IAI RETIREMENT FUNDS INC, 485APOS, 1999-03-01

IAI RETIREMENT FUNDS INC
485APOS, 1999-03-01

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1933 Act Registration No. 33-69012
1940 Act Registration No. 811-8032

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 1, 1999

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

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. ___
Post-Effective Amendment No. _7_

AND/OR

REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. _7_
(Check appropriate box or boxes)

IAI RETIREMENT FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)

3700 U.S. Bank Place
P.O. Box 357
Minneapolis, Minnesota 55440
(Address of Principal Executive Offices, Zip Code)

(612) 376-2700
(Registrant's Telephone Number, including Area Code)

Steven G. Lentz, Esq.
3700 U.S. Bank Place
P.O.Box 357
Minneapolis, Minnesota 55440
(Name and Address of Agent for Service)

COPY TO:
Kathleen L. Prudhomme, Esq.
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, Minnesota 55402-1498

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

___ immediately upon filing pursuant to paragraph (b) of Rule 485
___ (specify date) pursuant to paragraph (b) of Rule 485
___ 75 days after filing pursuant to paragraph (a) of Rule 485
_X_ on May 1, 1999 pursuant to paragraph (a) of Rule 485
___ 60 days after filing pursuant to paragraph (a) of Rule 485

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

<PAGE>

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IAI RETIREMENT FUNDS, INC.

IAI REGIONAL PORTFOLIO
IAI BALANCED PORTFOLIO
IAI RESERVE PORTFOLIO

PROSPECTUS May 1, 1999

As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the shares of the Portfolios, or determined if the
information in this prospectus is accurate or complete. Any statement to the
contrary is a criminal offense.

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

P.O. BOX 357
MINNEAPOLIS, MINNESOTA 55440
TELEPHONE 1-612-376-2700
1-800-945-3863

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TABLE OF CONTENTS

Page
----

Portfolio Summaries........................................................
IAI Regional Portfolio................................................
IAI Balanced Portfolio................................................
IAI Reserve Portfolio.................................................

Pricing of Portfolio Shares................................................

Taxes......................................................................

Fund Management............................................................
Investment Adviser....................................................
Portfolio Managers....................................................

More Information on Investment Strategies and Risks........................
Investment Strategies.................................................
Temporary Defensive Investments.......................................
Portfolio Turnover....................................................
Effective Duration....................................................
Principal Risks.......................................................

Financial Highlights.......................................................

<PAGE>

PORTFOLIO SUMMARIES

This section briefly describes the objectives, principal investment strategies
and principal risks of IAI Regional Portfolio ("Regional Portfolio"), IAI
Balanced Portfolio ("Balanced Portfolio") and IAI Reserve Portfolio ("Reserve
Portfolio"). It also provides you with information on how each Portfolio has
performed. For further information on the Portfolios, please read the section
entitled "More Information on Investment Strategies and Risks."

Shares of the Portfolios may be purchased only by the separate accounts of
insurance companies for the purpose of funding variable annuity contracts and/or
variable life insurance policies. You should read this Prospectus along with the
prospectus issued by your insurance company for its variable annuity contracts
or variable life insurance policies.

You can lose money by investing in the Portfolios. An investment in a Portfolio
is not a deposit of any bank and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.

IAI REGIONAL PORTFOLIO

OBJECTIVE

Regional Portfolio has an objective of capital appreciation.

PRINCIPAL INVESTMENT STRATEGIES

Regional Portfolio invests primarily in common stocks of companies headquartered
in Minnesota, Wisconsin, Iowa, Illinois, Nebraska, Montana, North Dakota or
South Dakota. Regional Portfolio invests in both nationally recognized companies
and in less well known companies that are newer or have smaller capitalizations,
but that appear to have the potential for capital appreciation.

In selecting securities, the Portfolio's investment adviser considers a number
of factors, such as:

* product development and demand;
* operating ratios;
* utilization of earnings for expansion;
* management abilities;
* analyses of intrinsic values;
* market action; and
* overall economic and political conditions.

Regional Portfolio may write (i.e., sell) put or call options on securities. The
principal reason for writing these options is to obtain, through the receipt of
premiums, a greater current return than the Portfolio would realize on the
underlying securities alone.

MAIN RISKS

The main risks that could adversely affect the value of Regional Portfolio's
shares and the total return on your investment include:

* RISKS OF COMMON STOCKS. Common stocks may decline significantly in
price over short or extended periods of time. Price changes may occur
in the market as a whole or they may occur in only a particular
company, industry or sector of the market.

-1-

<PAGE>

* RISKS OF INVESTING IN SMALL COMPANIES. Investing in small companies
involves greater risk than is customarily associated with investments
in larger, more established companies. Small companies are more likely
than larger companies to have limited product lines, markets or
financial resources, or to depend on a small, inexperienced management
group. The securities of small companies may have limited market
stability and may be subject to more abrupt or erratic market movements
than securities of larger, more established companies or the market
averages in general.

* RISKS OF GEOGRAPHIC CONCENTRATION. The Portfolio's policy of
concentrating its investments in a certain geographic region means that
it will be subject to adverse economic, political or other developments
in that region. Moreover, because of this geographic limitation, the
Portfolio may be less diversified by industry and company than other
funds with a similar investment objective and no such geographic
limitation.

* RISKS OF WRITING PUT AND CALL OPTIONS. By writing a call option on
securities, the Portfolio becomes obligated during the term of the
option to deliver the securities upon payment of the exercise price.
The Portfolio therefore runs the risk of losing the potential for gain
on the underlying security. By writing a put option, the Fund becomes
obligated during the term of the option to purchase the securities
underlying the option at the exercise price. The Portfolio therefore
runs the risk of becoming obligated to purchase the underlying security
for more than its current market price upon exercise.

PORTFOLIO PERFORMANCE

The bar chart and table below provide you with information on Regional
Portfolio's volatility and performance. The bar charts show you how performance
of the Portfolio's shares has varied from year to year. The table compares the
Portfolio's performance over different time periods to that of a broad measure
of market performance. Remember, how the Portfolio has performed in the past is
not necessarily an indication of how it will perform in the future.

ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR*

50% --

40% --

30% --

20% --

10% --

0% --

- -10% --
---------------------------------------------

1995 1996 1997 1998

* The Portfolio's total return for the period from January 1, 1999 through March
31, 1999 was _____%.

BEST QUARTER: Quarter ending _______________, 199__ _____%
WORST QUARTER: Quarter ending _______________, 199__ _____%

-2-

<PAGE>

AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98

ONE YEAR SINCE INCEPTION
(1/31/94)

REGIONAL PORTFOLIO ____% ____%

STANDARD & POOR'S 500
COMPOSITE INDEX* ____% ____%

- ----------------------------
* An unmanaged index of 500 common stocks chosen to reflect the industries of
the U.S. economy.

IAI BALANCED PORTFOLIO

OBJECTIVE

The objective of Balanced Portfolio is to maximize total return.

PRINCIPAL INVESTMENT STRATEGIES

Balanced Portfolio invests in a broadly diversified portfolio of stocks and debt
instruments. The mix of securities will change based on existing and anticipated
market conditions.

Balanced Portfolio's investments in common stocks are primarily in larger
capitalization companies (market capitalizations of at least $1 billion at the
time of purchase) that cover a broad range of industries. The Portfolio's
investment adviser focuses on companies that it believes have solid competitive
advantages and extremely high financial quality at attractive fundamental
valuations.

Balanced Portfolio may invest in all types of long-term debt securities,
including:

* corporate debt obligations;

* securities issued or guaranteed by the U.S. government or its agencies
or instrumentalities;

* mortgage-backed securities issued by government and non-government
entities;

* asset-backed securities;

* zero coupon securities, which do not pay interest currently;

* payment-in-kind bonds, where interest is paid in other securities
rather than in cash; and

* short-term debt securities, including bank certificates of deposit,
bankers' acceptances and commercial paper.

The Portfolio's adviser employs a "top-down" approach in selecting debt
securities for the Fund. First, the advisor determines its economic outlook and
the direction in which it expects interest rates to move. Based on these
factors, the adviser makes duration and yield curve decisions and determines the
Portfolio's sector allocation. Selections of individual securities that fall
within the appropriate parameters are based on the adviser's analysis of the
individual security and its relative value compared to other securities in the
marketplace. The Portfolio's adviser anticipates that the average effective
duration for the debt portion of the Portfolio will range from 3.5 to 7.5 years.
This range may change, however, due to market conditions and other economic
factors.

-3-

<PAGE>

When investing in debt securities the Portfolio will invest primarily in
securities rated investment grade at the time of purchase (or in unrated
securities judged by the Portfolio's investment adviser to be of comparable
quality). Investment grade securities are rated within the four highest grades
assigned by Moody's Investors Services, Inc. ("Moody's") or Standard & Poor's
Corporation ("S&P"). The Portfolio may invest up to 10% of its total assets in
securities rated lower than investment grade, or "junk bonds." The Portfolio
will not invest in securities rated lower than B at the time of investment by
Moody's or S&P or, if unrated, judged to be of comparable quality by the
Portfolio's adviser. Commercial paper in which the Portfolio invests must, at
the time of purchase, be rated at least Prime-2 by Moody's or A-2 by S&P or be
issued by companies having an outstanding unsecured debt issue rated A or better
by Moody's or S&P.

The Portfolio may invest in both domestic and foreign equity and debt
securities. The Portfolio limits its investment in foreign securities
denominated in foreign currencies and not publicly traded in the United States
to 25% of total assets.

The Portfolio may enter into futures contracts on securities, financial indexes
and foreign currencies and options on those contracts, may invest in options on
securities, financial indexes and foreign currencies, may enter into other
currency transactions such as currency swaps or currency forward contracts, and
may enter into various interest rate transactions such as interest rate swaps.
The Portfolio intends to use these derivative instruments primarily to hedge the
value of its portfolio against potential adverse movements in securities prices,
foreign currency markets or interest rates. To a limited extent, the Portfolio
may also use derivative instruments for non-hedging purposes such as seeking to
increase the Portfolio's income or otherwise seeking to enhance return.

To generate additional income, the Portfolio may invest up to 10% of its net
assets in mortgage dollar roll transactions.

The Portfolio's adviser regularly reviews the allocation of Portfolio assets
among stocks and long-and short-term debt instruments. Because Balanced
Portfolio seeks to maximize total return over the long-term, the adviser will
not try to pinpoint the precise moment when major reallocations are warranted.
Rather, reallocations among asset classes will be made gradually over time to
favor asset classes that, in the adviser's judgment, provide the most favorable
total return outlook. Normally, a single reallocation decision will not involve
more than 10% of the Portfolio's total assets.

PRINCIPAL RISKS

The principal risks that could adversely affect the value of Balanced
Portfolio's shares and the total return on your investment include:

* RISKS OF COMMON STOCKS. Common stocks may decline significantly in price
over short or extended periods of time. Price changes may occur in the
market as a whole or they may occur in only a particular company, industry
or sector of the market.

* INTEREST RATE RISK. Prices of the Portfolio's debt securities will
generally fall when interest rates rise. One measure of interest rate risk
is effective duration, explained under ""More Information on Investment
Strategies and Risks -- Effective Duration." The longer the Portfolio's
effective duration, the greater its interest rate risk.

* INCOME RISK. The Portfolio's income could decline due to falling market
interest rates.

* CREDIT RISK. The Portfolio is subject to the risk that the issuers of
debt securities it holds will not make timely payments of interest or
principal on the securities.

* CALL RISK. The Portfolio is subject to the risk that, during periods of
falling interest rates, an issuer of debt securities will "call" -- or
repay -- its high-yielding bonds before their maturity date. The Portfolio
would then be forced to invest the unanticipated proceeds at lower interest
rates, resulting in a decline in the Portfolio's income.

-4-

<PAGE>

* RISKS OF MORTGAGE- AND ASSET-BACKED SECURITIES. Falling interest rates
could cause faster than expected prepayments of the obligations underlying
the Portfolio's mortgage- and asset-backed securities. These prepayments
pass through to the Portfolio, which must reinvest them at a time when
interest rates on new investments are falling, reducing the Portfolio's
income. On the other hand, rising interest rates could cause prepayments of
the obligations to slow, which would lengthen the duration of the
Portfolio's mortgage- and asset-backed securities and cause their prices to
decline.

* RISKS OF NON-INVESTMENT GRADE SECURITIES. Non-investment grade
securities, or "junk bonds," generally have more volatile prices and carry
more risk to principal than investment grade securities.

* RISKS OF FOREIGN SECURITIES. Investing in foreign securities typically
involves risks not associated with U.S. investing. Risks of foreign
investing include the risk that the Portfolio may experience a decline in
net asset value resulting from changes in exchange rates between the U.S.
dollar and foreign currencies, the risk of adverse political and economic
developments, and the possibility of expropriation, nationalization or
confiscatory taxation or limitations on the removal of Portfolio assets.

* RISKS OF DERIVATIVE INSTRUMENTS. The use of derivative instruments
exposes the Portfolio to additional risks and transaction costs. Successful
use of these instruments depends on the adviser's ability to correctly
forecast the direction of market movements. The Portfolio's performance
could be worse than if the Portfolio had not used these instruments if the
adviser's judgment proves incorrect. In addition, even if the adviser's
forecast is correct, there may be an imperfect correlation between the
price of derivative instruments and movements in the prices of the
securities, interest rates or currencies being hedged.

* RISKS OF DOLLAR ROLL TRANSACTIONS. The use of mortgage dollar rolls could
increase the volatility of the Portfolio's share price. It could also
diminish the Portfolio's investment performance if the adviser does not
predict mortgage prepayments and interest rates correctly.

PORTFOLIO PERFORMANCE

The bar chart and table below provide you with information on Balanced
Portfolio's volatility and performance. The bar charts show you how performance
of the Portfolio's shares has varied from year to year. The table compares the
Portfolio's performance over different time periods to that of a broad measure
of market performance. Remember, how the Portfolio has performed in the past is
not necessarily an indication of how it will perform in the future.

-5-

<PAGE>

ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR*

50% --

40% --

30% --

20% --

10% --

0% --

- -10% --
---------------------------------------------

1995 1996 1997 1998

* The Portfolio's total return for the period from January 1, 1999 through March
31, 1999 was _____%.

BEST QUARTER: Quarter ending _______________, 199__ _____%
WORST QUARTER: Quarter ending _______________, 199__ _____%

AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98

ONE YEAR SINCE INCEPTION
(2/3/94)

BALANCED PORTFOLIO ____% ____%

STANDARD & POOR'S 500
COMPOSITE INDEX* ____% ____%

LEHMAN
GOVERNMENT/CORPORATE ____% ____%
BOND INDEX**

- -----------------------------
* An unmanaged index of 500 common stocks chosen to reflect the industries of
the U.S. economy.
** An unmanaged index of Treasury securities, other securities issued or
guaranteed by the U.S. government or its agencies or instrumentalities, and
investment grade corporate obligations.

IAI RESERVE PORTFOLIO

OBJECTIVES

Reserve Portfolio's objective are to provide high levels of capital stability
and liquidity and, to the extent consistent with these primary objectives, a
high level of current income.

-6-

<PAGE>

PRINCIPAL INVESTMENT STRATEGIES

Reserve Portfolio invests primarily in a diversified portfolio of investment
grade debt securities. In order to achieve its objectives of capital stability
and liquidity, the Portfolio maintains a dollar weighted average maturity of its
investment portfolio of 25 months or less.

Debt securities in which Reserve Portfolio may invest include:

* corporate debt obligations;

* securities issued or guaranteed by the U.S. government or its agencies
or instrumentalities;

* mortgage-backed securities issued by government and non-government
entities;

* asset-backed securities;

* zero coupon securities, which do not pay interest currently;

* payment-in-kind bonds, where interest is paid in other securities
rather than in cash; and

* short-term debt securities, including bank certificates of deposit,
bankers' acceptances and commercial paper.

The Portfolio's adviser employs a "top-down" approach in selecting debt
securities for the Fund. First, the advisor determines its economic outlook and
the direction in which it expects interest rates to move. Based on these
factors, the adviser makes duration and yield curve decisions and determines the
Portfolio's sector allocation. Selections of individual securities that fall
within the appropriate parameters are based on the adviser's analysis of the
individual security and its relative value compared to other securities in the
marketplace. The Portfolio's adviser anticipates that the average effective
duration for the Portfolio will not exceed 1.75 years. This range may change,
however, due to market conditions and other economic factors.

The Portfolio invests only in securities rated investment grade at the time or
purchase (or in unrated securities judged by the Portfolio's investment adviser
to be of comparable quality). Investment grade securities are rated within the
four highest grades assigned by Moody's Investors Services, Inc. ("Moody's") or
Standard & Poor's Corporation ("S&P). Commercial paper in which the Portfolio
invests must, at the time of purchase, be rated at least Prime-2 by Moody's or
A-2 by S&P or be issued by companies having an outstanding unsecured debt issue
rated A or better by Moody's or S&P.

The main risks that could adversely affect the value of the Portfolio's shares
and the total return on your investment include:

* INTEREST RATE RISK. Prices of the Portfolio's debt securities will
generally fall when interest rates rise. One measure of interest rate risk
is effective duration, explained under "More Information on Investment
Strategies and Risks -- Effective Duration." The longer the Portfolio's
effective duration, the greater its interest rate risk.

* INCOME RISK. The Portfolio's income could decline due to falling market
interest rates.

* CREDIT RISK. The Portfolio is subject to the risk that the issuers of
debt securities it holds will not make timely payments of interest or
principal on the securities.

-7-

<PAGE>

PORTFOLIO PERFORMANCE

The bar chart and table below provide you with information on Reserve
Portfolio's volatility and performance. The bar charts show you how performance
of the Portfolio's shares has varied from year to year. The table compares the
Portfolio's performance over different time periods to that of a broad measure
of market performance. Remember, how the Portfolio has performed in the past is
not necessarily an indication of how it will perform in the future.

ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR*

50% --

40% --

30% --

20% --

10% --

0% --

- -10% --
---------------------------------------------

1995 1996 1997 1998

* The Portfolio's total return for the period from January 1, 1999 through March
31, 1999 was _____%.

BEST QUARTER: Quarter ending _______________, 199__ _____%
WORST QUARTER: Quarter ending _______________, 199__ _____%

AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98

ONE YEAR SINCE INCEPTION
(4/7/94)

RESERVE PORTFOLIO ____% ____%

SALOMON BROTHERS ONE
YEAR TREASURY BILL
INDEX* ____% ____%

- ---------------------------
* An unmanaged index of one-year constant maturity Treasury bills.

-8-

<PAGE>

PRICING OF PORTFOLIO SHARES

Investments in and redemptions from the Portfolios may be made only by separate
accounts established and maintained by insurance companies for the purpose of
funding variable annuity contracts or variable life insurance policies. The
purchase or redemption price will be equal to the Portfolio's net asset value
("NAV") per share next calculated after an insurance company's order is
accepted. Each Portfolio's NAV per share is generally calculated as of the close
of regular trading on the New York Stock Exchange (usually 3 p.m. Central time)
every day the exchange is open.

A Portfolio's NAV per share is computed by adding up the value of the
Portfolio's investments, cash and other assets, subtracting its liabilities, and
then dividing the result by the number of shares outstanding. Each Portfolio
values investments for which market quotations are readily available at market
value. Foreign securities are valued on the basis of quotations from the primary
market in which they are traded, and are translated from the local currency into
U.S. dollars using current exchange rates. Each Portfolio values short-term
investments maturing within 60 days at amortized cost, which approximates market
value. The Portfolios value all other investments and assets at their fair
value.

TAXES

Each Portfolio pays distributions from its net investment income and any net
capital gains that it has realized. Under current tax law, these distributions
are not currently taxable when left to accumulate within a variable annuity
contract or variable life insurance policy. Depending on the variable contract
or policy, withdrawals may be subject to ordinary tax and, in addition, to a 10%
penalty tax on withdrawals before age 59-1/2.

For a discussion of the tax status of your variable contract or policy, see the
prospectus of your insurance company's separate account.

FUND MANAGEMENT

INVESTMENT ADVISER

Investment Advisers, Inc. ("IAI") is the Portfolios' investment adviser. IAI,
which has been in the investment advisory business since 1947, also furnishes
investment advice to other concerns including other investment companies,
pension and profit sharing plans, portfolios of foundations, religious,
educational and charitable institutions, trusts, municipalities and individuals.
IAI is located at 601 2nd Avenue South, Suite 3600, Minneapolis, Minnesota
55402.

The Portfolios have entered into an Advisory Agreement with IAI under which IAI
provides the Portfolios with investment advice, statistical and research
facilities, and certain equipment and services such as office space and
necessary office facilities, equipment, and the services of required personnel.
During their most recent fiscal year, Regional, Balanced and Reserve Portfolios
paid IAI advisory fees at the annual rates of .65%, .65% and .45%, respectively,
of each Portfolio's average daily net assets.

IAI also provides all required administrative, stock transfer, redemption,
dividend disbursing and accounting services to the Portfolios under an
Administrative Agreement. During their last fiscal year, each Portfolio paid IAI
an administrative fee at the annual rate of .10% of the Portfolio's average
daily net assets.

PORTFOLIO MANAGERS

Mark Hoonsbeen has primary responsibility for the management of Regional
Portfolio. Mr. Hoonsbeen is a vice President of IAI and has managed Regional
Portfolio since he joined IAI in 1994.

-9-

<PAGE>

Larry Hill has primary responsibility for the management of Reserve Portfolio.
Mr. Hill is IAI's Chief Fixed Income Officer and has managed Reserve Portfolio
since March 1998.

Balanced Portfolio is managed by an investment committee comprised of several
IAI equity and fixed income portfolio managers.

MORE INFORMATION ON
INVESTMENT STRATEGIES AND RISKS

INVESTMENT STRATEGIES

The principal investment strategies of the Portfolios are described above under
"Portfolio Summaries." These are the strategies that IAI believes are most
likely to be important in trying to achieve the Portfolios' objectives. Of
course, there is no guarantee that any Portfolio will achieve its objectives.
Although not considered principal investment strategies, you should be aware
that the Portfolios may also use strategies and invest in securities that are
not described in this Prospectus, but that are described in the Statement of
Additional Information.

TEMPORARY DEFENSIVE INVESTMENTS

In an attempt to respond to adverse market, economic, political or other
conditions, each Portfolio may temporarily invest without limit in cash or cash
equivalents (in U.S. dollars or foreign currencies) and short-term securities,
including money market securities. Being invested in these securities may
prevent a Portfolio from achieving its investment objectives.

PORTFOLIO TURNOVER

Each Portfolio may dispose of securities whenever it appears advisable, without
regard to the length of time they have been held. As a result, a Portfolio may,
from time to time, have an annual portfolio turnover rate of over 100%. Active
trading may increase the amount of commissions or mark-ups to broker-dealers
that a Portfolio pays when it buys and sells securities. The "Financial
Highlights" section of this prospectus shows each Portfolio's historical
portfolio turnover rate.

EFFECTIVE DURATION

Balanced Portfolio anticipates that the average effective duration for the debt
portion of its portfolio will range from 3.5 to 7.5 years. Reserve Portfolio
anticipates that its average effective duration will not exceed 1.75 years.
Effective duration, one measure of interest rate risk, measures how much the
value of a security is expected to change with a given change in interest rates.
The longer a security's effective duration, the more sensitive its price to
changes in interest rates. For example, if interest rates were to increase by
one percentage point, the market value of a bond with an effective duration of
five years would decrease by 5%, with all other factors being constant.
Effective duration is based on assumptions and subject to a number of
limitations. It is most useful when interest rate changes are small, rapid and
occur equally in short-term and long-term securities. In addition, it is
difficult to calculate precisely for bonds with prepayment options, such as
mortgage-backed securities, because the calculation requires assumptions about
prepayment rates.

PRINCIPAL RISKS

The principal risks of investing in the Portfolios are described above under
"Portfolio Summaries." More information about risks is presented below.

* RISKS OF COMMON STOCKS. Regional Portfolio and the equity portion of Balanced
Portfolio are subject to the risks of investing in common stocks. These risks
include the following:

-10-

<PAGE>

MARKET RISK. The value of a company's stock may be affected by changes in
financial markets that are relatively unrelated to the company itself, such
as changes in interest rates, changes in general economic conditions,
changes in investor perceptions of the market, or the outlook for overall
corporate profitability.

SECTOR RISK. The stocks of companies within a certain industry or sector of
the economy can perform differently from the overall stock market. This
could be due to such factors as increased production costs or changes in
the regulatory or competitive environment.

COMPANY RISK. The value of a company's stock may fall as a result of
factors directly relating to that company, such as changes in corporate
profitability due to the success or failure of specific products or
management strategies.

* INTEREST RATE RISK. Reserve Portfolio and Balanced Portfolio are subject to
interest rate risk as a result of their investments in debt securities. Debt
securities will fluctuate in value with changes in interest rates. In general,
debt securities will increase in value when interest rates fall and decrease in
value when interest rates rise. Longer-term debt securities are generally more
sensitive to interest rate changes. Securities which do not pay interest on a
current basis, such as zero coupon securities, may be highly volatile as
interest rates rise or fall. Payment-in-kind bonds, which pay interest in other
securities rather than in cash, also may be highly volatile.

* INCOME RISK. The income of Reserve Portfolio or Balanced Portfolio could
decline due to falling market interest rates. This is because, in a falling
interest rate environment, a Portfolio generally will have to invest the
proceeds from sales of Portfolio shares, as well as the proceeds from maturing
portfolio securities (or portfolio securities that have been called, see "Call
Risk," or prepaid, see "Prepayment Risk") in lower-yielding securities.

* CREDIT RISK. Reserve Portfolio and Balanced Portfolio are subject to the risk
that the issuers of debt securities they hold will not make payments on the
securities. There is also the risk that an issuer could suffer adverse changes
in financial condition that could lower the credit quality of a security. This
could lead to greater volatility in the price of the security and the shares of
the Portfolio. Also, a change in the credit quality rating of a bond can affect
the bond's liquidity and make it more difficult for a Portfolio to sell. When a
Portfolio purchases unrated securities, it will depend on IAI's analysis of
credit risk more heavily than usual.

* RISKS OF NON-INVESTMENT GRADE SECURITIES. Balanced Portfolio may invest in
non-investment grade debt securities, which are commonly known as "junk bonds."
Although these securities usually offer higher yields than investment grade
securities, they also involve more risk. Junk bonds generally have more volatile
prices and carry more risk to principal than investment grade securities. Junk
bonds may be more susceptible to real or perceived adverse economic changes (for
instance, an economic downturn or prolonged period of rising interest rates),
political changes or adverse developments specific to the issuer. In addition,
the secondary trading market may be less liquid than the market for investment
grade securities. Adverse publicity and investor perceptions as well as new or
proposed laws also may have a greater negative impact on the market for junk
bonds.

* CALL RISK. Call risk is the possibility that corporate bonds held by Reserve
Portfolio or Balanced Portfolio will be repaid prior to maturity. Call
provisions, common in many corporate bonds, allow bond issuers to redeem bonds
prior to maturity (at a specified price). When interest rates are falling, bond
issuers often exercise these call provisions, paying off bonds that carry high
stated interest rates and often issuing new bonds at lower rates. If bonds held
by a Portfolio were called, the Portfolio would most likely be forced to invest
the unanticipated proceeds in lower-yielding securities, resulting in a decline
in the Portfolio's income.

* PREPAYMENT RISK. Mortgage-backed securities are secured by and payable from
pools of mortgage loans. Similarly, asset-backed securities are supported by
obligations such as automobile loans or home equity loans. These mortgages and
other obligations generally can be prepaid at any time without penalty. As a
result, mortgage- and asset-backed securities are subject to prepayment risk,
which is the risk that falling interest rates could cause prepayments of the
securities to occur more quickly than expected. This occurs because, as interest
rates fall, more homeowners refinance the mortgages underlying mortgage-related
securities or prepay the debt obligations underlying asset-backed securities. A
Portfolio holding these securities must reinvest the prepayments at a time when
interest rates are falling, reducing the income of the Portfolio. In addition,
when interest rates fall, prices on

-11-

<PAGE>

mortgage- and asset-backed securities may not rise as much as for other types of
comparable debt securities because investors may anticipate an increase in
prepayments.

* EXTENSION RISK. Mortgage- and asset-backed securities also are subject to
extension risk, which is the risk that rising interest rates could cause
mortgages and other obligations underlying the securities to be prepaid more
slowly than expected, resulting in slower prepayments of the securities. This
would, in effect, convert a short- or medium-duration mortgage- or asset-backed
security into a longer-duration security, increasing its sensitivity to interest
rate changes and causing its price to decline.

* RISKS OF FOREIGN SECURITIES. Balanced Portfolio may invest in foreign
securities. Investments in foreign securities involve risks that are different
in some respects from investments in securities of U.S. issuers. Because the
Portfolio can invest in securities denominated or quoted in currencies other
than the U.S. dollar, changes in foreign currency exchange rates may affect the
value of securities held by the Portfolio. Foreign currency exchange rates are
determined by forces of supply and demand in the foreign exchange markets and
other economic and financial conditions affecting the world economy. A decline
in the value of any particular currency against the U.S. dollar will cause a
decline in the U.S. dollar value of Balanced Portfolio's holdings of securities
denominated in that currency and, therefore, will cause an overall decline in
the Portfolio's net asset value and net investment income and capital gains, if
any. Other risks include the risk of adverse political and economic developments
and, with respect to certain countries, the possibility of expropriation,
nationalization or confiscatory taxation or limitations on the removal of funds
or other assets of the Portfolio. Securities of some foreign companies are less
liquid and more volatile than securities of comparable domestic companies. There
also may be less publicly available information about foreign issuers than
domestic issuers, and foreign issuers generally are not subject to the uniform
accounting, auditing and financial reporting standards, practices and
requirements applicable to domestic issuers. Delays may be encountered in
settling securities transactions in certain foreign markets, and the Portfolio
will incur costs in converting foreign currencies into U.S. dollars. Custody
charges are generally higher for foreign securities.

* RISKS OF DOLLAR ROLL TRANSACTIONS. Balanced Portfolio may enter into dollar
roll transactions, the Portfolio sells mortgage-backed securities for delivery
in the current month while contracting with the same party to repurchase similar
securities at a future date. Because the Portfolio gives up the right to receive
principal and interest paid on the securities sold, a mortgage dollar roll
transaction will diminish the investment performance of the Portfolio unless the
difference between the price received for the securities sold and the price to
be paid for the securities to be purchased in the future, plus any fee income
received, exceeds any income, principal payments and appreciation on the
securities sold as part of the mortgage dollar roll. Whether mortgage dollar
rolls will benefit Balanced Portfolio will depend upon IAI's ability to predict
mortgage prepayments and interest rates. In addition, the use of mortgage dollar
rolls by Balanced Portfolio increases the amount of the Portfolio's assets that
are subject to market risk, which could increase the volatility of the
Portfolio's share price.

* RISKS OF DERIVATIVE INSTRUMENTS. The use of derivative instruments exposes
Balanced Portfolio to additional investment risks and transaction costs. Risks
inherent in the use of derivative instruments include:

* the risk that interest rates, securities prices and currency markets
will not move in the direction that IAI anticipates;

* an imperfect correlation between the price of derivative instruments
and movements in the prices of the securities, interest rates or
currencies being hedged;

* the inability to close out certain hedged positions to avoid adverse
tax consequences;

* the possible absence of a liquid secondary market for any particular
instrument and possible exchange-imposed price fluctuation limits,
either of which may make it difficult or impossible to close out a
position when desired;

* leverage risk, which is the risk that adverse price movements in an
instrument can result in a loss substantially greater than the
Portfolio's initial investment in that instrument; and

-12-

<PAGE>

* particularly in the case of privately negotiated instruments, the risk
that the counterparty will fail to perform its obligations, which
could leave the Portfolio worse off than if it had not entered into
the position.

If Balanced Portfolio uses derivative instruments and if IAI's judgment proves
incorrect, the Portfolio's performance could be worse than if it had not used
these instruments.

* MANAGER RISK. IAI manages the Portfolios according to the traditional methods
of "active" investment management, which involve the buying and selling of
securities based upon economic, financial and market analysis and investment
judgment. Manager risk refers to the possibility that IAI may fail to execute a
Portfolio's investment strategy effectively. As a result, the Portfolio may fail
to achieve its stated objectives.

* YEAR 2000 ISSUES. The investment advisory, transfer agency and administrative
services provided to the Portfolios by IAI depend on the smooth functioning of
IAI's computer systems. Many computer software systems in use today cannot
distinguish the year 2000 from the year 1900 because of the way dates are
encoded and calculated. That failure could have a negative impact on handling
securities trades, pricing and account services. IAI has been actively working
on necessary changes to its computer systems to deal with the year 2000 and
expects that its systems will be adapted in time for that event, although there
cannot be assurance of success.

IAI is working with third parties to assess the adequacy of their compliance
efforts and is developing contingency plans intended to assure that third-party
noncompliance will not materially affect IAI's operations. Companies,
organizations, governmental entities and markets in which the Portfolios invest
will be affected by the Year 2000 issue, but at this time the Portfolios cannot
predict the degree of impact. To the extent the effect is negative, the
Portfolios' returns could be adversely affected.

-13-

<PAGE>

FINANCIAL HIGHLIGHTS

The tables that follow present performance information about the Portfolios.
This information is intended to help you understand each Portfolio's financial
performance since it commenced operations. Some of this information reflects
financial results for a single Portfolio share. The total returns in the table
represent the rate that you would have earned or lost on an investment in the
Portfolio, assuming you reinvested all of your dividends and distributions. This
information has been audited by KPMG Peat Marwick LLP, independent auditors,
whose report, along with the Portfolios' financial statements, is included in
the Portfolios' annual report, which is available upon request.

Regional Portfolio

<TABLE>
<CAPTION>
Period from
Years ended December 31, January 31, 1994***
--------------------------------------------------- to
1998 1997 1996 1995 December 31, 1994
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 15.02 $ 14.16 $ 10.62 $ 10.00
-----------------------------------------------------------------------
OPERATIONS
Net investment income 0.08 0.05 0.06 0.03
Net realized and unrealized gains (losses) 1.90 1.60 3.50 0.59
-----------------------------------------------------------------------
TOTAL FROM OPERATIONS 1.98 1.65 3.56 0.62
-----------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.07) (0.05) (0.02) --
Net realized gains (0.62) (0.74) -- --
-----------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.69) (0.79) (0.02) --
-----------------------------------------------------------------------
NET ASSET VALUE
End of period $ 16.31 $ 15.02 $ 14.16 $ 10.62
=======================================================================

Total investment return* 13.45% 11.88% 33.51% 6.20%
Net assets at end of period (000's omitted) $ 17,085 $ 11,831 $ 5,105 $ 865

RATIOS
Expenses to average daily net assets** 0.90% 1.03% 1.37% 1.13%+
Net investment income to average net assets** 0.65% 0.77% 1.12% 0.81%+
Portfolio turnover rate (excluding short-term
securities) 62.1% 78.4% 156.0% 127.6%
</TABLE>

- --------------------
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of all distributions at
net asset value.
** The Portfolio's adviser voluntarily waived $6,737 and $7,455 in expenses
for the year ended December 31, 1995 and for the period ended December 31,
1994, respectively. If the Portfolio had been charged for these expenses,
the ratio of expenses to average daily net assets would have been 1.64% and
3.90%, respectively, and the ratio of net investment income (loss) to
average daily net assets would have been .85% and (1.96%), respectively.
*** Commencement of operations.
+ Annualized.

-14-

<PAGE>

Balanced Portfolio

<TABLE>
<CAPTION>
Period from
Years ended December 31, February 3, 1994***
------------------------------------------------------ to
1998 1997 1996 1995 December 31, 1994
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 12.71 $ 11.78 $ 10.22 $ 10.00
--------------------------------------------------------------------------
OPERATIONS
Net investment income 0.27 0.22 0.09 0.10
Net realized and unrealized gains (losses) 1.81 0.92 1.56 0.12
--------------------------------------------------------------------------
TOTAL FROM OPERATIONS 2.08 1.14 1.65 0.22
--------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.24) (0.10) (0.09) --
Net realized gains (0.26) (0.11) -- --
--------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.50) (0.21) (0.09) --
--------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 14.29 $ 12.71 $ 11.78 $ 10.22
==========================================================================

Total investment return* 16.60% 9.80% 16.21% 2.20%
Net assets at end of period (000's omitted) $ 2,446 $ 1,534 $ 764 $ 206

RATIOS
Expenses to average daily net assets** 1.25% 1.25% 1.70% 1.25%+
Net investment income to average net assets** 2.63% 2.84% 2.34% 2.28%+
Portfolio turnover rate (excluding short-term
securities) 38.8% 67.4% 56.0% 21.6%
</TABLE>

- ---------------------
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of all distributions at
net asset value.
** The Portfolio's adviser voluntarily waived $1,753, $8,031, $13,428 and
$7,756 in expenses for the year ended December 31, 1997, 1996, 1995, and
for the period ended December 31, 1994, respectively. If the Portfolio had
been charged for these expenses, the ratio of expenses to average daily net
assets would have been 1.34%, 1.96%, 5.29% and 10.33%, respectively, and
the ratio of net investment income (loss) to average daily net assets would
have been 2.54%, 2.13%, (1.25%) and (6.80%), respectively.
*** Commencement of operations.
+ Annualized.

-15-

<PAGE>

Reserve Portfolio

<TABLE>
<CAPTION>
Period from
Years ended December 31, April 7, 1994***
---------------------------------------------------- to
1998 1997 1996 1995 December 31, 1994
------------------------------------------------------------------------
NET ASSET VALUE
<S> <C> <C> <C> <C> <C>
Beginning of period $ 10.03 $ 10.05 $ 10.03 $ 10.00
------------------------------------------------------------------------
OPERATIONS
Net investment income 0.43 0.49 0.48 0.20
Net realized and unrealized gains (losses) 0.02 (0.01) 0.02 0.02
------------------------------------------------------------------------
TOTAL FROM OPERATIONS 0.45 0.48 0.50 0.22
------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.46) (0.50) (0.48) (0.19)
Net realized gains (0.02) -- -- --
------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.48) (0.50) (0.48) (0.19)
------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 10.00 $ 10.03 $ 10.05 $ 10.03
========================================================================

Total investment return* 4.62% 4.93% 5.09% 2.25%
Net assets at end of period (000's omitted) $ 1,021 $ 528 $ 844 $ 544

RATIOS
Expenses to average daily net assets** 0.85% 0.85% 1.03% 0.85%+
Net investment income to average net assets** 4.57% 4.54% 4.84% 3.56%+
Portfolio turnover rate (excluding short-term
securities) 0.0% 185.3% 0.0% 0.0%
</TABLE>

- ---------------------
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of all distributions at
net asset value.
** The Portfolio's adviser voluntarily waived $8,479, $9,034, $11,528 and
$6,930 in expenses for the year ended December 31, 1997, 1996, 1995, and
for the period ended December 31, 1994, respectively. If the Portfolio had
been charged for these expenses, the ratio of expenses to average daily net
assets would have been 2.25%, 1.81%, 2.62% and 4.62%, respectively, and the
ratio of net investment income (loss) to average daily net assets would
have been 3.17%, 3.58%, 3.25% and (.21), respectively.
*** Commencement of operations.
+ Annualized.

-16-

<PAGE>

FOR MORE INFORMATION ABOUT IAI REGIONAL PORTFOLIO
IAI BALANCED PORTFOLIO
IAI RESERVE PORTFOLIO

The Portfolios' statement of additional information ("SAI") and annual and
semi-annual reports to shareholders include additional information about the
Portfolios. The SAI provides more details about each Portfolio and its policies.
A current SAI is on file with the Securities and Exchange Commission (SEC) and
is incorporated into this prospectus by reference (which means that it is
legally considered part of this prospectus). Additional information about each
Portfolio's investments is available in the Portfolios annual and semiannual
reports to shareholders. In the Portfolios' annual report, you will find a
discussion of the market conditions and investment strategies that significantly
affected each Portfolio's performance during its last fiscal year. You may get
free copies of these materials by calling the Portfolios toll-free a
1-800-945-3863.

You may also obtain copies by visiting the SEC's Public Reference Room in
Washington, DC or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009. For more information, call
1-800-SEC-0330.

Information about the Portfolios is also available on the Internet. Text-only
versions of fund documents can be viewed online or downloaded from the SEC's
Internet site at http://www.sec.gov.

SEC file number: 811-8032

<PAGE>

IAI REGIONAL PORTFOLIO
IAI BALANCED PORTFOLIO
IAI RESERVE PORTFOLIO
SERIES OF
IAI RETIREMENT FUNDS, INC.

STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 1, 1999

THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. THIS
STATEMENT OF ADDITIONAL INFORMATION RELATES TO A PROSPECTUS FOR IAI REGIONAL
PORTFOLIO, IAI BALANCED PORTFOLIO AND IAI RESERVE PORTFOLIO (THE "PORTFOLIOS")
DATED MAY 1, 1999 AND SHOULD BE READ IN CONJUNCTION THEREWITH. THE FINANCIAL
STATEMENTS INCLUDED AS PART OF THE PORTFOLIOS' ANNUAL REPORT TO SHAREHOLDERS FOR
THE FISCAL YEAR ENDED DECEMBER 31, 1998 ARE INCORPORATED BY REFERENCE INTO THIS
STATEMENT OF ADDITIONAL INFORMATION. COPIES OF THE PORTFOLIO'S PROSPECTUS AND/OR
ANNUAL REPORT ARE AVAILABLE, WITHOUT CHARGE, BY WRITING OR CALLING THE
PORTFOLIOS, P.O. BOX 357, MINNEAPOLIS, MINNESOTA 55440 (TELEPHONE:
1-612-376-2700 OR 1-800-945-3863).

<PAGE>

TABLE OF CONTENTS

Page

INVESTMENT OBJECTIVES AND STRATEGIES........................................ 1

INVESTMENT RESTRICTIONS..................................................... 15

INVESTMENT PERFORMANCE...................................................... 17

MANAGEMENT.................................................................. 19

CUSTODIAN................................................................... 22

LEGAL COUNSEL............................................................... 22

PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE.......................... 22

CAPITAL STOCK............................................................... 23

CONTROL PERSONS AND PRINCIPAL SECURITY HOLDERS.............................. 24

NET ASSET VALUE AND PUBLIC OFFERING PRICE................................... 25

TAX STATUS.................................................................. 25

LIMITATION OF DIRECTOR LIABILITY............................................ 25

SHAREHOLDER MEETINGS........................................................ 26

FINANCIAL STATEMENTS........................................................ 26

APPENDIX A -- Ratings of Debt Securities.................................... 27

<PAGE>

INVESTMENT OBJECTIVES AND STRATEGIES

IAI Retirement Funds, Inc. (the "Fund") is an open-end management
investment company designed to provide investment vehicles for variable annuity
contracts and/or variable life insurance policies of various insurance
companies. IAI Reserve Portfolio ("Reserve Portfolio"), IAI Balanced Portfolio
("Balanced Portfolio") and IAI Regional Portfolio ("Regional Portfolio")
(individually, "Portfolio" and collectively, the "Portfolios") are diversified
series of the Fund.

The investment objectives and principal investment strategies of the
Portfolios are discussed in the Prospectus under "Portfolio Summaries" and "More
Information of Investment Strategies." The Portfolios' investment objectives may
not be changed without shareholder approval. Investors should understand that
all investments are subject to various risks. There can be no guarantee against
loss resulting from an investment in any Portfolio, and there can be no
assurance that a Portfolio's investment strategies will be successful, or that
its investment objectives will be attained. Certain of the Portfolios' principal
investment strategies are discussed in more detail below. In addition, the
Portfolios may also use strategies and invest in securities that are not
principal investment strategies and are not described in the Prospectus. These
strategies and securities are described below.

REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS

Each Portfolio may engage in repurchase agreements relating to the
securities in which it may invest. A repurchase agreement, which is functionally
equivalent to a loan by a Portfolio, involves the purchase of securities by a
Portfolio with the condition that, after a stated period of time, the original
seller will buy back the securities at a predetermined price or yield. Each
Portfolio's custodian will have custody of, and will hold in a segregated
account, securities acquired by the Portfolio under a repurchase agreement or
other securities as collateral. In the case of a security registered on a book
entry system, the book entry will be maintained in the Portfolio's name or that
of its custodian. Repurchase agreements involve certain risks not associated
with direct investments in securities. For example, if the seller of the
agreement defaults on its obligation to repurchase the underlying securities at
a time when the value of the securities has declined, a Portfolio may incur a
loss upon disposition of such securities. In the event that bankruptcy
proceedings are commenced with respect to the seller of the agreement, a
Portfolio's ability to dispose of the collateral to recover its investment may
be restricted or delayed. While collateral will at all times be maintained in an
amount equal to the repurchase price under the agreement (including accrued
interest due thereunder), to the extent proceeds from the sale of collateral
were less than the repurchase price, a Portfolio could suffer a loss.

Each Portfolio may engage in reverse repurchase agreements as a form of
borrowing. In a reverse repurchase agreement, a Portfolio sells an instrument to
another party, such as a bank or broker-dealer, in return for cash and agrees to
repurchase the instrument at a particular price and time. While a reverse
repurchase agreement is outstanding, each Portfolio will comply with guidelines
established by the Securities and Exchange Commission regarding the segregation
of assets. Each Portfolio will enter into reverse repurchase agreements only
with parties whose creditworthiness has been found satisfactory by Investment
Advisers, Inc. ("IAI"), the Portfolios' investment adviser and manager. Such
transactions may increase fluctuations in the market value of the Portfolios'
assets and may be viewed as a form of leverage. Each Portfolio does not
currently intend to invest more than 5% of its net assets in reverse repurchase
agreements.

SECURITIES OF FOREIGN ISSUERS

Each Portfolio may invest in securities of foreign issuers in
accordance with its investment objectives and policies. However, only Balanced
Portfolio currently intends to invest in such securities. Investing in foreign
securities may result in greater risk than that incurred by investing in
domestic securities. There is generally less publicly available information
about foreign issuers comparable to reports and ratings that are published about
companies in the United States. Also, foreign issuers are not subject to uniform
accounting and auditing and financial reporting standards, practices and
requirements comparable to those applicable to United States companies.
Furthermore, volume and liquidity in most foreign bond markets in less than in
the United States and at times volatility of price can be greater than in the
United States. There is generally less government supervision of foreign bond
markets, brokers and companies than in the United States.

-1-

<PAGE>

It is contemplated that most foreign securities will be purchased in
over-the-counter markets or on stock exchanges located in the countries in which
the respective principal offices of the issuers of the various securities are
located, if that is the best available market. Foreign stock markets are
generally not as developed or efficient as those in the United States. While
growing in volume, they usually have substantially less volume than the New York
Stock Exchange, and securities of some foreign companies are less liquid and
more volatile than securities of comparable United States companies. Similarly,
volume and liquidity in most foreign bond markets is less than in the United
States and at times volatility of price can be greater than in the United
States. Commissions on foreign stock exchanges are generally higher than
commissions on United States exchanges, although each Portfolio will endeavor to
achieve the most favorable net results on its portfolio transactions. There is
generally less government supervision and regulation of foreign stock exchanges,
brokers and listed companies than in the United States.

With respect to certain foreign countries, there is the possibility of
adverse changes in investment or exchange control regulations, expropriation or
confiscatory taxation, limitations on the removal of funds or other assets of
the Portfolio, political or social instability, or diplomatic developments which
could affect United States investments in those countries. Moreover, individual
foreign economies may differ favorably or unfavorably from the United States'
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position.

The Portfolios are not aware at this time of the existence of any
investment or exchange control regulations which might substantially impair the
operations of the Portfolios as described in the Prospectus and this Statement
of Additional Information. It should be noted, however, that this situation
could change at any time.

The dividends and interest payable on certain of the Portfolios'
foreign securities may be subject to foreign withholding taxes, thus reducing
the net amount of income available for distribution to the Portfolios'
shareholders. The expense ratio of each Portfolio should not be materially
affected by such Portfolio's investment in foreign securities.

U.S. GOVERNMENT SECURITIES

Reserve Portfolio and Balanced Portfolio may invest in securities of,
or guaranteed by, the United States Government, its agencies or
instrumentalities. These securities include:

1. United States Treasury obligations, such as Treasury Bills
(which have original maturities of one year or less), Treasury Notes
(which have original maturities of one to ten years) and Treasury Bonds
(which have original maturities generally greater than ten years);

2. obligations of United States government agencies and
instrumentalities which are secured by the full faith and credit of the
United States Treasury, such as Government National Mortgage
Association ("Ginnie Mae") modified pass-through certificates;

3. obligations which are secured by the right of the issuer to
borrow from the United States Treasury, such as securities issued by
the Federal Financing Bank or the United States Postal Service; and

4. obligations which are supported by the credit of the
government agency or instrumentality itself (but are not backed by the
full faith and credit of the United States Government) such as
securities of the Federal Home Loan Mortgage Corporation ("Freddie
Mac") or the Federal National Mortgage Association ("Fannie Mae"),
including pass-through securities and participation certificates
thereof.

Guarantees as to the timely payment of principal and interest do not
extend to the value or yield of such securities nor do they extend to the value
of the Portfolios' shares. In the case of securities in which the Portfolios
invest that are not backed by the "full faith and credit" of the United States
government, the investor must look principally to the agency issuing or
guaranteeing the obligation for ultimate repayment and may not be able to assert
a claim against the United States government itself in the event the agency or
instrumentality does not meet its commitment.

The Portfolios' investments in U.S. government securities may include
U.S. Treasury inflation-protection securities. Inflation-protection securities
are a type of marketable book-entry security issued by the United States

-2-

<PAGE>

Department of Treasury ("Treasury") with a nominal return linked to the
inflation rate in prices. Inflation-protection securities are auctioned and
issued on a quarterly basis on the 15th of January, April, July, and October.
They have been issued as 10-year notes, with other maturities added thereafter.
The index used to measure inflation is the non-seasonally adjusted U.S. City
Average All Items Consumer Price Index for All Urban Consumers ("CPI-U").

The value of the principal is adjusted for inflation, and every six
months the security will pay interest, which is an amount equal to a fixed
percentage of the inflation-adjusted value of the principal. The final payment
of principal of the security will not be less than the original par amount of
the security at issuance.

The principal of the inflation-protection security is indexed to the
non-seasonally adjusted CPI-U. To calculate the inflation-adjusted principal
value for a particular valuation date, the value of the principal at issuance is
multiplied by the index ratio applicable to that valuation date. The index ratio
for any date is the ratio of the reference CPI applicable to such date to the
reference CPI applicable to the original issue date. Semiannual coupon interest
is determined by multiplying the inflation-adjusted principal amount by one-half
of the stated rate of interest on each interest payment date.

Inflation-adjusted principal or the original par amount, whichever is
larger, will be paid on the maturity date as specified in the applicable
offering announcement. If at maturity the inflation-adjusted principal is less
than the original principal value of the security an additional amount will be
paid at maturity so that the additional amount plus the inflation-adjusted
principal equals the original principal amount. Some inflation-protection
securities may be stripped into principal and interest components. In the case
of a stripped security, the holder of the stripped principal would receive this
additional amount. The final interest payment, however, will be based on the
final inflation-adjusted principal value, not the original par amount.

The reference CPI for the first day of any calendar month is the CPI-U
for the third preceding calendar month. (For example, the reference CPI for
December 1 is the CPI-U reported for September of the same year, which is
released in October.) The reference CPI for any other day of the month is
calculated by a linear interpolation between the reference CPI applicable to the
first day of the month and the reference CPI applicable to the first day of the
following month.

Any revisions the Bureau of Labor Statistics (or successor agency)
makes to any CPI-U number that has been previously released will not be used in
calculations of the value of outstanding inflation-protection securities. In the
case that the CPI-U for a particular month is not reported by the last day of
the following month, the Treasury will announce an index number based on the
last year-over-year CPI-U inflation rate available. Any calculations of the
Treasury's payment obligations on the inflation-protection security that need
that month's CPI-U number will be based on the index number that the Treasury
has announced. If the CPI-U is based to a different year, the Treasury will
continue to use the CPI-U series based on the base reference period in effect
when the security was first issued as long as that series continues to be
published. If the CPI-U is discontinued during the period the
inflation-protection security is outstanding, the Treasury will, in consultation
with the Bureau of Labor Statistics (or successor agency), determine an
appropriate substitute index and methodology for linking the discontinued series
with the new price index series. Determinations of the Secretary of the Treasury
in this regard are final.

Inflation-protection securities will be held and transferred in either
of two book-entry systems: the commercial book-entry system (TRADES) and
TREASURY DIRECT. The securities will be maintained and transferred at their
original par amount, i.e., not at their inflation-adjusted value. STRIPS
components will be maintained and transferred in TRADES at their value based on
the original par amount of the fully constituted security.

LENDING PORTFOLIO SECURITIES

In order to generate additional income, each Portfolio may lend
portfolio securities to broker-dealers, banks or other financial borrowers of
securities. As with other extensions of credit, there are risks of delay in
recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. However, the Portfolios will only enter into loan
arrangements with broker-dealers, banks or other institutions which IAI has
determined are creditworthy under guidelines established by the Portfolios'
Board of Directors. The Portfolios may also experience a loss, if upon the
failure of a borrower to return loaned securities, the collateral is not
sufficient in value or liquidity to cover the value

-3-

<PAGE>

of such loaned securities (including accrued interest thereon). However, the
Portfolios will receive collateral in the form of cash, United States Government
securities, certificates of deposit or other high-grade, short-term obligations
or interest-bearing cash equivalents equal to at least 102% of the value of the
securities loaned. The value of the collateral and of the securities loaned will
be marked to market on a daily basis. During the time portfolio securities are
on loan, the borrower pays a Portfolio an amount equivalent to any dividends or
interest paid on the securities and a Portfolio may invest the cash collateral
and earn additional income or may receive an agreed upon amount of interest
income from the borrower. However, the amounts received by a Portfolio may be
reduced by finders' fees paid to broker-dealers and related expenses.

EXTENDIBLE NOTES

Reserve Portfolio is permitted to invest up to 25% of the value of its
total assets in extendible notes. An extendible note is a debt arrangement under
which the holder, at its option, may require the issuer to repurchase the note
for a predetermined fixed price at one or more times prior to the ultimate
maturity date of the note. Typically, an extendible note is issued at an
interest rate that can be adjusted at fixed times throughout its term. At the
same time as the interest rate is adjusted by the issuer, the holder of the note
is typically given the option to "put" the note back to the issuer at a
predetermined price (e.g., at 100% of the outstanding principal amount plus
unpaid accrued interest) if the extended interest rate is undesirable to the
holder. This option to put the note back to the issuer (i.e., to require the
issuer to repurchase the note) provides the holder with an optional maturity
date that is shorter than the actual maturity date of the note.

Extendible notes may be issued with maturity dates in excess of ten
years from the date of issuance. However, if such extendible notes provide for
an optional maturity date of ten years or less, then such notes are deemed by
the Portfolio to have been issued for the shorter optional maturity date.
Investment in extendible notes is not expected to have a material impact on the
effective portfolio maturity of the Portfolio.

An investment in an extendible note is liquid, and the note may be
resold to another investor prior to its optional maturity date at its market
value. The market value of an extendible note with a given optional maturity
date is determined and fluctuates in a similar manner as the market value of a
fixed maturity note with a maturity equivalent to the optional maturity of the
extendible note. Compared to fixed term notes of the same issuer, however,
extendible notes with equivalent optional maturities generally yield higher
returns without a material increase in risk to the Portfolio.

The creditworthiness of the issuers of extendible notes is monitored
and rated by Moody's and by S&P, and investments by the Reserve Portfolio in
such extendible notes are restricted to notes with the same investment ratings
as are acceptable to the Portfolio with respect to other forms of investment.
The creditworthiness of such issuers is also monitored by IAI.

VARIABLE OR FLOATING RATE INSTRUMENTS

Balanced and Reserve Portfolios may purchase instruments with variable
or floating rates. Such instruments (including notes purchased directly from
issuers) bear variable or floating interest rates and carry rights that permit
holders to demand payment of the unpaid principal balance plus accrued interest
from the issuers or certain financial intermediaries. Floating rate securities
have interest rates that change whenever there is a change in a designated base
rate while variable rate instruments provide for a specified periodic adjustment
in the interest rate. These formulas are designed to result in a market value
for the instrument that approximates its par value.

WHEN-ISSUED/DELAYED-DELIVERY TRANSACTIONS

Reserve and Balanced Portfolios may buy and sell securities on a
delayed-delivery or when-issued basis. These transactions involve a commitment
by a Portfolio to purchase or sell specific securities at a predetermined price
or yield, with payment and delivery taking place after the customary settlement
period for that type of security (and more than seven days in the future).
Typically, no interest accrues to the purchaser until the security is delivered.
Each Portfolio may receive fees for entering into delayed-delivery transactions.

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When purchasing securities on a delayed-delivery basis, a Portfolio
assumes the rights and risks of ownership, including the risk of price and yield
fluctuations. Because a Portfolio is not required to pay for securities until
the delivery date, these risks are in addition to the risks associated with such
Portfolio's other investments. If a Portfolio remains substantially fully
invested at a time when delayed delivery purchases are outstanding,
delayed-delivery purchases may result in a form of leverage. When
delayed-delivery purchases are outstanding, a Portfolio will set aside
appropriate liquid assets in a segregated custodial account to cover its
purchase obligations. When a Portfolio has sold a security on a delayed-delivery
basis, such Portfolio does not participate in further gains or losses with
respect to the security. If the other party to a delayed-delivery transaction
fails to deliver or pay for the securities, a Portfolio could miss a favorable
price or yield opportunity, or could suffer a loss.

Such Portfolios may renegotiate delayed-delivery transactions after
they are entered into, and may sell underlying securities before they are
delivered, which may result in capital gains or losses.

DOLLAR ROLLS

In connection with its ability to purchase securities on a when-issued
or forward commitment basis, Balanced Portfolio may enter into "dollar rolls" in
which the Portfolio sells securities for delivery in the current month and
simultaneously contracts with the same counterparty to repurchase similar (same
type, coupon and maturity) but not identical securities on a specified future
date. The Portfolio gives up the right to receive principal and interest paid on
the securities sold. However, the Portfolio would benefit to the extent of any
difference between the price received for the securities sold and lower forward
price for the future purchase plus any fee income received. Unless such benefits
exceed the income and capital appreciation that would have been realized on the
securities sold as part of the dollar roll, the use of this technique will
diminish the investment performance of the Portfolio compared with what such
performance would have been without the use of dollar rolls. The benefits
derived from the use of dollar rolls may depend, among other things, upon IAI's
ability to predict interest rates correctly. There is no assurance that dollar
rolls can be successfully employed. In addition, the use of dollar rolls by the
Portfolio while remaining substantially fully invested increases the amount of
the Portfolio's assets that are subject to market risk to an amount that is
greater than the Portfolio's net asset value, which could result in increased
volatility of the price of the Portfolio's shares.

MORTGAGE-BACKED SECURITIES

Reserve Portfolio and Balanced Portfolio may invest in mortgage-backed
securities that are Agency Pass-Through Certificates, Private Pass-Throughs or
collateralized mortgage obligations ("CMOs"), as defined and described below.

Agency Pass-Through Certificates are mortgage pass-through certificates
representing undivided interests in pools of residential mortgage loans.
Distribution of principal and interest on the mortgage loans underlying an
Agency Pass-Through Certificate is an obligation of or guaranteed by GNMA, FNMA
or FHLMC. GNMA is a wholly-owned corporate instrumentality of the United States
within the Department of Housing and Urban Development. The guarantee of GNMA
with respect to GNMA certificates is backed by the full faith and credit of the
United States, and GNMA is authorized to borrow from the United States Treasury
in an amount which is at any time sufficient to enable GNMA, with no limitation
as to amount, to perform its guarantee.

FNMA is a federally chartered and privately owned corporation organized
and existing under federal law. Although the Secretary of the Treasury of the
United States has discretionary authority to lend funds to FNMA, neither the
United States nor any agency thereof is obligated to finance FNMA's operations
or to assist FNMA in any other manner.

FHLMC is a federally chartered corporation organized and existing under
federal law, the common stock of which is owned by the Federal Home Loan Banks.
Neither the United States nor any agency thereof is obligated to finance FHLMC's
operations or to assist FHLMC in any other manner.

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.

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Agency Pass-Through Certificates may be issued in a single class with respect to
a given pool of mortgage loans or in multiple classes.

The residential mortgage loans evidenced by Agency Pass-Through
Certificates and upon which CMOs are based generally are secured by first
mortgages on one- to four-family residential dwellings. Such mortgage loans
generally have final maturities ranging from 15 to 30 years and provide for
monthly payments in amounts sufficient to amortize their original principal
amounts by the maturity dates. Each monthly payment on such mortgage loans
generally includes both an interest component and a principal component, so that
the holder of the mortgage loans receives both interest and a partial return of
principal in each monthly payment. In general, such mortgage loans can be
prepaid by the borrowers at any time without any prepayment penalty. In
addition, many such mortgage loans contain a "due-on-sale" clause requiring the
loans to be repaid in full upon the sale of the property securing the loans.
Because residential mortgage loans generally provide for monthly amortization
and may be prepaid in full at any time, the weighted average maturity of a pool
of residential mortgage loans is likely to be substantially shorter than its
stated final maturity date. The rate at which a pool of residential mortgage
loans is prepaid may be influenced by many factors and is not predictable with
precision.

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 FHLMC, 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 provisions 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 Portfolios 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.

Balanced Portfolio and Reserve Portfolio may invest in stripped
mortgage-backed securities. Such securities are created when a U.S. government
agency or a financial institution separates the interest and principal
components of a mortgage-backed security and sells them as individual
securities. The holder of the "principal-only" security (PO) receives the
principal payments made by the underlying mortgage-backed security, while the
holder of the "interest-only" security (IO) receives interest payments from the
same underlying security. The prices of stripped mortgage-backed securities may
be particularly affected by changes in interest rates. As interest rates fall,
prepayment rates tend to increase, which tends to reduce prices of IOs and
increase prices of POs. Rising interest rates can have the opposite effect.

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. 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

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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. In addition, for example:

* In a sequential-pay CMO structure, one class is entitled to
receive all principal payments and prepayments on the
underlying mortgage loans (and interest on unpaid principal)
until the principal of the class is repaid in full, while the
remaining classes receive only interest; when the first class
is repaid in full, a second class becomes entitled to receive
all principal payments and prepayments on the underlying
mortgage loans until the class is repaid in full, and so
forth.

* A planned amortization class ("PAC") of CMOs is entitled to
receive principal on a stated schedule to the extent that it
is available from the underlying mortgage loans, thus
providing a greater (but not absolute) degree of certainty as
to the schedule upon which principal will be repaid.

* An accrual class of CMOs provides for interest to accrue and
be added to principal (but not be paid currently) until
specified payments have been made on prior classes, at which
time the principal of the accrual class (including the accrued
interest which was added to principal) and interest thereon
begins to be paid from payments on the underlying mortgage
loans.

* As discussed above with respect to pass-through
mortgage-backed securities, an interest-only class of CMOs
entitles the holder to receive all of the interest and none of
the principal on the underlying mortgage loans, while a
principal-only class of CMOs entitles the holder to receive
all of the principal payments and prepayments and none of the
interest on the underlying mortgage loans.

* A floating rate class of CMOs entitles the holder to receive
interest at a rate which changes in the same direction and
magnitude as changes in a specified index rate. An inverse
floating rate class of CMOs 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. Floating rate and inverse
floating rate classes also may be subject to "caps" and
"floors" on adjustments to the interest rates which they bear.

* A subordinated class of CMOs is subordinated in right of
payment to one or more other classes. Such a subordinated
class provides some or all of the credit support for the
classes that are senior to it by absorbing losses on the
underlying mortgage loans before the senior classes absorb any
losses. A subordinated class which is subordinated to one or
more classes but senior to one or more other classes is
sometimes referred to as a "mezzanine" class. A subordinated
class generally carries a lower rating than the classes that
are senior to it, but may still carry an investment grade
rating.

It generally 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, 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

Reserve Portfolio and Balanced Portfolio may invest in types of
asset-backed securities which represent forms of consumer credit such as
automobile and credit card receivables, manufactured (mobile) home loans, home
improvement loans and home equity loans. Asset-backed securities are generally
privately issued and pass through cash flows to investors. Interest and
principal payments depend upon payment of the underlying loans by individuals,
although the securities may be supported by letters of credit or other credit
enhancements. The value of asset-backed

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securities may also depend on the creditworthiness of the servicing agent for
the loan pool, the originator of the loans, or the financial institution
providing the credit enhancement.

Generally, asset-backed securities include many of the risks associated
with mortgage-related securities. In general, however, the collateral supporting
asset-backed securities is of shorter maturity than mortgage loans and is less
likely to experience substantial prepayments. Asset-backed securities involve
certain risks that are not posed by mortgage-backed securities, resulting mainly
from the fact that asset-backed securities do not usually contain the complete
benefit of a security interest in the related collateral. For example, credit
card receivables generally are unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, including the
bankruptcy laws, some of which may reduce the ability to obtain full payment. In
the case of automobile receivables, due to various legal and economic factors,
proceeds for repossessed collateral may not always be sufficient to support
payments on these securities.

ZERO COUPON BONDS

Reserve Portfolio and Balanced Portfolio may invest in zero coupon
bonds. Zero coupon bonds do not make interest payments; instead, they are sold
at a deep discount from their face value and are redeemed at face value when
they mature. Because zero coupon bonds do not pay current income, their prices
can be very volatile when interest rates change. In calculating its dividends, a
Portfolio takes into account as income a portion of the difference between a
zero coupon bond's purchase price and its face value.

A broker-dealer creates a derivative zero by separating the interest
and principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury Receipts) are
examples of derivative zeros.

The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and principal
components of an outstanding U.S. Treasury bond and selling them as individual
securities. Bonds issued by the Resolution Funding Corporation (REFCORP) and the
Financing Corporation (FICO) can also be separated in this fashion. Original
issue zeroes are zero coupon securities originally issued by the U.S.
government, a government agency, or a corporation in zero coupon form.

PAYMENT-IN-KIND BONDS

Reserve Portfolio and Balanced Portfolio may invest in bonds the
interest on which may be paid in other securities rather than cash (PIKs).
Typically, during a specified term prior to the bond's maturity, the issuer of a
PIK may provide for the option or the obligation to make interest payments in
bonds, common stock or other instruments (i.e., "in kind" rather than in cash).
The type of instrument in which interest may or will be paid would be known by
the Portfolio at the time of investment. While PIKs generate income for purposes
of generally accepted accounting standards, they do not generate cash flow and
thus could cause a Portfolio to be forced to liquidate securities at an
inopportune time in order to distribute cash, as required by the Internal
Revenue Code.

LOWER-RATED DEBT SECURITIES

Reserve and Balanced Portfolios may invest in lower-rated debt
securities, although Reserve Portfolio currently does not intend to invest in
such securities. Issuers of high yield securities may be highly leveraged and
may not have available to them more traditional methods of financing. Therefore,
the risks associated with acquiring the securities of such issuers generally are
greater than is the case with higher rated securities. For example, during an
economic downturn or a sustained period of rising interest rates, issuers of
high yield securities may be more likely to experience financial stress,
especially if such issuers are highly leveraged. During such periods, such
issuers may not have sufficient revenues to meet their interest payment
obligations. The issuer's ability to service its debt obligations also may be
adversely affected by specific issuer developments or the issuer's inability to
meet specific projected business forecasts or the unavailability of additional
financing. The risk of loss due to default by the issuer is significantly
greater for the holders of high yield securities because such securities may be
unsecured and may be subordinated to other creditors of the issuer.

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High yield securities frequently have call or redemption features which
would permit an issuer to repurchase the security from a Portfolio. If a call
were exercised by the issuer during a period of declining interest rates, a
Portfolio likely would have to replace such called security with a lower
yielding security, thus decreasing the net investment income to a Portfolio and
dividends to shareholders.

A Portfolio may have difficulty disposing of certain high yield
securities because there may be a thin trading market for such securities. The
secondary trading market for high yield securities is generally not as liquid as
the secondary market for higher rated securities. Reduced secondary market
liquidity may have an adverse impact on market price and a Portfolio's ability
to dispose of particular issues when necessary to meet such Portfolio's
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer.

Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. Factors adversely affecting
the market value of high yield securities are likely to adversely affect a
Portfolio's net asset value. In addition, a Portfolio may incur additional
expenses to the extent it is required to seek recovery upon a default on a
portfolio holding or participate in the restructuring of the obligation.

ILLIQUID SECURITIES

Each Portfolio may also invest up to 15% of its net assets in
securities that are considered illiquid because of the absence of a readily
available market or due to legal or contractual restrictions. However, certain
restricted securities that are not registered for sale to the general public but
that can be resold to institutional investors may be considered liquid pursuant
to guidelines adopted by the Board of Directors. In the case of a Rule 144A
Security, such security is deemed to be liquid if:

(1) IAI reasonably expects to be able to resell the security to a
qualified institutional buyer, as defined in paragraph (a)(1) of Rule 144A, who
is aware of the Portfolio's reliance upon Rule 144A in selling the security
without registration, as required by paragraph (d)(2) of Rule 144A;

(2) the Rule 144A Security is not (a) of the same class as securities
listed on any national securities exchange or quoted in NASDAQ as determined
under paragraph (d)(3)(i) of Rule 144A, or (b) a security of a registered
investment company (other than a closed-end investment company); and

(3) the issuer (a) is a foreign government eligible to register
securities under Schedule B of the Securities Act of 1933, (b) is a company that
files periodic reports under the Securities Act of 1934 on Forms 8-K, 10-Q, 10-K
or 20-F or provides information under Rule 12g3-2(b) thereunder, or (c) has
agreed in writing to provide the holder and any prospective purchaser of the
Rule 144A Security with reasonably current financial information as required
under paragraph (d)(4)(i) of Rule 144A.

Other securities are deemed to be liquid if IAI determines that the
security can be disposed of within seven days in the ordinary course of business
at approximately the amount at which the Portfolios have valued the instrument
for purposes of calculating a Portfolio's net asset value. In making this
determination, IAI will consider such factors as may be relevant to a
Portfolio's ability to dispose of the security, including but not limited to,
the following factors (none of which, standing alone, would necessarily be
determinative):

1. the frequency of trades and quotes for the security;

2. the number of dealers willing to purchase or sell the security and
the number of potential purchasers;

3. dealer undertakings to make a market in the security; and

4. the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of transfer).

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It is not possible to predict with assurance the maintenance of an
institutional trading market for such securities and the liquidity of a
Portfolio's investments could be impaired if trading declines.

SWAP AGREEMENTS

Regional and Balanced Portfolios may engage in swap agreements,
although Regional Portfolio currently does not intend to do so. Swap agreements
can be individually negotiated and structured to include exposure to a variety
of different types of investments or market factors. Depending on their
structure, swap agreements may increase or decrease a Portfolio's exposure to
long- or short-term interest rates (in the U.S. or abroad), foreign currency
values, mortgage securities, corporate borrowing rates, or other factors such as
security prices or inflation rates. Swap agreements can take many different
forms and are known by a variety of names. Each Portfolio is not limited to any
particular form of swap agreement if IAI determines it is consistent with such
Portfolio's investment objectives and policies.

Swap agreements will tend to shift a Portfolio's investment exposure
from one type of investment to another. For example, if a Portfolio agrees to
exchange payments in dollars for payments in foreign currency, the swap
agreement would tend to decrease such Portfolio's exposure to U.S. interest
rates and increase its exposure to foreign currency and interest rates.
Depending on how they are used, swap agreements may increase or decrease the
overall volatility of a Portfolio's investments and its share price.

The most significant factor in the performance of swap agreements is
the change in the specific interest rate, currency, or other factors that
determine the amounts of payments due to and from a Portfolio. If a swap
agreement calls for payments by a Portfolio, such Portfolio must be prepared to
make such payments when due. In addition, if the counterparty's creditworthiness
declined, the value of a swap agreement would be likely to decline, potentially
resulting in losses. Each Portfolio expects to be able to eliminate its exposure
under swap agreements either by assignment or other disposition, or by entering
into an offsetting swap agreement with the same party or a similarly
creditworthy party.

Each Portfolio will maintain appropriate liquid assets in a segregated
custodial account to cover its current obligations under swap agreements. If a
Portfolio enters into a swap agreement on a net basis, it will segregate assets
with a daily value at least equal to the excess, if any, of such Portfolio's
accrued obligations under the swap agreement over the accrued amount the
Portfolio is entitled to receive under the agreement. If a Portfolio enters into
a swap agreement on other than a net basis, it will segregate assets with a
value equal to the full amount of a Portfolio's accrued obligations under the
agreement.

INDEXED SECURITIES

Each Portfolio may purchase securities whose prices are indexed to the
prices of other securities, securities indexes, currencies, precious metals or
other commodities, or other financial indicators. However, Regional Portfolio
and Reserve Portfolio currently have no intention of doing so. Indexed
securities typically, but not always, are debt securities or deposits whose
value at maturity or coupon rate is determined by reference to a specific
instrument or statistic. Gold-indexed securities, for example, typically provide
for a maturity value that depends on the price of gold, resulting in a security
whose price tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign-denominated instrument, or their maturity
value may decline when foreign currencies increase, resulting in a security
whose price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.

The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies. IAI will use its judgment in determining

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whether indexed securities should be treated as short-term instruments, bonds,
stocks, or as a separate asset class for purposes of each Portfolio's investment
policies, depending on the individual characteristics of the securities. Indexed
securities may be more volatile than the underlying instruments.

FOREIGN CURRENCY TRANSACTIONS

Each Portfolio has the may enter into foreign currency transactions as
described in this section. However, Regional Portfolio and Reserve Portfolio
currently have no intention of doing so.

Each Portfolio may hold foreign currency deposits from time to time and
may convert dollars and foreign currencies in the foreign exchange markets.
Currency conversion involves dealer spreads and other costs, although
commissions usually are not charged. Currencies may be exchanged on a spot
(i.e., cash) basis, or by entering into forward contracts to purchase or sell
foreign currencies at a future date and price. Forward contracts generally are
traded in an interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. The parties to a forward
contract may agree to offset or terminate the contract before its maturity, or
may hold the contract to maturity and complete the contemplated currency
exchange.

Each Portfolio may use currency forward contracts to manage currency
risks and to facilitate transactions in foreign securities. The following
discussion summarizes the principal currency management strategies involving
forward contracts that could be used by the Portfolios.

In connection with purchases and sales of securities denominated in
foreign currencies, the Portfolios may enter into currency forward contracts to
fix a definite price for the purchase or sale in advance of the trade's
settlement date. This technique is sometimes referred to as a "settlement hedge"
or "transaction hedge." IAI expects to enter into settlement hedges in the
normal course of managing a Portfolio's foreign investments. The Portfolios
could also enter into forward contracts to purchase or sell a foreign currency
in anticipation of future purchases or sales of securities denominated in
foreign currency, even if the specific investments have not yet been selected by
IAI.

Each Portfolio may also use forward contracts to hedge against a
decline in the value of existing investments denominated in foreign currency.
For example, if a Portfolio owned securities denominated in pounds sterling, it
could enter into a forward contract to sell pounds sterling in return for U.S.
dollars to hedge against possible declines in the pound's value. Such a hedge,
sometimes referred to as a "position hedge," would tend to offset both positive
and negative currency fluctuations but would not offset changes in security
values caused by other factors. A Portfolio could also hedge the position by
selling another currency expected to perform similarly to the pound sterling --
for example, by entering into a forward contract to sell Deutschmarks or
European Currency Units in return for U.S. dollars. This type of hedge,
sometimes referred to as a "proxy hedge," could offer advantages in terms of
cost, yield, or efficiency, but generally would not hedge currency exposure as
effectively as a simple hedge into U.S. dollars. Proxy hedges may result in
losses if the currency used to hedge does not perform similarly to the currency
in which the hedged securities are denominated.

Under certain conditions, SEC guidelines require mutual funds to set
aside appropriate liquid assets in a segregated custodial account to cover
currency forward contracts. As required by SEC guidelines, the Portfolios will
segregate assets to cover currency forward contracts, if any, whose purpose is
essentially speculative. The Portfolios will not segregate assets to cover
forward contracts entered into for hedging purposes, including settlement
hedges, position hedges, and proxy hedges.

Successful use of forward currency contracts will depend on IAI's skill
in analyzing and predicting currency values. Forward contracts may substantially
change a Portfolio's investment exposure to changes in currency exchange rates,
and could result in losses to the Portfolio if currencies do not perform as IAI
anticipates. For example, if a currency's value rose at a time when IAI had
hedged a Portfolio by selling that currency in exchange for dollars, the
Portfolio would be unable to participate in the currency's appreciation. If IAI
hedges currency exposure through proxy hedges, a Portfolio could realize
currency losses from the hedge and the security position at the same time if the
two currencies do not move in tandem. Similarly, if IAI increases a Portfolio's
exposure to a foreign currency, and that currency's value declines, the
Portfolio will realize a loss. There is no assurance that IAI's use of forward
currency

-11-

<PAGE>

contracts will be advantageous to a Portfolio or that it will hedge at an
appropriate time. The policies described in this section are non-fundamental
policies of the Portfolios.

LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS

Each Portfolio may enter into futures contracts and options on futures
contracts. However, Regional Portfolio and Reserve Portfolio currently have no
intention of doing so. A Portfolio will file a notice of eligibility for
exclusion from the definition of the term "commodity pool operator" with the
Commodity Futures Trading Commission (CFTC) and the National Futures
Association, which regulate trading in the futures markets, before engaging in
any purchases or sales of futures contracts or options on futures contracts. The
Portfolios intends to comply with Section 4.5 of the regulations under the
Commodity Exchange Act, which limits the extent to which the Portfolios can
commit assets to initial margin deposits and option premiums.

The above limitations on the Portfolios' investments in futures
contracts and options, and the Portfolios' policies regarding futures contracts
and options discussed elsewhere in this Statement of Additional Information may
be changed as regulatory agencies permit. With respect to positions in commodity
futures or commodity option contracts which do not come within the meaning and
intent of bona fide hedging in the CFTC rules, the aggregate initial margin and
premiums required to establish such positions will not exceed five percent of
the liquidation value of a Portfolio, after taking into account unrealized
profits and unrealized losses on any such contracts it has entered into; and,
provided further, that in the case of an option that is in-the-money, such
amount may be excluded in computing such five percent.

FUTURES CONTRACTS

When a Portfolio purchases a futures contract, it agrees to purchase a
specified underlying instrument at a specified future date. When a Portfolio
sells a futures contract, it agrees to sell the underlying instrument at a
specified future date. The price at which the purchase and sale will take place
is fixed when the Portfolio enters into the contract. Some currently available
futures contracts are based on specific securities, such as U.S. Treasury bonds
or notes, and some are based on indexes of securities prices, such as the
Standard & Poor's 500 Composite Stock Price Index (S&P 500). Futures can be held
until their delivery dates, or can be closed out before then if a liquid
secondary market is available.

The value of a futures contract tends to increase and decrease in
tandem with the value of its underlying instrument. Therefore, purchasing
futures contracts will tend to increase a Portfolio's exposure to positive and
negative price fluctuations in the underlying instrument, much as if it had
purchased the underlying instrument directly. When a Portfolio sells a futures
contract, by contrast, the value of its futures position will tend to move in a
direction contrary to the market. Selling futures contracts, therefore, will
tend to offset both positive and negative market price changes, much as if the
underlying instrument had been sold.

FUTURES MARGIN PAYMENTS

The purchaser or seller of a futures contract is not required to
deliver or pay for the underlying instrument unless the contract is held until
the delivery date. However, both the purchaser and seller are required to
deposit "initial margin" with a futures broker, known as a futures commission
merchant (FCM), when the contract is entered into. Initial margin deposits are
typically equal to a percentage of the contract's value. If the value of either
party's position declines, that party will be required to make additional
"variation margin" payments to settle the change in value on a daily basis. The
party that has a gain may be entitled to receive all or a portion of this
amount. Initial and variation margin payments do not constitute purchasing
securities on margin for purposes of a Portfolio's investment limitations. In
the event of the bankruptcy of an FCM that holds margin on behalf of a
Portfolio, the Portfolio may be entitled to return of margin owed to it only in
proportion to the amount received by the FCM's other customers, potentially
resulting in losses to the Portfolio.

-12-

<PAGE>

PURCHASING PUT AND CALL OPTIONS

Each Portfolio may purchase put and call options. However, Regional
Portfolio and Reserve Portfolio currently have no intention of doing so. By
purchasing a put option, a Portfolio obtains the right (but not the obligation)
to sell the option's underlying instrument at a fixed strike price. In return
for this right, the Portfolio pays the current market price for the option
(known as the option premium). Options have various types of underlying
instruments, including specific securities, indexes of securities prices, and
futures contracts. A Portfolio may terminate its position in a put option it has
purchased by allowing it to expire or by exercising the option. If the option is
allowed to expire, the Portfolio will lose the entire premium it paid. If a
Portfolio exercises the option, it completes the sale of the underlying
instrument at the strike price. A Portfolio may also terminate a put option
position by closing it out in the secondary market at its current price, if a
liquid secondary market exists.

The buyer of a typical put option can expect to realize a gain if
security prices fall substantially. However, if the underlying instrument's
price does not fall enough to offset the cost of purchasing the option, a put
buyer can expect to suffer a loss (limited to the amount of the premium paid,
plus related transaction costs).

The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price. A call buyer typically attempts to participate in potential price
increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to suffer
a loss if security prices do not rise sufficiently to offset the cost of the
option.

WRITING PUT AND CALL OPTIONS

Each Portfolio may write (i.e., sell) put and call options. However,
Reserve Portfolio currently has no intention of doing so. When a Portfolio
writes a put option, it takes the opposite side of the transaction from the
option's purchaser. In return for receipt of the premium, a Portfolio assumes
the obligation to pay the strike price for the option's underlying instrument if
the other party to the option chooses to exercise it. When writing an option on
a futures contract a Portfolio would be required to make margin payments to an
FCM as described above for futures contracts. A Portfolio may seek to terminate
its position in a put option it writes before exercise by closing out the option
in the secondary market at its current price. If the secondary market is not
liquid for a put option a Portfolio has written, however, such Portfolio must
continue to be prepared to pay the strike price while the option is outstanding,
regardless of price changes, and must continue to set aside assets to cover its
position. If security prices rise, a put writer would generally expect to
profit, although its gain would be limited to the amount of the premium it
received.

If security prices remain the same over time, it is likely that the
writer will also profit, because it should be able to close out the option at a
lower price. If security prices fall, the put writer would expect to suffer a
loss. This loss should be less than the loss from purchasing the underlying
instrument directly, however, because the premium received for writing the
option should mitigate the effects of the decline.

Writing a call option obligates a Portfolio to sell or deliver the
option's underlying instrument, in return for the strike price, upon exercise of
the option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.

COMBINED POSITIONS

Each Portfolio may purchase and write options in combination with each
other, or in combination with futures or forward contracts, to adjust the risk
and return characteristics of the overall position. However, Regional Portfolio
and Reserve Portfolio currently have no intention of doing so. For example, each
Portfolio may purchase a put option and write a call option on the same
underlying instrument, in order to construct a combined position whose risk and
return characteristics are similar to selling a futures contract. Another
possible combined position would involve writing a call option at one strike
price and buying a call option at a lower price, in order to reduce the risk of
the written call

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<PAGE>

option in the event of a substantial price increase. Because combined options
positions involve multiple trades, they result in higher transaction costs and
may be more difficult to open and close out.

CORRELATION OF PRICE CHANGES

Because there are a limited number of types of exchange-traded options
and futures contracts, it is likely that the standardized contracts available
will not match a Portfolio's current or anticipated investments exactly. Each
Portfolio may invest in options and futures contracts based on securities with
different issuers, maturities, or other characteristics from the securities in
which it typically invests, which involves a risk that the options or futures
position will not track the performance of such Portfolio's other investments.

Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match a Portfolio's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price fluctuation
limits or trading halts. Each Portfolio may purchase or sell options and futures
contracts with a greater or lesser value than the securities it wishes to hedge
or intends to purchase in order to attempt to compensate for differences in
volatility between the contract and the securities, although this may not be
successful in all cases. If price changes in a Portfolio's options or futures
positions are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not offset by
gains in other investments.

LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS

There is no assurance a liquid secondary market will exist for any
particular options or futures contract at any particular time. Options may have
relatively low trading volume and liquidity if their strike prices are not close
to the underlying instrument's current price. In addition, exchanges may
establish daily price fluctuation limits for options and futures contracts, and
may halt trading if a contract's price moves upward or downward more than the
limit in a given day. On volatile trading days when the price fluctuation limit
is reached or a trading halt is imposed, it may be impossible for a Portfolio to
enter into new positions or close out existing positions. If the secondary
market for a contract is not liquid because of price fluctuation limits or
otherwise, it could prevent prompt liquidation of unfavorable positions, and
potentially could require a Portfolio to continue to hold a position until
delivery or expiration regardless of changes in its value. As a result, a
Portfolio's access to other assets held to cover its options or futures
positions could also be impaired.

OTC OPTIONS

Unlike exchange-traded options, which are standardized with respect to
the underlying instrument, expiration date, contract size, and strike price, the
terms of over-the-counter options (options not traded on exchanges) generally
are established through negotiation with the other party to the option contract.
While this type of arrangement allows a Portfolio greater flexibility to tailor
an option to its needs, OTC options generally involve greater credit risk than
exchange-traded options, which are guaranteed by the clearing organization of
the exchanges where they are traded.

OPTIONS AND FUTURES RELATING TO FOREIGN CURRENCIES

Currency futures contracts are similar to forward currency exchange
contracts, except that they are traded on exchanges (and have margin
requirements) and are standardized as to contract size and delivery date. Most
currency futures contracts call for payment or delivery in U.S. dollars. The
underlying instrument of a currency option may be a foreign currency, which
generally is purchased or delivered in exchange for U.S. dollars, or may be a
futures contract. The purchaser of a currency call obtains the right to purchase
the underlying currency, and the purchaser of a currency put obtains the right
to sell the underlying currency.

The uses and risks of currency options and futures are similar to
options and futures relating to securities or indexes, as discussed above. Each
Portfolio may purchase and sell currency futures and may purchase and write

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<PAGE>

currency options to increase or decrease its exposure to different foreign
currencies. Each Portfolio may also purchase and write currency options in
conjunction with each other or with currency futures or forward contracts.
Because Regional Portfolio and Reserve Portfolio do not currently invest in
foreign securities, however, they do not currently intend to enter into such
transactions. Currency futures and options values can be expected to correlate
with exchange rates, but may not reflect other factors that affect the value of
a Portfolio's investments. A currency hedge, for example, should protect a
Yen-denominated security from a decline in the Yen, but will not protect a
Portfolio against a price decline resulting from deterioration in the issuer's
creditworthiness. Because the value of a Portfolio's foreign-denominated
investments changes in response to many factors other than exchange rates, it
may not be possible to match the amount of currency options and futures to the
value of a Portfolio's investments exactly over time.

ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS

Each Portfolio will comply with guidelines established by the
Securities and Exchange Commission with respect to coverage of options and
futures strategies by mutual funds, and if the guidelines so require will
segregate appropriate liquid assets in the amount prescribed. These assets will
be marked to market daily to assure that asset coverage requirements are met.
Securities held in a segregated account cannot be sold while the futures or
option strategy is outstanding, unless they are replaced with other suitable
assets. As a result, there is a possibility that segregation of a large
percentage of a Portfolio's assets could impede portfolio management or the
Portfolio's ability to meet redemption requests or other current obligations.

INVESTMENT RESTRICTIONS

The investment objectives and certain investment policies and
restrictions of each Portfolio are "fundamental" and may not be changed without
shareholder approval. Shareholder approval consists of the approval of the
lesser of (i) more than 50% of the outstanding voting securities of a Portfolio,
or (ii) 67% or more of the voting securities present at a meeting if the holders
of more than 50% of the outstanding voting securities of a Portfolio are present
or represented by proxy. Limitations 1 through 8 below are deemed fundamental
limitations for each Portfolio. The remaining limitations set forth below serve
as operating policies of each Portfolio and may be changed by the Board of
Directors without shareholder approval.

Each Portfolio may not:

1. Purchase the securities of any issuer if such purchase would cause
the Portfolio to fail to meet the requirements of a "diversified company" as
defined under the Investment Company Act of 1940, as amended (the "1940 Act").

As currently defined in the 1940 Act, "diversified company" means a
management company which meets the following requirements: at least 75% of the
value of its total assets is represented by cash and cash items (including
receivables), government securities, securities of other investment companies
and other securities for the purposes of this calculation limited in respect to
any one issuer to an amount not greater in value than 5% of the value of the
total assets of such management company and not more than 10% of the outstanding
voting securities of such issuer.

2. Purchase the securities of any issuer (other than "Government
securities" as defined under the 1940 Act) if, as a result, more than 25% of the
value of the Portfolio's total assets would be invested in the securities of
companies whose principal business activities are in the same industry.

For purposes of applying this restriction, each Portfolio will not
purchase securities, as defined above, such that 25% or more of the value of the
Portfolio's total assets are invested in the securities of companies whose
principal business activities are in the same industry.

3. Issue any senior securities, except as permitted by the 1940 Act or
the Rules and Regulations of the Securities and Exchange Commission.

4. Borrow money, except from banks for temporary or emergency purposes
provided that such borrowings may not exceed 33-1/3% of the value of a
Portfolio's net assets (including the amount borrowed). Any borrowings that

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<PAGE>

come to exceed this amount will be reduced within three days (not including
Sundays and holidays) to the extent necessary to comply with the 33-1/3%
limitation. This limitation shall not prohibit the Fund from engaging in reverse
repurchase agreements, making deposits of assets to margin or guarantee
positions in futures, options, swaps or forward contracts, or segregating assets
in connection with such agreements or contracts.

To the extent a Portfolio engages in reverse repurchase agreements,
because such transactions are considered borrowing, reverse repurchase
agreements are included in the 33-1/3% limitation.

5. Act as an underwriter of securities of other issuers, except to the
extent that in connection with the disposition of portfolio securities the
Portfolio may be deemed to be an underwriter under applicable laws.

6. Purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments. This restriction shall not prevent
the Portfolio from investing in securities or other instruments backed by real
estate or securities of companies engaged in the real estate business.

7. Purchase or sell commodities other than foreign currencies unless
acquired as a result of ownership of securities. This limitation shall not
prevent the Portfolio from purchasing or selling options, futures, swaps and
forward contracts or from investing in securities or other instruments backed by
commodities.

For purposes of applying this restriction, "commodities" shall be
deemed to include commodity contracts.

8. Make loans to other persons except to the extent not inconsistent
with the 1940 Act or the Rules and Regulations of the Securities and Exchange
Commission. This limitation does not apply to purchases of commercial paper,
debt securities or repurchase agreements, or to the lending of portfolio
securities.

9. Purchase securities on margin, except that the Portfolio may obtain
such short-term credits as may be necessary for the clearance of purchases or
sales of securities and provided that margin payments in connection with
transactions in options, futures, swaps and forward contracts shall not be
deemed to constitute purchasing securities on margin.

10. Sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, and
provided that transactions in options, swaps and forward futures contracts are
not deemed to constitute selling securities short.

For purposes of applying this restriction, each Portfolio will not sell
securities short except to the extent that it contemporaneously owns or has the
right to obtain at no added cost securities identical to those sold short.

11. Except as part of a merger, consolidation, acquisition, or
reorganization, invest more than 5% of the value of its total assets in the
securities of any one investment company or more than 10% of the value of its
total assets, in the aggregate, in the securities of two or more investment
companies, or acquire more than 3% of the total outstanding voting securities of
any one investment company.

12. Mortgage, pledge or hypothecate its assets except to the extent
necessary to secure permitted borrowings. This limitation does not apply to
reverse repurchase agreements or in the case of assets deposited to margin or
guarantee positions in futures, options, swaps or forward contracts or placed in
a segregated account in connection with such contracts.

13. Participate on a joint or a joint and several basis in any
securities trading account.

14. Invest more than 15% of its net assets in illiquid investments.

15. Invest directly in interests (including partnership interests) in
oil, gas or other mineral exploration or development leases or programs, except
a Portfolio may purchase or sell securities issued by corporations engaging in
oil, gas or other mineral exploration or development business.

-16-

<PAGE>

Any of the investment policies set forth in the Prospectus, or any
restriction set forth above under "Investment Restrictions" which involves a
maximum percentage of securities or assets (other than Restriction 4) shall not
be considered to be violated unless an excess over the percentage occurs
immediately after an acquisition of securities or utilization of assets and
results therefrom.

PORTFOLIO TURNOVER

The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the particular fiscal year by the
monthly average of the value of portfolio securities owned by each Portfolio
during the same fiscal year. "Portfolio securities" for purposes of this
calculation do not include securities with a maturity date of less than twelve
(12) months from the date of investment. A 100% portfolio turnover rate would
occur, for example, if the lesser of the value of purchases or sales of
portfolio securities for a particular year were equal to the average monthly
value of the portfolio securities owned during such year. Each Portfolio's
historical portfolio turnover rates are set forth in the Prospectus section
"Financial Highlights".

INVESTMENT PERFORMANCE

Advertisements and other sales literature may refer to monthly,
quarterly, yearly, cumulative and average annual total returns. Each such
calculation assumes all dividends and capital gain distributions are reinvested
at net asset value on the appropriate reinvestment dates as described in the
Prospectus, and includes all recurring fees, such as investment advisory and
management fees, charged as expenses to all shareholder accounts. Each of
monthly, quarterly and yearly total return is computed in the same manner as
cumulative total return, as set forth below.

Cumulative total return is computed by finding the cumulative rate of
return over the period indicated in the advertisement that would equate the
initial amount invested to the ending redeemable value, according to the
following formula:

CTR = (ERV-P) 100
-----
P

Where: CTR = Cumulative total return;

ERV = ending redeemable value at the end of the period
of a hypothetical $1,000 payment made at the
beginning of such period; and

P = initial payment of $1,000

Average annual total return is computed by finding the average annual
compounded rates of return over the periods indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:

P(1+T)n = ERV

Where: P = a hypothetical initial payment of $1,000;

T = average annual total return;

n = number of years; and

ERV = ending redeemable value at the end of the period
of a hypothetical $1,000 payment made at the
beginning of such period.

Reserve and Balanced Portfolios may quote yield figures from time to
time. The "yield" is computed by dividing the net investment income per share
earned during a 30-day period (using the average number of shares entitled to
receive dividends) by the net asset value per share on the last day of the
period. The yield formula provides for

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<PAGE>

monthly compounding which assumes that net investment income is earned and
reinvested at a constant rate and annualized at the end of a six-month period.

The yield formula is as follows:

YIELD = 2[(a-b) + 1)6 -1]
---
cd

Where: a = dividends and interest earned during the period.

b = expenses accrued for the period (net of
reimbursements).

c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.

d = the net asset value of the Portfolio at the end
of the period.

The table below shows the yearly return for each Portfolio for the
periods ended:

<TABLE>
<CAPTION>
Regional Portfolio Balanced Portfolio Reserve Portfolio
Period Ended 12/31 Total Return Total Return Total Return
- ---------------------- ---------------------- ---------------------- ---------------------
<S> <C> <C> <C>
1994* 6.20% 2.20% 2.25%
1995 33.51% 16.21% 5.09%
1996 11.88% 9.80% 4.93%
1997 13.45% 16.60% 4.62%
1998 % % %
</TABLE>

* For the period commencing January 31, 1994 (Regional), February 3, 1994
(Balanced) and April 7, 1994 (Reserve).

The average annual total return of Regional Portfolio for the year
ended December 31, 1998 and from inception of the Regional Portfolio through
December 31, 1998 was ____% and ____%, respectively.

The average annual total return of Balanced Portfolio for the year
ended December 31, 1998 and from inception of the Balanced Portfolio through
December 31, 1998 was ____% and ____%, respectively. Balanced Portfolio's yield
for the thirty-day period ended December 31, 1998 was ____%.

The average annual total return of Reserve Portfolio for the year ended
December 31, 1998 and from inception of the Reserve Portfolio through December
31, 1998 was ____% and ____%, respectively. Reserve Portfolio's yield for the
thirty-day period ended December 31, 1998 was ____%.

In advertising and sales literature, a Portfolio's performance may be
compared with that of other mutual funds, indexes or averages of other mutual
funds, indexes of related financial assets or data, and other competing
investment and deposit products available from or through other financial
institutions. The composition of these indexes, averages or products differs
from that of a Portfolio. The comparison of a Portfolio to an alternative
investment should be made with consideration of differences in features and
expected performance.

Yields and total returns quoted for a Portfolio include the effect of
deducting the Portfolio's expenses, but may not include charges and expenses
attributable to any particular insurance product. Since shares of the Fund may
only be purchased through a variable annuity contract or variable life insurance
policy, you should carefully review the prospectus of the insurance product you
have chosen for information on relevant charges and expenses. Excluding these

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<PAGE>

charges from quotations of a Portfolio's performance has the effect of
increasing the performance quoted. You should bear in mind the effect of these
charges when comparing a Portfolio's performance to that of other mutual funds.

MANAGEMENT

Under Minnesota law, the Board of Directors of the Fund is generally
responsible for the overall operation and management of the Portfolios.

The names, addresses, positions and principal occupations of the
directors and executive officers of the Portfolios are given below.

<TABLE>
<CAPTION>
Name and Address Age Position Principal Occupation(s) During Past 5 Years
- --------------------------- --- --------- --------------------------------------------
<S> <C> <C> <C>
Madeline Betsch 56 Director Currently retired; until April 1994, was
19 South 1st Street Executive Vice President, Director of Client
Minneapolis, MN 55401 Services, of CME-KHBB Advertising since May
1985, and prior thereto was a Vice President
with Campbell-Mithun, Inc. (advertising
agency) since February 1977.

W. William Hodgson 74 Director Currently retired; served as information
1698 Dodd Road manager for the North Central Home Office of
Mendota Heights, MN 55118 the Prudential Insurance Company of America
from 1961 until 1984.

George R. Long 68 Director Chairman of Mayfield Corp. (financial
29 Las Brisas Way consultants and venture capitalists) since
Naples, FL 33963 1973.

J. Peter Thompson 67 Director Grain farmer in southwestern Minnesota since
Route 1 1974. Prior to that, Mr. Thompson was
Mountain Lake, MN 56159 employed by Paine Webber, Jackson & Curtis,
Incorporated, (a diversified financial
services concern), most recently as Senior
Vice President and General Partner.

Charles H. Withers 72 Director Currently retired; was Editor of the
Rochester Post Bulletin Rochester Post-Bulletin, Rochester, Minnesota
P.O. Box 6118 from 1960 through March 31, 1980.
Rochester, MN 55903

John A. Alexander 42 President Chief Operating Officer of IAI since 1998
601 Second Avenue South Prior to that time, Mr. Alexander served in
P.O Box 357 various senior management capacities with
Minneapolis, MN 55440 Lloyds Bank plc since 1984.

David Koehler 61 Vice Independent training and marketing consultant
601 Second Avenue South President since 1993. Prior to that time, Mr. Koehler
P.O. Box 357 was a partner at IAI Venture Capital Group.
Minneapolis, MN 55440

Paul H. Perseke 33 Treasurer Vice President of IAI. Prior to joining IAI
601 Second Avenue South in 1996, Mr. Perseke served as Vice President
P.O. Box 357 and Manager of Finance and Planning at Dain
Minneapolis, MN 55440 Rauscher Corporation from 1991 to 1996.
</TABLE>

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<PAGE>

<TABLE>
<S> <C> <C> <C>
Michael J. Radmer 53 Secretary Partner of Dorsey & Whitney LLP, a Minnesota
220 South Sixth Street based law firm which acts as General Counsel
Minneapolis, MN 55402 to the Portfolios.
</TABLE>

Each of the directors and executive officers of the Portfolios, other
than Mr. Koehler, also serves in the same capacity for each of the other 12
mutual funds for which IAI serves as investment adviser (together with the
Portfolios, the "IAI Mutual Funds").

No compensation is paid by the Portfolios to any of their officers.
Directors who are not affiliated with IAI receive from the IAI Mutual Funds a
$15,000 annual retainer, $2,500 for each Board meeting attended, $3,600 for each
Audit Committee meeting attended (as applicable) and $1,800 for each Securities
Valuation Committee meeting attended. Each Portfolio will pay its pro rata share
of these fees based on its net assets. Such unaffiliated directors also are
reimbursed for expenses incurred in connection with attending meetings.

<TABLE>
<CAPTION>
Compensation From Aggregate
----------------------------------------------------------- Compensation From
Name of Person, Position Regional Portfolio Balanced Portfolio Reserve Portfolio 15 IAI Mutual Funds*
- ---------------------------- ------------------ ------------------ ----------------- --------------------
<S> <C> <C> <C> <C>
Betsch, Madeline -- Director $ $ $ $26,250

Hodgson, W. William -- $ $ $ $37,200
Director

Long, George R. -- Director $ $ $ $37,200

Thompson, J. Peter -- $ $ $ $37,200
Director

Withers, Charles H. -- $ $ $ $37,200
Director
Total $ $ $ $175,050
</TABLE>

- ------------------
* For the calendar year ended December 31, 1998; excludes expenses incurred in
connection with attending meetings.

Effective February 1998, the directors have agreed that the position of
Board Chair shall rotate from director to director on a quarterly basis.

The Board of Directors has approved a Code of Ethics. The Code permits
access persons to engage in personal securities transactions subject to certain
policies and procedures. Such procedures prohibit the acquiring of any
securities in an initial public offering. In addition, all securities acquired
through private placement must be pre-cleared. Procedures have been adopted
which would implement blackout periods for certain securities, as well as a ban
on short-term trading profits. Additional policies prohibit the receipt of gifts
in certain instances. Procedures have been implemented to monitor employee
trading. Each access person of the Adviser is required to certify annually that
they have read and understood the Code of Ethics. An annual report is provided
to the Fund's Board of Directors summarizing existing procedures and changes,
identifying material violations and recommending any changes needed.

INVESTMENT ADVISORY AGREEMENT

Pursuant to an Investment Advisory Agreement between the Fund and IAI
(the "Advisory Agreement") dated November 3, 1993, IAI has agreed to provide
each Portfolio with investment advice, statistical and research facilities, and
certain equipment and services, including, but not limited to, office space and
necessary office facilities, equipment, and the services of required personnel.
In return, each Portfolio pays IAI a monthly fee. Under the Advisory Agreement,
IAI has the sole authority and responsibility to make and execute investment
decisions for the Portfolios within the framework of each Portfolio's investment
policies, subject to review by the directors of the Fund.

-20-

<PAGE>

Regional Portfolio, Balanced Portfolio and Reserve Portfolio have
agreed to pay advisory fees equal to an annual rate of .65%, .65% and .45%,
respectively, of a Portfolio's average daily net assets. Pursuant to the
Advisory Agreement, during the past three fiscal years the Portfolios have paid
IAI advisory fees, net of waivers, as follows:

<TABLE>
<CAPTION>
Regional Balanced Reserve
Portfolio Portfolio Portfolio
------------- ------------- -------------
<S> <C> <C> <C>
Fiscal Year Ended December 31, 1996 $ 51,843 $ 0 $ 0

Fiscal Year Ended December 31, 1997 $ 95,467 $ 10,836 $ 0

Fiscal Year Ended December 31, 1998 $ $ $
</TABLE>

IAI's ultimate corporate parent is Lloyds TSB Group, plc ("Lloyds
TSB"), a publicly-held financial services organization headquartered in London,
England. Lloyds TSB is one of the largest personal and corporate financial
services groups in the United Kingdom, engaged in a wide range of activities
including commercial and retail banking. The principal offices of Lloyds TSB are
located at St. George's House, 6/8 Eastcheap, London, EC3M 1LL.

ADMINISTRATIVE AGREEMENT

The Fund has engaged IAI to serve as the Portfolios' administrative,
dividend disbursing, redemption, accounting services and transfer agent pursuant
to an Administrative Agreement. Under the Administrative Agreement, IAI has
agreed to provide to the Portfolios all required administrative, stock transfer,
redemption, dividend disbursing and accounting services including, without
limitation, the following: (1) the maintenance of the Portfolios' accounts,
books and records; (2) the calculations of the daily net asset value in
accordance with the Portfolios' current Prospectus and Statement of Additional
Information; (3) daily and periodic reports; (4) all information necessary to
complete tax returns, questionnaires and other reports requested by the
Portfolios; (5) the maintenance of stock registry records; (6) the processing of
requested account registration changes, stock certificate issuances and
redemption requests; and (7) the administration of payments of dividends and
distributions declared by each Portfolio. As compensation for these services,
each Portfolio has agreed to pay IAI a fee equal to an annual rate of .10% of
such Portfolio's average daily net assets. Pursuant to the Administrative
Agreement, the Portfolios have paid the following administrative fees to IAI
(net of waivers) during the past three fiscal years:

<TABLE>
<CAPTION>
Regional Balanced Reserve
Portfolio Portfolio Portfolio
------------- ------------- -------------
<S> <C> <C> <C>
Fiscal Year Ended December 31, 1996 $ $ $

Fiscal Year Ended December 31, 1997 $ 14,687 $ 1,937 $ 0

Fiscal Year Ended December 31, 1998 $ $ $
</TABLE>

ALLOCATION OF EXPENSES

In addition to the advisory and administrative fees paid to IAI, each
Portfolio pays all its other costs and expenses, including, for example, costs
incurred in the purchase and sale of assets, interest, taxes, charges of the
custodian of the Portfolio's assets, costs of reports and proxy material sent to
Portfolio shareholders, fees paid for independent accounting and legal services,
costs of printing Prospectuses for Portfolio shareholders and registering the
Portfolios' shares, postage, fees to directors who are not "interested persons"
of each Portfolio, insurance premiums, costs of attending investment conferences
and such other costs which may be designated as extraordinary. IAI, in its
discretion, may from time to time waive or reduce its management and/or
administrative fee or otherwise reimburse Portfolio operating expenses. IAI has
voluntarily agreed to waive fees and expenses for Balanced and Reserve
Portfolios in excess of 1.25% and 0.85%, respectively, of average daily net
assets through May 1, 1999. IAI is not liable for any loss suffered by a
Portfolio in the absence of willful misfeasance, bad faith or gross negligence
in the

-21-

<PAGE>

performance of its duties and obligations. For the fiscal year ended December
31, 1998, IAI voluntarily reimbursed total Portfolio operating expenses (net of
expenses paid indirectly) which exceeded 1.25% and .85% of the average daily net
assets of Balanced and Reserve Portfolios, respectively.

DURATION OF AGREEMENTS

The Advisory Agreement and the Administrative Agreement will terminate
automatically in the event of their assignment. In addition, each Agreement is
terminable at any time with respect to a Portfolio without penalty by the Board
of Directors of the Fund or by vote of a majority of the Portfolio's outstanding
voting securities on not more than 60 days' written notice to IAI, and by IAI on
60 days' notice to the Fund. Each Agreement shall continue in effect from year
to year only so long as such continuance is specifically approved at least
annually by either the Board of Directors of the Fund or by vote of a majority
of the outstanding voting securities of the affected Portfolio, provided that in
either event such continuance is also approved by the vote of a majority of
directors who are not parties to the Agreement or interested persons of such
parties cast in person at a meeting called for the purpose of voting on such
approval.

CUSTODIAN

The custodian for the Fund is Norwest Bank Minnesota, N.A. Norwest
Center, Sixth and Marquette, Minneapolis, MN 55479. The Custodian maintains
records of all cash transactions of the Portfolios. All other books and records
of the Portfolios, including books and records of the Portfolio's investment
portfolios, are maintained by IAI.

LEGAL COUNSEL

Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis, Minnesota 55402, act
as General Counsel to the Portfolios.

PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE

Fixed income and non-listed equity transactions of the Portfolios are
generally effected with dealers without the payment of brokerage commissions but
at a net price which usually includes a spread or markup. In effecting such
portfolio transactions on behalf of the Portfolios, IAI seeks the most favorable
net price consistent with the best execution. However, frequently IAI selects a
dealer to effect a particular transaction without contacting all dealers who
might be able to effect such transaction because of the volatility of the market
and the desire of IAI to accept a particular price for a security because the
price offered by the dealer meets its guidelines for profit, yield or both.

So long as IAI believes that it is obtaining the best net price
(including the spread or markup) consistent with the best execution, as
described above, it gives consideration in placing portfolio transactions to
dealers furnishing research, statistical information, or other services to IAI.
This allows IAI to supplement its own investment research activities and enables
IAI to obtain the views and information of individuals and research staffs of
many different securities firms prior to making investment decisions for the
Portfolios. To the extent portfolio transactions are effected with dealers who
furnish research services to it, IAI receives a benefit which is not capable of
evaluation in dollar amounts.

Generally, Regional Portfolio and Balanced Portfolio must deal with
brokers. IAI selects and (where applicable) negotiates commissions with the
brokers who execute the transactions for each Portfolio. The primary criteria
for the selection of a broker is the ability of the broker, in the opinion of
IAI, to secure prompt execution of the transactions on favorable terms,
including the reasonableness of the commission and considering the state of the
market at the time. In selecting a broker, IAI may consider whether such broker
provides brokerage and research services (as defined in the Securities Exchange
Act of 1934). IAI may direct Portfolio transactions to brokers who furnish
research services to IAI. Such research services include advice, both directly
and in writing, as to the value of securities, the advisability of investing in,
purchasing or selling securities, and the availability of securities or
purchasers or sellers of securities, as well as analyses and reports concerning
issues, industries, securities, economic factors and trends, portfolio strategy,
and the performance of accounts. By allocating brokerage business in order to
obtain research services for IAI, each Portfolio enables IAI to supplement its
own investment research activities and allows IAI to obtain the views and

-22-

<PAGE>

information of individuals and research staffs of many different securities
research firms prior to making investment decisions for each Portfolio. To the
extent such commissions are directed to brokers who furnish research services to
IAI, IAI receives a benefit, not capable of evaluation in dollar amounts,
without providing any direct monetary benefit to the Portfolios. IAI believes
that most research services obtained by it generally benefit one or more of the
mutual funds or other accounts which it manages. Research services obtained from
transactions in fixed income securities would primarily benefit the funds and
accounts investing in fixed income securities. Similarly, research services
obtained from the transactions in equity securities would primarily benefit the
funds and accounts investing in equity securities. Generally, the Portfolios pay
higher than the lowest commission rates available.

Although investment decisions for each Portfolio are made independently
from those of the other Portfolios, funds and accounts as to which IAI gives
investment advice, it may occasionally develop that the same security is
suitable for more than one Portfolio, fund and/or other account. If and when
more than one Portfolio, fund or other account simultaneously purchase or sell
the same security, the transactions will be averaged as to price and allocated
as to amount in accordance with arrangements equitable to such Portfolios, funds
and accounts. The simultaneous purchase or sale of the same securities by more
than one Portfolio or by any Portfolio and other accounts may have detrimental
effects on each Portfolio, as they may affect the price paid or received by a
Portfolio or the size of the position obtainable by a Portfolio.

Consistent with the Rules of Conduct of the National Association of
Securities Dealers, Inc. and subject to the policies set forth in the preceding
paragraphs and such other policies as the Board of Directors of the Fund may
determine, IAI may consider sales of shares of each Portfolio, or any IAI Mutual
Fund, as a factor in the selection of broker-dealers to execute the Portfolios'
securities transactions.

The following table sets forth brokerage commissions paid by Regional
and Balanced Portfolios for the indicated fiscal years ended December 31. The
table also sets forth the amount and percentage of commissions paid during the
Portfolios' last fiscal year to brokerage firms that provided research services
to IAI. The provision of such services was not necessarily a factor in the
placement of all such business with such firms.

<TABLE>
<CAPTION>
Amount of Percentage of
Commissions to Commissions to
Brokers Providing Brokers Providing
Amount of Commissions Research Research
--------------------------------------------------- ------------------- -------------------
Portfolio 1998 1997 1996 1998 1998
- ----------- -------------- -------------- ------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
Regional $ $ 64,860 $ 36,268 $ %

Balanced $ $ 1,471 $ 2,188 $ %
</TABLE>

CAPITAL STOCK

Each Portfolio is a separate portfolio of IAI Retirement Funds, Inc., a
corporation organized on September 28, 1993, pursuant to the laws of the State
of Minnesota whose shares of common stock are currently issued in three series
(Series A, B and C). Each share of a series is entitled to participate pro rata
in any dividends and other distributions of such series and all shares of a
series have equal rights in the event of liquidation of that series. The Board
of Directors of IAI Retirement Funds, Inc. is empowered under the Articles of
Incorporation of such company to issue other series of the company's common
stock without shareholder approval. IAI Retirement Funds, Inc. has authorized
10,000,000,000 shares of $.01 par value common stock to be issued as Series A
common shares, 10,000,000,000 shares of $.01 par value common stock to be issued
as Series B common shares, and 10,000,000,000 shares of $.01 par value common
stock to be issued as Series C common shares. The investment portfolio
represented by Series A common shares is referred to as IAI Regional Portfolio,
by Series B common shares as IAI Balanced Portfolio, and by Series C common
shares as IAI Reserve Portfolio.

-23-

<PAGE>

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of March 31, 1999, no person was a record holder or, to the
knowledge of the Fund, a beneficial owner of more than 5% of the outstanding
shares of a Portfolio, except as set forth in the following tables:

REGIONAL PORTFOLIO

Name and Address Percent of
of Shareholder Number of Shares* Outstanding Shares
---------------- ----------------- ------------------

Lincoln Benefit Life Company
Annuity Products
P.O. Box 82532
Lincoln, Nebraska 68501

Lincoln Benefit Life Company
Life Products
P.O. Box 82532
Lincoln, Nebraska 68501

BALANCED PORTFOLIO

Name and Address Percent of
of Shareholder Number of Shares* Outstanding Shares
---------------- ----------------- ------------------

Lincoln Benefit Life Company
Annuity Products
P.O. Box 82532
Lincoln, Nebraska 68501

Lincoln Benefit Life Company
Life Products
P.O. Box 82532
Lincoln, Nebraska 68501

RESERVE PORTFOLIO

Name and Address Percent of
of Shareholder Number of Shares* Outstanding Shares
---------------- ----------------- ------------------

Lincoln Benefit Life Company
Annuity Products
P.O. Box 82532
Lincoln, Nebraska 68501

Lincoln Benefit Life Company
Life Products
P.O. Box 82532
Lincoln, Nebraska 68501

- -------------------------------
* All shares are owned both of record and beneficially.

In addition, as of March 31, 1999, none of Regional, Balanced and
Reserve Portfolios' officers and directors owned any of the outstanding shares
of the Portfolios.

-24-

<PAGE>

Due to its ownership of more than 25% of the outstanding shares of each
of the Portfolios through its Life and Annuity Products, Lincoln Benefit Life
Company may be said to control each of such Portfolios. Lincoln Benefit Life
Company is an insurance company organized under the laws of Nebraska. Lincoln
Benefit Life Company is a wholly-owned subsidiary of Allstate Life Insurance
Company, which in turn is wholly-owned by Allstate Insurance Company. Allstate
Insurance Company is a wholly-owned subsidiary of The Allstate Corporation.

NET ASSET VALUE AND PUBLIC OFFERING PRICE

The portfolio securities in which the Portfolios invest fluctuate in
value, and hence, for each Portfolio, the net asset value per share also
fluctuates.

The net asset value per share of each Portfolio is determined once
daily as of the close of trading on the New York Stock Exchange on each business
day on which the New York Stock Exchange is open for trading, and may be
determined on additional days as required by the rules of the Securities and
Exchange Commission. The New York Stock Exchange is closed, and the net asset
values per share of each are not determined, on the following national holidays:
New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.

On December 31, 1998, the net asset value and public offering price per
share of each Portfolio was calculated as follows:

REGIONAL PORTFOLIO

NAV = Net Assets ($ ) = $
-------------------------------
Shares Outstanding ( )

BALANCED PORTFOLIO

NAV = Net Assets ($ ) = $
-------------------------------
Shares Outstanding ( )

RESERVE PORTFOLIO

NAV = Net Assets ($ ) = $
-------------------------------
Shares Outstanding ( )

TAX STATUS

The Board of Directors intends that each of the Portfolios will comply
with the diversification requirements imposed by section 817(h) of the Internal
Revenue Code as a condition to favorable tax treatment of variable annuity and
variable life insurance contracts. Under Internal Revenue Service Regulations,
such requirements are satisfied if, at the end of each calendar quarter: (1) not
more than 55% of the Portfolio's assets are attributable to any one investment;
not more than 70% of such assets are attributable to any two investments; not
more than 80% of such assets are attributable to any three investments; and not
more than 90% of such assets are attributable to any four investments. If a
Portfolio fails to be adequately diversified within the meaning of section
817(h) of the Internal Revenue Code, the variable contracts funded by the
Portfolio could lose their favorable tax status. See the accompanying prospectus
for your separate account for more information.

LIMITATION OF DIRECTOR LIABILITY

Under Minnesota law, the Fund's Board of Directors owes certain
fiduciary duties to the Fund and to its shareholders. Minnesota law provides
that a director "shall discharge the duties of the position of director in good
faith, in a manner the director reasonably believes to be in the best interest
of the corporation, and with the care an ordinarily prudent person in a like
position would exercise under similar circumstances." Fiduciary duties of a
director of a Minnesota corporation include, therefore, both a duty of "loyalty"
(to act in good faith and act in a manner reasonably

-25-

<PAGE>

believed to be in the best interests of the corporation) and a duty of "care"
(to act with the care an ordinarily prudent person in a like position would
exercise under similar circumstances). Minnesota law authorizes corporations to
eliminate or limit the personal liability of a director to the corporation or
its shareholders for monetary damages for breach of the fiduciary duty of
"care." Minnesota law does not, however, permit a corporation to eliminate or
limit the liability of a director (i) for any breach of the director's duty of
"loyalty" to the corporation or its shareholders, (ii) for acts or omissions not
in good faith or that involve intentional misconduct or a knowing violation of
law, (iii) for authorizing a dividend, stock repurchase or redemption or other
distribution in violation of Minnesota law or for violation of certain
provisions of Minnesota securities laws, or (iv) for any transaction from which
the director derived an improper personal benefit. The Articles of Incorporation
of IAI Retirement Funds, Inc., limit the liability of directors to the fullest
extent permitted by Minnesota statutes, except to the extent that such liability
cannot be limited as provided in the Investment Company Act of 1940 (which Act
prohibits any provisions which purport to limit the liability of directors
arising from such directors' willful misfeasance, bad faith, gross negligence,
or reckless disregard of the duties involved in the conduct of their role as
directors).

Minnesota law does not eliminate the duty of "care" imposed upon a
director. It only authorizes a corporation to eliminate monetary liability for
violations of that duty. Minnesota law, further, does not permit elimination or
limitation of liability of "officers" of the corporation for breach of their
duties as officers (including the liability of directors who serve as officers
for breach of their duties as officers.) Minnesota law does not permit
elimination or limitation of the availability of equitable relief, such as
injunctive or recessionary relief. Further, Minnesota law does not permit
elimination or limitation of a director's liability under the Securities Act of
1933 or the Securities Exchange Act of 1934, and it is uncertain whether and to
what extent the elimination of monetary liability would extend to violations of
duties imposed on directors by the Investment Company Act of 1940 and the rules
and regulations adopted under such Act.

SHAREHOLDER MEETINGS

Annual or periodically scheduled regular meetings of shareholders will
not be held except as required by law. Minnesota corporation law does not
require an annual meeting; instead, it provides for the Board of Directors to
convene shareholder meetings when it deems appropriate. In addition, if a
regular meeting of shareholders has not been held during the immediately
preceding fifteen months, shareholders holding three percent or more of the
voting shares of the Fund may demand a regular meeting of shareholders by
written notice of demand given to the Chief Executive Officer or the Chief
Financial Officer of the Fund. Within thirty days after receipt of the demand by
one of those officers, the Board of Directors shall cause a regular meeting of
shareholders to be called and held no later than ninety days after receipt of
the demand, all at the expense of the Fund. An annual meeting will be held on
the removal of a director or directors of the Fund if requested in writing by
holders of not less than 10% of the outstanding shares of the Fund.

FINANCIAL STATEMENTS

The financial statements, included as a part of the Fund's 1998 Annual
Report to shareholders, are incorporated herein by reference. Such Annual Report
may be obtained by shareholders on request from the Fund at no additional
charge.

-26-

<PAGE>

APPENDIX A

RATINGS OF DEBT SECURITIES

RATINGS BY MOODY'S

CORPORATE BONDS

Aaa. Bonds rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.

Aa. Bonds rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.

A. Bonds rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.

Baa. Bonds rated Baa are considered medium grade obligations; i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

Ba. Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate, and thereby
not well safeguarded during other good and bad times over the future.
Uncertainty of position characterizes bonds in this class.

B. Bonds rated B generally lack characteristics of the desirable
investment. Assurances of interest and principal payment or maintenance of other
terms of the contract over any long period of time may be small.

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

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

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

Conditional Ratings. The designation "Con." followed by a rating
indicates bonds for which the security depends upon the completion of some act
or the fulfillment of some condition. These are bonds secured by (a) earnings of
projects under construction, (b) earnings or projects unseasoned in operating
experience, (c) rentals which begin when facilities are completed, or (d)
payments to which some other limiting condition attaches. Parenthetical rating
denotes probable credit stature upon completion of construction or elimination
of basis of condition.

Note: Moody's applies numerical modifiers 1, 2, and 3 in the Aa and A
classifications of its corporate bond rating system. The modifier 1 indicates
that the security ranks in the higher end of its generic rating category; the
modifier

-27-

<PAGE>

2 indicates a mid-range ranking; and the modifier 3 indicates that the issue
ranks in the lower end of its generic rating category. With respect to municipal
securities, those bonds in the Aa, A, Baa, Ba, and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aa1, A1, Baa1, Ba1, and B1.

COMMERCIAL PAPER

Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:

Prime - 1 Superior ability for repayment of senior short-term debt
obligations

Prime - 2 Strong ability for repayment of senior short-term debt
obligations

Prime - 3 Acceptable ability for repayment of senior short-term debt
obligations

If an issuer represents to Moody's that its Commercial Paper
obligations are supported by the credit of another entity or entities, Moody's,
in assigning ratings to such issuers, evaluates the financial strength of the
indicated affiliated corporations, commercial banks, insurance companies,
foreign governments, or other entities, but only as one factor in the total
rating assessment.

-28-

<PAGE>

RATINGS BY S&P

CORPORATE BONDS

AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.

AA. Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.

A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.

BBB. Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.

BB. Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments.

B. Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB-rating.

CCC. Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal.

CC. Debt rated CC is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC debt rating.

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

C1. The rating C1 is reserved for income bonds on which no interest
is being paid.

D. Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. The D rating will be used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.

In order to provide more detailed indications of credit quality,
S&P's bond letter ratings described above (except for the AAA category) may be
modified by the addition of a plus or a minus sign to show relative standing
within the rating category.

COMMERCIAL PAPER

A. This highest rating category indicates the greatest capacity for
timely payment. Issues in this category are further defined with the
designations 1, 2, and 3 to indicate the relative degree to safety.

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<PAGE>

A-1. This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are designed A-1+.

A-2. Capacity for timely payments on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designed A-1.

A-3. Issues carrying this designation have adequate capacity for
timely repayment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.

-30-

<PAGE>

PART C
IAI Regional Portfolio,
IAI Balanced Portfolio
and
IAI Reserve Portfolio
series of
IAI Retirement Funds Inc.

OTHER INFORMATION

Item 23. Exhibits

THE FUND IS FILING OR INCORPORATING BY REFERENCE THE FOLLOWING
EXHIBITS:

(a) Articles of Amendment dated 9/16/93 *
(b) Bylaws *
(c) Instruments Defining Rights of Security Holders - not
applicable
(d) Investment Advisory Agreement dated 11/3/93 *
(e) Underwriting Agreement - not applicable
(f) Bonus or Profit Sharing Contracts - not applicable
(g) Custody Agreement dated 11/3/93 *
(h) Other Material Contracts - not applicable
(i) Legal Opinion - not applicable
(j) Consent of KPMG Peat Marwick LLP *
(k) Omitted Financial Statements - not applicable
(l) Initial Capital Agreements - not applicable
(m) Rule 12b-1 Plan - not applicable
(n) Financial Data Schedule - not applicable
(o) Rule 18f-3 Plan - not applicable

- ----------------------
* To be filed by amendment.

Item 24. Persons Controlled by or Under Common Control with the Fund

THE FOLLOWING IS A LIST OF ALL PERSONS DIRECTLY OR INDIRECTLY
CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND:

See the section of the Prospectus entitled "Fund Management" and the
section of the Statement of Additional Information entitled "Management" filed
as part of this Registration Statement.

Item 25. Indemnification

STATE THE GENERAL EFFECT OF ANY CONTRACT, ARRANGEMENTS OR STATUTE UNDER
WHICH ANY DIRECTOR, OFFICER, UNDERWRITER OR AFFILIATED PERSON OF THE FUND IS
INSURED OR INDEMNIFIED AGAINST ANY LIABILITY INCURRED IN THEIR OFFICIAL
CAPACITY, OTHER THAN INSURANCE PROVIDED BY ANY DIRECTOR, OFFICER, AFFILIATED
PERSON, OR UNDERWRITER FOR THEIR OWN PROTECTION.

Incorporated by reference to Post-Effective Amendment to Registrant's
Registration Statement on Form N-1A filed on February 28, 1997.

<PAGE>

Item 26. Business and Other Connections of the Investment Adviser

DESCRIBE ANY OTHER BUSINESS, PROFESSION, VOCATION OR EMPLOYMENT OF A
SUBSTANTIAL NATURE THAT EACH INVESTMENT ADVISER, AND EACH DIRECTOR, OFFICER OR
PARTNER OF THE ADVISER, IS OR HAS BEEN ENGAGED WITHIN THE LAST TWO FISCAL YEARS
FOR HIS OR HER OWN ACCOUNT OR IN THE CAPACITY OF DIRECTOR, OFFICER, EMPLOYEE,
PARTNER OR TRUSTEE.

Information on the business of Investment Advisers, Inc. ("IAI") is
described in the Prospectus section "Management" and in Part B of this
Registration Statement in the section "Management."

The following senior officers and directors of IAI are not listed in
the Statement of Additional Information:

Other Business/Employment
Name Position with Adviser During Past Two Years
- ---- --------------------- ---------------------
Iain D. Cheyne Chairman/Director None
Stephen C. Coleman Senior Vice President None
Larry Ray Hill Executive Vice President None
Kevin McKendry Director None
Peter Phillips Director None
James S. Sorenson Senior Vice President None
John Caravello Director Senior Vice President, Lloyds
Bank, New York, NY since 1980.

Certain of the officers and directors of IAI also serve as officers and
directors of IAI International Ltd. The address of IAI International is 10 Fleet
Place, London, EC4M 7RH, England. Both IAI and IAI International's ultimate
corporate parent is Lloyds TSB Group plc, a publicly-held financial services
organization based in London, England. The senior officers and directors of IAI
International and their titles are as follows:

Name Title
- ---- -----
John A. Alexander Deputy Chief Investment Officer
Iain D. Cheyne Director

Certain of the officers and directors of IAI also serve as officers and
directors of IAI Trust Company, a wholly-owned subsidiary of IAI. The address of
IAI Trust Company is 3600 U.S. Bank Place, Minneapolis, Minnesota 55402. John A.
Alexander is the President and a Director of IAI Trust Company.

Item 27. Principal Underwriters

(a) STATE THE NAME OF EACH INVESTMENT COMPANY (OTHER THAN THE FUND) FOR WHICH
EACH PRINCIPAL UNDERWRITER CURRENTLY DISTRIBUTING THE FUND'S SECURITIES ALSO
ACTS AS A PRINCIPAL UNDERWRITER, DEPOSITOR, OR INVESTMENT ADVISER.

Not applicable.

<PAGE>

(b) PROVIDE THE INFORMATION REQUIRED BY THE FOLLOWING TABLE FOR EACH DIRECTOR,
OFFICER, OR PARTNER OF EACH PRINCIPAL UNDERWRITER NAMED IN RESPONSE TO ITEM 20.

Not applicable.

(c) PROVIDE THE INFORMATION REQUIRED BY THE FOLLOWING TABLE FOR ALL COMMISSIONS
AND OTHER COMPENSATION RECEIVED, DIRECTLY OR INDIRECTLY, FROM THE FUND DURING
THE LAST FISCAL YEAR BY EACH PRINCIPAL UNDERWRITER WHO IS NOT AN AFFILIATED
PERSON OF THE FUND OR ANY AFFILIATED PERSON OF AN AFFILIATED PERSON.

Not applicable.

Item 28. Location of Accounts and Records

STATE THE NAME AND ADDRESS OF EACH PERSON MAINTAINING PHYSICAL
POSSESSION OF EACH ACCOUNT, BOOK, OR OTHER DOCUMENT REQUIRED TO BE MAINTAINED BY
SECTION 31(a) AND THE RULES UNDER THAT SECTION.

The Custodian for Registrant is Norwest Bank Minnesota, N.A., Norwest
Center, Sixth & Marquette, Minneapolis, Minnesota 55479. The Custodian maintains
records of all cash transactions of Registrant. All other books and records of
Registrant's investment portfolios are maintained by IAI. IAI also acts as
Registrant's transfer agent and dividend disbursing agent, at 601 Second Avenue
South, P.O. Bos 357, Minneapolis, Minnesota 55402.

Item 29. Management Services

PROVIDE A SUMMARY OF THE SUBSTANTIVE PROVISIONS OF ANY
MANAGEMENT-RELATED SERVICE CONTRACT NOT DISCUSSED IN PART A OR B, DISCLOSING THE
PARTIES TO THE CONTRACT AND THE TOTAL AMOUNT PAID AND BY WHOM FOR THE FUND FOR
THE LAST THREE FISCAL YEARS.

Not applicable.

Item 30. Undertakings

(a) IN INITIAL REGISTRATION STATEMENTS FILED UNDER THE SECURITIES ACT,
PROVIDE AN UNDERTAKING TO FILE AN AMENDMENT TO THE REGISTRATION
STATEMENT WITH CERTIFIED FINANCIAL STATEMENTS SHOWING THE INITIAL
CAPITAL RECEIVED BEFORE ACCEPTING SUBSCRIPTIONS FROM MORE THAN 25
PERSONS IF THE FUND INTENDS TO RAISE ITS INITIAL CAPITAL UNDER SECTION
14(a)(3).

Not applicable.

(b) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of its latest Annual Report to shareholders, upon
request and without charge.

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement on Form N-1A to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Minneapolis and State of Minnesota on the 1st
day of March 1999.

IAI RETIREMENT FUNDS, INC.
(Registrant)

By /s/ John A. Alexander
---------------------------------
John A. Alexander, President

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:

/s/ John A. Alexander President (principal March 1, 1999
- ----------------------------- executive officer)
John A. Alexander

/s/ Paul H. Perseke Treasurer (principal financial March 1, 1999
- ----------------------------- and accounting officer)
Paul H. Perseke

Madeline Betsch * Director

W. William Hodgson * Director

George R. Long * Director

J. Peter Thompson * Director

Charles H. Withers * Director

*By /s/ William C. Joas March 1, 1999
-------------------------
William C. Joas, Attorney-in-Fact

* Registrant's directors executing Powers of Attorney dated August 18, 1993,
filed with the Commission on June 28, 1994.