ND TAX FREE FUND INC /ND/, 485APOS, 1996-06-25

ND TAX FREE FUND INC /ND/
485APOS, 1996-06-25

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<PAGE>

As filed with the Securities and Exchange Commission

June 25, 1996

File Nos. 33-25138 and 811-5681
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ]
Pre-Effective Amendment No. [ ]

Post-Effective Amendment No. 10 [ X ]

AND

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

Amendment No. 12

ND TAX-FREE FUND, INC.
(Exact Name of Registrant as Specified in Charter)

1 North Main, Minot, North Dakota 58703
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, including Area Code:
(701) 852-5292

Robert E. Walstad
President
ND Tax-Free Fund, Inc.

1 North Main
Minot, North Dakota 58703
(Name and Address of Agent for Service)

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

[_] immediately upon filing pursuant to paragraph (b)

[_] on (date) pursuant to paragraph (b)

[X] 60 days after filing pursuant to paragraph (a)

[_] on (date) pursuant to paragraph (a) of Rule 485.

Registrant has registered an indefinite number of its shares under the
Securities Act of 1933 pursuant to Section 24(f) of the Investment Company Act
of 1940. Registrant's Rule 24f-2 Notice for the fiscal year ended December 31,
1995, was filed on February 26, 1996.

Page 1 of 70 pages

<PAGE>

ND TAX-FREE FUND, INC.
CROSS REFERENCE SHEET
PURSUANT TO RULE 495(A)

<TABLE>
<CAPTION>
PART A
ITEM
NUMBER PROSPECTUS CAPTION

<S> <C> <C>
1. Cover Page....................................................... Cover Page
2. Synopsis......................................................... FEE AND EXPENSE TABLE
and SYNOPSIS
3. Condensed Financial Information.................................. FINANCIAL HIGHLIGHTS
4. General Description of Registrant................................ GENERAL DESCRIPTION OF
THE FUND
5. Management of the Fund........................................... MANAGEMENT
5A. Management's Discussion of Fund Performance...................... Included in Annual Report
6. Capital Stock and Other Securities............................... SHARES
7. Purchase of Securities Being Offered............................. PURCHASE OF SHARES
8. Redemption or Repurchase......................................... REDEMPTION OF SHARES
9. Pending Legal Proceedings........................................ Inapplicable

<CAPTION>
PART B
ITEM STATEMENT OF ADDITIONAL
NUMBER INFORMATION CAPTION

<S> <C> <C>
10. Cover Page....................................................... Cover Page
11. Table of Contents................................................ TABLE OF CONTENTS
12. General Information and History.................................. Inapplicable
13. Investment Objectives and Policies............................... INVESTMENT POLICIES
AND TECHNIQUES
14. Management of the Fund........................................... MANAGEMENT OF THE FUND
15. Control Persons and Principal Holders of Securities.............. CONTROL PERSONS AND
PRINCIPAL HOLDERS
OF SECURITIES
16. Investment Advisory and Other Services........................... INVESTMENT ADVISORY
AND OTHER SERVICES
17. Brokerage Allocation and Other Practices......................... PORTFOLIO TRANSACTIONS
18. Capital Stock and Other Securities............................... Included in Prospectus
19. Purchase, Redemption and Pricing of Securities
Being Offered............................................... PURCHASE AND
REDEMPTION OF SHARES
20. Tax Status....................................................... DIVIDENDS AND TAXES
21. Underwriters..................................................... UNDERWRITER
22. Calculation of Performance Data.................................. CALCULATIONOF
PERFORMANCE DATA
23. Financial Statements............................................. FINANCIAL STATEMENTS
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
PART C
ITEM
NUMBER PAGE

<S> <C> <C>
24. Financial Statements and Exhibits................................ C-1
25. Persons Controlled by or Under Common Control with Registrant.... C-2
26. Number of Holders of Securities.................................. C-2
27. Indemnification.................................................. C-2
28. Business and Other Connections of Investment Adviser............. C-3
29. Principal Underwriters........................................... C-3
30. Location of Accounts and Records................................. C-4
31. Management Services.............................................. C-4
32. Undertakings..................................................... C-4
33. Signature Page................................................... C-4
</TABLE>

<PAGE>

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[LOGO]
INTEGRITY
ND TAX-FREE FUND, INC.

1 North Main o Minot, North Dakota 58703 o (701) 852-5292
- --------------------------------------------------------------------------------

Prospectus May 1, 1996 (As amended June 25, 1996)

ND Tax-Free Fund, Inc. (the "Fund"), is an open-end, non-diversified,
management investment company. The Fund's objective is to provide as high a
level of current income exempt from federal and North Dakota income taxes as is
consistent with preservation of capital. The Fund will seek to achieve this
objective by investing primarily in tax-exempt securities issued by the State of
North Dakota and its political subdivisions, agencies, and instrumentalities
which are within the four highest grades of either Moody's Investors Service,
Inc., or Standard & Poor's Corporation or of comparable quality (See "Investment
Objective and Policies.").

Shares of the Fund are offered with no initial sales charge. A contingent
deferred sales charge is assessed on certain redemptions, however (See
"Contingent Deferred Sales Charge."). See "Distribution Plan" for information
about commissions paid to dealers who sell shares and Fund payments to
compensate for these and other distribution expenses and services.

This Prospectus contains information about the Fund that a prospective
investor should know before investing and should be retained for future
reference. More detailed information concerning the Fund is contained in the
Statement of Additional Information dated May 1, 1996 (as amended June 25,
1996), which has been filed with the Securities and Exchange Commission and is
incorporated into this Prospectus by reference. A free copy of the Statement of
Additional Information may be obtained by contacting the Fund at the address or
telephone number at the top of the page.

--------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------

<TABLE>
<S> <C>
Fee and Expense Table..................................2
Synopsis...............................................3
Financial Highlights...................................5
General Description of the Fund........................6
Management............................................12
Shares................................................13
Purchase of Shares....................................16
Redemption of Shares..................................18
Performance Data......................................20
</TABLE>

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

FEE AND EXPENSE TABLE

The purpose of the FEE AND EXPENSE TABLE is to assist the investor in
understanding the various costs and expenses that an investor in the Fund will
bear directly or indirectly. For more complete descriptions of these costs and
expenses, see MANAGEMENT, PURCHASE OF SHARES, and REDEMPTION OF SHARES.

_________________________________

<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price).............................None
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price)..................None
Maximum Deferred Sales Load (as a percentage of redemption proceeds)....................................4.00%(1)
Redemption Fees.........................................................................................None

ANNUAL FUND OPERATING EXPENSES (After Fee Waiver and Expense Assumption)
(as a percentage of average net assets) (2)
Management Fees........................................................................................ 0.60%
12b-1 Fees (3)......................................................................................... 0.30% (4)
Other Expenses After Expense Assumption................................................................ 0.20% (5)
----
Total Fund Operating Expenses (After Fee Waiver and Expense Assumption).............................. 1.10% (6)
</TABLE>

<TABLE>
<CAPTION>
EXAMPLE (7) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (i) 5% annual return and (ii)
redemption at the end of each time period: $51.00 $65.00 $71.00 $134.00

You would pay the following expenses on the same $11.00 $35.00 $61.00 $134.00
investment, assuming no redemption:
</TABLE>

_________________________________

(1) 4% is the maximum contingent deferred sales charge ("charge") which may
be assessed upon redemption of shares. As more fully explained under "Contingent
Deferred Sales Charge," a charge is assessed, with certain exceptions, against
shares which are redeemed within the first five years of their purchase. The
charge varies from a maximum of 4% for shares which are redeemed within the
first two years, down to 1% for shares redeemed within the fifth year, after
which no further charge is assessed, in accordance with the following schedule:

<TABLE>
<CAPTION>
Year of Purchase 1 2 3 4 5 6 & Following
---------------- --- --- --- --- --- -------------
<S> <C> <C> <C> <C> <C> <C>
Contingent Deferred Sales Charge 4% 4% 3% 2% 1% 0
</TABLE>

(2) Assumes that the percentages shown remain the same in each year. The
percentages have been restated to reflect operating expenses that are expected
to occur during the current fiscal year.

(3) Because the Fund pays 12b-1 fees, long-term shareholders may pay more
in distribution expenses than the economic equivalent of the maximum front-end
sales charges permitted by the NASD.

(4) Under the Distribution Agreement, ND Capital, Inc. (the "Underwriter"),
is entitled to a fee, calculated daily and paid monthly, at the annual rate of
0.85% of the average daily net assets of the Fund. The Underwriter has
voluntarily agreed to waive a portion of this fee during the early stages of the
Fund's exis-

2
<PAGE>

tence. The Fund incurred a fee of $238,662 for the fiscal year ended December
31, 1995, all of which was used to partially defray the costs of commissions
paid to dealers.

(5) "Other Expenses" are estimated. ND Holdings, Inc., voluntarily agreed
to assume any "Other Expenses" in excess of 0.20% on an annualized basis of the
Fund's average daily net assets for fiscal year 1995 and has also voluntarily
agreed to do so for fiscal year 1996. Absent the expense assumption, "Other
Expenses" would have been 0.204% of average daily net assets on an annualized
basis for fiscal year 1995.

(6) Absent the fee waiver and expense assumption, estimated "Total Fund
Operating Expenses" would have been 1.65% of average daily net assets on an
annualized basis for fiscal year 1995.

(7) THE EXAMPLE IS BASED UPON PERCENTAGES IN THE TABLE ABOVE AND SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESSER THAN THOSE SHOWN. If the fee waiver and expense assumption
are removed, the expenses contained in the example will increase. The Securities
and Exchange Commission requires the use of an assumed 5% annual return. The
example assumes the reinvestment of all dividends and distributions. All dollar
figures have been rounded to the nearest dollar.

SYNOPSIS

INVESTMENT OBJECTIVE; PERMITTED INVESTMENTS

The Fund is an open-end, non-diversified, management investment company.
The Fund's objective is to provide as high a level of current income exempt from
federal and North Dakota income taxes as is consistent with preservation of
capital. The Fund will seek to achieve this objective by investing primarily in
tax-exempt securities issued by the State of North Dakota and its political
subdivisions, agencies, and instrumentalities which are within the four highest
grades of either Moody's Investors Service, Inc., or Standard & Poor's
Corporation or of comparable quality. There is no assurance that the Fund's
objective will be achieved. The Fund may also purchase and sell put and call
options and financial futures contracts and options thereon. See "Investment
Objective and Policies" and "Other Investment Practices."

INVESTMENT ADVISER AND UNDERWRITER

ND Money Management, Inc. (the "Investment Adviser"), has been retained
under an Investment Advisory Agreement to act as the Fund's investment adviser.
The Investment Adviser furnishes the Fund with investment advice and, in
general, supervises the management and investment program of the Fund. Under the
Investment Advisory Agreement, the Fund has agreed to pay the Investment Adviser
an annual fee, payable monthly, of 0.60% of the Fund's average daily net assets.
See "Investment Adviser."

ND Capital, Inc. (the "Underwriter"), is the Fund's principal underwriter.
See "Purchase of Shares."

PURCHASES AND REDEMPTIONS

Shares may be purchased from investment dealers who have sales agreements
with the Underwriter or from the Underwriter at the public offering price, which
is the net asset value next determined after the Fund receives an order. The
minimum initial investment is $1,000 ($100 for the Monthomatic Investment Plan),
and subsequent investments must be at least $50. See "Purchase of Shares." No
sales charge is imposed when shares are purchased. However, a contingent
deferred sales charge is imposed if certain shares are redeemed within five
years after their purchase. See "Redemption of Shares."

3
<PAGE>

INVESTORS IN THE FUND

The Fund is designed for persons who are seeking a high level of income
exempt from federal and North Dakota income taxes from a portfolio consisting
primarily of investment grade Municipal Securities. Dividends derived from
earnings of North Dakota state and local government issues are exempt from North
Dakota income taxes. Through an investment in shares of the Fund, investors
receive the benefits of professional management and liquidity. In addition, the
Fund offers the economic advantages of block purchases of securities and relief
from administrative details, such as accounting for distributions and the
safekeeping of securities. The Fund's yield and net asset value will fluctuate.

DIVIDENDS

The Fund declares daily dividends of its net investment income on shares
for which it has received payment. The Fund distributes income dividends monthly
and distributes any net realized short-term and long-term capital gains
annually. Investors may elect to have income and capital gains dividends
automatically reinvested in shares of the Fund. See "Dividends and Taxes."

ORGANIZATION; SHARE ATTRIBUTES; MEETINGS

The Fund is organized as a corporation under the laws of the State of North
Dakota and is authorized to issue a total of 100,000,000 shares, all of one
class and one series, with a par value of $.001 per share. Shares are fully paid
and nonassessable when issued, are redeemable and freely transferable, and have
equal rights and preferences in all matters, including voting. There are no
subscription, preemptive, or conversion rights. Regular meetings of shareholders
need not be held unless required under the North Dakota Business Corporation Act
or the Investment Company Act of 1940. Special meetings of shareholders may be
called for any purpose at any time in the manner prescribed under the North
Dakota Business Corporation Act.

SPECIAL CONSIDERATIONS

An investment in the Fund is subject to a number of different risks, some
of which are described under "Investment Objective and Policies" and "Other
Investment Practices." As with other mutual funds, there can be no assurance
that the Fund will achieve its objective.

4
<PAGE>

FINANCIAL HIGHLIGHTS

Selected per share data and ratios in the table have been derived from the
financial statements of the Fund which have been audited by Eide Helmeke & Co.
and Brady, Martz & Associates, P.C. ("Brady, Martz"), the Fund's former and
present independent public accountant, respectively. The Fund's complete,
current audited financial statements, including Brady, Martz' report thereon,
are contained in the Statement of Additional Information. Further information
about the Fund's performance is contained in the 1995 Annual Report to
shareholders. Copies of the Statement of Additional Information and 1995 Annual
Report may be obtained from the Fund upon request and without charge.

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1995 1994 1993 1992 1991 1990
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .................... $ 8.83 $ 9.52 $ 9.49 $ 9.47 $ 9.36 $ 9.49
-------------------------------------------------------------------------

INCOME FROM INVESTMENT OPERATIONS:
Net investment income ............................... $ .47 $ .48 $ .52 $ .59 $ .61 $ .63
Net realized and unrealized gain (loss) on investment
and futures transactions ............................ .28 (.67) .05 .04 .11 (.13)
-------------------------------------------------------------------------

Total income(loss) from investment operations ...... $ .75 $ (.19) $ .57 $ .63 $ .72 $ .50
-------------------------------------------------------------------------

LESS DISTRIBUTIONS:
Dividends from net investment income ................ $ (.47) $ (.48) $ (.52) $ (.59) $ (.61) $ (.63)
Distributions in excess of net investment income ... (.02) (.02) (.02) (.02) .00 .00
-------------------------------------------------------------------------

Total distributions .............................. $ (.49) $ (.50) $ (.54) $ (.61) $ (.61) $ (.63)
-------------------------------------------------------------------------

NET ASSET VALUE, END OF PERIOD .......................... $ 9.09 $ 8.83 $ 9.52 $ 9.49 $ 9.47 $ 9.36
=========================================================================

TOTAL RETURN .......................................... 8.68%(A) (2.07)%(A) 5.94%(A) 6.62%(A) 7.86%(A) 7.96%(A)

Ratios/Supplemental Data:
Net assets, end of period (in thousands) ........... $94,532 $91,865 $85,042 $61,429 $31,243 $14,793
Ratio of net expenses (after expense assumption)
to average net assets ............................... 1.05%(B) 1.06%(B) 1.01%(B) 0.95%(B) 0.72%(B) 0.49%(B)

Ratio of net investment income to average net assets 5.20% 5.19% 5.39% 5.91% 6.26% 6.68%
Portfolio turnover rate ............................. 8.02% 5.55% 18.59% 17.35% 14.11% 57.96%
</TABLE>

(A) Excludes contingent deferred sales charge of 4%.

(B) During the periods indicated above, ND Holdings, Inc. assumed expenses of
$3,799, $31,115, $30,707, $66,030, $111,171, and $93,006, respectively. If
the expenses had not been assumed, the annualized ratios of total expenses
to average net assets would have been 1.05%, 1.10%, 1.05%, 1.08%, 1.18%,and
1.38%, respectively.

5
<PAGE>

GENERAL DESCRIPTION OF THE FUND

ORGANIZATION AND CLASSIFICATION

The Fund is an open-end, non-diversified, management investment company,
which is a type of company commonly known as a "mutual fund." The Fund was
incorporated under the laws of the State of North Dakota on October 7, 1988.

INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is to provide as high a level of current
income exempt from federal and North Dakota income taxes as is consistent with
the preservation of capital. There are market and investment risks with any
security, and the value of an investment in the Fund will fluctuate over time.
Normally, the value of the Fund's investments will vary inversely with changes
in interest rates. There can be no assurance that the Fund's objective will be
achieved.

The Fund will seek to achieve its objective by investing in a portfolio of
obligations issued by or on behalf of states, territories, and possessions of
the United States and the District of Columbia and their political subdivisions,
agencies, and instrumentalities, the interest from which is exempt from federal
income taxes ("Municipal Securities"). The Fund may also purchase and sell
options on securities, index options, financial futures contracts, and options
on financial futures contracts, which may produce taxable capital gains, in
connection with attempts to hedge its portfolio investments and not for
speculation.

The Fund will generally invest substantially all of its assets in
securities on which the interest is exempt from both federal and North Dakota
income taxes. As a matter of fundamental policy, the Fund will, under normal
market conditions, invest at least 80% of its net assets in Municipal Securities
which generate interest that is not subject to the alternative minimum tax. All
of the Fund's assets will consist of (1) Municipal Securities which are rated at
the time of purchase within the four highest grades of either Moody's Investors
Service, Inc. (Aaa, Aa, A, or Baa) or Standard & Poor's Corporation (AAA, AA, A,
or BBB) or which are unrated but, in the opinion of the Investment Adviser, are
of comparable quality, (2) temporary investments in high quality taxable
short-term, fixed income investments, as described in the paragraph which
follows and in the Statement of Additional Information under "Temporary
Investments," (3) options and financial futures as described under "Other
Investment Practices," and (4) cash. Municipal Securities within the four
highest grades of Moody's and Standard & Poor's are generally considered to be
"investment grade." Those rated Baa by Moody's and BBB by Standard & Poor's (and
equivalent for unrated securities) may have speculative characteristics, and
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity to make principal and interest payments than is the case
with higher grade bonds. The Fund will promptly dispose of a bond whose rating
drops below investment grade or is reduced in credit quality with respect to
unrated securities. The characteristics of the rating categories are described
in the Statement of Additional Information under "Appendix-Ratings of
Investments." As indicated under "Dividends and Taxes," the Fund may invest in
"private activity" bonds. The Fund may also purchase participation interests in
Municipal Securities from various financial institutions, including banks,
insurance companies, and broker-dealers. See "Municipal Securities" in the
Statement of Additional Information.

6
<PAGE>

rary investments subject to short-term repurchase agreements. When the Fund
invests in accordance with this policy, it may do so without any percentage
limitations.

The two principal classifications of Municipal Securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its faith, credit, and taxing power for the payment of
principal and interest. Revenue bonds are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source. Industrial
development bonds that are Municipal Securities are in most cases revenue bonds
and do not generally involve the pledge of the credit of the issuer of such
bonds. There are, of course, variations in the degree of risk of Municipal
Securities, both within a particular classification and between classifications,
depending upon numerous factors. See "Municipal Securities" in the Statement of
Additional Information.

The average weighted maturity of the Fund's debt securities is expected to
range between 15 and 25 years.

Any policy or restriction which involves a maximum percentage of securities
or assets will not be considered to be violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition of
securities or assets of, or borrowing by, the Fund. Changes due to market action
will not cause a violation of a policy or restriction.

The Fund will not normally engage in the trading of securities for the
purpose of realizing short-term profits, but it will adjust its portfolio as
considered advisable in view of prevailing or anticipated market conditions and
the Fund's investment objective. Accordingly, the Fund may sell portfolio
securities in anticipation of a rise in interest rates and purchase securities
in anticipation of a decline in interest rates. In addition, a security may be
sold and another of comparable quality purchased at approximately the same time
to take advantage of what the Investment Adviser believes to be a temporary
disparity in the normal yield relationship between the two securities. Yield
disparities may occur for reasons not directly related to the investment quality
of particular issues or the general movement of interest rates, such as changes
in the overall demand for or supply of various types of Municipal Securities or
changes in the investment objectives of some investors. Frequency of portfolio
turnover will not be a limiting factor should the Investment Adviser deem it
desirable to purchase or sell securities.

The Fund has adopted certain investment restrictions which are presented in
the Statement of Additional Information and which, together with the investment
objective and policies of the Fund, cannot be changed without approval by
holders of a majority of its outstanding shares. As defined in the Investment
Company Act of 1940, this means the lesser of the vote of (a) 67% of the
outstanding shares of the Fund present at a meeting where more than 50% of the
outstanding shares are present in person or by proxy; or (b) more than 50% of
the outstanding shares of the Fund.

Because North Dakota's economy is primarily dependent upon agriculture and
energy and mineral resources, various factors which influence these segments,
such as weather conditions, regulatory policies, world prices, the value of the
dollar, and international relations, could affect the ability of issuers of
North Dakota Municipal Securities to make interest and principal payments.

OTHER INVESTMENT PRACTICES

OPTIONS TRANSACTIONS

The Fund may write (sell) covered call options and secured put options on
up to 25% of its net assets and may purchase put and call options, provided that
no more than 5% of its net assets may be invested in

7
<PAGE>

premiums on such options. The Fund will engage in options transactions only in
Municipal Securities and temporary investments.

A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security at the exercise price during the
option period. A put option gives the purchaser the right to sell, and the
writer the obligation to buy, the underlying security at the exercise price
during the option period.

During the option period, the covered call writer gives up the potential
for capital appreciation above the exercise price should the underlying security
rise in value, and the secured put writer retains the risk of loss should the
underlying security decline in value. For the covered call writer, substantial
appreciation in the value of the underlying security would result in the
security being "called away." For the secured put writer, substantial
depreciation in the value of the underlying security would result in the
security being "put to" the writer. If a covered call option expires
unexercised, the writer realizes a gain and the buyer a loss in the amount of
the premium. If the covered call option writer has to sell the underlying
security because of the exercise of the call option, it realizes a gain or loss
from the sale of the underlying security, with the proceeds being increased by
the amount of the premium.

If a secured put option expires unexercised, the writer realizes a gain and
the buyer a loss in the amount of the premium. If the secured put writer has to
buy the underlying security because of the exercise of the put option, the
secured put writer incurs an unrealized loss to the extent that the current
market value of the underlying security is less than the exercise price of the
put option, minus the premium received.

As part of its options transactions, the Fund may also use index options
which are traded on national stock exchanges. Through the writing or purchase of
index options, the Fund can achieve many of the same objectives as through the
use of options on individual securities. Options on securities indices are
similar to options on a security except that, rather than the right to take or
make delivery of a security at a specified price, an option on a securities
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the securities index upon which the
option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option.

Price movements in securities which the Fund owns or intends to purchase
will not correlate perfectly with movements in the level of the index, and,
therefore, the Fund bears the risk that a loss on an index option would not be
completely offset by movements in the price of such securities. As discussed
below with respect to futures contracts, the use of index options on a taxable
security may involve a greater risk of an imperfect correlation between price
movements in the Municipal Securities being hedged and the movements in the
level of the index. Because index options are settled in cash, a call writer
cannot determine the amount of its settlement obligations in advance and, unlike
call writing on specific securities, cannot provide in advance for, or cover,
its potential settlement obligations by acquiring and holding the underlying
securities.

FINANCIAL FUTURES TRANSACTIONS

The Fund may engage in various interest rate hedging transactions using
financial instruments with a high degree of correlation to the fixed-income
securities which the Fund may purchase for its portfolio, including interest
rate futures contracts in such financial instruments (e.g., futures contracts in
U.S. Treasury securities) and interest rate related indices (municipal bond
indices) and put and call options on such futures contracts and on such
financial instruments. Financial futures contracts are commodity contracts that
obligate the long or short holder to take or make delivery of a specified
quantity of a financial instrument, such as a security, or the cash value of a
securities index during a specified future period at a specified price. A "sale"
of a futures contract means the undertaking of a contractual obligation to
deliver

8
<PAGE>

the securities or the cash value of an index called for by the contract at a
specified price during a specified delivery period. A "purchase" of a futures
contract means the undertaking of a contractual obligation to acquire the
securities or cash value of an index at a specified price during a specified
delivery period. Although some financial futures contracts call for making or
taking delivery of the underlying securities, in most cases these obligations
are closed out before delivery. The closing of such a contractual obligation is
accomplished by purchasing or selling an identical offsetting futures contract.
Such a transaction cancels the obligation under the original contract to make or
take delivery. Other financial futures contracts, such as futures contracts on a
securities index, by their terms call for cash settlements.

At the time the Fund enters into a futures contract, it is required to
deposit with its Custodian a specified amount of cash or eligible securities
called "initial margin." The initial margin required for a futures contract is
set by the exchange on which the contract is traded. Subsequent payments, called
"variation margin," to and from the broker are made on a daily basis as the
market price of the futures contract fluctuates.

The Fund may engage in financial futures transactions as an attempt to
hedge against the effects of fluctuations in interest rates and other market
conditions. For example, if the Fund owned long-term Municipal Securities and
interest rates were expected to rise, it could sell futures contracts or a
Municipal Securities Index. If interest rates did increase, the value of the
Municipal Securities in the Fund would decline, but this decline would be offset
in whole or in part by an increase in the value of the Fund's futures contracts.
If, on the other hand, long-term interest rates were expected to decline, the
Fund could hold short-term Municipal Securities and benefit from the income
earned by holding such securities, while at the same time the Fund could
purchase futures contracts on a Municipal Securities Index. Thus, the Fund could
take advantage of the anticipated rise in the value of long-term Municipal
Securities without actually buying them. The futures contracts and short-term
Municipal Securities could then be liquidated and the cash proceeds used to buy
long-term Municipal Securities.

There are risks associated with the use of financial futures contracts,
because there may be an imperfect correlation between the price movements of the
futures contracts and price movements of the securities which the Fund owns or
intends to purchase. The Fund could lose money on the financial futures
contracts and also on the price of such securities. The degree of difference in
price movements between futures contracts and the securities being hedged
depends upon such things as variations in speculative market demand for futures
contracts and debt securities and differences between the securities being
hedged and the securities underlying the futures contracts, e.g., interest
rates, tax status, maturities, and creditworthiness of issuers. While interest
rates on taxable securities generally move in the same direction as interest
rates on Municipal Securities, there are frequently differences in the rate of
such movements and temporary dislocations. Accordingly, the use of a financial
futures contract on a taxable security or a taxable securities index may involve
a greater risk of an imperfect correlation between the price movements of the
futures contract and of the Municipal Security being hedged than when using a
financial futures contract on a Municipal Security or a Municipal Securities
Index. If a liquid secondary market did not exist when the Fund wished to close
out a financial futures contract, it would not be able to do so and would have
to continue making daily cash payments of variation margin in the event of
adverse price movements. If the Investment Adviser's judgment about the general
direction of interest rates or markets is wrong, the overall performance will be
poorer than if no such contracts had been used. The costs incurred in connection
with futures transactions would also reduce the Fund's yield. In addition,
futures markets have daily market price movement limits for many futures
contracts which may further inhibit the Investment Adviser's ability to manage
the Fund's portfolio. Futures contracts held by the Fund may be illiquid during
periods when daily market price movement limits have been reached. As a result,
net assets of the Fund may be impacted negatively until normal futures trading
resumes or until the Fund's futures

9
<PAGE>

contracts are closed out. Finally, certain provisions of Subchapter M of the
Internal Revenue Code restrict the use of futures contracts and options
techniques. See "Taxes" in the Statement of Additional Information.

The Fund may also purchase and write call and put options on financial
futures contracts in an attempt to hedge against the effects of fluctuations in
interest rates and other market conditions. A call option gives the purchaser
the right to buy, and the writer the obligation to sell, the underlying futures
contract at the exercise price during the option period. A put option gives the
purchaser the right to sell, and the writer the obligation to buy, the
underlying futures contract at the exercise price during the option period. Upon
exercise, the writer (seller) of the option delivers the futures contract to the
holder (buyer) at the exercise price. An option purchased by the Fund may expire
worthless in which case the Fund would lose the premium paid for it.

The Fund may engage in futures transactions only on commodities or
securities exchanges or boards of trade. The Fund will not engage in
transactions in financial futures contracts or related options for speculation,
but only as an attempt to hedge against changes in interest rates or market
conditions affecting the values of securities which the Fund owns or intends to
purchase. Although the successful use of futures contracts and options
techniques requires skills different from those needed to select portfolio
securities, the Investment Adviser has experience in the use of these
techniques.

To the extent necessary to comply with Securities and Exchange Commission
Release No. 10666, when purchasing a futures contract, writing a put option, or
entering into a delayed delivery purchase, the Fund will maintain in a
segregated account with its Custodian cash or liquid high-grade debt securities
equal to the value of such contracts. The amount held by the Custodian is less
than the amount held by any futures commission agent as initial margin and will
be marked to market daily.

DELAYED DELIVERY TRANSACTIONS

The Fund may purchase portfolio securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions involve a
commitment by the Fund to purchase securities with payment and delivery to take
place in the future in order to secure what is considered to be an advantageous
price or yield to the Fund at the time of entering into the transaction. The
value of fixed income securities to be delivered in the future will fluctuate as
interest rates vary. Because the Fund is required to set aside cash or liquid
high-grade debt securities to satisfy its commitments to purchase when-issued or
delayed delivery securities, management of the Fund's investments may be limited
if commitments to purchase when-issued or delayed delivery securities were to
exceed 25% of the value of its total assets.

To the extent the Fund engages in when-issued or delayed delivery
purchases, it will do so for the purpose of acquiring portfolio securities
consistent with the Fund's investment objective and policies and not for the
purpose of investment leverage or to speculate in interest rate changes. The
Fund will only make commitments to purchase securities on a when-issued or
delayed delivery basis with the intention of actually acquiring the securities,
but the Fund reserves the right to sell these securities before the settlement
date if deemed advisable.

BORROWING

The Fund may borrow money for temporary or emergency purposes and then only
in amounts not exceeding the lesser of 10% of its total assets valued at cost or
5% of its total assets valued at market, and, in any event, only if immediately
thereafter there is an asset coverage of at least 300%. The Fund will not
purchase portfolio securities when outstanding borrowings exceed 5% of total
assets. Interest paid on borrowed funds will decrease the net earnings of the
Fund. The Fund may mortgage, pledge, or hypothe-

10
<PAGE>

cate its assets in an amount not exceeding 10% of its total assets to secure
temporary or emergency borrowing. The policies set forth in this paragraph are
fundamental and may not be changed without the approval of a majority of the
Fund's shares.

PORTFOLIO TURNOVER

The portfolio turnover rate of the Fund is not expected to exceed 100%
annually, but on occasions when there are substantial adjustments in the
portfolio brought about by market conditions, such as significant changes in
interest rates, the portfolio turnover rate may be higher. A 100% annual
portfolio turnover rate would occur, for example, if all the investments in the
Fund's portfolio (exclusive of securities with less than one year to maturity)
were replaced once in a period of one year. Higher portfolio turnover rates may
result in increased expenses and taxable capital gains.

DIVERSIFICATION AND CONCENTRATION POLICIES

The Fund is a non-diversified investment company under the Investment
Company Act of 1940. This means that more than 5% of the Fund's assets may be
invested in the obligations of any issuer. Inasmuch as a relatively high
percentage of the Fund's assets may be invested in the obligations of a limited
number of issuers, the Fund's portfolio securities may be more susceptible to
any single economic, political, or regulatory occurrence than the portfolio
securities of a diversified investment company.

Because of the relatively small number of issuers of North Dakota Municipal
Securities, the Fund is more likely to invest a higher percentage of its assets
in the securities of a single issuer than an investment company which invests in
a broad range of tax-exempt securities. This practice involves an increased risk
of loss to the Fund if the issuer is unable to make interest or principal
payments or if the market value of such securities declines.

The Fund will not invest 25% or more of its total assets in any industry.
Governmental issuers of North Dakota Municipal Securities are not considered
part of any "industry." However, North Dakota Municipal Securities backed only
by the assets and revenues of non-governmental users will for this purpose be
deemed to be issued by such non-governmental users, in which case the 25%
limitation would apply to such obligations. Accordingly, no more than 25% of the
Fund's assets will be invested in obligations deemed to be issued by
non-governmental users in any one industry and in taxable obligations of issuers
in the same industry. In addition, the Fund may invest more than 25% of its net
assets in industrial development bonds whose revenue sources are from similar
types of projects, for example, education, electric utilities, health care,
housing, transportation, or water, sewer, and gas utilities. There may be
economic, business, or political developments or changes that affect all
securities of a similar type, such as proposed legislation affecting the
financing of certain projects, shortages or price increases of necessary
materials, or declining market needs for such projects. Therefore, developments
affecting a single issuer, industry, or securities financing similar types of
projects could have a significant effect on the Fund's performance.

SPECIAL CONSIDERATIONS

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<PAGE>

MANAGEMENT

BOARD OF DIRECTORS

Responsibility for overall management of the Fund rests with its Board of
Directors.

INVESTMENT ADVISER

ND Money Management, Inc. (the "Investment Adviser"), has been retained
under an Investment Advisory Agreement to act as the Fund's investment adviser
subject to the authority of the Board of Directors. The Investment Adviser is a
wholly-owned subsidiary of ND Holdings, Inc., a North Dakota venture capital
corporation which is also the Fund's promoter. The Investment Adviser was
incorporated under North Dakota law on August 19,1988, and also serves as
investment adviser for ND Insured Income Fund, Inc., Montana Tax-Free Fund,
Inc., South Dakota Tax-Free Fund, Inc., and Integrity Fund of Funds, Inc. The
address of the Investment Adviser is 1 North Main, Minot, North Dakota 58703.

The Investment Adviser furnishes the Fund with investment advice and, in
general, supervises the management and investment program of the Fund. The
Investment Adviser furnishes at its own expense all necessary administrative
services, office space, equipment, and clerical personnel for managing the
investments and effecting the portfolio transactions of the Fund. In addition,
the Investment Adviser pays the salaries and fees of all officers and directors
of the Fund who are affiliated persons of the Investment Adviser.

Under the Investment Advisory Agreement, the Fund has agreed to pay the
Investment Adviser an annual fee, payable monthly, of 0.60% of the Fund's
average daily net assets. The Fund incurred advisory fees of $572,789, or 0.60%
of the Fund's average net assets, for the fiscal year ended December 31, 1995.

W. Dan Korgel, portfolio manager, is primarily responsible for the
day-to-day management of the Fund's portfolio under the supervision and
direction of Robert E. Walstad, president of the Fund. Mr. Korgel has been
portfolio manager of the Fund since April 1988 and has served in a similar
capacity for four related funds, ND Insured Income Fund, Inc., Montana Tax-Free
Fund, Inc., South Dakota Tax-Free Fund, Inc., and Integrity Fund of Funds, Inc.,
since November 1990, July 1993, March 1994, and December 1994 through December
1995, respectively. Mr. Walstad is also president of ND Insured Income Fund,
Inc., Montana Tax-Free Fund, Inc., South Dakota Tax-Free Fund, Inc., and
Integrity Fund of Funds, Inc., and has supervised and directed the management of
their portfolios since they commenced operations.

CUSTODIAN, TRANSFER AGENT, AND ACCOUNTING SERVICES AGENT

First American Bank West, 20 First Street SW, Minot, North Dakota 58701,
serves as Custodian for the Fund's portfolio securities and cash. ND Resources,
Inc. ("Resources"), a wholly-owned subsidiary of ND Holdings, Inc., 1 North
Main, Minot, North Dakota 58701, is the Fund's Transfer Agent. As Transfer
Agent, Resources performs many of the Fund's clerical and administrative
functions, for which it is paid a monthly fee ranging from .16 of 1% of the net
asset value of all outstanding Fund shares up to $10 million down to .09 of 1%
from $50,000,001 and larger. Resources also provides internal accounting and
related services for the Fund, for which it is paid a monthly fee of $2,000 plus
0.05% of the Fund's average daily net assets on an annual basis for the first
$50 million down to 0.01% for net assets in excess of $500 million.

12
<PAGE>

EXPENSES

The expenses of the Fund are deducted from its total income before
dividends are paid. These expenses include, but are not limited to,
organizational expenses; taxes; interest; brokerage fees and commissions, if
any; fees and expenses of directors and officers of the Fund who are not
officers or directors of the Investment Adviser; Securities and Exchange
Commission fees and state securities laws fees; charges of custodians and
transfer and dividend disbursing agents; insurance premiums; outside auditing
and legal expenses; costs of maintenance of the Fund's existence; costs
attributable to investor services, including, without limitation, telephone and
personnel expenses; costs of preparing and printing prospectuses and statements
of additional information for regulatory purposes and for distribution to
existing shareholders; costs of shareholders' reports and meetings of the
shareholders of the Fund and of the officers and Board of Directors of the Fund;
and any extraordinary expenses. In addition, the Fund pays distribution fees
pursuant to the terms of a Distribution Plan adopted under Rule 12b-1 of the
Investment Company Act of 1940.

The Fund's total expenses for the fiscal year ended December 31, 1995, as a
percentage of the Fund's average net assets was 1.05%.

PORTFOLIO TRANSACTIONS

The Investment Adviser may consider a number of factors in determining
which brokers to use for the Fund's portfolio transactions. These factors
include, but are not limited to, research services, reasonableness of
commissions, quality of services and execution, and sales of Fund shares. For
further details, see "Portfolio Transactions" in the Statement of Additional
Information.

In effecting purchases and sales of the Fund's portfolio securities, the
Investment Advisor and the Fund may place orders with and pay brokerage
commissions to brokers which are affiliated with the Fund, the Investment
Advisor, the Distributor or selected dealers participating in the offering of
the Fund's shares. Subject to rules adopted by the Securities and Exchange
Commission, the Fund may also purchase municipal securities from other members
of underwriting syndicates of which the Underwriter or other affiliates of the
Fund are members.

SHARE ATTRIBUTES

The Fund is authorized to issue a total of 100,000,000 shares, all of one
class and one series, with a par value of $.001 per share. All shares, when
issued, are fully paid and non-assessable and are redeemable and freely
transferable. All shares are common shares and have equal rights and preferences
in all matters, including voting. Cumulative voting, a form of proportional
representation, is permitted in the election of directors. Under cumulative
voting, a shareholder may cumulate votes either by casting for one candidate a
number of votes equal to the number of directors to be elected multiplied by the
number of votes represented by the shares entitled to vote or by distributing
all of those votes on the same principle among any number of candidates. There
are no subscription, preemptive, or conversion rights.

SHAREHOLDER MEETINGS

It is probable that the Fund will not hold regular meetings of
shareholders. The Fund's Bylaws provide that regular meetings of shareholders
may be held on an annual or other less frequent basis but need not be held
unless required by law. Under the North Dakota Business Corporation Act, if a
regular meeting of shareholders has not been held during the immediately
preceding fifteen months, a shareholder or shareholders holding 5% or more of
the voting power of all shares entitled to vote may demand a regular meeting by
written notice of demand given to the president or secretary of the Fund. Within
thirty days after receipt of the demand, the Board of Directors must cause a
regular meeting of shareholders to be called, or if the Board fails to do so,
the shareholder or shareholders making the demand may call the meeting by giving
notice as prescribed by law. All necessary expenses of the notice and the
meeting must be paid by the Fund.

13
<PAGE>

In addition to regular meetings, special meetings of shareholders may be
called for any purpose at any time in the manner prescribed under the North
Dakota Business Corporation Act. Meetings of shareholders will also be held
whenever required in order to comply with the Investment Company Act of 1940;
however, the Fund does not intend to hold annual shareholder meetings.
Shareholders have the right to remove directors.

DIVIDENDS AND TAXES

DIVIDENDS

All the net investment income of the Fund is declared daily as a dividend
on shares for which the Fund has received payment. Net investment income of the
Fund consists of all interest income earned on portfolio assets less all
expenses of the Fund. Income dividends will be distributed monthly, and
dividends of net realized short-term and long-term capital gains, if any, will
normally be paid out once a year after the end of the Fund's fiscal year. The
Fund may at any time vary the foregoing dividend practices and, therefore,
reserves the right from time to time to either distribute or retain for
reinvestment such of its net investment income and its net short-term and
long-term capital gains as the Board of Directors of the Fund determines
appropriate under the then current circumstances. In particular, and without
limiting the foregoing, the Fund may make additional distributions of net
investment income or capital gain net income in order to satisfy the minimum
distribution requirements contained in the Internal Revenue Code (the "Code").

Income and capital gain dividends, if any, will be credited to shareholder
accounts in full and fractional Fund shares at net asset value on the
reinvestment date, except that upon written request to the Transfer Agent, a
shareholder may select one of the following options:

(1) To receive income dividends in cash and capital gain dividends in
shares at net asset value;

(2) To receive both income and capital gain dividends in cash; or

(3) To receive both income and capital gain dividends in shares of
Integrity Fund of Funds, Inc. ("Integrity"), at net asset value. If you select
this option, you must first open a new account with Integrity with a minimum
investment of $100.

Cash dividends and reinvested dividends will be paid or reinvested, as the
case may be, on the last day of the month. Share certificates are issued only
for full shares and only upon a request by the shareholder to the Transfer
Agent.

TAXES

The Fund intends to qualify as a regulated investment company under
Subchapter M of the Code and, if so qualified, will not be liable for federal
income taxes to the extent its earnings are distributed. The Fund intends to
meet the requirements of the Code applicable to regulated investment companies
distributing tax-exempt interest dividends, and, therefore, dividends
representing net interest received on Municipal Securities will not be
includable by shareholders in their gross income for federal income tax
purposes, except to the extent such interest is subject to the alternative
minimum tax as discussed hereinafter. Dividends representing taxable net
investment income (such as net interest income from temporary investments in
obligations of the United States), net short-term capital gains, and gains on
the sale of market discount bonds purchased after April 30, 1993, if any, are
taxable to shareholders as ordinary income, and long-term capital gain dividends
are taxable to shareholders as long-term capital gains, regardless of how long
the shares have been held and whether received in cash or shares. Long-term
capital gain dividends received by individual shareholders whose marginal rate
on ordinary income is at least 31% are taxed at a maximum federal rate of 28%.
Dividends declared by the Fund in October, November, or December to shareholders
of record as of a date in one of those months and paid before the following
January are treat-

14
<PAGE>

ed as paid on December 31 of the calendar year declared for federal income tax
purposes. All taxpayers are required to disclose on their federal income tax
returns the amount of tax-exempt interest earned during the year, including
exempt-interest dividends from the Fund.

A capital gains dividend received shortly after the purchase of shares
reduces the net asset value of the shares by the amount of the dividend and,
although in effect a return of capital, will be taxable to the shareholder. If
the net asset value of shares were reduced below the shareholder's cost by
dividends representing gains realized on sales of securities, such dividends
would be a return of investment though taxable as stated above. In addition,
shareholders may lose the tax-exempt status on accrued income if shares are
redeemed before a dividend is declared.

Net interest on certain "private activity bonds" issued on or after
August 8, 1986, is treated as an item of tax preference and may, therefore, be
subject to both the individual and corporate alternative minimum tax. To the
extent provided by regulations to be issued by the Secretary of the Treasury,
exempt-interest dividends from the Fund are to be treated as interest on
"private activity bonds" in proportion to the interest the Fund receives from
private activity bonds, reduced by allowable deductions.

Exempt-interest dividends, except to the extent of interest from "private
activity bonds," are not treated as a tax preference item. For a corporate
shareholder, however, such dividends will be included in determining such
corporate shareholder's "adjusted current earnings." Seventy-five percent of the
excess, if any, of "adjusted current earnings" over the corporate shareholder's
alternative minimum taxable income with certain adjustments will be a tax
preference item. Corporate shareholders are advised to consult their tax
advisers with respect to alternative minimum tax consequences.

Individuals whose modified income exceeds a base amount will be subject to
federal income tax on up to 85% of their Social Security benefits. Modified
income includes adjusted gross income, one-half of Social Security benefits, and
tax-exempt interest, including exempt-interest dividends from the Fund.

Dividends to the extent of interest received on North Dakota state and
local government issues are exempt from North Dakota state income taxes.
Distributions which are categorized as long-term capital gains for federal
income tax purposes will generally receive the same treatment under North Dakota
law. However, dividends from the Fund are not exempt to banks which are
shareholders of the Fund under North Dakota law. Banks are advised to consult
their own tax advisers in that regard.

The Fund is required by law to withhold 31% of taxable dividends and
redemption proceeds paid to certain shareholders who do not furnish a correct
taxpayer identification number (in the case of individuals, a Social Security
number) and in certain other circumstances.

After each transaction, shareholders will receive a confirmation statement
giving complete details of the transaction. In addition, the statement will show
the details of prior transactions in the account during the calendar year.
Information for federal income tax purposes will be provided after the end of
the calendar year.

NET ASSET VALUE

The net asset value per share is determined by calculating the total value
of the Fund's assets, which will normally be composed mainly of investment
securities, deducting total liabilities, and dividing the result by the number
of shares outstanding. Fixed income securities are valued by using market
quotations or independent pricing services that use prices provided by market
makers or estimates of market values obtained from yield data relating to
instruments or securities with similar characteristics. Exchange-traded options
are valued at the last sale price unless there is no sale price, in which event
the options will be valued at the mean between the current closing bid and asked
prices. Financial futures are valued at the set-

15
<PAGE>

tlement price established each day by the board of trade or exchange on which
they are traded. Other securities, including restricted securities, and other
assets are valued at fair value as determined in good faith by the Board of
Directors. If an event were to occur, after the value of an instrument was so
established but before the net asset value per share was determined, which was
likely to materially change the net asset value, then that instrument would be
valued using fair value considerations by the Board of Directors or its
delegates. On each day the New York Stock Exchange is open for trading, the net
asset value is determined as of the close of the Exchange (normally, 3:00 p.m.
Minot, North Dakota, time).

PURCHASE OF SHARES

GENERAL INFORMATION

The Fund's principal underwriter is ND Capital, Inc. (the "Underwriter"),
1 North Main, Minot, North Dakota 58701. Shares may be purchased from investment
dealers who have sales agreements with the Underwriter or from the Underwriter
at the public offering price, which is the net asset value next determined after
the Fund receives an order. If you do not have a dealer, the Fund can refer you
to one. The minimum initial investment is $1,000 ($100 for the Monthomatic
Investment Plan), and the minimum subsequent investment is $50, but such minimum
amounts may be changed at any time in the Fund's discretion. The Fund allocates
net interest income to those shares for which the Fund has received payment. The
Fund receives the entire public offering price of all shares sold.

Orders for the purchase of shares will be confirmed at a price based on the
net asset value next determined after receipt of the order by the Fund. However,
orders received by dealers prior to the determination of net asset value (See
"Net Asset Value.") and received by the Fund prior to the close of its business
day will be confirmed at a price based on the net asset value effective on that
day. Dealers are obligated to transmit orders promptly.

No sales charge is imposed when shares are purchased. However, a contingent
deferred sales charge is imposed if certain shares are redeemed within five
years after their purchase. See "Redemption of Shares." The Underwriter will pay
a sales commission to investment dealers and to its salesmen who sell Fund
shares. The Underwriter may also provide additional promotional incentives to
dealers who sell Fund shares. In some instances, these incentives may be offered
only to certain dealers who have sold or may sell significant amounts of shares.

The Fund reserves the right to withdraw all or any part of the offering
made by this Prospectus and to reject purchase orders. Also, from time to time,
the Fund may temporarily suspend the offering of its shares to new investors.
During the period of such suspension, persons who are already shareholders of
the Fund normally will be permitted to continue to purchase additional shares
and to have dividends reinvested.

In order to facilitate redemptions and to eliminate the need for
safekeeping, the Transfer Agent will not issue certificates for shares unless
requested to do so. A shareholder may obtain a certificate by writing to the
Transfer Agent at the address on the cover of the Prospectus.

Shareholders should direct their inquiries to the Fund at the address and
telephone number shown on the cover page of the Prospectus or to the investment
dealer from which they received the Prospectus.

Robert E. Walstad and Peter A. Quist, who are directors and the
president-treasurer and vice president-secretary, respectively, of the Fund, are
also the only two directors and officers of the Underwriter. The Underwriter is
a subsidiary of ND Holdings, Inc., a North Dakota venture capital corporation
which is the Fund's promoter.

16
<PAGE>

MONTHOMATIC INVESTMENT PLAN

A shareholder may purchase additional Fund shares through an automatic
investment program. With the Monthomatic Investment Plan ("Monthomatic"),
monthly investments (minimum $50) are made automatically from the shareholder's
account at a bank, savings and loan association, or credit union into the
shareholder's Fund account. By enrolling in Monthomatic, the shareholder
authorizes the Fund and its agents to either draw checks or initiate Automated
Clearing House debits against the designated account at a bank or other
financial institution. Such account must have check or draft writing privileges.
This privilege may be selected by completing the appropriate section on the
Account Application or by contacting the Underwriter for appropriate forms.

A shareholder may terminate the Plan by sending written notice to the
Transfer Agent at the address shown on the back cover of the Prospectus.
Termination by a shareholder will become effective within 7 days after the
Transfer Agent has received the request. The Fund may immediately terminate a
shareholder's Plan in the event that any item is unpaid by the shareholder's
financial institution. The Fund may terminate or modify this privilege at any
time.

DISTRIBUTION PLAN

Although Fund shares are sold without an initial sales charge, the
Underwriter pays a sales commission equal to 3-3/4% (1% on sales of $1 million
or more) of the amount invested to dealers who sell shares (excluding sales to
investors exempt from the contingent deferred sales charge). As a further
inducement to the sale of Fund shares and in recognition of services provided to
shareholders, the Underwriter may also make commission payments to dealers at
the annual rate of up to 0.25% of the average net assets (computed as described
under "Net Asset Value") which are attributable to shareholders of the Fund for
whom such dealers are designated as the dealers of record. Among the various
services which dealers provide shareholders are giving investment advice with
respect to the Fund on an ongoing basis, assisting in redeeming shares,
interpreting confirmations, statements, and other documents, and communicating
with the Fund and its Transfer Agent and Custodian.

To compensate the Underwriter for its services and expenses in distributing
shares, including the foregoing payments, the Fund has adopted a Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940. The Plan provides for monthly payments by the Fund to the Underwriter at
the annual rate of 0.85% of the average daily net assets of the Fund. The Plan
must be approved annually by the Fund's Board of Directors and may be terminated
at any time by a majority vote of the directors who are not "interested persons"
of the Fund and have no direct or indirect financial interest in the operation
of the Plan or in the Distribution Agreement or in any other agreement related
to the Plan (the "Qualified Directors") or by vote of a majority of the
outstanding shares of the Fund. If the Plan is terminated and not continued, the
Underwriter is not legally entitled to any payments for amounts expended but not
yet recovered. However, the Fund's Board of Directors reserves the right to make
payments to the Underwriter notwithstanding a termination or non-continuance.
The Plan may not be amended so as to increase materially the amount of the fee
unless approved by a vote of at least a majority of the outstanding shares of
the Fund. In addition, no material amendment to the Plan may be made unless
approved by the Fund's Board of Directors. In addition to reimbursing the
Underwriter for commissions previously paid to dealers and related financing
costs (together with amounts received from contingent deferred sales charges),
the Plan also provides the Underwriter with reasonable compensation for its
services and other expenses. Other expenses incurred by the Underwriter may
include allocable overhead expenses, such as salaries, rent, printing, and
communications.

17
<PAGE>

During periods of substantial sales of shares, the commissions paid by the
Underwriter to dealers may, together with other distribution expenses, exceed
the amount of Plan payments it receives. This is likely to be the case in the
early years of the Fund's operations. In other periods, the payments under the
Plan may exceed the amount of commissions and other distribution expenses paid
by the Underwriter, which has the effect of reimbursing the Underwriter for
distribution expenses incurred in prior periods. Payments made to the
Underwriter under the Plan are not dependent upon expenses incurred, and in any
given year the Underwriter may have fewer expenses than the amount of the
payments, thus creating a "profit."

EXCHANGE PRIVILEGE

By contacting the Transfer Agent, a shareholder may exchange some or all of
his shares in any of the funds underwritten by ND Capital, Inc. or Ranson
Capital Corporation at net asset value, subject to these conditions: (1) The
length of time of the investment will be carried forward to the Fund. (2) If you
paid a front-end sales charge, no contingent deferred sales charge will be
imposed in the event you redeem any or all of your shares. (3) If the original
fund is subject to a contingent deferred sales charge ("CDSC"), the CDSC will be
carried forward into the Fund and will be applied in the event you redeem any or
all of your shares.

Each exchange involves the redemption of fund shares to be exchanged and
the purchase of Fund shares. As a result, any gain or loss on the redemption of
fund shares exchanged is reportable on the shareholder's federal income tax
return. The exchange privilege may be changed or discontinued upon 60 days'
written notice to shareholders and is available only to shareholders in states
where such exchanges may be legally made. A sharehold considering an exchange
should obtain and read the prospectus of the Fund and consider the differences
between it and the fund whose shares he owns before making an exchange.

For further information on how to excercise the exchange privilege, contact
the Transfer Agent.

REDEMPTION OF SHARES

REDEMPTIONS

Any shareholder may require the Fund to redeem shares. When shares are held
for the account of a shareholder by the Fund's Transfer Agent, the shareholder
may redeem them by making a written request with signatures guaranteed to the
Transfer Agent at the address shown on the back cover of the Prospectus. When
certificates for shares have been issued, they must be mailed to or deposited
with the Transfer Agent, along with a duly endorsed stock power with signatures
guaranteed and accompanied by a written request for redemption. Signatures must
be guaranteed by a commercial bank, trust company, savings and loan association,
or member firm of a national securities exchange, and a signature guarantee will
be required before payment is made in connection with a redemption. A notary
public may not provide a signature guarantee. Further documentation may be
requested, and a signature guarantee is always required, from corporations,
custodians (e.g., under the Uniform Transfers to Minors Act), executors,
administrators, trustees, or guardians. The redemption request and stock power
must be signed exactly as the account is registered including any special
capacity of the registered owner. The redemption price will be the net asset
value next determined following receipt of a properly executed request with any
required documents, less any applicable contingent deferred sales charge, as
described below. Payment for shares redeemed will be made in cash as promptly as
practicable but in no event later than seven days after

18
<PAGE>

receipt of a properly executed letter of instructions accompanied by any
outstanding share certificates in proper form for transfer. When the Fund is
requested to redeem shares for which it may not yet have received good payment
(e.g., cash or certified check on a United States bank), it may delay the
mailing of a redemption check until such time as it has assured itself that good
payment has been collected for the purchase of such shares (which will generally
be within 15 calendar days).

CONTINGENT DEFERRED SALES CHARGE

Except as otherwise provided below, a contingent deferred sales charge
("charge") is imposed only if a shareholder redeems shares purchased within the
preceding five years. Shares acquired by reinvestment of dividends may be
redeemed without charge even though acquired within five years. In addition, a
number of shares having a value equal to any net increase in the value of all
shares purchased by the shareholder during the preceding five years will be
redeemed without a contingent deferred sales charge. Subject to the foregoing
exclusions, the amount of the charge is determined as a percentage of the
original purchase price of the redeemed shares and will depend on the number of
years the dollar amount being redeemed was invested, according to the following
table:

<TABLE>
<CAPTION>
YEAR SINCE REDEMPTION PERCENTAGE CONTINGENT
AMOUNT WAS INVESTED DEFERRED SALES CHARGE
<S> <C>
First........................................4.0%
Second.......................................4.0%
Third........................................3.0%
Fourth.......................................2.0%
Fifth........................................1.0%
Sixth and following........................No Charge
</TABLE>

If the initial amount of purchase is $1 million or more, the charge is
reduced to 1% and only applies during the first year of purchase. In addition,
purchases totaling $1 million or more made within 13 months of the initial
purchase date qualify for this exception, provided that the purchaser notifies
the Fund in writing at the time of the initial purchase of his or her intent to
purchase $1 million or more within 13 months and subsequently satisfies this
condition. Any shares purchased and sold within the 13-month period will be
deducted in computing total purchases, and the charge applies for one year after
purchases total a minimum of $1 million.

All purchases are considered made on the last day of the month of purchase.
In determining whether a contingent deferred sales charge is payable on any
redemption, the Fund will first redeem shares not subject to any charge.
Thereafter, in determining the applicable percentage rate, the amount of dollars
redeemed will be charged against the aggregate cost of shares purchased in each
year, beginning with the shares purchased earliest. This will result in a
shareholder paying the lowest possible contingent deferred sales charge rate.
For an example illustrating the operation of the contingent deferred sales
charge, see "Purchase and Redemption of Shares" in the Statement of Additional
Information.

The Fund may sell shares without a contingent deferred sales charge to
directors, officers, and employees (including retirees) of the Fund, of ND
Holdings, Inc., of ND Money Management, Inc., and of ND Capital, Inc., for
themselves or their spouses, children, or parents, and parents of spouses or to
any trust, pension, or profit-sharing, or other benefit plan for only such
persons at net asset value and in any amount. The Fund may also sell shares
without a contingent deferred sales charge to broker-dealers having sales
agreements with ND Capital, Inc., and registered representatives and other
employees of such broker-dealers, including their spouses and children; to
financial institutions having sales agreements with ND Capital, Inc., and
employees of such financial institutions, including their spouses and children;
and to any broker-dealer, financial institution, or other qualified firm which
receives no commissions for selling shares to its clients.

ND Capital, Inc., receives the entire amount of any contingent deferred
sales charges assessed.

19
<PAGE>

Reinvestment Privilege

You may reinvest up to the amount of your redemption proceeds free of all
sales charges for a period of 60 days. You will receive the net asset value per
share the day your check arrives at the Fund. If you were charged a contingent
deferred sales charge on your redemption, the amount you were charged will be
reinstated as additional shares upon repurchase in proportion to the
reinvestment amount of your redemption proceeds. Please remember that we need to
receive your reinvestment check within 60 days of the date of your redemption in
order for you to utilize the reinvestment privilege.

PERFORMANCE DATA

The Fund may publish certain performance figures in advertisements from
time to time. These performance figures may include yield, tax equivalent yield,
and total return figures.

Yield reflects the income per share deemed earned by the Fund's portfolio
investments. Yield is determined by dividing the net investment income per share
deemed earned during the preceding 30-day period by the offering price per share
on the last day of the period and annualizing the result. Tax equivalent yield
shows the yield from a taxable investment which would produce an after-tax yield
equal to that of a fund that invests in tax-exempt securities. lt is computed by
dividing the tax-exempt portion of the Fund's yield (as calculated above) by one
minus a stated income tax rate and adding the product to the portion (if any) of
the Fund's yield that is not tax-exempt. Yields are calculated according to
accounting methods that are standardized for all stock and bond funds. Because
yield calculation methods differ from the methods used for other accounting
purposes, the Fund's yield may not equal its distribution rate, the income paid
to an investor's account, or the income reported in the Fund's financial
statements.

Total return is the percentage change in the value of a hypothetical
investment that has occurred in the indicated time period, taking into account
the imposition of various fees, except the contingent deferred sales charge, and
assuming the reinvestment of all dividends and distributions. Cumulative total
return reflects the Fund's performance over a stated period of time. Average
annual total return reflects the hypothetical annually compounded return that
would have produced the same cumulative total return if the Fund's performance
had been constant over the entire period.

The Fund may also include in advertisements quarterly performance rankings
compiled by independent organizations such as Lipper Analytical Services and
publications which monitor the performance of mutual funds. Performance
information may be quoted numerically or may be represented in a table, graph,
or other illustration.

All performance figures are based on historical results and are not
intended to indicate future performance. A more detailed description of the
foregoing performance figures and their methods of computation is contained in
the Fund's Statement of Additional Information under CALCULATION OF PERFORMANCE
DATA.

20
<PAGE>

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21
<PAGE>

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22
<PAGE>

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23
<PAGE>

ND
TAX-FREE
FUND, INC.
- --------------------------------------------------------------------------------

1 North Main
Minot, ND 58703
(701) 852-5292

DIRECTORS
Lynn W. Aas
Minot, ND

Orlin W. Backes
Minot, ND

Arthur A. Link
Bismarck, ND

Peter A. Quist
Bismarck, ND

Robert E. Walstad
Minot, ND

INVESTMENT ADVISER
ND Money Management, Inc.
1 North Main
Minot, ND 58703

PRINCIPAL UNDERWRITER
ND Capital, Inc.
1 North Main
Minot, ND 58703

CUSTODIAN
First American Bank West
20 First Street SW
P.O. Box 1548
Minot, ND 58702

TRANSFER AGENT
ND Resources, Inc.
1 North Main
Minot, ND 58703

INDEPENDENT PUBLIC ACCOUNTANT
Brady, Martz & Associates, P.C.
24 West Central Avenue
Minot, ND 58701

LEGAL COUNSEL
Pringle & Herigstad, P.C.
20 First Street SW
P.O. Box 1000
Minot, ND 58702

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

ND TAX-FREE
FUND, INC.

A mutual fund for investors
seeking high current income
exempt from federal and
North Dakota income taxes

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

Prospectus
May 1, 1996

(As amended June 25, 1996)

[LOGO]
INTEGRITY
ND TAX FREE FUND

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

24
<PAGE>

ACCOUNT APPLICATION INTEGRITY MUTUAL FUNDS
ND TAX-FREE FUND, INC.
P.O. Box 759, Minot, ND 58702-0759

If you have any questions on this form or any shareholder services questions,
phone 1-800-601-5593.

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

1. ACCOUNT REGISTRATION (Please print.) - First Name, Middle Initial, and Last
NAME

____ INDIVIDUAL ____JOINT* *Joint tenants with rights of survivorship,
unless you specify otherwise

- ------------------------------------- --------------------------------------
Name Joint Owner's Name

____GIFT OR TRANSFER TO A MINOR (UGMA/UTMA)

__________________________as custodian for______________________ under the_____
Custodian's name Minor's name State
Uniform Gifts/Transfers to Minors Act

____TRUST*

_______________as trustee(s) of_______________________ _______________________
Trustee's name Name of trust agreement Date of trust agreement

*Please include copy of first and last page of trust agreement.

____CORPORATION/OTHER ENTITY*

- ------------------------------------- --------------------------------------
Name of corporation or other entity Type of organization (i.e.,
corporation, partnership, etc.)

*Please attach a certified copy of the corporate resolution showing the
person(s) authorized to act on this account.

____TOD (Transfer on Death)* *Transfer on Death form available upon request

ADDRESS_____________________________ CITY, STATE, ZIP__________________________

SOCIAL SECURITY OR TAXPAYER ID NUMBER_______________ TELEPHONE NUMBER___________

________________________________________________________________________________

2. INITIAL INVESTMENT

Check enclosed for $__________________ . Minimum initial investment is $1,000
($100 in Monthomatic Plan); subsequent $50.
Make check payable to: ND TAX-FREE FUND, INC.

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

3. Dividends Choose how you wish to receive dividends. IF NO BOX IS CHECKED,
OPTION A WILL BE ASSIGNED.

A. ____ All income and capital gains dividends reinvested into my
account.
B. ____ All income dividends in cash and capital gains reinvested in
my account. Complete cash dividends section below.
C. ____ All income and capital gains dividends paid to me in cash.
Complete cash dividends section below.
D. ____ All income and capital gains dividends reinvested in Integrity
Fund of Funds account #____________________________________

Please send cash dividends to: _______ Account registration address OR
_______ Special payee as follows:

Name____________________________________________________________________________

Address_______________________________ City, State, Zip_________________________

Account number (if applicable)__________________ Attach voided check if payable
to your bank account (signature guarantee not required).
* If payable to person or address other than registration, PLEASE signature
guarantee here:

________________________________________________________________________________

4. SYSTEMATIC INVESTMENT PROGRAM (MONTHOMATIC) COMPLETE THE FOLLOWING IF YOU
ARE ESTABLISHING A SYSTEMATIC INVESTMENT PROGRAM.

I authorize the Fund's Agent to draw checks or initiate Automated Clearing
House ("ACH") debits against the bank account provided below in the amount of
$________________________ (minimum $50)

Please check one: starting on the ___5th OR the ___20th
_____________________ (indicate month)

Name of Depositor_______________________ Bank Account Number____________________
(As shown on bank records)

Name of Bank____________________________ Address of Bank________________________
(The account must have check or draft writing privileges.)

City____________________________________ State, Zip_____________________________
As a convenience to us, we hereby request and authorize you to honor and charge
to our account (i) checks drawn on our account by Integrity Fund of Funds, Inc.,
and payable to the order of the Fund, and (ii) Automated Clearing House ("ACH")
debit entries initiated by any of us through Integrity Fund of Funds, Inc., for
the account of the Fund, provided in either case that there are sufficient
collected funds in said account to pay the same upon presentation. We agree that
your rights with respect to each such check or ACH debit shall be the same as if
either were signed personally by each of us. This authority is to remain in
effect until revoked by us in writing to you, and until you actually receive
such notice, we agree that you shall be fully protected in honoring any such
checks or ACH debits. We further agree that if any check or ACH debit be
dishonored, whether with or without cause and whether intentionally or
inadvertently, you shall be under no liability whatsoever.

Signature(s) of depositor(s):* Date:___________________
*Sign exactly as shown on bank records

X____________________________________ X________________________________
Signature Signature

Please attach a VOIDED check to ensure correct encoding.
<PAGE>

5. SYSTEMATIC WITHDRAWAL PLAN (Note: All distributions from the Fund must be
reinvested.)

Systematic Withdrawal (available only for accounts of $5,000 or more) - Redeem
sufficient shares or dollars on the 1st of the month and send check to the owner
listed above: _____Monthly _____Quarterly _____Semiannually _____Yearly for
$______________ or ____________ shares (minimum $100). The first redemption is
to take place on the 1st of __________________________________ (Indicate
month.)

If systematic withdrawal checks are payable to person or address other than as
registered above, make check payable to:
Name____________________________________________________________________________
Address__________________________________ City, State, Zip______________________
Account Number (if applicable)______________ Attach voided check if payable to
your bank account (signature guarantee not required).
If payable to person or address other than registration, PLEASE signature
guarantee here:

________________________________________________________________________________

6. YOUR SIGNATURE AND TAX CERTIFICATIONS

See enclosed substitute instructions and important notice. The Fund reserves the
right to refuse to open an account without either a certified taxpayer
identification number ("TIN") or a certification of foreign status. Failure to
provide the tax certifications in this section may result in backup withholding
on payments relating to your account and/or in your inability to qualify for
treaty withholding rates.

_____________________________________ OR _______________________________________
Social Security Number Employer Identification Number
I am a citizen of: ____U.S. ____ My country of residence for tax purposes is:
____U.S. Other_____________________________
Check one of the following:
______ The number shown above is my correct TIN. I am not subject to backup
withholding due to underreporting of interest or dividend income either
because no notification has been received from the IRS or because the
IRS has notified me that I am no longer subject to backup withholding.
(If you are subject to backup withholding, please cross out the second
sentence.)
______ Awaiting TIN. A TIN has not been issued to me, but I am in the process
of applying for a TIN from either the appropriate Internal Revenue
Service Center or Social Security Administration Office. I understand
that if I do not provide a TIN to the Fund within 60 days, the Fund is
required to commence backup withholding until I provide a certified
TIN. I am not subject to backup withholding due to underreporting of
interest or dividend income either because no notification has been
received from the IRS or because the IRS has notified me that I am no
longer subject to backup withholding. (If you are subject to backup
withholding, please cross out the third sentence.)
______ Exempt Recipient. I am an Exempt Recipient. The instructions give a
list of the most common Exempt Recipients. (You should still provide a
TIN.)
______ Exempt Foreign Person. I am an Exempt Foreign Person as explained in
the instructions.
Under the penalties of perjury, I certify that (1) the information provided on
this application is true, correct, and complete, (2) I have read the prospectus
for the Fund in which I am investing and agree to the terms thereof, and (3) I
am of legal age or an emancipated minor.

Date______________________________________
The Internal Revenue Service does not require your consent to any provision of
this document other than the certifications required to avoid backup
withholding.

X____________________________________ X______________________________________
Signature Signature

________________________________________________________________________________

7. BROKER/DEALER USE ONLY (Please print.)

We hereby submit this application for the purchase of shares of ND Tax-Free
Fund, Inc., indicated within the terms of our selling agreement with ND
Holdings, Inc., and with the prospectus for ND Tax-Free Fund, Inc.

Firm Name_____________________________ Branch Address__________________________

Representative's Name_________________ ________________________________________

Representative's Number_______________ Representative's Phone Number___________

________________________________________________________________________________

8. ADDITIONAL INFORMATION

Each time there is a transaction in a Shareholder Account, the shareholder and
representative will receive a confirmation statement showing the current
transaction.

All correspondence regarding Shareholder Accounts should be addressed to ND
Resources, Inc., P.O. Box 759, Minot, ND 58702. If you have any questions, call
1-800-601-5593.

Fund exchanges are acceptable within Integrity Mutual Funds. The account being
exchanged must bear the same account registration or must be accompanied by a
Signature Guarantee if the account value is over $50,000. A "Letter of
Instruction" stating from what fund to what fund is needed to do any exchange
and signed by all registered owners.

Phone orders: Payment for share purchases by telephone should be received within
three business days. Payment must be received within 7 days of the order or the
trade may be canceled, and the dealer or broker placing the trade will be liable
for any losses. It is a dealer's or broker's responsibility to promptly forward
payment and registration instructions (or completed applications) to the
Transfer Agent for shares being purchased.

Registration changes require that all registered owners sign and also require a
signature guarantee. Example: single to joint, joint to single, joint to trust,
etc...
<PAGE>

PART B
STATEMENT OF ADDITIONAL INFORMATION

May 1, 1996

(As amended June 25, 1996)

ND TAX-FREE FUND, INC.
1 North Main
Minot, North Dakota 58703
(701) 852-5292

This Part B Statement of Additional Information is not a prospectus. It
should be read in conjunction with the Prospectus of ND Tax-Free Fund, Inc. (the
"Fund"), dated May 1, 1996 (as amended June 25, 1996). The Prospectus may be
obtained without charge from the Fund.

__________

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
<S> <C>
Investments .............................................................. B-2
Investment Policies and Techniques........................................ B-4
Investment Restrictions .................................................. B-7
Management of the Fund ................................................... B-9
Control Persons and Principal Holders of Securities ...................... B-11
Investment Advisory and Other Services ................................... B-11
Portfolio Transactions.................................................... B-14
Purchase and Redemption of Shares ........................................ B-14
Underwriter............................................................... B-15
Dividends and Taxes ...................................................... B-16
Calculation of Performance Data .......................................... B-17
Tax-Free Versus Taxable Income ........................................... B-19
Appendix--Ratings of Investments .......................................... B-20
Financial Statements ..................................................... F-1
</TABLE>
<PAGE>

INVESTMENTS

MUNICIPAL SECURITIES

Municipal Securities (as defined in the Prospectus) are debt obligations
issued to obtain funds for various public purposes, including the construction
of a wide range of public facilities such as airports, bridges, highways,
housing, hospitals, mass transportation, schools, streets, and water and sewer
works. Other public purposes for which Municipal Securities may be issued
include refunding of outstanding obligations, obtaining funds for general
operating expenses, and obtaining funds to loan to other public institutions and
facilities. In addition, certain types of industrial development bonds are
issued by or on behalf of public authorities to obtain funds to provide
privately-operated housing facilities, sports facilities, convention or trade
show facilities, airport, mass transit, port, or parking facilities, air or
water pollution control facilities, and certain local facilities for water
supply, gas, electricity, or sewage or solid waste disposal. Such obligations,
which may include lease arrangements, are included within the term Municipal
Securities if the interest paid thereon qualifies as exempt from federal income
tax. Other types of industrial development bonds, the proceeds of which are used
for the construction, equipment, repair, or improvement of privately-operated
industrial or commercial facilities, may constitute Municipal Securities,
although the current federal tax laws place substantial limitations on the size
of such issues.

The yields on Municipal Securities are dependent upon a variety of factors,
including general money market conditions, general conditions of the Municipal
Securities market, size of particular offering, maturity of the obligation, and
rating of the issue. The ratings of Moody's Investors Service, Inc., and
Standard & Poor's Corporation represent their opinions as to the quality of the
Municipal Securities which they undertake to rate. It should be emphasized,
however, that ratings are general and are not absolute standards of quality.
Consequently, Municipal Securities with the same maturity, coupon, and rating
may have different yields, while Municipal Securities of the same maturity and
coupon with different ratings may have the same yield. The Fund will not
purchase or hold more than 5% of its net assets in securities rated below
investment grade.

The Fund may purchase participation interests in Municipal Securities (such
as industrial development bonds) from financial institutions. A participation
interest gives the Fund an undivided interest in the Municipal Securities in the
proportion that the Fund's participation interest bears to the total principal
amount of the Municipal Securities. These instruments may be variable or fixed
rate.

B-2
<PAGE>

Not more than 5% of the net assets of the Fund will invested in
participation interests in Municipal Securities during the coming year.

Provisions of the federal bankruptcy statutes relating to the adjustment of
debts of political subdivisions and authorities of states of the United States
provide that, in certain circumstances, such subdivisions or authorities may be
authorized to initiate bankruptcy proceedings without prior notice to or consent
of creditors, which proceedings could result in material and adverse
modification or alteration of the rights of holders of obligations issued by
such subdivisions or authorities.

Litigation challenging the validity under state constitutions of present
systems of financing public education has been initiated or adjudicated in a
number of states, and legislation has been introduced to effect changes in
public school finances in some states. In other instances there has been
litigation challenging the issuance of pollution control revenue bonds or the
validity of their issuance under state or federal law which litigation could
ultimately affect the validity of those Municipal Securities or the tax-free
nature of the interest thereon.

TEMPORARY INVESTMENTS

For temporary defensive purposes, the Fund may invest in any of the
following short-term, fixed-income obligations, the interest on which is subject
to federal income taxes: obligations of the United States Government, its
agencies, or instrumentalities; debt securities rated within the three highest
grades of Moody's Investors Service, Inc., or Standard & Poor's Corporation;
commercial paper rated in the highest two grades by either of those rating
services (P-l, P-2 or A-l, A-2, respectively); certificates of deposit of
domestic banks with assets of $25,000,000 or more; and Municipal Securities or
any of the foregoing temporary investments subject to short-term repurchase
agreements. When the Fund invests in accordance with this policy, it may do so
without percentage limits. A repurchase agreement is an instrument under the
purchaser acquires ownership of a security from a broker-dealer or bank that
agrees to repurchase the security at a mutually agreed upon time and price
(which price is higher than the purchase price), thereby determining the yield
during the holding period. Maturity of the securities subject to repurchase may
exceed one year. In the event of a bankruptcy or other default of a seller of a
repurchase agreement, the Fund might incur expenses in enforcing its rights and
could experience losses, including a decline in the value of the underlying
securities and loss of income. Dividends from interest income from temporary
investments may be taxable to shareholders as ordinary income. See "Dividends
and Taxes" in the Prospectus. For a description of the ratings of commercial
paper and other debt securities permitted as temporary investments, see
"Appendix--Ratings of Investments."

B-3
<PAGE>

INVESTMENT POLICIES AND TECHNIQUES

GENERAL

The Fund may engage in futures and options transactions in accordance with
its investment objective and policies. The Fund intends to engage in such
transactions if it appears advantageous to the Investment Adviser to do so in
order to pursue its investment objective, to hedge against the effects of
fluctuating interest rates, and to stabilize the value of its assets. The use of
futures and options, possible benefits, and attendant risks are discussed below,
along with information concerning certain other investment policies and
techniques.

FINANCIAL FUTURES CONTRACTS

The Fund may enter into financial futures contracts for the future delivery
of a financial instrument, such as a security, or the cash value of a security
index. This investment technique is designed primarily to hedge (i.e., protect)
against anticipated future changes in interest rates or market conditions which
otherwise might adversely affect the value of securities which the Fund holds or
intends to purchase. A "sale" of a futures contract means the undertaking of a
contractual obligation to deliver the securities or the cash value of an index
called for by the contract at a specified price during a specified delivery
period. A "purchase" of a futures contract means the undertaking of a
contractual obligation to acquire the securities or cash value of an index at a
specified price during a specified delivery period. At the time of delivery in
the case of fixed income securities pursuant to the contract, adjustments are
made to recognize differences in value arising from the delivery of securities
with a different interest rate than that specified in the contract. In some
cases, securities called for by a futures contract may not have been issued at
the time the contract was written. The Fund will not enter into any futures
contracts or options on futures contracts if the aggregate of the contract value
of the outstanding options written by the Fund would exceed 50% of the total
assets of the Fund.

Although some financial futures contracts by their terms call for the
actual delivery or acquisition of securities, in most cases the contractual
commitment is closed out before delivery without having to make or take delivery
of the security. The offsetting of a contractual obligation is accomplished by
purchasing (or selling, as the case may be) on a commodities exchange an
identical futures contract calling for delivery in the same month. Such a
transaction, if effected through a member of an exchange, cancels the obligation
to make or take delivery of the securities. All transactions in the futures
market are made, offset, or fulfilled through a clearing house associated with
the exchange on which the contracts are traded. The Fund will incur brokerage
fees when it purchases or sells contracts and will be required to maintain
margin deposits. Futures contracts entail risks. If the Investment Adviser's
judgment about the general direction of interest rates or markets is wrong, the
overall performance may be poorer than if no such contracts had been made.

There may be an imperfect correlation between movements in prices of
futures contracts and portfolio securities being hedged. In addition, the market
prices of futures contracts may be affected by certain factors. If participants
in the futures market elect to close out their contracts through offsetting
transactions rather than meet margin requirements, distortions in the normal
relationship between the debt securities and futures markets could result. Price
distortions could also result if investors in futures contracts decide to make
or take delivery of underlying securities rather than

B-4
<PAGE>

engage in closing transactions because of the resultant reduction in the
liquidity of the futures market. In addition, from the point of view of
speculators, the margin requirements in the futures market are less onerous than
margin requirements in the cash market. Thus, increased participation by
speculators in the futures market could cause temporary price distortions. Due
to the possibility of price distortions in the futures market and because of the
imperfect correlation between movements in the prices of securities and
movements in the prices of futures contracts, a correct forecast of market
trends by the Investment Adviser may still not result in a successful hedging
transaction. If this should occur, the Fund could lose money on the financial
futures contracts and also on the value of its portfolio securities.

OPTIONS ON FINANCIAL FUTURES CONTRACTS

The Fund may purchase and write call and put options on financial futures
contracts. An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract at a
specified exercise price at any time during the period of the option. Upon
exercise, the writer of the option delivers the futures contract to the holder
at the exercise price. the fund would be required to deposit with its Custodian
initial margin and maintenance margin with respect to put and call options on
futures contracts written by it. Options on futures contracts involve risks
similar to those risks relating to transactions in financial futures contracts
described above. Also, an option purchased by the Fund may expire worthless, in
which case the Fund would lose the premium paid therefor.

OPTIONS ON SECURITIES

The Fund may write (sell) covered call options as long as it owns
securities which are acceptable for escrow purposes and may write secured put
options, which means that as long as the Fund is obligated as a writer of a put
option, it will invest an amount not less than the exercise price of the put
option in Municipal Securities or temporary investments. A call option gives the
purchaser the right to buy, and the writer the obligation to sell, the
underlying security at the exercise price during the option period. A put option
gives the purchaser the right to sell, and the writer has the obligation to buy,
the underlying security at the exercise price during the option period. The
premium received for writing an option will reflect, among other things, the
current market price of the underlying security, the relationship of the
exercise price to such market price, the price volatility of the underlying
security, the option period, supply and demand, and interest rates. The Fund may
write or purchase spread options, which are options for which the exercise price
may be a fixed dollar spread or yield spread between the security underlying the
option and another security that is used as a bench mark. The exercise price of
an option may be below, equal to, or above the current market value of the
underlying security at the time the option is written. The buyer of a put who
also owns the related securities is protected by ownership of a put option
against any decline in that security's price below the exercise price less the
amount paid for the option. The ability to purchase put options allows the Fund
to protect capital gains in an appreciated security it owns without being
required to actually sell that security. At times, the Fund would like to
establish a position in a security upon which call options are available. By
purchasing a call option, the Fund is able to fix the cost of acquiring the
securities, this being the cost of the call plus the exercise price of the

B-5
<PAGE>

option. This procedure also provides some protection from an unexpected downturn
in the market, because the Fund is only at risk for the amount of the premium
paid for the call option which it can, if it chooses, permit to expire.

OPTIONS ON SECURITIES INDICES

The Fund also may purchase and write call and put options on securities
indices in an attempt to hedge against market conditions affecting the value of
securities that the Fund owns or intends to purchase and not for speculation.
Through the writing or purchase of index options, the Fund can achieve many of
the same objectives as through the use of options on individual securities.
Options on securities indices are similar to options on a security except that,
rather than the right to take or make delivery of a security at a specified
price, an option on a securities index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the
securities index upon which the option is based is greater than, in the case of
a call, or less than, in the case of a put, the exercise price of the option.
This amount of cash is equal to the difference between the closing price of the
index and the exercise price of the option. The writer of the option is
obligated, in return for the premium received, to make delivery of this amount.
Unlike security options, all settlements are in cash, and gain or loss depends
upon price movements in the market generally (or in a particular industry or
segment of the market), rather than upon price movements in individual
securities.

When the Fund writes an option on a securities index, it will be required
to deposit with its Custodian eligible securities equal in value to 100% of the
exercise price, in the case of a put, or the contract value, in the case of a
call. In addition, where the Fund writes a call option on a securities index at
a time when the contract value exceeds the exercise price, the Fund will
segregate, until the option expires or is closed out, cash or cash equivalents
equal in value to such excess.

Options on futures contracts and index options involve risks similar to
those risks relating to transactions in financial futures contracts described
above. Also, an option purchased by the Fund may expire worthless, in which case
the Fund would lose the premium paid therefor.

DELAYED DELIVERY TRANSACTIONS

The Fund may purchase portfolio securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions involve a
commitment by the Fund to purchase securities with payment and delivery to take
place in the future in order to secure what is considered to be an advantageous
price or yield to the Fund at the time of entering into the transaction. When
the Fund enters into a delayed delivery purchase, it becomes obligated to
purchase securities and it has all the rights and risks attendant to ownership
of a security, although delivery and payment occur at a later date. The value of
fixed income securities to be delivered in the future will fluctuate as interest
rates vary. At the time the Fund makes the commitment to purchase a security on
a when-issued or delayed delivery basis, it will record the transaction and
reflect the amount due and the value of the security in determining its net
asset value. The Fund generally has the ability to close out a purchase
obligation on or before the settlement date, rather than to purchase the
security.

B-6
<PAGE>

REGULATORY RESTRICTIONS

To the extent required to comply with Securities and Exchange Commission
Release No. 10666, when purchasing a futures contract, writing a put option, or
entering into a delayed delivery purchase, the Fund will maintain in a
segregated account with its Custodian cash or liquid high-grade debt securities
equal to the value of such contracts. The amount held by the Custodian is less
than the amount held by any futures commission agent as initial margin and will
be marked to market daily.

To the extent required to comply with Commodity Futures Trading Commission
Regulation 4.5 and thereby avoid "commodity pool operator" status, the Fund will
not enter into a futures contract or purchase an option thereon if immediately
thereafter the initial margin deposits for futures contracts held by the Fund
plus premiums paid by it for open options on futures would exceed 5% of the
Fund's total assets. The Fund will not engage in transactions in financial
futures contracts or options thereon for speculation, but only to attempt to
hedge against changes in market conditions affecting the values of securities
which the Fund holds or intends to purchase. When futures contracts or options
thereon are purchased to protect against a price increase on securities intended
to be purchased later, it is anticipated that at least 75% of such intended
purchases will be completed. When other futures contracts or options thereon are
purchased, the underlying value of such contracts will at all times not exceed
the sum of: (l) accrued profit on such contracts held by the broker; (2) cash or
high quality money market instruments set aside in an identifiable manner; and
(3) cash proceeds from investments due in 30 days.

INVESTMENT RESTRICTIONS

The Fund has adopted certain investment restrictions which, together with
the investment objective and policies, cannot be changed without approval by
holders of a majority of its outstanding voting shares. As defined in the
Investment Company Act of 1940, this means the lesser of the vote of (a) 67% or
more of the outstanding shares of the Fund present at a meeting where more than
50% of the outstanding shares are present in person or by proxy; or (b) more
than 50% of the outstanding shares of the Fund. The Fund may not:

(l) Purchase securities or make investments other than in accordance with its
investment objectives and policies.

(2) Purchase securities (other than securities of the United States Government,
its agencies or

B-7
<PAGE>

instrumentalities, or the State of North Dakota or its political subdivisions,
agencies, or instrumentalities) if as a result of such purchase 25% or more of
the Fund's total assets would be invested in any industry.

(3) Make loans, except in accordance with its investment objectives and
policies.

(4) Borrow money except for temporary or emergency purposes and then only in
amounts not exceeding the lesser of 10% of its total assets valued at cost, or
5% of its total assets valued at market, and, in any event, only if immediately
thereafter there is an asset coverage of at least 300%; or mortgage, pledge, or
hypothecate its assets in an amount exceeding 10% of its total assets to secure
temporary or emergency borrowing.

(5) Make short sales of securities.

(6) Write, purchase, or sell puts, calls, or combinations thereof, except in
accordance with its investment objective and policies.

(7) Purchase or retain the securities of any issuer if any of its officers or
directors or of the Investment Adviser owns beneficially more than 1/2 of 1% of
the securities of such issuer and together own more than 5% of the securities of
such issuer.

(8) Invest more than 15% of its net assets in illiquid securities, including (a)
securities which at the time of such investment are not readily marketable, (b)
securities restricted as to disposition under the federal securities laws, and
(c) repurchase agreements maturing in more than seven days.

(9) Invest for the purpose of exercising control or management of another
issuer.

(10) Invest in commodities or commodity futures contracts, although it may buy
or sell financial futures contracts and options on such contracts.

(11) Invest in interests in oil, gas, or other mineral exploration or
development programs, although it may invest in the Municipal Securities of
issuers which invest in or sponsor such programs.

(12) Invest more than 10% of its total assets in securities of other investment
companies, except in connection with a merger, consolidation, reorganization, or
acquisition of assets.

(13) Underwrite securities issued by others, except to the extent that the Fund
may be deemed to be an underwriter under the federal securities laws in
connection with the disposition of portfolio securities.

(14) Issue senior securities as defined in the Investment Company Act of 1940,
except money borrowed as permitted by (4) above.

(15) Invest in real estate, although it may invest in Municipal Securities which
are secured by real estate and securities of issuers which invest or deal in
real estate.

B-8
<PAGE>

During the coming year, the Fund does not intend to invest more than 5% of
its net assets in securities of other investment companies.

MANAGEMENT OF THE FUND

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------

Position(s) Held Principal Occupation(s)
Name, Address, and Age with Fund During Past 5 Years /(1)/
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C>
Lynn W. Aas /(2)/ Director Retired; Attorney; Director, ND Holdings, Inc.;
904 NW 27th Director, ND Insured Income Fund, Inc.,
Minot, North Dakota 58701 Montana Tax-Free Fund, Inc., South Dakota Tax-Free
74 Fund, Inc., and Integrity Fund of Funds, Inc.; Trustee,
Ranson Managed Portfolios; Director, First Western
Bank & Trust

Orlin W. Backes /(3)/ Director Attorney; Director, ND Insured Income Fund, Inc.,
15 2nd Ave. SW, Suite 305 Montana Tax-Free Fund, Inc., South Dakota
Minot, North Dakota 58701 Tax-Free Fund, Inc., and Integrity Fund of Funds, Inc.;
60 Trustee, Ranson Managed Portfolios; Director, First
Western Bank & Trust

Arthur A. Link /(4)/ Director Director, ND Insured Income Fund, Inc., Montana
2001 Grimsrud Drive Tax-Free Fund, Inc., South Dakota Tax-Free Fund, Inc.,
Bismarck, North Dakota 58501 and Integrity Fund of Funds, Inc.; Trustee, Ranson
81 Managed Portfolios; Director, Bank Center First

* Peter A. Quist /(5)/ Director Director and Vice President, ND Holdings, Inc.;
1 North Broadway Vice President Director, Vice President, and Secretary, ND Money
Minot, North Dakota 58703 Secretary Management, Inc., ND Capital, Inc., ND Resources,
62 Inc., ND Insured Income Fund, Inc., Montana
Tax-Free Fund, Inc., South Dakota Tax-Free Fund, Inc.,
and Integrity Fund of Funds, Inc.; The Ranson
Company,Inc., and Ranson Capital Corporation; Vice
President and Secretary, Ranson Managed Portfolios

* Robert E. Walstad /(6)/ Director Director and President, ND Holdings, Inc.; Director,
1 North Broadway President President, and Treasurer, ND Money Management,
Minot, North Dakota 58703 Treasurer Inc., ND Capital, Inc., ND Resources, Inc., ND Insured
51 Income Fund, Inc., Montana Tax-Free Fund, Inc.,
South Dakota Tax-Free Fund, Inc., and Integrity Fund
of Funds, Inc.; Trustee, Chairman, President, and
Treasurer, Ranson Managed Portfolios; Director,
President, CEO, and Treasurer, The Ranson Company,
Inc., and Ranson Capital Corporation; Director, First
Western Bank & Trust

- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

B-9
<PAGE>

* "Interested person" as defined in the Investment Company Act of 1940

(1) Except as otherwise indicated, each individual has held the office(s) shown
for the past five years. Messrs. Aas, Backes, Link, and Walstad were
elected to the Board of Trustees of Ranson Managed Portfolios at a joint
special meeting of the shareholders of The Kansas Municipal Fund Series,
The Kansas Insured Municipal Fund - Limited Maturity (subsequently renamed
"The Kansas Insured Intermediate Fund") Series, and The Nebraska Municipal
Fund Series of Ranson Managed Portfolios held on December 11, 1995, but did
not assume office until January 5, 1996. Mssrs. Quist and Walstad were
elected as directors and officers of The Ranson Company, Inc., and Ranson
Capital Corporation on January 5, 1996.

(2) Mr. Aas resigned as a director of ND Holdings, Inc., on August 17, 1994. He
was elected to the board of directors of Integrity Fund of Funds, Inc., on
August 19, 1994, and to the boards of ND Insured Income Fund, Inc., Montana
Tax-Free Fund, Inc., South Dakota Tax-Free Fund, Inc., and the Fund on
December 2, 1994. His term as a director of First Western Bank & Trust
expired on April 20, 1996.

(3) Mr. Backes was elected to the boards of directors of ND Insured Income
Fund, Inc., Montana Tax-Free Fund, Inc., South Dakota Tax-Free Fund, Inc.,
Integrity Fund of Funds, Inc., and the Fund in 1995.

(4) Mr. Link has served on the boards of directors of ND Insured Income Fund,
Inc., Montana Tax-Free Fund, Inc., South Dakota Tax-Free Fund, Inc.,
Integrity Fund of Funds, Inc., and the Fund since their inceptions.

(5) Mr. Quist has served on the boards of directors of ND Insured Income Fund,
Inc., Montana Tax-Free Fund, Inc., Integrity Fund of Funds, Inc., and the
Fund since their inceptions. He was elected to the board of South Dakota
Tax-Free Fund, Inc., on April 7, 1995, and has served as the vice president
and secretary of each of the aforenamed funds since their inceptions.

(6) Mr. Walstad has served as a director and as the president and treasurer of
ND Insured Income Fund, Inc., Montana Tax-Free Fund, Inc., South Dakota
Tax-Free Fund, Inc., Integrity Fund of Funds, Inc., and the Fund since
their inceptions. He was elected to the board of directors of First Western
Bank & Trust on April 20, 1996.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
COMPENSATION TABLE*
---------------------------------------------------------------------------------------------------------------------
Pension or
Retirement Total Compensation
Aggregate Benefits Accrued Estimated Annual from Fund and Fund
Name of Person, Compensation as Part of Fund Benefits Upon Complex Paid to
Position(s) from Fund Expenses Retirement Directors
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lynn W. Aas 9,569.68 -0- -0- $10,000.00
Director

Orlin W. Backes $7,177.26 -0- -0- $7,500.00
Director

Arthur A. Link $9,569.68 -0- -0- $10,000.00
Director

Peter A. Quist -0- -0- -0- -0-
Director,
Vice President, and
Secretary

Robert E. Walstad -0- -0- -0- -0-
Director, President,
and Treasurer
---------- --- --- ----------
Totals $26,316.62 -0- -0- $27,500.00
--------------------------------------------------------------------------------------------------------------------
</TABLE>

* Directors who are not an "interested person" as that term is defined in the
1940 Act are paid an annual fee of $10,000 for serving on the boards of the
funds in the complex. Each of the funds, including the three series of Ranson
Managed Portfolios, pays a pro rata share of the fee based upon its respective
assets. Mssrs Quist and Walstad, who are the only "interested persons" of the
funds, receive no compensation from the funds.

B-10
<PAGE>

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of June 12, 1996, no person owned of record or was known by Registrant
to own of record or beneficially 5 percent or more of Registrant's outstanding
shares, and the amount of shares owned by all officers and directors of
Registrant, as a group, was less than 1 percent of Registrant's outstanding
shares.

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISER

ND Money Management, Inc. (the "Investment Adviser"), has been retained
under an Investment Advisory Agreement to act as the Fund's investment adviser,
subject to the authority of the Board of Directors. The Investment Adviser is a
wholly-owned subsidiary of ND Holdings, Inc., a venture capital corporation
organized under the laws of the State of North Dakota on September 22, 1987,
which is also the Fund's promoter. The Investment Adviser was incorporated under
North Dakota law on August 19, 1988, and also serves as investment adviser for
ND Insured Income Fund, Inc., Montana Tax-Free Fund, Inc., South Dakota Tax-Free
Fund, Inc., and Integrity Fund of Funds, Inc. The address of the Investment
Adviser is 1 North Main, Minot, North Dakota 58703.

The Investment Adviser furnishes the Fund with investment advice and, in
general, supervises the management and investment program of the Fund. The
Investment Adviser furnishes at its own expense all necessary administrative
services, office space, equipment, and clerical personnel for servicing the
investments of the Fund and investment advisory facilities and executive and
supervisory personnel for managing the investments and effecting the portfolio
transactions of the Fund. In addition, the Adviser pays the salaries and fees of
all officers and directors of the Fund who are affiliated persons of the
Investment Adviser. All other charges and expenses, as more fully described in
the Prospectus under "Expenses," are paid by the Fund.

Under the Investment Advisory Agreement, the Fund has agreed to pay the
Investment Adviser an annual fee, payable monthly, of 0.60% of the Fund's
average daily net assets. The Investment Adviser was paid $415,394, $541,290,
and $572,789 in advisory fees for fiscal years 1993, 1994, and 1995,
respectively.

The Investment Advisory Agreement provides that the Investment Adviser will
not be liable for any error of judgment or mistake of law or for any loss
suffered by the Fund in connection with the matters to which the Investment
Advisory Agreement relates, except a loss resulting from willful misfeasance,
bad faith, or gross negligence on the part of the Investment Adviser in the
performance of its duties or by reason of its reckless disregard of its
obligations and duties under the Investment Advisory Agreement.

B-11
<PAGE>

The Investment Advisory Agreement continues in effect from year to year as
long as its continuation is approved at least annually by a majority of the
directors who are not parties to the Investment Advisory Agreement or interested
persons of any such party except in their capacity as directors of the Fund and
by the shareholders or the Board of Directors. It may be terminated at any time
upon 60 days' written notice by the Fund or by a majority vote of the
outstanding shares and will terminate automatically upon assignment.

Robert E. Walstad and Peter A. Quist, directors and officers of the Fund,
are also directors and officers of the Investment Adviser as indicated under
"Management of the Fund."

DISTRIBUTION PLAN

Although shares of the Fund are sold without an initial sales charge, ND
Capital, Inc. (the "Underwriter"), the Fund's principal underwriter, currently
pays dealers who sell Fund shares a commission equal to 3 3/4% (1% on sales of
$1 million or more) of the value of each sale. Such payments are made out of the
Underwriter's own funds. As a further inducement to the sale of Fund shares and
in recognition of the services provided to shareholders, the Underwriter may
also make payments to investment dealers at the annual rate of 0.25% of the
average net assets of the Fund which are attributable to shareholders of the
Fund for whom dealers are designated as the dealer of record. For this purpose,
"average net assets" attributable to a shareholder account means the product of
(i) the average daily share balance of the account times (ii) the Fund's average
daily net asset value per share. Such payments may be suspended or modified by
the Underwriter at any time and are subject to continuation of the Fund's
Distribution Plan (the "Plan") described below.

The Fund has adopted the Plan pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Rule 12b-1 provides that any payments made by the Fund in
connection with the distribution of its shares may be made only pursuant to a
written plan describing all material aspects of the proposed financing of the
distribution and also requires that all agreements with any person relating to
the implementation of a plan must be in writing. The Fund has also entered into
a related Distribution Agreement with the Underwriter.

The Plan and the related Distribution Agreement provide that the Fund will
pay the Underwriter an annual fee for certain expenses incurred in connection
with the offer and sale of the Fund's shares. The fee is calculated daily and
paid monthly at the annual rate of 0.85% of the average daily net assets of the
Fund. The fee may be used by the Underwriter to cover any expenses primarily
intended to result in the sale of the Fund's shares, including, but not limited
to, sales commissions and other fees paid to dealers who sell Fund shares;
payments made to, and expenses of, persons who provide support services in
connection with the distribution of the Fund's shares; costs relating to the
formulation and implementation of marketing and promotional activities; costs of
printing and distributing prospectuses, statements of additional information,
and reports of the Fund to prospective shareholders; costs involved in
preparing, printing, and distributing advertising and sales literature; and
other sales expenses.

B-12
<PAGE>

The Plan continues in effect from year to year, provided that each such
continuance is approved at least annually by a vote of the Board of Directors,
including a majority of the directors who are not "interested persons" of the
Fund and have no direct or indirect financial interest in the operation of the
Plan or in the Distribution Agreement or in any other agreement related to the
Plan (the "Qualified Directors"), cast in person at a meeting called for the
purpose of voting on such continuance. The Plan may be terminated at any time,
without penalty, by vote of a majority of the Qualified Directors or by vote of
the lesser of (a) 67% or more of the shares present at a meeting, if the holders
of more than 50% of the outstanding shares are present or represented by proxy;
or (b) more than 50% of the outstanding shares. Any amendment of the Plan to
increase materially the amount the Fund is authorized to pay thereunder would
require approval by shareholders as described in the preceding sentence. Other
material amendments to the Plan would be required to be approved by vote of the
Board of Directors of the Fund, including a majority of the Qualified Directors,
cast in person at a meeting called for that purpose. The Plan further provides
that as long as the Plan remains in effect, the selection and nomination of the
Qualified Directors will be committed to the discretion of the Qualified
Directors then in office. It is expected that payments made under the Plan will
serve to encourage the Underwriter and investment dealers to sell Fund shares
and to provide ongoing services to Fund shareholders.

The Underwriter has voluntarily agreed (not as part of the Distribution
Agreement) to waive a portion of the fee payable under the Distribution
Agreement during the early stages of the Fund's existence. Pursuant to this
voluntary agreement, the Underwriter waived the entire fee payable for the
period of January through September 1989. Effective as of October 1, 1989, the
Fund began paying the Underwriter a fee of 0.20% of the average daily net assets
of the Fund. This fee was subsequently increased in five steps to 0.70% on
January 22, 1991. The Fund incurred $201,612, $226,026, and $238,622 in fees for
the fiscal years ended December 31, 1993, 1994, and 1995, respectively.

The Investment Adviser and the Underwriter are subsidiaries of ND Holdings,
Inc. ("Holdings"), the promoter of the Fund. Robert E. Walstad and Peter A.
Quist, directors and president and vice president, respectively, of Holdings,
are also directors and officers of the Fund, the Investment Adviser, and the
Underwriter. See "Management of the Fund." Messrs. Walstad and Quist are also
shareholders of Holdings and, accordingly, may indirectly benefit from the
payment of 12b-1 fees by the Fund to the Underwriter.

CUSTODIAN AND TRANSFER AGENT

ACCOUNTANTS AND REPORTS TO SHAREHOLDERS

The Fund's independent public accountant, Brady, Martz & Associates, P.C.,
24 West Central Avenue, Minot, North Dakota 58701, audits and reports on the
Fund's annual financial statements, reviews certain regulatory reports and the
Fund's federal income tax return, and performs other professional accounting,
auditing, tax, and advisory services when engaged to do so by the Fund.
Shareholders will receive annual audited financial statements and semiannual
unaudited financial statements.

B-13
<PAGE>

PORTFOLIO TRANSACTIONS

Allocation of portfolio brokerage transactions to various brokers is
determined by the Investment Adviser in its best judgment and in a manner deemed
fair and reasonable to shareholders. The primary consideration is prompt and
efficient execution of orders in an effective manner at the most favorable
price. Subject to this consideration, brokers who provide supplemental
investment research, statistical, or other services to the Investment Adviser
may receive orders for transactions by the Fund. Information thus received will
enable the Investment Adviser to supplement its own research and analysis with
the views and information of other securities firms and may be used for the
benefit of clients of the Investment Adviser other than the Fund. Research
services may include advice as to the value of securities; the advisability of
investing in, purchasing, or selling securities; the availability of securities
or purchasers or sellers of securities; furnishing analyses and reports
concerning issues, industries, securities, economic factors and trends,
portfolio strategy, and performance of accounts; and effecting securities
transactions and performing functions incidental thereto (such as clearance and
settlement). A broker's sales of Fund shares may also be considered a factor if
the Investment Adviser is satisfied that the Fund would receive from that broker
the most favorable price and execution then available for a transaction.
Municipal bonds, notes, and short-term securities in which the Fund invests are
traded primarily in the over-the-counter market on a net basis and do not
normally involve either brokerage commissions or transfer taxes. The Fund's cost
of portfolio securities transactions will consist primarily of dealer or
underwriter spreads. The Fund will not engage in principal transactions with
affiliates.

The Board of Directors will monitor the Investment Adviser's performance
with respect to portfolio transactions in order to evaluate the overall
reasonableness of brokerage commissions paid or spreads allowed.

PURCHASE AND REDEMPTION OF SHARES

Fund shares are sold at their public offering price, which is the net asset
value next determined after an order and payment are received in proper form.
The minimum initial investment is $1,000 ($100 for the Monthomatic Investment
Plan), and the minimum subsequent investment is $50, but such minimum amounts
may be changed at any time.

Upon receipt of a request for redemption, shares will be redeemed by the
Fund at the net asset value next determined following receipt of a properly
executed request with any required documents, less any applicable contingent
deferred sales charge as described in the Prospectus.

The following example illustrates the operation of the contingent deferred
sales charge. Assume that you own 1,000 shares that you purchased six years ago,
1,000 shares acquired by reinvesting distributions, 1,000 shares that you
purchased two years ago at $10 each, and 1,000 shares that you purchased one
year ago at $10 each. Also assume that the shares now have a net asset value
equal to $20 each. You may redeem the 2,000 shares that you have owned for six
years or acquired by reinvesting distributions without paying a contingent
deferred sales charge. Appreciation on the shares you bought in the last two
years equals $20,000 (the $10 increase in net asset value times 2,000 shares),
$10,000 of which is attributed to each of the two years. Because the $20,000 of
appreciation is equivalent to 1,000 shares at the assumed current net asset
value of $20

B-14
<PAGE>

per share, you may redeem 1,000 more shares without paying a contingent deferred
sales charge. If you redeem 3,500 shares, you would have a contingent deferred
sales charge on 500 of those shares. The Fund would treat these 500 redeemed
shares as representing a redemption of the $10,000 investment which you made two
years ago. Based on the assumed net asset value of $20 per share, you would pay
a contingent deferred sales charge equal to $400 (500 shares times $20 per share
times the applicable rate of 4.0%). If in the same year you redeemed your
remaining 500 shares, the Fund would treat this as a redemption of your $10,000
investment made one year ago, applying a charge at the rate of 4.0%.

The elimination of the contingent deferred sales charge for redemptions by
certain classes of persons as described in the Prospectus is provided because of
anticipated economies in sales and sales related efforts.

The Fund may suspend the right of redemption or delay payment more than
seven days (a) during any period when the New York Stock Exchange is closed for
trading (other than customary weekend and holiday closings), (b) when trading in
the markets the Fund normally utilizes is restricted or an emergency exists as
determined by the Securities and Exchange Commission so that disposal of the
Fund's investments or determination of its net asset value is not reasonably
practicable, or (c) for such other periods as the Securities and Exchange
Commission by order may permit for protection of the Fund's shareholders. The
New York Stock Exchange is currently closed on the following holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, the Fourth of July,
Labor Day, Thanksgiving, and Christmas. The amount received by a shareholder
upon redemption may be more or less than the amount paid for such shares
depending on the market value of the Fund's portfolio securities at the time.
When the Fund is requested to redeem shares for which it may not have yet
received good payment (e.g., cash or certified check on a United States bank),
it may delay the mailing of a redemption check until such time as it has assured
itself that good payment has been collected for the purchase of such shares
(which will generally be within 15 calendar days).

UNDERWRITER

ND Capital, Inc. (the "Underwriter"), a subsidiary of ND Holdings, Inc.,
the Fund's promoter, is the principal underwriter of the Fund's shares in a
continuous public offering.

Under the terms of the Distribution Agreement between the Fund and the
Underwriter, the Underwriter has agreed to use its best efforts to solicit
orders for the sale of the Fund's shares and to undertake such advertising and
promotion as it believes is reasonable in connection with such solicitation. In
consideration of those services, the Fund pays the Underwriter a fee, calculated
daily and paid monthly, at the annual rate of 0.85% of the average daily net
assets of the shares for the prior month. For information concerning payments
made by the Fund to the Underwriter pursuant to the Distribution Agreement, see
"Distribution Plan" above. As further consideration, the Fund has agreed to pay
the Underwriter the proceeds from any contingent deferred sales charges imposed
on the redemption of shares. The Fund paid the Underwriter $105,713 in
contingent deferred sales charges for the fiscal year ended December 31,
1995.

B-15
<PAGE>

The Underwriter, in turn, pays a sales commission currently equal to 3 3/4%
(1% on sales of $1 million or more) of the amount invested to dealers who sell
shares (excluding sales to investors exempt from the contingent deferred sales
charge). Commission payments totaled $815,909 in 1993, $538,142 in 1994, and
$154,888 in 1995. As a further inducement to the sale of Fund shares and in
recognition of services provided to shareholders, the Underwriter may also make
commission payments to dealers at the annual rate of up to 0.25% of the average
net assets which are attributable to shareholders of the Fund for whom such
dealers are designated as the dealers of record.

The Distribution Agreement must be approved at least annually by the Fund's
Board of Directors and a vote of a majority of the Fund's directors who are not
"interested persons"' (as defined in the 1940 Act) of the Fund and who have no
direct or indirect financial interest in the operation of the Distribution Plan
or any agreement related thereto or in the Distribution Agreement (the
"Qualified Directors"), by vote cast in person at a meeting called for the
purpose of voting on such approval. The Distribution Agreement will terminate
automatically in the event of its assignment and is terminable with respect to
the Fund without penalty on 60 days' written notice by vote of a majority of the
Qualified Directors or by vote of a majority (as defined in the 1940 Act) of the
outstanding voting securities of the Fund.

DIVIDENDS AND TAXES

DIVIDENDS

All of the net investment income of the Fund is declared daily as a
dividend on shares for which the Fund has received payment. Net investment
income of the Fund consists of all interest income earned on portfolio assets
less all expenses of the Fund. Income dividends will be distributed monthly, and
dividends of net realized capital gains, if any, will normally be paid out once
a year after the end of the Fund's fiscal year. The Fund may at any time vary
the foregoing dividend practices and, therefore, reserves the right from time to
time to either distribute or retain for reinvestment such of its net investment
income and its net short-term and long-term capital gains as the Board of
Directors of the Fund determines appropriate under the then current
circumstances. In particular, and without limiting the foregoing, the Fund may
make additional distributions of net investment income or capital gain net
income in order to satisfy the minimum distribution requirements contained in
the Internal Revenue Code (the "Code"). Dividends will be reinvested in shares
of the Fund unless shareholders indicate in writing that they wish to receive
them in cash.

TAXES

To the extent that dividends are derived from earnings on North Dakota
state and local government issues, such dividends will be exempt from North
Dakota income taxes.

For federal income tax purposes, the Fund is generally required to
recognize its unrealized gains and losses at year end on financial futures
contracts, options thereon, index options, and listed options on debt
securities. Any gain or loss recognized on such financial instruments is
generally considered to be 60% long-term and 40% short-term without regard to
the holding period of the contract or option. One of the requirements of
Subchapter M of the Code is that a fund must derive less than 30% of its gross
income from gains (not reduced by losses) on stocks and securities and

B-16
<PAGE>

certain other investments held for less than three months. The Fund may be
limited in its options and futures transactions in order to prevent recognition
of such gains. Dividends from the Fund will not be eligible for the dividends
received deduction available to corporate shareholders.

The Fund's options and futures transactions are subject to special tax
provisions that may accelerate or defer recognition of certain gains or losses,
change the character of certain gains or losses, or alter the holding periods of
certain of the Fund's securities.

Redemption of shares of the Fund will be a taxable transaction for federal
income tax purposes, and the shareholder will recognize gain or loss in an
amount equal to the difference between the basis of the shares and the amount
received. The gain or loss will be a capital gain or loss and will be long-term
if the shares are held for a period of more than one year. The loss on shares
held six months or less will be a long-term capital loss to the extent any
long-term capital gain distribution is made with respect to such shares during
the period the investor owns the shares. In the case of shareholders holding
shares of the Fund for less than six months and subsequently selling those
shares at a loss after receiving an exempt-interest dividend, the loss will be
disallowed to the extent of the exempt-interest dividends received.

Interest on indebtedness which is incurred to purchase or carry shares of a
mutual fund which distributes exempt-interest dividends during the year is not
deductible for federal income tax purposes. Further, the Fund may not be an
appropriate investment for persons who are "substantial users" of facilities
financed by industrial development bonds held by the Fund or are "related
persons" to such users. Such persons should consult their tax adviser before
investing in the Fund.

The "Superfund Act of 1986" (the "Superfund Act") imposes a separate tax on
corporations at a rate of 0.12% of the excess of such corporation's "modified
alternative minimum taxable income" over $2,000,000. A portion of tax-exempt
interest, including exempt-interest dividends from the Fund, may be includable
in modified alternative minimum taxable income. Corporate shareholders are
advised to consult with their tax advisers with respect to the consequences of
the Superfund Act.

CALCULATION OF PERFORMANCE DATA

The Fund may publish certain performance figures in advertisements from
time to time. These performance figures may include yield, tax equivalent yield,
and total return figures.

Yield

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

B-17
<PAGE>

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 maximum offering price per share on the last day of the period.

To calculate interest earned (for the purpose of "a" above), the Fund will:

(a) Compute the yield to maturity of each obligation held by the Fund based
on the market value of the obligation at the close of business on the last
business day of each month, or, with respect to obligations purchased
during the month, the purchase price.

(b) Divide the yield to maturity by 360 and multiply the quotient by the
market value of the obligation (including actual accrued interest) to
determine the interest income on the obligation for each day of the
subsequent month that the obligation is in the portfolio.

The maturity of an obligation with a call provision is the next call date
on which the obligation reasonably may be expected to be called or, if none, the
maturity date.

In the case of an obligation issued without original issue discount and
having a current market discount, the coupon rate of interest is used in lieu of
the yield to maturity. In the case of an obligation with original issue
discount, if the discount based on the current market value exceeds the
then-remaining portion of original issue discount (market discount), the yield
to maturity is the imputed rate based on the original issue discount
calculation. In the case of an obligation with original issue discount, if the
discount based on the current market value is less than the then-remaining
portion of original issue discount (market premium), the yield to maturity is
based upon market value.

TAX EQUIVALENT YIELD

Tax equivalent yield shows the yield from a taxable investment which would
produce an after-tax yield equal to that of a fund that invests in tax-exempt
securities. It is computed by dividing the tax-exempt portion of the Fund's
yield (as calculated above) by one minus a stated income tax rate and adding the
product to the portion (if any) of the Fund's yield that is not tax-exempt.

B-18
<PAGE>

TOTAL RETURN

ERV - P = Total Return
-------
P
Where:

ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the base period, assuming reinvestment of all dividends
and distributions

P = a hypothetical initial payment of $1,000

Average annual total return reflects the hypothetical annually compounded
return that would have produced the same cumulative total return if the Fund's
performance had been constant over the entire period and is computed according
to the following formula:

P(1 + T)/n/ = ERV

Where:

P = a hypothetical initial payment of $1,000

T = average annual total return

n = number of years

ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the base period, assuming reinvestment of all dividends
and distributions

All performance figures are based on historical results and are not
intended to indicate future performance.

TAX-FREE VERSUS TAXABLE INCOME

The following table shows the rate of return an individual North Dakota
investor would need to receive from a taxable investment to equal the rate of
return from the Fund. The table assumes that the investor's income from a
taxable investment would be subject to federal income tax at the maximum federal
rate and North Dakota state income tax at a rate equal to 14% of the federal tax
liability.

B-19
<PAGE>

Our calculations are based on the maximum federal statutory tax rates
applicable in 1996. The highest marginal federal tax rate for 1996 can be in
excess of the statutory maximum federal tax rate due to the disallowance of a
portion of itemized deductions and personal exemptions. We have calculated the
combined marginal tax rate based on a family with adjusted gross income from
$180,000 to $300,000 for 1996 filing on a married filing jointly basis with two
dependent children. At this level of income, the highest federal marginal tax
rate is 43.95%. In addition, this assumes the investor is not subject to
alternative minimum tax and has a reasonable amount of itemized deductions. The
combined marginal tax rate for this taxpayer is approximately 48.68%.

The following table uses the combined marginal tax rate of 48.68% to
present the equivalent taxable yield for taxpayers in the situation presented
above.

<TABLE>
<CAPTION>
ND Tax-Free Equivalent Taxable Yield
Yield for Taxpayer in 1996
----- --------------------
<S> <C>
5.0% 9.74%
5.5% 10.71%
6.0% 11.69%
6.5% 12.66%
7.0% 13.63%
7.5% 14.61%
8.0% 15.58%
</TABLE>

APPENDIX--RATINGS OF INVESTMENTS

The four highest ratings of Moody's Investors Service, Inc. ("Moody's"),
for municipal bonds are Aaa, Aa, A, and Baa. Municipal bonds rated Aaa are
judged to be of the "best quality." The rating of Aa is assigned to municipal
bonds which are of "high quality by all standards," but as to which margins of
protection or other elements make long-term risks appear somewhat larger than
Aaa rated municipal bonds. The Aaa, Aa, and A rated municipal bonds comprise
what are generally known as "high grade bonds." Municipal bonds which are rated
A by Moody's possess many favorable investment attributes and are considered
"upper medium grade obligations." Factors giving security to principal and
interest of A rated municipal bonds are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Municipal bonds which are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest coverage
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.

The four highest ratings of Standard & Poor's Corporation ("S&P") for
municipal bonds are AAA, AA, A, and BBB. Municipal bonds rated AAA have the
highest rating assigned by S&P to a debt obligation. Capacity to pay interest
and repay principal is extremely strong. Bonds rated AA

B-20
<PAGE>

have a very strong capacity to pay interest and repay principal and differ from
the highest rated issues only in small degree. Bonds rated A have a strong
capacity to pay interest and repay principal although they are somewhat
susceptible to the adverse effects of changes in circumstances and economic
conditions than bonds in higher rated categories. Bonds rated BBB are regarded
as having an adequate capacity to pay interest and repay principal. Whereas they
normally exhibit adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity than for
bonds in higher rated categories.

The "debt securities" included in the discussion of temporary investments
are corporate (as opposed to municipal) debt obligations rated AAA, AA, or A by
S&P or Aaa, Aa, or A by Moody's. Corporate debt obligations rated AAA by S&P are
"highest grade obligations." Obligations bearing the rating of AA also qualify
as "high grade obligations" and "in the majority of instances differ from AAA
issues only in small degree." Corporate debt obligations rated A by S&P are
regarded as "upper medium grade" and have "considerable investment strength, but
are not entirely free from adverse effects of changes in economic and trade
conditions." The Moody's corporate debt ratings of Aaa, Aa, and A do not differ
materially from those set forth above for municipal bonds.

Taxable or tax-exempt commercial paper ratings of A-l or A-2 by S&P and P-l
or P-2 by Moody's are the highest paper ratings of the respective agencies. The
issuer's earnings, quality of long-term debt, management, and industry position
are among the factors considered in assigning such ratings.

Subsequent to its purchase by the Fund, an issue of Municipal Securities or
a temporary investment may cease to be rated or its rating may be reduced below
the minimum required for purchase by the Fund. Neither event requires the
elimination of such obligation from the Fund's portfolio, but the Investment
Adviser will consider such an event in its determination of whether the Fund
should continue to hold such obligation in its portfolio. To the extent that the
ratings accorded by S&P or Moody's for municipal bonds or temporary investments
may change as a result of changes in such organizations or changes in their
rating system, the Fund will attempt to use comparable ratings as standards for
its investments in municipal bonds or temporary investments in accordance with
the investment policies contained herein.

B-21
<PAGE>

INDEPENDENT AUDITOR'S REPORT

To the Shareholders and Board of Directors of
ND Tax Free Fund, Inc.

We have audited the accompanying statement of assets and liabilities of ND Tax
Free Fund, Inc. (the Fund), including the schedule of investments, as of
December 31, 1995, the related statement of operations for the year then ended,
the statement of changes in net assets, and the financial highlights for each of
the two years in the period then ended. These financial statements and financial
highlights are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit. The financial highlights for each of
the four years in the period ended December 31, 1993, were audited by other
auditors whose report dated January 20, 1994, expressed an unqualified opinion
on those statements.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned as of December 31,
1995, by correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provides a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of ND Tax
Free Fund, Inc. as of December 31, 1995, the results of its operations for the
year then ended, the changes in net assets, and the financial highlights for
each of the two years in the period then ended, in conformity with generally
accepted accounting principles.

/s/ BRADY, MARTZ
BRADY, MARTZ & ASSOCIATES, P.C.

February 12, 1996

F-1
<PAGE>

ND TAX-FREE FUND, INC.

SCHEDULE OF INVESTMENTS December 31, 1995

<TABLE>
<CAPTION>
NAME OF ISSUER (Unaudited)
Percentages represent the market value of Rating Coupon Principal Market
each investment category to total net assets Moody's/S&P Rate Maturity Amount Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FINANCIAL (7.33%)
ND Municipal Bond Bank ............................ A1/NR 6.300% 10/01/15 $ 530,000 $ 566,527
ND Municipal Bond Bank ............................ NA/A 7.850 10/01/14 1,300,000 1,495,468
ND Municipal Bond Bank ............................ A1/NR 6.250 10/01/14 3,325,000 3,567,791
ND Building Auth. Lease Rev ....................... A/A 5.500 08/15/14 1,300,000 1,294,839
-----------
$ 6,924,625
-----------
HEALTH CARE (23.75%)
Bismarck (St. Vincent Nurs. Home) Hlth. Rev........ NR/NR 8.500% 06/01/09 $ 175,000 $ 187,077
Bismarck (Marillac Manor II) Ret. Facs. Rev........ NR/NR 8.625 02/01/10 675,000 741,049
Bismarck (Marillac Manor) Ret. Facs. Rev........... NR/NR 7.700 02/01/16 250,000 279,247
Burleigh Cty. (St. Vincent Nurs. Home) Rev......... NR/NR 7.000 06/01/19 500,000 554,650
Burleigh Cty. (Missouri Slope Ctr.) Rev. Ref....... NR/NR 7.000 11/01/07 500,000 528,630
Burleigh Cty. (Missouri Slope Care Fdn.) Rev. Ref.. NR/NR 7.250 06/01/12 500,000 531,240
Carrington, Catholic Hlth. Corp. (Ctr.) Rev........ A1/A+ 6.250 11/15/15 500,000 533,315
Cass Cty., Catholic Hlth. Corp. (Vil. Naz.) Rev.... A1/A+ 6.250 11/15/07 1,000,000 1,050,570
Cass Cty., Catholic Hlth. Corp. (Vil. Naz.) Rev.... A1/A+ 6.250 11/15/14 2,545,000 2,732,795
Cass Cty. (St. Lukes Hosp.) Facs. Rev.............. NR/A+ 7.500 06/01/06 300,000 319,074
Devils Lake (Lake Region Luth. Home) Rev........... NR/NR 6.500 10/01/13 250,000 263,480
Devils Lake (Catholic Health Corp.) Rev............ A1/A+ 6.250 11/15/07 1,125,000 1,201,320
Dickinson, Cath. Hlth. Corp. (St. Josephs) Rev. ... A1/A+ 7.200 06/01/14 1,015,000 1,072,439
Dickinson (BHS L/T Care) Hlth. Care Facs. Rev...... A1/NR 7.625 02/15/20 1,210,000 1,336,614
Dickinson (BHS L/T Care) Hlth. Care Facs. Rev...... A1/NR 7.500 02/15/10 600,000 661,212
Fargo (St. Lukes Hosp.) Facs. Ref. Rev............. NR/A+ 6.500 06/01/15 4,000,000 4,343,840
Fargo (Elim Homes) Nursing Home Ref. Rev........... NR/NR 8.750 03/01/09 150,000 151,005
Fargo (Elim Homes) Nursing Home Rev................ NR/NR 9.000 03/01/19 380,000 382,869
Jamestown (Heritage Center) Cong. Hsg. Rev......... NR/NR 8.500 09/01/06 200,000 224,030
Lisbon (Parkside Luth. Home) Nurs. Home Rev........ NR/NR 7.500 06/01/12 500,000 527,740
Ward Cty. (St. Joseph's Hosp.) Rev................. NR/BBB- 7.500 11/01/15 1,000,000 1,083,530
Ward Cty. (St. Joseph's Hosp.) Rev................. NR/BBB- 7.250 11/01/06 1,000,000 1,085,300
Ward Cty. (St. Joseph's Hosp.) Rev................. NR/BBB- 7.250 11/01/06 1,000,000 1,085,300
Ward Cty. (St. Joseph's Hosp.) Rev................. NR/BBB- 7.500 11/01/15 1,450,000 1,571,118
-----------
$22,447,444
-----------

HOUSING (24.23%)
Grand Forks Hsg. Auth. (Ryan Hse.) Multifam. Ref... Aa/NR 6.300% 03/01/22 $ 500,000 $ 516,620
North Dakota (HFA) Single Family Mortgage Program.. Aa/A+ 6.700 07/01/13 405,000 433,836
North Dakota (HFA) Single Family Mortgage Program.. Aa/A+ 7.750 07/01/24 840,000 910,535
North Dakota (HFA) Single Family Mortgage Program.. Aa/A+ 8.000 07/01/13 295,000 321,751
North Dakota (HFA) Single Family Mortgage Program.. Aa/A+ 8.050 01/01/24 930,000 1,013,272
North Dakota (HFA) Single Family Mortgage Program.. Aa/A+ 7.850 07/01/01 265,000 285,834
North Dakota (HFA) Single Family Mortgage Program.. Aa/A+ 6.800 07/01/25 1,540,000 1,657,964
North Dakota (HFA) Single Family Mortgage Program.. Aa/A+ 6.800 07/01/23 2,965,000 3,188,620
North Dakota (HFA) Single Family Mortgage Program.. Aa/A+ 7.000 07/01/23 1,345,000 1,467,328
North Dakota (HFA) Single Family Mortgage Program.. Aa/A+ 7.250 07/01/10 350,000 379,379
North Dakota (HFA) Single Family Mortgage Program.. Aa/A+ 7.300 07/01/24 1,360,000 1,473,356
North Dakota (HFA) Single Family Mortgage Program.. Aa/A+ 7.900 07/01/10 175,000 190,591
North Dakota (HFA) Single Family Mortgage Program.. Aa/A+ 7.375 07/01/17 580,000 609,441
North Dakota (HFA) Single Family Mortgage Program.. Aa/A+ 5.950 07/01/25 3,190,000 3,232,236
North Dakota (HFA) Single Family Mortgage Program.. Aa/A+ 6.950 07/01/25 1,995,000 2,172,316
North Dakota (HFA) Finance Program................. Aa/NR 6.750 01/01/25 3,470,000 3,754,852
North Dakota (HFA) Finance Program................. Aa/NR 6.300 01/01/15 980,000 1,027,236
North Dakota (HFA) Finance Program................. Aa/NR 6.250 07/01/15 265,000 274,092
-----------
$22,909,259
-----------
</TABLE>

F-2
<PAGE>

<TABLE>
<S> <C> <C> <C> <C> <C>
POLLUTION CONTROL (5.48%)
Mercer Cty. (Basin Electric) PCR................... A/A 7.700% 01/01/19 $2,085,000 $ 2,147,550
Mercer Cty. (Basin Electric) PCR................... A/A 8.125 01/01/19 1,230,000 1,266,900
Mercer Cty. (Basin Electric) PCR................... A/A 8.125 01/01/19 180,000 185,400
Mercer Cty. (Basin Electric) PCR................... A/A 7.000 01/01/19 995,000 1,080,232
Mercer Cty. (Ottertail Power) PCR Ref. (MBIA)...... Aa/AA- 6.900 02/01/19 450,000 498,105
-----------
$ 5,178,187
-----------
REAL ESTATE (8.41%)
Burleigh Co. (Univ. of Mary) Facs. Rev............. NR/NR 5.750% 12/01/11 $1,000,000 $ 983,580
Burleigh Co. (Univ. of Mary) Facs. Rev............. NR/NR 5.875 12/01/11 1,000,000 988,950
Fargo (Dome Authority) Sub. Sales Tax. Rev......... Baa1/NR 7.250 01/01/09 1,000,000 1,119,160
Fargo, Park District (Golf Course) Rev............. NR/NR 7.300 11/01/06 130,000 144,134
Fargo, Park District (Golf Course) Rev............. NR/NR 7.350 11/01/07 110,000 122,069
Fargo, Park District (Golf Course) Rev............. NR/NR 7.250 11/01/10 190,000 210,360
Grand Forks Regional Airport Authority Rev......... A/NR 7.500 10/01/09 225,000 242,705
Grand Forks Regional Airport Authority Rev......... A/NR 7.500 10/01/10 240,000 258,886
Jamestown (College) Facility Rev................... NR/NR 6.625 10/01/14 800,000 847,376
ND St. Brd of Hgr Ed. (MSU) Student Svcs. Ref...... NR/NR 6.750 08/01/05 755,000 816,729
ND St. Brd of Hgr Ed. (MSU) Student Svcs. Ref...... NR/NR 5.500 08/01/13 400,000 398,488
University of ND (G.F.) Lease Financing COP........ A/A- 7.300 09/01/10 1,425,000 1,550,001
Wahpeton (Town Centre. Sqr.) MultiFam. Hsg. Ref.... NR/NR 8.500 02/01/14 250,000 263,088
-----------
$ 7,945,526
-----------
INSURED/GUARANTEED (30.44%)
*Bismarck (MedCenter. One) Ref. & Imp. (BIGI)...... Aaa/AAA 7.500% 05/01/13 $2,500,000 $ 2,790,750
Bismarck (St. Alexius Med. Ctr.) Ref. AMBAC........ Aaa/AAA 6.900 05/01/06 1,400,000 1,569,456
Central Cass Cty., PSD#17 GO Sch. Bldg. (MBIA)..... Aaa/AAA 6.500 05/01/13 430,000 472,463
Central Cass Cty., PSD#17 GO Sch. Bldg. (MBIA)..... Aaa/AAA 6.500 05/01/14 460,000 505,724
Grand Forks (United Hosp.) Facs. Rev. MBIA......... Aaa/AAA 6.625 12/01/10 830,000 915,141
Grand Forks (United Hosp.) Facs. Rev. MBIA......... Aaa/AAA 6.500 12/01/06 750,000 827,078
Grand Forks (United Hosp.) Facs. Rev. MBIA......... Aaa/AAA 6.250 12/01/19 1,000,000 1,077,050
Grand Forks (United Hosp.) Facs. Rev. MBIA......... Aaa/AAA 6.450 12/01/23 1,525,000 1,674,404
Mercer Cty. (Mont.-Dak. Utilities) PCR (FGIC)...... Aaa/AAA 6.650 06/01/22 7,000,000 7,696,220
Mercer Cty. (NW Public. Service.) PCR Ref. (MBIA).. Aaa/AAA 5.850 06/01/23 4,300,000 4,540,671
Morton Cty. (Mont.-Dak. Utilities) PCR (FGIC)...... Aaa/AAA 6.650 06/01/22 350,000 386,449
ND (HFA) Muliti-family Ref. (FNMA guaranteed)...... Aaa/AAA 6.200 12/01/20 825,000 842,391
*ND Building. Auth. (St. Bd. Hr. Ed.) (AMBAC)...... Aaa/AAA 7.400 06/01/10 1,140,000 1,278,442
ND Building Auth. Ref.Lease Rev. (AMBAC)........... Aaa/AAA 6.000 06/01/10 1,700,000 1,824,695
*North Dakota Student Loan Rev. (AMBAC)............ Aaa/AAA 7.750 07/01/02 1,060,000 1,145,669
University of ND (G.F.) Hsg. & Aux. Ref. (AMBAC)... Aaa/AAA 7.850 04/01/14 340,000 374,500
Valley City, Western Hlth. Care Fac. Rev. (BIGI)... Aaa/AAA 7.625 01/01/19 200,000 216,830
Williston Cath. Hlth. Corp. (Mercy Hosp.) (MBIA)... Aaa/AAA 7.200 06/01/14 600,000 641,028
-----------
$28,778,961
-----------
TOTAL NORTH DAKOTA MUNICIPAL BONDS (COST:$88,880,596).............................................. $94,184,002
SHORT-TERM SECURITIES (.13%)
Goldman Sachs Institutional Liquid Assets Tax-Exempt Diversified Portfolio (COST: $120,227)........ 120,227
-----------
TOTAL INVESTMENTS IN SECURITIES (COST: $89,000,823)................................................ $94,304,229
===========
</TABLE>

* Indicates bonds are segregated by the custodian to cover when-issued or
delayed-delivery purchases.
The accompanying notes are an integral part of these financial statements.

F-3
<PAGE>

ND TAX-FREEFUND, INC.
FINANCIAL STATEMENTS December 31, 1995

<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
<S> <C>
ASSETS
Investments in securities, at value
(cost:$89,000,823) ................ $94,304,229
Accrued dividends receivable ...... 4,551
Accrued interest receivable ....... 1,621,079
------------
Total Assets ..................... $95,929,859
------------
LIABILITIES
Bank overdraft .................... $ 23,315
Dividends payable ................. 403,120
Accrued expenses .................. 94,108
Payable for fund shares redeemed .. 28,196
Security purchases payable ........ 849,415
------------
Total Liabilities .............. $ 1,398,154
------------
NET ASSETS .......................... $94,531,705
============
Net asset value per share,
10,402,491 shares outstanding ..... $ 9.09
============

<CAPTION>
STATEMENT OF OPERATIONS
For the year ended December 31, 1995

INVESTMENT INCOME
Interest .......................... $ 5,905,886
Dividends ......................... 58,083
------------
Total Investment Income ........ $ 5,963,969
------------
EXPENSES
Investment advisory fees .......... $ 572,789
Distribution fees (12b-1) ......... 238,662
Custodian fees .................... 15,031
Transfer agent fees ............... 103,153
Accounting service fees ........... 4,310
Audit and legal fees .............. 7,910
Directors fees .................... 26,317
Insurance ......................... 11,000
Printing and postage .............. 19,115
License, fees, and registrations .. 7,893
------------
Total Expenses .................. $ 1,006,180
Less expenses waived or absorbed
by the Fund's manager ............. 3,799
------------
Total Net Expenses .............. $ 1,002,381
------------
NET INVESTMENT INCOME ............... $ 4,961,588
------------
</TABLE>

F-4
<PAGE>

<TABLE>
<CAPTION>
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS AND FUTURES
<S> <C>
Net realized gain (loss) from:
Investment transactions .............. $ 120,879
Futures transactions ................. (4,228,723)
Net change in unrealized appreciation
(depreciation) of investments ........ 7,035,220
------------
Net Realized and Unrealized Gain
(Loss) On Investments And Futures $ 2,927,376
------------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS ......................... $ 7,888,964
============
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-5
<PAGE>

ND TAX-FREE FUND, INC.
FINANCIAL STATEMENTS December 31, 1995

STATEMENT OF CHANGES IN NET ASSETS
For the year ended December 31, 1995 and year ended December 31, 1994

<TABLE>
<CAPTION>
For the Year For the Year
Ended Ended
December 31, 1995 December 31, 1994
-------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income ........................................................ $ 4,961,588 $ 4,692,695
Net realized gain (loss) on investment and futures transactions .............. (4,107,844) 1,173,544
Net unrealized appreciation (depreciation) on investments .................... 7,035,220 (7,832,506)
-----------------------------------
Net Increase (Decrease) in Net Assets Resulting From Operations ........... $ 7,888,964 $ (1,966,267)
-----------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income ......................................... $ (4,961,588) $ (4,692,695)
Distributions in excess of net investment income ............................. (229,423) (226,026)
Distributions from net realized gain on investment and futures transactions... 0 0
-----------------------------------
Total Dividends and Distributions ......................................... $ (5,191,011) $ (4,918,721)
-----------------------------------
CAPITAL SHARE TRANSACTIONS
Proceeds from sale of shares ................................................. $ 5,471,316 $ 13,739,580
Proceeds from reinvested dividends ........................................... 3,322,041 3,061,970
Cost of shares redeemed ...................................................... (8,824,914) (3,093,650)
-----------------------------------
Net Increase (Decrease) in Net Assets Resulting From
Capital Share Transactions ................................................ $ (31,557) $ 13,707,900
-----------------------------------
TOTAL INCREASE IN NET ASSETS ................................................... $ 2,666,396 $ 6,822,912

NET ASSETS, BEGINNING OF PERIOD ................................................ 91,865,309 85,042,397
-----------------------------------
NET ASSETS, END OF PERIOD ...................................................... $ 94,531,705 $ 91,865,309
===================================
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-6
<PAGE>

ND TAX-FREE FUND, INC.

NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995

NOTE 1. ORGANIZATION

ND Tax-Free Fund, Inc. (the Fund) is registered under the Investment
Company Act of 1940 as a non-diversified, open-end management investment
company. The Fund incorporated under the laws of the State of North Dakota
on October 7, 1988, and commenced operations on January 3, 1989. The Fund's
objective is to provide as high a level of current income exempt from
federal and North Dakota income taxes as is consistent with preservation of
capital. The Fund will seek to achieve this objective by investing
primarily in a portfolio of North Dakota tax-exempt securities.

Shares of the Fund are offered with no initial sales charge. Shares may be
subject to a contingent deferred sales charge, if those shares are redeemed
within five years of purchase.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

INVESTMENT SECURITY VALUATION - Investments in securities traded on
national securities exchanges are valued at the last reported sales price
at the close of each business day. Securities for which market quotations
are not readily available are valued at fair value as determined in good
faith by the portfolio management team. The Fund follows industry practice
and records security transactions on the trade date.

The Fund concentrates its investments in a single state. This concentration
may result in the Fund investing a relatively high percentage of its assets
in a limited number of issuers.

FEDERAL AND STATE INCOME TAXES - The Fund's policy is to comply with the
requirements of the Internal Revenue Code that are applicable to regulated
investment companies, and to distribute all of its net investment income
and any net realized gain on investments, to its shareholders. Therefore,
no provision for income taxes is required.

DISTRIBUTIONS TO SHAREHOLDERS - Dividends from net investment income,
declared daily and payable monthly, are reinvested in additional shares of
the Fund at net asset value or payable in cash. Capital gains, when
available, are distributed along with the last income dividend of the
calendar year.

INVESTMENT INCOME - Dividend income is recognized on the ex-dividend date
and interest income is recognized daily on an accrual basis. Premiums and
discounts on securities purchased are amortized using the effective
interest method over the life of the respective securities, unless
callable, in which case they are amortized to the earliest call date.

FUTURES CONTRACTS AND OPTIONS - The Fund may purchase and sell financial
futures and option contracts to hedge against changes in the values of
tax-exempt municipal securities the Fund owns or expects to purchase.

A futures contract is an agreement between two parties to buy or sell units
of a particular index or a certain amount of USGovernment or municipal
securities at a set price on a future date. Upon entering into a futures
contract, the Fund is required to deposit with a broker an amount of cash
or securities equal to the

F-7
<PAGE>

minimum "initial margin" requirement of the futures exchange on which the
contract is traded. Subsequent payments ("variation margin") are made or
received by the Fund, dependent on the fluctuations in the value of the
underlying index. Daily fluctuations in value are recorded for financial
reporting purposes as unrealized gains or losses by the fund. When entering
into a closing transaction, the Fund will realize, for book purposes, a
gain or loss equal to the difference between the value of the futures
contracts sold and the futures contracts to buy.

Daily fluctuations in the value of options are recorded for financial
reporting purposes as unrealized gains or losses by the fund. Upon sale or
expiration of the option, the Fund will realize, for book purposes, a gain
or loss equal to the difference between the cost of the option and the
value on sale or expiration date.

Certain risks may arise upon entering into futures contracts and options.
These risks may include changes in the value of the futures contracts or
options that may not directly correlate with changes in the value of the
underlying securities.

USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statments and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.

NOTE 3. SHARE TRANSACTIONS

As of December 31, 1995, there were 100,000,000 shares of $.001 par
authorized; 10,402,491 and 10,408,547 were outstanding at December 31, 1995
and December 31, 1994, respectively. Transactions in capital shares were as
follows:

<TABLE>
<CAPTION>
Shares Amount
------------------- ---------------------
For The For The For The For The
Year Ended Year Ended Year Ended Year Ended
December 31, 1995 December 31, 1994 December 31, 1995 December 31, 1994
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold .............................. 605,360 1,478,546 $ 5,471,316 $ 13,739,580
Shares issued on reinvestment of dividends 368,749 330,011 3,322,041 3,061,970
Shares redeemed .......................... (980,165) (337,033) (8,824,914) (3,093,650)
------------------------------------------------------------------------------
Net increase (decrease) .................. (6,056) 1,471,524 $ (31,557) $ 13,707,900
================================================================================
</TABLE>

NOTE 4. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES

ND Money Management, Inc., the Fund's investment adviser, ND Capital, Inc.,
the Fund's underwriter, and ND Resources, Inc., the Fund's transfer agent,
are subsidiaries of ND Holdings, Inc., the Fund's sponsor.

The Fund has engaged ND Money Management, Inc., to provide investment
advisory and management services to the Fund. The Investment Advisory
Agreement provides for fees to be computed at an annual rate of 0.60% of
the Fund's average daily net assets. The Fund has recognized $572,789 of
investment advisory fees for the year ended December 31, 1995. The Fund has
a payable to ND Money

F-8
<PAGE>

Management, Inc. of $45,139 at December 31, 1995 for investment advisory
fees. Certain officers and directors of the Fund are also officers and
directors of the investment adviser.

The Fund has adopted a distribution plan pursuant to Rule 12b-1 under the
1940 Act (the Plan), whereby the Fund shall pay at the annual rate of 0.75%
of the average daily net assets of the Fund to ND Capital, Inc. (Capital),
its principal underwriter, for expenses incurred in the distribution of the
Fund's shares. Pursuant to the Plan, Capital is entitled to reimbursement
each month for its actual expenses incurred in the distribution and
promotion of the Fund's shares, including the printing of prospectuses and
reports used for sales purposes, expenses of preparation and printing of
sales literature and other such distribution related expenses, including
any distribution or service fees paid to securities dealers who have
executed a dealer sales agreement with Capital. Capital will be reimbursed
at a rate not to exceed 0.75% of the average daily net assets of the Fund
for the prior month. The fund has recognized $238,662 of 12b-1 fee expenses
for the period ended December 31, 1995. The Fund has a payable to ND
Capital, Inc. of $18,808 at December 31, 1995 for 12b-1 fees.

ND Resources, Inc., (the transfer agent), provides shareholder services for
a monthly fee equal to an annual rate of .16% of the Fund's first $10
million of average daily net assets, .13% of the Fund's average daily net
assets on the next $15 million, .11% of the Fund's average daily net assets
on the next $15 million, .10% of the Fund's average daily net assets on the
next $10 million, and 0.09% of the Fund's average daily net assets in
excess of $50 million. The Fund has recognized $103,153 of transfer agency
fees for the year ended December 31, 1995.

NOTE 5. INVESTMENT SECURITY TRANSACTIONS

The cost of purchases and proceeds from the sales of investment securities
(excluding short-term securities) aggregated $7,521,800 and $10,821,633
respectively, for the year ended December 31, 1995.

NOTE 6. INVESTMENT IN SECURITIES

At December 31, 1995, the aggregate cost of securities for federal income
tax purposes was $89,000,823, and the net unrealized appreciation of
investments based on the cost was $5,303,406, which is comprised of
$5,307,354 aggregate gross unrealized appreciation and $3,948 aggregate
gross unrealized depreciation.

F-9
<PAGE>

ND TAX-FREE FUND, INC.

FINANCIAL HIGHLIGHTS Selected per share data and ratios for the period
indicated.

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1995 1994 1993 1992 1991 1990
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ................ $ 8.83 $ 9.52 $ 9.49 $ 9.47 $ 9.36 $ 9.49
---------------------------------------------------------------------------
Income from Investment Operations:
Net Investment Income ............................ $ .47 $ .48 $ .52 $ .59 $ .61 $ .63
Net realized and unrealized gain (loss) on
investment and futures transactions .............. .28 (.67) .05 .04 .11 (.13)
---------------------------------------------------------------------------
Total Income(Loss) From Investment Operations... $ .75 $ (.19) $ .57 $ .63 $ .72 $ .50
---------------------------------------------------------------------------
Less Distributions:
Dividends from net investment income ............. $ (.47) $ (.48) $ (.52) $ (.59) $ (.61) $ (.63)
Distributions in excess of net investment income (.02) (.02) (.02) (.02) .00 .00
---------------------------------------------------------------------------
Total Distributions ............................. $ (.49) $ (.50) $ (.54) $ (.61) $ (.61) $ (.63)
---------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD ...................... $ 9.09 $ 8.83 $ 9.52 $ 9.49 $ 9.47 $ 9.36
===========================================================================
TOTAL RETURN ....................................... 8.68%(A) (2.07)%(A) 5.94%(A) 6.62%(A) 7.86%(A) 7.96%(A)
Ratios/Supplemental Data:
Net assets, end of period (in thousands)............ $94,532 $91,865 $85,042 $61,429 $31,243 $14,793
Ratio of net expenses (after expense assumption)
to average net assets .............................. 1.05%(B) 1.06%(B) 1.01%(B) 0.95%(B) 0.72%(B) 0.49%(B)
Ratio of net investment income to average
net assets ......................................... 5.20% 5.19% 5.39% 5.91% 6.26% 6.68%
Portfolio turnover rate ............................ 8.02% 5.55% 18.59% 17.35% 14.11% 57.96%
</TABLE>

(A) Excludes contingent deferred sales charge of 4%.

F-10
<PAGE>

ND TAX-FREE FUND, INC.

PART C
OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS

(a) Financial Statements

Included in Part B of the Registration Statement:

Independent Public Accountant's Report, dated February 12, 1996

Statement of Assets and Liabilities as of December 31, 1995

Statement of Operations for the Year Ended December 31, 1995

Statement of Changes in Net Assets for the Years Ended December
31, 1995 and 1994

Notes to Financial Statements

Financial Highlights

Schedule of Investments

Schedules II through VII are ommitted because inapplicable.

(b) Exhibits

(1) Articles of Incorporation *

(2) Bylaws **

(4) Specimen Copy of Share Certificate *

(5) Form of Investment Advisory Agreement *

(6)(a) Form of Distribution Agreement *

(6)(b) Form of Dealer Sales Agreement ****

(8) Form of Custodian Agreement ***

(9)(a) Form of Transfer Agency Agreement ***

(9)(b) Form of Accounting Services Agreement*****

(10) Opinion of Pringle & Herigstad, P. C. **

(11) Consent of Independent Accountant

(13) Form of Purchase Agreement *

(14) Form of Distribution Plan ***

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

* Previously filed as an exhibit to Registrant's Registration
Statement on Form N-1A filed with the Securities and Exchange
Commission on October 25, 1988, and incorporated by reference
herein.

** Previously filed as an exhibit to Pre-effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A filed with the
Securities and Exchange Commission on December 13, 1989, and
incorporated by reference herein.

C-1
<PAGE>

*** Previously filed as an exhibit to Post-effective Amendment No. 7 to
Registrant's Registration Statement on Form N-1A filed with the Securities
and Exchange Commission on October 25, 1988, and incorporated by reference
herein.

**** Previously filed as an exhibit to Post-effective Amendment No. 8 to
Registrant's Registration Statement on Form N-1A filed with the Securities
and Exchange Commission on May 1, 1995, and incorporated by reference
herein.

***** Previously filed as an exhibit to Post-effective Amendment No. 9 to
Registrant's Registration Statement on Form N-1A filed with the Securities
and Exchange Commission on May 1, 1996, and incorporated by reference
herein.

Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT

Inapplicable

Item 26. NUMBER OF HOLDERS OF SECURITIES

<TABLE>
<CAPTION>
TITLE OF CLASS NUMBER OF RECORD HOLDERS
<S> <C>
Shares, par value
$.001 per share (As of April 19, 1996)
</TABLE>

Item 27. INDEMNIFICATION

Section 4 of the Distribution Agreement [Exhibit (6) (a)] provides for
the indemnification of ND Capital, Inc., Registrant's principal underwriter,
against certain losses. Section 12 of the Transfer Agency Agreement [Exhibit 9]
provides for the indemnification of NDResources, Inc., Registrant's transfer
agent, against certain losses.

Indemnification of directors, officers, employees, and agents of
Registrant is required under Section 10-19.1-91 of the North Dakota Century
Code. In addition, Registrant has obtained an insurance policy on behalf of
directors and officers against any liability asserted against and incurred by
the person in or arising from that person's official capacity to the extent
permitted by law.

In no event will Registrant indemnify its directors, officers,
employees, or agents against any liability to which such person would otherwise
be subject by reason of his willful misfeasance, bad faith, gross negligence in
the performance of his duties, or by reason of his reckless disregard of the
duties involved in the conduct of his office arising under his agreement with
Registrant.

Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a director, officer, or controlling person of Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

C-2
<PAGE>

Anything in the North Dakota Business Corporation Act (Chapters 10-19
through 10-23 of the North Dakota Century Code), the Fund's Articles of
Incorporation or Bylaws, or the Investment Advisory, Distribution, or Transfer
Agency Agreements to the contrary notwithstanding, Registrant will comply in all
respects with the provisions of Investment Company Act Release No. 11330
(September 4, 1980) concerning indemnification.

Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

ND Money Management, Inc. (the "Investment Adviser"), is a wholly-
owned subsidiary of ND Holdings, Inc. ("Holdings"), Registrant's promoter. The
Investment Adviser was organized under the laws of the State of North Dakota on
August 19, 1988, and also serves as investment adviser for ND Insured Income
Fund, Inc. ("NDIIF"), Montana Tax-Free Fund, Inc. ("MTFF"), South Dakota Tax-
Free Fund, Inc. ("SDTFF"), and Integrity Fund of Funds, Inc. ("IFF").

The officers and directors of the Investment Adviser are Robert E.
Walstad and Peter A. Quist. Messrs. Walstad and Quist are also officers and
directors of Holdings, ND Capital, Inc. ("Capital"), Registrant's principal
underwriter and initial shareholder, ND Resources, Inc. ("Resources"),
Registrant's transfer agent, NDIIF, MTFF, SDTFF, and IFF.

Mr. Walstad served as a stockbroker and branch manager of the Minot,
North Dakota, office of Dean Witter Reynolds from September 1977 to October 1987
when he resigned to organize Holdings. Mr. Quist was Securities Commissioner of
the State of North Dakota from May 6, 1983, to January 31, 1988, when he
resigned to join Holdings as vice president and director.

The Investment Adviser, Registrant, Holdings, Capital, Resources, ND
IIF, MTFF, SDTFF, and IFF have their principal address at 1 North Main, Minot,
North Dakota 58703.

Item 29. PRINCIPAL UNDERWRITERS

(a) Other investment companies for which Registrant's principal
underwriter also acts as principal underwriter, depositor, or investment
adviser: ND Insured Income Fund, Inc., Montana Tax-Free Fund, Inc., South Dakota
Tax-Free Fund, Inc., and Integrity Fund of Funds, Inc.

(b) Information concerning each director, officer, or partner of the
principal underwriter:

<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND OFFICES
BUSINESS ADDRESS WITH UNDERWRITER WITH REGISTRANT
-------------------- --------------------- --------------------
<S> <C> <C>
Robert E. Walstad President, Treasurer, President, Treasurer,
1 North Main and Director and Director
Minot, North Dakota 58703

Peter A. Quist Vice President, Secretary, Vice President, Secretary
1 North Main and Director and Director
Minot, North Dakota 58703
</TABLE>

C-3
<PAGE>

Item 30. LOCATION OF ACCOUNTS AND RECORDS

First American Bank West, 20 First Street SW, Minot, North Dakota
58701, serves as custodian of Registrant and maintains all records related to
that function. ND Resources, Inc. ("Resources"), serves as transfer agent,
dividend disbursing, administrative, and accounting services agent of Registrant
and maintains all records related to those functions. ND Capital, Inc.
("Capital"), serves as the principal underwriter of Registrant and maintains all
records related to that function. ND Money Management, Inc. ("Money
Management"), serves as Registrant's investment adviser and maintains all
records related to that function. Registrant maintains all of its corporate
records. The address of Resources, Capital, Money Management, and Registrant is
1 North Main, Minot, North Dakota 58703.

Item. 31. MANAGEMENT SERVICES

Inapplicable

Item 32. UNDERTAKINGS

Inapplicable

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, Registrant certifies that it meets all of the
requirements for effectiveness of this Post-effective Amendment No. 10 to
Registrant's Registration Statement on Form N-1A filed with the Securities and
Exchange Commission on October 25, 1988, pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Post-effective Amendment No. 10
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Minot, State of North Dakota, on the 25th day of April, 1996.

ND TAX-FREE FUND, INC.

By ________________________________________
Robert E. Walstad
President

C-4
<PAGE>

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, this Post-effective Amendment No. 10 to
Registrant's Registration Statement on Form N-1A has been signed below by the
following persons in the capacities and on the date indicated.

_______________________________________ June 17, 1996
Lynn W. Aas
Director

_______________________________________ June 17, 1996
Orlin W. Backes
Director

_______________________________________ June 17, 1996
Arthur A. Link
Director

_______________________________________ June 17, 1996
Peter A. Quist
Director, Vice President, and Secretary

_______________________________________ June 17, 1996
Robert E. Walstad
Director, President, and Treasurer

C-5

<PAGE>

[LOGO OF BRADY MARTZ]

We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-effective Amendment No. 10 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
February 12, 1996, relating to the financial statements and selected per share
data and ratios of ND Tax-Free Fund, Inc., which appears in such Statement of
Additional Information and to the incorporation by reference of our report into
the Prospectus which constitutes part of the Registration Statement. We also
consent to the reference to us under the heading "Accountant and Reports to
Shareholders" in such Statement of Additional Information and to the reference
to us under the heading "Financial Highlights" in the Prospectus and on the back
cover of the Prospectus.

/s/ Brady, Martz
BRADY, MARTZ & ASSOCIATES, P.C.

June 13, 1996

[LETTERHEAD]

<PAGE>

<ARTICLE> 6

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 89000823
<INVESTMENTS-AT-VALUE> 94304229
<RECEIVABLES> 1625630
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 95929859
<PAYABLE-FOR-SECURITIES> 849415
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 548739
<TOTAL-LIABILITIES> 1398154
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 10402491
<SHARES-COMMON-PRIOR> 10408547
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (7582238)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5303406
<NET-ASSETS> 94531705
<DIVIDEND-INCOME> 58083
<INTEREST-INCOME> 5905886
<OTHER-INCOME> 0
<EXPENSES-NET> 1002381
<NET-INVESTMENT-INCOME> 4961588
<REALIZED-GAINS-CURRENT> (4107844)
<APPREC-INCREASE-CURRENT> 7035220
<NET-CHANGE-FROM-OPS> 7888964
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4961588
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 229423
<NUMBER-OF-SHARES-SOLD> 605360
<NUMBER-OF-SHARES-REDEEMED> 980165
<SHARES-REINVESTED> 368749
<NET-CHANGE-IN-ASSETS> 2666396
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 572789
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1006180
<AVERAGE-NET-ASSETS> 95429162
<PER-SHARE-NAV-BEGIN> 8.83
<PER-SHARE-NII> .47
<PER-SHARE-GAIN-APPREC> .23
<PER-SHARE-DIVIDEND> .47
<PER-SHARE-DISTRIBUTIONS> .00
<RETURNS-OF-CAPITAL> .02
<PER-SHARE-NAV-END> 9.09
<EXPENSE-RATIO> 1.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>