FIRST AMERICAN INVESTMENT FUNDS INC, 497, 1998-07-24

FIRST AMERICAN INVESTMENT FUNDS INC
497, 1998-07-24

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JANUARY 31, 1998
AS SUPPLEMENTED ON MAY 15, 1998 AND JULY 24, 1998

TAX FREE BOND FUNDS

CLASS A SHARES

INTERMEDIATE TAX
FREE FUND

CALIFORNIA INTERMEDIATE
TAX FREE FUND

COLORADO INTERMEDIATE
TAX FREE FUND

MINNESOTA INTERMEDIATE
TAX FREE FUND

FIRST AMERICAN
INVESTMENT FUNDS, INC.

PROSPECTUS

[LOGO] FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING(R)

<PAGE>

TABLE OF CONTENTS

Summary 2
...........................................
Fees and Expenses 4
...........................................
Financial Highlights 6
...........................................
The Funds 10
...........................................
Investment Objectives and Policies 10
...........................................
Management 14
...........................................
Distributor 16
...........................................
Investing in the Funds 17
...........................................
Redeeming Shares 23
...........................................
Determining the Price of Shares 25
...........................................
Income Taxes 26
...........................................
Tax-Exempt vs. Taxable Income 28
...........................................
Fund Shares 29
...........................................
Calculation of Performance Data 29
...........................................
Performance Information for Successor to
Common Trust Funds 30
...........................................
Special Investment Methods 31
...........................................
Information Concerning Compensation Paid
to U.S. Bank National Association and
Other Affiliates 37
...........................................

<PAGE>

FIRST AMERICAN INVESTMENT FUNDS, INC.

CLASS A SHARES 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 A Shares of the following funds (the "Funds"):

* INTERMEDIATE TAX FREE FUND

* CALIFORNIA INTERMEDIATE
TAX FREE FUND

* COLORADO INTERMEDIATE
TAX FREE FUND

* MINNESOTA INTERMEDIATE
TAX FREE FUND

SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY,
ANY BANK, INCLUDING U.S. 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 January 31, 1998 as supplemented
from time to time for the Funds has been filed with the Securities and
Exchange Commission ("SEC") 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. The SEC maintains a World Wide Web site that
contains reports and information regarding issuers that file electronically
with the SEC. The address of such site is "http://www.sec.gov."

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 REPRE- SENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

The date of this Prospectus is January 31, 1998 as supplemented on May 15,
1998 and July 24, 1998.

<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 of the
following funds (the "Funds"):

INTERMEDIATE TAX FREE FUND has an objective of providing current income that
is exempt from federal 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 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.

COLORADO INTERMEDIATE TAX FREE FUND has an objective of providing current
income which is exempt from both federal income tax and Colorado 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
Colorado 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.

MINNESOTA INTERMEDIATE TAX FREE FUND (formerly Minnesota Insured
Intermediate Tax Free Fund) has an objective of providing current income
which is exempt from both federal income tax and Minnesota 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 Minnesota
income tax. No more than 20% of the securities owned by this Fund will
generate income that is subject to the federal or the Minnesota 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.

INVESTMENT ADVISOR. U.S. Bank National Association (the "Advisor" or "U.S.
Bank") serves as investment advisor to each of the Funds through its First
American Asset Management group. See "Management."

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

OFFERING PRICES. Class A Shares of the Funds are sold at net asset value
plus a maximum sales charge of 3.00%. 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 the Distributor and
certain securities firms, financial institutions (including, without
limitation, banks) and other industry professionals may receive a commission
equal to 1.00% of the first $3 million of shares purchased, 0.75% of shares
purchased in excess of $3 million up to $5 million, and 0.50% of shares
purchased in excess of $5 million. If such a commission is paid, redemptions
of Class A Shares purchased at net asset value within 12 months following
such purchases will be subject to a contingent deferred sales charge of
1.00%.

<PAGE>

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 -- Class A Share
Price and Sales Charge."

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 any Fund may be exchanged for the same class of
shares of other funds in the First American family of funds 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."

In addition, the value of municipal obligations held by the 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 California
Intermediate Tax Free Fund, Colorado Intermediate Tax Free Fund and
Minnesota Intermediate Tax Free Fund invest principally in municipal
obligations of issuers located only in California, Colorado and Minnesota,
respectively. See "Investment Objectives and Policies -- Risks to Consider"
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.

<PAGE>

FEES AND EXPENSES

----------------------------------------------------------------------------
CLASS A SHARE FEES AND EXPENSES

<TABLE>
<CAPTION>
CALIFORNIA COLORADO MINNESOTA
INTERMEDIATE INTERMEDIATE INTERMEDIATE INTERMEDIATE
TAX FREE TAX FREE TAX FREE TAX FREE
FUND FUND FUND FUND
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on purchases (as a
percentage of offering price)(1) 3.00% 3.00% 3.00% 3.00%
Maximum sales load imposed on reinvested dividends None None None None
Deferred sales load None None None None
Redemption fees None None None None
Exchange fees None None None None
- ----------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment advisory fees (after voluntary fee waivers)(2) 0.47% 0.29% 0.49% 0.50%
Rule 12b-1 fees(2) 0.00% 0.00% 0.00% 0.00%
Other expenses 0.23% 0.41% 0.21% 0.20%
Total fund operating expenses
(after voluntary fee waivers)(2) 0.70% 0.70% 0.70% 0.70%
- ----------------------------------------------------------------------------------------------------------------------
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 $37 $37 $37
3 years $52 $52 $52 $52
5 years $68 $68 $68 $68
10 years $114 $114 $114 $114
</TABLE>

(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 THE DISTRIBUTOR AND
CERTAIN SECURITIES FIRMS, FINANCIAL INSTITUTIONS (INCLUDING, WITHOUT
LIMITATION, BANKS) AND OTHER INDUSTRY PROFESSIONALS MAY RECEIVE A COMMISSION
OF UP TO 1.00% ON SUCH SALES. IN ADDITION, A CONTINGENT DEFERRED SALES
CHARGE OF UP TO 1.00% MAY BE IMPOSED ON SUCH PURCHASES IN THE EVENT OF
REDEMPTION WITHIN 24 MONTHS FOLLOWING THE DATE OF THE APPLICABLE PURCHASE.
SEE "INVESTING IN THE FUNDS -- CLASS A SHARE PRICE AND SALES CHARGE."

(2) THE ADVISOR AND THE DISTRIBUTOR INTEND TO WAIVE A PORTION OF THEIR FEES ON A
VOLUNTARY BASIS, AND THE AMOUNTS SHOWN REFLECT THESE WAIVERS AS OF THE DATE
OF THIS PROSPECTUS. EACH OF THESE PERSONS INTENDS TO MAINTAIN SUCH WAIVERS
IN EFFECT FOR THE CURRENT FISCAL YEAR BUT RESERVES THE RIGHT TO DISCONTINUE
SUCH WAIVERS AT ANY TIME IN ITS SOLE DISCRETION. ABSENT ANY FEE WAIVERS,
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%; AND TOTAL FUND OPERATING EXPENSES CALCULATED ON SUCH
BASIS WOULD BE 1.18% FOR INTERMEDIATE TAX FREE FUND, 1.36% FOR CALIFORNIA
INTERMEDIATE TAX FREE FUND, 1.16% FOR COLORADO INTERMEDIATE TAX FREE FUND,
AND 1.15% FOR MINNESOTA INTERMEDIATE TAX FREE FUND. "OTHER EXPENSES"
INCLUDES AN ADMINISTRATION FEE.

(3) ABSENT THE FEE WAIVERS REFERRED TO IN (2) ABOVE, THE DOLLAR AMOUNTS FOR THE
1, 3, 5 AND 10-YEAR PERIODS WOULD BE AS FOLLOWS: INTERMEDIATE TAX FREE FUND,
$42, $66, $93 AND $169; CALIFORNIA INTERMEDIATE TAX FREE FUND, $43, $72,
$102 AND $189; COLORADO INTERMEDIATE TAX FREE FUND, $41, $66, $92 AND $167;
AND MINNESOTA INTERMEDIATE TAX FREE FUND, $41, $65, $91 AND $166.

<PAGE>

----------------------------------------------------------------------------
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.

<PAGE>

FINANCIAL HIGHLIGHTS

The following audited financial highlights should be read in conjunction
with the Funds' financial statements, the related notes thereto and the
independent auditors' report of KPMG Peat Marwick LLP appearing in FAIF's
annual report to shareholders dated September 30, 1997. Further information
about the Funds' performance is contained in such annual report to
shareholders, which may be obtained without charge by calling (800) 637-2548
or by writing SEI Investments Distribution Co., Oaks, Pennsylvania 19456.

For the periods ended September 30,
For a share outstanding throughout the period

<TABLE>
<CAPTION>
REALIZED AND
UNREALIZED DIVIDENDS
NET ASSET NET GAINS OR FROM NET
VALUE BEGINNING INVESTMENT (LOSSES) ON INVESTMENT
OF PERIOD INCOME INVESTMENTS INCOME
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTERMEDIATE TAX FREE FUND CLASS A
1997 $ 10.66 $ 0.47 $ 0.24 $ (0.47)
1996 10.72 0.46 0.01 (0.46)
1995 10.28 0.49 0.43 (0.48)
1994 10.92 0.44 (0.57) (0.44)
1993 10.56 0.47 0.42 (0.47)
1992 10.34 0.53 0.22 (0.53)
1991(1) 10.04 0.50 0.31 (0.50)
1990(2) 10.08 0.56 (0.04) (0.56)
1989(2) 10.19 0.56 (0.11) (0.56)
1988(2)(3) 10.03 0.47 0.16 (0.47)
CALIFORNIA INTERMEDIATE TAX FREE FUND CLASS A
1997(4) $ 10.00 $ 0.06 $ 0.04 $ (0.06)
COLORADO INTERMEDIATE TAX FREE FUND CLASS A
1997 $ 10.42 $ 0.48 $ 0.24 $ (0.48)
1996 10.51 0.49 (0.04) (0.49)
1995 10.15 0.49 0.36 (0.49)
1994(5) 10.00 0.21 0.16 (0.22)
MINNESOTA INTERMEDIATE TAX FREE FUND CLASS A
1997 $ 9.91 $ 0.44 $ 0.21 $ (0.44)
1996 9.92 0.45 0.02 (0.45)
1995 9.58 0.46 0.33 (0.45)
1994(6) 10.00 0.25 (0.42) (0.25)
- -----------------------------------------------------------------------------------------
</TABLE>

* TOTAL RETURN EXCLUDES SALES CHARGES.

+ RETURNS, EXCLUDING SALES CHARGES, ARE FOR THE PERIOD INDICATED AND HAVE NOT
BEEN ANNUALIZED.

(1) ON SEPTEMBER 3, 1991, THE BOARD OF DIRECTORS OF FAIF APPROVED A CHANGE IN
FAIF'S FISCAL YEAR END FROM OCTOBER 31 TO SEPTEMBER 30, EFFECTIVE SEPTEMBER
30, 1991. ALL RATIOS FOR THE PERIOD HAVE BEEN ANNUALIZED.

(2) FOR THE PERIOD ENDED OCTOBER 31.

(3) COMMENCED OPERATIONS ON DECEMBER 22, 1987. ALL RATIOS FOR THE PERIOD HAVE
BEEN ANNUALIZED.

(4) COMMENCED OPERATIONS ON AUGUST 8, 1997. ALL RATIOS FOR THE PERIOD HAVE BEEN
ANNUALIZED.

(5) COMMENCED OPERATIONS ON APRIL 4, 1994. ALL RATIOS FOR THE PERIOD HAVE BEEN
ANNUALIZED.

(6) COMMENCED OPERATIONS ON FEBRUARY 25, 1994. ALL RATIOS FOR THE PERIOD HAVE
BEEN ANNUALIZED.

<PAGE>

<TABLE>
<CAPTION>
RATIO OF
RATIO OF NET EXPENSES TO
NET ASSET RATIO OF INVESTMENT AVERAGE
DISTRIBUTIONS VALUE NET ASSETS EXPENSES TO INCOME TO NET ASSETS PORTFOLIO
FROM END OF TOTAL END OF AVERAGE AVERAGE (EXCLUDING TURNOVER
CAPITAL GAINS PERIOD RETURN* PERIOD (000) NET ASSETS NET ASSETS WAIVERS) RATE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>

$ (0.06) $ 10.84 6.84% $3,849 0.67% 4.41% 1.18% 66%
(0.07) 10.66 4.45 2,618 0.66 4.35 1.17 53
-- 10.72 9.15 983 0.67 4.71 1.30 68
(0.07) 10.28 (1.25) 1,128 0.59 4.13 2.78 52
(0.06) 10.92 8.66 2,969 0.71 4.31 5.09 27
-- 10.56 7.23 725 0.99 4.83 16.09 23
(0.01) 10.34 8.15+ 637 0.99 5.35 15.48 15
-- 10.04 5.31 537 1.08 5.58 13.85 4
-- 10.08 4.57 491 1.09 5.57 19.55 4
-- 10.19 6.73+ 425 0.84 5.87 13.60 0

$ -- $ 10.04 1.02%+ $ 1 0.69% 4.48% 1.36% 3%

$ (0.05) $ 10.61 7.11% $4,187 0.70% 4.55% 1.16% 11%
(0.05) 10.42 4.39 2,861 0.70 4.69 1.18 20
-- 10.51 8.57 2,189 0.70 4.83 1.27 19
-- 10.15 3.66+ 693 0.69 4.51 4.96 4

$ (0.03) $ 10.09 6.72% $7,453 0.70% 4.49% 1.15% 20%
(0.03) 9.91 4.80 3,916 0.70 4.52 1.18 19
-- 9.92 8.46 2,219 0.70 4.74 1.25 38
-- 9.58 (1.68) + 1,508 0.67 4.57 1.84 22
- ---------------------------------------------------------------------------------------------------------------
</TABLE>

FINANCIAL HIGHLIGHTS (continued)

The following unaudited financial highlights for California Intermediate Tax
Free Fund for the period commencing August 8, 1997 and ending December 31,
1997 should be read in conjunction with the Fund's unaudited financial
statements and the related notes thereto appearing in the Funds' Statement
of Additional Information dated January 31, 1998 as supplemented on May 15,
1998.

Further information about the Fund's performance for the period commencing
August 8, 1997 and ending December 31, 1997 is contained in such Statement
of Additional Information, which may be obtained without charge by calling
(800) 637-2548 or by writing SEI Investments Distribution Co., Oaks,
Pennsylvania 19456.

For the period ended December 31, 1997

REALIZED AND DIVIDENDS
NET ASSET NET UNREALIZED FROM NET
VALUE BEGINNING INVESTMENT GAINS ON INVESTMENT
OF PERIOD INCOME INVESTMENTS INCOME
- -----------------------------------------------------------------------

CALIFORNIA INTERMEDIATE TAX FREE FUND CLASS A(1)
$ 10.00 $ 0.17 $ (0.11) $ (0.17)
- -----------------------------------------------------------------------

+ RETURN IS FOR THE PERIOD INDICATED AND HAS NOT BEEN ANNUALIZED.

(1) COMMENCED OPERATIONS ON AUGUST 8, 1997. ALL RATIOS FOR THE PERIOD HAVE BEEN
ANNUALIZED.

<PAGE>

<TABLE>
<CAPTION>
RATIO OF
RATIO OF NET EXPENSES TO
NET ASSET RATIO OF INVESTMENT AVERAGE
DISTRIBUTION VALUE NET ASSETS EXPENSES TO INCOME TO NET ASSETS
FROM END OF TOTAL END OF AVERAGE AVERAGE (EXCLUDING PORTFOLIO
CAPITAL GAIN PERIOD RETURN PERIOD (000) NET ASSETS NET ASSETS WAIVERS) TURNOVER
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>

$ -- $ 10.11 2.86%+ $ 1 0.70% 4.40% 1.26% 11%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

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 A Shares of the Funds named on the
cover hereof. Information regarding the Class Y Shares of these Funds and
regarding the Class A, Class B and Class Y Shares of the other FAIF Funds is
contained in separate prospectuses that may be obtained from FAIF's
Distributor, SEI Investments Distribution Co., 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. Intermediate Tax Free Fund is a
diversified investment company, as defined in the Investment Company Act of
1940 (the "1940 Act"). California Intermediate Tax Free Fund, Colorado
Intermediate Tax Free Fund, and Minnesota 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 limitations on illiquid investments and borrowing. 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 invested in non-investment grade
securities. Descriptions of the rating categories of Standard & Poor's
Rating Services, a division of The McGraw-Hill Companies, Inc. ("Standard &
Poor's") and Moody's Investors Service, Inc. ("Moody's") are contained in
the Statement of Additional Information.

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."

----------------------------------------------------------------------------
INTERMEDIATE TAX FREE FUND

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

INVESTMENT POLICIES. Under normal market conditions, Intermediate Tax Free
Fund invests at least 80% of its net assets in municipal bonds and other
municipal obligations, the interest on which is, in the opinion of bond
counsel to the issuer, exempt from federal income tax. No more than

<PAGE>

20% of the securities owned by the 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 the 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 Intermediate Tax Free Fund will range from 3 to 10 years.

Intermediate Tax Free Fund may purchase obligations which are rated 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
Advisor. Unrated securities deemed to be of comparable quality to rated
securities as set forth above will not exceed 25% of the Fund's total
assets. The Fund also may purchase municipal notes which are rated no lower
than SP-1 by Standard & Poor's or MIG/VMIG-1 by Moody's or which have been
assigned an equivalent rating by another nationally recognized statistical
rating organization.

While the assets of Intermediate Tax Free Fund ordinarily will be invested
in municipal obligations, on occasion the 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, the Fund may not invest more than 20% of its assets in
investments other than municipal obligations. However, when a temporary
defensive position to protect capital is deemed advisable and practicable,
the Fund may have more than 20% 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."

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

The Fund also may (i) in order to attempt to reduce risk, invest in exchange
traded interest rate futures and interest rate index futures contracts; (ii)
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;
(iii) purchase securities on a when-issued or delayed delivery basis; and
(iv) engage in the lending of portfolio securities. In addition, the Fund
may invest up to 10% of its total 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."

The requirement, described above, that Intermediate Tax Free Fund invest at
least 80% of its net assets in tax free obligations under normal market
conditions is a fundamental policy, which cannot be changed without a
shareholder vote. Under normal market conditions, the Fund will invest at
least 65% of its total assets in municipal obligations which are municipal
bonds. See "Special Investment Methods -- Municipal Bonds and Other
Municipal Obligations."

<PAGE>

----------------------------------------------------------------------------
CALIFORNIA INTERMEDIATE TAX FREE FUND, COLORADO INTERMEDIATE TAX FREE FUND
AND MINNESOTA INTERMEDIATE TAX FREE FUND

OBJECTIVES. 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. Colorado Intermediate Tax Free Fund has an objective of providing
current income which is exempt from both federal income tax and Colorado
state income tax to the extent consistent with preservation of capital.
Minnesota Intermediate Tax Free Fund has an objective of providing current
income which is exempt from both federal income tax and Minnesota 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 any of these Funds will generate income that is an item of tax
preference for the purpose of the federal alternative minimum tax and, in
the case of Minnesota Intermediate Tax Free Fund, for the purpose of the
Minnesota alternative minimum tax. Municipal obligations generating income
subject to taxation under the federal alternative minimum tax rules or, in
the case of Minnesota Intermediate Tax Free Fund, under the Minnesota
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 Advisor. Unrated securities deemed to be of
comparable quality to rated securities as set forth above will not exceed
25% of each Fund's total assets. Each of these Funds also may purchase
municipal notes which are rated no lower than SP-1 by Standard & Poor's or
MIG/VMIG-1 by Moody's or which have been assigned an equivalent rating by
another nationally recognized statistical rating organization.

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, 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 Advisor. 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

<PAGE>

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 interest rate futures and interest rate index futures
contracts; (ii) 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; (iii) purchase securities on a when-issued or delayed
delivery basis; (iv) engage in the lending of portfolio securities; and (v)
invest up to 10% of its total 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."

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RISKS TO CONSIDER

An investment in any of the 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 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 the Funds bear the risk that increases in market
interest rates will cause the value of their Fund's portfolio investments to
decline.

Although the Advisor 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 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 the 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 Funds'
permitted investments, as described elsewhere in this Prospectus, are
intended to limit the amount of credit risk undertaken by the 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 Advisor. 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 a 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 Funds invest in
callable bonds, Fund shareholders bear the risk that reductions in income
will result from the call of bonds.

POLITICAL AND ECONOMIC CONDITIONS. The value of municipal obligations owned
by the 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). The value of certain municipal obligations
may also be adversely affected by the enactment of changes to certain
federal or state income tax laws, including, but not limited to, income tax
rate reductions or the imposition of a flat tax.

Intermediate Tax Free Fund cannot invest 25% or more of its total assets in
obligations of issuers located in the same state (for this purpose, the
location of an "issuer" shall be deemed to be the location of the entity the
revenues of which are the primary source of payment or the location of the
project or facility which may be the subject of the obligation). See
"Special Investment Methods -- Investment Restrictions." California
Intermediate Tax Free Fund, Colorado Intermediate Tax Free Fund and
Minnesota 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 three Funds
will be particularly affected by local conditions in those states. A more
detailed description of the factors affecting California, Colorado and
Minnesota issuers of municipal obligations is set forth in the Statement of
Additional Information.

YEAR 2000. Like other mutual funds, financial and business organizations,
the Funds could be adversely affected if the computer systems used by the
Advisor, the Administrator and other service providers and entities with
computer systems that are linked to Fund records do not properly process and
calculate date-related information and data from and after January 1, 2000.
This is commonly known as the "Year 2000 issue." The Funds have undertaken a
Year 2000 program that is believed by the Advisor to be reasonably designed
to assess and monitor the steps being taken by the Funds' service providers
to address the Year 2000 issue with respect to the computer systems they
use. However, there can be no assurance that these steps will be sufficient
to avoid any adverse impact on the Funds.

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

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 Advisor
acts as investment advisor for and manages the investment portfolios of
FAIF.

<PAGE>

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INVESTMENT ADVISOR

U.S. Bank National Association, 601 Second Avenue South, Minneapolis,
Minnesota 55402, acts as the Funds' investment advisor through its First
American Asset Management group. The Advisor has acted as an investment
advisor to FAIF since its inception in 1987 and has acted as investment
advisor to First American Funds, Inc. since 1982 and to First American
Strategy Funds, Inc. since 1996. As of September 30, 1997, the Advisor was
managing accounts with an aggregate value of approximately $55 billion,
including mutual fund assets of approximately $20 billion. U.S. Bancorp, 601
Second Avenue South, Minneapolis, Minnesota 55402, is the holding company
for the Advisor.

Each of the Funds has agreed to pay the Advisor monthly fees calculated on
an annual basis equal to 0.70% of its average daily net assets. The Advisor
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 Advisor 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 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 advisors 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, FAIF has received an opinion from its
counsel that the Advisor is not prohibited from performing the investment
advisory services described above, and that certain broker-dealers
affiliated with the Advisor, are 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 Advisor and
certain affiliated broker-dealers 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.

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PORTFOLIO MANAGERS

Intermediate Tax Free Fund, California Intermediate Tax Free Fund and
Minnesota Intermediate Tax Free Fund are each managed by a committee
comprised of Mr. Drahn and Mr. White. Colorado Intermediate Tax Free Fund
is managed by a committee comprised of Mr. Drahn and Mr. Knight.

CHRISTOPHER L. DRAHN is a member of the committees that manage the Funds. He
joined the Advisor in 1985 and has 12 years of investment industry
experience. Mr. Drahn received his bachelor's degree from Wartburg College
and his master's degree in business administration from the University of
Minnesota. He is a Chartered Financial Analyst.

<PAGE>

to joining the Advisor in 1998, Mr. White served as a senior vice
president and portfolio co-manager for Piper Capital Management
Incorporated, overseeing the management of several Piper Funds, including
the Piper Funds Tax-Exempt Fund and Minnesota Tax-Exempt Fund. Mr. White
received his bachelor's degree in political science from Carleton College
and his master's degree in business administration from the University of
Minnesota. Mr. White is a Chartered Financial Analyst.

STEVEN J. KNIGHT is a member of the committee that manages Colorado
Intermediate Tax Free Fund. Mr. Knight has over 17 years of investment
industry experience. Mr. Knight joined the Advisor in 1997. Prior to
joining the Advisor, Mr. Knight served as an international investment
director at Principal International, Inc. in Des Moines, Iowa. Mr. Knight
received his bachelor's degree from Central College and his master's
degree in economics from the University of Iowa. He is a Chartered
Financial Analyst.

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CUSTODIAN

The Custodian of the Funds' assets is U.S. Bank National Association (the
"Custodian"), U.S. Bank Center, 180 East Fifth Street, St. Paul, Minnesota
55101. The Custodian is a subsidiary of U.S. Bancorp.

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 for its
out-of-pocket expenses incurred while providing its services to the Funds.

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ADMINISTRATOR

The administrator for the Funds is SEI Investments 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, 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. U.S.
Bank assists the Administrator and provides sub-administration services for
the Funds. For these services, the Administrator compensates the
sub-administrator at an annual rate of up to 0.05% of each Fund's average
daily net assets.

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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 330 West Ninth Street, Kansas City, Missouri 64105. The Transfer Agent
is not affiliated with the Distributor, the Administrator or the Advisor.

Effective October 1, 1998, FAIF has appointed U.S. Bank as servicing agent
to perform certain transfer agent and dividend disbursing agent services
with respect to the Class A Shares of the Funds held through accounts at
U.S. Bank and its affiliates. The Funds pay U.S. Bank an annual fee of $15
per account for such services.

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, which is not affiliated with the
Advisor, is a wholly-owned subsidiary of SEI

<PAGE>

Investments Company, and is located at Oaks, Pennsylvania 19456.

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.

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") pursuant to
which the Distributor agrees to provide, or enter into written agreements
with service providers to provide, one or more specified shareholder
services to beneficial owners of shares of the Funds. 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." In consideration of the services and facilities to
be provided by the Distributor or any service provider, each Fund also pays
the Distributor a shareholder servicing fee at an annual rate of 0.25% of
the Fund's Class A Shares' average daily net asset value, which fee is
computed and paid monthly. However, for a one year period following the date
of purchase, the Fund pays no shareholder servicing fee for Class A Shares
which are sold at net asset value if a commission is paid in connection
with such sale. 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 Advisor 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 any of the Funds. Any such waivers may
be made at the Distributor's discretion and may be terminated at any time.

The Class A Distribution Plan recognizes that the Advisor, 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
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 Advisor may pay amounts to broker-dealers from its
own assets with respect to such sales. U.S. Bancorp Investments, Inc. and
U.S. Bancorp Piper Jaffray Inc., broker-dealers affiliated with the Advisor,
are Participating Institutions.

INVESTING IN THE FUNDS

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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
both the New York Stock Exchange and federally- chartered banks are 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.

<PAGE>

Certain financial institutions 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.

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: U.S. Bank National Association,
Minneapolis, Minnesota, ABA Number 091000022; For Credit To: DST Systems,
Inc., 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 or federally-chartered
banks are closed.

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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 the Advisor and its
affiliates.

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CLASS A SHARE PRICE AND SALES CHARGE

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:

<TABLE>
<CAPTION>
MAXIMUM
AMOUNT OF
SALES CHARGE SALES CHARGE SALES CHARGE
AS PERCENTAGE AS PERCENTAGE REALLOWED TO
OF OFFERING OF NET ASSET PARTICIPATING
PRICE VALUE INSTITUTIONS
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
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%
- ---------------------------------------------------------------------------------------
</TABLE>

There is no initial sales charge on purchases of Class A Shares of $1
million or more. However, Participating Institutions may receive a
commission equal to 1.00% of the first $3 million of

<PAGE>

shares purchased, 0.75% of shares purchased in excess of $3 million up to $5
million, and 0.50% of shares purchased in excess of $5 million. If such a
commision is paid, redemptions of Class A Shares purchased at net asset
value within 12 months of such purchases will be subject to a contingent
deferred sales charge of 1.00%. 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 as of the close of normal trading on the New
York Stock Exchange (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) days on which the New York Stock
Exchange or federally-chartered banks are closed including, but not limited
to, the following federal holidays: New Year's Day, Martin Luther King, Jr.
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.

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

<PAGE>

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.

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 Advisor, 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 advisors, 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 investors participating in asset
allocation "wrap" accounts offered by the Advisor or any of its affiliates,
and by retirement and deferred compensation plans and the trusts used to
fund such plans (including, but not limited to, those defined in sections
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. No
commission is paid in connection with net asset value purchases of Class A
Shares made pursuant to this paragraph, nor is any contingent deferred sales
charge imposed upon the redemption of such shares.

Class A Shares may also be purchased without a sales charge by retirement
and deferred compensation plans and trusts used to fund such plans as
defined in Sections 401(a), 403(b) and 457 of the Internal Revenue Code
which either have 200 or more eligible participants or purchase shares
through a Participating Institution that is an affiliate of the Advisor. A
contingent deferred sales charge of 1.00% will be imposed if such shares
are redeemed within 12 months of such purchase. Participating Institutions
may receive a commission on such sales equal to 1.00% of the first $3
million of shares purchased, 0.75% of shares purchased in excess of $3
million and up to $5 million and 0.50% of shares purchased in excess of $5
million.

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

<PAGE>

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

----------------------------------------------------------------------------
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.

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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 by calling (800) 637-2548.

----------------------------------------------------------------------------
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 Advisor 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.

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DIVIDENDS AND DISTRIBUTIONS

<PAGE>

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 A Shares generally will be less
than the dividends payable on Class Y Shares because of the shareholder
servicing, transfer agent and/or dividend disbursing expenses charged to
Class A Shares.

----------------------------------------------------------------------------
EXCHANGE PRIVILEGE

Shareholders may exchange Class A Shares of a Fund for currently available
Class A Shares of the other FAIF Funds or of other funds in the First
American family of funds. 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
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.

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 -- By Mail." None of the Funds, the Distributor, the Transfer Agent,
any shareholder servicing agent, nor 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.

Shareholders of the Funds may have difficulty in making exchanges by
telephone through brokers

<PAGE>

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., 330 West Ninth
Street, Kansas City, Missouri 64105. The exchange privilege should not be
used to take advantage of short-term swings in the securities markets. The
Funds reserve the right to limit or terminate exchange privileges as to any
shareholder who makes exchanges more than four times a year (other than
through the Systematic Exchange Program or similar periodic investment
programs). The Funds may modify or revoke the exchange privilege for all
shareholders upon 60 days' prior written notice or without notice in times
of drastic economic or market changes.

Shares of a class may be exchanged for shares of a class in which an
investor subsequently becomes eligible to participate. An example of such an
exchange would be a situation in which an individual holder of Class A
Shares subsequently opens a fiduciary, custody or agency account with a
financial institution which invests in Class Y Shares.

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 the imposition
of any additional fees or charges.

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.

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.

<PAGE>

procedures to confirm that instructions communicated are 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.

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. Shares are redeemed at net asset value less any applicable
contingent deferred sales charge. See "Investing in the Funds -- Class A
Share Price and Sales Charge."

The net asset value per share is determined as of the close of normal
trading on the New York Stock Exchange (3:00 p.m. Central time) on each day
the New York Stock Exchange and federally-chartered banks are 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 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.
Security valuations are furnished by an independent pricing service that has
been approved by the Board of Directors.

Debt obligations with remaining maturities in excess of 60 days are valued
at the most recently quoted bid price. For such debt obligations the pricing
service may employ methods that utilize actual market transactions,
broker-dealer valuations, or other electronic data processing techniques.
These techniques generally consider such factors as security prices, yields,
maturities, call features, ratings and developments relating to specific
securities in arriving at security valuations. Debt obligations with
remaining maturities of 60 days or less may be valued at their amortized
cost which approximates market value. If a security price cannot be obtained
from an independent pricing service a bid price may be obtained from an
independent broker who makes a market in the security.

If the value for a security cannot be obtained from the sources described
above, the security's value may be determined pursuant to the fair value
procedures established by the Board of Directors.

Financial futures are valued at the settlement price established each day by
the board of exchange on which they are traded. Portfolio securities
underlying actively traded options are valued at

<PAGE>

their market price as determined above. The current market value of any
exchange traded options held or written by a Fund, are valued at the closing
bid price for a long position or the closing ask price for a short position.

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 differing
shareholder servicing, transfer agent and/or dividend disbursing expenses
charged to Class A Shares.

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 all of the Funds intend 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 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 and from any net realized
short-term capital gains will be taxable to shareholders as ordinary income,
whether received in cash or in additional shares. Since none of the Funds'
income will consist of dividends from domestic corporations, the
dividends-received deduction for corporations will not be applicable to
taxable distributions by the Funds. Distributions paid from long-term
capital gains (and designated as such) generally 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. In the case of shareholders who are individuals, estates, or trusts,
each Fund will designate the portion of each capital gain dividend that must
be treated as mid-term capital gain and the portion that must be treated as
long-term capital gain.

Gain or loss realized on the sale or exchange of shares in a Fund will be
treated as capital gain or loss, provided that the shares represented a
capital asset in the hands of the shareholder. Such gain or loss will be
long-term (subject to a maximum 20% tax rate in the case of individuals,
estates and trusts) 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 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. Each 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, 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 advisor with respect to the possible effects of such tax preference
items.

The Tax Reform Act of 1986 imposed new requirements on certain tax-exempt
bonds which,

<PAGE>

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 Funds. The Funds will avoid investment in bonds
which, in the opinion of the Advisor, pose a material risk of the loss of
tax exemption. Further, if a bond in a 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
Funds.

Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Funds 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

The portion of exempt-interest dividends paid by California Intermediate Tax
Free Fund that is derived from interest on tax-exempt obligations issued by
the State of California, its political subdivisions and instrumentalities,
is excluded from the California taxable income of individuals, estates, and
trusts, 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. The
remaining portion of such dividends, and dividends that are not
exempt-interest dividends or capital gains dividends, are included in the
California taxable income of individuals, estates and trusts, except for
dividends directly attributable to interest on obligations of the United
States Government, its territories and possessions. Exempt-interest
dividends are not excluded from the California taxable income of
corporations and financial institutions. Dividends qualifying for federal
income tax purposes as capital gains dividends are to be treated by
shareholders as long-term capital gains. California has repealed the
favorable treatment of long-term capital gains, while retaining restrictions
on the deductibility of capital losses. Dividends generally will not qualify
for the dividends-received deduction for corporations and financial
institutions.

----------------------------------------------------------------------------
COLORADO INCOME TAXATION

To the extent that dividends paid by Colorado Intermediate Tax Free Fund are
derived from interest on tax-exempt obligations issued by the State of
Colorado, its political subdivisions and instrumentalities, such dividends
will also be exempt from Colorado income taxes for individuals, trusts,
estates, and corporations. The remaining portion of such dividends are
included in the Colorado taxable income of individuals, trusts, estates, and
corporations, except for dividends directly attributable to interest on
obligations of the United States Government. Dividends qualifying for
federal income tax purposes as capital gain dividends are to be treated by
shareholders as long-term capital gains under Colorado law. However,
Colorado has repealed the favorable treatment of long-term capital gains,
while retaining restrictions on the deductibility of capital losses.

Dividends paid by Colorado Intermediate Tax Free Fund that are derived from
interest on tax-exempt

<PAGE>

obligations issued by the State of Colorado, its political subdivisions and
instrumentalities (including tax-exempt obligations treated for federal
purposes as private activity bonds) will not be treated as items of tax
preference for purposes of the alternative minimum tax that Colorado imposes
on individuals, trusts and estates.

As under federal law, the portion of Social Security benefits subject to
Colorado income tax may be affected by the amount of exempt-interest
dividends received by the shareholders.

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MINNESOTA INCOME TAXATION

The portion of exempt-interest dividends paid by Minnesota Intermediate Tax
Free Fund that is derived from interest on tax-exempt obligations issued by
the State of Minnesota, its political subdivisions and instrumentalities, is
excluded from the Minnesota taxable net income of individuals, estates and
trusts, provided that the portion of the exempt-interest dividends from such
Minnesota sources paid to all shareholders represents 95% or more of the
exempt-interest dividends paid by the respective Fund. The remaining portion
of such dividends, and dividends that are not exempt-interest dividends or
capital gain dividends, are included in the Minnesota taxable net income of
individuals, estates and trusts, except for dividends directly attributable
to interest on obligations of the United States Government, its territories
and possessions. Exempt-interest dividends are not excluded from the
Minnesota taxable income of corporations and financial institutions.
Dividends qualifying for federal income tax purposes as capital gain
dividends are to be treated by shareholders as long-term capital gains.
Minnesota has repealed the favorable treatment of long-term capital gains,
while retaining restrictions on the deductibility of capital losses. As
under federal law, the portion of Social Security benefits subject to
Minnesota income tax may be affected by the amount of exempt-interest
dividends received by the shareholders. Exempt-interest dividends
attributable to interest on certain private activity bonds issued after
August 7, 1986 will be included in Minnesota alternative minimum taxable
income of individuals, estates and trusts for purposes of computing
Minnesota's alternative minimum tax. Dividends generally will not qualify
for the dividends-received deduction for corporations and financial
institutions.

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OTHER STATE AND LOCAL TAXATION

Except to the extent described above under "-- California Income Taxation,"
"-- Colorado Income Taxation" and "-- Minnesota 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 advisors regarding state and local taxation.

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 federal income taxes; (ii)
exempt from both federal and California income taxes; (iii) exempt from both
federal and Colorado income taxes; and (iv) exempt from both federal and
Minnesota income taxes under selected income tax brackets scheduled to be in
effect in 1998. The effective combined rates reflect the deduction of state
income taxes from federal income. The 34.7%, 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 31.6%, 34.5%, 39.2% and 42.6%
combined federal/Colorado rates assume that the investor is subject to a 5%
Colorado income tax rate and a marginal federal income tax rate of 28%, 31%,
36% and 39.6%, respectively. The 34.1%, 36.9%, 41.4%, and 44.7% combined
federal/Minnesota rates assume that the investor is subject to an 8.5%
marginal Minnesota income tax rate and a

<PAGE>

Tax-Equivalent Yields
<TABLE>
<CAPTION>
Combined Federal and
Federal Tax Brackets California Tax Brackets
Tax-Free
Yields 28% 31% 36% 39.6% 34.7% 37.4% 42.0% 45.2%
- ------------------------------------------------------ ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
3.0% 4.17% 4.35% 4.69% 4.97% 4.59% 4.79% 5.17% 5.47%
3.5% 4.86% 5.07% 5.47% 5.79% 5.37% 5.59% 6.03% 6.39%
4.0% 5.56% 5.80% 6.25% 6.62% 6.13% 6.39% 6.90% 7.30%
4.5% 6.25% 6.52% 7.03% 7.45% 6.89% 7.19% 7.76% 8.21%
5.0% 6.94% 7.25% 7.81% 8.28% 7.66% 7.99% 8.62% 9.12%
5.5% 7.64% 7.97% 8.59% 9.11% 8.42% 8.79% 9.48% 10.04%
6.0% 8.33% 8.70% 9.38% 9.93% 9.19% 9.58% 10.34% 10.95%
6.5% 9.03% 9.42% 10.16% 10.76% 9.95% 10.38% 11.21% 11.86%
- ------------------------------------------------------ ---------------------------------------
</TABLE>

[WIDE TABLE CONTINUED FROM ABOVE]

<TABLE>
<CAPTION>
Combined Federal and Combined Federal and
Colorado Tax Brackets Minnesota Tax Brackets
Tax-Free
Yields 31.6% 34.5% 39.2% 42.6% 34.1% 36.9% 41.4% 44.7%
- ------------------------------------------------------ ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
3.0% 4.39% 4.58% 4.93% 5.23% 4.55% 4.75% 5.12% 5.42%
3.5% 5.12% 5.34% 5.76% 6.10% 5.31% 5.55% 5.97% 6.33%
4.0% 5.85% 6.11% 6.58% 6.97% 6.07% 6.34% 6.83% 7.23%
4.5% 6.58% 6.87% 7.40% 7.84% 6.83% 7.13% 7.68% 8.14%
5.0% 7.31% 7.63% 8.22% 8.71% 7.59% 7.92% 8.53% 9.04%
5.5% 8.04% 8.40% 9.05% 9.58% 8.35% 8.72% 9.39% 9.95%
6.0% 8.77% 9.16% 9.87% 10.45% 9.10% 9.51% 10.24% 10.85%
6.5% 9.50% 9.92% 10.69% 11.32% 9.86% 10.30% 11.09% 11.75%
- ------------------------------------------------------ ---------------------------------------
</TABLE>

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 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.

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.

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 of shares, 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 of
shares.

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 "tax equivalent yield,"
its "cumulative total return," its "average annual total return," its
"distribution rate" 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 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

<PAGE>

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.

"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.

"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 A Shares of a Fund will normally be lower than
for the Class Y Shares because Class Y Shares are not subject to the sales
charges and shareholder servicing, transfer agent and/or dividend disbursing
expenses applicable to Class A 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.

PERFORMANCE INFORMATION FOR SUCCESSOR TO COMMON TRUST FUNDS

From time to time California Intermediate Tax Free Fund may advertise
performance information which includes performance data of certain
predecessor common trust funds.

California Intermediate Tax Free 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 the Fund.
One predecessor common trust fund was managed by the Advisor, while the
other was managed by Qualivest Capital

<PAGE>

Management, Inc. prior to the acquisition of its parent company by the
Advisor's parent company. The personnel who managed that common trust fund
on behalf of Qualivest Capital Management, Inc. became employees of the
Advisor, and assumed management of the Fund, at the time the assets were
transferred from the common trust fund to the Fund.

Such performance data is deemed relevant because the common trust funds were
managed using investment objectives, policies and restrictions very similar
to those of the Fund. 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, their performance could have been adversely affected by virtue of such
investment restrictions. In addition, the predecessor common trust funds did
not incur the same expenses as California Intermediate Tax Free Fund.

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 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.

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 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 Fund also may purchase participation interests in
municipal leases.

<PAGE>

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 Fund
of the full principal amount represented by an obligation.

In light of these concerns, each 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 Advisor may deem relevant. As described below under
"-- Investment Restrictions," each Fund is subject to limitations on the
percentage of illiquid securities it can hold.

----------------------------------------------------------------------------
TEMPORARY TAXABLE INVESTMENTS

Each of the 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 (including zero coupon securities); (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

<PAGE>

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 Advisor will monitor
the creditworthiness of the firms with which the Funds enter into repurchase
agreements.

----------------------------------------------------------------------------
INVERSE FLOATING RATE OBLIGATIONS

Each of the Funds may invest up to 10% of its total 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.

----------------------------------------------------------------------------
ZERO COUPON SECURITIES

Each of the Funds may invest in zero coupon, fixed income securities. Zero
coupon securities pay no cash income to their holders until they mature and
are issued at substantial discounts from their value at maturity. When held
to maturity, their entire return comes from the difference between their
purchase price and their maturity value. Because interest on zero coupon
securities is not paid on a current basis, the values of securities of this
type are subject to greater fluctuations than are the value of securities
that distribute income regularly and may be more speculative than such
securities. Accordingly, the values of these securities may be highly
volatile as interest rates rise or fall.

<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 Advisor 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 Advisor) in connection
with these loans, which in the case of U.S. Bank, are 40% of the Funds'
income from such securities lending transactions.

----------------------------------------------------------------------------
OPTIONS TRANSACTIONS

Each of the Funds may, in order to reduce risk, invest in exchange traded
put and call options 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.

None of the 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.

Options on interest rate indices give 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
to hedge the value of a portfolio of debt securities against anticipated
changes in interest rates.

The use of options 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.

----------------------------------------------------------------------------
FUTURES AND OPTIONS ON FUTURES

The Funds may engage in futures transactions and purchase options on futures
to the extent specified with under "Investment Objectives and Policies."
These transactions may include the purchase of interest rate index futures
and options on interest rate index futures.

<PAGE>

acquisition of put and call options on futures contracts will, respectively,
give a Fund the right (but not the obligation), for a specified exercise
price, to sell or to purchase the underlying futures contract at any time
during the option period. A Fund may use futures contracts and options on
futures in an effort to hedge against market risks.

Aggregate initial margin deposits for futures contracts, and premiums paid
for related options, may not exceed 5% of a Fund's total assets, and the
value of securities that are the subject of such futures and options (both
for receipt and delivery) may not exceed 1/3 of the market value of a Fund's
total assets. Futures transactions will be limited to the extent necessary
to maintain each Fund's qualification as a regulated investment company
under the Code.

Where a Fund is permitted to purchase options on futures, its potential loss
is limited to the amount of the premiums paid for the options. As stated
above, this amount may not exceed 5% of a Fund's total assets. Where a Fund
is permitted to enter into futures contracts obligating it to purchase an
index in the future at a specified price, such Fund could lose 100% of its
net assets in connection therewith if it engaged extensively in such
transactions and if the index value of the subject index at the delivery or
settlement date fell to zero for all contracts into which a Fund was
permitted to enter.

A Fund may lose the expected benefit of futures transactions if interest
rates, move in an unanticipated manner. Such unanticipated changes may also
result in poorer overall performance than if the Fund had not entered into
any futures transactions.

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

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 Advisor. 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 (100%
or more) 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.

<PAGE>

* 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.

* Intermediate Tax Free Fund will not invest 25% or more of the value of
its total assets in obligations of issuers located in the same state
(for this purpose, the location of an "issuer" shall be deemed to be the
location of the entity the revenues of which are the primary source of
payment or the location of the project or facility which may be the
subject of the obligation). None of the 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 "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 or, in
the case of Intermediate Tax Free Fund, to pollution control revenue
bonds. However, in the case of the latter Fund, it is anticipated that
normally (unless there are unusually favorable interest and market
factors) less than 25% of such Fund's total assets will be invested in
pollution control bonds. 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 SEC 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 U.S. BANK NATIONAL ASSOCIATION
AND OTHER AFFILIATES

U.S. Bank National Association and other affiliates of U.S. Bancorp may act
as fiduciary with respect to plans subject to the Employee Retirement Income
Security Act of 1974 ("ERISA") and other trust and agency accounts that
invest in the Funds. These U.S. Bancorp affiliates may receive compensation
from the Funds for the services they provide to the Funds, as described more
fully in the following sections of this Prospectus:

Investment advisory services -- see "Management-Investment Advisor"

Custodian services -- see "Management-Custodian"

Sub-administration -- see "Management-Administrator"

Shareholder servicing -- see "Distributor"

Securities lending -- see "Special Investment Methods-Lending of Portfolio
Securities"

Transfer agent services -- see "Management-Transfer Agent"

<PAGE>

FIRST AMERICAN INVESTMENT FUNDS, INC.
Oaks, Pennsylvania 19456

Investment advisor
U.S. BANK NATIONAL ASSOCIATION
601 Second Avenue South
Minneapolis, Minnesota 55402

Custodian
U.S. BANK NATIONAL ASSOCIATION
180 East Fifth Street
St. Paul, Minnesota 55101

Distributor
SEI INVESTMENTS DISTRIBUTION CO.
Oaks, Pennsylvania 19456

Administrator
SEI INVESTMENTS MANAGEMENT CORPORATION
Oaks, Pennsylvania 19456

Transfer Agent
DST SYSTEMS, INC.
330 West Ninth Street
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-1002 (7/98) R

<PAGE>

JANUARY 31, 1998
AS SUPPLEMENTED ON MAY 15, 1998 AND JULY 24, 1998

TAX FREE BOND FUNDS

CLASS Y SHARES

INTERMEDIATE TAX
FREE FUND

CALIFORNIA INTERMEDIATE
TAX FREE FUND

COLORADO INTERMEDIATE
TAX FREE FUND

MINNESOTA INTERMEDIATE
TAX FREE FUND

OREGON INTERMEDIATE
TAX FREE FUND

FIRST AMERICAN
INVESTMENT FUNDS, INC.

PROSPECTUS

[LOGO] FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING(R)

<PAGE>

TABLE OF CONTENTS

Summary 2
..............................................
Fees and Expenses 4
..............................................
Financial Highlights 6
..............................................
The Funds 10
..............................................
Investment Objectives and Policies 10
..............................................
Management 15
..............................................
Distributor 16
..............................................
Purchases and Redemptions of Shares 17
..............................................
Income Taxes 20
..............................................
Tax-Exempt vs. Taxable Income 23
..............................................
Fund Shares 23
..............................................
Calculation of Performance Data 24
..............................................
Performance Information for Successors to
Common Trust Funds 25
..............................................
Special Investment Methods 25
..............................................
Information Concerning Compensation Paid
to U.S. Bank National Association and Other
Affiliates 31
..............................................

<PAGE>

FIRST AMERICAN INVESTMENT FUNDS, INC.

CLASS Y SHARES PROSPECTUS

* INTERMEDIATE TAX FREE FUND

* CALIFORNIA INTERMEDIATE
TAX FREE FUND

* COLORADO INTERMEDIATE
TAX FREE FUND

* MINNESOTA INTERMEDIATE
TAX FREE FUND

* OREGON INTERMEDIATE
TAX FREE 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 January 31, 1998 as supplemented on May 15,
1998 and July 24, 1998.

<PAGE>

SUMMARY

OREGON INTERMEDIATE TAX FREE FUND has an objective of providing current
income which is exempt from both federal 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.

INVESTMENT ADVISOR. U.S. Bank National Association (the "Advisor" or "U.S.
Bank") serves as investment advisor to each of the Funds though its First
American Asset Management group. See "Management."

ELIGIBLE INVESTORS; OFFERING PRICES. Class Y Shares are offered through
banks and certain other

<PAGE>

institutions for the investment of their own funds and funds for which they
act in a fiduciary, agency or custodial capacity. Class Y Shares are sold at
net asset value without any front-end or deferred sales charges.
See "Purchases and Redemptions of Shares."

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

In addition, the value of municipal obligations held by the 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 California
Intermediate Tax Free Fund, Colorado Intermediate Tax Free Fund, Minnesota
Intermediate Tax Free Fund and Oregon Intermediate Tax Free Fund invest
principally in municipal obligations of issuers located only in California,
Colorado, Minnesota and Oregon, respectively. See "Investment Objectives and
Policies -- Risks to Consider" and "Special Investment Methods."

<PAGE>

FEES AND EXPENSES

----------------------------------------------------------------------------
CLASS Y SHARE FEES AND EXPENSES

<TABLE>
<CAPTION>
CALIFORNIA COLORADO MINNESOTA OREGON
INTERMEDIATE INTERMEDIATE INTERMEDIATE INTERMEDIATE INTERMEDIATE
TAX FREE TAX FREE TAX FREE TAX FREE TAX FREE
FUND FUND FUND FUND FUND
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed
on purchases None None None None None
Maximum sales load imposed on
reinvested dividends None None None None None
Deferred sales load None None None None None
Redemption fees None None None None None
Exchange fees None None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment advisory fees (after voluntary
fee waivers)(1) 0.47% 0.29% 0.49% 0.50% 0.31%
Rule 12b-1 fees None None None None None
Other expenses 0.23% 0.41% 0.21% 0.20% 0.39%
Total fund operating expenses
(after voluntary fee waivers )(1) 0.70% 0.70% 0.70% 0.70% 0.70%
- ----------------------------------------------------------------------------------------------------------------------------
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 $7 $7 $7
3 years $22 $22 $22 $22 $22
5 years $39 $39 $39 $39 $39
10 years $87 $87 $87 $87 $87
</TABLE>

(1) THE ADVISOR 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 ADVISOR INTENDS TO MAINTAIN SUCH WAIVERS IN EFFECT FOR THE CURRENT
FISCAL YEAR BUT RESERVES THE RIGHT TO DISCONTINUE SUCH WAIVERS AT ANY TIME
IN ITS SOLE DISCRETION. ABSENT ANY FEE WAIVERS, INVESTMENT ADVISORY FEES FOR
EACH FUND AS AN ANNUALIZED PERCENTAGE OF AVERAGE DAILY NET ASSETS WOULD BE
0.70%; AND TOTAL FUND OPERATING EXPENSES CALCULATED ON SUCH BASIS WOULD BE
0.93% FOR INTERMEDIATE TAX FREE FUND, 1.11% FOR CALIFORNIA INTERMEDIATE TAX
FREE FUND, 0.91% FOR COLORADO INTERMEDIATE TAX FREE FUND, 0.90% FOR
MINNESOTA INTERMEDIATE TAX FREE FUND AND 1.09% FOR OREGON INTERMEDIATE TAX
FREE FUND. "OTHER EXPENSES" INCLUDES AN ADMINISTRATION FEE.

(2) ABSENT THE FEE WAIVERS REFERRED TO IN (1) ABOVE, THE DOLLAR AMOUNTS FOR THE
1, 3, 5 AND 10-YEAR PERIODS WOULD BE AS FOLLOWS: INTERMEDIATE TAX
FREE FUND, $9, $30, $51 AND $114; CALIFORNIA INTERMEDIATE TAX FREE FUND,
$11, $35, $61, AND $135; COLORADO INTERMEDIATE TAX FREE FUND, $9, $29, $50
AND $112; MINNESOTA INTERMEDIATE TAX FREE FUND, $9, $29, $50 AND $111; AND
OREGON INTERMEDIATE TAX FREE FUND, $11, $35, $60 AND $133.

<PAGE>

----------------------------------------------------------------------------
INFORMATION CONCERNING FEES AND EXPENSES

<PAGE>

FINANCIAL HIGHLIGHTS

For the periods ended September 30,
For a share outstanding throughout this period

REALIZED AND
UNREALIZED DIVIDENDS
NET ASSET NET GAINS OR FROM NET
VALUE BEGINNING INVESTMENT (LOSSES) ON INVESTMENT
OF PERIOD INCOME INVESTMENTS INCOME
- -------------------------------------------------------------------------------

INTERMEDIATE TAX FREE FUND CLASS Y
1997 $ 10.65 $ 0.47 $ 0.23 $ (0.47)
1996 10.72 0.46 0.00 (0.46)
1995 10.28 0.49 0.43 (0.48)
1994(1) 10.89 0.29 (0.61) (0.29)
CALIFORNIA INTERMEDIATE TAX FREE FUND CLASS Y
1997(2) $ 10.00 $ 0.06 $ 0.03 $ (0.06)
COLORADO INTERMEDIATE TAX FREE FUND CLASS Y
1997 $ 10.42 $ 0.48 $ 0.24 $ (0.48)
1996 10.51 0.49 (0.04) (0.49)
1995 10.16 0.48 0.36 (0.49)
1994(3) 10.00 0.22 0.16 (0.22)
MINNESOTA INSURED INTERMEDIATE TAX FREE FUND CLASS Y
1997 $ 9.91 $ 0.44 $ 0.18 $ (0.44)
1996 9.92 0.45 0.02 (0.45)
1995 9.59 0.45 0.33 (0.45)
1994(4) 10.00 0.25 (0.41) (0.25)
OREGON INTERMEDIATE TAX FREE FUND CLASS Y
1997(2) $ 10.00 $ 0.07 $ 0.05 $ (0.07)
- -------------------------------------------------------------------------------

+ RETURNS ARE FOR THE PERIOD INDICATED AND HAVE NOT BEEN ANNUALIZED.

(1) THIS CLASS OF SHARES HAS BEEN OFFERED SINCE FEBRUARY 4, 1994 (THE FUND
ITSELF HAVING COMMENCED OPERATIONS ON DECEMBER 22, 1987). ALL RATIOS FOR
THE PERIOD HAVE BEEN ANNUALIZED.

(2) COMMENCED OPERATIONS ON AUGUST 8, 1997. ALL RATIOS FOR THE PERIOD HAVE BEEN
ANNUALIZED.

<PAGE>

<TABLE>
<CAPTION>
RATIO OF
RATIO OF NET EXPENSES TO
NET ASSET RATIO OF INVESTMENT AVERAGE
DISTRIBUTIONS VALUE NET ASSETS EXPENSES TO INCOME TO NET ASSETS
FROM END OF END OF AVERAGE AVERAGE (EXCLUDING PORTFOLIO
CAPITAL GAINS PERIOD TOTAL RETURN PERIOD (000) NET ASSETS NET ASSETS WAIVERS) TURNOVER RATE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ (0.06) $ 10.82 6.75% $431,000 0.67% 4.40% 0.93% 66%
(0.07) 10.65 4.35 66,994 0.66 4.35 0.92 53
-- 10.72 9.15 46,025 0.67 4.73 1.05 68
-- 10.28 (2.91)+ 6,168 0.45 4.48 2.20 52
$ -- $ 10.03 0.92%+ $ 33,287 0.69% 4.14% 1.11% 3%
$ (0.05) $ 10.61 7.11% $ 54,378 0.70% 4.55% 0.91% 11%
(0.05) 10.42 4.39 48,927 0.70 4.69 0.93 20
-- 10.51 8.47 50,071 0.70 4.84 1.02 19
-- 10.16 3.76+ 7,281 0.69 4.51 4.71 4
$ (0.03) $ 10.06 6.42% $297,122 0.70% 4.47% 0.90% 20%
(0.03) 9.91 4.80 93,394 0.70 4.53 0.93 19
-- 9.92 8.34 61,693 0.70 4.76 1.00 38
-- 9.59 (1.58)+ 20,272 0.67 4.57 1.59 22
$ -- $ 10.05 1.17%+ $182,069 0.70% 4.55% 1.09% 4%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>

(3) COMMENCED OPERATIONS ON APRIL 4, 1994. ALL RATIOS FOR THE PERIOD HAVE BEEN
ANNUALIZED.

(4) COMMENCED OPERATIONS ON FEBRUARY 25, 1994. ALL RATIOS FOR THE PERIOD HAVE
BEEN ANNUALIZED.

<PAGE>

FINANCIAL HIGHLIGHTS (continued)

The following unaudited financial highlights for California Intermediate Tax
Free Fund and Oregon Intermediate Tax Free Fund for the period commencing
August 8, 1997 and ending December 31, 1997 should be read in conjunction
with the Funds' unaudited financial statements and the related notes thereto
appearing in the Funds' Statement of Additional Information dated January
31, 1998 as supplemented on May 15, 1998.

For the period ended December 31, 1997

<TABLE>
<CAPTION>
REALIZED AND DIVIDENDS
NET ASSET NET UNREALIZED FROM NET
VALUE BEGINNING INVESTMENT GAINS ON INVESTMENT
OF PERIOD INCOME INVESTMENTS INCOME
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CALIFORNIA INTERMEDIATE TAX FREE FUND(1) CLASS Y
$ 10.00 $ 0.17 $ 0.10 $ (0.17)
OREGON INTERMEDIATE TAX FREE FUND(1) CLASS Y
$ 10.00 $ 0.18 $ 0.12 $ (0.18)
- ------------------------------------------------------------------------------------------------------------

</TABLE>

+ RETURNS ARE FOR THE PERIOD INDICATED AND HAVE NOT BEEN ANNUALIZED.

(1) COMMENCED OPERATIONS ON AUGUST 8, 1997. ALL RATIOS FOR THE PERIOD HAVE BEEN
ANNUALIZED.

<PAGE>

<TABLE>
<CAPTION>
RATIO OF
RATIO OF NET EXPENSES TO
NET ASSET RATIO OF INVESTMENT AVERAGE
DISTRIBUTIONS VALUE NET ASSETS EXPENSES TO INCOME TO NET ASSETS
FROM END OF TOTAL END OF AVERAGE AVERAGE (EXCLUDING PORTFOLIO
CAPITAL GAIN PERIOD RETURN PERIOD (000) NET ASSETS NET ASSETS WAIVERS) TURNOVER
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ -- $ 10.10 2.76%+ $ 34,039 0.70% 4.37% 1.01% 11%
$ (0.02) $ 10.10 2.97%+ $182,309 0.70% 4.56% 0.95% 8%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

THE FUNDS

This Prospectus relates only to the Class Y Shares of the Funds named on the
cover hereof. Information regarding the Class A Shares of these Funds and
regarding the Class A, Class B and Class Y Shares of the other FAIF Funds is
contained in separate prospectuses that may be obtained from FAIF's
Distributor, SEI Investments Distribution Co., 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. Intermediate Tax Free Fund is a
diversified investment company, as defined in the Investment Company Act of
1940 (the "1940 Act"). California Intermediate Tax Free Fund, Colorado
Intermediate Tax Free Fund, Minnesota Intermediate Tax Free Fund and Oregon
Intermediate Tax Free Fund are nondiversified investment companies under the
1940 Act.

----------------------------------------------------------------------------
INTERMEDIATE TAX FREE FUND

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

<PAGE>

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

The requirement, described above, that Intermediate Tax Free Fund invest at
least 80% of its net assets in tax free obligations under normal market
conditions is a fundamental policy, which cannot be changed without a
shareholder vote. Under normal market conditions, that Fund will invest at
least 65% of its total assets in municipal obligations which are municipal
bonds. See "Special Investment Methods -- Municipal Bonds and Other
Municipal Obligations."

<PAGE>

----------------------------------------------------------------------------
CALIFORNIA INTERMEDIATE TAX FREE FUND, COLORADO INTERMEDIATE TAX FREE FUND,
MINNESOTA INTERMEDIATE TAX FREE FUND AND OREGON INTERMEDIATE TAX FREE FUND

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

While the assets of each of these Funds ordinarily will be invested in
municipal obligations, on occasion any 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, 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."

<PAGE>

market funds advised by the Advisor. 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.

----------------------------------------------------------------------------
RISKS TO CONSIDER

An investment in any of the Funds involves certain risks. These include the
following:

<PAGE>

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.

POLITICAL AND ECONOMIC CONDITIONS. The value of municipal obligations owned
by the 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). The value of certain municipal obligations
also may be adversely affected by the enactment of changes to certain
federal or state income tax laws including, but not limited to, income tax
rate reductions or the imposition of a flat tax.

Intermediate Tax Free Fund cannot invest 25% or more of its total assets in
obligations of issuers located in the same state (for this purpose, the
location of an "issuer" shall be deemed to be the location of the entity the
revenues of which are the primary source of payment or the location of the
project or facility which may be the subject of the obligation). See
"Special Investment Methods -- Investment Restrictions." California
Intermediate Tax Free Fund, Colorado Intermediate Tax Free Fund, Minnesota
Intermediate Tax Free Fund and Oregon 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 four Funds will be particularly affected by local
conditions in those states. A more detailed description of the factors
affecting California, Colorado, Minnesota and Oregon 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 Funds.

<PAGE>

MANAGEMENT

----------------------------------------------------------------------------
INVESTMENT ADVISOR

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, FAIF has received an opinion from its
counsel that the Advisor 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 Advisor 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 a member of the committees that manage the Funds.

<PAGE>

He joined the Advisor in 1985 and has 12 years of investment industry
experience. Mr. Drahn received his bachelor's degree from Wartburg College
and his master's degree in business administration from the University of
Minnesota. He is a Chartered Financial Analyst.

DOUGLAS WHITE is a member of the committee that manages Intermediate Tax
Free Fund, California Intermediate Tax Free Fund and Minnesota Intermediate
Tax Free Fund. Mr. White has over 14 years of investment industry
experience. Prior to joining the Advisor in 1998, Mr. White served as a
senior vice president and portfolio co-manager for Piper Capital Management
Incorporated, overseeing the management of several Piper Funds, including
the Piper Funds Tax-Exempt Fund and Minnesota Tax-Exempt Fund. Mr. White
received his bachelor's degree in political science from Carleton College
and his master's degree in business administration from the University of
Minnesota. Mr. White is a Chartered Financial Analyst.

STEVEN J. KNIGHT is a member of the committee that manages Colorado
Intermediate Tax Free Fund. Mr. Knight has over 17 years of investment
industry experience. Mr. Knight joined the Advisor in 1997. Prior to joining
the Advisor, Mr. Knight served as an international investment director at
Principal International, Inc. in Des Moines, Iowa. Mr. Knight received his
bachelor's degree from Central College and his master's degree in economics
from the University of Iowa. He is a Chartered Financial Analyst.

MICHAEL S. HAMILTON is a member of the committee that manages Oregon
Intermediate Tax Free Fund. He joined the Advisor in 1989 and has over six
years of investment industry experience. Mr. Hamilton received his
bachelor's degree from Albertson College and his master's degree in
business administration from Western Washington University.

----------------------------------------------------------------------------
CUSTODIAN

----------------------------------------------------------------------------
ADMINISTRATOR

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

<PAGE>

distributor for a number of investment companies. The Distributor, which is
not affiliated with the Advisor, is a wholly-owned subsidiary of SEI
Investments Company and is located at Oaks, Pennsylvania 19456.

The Distributor, the Administrator and the Advisor may in their discretion
use their own assets to pay for certain costs of distributing Fund shares.
Any arrangement to pay such additional costs may be commenced or
discontinued by any of these persons at any time. In addition, the
Distributor and the Advisor 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 both the New York
Stock Exchange and federally-chartered banks are open for business
("Business Days").

Payment for shares can be made only by wire transfer. All information needed
will be taken over the telephone and the order will be considered placed
when the Custodian receives payment by wire. Federal funds should be wired
as follows: U.S. Bank National Association, Minneapolis, Minnesota, ABA
Number 091000022; For Credit To: DST Systems, Inc.: 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 or federally-chartered banks are closed. 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 Funds reserve the right to reject a purchase order.

Shares may be purchased through a financial institution which has a sales
agreement with the Distributor. An investor may call its 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.

The Funds are required to redeem for cash all full and fractional shares of
the Funds. Redemption requests may be made any time before 3:00 p.m. Central
time in order to receive that day's redemption price. For redemption
requests 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 after the request.

----------------------------------------------------------------------------
WHAT SHARES COST

Class Y Shares of the Funds are sold and redeemed at net asset value. The
net asset value per share is determined as of the close of normal trading on
the New York Stock Exchange (3:00 p.m. Central time) on each Business Day,
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

<PAGE>

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. Security valuations are furnished by an independent
pricing service that has been approved by the Board of Directors.

If the value for a security cannot be obtained from the sources described
above, the security's value may be determined pursuant to the fair value
procedures established by the Board of Directors.

Financial futures are valued at the settlement price established each day by
the board of exchange on which they are traded. Portfolio securities
underlying actively traded options are valued at their market price as
determined above. The current market value of any exchange traded options
held or written by a Fund is valued at the closing bid price for a long
position or the closing ask price for a short position.

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
shareholder servicing, transfer agent and/or dividend disbursing expenses
charged to Class A Shares.

----------------------------------------------------------------------------
EXCHANGING SECURITIES FOR FUND SHARES

----------------------------------------------------------------------------
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 each Fund are declared and paid monthly 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

<PAGE>

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 Y Shares generally will be more
than the dividends payable on Class A Shares because of shareholder
servicing, transfer agent and/or dividend disbursing expenses charged to
Class A Shares.

----------------------------------------------------------------------------
EXCHANGE PRIVILEGE

Shareholders may exchange Class Y Shares of a Fund for currently available
Class Y Shares of the other FAIF Funds or of other funds in the First
American family of funds 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.

Written exchange requests must be signed exactly as shown on the
authorization form. None of the Funds, the Distributor, the Transfer Agent,
any shareholder servicing agent, nor 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 Funds by telephone only if both Funds
have identical shareholder registrations.

<PAGE>

to any shareholder who makes exchanges more than four times a year (other
than through periodic investment programs). The Funds may modify or revoke
the exchange privilege for all shareholders upon 60 days' prior written
notice or without notice in times of drastic economic or market changes.

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 Y 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

Distributions paid from other interest income and from any net realized
short-term capital gains will be taxable to shareholders as ordinary income,
whether received in cash or in additional shares. Since none of the Funds'
income will consist of dividends from domestic corporations, the
dividends-received deduction for corporations will not be applicable to
taxable distributions by the Funds. Distributions paid from long-term
capital gains (and designated as such) generally 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. In the case of shareholders who are individuals, estates, or trusts,
each Fund will designate the portion of each capital gain dividend that must
be treated as mid-term capital gains and the portion that must be treated as
long-term capital gain. Shareholders not subject to federal income taxation
will not be taxed on distributions by a Fund.

<PAGE>

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 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 Funds. The Funds will avoid
investment in bonds which, in the opinion of the Advisor, pose a material
risk of the loss of tax exemption. Further, if a bond in a 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 the 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.

----------------------------------------------------------------------------
CALIFORNIA INCOME TAXATION

The portion of exempt-interest dividends paid by California Intermediate Tax
Free Fund that is derived from interest on tax-exempt obligations issued by
the State of California, its political subdivisions and instrumentalities,
is excluded from the California taxable income of individuals, estates, and
trusts, provided that at least 50% of the value of the Fund's total assets
consists of obligations of the interest on which is exempt from California
personal income taxation pursuant to federal or California law. The
remaining portion of such dividends, and dividends that are not
exempt-interest dividends or capital gains dividends, are included in the
California taxable income of individuals, estates and trusts, except for
dividends directly attributable to interest on obligations of the United
States Government, its territories and possessions. Exempt-interest
dividends are not excluded from the California taxable income of
corporations and financial institutions. Dividends qualifying for federal
income tax purposes as capital gains dividends are to be treated by
shareholders as long-term capital gains. California has repealed the
favorable treatment of long-term capital gains, while retaining restrictions
on the deductibility of capital losses. Dividends generally will not qualify
for the dividends-received deduction for corporations and financial
institutions.

----------------------------------------------------------------------------
COLORADO INCOME TAXATION

<PAGE>

while retaining restrictions on the deductibility of capital losses.

Dividends paid by Colorado Intermediate Tax Free Fund that are derived from
interest on tax-exempt obligations issued by the state of Colorado, its
political subdivisions and instrumentalities (including tax-exempt
obligations treated for federal purposes as private activity bonds) will not
be treated as items of tax preference for purposes of the alternative
minimum tax that Colorado imposes on individuals, trusts and estates.

As under federal law, the portion of Social Security benefits subject to
Colorado income tax may be affected by the amount of exempt-interest
dividends received by the shareholders.

----------------------------------------------------------------------------
MINNESOTA INCOME TAXATION

----------------------------------------------------------------------------
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 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 gains
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.

----------------------------------------------------------------------------
OTHER STATE AND LOCAL TAXATION

Except to the extent described above under "-- California Income Taxation,"
"-- Colorado Income Taxation," "-- Minnesota Income Taxation" and "-- Oregon
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

<PAGE>

to consult their own tax advisors regarding state and local taxation.

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 federal income taxes; (ii)
exempt from both federal and California income taxes; (iii) exempt from both
federal and Colorado income taxes; (iv) exempt from both federal and
Minnesota income taxes; and (v) exempt from both federal and Oregon income
taxes, under selected income tax brackets scheduled to be in effect in 1998.
The effective combined rates reflect the deduction of state income taxes
from federal income. The 34.7%, 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 31.6%, 34.5%, 39.2% and 42.6%
combined federal/Colorado rates assume that the investor is subject to a 5%
Colorado income tax rate and a marginal federal income tax rate of 28%, 31%,
36% and 39.6%, respectively. The 34.1%, 36.9%, 41.4% and 44.7% combined
federal/Minnesota rates assume that the investor is subject to an 8.5%
marginal

<TABLE>
<CAPTION>
Tax-Equivalent Yields
Combined Federal and
Federal Tax Brackets California Tax Brackets
Tax-Free
Yields 28% 31% 36% 39.6% 34.7% 37.4% 42.0% 45.2%
- ---------------------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
3.0% 4.17% 4.35% 4.69% 4.97% 4.59% 4.79% 5.17% 5.47%
3.5% 4.86% 5.07% 5.47% 5.79% 5.37% 5.59% 6.03% 6.39%
4.0% 5.56% 5.80% 6.25% 6.62% 6.13% 6.39% 6.90% 7.30%
4.5% 6.25% 6.52% 7.03% 7.45% 6.89% 7.19% 7.76% 8.21%
5.0% 6.94% 7.25% 7.81% 8.28% 7.66% 7.99% 8.62% 9.12%
5.5% 7.64% 7.97% 8.59% 9.11% 8.42% 8.79% 9.48% 10.04%
6.0% 8.33% 8.70% 9.38% 9.93% 9.19% 9.58% 10.34% 10.95%
6.5% 9.03% 9.42% 10.16% 10.76% 9.95% 10.38% 11.21% 11.86%
- ---------------------------------------------------- ---------------------------------------
</TABLE>

[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
Combined Federal and
Colorado Tax Brackets
Tax-Free
Yields 31.6% 34.5% 39.2% 42.6%
- -------------------------------------------------------
<S> <C> <C> <C> <C>
3.0% 4.39% 4.58% 4.93% 5.23%
3.5% 5.12% 5.34% 5.76% 6.10%
4.0% 5.85% 6.11% 6.58% 6.97%
4.5% 6.58% 6.87% 7.40% 7.84%
5.0% 7.31% 7.63% 8.22% 8.71%
5.5% 8.04% 8.40% 9.05% 9.58%
6.0% 8.77% 9.16% 9.87% 10.45%
6.5% 9.50% 9.92% 10.69% 11.32%
- -------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
Tax-Equivalent Yields
(Continued)
Combined Federal and Combined Federal and
Minnesota Tax Brackets Oregon Tax Brackets
Tax-Free
Yields 34.1% 36.9% 41.4% 44.7% 34.5% 37.2% 41.8% 45.0%
- ----------------------------------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
3.0% 4.55% 4.75% 5.12% 5.42% 4.58% 4.78% 5.15% 5.45%
3.5% 5.31% 5.55% 5.97% 6.33% 5.34% 5.57% 6.01% 6.36%
4.0% 6.07% 6.34% 6.83% 7.23% 6.11% 6.37% 6.87% 7.27%
4.5% 6.83% 7.13% 7.68% 8.14% 6.87% 7.17% 7.73% 8.18%
5.0% 7.59% 7.92% 8.53% 9.04% 7.63% 7.96% 8.59% 9.09%
5.5% 8.35% 8.72% 9.39% 9.95% 8.40% 8.76% 9.45% 10.00%
6.0% 9.10% 9.51% 10.24% 10.85% 9.16% 9.55% 10.31% 10.91%
6.5% 9.86% 10.30% 11.09% 11.75% 9.92% 10.35% 11.17% 11.82%
- ----------------------------------------------------------- ---------------------------------------------
</TABLE>

Minnesota income tax rate and a marginal federal income tax rate of 28%,
31%, 36% and 39.6%, respectively. 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 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 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.

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
<PAGE>

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

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

"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. "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.

<PAGE>

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 Y Shares of a Fund will normally be higher than
for the Class A Shares because Class Y Shares are not subject to the sales
charges and shareholder servicing, transfer agent and/or dividend disbursing
expenses applicable to Class A Shares.

PERFORMANCE INFORMATION FOR SUCCESSORS TO COMMON TRUST FUNDS

From time to time California Intermediate Tax Free Fund and Oregon
Intermediate Tax Free Fund may advertise performance information which
includes performance data of certain predecessor common trust funds.

Each of California Intermediate Tax Free Fund and Oregon Intermediate Tax
Free 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. For each such Fund, one
predecessor common trust fund was managed by the Advisor, while the other
was managed by Qualivest Capital Management, Inc. prior to the acquisition
of its parent company by the Advisor's parent company. The personnel who
managed that common trust fund on behalf of Qualivest Capital Management,
Inc. became employees of the Advisor, and assumed management of the
applicable Fund, at the time the assets were transferred from the common
trust fund to the applicable Fund.

Such performance data is deemed relevant because the common trust funds were
managed using investment objectives, policies, and restrictions very similar
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, their performance could have been adversely affected by
virtue of such investment restrictions. In addition, the predecessor common
trust funds did not incur the same expenses as the corresponding Funds.

SPECIAL INVESTMENT METHODS

----------------------------------------------------------------------------
MUNICIPAL BONDS AND OTHER MUNICIPAL OBLIGATIONS

<PAGE>

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 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. Each 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
"nonappropriation" 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 Fund
of the full principal amount represented by an obligation.

<PAGE>

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 Advisor may deem relevant. As described
below under "-- Investment Restrictions," each Fund is subject to
limitations on the percentage of illiquid securities it can hold.

----------------------------------------------------------------------------
TEMPORARY TAXABLE INVESTMENTS

----------------------------------------------------------------------------
REPURCHASE AGREEMENTS

The temporary taxable investments which each Fund may make include
repurchase 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 would suffer a loss if the proceeds from the sale of the collateral
were less than the agreed-upon repurchase price. The Advisor will monitor
the creditworthiness of the firms with which the Funds enter into repurchase
agreements.

----------------------------------------------------------------------------
INVERSE FLOATING RATE OBLIGATIONS

<PAGE>

----------------------------------------------------------------------------
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

----------------------------------------------------------------------------
ZERO COUPON SECURITIES

The Funds may invest in zero coupon, fixed income securities. Zero coupon
securities pay no cash income to their holders until they mature and are
issued at substantial discounts from their value at maturity. When held to
maturity, their entire return comes from the difference between their
purchase price and their maturity value. Because interest on zero coupon
securities is not paid on a current basis, the values of securities of this
type are subject to greater fluctuations than are the value of securities
that distribute income regularly and may be more speculative than such
securities. Accordingly, the values of these securities may be highly
volatile as interest rates rise or fall.

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

----------------------------------------------------------------------------
OPTIONS TRANSACTIONS

<PAGE>

to reduce risks inherent in the Funds' portfolios or contemplated
investments.

----------------------------------------------------------------------------
FUTURES AND OPTIONS ON FUTURES

The Funds may engage in futures transactions and purchase options on futures
to the extent specified under "Investment Objectives and Policies." These
transactions may include the purchase of interest rate index futures and
options on interest rate index futures.

A futures contract on an index obligates the seller to deliver, and entitles
the purchaser to receive, an amount of cash equal to a specific dollar
amount times the difference between the value of the index at the expiration
date of the contract and the index value specified in the contract. The
acquisition of put and call options on futures contracts will, respectively,
give a Fund the right (but not the obligation), for a specified exercise
price, to sell or to purchase the underlying futures contract at any time
during the option period. A Fund may use futures contracts and options on
futures in an effort to hedge against market risks.

A Fund may lose the expected benefit of futures transactions if interest
rates move in an unanticipated manner. Such unanticipated changes may also
result in poorer overall performance than if the Fund had not entered into
any futures transactions.

----------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS

Portfolio transactions in the over-the-counter market will be effected
with market makers or

<PAGE>

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:

* 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 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.

* Intermediate Tax Free Fund will not invest 25% or more of the value of
its total assets in obligations of issuers located in the same state
(for this purpose, the location of an "issuer" shall be deemed to be the
location of the entity the revenues of which are the primary source of
payment or the location of the project or facility which may be the
subject of the obligation). None of the 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 "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 or, in
the case of Intermediate Tax Free Fund, to pollution control revenue
bonds. However, in the case of the latter Fund, it is anticipated that
normally (unless there are unusually favorable interest and market
factors) less than 25% of such Fund's total assets will be invested in
pollution control bonds. This restriction does not apply to securities
of the United States Government or its agencies and instrumentalities or
repurchase agreements relating thereto.

<PAGE>

INFORMATION CONCERNING COMPENSATION PAID TO U.S. BANK NATIONAL ASSOCIATION
AND OTHER AFFILIATES

Investment advisory services -- see "Management-Investment Advisor"

Custodian services -- see "Management-Custodian"

Sub-administration -- see "Management-Administrator"

Shareholder servicing -- see "Distributor"

Securities lending -- see "Special Investment Methods-Lending of Portfolio
Securities"

<PAGE>

FIRST AMERICAN INVESTMENT FUNDS, INC.
Oaks, Pennsylvania 19456

Investment Advisor
U.S. BANK NATIONAL ASSOCIATION
601 Second Avenue South
Minneapolis, Minnesota 55402

Custodian
U.S. BANK NATIONAL ASSOCIATION
180 East Fifth Street
St. Paul, Minnesota 55101

Distributor
SEI INVESTMENTS DISTRIBUTION CO.
Oaks, Pennsylvania 19456

Administrator
SEI INVESTMENTS MANAGEMENT CORPORATION
Oaks, Pennsylvania 19456

Transfer Agent
DST SYSTEMS, INC.
330 West Ninth Street
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 (7/98) I

<PAGE>

JANUARY 31, 1998
AS SUPPLEMENTED ON MAY 15, 1998 AND JULY 24, 1998

BOND FUNDS

CLASS A AND CLASS B SHARES

LIMITED TERM
INCOME FUND

INTERMEDIATE TERM
INCOME FUND

FIXED INCOME FUND

INTERMEDIATE GOVERNMENT
BOND FUND

FIRST AMERICAN
INVESTMENT FUNDS, INC.

PROSPECTUS

[LOGO] FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING(R)

<PAGE>

TABLE OF CONTENTS

Summary 2
..............................................
Fees and Expenses 4
..............................................
Financial Highlights 7
..............................................
The Funds 10
..............................................
Investment Objectives and Policies 10
..............................................
Management 14
..............................................
Distributor 17
..............................................
Investing in the Funds 18
..............................................
Redeeming Shares 25
..............................................
Determining the Price of Shares 27
..............................................
Federal Income Taxes 28
..............................................
Fund Shares 29
..............................................
Calculation of Performance Data 29
..............................................
Special Investment Methods 30
..............................................
Information Concerning Compensation Paid
to U.S. Bank National Association and Other
Affiliates 36
..............................................

<PAGE>

FIRST AMERICAN INVESTMENT FUNDS, INC.

CLASS A AND CLASS B SHARES PROSPECTUS

* LIMITED TERM INCOME FUND

* INTERMEDIATE TERM INCOME FUND

* FIXED INCOME FUND

* INTERMEDIATE GOVERNMENT BOND
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 January 31, 1998 as supplemented on May 15,
1998 and July 24, 1998.

<PAGE>

SUMMARY

LIMITED TERM INCOME FUND has an objective of providing current income while
attempting to provide a high degree of principal stability. This Fund
invests in investment grade debt securities, at least 65% of which are
United States Government obligations and corporate debt obligations and
mortgage-backed and asset-backed securities rated at least A by Standard &
Poor's Rating Services, a division of The McGraw-Hill Companies, Inc.
("Standard & Poor's") or Moody's Investors Service, Inc. ("Moody's") or
which have been assigned an equivalent rating by another nationally
recognized statistical rating organization. Under normal market conditions,
the weighted average maturity of the securities held by this Fund will range
from 6 months to 2 years.

INTERMEDIATE TERM INCOME FUND has an objective of providing current income
to the extent consistent with preservation of capital. This Fund generally
invests in the same kinds of debt securities as Limited Term Income Fund.
Under normal market conditions, the weighted average maturity of the
securities held by this Fund will range from 2 to 7 years.

FIXED INCOME FUND has an objective of providing a high level of current
income consistent with limited risk to capital. This Fund generally invests
in the same kinds of debt securities as Limited Term Income Fund. Under
normal market conditions, the weighted average maturity of the securities
held by this Fund will not exceed 15 years.

INTERMEDIATE GOVERNMENT BOND FUND has an objective of providing current
income to the extent consistent with preservation of capital. Under normal
market conditions, this Fund invests at least 65% of its total assets in
securities issued or guaranteed by the United States Government and its
agencies and instrumentalities. Under normal market conditions, the weighted
average maturity of the securities held by this Fund will range from 2 to 7
years.

At the present time, Class B Shares are offered only with respect to Fixed
Income Fund.

OFFERING PRICES. Class A Shares of the Funds are sold at net asset value
plus a maximum sales charge of 2.00% for Limited Term Income Fund, 3.00% for
Intermediate Government Bond Fund, and 3.75% for Intermediate Term Income
Fund and Fixed Income 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 the Distributor and certain
securities firms, financial institutions (including, without limitation,
banks) and other industry professionals may receive a commission equal to
1.00% of the first $3 million of shares purchased, 0.75% of shares purchased
in excess of $3 million up to $5 million, and 0.50% of shares purchased in
excess of $5 million. If such a commission is paid, redemptions of Class A
Shares within 12 months following such purchases will be subject to a
contingent deferred sales charge of 1.00%. 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

<PAGE>

that class. See "Investing in the Funds -- Alternative Sales Charge
Options."

Class B Shares of the Funds are sold at net asset value without an initial
sales charge. Class B Shares of each 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. See "Investing in the Funds
-- Alternative Sales Charge Options."

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 or an authorized financial institution, 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. Each of the 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, those Funds which may invest in mortgage-backed securities are
subject to certain additional risks associated with investing in securities
representing interests in, or secured by, pools of residential mortgage
loans. See "Investment Objectives and Policies -- Risks to Consider" and
"Special Investment Methods."

<PAGE>

FEES AND EXPENSES

----------------------------------------------------------------------------
CLASS A SHARE FEES AND EXPENSES

<TABLE>
<CAPTION>
LIMITED INTERMEDIATE INTERMEDIATE
TERM TERM FIXED GOVERNMENT
INCOME INCOME INCOME BOND
FUND FUND FUND FUND
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on purchases
(as a percentage of offering price)(1) 2.00% 3.75% 3.75% 3.00%
Maximum sales load imposed on reinvested dividends None None None None
Deferred sales load None None None None
Redemption fees None None None None
Exchange fees None None None None
- -------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment advisory fees (after voluntary fee waivers)(2) 0.40% 0.48% 0.52% 0.53%
Rule 12b-1 fees (after voluntary fee waivers)(2) 0% 0.15% 0.25%(3) 0%
Other expenses 0.20% 0.22% 0.18% 0.17%
Total fund operating expenses
(after voluntary fee waivers)(2) 0.60% 0.85% 0.95% 0.70%
- -------------------------------------------------------------------------------------------------------------------
EXAMPLE(4)
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 $26 $46 $47 $37
3 years $39 $64 $67 $52
5 years $53 $83 $88 $68
10 years $94 $138 $143 $114
</TABLE>

(2) FOR INTERMEDIATE TERM INCOME FUND, TOTAL FUND OPERATING EXPENSES WILL BE
MAINTAINED AT THE LEVELS SHOWN BEGINNING OCTOBER 1, 1998. PRIOR TO THAT
DATE, TOTAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
FOR INTERMEDIATE TERM INCOME FUND WILL BE MAINTAINED AT 0.70%. THE ADVISOR
AND THE DISTRIBUTOR INTEND TO WAIVE A PORTION OF THEIR FEES ON A VOLUNTARY
BASIS, AND THE AMOUNTS SHOWN REFLECT THESE WAIVERS AS OF THE DATE OF THIS
PROSPECTUS. EACH OF THESE PERSONS INTENDS TO MAINTAIN SUCH WAIVERS IN EFFECT
FOR THE CURRENT FISCAL YEAR BUT RESERVES THE RIGHT TO DISCONTINUE SUCH
WAIVERS AT ANY TIME IN ITS SOLE DISCRETION. NOTWITHSTANDING THE FOREGOING,
THE ADVISOR WILL MAINTAIN SUCH WAIVERS OF INTERMEDIATE TERM INCOME FUND AND
FIXED INCOME FUND IN EFFECT THROUGH SEPTEMBER 30, 1998. IN ADDITION, THE
ADVISOR WILL MAINTAIN SUCH WAIVERS FOR THE APPLICABLE FUNDS AT LEAST THROUGH
JULY 31, 2000 SO THAT THE TOTAL FUND OPERATING EXPENSES DO NOT EXCEED 0.85%
FOR INTERMEDIATE TERM INCOME FUND, AND 1.19% FOR FIXED INCOME FUND. ABSENT
ANY FEE WAIVERS, 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%; AND TOTAL FUND OPERATING EXPENSES
CALCULATED ON SUCH BASIS WOULD BE 1.15% FOR LIMITED TERM INCOME FUND, 1.17%
FOR INTERMEDIATE TERM INCOME FUND, 1.13% FOR FIXED INCOME FUND AND 1.12% FOR
INTERMEDIATE GOVERNMENT BOND FUND. "OTHER EXPENSES" INCLUDES AN
ADMINISTRATION FEE.

(3) OF THIS AMOUNT, 0.25% IS DESIGNATED AS A SHAREHOLDER SERVICING FEE AND NONE
AS A DISTRIBUTION FEE.

(4) ABSENT THE FEE WAIVERS REFERRED TO IN (2) ABOVE, THE DOLLAR AMOUNTS FOR THE
1, 3, 5 AND 10-YEAR PERIODS WOULD BE AS FOLLOWS: LIMITED TERM INCOME FUND,
$31, $56, $82 AND $157; INTERMEDIATE TERM INCOME FUND, $49, $73, $99 AND
$174; FIXED INCOME FUND, $49, $72, $97 AND $170; AND INTERMEDIATE GOVERNMENT
BOND FUND, $48, $72, $97 AND $169.

<PAGE>

----------------------------------------------------------------------------
CLASS B SHARE FEES AND EXPENSES

<TABLE>
<CAPTION>
LIMITED INTERMEDIATE INTERMEDIATE
TERM TERM FIXED GOVERNMENT
INCOME INCOME INCOME BOND
FUND FUND FUND FUND
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on purchases (as a
percentage of offering price) None None None None
Maximum sales load imposed on reinvested dividends None None None None
Maximum contingent deferred sales charge (AS A
PERCENTAGE OF ORIGINAL PURCHASE PRICE OR REDEMPTION
PROCEEDS, AS APPLICABLE) 5.00% 5.00% 5.00% 5.00%
Redemption fees None None None None
Exchange fees None None None None
- --------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment advisory fees (after voluntary fee waivers)(1) 0.40% 0.48% 0.52% 0.53%
Rule 12b-1 fees 1.00%(2) 1.00%(2) 1.00%(2) 1.00%(2)
Other expenses (after voluntary fee waivers) (1) 0.20% 0.22% 0.18% 0.17%
Total fund operating expenses
(after voluntary fee waivers)(1) 1.60% 1.70% 1.70% 1.70%
- --------------------------------------------------------------------------------------------------------------------
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, 4% in year 3, 2% in year 5, and automatic conversion at the end of year
8:
1 year $66 $67 $67 $67
3 years $90 $94 $94 $94
5 years $107 $112 $112 $112
10 years $163 $174 $174 $174
- --------------------------------------------------------------------------------------------------------------------
ASSUMING NO REDEMPTION(4)
You would pay the following expenses on the same investment, assuming no
redemption:
1 year $16 $17 $17 $17
3 years $50 $54 $54 $54
5 years $87 $92 $92 $92
10 years $163 $174 $174 $174
</TABLE>

(1) THE ADVISOR 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 ADVISOR INTENDS TO MAINTAIN SUCH WAIVERS IN EFFECT FOR THE CURRENT
FISCAL YEAR BUT RESERVES THE RIGHT TO DISCONTINUE SUCH WAIVERS AT ANY TIME
IN ITS SOLE DISCRETION. ABSENT ANY FEE WAIVERS, INVESTMENT ADVISORY FEES FOR
EACH FUND AS AN ANNUALIZED PERCENTAGE OF AVERAGE DAILY NET ASSETS WOULD BE
0.70%; AND TOTAL FUND OPERATING EXPENSES CALCULATED ON SUCH BASIS WOULD BE
1.90% FOR LIMITED TERM INCOME FUND, 1.92% FOR INTERMEDIATE TERM INCOME FUND,
1.88% FOR FIXED INCOME FUND AND 1.87% FOR INTERMEDIATE GOVERNMENT BOND FUND.
"OTHER EXPENSES" INCLUDES AN ADMINISTRATION FEE.

(2) OF THIS AMOUNT, 0.25% IS DESIGNATED AS A SHAREHOLDER SERVICING FEE AND 0.75%
AS A DISTRIBUTION FEE.

(3) ABSENT THE FEE WAIVERS REFERRED TO IN (1) ABOVE, THE DOLLAR AMOUNTS FOR THE
1, 3, 5 AND 10-YEAR PERIODS WOULD BE AS FOLLOWS: LIMITED TERM INCOME FUND,
$69, $100, $123 AND $203; INTERMEDIATE TERM INCOME FUND, $69, $100, $124 AND
$205; FIXED INCOME FUND, $69, $99, $122 AND $201; AND INTERMEDIATE
GOVERNMENT BOND FUND, $69, $99, $121 AND $199.

(4) ABSENT THE FEE WAIVERS REFERRED TO IN (1) ABOVE (ASSUMING NO REDEMPTION),
THE DOLLAR AMOUNTS FOR THE 1, 3, 5 AND 10-YEAR PERIODS WOULD BE AS FOLLOWS:
LIMITED TERM INCOME FUND, $19, $60, $103 AND $203; INTERMEDIATE TERM INCOME
FUND, $19, $60, $104 AND $205; FIXED INCOME FUND, $19, $59, $101 AND $199;
AND INTERMEDIATE GOVERNMENT BOND FUND, $19, $59, $101 AND $199.

<PAGE>

----------------------------------------------------------------------------
INFORMATION CONCERNING FEES AND EXPENSES

<PAGE>

FINANCIAL HIGHLIGHTS

<PAGE>

FINANCIAL HIGHLIGHTS (continued)

For the periods ended September 30,
For a share outstanding throughout the period

<TABLE>
<CAPTION>
REALIZED AND
UNREALIZED DIVIDENDS
NET ASSET NET GAINS OR FROM NET
VALUE BEGINNING INVESTMENT (LOSSES) ON INVESTMENT
OF PERIOD INCOME INVESTMENTS INCOME
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LIMITED TERM INCOME FUND CLASS A
1997 $ 9.91 $ 0.56 $ 0.03 $ (0.56)
1996 9.92 0.58 (0.01) (0.58)
1995 9.85 0.56 0.07 (0.56)
1994 10.06 0.44 (0.22) (0.43)
1993(1) 10.00 0.29 0.07 (0.30)
INTERMEDIATE TERM INCOME FUND CLASS A
1997 $ 9.93 $ 0.55 $ 0.15 $ (0.56)
1996 9.94 0.55 -- (0.55)
1995 9.55 0.59 0.38 (0.58)
1994 10.22 0.46 (0.56) (0.46)
1993(1) 10.00 0.41 0.29 (0.41)
FIXED INCOME FUND CLASS A
1997 $10.77 $ 0.59 $ 0.27 $ (0.59)
1996 10.98 0.61 (0.11) (0.61)
1995 10.37 0.66 0.61 (0.63)
1994 11.38 0.57 (0.89) (0.57)
1993 11.13 0.62 0.36 (0.61)
1992 10.59 0.66 0.60 (0.66)
1991(2) 10.01 0.65 0.58 (0.65)
1990(3) 10.44 0.74 (0.26) (0.74)
1989(3) 10.13 0.74 0.31 (0.74)
1988(3)(4) 10.03 0.62 0.13 (0.65)
CLASS B
1997 $10.72 $ 0.51 $ 0.26 $ (0.51)
1996 10.94 0.52 (0.11) (0.53)
1995 10.35 0.58 0.60 (0.56)
1994(5) 10.54 0.08 (0.17) (0.10)
INTERMEDIATE GOVERNMENT BOND FUND CLASS A
1997 $ 9.19 $ 0.54 $ 0.09 $ (0.54)
1996 9.29 0.54 (0.10) (0.54)
1995 8.98 0.54 0.31 (0.54)
1994 9.52 0.41 (0.51) (0.39)
1993 10.18 0.44 0.02 (0.44)
1992 10.25 0.60 0.28 (0.60)
1991(2) 10.01 0.65 0.24 (0.65)
1990(3) 10.05 0.75 (0.04) (0.75)
1989(3) 9.99 0.74 0.06 (0.74)
1988(3)(4) 10.03 0.58 (0.01) (0.61)
- ---------------------------------------------------------------------------------------
</TABLE>

* TOTAL RETURN EXCLUDES SALES CHARGES.

+ RETURNS, EXCLUDING SALES CHARGES, ARE FOR THE PERIOD INDICATED AND HAVE NOT
BEEN ANNUALIZED.

(1) COMMENCED OPERATIONS ON DECEMBER 14, 1992. ALL RATIOS FOR THE PERIOD HAVE
BEEN ANNUALIZED.

(2) ON SEPTEMBER 3, 1991, THE BOARD OF DIRECTORS OF FAIF APPROVED A CHANGE IN
FAIF'S FISCAL YEAR END FROM OCTOBER 31 TO SEPTEMBER 30, EFFECTIVE SEPTEMBER
30, 1991. ALL RATIOS FOR THE PERIOD HAVE BEEN ANNUALIZED.

<PAGE>

$ -- $ 9.94 6.09% $ 7.152 0.60% 5.61% 1.15% 147%
-- 9.91 5.93 7,627 0.60 5.80 1.09 61
-- 9.92 6.57 9,977 0.60 5.60 1.22 120
-- 9.85 2.21 9,509 0.60 4.17 1.23 48
-- 10.06 3.61+ 121,800 0.60 3.61 1.27 104

$ (0.07) $ 10.00 7.19% $ 2.484 0.70% 5.51% 1.17% 165%
(0.01) 9.93 5.63 2,213 0.70 5.43 1.13 161
-- 9.94 10.51 2,437 0.70 5.97 1.19 69
(0.11) 9.55 (1.05) 3,208 0.69 2.48 1.24 177
(0.07) 10.22 7.21+ 67,291 0.70 4.90 1.29 163

$ (0.07) $ 10.97 8.26% $ 8,535 0.95% 5.44% 1.13% 130%
(0.10) 10.77 4.64 8,332 0.95 5.55 1.12 108
(0.03) 10.98 12.78 7,853 0.86 6.14 1.19 106
(0.12) 10.37 (2.92) 8,028 0.68 3.83 1.06 142
(0.12) 11.38 9.20 53,601 0.70 5.65 1.14 91
(0.06) 11.13 12.34 5,645 0.99 6.12 2.68 180
-- 10.59 12.48+ 6,045 0.99 6.85 4.11 176
(0.17) 10.01 5.14 2,209 1.07 7.49 5.46 144
-- 10.44 10.93 555 1.22 7.26 22.44 157
-- 10.13 8.07+ 240 0.96 7.18 20.70 93

$ (0.07) $ 10.91 7.40% $ 15,253 1.70% 4.68% 1.88% 130%
(0.10) 10.72 3.93 16,092 1.70 4.81 1.87 108
(0.03) 10.94 11.75 7,280 1.70 5.12 1.94 106
-- 10.35 (0.88)+ 115 1.70 4.89 1.92 142

$ -- $ 9.28 7.06% $ 3,525 0.70% 5.88% 1.12% 22%
-- 9.19 4.85 3,320 0.70 5.85 1.10 29
-- 9.29 9.82 2,860 0.70 6.10 1.22 17
(0.05) 8.98 (1.13) 1,977 0.53 4.49 2.14 74
(0.68) 9.52 4.99 3,716 0.71 4.00 4.73 182
(0.35) 10.18 8.88 589 0.99 6.03 14.14 101
-- 10.25 9.13+ 1,756 0.99 6.99 6.76 100
-- 10.01 7.41 1,573 1.08 7.57 5.55 40
-- 10.05 8.35 1,501 1.19 7.49 9.65 72
-- 9.99 6.18+ 375 0.95 6.78 17.20 0
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(3) FOR THE PERIOD ENDED OCTOBER 31.

(4) COMMENCED OPERATIONS ON DECEMBER 22, 1987. ALL RATIOS FOR THE PERIOD HAVE
BEEN ANNUALIZED.

(5) CLASS B SHARES HAVE BEEN OFFERED SINCE AUGUST 15, 1994. ALL RATIOS FOR THE
PERIOD HAVE BEEN ANNUALIZED.

<PAGE>

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 three separate
classes (Class A, Class B and Class Y) 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 A and Class B Shares of the Funds
named on the cover hereof. Information regarding the Class Y Shares of these
Funds and regarding the Class A, Class B and Class Y Shares of the other
FAIF Funds is contained in separate prospectuses that may be obtained from
FAIF's Distributor, SEI Investments Distribution Co., 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. Each of the Funds is a diversified
investment company, as defined in the Investment Company Act of 1940 (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 limitations on illiquid investments and borrowing. 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 invested in non-investment grade
securities. Descriptions of the rating categories of Standard & Poor's and
Moody's are contained in the Statement of Additional Information.

----------------------------------------------------------------------------
LIMITED TERM INCOME FUND, INTERMEDIATE TERM INCOME FUND AND FIXED
INCOME FUND

OBJECTIVES. Limited Term Income Fund has an objective of providing current
income while attempting to provide a high degree of principal stability.
Intermediate Term Income Fund has an objective of providing current income
to the extent consistent with preservation of capital. Fixed Income Fund has
an objective of providing a high level of current income consistent with
limited risk to capital.

INVESTMENT POLICIES. Each of these Funds invests in investment grade debt
securities, at least 65% of which are United States Government obligations
and corporate debt obligations and mortgage-backed and asset-backed
securities rated at least A by Standard & Poor's or Moody's or which have
been assigned an equivalent rating by

<PAGE>

another nationally recognized statistical rating organization.

Under normal market conditions, the weighted average maturity of the
securities held by Limited Term Income Fund will range from 6 months to 2
years; that of Intermediate Term Income Fund will range from 2 to 7 years;
and that of Fixed Income Fund will not exceed 15 years.

These Funds' permitted investments include notes, bonds and discount notes
of United States Government agencies or instrumentalities (including zero
coupon securities); domestic issues of corporate debt obligations having
floating or fixed rates of interest and rated at least 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 Advisor; other fixed income
securities, including mortgage-backed securities, which are rated in one of
the four highest categories by a nationally recognized statistical rating
organization or which are of comparable quality in the judgment of the
Advisor; and commercial paper which is rated 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. Unrated securities
deemed to be of comparable quality to rated securities as set forth above
will not exceed 25% of each Fund's total assets. At least 65% of the total
assets of Fixed Income Fund will be invested in fixed rate obligations.

Subject to the foregoing limitations, each of these Funds may invest in the
following kinds of securities, as described under the related headings under
"Special Investment Methods:" (i) mortgage-backed securities (provided that
Limited Term Income Fund will not invest in interest-only, principal-only or
inverse floating rate mortgage-backed securities, and each of Intermediate
Term Income Fund and Fixed Income Fund will not invest more than 10% of its
total assets in the aggregate in these kinds of securities); (ii)
asset-backed securities; and (iii) bank instruments.

In addition, each of these Funds may (i) invest up to 15% of its total
assets in foreign securities payable in United States dollars; (ii) enter
into repurchase agreements; (iii) 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; (iv) purchase securities on a when-issued or
delayed delivery basis; and (v) engage in the lending of portfolio
securities. Furthermore, Intermediate Term Income Fund and Fixed Income Fund
may, in order to attempt to reduce risk, invest in exchange traded interest
rate futures and interest rate index futures contracts and may invest up to
25% of its total assets in mortgage dollar roll transactions. For
information about these investment methods, restrictions on their use, and
certain associated risks, see the related headings under "Special Investment
Methods."

Limited Term Income Fund also may purchase investment-type insurance
products such as Guaranteed Investment Contracts ("GICs"). A GIC is a
deferred annuity under which the purchaser agrees to pay money to an insurer
(either in a lump sum or in installments) and the insurer promises to pay
interest at a guaranteed rate for the life of the contract. GICs may have
fixed or variable interest rates. A GIC is a general obligation of the
issuing insurance company. The purchase price paid for a GIC becomes part of
the general assets of the insurer, and the contract is paid at maturity from
the general assets of the insurer. In general, GICs are not assignable or
transferable without the permission of the issuing insurance companies and
can be redeemed before maturity only at a substantial discount or penalty.
GICs therefore are usually considered to be illiquid investments. Limited
Term Income Fund will purchase only GICs which are obligations of insurance
companies with a policyholder's rating of A or better by A.M. Best Company.
A description of these ratings is contained in the Statement of Additional
Information.

Although these Funds will not make direct purchases of common or preferred
stocks or rights to acquire common or preferred stocks, they may

<PAGE>

invest in debt securities which are convertible into or exchangeable for, or
which carry warrants or other rights to acquire, such stocks. Equity
interests acquired through conversion, exchange or exercise of rights to
acquire stock will be disposed of by these Funds as soon as practicable in
an orderly manner.

For temporary defensive purposes, these Funds may, without limitation, hold
cash or invest in cash items. The Funds also may invest not more than 35% of
their total assets in cash and cash items in order to utilize assets
awaiting normal investment. Cash items may include short-term obligations
such as rated commercial paper and variable amount master demand notes; 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; and securities of other mutual funds which invest primarily in
debt securities with remaining maturities of 13 months or less (which
investments also are subject to the advisory fee). Such other mutual funds
include money market funds advised by the Advisor, subject to certain
restrictions contained in an exemptive order issued by the SEC with respect
thereto.

----------------------------------------------------------------------------
INTERMEDIATE GOVERNMENT BOND FUND

OBJECTIVE. Intermediate Government Bond Fund has an objective of providing
current income to the extent consistent with preservation of capital.

INVESTMENT POLICIES. Under normal market conditions, Intermediate Government
Bond Fund invests at least 65% of its total assets in securities issued or
guaranteed by the United States Government and its agencies and
instrumentalities (including zero coupon securities). The Fund's share price
and yield, however, are not guaranteed or insured by the United States
Government or any of its agencies or instrumentalities. Under normal market
conditions, the weighted average maturity of the securities held by this
Fund will range from 2 to 7 years.

The types of securities in which the Fund may invest include direct
obligations of the United States Treasury, such as United States Treasury
bonds, notes and bills. In addition, the Fund may invest in obligations
issued or guaranteed as to principal and interest by agencies of the United
States Government or by instrumentalities which have been established or
sponsored by the United States Government, provided, in each case, that
interest on the obligations is excludable from state taxable income by the
holders thereof. Such agencies and instrumentalities include, but are not
limited to, the Farm Credit System Financial Assistance Corporation, the
Federal Home Loan Banks System, the Student Loan Marketing Association and
the Tennessee Valley Authority. Obligations issued or guaranteed by some of
these agencies or instrumentalities are not guaranteed by the United States
Government, but instead rely solely on the assets and credit of the issuing
agency or instrumentality. The United States Treasury, agency and
instrumentality securities in which the Fund may invest include adjustable
rate securities and United States Treasury inflation-protection securities.
The principal amount of such inflation-protection securities is adjusted for
inflation, and periodic interest payments are an amount equal to a fixed
percentage of the inflation-adjusted principal amount.

In addition, the Fund may (i) enter into repurchase agreements; (ii) 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;
(iii) in order to attempt to reduce risk, invest in exchange traded interest
rate futures and interest rate index futures contracts; (iv) invest up to
25% of its total assets in mortgage dollar roll transactions; (v) purchase
securities on a when-issued or delayed delivery basis; and (vi) 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, the Fund may, without limitation, hold
cash or invest in

<PAGE>

short-term government securities maturing within 13 months from the date of
purchase; or repurchase agreements with respect to government securities;
and securities of other mutual funds which invest primarily in debt
securities with remaining maturities of 13 months or less (which investments
also are subject to the advisory fee). Such other mutual funds include money
market funds advised by the Advisor, subject to certain restrictions
contained in an exemptive order issued by the SEC with respect thereto. The
Fund also may so invest not more than 35% of its total assets in such
investments in order to utilize assets awaiting normal investment. See
"Special Investment Methods -- Repurchase Agreements."

----------------------------------------------------------------------------
RISKS TO CONSIDER

An investment in any of the Funds involves certain risks. These include the
following:

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, such as
Fixed Income Fund, 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, such as Limited Term
Income Fund. Similarly, the volatility of Intermediate Term Income Fund and
Intermediate Government Bond Fund generally should be expected to be between
that of Fixed Income Fund and Limited Term Income Fund. As described below
under "Special Investment Methods -- Mortgage-Backed Securities," it is more
difficult to generalize about the effect of changes in market interest rates
on the values of mortgage-backed securities.

Securities issued or guaranteed by the United States Government generally
are viewed as carrying minimal credit risk. Securities issued by
governmental entities but not backed by the full faith and credit of the
United States, and securities issued by private entities, are subject to
higher levels of credit risk. The ratings and certain other requirements
which apply to the Funds' permitted investments, as described elsewhere in
this Prospectus, are intended to limit the amount of credit risk undertaken
by the 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 Limited Term Income Fund,
Intermediate Term Income Fund and Fixed Income Fund can invest in debt
securities 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 Advisor. 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.

CALL RISK. Many corporate bonds may be redeemed at the option of the
issuer ("called") at a

<PAGE>

specified price prior to their stated maturity date. In general, it is
advantageous for a corporate 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 corporate
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 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 Funds invest in
callable corporate bonds, Fund shareholders bear the risk that reductions in
income will result from the call of bonds. Most United States Government
securities are not callable before their stated maturity, although U.S.
agency securities often are.

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

MANAGEMENT

----------------------------------------------------------------------------
INVESTMENT ADVISOR

Each of the Funds has agreed to pay the Advisor monthly fees calculated on
an annual basis equal to 0.70% of its average daily net assets. The Advisor
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 except as discussed under
"Fees and Expenses -- Class A Share Fees and Expenses." The Advisor 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 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.

<PAGE>

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
advisors 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, FAIF has received an opinion from its
counsel that the Advisor is not prohibited from performing the investment
advisory services described above, and that certain broker-dealers
affiliated with the Advisor are 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 Advisor and
certain affiliated broker-dealers 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

Limited Term Income Fund is managed by a committee comprised of Mr. Jones,
Mr. Green, Ms. Rehkamp, Ms. Olsen and Mr. McGlinch, whose backgrounds are
set forth below. Fixed Income Fund is managed by a committee comprised of
Mr. Jones, Mr. Salvog, Ms. Rehkamp, Mr. Green and Mr. Steele, whose
backgrounds are set forth below. Intermediate Government Bond Fund is
managed by a committee comprised of Mr. Drahn and Ms. Kung, whose
backgrounds are set forth below. Intermediate Term Income Fund is managed by
a committee comprised of Mr. Jones, Mr. Salvog, Mr. Steele, Mr. Green and
Ms. Rehkamp, whose backgrounds are set forth below.

MARTIN L. JONES is a member of the committees that manage Limited Term
Income Fund, Intermediate Term Income Fund and Fixed Income Fund. Mr. Jones
heads the Fixed Income Group of the Advisor and has over 20 years of
investment industry experience. Formerly with Harris Trust & Savings Bank,
Dillon, Read & Co., and Loeb Rhoades & Co., Mr. Jones received his
bachelor's degree from Texas Tech University, his master's degree from
University of Texas and his master's degree in business administration from
the University of Chicago.

CHRISTOPHER L. DRAHN is a member of the committee that manages
Intermediate Government Bond Fund. He joined the Advisor in 1985 and has
12 years of investment industry experience. Mr. Drahn received his
bachelor's degree from Wartburg College and his master's degree in
business administration from the University of Minnesota. He is a
Chartered Financial Analyst.

LUCILLE C. REHKAMP is a member of the committees that manage Limited Term
Income Fund, Intermediate Term Income Fund and Fixed Income Fund. She
joined the Advisor in 1979 and has 21 years of investment industry
experience. Ms. Rehkamp received her bachelor's degree from Marquette
University.

MARK M. GREEN is a member of the committees that manage Limited Term
Income Fund, Intermediate Term Income Fund and Fixed Income Fund. He
joined the Advisor in 1996 and has over ten years of investment industry
experience. Prior to joining the Advisor, Mr. Green was a portfolio
manager at Wells Fargo Investment Management. Mr. Green received his
bachelor's degree and master's degree from San Francisco State University.

THOMAS MCGLINCH is a member of the committee that manages Limited Term
Income Fund. Mr. McGlinch has over 16 years of investment industry
experience. Prior to joining the Advisor in 1998,

<PAGE>

Mr. McGlinch served as a senior vice president and portfolio co-manager
for Piper Capital Management Incorporated overseeing the management of
several Piper Funds, including the Piper Funds Adjustable Rate Mortgage
Securities Fund. Mr. McGlinch received his bachelor's degree in accounting
from St. John's University and master's degree in business administration
from the University of St. Thomas. Mr. McGlinch is a Chartered Financial
Analyst.

WAN-CHONG KUNG is a member of the committee that manages Intermediate
Government Bond Fund. Ms. Kung has over five years of investment industry
experience. Prior to joining the Advisor in 1998, Ms. Kung served as a
vice president and a portfolio co-manager for Piper Capital Management
Incorporated overseeing the management of several Piper Funds, including
the Piper Funds Adjustable Rate Mortgage Securities Fund. Ms. Kung
received her bachelor's degree in economics from the University of the
Philippines and received her master's degree in business administration
from the University of Minnesota. Ms. Kung is a Chartered Financial
Analyst.

BRUCE SALVOG is a member of the committees that manage Fixed Income Fund and
Intermediate Term Income Fund. Mr. Salvog has over 27 years of investment
industry experience. Prior to joining the Advisor in 1998, Mr. Salvog served
as a senior vice president and portfolio co-manager for Piper Capital
Management Incorporated overseeing the management of several Piper Funds
including the Piper Funds Government Income Fund and Intermediate Bond Fund.
Mr. Salvog received his bachelor's degree in economics from Harvard
University.

DAVID STEELE is a member of the committees that manage Fixed Income Fund and
Intermediate Term Income Fund. Mr. Steele has over 18 years of investment
industry experience. Prior to joining the Advisor in 1998, Mr. Steele served
as a senior vice president and portfolio co-manager for Piper Capital
Management Incorporated overseeing the management of several Piper Funds
including the Piper Funds Government Income Fund and Intermediate Bond Fund.
Mr. Steele received his bachelor's degree in business administration from
the University of Washington and master's degree in businesss administration
from the University of Southern California.

NANCY OLSEN is a member of the committee that manages Limited Term Income
Fund. Ms. Olsen has over 19 years of investment industry experience. Prior
to joining the Advisor in 1998, Ms. Olsen served as a senior vice president
and portfolio co-manager for Piper Capital Management Incorporated
overseeing the management of several Piper Funds including the Piper Funds
Money Market Fund and U.S. Government Money Market Fund. Ms. Olsen received
her bachelor's degree in business administration and her master's degree in
business administration from the University of Minnesota.

----------------------------------------------------------------------------
CUSTODIAN

----------------------------------------------------------------------------
ADMINISTRATOR

<PAGE>

provides these services for a fee calculated at an annual rate of 0.12% of
each Fund's average daily net assets, 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. U.S.
Bank assists the Administrator and provides sub-administration services for
the Funds. For these services, the Administrator compensates the
sub-administrator at an annual rate of up to 0.05% of each Fund's average
daily net assets.

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TRANSFER AGENT

Effective October 1, 1998, FAIF has appointed U.S. Bank as servicing agent
to perform certain transfer agent and dividend disbursing agent services
with respect to the Class A Shares and Class B Shares of the Funds held
through accounts at U.S. Bank and its affiliates. The Funds pay U.S. Bank an
annual fee of $15 per account for such services.

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, which is not affiliated with the Advisor, is a
wholly-owned subsidiary of SEI Investments Company and is located at Oaks,
Pennsylvania 19456.

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"), pursuant to
which the Distributor agrees to provide, or enter into written agreements
with service providers to provide, one or more specified shareholder
services to beneficial owners of shares of the Funds. 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 -- Alternative Sales
Charge Options." In consideration of the services and facilities to be
provided by the Distributor or any service provider, each Fund also pays the
Distributor a shareholder servicing fee at an annual rate of 0.25% of the
Fund's Class A Shares' average daily net asset value, which fee is computed
and paid monthly. However, for a one year period following the date of
purchase, the Fund pays no shareholder servicing fee for Class A Shares
which are sold at net asset value if a commission is paid in connection with
such sale. 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 servicing provided by
"one-stop" mutual fund networks through which the Funds are made available.
In addition, the Distributor and the Advisor 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 any of

<PAGE>

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, the Funds may pay to the
Distributor a sales support fee at an annual rate of up to 0.75% of the
Funds' Class B Shares' average daily net asset value, which fee is computed
and paid monthly. The sales support fee may be used by the Distributor to
provide compensation for sales support and distribution activities with
respect to Class B Shares of the Funds. 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 Funds. 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 of funds).
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 Advisor, 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
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 Advisor may pay amounts to broker-dealers from its
own assets with respect to such sales. U.S. Bancorp Investments, Inc. and
U.S. Bancorp Piper Jaffray Inc., broker-dealers affiliated with the Advisor,
are Participating Institutions.

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
both the New York Stock Exchange and federally-chartered banks are open for
business. Shares may be purchased as described below. The Funds reserve the
right to reject any purchase order.

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 unless the financial
institution has been authorized to accept purchase orders on behalf of the
Funds. It is the financial institution's responsibility to transmit orders
promptly.

Certain financial institutions assist their clients in the purchase or
redemption of shares and charge a fee for this service. In addition, certain
financial institutions are authorized to act as the Funds' agent for the
purpose of accepting purchase orders, and the Funds will be deemed to have
received a purchase order upon receipt of the order by the financial
institution.

<PAGE>

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.

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: U.S. Bank National Association,
Minneapolis, Minnesota, ABA Number 091000022; For Credit To: DST Systems,
Inc.: Account Number 160234580266; For Further Credit To: (Investor Name
and Fund Name). Shares cannot be purchased by Federal Reserve wire on days
the New York Stock Exchange is closed or federally-chartered banks are
closed.

----------------------------------------------------------------------------
MINIMUM INVESTMENT REQUIRED

----------------------------------------------------------------------------
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 per share plus a sales charge which, at
the investor's election, may be imposed 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").
Each of Class A and Class B Shares 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 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 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 for $250,000 or more ordinarily will be treated as orders
for Class A Shares or declined.

<PAGE>

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.

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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:

----------------------------------------------------------------------------
LIMITED TERM INCOME FUND:
MAXIMUM
AMOUNT OF
SALES CHARGE SALES CHARGE SALES CHARGE
AS PERCENTAGE AS PERCENTAGE REALLOWED TO
OF OFFERING OF NET ASSET PARTICIPATING
PRICE VALUE INSTITUTIONS
- --------------------------------------------------------------------------------
Less than $50,000 2.00% 2.04% 1.80%
$50,000 but less
than $100,000 1.50% 1.52% 1.35%
$100,000 but less
than $250,000 1.00% 1.01% 0.90%
$250,000 but less
than $500,000 0.75% 0.76% 0.68%
$500,000 but less
than $1,000,000 0.50% 0.50% 0.45%
$1,000,000 and over 0.00% 0.00% 0.00%
- --------------------------------------------------------------------------------

----------------------------------------------------------------------------
INTERMEDIATE TERM INCOME FUND AND FIXED INCOME FUND:
MAXIMUM
AMOUNT OF
SALES CHARGE SALES CHARGE SALES CHARGE
AS PERCENTAGE AS PERCENTAGE REALLOWED TO
OF OFFERING OF NET ASSET PARTICIPATING
PRICE VALUE INSTITUTIONS
- --------------------------------------------------------------------------------
Less than $50,000 3.75% 3.90% 3.38%
$50,000 but less
than $100,000 3.25% 3.36% 2.93%
$100,000 but less
than $250,000 2.75% 2.83% 2.48%
$250,000 but less
than $500,000 2.00% 2.04% 1.80%
$500,000 but less
than $1,000,000 1.00% 1.01% 0.90%
$1,000,000 and over 0.00% 0.00% 0.00%
- --------------------------------------------------------------------------------

----------------------------------------------------------------------------
INTERMEDIATE GOVERNMENT BOND FUND:
MAXIMUM
AMOUNT OF
SALES CHARGE SALES CHARGE SALES CHARGE
AS PERCENTAGE AS PERCENTAGE REALLOWED TO
OF OFFERING OF NET ASSET PARTICIPATING
PRICE 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%
- --------------------------------------------------------------------------------

There is no initial sales charge on purchases of Class A Shares of $1
million or more. However, Participating Institutions may receive a
commission of 1.00% of the first $3 million of shares purchased, 0.75% of
shares purchased in excess of $3 million up to $5 million, and 0.50% of
shares purchased in excess of $5 million. If such a commission is paid,
redemptions of Class A Shares purchased at net asset value within 12 months
of such purchases will be subject to a contingent deferred sales charge of
1.00%. 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 as of the close of normal trading on the New
York Stock Exchange (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) days in which the New York Stock
Exchange or federally-chartered banks are closed including, but not limited
to, the following federal holidays: New Year's Day, Martin Luther King, Jr.
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.

<PAGE>

* 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.

SALES OF CLASS A SHARES AT NET ASSET VALUE. Purchases of a Fund's Class A
Shares by the Advisor or any of its affiliates, or any of its or

<PAGE>

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 advisors, 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 investors participating in asset
allocation "wrap" accounts offered by the Advisor or any of its affiliates,
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. No
commission is paid in connection with net asset value purchases of Class A
Shares made pursuant to this paragraph, nor is any contingent deferred sales
charge imposed upon the redemption of such shares.

Class A Shares may also be purchased without a sales charge by retirement
and deferred compensation plans and trusts used to fund such plans as
defined in Sections 401(a), 403(b) and 457 of the Internal Revenue Code
which either have 200 or more eligible participants or purchase shares
through a Participating Institution that is an affiliate of the Advisor. A
contingent deferred sales charge of 1.00% will be imposed if such shares
are redeemed within 12 months of such purchase. Participating Institutions
may receive a commission on such sales equal to 1.00% of the first $3
million of shares purchased, 0.75% of shares purchased in excess of $3
million up to $5 million, and 0.50% of shares purchased in excess of $5
million.

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 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

CONTINGENT DEFERRED SALES CHARGE. Class B Shares 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

<PAGE>

purchase price or on shares derived from reinvestment of dividends or
capital gain distributions.

CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
OF DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO 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 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 701/2. 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 eligible 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 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

----------------------------------------------------------------------------
SYSTEMATIC INVESTMENT PROGRAM

----------------------------------------------------------------------------
EXCHANGING SECURITIES FOR FUND SHARES

A Fund may accept securities in exchange for Fund shares. A Fund will allow
such exchanges

<PAGE>

only upon the prior approval by the Fund and a determination by the Fund and
the Advisor 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

The amount of dividends payable on Class A and Class B Shares generally will
be less than the dividends payable on Class Y Shares because of the
distribution, shareholder servicing transfer agent and/or dividend
disbursing 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 Class B Shares.

----------------------------------------------------------------------------
EXCHANGE PRIVILEGE

Shareholders may exchange Class A or Class B Shares of a Fund for currently
available Class A or Class B Shares, respectively, of the other FAIF Funds
or of other funds in the First American family of funds. 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 American family of funds must meet any
applicable minimum investment of the fund for which shares are being
exchanged.

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.

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

<PAGE>

Agent, shareholder servicing agent, or financial institution.

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., 330 West Ninth Street, Kansas City, Missouri 64105. The
exchange privilege should not be used to take advantage of short-term swings
in the securities markets. The Funds reserve the right to limit or terminate
exchange privileges as to any shareholder who makes exchanges more than four
times a year (other than through the Systematic Exchange Program or similar
periodic investment programs). The Funds may modify or revoke the exchange
privilege for all shareholders upon 60 days' prior written notice or without
notice in times of drastic economic or market changes.

REDEEMING SHARES

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

<PAGE>

after the Fund receives the redemption request from the financial
institution (less the amount of any applicable contingent deferred sales
charge). 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 unless the financial
institution has been authorized to accept redemption requests on behalf of
the Funds. 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.
Certain financial institutions are authorized to act as the Funds' agent for
the purpose of accepting redemption requests, and the Funds will be deemed
to have received a redemption request upon receipt of the request by the
financial institution.

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. The Transfer Agent
and the Funds will each employ reasonable procedures to confirm that
instructions communicated are 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 tax
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

* 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;

<PAGE>

* 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.

----------------------------------------------------------------------------
BY SYSTEMATIC WITHDRAWAL PROGRAM

----------------------------------------------------------------------------
REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR

----------------------------------------------------------------------------
ACCOUNTS WITH LOW BALANCES

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 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."

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

<PAGE>

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

Foreign securities owned by the Funds are valued at the closing prices on
the principal exchange on which they trade.

If the value for a security cannot be obtained from the sources described
above, the security's value may be determined pursuant to the fair value
procedures established by the Board of Directors.

Financial futures are valued at the settlement price established each day by
the board of exchange on which they are traded. Portfolio securities
underlying actively traded options are valued at their market price as
determined above. The current market value of any exchange traded options
held or written by a Fund, are valued at the closing bid price for a long
position or the closing asked price for a short position.

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
differing distribution, shareholder servicing, transfer agent and/or
dividend disbursing expenses charged to Class A and Class B Shares.

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

Any assets or liabilities of the Funds initially expressed in terms of
foreign currencies are translated into United States dollars using current
exchange rates. Trading in securities on foreign markets may be completed
before the close of business on each business day of the Funds. Thus, the
calculation of the Funds' net asset value may not take place
contemporaneously with the determination of the prices of foreign securities
held in the Funds' portfolios. In addition, trading in securities on foreign
markets may not take place on all days on which the New York Stock Exchange
is open for business or may take place on days on which the New York Stock
Exchange is not open for business. Therefore, the net asset value of a Fund
which holds foreign securities might be significantly affected on days when
an investor has no access to the Fund.

FEDERAL INCOME TAXES

----------------------------------------------------------------------------
GENERAL

Each Fund intends to qualify as a regulated investment company under
Subchapter M of the

<PAGE>

Internal Revenue Code of 1986, as amended, during its current taxable year
in order to be relieved of payment of federal income taxes on amounts of
taxable income it distributes to shareholders.

Dividends paid from the net capital gains of each Fund and designated as
capital gain dividends generally will be taxable to shareholders as
long-term capital gains, regardless of the length of time for which they
have held their shares in the Fund. In the case of shareholders who are
individuals, estates, or trusts, each Fund will designate the portion of
each capital gain dividend that must be treated as mid-term capital gain and
the portion that must be treated as long-term capital gain.

Gain or loss realized upon the sale of shares in the Funds will be treated
as capital gain or loss, provided that the shares represented a capital
asset in the hands of the shareholder. Such gain or loss will be long-term
(subject to a maximum 20% tax rate in the case of individuals, estates and
trusts) if the shares were held for more than one year.

Each Fund is required by federal law to withhold 31% of reportable payments
(including dividends, capital gain distributions, and redemptions) paid to
certain shareholders who have not complied with IRS regulations. In order to
avoid this withholding requirement, each investor will be asked to certify
on his or her account application that the social security or taxpayer
identification number provided is correct and that the investor is not
subject to backup withholding for previous underreporting to the IRS.

This is a general summary of the federal tax laws applicable to the Funds
and their shareholders as of the date of this Prospectus. See the Statement
of Additional Information for further details.

FUND SHARES

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."
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

<PAGE>

and is not intended to indicate future performance, and, except for
"distribution rate," is standardized in accordance with SEC regulations.

"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, as
applicable, the maximum sales charge imposed on Class A Shares or the
contingent deferred sales charge imposed on Class B Shares redeemed at the
end of the specified period covered by the total return figure. "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. 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 A and Class B Shares of a Fund will normally be
lower than for the Class Y Shares because Class Y Shares are not subject to
the sales charges and distribution, shareholder servicing, transfer agent
and/or dividend disbursing 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.

SPECIAL INVESTMENT METHODS

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BANK INSTRUMENTS

The bank instruments in which Limited Term Income Fund, Intermediate Term
Income Fund,

<PAGE>

and Fixed Income Fund may invest include time and savings deposits, deposit
notes and bankers' acceptances (including certificates of deposit) in
commercial or savings banks. They also include Eurodollar Certificates of
Deposit issued by foreign branches of United States or foreign banks;
Eurodollar Time Deposits, which are United States dollar-denominated
deposits in foreign branches of United States or foreign banks; and Yankee
Certificates of Deposit, which are United States dollar-denominated
certificates of deposit issued by United States branches of foreign banks
and held in the United States. For a description of certain risks of
investing in foreign issuers' securities, see "-- Foreign Securities" below.
In each instance, the Funds may only invest in bank instruments issued by an
institution which has capital, surplus and undivided profits of more than
$100 million or the deposits of which are insured by the Bank Insurance Fund
or the Savings Association Insurance Fund.

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FOREIGN SECURITIES

Each of Limited Term Income Fund, Intermediate Term Income Fund and Fixed
Income Fund may invest up to 15% of its total assets in foreign securities
payable in United States dollars. These securities may include securities
issued or guaranteed by (i) the Government of Canada, any Canadian Province,
or any instrumentality or political subdivision thereof; (ii) any other
foreign government, agency or instrumentality; (iii) foreign subsidiaries of
United States corporations; and (iv) foreign banks having total capital and
surplus at the time of investment of at least $1 billion. Such foreign bank
or corporate securities must be rated by at least one major United States
rating agency as having a quality not less than that which would be required
for comparable domestic securities. In addition, Limited Term Income Fund,
Intermediate Term Income Fund, and Fixed Income Fund also may invest in
Eurodollar Certificates of Deposit, Eurodollar Time Deposits and Yankee
Certificates of Deposit as described under "-- Bank Instruments" above.

Although investments of these kinds are not subject to currency risk because
they are denominated in United States dollars, they are subject to certain
other risks associated with foreign investments. Risks which may affect
foreign issuers include political, social or economic instability in the
country of the issuer, the possibility of the imposition of exchange
controls, expropriation, limits on removal of currency or other assets, and
nationalization of assets. Foreign issuers may not be subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic United States issuers. In addition, foreign branches
of United States banks and foreign banks may be subject to less stringent
regulatory requirements than United States banks.

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ASSET-BACKED SECURITIES

Each of Limited Term Income Fund, Intermediate Term Income Fund, and Fixed
Income Fund may invest in asset-backed securities. Asset-backed securities
generally constitute interests in, or obligations secured by, a pool of
receivables other than mortgage loans, such as automobile loans and leases,
credit card receivables, home equity loans and trade receivables.
Asset-backed securities generally are issued by a private special-purpose
entity. Their ratings and creditworthiness typically depend on the legal
insulation of the issuer and transaction from the consequences of a
sponsoring entity's bankruptcy, as well as on the credit quality of the
underlying receivables and the amount and credit quality of any third-party
credit enhancement supporting the underlying receivables or the asset-backed
securities. Asset-backed securities and their underlying receivables
generally are not issued or guaranteed by any governmental entity.

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MORTGAGE-BACKED SECURITIES

Each of Limited Term Income Fund, Intermediate Term Income Fund and Fixed
Income Fund may invest in mortgage-backed securities which are

<PAGE>

Agency Pass-Through Certificates or collateralized mortgage obligations
("CMOs"), as described below.

Agency Pass-Through Certificates are mortgage pass-through certificates
representing undivided interests in pools of residential mortgage loans.
Distribution of principal and interest on the mortgage loans underlying an
Agency Pass-Through Certificate is an obligation of or guaranteed by the
Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation
("FHLMC"). The obligation of GNMA with respect to such certificates is
backed by the full faith and credit of the United States, while the
obligations of FNMA and FHLMC with respect to such certificates rely solely
on the assets and credit of those entities. The mortgage loans underlying
GNMA certificates are partially or fully guaranteed by the Federal Housing
Administration or the Veterans Administration, while the mortgage loans
underlying FNMA certificates and FHLMC certificates are conventional
mortgage loans which are, in some cases, insured by private mortgage
insurance companies. Agency Pass-Through Certificates may be issued in a
single class with respect to a given pool of mortgage loans or in multiple
classes.

CMOs are debt obligations typically issued by a private special-purpose
entity and collateralized by residential or commercial mortgage loans or
Agency Pass-Through Certificates. The Funds will invest only in CMOs which
are rated in one of the four highest rating categories by a nationally
recognized statistical rating organization, or which are of comparable
quality in the judgment of the Advisor. Because CMOs are debt obligations of
private entities, payments on CMOs generally are not obligations of or
guaranteed by any governmental entity, and their ratings and
creditworthiness typically depend on, among other factors, the legal
insulation of the issuer and transaction from the consequences of a
sponsoring entity's bankruptcy. CMOs generally are issued in multiple
classes, with holders of each class entitled to receive specified portions
of the principal payments and prepayments and/or of the interest payments on
the underlying mortgage loans. These entitlements can be specified in a wide
variety of ways, so that the payment characteristics of various classes may
differ greatly from one another. Examples of the more common classes are
provided in the Statement of Additional Information. The CMOs in which the
Funds may invest include classes which are subordinated in right of payment
to other classes, as long as they meet the respective Fund's rating
requirements.

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

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REPURCHASE AGREEMENTS

<PAGE>

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 Advisor will monitor the creditworthiness of the firms with which
the Funds enter into repurchase agreements.

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WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

In connection with their ability to purchase securities on a when-issued or
delayed delivery basis, the Funds may enter into mortgage "dollar rolls" in
which a Fund sells securities and simultaneously contracts with the same
counterparty to repurchase similar (same type, coupon and maturity) but not
identical securities on a future date. In a mortgage dollar roll, a Fund
gives up the right to receive principal and interest paid on the securities
sold. However, a Fund would benefit to the extent of any difference between
the price received for the securities sold and the lower forward price for
the future purchase plus any fee income received. Unless such benefits
exceed the income, capital appreciation and gain or loss due to mortgage
prepayments that would have been realized on the securities sold as part of
the mortgage dollar roll, the use of this technique will diminish the
investment performance of the Funds compared with what such performance
would have been without the use of mortgage dollar rolls. The Funds will
hold and maintain in a segregated account until the settlement date cash or
liquid securities in an amount equal to the forward purchase price.

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ZERO COUPON SECURITIES

<PAGE>

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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. 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 Advisor 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 Advisor) in connection with these loans which, in the case
of U.S. Bank, are 40% of the Funds' income from such securities lending
transactions.

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OPTIONS TRANSACTIONS

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FUTURES AND OPTIONS ON FUTURES

<PAGE>

contract at any time during the option period. A Fund may use futures
contracts and options on futures in an effort to hedge against market risks.

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PORTFOLIO TRANSACTIONS

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PORTFOLIO TURNOVER

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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 make short sales of securities.

<PAGE>

* 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.

INFORMATION CONCERNING COMPENSATION PAID TO U.S. BANK NATIONAL ASSOCIATION
AND OTHER AFFILIATES

U.S. Bank National Association and other affiliates of U.S. Bancorp may act
as a fiduciary with respect to plans subject to the Employee Retirement
Income Security Act of 1974 ("ERISA") and other trust and agency accounts
that invest in the Funds. These U.S. Bancorp affiliates may receive
compensation from the Funds for the services they provide to the Funds, as
described more fully in the following sections of this Prospectus:

Investment advisory services -- see "Management-Investment Advisor"

Custodian services -- see "Management-Custodian"

Sub-administration services -- see "Management-Administrator"