel that
the Adviser is not prohibited from performing the investment advisory services
described above. In the event of changes in federal or state statutes or
regulations or judicial and administrative interpretations or decisions
pertaining to permissible activities of bank holding companies and their bank
and nonbank subsidiaries, the Adviser might be prohibited from continuing these
arrangements. In that event, it is expected that the Board of Directors would
make other arrangements and that shareholders would not suffer adverse financial
consequences.

PORTFOLIO MANAGERS

MICHAEL HAMILTON is portfolio co-manager for Oregon Intermediate Tax Free Fund.
He joined the Adviser in August 1997, when the parent company of Qualivest
Capital Management, Inc. and U.S. Bank, by whom he was employed since 1989, was
acquired by the parent company of the Adviser. He received his bachelor's degree
from the College of Idaho and his master's degree in business administration
from Western Washington University.

CHRISTOPHER L. DRAHN is portfolio co-manager for California Intermediate Tax
Free Fund. Chris joined the fixed income department of the Adviser in 1985,
having previously served in its securities lending and corporate trust areas.
He received his master's degree in business administration from the
University of Minnesota and is a Chartered Financial Analyst.

RICHARD W. STANLEY is portfolio co-manager for Oregon Intermediate Tax Free Fund
and California Intermediate Tax Free Fund. Dick entered the investment business
via sales with Smith Barney & Co. in 1958. He then moved to Heritage Investment
Advisers as head of fixed income investment in 1973. He joined the Adviser in
early 1986 as Vice President and Manager of Fixed

<PAGE>

Income/Personal Trust. Dick received his master's degree in business
administration from Cornell University in 1958 and received his Chartered
Financial Analyst certification in 1977.

Micro Cap Value Fund is managed by a committee composed of Albin S. Dubiak,
Roland P. Whitcomb and Jeff A. Johnson.

ALBIN S. DUBIAK began his investment career as a security trader with the
First National Bank of Chicago in 1963 before joining First Bank as an
investment analyst in 1969. Mr. Dubiak received his bachelor's degree from
Indiana University and his master's degree in business administration from
the University of Arizona. Mr. Dubiak also is portfolio co-manager for three
other First American equity funds and is a member of the committees which
manage five other First American equity funds.

ROLAND B. WHITCOMB joined First Bank in 1986 after serving as an account
executive with Smith Barney & Co. since 1979. He received his bachelor's
degree from the University of Chicago and is a Chartered Financial Analyst.
Mr. Whitcomb also is portfolio co-manager for two other First American equity
funds and is a member of the committees which manage five other First
American equity funds.

JEFF A. JOHNSON has been employed by First Bank in investment management
since 1991 and in commercial lending from 1985 to 1991. Mr. Johnson received
his master of fine arts degree from the University of Iowa. Mr. Johnson also
is portfolio co-manager for two other First American equity funds and is a
member of the committee which manages three other First American equity
funds.

CUSTODIAN

The custodian of the Funds' assets is First Trust National Association (the
"Custodian"), First Trust Center, 180 East Fifth Street, St. Paul, Minnesota
55101. The Custodian is a subsidiary of First Bank System, Inc., which also
controls the Adviser.

As compensation for its services to the Funds, the Custodian is paid monthly
fees calculated on an annual basis equal to 0.03% of the applicable Fund's
average daily net assets. In addition, the Custodian is reimbursed by the Funds
for its out-of-pocket expenses incurred while providing its services to the
Funds.

ADMINISTRATOR

<PAGE>

servicing and certain accounting and other services. The Administrator provides
these services for a fee calculated at an annual rate of 0.12% of each Fund's
average daily net assets, subject to a minimum administrative fee during each
fiscal year of $50,000 per Fund; provided, that to the extent that the aggregate
net assets of all First American funds exceed $8 billion, the percentage stated
above is reduced to 0.105%. From time to time, the Administrator may voluntarily
waive its fees or reimburse expenses with respect to any of the Funds. Any such
waivers or reimbursements may be made at the Administrator's discretion and may
be terminated at any time.

TRANSFER AGENT

DST Systems, Inc. (the "Transfer Agent") serves as the transfer agent and
dividend disbursing agent for the Funds. The address of the Transfer Agent is
1004 Baltimore, Kansas City, Missouri 64105. The Transfer Agent is not
affiliated with the Distributor, the Administrator or the Adviser.

DISTRIBUTOR

SEI Investments Distribution Co. is the principal distributor for shares of
the Funds and of the other FAIF Funds. The Distributor is a Pennsylvania
corporation and is the principal distributor for a number of investment
companies. The Distributor is a wholly-owned subsidiary of SEI Investments
Company and is located at Oaks, Pennsylvania, 19456. The Distributor is not
affiliated with the Adviser, First Bank System, Inc., the Custodian or their
respective affiliates.

The Distributor, the Administrator and the Adviser may in their discretion use
their own assets to pay for certain costs of distributing Fund shares. They also
may discontinue any payment of such costs at any time. In addition, the
Distributor and the Adviser and its affiliates may provide compensation from
their own resources for shareholder services provided by third parties,
including "one-stop" mutual fund networks through which the Funds are made
available.

PURCHASES AND REDEMPTIONS OF SHARES

SHARE PURCHASES AND REDEMPTIONS

Shares of the Funds are sold and redeemed on days on which the New York Stock
Exchange is open for business ("Business Days").

Payment for shares can be made only by wire transfer. Wire transfers of federal
funds for share purchases should be sent to First Bank National

<PAGE>

Association, Minneapolis, Minnesota, ABA Number 091000022; For Credit to: DST
Systems: Account Number 160234580266; For Further Credit To: (Investor Name and
Fund Name). Shares cannot be purchased by Federal Reserve wire on days on which
the New York Stock Exchange is closed and on Federal holidays upon which wire
transfers are restricted. Purchase orders will be effective and eligible to
receive dividends declared the same day if the Transfer Agent receives an order
before 3:00 p.m. Central time and the Custodian receives Federal funds before
the close of business that day. Otherwise, the purchase order will be effective
the next Business Day. The net asset value per share is calculated as of 3:00
p.m. Central time each Business Day. The Funds reserve the right to reject a
purchase order.

The Funds are required to redeem for cash all full and fractional shares of the
Funds. Redemption orders may be made any time before 3:00 p.m. Central time in
order to receive that day's redemption price. For redemption orders received
before 3:00 p.m. Central time, payment will ordinarily be made the next business
day by transfer of Federal funds, but payment may be made up to 7 days later.

WHAT SHARES COST

Class C Shares of the Funds are sold and redeemed at net asset value. The net
asset value per share is determined as of the earlier of the close of the New
York Stock Exchange or 3:00 p.m. Central time on each day the New York Stock
Exchange is open for business, provided that net asset value need not be
determined on days when no Fund shares are tendered for redemption and no order
for that Fund's shares is received and on days on which changes in the value of
portfolio securities will not materially affect the current net asset value of
the Fund's shares. The price per share for purchases or redemptions is such
value next computed after the Transfer Agent receives the purchase order or
redemption request. In the case of redemptions and repurchases of shares owned
by corporations, trusts or estates, the Transfer Agent may require additional
documents to evidence appropriate authority in order to effect the redemption,
and the applicable price will be that next determined following the receipt of
the required documentation.

DETERMINING NET ASSET VALUE. The net asset value per share for each of the Funds
is determined by dividing the value of the securities owned by the Fund plus any
cash and other assets (including interest accrued and dividends declared but not
collected), less all liabilities, by the number of Fund shares outstanding. For
the purpose of determining the aggregate net assets of the Funds, cash and
receivables will be valued at their face amounts. Interest will be recorded as
accrued and dividends will be recorded on the ex-dividend date. Investments in
equity securities which are traded on a national securities exchange (or
reported on the NASDAQ national market system) are stated at the last quoted
sales price if readily available for such equity securities on

<PAGE>

each business day; other equity securities traded in the over-the-counter market
and listed equity securities for which no sale was reported on that date are
stated at the last quoted bid price. Debt obligations exceeding 60 days to
maturity which are actively traded are valued by an independent pricing service
at the most recently quoted bid price. Debt obligations with 60 days or less
remaining until maturity may be valued at their amortized cost. When market
quotations are not readily available, securities are valued at fair value as
determined in good faith by procedures established and approved by the Board of
Directors.

Portfolio securities underlying actively traded options are valued at their
market price as determined above. The current market value of any exchange
traded option held or written by a Fund is its last sales price on the exchange
prior to the time when assets are valued, unless the bid price is higher or the
asked price is lower, in which event the bid or asked price is used. In the
absence of any sales that day, options will be valued at the current closing bid
price.

Although the methodology and procedures for determining net asset value are
identical for all classes of shares, the net asset value per share of different
classes of shares of the same Fund may differ because of the distribution and/or
shareholder servicing expenses charged to Class A and Class B Shares.

EXCHANGING SECURITIES FOR FUND SHARES

A Fund may accept securities in exchange for Fund shares. A Fund will allow such
exchanges only upon the prior approval by the Fund and a determination by the
Fund and the Adviser that the securities to be exchanged are acceptable.
Securities accepted by a Fund will be valued in the same manner that a Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Fund shares on the day the securities are valued.

CERTIFICATES AND CONFIRMATIONS

The Transfer Agent maintains a share account for each shareholder. Share
certificates will not be issued by the Funds.

Confirmations of each purchase and redemption are sent to each shareholder. In
addition, monthly confirmations are sent to report all transactions and
dividends paid during that month for the Funds.

DIVIDENDS AND DISTRIBUTIONS

Dividends with respect to Oregon Intermediate Tax Free Fund and California
Intermediate Tax Free Fund are declared and paid monthly to all shareholders of
record on the

<PAGE>

record date. Dividends with respect to Micro Cap Value Fund are declared and
paid quarterly to all shareholders of record on the record date. Distributions
of any net realized long-term capital gains will be made at least once every 12
months. Dividends and distributions are automatically reinvested in additional
shares of the Fund paying the dividend on payment dates at the ex-dividend date
net asset value without a sales charge, unless shareholders request cash
payments on the new account form or by writing to the Fund.

All shareholders on the record date are entitled to the dividend. If shares are
purchased before a record date for a dividend or a distribution of capital
gains, a shareholder will pay the full price for the shares and will receive
some portion of the purchase price back as a taxable dividend or distribution
(to the extent, if any, that the dividend or distribution is otherwise taxable
to holders of Fund shares). If shares are redeemed or exchanged before the
record date for a dividend or distribution or are purchased after the record
date, those shares are not entitled to the dividend or distribution.

The amount of dividends payable on Class C Shares generally will be more than
the dividends payable on Class A or Class B Shares because of the distribution
and/or shareholder servicing expenses charged to Class A and Class B Shares.

EXCHANGE PRIVILEGE

Shareholders may exchange Class C Shares of a Fund for currently available Class
C Shares of the other FAIF Funds or of other funds in the First American family
at net asset value. Exchanges of shares among the First American family of funds
must meet any applicable minimum investment of the fund for which shares are
being exchanged.

The ability to exchange shares of the Funds does not constitute an offering or
recommendation of shares of one fund by another fund. This privilege is
available to shareholders resident in any state in which the fund shares being
acquired may be sold. An investor who is considering acquiring shares in another
First American fund pursuant to the exchange privilege should obtain and
carefully read a prospectus of the fund to be acquired. Exchanges may be
accomplished by a written request, or by telephone if a preauthorized exchange
authorization is on file with the Transfer Agent, shareholder servicing agent,
or financial institution. Neither the Transfer Agent nor any Fund will be
responsible for the authenticity of exchange instructions received by telephone
if it reasonably believes those instructions to be genuine. The Funds and the
Transfer Agent will each employ reasonable procedures to confirm that telephone
instructions are genuine, and they may be liable for losses resulting from
unauthorized or fraudulent telephone instructions if they do not employ these
procedures. These procedures may include taping of telephone conversations.

<PAGE>

Shares of a class in which an investor is no longer eligible to participate may
be exchanged for shares of a class in which that investor is eligible to
participate. An example of this kind of exchange would be a situation in which
Class C Shares of a Fund held by a financial institution in a trust or agency
capacity for one or more individual beneficiaries are exchanged for Class A
Shares of that Fund and distributed to the individual beneficiaries.

INCOME TAXES

FEDERAL INCOME TAXATION

Each Fund is treated as a different entity for federal income tax purposes. Each
of the Funds qualified during its last fiscal year as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the "Code"), and
each of the Funds intends to so qualify in the future. If so qualified and
provided certain distribution requirements are met, a Fund will not be liable
for federal income taxes to the extent it distributes its income to its
shareholders.

Distributions of net interest income from tax-exempt obligations that are
designated by each Tax Free Fund as exempt-interest dividends are excludable
from the gross income of the Fund's shareholders. A portion of such dividends
may, however, be subject to the alternative minimum tax, as discussed below.

Distributions paid from other interest income of the Tax Free Funds, from the
net investment income of Micro Cap Value Fund, and from any net realized
short-term capital gains of each Fund will be taxable to shareholders as
ordinary income, whether received in cash or in additional shares. Since none of
the Tax Free Funds' income will consist of dividends from domestic corporations,
the dividends-received deduction for corporations will not be applicable to
taxable distributions by those Funds. Distributions paid by each Fund from
long-term capital gains (and designated as such) will be taxable as long-term
capital gains for federal income tax purposes, whether received in cash or
shares, regardless of how long a shareholder has held the shares in a Fund.
Shareholders not subject to federal income taxation will not be taxed on
distributions by a Fund.

Gain or loss realized on the sale or exchange of shares in a Fund will be
treated as capital gain or loss, provided that (as is usually the case) the
shares represented a capital asset in the hands of the shareholder. Such gain or
loss will be long-term gain or loss if the shares were held for more than one
year.

For federal income tax purposes, an alternative minimum tax ("AMT") is imposed
on taxpayers to the extent that such tax, if any, exceeds a taxpayer's

<PAGE>

regular income tax liability (with certain adjustments). Liability for AMT will
depend on each shareholder's tax situation.

Exempt-interest dividends attributable to interest income on certain tax-exempt
obligations issued after August 7, 1986, to finance certain private activities
will be treated as an item of tax preference that is included in alternative
minimum taxable income for purposes of computing the federal AMT for all
taxpayers and the federal environmental tax on corporations. Each Tax Free Fund
may invest up to 20% of its total assets in obligations the interest on which is
treated as an item of tax preference for federal income tax purposes. Also, a
portion of all other tax-exempt interest received by a corporation, including
exempt-interest dividends, will be included in adjusted current earnings and in
earnings and profits for purposes of determining the federal corporate
alternative minimum tax, the environmental tax imposed on corporations under
Section 59A of the Code, and the branch profits tax imposed on foreign
corporations under Section 884 of the Code.

The Tax Reform Act of 1986 imposed new requirements on certain tax-exempt bonds
which, if not satisfied, could result in loss of tax exemption for interest on
such bonds, even retroactively to the date of issuance of the bonds. Proposals
may be introduced before Congress in the future, the purpose of which will be to
further restrict or eliminate the federal income tax exemption for tax-exempt
bonds held by the Tax Free Funds. The Tax Free Funds will avoid investment in
bonds which, in the opinion of the Adviser, pose a material risk of the loss of
tax exemption. Further, if a bond in a Tax Free Fund's portfolio lost its exempt
status, the Fund would make every effort to dispose of that investment on terms
that are not detrimental to the Fund.

In certain instances, the portion of Social Security benefits received by a
shareholder that is subject to federal income tax may be affected by the amount
of exempt-interest dividends received by the shareholder from the Tax Free
Funds.

Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Tax Free Funds will not be deductible for federal income
purposes.

Information concerning distributions will be mailed to shareholders annually.
Shareholders who are subject to federal income tax are required for information
purposes to report exempt-interest dividends and other tax-exempt interest on
their tax returns.

OREGON INCOME TAXATION

The portion of exempt-interest dividends paid by Oregon Intermediate Tax Free
Fund that is derived from interest on tax-exempt obligations issued by the state
of Oregon, its political subdivisions and instrumentalities, is excluded

<PAGE>

from the taxable income of individuals, trusts and estates. All remaining
dividends (except for dividends, if any, derived from interest paid on
obligations of the United States, its territories and possessions), including
dividends derived from capital gains, will be includable in the taxable income
of individuals, trusts and estates. Furthermore, all dividends, including
exempt-interest dividends, will be includable in the taxable income of
corporations subject to the Oregon corporation excise tax. Dividends qualifying
for federal income tax purposes as capital gain dividends are to be treated by
shareholders as long-term capital gains. Oregon taxes long-term capital gains at
the same rates as ordinary income, while restricting the deductibility of
capital losses.

CALIFORNIA INCOME TAXATION

Individual shareholders of California Intermediate Tax Free Fund who are subject
to California personal income taxation will not be required to include in their
California gross income that portion of their federally tax exempt dividends
which the Fund clearly identifies as directly attributable to interest earned on
California state or municipal obligations, and dividends which the Fund clearly
identifies as directly attributable to interest earned on obligations of the
United States, the interest on which is exempt from California personal income
tax pursuant to federal law, provided that at least 50% of the value of the
Fund's total assets consists of obligations the interest on which is exempt from
California personal income taxation pursuant to federal or California law.
Distributions to individual shareholders derived from interest on state or
municipal obligations issued by governmental authorities in states other than
California, short-term capital gains and other taxable income will be taxed as
dividends for purposes of California personal income taxation. The Fund's
long-term capital gains for federal income tax purposes will be taxed as
long-term capital gains to individual shareholders of the Fund for purposes of
California personal income taxation. Gain or loss, if any, resulting from an
exchange or redemption of shares will be recognized in the year of the exchange
or redemption.

OTHER STATE AND LOCAL TAXATION

Except to the extent described above under "-- Oregon Income Taxation" and "--
California Income Taxation," distributions by all the Funds may be subject to
state and local taxation even if they are exempt from federal income taxes.
Shareholders are urged to consult their own tax advisers regarding state and
local taxation.

<PAGE>

TAX FREE FUNDS: TAX-EXEMPT VS. TAXABLE INCOME

The tables below show the approximate yields that taxable securities must earn
to equal yields that are (i) exempt from both federal and Oregon income taxes;
and (ii) exempt from both federal and California income taxes, under selected
income tax brackets scheduled to be in effect in 1997. The effective combined
rates reflect the deduction of state income taxes from federal income. The
34.5%, 37.2%, 41.8% and 45.0% combined federal/Oregon rates assume that the
investor is subject to a 9% marginal Oregon income tax rate and a marginal
federal income tax rate of 28%, 31%, 36% and 39.6%, respectively. The 34.8%,
37.4%, 42.0% and 45.2% combined federal/California rates assume that the
investor is subject to a 9.3% marginal California income tax rate and a marginal
federal income tax rate of 28%, 31%, 36% and 39.6%, respectively. The combined
rates do not reflect federal rules concerning the phase-out of personal
exemptions and limitations on the allowance of itemized deductions for certain
high-income taxpayers. The tables are based upon yields that are derived solely
from tax-exempt income. To the extent that a Tax Free Fund's yield is derived
from taxable income, the Fund's tax equivalent yield will be less than set forth
in the tables. The tax-free yields used in these tables should not be considered
as representations of any particular rates of return and are for purposes of
illustration only.

TAX-EQUIVALENT YIELDS

COMBINED FEDERAL AND COMBINED FEDERAL AND
OREGON TAX BRACKETS CALIFORNIA TAX BRACKETS
TAX-FREE
YIELDS 34.5% 37.2% 41.8% 45.0% 34.8% 37.4% 42.0% 45.2%

3.0% 4.58% 4.78% 5.15% 5.45% 4.60% 4.79% 5.17% 5.47%
3.5% 5.34% 5.57% 6.01% 6.36% 5.37% 5.59% 6.03% 6.39%
4.0% 6.11% 6.37% 6.87% 7.27% 6.13% 6.39% 6.90% 7.30%
4.5% 6.87% 7.17% 7.73% 8.18% 6.90% 7.19% 7.76% 8.21%
5.0% 7.63% 7.96% 8.59% 9.09% 7.67% 7.99% 8.62% 9.12%
5.5% 8.40% 8.76% 9.45% 10.00% 8.44% 8.79% 9.48% 10.03%
6.0% 9.16% 9.55% 10.31% 10.91% 9.20% 9.58% 10.34% 10.95%
6.5% 9.92% 10.35% 11.17% 11.82% 9.97% 10.38% 11.21% 11.86%

FUND SHARES

Each share of a Fund is fully paid, nonassessable, and transferable. Shares may
be issued as either full or fractional shares. Fractional shares have pro rata
the same rights and privileges as full shares. Shares of the Funds have no
preemptive or conversion rights.

<PAGE>

the directors if they choose to do so. On issues affecting only a particular
Fund or Class, the shares of that Fund or Class will vote as a separate series.
Examples of such issues would be proposals to alter a fundamental investment
restriction pertaining to a Fund or to approve, disapprove or alter a
distribution plan pertaining to a Class.

Under the laws of the State of Maryland and FAIF's Articles of Incorporation,
FAIF is not required to hold shareholder meetings unless they (i) are required
by the 1940 Act, or (ii) are requested in writing by the holders of 25% or more
of the outstanding shares of FAIF.

CALCULATION OF PERFORMANCE DATA

From time to time, any of the Funds may advertise information regarding its
performance. Each Fund may publish its "yield," its "cumulative total return,"
its "average annual total return," and its "distribution rate." In addition,
each Tax Free Fund may publish its "tax equivalent yield" and its "tax
equivalent distribution rate." Distribution rates and tax equivalent
distribution rates may only be used in connection with sales literature and
shareholder communications preceded or accompanied by a Prospectus. Each of
these performance figures is based upon historical results and is not intended
to indicate future performance, and, except for "distribution rate" and "tax
equivalent distribution rate," is standardized in accordance with Securities and
Exchange Commission ("SEC") regulations.

"Yield" for the Funds is computed by dividing the net investment income per
share (as defined in applicable SEC regulations) earned during a 30-day period
(which period will be stated in the advertisement) by the maximum offering price
per share on the last day of the period. Yield is an annualized figure, in that
it assumes that the same level of net investment income is generated over a one
year period. The yield formula annualizes net investment income by providing for
semi-annual compounding.

"Tax equivalent yield" is that yield which a taxable investment must generate in
order to equal a Fund's yield for an investor in a stated federal or combined
federal/state income tax bracket (normally assumed to be the maximum tax rate or
combined rate). Tax equivalent yield is computed by dividing that portion of the
yield which is tax-exempt by one minus the stated income tax rate, and adding
the resulting amount to that portion, if any, of the yield which is not
tax-exempt.

<PAGE>

charge imposed on Class B Shares. "Cumulative total return" reflects a Fund's
performance over a stated period of time. "Average annual total return" reflects
the hypothetical annually compounded rate that would have produced the same
cumulative total return if performance had been constant over the entire period.
Because average annual returns tend to smooth out variations in a Fund's
performance, they are not the same as actual year-by-year results. As a
supplement to total return computations, a Fund may also publish "total
investment return" computations which do not assume deduction of the maximum
sales charge imposed on Class A Shares or the contingent deferred sales charge
imposed on Class B Shares.

"Distribution rate" is determined by dividing the income dividends per share for
a stated period by the maximum offering price per share on the last day of the
period. "Tax equivalent distribution rate" is computed by dividing the portion
of the distribution rate (determined as described above) which is tax-exempt by
one minus the stated federal or combined federal/state income tax rate, and
adding to the resulting amount that portion, if any, of the distribution rate
which is not tax-exempt. All distribution rates published for the Funds are
measures of the level of income dividends distributed during a specified period.
Thus, these rates differ from yield (which measures income actually earned by a
Fund) and total return (which measures actual income, plus realized and
unrealized gains or losses of a Fund's investments). Consequently, distribution
rates alone should not be considered complete measures of performance.

The performance of the Class C Shares of a Fund will normally be higher than for
the Class A and Class B Shares because Class C Shares are not subject to the
sales charges and distribution and/or shareholder servicing expenses applicable
to Class A and Class B Shares.

In reports or other communications to shareholders and in advertising material,
the performance of each Fund may be compared to recognized unmanaged indices or
averages of the performance of similar securities and to composites of such
indices and averages. Also, the performance of each Fund may be compared to that
of other funds of similar size and objectives as listed in the rankings prepared
by Lipper Analytical Services, Inc. or similar independent mutual fund rating
services, and each Fund may include in such reports, communications and
advertising material evaluations published by nationally recognized independent
ranking services and publications. For further information regarding the Funds'
performance, see "Fund Performance" in the Statement of Additional Information.

<PAGE>

PERFORMANCE INFORMATION FOR SUCCESSORS TO COMMON TRUST FUNDS

Each of Oregon Intermediate Tax Free Fund, California Intermediate Tax Free
Fund, and Micro Cap Value Fund commenced operations when substantially all of
the assets of certain common trust funds which were exempt from registration
under the 1940 Act were transferred to these Funds. One predecessor common trust
fund was managed by the Adviser, while the others were managed by Qualivest
Capital Management, Inc. prior to the acquisition of its parent company by the
Adviser's parent company. The personnel who managed those common trust funds on
behalf of Qualivest Capital Management became employees of the Adviser, and
assumed management of the applicable Funds, at the time the assets were
transferred from the common trust funds to the Funds.

Certain performance data for these Funds and their predecessor common trust
funds is set forth below. This data is deemed relevant because the common trust
funds were managed using investment obejctives, policies, guidelines, and
restrictions materially equivalent to those of their corresponding Funds.
However, the predecessor common trust funds were not subject to certain
investment restrictions that are imposed by the 1940 Act. Accordingly, if the
common trust funds had been registered under the 1940 Act or subject to the
registered investment company provisions of the Internal Revenue Code, their
performance could have been adversely affected by virtue of such investment
restrictions.

The predecessor common trust funds did not incur the same expenses as the Funds.
The performance information set forth below has been adjusted, for periods prior
to the transfer of the common trust funds' assets to the Funds, to apply the
total expense ratios for the corresponding Funds as disclosed in the Funds'
prospectuses at the time they commenced operations (after voluntary fee waivers
reflected in such total expense ratios). These adjustments had the effect of
reducing the reported performance of the respective common trust funds.

<PAGE>

The average annual total returns for the Funds' predecessor common trust funds
for the periods set forth below, adjusted as described above, were as follows.
The returns set forth below were computed in accordance with Securities and
Exchange Commission rules for computing mutual funds' total returns.

FROM INCEPTION
(5/1/92)
1 YEAR ENDED THROUGH
4/30/97 4/30/97

California Intermediate
Tax Free Fund, Class C
predecessor 3.89% 5.33%

1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED
4/30/97 4/30/97 4/30/97

Oregon Intermediate
Tax Free Fund, Class C
predecessor 3.76% 5.01% 6.27%
Micro Cap Value Fund,
Class C predecessor 9.04% 19.34% 15.69%

SPECIAL INVESTMENT METHODS

This section provides additional information concerning the securities in which
the Funds may invest and related topics. Further information concerning these
matters is contained in the Statement of Additional Information.

MUNICIPAL BONDS AND OTHER MUNICIPAL OBLIGATIONS

As described under "Investment Objectives and Policies," each of the Tax Free
Funds invests principally in municipal bonds and other municipal obligations.
These bonds and other obligations are issued by the states and by their local
and special-purpose political subdivisions. The term "municipal bond" as used in
this Prospectus includes short-term municipal notes issued by the states and
their political subdivisions.

MUNICIPAL BONDS. The two general classifications of municipal bonds are "general
obligation" bonds and "revenue" bonds. General obligation bonds are secured by
the governmental issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. They are usually paid from general revenues
of the issuing governmental entity. Revenue bonds, on the other hand, are
usually payable only out of a specific revenue source rather than from general
revenues. Revenue bonds ordinarily are not backed by the faith, credit or
general taxing power of the issuing governmental entity. The principal and
interest on revenue bonds for private facilities are typically paid out of rents
or other specified payments made to the issuing governmental entity by a private
company which uses or operates the facilities. Examples of these types of
obligations are industrial revenue bonds and pollution control revenue bonds.
Industrial revenue bonds are issued by

<PAGE>

governmental entities to provide financing aid to community facilities such as
hospitals, hotels, business or residential complexes, convention halls and sport
complexes. Pollution control revenue bonds are issued to finance air, water and
solids pollution control systems for privately operated industrial or commercial
facilities.

Revenue bonds for private facilities usually do not represent a pledge of the
credit, general revenues or taxing powers of the issuing governmental entity.
Instead, the private company operating the facility is the sole source of
payment of the obligation. Sometimes, the funds for payment of revenue bonds
come solely from revenue generated by operation of the facility. Revenue bonds
which are not backed by the credit of the issuing governmental entity frequently
provide a higher rate of return than other municipal obligations, but they
entail greater risk than obligations which are guaranteed by a governmental unit
with taxing power. Federal income tax laws place substantial limitations on
industrial revenue bonds, and particularly certain specified private activity
bonds issued after August 7, 1986. In the future, legislation could be
introduced in Congress which could further restrict or eliminate the income tax
exemption for interest on debt obligations in which the Funds may invest.

MUNICIPAL LEASES. Each Tax Free Fund also may purchase participation interests
in municipal leases. Participation interests in municipal leases are undivided
interests in a lease, installment purchase contract or conditional sale contract
entered into by a state or local governmental unit to acquire equipment or
facilities. Municipal leases frequently have special risks which generally are
not associated with general obligation bonds or revenue bonds.

Municipal leases and installment purchase or conditional sale contracts (which
usually provide for title to the leased asset to pass to the governmental issuer
upon payment of all amounts due under the contract) have evolved as a means for
governmental issuers to acquire property and equipment without meeting the
constitutional and statutory requirements for the issuance of municipal debt.
The debt-issuance limitations are deemed to be inapplicable because of the
inclusion in many leases and contracts of "non-appropriation" clauses that
provide that the governmental issuer has no obligation to make future payments
under the lease or contract unless money is appropriated for this purpose by the
appropriate legislative body on a yearly or other periodic basis. Although these
kinds of obligations are secured by the leased equipment or facilities, the
disposition of the pledged property in the event of non-appropriation or
foreclosure might, in some cases, prove difficult and time-consuming. In
addition, disposition upon non-appropriation or foreclosure might not result in
recovery by a Tax Free Fund of the full principal amount represented by an
obligation.

In light of these concerns, each Tax Free Fund has adopted and follows
procedures for determining whether municipal lease obligations purchased by

<PAGE>

the Fund are liquid and for monitoring the liquidity of municipal lease
securities held in the Fund's portfolio. These procedures require that a number
of factors be used in evaluating the liquidity of a municipal lease security,
including the frequency of trades and quotes for the security, the number of
dealers willing to purchase or sell the security and the number of other
potential purchasers, the willingness of dealers to undertake to make a market
in the security, the nature of the marketplace in which the security trades, and
other factors which the Adviser may deem relevant. As described below under "--
Investment Restrictions," each Tax Free Fund is subject to limitations on the
percentage of illiquid securities it can hold.

TEMPORARY TAXABLE INVESTMENTS

Each of the Tax Free Funds may make temporary taxable investments as described
under "Investment Objectives and Policies." Temporary taxable investments will
include only the following types of obligations maturing within 13 months from
the date of purchase: (i) obligations of the United States Government, its
agencies and instrumentalities; (ii) commercial paper rated not less than A-1 by
Standard & Poor's or P-1 by Moody's or which has been assigned an equivalent
rating by another nationally recognized statistical rating organization; (iii)
other short-term debt securities issued or guaranteed by corporations having
outstanding debt rated not less than BBB by Standard & Poor's or Baa by Moody's
or which have been assigned an equivalent rating by another nationally
recognized statistical rating organization; (iv) certificates of deposit of
domestic commercial banks subject to regulation by the United States Government
or any of its agencies or instrumentalities, with assets of $500 million or more
based on the most recent published reports; and (v) repurchase agreements with
domestic banks or securities dealers involving any of the securities which the
Fund is permitted to hold. See "-- Repurchase Agreements" below.

REPURCHASE AGREEMENTS

The temporary taxable investments which each Tax Free Fund may make include
repurchase agreements, and Micro Cap Value Fund also is permitted to enter into
such agreements. A repurchase agreement involves the purchase by a Fund of
securities with the agreement that after a stated period of time, the original
seller will buy back the same securities ("collateral") at a predetermined price
or yield. Repurchase agreements involve certain risks not associated with direct
investments in securities. If the original seller defaults on its obligation to
repurchase as a result of its bankruptcy or otherwise, the purchasing Fund will
seek to sell the collateral, which could involve costs or delays. Although
collateral (which may consist of any fixed income security which is an eligible
investment for the Fund entering into the repurchase agreement) will at all
times be maintained in an amount equal to the repurchase price under the
agreement (including accrued interest), a Fund

<PAGE>

would suffer a loss if the proceeds from the sale of the collateral were less
than the agreed-upon repurchase price. The Adviser will monitor the
creditworthiness of the firms with which the Funds enter into repurchase
agreements.

INVERSE FLOATING RATE OBLIGATIONS

Each of the Tax Free Funds may invest up to 5% of its net assets in inverse
floating rate municipal obligations. An inverse floating rate obligation
entitles the holder to receive interest at a rate which changes in the opposite
direction from, and in the same magnitude as or in a multiple of, changes in a
specified index rate. Although an inverse floating rate municipal obligation
would tend to increase portfolio income during a period of generally decreasing
market interest rates, its income and value would tend to decline during a
period of generally increasing market interest rates. In addition, its decline
in value may be greater than for a fixed-rate municipal obligation, particularly
if the interest rate borne by the floating rate municipal obligation is adjusted
by a multiple of changes in the specified index rate. For these reasons, inverse
floating rate municipal obligations have more risk than more conventional
fixed-rate and floating rate municipal obligations.

WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS

Each of the Funds may purchase securities on a when-issued or delayed-delivery
basis. When such a transaction is negotiated, the purchase price is fixed at the
time the purchase commitment is entered, but delivery of and payment for the
securities take place at a later date. A Fund will not accrue income with
respect to securities purchased on a when-issued or delayed-delivery basis prior
to their stated delivery date. Pending delivery of the securities, each Fund
will maintain in a segregated account cash or liquid high-grade securities in an
amount sufficient to meet its purchase commitments.

The purchase of securities on a when-issued or delayed-delivery basis exposes a
Fund to risk because the securities may decrease in value prior to delivery. In
addition, a Fund's purchase of securities on a when-issued or delayed-delivery
basis while remaining substantially fully invested could increase the amount of
the Fund's total assets that are subject to market risk, resulting in increased
sensitivity of net asset value to changes in market prices. However, the Funds
will engage in when-issued and delayed-delivery transactions only for the
purpose of acquiring portfolio securities consistent with their investment
objectives, and not for the purpose of investment leverage. A seller's failure
to deliver securities to a Fund could prevent the Fund from realizing a price or
yield considered to be advantageous.

<PAGE>

LENDING OF PORTFOLIO SECURITIES

In order to generate additional income, each of the Funds may lend portfolio
securities representing up to one-third of the value of its total assets to
broker-dealers, banks or other institutional borrowers of securities. If the
Funds engage in securities lending, distributions paid to shareholders from the
resulting income will not be excludable from shareholders' gross income for
income tax purposes. As with other extensions of credit, there may be risks of
delay in recovery of the securities or even loss of rights in the collateral
should the borrower of the securities fail financially. However, the Funds will
only enter into loan arrangements with broker-dealers, banks, or other
institutions which the Adviser has determined are creditworthy under guidelines
established by the Board of Directors. In these loan arrangements, the Funds
will receive collateral in the form of cash, United States Government securities
or other high-grade debt obligations equal to at least 100% of the value of the
securities loaned. Collateral is marked to market daily. The Funds will pay a
portion of the income earned on the lending transaction to the placing broker
and may pay administrative and custodial fees (including fees to an affiliate of
the Adviser) in connection with these loans.

OPTIONS TRANSACTIONS

TAX FREE FUNDS. Each of the Tax Free Funds may, in order to reduce risk, invest
in exchange traded put and call options on interest rate futures contracts and
on interest rate indices. Such investments will be made solely as a hedge
against adverse changes resulting from market conditions in the values of
securities held by the Funds or which they intend to purchase and where the
transactions are deemed appropriate to reduce risks inherent in the Funds'
portfolios or contemplated investments.

Neither of the Tax Free Funds will invest more than 5% of the value of its total
assets in purchased options, provided that options which are "in the money" at
the time of purchase may be excluded from this 5% limitation. A call option is
"in the money" if the exercise price is lower than the current market price of
the underlying contract or index, and a put option is "in the money" if the
exercise price is higher than the current market price. A Fund's loss exposure
in purchasing an option is limited to the sum of the premium paid (purchase
price of the option) and the commission or other transaction expenses associated
with acquiring the option.

<PAGE>

an interest rate futures contract at a specified exercise price at any time
prior to the expiration date of the option. In order to hedge its portfolio
against anticipated changes in interest rates, a Fund might purchase a put
option on an interest rate futures contract if interest rates were expected to
rise, or might purchase a call option on an interest rate futures contract if
rates were expected to decline.

Options on interest rate indices are similar to options on interest rate futures
contracts except that, rather than the right to take or make delivery of a
specific financial instrument at a specified price, an option on an interest
rate index gives the holder the right to receive, upon exercise of the option, a
defined amount of cash if the closing value of the interest rate index upon
which the option is based is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. Put and call options on
interest rate indices thus may be used in a fashion similar to that of options
on interest rate futures contracts to hedge the value of a portfolio of debt
securities against anticipated changes in interest rates.

The use of options on interest rate futures contracts and on interest rate
indices involves certain risks. These include the risk that changes in interest
rates on the hedged instruments may not correlate to changes in interest rates
on the instrument or index upon which the hedge is based, and the risk of
limited liquidity in the event that a Fund seeks to close out an options
position before expiration by entering into an offsetting transaction.

MICRO CAP VALUE FUND.

PURCHASES OF PUT AND CALL OPTIONS. Micro Cap Value Fund may purchase put and
call options on equity securities and on stock indices. These transactions will
be undertaken only for the purpose of reducing risk to the Fund; that is, for
"hedging" purposes.

A put option on a security gives the purchaser of the option the right (but not
the obligation) to sell, and the writer of the option the obligation to buy, the
underlying security at a stated price (the "exercise price") at any time before
the option expires. A call option on a security give the purchaser the right
(but not the obligation) to buy, and the writer the obligation to sell, the
underlying security at the exercise price at any time before the option expires.
The purchase price for a put or call option is the "premium" paid by the
purchaser for the right to sell or buy.

Options on indices are similar to options on securities except that, rather than
the right to take or make delivery of a specific security at a stated price, an
option on an index gives the holder the right to receive, upon exercise of the
option, a defined amount of cash if the closing value of the index upon which
the option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option.

<PAGE>

Micro Cap Value Fund will not invest more than 5% of the value of its total
assets in purchased options, provided that options which are "in the money" at
the time of purchase may be excluded from this 5% limitation. A call option is
"in the money" if the exercise price is lower than the current market price of
the underlying security or index, and a put option is "in the money" if the
exercise price is higher than the current market price. The Fund's loss exposure
in purchasing an option is limited to the sum of the premium paid and the
commission or other transaction expenses associated with acquiring the option.

The use of purchased put and call options involves certain risks. These include
the risk of an imperfect correlation between market prices of securities held by
the Fund and the prices of options, and the risk of limited liquidity in the
event that the Fund seeks to close out an options position before expiration by
entering into an offsetting transaction.

WRITING OF CALL OPTIONS. Micro Cap Value Fund may write (sell) covered call
options on equity securities which it owns or has the right to acquire to the
extent specified under "Investment Objectives and Policies -- Micro Cap Value
Fund." These transactions would be undertaken primarily to produce additional
income.

When a Fund sells a covered call option, it is paid a premium by the purchaser.
If the market price of the security covered by the option does not increase
above the exercise price before the option expires, the option generally will
expire without being exercised, and the Fund will retain both the premium paid
for the option and the security. If the market price of the security covered by
the option does increase above the exercise price before the option expires,
however, the option is likely to be exercised by the purchaser. In that case the
Fund will be required to sell the security at the exercise price, and it will
not realize the benefits of increases in the market price of the security above
the exercise price of the option.

Micro Cap Value Fund also may write call options on stock indices the movements
of which generally correlate with those of the Fund's portfolio holdings. These
transactions, which would be undertaken principally to produce additional
income, entail the risk of an imperfect correlation between movements of the
index covered by the option and movements in the price of the Fund's portfolio
securities.

CASH ITEMS

<PAGE>

United States Government or its agencies or instrumentalities; repurchase
agreements collateralized by eligible investments of the Fund; securities of
other mutual funds which invest primarily in debt obligations with remaining
maturities of 13 months or less (which investments are subject to the advisory
fee); and other similar high-quality short-term United States dollar-denominated
obligations. The other mutual funds in which Micro Cap Value Fund may so invest
include money market funds advised by the Adviser, subject to certain
restrictions contained in an exemptive order issued by the Securities and
Exchange Commission with respect thereto.

FIXED INCOME SECURITIES

The fixed income securities in which Micro Cap Value Fund may invest include
securities issued or guaranteed by the United States Government or its agencies
or instrumentalities, nonconvertible preferred stocks, nonconvertible corporate
debt securities, and short-term obligations of the kinds described above under
"-- Cash Items." Investments in nonconvertible preferred stocks and
nonconvertible corporate debt obligations will be limited to securities which
are rated at the time of purchase not less than BBB by Standard & Poor's or Baa
by Moody's (or equivalent short-term ratings), or which have been assigned an
equivalent rating by another nationally recognized statistical rating
organization, or which are of comparable quality in the judgment of the Adviser.
Obligations rated BBB, Baa or their equivalent, although investment grade, have
speculative characteristics and carry a somewhat higher risk of default than
obligations rated in the higher investment grade categories. In addition, Micro
Cap Value Fund may invest up to 5% of its net assets in less than investment
grade convertible debt obligations.

The fixed income securities specified above are subject to interest rate risk,
credit risk, and call or prepayment risk. The nature of these risks is discussed
above under "Investment Objectives and Policies -- Risks to Consider -- Tax Free
Funds."

FOREIGN SECURITIES

GENERAL. As described under "Investment Objective and Policies -- Micro Cap
Value Fund," Micro Cap Value Fund may invest up to 25% of its total assets in
securities of foreign issuers which are either listed on a United States
securities exchange or represented by American Depositary Receipts.

<PAGE>

practices (including higher trading commissions, custodial charges and delayed
settlements). Foreign securities also may be subject to greater fluctuations in
price than securities issued by United States corporations. The principal
markets on which these securities trade may have less volume and liquidity, and
may be more volatile, than securities markets in the United States.

In addition, there may be less publicly available information about a foreign
company than about a United States domiciled company. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to United States domestic
companies. There is also generally less government regulation of securities
exchanges, brokers and listed companies abroad than in the United States.
Confiscatory taxation or diplomatic developments could also affect investment in
those countries. In addition, foreign branches of United States banks, foreign
banks and foreign issuers may be subject to less stringent reserve requirements
and to different accounting, auditing, reporting, and recordkeeping standards
than those applicable to domestic branches of United States banks and United
States domestic issuers.

AMERICAN DEPOSITARY RECEIPTS. For many foreign securities, United States
dollar-denominated American Depositary Receipts, which are traded in the United
States on exchanges or over-the-counter, are issued by domestic banks. American
Depositary Receipts represent the right to receive securities of foreign issuers
deposited in a domestic bank or a correspondent bank. American Depositary
Receipts do not eliminate all the risk inherent in investing in the securities
of foreign issuers. However, by investing in American Depositary Receipts rather
than directly in foreign issuers' stock, the Fund can avoid currency risks
during the settlement period for either purchases or sales. In general, there is
a large, liquid market in the United States for many American Depositary
Receipts. The information available for American Depositary Receipts is subject
to the accounting, auditing and financial reporting standards of the domestic
market or exchange on which they are traded, which standards are more uniform
and more exacting than those to which many foreign issuers may be subject.

Certain American Depositary Receipts, typically those denominated as
unsponsored, require the holders thereof to bear most of the costs of the
facilities while issuers of sponsored facilities normally pay more of the costs
thereof. The depository of an unsponsored facility frequently is under no
obligation to distribute shareholder communications received from the issuer of
the deposited securities or to pass through the voting rights to facility
holders in respect to the deposited securities, whereas the depository of a
sponsored facility typically distributes shareholder communications and passes
through voting rights.

PORTFOLIO TRANSACTIONS

Portfolio transactions in the over-the-counter market will be effected with
market makers or issuers, unless better overall price and execution are

<PAGE>

available through a brokerage transaction. It is anticipated that most portfolio
transactions involving debt securities will be executed on a principal basis.
Also, with respect to the placement of portfolio transactions with securities
firms, subject to the overall policy to seek to place portfolio transactions as
efficiently as possible and at the best price, research services and placement
of orders by securities firms for a Fund's shares may be taken into account as a
factor in placing portfolio transactions for the Fund.

PORTFOLIO TURNOVER

Although the Funds do not intend generally to trade for short-term profits, they
may dispose of a security without regard to the time it has been held when such
action appears advisable to the Adviser. The portfolio turnover rate for a Fund
may vary from year to year and may be affected by cash requirements for
redemptions of shares. High portfolio turnover rates generally would result in
higher transaction costs and could result in additional tax consequences to a
Fund's shareholders.

INVESTMENT RESTRICTIONS

The fundamental and nonfundamental investment restrictions of the Funds are set
forth in full in the Statement of Additional Information. The fundamental
restrictions include the following:

* None of the Funds will borrow money, except from banks for temporary or
emergency purposes. The amount of such borrowing may not exceed 10% of
the borrowing Fund's total assets. None of the Funds will borrow money
for leverage purposes. For the purpose of this investment restriction,
the use of options and futures transactions and the purchase of
securities on a when-issued or delayed-delivery basis shall not be
deemed the borrowing of money. If a Fund engages in borrowing, its
share price may be subject to greater fluctuation, and the interest
expense associated with the borrowing may reduce the Fund's net income.

* None of the Funds will mortgage, pledge or hypothecate its assets,
except in an amount not exceeding 15% of the value of its total assets
to secure temporary or emergency borrowing.

* None of the Funds will make short sales of securities.

* None of the Funds will purchase any securities on margin except to
obtain such short-term credits as may be necessary for the clearance of
transactions.

* Neither of the Tax Free Funds will invest 25% or more of the value of
its total assets in revenue bonds or notes, payment for which comes
from revenues from any one type of activity (for this purpose, the term

<PAGE>

"type of activity" shall include without limitation (i) sewage
treatment and disposal; (ii) gas provision; (iii) electric power
provision; (iv) water provision; (v) mass transportation systems; (vi)
housing; (vii) hospitals; (viii) nursing homes; (ix) street development
and repair; (x) toll roads; (xi) airport facilities; and (xii)
educational facilities), except that, in circumstances in which other
appropriate available investments may be in limited supply, such Funds
may invest without limitation in gas provision, electric power
provision, water provision, housing and hospital obligations. This
restriction does not apply to general obligation bonds or notes. This
restriction does not apply to securities of the United States
Government or its agencies and instrumentalities or repurchase
agreements relating thereto.

A fundamental policy or restriction, including those stated above, cannot be
changed without an affirmative vote of the holders of a "majority" of the
outstanding shares of the applicable Fund, as defined in the 1940 Act.

As a nonfundamental policy, none of the Funds will invest more than 15% of its
net assets in all forms of illiquid investments, as determined pursuant to
applicable Securities and Exchange Commission rules and interpretations. Section
4(2) commercial paper and Rule 144A securities may be determined to be "liquid"
under guidelines adopted by the Board of Directors. Investing in Rule 144A
securities could have the effect of increasing the level of illiquidity in a
Fund to the extent that qualified institutional buyers become, for a time,
uninterested in purchasing these securities.

INFORMATION CONCERNING COMPENSATION PAID TO FIRST TRUST NATIONAL
ASSOCIATION AND ITS AFFILIATES

First Trust National Association ("First Trust") may act as fiduciary with
respect to plans subject to the Employee Retirement Income Security Act of 1974
("ERISA") which invest in the Funds. This section sets forth information
concerning compensation that First Trust and its affiliates may receive from the
Funds.

First Trust, as custodian for the assets of the Funds, receives the custodian
fees specified herein under the caption "Management -- Custodian."

First Bank National Association, which is under common control with First Trust,
acts as investment adviser to the Funds and receives the advisory fees specified
herein under the caption "Management -- Investment Adviser."

First Trust and its affiliates may receive shareholder servicing fees in the
amounts specified herein under the caption "Distributor." First Trust also may
act as securities lending agent in connection with the Funds' securities lending
transactions and receive as compensation for such services, fees equal to 40% of
the Funds' income from such securities lending transactions.

<PAGE>

FIRST AMERICAN INVESTMENT FUNDS, INC.
Oaks, Pennsylvania 19456

INVESTMENT ADVISER
FIRST BANK NATIONAL ASSOCIATION
601 Second Avenue South
Minneapolis, Minnesota 55402

CUSTODIAN
FIRST TRUST NATIONAL ASSOCIATION
180 East Fifth Street
St. Paul, Minnesota 55101

DISTRIBUTOR
SEI INVESTMENTS DISTRIBUTION CO.
Oaks, Pennsylvania 19456

ADMINISTRATOR
SEI FINANCIAL MANAGEMENT CORPORATION
Oaks, Pennsylvania 19456

TRANSFER AGENT
DST SYSTEMS, INC.
1004 Baltimore
Kansas City, Missouri 64105

INDEPENDENT AUDITORS
KPMG PEAT MARWICK LLP
90 South Seventh Street
Minneapolis, Minnesota 55402

COUNSEL
DORSEY & WHITNEY LLP
220 South Sixth Street
Minneapolis, Minnesota 55402

FAIF-1502(1/97)I

<PAGE>

FIRST AMERICAN INVESTMENT FUNDS, INC.

RETAIL CLASSES

CALIFORNIA INTERMEDIATE TAX
FREE FUND

MICRO CAP VALUE FUND

PROSPECTUS

AUGUST 5, 1997

[LOGO]
FIRST AMERICAN FUNDS
THE POWER OF DISCIPLINED INVESTING

FIRST AMERICAN INVESTMENT FUNDS, INC.
Oaks, Pennsylvania 19456

RETAIL CLASSES PROSPECTUS

* CALIFORNIA INTERMEDIATE TAX FREE FUND

* MICRO CAP VALUE FUND

This Prospectus also relates to the Class B Shares of Micro Cap Value Fund.

This Prospectus concisely sets forth information about the Funds that a
prospective investor should know before investing. It should be read and
retained for future reference.

The date of this Prospectus is August 5, 1997.

<PAGE>

TABLE OF CONTENTS

PAGE
----
SUMMARY 4

FEES AND EXPENSES 7
Class A Share Fees and Expenses 7
Class B Share Fees and Expenses 8
Information Concerning Fees and
Expenses 9

THE FUNDS 10

INVESTMENT OBJECTIVES AND POLICIES 10
California Intermediate Tax Free Fund 11
Micro Cap Value Fund 12
Risks to Consider 13

MANAGEMENT 16
Investment Adviser 16
Portfolio Managers 17
Custodian 18
Administrator 19
Transfer Agent 19

DISTRIBUTOR 19

INVESTING IN THE FUNDS 21
Share Purchases 21
Minimum Investment Required 22
Alternative Sales Charge
Options 22
Systematic Exchange Program 27
Systematic Investment Program 28
Exchanging Securities for
Fund Shares 28
Certificates and Confirmations 28
Dividends and Distributions 28
Exchange Privilege 29

REDEEMING SHARES 31
By Telephone 31
By Mail 32
By Systematic Withdrawal Program 33
Redemption Before Purchase
Instruments Clear 33
Accounts with Low Balances 34

DETERMINING THE PRICE OF SHARES 34
Determining Net Asset Value 34

INCOME TAXES 35
Federal Income Taxation 35
California Income Taxation 37
Other State and Local Taxation 38

CALIFORNIA INTERMEDIATE TAX FREE
FUND: TAX-EXEMPT VS. TAXABLE INCOME 38

FUND SHARES 38

CALCULATION OF PERFORMANCE DATA 39

PERFORMANCE INFORMATION FOR
SUCCESSORS TO COMMON TRUST FUNDS 41

SPECIAL INVESTMENT METHODS 42
Municipal Bonds and Other Municipal
Obligations 42
Temporary Taxable Investments 44
Repurchase Agreements 44
Inverse Floating Rate Obligations 45
When-Issued and Delayed-Delivery
Transactions 45
Lending of Portfolio Securities 46
Options Transactions 46
Cash Items 49
Fixed Income Securities 49
Foreign Securities 50
Portfolio Transactions 51
Portfolio Turnover 51
Investment Restrictions 51
Information Concerning Compensation
Paid to First Trust National
Association and its Affiliates 53

<PAGE>

SUMMARY

First American Investment Funds, Inc. ("FAIF") is an open-end investment
company which offers shares in several different mutual funds. This
Prospectus provides information with respect to the Class A Shares and, in
the case of the last-named fund, the Class B Shares, of the following funds
(the "Funds"):

INVESTMENT ADVISER First Bank National Association (the "Adviser") serves as
investment adviser to each of the Funds. See "Management."

OFFERING PRICES Class A Shares of the Funds are sold at net asset value plus a
maximum sales charge of 3.00% in the case of California Intermediate Tax Free
Fund and 4.50% in the case of Micro Cap Value Fund. These sales charges are
reduced on purchases of $50,000 or more. Purchases of $1 million or more of
Class A Shares are not subject to an initial sales charge, but a contingent
deferred sales charge of 1.00% will be imposed on such purchases in the event of
redemption within 24 months following the purchase. Class A Shares of the Funds
otherwise are redeemed at net asset value without any additional charge. Class A
Shares of each Fund are subject to a shareholder servicing fee computed at an
annual rate of 0.25% of the average daily net assets of that class. See
"Investing in the Funds -- Alternative Sales Charge Options."

<PAGE>

Class B Shares of Micro Cap Value Fund are sold at net asset value without an
initial sales charge. Class B Shares of such Fund are subject to Rule 12b-1
distribution and shareholder servicing fees computed at an annual rate totaling
1.00% of the average daily net assets of that class. If Class B Shares are
redeemed within six years after purchase, they are subject to a contingent
deferred sales charge declining from 5.00% in the first year to zero after six
years. Class B Shares automatically convert into Class A Shares approximately
eight years after purchase. California Intermediate Tax Free Fund does not offer
Class B Shares. See "Investing in the Funds -- Alternative Sales Charge
Options."

MINIMUM INITIAL AND SUBSEQUENT INVESTMENTS The minimum initial investment is
$1,000 ($250 for IRAs) for each Fund. Subsequent investments must be $100 or
more. Regular investment in the Funds is simplified through the Systematic
Investment Program through which monthly purchases of $100 or more are possible.
See "Investing in the Funds -- Minimum Investment Required" and "-- Systematic
Investment Program."

EXCHANGES Shares of either Fund may be exchanged for the same class of shares of
other funds in the First American family at the shares' respective net asset
values with no additional charge. See "Investing in the Funds -- Exchange
Privilege."

REDEMPTIONS Shares of each Fund may be redeemed at any time at their net asset
value next determined after receipt of a redemption request by the Funds'
transfer agent, less any applicable contingent deferred sales charge. Each Fund
may, upon 60 days written notice, redeem an account if the account's net asset
value falls below $500. See "Investing in the Funds" and "Redeeming Shares."

RISKS TO CONSIDER California Intermediate Tax Free Fund is subject to (i)
interest rate risk (the risk that increases in market interest rates will cause
declines in the value of debt securities held by a Fund); (ii) credit risk (the
risk that the issuers of debt securities held by a Fund default in making
required payments); and (iii) call or prepayment risk (the risk that a borrower
may exercise the right to prepay a debt obligation before its stated maturity,
requiring a Fund to reinvest the prepayment at a lower interest rate).

In addition, the value of municipal obligations held by California Intermediate
Tax Free Fund may be adversely affected by local political and economic
conditions and developments in the state and political subdivisions which issue
the obligations. Investors should note in this regard that California
Intermediate Tax Free Fund invests primarily in municipal obligations of issuers
located in California. California Intermediate Tax Free Fund also may, in order
to attempt to reduce risk, invest in exchange traded put and call options on
interest rate futures contracts and on interest rate indices. See "Investment
Objectives and Policies -- Risks to Consider -- California Intermediate Tax Free
Fund" and "Special Investment Methods."

<PAGE>

FEES AND EXPENSES

CLASS A SHARE FEES AND EXPENSES

CALIFORNIA
INTERMEDIATE MICRO CAP
TAX FREE FUND VALUE FUND

SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on purchases
(as a percentage of offering price)(1) 3.00% 4.50%

Maximum sales load imposed on reinvested
dividends None None

Deferred sales load None None

Redemption fees None None

Exchange fees None None

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

Investment advisory fees
(after voluntary fee waivers )(2) 0.00% 0.63%

Rule 12b-1 fees (after voluntary fee
waivers)(2) 0.00% 0.25%

Other expenses (after
reimbursements)(2) 0.70% 0.27%

Total fund operating expenses
(after voluntary fee waivers and
reimbursements)(2) 0.70% 1.15%

EXAMPLE(3)

You would pay the following expenses on a $1,000 investment, assuming (i) the
maximum applicable sales charge for all funds; (ii) a 5% annual return; and
(iii) redemption at the end of each time period:

1 year $ 37 $ 56
3 years $ 52 $ 80

(1) The rules of the Securities and Exchange Commission require that the
maximum sales charge be reflected in the above table. However, certain
investors may qualify for reduced sales charges. Purchases of $1
million or more of Class A Shares are not subject to an initial sales
charge, but a contingent deferred sales charge of 1.00% will be imposed
on such purchases in the event of redemption within 24 months following
the purchase. See "Investing in the Funds -- Alternative Sales Charge
Options."

(2) The Adviser and the Distributor intend to waive a portion of their fees
and/or reimburse expenses on a voluntary basis, and the amounts shown
reflect these waivers and reimbursements as of the date of this
Prospectus. Each of these persons intends to maintain such waivers and
reimbursements in effect through September 30, 1998, but reserves the
right to discontinue such waivers and reimbursements at any time in
their sole discretion. Absent any fee waivers or reimbursements,
investment advisory fees for each Fund as an annualized percentage of
average daily net assets would be 0.70%; Rule 12b-1 fees calculated on
such basis would be 0.25%; other expenses calculated on such basis
would be 0.71% for California Intermediate Tax Free Fund and 0.27% for
Micro Cap Value Fund; and total fund operating expenses calculated on
such basis would be 1.66% for California Intermediate Tax Free Fund and
1.22% for Micro Cap Value Fund. "Other expenses" includes an
administration fee and is based on estimated amounts for the current
fiscal year.

<PAGE>

(3) Absent the fee waivers and reimbursements referred to in (1) above, the
dollar amounts for the 1- and 3-year periods would be as follows:
California Intermediate Tax Free Fund, $46 and $81; and Micro Cap Value
Fund, $57 and $82.

CLASS B SHARE FEES AND EXPENSES

MICRO CAP
VALUE FUND

SHAREHOLDER TRANSACTION EXPENSES

Maximum sales load imposed on purchases
(as a percentage of offering price) None

Maximum sales load imposed on reinvested dividends None

Maximum contingent deferred sales charge (as a
percentage of original purchase price or redemption
proceeds, as applicable) 5.00%

Redemption fees None

Exchange fees None

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

Investment advisory fees
(after voluntary fee waivers)(1) 0.63%

Rule 12b-1 fees 1.00%(2)

Other expenses(1) 0.27%

Total fund operating expenses
(after voluntary fee waivers)(1) 1.90%

EXAMPLE

ASSUMING REDEMPTION(3)

You would pay the following expenses on a $1,000 investment, assuming (i) a 5%
annual return; (ii) redemption at the end of each time period; and (iii) payment
of the maximum applicable contingent deferred sales charge of 5% in year 1 and
4% in year 3:

1 year $ 69
3 years $100

ASSUMING NO REDEMPTION(4)

You would pay the following expenses on the same investment, assuming no
redemption:

1 year $ 19
3 years $ 60

(1) The Adviser intends to waive a portion of its fees on a voluntary
basis, and the amounts shown reflect these waivers as of the date of
this Prospectus. The Adviser intends to maintain such waivers in effect
through September 30, 1998 but reserves the right to discontinue such
waivers at any time in its sole discretion. Absent any fee waivers,
investment advisory fees as an annualized percentage of average daily
net assets would be 0.70%: and total fund operating expenses would be
1.97%. "Other expenses" includes an administration fee and is based on
estimated amounts for the current fiscal year.

(2) Of this amount, 0.25% is designated as a shareholder servicing fee and
0.75% as a distribution fee.

<PAGE>

(3) Absent the fee waivers and reimbursements referred to in (1) above, the
dollar amounts for the 1 and 3-year periods would be $70 and $102,
respectively.

(4) Absent the fee waivers and reimbursements referred to in (1) above, the
dollar amounts for the 1 and 3-year periods would be $20 and $62,
respectively.

INFORMATION CONCERNING FEES AND EXPENSES

The purpose of the preceding tables is to assist the investor in understanding
the various costs and expenses that an investor in a Fund may bear directly or
indirectly. THE EXAMPLES CONTAINED IN THE TABLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN. The information set forth in the foregoing tables and
examples relates only to the Class A Shares of the Funds and the Class B Shares
of Micro Cap Value Fund. The Funds also offer Class C Shares which are subject
to the same expenses except that they bear no sales loads or shareholder
servicing fees.

The examples in the above tables are based on annual Fund operating expenses
after voluntary fee waivers and expense reimbursements by the Adviser and the
Distributor. Although these persons intend to maintain such waivers in effect
through September 30, 1998, any such waivers are voluntary and may be
discontinued at any time. Prior to fee waivers, investment advisory fees accrue
at the annual rate as a percentage of average daily net assets of 0.70% for each
of the Funds. "Other expenses" in the tables are based on estimates.

The Class A Shares of each Fund pay shareholder servicing fees to the
Distributor in an amount equaling 0.25% per year of each such class's average
daily net assets (which fees currently are being waived), and the Class B Shares
of Micro Cap Value Fund bear distribution and shareholder servicing fees
totaling 1.00% per year of such class's average daily net assets. The
Distributor also receives the sales charge for distributing the Funds' Class A
Shares. Due to the distribution and shareholder servicing fees paid by the Class
B Shares, long-term shareholders may pay more than the equivalent of the maximum
front-end sales charges otherwise permitted by NASD rules. For additional
information, see "Distributor."

<PAGE>

THE FUNDS

This Prospectus relates only to the Class A and, in the case of Micro Cap Value
Fund, the Class B Shares of the Funds named on the cover hereof. Information
regarding the Class C Shares of these Funds and regarding the Class A, Class B
and Class C Shares of the other FAIF Funds is contained in separate prospectuses
that may be obtained from FAIF's Distributor, SEI Financial Services Company,
Oaks, Pennsylvania 19456, or by calling (800) 637-2548. The Board of Directors
of FAIF may authorize additional series or classes of common stock in the
future.

INVESTMENT OBJECTIVES AND POLICIES

This section describes the investment objectives and policies of the Funds.
There is no assurance that any of these objectives will be achieved. The Funds'
investment objectives are not fundamental and therefore may be changed without a
vote of shareholders. Such changes could result in a Fund having investment
objectives different from those which shareholders considered appropriate at the
time of their investment in a Fund. Shareholders will receive written
notification at least 30 days prior to any change in a Fund's investment
objectives. Micro Cap Value Fund is a diversified investment company, as defined
in the Investment Company Act of 1940 (the "1940 Act"). California Intermediate
Tax Free Fund is a nondiversified investment company under the 1940 Act.

<PAGE>

so. However, in no event will more than 5% of any Fund's net assets be invested
in non-investment grade securities. Descriptions of the rating categories of
Standard & Poor's Corporation ("Standard & Poor's") and Moody's Investors
Service, Inc. ("Moody's") are contained in the Statement of Additional
Information.

CALIFORNIA INTERMEDIATE TAX FREE FUND

OBJECTIVE. California Intermediate Tax Free Fund has an objective of providing
current income which is exempt from both federal income tax and California state
income tax to the extent consistent with preservation of capital.

INVESTMENT POLICIES. Under normal market conditions, California Intermediate Tax
Free Fund invests at least 80% of its net assets in municipal bonds and other
municipal obligations of the state referred to in its title, the interest on
which is, in the opinion of bond counsel to the issuer, exempt from federal
income tax and that state's income tax. No more than 20% of the securities owned
by this Fund will generate income that is an item of tax preference for the
purpose of the federal alternative minimum tax. Municipal obligations generating
income subject to taxation under the federal alternative minimum tax rules will
not be counted as tax exempt obligations for purposes of the 80% test. See
"Income Taxes." The types of municipal bonds and other municipal obligations in
which this Fund may invest are described under "Special Investment Methods --
Municipal Bonds and Other Municipal Obligations."

Under normal market conditions, the weighted average maturity of the securities
held by California Intermediate Tax Free Fund will range from 3 to 10 years.

California Intermediate Tax Free Fund may purchase obligations which are rated
(without regard to insurance) no lower than BBB by Standard & Poor's or Baa by
Moody's, or which have been assigned an equivalent rating by another nationally
recognized statistical rating organization, or which are of comparable quality
in the judgment of the Adviser. This Fund also may purchase municipal notes
which are rated no lower than SP-1 by Standard &

<PAGE>

Poor's or MIG/VMIG-1 by Moody's or which have been assigned an equivalent rating
by another nationally recognized statistical rating organization. Unrated
securities will not exceed 10% in the aggregate of the value of the total assets
of either of these Funds.

While the assets of California Intermediate Tax Free Fund ordinarily will be
invested in municipal obligations, on occasion this Fund may temporarily hold
short-term securities, other than municipal obligations, the income from which
is taxable. Temporary taxable investments would be held solely for the purpose
of managing exceptional in-flows and out-flows of cash or for temporary
defensive purposes to preserve existing portfolio values. Under normal
circumstances, this Fund may not invest more than 20% of its assets in
investments other than municipal obligations. However, in periods of adverse
markets when a temporary defensive position to protect capital is deemed
advisable and practicable, this Fund may have more than 20% (and up to 100%) of
its assets in temporary taxable investments or cash. The types of investments
which are permitted for these purposes are described under "Special Investment
Methods -- Temporary Taxable Investments."

California Intermediate Tax Free Fund also may temporarily invest in shares of
investment companies which invest primarily in short-term municipal obligations
with maturities not exceeding 13 months. Investments of these types are also
subject to the advisory fee. Such investments may include tax free money market
funds advised by the Adviser. Income from these investments is normally exempt
from federal income tax but may not be exempt from the applicable state tax.
Where the income from these investments is exempt from both federal income tax
and the applicable state tax, the investments will be counted as tax exempt
obligations for purposes of the 80% test described above.

California Intermediate Tax Free Fund also may (i) in order to attempt to reduce
risk, invest in exchange traded put and call options on interest rate futures
contracts and on interest rate indices; (ii) purchase securities on a
when-issued or delayed-delivery basis; (iii) engage in the lending of portfolio
securities; and (iv) invest up to 5% of its net assets in inverse floating rate
municipal obligations. For information about these investment methods,
restrictions on their use, and certain associated risks, see the related
headings under "Special Investment Methods."

MICRO CAP VALUE FUND

OBJECTIVE. Micro Cap Value Fund has an objective of capital appreciation.

INVESTMENT POLICIES. Under normal market conditions, Micro Cap Value Fund
invests at least 65% of its total assets in equity securities of very small-

<PAGE>

capitalization companies. For these purposes, very small-capitalization
companies are deemed those with market capitalizations of less than $500
million. In selecting equity securities, the Adviser utilizes a value-based
selection discipline, investing in equity securities it believes are undervalued
relative to other securities at the time of purchase. In assessing relative
value, the Adviser will consider such factors as ratios of market price to book
value, market price to earnings, and market price to assets; estimated earnings
growth rate; cash flow; and liquidation value.

RISKS TO CONSIDER

CALIFORNIA INTERMEDIATE TAX FREE FUND. An investment in California Intermediate
Tax Free Fund involves certain risks. These include the following:

INTEREST RATE RISK. Interest rate risk is the risk that the value of a
fixed-rate debt security will decline due to changes in market interest rates.
Because California Intermediate Tax Free Fund invests in fixed-rate debt
securities, it is subject to interest rate risk. In general, when interest rates
rise, the value of a fixed-rate debt security declines. Conversely, when
interest rates decline, the

<PAGE>

value of a fixed-rate debt security generally increases. Thus, shareholders in
this Fund bear the risk that increases in market interest rates will cause the
value of the Fund's portfolio investments to decline.

Although the Adviser may engage in transactions intended to hedge the value of
the Fund's portfolios against changes in market interest rates, there is no
assurance that such hedging transactions will be undertaken or will fulfill
their purpose. See "Special Investment Methods -- Options Transactions."

CREDIT RISK. Credit risk is the risk that the issuer of a debt security will
fail to make payments on the security when due. Because California Intermediate
Tax Free Fund invests in debt securities, it is subject to credit risk.

As described under "Special Investment Methods -- Municipal Bonds and Other
Municipal Obligations," the revenue bonds and municipal lease obligations in
which the Fund invest may entail greater credit risk than the general obligation
bonds in which they invest. This is the case because revenue bonds and municipal
lease obligations generally are not backed by the faith, credit or general
taxing power of the issuing governmental entity. In addition, as described under
that section, municipal lease obligations also are subject to nonappropriation
risk, which is a type of nonpayment risk. Investors also should note that even
general obligation bonds of the states and their political subdivisions are not
free from the risk of default.

The ratings and certain other requirements which apply to this Fund's permitted
investments, as described elsewhere in this Prospectus, are intended to limit
the amount of credit risk undertaken by the Fund. Nevertheless, shareholders in
the Fund bear the risk that payment defaults could cause the value of the Fund's
portfolio investments to decline. Investors also should note that the Fund can
invest in municipal obligations rated as low as BBB by Standard & Poor's or Baa
by Moody's, or which have been assigned an equivalent rating by another
nationally recognized statistical rating organization, or which are of
comparable quality in the judgment of the Adviser. Although these rating
categories are investment grade, obligations with these ratings are viewed as
having speculative characteristics and carry a somewhat higher risk of default
than obligations rated in the higher investment grade categories.

<PAGE>

CALL RISK. Many municipal bonds may be redeemed at the option of the issuer
("called") at a specified price prior to their stated maturity date. In general,
it is advantageous for an issuer to call its bonds if they can be refinanced
through the issuance of new bonds which bear a lower interest rate than that of
the called bonds. Call risk is the risk that bonds will be called during a
period of declining market interest rates so that such refinancings may take
place.

If a bond held by California Intermediate Tax Free Fund is called during a
period of declining interest rates, the Fund probably will have to reinvest the
proceeds received by it at a lower interest rate than that borne by the called
bond, thus resulting in a decrease in the Fund's income. To the extent that the
Fund invests in callable bonds, Fund shareholders bear the risk that reductions
in income will result from the call of bonds.

STATE AND LOCAL POLITICAL AND ECONOMIC CONDITIONS. The value of municipal
obligations owned by California Intermediate Tax Free Fund may be adversely
affected by local political and economic conditions and developments. Adverse
conditions in an industry significant to a local economy could have a
correspondingly adverse effect on the financial condition of local issuers.
Other factors that could affect tax-exempt obligations include a change in the
local, state or national economy, demographic factors, ecological or
environmental concerns, statutory limitations on the issuer's ability to
increase taxes and other developments generally affecting the revenues of
issuers (for example, legislation or court decisions reducing state aid to local
governments or mandating additional services).

California Intermediate Tax Free Fund will invest primarily in municipal
obligations issued by the state of California and its political subdivisions.
For this reason, the municipal obligations held by this Fund will be
particularly affected by local conditions in that state. A more detailed
description of the factors affecting California issuers of municipal obligations
is set forth in the Statement of Additional Information.

OTHER. Investors also should review "Special Investment Methods" for information
concerning risks associated with certain investment techniques which may be
utilized by California Intermediate Tax Free Fund.

<PAGE>

MICRO CAP VALUE FUND. An investment in Micro Cap Value Fund involves certain
risks. These include the following:

VERY SMALL-CAPITALIZATION COMPANIES. Micro Cap Value Fund emphasizes investments
in companies with very small market capitalizations. The equity securities of
such companies frequently have experienced greater price volatility in the past
than those of larger-capitalization companies, and they may be expected to do so
in the future. In addition, such companies may be at an earlier stage of their
development and followed by fewer investors than small-, mid- or
large-capitalization companies, thus increasing the potential for volatility in
their market prices.

ACTIVE MANAGEMENT. Cap Value Fund is actively managed by the Adviser. The
performance of this Fund therefore will reflect in part the ability of the
Adviser to select securities which are suited to achieving the Fund's investment
objective. Due to its active management, this Fund could underperform other
mutual funds with similar investment objectives or the market generally.

OTHER. Investors also should review "Special Investment Methods" for information
concerning risks associated with certain investment techniques which may be
utilized by Micro Cap Value Fund.

MANAGEMENT

INVESTMENT ADVISER

<PAGE>

with an aggregate value of approximately $35 billion, including mutual fund
assets in excess of $12 billion. First Bank System, Inc., 601 Second Avenue
South, Minneapolis, Minnesota 55480, is the holding company for the Adviser.

Although the scope of the prohibitions and limitations imposed by the
Glass-Steagall Act has not been fully defined by the courts or the appropriate
regulatory agencies, the Funds have received an opinion from their counsel that
the Adviser is not prohibited from performing the investment advisory services
described above, and that FBS Investment Services, Inc. ("ISI"), a wholly owned
broker-dealer subsidiary of the Adviser, is not prohibited from serving as a
Participating Institution as described herein. In the event of changes in
federal or state statutes or regulations or judicial and administrative
interpretations or decisions pertaining to permissible activities of bank
holding companies and their bank and nonbank subsidiaries, the Adviser and ISI
might be prohibited from continuing these arrangements. In that event, it is
expected that the Board of Directors would make other arrangements and that
shareholders would not suffer adverse financial consequences.

PORTFOLIO MANAGERS

CHRISTOPHER L. DRAHN is portfolio co-manager for California Intermediate Tax
Free Fund. Chris joined the fixed income department of the Adviser in 1985,

<PAGE>

having previously served in its securities lending and corporate trust areas. He
received his master's degree in business administration from the University of
Minnesota and is a Chartered Financial Analyst.

RICHARD W. STANLEY is portfolio co-manager for California Intermediate Tax Free
Fund. Dick entered the investment business via sales with Smith Barney & Co. in
1958. He then moved to Heritage Investment Advisers as head of fixed income
investment in 1973. He joined the Adviser in early 1986 as Vice President and
Manager of Fixed Income/Personal Trust. Dick received his master's degree in
business administration from Cornell University in 1958 and received his
Chartered Financial Analyst certification in 1977.

Micro Cap Value Fund is managed by a committee composed of Albin S. Dubiak,
Roland P. Whitcomb and Jeff A. Johnson.

ALBIN S. DUBIAK began his investment career as a security trader with the First
National Bank of Chicago in 1963 before joining First Bank as an investment
analyst in 1969. Mr. Dubiak received his bachelor's degree from Indiana
University and his master's degree in business administration from the
University of Arizona. Mr. Dubiak also is portfolio co-manager for three other
First American equity funds and is a member of the committees which manage five
other First American equity funds.

ROLAND B. WHITCOMB joined First Bank in 1986 after serving as an account
executive with Smith Barney & Co. since 1979. He received his bachelor's degree
from the University of Chicago and is a Chartered Financial Analyst. Mr.
Whitcomb also is portfolio co-manager for two other First American equity funds
and is a member of the committees which manage five other First American equity
funds.

JEFF A. JOHNSON has been employed by First Bank in investment management since
1991 and in commercial lending from 1985 to 1991. Mr. Johnson received his
master of fine arts degree from the University of Iowa. Mr. Johnson also is
portfolio co-manager for two other First American equity funds and is a member
of the committee which manages three other First American equity funds.

CUSTODIAN

As compensation for its services to the Funds, the Custodian is paid monthly
fees calculated on an annual basis equal to 0.03% of the applicable Fund's

<PAGE>

average daily net assets. In addition, the Custodian is reimbursed by the Funds
for its out-of-pocket expenses incurred while providing its services to the
Funds.

ADMINISTRATOR

The administrator for the Funds is SEI Financial Management Corporation, Oaks,
Pennsylvania 19456. The Administrator, a wholly-owned subsidiary of SEI
Investments Company, provides the Funds with certain administrative services
necessary to operate the Funds. These services include shareholder servicing and
certain accounting and other services. The Administrator provides these services
for a fee calculated at an annual rate of 0.12% of each Fund's average daily net
assets, subject to a minimum administrative fee during each fiscal year of
$50,000 per Fund; provided, that to the extent that the aggregate net assets of
all First American funds exceed $8 billion, the percentage stated above is
reduced to 0.105%. From time to time, the Administrator may voluntarily waive
its fees or reimburse expenses with respect to any of the Funds. Any such
waivers or reimbursements may be made at the Administrator's discretion and may
be terminated at any time.

TRANSFER AGENT

DISTRIBUTOR

SEI Investments Distribution Co. is the principal distributor for shares of
the Funds and of the other FAIF Funds. The Distributor is a Pennsylvania
corporation and is the principal distributor for a number of investment
companies. The Distributor is a wholly-owned subsidiary of SEI Investments
Company, and is located at Oaks, Pennsylvania 19456. The Distributor is not
affiliated with the Adviser, First Bank System, Inc., the Custodian or their
respective affiliates.

Shares of the Funds are distributed through the Distributor and securities
firms, financial institutions (including, without limitation, banks) and other
industry professionals (the "Participating Institutions") which enter into sales
agreements with the Distributor to perform share distribution or shareholder
support services.

<PAGE>

FAIF has adopted a Plan of Distribution for the Class A Shares pursuant to Rule
12b-1 under the 1940 Act (the "Class A Distribution Plan"). The Class A
Distribution Plan authorizes the Distributor to retain the sales charge paid
upon purchase of Class A Shares, except that portion which is reallowed to
Participating Institutions. See "Investing in the Funds -- Class A Share Price
and Sales Charge." Each Fund also pays the Distributor a shareholder servicing
fee monthly at an annual rate of 0.25% of the Fund's Class A Shares' average
daily net assets. The shareholder servicing fee is intended to compensate the
Distributor for ongoing servicing and/or maintenance of shareholder accounts and
may be used by the Distributor to provide compensation to institutions through
which shareholders hold their shares for ongoing servicing and/or maintenance of
shareholder accounts. The shareholder servicing fee may be used to provide
compensation for shareholder services provided by "one-stop" mutual fund
networks through which the Funds are made available. In addition, the
Distributor and the Adviser and its affiliates may provide compensation for
services provided by such networks from their own resources. From time to time,
the Distributor may voluntarily waive its fees with respect to the Class A
Shares of either of the Funds. Any such waivers may be made at the Distributor's
discretion and may be terminated at any time.

Under another distribution plan (the "Class B Distribution Plan") adopted in
accordance with Rule 12b-1 under the 1940 Act, Micro Cap Value Fund may pay to
the Distributor a sales support fee at an annual rate of up to 0.75% of the
average daily net assets of the Class B Shares of the Fund, which fee may be
used by the Distributor to provide compensation for sales support and
distribution activities with respect to Class B Shares of the Fund. This fee is
calculated and paid each month based on the average daily net assets for that
month. In addition to this fee, the Distributor is paid a shareholder servicing
fee of 0.25% of the average daily net assets of the Class B Shares pursuant to a
service plan (the "Class B Service Plan"), which fee may be used by the
Distributor to provide compensation for ongoing servicing and/or maintenance of
shareholder accounts with respect to Class B Shares of the Fund. Although Class
B Shares are sold without an initial sales charge, the Distributor pays a total
of 4.25% of the amount invested (including a prepaid service fee of 0.25% of the
amount invested) to dealers who sell Class B Shares (excluding exchanges from
other Class B Shares in the First American family). The service fee payable
under the Class B Service Plan is prepaid for the first year as described above.

The Class A and Class B Distribution Plans recognize that the Adviser, the
Administrator, the Distributor, and any Participating Institution may in their
discretion use their own assets to pay for certain additional costs of
distributing Fund shares. Any arrangement to pay such additional costs may

<PAGE>

be commenced or discontinued by any of these persons at any time. In addition,
while there is no sales charge on purchases of Class A Shares of $1 million and
more, the Adviser may pay amounts to broker-dealers from its own assets with
respect to such sales. ISI, a subsidiary of the Adviser, is a Participating
Institution.

INVESTING IN THE FUNDS

SHARE PURCHASES

Shares of the Funds are sold at their net asset value, next determined after an
order is received, plus any applicable sales charge, on days on which the New
York Stock Exchange is open for business. Shares may be purchased as described
below. The Funds reserve the right to reject any purchase request.

THROUGH A FINANCIAL INSTITUTION. Shares may be purchased through a financial
institution which has a sales agreement with the Distributor. An investor may
call his or her financial institution to place an order. Purchase orders must be
received by the financial institution by the time specified by the institution
to be assured same day processing, and purchase orders must be transmitted to
and received by the Funds by 3:00 p.m. Central time in order for shares to be
purchased at that day's price. It is the financial institution's responsibility
to transmit orders promptly.

Certain brokers assist their clients in the purchase or redemption of shares
and charge a fee for this service.

BY MAIL. An investor may place an order to purchase shares of the Funds directly
through the Transfer Agent. Orders by mail will be executed upon receipt of
payment by the Transfer Agent. If an investor's check does not clear, the
purchase will be cancelled and the investor could be liable for any losses or
fees incurred. Third-party checks, credit cards, credit card checks and cash
will not be accepted. When purchases are made by check, the proceeds of
redemptions of the shares purchased are not available until the Transfer Agent
is reasonably certain that the purchase payment has cleared, which could take up
to ten calendar days from the purchase date. In order to purchase shares by
mail, an investor must:

* complete and sign the new account form;

* enclose a check made payable to (Fund name); and

* mail both to DST Systems, Inc., P.O. Box 419382, Kansas City, Missouri
64141-6382.

<PAGE>

After an account is established, an investor can purchase shares by mail by
enclosing a check and mailing it to DST Systems, Inc. at the above address.

BY WIRE. To purchase shares of a Fund by wire, call (800) 637-2548 before 3:00
p.m. Central time. All information needed will be taken over the telephone, and
the order will be considered placed when the Custodian receives payment by wire.
If the Custodian does not receive the wire by 3:00 p.m. Central time, the order
will be executed the next business day. Federal funds should be wired as
follows: First Bank National Association, Minneapolis, Minnesota, ABA Number
091000022; For Credit to: DST Systems, Account Number 160234580266; For Further
Credit To: (Investor Name and Fund Name). Shares cannot be purchased by Federal
Reserve wire on days on which the New York Stock Exchange is closed and on
federal holidays upon which wire transfers are restricted.

MINIMUM INVESTMENT REQUIRED

The minimum initial investment for each Fund is $1,000 unless the investment is
in a retirement plan, in which case the minimum investment is $250. The minimum
subsequent investment is $100. The Funds reserve the right to waive the minimum
investment requirement for employees of First Bank National Association, First
Trust National Association and First Bank System, Inc. and their respective
affiliates.

ALTERNATIVE SALES CHARGE OPTIONS

THE TWO ALTERNATIVES: OVERVIEW. An investor may purchase shares of a Fund at a
price equal to its net asset value plus a sales charge. In the case of Micro Cap
Value Fund, this sales charge may be imposed, at the investor's election, either
(i) at the time of the purchase (the Class A "initial sales charge
alternative"), or (ii) on a contingent deferred basis (the Class B "deferred
sales charge alternative"). In the case of California Intermediate Tax Free
Fund, only the Class A initial sales charge alternative is available. Each of
Class A and Class B represents a Fund's interest in its portfolio of
investments. The classes have the same rights and are identical in all respects
except that (i) Class B Shares bear the expenses of the contingent deferred
sales charge arrangement and distribution and service fees resulting from such
sales arrangement, while Class A Shares bear only shareholder servicing fees;
(ii) each class has exclusive voting rights with respect to approvals of any
Rule 12b-1 distribution plan related to that specific class (although Class B
shareholders may vote on any distribution fees imposed on Class A Shares as long
as Class B Shares convert into Class A Shares); (iii) only Class B Shares carry
a conversion feature; and (iv) each class has different exchange privileges.
Sales personnel of financial institutions distributing the Funds' shares, and
other

<PAGE>

persons entitled to receive compensation for selling shares, may receive
differing compensation for selling Class A and Class B Shares.

These alternative purchase arrangements permit an investor in Micro Cap Value
Fund to choose the method of purchasing shares that is more beneficial to that
investor. The amount of a purchase, the length of time an investor expects to
hold the shares, and whether the investor wishes to receive dividends in cash or
in additional shares, will all be factors in determining which sales charge
option is best for a particular investor. An investor should consider whether,
over the time he or she expects to maintain the investment, the accumulated
sales charges on Class B Shares prior to conversion would be less than the
initial sales charge on Class A Shares, and to what extent the differential may
be offset by the expected higher yield of Class A Shares. Class A Shares will
normally be more beneficial to an investor if he or she qualifies for reduced
sales charges as described below. Accordingly, orders for Class B Shares of
Micro Cap Value Fund for $250,000 or more ordinarily will be treated as orders
for Class A Shares or declined.

The Directors of FAIF have determined that no conflict of interest currently
exists between the Class A and Class B Shares. On an ongoing basis, the
Directors, pursuant to their fiduciary duties under the 1940 Act and state laws,
will seek to ensure that no such conflict arises.

CLASS A SHARES.

WHAT CLASS A SHARES COST. Class A Shares of each Fund are offered on a
continuous basis at their next determined offering price, which is net asset
value, plus a sales charge as set forth below:

CALIFORNIA INTERMEDIATE TAX FREE FUND

MAXIMUM AMOUNT
OF SALES CHARGE
SALES CHARGE AS SALES CHARGE AS REALLOWED TO
PERCENTAGE OF PERCENTAGE OF PARTICIPATING
OFFERING PRICE NET ASSET VALUE INSTITUTIONS
-------------- --------------- ------------
Less than $50,000 3.00% 3.09% 2.70%
$50,000 but less than $100,000 2.50% 2.56% 2.25%
$100,000 but less than $250,000 2.00% 2.04% 1.80%
$250,000 but less than $500,000 1.50% 1.52% 1.35%
$500,000 but less than
$1,000,000 1.00% 1.01% 0.80%
$1,000,000 and over 0.00% 0.00% 0.00%

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MICRO CAP VALUE FUND

MAXIMUM AMOUNT
OF SALES CHARGE
SALES CHARGE AS SALES CHARGE AS REALLOWED TO
PERCENTAGE OF PERCENTAGE OF PARTICIPATING
OFFERING PRICE NET ASSET VALUE INSTITUTIONS
-------------- --------------- ------------
Less than $50,000 4.50% 4.71% 4.05%
$50,000 but less than $100,000 4.00% 4.17% 3.60%
$100,000 but less than $250,000 3.50% 3.63% 3.15%
$250,000 but less than $500,000 2.75% 2.83% 2.47%
$500,000 but less than
$1,000,000 2.00% 2.04% 1.80%
$1,000,000 and over 0.00% 0.00% 0.00%

There is no initial sales charge on purchases of Class A Shares of $1 million or
more. However, Participating Institutions will receive a commission of 1.00% on
such sales. Redemptions of Class A Shares purchased at net asset value within 24
months of purchase will be subject to a contingent deferred sales charge of
1.00% (unless a Participating Institution waived its commission on the initial
purchase). Class A Shares that are redeemed will not be subject to this
contingent deferred sales charge to the extent that the value of the shares
represents capital appreciation of Fund assets or reinvestment of dividends or
capital gain distributions.

Net asset value is determined at 3:00 p.m. Central time Monday through Friday
except on (i) days on which there are not sufficient changes in the value of a
Fund's portfolio securities that its net asset value might be materially
affected; (ii) days during which no shares are tendered for redemption and no
orders to purchase shares are received; and (iii) on the following federal
holidays: New Year's Day, Presidents' Day, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, and Christmas Day. In addition, net asset value will not
be calculated on Good Friday.

DEALER CONCESSION. A dealer will normally receive up to 90% of the applicable
sales charge. Any portion of the sales charge which is not paid to a dealer will
be retained by the Distributor. In addition, the Distributor may, from time to
time in its sole discretion, institute one or more promotional incentive
programs which will be paid by the Distributor from the sales charge it receives
or from any other source available to it. Under any such program, the
Distributor will provide promotional incentives, in the form of cash or other
compensation including merchandise, airline vouchers, trips and vacation
packages, to all dealers selling shares of the Funds. Promotional incentives of
these kinds will be offered uniformly to all dealers and predicated upon the
amount of shares of the Funds sold by the dealer. Whenever 90% or more of a
sales charge is paid to a dealer, that dealer may be deemed to be an underwriter
as defined in the Securities Act of 1933.

<PAGE>

The sales charge for shares sold other than through registered broker/dealers
will be retained by the Distributor. The Distributor may pay fees to financial
institutions out of the sales charge in exchange for sales and/or administrative
services performed on behalf of the institution's customers in connection with
the initiation of customer accounts and purchases of Fund shares.

REDUCING THE CLASS A SALES CHARGE. The sales charge can be reduced on the
purchase of Class A Shares through (i) quantity discounts and accumulated
purchases, or (ii) signing a 13-month letter of intent:

* QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES: As shown in the table
above, larger purchases of Class A Shares reduce the percentage sales
charge paid. Each Fund will combine purchases made on the same day by
an investor, the investor's spouse, and the investor's children under
age 21 when it calculates the sales charge. In addition, the sales
charge, if applicable, is reduced for purchases made at one time by a
trustee or fiduciary for a single trust estate or a single fiduciary
account.

The sales charge discount applies to the total current market value of
any Fund, plus the current market value of any other FAIF Fund and any
other mutual funds having a sales charge and distributed as part of the
First American family of funds. Prior purchases and concurrent
purchases of Class A Shares of any FAIF Fund will be considered in
determining the sales charge reduction. In order for an investor to
receive the sales charge reduction on Class A Shares, the Transfer
Agent must be notified by the investor in writing or by his or her
financial institution at the time the purchase is made that Fund shares
are already owned or that purchases are being combined.

* Letter of Intent: If an investor intends to purchase at least $50,000
of Class A Shares in a Fund and other FAIF Funds over the next 13
months, the sales charge may be reduced by signing a letter of intent
to that effect. This letter of intent includes a provision for a sales
charge adjustment depending on the amount actually purchased within the
13-month period and a provision for the Custodian to hold a percentage
equal to the particular FAIF Fund's maximum sales charge rate of the
total amount intended to be purchased in escrow (in shares) for all
FAIF Funds until the purchase is completed.

The amount held in escrow for all FAIF Funds will be applied to the
investor's account at the end of the 13-month period after deduction of
the sales load applicable to the dollar value of shares actually
purchased. In this event, an appropriate number of escrowed shares may
be redeemed in order to realize the difference in the sales charge.

<PAGE>

A letter of intent will not obligate the investor to purchase shares,
but if he or she does, each purchase during the period will be at the
sales charge applicable to the total amount intended to be purchased.
This letter may be dated as of a prior date to include any purchases
made within the past 90 days.

SALES OF CLASS A SHARES AT NET ASSET VALUE. Purchases of a Fund's Class A Shares
by the Adviser or any of its affiliates, or any of their or FAIF's officers,
directors, employees, retirees, sales representatives and partners, registered
representatives of any broker/dealer authorized to sell Fund shares, and
full-time employees of FAIF's general counsel, and members of their immediate
families (i.e., parent, child, spouse, sibling, step or adopted relationships,
and UTMA accounts naming qualifying persons), may be made at net asset value
without a sales charge. A Fund's Class A Shares also may be purchased at net
asset value without a sales charge by fee-based registered investment advisers,
financial planners and registered broker/dealers who are purchasing shares on
behalf of their customers and by purchasers through "one-stop" mutual fund
networks through which the Funds are made available. In addition, Class A Shares
may be purchased at net asset value without a sales charge by qualified defined
contribution plans participating in the First American 401(k) Plan Program and
by retirement and deferred compensation plans and the trusts used to fund such
plans (including, but not limited to, those defined in section 401(a), 403(b)
and 457 of the Internal Revenue Code and "rabbi trusts"), which plans and trusts
purchase through "one-stop" mutual fund networks.

If Class A Shares of a Fund have been redeemed, the shareholder has a one-time
right, within 30 days, to reinvest the redemption proceeds in Class A Shares of
any FAIF fund at the next-determined net asset value without any sales charge.
The Transfer Agent must be notified by the shareholder in writing or by his or
her financial institution of the reinvestment in order to eliminate a sales
charge. If the shareholder redeems his or her shares of a Fund, there may be tax
consequences.

In addition, purchases of Class A Shares of a Fund that are funded by proceeds
received upon the redemption (within 60 days of the purchase of Fund shares) of
shares of any unrelated open-end investment company that charges a sales load
and rollovers from retirement plans that utilize the Funds as investment options
may be made at net asset value. To make such a purchase at net asset value, an
investor or the investor's broker must, at the time of purchase, submit a
written request to the Transfer Agent that the purchase be processed at net
asset value pursuant to this privilege, accompanied by a photocopy of the
confirmation (or similar evidence) showing the redemption from the unrelated
fund. The redemption of the

<PAGE>

shares of the non-related fund is, for federal income tax purposes, a sale upon
which a gain or loss may be realized.

CLASS B SHARES OF MICRO CAP VALUE FUND.

CONTINGENT DEFERRED SALES CHARGE. Class B Shares of Micro Cap Value Fund are
sold at net asset value without any initial sales charge. If an investor redeems
Class B Shares within eight years of purchase, he or she will pay a contingent
deferred sales charge at the rates set forth below. This charge is assessed on
an amount equal to the lesser of the then-current market value or the cost of
the shares being redeemed. Accordingly, no sales charge is imposed on increases
in net asset value above the initial purchase price or on shares derived from
reinvestment of dividends or capital gain distributions.

CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF DOLLAR
AMOUNT SUBJECT TO
YEAR SINCE PURCHASE CHARGE
- ------------------- --------------------
First 5.00%
Second 5.00%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh None
Eighth None

In determining whether a particular redemption is subject to a contingent
deferred sales charge, it is assumed that the redemption is first of any Class A
Shares in the shareholder's Fund account; second, of any Class B Shares held for
more than eight years and Class B Shares acquired pursuant to reinvestment of
dividends or other distributions; and third, of Class B Shares held longest
during the eight-year period. This method should result in the lowest possible
sales charge.

The contingent deferred sales charge is waived on redemption of Class B Shares
(i) within one year following the death or disability (as defined in the
Internal Revenue Code) of a shareholder, and (ii) to the extent that the
redemption represents a minimum required distribution from an individual
retirement account or other retirement plan to a shareholder who has attained
the age of 70 1/2 . A shareholder or his or her representative must notify the
Transfer Agent prior to the time of redemption if such circumstances exist and
the shareholder is elegible for this waiver.

CONVERSION FEATURE. At the end of the period ending eight years after the
beginning of the month in which the shares were issued, Class B Shares of

<PAGE>

Micro Cap Value Fund will automatically convert to Class A Shares and will no
longer be subject to the Class B distribution and service fees. This conversion
will be on the basis of the relative net asset values of the two classes.

SYSTEMATIC EXCHANGE PROGRAM

Shares of a Fund may also be purchased through automatic monthly deductions from
a shareholder's account in the same class of shares of Prime Obligations Fund of
First American Funds, Inc. Under a systematic exchange program, a shareholder
enters an agreement to purchase a specified class of shares of one or more Funds
over a specified period of time, and initially purchases Prime Obligations Fund
shares of the same class in an amount equal to the total amount of the
investment. On a monthly basis a specified dollar amount of shares of Prime
Obligations Fund is exchanged for shares of the same class of the Funds
specified. The systematic exchange program of investing a fixed dollar amount at
regular intervals over time has the effect of reducing the average cost per
share of the Funds. This effect also can be achieved through the systematic
investment program described below. Because purchases of Class A Shares are
subject to an initial sales charge, it may be beneficial for an investor to
execute a Letter of Intent in connection with the systematic exchange program. A
shareholder may apply for participation in this program through his or her
financial institution or by calling (800) 637-2548.

SYSTEMATIC INVESTMENT PROGRAM

Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Fund shares at the net asset value next determined after an order is
received, plus any applicable sales charge. A shareholder may apply for
participation in this program through his or her financial institution or call
(800) 637-2548.

EXCHANGING SECURITIES FOR FUND SHARES

<PAGE>

CERTIFICATES AND CONFIRMATIONS

The Transfer Agent maintains a share account for each shareholder. Share
certificates will not be issued by the Funds.

Confirmations of each purchase and redemption are sent to each shareholder. In
addition, monthly confirmations are sent to report all transactions and
dividends paid during that month for the Funds.

DIVIDENDS AND DISTRIBUTIONS

Dividends with respect to California Intermediate Tax Free Fund are declared and
paid monthly to all shareholders of record on the record date. Dividends with
respect to Micro Cap Value Fund are declared and paid quarterly to all
shareholders of record on the record date. Distributions of any net realized
long-term capital gains will be made at least once every 12 months. Dividends
and distributions are automatically reinvested in additional shares of the Fund
paying the dividend on payment dates at the ex-dividend date net asset value
without a sales charge, unless shareholders request cash payments on the new
account form or by writing to the Fund.

The amount of dividends payable on Class A and Class B Shares generally will be
less than the dividends payable on Class C Shares because of the distribution
and/or shareholder servicing expenses charged to Class A and Class B Shares. The
amount of dividends payable on Class A Shares generally will be more than the
dividends payable on the Class B Shares because of the higher distribution and
shareholder servicing fees paid by the Class B shares.

EXCHANGE PRIVILEGE

Shareholders may exchange Class A Shares of a Fund or, in the case of Micro Cap
Value Fund, Class B Shares for currently available Class A or Class B Shares,
respectively, of the other FAIF Funds or of other funds in the First American
family. Class A Shares of the Funds, whether acquired by direct purchase,
reinvestment of dividends on such shares, or otherwise, may be exchanged for
Class A Shares of other funds without the payment of any sales charge (i.e., at
net asset value). Exchanges of shares among the First

<PAGE>

American family of funds must meet any applicable minimum investment of the fund
for which shares are being exchanged.

With respect to Micro Cap Value Fund, for purposes of calculating the Class B
Shares' eight-year conversion period or contingent deferred sales charges
payable upon redemption, the holding period of Class B Shares of the "old" fund
and the holding period of Class B Shares of the "new" fund are aggregated.

Written exchange requests must be signed exactly as shown on the authorization
form, and the signatures may be required to be guaranteed as for a redemption of
shares by an entity described below under "Redeeming Shares -- Directly From the
Funds -- Signatures." Neither the Funds, the Distributor, the Transfer Agent,
any shareholder servicing agent, or any financial institution will be
responsible for further verification of the authenticity of the exchange
instructions.

Telephone exchange instructions made by an investor may be carried out only if a
telephone authorization form completed by the investor is on file with the
Transfer Agent, shareholder servicing agent, or financial institution. Shares
may be exchanged between two First American funds by telephone only if both
funds have identical shareholder registrations.

Telephone exchange instructions may be recorded and will be binding upon the
shareholder. Telephone instructions must be received by the Transfer Agent
before 3:00 p.m. Central time, or by a shareholder's shareholder servicing agent
or financial institution by the time specified by it, in order for shares to be
exchanged the same day. Neither the Transfer Agent nor any Fund will be
responsible for the authenticity of exchange instructions received by telephone
if it reasonably believes those instructions to be genuine. The Funds and the
Transfer Agent will each employ reasonable procedures to confirm that telephone
instructions are genuine, and they may be liable for losses resulting from
unauthorized or fraudulent telephone instructions if they do not employ these
procedures.

<PAGE>

Shareholders of the Funds may have difficulty in making exchanges by telephone
through brokers and other financial institutions during times of drastic
economic or market changes. If a shareholder cannot contact his or her broker or
financial institution by telephone, it is recommended that an exchange request
be made in writing and sent by overnight mail to DST Systems, Inc., 1004
Baltimore, Kansas City, Missouri 64105.

Shareholders who become eligible to purchase Class C Shares may exchange Class A
Shares for Class C Shares. An example of such an exchange would be a situation
in which an individual holder of Class A Shares subsequently opens a custody or
agency account with a financial institution which invests in Class C Shares.

The terms of any exchange privilege may be modified or terminated by the Funds
at any time. There are currently no additional fees or charges for the exchange
service. The Funds do not contemplate establishing such fees or charges, but
they reserve the right to do so. Shareholders will be notified of any
modification or termination of the exchange privilege and of the imposition of
any additional fees or changes.

REDEEMING SHARES

Each Fund redeems shares at their net asset value next determined after the
Transfer Agent receives the redemption request, reduced by any applicable
contingent deferred sales charge. Redemptions will be made on days on which the
Fund computes its net asset value. Redemption requests can be made as described
below and must be received in proper form.

BY TELEPHONE

A shareholder may redeem shares of a Fund, if he or she elects the privilege on
the initial shareholder application, by calling his or her financial institution
to request the redemption. Shares will be redeemed at the net asset value next
determined after the Fund receives the redemption request from the financial
institution. Redemption requests must be received by the financial institution
by the time specified by the institution in order for shares to be redeemed at
that day's net asset value, and redemption requests must be transmitted to and
received by the Funds by 3:00 p.m. Central time in order for shares to be
redeemed at that day's net asset value. Pursuant to instructions received from
the financial institution, redemptions will be made by check or by wire
transfer. It is the financial institution's responsibility to transmit
redemption requests promptly.

<PAGE>

Shareholders who did not purchase their shares of a Fund through a financial
institution may redeem their shares by telephoning (800) 637-2548. At the
shareholder's request, redemption proceeds will be paid by check mailed to the
shareholder's address of record or wire transferred to the shareholder's account
at a domestic commercial bank that is a member of the Federal Reserve System,
normally within one business day, but in no event more than seven days after the
request. Wire instructions must be previously established on the account or
provided in writing. The minimum amount for a wire transfer is $1,000. If at any
time the Funds determine it necessary to terminate or modify this method of
redemption, shareholders will be promptly notified.

In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming shares by telephone. If this should occur, another
method of redemption should be considered. Neither the Transfer Agent nor any
Fund will be responsible for any loss, liability, cost or expense for acting
upon wire transfer instructions or telephone instructions that it reasonably
believes to be genuine. These procedures may include taping of telephone
conversations. To ensure authenticity of redemption or exchange instructions
received by telephone, the Transfer Agent examines each shareholder request by
verifying the account number and/or taxpayer identification number at the time
such request is made. The Transfer Agent subsequently sends confirmations of
both exchange sales and exchange purchases to the shareholder for verification.
If reasonable procedures are not employed, the Transfer Agent and the Funds may
be liable for any losses due to unauthorized or fraudulent telephone
transactions.

BY MAIL

Any shareholder may redeem Fund shares by sending a written request to the
Transfer Agent, shareholder servicing agent, or financial institution. The
written request should include the shareholder's name, the Fund name, the
account number, and the share or dollar amount requested to be redeemed, and
should be signed exactly as the shares are registered. Shareholders should call
the Fund, shareholder servicing agent or financial institution for assistance in
redeeming by mail. A check for redemption proceeds normally is mailed within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request.

<PAGE>

Shareholders requesting a redemption of $5,000 or more, a redemption of any
amount to be sent to an address other than that on record with the Fund, or a
redemption payable other than to the shareholder of record, must have signatures
on written redemption requests guaranteed by:

* a trust company or commercial bank the deposits of which are insured by
the Bank Insurance Fund, which is administered by the Federal Deposit
Insurance Corporation ("FDIC");

* a member firm of the New York, American, Boston, Midwest, or Pacific
Stock Exchanges or of the National Association of Securities Dealers;

* a savings bank or savings and loan association the deposits of which
are insured by the Savings Association Insurance Fund, which is
administered by the FDIC; or

* any other "eligible guarantor institution," as defined in the
Securities Exchange Act of 1934.

The Funds do not accept signatures guaranteed by a notary public.

The Funds and the Transfer Agent have adopted standards for accepting signature
guarantees from the above institutions. The Funds may elect in the future to
limit eligible signature guarantees to institutions that are members of a
signature guarantee program. The Funds and the Transfer Agent reserve the right
to amend these standards at any time without notice.

BY SYSTEMATIC WITHDRAWAL PROGRAM

Shareholders whose account value is at least $5,000 may elect to participate in
the Systematic Withdrawal Program. Under this program, Fund shares are redeemed
to provide for periodic withdrawal payments in an amount directed by the
shareholder. A shareholder may apply to participate in this program through his
or her financial institution. It is generally not in a shareholder's best
interest to participate in the Systematic Withdrawal Program at the same time
that the shareholder is purchasing additional shares if a sales charge must be
paid in connection with such purchases.

REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR

When shares are purchased by check or with funds transmitted through the
Automated Clearing House, the proceeds of redemptions of those shares are not
available until the Transfer Agent is reasonably certain that the purchase
payment has cleared, which could take up to ten calendar days from the purchase
date.

<PAGE>

ACCOUNTS WITH LOW BALANCES

Due to the high cost of maintaining accounts with low balances, a Fund may
redeem shares in any account, except retirement plans, and pay the proceeds,
less any applicable contingent deferred sales charge, to the shareholder if the
account balance falls below the required minimum value of $500. Shares will not
be redeemed in this manner, however, if the balance falls below $500 because of
changes in a Fund's net asset value. Before shares are redeemed to close an
account, the shareholder will be notified in writing and allowed 60 days to
purchase additional shares to meet the minimum account requirement.

DETERMINING THE PRICE OF SHARES

Class A Shares of the Funds are sold at net asset value plus a sales charge,
while Class B Shares of Micro Cap Value Fund are sold without a front-end sales
charge. Shares are redeemed at net asset value less any applicable contingent
deferred sales charge. See "Investing in the Funds -- Alternative Sales Charge
Options."

The net asset value per share is determined as of the earlier of the close of
the New York Stock Exchange or 3:00 p.m. Central time on each day the New York
Stock Exchange is open for business, provided that net asset value need not be
determined on days when no Fund shares are tendered for redemption and no order
for that Fund's shares is received and on days on which changes in the value of
portfolio securities will not materially affect the current net asset value of
the Fund's shares. The price per share for purchases or redemptions is such
value next computed after the Transfer Agent receives the purchase order or
redemption request.

It is the responsibility of Participating Institutions promptly to forward
purchase and redemption orders to the Transfer Agent. In the case of redemptions
and repurchases of shares owned by corporations, trusts or estates, the Transfer
Agent or Fund may require additional documents to evidence appropriate authority
in order to effect the redemption, and the applicable price will be that next
determined following the receipt of the required documentation.

DETERMINING NET ASSET VALUE

The net asset value per share for each of the Funds is determined by dividing
the value of the securities owned by the Fund plus any cash and other assets
(including interest accrued and dividends declared but not collected), less all
liabilities, by the number of Fund shares outstanding. For the purpose of

<PAGE>

determining the aggregate net assets of the Funds, cash and receivables will be
valued at their face amounts. Interest will be recorded as accrued and dividends
will be recorded on the ex-dividend date. Investments in equity securities which
are traded on a national securities exchange (or reported on the NASDAQ national
market system) are stated at the last quoted sales price if readily available
for such equity securities on each business day; other equity securities traded
in the over-the-counter market and listed equity securities for which no sale
was reported on that date are stated at the last quoted bid price. Debt
obligations exceeding 60 days to maturity which are actively traded are valued
by an independent pricing service at the most recently quoted bid price. Debt
obligations with 60 days or less remaining until maturity may be valued at their
amortized cost. When market quotations are not readily available, securities are
valued at fair value as determined in good faith by procedures established and
approved by the Board of Directors.

INCOME TAXES

FEDERAL INCOME TAXATION

Distributions of net interest income from tax-exempt obligations that are
designated by California Intermediate Tax Free Fund as exempt-interest dividends
are excludable from the gross income of the Fund's shareholders. A portion of
such dividends may, however, be subject to the alternative minimum tax, as
discussed below.

Distributions paid from other interest income of California Intermediate Tax
Free Fund, from the net investment income of Micro Cap Value Fund, and

<PAGE>

from any net realized short-term capital gains of either Fund, will be taxable
to shareholders as ordinary income, whether received in cash or in additional
shares. Since none of the income of California Intermediate Tax Free Fund will
consist of dividends from domestic corporations, the dividends-received
deduction for corporations will not be applicable to taxable distributions by
that Fund. Distributions paid by each Fund from long-term capital gains (and
designated as such) will be taxable as long-term capital gains for federal
income tax purposes, whether received in cash or shares, regardless of how long
a shareholder has held the shares in a Fund. Long-term capital gains of
individuals are currently taxed at a maximum rate of 28%.

For federal income tax purposes, an alternative minimum tax ("AMT") is imposed
on taxpayers to the extent that such tax, if any, exceeds a taxpayer's regular
income tax liability (with certain adjustments). Liability for AMT will depend
on each shareholder's tax situation.

Exempt-interest dividends attributable to interest income on certain tax-exempt
obligations issued after August 7, 1986, to finance certain private activities
will be treated as an item of tax preference that is included in alternative
minimum taxable income for purposes of computing the federal AMT for all
taxpayers and the federal environmental tax on corporations. California
Intermediate Tax Free Fund may invest up to 20% of its total assets in
obligations the interest on which is treated as an item of tax preference for
federal income tax purposes. Also, a portion of all other tax-exempt interest
received by a corporation, including exempt-interest dividends, will be included
in adjusted current earnings and in earnings and profits for purposes of
determining the federal corporate alternative minimum tax, the environmental tax
imposed on corporations under Section 59A of the Code, and the branch profits
tax imposed on foreign corporations under Section 884 of the Code. Each
shareholder is advised to consult his or her tax adviser with respect to the
possible effects of such tax preference items.

<PAGE>

Adviser, pose a material risk of the loss of tax exemption. Further, if a bond
in this Fund's portfolio lost its exempt status, the Fund would make every
effort to dispose of that investment on terms that are not detrimental to the
Fund.

Interest on indebtedness incurred by a shareholder to purchase or carry shares
of California Intermediate Tax Free Fund will not be deductible for federal
income purposes.

A Fund may be required to "back-up" withhold 31% of any dividend, distribution,
or redemption payment made to a shareholder who fails to furnish the Fund with
the shareholder's Social Security number or other taxpayer identification number
or to certify that he or she is not subject to back-up withholding.

Information concerning distributions will be mailed to shareholders annually.
Shareholders are required for information purposes to report exempt-interest
dividends and other tax-exempt interest on their tax returns.

CALIFORNIA INCOME TAXATION

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OTHER STATE AND LOCAL TAXATION

Except to the extent described above under "-- California Income Taxation,"
distributions by both Funds may be subject to state and local taxation even if
they are exempt from federal income taxes. Shareholders are urged to consult
their own tax advisers regarding state and local taxation.

CALIFORNIA INTERMEDIATE TAX FREE FUND: TAX-EXEMPT VS. TAXABLE INCOME

The table below shows the approximate yields that taxable securities must earn
to equal yields that are exempt from both federal and California income taxes,
under selected income tax brackets scheduled to be in effect in 1997. The
effective combined rates reflect the deduction of state income taxes from
federal income. The 34.8%, 37.4%, 42.0% and 45.2% combined federal/California
rates assume that the investor is subject to a 9.3% marginal California income
tax rate and a marginal federal income tax rate of 28%, 31%, 36% and 39.6%,
respectively. The combined rates do not reflect federal rules concerning the
phase-out of personal exemptions and limitations on the allowance of itemized
deductions for certain high-income taxpayers. The tables are based upon yields
that are derived solely from tax-exempt income. To the extent that California
Intermediate Tax Free Fund's yield is derived from taxable income, the Fund's
tax equivalent yield will be less than set forth in the tables. The tax-free
yields used in these tables should not be considered as representations of any
particular rates of return and are for purposes of illustration only.

TAX-EQUIVALENT YIELDS
COMBINED FEDERAL AND
CALIFORNIA TAX BRACKETS
TAX-FREE
YIELDS 34.8% 37.4% 42.0% 45.2%

3.0% 4.60% 4.79% 5.17% 5.47%
3.5% 5.37% 5.59% 6.03% 6.39%
4.0% 6.13% 6.39% 6.90% 7.30%
4.5% 6.90% 7.19% 7.76% 8.21%
5.0% 7.67% 7.99% 8.62% 9.12%
5.5% 8.44% 8.79% 9.48% 10.03%
6.0% 9.20% 9.58% 10.34% 10.95%
6.5% 9.97% 10.38% 11.21% 11.86%

FUND SHARES

Each share of a Fund is fully paid, nonassessable, and transferable. Shares may
be issued as either full or fractional shares. Fractional shares have pro rata
the

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same rights and privileges as full shares. Shares of the Funds have no
preemptive or conversion rights.

Each share of a Fund has one vote. On some issues, such as the election of
directors, all shares of all FAIF Funds vote together as one series. The shares
do not have cumulative voting rights. Consequently, the holders of more than 50%
of the shares voting for the election of directors are able to elect all of the
directors if they choose to do so. On issues affecting only a particular Fund or
Class, the shares of that Fund or Class will vote as a separate series. Examples
of such issues would be proposals to alter a fundamental investment restriction
pertaining to a Fund or to approve, disapprove or alter a distribution plan
pertaining to a Class.

CALCULATION OF PERFORMANCE DATA

From time to time, either of the Funds may advertise information regarding its
performance. Each Fund may publish its "yield," its "cumulative total return,"
its "average annual total return," and its "distribution rate." In addition,
California Intermediate Tax Free Fund may publish its "tax equivalent yield" and
its "tax equivalent distribution rate." Distribution rates and tax equivalent
distribution rates may only be used in connection with sales literature and
shareholder communications preceded or accompanied by a Prospectus. Each of
these performance figures is based upon historical results and is not intended
to indicate future performance, and, except for "distribution rate" and "tax
equivalent distribution rate," is standardized in accordance with Securities and
Exchange Commission ("SEC") regulations.

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rate or combined rate). Tax equivalent yield is computed by dividing that
portion of the yield which is tax-exempt by one minus the stated income tax
rate, and adding the resulting amount to that portion, if any, of the yield
which is not tax-exempt.

"Total return" is based on the overall dollar or percentage change in value of a
hypothetical investment in a Fund assuming reinvestment of dividend
distributions and deduction of all charges and expenses, including the maximum
sales charge imposed on Class A Shares. "Cumulative total return" reflects a
Fund's performance over a stated period of time. "Average annual total return"
reflects the hypothetical annually compounded rate that would have produced the
same cumulative total return if performance had been constant over the entire
period. Because average annual returns tend to smooth out variations in a Fund's
performance, they are not the same as actual year-by-year results. As a
supplement to total return computations, a Fund may also publish "total
investment return" computations which do not assume deduction of the maximum
sales charge imposed on Class A Shares or the contingent deferred sales charge
imposed on Class B Shares.

The performance of the Class A and Class B Shares of a Fund will normally be
lower than for the Class C Shares because Class C Shares are not subject to the
sales charges and distribution and/or shareholder servicing expenses applicable
to Class A and Class B Shares. In addition, the performance of Class A and Class
B Shares of a Fund will differ because of the different sales charge structures
of the classes and because of the differing distribution and shareholder
servicing fees charged to Class B Shares.

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may be compared to that of other funds of similar size and objectives as listed
in the rankings prepared by Lipper Analytical Services, Inc. or similar
independent mutual fund rating services, and each Fund may include in such
reports, communications and advertising material evaluations published by
nationally recognized independent ranking services and publications. For further
information regarding the Funds' performance, see "Fund Performance" in the
Statement of Additional Information.

PERFORMANCE INFORMATION FOR SUCCESSORS TO COMMON TRUST FUNDS

Each of California Intermediate Tax Free Fund and Micro Cap Value Fund commenced
operations when substantially all of the assets of certain common trust funds
which were exempt from registration under the 1940 Act were transferred to these
Funds. One predecessor common trust fund was managed by the Adviser, while the
other was managed by Qualivest Capital Management, Inc. prior to the acquisition
of its parent company by the Adviser's parent company. The personnel who managed
that common trust fund on behalf of Qualivest Capital Management became
employees of the Adviser, and assumed management of the applicable Fund, at the
time the assets were transferred from the common trust fund to the Fund.

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FROM INCEPTION
(5/1/92)
1 YEAR ENDED THROUGH
4/30/97 4/30/97

California Intermediate
Tax Free Fund, Class A
predecessor 0.77% 4.69%

1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED
4/30/97 4/30/97 4/30/97

Micro Cap Value Fund,
Class A predecessor 3.87% 17.93% 14.84%
Micro Cap Value Fund,
Class B predecessor 2.94% 17.85% 14.56%

SPECIAL INVESTMENT METHODS

MUNICIPAL BONDS AND OTHER MUNICIPAL OBLIGATIONS

As described under "Investment Objectives and Policies," California Intermediate
Tax Free Fund invests principally in municipal bonds and other municipal
obligations. These bonds and other obligations are issued by the states and by
their local and special-purpose political subdivisions. The term "municipal
bond" as used in this Prospectus includes short-term municipal notes issued by
the states and their political subdivisions.

The principal and interest on revenue bonds for private facilities are typically
paid out of rents or other specified payments made to the issuing

<PAGE>

governmental entity by a private company which uses or operates the facilities.
Examples of these types of obligations are industrial revenue bonds and
pollution control revenue bonds. Industrial revenue bonds are issued by
governmental entities to provide financing aid to community facilities such as
hospitals, hotels, business or residential complexes, convention halls and sport
complexes. Pollution control revenue bonds are issued to finance air, water and
solids pollution control systems for privately operated industrial or commercial
facilities.

MUNICIPAL LEASES. California Intermediate Tax Free Fund also may purchase
participation interests in municipal leases. Participation interests in
municipal leases are undivided interests in a lease, installment purchase
contract or conditional sale contract entered into by a state or local
governmental unit to acquire equipment or facilities. Municipal leases
frequently have special risks which generally are not associated with general
obligation bonds or revenue bonds.

<PAGE>

time-consuming. In addition, disposition upon non-appropriation or foreclosure
might not result in recovery by the Fund of the full principal amount
represented by an obligation.

In light of these concerns, the Fund has adopted and follows procedures for
determining whether municipal lease obligations purchased by the Fund are liquid
and for monitoring the liquidity of municipal lease securities held in the
Fund's portfolio. These procedures require that a number of factors be used in
evaluating the liquidity of a municipal lease security, including the frequency
of trades and quotes for the security, the number of dealers willing to purchase
or sell the security and the number of other potential purchasers, the
willingness of dealers to undertake to make a market in the security, the nature
of the marketplace in which the security trades, and other factors which the
Adviser may deem relevant. As described below under "-- Investment
Restrictions," California Intermediate Tax Free Fund is subject to limitations
on the percentage of illiquid securities it can hold.

TEMPORARY TAXABLE INVESTMENTS

California Intermediate Tax Free Fund may make temporary taxable investments as
described under "Investment Objectives and Policies." Temporary taxable
investments will include only the following types of obligations maturing within
13 months from the date of purchase: (i) obligations of the United States
Government, its agencies and instrumentalities; (ii) commercial paper rated not
less than A-1 by Standard & Poor's or P-1 by Moody's or which has been assigned
an equivalent rating by another nationally recognized statistical rating
organization; (iii) other short-term debt securities issued or guaranteed by
corporations having outstanding debt rated not less than BBB by Standard &
Poor's or Baa by Moody's or which have been assigned an equivalent rating by
another nationally recognized statistical rating organization; (iv) certificates
of deposit of domestic commercial banks subject to regulation by the United
States Government or any of its agencies or instrumentalities, with assets of
$500 million or more based on the most recent published reports; and (v)
repurchase agreements with domestic banks or securities dealers involving any of
the securities which the Fund is permitted to hold. See "-- Repurchase
Agreements" below.

REPURCHASE AGREEMENTS

The temporary taxable investments which California Intermediate Tax Free Fund
may make include repurchase agreements, and Micro Cap Value Fund also is
permitted to enter into such agreements. A repurchase agreement involves the
purchase by a Fund of securities with the agreement that after a stated period
of time, the original seller will buy back the same securities ("collateral") at
a predetermined price or yield. Repurchase agreements involve

<PAGE>

certain risks not associated with direct investments in securities. If the
original seller defaults on its obligation to repurchase as a result of its
bankruptcy or otherwise, the purchasing Fund will seek to sell the collateral,
which could involve costs or delays. Although collateral (which may consist of
any fixed income security which is an eligible investment for the Fund entering
into the repurchase agreement) will at all times be maintained in an amount
equal to the repurchase price under the agreement (including accrued interest),
a Fund would suffer a loss if the proceeds from the sale of the collateral were
less than the agreed-upon repurchase price. The Adviser will monitor the
creditworthiness of the firms with which the Funds enter into repurchase
agreements.

INVERSE FLOATING RATE OBLIGATIONS

California Intermediate Tax Free Fund may invest up to 5% of its net assets in
inverse floating rate municipal obligations. An inverse floating rate obligation
entitles the holder to receive interest at a rate which changes in the opposite
direction from, and in the same magnitude as or in a multiple of, changes in a
specified index rate. Although an inverse floating rate municipal obligation
would tend to increase portfolio income during a period of generally decreasing
market interest rates, its income and value would tend to decline during a
period of generally increasing market interest rates. In addition, its decline
in value may be greater than for a fixed-rate municipal obligation, particularly
if the interest rate borne by the floating rate municipal obligation is adjusted
by a multiple of changes in the specified index rate. For these reasons, inverse
floating rate municipal obligations have more risk than more conventional
fixed-rate and floating rate municipal obligations.

WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS

<PAGE>

increased sensitivity of net asset value to changes in market prices. However,
the Funds will engage in when-issued and delayed-delivery transactions only for
the purpose of acquiring portfolio securities consistent with their investment
objectives, and not for the purpose of investment leverage. A seller's failure
to deliver securities to a Fund could prevent the Fund from realizing a price or
yield considered to be advantageous.

LENDING OF PORTFOLIO SECURITIES

OPTIONS TRANSACTIONS

CALIFORNIA INTERMEDIATE TAX FREE FUND. California Intermediate Tax Free Fund
may, in order to reduce risk, invest in exchange traded put and call options on
interest rate futures contracts and on interest rate indices. Such investments
will be made solely as a hedge against adverse changes resulting from market
conditions in the values of securities held by the Fund or which it intends to
purchase and where the transactions are deemed appropriate to reduce risks
inherent in the Fund's portfolio or contemplated investments.

California Intermediate Tax Free Fund will not invest more than 5% of the value
of its total assets in purchased options, provided that options which are "in
the money" at the time of purchase may be excluded from this 5% limitation. A
call option is "in the money" if the exercise price is lower than the current
market price of the underlying contract or index, and a put option is "in the
money" if the exercise price is higher than the current market price. A Fund's
loss exposure in purchasing an option is limited to the sum of the

<PAGE>

premium paid (purchase price of the option) and the commission or other
transaction expenses associated with acquiring the option.

An interest rate futures contract provides for the future sale by one party and
purchase by the other party of a certain amount of a specific financial
instrument (debt security) at a specified price, date, time and place. An option
on an interest rate futures contract, as contrasted with the direct investment
in such a contract, gives the purchaser the right, in return for the premium
paid, to purchase (in the case of a call option) or sell (in the case of a put
option) an interest rate futures contract at a specified exercise price at any
time prior to the expiration date of the option. In order to hedge its portfolio
against anticipated changes in interest rates, a Fund might purchase a put
option on an interest rate futures contract if interest rates were expected to
rise, or might purchase a call option on an interest rate futures contract if
rates were expected to decline.

MICRO CAP VALUE FUND.

<PAGE>

right (but not the obligation) to buy, and the writer the obligation to sell,
the underlying security at the exercise price at any time before the option
expires. The purchase price for a put or call option is the "premium" paid by
the purchaser for the right to sell or buy.

Micro Cap Value Fund also may write call options on stock indices the movements
of which generally correlate with those of the Fund's portfolio

<PAGE>

holdings. These transactions, which would be undertaken principally to produce
additional income, entail the risk of an imperfect correlation between movements
of the index covered by the option and movements in the price of the Fund's
portfolio securities.

CASH ITEMS

The "cash items" in which Micro Cap Value Fund may invest, as described under
"Investment Objectives and Policies -- Micro Cap Value Fund," include short-term
obligations such as commercial paper and variable amount master demand notes;
United States dollar-denominated time and savings deposits (including
certificates of deposit); bankers acceptances; obligations of the United States
Government or its agencies or instrumentalities; repurchase agreements
collateralized by eligible investments of the Fund; securities of other mutual
funds which invest primarily in debt obligations with remaining maturities of 13
months or less (which investments are subject to the advisory fee); and other
similar high-quality short-term United States dollar-denominated obligations.
The other mutual funds in which Micro Cap Value Fund may so invest include money
market funds advised by the Adviser, subject to certain restrictions contained
in an exemptive order issued by the Securities and Exchange Commission with
respect thereto.

FIXED INCOME SECURITIES

<PAGE>

FOREIGN SECURITIES

Investment in foreign securities is subject to special investment risks that
differ in some respects from those related to investments in securities of
United States domestic issuers. These risks include political, social or
economic instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of the imposition of exchange
controls, expropriation, limits on removal of currency or other assets,
nationalization of assets, foreign withholding and income taxation, and foreign
trading practices (including higher trading commissions, custodial charges and
delayed settlements). Foreign securities also may be subject to greater
fluctuations in price than securities issued by United States corporations. The
principal markets on which these securities trade may have less volume and
liquidity, and may be more volatile, than securities markets in the United
States.

<PAGE>

financial reporting standards of the domestic market or exchange on which they
are traded, which standards are more uniform and more exacting than those to
which many foreign issuers may be subject.

PORTFOLIO TRANSACTIONS

Portfolio transactions in the over-the-counter market will be effected with
market makers or issuers, unless better overall price and execution are
available through a brokerage transaction. It is anticipated that most portfolio
transactions involving debt securities will be executed on a principal basis.
Also, with respect to the placement of portfolio transactions with securities
firms, subject to the overall policy to seek to place portfolio transactions as
efficiently as possible and at the best price, research services and placement
of orders by securities firms for a Fund's shares may be taken into account as a
factor in placing portfolio transactions for the Fund.

PORTFOLIO TURNOVER

INVESTMENT RESTRICTIONS

The fundamental and nonfundamental investment restrictions of the Funds are set
forth in full in the Statement of Additional Information. The fundamental
restrictions include the following:

* Neither of the Funds will borrow money, except from banks for temporary
or emergency purposes. The amount of such borrowing may not exceed 10%
of the borrowing Fund's total assets. Neither of the Funds will borrow
money for leverage purposes. For the purpose of this

<PAGE>

investment restriction, the use of options and futures transactions and
the purchase of securities on a when-issued or delayed-delivery basis
shall not be deemed the borrowing of money. If a Fund engages in
borrowing, its share price may be subject to greater fluctuation, and
the interest expense associated with the borrowing may reduce the
Fund's net income.

* Neither of the Funds will mortgage, pledge or hypothecate its assets,
except in an amount not exceeding 15% of the value of its total assets
to secure temporary or emergency borrowing.

* Neither of the Funds will make short sales of securities.

* Neither of the Funds will purchase any securities on margin except to
obtain such short-term credits as may be necessary for the clearance of
transactions.

* California Intermediate Tax Free Fund will not invest 25% or more of
the value of its total assets in revenue bonds or notes, payment for
which comes from revenues from any one type of activity (for this
purpose, the term "type of activity" shall include without limitation
(i) sewage treatment and disposal; (ii) gas provision; (iii) electric
power provision; (iv) water provision; (v) mass transportation systems;
(vi) housing; (vii) hospitals; (viii) nursing homes; (ix) street
development and repair; (x) toll roads; (xi) airport facilities; and
(xii) educational facilities), except that, in circumstances in which
other appropriate available investments may be in limited supply, such
Funds may invest without limitation in gas provision, electric power
provision, water provision, housing and hospital obligations. This
restriction does not apply to general obligation bonds or notes. This
restriction does not apply to securities of the United States
Government or its agencies and instrumentalities or repurchase
agreements relating thereto.

As a nonfundamental policy, neither of the Funds will invest more than 15% of
its net assets in all forms of illiquid investments, as determined pursuant to
applicable Securities and Exchange Commission rules and interpretations. Section
4(2) commercial paper and Rule 144A securities may be determined to be "liquid"
under guidelines adopted by the Board of Directors. Investing in Rule 144A
securities could have the effect of increasing the level of illiquidity in a
Fund to the extent that qualified institutional buyers become, for a time,
uninterested in purchasing these securities.

<PAGE>

INFORMATION CONCERNING COMPENSATION PAID TO FIRST TRUST NATIONAL
ASSOCIATION AND ITS AFFILIATES

First Trust, as custodian for the assets of the Funds, receives the custodian
fees specified herein under the caption "Management--Custodian."