FIRST AMERICAN INVESTMENT FUNDS INC, 485APOS, 1998-04-15

FIRST AMERICAN INVESTMENT FUNDS INC
485APOS, 1998-04-15

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1933 Act Registration No. 33-16905
1940 Act Registration No. 811-5309

As filed with the Securities and Exchange Commission on April 15, 1998

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]

Pre-Effective Amendment No.___ [ ]
Post-Effective Amendment No. 36 [X]

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 [X]

Amendment No. 37

FIRST AMERICAN INVESTMENT FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)

OAKS, PENNSYLVANIA 19456
(Address of Principal Executive Offices) (Zip Code)

(610) 676-1924
(Registrant's Telephone Number, including Area Code)

KATHRYN STANTON
C/O SEI INVESTMENTS COMPANY, OAKS, PENNSYLVANIA 19456
(Name and Address of Agent for Service)

COPIES TO:
Kathryn Stanton, Esq. Michael J. Radmer, Esq.
SEI Investments Company James D. Alt, Esq.
Oaks, Pennsylvania 19456 Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, Minnesota 55402

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

[ ] immediately upon filing pursuant to paragraph (b) of rule 485
[ ] on January 31, 1998 pursuant to paragraph (b) of rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485
[X] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
[ ] on January 31, 1995 pursuant to paragraph (a)(2) of Rule 485

Registrant has registered an indefinite number or amount of securities under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940. A Rule 24f-2 Notice was filed with the Securities and Exchange
Commission on December 9, 1997.

================================================================================

<PAGE>

FIRST AMERICAN INVESTMENT FUNDS, INC.
POST-EFFECTIVE AMENDMENT NO. 36
CROSS REFERENCE SHEET FOR ITEMS REQUIRED BY FORM N-1A

NOTE:

PART A of this Registration Statement consists of the following
documents:

(1) Class A and Class B Shares Prospectus relating to the
following funds (the "Funds"): Mid Cap Growth Fund, Emerging
Markets Fund, Adjustable Rate Mortgage Securities Fund, Tax
Free Fund and Minnesota Tax Free Fund.

(2) Class Y Shares Prospectus relating to the Funds.

(3) Class A and Class B Shares Prospectus relating to Strategic
Income Fund.

(4) Class Y Shares Prospectus relating to Strategic Income Fund.

PART B of this Registration Statement consists of one Statement of
Additional Information which relates to all four Prospectuses listed above.

<PAGE>

CROSS REFERENCE SHEET FOR THE FUNDS

ITEM NUMBER OF FORM N-1A

PART A CAPTION IN PROSPECTUS

CLASS A AND CLASS B SHARES PROSPECTUS

1 Cover Page
2 Fees and Expenses
3 Not Applicable
4 The Funds; Investment Objectives and Policies; Special Investment
Methods
5 Management; Distributor
5A Not Applicable
6 Fund Shares; Investing in the Funds; Income Taxes; Tax-Exempt vs.
Taxable Income
7 Distributor; Investing in the Funds; Determining the Price of Shares
8 Redeeming Shares
9 Not Applicable

CLASS Y SHARES PROSPECTUS

1 Cover Page
2 Fees and Expenses
3 Not Applicable
4 The Funds; Investment Objectives and Policies; Special Investment
Methods
5A Not Applicable
5 Management; Distributor
6 Fund Shares; Purchases and Redemptions of Shares; Federal Income
Taxes; Tax-Exempt vs. Taxable Income
7 Distributor; Purchases and Redemptions of Shares
8 Purchases and Redemptions of Shares
9 Not Applicable

CAPTION IN COMBINED STATEMENT
PART B OF ADDITIONAL INFORMATION

10 Cover Page
11 Table of Contents
12 General Information
13 Additional Information Concerning Fund Investments; Investment
Restrictions
14 Directors and Executive Officers
15 Capital Stock
16 Investment Advisory and Other Services
17 Portfolio Transactions and Allocation of Brokerage
18 Not Applicable
19 Net Asset Value and Public Offering Price
20 Taxation
21 Investment Advisory and Other Services
22 Fund Performance
23 Not Applicable

<PAGE>

CROSS REFERENCE SHEET FOR STRATEGIC INCOME FUND

ITEM NUMBER OF FORM N-1A

PART A CAPTION IN PROSPECTUS

CLASS A AND CLASS B SHARES PROSPECTUS

1 Cover Page
2 Fees and Expenses
3 Not Applicable
4 The Fund; Investment Objectives and Policies; Special Investment
Methods
5 Management; Distributor
5A Not Applicable
6 Fund Shares; Investing in the Funds; Federal Income Taxes
7 Distributor; Investing in the Fund; Determining the Price of Shares
8 Redeeming Shares
9 Not Applicable

CLASS Y SHARES PROSPECTUS

1 Cover Page
2 Fees and Expenses
3 Not Applicable
4 The Fund; Investment Objectives and Policies; Special Investment
Methods
5A Not Applicable
5 Management; Distributor
6 Fund Shares; Purchases and Redemptions of Shares; Federal Income
Taxes
7 Distributor; Purchases and Redemptions of Shares
8 Purchases and Redemptions of Shares
9 Not Applicable

CAPTION IN COMBINED STATEMENT
PART B OF ADDITIONAL INFORMATION

<PAGE>

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION AND AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

, 1998

CLASS A AND CLASS B SHARES

Mid Cap
Growth Fund

Emerging
Markets Fund

Adjustable Rate
Mortgage Securities Fund

Tax Free Fund

Minnesota
Tax Free Fund

FIRST AMERICAN
INVESTMENT FUNDS, INC.

PROSPECTUS

Subject to Completion -- April 15, 1998

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

<PAGE>

TABLE OF CONTENTS

Summary 2
...............................................
Fees and Expenses 5
...............................................
The Funds 8
...............................................
Investment Objectives and Policies 8
...............................................
Management 15
...............................................
Distributor 20
...............................................
Investing in the Funds 21
...............................................
Redeeming Shares 29
...............................................
Determining the Price of Shares 31
...............................................
Income Taxes 32
...............................................
Tax-Exempt vs. Taxable Income 35
...............................................
Fund Shares 35
...............................................
Calculation of Performance Data 36
...............................................
Special Investment Methods 37
...............................................
Information Concerning Compensation Paid
to U.S. Bank National Association, U.S. Bank
Trust National Association and Other
Affiliates 49
...............................................

<PAGE>

FIRST AMERICAN INVESTMENT FUNDS, INC.

CLASS A AND CLASS B
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"):

* MID CAP GROWTH FUND

* EMERGING MARKETS FUND

* ADJUSTABLE RATE MORTGAGE SECURITIES FUND

* TAX FREE FUND

* MINNESOTA TAX FREE FUND

This Prospectus also relates to the Class B Shares of Mid Cap Growth Fund
and Emerging Markets Fund.

SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED 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 _______________, 1998 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 _________, 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"). It also relates to the Class B Shares of Mid
Cap Growth Fund and Emerging Markets Fund.

MID CAP GROWTH FUND has an objective of growth of capital. Under normal
market conditions, the Fund invests at least 65% of its total assets in
equity securities of mid-capitalization companies (those with market
capitalizations from $1 billion to $5 billion at the time of purchase) that,
in the Fund's adviser's opinion, exhibit outstanding potential for superior
growth based on a combination of factors such as above average growth in
revenue and earnings, strong management and sound and improving financial
condition.

EMERGING MARKETS FUND has an objective of long-term growth of capital. Under
normal market conditions, the Fund invests at least 65% of its total assets
in an internationally diversified portfolio of equity securities which trade
in emerging markets.

ADJUSTABLE RATE MORTGAGE SECURITIES FUND has an objective of providing
current income while attempting to provide a high degree of principal
stability. Under normal market conditions, the Fund will invest at least 65%
of its total assets in mortgage-related securities having adjustable
interest rates which reset at periodic intervals.

TAX FREE FUND has an objective of providing maximum current income which is
exempt from federal taxation to the extent consistent with prudent
investment risk. Under normal market conditions, the Fund will invest 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 15 to 25 years.

MINNESOTA TAX FREE FUND has an objective of providing maximum current income
which is exempt from both federal income tax and Minnesota state income tax
to the extent consistent with prudent investment risk. 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 15 to 25 years.

INVESTMENT ADVISER. U.S. Bank National Association (the "Adviser" or "U.S.
Bank") serves as investment adviser to each of the Funds through its First
American Asset Management group. Marvin & Palmer Associates, Inc. (the
"Sub-Adviser") serves as sub-adviser to Emerging Markets Fund. 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 4.50%, in the case of Mid Cap Growth Fund and
Emerging Markets Fund; 3.00%, in the case of Tax Free Fund and Minnesota Tax
Free Fund; and 2.00% in the case of Adjustable Rate Mortgage Securities
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 of up to 1.00% on such
sales.

<PAGE>

Redemptions of Class A Shares within 24 months following such purchases will
be subject to a contingent deferred sales charge of up to 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 that class. See "Investing in the Funds -- Class A Share Price and
Sales Charge."

Class B Shares of Mid Cap Growth Fund and Emerging Markets Fund are sold at
net asset value without an initial sales charge. Class B Shares of such
Funds 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."

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."

RISKS TO CONSIDER. Mid Cap Growth Fund and Emerging Markets Fund are subject
to the risk of generally adverse equity markets. Investors also should
recognize that market prices of equity securities generally, and of
particular companies' equity securities, frequently are subject to greater
volatility than prices of fixed income securities. Because Mid Cap Growth
Fund and Emerging Markets Fund are actively managed, their performance will
reflect in part the ability of the Adviser or Sub-Adviser to select
securities which are suited to achieving their investment objectives. Due to
their active management, these Funds could underperform other mutual funds
with similar investment objectives or the market generally. In addition, (i)
Mid Cap Growth Fund and Emerging Markets Fund are subject to risks
associated with investing in mid- and small-capitalization companies; (ii)
Emerging Markets Fund is subject to the risks associated with investing in
foreign securities and to currency risk; (iii) Mid Cap Growth Fund may
invest specified portions of its assets in securities of foreign issuers
which are listed on a United States stock exchange or represented by
American Depositary Receipts; and (iv) certain Funds may invest (but not for
speculative purposes) in stock index futures contracts, options on stock
indices and options on stock index futures.

<PAGE>

interest rate risk and prepayment risk by investing primarily in
mortgage-related securities which have adjustable interest rates. Adjustable
Rate Mortgage Securities Fund is also subject to extension risk. That is,
rising interest rates could cause homeowners to prepay their mortgages more
slowly than expected, and in effect convert a short-or medium-duration
mortgage-related security into a longer-duration security, increasing its
sensitivity to interest rate changes and causing its price to decline.

In addition, the value of municipal obligations held by Tax Free Fund and
Minnesota Tax Free Fund 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 Minnesota Tax Free Fund invests principally in municipal
obligations of issuers located only in Minnesota. Adjustable Rate Mortgage
Securities Fund, Tax Free Fund and Minnesota Tax Free Fund also may, in
order to attempt to reduce risk, invest in exchange traded interest rate
futures contracts, interest rate index futures contracts, traded put and
call options on interest rate futures contracts and on interest rate
indices. 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>
ADJUSTABLE RATE
MID CAP EMERGING MORTGAGE MINNESOTA
GROWTH MARKETS SECURITIES TAX FREE TAX FREE
FUND FUND FUND FUND FUND
=============================================================================================================
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum sales load imposed on purchases
(as a percentage of offering price)(1) 4.50% 4.50% 2.00% 3.00% 3.00%
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)(2) 0.70% 0.70% 0.40% 0.63% 0.52%
Rule 12b-1 fees
(after voluntary fee waivers)(2) 0.25%(3) 0.25%(3) 0.15%(3) 0.25%(3) 0.25%(3)
Other expenses 0.17% 0.75% 0.25% 0.22% 0.18%
Total fund operating expenses
(after voluntary fee waivers)(2) 1.12% 1.70% 0.80% 1.10% 0.95%
=============================================================================================================

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 $ 56 $ 62 $ 28 $ 41 $ 39
3 years $ 79 $ 96 $ 45 $ 64 $ 59

</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 ADVISER INTENDS TO WAIVE A PORTION OF ITS FEES ON A VOLUNTARY BASIS, AND
THE AMOUNTS SHOWN REFLECT THESE WAIVERS AS OF THE DATE OF THIS PROSPECTUS.
THE ADVISER INTENDS TO MAINTAIN SUCH WAIVERS IN EFFECT FOR THE CURRENT
FISCAL YEAR BUT RESERVES THE RIGHT TO DISCONTINUE SUCH WAIVERS AT ANY TIME
IN ITS SOLE DISCRETION, NOTWITHSTANDING THE FOREGOING, THE ADVISER WILL
MAINTAIN SUCH WAIVERS FOR THE FUNDS AT LEAST THROUGH JULY 31, 2000 SO THAT
THE TOTAL FUND OPERATING EXPENSES DO NOT EXCEED 1.23% FOR MID CAP GROWTH
FUND, 2.00% FOR EMERGING MARKETS FUND, 0.81% FOR ADJUSTABLE RATE MORTGAGE
SECURITIES FUND, 1.11% FOR TAX FREE FUND, AND 0.95% FOR MINNESOTA TAX FREE
FUND. ABSENT ANY FEE WAIVERS, INVESTMENT ADVISORY FEES FOR EACH FUND AS AN
ANNUALIZED PERCENTAGE OF AVERAGE DAILY NET ASSETS WOULD BE 0.70%, EXCEPT, IN
THE CASE OF EMERGING MARKETS FUND, 1.25%; RULE 12b-1 FEES CALCULATED ON SUCH
BASIS WOULD BE 0.25%; AND TOTAL FUND OPERATING EXPENSES CALCULATED ON SUCH
BASIS WOULD BE 1.12% FOR MID CAP GROWTH FUND, 2.25% FOR EMERGING MARKETS
FUND, 1.20% FOR ADJUSTABLE RATE MORTGAGE SECURITIES FUND, 1.17% FOR TAX FREE
FUND AND 1.13% FOR MINNESOTA TAX FREE FUND. "OTHER EXPENSES" INCLUDES AN
ADMINISTRATION FEE.

(3) ALL OF THIS AMOUNT 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 AND 3-YEAR PERIODS WOULD BE AS FOLLOWS: MID CAP GROWTH FUND, $56 AND $79;
EMERGING MARKETS FUND, $67 AND $112; ADJUSTABLE RATE MORTGAGE SECURITIES
FUND, $32 AND $57; TAX FREE FUND, $42 AND $66; AND MINNESOTA TAX FREE FUND,
$41 AND $65.

<PAGE>

FEES AND EXPENSES

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

<TABLE>
<CAPTION>
MID CAP EMERGING
GROWTH MARKETS
FUND FUND
=======================================================================================
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on purchases (as a
percentage of offering price)(1) None None
Maximum sales load imposed on reinvested dividends None None
Deferred sales load 5.00% 5.00%
Redemption fees None None
Exchange fees None None
=======================================================================================
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment advisory fees (after voluntary fee waivers)(1) 0.70% 0.70%
Rule 12b-1 fees(2) 1.00% 1.00%
Other expenses 0.17% 0.75%
Total fund operating expenses
(after voluntary fee waivers)(1) 1.87% 2.45%
=======================================================================================
EXAMPLE(3)

1 year $ 69 $ 75
3 years $ 99 $ 116
=======================================================================================
ASSUMING NO REDEMPTION(4)

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

1 year $ 19 $ 25
3 years $ 59 $ 76
=======================================================================================

</TABLE>

(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 AND 3-YEAR PERIODS WOULD BE AS FOLLOWS: MID CAP GROWTH FUND, $69 AND $99;
AND EMERGING MARKETS FUND, $80 AND $133.

(4) ABSENT THE FEE WAIVER REFERRED TO IN (1) ABOVE (ASSUMING NO REDEMPTION), THE
DOLLAR AMOUNTS FOR THE 1 AND 3-YEAR PERIODS WOULD BE AS FOLLOWS: MID CAP
GROWTH FUND, $19 AND $59; AND EMERGING MARKETS FUND, $30 AND $93.

<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>

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 to the Class A Shares of the Funds named on the
cover hereof. In addition, this Prospectus also relates to the Class B
Shares of Mid Cap Growth Fund and Emerging Markets Fund. 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 (except
Minnesota Tax Free Fund) is a diversified investment company, as defined in
the Investment Company Act of 1940 (the "1940 Act"). Minnesota Tax Free Fund
is a nondiversified investment company under the 1940 Act.

If a percentage limitation on investments by a Fund stated below or in the
Statement of Additional Information is adhered to at the time of an
investment, a later increase or decrease in percentage resulting from
changes in asset values will not be deemed to violate the limitation except
in the case of the limitation on illiquid investments. Similarly, if a Fund
is required or permitted to invest a stated percentage of its assets in
companies with no more or no less than a stated market capitalization,
deviations from the stated percentages which result from changes in
companies' market capitalizations after the Fund purchases their shares will
not be deemed to violate the limitation. 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.

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

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

<PAGE>

---------------------------------------------------------------------------
MID CAP GROWTH FUND

OBJECTIVE. Mid Cap Growth Fund has an objective of growth of capital.

INVESTMENT POLICIES. Under normal market conditions, Mid Cap Growth Fund
invests at least 65% of its total assets in equity securities of
mid-capitalization companies that, in the Adviser's opinion, exhibit
outstanding potential for superior growth based on a combination of factors
such as above average growth in revenue and earnings, strong management and
sound and improving financial condition. For these purposes,
mid-capitalization growth companies are deemed those with market
capitalizations from $1 billion to $5 billion at the time of purchase.

The Fund also may invest up to 35% of its total assets in the aggregate in
equity securities of issuers with a market capitalization of less than $1
billion or more than $5 billion and in fixed income securities of the kinds
described under "Special Investment Methods -- Fixed Income
Securities."

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

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

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

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EMERGING MARKETS FUND

OBJECTIVE. Emerging Markets Fund has an objective of long-term growth of
capital.

INVESTMENT POLICIES. Under normal market conditions, Emerging Markets Fund
invests at least 65% of its total assets in an internationally diversified
portfolio of equity securities which trade in emerging markets. A country
will be considered to have an "emerging market" if it has relatively low
gross national product per capita compared to the world's major economies
and the potential for rapid economic growth. Countries with emerging markets
include those that have an emerging stock market (as defined by the
International Finance Corporation), those with low- to middle income
economies (according to the World Bank), and those listed in World Bank
publications as "developing."

The securities in which the Fund invests include common and preferred stock,
securities (bonds and preferred stock) convertible into common stock,
warrants and securities representing underlying international securities
such as American Depositary Receipts and European Depositary Receipts. The
Fund may also hold securities of other investment companies (which
investments are also subject to the advisory fee) and depositary or
custodial receipts representing beneficial interests in any of the foregoing
securities. Normally, the Fund will invest at least 65% of its total assets
in securities traded in at least six foreign countries although it may
invest all of its assets in a single country. At the present time, the Fund
has no intention of investing all of its assets in a single country.

In investing the Fund's assets, the Sub-Adviser expects to place primary
emphasis on country selection, followed by selection of industries or

<PAGE>

sectors within or across countries and by selection of individual stocks
corresponding to the industries or sectors selected.

In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 50% of the
equity securities owned by the Fund and write call options on stock indices
related to such equity securities; (iv) purchase securities on a when-issued
or delayed delivery basis; (v) engage in the lending of portfolio
securities; (vi) engage in foreign currency transactions; (vii) in order to
attempt to reduce risk, purchase put and call options on foreign currencies;
(viii) write covered call options on foreign currencies owned by the Fund;
and (ix) enter into contracts for the future purchase or delivery of
securities, foreign currencies, and indices, purchase or sell options on any
such futures contracts and engage in related closing purchase transactions.
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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ADJUSTABLE RATE MORTGAGE SECURITIES FUND

OBJECTIVE. Adjustable Rate Mortgage Securities Fund has an objective of
providing current income while attempting to provide a high degree of
principal stability.

INVESTMENT POLICIES. Under normal market conditions, Adjustable Rate
Mortgage Securities Fund will invest at least 65% of its total assets in
mortgage-related securities having adjustable interest rates which reset at
periodic intervals ("adjustable rate mortgage securities" or "ARMS"). ARM
securities have interest rates which reset periodically in response to
changes in the current interest rate environment. ARM securities include
pass-through securities and floating rate collateralized mortgage
obligations.

The Fund may invest up to 35% of its total assets in mortgage-related
securities other than ARMS, securities issued or guaranteed as to principal
or interest by the U.S. government or its agencies or instrumentalities
private pass-through securities, asset backed securities and fixed income
securities. For information about these investment methods, restrictions on
their use, and certain associated risks, see the related headings under
"Special Investment Methods."

In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, invest in exchange traded interest rate
futures and interest rate index futures contracts, (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; (v) purchase interest
rate caps and floors; (vi) in order to attempt to reduce risk, invest in
Eurodollar instruments; and (vii) 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."

At least 65% of the Fund's total assets must be U.S. government securities,
securities with a minimum rating of A by Standard & Poor's and by Moody's or
which have been assigned an equivalent rating by another nationally
recognized statistical rating organization, or unrated securities of
comparable quality as determined by the Adviser. The Fund may not invest in
securities rated lower than A by Standard & Poor's or Moody's. If a
security's rating falls below an A, the Fund will sell the security as
promptly as possible.

<PAGE>

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TAX FREE FUND

OBJECTIVE. Tax Free Fund has an objective of providing maximum current
income which is exempt from federal income tax to the extent consistent with
prudent investment risk.

INVESTMENT POLICIES. Under normal market conditions, Tax Free Fund invests
at least 80% of its net assets in municipal bonds and other municipal
obligations, the interest on which is exempt from federal income tax. No
more than 20% of the securities owned by the Fund will generate income that
is subject to 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 Tax Free Fund will range from 15 to 25 years.

Tax Free Fund may purchase (i) municipal bonds which are rated no lower than
BBB by Standard & Poor's and Baa by Moody's, (ii) state and municipal notes
which are rated SP-1 by Standard & Poor's or MIG-1/VMIG-1 by Moody's, and
(iii) commercial paper which is rated A-1 by Standard & Poor's or Prime-1 by
Moody's, or which have been assigned an equivalent rating by another
nationally recognized statistical rating organization or which are of
comparable quality in the judgment of the Adviser.

While the assets of the 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 Adviser. 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) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, invest in exchange traded interest rate futures and
interest rate index futures contracts; (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. 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."

<PAGE>

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MINNESOTA TAX FREE FUND

OBJECTIVE. Minnesota Tax Free Fund has an objective of providing maximum
current income which is exempt from both federal income tax and Minnesota
state income tax to the extent consistent with prudent investment risk.

INVESTMENT POLICIES. Under normal market conditions, Minnesota Tax Free Fund
invests at least 80% of its net assets in municipal bonds and other
municipal obligations of the State of Minnesota, the interest on which is
exempt from federal income tax and the Minnesota state income tax. No more
than 20% of the securities owned by this Fund will generate income that is
an item of tax preference for the purpose of the federal alternative minimum
tax and for the purpose of the Minnesota alternative minimum tax. Municipal
obligations generating income subject to taxation under the federal
alternative minimum tax rules or 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 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 the Fund will range from 15 to 25 years.

Minnesota Tax Free Fund may purchase (i) municipal bonds which are rated no
lower than BBB by Standard & Poor's and Baa by Moody's, (ii) state and
municipal notes which are rated SP-1 by Standard & Poor's or MIG-1/VMIG-1 by
Moody's, and (iii) commercial paper which is rated A-1 by Standard and
Poor's or Prime-1 by Moody's, or which have been assigned an equivalent
rating by another nationally recognized statistical rating organization or
which are of comparable quality in the judgment of the Adviser.

While the assets of the 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% (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."

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 Adviser. Investments of these types are also subject to
the advisory fee. 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.

The Fund also may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, invest in exchange traded interest rate futures and
interest rate index futures contracts; (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; (v) engage in the lending of
portfolio securities; and (vi) 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."

<PAGE>

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RISKS TO CONSIDER

An investment in the Funds involves certain risks in addition to those noted
above with respect to particular Funds. These include the following:

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

SMALL CAPITALIZATION COMPANIES. Emerging Markets Fund and Mid Cap Growth
Fund are permitted to invest in equity securities of companies with small
market capitalizations. The equity securities of such companies frequently
have experienced greater price volatility in the past than those of
larger-capitalization companies, and they may be expected to do so in the
future. To the extent that the Funds invest in small capitalization
companies, they are subject to this risk of greater volatility.

ACTIVE MANAGEMENT. Mid Cap Growth Fund and Emerging Markets Fund are
actively managed by the Adviser, or in the case of Emerging Markets Fund,
the Sub-Adviser. The performance of these Funds will reflect in part the
ability of the Adviser or Sub-Adviser to select equity securities which are
suited to achieving the Funds' investment objectives. Due to their active
management, these Funds could under perform other mutual funds with similar
investment objectives or the market generally.

FOREIGN SECURITIES. Emerging Markets Fund is subject to special risks
associated with investing in foreign securities and to declines in net asset
value resulting from changes in exchange rates between the United States
dollar and foreign currencies. These risks are discussed under "Special
Investment Methods -- Foreign Securities" elsewhere herein. Because of the
special risks associated with foreign investing, the Funds may be subject to
greater volatility than most mutual funds which invest principally in
domestic securities.

INTEREST RATE RISK. Tax Free Fund and Minnesota Tax Free Fund emphasize
investments in fixed income securities. Investments in fixed income
securities give rise to 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 such Funds invest in fixed-rate debt
securities, they are subject to interest rate risk. In general, when
interest rates rise, the value of a fixed-rate debt security declines.
Conversely, when interest rates decline, the value of a fixed-rate debt
security generally increases. Thus, shareholders in these Funds bear the
risk that increases in market interest rates will cause the value of their
Fund's portfolio investments to decline. In addition to the extent that
Adjustable Rate Mortgage Securities Fund invests in fixed rate
mortgage-based securities, and to the extent that market interest rates
change between the dates upon which the interest rates borne by the
adjustable-rate securities held by this Fund adjust, this Fund is also
exposed to interest rate risk.

In general, the value of fixed-rate debt securities with longer maturities
are more sensitive to changes in market interest rates than the value of
such securities with shorter maturities. Thus, the net asset value of a Fund
which invests in securities with longer weighted average maturities should
be expected to have greater volatility in periods of changing market
interest rates than that of a Fund which invests in securities with shorter
weighted average maturities. Investors should note in this regard that Tax
Free Fund and Minnesota Tax Free Fund invest in securities with longer
weighted average maturities than First American's Intermediate Tax Free Fund
and Minnesota Insured Intermediate Tax Free Fund.

Although the Adviser may engage in transactions intended to hedge the value
of the Funds' portfolios against changes in market interest rates, there is
no assurance that such hedging transactions will

<PAGE>

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 or
mortgage-related security will fail to make payments on the security when
due. Because Adjustable Rate Mortgage Securities Fund, Tax Free Fund and
Minnesota Tax Free Fund invest in debt securities or mortgage-related
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 Tax Free Fund and Minnesota Tax Free Fund invest may entail greater
credit risk than the general obligation bonds in which they invest. This is
the case because revenue bonds and municipal lease obligations generally are
not backed by the faith, credit or general taxing power of the issuing
governmental entity. In addition, as described under that section, municipal
lease obligations also may be 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 these Funds'
permitted investments, as described elsewhere in this Prospectus, are
intended to limit the amount of credit risk undertaken by these Funds.
Nevertheless, shareholders in such Funds bear the risk that payment defaults
could cause the value of their Fund's portfolio investments to decline.
Investors also should note that Tax Free Fund and Minnesota Tax Free Fund
can invest in municipal obligations rated as low as BBB by Standard & Poor's
or Baa by Moody's, that Adjustable Rate Mortgage Securities Fund can invest
in mortgage-related and other securities rated as low as A by Standard &
Poor's or Moody's, or which have been assigned an equivalent rating by
another nationally recognized statistical rating organization, or which are
of comparable quality in the judgment of the Adviser. Although these rating
categories are investment grade, obligations and securities with these
ratings are viewed as having speculative characteristics and carry a
somewhat higher risk of default than obligations and securities rated in the
higher investment grade categories.

CALL RISK. Many municipal bonds and mortgage-related securities 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 or mortgage-related securities if they can be refinanced
through the issuance of new bonds or mortgage-related securities which bear
a lower interest rate than that of the called bonds or mortgage-related
securities. Call risk is the risk that bonds or mortgage-related securities
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 these Funds invest in
callable bonds, Fund shareholders bear the risk that reductions in income
will result from the call of bonds.

MORTGAGE-BACKED SECURITIES. Because residential mortgage loans generally can
be prepaid in whole or in part by the borrowers at any time without any
prepayment penalty, the holder of a mortgage-backed security which
represents an interest in a pool of such mortgage loans is subject to a form
of call risk which is generally called "prepayment risk." In addition, it is
more difficult to predict the effect of changes in market interest rates on
the return on mortgage-backed securities than to predict the effect of such
changes on the return of a conventional fixed-rate debt instrument; the
magnitude of such effects may be greater in some cases; and the return on
certain types of mortgage-backed securities, such as interest-only,
principal-only and inverse floating rate mortgage-backed securities, are
particularly sensitive to changes in interest rates and in the rate at which
the mortgage loans underlying the

<PAGE>

securities are prepaid by borrowers. For these reasons, Adjustable Rate
Mortgage Securities Fund's investments in mortgage-backed securities may
involve greater risks than investments in governmental or corporate bonds.
For further information, see "Special Investment Methods --
Mortgage-Backed Securities."

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

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." Minnesota Tax Free Fund will
invest primarily in municipal obligations issued by the State of Minnesota
and its political subdivisions. For this reason, the municipal obligations
held by this Fund will be particularly affected by local conditions in the
State of Minnesota. A more detailed description of the factors affecting
Minnesota 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.

MANAGEMENT

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

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INVESTMENT ADVISER

U.S. Bank National Association, 601 Second Avenue South, Minneapolis,
Minnesota 55402, acts as the Funds' investment adviser through its First
American Asset Management group. The Adviser has acted as an investment
adviser to FAIF since its inception in 1987 and has acted as investment
adviser to First American Funds, Inc. since 1982 and to First American
Strategy Funds, Inc. since 1996. As of September 30, 1997, the Adviser 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 Adviser.

Each of the Funds, other than Emerging Markets Fund, has agreed to pay the
Adviser monthly fees calculated on an annual basis equal to 0.70% of its
average daily net assets. Emerging Markets Fund pays the Adviser a monthly
fee calculated on the same basis equal to 1.25% of its average daily net
assets, out of which the Adviser pays the Sub-Adviser's fee. The Adviser
may, at its option, waive any or all of its fees, or reimburse expenses,
with respect to any Fund from time to time. Any such waiver or reimbursement
is voluntary and may be discontinued at any time. The Adviser also may
absorb or reimburse expenses of the Funds

<PAGE>

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 advisers to registered investment companies, subject
to a number of terms and conditions.

Although the scope of the prohibitions and limitations imposed by the
Glass-Steagall Act has not been fully defined by the courts or the
appropriate regulatory agencies, the Funds have received an opinion from
their counsel that the Adviser is not prohibited from performing the
investment advisory services described above, and that certain
broker-dealers affiliated with the Adviser, 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 Adviser 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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SUB-ADVISER TO EMERGING MARKETS FUND

Marvin & Palmer Associates, Inc., 1201 North Market Street, Suite 2300,
Wilmington, Delaware 19801, is Sub-Adviser to Emerging Markets Fund under an
agreement with the Adviser (the "Sub-Advisory Agreement"). The Sub-Adviser
is responsible for the investment and reinvestment of Emerging Markets
Fund's assets and the placement of brokerage transactions in connection
therewith. For its services under the Sub-Advisory Agreement, the
Sub-Adviser is paid a monthly fee by the Adviser calculated on an annual
basis equal to 0.85% of the first $100 million of Emerging Markets Fund's
average daily net assets, 0.60% of Emerging Markets Fund's average daily net
assets in excess of $100 million up to $300 million, 0.55% of Emerging
Markets Fund's average daily net assets in excess of $300 million up to $500
million and 0.50% of Emerging Markets Fund's average daily net assets in
excess of $500 million.

The Sub-Adviser, a privately held company, was founded in 1986 by David F.
Marvin and Stanley Palmer. The stock of the Sub-Adviser is owned by Mr.
Marvin, Mr. Palmer and 24 other holders. The Sub-Adviser is engaged in the
management of global, non-United States and emerging markets equity
portfolios for institutional accounts. At January 1, 1998, the Sub-Adviser
managed a total of $4.6 billion in investments for 53 institutional
investors.

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PORTFOLIO MANAGERS

Mid Cap Growth Fund is managed by a committee comprised of Ms. Shrewsbury,
Mr. Benson, Ms. Halbe, Ms. Hoyme, Mr. McSweeney and Ms. Thompson, whose
backgrounds are set forth below. Adjustable Rate Mortgage Securities Fund
is managed by a committee comprised of Mr. McGlinch, Ms. Kung and Mr.
Green, whose backgrounds are also set forth below. The remaining Funds are
managed or co-managed as indicated below.

SANDRA SHREWSBURY is a member of the committee which manages Mid Cap
Growth Fund. Ms. Shrewsbury has over 11 years of investment industry
experience. Prior to joining the Adviser in 1998, Ms. Shrewsbury served as
a portfolio co-manager for Piper Capital Management

<PAGE>

Incorporated overseeing the management of the Piper Funds Emerging Growth
Fund and Small Company Growth Fund. Ms. Shrewsbury received her bachelor's
degree in mathematics and education from Nebraska Wesleyan University and
a master's degree from Iowa State University. Ms. Shrewsbury is a
Chartered Financial Analyst.

ADAM BENSON is a member of the committee which manages Mid Cap Growth Fund.
Mr. Benson has over 4 years of investment industry experience. Prior to
joining the Adviser in 1998, Mr. Benson served as an assistant vice
president and portfolio co-manager for Piper Capital Management Incorporated
overseeing the management of the Piper Funds Emerging Growth Fund and Small
Company Growth Fund. Mr. Benson received his bachelor's degree in economics
from Luther College and master's degree in finance from the University of
Minnesota.

JOYCE HALBE is a member of the committee which manages Mid Cap Growth
Fund. Ms. Halbe has over 13 years of investment industry experience. Prior
to joining the Adviser in 1998, Ms. Halbe served, from 1996 to 1998, as a
senior vice president and portfolio co-manager for Piper Capital
Management Incorporated overseeing the management of the Piper Funds
Emerging Growth Fund and Small Company Growth Fund. Prior to 1996, Ms.
Halbe served as a vice president, analyst and portfolio manager for the
Adviser. Ms. Halbe received her bachelor's degree, master's degree and
master's degree in business administration from the University of
Wisconsin. Ms. Halbe is a Chartered Financial Analyst.

MARY HOYME is a member of the committee which manages Mid Cap Growth Fund.
Ms. Hoyme has over 15 years of investment industry experience. Prior to
joining the Adviser in 1998, Ms. Hoyme served, from 1996 to 1998, as a
senior vice president and portfolio co-manager for Piper Capital Management
Incorporated overseeing the management of the Piper Funds Emerging Growth
Fund and Small Company Growth Fund. Prior to 1996, Ms. Hoyme served as a
portfolio manager for the Adviser overseeing the management of the Adviser's
real estate and growth portfolios. Ms. Hoyme received her bachelor's degree
in finance and economics from the University of Wisconsin-Eau Claire and
master's degree in business administration from the University of St.
Thomas. Ms. Hoyme is a Chartered Financial Analyst.

TIMOTHY MCSWEENEY is a member of the committee which manages Mid Cap Growth
Fund. Mr. McSweeney has over 11 years of investment industry experience.
Prior to joining the Adviser in 1998, Mr. McSweeney served, from 1997 to
1998, as assistant vice president and portfolio co-manager for Piper Capital
Management Incorporated overseeing the management of the Piper Funds
Emerging Growth Fund and Small Company Growth Fund. Prior to 1997, Mr.
McSweeney served as a technology analyst for Gintel Asset Management. Mr.
McSweeney received his bachelor's degree in economics from Clark University
and master's degree in business administration from Northeastern University.

JILL THOMPSON is a member of the committee which manages Mid Cap Growth
Fund. Ms. Thompson has over 9 years of investment industry experience.
Prior to joining the Adviser in 1998, Ms. Thompson served as a senior vice
president and portfolio co-manager for Piper Capital Management
Incorporated overseeing the management of the Piper Funds Emerging Growth
Fund and Small Company Growth Fund. Ms. Thompson received her bachelor's
degree from St. Cloud State University. Ms. Thompson is a Chartered
Financial Analyst.

THOMAS MCGLINCH is a member of the committee which manages Adjustable Rate
Mortgage Securities Fund. Mr. McGlinch has over 16 years of investment
industry experience. Prior to joining the Adviser in 1998, Mr. McGlinch
served as 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. Mr. McGlinch received his
bachelor's degree in accounting from St. John's University and

<PAGE>

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 which manages Adjustable Rate
Mortgage Securities Fund. Ms. Kung has over five years of investment
industry experience. Prior to joining the Adviser 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.

MARK M. GREEN is a member of the committee which manages Adjustable Rate
Mortgage Securities Fund. Mr. Green joined the Adviser in 1996 and has
over ten years of investment industry experience. Mr. Green is also a
member of the committee which manages FAIF Limited Term Income Fund,
Intermediate Term Income Fund and Fixed Income Fund. Prior to joining the
Adviser, 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.

RONALD REUSS is a portfolio co-manager for Tax Free Fund and Minnesota Tax
Free Fund. Mr. Reuss has over 28 years of investment industry experience.
Prior to joining the Adviser in 1998, Mr. Reuss served as an economist, a
senior vice president and portfolio manager for Piper Capital Management
Incorporated overseeing the management of the Piper Funds National
Tax-Exempt Fund and Minnesota Tax-Exempt Fund. Mr. Reuss received his
bachelor's degree in business administration from John Carroll University
and master's degree in economics from Cleveland State University. Mr. Reuss
is a Chartered Financial Analyst.

DOUGLAS WHITE is a portfolio co-manager for Tax Free Fund and Minnesota
Tax Free Fund. Mr. White has over 14 years of investment industry
experience. Prior to joining the Adviser in 1998, Mr. White served as a
portfolio manager for Piper Capital Management Incorporated overseeing the
management of 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.

A committee comprised of the following eight individuals shares the
management of Emerging Markets Fund on behalf of the Sub-Adviser:

DAVID F. MARVIN is Chairman of the Sub-Adviser and founded the firm
together with Mr. Palmer in 1986. Before founding the Sub-Adviser, Mr.
Marvin was Vice President in charge of DuPont Corporation's $10 billion
internally-managed pension fund. Prior to that Mr. Marvin was Associate
Portfolio Manager, and then Head Portfolio Manager, for Investors
Diversified Services' IDS Stock Fund. Mr. Marvin started in the investment
business in 1965 as a securities analyst for Chicago Title & Trust. Mr.
Marvin received his bachelor's degree from the University of Illinois and
his master's degree in business administration from Northwestern
University. He is a Chartered Financial Analyst and a member of the
Financial Analysts Federation.

STANLEY PALMER is Vice Chairman of the Sub-Adviser and co-founder of the
firm. Mr. Palmer was Equity Portfolio Manager for DuPont Corporation from
1978 through 1986, an analyst and portfolio manager at Investors Diversified
Services from 1971 through 1978, and an analyst at Harris Trust & Savings
Bank from 1964 through 1971. Mr. Palmer received his bachelor's degree from
Gustavus Adolphus College and his master's degree in business administration
from the University of Iowa. He is a Chartered Financial Analyst and a
member of the Financial Analysts Federation.

WILLIAM E. DODGE has been President since January 1998 and a portfolio
manager of the Sub-Adviser since 1996. Mr. Dodge was Chief Investment
Strategist and

<PAGE>

Chairman of the Investment Policy Committee of Dean Witter in New York from
1991 to 1996, and he served as a Senior Portfolio Manager, Director of
Quantitative Equity Strategies, and United States equity analyst at the
DuPont Corporation pension fund from 1983 to 1991. From 1976 to 1983 Mr.
Dodge served in various United States portfolio management and analytical
positions including senior investment manager of a bank trust department
from 1981 to 1983. Mr. Dodge received his bachelor's degree and his master's
degree in business administration from the University of Massachusetts at
Amherst. He is a Chartered Financial Analyst and a member of the Financial
Analysts Federation.

TERRY B. MASON is a Senior Vice President and portfolio manager of the
Sub-Adviser. Before joining the Sub-Adviser, Mr. Mason was employed for 14
years by DuPont Corporation, the last five as international equity analyst
and international trader. Mr. Mason received his bachelor's degree from
Glassboro State College and his master's degree in business administration
from Widener University.

JAY F. MIDDLETON is a Senior Vice President and portfolio manager for the
Sub-Adviser and joined the firm in 1989. Mr. Middleton received his
bachelor's degree from Wesleyan University.

TODD D. MARVIN is a Senior Vice President and portfolio manager for the
Sub-Adviser and joined the firm in 1991. Before joining the Sub-Adviser,
Mr. Marvin was employed by Oppenheimer & Company as an analyst in
investment banking. Mr. Marvin received his bachelor's degree from
Wesleyan University.

DAVID L. SCHAEN is a Vice President and portfolio manager of the
Sub-Adviser. Before becoming a portfolio manager, Mr. Schaen was Head Trader
for the Sub-Adviser from 1991 to 1994 and an International Analyst for the
Sub-Adviser from 1994 to 1995. Prior to 1991 he was Head Trader and
Investment Officer at the Bank of Delaware. Mr. Schaen received his
bachelor's degree from the University of Delaware and his master's degree in
business administration from Widener University.

STEPHEN D. MARVIN is a Vice President and portfolio manager for the
Sub-Adviser and joined the firm in 1994. Before joining the Sub-Adviser,
Mr. Marvin was employed by Bear, Stearns & Company as a corporate
financial analyst. Mr. Marvin received his bachelor's degree from Carleton
College.

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

The Custodian of the Funds' assets is U.S. Bank Trust National Association
(the "Custodian"), U.S. Bank Trust 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
(except Emerging Markets Fund) average daily net assets and, in the case of
Emerging Markets Fund, 0.10% of the 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.

Rules adopted under the 1940 Act permit Emerging Markets Fund to maintain
its securities and cash in the custody of certain eligible foreign banks and
depositories. Emerging Markets Fund's portfolio of non-United States
securities are held by sub-custodians which are approved by the directors of
FAIF or a foreign custody manager appointed by the directors in accordance
with these rules. This determination is made pursuant to these rules
following a consideration of a number of factors including, but not limited
to, the reliability and financial stability of the institution; the ability
of the institution to perform custodian services for Emerging Markets Fund;
the reputation of the institution in its national market; the political and
economic stability of the country in which the institution is located; and
the risks of potential nationalization or expropriation of Emerging Markets
Fund's assets.

<PAGE>

Sub-custodian fees with respect to Emerging Markets Fund are paid by the
Custodian out of the Custodian's fees.

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

---------------------------------------------------------------------------
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 Adviser.

FAIF has appointed Piper Jaffray Inc., a broker-dealer affiliated with the
Adviser, as servicing agent to perform certain transfer agent and dividend
disbursing agent services with respect to the Class A Shares and the Class B
Shares of the Funds held through accounts at Piper Jaffray Inc. and its
affiliates. The Funds pay Piper Jaffray Inc. 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 Adviser, is a
wholly-owned subsidiary of SEI 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 purchases 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. 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

<PAGE>

their shares for ongoing servicing and/or maintenance of shareholder
accounts. The shareholder servicing fee may be used to provide compensation
for shareholder services provided by "one-stop" mutual fund networks through
which the Funds are made available. In addition, the Distributor and the
Adviser and its affiliates may provide compensation for services provided by
such networks from their own resources. From time to time, the Distributor
may voluntarily waive its fees with respect to the Class A Shares of any of
the Funds. Any such waivers may be made at the Distributor's discretion and
may be terminated at any time.

Under another distribution plan (the "Class B Distribution Plan") adopted in
accordance with Rule 12b-1 under the 1940 Act, Mid Cap Growth Fund and
Emerging Markets Fund may pay to the Distributor a sales support fee at an
annual rate of up to 0.75% of the Fund's 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 Distribution 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 Share 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 Adviser, the
Administrator, the Distributor, and any Participating Institution may in
their discretion use their own assets to pay for certain additional costs of
distributing Fund shares. Any arrangement to pay such additional costs may
be commenced or discontinued by any of these persons at any time. In
addition, while there is no sales charge on purchases of Class A Shares of
$1 million and more, the Adviser may pay amounts to broker-dealers from its
own assets with respect to such sales. U.S. Bancorp Investments, Inc., and
Piper Jaffray Inc., broker-dealers affiliated with the Adviser ("USBI"),
each is a Participating Institution.

INVESTING IN THE FUNDS

---------------------------------------------------------------------------
SHARE PURCHASES

Shares of the Funds are sold at their net asset value, next determined after
an order is received, plus any applicable sales charge, on days on which
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 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 Mid Cap Growth Fund's and
Emerging Markets Fund's agent for the purpose of accepting purchase orders,
and such Funds will be deemed to have received a

<PAGE>

purchase order upon receipt of the order by the financial institution.

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.

---------------------------------------------------------------------------
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 Adviser and its
affiliates.

---------------------------------------------------------------------------
ALTERNATIVE SALES CHARGE OPTIONS

THE TWO ALTERNATIVES: OVERVIEW. An investor may purchase shares of a Fund at
a price equal to its net asset value 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), in the
case of Mid Cap Growth and Emerging Markets Fund, 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.

<PAGE>

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.

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

---------------------------------------------------------------------------
CLASS A SHARES

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

----------------------------------------------------------------------------
MIDCAP GROWTH FUND AND EMERGING MARKETS 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 4.50% 4.71% 4.05%
$50,000 but less than $100,000 4.00% 4.17% 3.60%
$100,000 but less than $250,000 3.50% 3.63% 3.15%
$250,000 but less than $500,000 2.75% 2.83% 2.47%
$500,000 but less than $1,000,000 2.00% 2.04% 1.80%
$1,000,000 and over 0% 0% 0%
================================================================================

----------------------------------------------------------------------------
ADJUSTABLE RATE MORTGAGE SECURITIES 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% 0% 0%
================================================================================

<PAGE>

----------------------------------------------------------------------------
TAX FREE FUND AND MINNESOTA TAX FREE 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 $500,00 0 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% 0% 0%
================================================================================

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 up to 1.00% on such sales. Redemptions of Class A Shares
purchased at net asset value within 24 months of such purchases will be
subject to a contingent deferred sales charge of up to 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

<PAGE>

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

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

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

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

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

SALES OF CLASS A SHARES AT NET ASSET VALUE. Purchases of a Fund's Class A
Shares by the Adviser, the Sub-Adviser, or any of their affiliates, or any
of their or FAIF's officers, directors, employees, retirees, sales
representatives and partners, registered representatives of any
broker-dealer authorized to sell Fund shares, and full-time employees of
FAIF's general counsel, and members of their immediate families (i.e.,
parent, child, spouse, sibling, step or adopted relationships, and UTMA
accounts naming qualifying persons), may be made at net asset value without
a sales charge. A Fund's Class A Shares also may be purchased at net asset
value without a sales charge by fee-based registered investment advisers,
financial planners and registered broker-dealers who are purchasing shares
on behalf of their customers and by purchasers through "one-stop" mutual
fund networks through which the Funds are made available. In addition, Class
A Shares may be purchased at net asset value without a sales charge by
qualified defined contribution plans participating in the First American
401(k) Plan Program, investors participating in asset allocation "wrap"
accounts offered by the Adviser 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.

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

<PAGE>

the reinvestment in order to eliminate a sales charge. If the shareholder
redeems his or her shares of a Fund, there may be tax consequences.

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

CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
YEAR SINCE DOLLAR AMOUNT
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 held for more than eight years and Class B Shares acquired pursuant
to reinvestment of dividends or other distributions; and third, of Class B
Shares held longest during the eight-year period. This method should result
in the lowest possible sales charge.

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

<PAGE>

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

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.

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EXCHANGING SECURITIES FOR FUND SHARES

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

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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

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

<PAGE>

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

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

Shareholders may exchange Class A or Class B Shares of a Fund for currently
available Class A Shares 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.

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

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

Telephone exchange instructions may be recorded and will be binding upon the
shareholder. Telephone instructions must be received by the Transfer Agent
before 3:00 p.m. Central time, or by a shareholder's shareholder servicing
agent or financial institution by the time specified by it, in order for
shares to be exchanged the same day. Neither the Transfer Agent nor any Fund
will be responsible for the authenticity of exchange instructions received
by telephone if it reasonably believes those instructions to be genuine. The
Funds and the Transfer Agent will each employ reasonable procedures to
confirm that telephone instructions are genuine, and they may be liable for
losses resulting from unauthorized or fraudulent

<PAGE>

telephone instructions if they do not employ these procedures.

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 program). 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 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.

The terms of any exchange privilege may be modified or terminated by the
Funds at any time. There are currently no additional fees or charges for the
exchange service. The Funds do not contemplate establishing such fees or
charges, but they reserve the right to do so. Shareholders will be notified
of any modification or termination of the exchange privilege and of the
imposition of any additional fees or 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 (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 Mid Cap Growth
Fund's and Emerging Markets Fund's agent for the purpose of accepting
redemption requests, and such Funds will be deemed to have received a
redemption request upon receipt of the request by the financial institution.

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

<PAGE>

System, normally within one business day, but in no event more than seven
days after the request. Wire instructions must be previously established on
the account or provided in writing. The minimum amount for a wire transfer
is $1,000. If at any time the Funds determine it necessary to terminate or
modify this method of redemption, shareholders will be promptly notified.

In the event of drastic economic or market changes, a shareholder may
experience difficulty in redeeming shares by telephone. If this should
occur, another method of redemption should be considered. Neither the
Transfer Agent nor any Fund will be responsible for any loss, liability,
cost or expense for acting upon wire transfer instructions or telephone
instructions that it reasonably believes to be genuine. 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 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

<PAGE>

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.

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

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

DETERMINING THE PRICE
OF SHARES

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

The net asset value per share is determined as of the 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. Securities listed on a securities
exchange or an automated quotation system for which quotations are readily
available, including securities traded over the counter, are valued at the
last quoted sale price on the principal exchange on which they are traded on
the valuation date, or, if there is no such reported sale on the valuation
date, at the most recently quoted bid price.

<PAGE>

Debt obligations with remaining maturities in excess of sixty 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 sixty 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.

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 ask price for a short position.

Foreign currency forward contracts are valued at the current day's
interpolated foreign exchange rate, as calculated using the current day's
exchange rate and the thirty, sixty, ninety and one-hundred eighty day
forward rates provided by the Reuters system.

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

INCOME TAXES

---------------------------------------------------------------------------
FEDERAL INCOME TAXATION -- ALL OF THE FUNDS

Each Fund is treated as a different entity for federal income tax purposes.
Each of the Funds intends to qualify as a regulated investment company under
the Internal Revenue Code of 1986, as amended (the "Code"), for the current
fiscal year and 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 paid from net taxable investment income and any net realized
short-term capital gains will be taxable to shareholders as ordinary income,
whether received in cash or in additional shares.

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
(subject to a maximum tax rate of 28%) and the

<PAGE>

portion that must be treated as long-term capital gain (subject to a maximum
tax rate of 20%).

Gain or loss realized on the sale or exchange of shares in a Fund will be
treated as capital gain or loss, provided that (as is usually the case) the
shares represented a capital asset in the hands of the shareholder. For
corporate shareholders, such gain or loss will be long-term gain or loss if
the shares were held more than one year. For shareholders who are
individuals, estates, or trusts the gain or loss will be considered
long-term (subject to a maximum tax rate of 20%) if the shareholder has held
the shares for more than 18 months and mid-term (subject to a maximum tax
rate of 28%) if the shareholder has held the shares for more than one year
but not more than 18 months.

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.

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TAX FREE FUND AND MINNESOTA TAX FREE FUND

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

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 of Tax Free Fund and Minnesota Tax Free
Fund may invest up to 20% of its 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 adviser 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, 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 Tax Free Fund and Minnesota Tax
Free Fund. Tax Free Fund and Minnesota Tax Free Fund will avoid investment
in bonds which, in the opinion of the Adviser, pose a material risk of the
loss of tax exemption. Further, if a bond in a 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 Tax
Free Fund or Minnesota Tax Free Fund.

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

<PAGE>

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EMERGING MARKETS FUND

Dividends paid by Emerging Markets Fund attributable to investments in the
securities of foreign issuers will not be eligible for the 70% deduction for
dividends received by corporations.

Emerging Markets Fund may be required to pay withholding and other taxes
imposed by foreign countries, generally at rates from 10% to 40%, which
would reduce the Fund's investment income. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.

If at the end of Emerging Markets Fund's taxable year more than 50% of its
total assets consists of stock or securities of foreign corporations, the
Fund will be eligible to file an election with the Internal Revenue Service
to "pass through" to its shareholders the amount of foreign income taxes
(including withholding taxes) it paid. Pursuant to this election,
shareholders of the Fund will be required to include in gross income their
respective pro rata portions of such foreign taxes, treat such amounts as
foreign taxes paid by them, and subject to certain limitations, deduct such
amounts in computing their taxable income or, alternatively, use them as
foreign tax credits against their federal income taxes. If such an election
is filed for a year, Emerging Markets Fund shareholders will be notified of
the amounts which they may deduct as foreign taxes paid or used as foreign
tax credits.

Alternatively, if the amount of foreign taxes paid by Emerging Markets Fund
is not large enough in future years to warrant making the election described
above, the Fund may claim the amount of foreign taxes paid as a deduction
against its own gross income. In that case, shareholders will not be
required to include any amount of foreign taxes paid by the Fund in their
income and will not be permitted either to deduct any portion of foreign
taxes from their own income or to claim any amount of foreign tax credit for
taxes paid by the Fund.

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.

---------------------------------------------------------------------------
MINNESOTA INCOME TAXATION -- MINNESOTA TAX FREE FUND

The portion of exempt-interest dividends paid by Minnesota 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 represent 95 percent or more of
the exempt-interest dividends paid by the Fund. The remaining portion of
such dividends, and 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.

<PAGE>

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OTHER STATE AND LOCAL TAXATION

Except to the extent described above under "-- Minnesota Income Taxation --
Minnesota Tax Free Fund," distributions by all of the Funds may be subject
to state and local taxation (even if, in the case of Tax Free Fund, they are
exempt from federal income taxes). Shareholders are urged to consult their
own tax advisers regarding state and local taxation.

TAX-EXEMPT VS.
INCOME TAXABLE

The tables above show the approximate yields that taxable securities must
earn to equal yields that are (i) exempt from federal income taxes; and (ii)
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 34.1%,
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
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

<TABLE>
<CAPTION>
TAX-EQUIVALENT YIELDS

COMBINED FEDERAL AND
FEDERAL TAX BRACKETS MINNESOTA TAX BRACKETS
- ------------------------------------------------- --------------------------------------
TAX-FREE
YIELDS 28% 31% 36% 39.6% 34.1% 36.9% 41.4% 44.7%
================================================= ======================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
3.0% 4.17% 4.35% 4.69% 4.97% 4.55% 4.75% 5.12% 5.42%
3.5% 4.86% 5.07% 5.47% 5.79% 5.31% 5.55% 5.97% 6.33%
4.0% 5.56% 5.80% 6.25% 6.62% 6.07% 6.34% 6.83% 7.23%
4.5% 6.25% 6.52% 7.03% 7.45% 6.83% 7.13% 7.68% 8.14%
5.0% 6.94% 7.25% 7.81% 8.28% 7.59% 7.92% 8.53% 9.04%
5.5% 7.64% 7.97% 8.59% 9.11% 8.35% 8.72% 9.39% 9.95%
6.0% 8.33% 8.70% 9.38% 9.93% 9.10% 9.51% 10.24% 10.85%
6.5% 9.03% 9.42% 10.16% 10.76% 9.86% 10.30% 11.09% 11.75%
================================================= ======================================
</TABLE>

<PAGE>

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

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

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

"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. "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

<PAGE>

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 shareholder servicing expenses applicable to Class A
and Class B Shares. In addition, the performance of Class A and Class B
Shares of a Fund will differ because of the different sales charge
structures of the classes and because of the differing distribution and
shareholder servicing fees charged to Class B Shares.

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.

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.

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CASH ITEMS

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

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MUNICIPAL BONDS AND OTHER MUNICIPAL OBLIGATIONS

As described under "Investment Objectives and Policies," Tax Free Fund and
Minnesota Tax Free Fund invest 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

<PAGE>

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 Tax Free Fund and Minnesota Tax Free Fund may invest.

Certain municipal securities may carry variable or floating rates of
interest whereby the rate of interest is not fixed but varies with changes
in specified market rates or indexes, such a a bank prime rate or a
tax-exempt money market index. Accordingly, the yield on such securities can
be expected to fluctuate with changes in prevailing interest rates.

DERIVATIVE MUNICIPAL SECURITIES. Tax Free Fund and Minnesota Tax Free Fund
may also acquire derivative municipal securities, which are custodial
receipts or certificates underwritten by securities dealers or banks that
evidence ownership of future interest payments, principal payments or both
on certain municipal securities. The underwriter of these certificates or
receipts typically purchases municipal securities and deposits them in an
irrevocable trust or custodial account with a custodian bank, which then
issues receipts or certificates that evidence ownership of the periodic
unmatured coupon payments and the final principal payment on the
obligations.

The principal and interest payments on the municipal securities underlying
custodial receipts may be allocated in a number of ways. For example,
payments may be allocated such that certain custodial receipts may have
variable or floating interest rates and others may be stripped securities
which pay only the principal or interest due on the underlying municipal
securities.

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

Municipal leases and installment purchase or conditional sale contracts
(which usually provide for title to the leased asset to pass to the
governmental issuer upon payment of all amounts due under the contract) have
evolved as a means for governmental issuers to acquire property and
equipment without meeting the constitutional and statutory requirements for
the issuance of municipal debt. The debt-issuance limitations are deemed to
be inapplicable because of the inclusion in many leases and contracts of
"non-appropriation" clauses that provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money
is appropriated for this purpose by the appropriate legislative body on a
yearly or other periodic basis. Although these kinds of obligations are
secured by the leased equipment or facilities,

<PAGE>

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

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TEMPORARY TAXABLE INVESTMENTS

Tax Free Fund and Minnesota Tax Free Fund may make temporary taxable
investments as described under "Investment Objectives and Policies."
Temporary taxable investments will include only the following types of
obligations maturing within 13 months from the date of purchase: (i)
obligations of the United States Government, its agencies and
instrumentalities; (ii) commercial paper rated not less than A-2 by Standard
& Poor's or Prime-2 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.

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REPURCHASE AGREEMENTS

Each of the Funds may enter into 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 Adviser and, in the case of Emerging
Markets Fund, Sub-Adviser will monitor the creditworthiness of the firms
with which the Funds enter into repurchase agreements.

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INVERSE FLOATING RATE OBLIGATIONS

<PAGE>

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.

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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.

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ZERO-COUPON SECURITIES

Adjustable Rate Mortgage Securities Fund, Tax Free Fund and Minnesota Tax
Free Fund 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.

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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. If the
Funds engage in securities lending, distributions paid to shareholders from
the resulting income will not be excludable from shareholders' gross income
for income tax purposes. As with other extensions of credit, there may be
risks of delay in recovery of the securities or even loss of rights in the
collateral should the borrower of the securities fail financially. However,
the Funds will only enter into loan arrangements with broker-dealers, banks,
or other institutions which the Adviser or, in the case of Emerging Markets
Fund, the Sub-Adviser has determined are creditworthy under guidelines
established by the Board of Directors. In these loan arrangements, the Funds
will receive collateral in the form of cash, United States Government
securities or other high-grade debt obligations

<PAGE>

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

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OPTIONS TRANSACTIONS

The Funds may purchase put and call options. These transactions will be
undertaken only for the purpose of reducing risk to the Funds. Depending on
the Fund, these transactions may include the purchase of put and call
options on equity securities on stock indices, on interest rate indices or
(in the case of Emerging Markets Fund) on foreign currencies. Options on
futures contracts are discussed below under "-- Futures and Options on
Futures."

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

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

None of the Funds other than Mid Cap Growth Fund and Emerging Markets Fund
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 security 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
and the commission or other transaction expenses associated with acquiring
the option.

The use of purchased put and call options involves certain risks. These
include the risk of an imperfect correlation between market prices of
securities held by a Fund and the prices of options, 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.

WRITING OF CALL OPTIONS. The Funds may write (sell) covered call options to
the extent specified with respect to particular Funds under "Investment
Objectives and Policies." These transactions would be undertaken principally
to produce additional income. Depending on the Fund, these transactions may
include the writing of covered call options on equity securities or (only in
the case of Emerging Markets Fund) on foreign currencies which a Fund owns
or has the right to acquire or on interest rate indices.

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

<PAGE>

The Funds also may, to the extent specified with respect to particular Funds
under "Investment Objectives and Policies," write call options on stock
indices the movements of which generally correlate with those of the
respective Funds' portfolio holdings, These transactions, which would be
undertaken principally to produce additional income, entail the risk of an
imperfect correlation between movements of the index covered by the option
and movements in the price of the Fund's portfolio securities.

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FUTURES AND OPTIONS ON FUTURES

Emerging Markets Fund, Adjustable Rate Mortgage Securities Fund, Tax Free
Fund and Minnesota Tax Free Fund may engage in futures transactions and
purchase options on futures to the extent specified with under "Investment
Objectives and Policies." Depending on the Fund, these transactions may
include the purchase of stock index futures and options on stock index
futures, and the purchase of interest rate futures and options on interest
rate futures. In addition, Emerging Markets Fund may enter into contracts
for the future delivery of securities or foreign currencies and futures
contracts based on a specific security, class of securities, or foreign
currency.

A futures contract on a security obligates one party to purchase, and the
other to sell, a specified security at a specified price on a date certain
in the future. 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 and, in the case of Emerging Markets Fund, as
part of its management of foreign currency transactions.

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 Internal Revenue Code of 1986, as amended. Futures and options on
futures transactions will also be limited by regulations of the Commodity
Futures Trading Commission.

Adjustable Rate Mortgage Securities Fund may make investments in Eurodollar
instruments in order to attempt to reduce investment risk. Eurodollar
instruments are essentially U.S. dollar denominated futures contracts or
options thereon that are linked to the London Interbank Offered Rate
("LIBOR"). Eurodollar futures contracts enable purchasers to obtain a fixed
rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. Adjustable Rate Mortgage Securities Fund uses Eurodollar futures
contracts and options thereon to hedge against changes in LIBOR, to which
many short-term borrowings and floating rate securities are linked.
Eurodollar instruments are subject to the same limitations and risks as
other futures contracts and options thereon.

<PAGE>

date fell to zero for all contracts into which a Fund was permitted to
enter. Where a Fund is permitted to enter into futures contracts obligating
it to sell securities or currencies (as is the case with respect only to
Emerging Markets Fund), its potential losses are unlimited if it does not
own the securities or currencies covered by the contracts and it is unable
to close out the contracts prior to the settlement date.

Futures transactions involve brokerage costs and require a Fund to segregate
assets to cover contracts that would require it to purchase securities or
currencies. A Fund may lose the expected benefit of futures transactions if
interest rates, exchange rates or securities prices 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.
In addition, the value of a Fund's futures positions may not prove to be
perfectly or even highly correlated with the value of its portfolio
securities or foreign currencies, limiting the Fund's ability to hedge
effectively against interest rate, exchange rate and/or market risk and
giving rise to additional risks. There is no assurance of liquidity in the
secondary market for purposes of closing out futures positions.

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FIXED INCOME SECURITIES

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

The fixed income securities specified above are 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).

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FOREIGN SECURITIES

GENERAL. Under normal market conditions Emerging Markets Fund invests at
least 65% of its total assets in equity securities which trade in foreign
emerging markets. In addition, Mid Cap Growth Fund may invest lesser
proportions of its assets in securities of foreign issuers which are either
listed on a United States securities exchange or represented by American
Depositary Receipts.

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

<PAGE>

and may be more volatile, than securities markets in the United States.

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

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

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

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FOREIGN CURRENCY TRANSACTIONS

Emerging Markets Fund may invest in securities which are purchased and sold
in foreign currencies. The value of its assets as measured in United States
dollars therefore may be affected favorably or unfavorably by changes in
foreign currency exchange rates and exchange control regulations. Emerging
Markets Fund also will incur costs in converting United States dollars to
local currencies, and vice versa.

Emerging Markets Fund will conduct its foreign currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate prevailing
in the foreign currency exchange market, or through forward contracts to
purchase or sell foreign currencies. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specific currency at a
future date certain at a specified price. These forward currency contracts
are traded directly between currency traders (usually large commercial
banks) and their customers.

Emerging Markets Fund may enter into forward currency contracts in order
to hedge against

<PAGE>

adverse movements in exchange rates between currencies. It may engage in
"transaction hedging" to protect against a change in the foreign currency
exchange rate between the date the Fund contracts to purchase or sell a
security and the settlement date, or to "lock in" the United States dollar
equivalent of a dividend or interest payment made in a foreign currency. It
also may engage in "portfolio hedging" to protect against a decline in the
value of its portfolio securities as measured in United States dollars which
could result from changes in exchange rates between the United States dollar
and the foreign currencies in which the portfolio securities are purchased
and sold. Emerging Markets Fund also may hedge its foreign currency exchange
rate risk by engaging in currency financial futures and options
transactions.

Although a foreign currency hedge may be effective in protecting the Fund
from losses resulting from unfavorable changes in exchanges rates between
the United States dollar and foreign currencies, it also would limit the
gains which might be realized by the Fund from favorable changes in exchange
rates. The Sub-Adviser's decision whether to enter into currency hedging
transactions will depend in part on its view regarding the direction and
amount in which exchange rates are likely to move. The forecasting of
movements in exchange rates is extremely difficult, so that it is highly
uncertain whether a hedging strategy, if undertaken, would be successful. To
the extent that the Sub-Adviser's view regarding future exchange rates
proves to have been incorrect, Emerging Markets Fund may realize losses on
its foreign currency transactions.

Emerging Markets Fund does not intend to enter into forward currency
contracts or maintain a net exposure in such contracts where it would be
obligated to deliver an amount of foreign currency in excess of the value of
its portfolio securities or other assets denominated in that currency.

---------------------------------------------------------------------------
ADJUSTABLE RATE MORTGAGE SECURITIES

Adjustable Rate Mortgage Securities Fund invests in adjustable rate mortgage
securities ("ARMS"). ARMS are pass-through mortgage securities
collateralized by mortgages with interest rates that are adjusted from time
to time. The adjustments usually are determined in accordance with a
predetermined interest rate index and may be subject to certain limits.
While the values of ARMS, like other debt securities, generally vary
inversely with changes in market interest rates (increasing in value during
periods of declining interest rates and decreasing in value during periods
of increasing interest rates), the values of ARMS should generally be more
resistant to price swings than other debt securities because the interest
rates of ARMS move with market interest rates. The adjustable rate feature
of ARMS will not, however, eliminate fluctuations in the prices of ARMS,
particularly during periods of extreme fluctuations in interest rates.

ARMS typically have caps which limit the maximum amount by which the
interest rate may be increased or decreased at periodic intervals or over
the life of the loan. To the extent interest rates increase in excess of the
caps, ARMS can be expected to behave more like traditional debt securities
and to decline in value to a greater extent than would be the case in the
absence of such caps. Also, since many adjustable rate mortgages only reset
on an annual basis, it can be expected that the prices of ARMS will
fluctuate to the extent changes in prevailing interest rates are not
immediately reflected in the interest rates payable on the underlying
adjustable rate mortgages. The extent to which the prices of ARMS fluctuate
with changes in interest rates will also be affected by the indices
underlying the ARMS.

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MORTGAGE-BACKED SECURITIES

Adjustable Rate Mortgage Securities Fund may invest in mortgage-backed
securities which are Agency Pass-Through Certificates, private pass-through
securities 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.

<PAGE>

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.

Private mortgage pass-through securities ("Private Pass-Throughs") are
structured similarly to GNMA, FNMA and FHLMC mortgage pass-through
securities and are issued by originators of and investors in mortgage loans,
including savings and loan associations, mortgage bankers, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. These
securities usually are backed by a pool of conventional fixed rate or
adjustable loans. Since Private Pass-Throughs typically are not guaranteed
by an entity having the credit status of GNMA, FNMA or FHMLC, such
securities generally are structured with one or more types of credit
enhancement. Such credit support falls into two categories: (i) liquidity
protection and (ii) protection against losses resulting from ultimate
default by an obligor on the underlying assets. Liquidity protection refers
to the provision of advances, generally by the entity administering the pool
of assets, to ensure that the pass-through of payments due on the underlying
pool occurs in a timely fashion. Protection against losses resulting from
ultimate default enhances the likelihood of ultimate payment of the
obligations on at least a portion of the assets in the pool. Such protection
may be provided through guarantees, insurance policies or letters of credit
obtained by the issuer or sponsor from third parties, through various means
of structuring the transaction or through a combination of such approaches.
The Funds will not pay any additional fees for such credit support, although
the existence of credit support may increase the price of a security.

The ratings of securities for which third-party credit enhancement provides
liquidity protection or protection against losses from default are generally
dependent upon the continued creditworthiness of the enhancement provider.
The ratings of such securities could be subject to reduction in the event of
deterioration in the creditworthiness of the credit enhancement provider
even in cases where the delinquency and loss experience on the underlying
pool of assets is better than expected.

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. Adjustable Rate Mortgage Securities Fund
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 Adviser. 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, among other factors, on 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. For instance, holders may hold interests in
CMO tranches called Z-tranches which defer interest and principal payments
until one or other classes of the CMO have been paid in full. Examples of
the more common classes are provided in the Statement of Additional
Information. The CMOs in which the Fund may invest include classes which are
subordinated in right of payment to other classes, as long as they have the
required rating referred to above.

It generally is 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

<PAGE>

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.

---------------------------------------------------------------------------
ASSET-BACKED SECURITIES

Adjustable Rate Mortgage Securities 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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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 Adviser, and in the case of
Emerging Markets Fund, the Sub-Adviser. The portfolio turnover rate for a
Fund may vary from year to year and may be affected by cash requirements for
redemptions of shares. High portfolio turnover rates (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 and except, in the case of Emerging Markets Fund, as may be
necessary to make margin payments in connection with foreign currency
futures and other derivatives transactions.

* 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). Neither Tax Free Fund nor Minnesota Tax Free Fund 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 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 Securities and Exchange Commission rules and interpretations.
Section 4(2) commercial paper and Rule 144A securities may be determined to
be "liquid" under guidelines adopted by the Board of Directors. Investing in
Rule 144A securities could have the effect of increasing the level of
illiquidity in a Fund to the extent that qualified institutional buyers
become, for a time, uninterested in purchasing these securities.

<PAGE>

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

U.S. Bank National Association, U.S. Bank Trust 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 Adviser"

Custodian services -- see "Management-Custodian"

Sub-administration -- see "Management-Administrator"

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

Shareholder servicing -- see "Distributor"

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

<PAGE>

FIRST AMERICAN INVESTMENT FUNDS, INC.
Oaks, Pennsylvania 19456

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

Custodian
U.S. BANK TRUST 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>

, 1998

CLASS Y SHARES

Mid Cap
Growth Fund

Emerging
Markets Fund

Adjustable Rate
Mortgage Securities Fund

Tax Free Fund

Minnesota
Tax Free Fund

FIRST AMERICAN
INVESTMENT FUNDS, INC.

PROSPECTUS

Subject to Completion -- April 15, 1998

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

<PAGE>

TABLE OF CONTENTS

Summary 2
...............................................
Fees and Expenses 4
...............................................
The Funds 6
...............................................
Investment Objectives and Policies 6
...............................................
Management 13
...............................................
Distributor 18
...............................................
Purchases and Redemptions of Shares 18
...............................................
Income Taxes 21
...............................................
Tax-Exempt vs. Taxable Income 23
...............................................
Fund Shares 24
...............................................
Calculation of Performance Data 24
...............................................
Special Investment Methods 25
...............................................
Information Concerning Compensation Paid
to U.S. Bank National Association, U.S. Bank
Trust National Association and Other
Affiliates 38
...............................................

<PAGE>

FIRST AMERICAN INVESTMENT FUNDS, INC.

CLASS Y SHARES PROSPECTUS

* MID CAP GROWTH FUND

* EMERGING MARKETS FUND

* ADJUSTABLE RATE MORTGAGE SECURITIES FUND

* TAX FREE FUND

* MINNESOTA 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.

A Statement of Additional Information dated ____________, 1998 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."

The date of this Prospectus is ___________ 1998.

<PAGE>

SUMMARY

INVESTMENT ADVISER. U.S. Bank National Association (the "Adviser" or "U.S.
Bank") serves as investment adviser to each of the Funds though its First
American Asset Management group. Marvin & Palmer Associates, Inc. (the
"Sub-Adviser") serves as sub-adviser to Emerging Markets Fund. See
"Management."

ELIGIBLE INVESTORS; OFFERING PRICES. Class Y Shares are offered through
banks and certain other institutions for the investment of their own funds
and funds for which they act in a fiduciary, agency or custodial capacity.
Class 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

<PAGE>

charge. See "Purchases and Redemptions of Shares -- Exchange Privilege."

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

RISKS TO CONSIDER. Mid Cap Growth Fund and Emerging Markets Fund are subject
to the risk of generally adverse equity markets. Investors also should
recognize that market prices of equity securities generally, and of
particular companies' equity securities, frequently are subject to greater
volatility than prices of fixed income securities. Because Mid Cap Growth
Fund and Emerging Markets Fund are actively managed, their performance will
reflect in part the ability of the Adviser or Sub-Adviser to select
securities which are suited to achieving their investment objectives. Due to
their active management, these Funds could underperform other mutual funds
with similar investment objectives or the market generally. In addition, (i)
Mid Cap Growth Fund and Emerging Markets Fund are subject to risks
associated with investing in mid- and small capitalization companies, (ii)
Emerging Markets Fund is subject to the risks associated with investing in
foreign securities and to currency risk; (iii) Mid Cap Growth Fund may
invest specified portions of its assets in securities of foreign issuers
which are listed on a United States stock exchange or represented by
American Depositary Receipts; and (iv) certain Funds may invest (but not for
speculative purposes) in stock index futures contracts, options on stock
indices and options on stock index futures.

Adjustable Rate Mortgage Securities Fund, Tax Free Fund and Minnesota Tax
Free Fund are subject to (i) interest rate risk (the risk that increases in
market interest rates will cause declines in the value of debt securities or
mortgage-related securities held by a Fund); (ii) credit risk (the risk that
the issuers of debt securities or mortgage-related 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). Adjustable Rate Mortgage Securities Fund endeavors to
limit interest rate risk and prepayment risk by investing primarily in
mortgage-related securities which have adjustable interest rates. Adjustable
Rate Mortgage Securities Fund is also subject to extension risk. That is,
rising interest rates could cause homeowners to prepay their mortgages more
slowly than expected, and in effect, convert a short- or medium-duration
mortgage-related security into a longer-duration security, increasing its
sensitivity to interest rate changes and causing its price to decline.

In addition, the value of municipal obligations held by Tax Free Fund and
Minnesota Tax Free Fund 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 Minnesota Tax Free Fund invests principally in municipal
obligations of issuers located only in Minnesota. Adjustable Rate Mortgage
Securities Fund, Tax Free Fund and Minnesota Tax Free Fund also may, in
order to attempt to reduce risk, invest in exchange traded interest rate
futures contracts, interest rate index futures contracts, put and call
options on interest rate futures contracts and on interest rate indices. See
"Investment Objectives and Policies -- Risks to Consider" and "Special
Investment Methods."

<PAGE>

FEES AND EXPENSES

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

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
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment advisory fees (after voluntary
fee waivers)(1) 0.70% 0.70% 0.40% 0.63% 0.52%

Rule 12b-1 fees None None None None None

Other expenses 0.17% 0.75% 0.25% 0.22% 0.18%

Total fund operating expenses
(after voluntary fee waivers )(1) 0.87% 1.45% 0.65% 0.85% 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 $ 9 $ 15 $ 7 $ 9 $ 7
3 years $ 28 $ 46 $ 21 $ 27 $ 22

</TABLE>

(1) THE ADVISER INTENDS TO WAIVE A PORTION OF ITS FEES ON A VOLUNTARY BASIS, AND
THE AMOUNTS SHOWN REFLECT THESE WAIVERS AS OF THE DATE OF THIS PROSPECTUS.
THE ADVISER INTENDS TO MAINTAIN SUCH WAIVERS IN EFFECT FOR THE CURRENT
FISCAL YEAR BUT RESERVES THE RIGHT TO DISCONTINUE SUCH WAIVERS AT ANY TIME
IN ITS SOLE DISCRETION. NOTWITHSTANDING THE FOREGOING, THE ADVISER WILL
MAINTAIN SUCH WAIVERS FOR THE FUNDS AT LEAST THROUGH JULY 31, 2000 SO THAT
THE TOTAL FUND OPERATING EXPENSES DO NOT EXCEED 0.89% FOR MID CAP GROWTH
FUND, AND 0.71% FOR MINNESOTA TAX FREE FUND. ABSENT ANY FEE WAIVERS,
INVESTMENT ADVISORY FEES FOR EACH FUND AS AN ANNUALIZED PERCENTAGE OF
AVERAGE DAILY NET ASSETS WOULD BE 0.70% EXCEPT IN THE CASE OF EMERGING
MARKETS FUND, 1.25%; AND TOTAL FUND OPERATING EXPENSES CALCULATED ON SUCH
BASIS WOULD BE 0.87% FOR MID CAP GROWTH FUND, 2.00% FOR EMERGING MARKETS
FUND, 0.95% FOR ADJUSTABLE RATE MORTGAGE SECURITIES FUND, 0.92% FOR TAX FREE
FUND, AND 0.88% FOR MINNESOTA 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 AND 3-YEAR PERIODS WOULD BE AS FOLLOWS: MID CAP GROWTH FUND, $9 AND $28;
EMERGING MARKETS FUND, $20 AND $63; ADJUSTABLE RATE MORTGAGE SECURITIES
FUND, $10 AND $30; TAX FREE FUND, $9 AND $29; AND MINNESOTA TAX FREE FUND,
$9 AND $28.

<PAGE>

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

INFORMATION CONCERNING FEES AND EXPENSES

<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, the
Class B Shares of Mid Cap Growth Fund and Emerging Markets Fund, 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

If a percentage limitation on investments by a Fund stated below or in the
Statement of Additional Information is adhered to at the time of an
investment, a later increase or decrease in percentage resulting from
changes in asset values will not be deemed to violate the limitation except
in the case of the limitation on illiquid investments. Similarly, if a Fund
is required or permitted to invest a stated percentage of its assets in
companies with no more or no less than a stated market capitalization,
deviations from the stated percentages which result from changes in
companies' market capitalization, after the Fund purchases their shares will
not be deemed to violate the limitation. 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.

<PAGE>

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MID CAP GROWTH FUND

OBJECTIVE. Mid Cap Growth Fund has an objective of growth of capital.

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

---------------------------------------------------------------------------
EMERGING MARKETS FUND

OBJECTIVE. Emerging Markets Fund has an objective of long-term growth of
capital.

INVESTMENT POLICIES. Under normal market conditions, Emerging Markets Fund
invests at least 65% of its total assets in an internationally diversified
portfolio of equity securities which trade in emerging markets. A country
will be considered to have an "emerging market" if it has relatively low
gross national product per capita compared to the world's major economics
and the potential for rapid economic growth. Countries with emerging markets
include those that have an emerging stock market (as defined by the
International Financial Corporation), those with low- to middle income
economics (according to the World Bank), and those listed in World Bank
publications as "developing."

In investing the Fund's assets, the Sub-Adviser expects to place primary
emphasis on country selection, followed by selection of industries or

<PAGE>

sectors within or across countries and by selection of indiviual stocks
corresponding to the industries or sectors selected.

---------------------------------------------------------------------------
ADJUSTABLE RATE MORTGAGE SECURITIES
FUND

OBJECTIVE. Adjustable Rate Mortgage Securities Fund has an objective of
providing current income while attempting to provide a high degree of
principal stability.

The Fund may invest up to 35% of its total assets in mortgage-related
securities other than ARMS, securities issued or guaranteed as to principal
or interest by the U.S. government or its agencies or instrumentalities,
private pass-through securities, asset backed securities and fixed income
securities. For information about these investment methods, restrictions on
their use, and certain associated risks, see the related headings under
"Special Investment Methods."

In addition, the Fund may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, invest in exchange traded interest rate
futures and interest rate index futures contracts; (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; (v) purchase interest
rate caps and floors; (vi) in order to attempt to reduce risk, invest in
Eurodollar instruments; and (vii) 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."

<PAGE>

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

OBJECTIVE. Tax Free Fund has an objective of providing maximum current
income which is exempt from federal income tax to the extent consistent with
prudent investment risk.

INVESTMENT POLICIES. Under normal market conditions, Tax Free Fund invests
at least 80% of its net assets in municipal bonds and other municipal
obligations, the interest on which is exempt from federal income tax. No
more than 20% of the securities owned by the Fund will generate income that
is subject to 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 Tax Free Fund will range from 15 to 25 years.

While the assets of 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."

<PAGE>

---------------------------------------------------------------------------
MINNESOTA TAX FREE FUND

Under normal market conditions, the weighted average maturity of the
securities held by the Fund will range from 15 to 25 years.

Minnesota Tax Free Fund may purchase (i) municipal bonds which are rated no
lower than BBB by Standard & Poor's and Baa by Moody's, (ii) state and
municipal notes which are rated SP-1 by Standard & Poor's or MIG-1/VMIG-1 by
Moody's, and (iii) commercial paper which is rated A-1 by Standard & Poor's
or Prime-1 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 judgement of the Adviser.

While the assets of the 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% (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."

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 Adviser. Investments of these types are also subject to
the advisory fee. 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.

The Fund also may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, invest in exchange traded interest rate futures and
interest rate index futures contracts; (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; (v) engage in the lending of
portfolio securities; and (vi) 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."

<PAGE>

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RISKS TO CONSIDER

An investment in the Funds involves certain risks in addition to those noted
above with respect to particular Funds. These include the following:

ACTIVE MANAGEMENT. Mid Cap Growth Fund and Emerging Markets Fund are
actively managed by the Adviser, or in the case of Emerging Markets Fund,
the Sub-Adviser. The performance of these Funds will reflect in part the
ability of the Adviser or Sub-Adviser to select equity securities which are
suited to achieving the Funds' investment objectives. Due to their active
management, these Funds could underperform other mutual funds with similar
investment objectives or the market generally.

INTEREST RATE RISK. Tax Free Fund and Minnesota Tax Free Fund emphasize
investments in fixed income securities. Investments in fixed income
securities give rise to 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 such 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. In addition to the extent that Adjustable
Rate Mortgage Securities Fund invests in fixed rate mortgage-based
securities, and to the extent that market interest rates change between the
dates upon which the interest rates borne by the adjustble-rate securities
held by this Fund adjust, this Fund is also exposed to interest rate risk.

<PAGE>

be undertaken or will fulfill their purpose. See "Special Investment
Methods -- Options Transactions."

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.

<PAGE>

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

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

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INVESTMENT ADVISER

<PAGE>

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

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SUB-ADVISER TO EMERGING MARKETS FUND

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PORTFOLIO MANAGERS

SANDRA SHREWSBURY is a member of the committee which manages Mid Cap Growth
Fund. Ms. Shrewsbury has over 11 years of investment industry experience.
Prior to joining the Adviser in 1998, Ms. Shrewsbury served as a portfolio
manager for Piper Capital Management Incorporated overseeing the management
of the Piper Funds Emerging Growth Fund and Small

<PAGE>

Company Growth Fund. Ms. Shrewsbury received her bachelor's degree in
mathematics and education from Nebraska Wesleyan University and a master's
degree from Iowa State University. Ms. Shrewsbury is a Chartered Financial
Analyst.

<PAGE>

WAN-CHONG KUNG is a member of the committee which manages Adjustable Rate
Mortgage Securities Fund. Ms. Kung has over five years of investment
industry experience. Prior to joining the Adviser 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 Morgage 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.

A committee comprised of the following eight individuals shares the
management of Emerging Markets Fund on behalf of the Sub-Adviser:

WILLIAM E. DODGE has been President since January 1998 and a portfolio
manager of the Sub-Adviser since 1996. Mr. Dodge was Chief Investment
Strategist and Chairman of the Investment Policy Committee of Dean Witter in
New York from 1991 to 1996, and he served as a Senior Portfolio Manager,

<PAGE>

Director of Quantitative Equity Strategies, and United States equity analyst
at the DuPont Corporation pension fund from 1983 to 1991. From 1976 to 1983
Mr. Dodge served in various United States portfolio management and
analytical positions including senior investment manager of a bank trust
department from 1981 to 1983. Mr. Dodge received his bachelor's degree and
his master's degree in business administration from the University of
Massachusetts at Amherst. He is a Chartered Financial Analyst and a member
of the Financial Analysts Federation.

JAY F. MIDDLETON is a Senior Vice President and portfolio manager for the
Sub-Adviser and joined the firm in 1989. Mr. Middleton received his
bachelor's degree from Wesleyan University.

DAVID L. SCHAEN is a Vice President and portfolio manager of the
Sub-Adviser. Before becoming a Portfolio Manager, Mr. Schaen was Head Trader
for the Sub-Adviser from 1991 to 1994 and an International Analyst for the
Sub-Adviser from 1994 to 1995. Prior to 1991 he was Head Trader and
Investment Officer at the Bank of Delaware. Mr. Schaen received his
bachelor's degree from the University of Delaware and his master's degree in
business administration from Widener University.

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CUSTODIAN

Sub-custodian fees with respect to Emerging Markets Fund are paid by the
Custodian out of the Custodian's fees.

<PAGE>

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ADMINISTRATOR

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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 Adviser.

DISTRIBUTOR

The Distributor, the Administrator and the Adviser 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 Adviser and its affiliates may provide compensation from
their own resources for shareholder services provided by third parties,
including "one-stop" mutual fund networks through which the Funds are made
available.

PURCHASES AND REDEMPTIONS
OF SHARES

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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.

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.

<PAGE>

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.

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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 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. Securities
listed on a securities exchange or an automated quotation system for which
quotations are readily available, including securities traded over the
counter, are valued at the last quoted sale price on the principal exchange
on which they are traded on the valuation date, or, if there is no such
reported sale on the valuation date, at the most recently quoted bid price.

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.

Foreign currency forward contracts are valued at the current day's
interpolated foreign exchange rate, as calculated using the current day's
exchange rate, and the thirty, sixty, ninety and one-hundred eighty day
forward rates provided by the Reuters system.

<PAGE>

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
distribution and/or shareholder servicing 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.

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EXCHANGING SECURITIES FOR FUND SHARES

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

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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

Dividends with respect to each Fund (except Emerging Markets Fund) are
declared and paid monthly to all shareholders of record on the record date.

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

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

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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

<PAGE>

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.

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

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 benefi- ciaries are exchanged for
Class A Shares of that Fund and distributed to the individual beneficiaries.

INCOME TAXES

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FEDERAL INCOME TAXATION -- ALL OF THE FUNDS

<PAGE>

or to certify that he or she is not subject to back-up withholding.

---------------------------------------------------------------------------
TAX FREE FUND AND MINNESOTA TAX FREE FUND

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

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EMERGING MARKETS FUND

Dividends paid by Emerging Markets Fund attributable to investments in the
securities of foreign issuers will not be eligible for the 70% deduction for
dividends received by corporations.

<PAGE>

required to include in gross income their respective pro rata portions of
such foreign taxes, treat such amounts as foreign taxes paid by them, and
subject to certain limitations, deduct such amounts in computing their
taxable income or, alternatively, use them as foreign tax credits against
their federal income taxes. If such an election is filed for a year,
Emerging Markets Fund shareholders will be notified of the amounts which
they may deduct as foreign taxes paid or used as foreign tax credits.

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MINNESOTA INCOME TAXATION -- MINNESOTA TAX FREE FUND

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OTHER 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 Minnesota income taxes, under selected income
tax brackets scheduled to be in effect in 1998. The effective combined rates
reflect the deduction of state

<PAGE>

income taxes from federal income. 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 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

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

<TABLE>
<CAPTION>
Tax-Equivalent Yields

Combined Federal and
Federal Tax Brackets Minnesota Tax Brackets
- ----------------------------------------------- ------------------------------------
Tax-Free
Yields 28% 31% 36% 39.6% 34.1% 36.9% 41.4% 44.7%
=============================================== ====================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
3.0% 4.17% 4.35% 4.69% 4.97% 4.55% 4.75% 5.12% 5.42%
3.5% 4.86% 5.07% 5.47% 5.79% 5.31% 5.55% 5.97% 6.33%
4.0% 5.56% 5.80% 6.25% 6.62% 6.07% 6.34% 6.83% 7.23%
4.5% 6.25% 6.52% 7.03% 7.45% 6.83% 7.13% 7.68% 8.14%
5.0% 6.94% 7.25% 7.81% 8.28% 7.59% 7.92% 8.53% 9.04%
5.5% 7.64% 7.97% 8.59% 9.11% 8.35% 8.72% 9.39% 9.95%
6.0% 8.33% 8.70% 9.38% 9.93% 9.10% 9.51% 10.24% 10.85%
6.5% 9.03% 9.42% 10.16% 10.76% 9.86% 10.30% 11.09% 11.75%
=============================================== ====================================
</TABLE>

<PAGE>

connection with sales literature and shareholder communications preceded or
accompanied by a Prospectus. Each of these performance figures is based upon
historical results and is not intended to indicate future performance, and,
except for "distribution rate" and "tax equivalent distribution rate," is
standardized in accordance with Securities and Exchange Commission ("SEC")
regulations.

"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.

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

SPECIAL INVESTMENT METHODS

<PAGE>

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CASH ITEMS

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MUNICIPAL BONDS AND OTHER MUNICIPAL OBLIGATIONS

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.

Certain municipal securities may carry variable or floating rates of
interest whereby the rate of interest is not fixed but varies with changes
in specified market rates or indexes, such as a bank prime rate or a
tax-exempt money market index. Accordingly, the yield on such securities can
be expected to fluctuate with changes in prevailing interest rates.

<PAGE>

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.

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TEMPORARY TAXABLE INVESTMENTS

<PAGE>

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.

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REPURCHASE AGREEMENTS

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

Tax Free Fund and Minnesota Tax Free Fund may invest up to 10% of their
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.

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WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

<PAGE>

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.

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ZERO-COUPON SECURITIES

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LENDING OF PORTFOLIO SECURITIES

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OPTIONS TRANSACTIONS

The Funds may purchase put and call options. These transactions will be
undertaken only for the purpose of reducing risk to the Funds. Depending on
the Fund, these transactions may include the purchase of put and call
options on equity securities, on stock indices, on interest rate indices or
(in the case of Emerging Markets Fund) on foreign currencies. Options on
futures contracts are discussed below under "-- Futures and Options on
Futures."

<PAGE>

than, in the case of a call, or less than, in the case of a put, the
exercise price of the option.

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FUTURES AND OPTIONS ON FUTURES

<PAGE>

exercise price, to sell or to purchase the underlying futures contract at
any time during the option period.

Adjustable Rate Mortgage Securities Fund may make investments in Eurodollar
instruments in order to attempt to reduce investment risk. Eurodollar
instruments are essentially U.S. dollar denominated futures contracts or
options thereon that are linked to the London Interbank Offered Rate
("LIBOR"). Eurodollar futures contracts enable purchasers to obtain a fixed
rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. Adjustable Rate Mortgage Securities Funds uses Eurodollar
futures contracts and options thereon to hedge against changes in LIBOR, to
which many short-term borrowings and floating rate securities are linked.
Eurodollar instruments are subject to the same limitations and risks as
other futures contracts and options thereon.

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
securities, currency or 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 market value or index value of
the subject securities, currency or index at the delivery or settlement date
fell to zero for all contracts into which a Fund was permitted to enter.
Where a Fund is permitted to enter into futures contracts obligating it to
sell securities or currencies (as is the case with respect only to Emerging
Markets Fund), its potential losses are unlimited if it does not own the
securities or currencies covered by the contracts and it is unable to close
out the contracts prior to the settlement date.

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FIXED INCOME SECURITIES

<PAGE>

which are rated at the time of purchase not less than BBB by Standard &
Poor's or Baa by Moody's (or equivalent short-term ratings), or which have
been assigned an equivalent rating by another nationally recognized
statistical rating organization, or which are of comparable quality in the
judgment of the Adviser. Obligations rated BBB, Baa or their equivalent,
although investment grade, have speculative characteristics and carry a
somewhat higher risk of default than obligations rated in the higher
investment grade categories.

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FOREIGN SECURITIES

<PAGE>

traded, which standards are more uniform and more exacting than those to
which many foreign issuers may be subject. Emerging Markets Fund also may
invest in European Depositary Receipts, which are receipts evidencing an
arrangement with a European bank similar to that for American Depositary
Receipts and which are designed for use in the European securities markets.
European Depositary Receipts are not necessarily denominated in the currency
of the underlying security.

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FOREIGN CURRENCY TRANSACTIONS

Emerging Markets Fund may enter into forward currency contracts in order to
hedge against adverse movements in exchange rates between currencies. It may
engage in "transaction hedging" to protect against a change in the foreign
currency exchange rate between the date the Fund contracts to purchase or
sell a security and the settlement date, or to "lock in" the United States
dollar equivalent of a dividend or interest payment made in a foreign
currency. It also may engage in "portfolio hedging" to protect against a
decline in the value of its portfolio securities as measured in United
States dollars which could result from changes in exchange rates between the
United States dollar and the foreign currencies in which the portfolio
securities are purchased and sold. Emerging Markets Fund also may hedge its
foreign currency exchange rate risk by engaging in currency financial
futures and options transactions.

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ADJUSTABLE RATE MORTGAGE SECURITIES

Adjustable Rate Mortgage Securities Fund may invest in adjustable rate
mortgage securities ("ARMS"). ARMS are pass-through mortgage securities
collateralized by mortgages with interest rates that are adjusted from time
to time. The adjustments usually are determined in accordance with a
predetermined interest rate index and may be subject to certain limits.
While the values of ARMS, like other debt securities, generally vary
inversely with changes in market interest rates (increasing in value during
periods of declining interest rates and decreasing in value during periods
of increasing interest rates), the values of ARMS should generally be more
resistant to price swings than other debt securities because the interest
rates of ARMS move with market interest rates. The adjustable rate feature
of ARMS will not, however, eliminate fluctuations in the prices of ARMS,
particularly during periods of extreme fluctuations in interest rates.

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MORTGAGE-BACKED SECURITIES

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.

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advances, generally by the entity administering the pool of assets, to
ensure that the pass-through of payments due on the underlying pool occurs
in a timely fashion. Protection against losses resulting from ultimate
default enhances the likelihood of ultimate payment of the obligations on at
least a portion of the assets in the pool. Such protection may be provided
through guarantees, insurance policies or letters of credit obtained by the
issuer or sponsor from third parties, through various means of structuring
the transaction or through a combination of such approaches. The Funds will
not pay any additional fees for such credit support, although the existence
of credit support may increase the price of a security.

It generally is 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.

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ASSET-BACKED SECURITIES

<PAGE>

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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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 make short sales of securities.

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(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 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, U.S. BANK
TRUST NATIONAL ASSOCIATION
AND OTHER AFFILIATES

Investment advisory services -- see "Management-Investment Adviser"