IAI RETIREMENT FUNDS INC, 485BPOS, 2000-04-28

IAI RETIREMENT FUNDS INC
485BPOS, 2000-04-28

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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 APRIL 28, 2000

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. _9_

AND/OR

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. _9_
(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) 376-2000
(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)
_X_ on May 1, 2000 pursuant to paragraph (b)
___ 60 days after filing pursuant to paragraph (a)(1)
___ on (date) pursuant to paragraph (a)(1) ____
___ 75 days after filing pursuant to paragraph (a)(2)
___ on (date) pursuant to paragraph (a)(2) of Rule 485.

If appropriate, check the following box:

___ this post-effective amendment designates a new effective date for a
previously filed post- effective amendment.

<PAGE>

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

IAI RETIREMENT FUNDS, INC.

IAI REGIONAL PORTFOLIO
IAI BALANCED PORTFOLIO
IAI RESERVE PORTFOLIO

PROSPECTUS May 1, 2000

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.

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

<PAGE>

TABLE OF CONTENTS

Page
----

Portfolio Summaries......................................................... 3
IAI Regional Portfolio................................................. 3
IAI Balanced Portfolio................................................. 5
IAI Reserve Portfolio.................................................. 8

Pricing of Portfolio Shares................................................. 10

Taxes....................................................................... 10

Fund Management............................................................. 11
Investment Adviser..................................................... 11
Portfolio Managers..................................................... 11

More Information on Investment Strategies and Risks......................... 11
Investment Strategies.................................................. 11
Temporary Defensive Investments........................................ 11
Portfolio Turnover..................................................... 12
Effective Duration..................................................... 12
Principal Risks........................................................ 12

Financial Highlights........................................................ 15

<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.

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.

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.

PRINCIPAL RISKS

You could lose money by investing in Regional Portfolio. The principal risks
that could adversely affect the value of the 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.

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* 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 on the right provide you with information on Regional
Portfolio's volatility and performance. The bar chart shows 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. Both the chart and the table assume that all dividends
and distributions have been reinvested. Separate account fees are not taken into
account in calculating the Portfolio's returns. If they had been, returns would
have been lower. 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*
........
40%--
........
30%--
........
20%--
........
10%--
........
0%--
........
........ 33.51% 11.88% 13.45% 1.56% 18.37%
------------------------------------------------------------------
1995 1996 1997 1998 1999

* The Portfolio's total return for the period from January 1, 2000 through March
31, 2000 was 5.32%.

BEST QUARTER: Quarter ended December 31, 1999 16.49%
WORST QUARTER: Quarter ended September 30, 1998 (15.99%)

AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/99

ONE YEAR FIVE YEAR SINCE INCEPTION
(1/31/94)
REGIONAL PORTFOLIO 18.37% 15.29% 13.93%
STANDARD & POOR'S 500
COMPOSITE INDEX* 21.04% 28.55% 23.22%+

- ------------------------------
* An unmanaged index of 500 common stocks chosen to reflect the industries of
the U.S. economy.
+ Since 2/1/94

4
<PAGE>

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 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 adviser determines its economic outlook and
the direction in which it expects interest rates to move. Based on these
factors, the adviser adjusts the maturities of securities held by the Portfolio
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 1/2 to 7 1/2 years. This range may change, however, due to market
conditions and other economic factors. The longer the Portfolio's effective
duration, the more its net asset value can be expected to change in response to
interest rate changes. See "Principal Risks - Interest Rate Risk."

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 enter into futures contracts and options on those contracts,
and may invest in options on securities and financial indexes. The Portfolio
intends to use these derivative instruments primarily to hedge the value of its

5
<PAGE>

portfolio against potential adverse movements in securities prices 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

You could lose money by investing in Balanced Portfolio. The principal risks
that could adversely affect the value of the 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. Securities rated the lowest investment grade
have speculative characteristics. In adverse economic or other
circumstances, issuers of these lower rated securities are more likely to
have difficulty making principal and interest payments that issuers of
higher rated securities. Non-investment grade securities are subject to
additional risk. See "Risks of Non-Investment Grade Securities" below.

* 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.

* 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.

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<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 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 or interest rates 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 on the left provide you with information on Balanced
Portfolio's volatility and performance. The bar chart shows 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. Both the chart and the table assume that all dividends
and distributions have been reinvested. Separate account fees are not taken into
account in calculating the Portfolio's returns. If they had been, returns would
have been lower. 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*

........
20%--
........
15%--
........
10%--
........
5%--.
........
0%--
........
........ 16.21% 9.80% 16.60% 12.11% 3.87%
----------------------------------------------------
1995 1996 1997 1998 1999

* The Portfolio's total return for the period from January 1, 2000 through March
31, 2000 was 4.47%.

BEST QUARTER: Quarter ended June 30, 1997 10.63%
WORST QUARTER: Quarter ended September 30, 1999 (4.78%)

7
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AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/99

ONE YEAR FIVE YEAR SINCE INCEPTION
(2/3/94)
BALANCED PORTFOLIO 3.87% 11.62% 10.15%

STANDARD & POOR'S 500
COMPOSITE INDEX* 21.04% 28.55% 23.22%+

LEHMAN GOVERNMENT/CORPORATE
BOND INDEX** (2.15%) 7.61% 5.48%+

- ------------------------------
* 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.
+ Since 2/1/94

IAI RESERVE PORTFOLIO

OBJECTIVES

Reserve Portfolio's objectives 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.

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 adviser determines its economic outlook and
the direction in which it expects interest rates to move. Based on these
factors, the adviser adjusts the maturities of the securities held by the
Portfolio 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 3/4 years. This range may change, however, due to market conditions and
other economic factors. The longer the Portfolio's effective duration, the more
its net asset value can be expected to change in response to interest rate
changes. See "Principal Risks - Interest Rate Risk."

8
<PAGE>

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 or 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.

PRINCIPAL RISKS

You could lose money by investing in Reserve Portfolio. The principal risks that
could adversely affect the value of the Portfolio's shares and the total return
on your investment include:

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

PORTFOLIO PERFORMANCE

The bar chart and table that follow provide you with information on Reserve
Portfolio's volatility and performance. The bar chart shows 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. Both the chart and the table assume that all dividends
and distributions have been reinvested. Separate account fees are not taken into
account in calculating the Portfolio's returns. If they had been, returns would
have been lower. Remember, how the Portfolio has performed in the past is not
necessarily an indication of how it will perform in the future.

9
<PAGE>

ANNUAL TOTAL RETURNS AS OF 12/31 EACH YEAR*
5.0%--
.........
2.5%--
.........
0%--
......... 5.09% 4.93% 4.62% 5.46% 2.89%
----------------------------------------------------
1995 1996 1997 1998 1999

* The Portfolio's total return for the period from January 1, 2000 through March
31, 2000 was 2.00%.

BEST QUARTER: Quarter ended September 30, 1998 2.21%
WORST QUARTER: Quarter ended June 30, 1999 0.25%

AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/99

ONE YEAR FIVE YEAR SINCE INCEPTION
(4/7/94)
RESERVE PORTFOLIO 2.89% 4.60% 4.40%

SALOMON BROTHERS ONE
YEAR TREASURY BILL INDEX* 4.04% 5.96% 5.58%+

- ------------------------------
* An unmanaged index of one-year constant maturity Treasury bills.
+ Since 4/1/94.

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 to contract or policy owners when left to accumulate
within a variable annuity contract or variable life insurance policy.

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

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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

Julian "Bing" Carlin had responsibility for the management of the Regional
Portfolio from its inception in 1994 through 1996, when he retired. In May 1999,
Mr. Carlin rejoined IAI as Senior Vice President, and resumed management of the
Portfolio. Mr. Carlin has managed private client portfolios at Carlin Capital
Management since 1996, and continues to do so.

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.

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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 1/2 to 7 1/2 years. Reserve Portfolio
anticipates that its average effective duration will not exceed 1 3/4 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:

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 of
principal or interest on the securities. There is also the risk that an issuer
could

12
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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. Securities rated the lowest investment grade have
speculative characteristics. In adverse economic or other circumstances, issuers
of these lower rated securities are more likely to have difficulty making
principal and interest payments than issuers of higher rated securities.
Non-investment grade securities are subject to additional risk. See "Risks of
Non-Investment Grade Securities" below. 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-backed
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 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.

* INFLATION RISK. Even if the principal value of your investment in a Portfolio,
or your income from that investment, remains constant or increases, their value
may be less in the future because of inflation. Thus, as inflation occurs, the
purchasing power of your Portfolio shares and distributions may decline, even if
their value in dollars increases.

* RISKS OF DOLLAR ROLL TRANSACTIONS. Balanced Portfolio may enter into dollar
roll transactions. In a dollar roll transaction, 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.

13
<PAGE>

* 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 or securities prices 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 or interest rates 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

- 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.

14
<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 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>
Years ended December 31,

1999 1998 1997 1996 1995
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 15.68 $ 16.31 $ 15.02 $ 14.16 $ 10.62
-------------------------------------------------------------------------
OPERATIONS
Net investment income 0.05*** 0.08 0.08 0.05 0.06
Net realized and unrealized gains 2.79 0.18 1.90 1.60 3.50
-------------------------------------------------------------------------
TOTAL FROM OPERATIONS 2.84 0.26 1.98 1.65 3.56
-------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.10) (0.09) (0.07) (0.05) (0.02)
Net realized gains (0.19) (0.80) (0.62) (0.74) --
-------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.29) (0.89) (0.69) (0.79) (0.02)
-------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 18.23 $ 15.68 $ 16.31 $ 15.02 $ 14.16
=========================================================================

Total investment return* 18.37% 1.56% 13.45% 11.88% 33.51%

Net assets at end of period (000's omitted) $13,405 $15,738 $17,085 $11,831 $ 5,105

RATIOS
Expenses to average daily net assets** 0.88% 0.94% 0.90% 1.03% 1.37%
Net investment income to average
daily net assets** 0.29% 0.50% 0.65% 0.77% 1.12%
Portfolio turnover rate (excluding
short-term securities) 123.4% 74.3% 62.1% 78.4% 156.0%
</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 $6,737 in expenses for the year
ended December 31, 1995. If the Portfolio had been charged these expenses,
the ratio of expenses to average daily net assets would have been 1.64% and
the ratio of net investment income to average daily net assets would have
been 0.85%.
*** Net investment income per share represents net investment income divided by
the average shares outstanding throughout the year.

15
<PAGE>

BALANCED PORTFOLIO

<TABLE>
<CAPTION>
Years ended December 31,

1999 1998 1997 1996 1995
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $15.60 $14.29 $12.71 $11.78 $10.22
-------------------------------------------------------------------
OPERATIONS
Net investment income 0.41*** 0.31 0.27 0.22 0.09
Net realized and unrealized gains 0.16 1.40 1.81 0.92 1.56
-------------------------------------------------------------------
TOTAL FROM OPERATIONS 0.57 1.71 2.08 1.14 1.65
-------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.35) (0.26) (0.24) (0.10) (0.09)
Net realized gains (0.57) (0.14) (0.26) (0.11) --
-------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.92) (0.40) (0.50) (0.21) (0.09)
-------------------------------------------------------------------
NET ASSET VALUE
End of period $15.25 $15.60 $14.29 $12.71 $11.78
===================================================================

Total investment return* 3.87% 12.11% 16.60% 9.80% 16.21%

Net assets at end of period (000's omitted) $3,815 $3,509 $2,446 $1,534 $ 764

RATIOS
Expenses to average daily net assets** 0.97% 1.02% 1.25% 1.25% 1.70%
Net investment income to average
daily net assets** 2.70% 2.69% 2.63% 2.84% 2.34%
Portfolio turnover rate (excluding
short-term securities) 126.1% 40.9% 38.8% 67.4% 56.0%
</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 $793, $10,627, $1,753, $8,031,
and $13,428 in expenses for the years ended December 31, 1999, 1998, 1997,
1996, and 1995, respectively. If the Portfolio had been charged these
expenses, the ratio of expenses to average daily net assets would have been
0.99%, 1.37%, 1.34%, 1.96% and 5.29%, respectively, and the ratio of net
investment income (loss) to average daily net assets would have been 2.68%,
2.34%, 2.54%, 2.13%, and (1.25%), respectively.
*** Net investment income per share represents net investment income divided by
the average shares outstanding throughout the year.

16
<PAGE>

RESERVE PORTFOLIO

<TABLE>
<CAPTION>
Years ended December 31,

1999 1998 1997 1996 1995
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $10.08 $10.00 $10.03 $10.05 $10.03
---------------------------------------------------------------------
OPERATIONS
Net investment income 0.44 0.47 0.43 0.49 0.48
Net realized and unrealized gains (losses) (0.16) 0.06 0.02 (0.01) 0.02
---------------------------------------------------------------------
TOTAL FROM OPERATIONS 0.28 0.53 0.45 0.48 0.50
---------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.35) (0.45) (0.46) (0.50) (0.48)
Net realized gains (0.02) -- (0.02) -- --
---------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.37) (0.45) (0.48) (0.50) (0.48)
---------------------------------------------------------------------
NET ASSET VALUE
End of period $ 9.99 $10.08 $10.00 $10.03 $10.05
=====================================================================

Total investment return* 2.89% 5.46% 4.62% 4.93% 5.09%
Net assets at end of period (000's omitted) $ 642 $ 634 $1,021 $ 528 $ 844

RATIOS
Expenses to average daily net assets** 1.01% 0.68% 0.85% 0.85% 1.03%
Net investment income to average
daily net assets** 4.32% 4.57% 4.57% 4.54% 4.84%
Portfolio turnover rate (excluding
short-term securities) 120.9% 129.0% 0.0% 185.3% 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 $4,474, $7,960, $8,479, $9,034
and $11,528 in expenses for the years ended December 31, 1999, 1998, 1997,
1996, and 1995, respectively. If the Portfolio had been charged these
expenses, the ratio of expenses to average daily net assets would have been
1.66%, 1.69%, 2.25%, 1.81% and 2.62%, respectively, and the ratio of net
investment income to average daily net assets would have been 3.66%, 3.56%,
3.17%, 3.58% and 3.25%, respectively.

17
<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 at
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

18
<PAGE>

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

STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 1, 2000

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, 2000 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, 1999 ARE INCORPORATED BY REFERENCE INTO THIS
STATEMENT OF ADDITIONAL INFORMATION. COPIES OF THE PORTFOLIOS' 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).

1
<PAGE>

TABLE OF CONTENTS

Page

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

INVESTMENT RESTRICTIONS.................................................... 16

INVESTMENT PERFORMANCE..................................................... 18

MANAGEMENT................................................................. 20

CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT.................... 24

LEGAL COUNSEL.............................................................. 24

INDEPENDENT AUDITORS....................................................... 24

PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE......................... 24

CAPITAL STOCK.............................................................. 25

CONTROL PERSONS AND PRINCIPAL SECURITY HOLDERS............................. 25

NET ASSET VALUE AND PUBLIC OFFERING PRICE.................................. 26

TAX STATUS................................................................. 27

LIMITATION OF DIRECTOR LIABILITY........................................... 27

SHAREHOLDER MEETINGS....................................................... 28

FINANCIAL STATEMENTS....................................................... 28

APPENDIX A -- Ratings of Debt Securities................................... A-1

2
<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.

BORROWING

Each Portfolio may borrow from banks (or through reverse repurchase
agreements) for temporary or emergency purposes. If a Portfolio borrows money,
its share price may be subject to greater fluctuation until the borrowing is
paid off. If a Portfolio makes additional investments while borrowings are
outstanding, this may be considered a form of leverage. Each Portfolio currently
has a line of credit with a bank at the prime interest rate. To the extent funds
are drawn against the line of credit, securities are held in a segregated
account. No compensating balances or commitment fees are required under the
lines of credit. Each Portfolio does not intend its borrowing to exceed 5% of
its net assets.

3
<PAGE>

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
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.

4
<PAGE>

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 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.

5
<PAGE>

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.

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.

No more than 20% of a Portfolio's net assets may be invested in
when-issued, delayed delivery or forward commitments, and in the case of
Balanced Portfolio, of such 20%, no more than one-half (i.e., 10% of net assets)
may be invested in dollar rolls.

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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. No more than 10% of Balanced
Portfolio's net assets may be invested in dollar rolls.

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. 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.

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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 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:

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* 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.

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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 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.

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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.

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

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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).

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 and Balanced
Portfolio does not intend to do so as a principal investment strategy. 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.

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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 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.

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 intend 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.

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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.

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.

14
<PAGE>

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 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

15
<PAGE>

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.

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 which have been segregated 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.

16
<PAGE>

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 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.

17
<PAGE>

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.

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. The portfolio turnover
rate over the last two most recently completed fiscal years increased in
Regional and Balanced Portfolios as a result of portfolio restructuring. 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;

18
<PAGE>

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 Portfolio 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 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 1.56% 12.11% 5.46%
1999 18.37% 3.87% 2.89%
</TABLE>

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

The average annual total returns of Regional Portfolio for the one year
and five year periods ended December 31, 1999 and from inception of the Regional
Portfolio through December 31, 1999 were 18.37%, 15.29% and 13.93%,
respectively.

The average annual total returns of Balanced Portfolio for the one year
and five year periods ended December 31, 1999 and from inception of the Balanced
Portfolio through December 31, 1999 were 3.87%, 11.62% and 10.15%, respectively.

The average annual total returns of Reserve Portfolio for the one year
and five year periods ended December 31, 1999 and from inception of the Reserve
Portfolio through December 31, 1999 were 2.89%, 4.60% and 4.40%, respectively.
Reserve Portfolio's yield for the thirty-day period ended December 31, 1999 was
5.05%.

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

19
<PAGE>

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
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 57 Director Currently retired; until April 1994, was
19 South 1st Street Executive Vice President, Director of Client
Minneapolis, Minnesota 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 75 Director Currently retired; served as information manager
1698 Dodd Road for the North Central Home Office of the
Mendota Heights, Minnesota 55118 Prudential Insurance Company of America from 1961
until 1984.

George R. Long 69 Director Chairman of Mayfield Corp. (financial consultants
29 Las Brisas Way and venture capitalists) since 1973.
Naples, Florida 33963
</TABLE>

20
<PAGE>

<TABLE>
<S> <C> <C> <C>
J. Peter Thompson 68 Director Grain farmer in southwestern Minnesota since
Route 1 1974. Prior to that, Mr. Thompson was employed by
Mountain Lake, Minnesota 56159 Paine Webber, Jackson & Curtis, Incorporated, (a
diversified financial services concern), most
recently as Senior Vice President and General
Partner.

Charles H. Withers 73 Director Currently retired; was Editor of the Rochester
Rochester Post Bulletin Post-Bulletin, Rochester, Minnesota from 1960
P.O. Box 6118 through March 31, 1980.
Rochester, Minnesota 55903

Keith Wirtz 40 President President and Chief Investment Officer of IAI
601 Second Avenue South since 1999. Prior to that time, Mr. Wirtz was the
P.O. Box 357 Chief Investment Strategist for TradeStreet
Minneapolis, Minnesota 55440 Investment Associates, Inc.

David Koehler 62 Vice Independent training and marketing consultant
601 Second Avenue South President from 1993 to current. Prior to that time, Mr.
P.O. Box 357 Koehler was a partner at IAI Venture Capital
Minneapolis, Minnesota 55440 Group.

Jill Stevenson 34 Treasurer Associate Vice President and Director of Fund
601 Second Avenue South Administration and Investment Accounting of IAI.
P.O. Box 357 Ms. Stevenson has served IAI in various
Minneapolis, Minnesota 55440 capacities since joining the firm in 1984.

Michael J. Radmer 55 Secretary Partner of Dorsey & Whitney LLP, a Minnesota
220 South Sixth Street based law firm which acts as General Counsel to
Minneapolis, Minnesota 55402 the Fund.
</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.

21
<PAGE>

<TABLE>
<CAPTION>
Compensation From
----------------------------------------------- Aggregate
Regional Balanced Reserve Compensation From
Name of Person, Position Portfolio Portfolio Portfolio 15 IAI Mutual Funds*
- ---------------------------- ------------- ------------- ------------- ------------------------
<S> <C> <C> <C> <C>
Betsch, Madeline -- $ 856 $ 227 $ 43 $ 37,200
Director
Hodgson, W. William -- $ 856 $ 227 $ 43 $ 37,200
Director
Long, George R. -- $ 876 $ 236 $ 45 $ 37,200
Director
Thompson, J. Peter -- $ 856 $ 227 $ 43 $ 37,200
Director
Withers, Charles H. -- $ 876 $ 236 $ 45 $ 37,200
Director
Koehler, David -- $ 810 $ 216 $ 42 $ 35,000
Vice President
Total $ 5,130 $ 1,369 $ 261 $ 221,000
</TABLE>

- ------------------
* For the calendar year ended December 31, 1999; excludes expenses incurred in
connection with attending meetings.

The Fund and IAI have adopted a Code of Ethics. The Code permits access
persons to engage in personal securities transactions with respect to securities
that may be purchased or held by the Portfolios, 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 IAI 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.

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, 1997 $ 95,467 $ 10,836 $ 0

Fiscal Year Ended December 31, 1998 $ 108,792 $ 8,892 $ 0

Fiscal Year Ended December 31, 1999 $ 88,726 $ 22,746 $ 0
</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

22
<PAGE>

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, 1997 $ 14,687 $ 1,937 $ 0

Fiscal Year Ended December 31, 1998 $ 16,737 $ 3,003 $ 0

Fiscal Year Ended December 31, 1999 $ 13,651 $ 3,622 $ 0
</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 is
not liable for any loss suffered by a Portfolio in the absence of willful
misfeasance, bad faith or gross negligence in the performance of its duties and
obligations.

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.

23
<PAGE>

CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT

The Fund's custodian is Firstar Bank, N.A., P.O. Box 510, Milwaukee,
Wisconsin 53201-0510.

Firstar Mutual Fund Services, LLC acts as the Fund's transfer agent and
dividend disbursing agent at P.O. Box 701, Milwaukee Wisconsin 53201-0701.

LEGAL COUNSEL

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

INDEPENDENT AUDITORS

KPMG LLP, 90 South Seventh Street, Minneapolis, Minnesota 55402, acts
as the Fund's independent auditors.

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
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

24
<PAGE>

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.
Reserve Portfolio did not pay any brokerage commissions during such fiscal
years. The table also sets forth the amount and percentage of commissions paid
by Regional and Balanced Portfolios during their 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 1999 1998 1997 1999 1999
- ------------- ------------ ------------- ----------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
Regional $ 41,104 $ 23,545 $ 24,932 $ 1,368 3.33%
Balanced $ 8,442 $ 994 $ 1,244 $ 143 1.69%
</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.

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of April 3, 2000, 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 527,446 78.3%
Annuity Products
P.O. Box 82532
Lincoln, Nebraska 68501

Lincoln Benefit Life Company 145,895 21.7%
Life Products

25
<PAGE>

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 176,149 75.9%
Annuity Products
P.O. Box 82532
Lincoln, Nebraska 68501

Lincoln Benefit Life Company 55,921 24.1%
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 46,789 72.7%
Annuity Products
P.O. Box 82532
Lincoln, Nebraska 68501

Lincoln Benefit Life Company 17,608 27.3%
Life Products
P.O. Box 82532
Lincoln, Nebraska 68501

* All shares are owned both of record and beneficially.

In addition, as of April 3, 2000, none of Regional, Balanced and
Reserve Portfolios' officers and directors owned any of the outstanding shares
of the Portfolios.

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.

26
<PAGE>

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, 1999, the net asset value and public offering price per
share of each Portfolio was calculated as follows:

REGIONAL PORTFOLIO

NAV = Net Assets ($13,405,100) = $ 18.23
-----------------------
Shares Outstanding (735,263)

BALANCED PORTFOLIO

NAV = Net Assets ($3,815,320) = $ 15.25
----------------------
Shares Outstanding (250,209)

RESERVE PORTFOLIO

NAV = Net Assets ($641,916) = $ 9.99
--------------------
Shares Outstanding (64,276)

TAX STATUS

Each Portfolio has qualified in the past, and each Portfolio intends to
continue to qualify, as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). If so qualified, each
Portfolio is not subject to income tax to the extent it distributes its income
to the insurance company separate accounts that are its shareholders.

The Board of Directors intends that each of the Portfolios will also
comply with the diversification requirements imposed by section 817(h) of the
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
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 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

27
<PAGE>

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 1999 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.

28
<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.

A-1
<PAGE>

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 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.

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.

A-2
<PAGE>

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.

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.

A-3
<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 Incorporation Dated 9/16/93 (1)
(b) Bylaws (1)
(c) Instruments Defining Rights of Security Holders - not
applicable
(d) Investment Advisory Agreement dated 11/3/93 (1)
(e) Underwriting Contracts - not applicable
(f) Bonus or Profit Sharing Contracts - not applicable
(g) Custody Agreement dated 11/3/93 (1)
(h) Administrative Agreement dated 11/3/93 (1)
(i) Legal Opinion of Dorsey & Whitney LLP*
(j) Consent of KPMG LLP*
(k) Omitted Financial Statements - not applicable
(l) Initial Capital Agreements - not applicable
(m) Rule 12b-1 Plan - not applicable
(n) Rule 18f-3 Plan - not applicable
(o) Not applicable
(p) Code of Ethics*

- -----------------
(1) Incorporated by reference to Post-Effective Amendment No. 8 to the
Registrant's Registration Statement on Form N-1A filed with the
Commission on April 30, 1999.
* Filed herewith.

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, ARRANGEMENT 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 PROTECTION.

C-1
<PAGE>

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

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 "Fund 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
John Alexander Executive Vice President None
Larry Ray Hill Executive Vice President None
James Beloff Senior Vice President None
Stephen C. Coleman Senior Vice President None
Lindsay Johnston Senior Vice President None
Steve Lentz Senior Vice President None
Curt McLeod Senior Vice President None
Deb Ratelle Senior Vice President None
John Caravello Director None
Kevin McKendry Director None
Peter Phillips Director None

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
Street, 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 are Peter Norton, Senior Vice President, International Equity
Investments, and 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.

C-2
<PAGE>

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.

(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 Firstar Bank, N.A., P.O. Box 510,
Milwaukee, WI 53201- 0510. The Custodian maintains records of all cash
transactions of Registrant. All other books and records of Registrant's
investment portfolios are maintained by IAI. Firstar Mutual Fund Services, LLP,
P.O. Box 701, Milwaukee, WI 53201-0701, acts as Registrant's transfer agent and
dividend disbursing agent.

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

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.

C-3
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement on Form N-1A
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Minneapolis and State of Minnesota on
the 27th day of April, 2000.

IAI RETIREMENT FUNDS, INC.
(Registrant)

By: /s/ Keith Wiltz
-------------------------------------
Keith Wiltz, 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/ Keith Wiltz President (principal executive April 27, 2000
- ------------------------- officer)
Keith Wiltz

/s/ Jill Stevenson Treasurer (principal financial and April 27, 2000
- ------------------------- accounting officer)
Jill Stevenson

Madeline Betsch* Director

W. William Hodgson* Director

George R. Long* Director

J. Peter Thompson* Director

Charles H. Withers* Director

*By: /s/ Steven G. Lentz April 27, 2000
----------------------------
Steven G. Lentz, Attorney-in-Fact

* Pursuant to Powers of Attorney dated April 26, 2000

Exhibit (i)

DORSEY & WHITNEY LLP
PILLSBURY CENTER SOUTH
220 SOUTH SIXTH STREET
MINNEAPOLIS, MINNESOTA 55402

April 27, 2000

IAI Retirement Funds, Inc.
3700 U.S. Bank Place
P.O. Box 357
Minneapolis, Minnesota 55440

Ladies and Gentlemen:

We have acted as counsel to IAI Retirement Funds, Inc., a Minnesota
corporation (the "Fund"), in connection with a Registration Statement on Form
N-1A (File No. 33-69012) (the "Registration Statement") relating to the sale by
the Fund of an indefinite number of shares of the Fund's Series A, Series B and
Series C common stock, each with a par value of $.01 per share (the "Shares").

We have examined such documents and have reviewed such questions of law
as we have considered necessary and appropriate for the purposes of our opinions
set forth below. In rendering our opinions set forth below, we have assumed the
authenticity of all documents submitted to us as originals, the genuineness of
all signatures and the conformity to authentic originals of all documents
submitted to us as copies. We have also assumed the legal capacity for all
purposes relevant hereto of all natural persons and, with respect to all parties
to agreements or instruments relevant hereto other than the Fund, that such
parties had the requisite power and authority (corporate or otherwise) to
execute, deliver and perform such agreements or instruments, that such
agreements or instruments have been duly authorized by all requisite action
(corporate or otherwise), executed and delivered by such parties and that such
agreements or instruments are the valid, binding and enforceable obligations of
such parties. As to questions of fact material to our opinions, we have relied
upon certificates of officers of the Fund and of public officials. We have also
assumed that the Shares will be issued and sold as described in the Registration
Statement.

Based on the foregoing, we are of the opinion that the Shares have been
duly authorized by all requisite corporate action and, upon issuance, delivery
and payment therefore as described in the Registration Statement, will be
validly issued, fully paid and nonassessable.

Our opinions expressed above are limited to the laws of the State of
Minnesota.

<PAGE>

IAI Retirement Funds, Inc.
April 27, 2000
Page 2

We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and to the reference to our firm under the caption
"Legal Counsel" in the Statement of Additional Information constituting part of
the Registration Statement.

Very truly yours,

/s/ DORSEY & WHITNEY LLP

KLP

EXHIBIT (j)

Independent Auditors' Consent

The Board of Directors
IAI Retirement Funds, Inc.:

We consent to the use of our report incorporated herein by reference and to the
references to our Firm under the heading "Financial Highlights" in Part A and
"Independent Auditors" in Part B of the Registration Statement.

KPMG LLP

Minneapolis, Minnesota
April 25, 2000

EXHIBIT (p)

[LOGO] IAI CODE OF ETHICS

Adopted May 10, 1995
Revised January 20, 1999

CODE OF ETHICS

1. PURPOSES

This Code of Ethics is adopted by and on behalf of Investment Advisers,
Inc., IAI International Limited, IAI Securities, Inc. and each of the
registered investment companies within the IAI Family of Funds in an
effort to prevent violations of the 1940 Act and the Rules and
Regulations thereunder and to codify the written policies and
procedures designed to prevent the misuse of Material nonpublic
information in violation of the 1934 Act or the Advisers Act, or the
Rules and Regulations thereunder or ensure IAI International's
compliance with the Investment Management Regulatory Organisation and
the Rules and Regulations thereunder.

Rule 17j-1(b)(1) of the 1940 Act requires registered investment
companies and each investment adviser of or principal underwriter for
such investment companies to adopt a written code of ethics containing
provisions reasonably necessary to prevent access persons from engaging
in certain activities prohibited by Rule 17j-1 and to use reasonable
diligence, and institute procedures reasonably necessary, to prevent
violations of such code.

Section 204A of the Advisers Act requires investment advisers to
establish, maintain, and enforce written policies and procedures
reasonably designed to prevent the misuse of Material nonpublic
information by such investment adviser or any person associated with
such investment adviser.

The purpose of this Code is to establish policies consistent with Rule
17j-1 of the 1940 Act, Section 204A of the Advisers Act and with the
following general principals:

ALL EMPLOYEES HAVE THE DUTY AT ALL TIMES TO PLACE THE
INTERESTS OF CLIENTS AND SHAREHOLDERS AHEAD OF THEIR OWN
PERSONAL INTERESTS IN ANY DECISION RELATING TO THEIR PERSONAL
INVESTMENTS.

ALL PERSONAL SECURITIES TRANSACTIONS SHALL BE CONDUCTED
CONSISTENT WITH THIS CODE AND IN SUCH A MANNER AS TO AVOID ANY
ACTUAL OR POTENTIAL

<PAGE>

CONFLICT OF INTEREST OR ANY ABUSE OF AN INDIVIDUAL'S POSITION
OF TRUST AND RESPONSIBILITY.

EMPLOYEES SHALL NOT TAKE INAPPROPRIATE ADVANTAGE OF THEIR
POSITION AND MUST AVOID ANY SITUATION THAT MIGHT COMPROMISE,
OR CALL INTO QUESTION, THEIR EXERCISE OF FULLY INDEPENDENT
JUDGMENT IN THE INTEREST OF SHAREHOLDERS AND CLIENTS.

2. SCOPE AND APPLICABILITY

The prohibitions and the preclearance and reporting requirements set
forth in this Code apply to all transactions in a Security which the
Access Person has, or by reason of such transaction acquires, any
direct or indirect Beneficial Ownership unless that Security or
transaction has been specifically exempted by this Code. An Access
Person may be an Access Person with respect to one or more of the
individual companies described collectively herein as Adviser.

3. DEFINITIONS

Unless the context clearly indicates otherwise, capitalized terms have
the meanings set forth in Section 15 hereto.

4. EXEMPTED SECURITIES

Sections 6, 7 and 9 of this Code shall not apply to:

(a) shares of unaffiliated registered open-end investment
companies (mutual funds, European funds and unit trusts);

(b) securities issued by the United States government, the UK
government or any EU government;

(d) bankers' acceptances, bank certificates of deposit, commercial
paper and such other money market instruments as may be
designated by Adviser or the Board of Directors of a Fund; and

(e) foreign currencies.

5. EXEMPTED TRANSACTIONS

A. Sections 6, 7 and 9 of this Code shall not apply to:

<PAGE>

(1) purchases or sales of securities which are not
eligible for purchase or sale by any Fund or other
client of Adviser;

(2) purchases or sales which are non-volitional on the
part of either the Access Person or a Fund or other
client of Adviser, including PEP and ISA products for
IAI International employees;

(3) purchases which are part of an automatic dividend
reinvestment plan; and

(4) purchases effected upon the exercise of rights issued
by an issuer pro rata to all holders of a class of
its securities, to the extent such rights were
acquired from such issuer, and sales of such rights
so acquired.

B. Sections 6 and 7 of this Code shall not apply to:

(1) purchases or sales effected in any account over which
the Access Person has no direct or indirect influence
or control; and

(2) purchases and sales of corporate and municipal bond
or UK and EU Local authority securities in the
secondary market; provided, however such transactions
shall remain subject to the prohibitions of Section
7.D.

(3) purchases and sales of World Bank and Government
Public Body bonds.

6. PRECLEARANCE

Except as set forth in Sections 4 and 5 of this Code, Access Persons,
other than Disinterested Directors and Non-Executive Directors, must
preclear all personal transactions in a Security as set forth below.
The preclearance requirements of this Section 6 are in addition to, and
not in limitation of, the prohibitions of Sections 7 and 8 and the
reporting requirements of Section 9 of this Code.

A. PUBLICLY TRADED SECURITIES

Preclearance is required for any purchase or sale of a
publicly traded Security. Such transactions must be precleared
pursuant to such procedures as may be established by Adviser
from time to time. If clearance is granted for a transaction,
the transaction must be executed by the close of business on
the day such clearance is granted.

B. PRIVATE PLACEMENTS

Prior approval is required for any purchase of a non-publicly
traded security. Such approval will take into account, among
other factors, whether the investment opportunity should be
reserved for a Fund or other client of Adviser and whether

<PAGE>

the opportunity is being offered to the Access Person by
virtue of his or her position with Adviser.

7. PROHIBITED PURCHASES AND SALES

A. EQUITY INITIAL PUBLIC OFFERINGS

No Investment Personnel or Senior Management shall acquire any
equity Security in an initial public offering. Privatisations
in which a traunch has been reserved for retail investors and
which no IAI or IAII clients have access, are permitted.

B. DEBT NEW ISSUE OFFERINGS

No Investment Personnel or Senior Management shall acquire in
a new issue offering any municipal or corporate debt security
in which a Fund or other client of Adviser is also acquiring
an interest.

C. BLACKOUT PERIODS

(1) Access Persons. Except as provided in Sections 4 and
5 of this Code, Access Persons are prohibited from
executing a personal transaction in a Security at any
time during which (1) such Security is listed on a
restricted security list or other such list as may be
maintained by Adviser; or (2) such Access Person has
actual knowledge that such Security is being
considered for purchase or sale by Adviser.

(2) Portfolio Managers. In addition to the prohibitions
set forth in Section 7.C.(1) above, Portfolio
Managers are prohibited from executing a personal
transaction in a Security within seven days before
purchasing or selling such Security for a Fund or
other client account for which such Portfolio Manager
has management or advisory responsibility.

D. SHORT-TERM TRADING

Except as provided in Section 4 and Sections 5.A. and 5.B.(1)
of this Code, Investment Personnel are prohibited from
profiting from a purchase and sale, or sale and purchase, of
the same Security within 60 calendar days. The following
additional securities are exempt from this restriction:

* Stock Index Options and Futures
* Hard Commodity Options and Futures
* Options and Futures on U.S. Government
Securities
* Options and Futures on Foreign Currencies
* Options and Futures on Corporate or
Municipal Bond Indices

<PAGE>

E. TRANSACTIONS BY DISINTERESTED AND NON-EXECUTIVE DIRECTORS

(1) Disinterested and Non-Executive Directors are
prohibited from executing transactions in a Security
if such director, at the time of the transaction,
knew, or in the ordinary course of fulfilling his or
her official duties as a director of a Fund or
Adviser should have known, that during the fifteen
day period immediately preceding or after the date of
the transaction in such a Security by the director,
such Security is or was purchased or sold by Adviser
or is or was being considered for purchase or sale by
Adviser.

(2) With respect to securities transactions by a Fund,
Disinterested Directors in their capacity as such
have responsibility for reviewing such transactions
at regular quarterly meetings. Such meetings
typically are held 30 to 45 days after each calendar
quarter. Schedules of securities transactions during
the most recent prior calendar quarter are mailed to
Disinterested Directors approximately one week before
the meeting at which they will be reviewed. Such
schedules do not include transactions in any security
which have occurred, or with respect to which the
transaction order has not been completed, within
fifteen days prior to the mailing. Consequently,
Disinterested Directors in the ordinary course of
fulfilling their official duties to a Fund shall be
deemed to have no duty, and would have no reason to
know of, or inquire about, a transaction in a
security by a Fund during the fifteen day period
immediately preceding or after such Disinterested
Director's transaction in that security.

8. INSIDER TRADING RESTRICTIONS

(a) Employees shall use due care to ensure that Material nonpublic
information remains secure and shall not divulge to any person
any Material nonpublic information, except in the performance
of his or her duties. For example, files containing Material
nonpublic information should be sealed, and access to computer
files containing Material nonpublic information should be
restricted.

(b) If an Employee learns of any Material nonpublic information,
such information shall not be divulged to any other person
except such information shall be promptly disclosed to the
Manager of Compliance of Adviser.

(c) Upon receipt of such Material nonpublic information, the
Manager of Compliance of Adviser shall promptly notify
appropriate personnel of Adviser to abstain from all trading
in the appropriate Security until such information becomes
public. Orders already sent for execution may not be halted or
changed upon receipt of material insider information.

(d) No Insider shall engage in Insider Trading, on behalf of
himself or others.

<PAGE>

(e) Absent extraordinary circumstances, no Insider shall be deemed
to have violated this Code for effecting a Securities
transaction, if such Insider has been advised by the Manager
of Compliance that the transaction would be consistent with
this Code.

(f) Adviser shall make written records of actions under this
Section 8.

9. REPORTING

A. ACCESS PERSONS

(1) Access Persons (other than Disinterested Directors
and Non-Executive Directors) shall direct their
brokers to supply to the Director of Compliance or
other designated compliance officer of the Adviser,
on a timely basis, duplicate copies of confirmations
of all personal securities transactions and copies of
periodic statements for all securities accounts in
which such Access Persons have Beneficial Ownership.
Compliance with this requirement will be deemed to
satisfy the reporting requirements imposed on Access
Persons under Rule 17j-1(c).

(2) Upon commencement of employment and monthly
thereafter, Access Persons (other than Disinterested
Directors and Non-Executive Directors) shall disclose
all personal securities holdings. Compliance with the
ongoing reporting requirement will be satisfied by
providing monthly statements of brokerage accounts.
Securities not included in such brokerage statements
must be reported annually.

(3) Investment Personnel and Senior Management who own
securities acquired in a private placement shall
disclose such ownership to the Chief Investment
Officer of Adviser if such person is involved in any
subsequent consideration of an investment in the
issuer by Adviser. In such circumstances, Adviser's
decision to purchase securities of the issuer will be
subject to an independent review by Investment
Personnel with no personal interest in the issuer.

B. DISINTERESTED DIRECTORS AND NON-EXECUTIVE DIRECTORS

(1) Disinterested Directors and Non-Executive Directors
need only report a transaction in a Security if such
director, at the time of that transaction, knew, or
in the ordinary course of fulfilling his or her
official duties as a director should have known, that
during the fifteen day period immediately preceding
or subsequent to the date of the transaction by the
director, such security was purchased or sold by a
Fund or Adviser or was being considered for purchase
or sale by a Fund or Adviser.

<PAGE>

(2) Any report required by this Section 9.B shall be made
not later than 10 days after the end of the calendar
quarter in which the transaction to which the report
relates was effected and shall contain the following
information:

(i) the date of the transaction, the title and
the number of shares, and the principal
amount of each security involved;

(ii) the nature of the transaction (i.e.,
purchase, sale or any other type of
acquisition or disposition);

(iii) the price at which the transaction was
effected; and

(iv) the name of the broker, dealer or bank with
or through whom the transaction was
effected.

10. POST-TRADE MONITORING

Adviser shall implement appropriate procedures to monitor personal
investment activity by Access Persons.

11. ANNUAL REPORTING

The Manager of Compliance will annually prepare a report to the Board
of Directors of the Adviser and to the Board of Directors of the Funds
that summarizes existing procedures concerning personal investing and
any changes in the procedures made during the past year, identifies any
violations requiring significant remedial action and identifies any
recommended changes in existing restrictions.

12. GIFTS

Employees of Adviser are prohibited from receiving any gift or
combination of gifts within a 12-month period of more than $100 in
value from any person or entity that does business with Adviser or a
Fund. Occasional business meals or entertainment (theatrical or
sporting events, etc.) are not considered as gifts and are permitted so
long as they are not excessive in number or cost. Employees must
maintain a log of gifts and occasional business meals/entertainment and
report such gifts in accordance with procedures adopted by Adviser from
time to time.

13. SERVICE AS A DIRECTOR

Employees of Adviser are prohibited from serving as a member of the
Board of Directors of publicly traded companies absent prior
authorization by the Board of Directors of the Fund based upon a
determination that such service is consistent with the interests of the
Fund and its shareholders.

<PAGE>

14. SANCTIONS

A. GENERAL

Upon discovering a violation of this Code of Ethics, Adviser
may impose such sanctions as it deems appropriate, including
inter alia, disgorgement of profits realized, a fine, letter
of censure, or suspension or termination of the employment of
the violator. A violator shall be obligated to pay any sums
due pursuant to this paragraph due to a violation by a member
of the immediate family of such violator. Any profits realized
on trades in violation of the prohibitions set forth in
Sections 7 and 8 must be immediately disgorged except those
violations described in Section 14.C. In determining any
further sanctions to be imposed for violations of this Code,
irrespective of whether profits were realized by the violator
as a result of trading within the proscribed period or
otherwise, Adviser may consider any factors deemed relevant,
including without limitation:

1. the degree of willfulness of the violation;

2. the severity of the violation;

3. the extent, if any, to which the violator
profited or benefited from the violation;

4. the adverse effect, if any, of the violation
on a Fund or other of Adviser's clients;

5. the market value and liquidity of the class
of securities involved in the violation;

6. the prior violations of the Code, if any, by
the violator; and

7. the circumstances of discovery of the
violation.

B. NON-EXCLUSIVITY OF SANCTIONS

The imposition of sanctions hereunder by the Board of
Directors of Adviser shall not preclude the imposition of
additional sanctions by the Board of Directors of a Fund and
shall not be deemed a waiver of any rights by a Fund. In
addition to sanctions which may be imposed by the Boards of
Directors of Adviser and a Fund, persons who violate this Code
may be subject to various penalties and sanctions including,
for example, (i) injunctions; (ii) treble damages; (iii)
disgorgement of profits; (iv) fines to the person who
committed the violation of up to three times the profit gained
or loss avoided, whether or not the person actually benefited;
and (v) jail sentences.

<PAGE>

C. INADVERTENT VIOLATIONS

A transaction by Access Persons inadvertently effected in
violation of the prohibitions set forth in Section 7.C., will
not be considered a violation of this Code and disgorgement
(or liquidation) will not be required so long as the
transaction was effected in accordance with the preclearance
procedures described in Section 6 above and without actual
knowledge that such Security was being considered for purchase
or sale, a pending buy or sell order existed, or the security
was otherwise subject to restriction.

15. DEFINITIONS

(a) "Access Person" means any director, officer, general partner,
or employee of Adviser, or any natural person in a control
relationship to Adviser who obtains information concerning
recommendations made by Adviser with regard to the purchase or
sale of a Security.

(b) "Adviser" means Investment Advisers, Inc., IAI International
Limited and IAI Securities, Inc.

(d) "Affiliated Person" of another person means:

1. Any person directly or indirectly owning,
controlling, or holding with power to vote, five
percent (5%) or more of the outstanding voting
securities of such other person;

2. Any person, five percent (5%) or more of whose
outstanding voting securities are directly or
indirectly owned, controlled, or held with power to
vote, by such other person;

3. Any person directly or indirectly controlling,
controlled by, or under common control with, such
other person;

4. Any officer, director, partner, co-partner, or
employee of such other person;

5. If such other person is an investment company, any
investment adviser thereof or any member of an
advisory board thereof; and

6. If such other person is an unincorporated investment
company not having a board of directors, the
depositor thereof.

<PAGE>

(e) "Associated Person" means any partner, officer or director of
Adviser (or any person performing similar functions), or any
person directly or indirectly controlling or controlled by
Adviser, or any employee of Adviser.

(f) "Beneficial Ownership" shall be interpreted in the same manner
as it would be in determining whether a person is subject to
the provisions of Section 16 of the Securities Exchange Act of
1934 and the rules and regulations thereunder, except that the
determination of direct or indirect beneficial ownership shall
apply to all securities which an Access Person has or
acquires. To have beneficial ownership, a person must have a
direct or indirect pecuniary interest, which is the
opportunity to profit directly or indirectly from a
transaction in securities. Thus, a person may be deemed to
have beneficial ownership of securities held by members of his
or her immediate family sharing the same household, or by
certain partnerships, trust, corporations or other
arrangements. For additional information, see Appendix A.

(g) "Code" means this Code of Ethics, as amended from time to
time.

(h) "Control" shall have the meaning as that set forth in Section
2(a)(9) of the Investment Company Act of 1940, as amended. For
example, "control" means the power to exercise a controlling
influence over the management or policies of a company.
Beneficial ownership of more than 25% of the voting securities
of a company is presumed to be "control" of such company.

(i) "Disinterested Director" means a director of a Fund who is not
an "interested person" of the Fund within the meaning of
Section 2(a)(19) of the Act.

(j) "Fund" means each of the registered investment companies
within the IAI Family of Funds.

(k) "Insider" means Adviser or an Associated Person of Adviser, or
any Affiliated Person thereof, or any member of the immediate
family. Additionally, a person is deemed an "Insider" if such
person enters into a special confidential relationship in the
conduct of the affairs of Adviser, or any Affiliated Person
thereof, and as a result is given access to Material nonpublic
information. Examples of such Insiders include accountants,
consultants, advisers, attorneys, bank lending officers, and
the employees of such organizations.

(l) "Insider Trading" means the use of Material nonpublic
information to trade in a Security (whether or not one is an
Insider) or the communication of Material nonpublic
information to others. While the meaning of the term is not
static, "Insider Trading" generally includes:

1. trading in a Security by an Insider, while in
possession of Material nonpublic information;

<PAGE>

2. trading in a Security by a person who is not an
Insider, while in possession of Material nonpublic
information, where the information either was
disclosed to such person in violation of an Insider's
duty to keep it confidential or was misappropriated;
and

3. communicating Material nonpublic information to any
person, who then trades in a Security while in
possession of such information.

(m) "Investment Personnel" means any Portfolio Manager or employee
who provides investment-related information or advice to a
Portfolio Manager or helps execute a Portfolio Manager's
decisions, including securities analysts and traders.

(n) "Material non-public information" means information that has
not been effectively communicated to the marketplace, and for
which there is a substantial likelihood that a reasonable
investor would consider it important in making investment
decisions, or information that is reasonably certain to have a
substantial effect on the price of a company's securities.
Examples of material information include information regarding
dividend changes, earnings estimates, changes in previously
released earnings estimates, significant merger or acquisition
proposals or agreements, major litigation, liquidation
problems, and extraordinary management developments.

(o) "Member of immediate family" of a person includes such
person's spouse, children under the age of twenty-five years
residing with such person, and any trust or estate in which
such person or any other member of his immediate family has a
substantial beneficial interest, unless neither such person
nor any other member of his immediate family is able to
control or participate in the investment decisions of such
trust or estate.

(p) "Non-Executive Director" means a director of Adviser who is
not an employee and who does not have timely access to
purchases and sales of securities by Adviser or the making of
recommendations with respect to such purchases and sales.

(q) "Portfolio Manager" means any employee who has direct
responsibility and authority to make investment decisions for
a Fund or other client of Adviser.

(r) "Security" shall have the meaning set forth in Section
2(a)(36) of the 1940 Act. For example, "security" includes any
note, stock, bond, debenture, certificate of interest or
participation in any profit sharing agreement, any put, call,
straddle, option, or privilege on any security, certificate of
deposit, or group or index of securities (including any
interest therein or based on the value thereof), or any put,
call, straddle, option, or privilege entered into on a
securities exchange relating to foreign currency.

<PAGE>

(s) "Senior Management" means any officer of Adviser with the
title of Senior Vice President or greater for Investment
Advisers, Inc. and IAI Securities and Director or greater for
IAI International, Inc. and such other persons as may be so
notified in writing by the Director of Compliance. Such term
shall not include Non-Executive Directors.

(t) "1934 Act" means the Securities Exchange Act of 1934, as
amended.

(u) "1940 Act" means the Investment Company Act of 1940, as
amended.

<PAGE>

APPENDIX A

Definition of Beneficial Ownership

The term "beneficial ownership" of securities would include not only
ownership of securities held by an Access Person for his or her own benefit.
Whether in bearer form or registered in his or her own name or otherwise, but
also ownership of securities held for his or her benefit by others (regardless
of whether or how they are registered) such as custodians, brokers, executors,
administrators, or trustees (including trusts in which he or she has only a
remainder interest), and securities held for his or her account by pledges,
securities owned by a partnership in which he or she should regard as a personal
holding corporation. Correspondingly, this term would exclude securities held by
an Access Person for the benefit of someone else.

Ordinarily, this term would not include securities held by executors or
administrators in estates in which an Access Person is a legatee or beneficiary
unless there is a specific legacy to such person of such securities or such
person is the sole legatee or beneficiary and there are other assets in the
estate sufficient to pay debts ranking ahead of such legacy, or the securities
are held in the estate more than a year after the decedent's death.

Securities held in the name of another should be considered as
"beneficially" owned by an Access Person where such person enjoys "benefits
substantially equivalent to ownership". The SEC has said that although the final
determination of beneficial ownership is a question to be determined in the
light of the facts of the particular case, generally a person is regarded as the
beneficial owner of securities held in the name of his or her spouse and their
minor children. Absent special circumstances such relationship ordinarily
results in such person obtaining benefits substantially equivalent to ownership,
e.g., application of the income derived from such securities to maintain a
common home, to meet expenses which such person otherwise would meet from other
sources, or the ability to exercise a controlling influence over the purchase,
sale or voting of such securities.

An Access Person also may be regarded as the beneficial owner of
securities held in the name of another person, if by reason of any contract,
understanding, relationship, agreement or other arrangement, he obtains
therefrom benefits substantially equivalent to those of ownership. Moreover, the
fact that the holder is a relative or relative of a spouse and sharing the same
home as an Access Person may in itself indicate that the Access Person would
obtain benefits substantially equivalent to those of ownership from securities
held in the name of such relative. Thus, absent countervailing facts, it is
expected that securities held by relatives who share the same home as an Access
Person will be treated as being beneficially owned by the Access Person.

An Access Person also is regarded as the beneficial owner of securities
held in the name of a spouse, minor children or other person, even though he
does not obtain therefrom the aforementioned benefits of ownership, if he can
vest or revest title in himself at once or at some future time.

.....................