MANAGED MUNICIPAL FUND INC, 497, 1997-03-06

MANAGED MUNICIPAL FUND INC
497, 1997-03-06

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LOGO

FLAG INVESTORS
MANAGED MUNICIPAL FUND CLASS A SHARES
(A Class of Managed Municipal Fund, Inc.)

Prospectus & Application -- March 1, 1997

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

Managed Municipal Fund, Inc. (the "Fund") is designed to provide a high level
of total return with relative stability of principal and, secondarily, high
current income exempt from federal income tax through investment in a
portfolio consisting primarily of tax-free municipal obligations. To achieve
this objective, the Fund invests primarily in municipal obligations rated
within the three highest rating categories of Moody's Investors Service, Inc.
or Standard & Poor's Ratings Group.

Flag Investors Class A Shares of the Fund ("Class A Shares") are available
through Alex. Brown & Sons Incorporated, the distributor of the Class A Shares
(the "Distributor"), as well as Participating Dealers and Shareholder Servicing
Agents. (See "How to Invest in the Fund.")

This Prospectus sets forth basic information that investors should know about
the Fund prior to investing and should be retained for future reference. A
Statement of Additional Information dated March 1, 1997 has been filed with
the Securities and Exchange Commission (the "SEC") and is incorporated herein
by reference. It is available upon request and without charge by calling the
Fund at (800) 767-FLAG.

No person has been authorized to give any information or to make
representations not contained in this Prospectus and, if given or made, such
information must not be relied upon as having been authorized by the Fund or
the Distributor.

TABLE OF CONTENTS
Fund Expenses ........................................................ 2
Financial Highlights ................................................. 3
Investment Program ................................................... 4
Investment Restrictions .............................................. 6
How to Invest in the Fund ............................................ 7
How to Redeem Shares ................................................. 9
Telephone Transactions ............................................... 10
Dividends and Taxes .................................................. 11
Management of the Fund ............................................... 12
Investment Advisor ................................................... 12
Administrator ........................................................ 13
Distributor .......................................................... 13
Custodian, Transfer Agent and
Accounting Services ............................................... 13
Performance Information .............................................. 14
General Information .................................................. 14
Application .......................................................... A-1

THE FUND'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK. THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THE SHARES INVOLVES RISK, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.

Flag Investors Funds
P.O. Box 515
Baltimore, Maryland 21203
- -----------------------------------------------------------------------------

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

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[This page intentionally left blank]

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FUND EXPENSES
=============================================================================

SHAREHOLDER TRANSACTION EXPENSES:

<TABLE>
<CAPTION>
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) ............. 4.50%*
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price) ... None
Maximum Deferred Sales Charge (as a percentage of original purchase price or
redemption proceeds, whichever is lower) ................................................ 0.50%*

Annual Fund Operating Expenses (net of fee waivers):
(as a percentage of average daily net assets)

Management Fees (net of fee waivers) ..................................................... .25%**
12b-1 Fees ............................................................................... .25%
Other Expenses (net of fee waivers) ...................................................... .40%
----------
Total Fund Operating Expenses (net of fee waivers) ....................................... .90%**
==========
</TABLE>
- ------
* Purchases of $1 million or more by persons not otherwise eligible for
sales load waivers are not subject to an initial sales charge, however, a
contingent deferred sales charge of .50% may be imposed upon redemption.
(See "How to Invest in the Fund -- Offering Price.")
** The Fund's investment advisor and administrator intend, but are not
obligated, to waive their fees proportionately, to the extent required, so
that Total Fund Operating Expenses do not exceed .90% of the Fund's
average daily net assets. Absent fee waivers, Management Fees would be
.40%, Other Expenses (including administration fees) would be .48%, and
Total Fund Operating Expenses would be 1.13%, respectively, of the Fund's
average daily net assets.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Example: 1 year 3 years 5 years 10 years
--------- ----------- ----------- ------------
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the
end of each time period:* ................................ $54 $72 $93 $151
</TABLE>
- ------
* The Example is based on Total Fund Operating Expenses, net of fee waivers.
Absent fee waivers, expenses would be higher.

The Example should not be considered a representation of future expenses.
Actual expenses may be greater or less than those shown.

The purpose of the foregoing table is to describe the various costs and
expenses that an investor in the Fund will bear directly and indirectly. A
person who purchases Class A Shares through a financial institution may be
charged separate fees by the financial institution. (For more complete
descriptions of the various costs and expenses, see "How to Invest in the
Fund -- Offering Price," "Investment Advisor," "Administrator" and
"Distributor.") The Expenses and Example appearing in the table above are
based on the Fund's expenses for the fiscal year ended October 31, 1996.

The rules of the SEC require that the maximum sales charge (in the Class A
Shares' case, 4.50% of the offering price) be reflected in the above table.
However, certain investors may qualify for reduced sales charges. (See "How
to Invest in the Fund -- Offering Price".) Due to the continuous nature of
Rule 12b-1 fees, long-term shareholders of the Fund may pay more than the
equivalent of the maximum front-end sales charges permitted by the Conduct
Rules of the National Association of Securities Dealers, Inc.

<PAGE>

FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------

The Fund was organized as a corporation under the laws of the State of
Maryland on January 5, 1990 and commenced operations on February 26, 1990.
The Fund commenced offering the Class A Shares on October 23, 1990. The Fund
has offered another class of shares (ISI Class Shares) since February 26,
1990. The financial highlights included in this table are a part of the
Fund's financial statements for the periods indicated and have been audited
by Coopers & Lybrand L.L.P., the Fund's independent accountants. The
financial statements and financial highlights for the fiscal year ended
October 31, 1996 and the report thereon of Coopers & Lybrand L.L.P. are
included in the Statement of Additional Information. Additional performance
information is contained in the Fund's Annual Report for the fiscal year
ended October 31, 1996, which can be obtained at no charge by calling the
Fund at (800) 767-FLAG.

(For a Share outstanding throughout each period)*
==============================================================================
<TABLE>
<CAPTION>
For the
Period
February 26,
1990
Year Ended October 31, through
---------------------------------------------------------------------- October 31,
1996 1995 1994 1993 1992 1991 1990
--------- --------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of
period ......................... $ 10.65 $ 9.81 $ 11.10 $ 10.31 $ 10.36 $ 9.99 $ 10.00
--------- --------- --------- --------- --------- --------- -------------
Income from Investment
Operations:
Net investment income ............. 0.48 0.48 0.46 0.50 0.50 0.57 0.38
Net realized and unrealized
gain/(loss) on investments ..... -- 0.98 (1.15) 0.94 0.22 0.49 (0.02)
--------- --------- --------- --------- --------- --------- -------------
Total from Investment Operations .. 0.48 1.46 (0.69) 1.44 0.72 1.06 0.36
--------- --------- --------- --------- --------- --------- -------------
Less Distributions:
Distributions from net investment
income and net realized
short-term gains ............... (0.54) (0.54) (0.56) (0.61) (0.65) (0.69) (0.37)
Distributions from net realized
long-term gains ................ (0.01) (0.08) (0.04) (0.04) (0.12) -- --
--------- --------- --------- --------- --------- --------- -------------
Total Distributions ............... (0.55) (0.62) (0.60) (0.65) (0.77) (0.69) (0.37)
--------- --------- --------- --------- --------- --------- -------------
Net asset value at end of period .. $ 10.58 $ 10.65 $ 9.81 $ 11.10 $ 10.31 $ 10.36 $ 9.99
========= ========= ========= ========= ========= ========= =============
Total Return:(1)
Flag Investors Class A Shares ..... 4.67% 15.42% (6.49)% 14.36% 6.06% 10.85% 1.21%(2)

ISI Class Shares .................. 4.67% 15.42% (6.49)% 14.36% 6.06% 10.85% 3.78%
Ratios to Average Daily Net Assets:
Expenses(4) ....................... 0.90% 0.90% 0.90% 0.90% 0.90% 0.90% 0.90%(3)

Net investment income(5) .......... 4.48% 4.72% 4.37% 4.38% 4.78% 5.57% 6.12%(3)

Supplemental Data:
Net assets at end of period (000):
Flag Investors Class A Shares .. $41,193 $45,980 $49,903 $53,486 $45,536 $38,491 $ 5,698
ISI Class Shares ............... $84,712 $86,292 $83,607 $88,378 $51,420 $20,053 $17,290
Portfolio turnover rate ........... 32% 55% 37% 68% 95% 86% 99%

===============================================================================================================================
</TABLE>
* Computed based upon average shares outstanding.
1 Total return excludes the effect of sales charge.
2 Flag Investors Class A Shares commenced operations on October 23, 1990.
3 Annualized.
4 Without the waiver of advisory and administration fees, the ratio of
expenses to average net assets would have been 1.13%, 1.10%, 1.11%, 1.14%,
1.27%, 1.47% and 1.92% for the periods ended October 31, 1996, 1995, 1994,
1993, 1992, 1991 and 1990, respectively.
5 Without the waiver of advisory and administration fees, the ratio of net
investment income to average net assets would have been 4.25%, 4.52%, 4.16%,
4.14%, 4.41%, 4.99% and 5.11% for the periods ended October 31, 1996, 1995,
1994, 1993, 1992, 1991 and 1990, respectively.

2
<PAGE>

INVESTMENT PROGRAM
===============================================================================

INVESTMENT OBJECTIVE, POLICIES AND RISK
CONSIDERATIONS

The investment objective of the Fund is a high level of total return with
relative stability of principal, and secondarily, high current income exempt
from federal income tax through investment in a portfolio consisting
primarily of tax-free municipal obligations ("Municipal Obligations").
Municipal Obligations include securities of states, territories and
possessions of the United States and the District of Columbia, and their
political subdivisions, agencies and instrumentalities, the interest on which
is exempt from federal income tax in the opinion of bond counsel for the
issuer. Under normal market conditions, the Fund will invest at least 80% of
its net assets in Municipal Obligations. This policy is fundamental and may
be changed only by a majority vote of shareholders. The Fund does not
currently intend to acquire Municipal Obligations that are subject to
alternative minimum tax but may so invest up to 20% of its net assets. There can
be no assurance that the Fund will achieve its investment objective.

The Fund will invest at least 75% of its portfolio of Municipal
Obligations in securities rated, on the date of investment, A1 or higher (in
the case of municipal bonds) and higher than MIG 3 (in the case of municipal
notes) by Moody's Investors Service, Inc. ("Moody's") or rated A+ or higher
(in the case of municipal bonds) and higher than SP-2 (in the case of
municipal notes) by Standard & Poor's Ratings Group ("S&P") or, if unrated,
of comparable quality as determined by the Fund's investment advisor under
criteria approved by the Board of Directors. The Fund may invest up to 25% of
its portfolio of Municipal Obligations in securities rated A (in the case of
municipal bonds) or MIG 3 (in the case of municipal notes) by Moody's or
rated A (in the case of municipal bonds) or SP-2 (in the case of municipal
notes) by S&P or, if unrated, of comparable quality as determined by the
investment advisor under criteria approved by the Board of Directors.

Even under normal circumstances the Fund may invest to a limited extent in
taxable obligations depending on market conditions. These obligations may
include U.S. Government and agency, bank and corporate securities and
repurchase agreements collateralized by such securities. For temporary
defensive purposes, the Fund may invest without limit in short-term
obligations of these types. The Fund may also invest in financial futures,
"when-issued" securities, standby commitments of brokers, dealers or banks
and variable and floating rate demand obligations. These investment
practices, which may involve certain special risks, are described below. The
Fund's investment objective may be changed only by the affirmative vote of a
majority of the outstanding shares of all classes of the Fund.

SELECTION OF INVESTMENTS

The Fund's investment advisor (the "Advisor" -- see "Investment Advisor")
buys and sells securities for the Fund's portfolio with a view toward, first, a
high level of total return with relative stability of principal and, second,
high current income that is federally tax exempt. Therefore, in addition to
yield, the potential for capital gains and appreciation resulting from possible
changes in interest rates will be a consideration in selecting investments.
While income distributions to shareholders will generally be tax exempt,
distributions of capital gains will be taxable. Accordingly, to the extent the
Fund achieves its investment objective, a larger portion of its distribution
will be taxable than would be the case if the Fund placed a greater emphasis on
earning tax exempt income. (See "Investment Program -- Taxable Investments" and
"Dividends and Taxes -- Tax Treatment of Dividends and Distributions.") The
Advisor will be free to take full advantage of the entire range of maturities
offered by Municipal Obligations and may adjust the average maturity of the
Fund's portfolio from time to time, depending on its assessment of the relative
yields available on securities of different maturities and its expectations of
future changes in interest rates. Thus, at certain times the average maturity of
the portfolio may be relatively short (under five years, for example) and at
other times may be relatively long (in the 20-30 year range, for example). In
determining which direction interest rates are likely to move, the Advisor
relies on the economic analysis made by its chairman, Edward S. Hyman. There is
no assurance that such economic analysis will accurately predict interest rate
trends or that the portfolio strategies based on Mr. Hyman's economic analysis
will be effective.

SPECIAL RISK CONSIDERATIONS

As with other debt securities, the value of Municipal Obligations changes
as interest rates fluctuate. Changes in the value of portfolio securities
will not affect interest income from those securities but will be reflected
in the Fund's net asset value. Thus, a decrease in interest rates will
generally result in an increase in the value of the Shares. Conversely,
during periods of rising interest rates, the value of the Shares

3
<PAGE>

will generally decline. The magnitude of these fluctuations will generally be
greater at times when the average maturity of the Fund's portfolio securities
is longer.

PURCHASE OF WHEN-ISSUED SECURITIES

New issues of Municipal Obligations are usually offered on a when-issued
basis, which means that delivery and payment for such Municipal Obligations
normally take place within 45 days after the date of the commitment to
purchase. The payment obligation and the interest rate that will be received
on a when-issued security are fixed at the time the purchase commitment is
entered into, although no interest on such security accrues to the Fund prior
to payment and delivery. A segregated account of the Fund consisting of cash
or liquid securities equal at all times to the amount of the when-issued
commitments will be established and maintained by the Fund at the Fund's
custodian. While the Fund will purchase securities on a when-issued basis
only with the intention of acquiring the securities, the Fund may sell the
securities before the settlement date if it is deemed advisable to limit the
effects of adverse market action. The value of securities so purchased or
sold is subject to market fluctuation. The Fund will ordinarily invest no
more than 40% of its net assets at any time in Municipal Obligations
purchased on a when-issued basis.

STAND-BY COMMITMENTS

The Fund may acquire "stand-by commitments" with respect to Municipal
Obligations held in its portfolio. Under a stand-by commitment, a broker,
dealer or bank is obligated to repurchase, at the Fund's option, specified
securities in the Fund's portfolio at a specified price. In this respect,
stand-by commitments are comparable to put options and thus the Fund's
ability to enforce such obligations is subject to the risk that the seller of
the commitment may default on its obligations. The Fund will acquire stand-by
commitments as a means of changing the average maturity of its portfolio in
response to expected changes in market interest rates.

The Fund anticipates that stand-by commitments will generally be available
from brokers, dealers and banks without the payment of any direct or indirect
consideration, but the Fund may have to pay for stand-by commitments, thus
increasing the cost of acquiring and holding the underlying security and
similarly decreasing such security's yield. Gains realized in connection with
stand-by commitments will be taxable.

VARIABLE AND FLOATING RATE DEMAND
OBLIGATIONS

The Fund may purchase floating and variable rate demand notes and bonds,
which are tax-exempt obligations normally having stated maturities in excess of
one year, but which permit the holder to demand payment of principal either at
any time or at specified intervals. The interest rates on these obligations
fluctuate from time to time in response to changes in the market interest rates.
Frequently, such obligations are secured by letters of credit or other credit
support arrangements provided by banks. Each demand note and bond purchased by
the Fund will meet the quality criteria established for the purchase of other
Municipal Obligations. Because these obligations are direct lending arrangements
between the lender and borrower, it is not contemplated that such instruments
generally will be traded, and there generally is no established secondary market
for these obligations, although they are redeemable at face value. The Fund will
not invest more than 10% of its net assets in floating or variable rate demand
obligations as to which the Fund cannot exercise the demand feature on less than
seven days' notice if there is no secondary market available for these
obligations.

<PAGE>

FUTURES CONTRACTS

The Fund may purchase and sell U.S. exchange traded futures contracts on
bond indices ("Futures Contracts"). At the same time a Futures Contract is
purchased or sold, the Fund must allocate cash or securities as a deposit
payment ("initial deposit"). The initial deposit varies but may be as low as
5% or less of the value of the contract. Daily thereafter, the Futures
Contract is valued and the payment of "variation margin" may be required, so
each day the Fund would provide or receive cash that reflects any decline or
increase in the contract's value.

4
<PAGE>

affect the prices of securities which the Fund intends to purchase at a later
date. Should interest rates move in an unexpected manner, the Fund may not
achieve the anticipated benefits of the Futures Contract and may realize a
loss on the Futures Contract in excess of any corresponding gain in the
hedged portfolio positions. Futures transactions involve other risks as well.
For example, a lack of correlation between the index and the assets being
hedged, or unexpected adverse price movements, could render the Fund's
hedging strategy unsuccessful and could result in losses on the Futures
Contract in excess of any corresponding gain in the hedged portfolio
positions. In addition, there can be no assurance that a liquid secondary
market will exist for any Futures Contract purchased or sold, and the Fund
may be required to maintain a position until exercise or expiration, which
could result in losses on the Futures Contract in excess of any corresponding
gain in the hedged portfolio positions.

Regulations of the Commodity Futures Trading Commission (the "CFTC")
permit the use of futures transactions for bona fide hedging purposes without
regard to the percentage of assets committed to futures margin and options
premiums. In addition, CFTC regulations also allow funds to employ futures
transactions for other "non-hedging" purposes to the extent that aggregate
initial futures margins and options premiums do not exceed 5% of total
assets. In addition, the Fund will not enter into Futures Contracts if
obligations under all Futures Contracts would amount to more than 30% of its
total assets.

REPURCHASE AGREEMENTS

The Fund may agree to purchase U.S. Treasury Securities from creditworthy
financial institutions, such as banks and broker-dealers, subject to the
seller's agreement to repurchase the securities at an established time and
price. U.S. Treasury Securities are direct obligations of the U.S.
Government and are supported by the full faith and credit of the United
States. Default by or bankruptcy proceedings with respect to the seller may,
however, expose the Fund to possible loss because of adverse market action or
delay in connection with the disposition of the underlying obligations.

TAXABLE INVESTMENTS

From time to time, the Fund may invest in securities, the interest on
which is subject to federal income tax. The Fund may make such investments
(a) pending investment of proceeds from sales of Fund shares or portfolio
securities in tax-exempt securities, (b) pending settlement of purchases of
portfolio securities, (c) to maintain liquidity for meeting anticipated
redemptions, or (d) when in the Advisor's opinion it is advisable because of
adverse conditions affecting the market for Municipal Obligations. The
taxable investments in which the Fund may invest consist of U.S. Treasury
Securities and repurchase agreements fully collateralized by U.S. Treasury
Securities (collectively, the "Taxable Investments"). The Fund may invest up
to 20% of its net assets in Taxable Investments. The Fund may earn taxable
income from other sources. Dividends paid by the Fund that are attributable
to interest earned from Taxable Investments and to taxable income from other
investments will be taxable to investors. (See "Dividends and Taxes -- Tax
Treatment of Dividends and Distributions.")

SIZE OF FUND

The Fund currently intends to limit the size of the Fund and to accept
share purchases only from existing shareholders at such time as the assets of
the Fund are in excess of $200 million but less than $250 million, and
thereafter not to accept any share purchases other than dividend
reinvestments.

<PAGE>

INVESTMENT RESTRICTIONS
- ------------------------------------------------------------------------------

The Fund's investment program is subject to a number of restrictions which
reflect both self-imposed standards and federal and state regulatory
limitations. The investment restrictions recited below are matters of
fundamental policy and may not be changed without the affirmative vote of a
majority of the outstanding shares of the Fund. Accordingly, the Fund will
not:

1) Concentrate 25% or more of its total assets in securities of issuers in
any one industry (for this purpose, the U.S. Government or any state or
local government or their agencies and instrumentalities are not
considered to be an industry);

2) With respect to 75% of its total assets, invest more than 5% of its total
assets in the securities of any single issuer (for this purpose, the U.S.
Government or its agencies and instrumentalities are not considered to be
an issuer and, in the case of Municipal Obligations, the public or private
entity ultimately responsible for payment of principal and interest on the
security is considered to be the issuer);

5
<PAGE>

of such borrowing, provided that, while borrowings by the Fund equaling
5% or more of the Fund's total assets are outstanding, the Fund will not
purchase securities; or

4) Invest more than 10% of its total assets in illiquid securities, including
repurchase agreements with maturities of greater than seven days and
floating or variable rate demand obligations as to which the Fund cannot
exercise the demand feature on less than seven days' notice if there is no
secondary market available for these obligations.

The Fund is subject to further investment restrictions that are set forth
in the Statement of Additional Information.

HOW TO INVEST IN THE FUND
==============================================================================

Class A Shares may be purchased from the Distributor through any securities
dealer which has entered into a dealer agreement with the Distributor
("Participating Dealers") or through any financial institution which has entered
into a shareholder servicing agreement with the Fund ("Shareholder Servicing
Agents"). Class A Shares may also be purchased by completing the Application
Form attached to this Prospectus and returning it, together with payment of the
purchase price, to the address shown on the Application Form.

The minimum initial investment is $2,000, except that the minimum initial
investment for shareholders of any other Flag Investors fund or class is $500
and the minimum initial investment for participants in the Fund's Automatic
Investing Plan is $250. Each subsequent investment must be at least $100,
except that the minimum subsequent investment under the Fund's Automatic
Investing Plan is $250 for quarterly investments and $100 for monthly
investments. (See "Purchases Through Automatic Investing Plan" below.)

The Fund reserves the right to suspend the sale of Class A Shares at any time
at the discretion of the Distributor. Orders for purchases of Class A Shares are
accepted on any day on which the New York Stock Exchange is open for business
(a "Business Day"). Purchase orders for Class A Shares will be executed at a per
share purchase price equal to the net asset value next determined after receipt
of the purchase order plus any applicable front-end sales charge (the "Offering
Price") on the date such net asset value is determined (the "Purchase Date").
Purchases made by mail must be accompanied by payment of the Offering Price.
Purchases made through the Distributor or a Participating Dealer or Shareholder
Servicing Agent must be in accordance with such entity's payment procedures. The
Distributor may, in its sole discretion, refuse to accept any purchase order.

The net asset value per share is determined daily as of the close of the
New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time), on
each Business Day. Net asset value per share of a class is calculated by
valuing its share of the Fund's assets, deducting all liabilities
attributable to that class, and dividing the resulting amount by the number
of then outstanding shares of the class. For this purpose, portfolio
securities are given their market value where feasible based on quotations
furnished by a pricing service approved by the Board of Directors. Options
and futures are valued at the settlement price, or if no sales are reported,
at the average of the last reported bid and asked prices. Securities or other
assets for which market quotations are not readily available are valued at
their fair value as determined in good faith under procedures established
from time to time and monitored by the Fund's Board of Directors. Debt
obligations with maturities of 60 days or less are valued at amortized cost
which constitutes fair value as determined by the Fund's Board of Directors.

<PAGE>

OFFERING PRICE

Class A Shares may be purchased from the Distributor, or from Participating
Dealers or Shareholder Servicing Agents at the Offering Price, which includes a
sales charge which is calculated as a percentage of the Offering Price and
decreases as the amount of purchase increases, as shown below:

<TABLE>
<CAPTION>
Sales Charge
as Percentage of Dealer
------------------------------ Retention
Offering Net Amount as Percentage of
Amount of Purchase Price Invested Offering Price
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than$ 50,000 ....... 4.50% 4.71% 4.00%
$ 50,000 - $ 99,999 ... 3.50% 3.63% 3.00%
$ 100,000 - $249,999 ... 2.50% 2.56% 2.00%
$ 250,000 - $499,999 ... 2.00% 2.04% 1.50%
$ 500,000 - $999,999 ... 1.50% 1.52% 1.25%
$1,000,000 and over ..... None* None* None*
- ------------------------------------------------------------------------------
</TABLE>
- ------
* Purchases of $1 million or more may be subject to a contingent deferred
sales charge. (See below.) The Distributor may make payments to dealers in
the amount of .50% of the Offering Price.

A shareholder who purchases additional Class A Shares may obtain reduced
sales charges, as set forth in the table above, through a right of
accumulation. In

6
<PAGE>

addition, an investor may obtain reduced sales charges as set forth above
through a right of accumulation of purchases of Class A Shares and purchases
of shares of other Flag Investors funds with the same sales charge and
purchases of Class A shares of Flag Investors Short-Intermediate Income Fund,
Inc. (formerly Flag Investors Intermediate-Term Income Fund, Inc.) and Flag
Investors Maryland Intermediate Tax-Free Income Fund, Inc. (the "Intermediate
Funds"). The applicable sales charge will be determined based on the total of
(a) the shareholder's current purchase plus (b) an amount equal to the then
current net asset value or cost, whichever is higher, of all Class A Shares
and of all Flag Investors shares described above and any Flag Investors Class
D shares held by the shareholder. To obtain the reduced sales charge through
a right of accumulation, the shareholder must provide the Distributor, either
directly or through a Participating Dealer or Shareholder Servicing Agent, as
applicable, with sufficient information to verify that the shareholder has
such a right. The Fund may amend or terminate this right of accumulation at
any time as to subsequent purchases.

The term "purchase" refers to an individual purchase by a single
purchaser, or to concurrent purchases, which will be aggregated, by a
purchaser, the purchaser's spouse and their children under the age of 21
years purchasing Class A Shares for their own account.

An investor may also obtain the reduced sales charges shown above by
executing a written Letter of Intent which states the investor's intention to
invest at least $50,000 within a 13-month period in Class A Shares. Each
purchase of Class A Shares under a Letter of Intent will be made at the
Offering Price applicable at the time of such purchase to the full amount
indicated on the Letter of Intent. A Letter of Intent is not a binding
obligation upon the investor to purchase the full amount indicated. The
minimum initial investment under a Letter of Intent is 5% of the full amount.
Shares purchased with the first 5% of the full amount will be held in escrow
(while remaining registered in the name of the investor) to secure payment of
the higher sales charge applicable to the Class A Shares actually purchased
if the full amount indicated is not invested. Such escrowed shares will be
involuntarily redeemed to pay the additional sales charge, if necessary. When
the full amount indicated has been purchased, the escrowed shares will be
released. An investor who wishes to enter into a Letter of Intent in
conjunction with an investment in Class A Shares may do so by completing the
appropriate section of the Application Form attached to this Prospectus.

No sales charge will be payable at the time of purchase on investments of
$1 million or more of Class A Shares. However, a contingent deferred sales
charge may be imposed on such investments in the event of a redemption within
24 months following the purchase, at the rate of .50% on the lesser of the
value of the Class A Shares redeemed or the total cost of such shares. No
contingent deferred sales charge will be imposed on purchases of $3 million
or more of Class A Shares redeemed within 24 months of purchase if the
Participating Dealer and the Distributor have entered into an agreement under
which the Participating Dealer agrees to return any payments received on the
sale of such shares. In determining whether a contingent deferred sales
charge is payable, and, if so, the amount of the charge, it is assumed that
Class A Shares not subject to such charge are the first redeemed followed by
other Class A Shares held for the longest period of time.

The Fund may sell Class A Shares at net asset value (without sales charge)
to the following: (i) banks, bank trust departments, registered investment
advisory companies, financial planners and broker-dealers purchasing Class A
Shares on behalf of their fiduciary and advisory clients, provided such
clients have paid an account management fee for these services (investors may
be charged a fee if they effect transactions in Fund shares through a broker
or agent); (ii) participants in a Flag Investors fund payroll savings plan
program; (iii) investors who have redeemed Class A Shares, or Class A shares
of any other mutual fund in the Flag Investors family of funds with the same
sales charges, or who have redeemed Class A shares of the Intermediate Funds
which they had held for at least 24 months prior to redemption, in an amount
that is not more than the total redemption proceeds, provided that the
purchase is within 90 days after the redemption; and (iv) current or retired
Directors of the Fund and directors and employees (and their immediate
families) of the Advisor, the Distributor, Participating Dealers and their
respective affiliates.

Class A Shares may also be purchased through a Systematic Purchase Plan.
An investor who wishes to take advantage of such a plan should contact the
Distributor or a Participating Dealer or Shareholder Servicing Agent.

PURCHASES BY EXCHANGE

As permitted pursuant to any rule, regulation or order promulgated by the
SEC, shareholders of other Flag Investors funds that have the same sales load
structure may exchange their Class A shares of those funds for an equal
dollar amount of Class A Shares. Except as provided below, Class A Shares
issued pursuant to this offer will not be subject to the sales charges
described above or any other charge. In addition, shareholders of Class A
shares of the Intermedi-

7
<PAGE>

ate Funds may exchange into Class A Shares upon payment of the difference in
sales charges, as applicable, except that the exchange will be made at net
asset value if the shares of such funds have been held for more than 24
months. Shareholders of Flag Investors Cash Reserve Prime Class A Shares may
also exchange into Class A Shares upon payment of the difference in sales
charges, as applicable.

When a shareholder acquires Class A Shares through an exchange from
another fund in the Flag Investors family of funds, the Fund will combine the
period for which the original shares were held prior to the exchange with the
holding period of the Class A Shares acquired in the exchange for purposes of
determining what, if any, contingent deferred sales charge is applicable upon
a redemption of any such shares.

The net asset value of shares purchased and redeemed in an exchange
request received on a Business Day will be determined on the same day,
provided that the exchange request is received prior to 4:00 p.m. (Eastern
Time). Exchange requests received after 4:00 p.m. (Eastern Time) or the close
of the New York Stock Exchange, whichever is earlier, will be effected on the
next Business Day.

Shareholders of any mutual fund not affiliated with the Fund who have paid
a sales charge may exchange shares of such fund for an equal dollar amount of
Class A Shares by submitting to the Distributor or a Participating Dealer the
proceeds of the redemption of such shares, together with evidence of the
payment of a sales charge and the source of such proceeds. Class A Shares
issued pursuant to this offer will not be subject to the sales charges
described above or any other charge.

The exchange privilege with respect to other Flag Investors funds may also
be exercised by telephone. (See "Telephone Transactions" below.) The Fund may
modify or terminate this offer of exchange at any time upon 60 days' prior
written notice to the shareholder.

PURCHASES THROUGH AUTOMATIC INVESTING PLAN

Shareholders may purchase Class A Shares regularly by means of an
Automatic Investing Plan with a pre-authorized check drawn on their checking
accounts. Under this plan, the shareholder may elect to have a specified
amount invested monthly or quarterly in Class A Shares. The amount specified
will be withdrawn from the shareholder's checking account using the
pre-authorized check and will be invested in Class A Shares at the applicable
Offering Price determined on the date the amount is available for investment.
Participation in the Automatic Investing Plan may be discontinued either by
the Fund or the shareholder upon 30 days' prior written notice to the other
party. A shareholder who wishes to enroll in the Automatic Investing Plan or
who wishes to obtain additional purchase information may do so by completing
the appropriate section of the Application Form attached to this Prospectus.

PURCHASES THROUGH DIVIDEND REINVESTMENT

Shareholders may elect to have their distributions (capital gains and/or
dividend income) paid by check or reinvested in additional Class A Shares.
Unless the shareholder elects otherwise, all income dividends and capital
gains distributions will be reinvested in additional Class A Shares at net
asset value, without a sales charge. Shareholders may elect to terminate
automatic reinvestment by giving written notice to the Fund's transfer agent
(the "Transfer Agent") (see "Custodian, Transfer Agent and Accounting
Services"), either directly or through their Participating Dealer or
Shareholder Servicing Agent, at least five days before the next date on which
dividends or distributions will be paid.

Alternately, shareholders may have their distributions invested in Class A
shares of other funds in the Flag Investors family of funds. Shareholders who
are interested in this option should call the Transfer Agent for additional
information.

HOW TO REDEEM SHARES
==============================================================================

Shareholders may redeem all or part of their investment on any Business
Day by transmitting a redemption order through the Distributor, a Participating
Dealer, a Shareholder Servicing Agent or by regular or express mail to the
Transfer Agent. Shareholders may also redeem Class A Shares by telephone (in
amounts up to $50,000). (See "Telephone Transactions" below.) A redemption
order is effected at the net asset value per share (reduced by any applicable
contingent deferred sales charge) next determined after receipt of the order
(or, if stock certificates have been issued for the Class A Shares to be
redeemed, after the tender of the stock certificates for redemption).
Redemption orders received after 4:00 p.m. (Eastern Time) or the close of the
New York Stock Exchange, whichever is earlier, will be effected at the net
asset value next determined on the following Business Day. Payment for
redeemed Class A Shares will be made by check and will be mailed within seven
days after receipt of a duly authorized telephone redemption request or of a
redemption order fully completed and, as applicable, accompanied by the
documents described below:

8
<PAGE>

1) A letter of instructions, specifying the shareholder's account number with
a Participating Dealer or Shareholder Servicing Agent, if applicable, and
the number of Class A Shares or dollar amount to be redeemed, signed by
all owners of the Class A Shares in the exact names in which their account
is maintained;

2) For redemptions in excess of $50,000, a guarantee of the signature of each
registered owner by a member of the Federal Deposit Insurance Corporation,
a trust company, broker, dealer, credit union (if authorized under state
law), securities exchange or association, clearing agency, or savings
association;

3) If Class A Shares are held in certificate form, stock certificates either
properly endorsed or accompanied by a duly executed stock power for Class
A Shares to be redeemed; and

4) Any additional documents required for redemption by corporations,
partnerships, trusts or fiduciaries.

Dividends payable up to the date of redemption of Class A Shares will be
paid on the next dividend payable date. If all of the Class A Shares in a
shareholder's account have been redeemed on a dividend payable date, the
dividend will be remitted by check to the shareholder.

The Fund has the power, under its Articles of Incorporation, to redeem
shareholder accounts amounting to less than $500 (as a result of redemptions)
upon 60 days' written notice.

SYSTEMATIC WITHDRAWAL PLAN

Shareholders who hold Class A Shares having a value of $10,000 or more may
arrange to have a portion of their Class A Shares redeemed monthly or
quarterly under the Fund's Systematic Withdrawal Plan. Such payments are
drawn from income dividends, and, to the extent necessary, from share
redemptions (which would be a return of principal and, if reflecting a gain,
would be taxable). If redemptions continue, a shareholder's account may
eventually be exhausted. Because share purchases include a sales charge that
will not be recovered at the time of redemption, a shareholder should not
have a withdrawal plan in effect at the same time he is making recurring
purchases of Class A Shares. A shareholder who wishes to participate in the
Systematic Withdrawal Plan may do so by completing the appropriate section of
the Application Form attached to this Prospectus.

TELEPHONE TRANSACTIONS
==============================================================================

Shareholders may exercise the exchange privilege with respect to other Flag
Investors funds, or redeem Class A Shares in amounts up to $50,000, by notifying
the Transfer Agent by telephone on any Business Day between the hours of 8:30
a.m. and 5:30 p.m. (Eastern Time) or by regular or express mail at its address
listed under "Custodian, Transfer Agent and Accounting Services." Telephone
transaction privileges are automatic. Shareholders may specifically request that
no telephone redemptions or exchanges be accepted for their accounts. This
election may be made on the Application Form or at any time thereafter by
completing and returning appropriate documentation supplied by the Transfer
Agent.

A telephone exchange or redemption placed by 4:00 p.m. (Eastern Time) or
the close of the New York Stock Exchange, whichever is earlier, is effective
that day. Telephone orders placed after 4:00 p.m. (Eastern Time) will be
effected at the net asset value (less any applicable contingent deferred
sales charge on redemptions) as determined on the next Business Day.

The Fund and the Transfer Agent will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. These
procedures include requiring the investor to provide certain personal
identification information at the time an account is opened and prior to
effecting each transaction requested by telephone. In addition, all telephone
transaction requests will be recorded and investors may be required to
provide additional telecopied instructions of such transaction requests. If
these procedures are employed, neither the Fund nor the Transfer Agent will
be responsible for any loss, liability, cost or expense for following
instructions received by telephone that either of them reasonably believes to
be genuine. During periods of extreme economic or market changes,
shareholders may experience difficulty in effecting telephone transactions.
In such event, requests should be made by regular or express mail. Class A
Shares held in certificate form may not be exchanged or redeemed by
telephone. (See "How to Invest in the Fund -- Purchases by Exchange" and "How
to Redeem Shares.")

9
<PAGE>

DIVIDENDS AND TAXES
==============================================================================

DIVIDENDS AND DISTRIBUTIONS

The Fund's policy is to distribute to shareholders substantially all of
its net investment income in the form of monthly dividends. The Fund may
distribute to shareholders any net capital gains (the excess of net long-term
capital gains over net short-term capital losses) on an annual basis or,
alternatively, may elect to retain such net capital gains and pay tax
thereon.

TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS

The following is only a general summary of certain federal tax
considerations affecting the Fund and the shareholders. No attempt is made to
present a detailed explanation of the tax treatment of the Fund or the
shareholders, and the discussion here is not intended as a substitute for
careful tax planning.

The following summary is based on current tax laws and regulations, which
may be changed by legislative, judicial, or administrative action. The
Statement of Additional Information sets forth further information concerning
taxes.

The Fund has been and expects to continue to be taxed as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986,
as amended (the "Code"). As long as the Fund qualifies for this tax
treatment, it will be relieved of federal income tax on amounts distributed
to shareholders. The Fund also intends to make sufficient distributions prior
to the end of each calendar year to avoid liability for federal excise tax.

The Fund intends to qualify to pay "exempt-interest dividends" to its
shareholders by satisfying the Code's requirement that at the close of each
quarter of its taxable year at least 50% of the value of its total assets
consists of obligations the interest on which is exempt from federal income
tax.

As long as this and certain other requirements are met, dividends derived
from the Fund's net tax-exempt interest income will be "exempt-interest
dividends" that are excluded from the gross income of the Fund's shareholders
for federal income tax purposes. Exempt-interest dividends may, however,
have collateral federal income tax consequences, including alternative
minimum tax consequences. Furthermore, the Fund may not be an appropriate
investment for persons who are "substantial users" of facilities financed
with industrial development bonds or private activity bonds (or related
parties to "substantial users"). (See the Statement of Additional
Information.)

Current federal tax law limits the types and volume of bonds qualifying
for the federal income tax exemption of interest, which may have an effect on
the ability of the Fund to purchase sufficient amounts of tax-exempt
securities to satisfy the Code's requirements for the payment of exempt
interest dividends.

Distributions to shareholders of net investment income of the Fund that is
not tax-exempt interest and of net short-term capital gains of the Fund will
be taxable to shareholders as ordinary income, whether such distributions are
received in cash or in additional Class A Shares.

Distributions to shareholders of net capital gains of the Fund are taxable
to shareholders as long-term capital gains, whether received in cash or
additional Class A Shares, and regardless of how long a shareholder has held
the shares. Shareholders will be advised annually as to the federal income
tax status of distributions made during the year.

Ordinarily, shareholders will include all dividends declared by the Fund as
income in the year of payment. However, dividends declared payable to
shareholders of record in December of one year, but paid in January of the
following year, will be deemed for tax purposes to have been received by the
shareholders and paid by the Fund in the year in which the dividends were
declared.

The sale, exchange or redemption of Class A Shares is a taxable event for
the shareholder.

<PAGE>

Any gain or loss recognized on a sale, exchange or redemption of Class A
Shares by a shareholder who is not a dealer in securities will generally be
treated as a long-term capital gain or loss if the Class A Shares have been
held for more than twelve months and otherwise will be generally treated as a
short-term capital gain or loss. Any loss recognized by a shareholder upon
the sale or redemption of Class A Shares held for six months or less,
however, will be disallowed to the extent of any exempt-interest dividends
received by the shareholder with respect to such Shares. If Class A Shares on
which a capital gains distribution has been received are subsequently sold or
redeemed and such shares have been held for six months or less, any loss
recognized will be treated as a long term capital loss to the extent of the
capital gains distribution.

Interest on indebtedness incurred or continued by shareholders to purchase
or carry Class A Shares will not be deductible for federal income tax
purposes.

The Fund may not be a suitable investment for tax-exempt shareholders and
plans, because such shareholders and plans would not gain any additional
benefit from the receipt of exempt-interest dividends.

10
<PAGE>

Shareholders are encouraged to consult with their tax advisors concerning
the application of the rules set forth above to their particular
circumstances and the application of state and local taxes to an investment
in the Fund.

MANAGEMENT OF THE FUND
==============================================================================

The overall business and affairs of the Fund are managed by its Board of
Directors. The Board approves all significant agreements between the Fund and
persons or companies furnishing services to the Fund, including the Fund's
agreements with its investment advisor, distributors, administrator, custodian
and transfer agent. The day-to-day operations of the Fund are delegated to the
Fund's executive officers, to the Distributor, to the Advisor and to the Fund's
administrator. Three Directors and all of the officers of the Fund are officers
or employees of the Distributor, the Advisor or the Fund's administrator. The
other Directors of the Fund have no affiliation with the Distributor, the
Advisor or the Fund's administrator.

The Fund's Directors and officers are as follows:

Edward S. Hyman Chairman Edward J. Veilleux Vice President
Richard T. Hale Vice Chairman Scott J. Liotta Vice President
R. Alan Medaugh Director and Nancy Lazar Vice President
President Carrie L. Butler Vice President
James J. Cunnane Director Joseph A. Finelli Treasurer
John F. Kroeger Director Edward J. Stoken Secretary
Louis E. Levy Director Laurie D. Collidge Assistant
Eugene J. McDonald Director Secretary

INVESTMENT ADVISOR
===============================================================================

International Strategy and Investment Inc. ("ISI" or the "Advisor"), a
registered investment advisor, serves as investment advisor to the Fund pursuant
to an investment advisory agreement dated as of April 1, 1991. ISI employs
Messrs. Edward S. Hyman and R. Alan Medaugh. Due to their stock ownership,
Messrs. Hyman and Medaugh may be deemed to be controlling persons of ISI. As of
December 31, 1996, the Advisor had approximately $1 billion under management
representing both tax-free and taxable accounts. The Advisor also acts as
investment advisor to Total Return U.S. Treasury Fund, Inc. and North American
Government Bond Fund, Inc., open-end investment companies with approximately
$385 million of aggregate net assets as of December 31, 1996.

For the fiscal year ended October 31, 1996, ISI received a fee (net of fee
waivers) equal to .25% of the Fund's average daily net assets. ISI and the
Fund's administrator, have voluntarily agreed to reduce proportionately their
respective annual fees if necessary, so that the Fund's annual expenses do
not exceed .90% of its average daily net assets. (See "Fund Expenses.")

The address of the Advisor is 717 Fifth Avenue, New York, New York 10022.

PORTFOLIO MANAGERS

Edward S. Hyman, Chairman of ISI and the Fund, and R. Alan Medaugh,
President of ISI and President and a Director of the Fund, have shared direct
portfolio management responsibility for the Fund since its inception. Mr.
Hyman is responsible for developing the economic analysis upon which the
Fund's selection of investments is based. (See "Investment Program.") Before
joining ISI, Mr. Hyman was a vice chairman and member of the Board of C.J.
Lawrence Inc. and prior thereto, an economic consultant at Data Resources. He
writes a variety of international and domestic economic research reports
which follow trends that may determine the direction of interest rates. These
international and domestic reports are sent to ISI's private institutional
clients in the United States and overseas. The periodical Institutional
Investor, which rates analysts and economists on an annual basis has rated
Mr. Hyman as its "first team" economist, which is its highest rating, in each
of the last seventeen years.

<PAGE>

Mr. Medaugh is responsible for day-to-day portfolio management. Prior to
joining ISI, Mr. Medaugh was Managing Director of C.J. Lawrence Fixed Income
Management and prior thereto Senior Vice President and bond portfolio manager
at Fiduciary Trust International. While at Fiduciary Trust International, Mr.
Medaugh led their Fixed-Income Department which managed $5 billion of
international fixed income portfolios for institutional clients. Mr. Medaugh
also had prior experience as a bond portfolio manager at both Putnam
Management Company and Fidelity Management and Research.

11
<PAGE>

ADMINISTRATOR
===============================================================================

Investment Company Capital Corp. ("ICC"), One South Street, Baltimore,
Maryland 21202, an indirect subsidiary of Alex. Brown Incorporated, provides
administration services to the Fund.

ICC supervises the day-to-day operations of the Fund, including the
preparation of registration statements, proxy materials, shareholder reports,
compliance with all requirements of securities laws in the states in which
the shares are distributed and oversight of the relationship between the Fund
and its other service providers. For its services as administrator of the
Fund for the fiscal year ended October 31, 1996, ICC received a fee (net of
fee waivers) equal to .12% of the Fund's average daily net assets. ICC and
ISI have voluntarily agreed to reduce proportionately their respective annual
fees if necessary, so that the Fund's annual expenses do not exceed .90% of
its average daily net assets. (See "Fund Expenses.")

ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund. (See "Custodian, Transfer Agent and
Accounting Services.")

DISTRIBUTOR
===============================================================================

Alex. Brown & Sons Incorporated ("Alex. Brown" or the "Distributor"), One
South Street, Baltimore, Maryland 21202, acts as distributor of the Class A
Shares. Alex. Brown is an investment banking firm which offers a broad range of
investment services to individual, institutional, corporate and municipal
clients. It is a wholly-owned subsidiary of Alex. Brown Incorporated which has
engaged directly and through subsidiaries and affiliates in the investment
business since 1800. Alex. Brown is a member of the New York Stock Exchange and
other leading securities exchanges. Headquartered in Baltimore, Maryland, Alex.
Brown has offices throughout the United States and, through subsidiaries,
maintains offices in London, England, Geneva, Switzerland and Tokyo, Japan.

The Fund has adopted a Distribution Plan for the Class A Shares (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940, as
amended. As compensation for its services for the fiscal year ended October
31, 1996, Alex. Brown received a fee equal to .25% of the Class A Shares'
average daily net assets. Alex. Brown expects to allocate on a proportional
basis most of its annual fee to its investment representatives or up to all
of its fee to selected Participating Dealers as compensation for their
ongoing shareholder services, including processing redemption and sale
requests and responding to shareholder inquiries.

Payments under the Plan are made as described above regardless of Alex.
Brown's actual cost of providing distribution services and may be used to pay
Alex. Brown's overhead expenses. If the cost of providing distribution
services to the Fund in connection with the sale of the Class A Shares is
less than .25% of the average daily net assets invested in Class A Shares for
any period, the unexpended portion of the distribution fee may be retained by
Alex. Brown. Alex. Brown will from time to time and from its own resources
pay or allow additional discounts or promotional incentives in the form of
cash or other compensation (including merchandise or travel) to Participating
Dealers.

CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
- -------------------------------------------------------------------------------

Investment Company Capital Corp., One South Street, Baltimore, Maryland 21202
(telephone: (800) 553-8080) is the Fund's transfer and dividend disbursing agent
and provides accounting services to the Fund. As compensation for providing
accounting services for the fiscal year ended October 31, 1996, ICC received
from the Fund a fee equal to .05% of the Fund's average daily net assets. (See
the Statement of Additional Information.)

PNC Bank, National Association, a national banking association with offices
at Airport Business Park, 200 Stevens Drive, Lester, Pennsylvania 19113, acts as
custodian of the Fund's assets.

12
<PAGE>

PERFORMANCE INFORMATION
- -------------------------------------------------------------------------------

From time to time, the Fund may advertise its performance, including
comparisons with other mutual funds with similar investment objectives and to
relevant indices. All such advertisements will show the average annual total
return, net of the Fund's maximum sales charge, over one, five and ten year
periods or, if such periods have not yet elapsed, shorter periods
corresponding to the life of the Fund. Such total return quotations will be
computed by finding the average annual compounded rates of return over such
periods that would equate an assumed initial investment of $1,000 to the
ending redeemable value, net of the maximum sales charge and other fees,
according to the required standardized calculation. The standardized
calculation is required by the SEC to provide consistency and comparability
in investment company advertising and is not equivalent to a yield
calculation.

The Fund may also advertise yield and tax-equivalent yield quotations.
Any yield quotation of the Fund is based on the annualized net investment
income per share of the Fund over a 30 day period. The yield for the Fund is
calculated by dividing the net investment income per share of the Fund earned
during the period by the maximum offering price per share of the Fund on the
last day of that period. The resulting figure is then annualized. The Fund's
yield calculations assume a maximum sales charge of 4.50% for the Class A
Shares. The Fund's taxable-equivalent yield is calculated by determining the
rate of return that would have to be achieved on a fully taxable investment
to produce the after tax equivalent of the Fund's yield. In calculating
taxable-equivalent yield, the Fund assumes certain tax brackets for
shareholders.

If the Fund compares its performance to other funds or to relevant
indices, its performance will be stated in the same terms in which such
comparative data and indices are stated.

The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Morningstar
Inc., independent services which monitor the performance of mutual funds. The
performance of the Fund may also be compared to the Lehman Brothers Municipal
Bond Index, the Consumer Price Index, the return on 90 day U.S. Treasury
Bills, long-term U.S. Treasury bonds, bank certificates of deposit, the
Standard & Poor's 500 Stock Index and the Dow Jones Industrial Average. The
Fund may also use total return performance data as reported in the following
national financial and industry publications that monitor the performance of
mutual funds: Money Magazine, Forbes, Business Week, Barron's, Investor's
Daily, IBC/Donoghue's Money Fund Report and The Wall Street Journal. For
these purposes, the performance of the Fund, as well as the performance of
such indices, may not reflect sales charges, the inclusion of which would
reduce performance results.

Performance will fluctuate, and any statement of performance should not be
considered as representative of the future performance of the Fund. Performance
is generally a function of the type and quality of investments held by the Fund,
operating expenses and market conditions. Any fees charged by banks with respect
to customer accounts through which Class A Shares may be purchased, although not
included in calculations of performance, will reduce performance results.

GENERAL INFORMATION
===============================================================================

CAPITAL SHARES

The Fund is an open-end diversified management investment company
organized under the laws of the State of Maryland on January 5, 1990, and is
authorized to issue 40 million shares of capital stock, with a par value of
$.001 per share. Shares of the Fund have equal rights with respect to voting.
Voting rights are not cumulative, so the holders of more than 50% of the
outstanding shares of capital stock voting together for election of Directors
may elect all the members of the Board of Directors of the Fund. In the event
of liquidation or dissolution of the Fund, each share is entitled to its
portion of the Fund's assets after all debts and expenses have been paid. The
fiscal year end of the Fund is October 31.

The Board of Directors of the Fund is authorized to establish additional
"series" of shares of capital stock, each of which would evidence interests
in a separate portfolio of securities, and separate classes of each series of
the Fund. The shares offered by this Prospectus have been designated "Flag
Investors Managed Municipal Fund Class A Shares." The Board has no present
intention of establishing any additional series of the Fund but the Fund does
have another class of shares in addition to the shares offered hereby, "ISI
Managed Municipal Fund Shares." Shares of that class are sold through
broker-dealers and have similar 12b-1 fees and front-end sales charges as the
Class A Shares. Different classes of the Fund may be offered to certain
investors and holders of such shares may be

13
<PAGE>

entitled to certain exchange privileges not offered to Class A Shares. All
classes of the Fund share a common investment objective, portfolio and
advisory fee, but the classes may have different distribution expenses and
sales charges and, accordingly, performance may differ.

ANNUAL MEETINGS

The Fund does not expect to hold annual meetings of shareholders but
special meetings of shareholders may be held under certain circumstances.
Shareholders of the Fund retain the right, under certain circumstances, to
request that a meeting of shareholders be held for the purpose of considering
the removal of a Director from office, and if such a request is made, the
Fund will assist with shareholder communications in connection with the
meeting.

REPORTS

The Fund furnishes shareholders with semi-annual reports containing
information about the Fund and its operations, including a list of
investments held in the Fund's portfolio and financial statements. The annual
financial statements are audited by the Fund's independent accountants,
Coopers & Lybrand L.L.P.

FUND COUNSEL

Morgan, Lewis & Bockius LLP serves as counsel to the Fund.

SHAREHOLDERS INQUIRIES

Shareholders with inquiries concerning their shares should contact the
Transfer Agent at (800) 553-8080, the Fund at (800) 767-FLAG, or a
Participating Dealer or Shareholder Servicing Agent, as appropriate.

<PAGE>
FLAG INVESTORS MANAGED MUNICIPAL FUND CLASS A SHARES
NEW ACCOUNT APPLICATION
- -----------------------------------------------------------------------------

Make check payable to "Flag Investors Managed Municipal Fund Class A Shares"
and mail with this Application to:
Alex. Brown & Sons Incorporated/Flag Investors Funds
P.O. Box 419663
Kansas City, MO 64141-6663
Attn: Flag Investors Managed Municipal Fund Class A Shares

For assistance in completing this Application please call: 1-800-553-8080,
Monday through Friday, 8:30 a.m. to 5:30 p.m. (Eastern Time).

To open an IRA account, please call 1-800-767-3524 to request an IRA information
kit.

I enclose a check for $____________ payable to "Flag Investors Managed Municipal
Fund Class A Shares" for the purchase of Flag Investors Managed Municipal Fund
Class A Shares. The minimum initial purchase is $2,000, except that the minimum
initial purchase for shareholders of any other Flag Investors Fund or class is
$500 and the minimum initial purchase for participants in the Fund's Automatic
Investing Plan is $250. The Fund reserves the right not to accept checks for
more than $50,000 that are not certified or bank checks.

- ------------------------------------------------------------------------------
YOUR ACCOUNT REGISTRATION (PLEASE PRINT)

Existing Account No., if any: ________________________________________________

INDIVIDUAL OR JOINT TENANT

______________________________________________________________________________
First Name Initial Last Name

______________________________________________________________________________
Social Security Number

______________________________________________________________________________
Joint Tenant Initial Last Name

CORPORATIONS, TRUSTS, PARTNERSHIPS, ETC.

______________________________________________________________________________
Name of Corporation, Trust or Partnership

______________________________________________________________________________
Tax ID Number Date of Trust

______________________________________________________________________________
Name of Trustees (If to be included in the Registration)

______________________________________________________________________________
For the Benefit of

GIFTS TO MINORS

______________________________________________________________________________
Custodian's Name (only one allowed by law)

______________________________________________________________________________
Minor's Name (only one)

______________________________________________________________________________
Social Security Number of Minor

under the ___________________Uniform Gifts to Minors Act
State of Residence

MAILING ADDRESS

______________________________________________________________________________
Street

______________________________________________________________________________
City State Zip

( )
______________________________________________________________________________
Daytime Phone

<PAGE>

==============================================================================
LETTER OF INTENT (OPTIONAL)

[ ] I agree to the Letter of Intent and Escrow Agreement set forth in the
accompanying prospectus. Although I am not obligated to do so, I intend to
invest over a 13-month period in Flag Investors Managed Municipal Fund Class A
Shares, as shown below, in an aggregate amount at least equal to:
[ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $500,000 [ ] $1,000,000

==============================================================================
RIGHT OF ACCUMULATION (OPTIONAL)

List the Account numbers of other Flag Investors Funds (except Class B Shares)
that you or your immediate family already own that qualify for this purchase.

Fund Name Account No. Owner's Name Relationship
--------- ----------- ------------ ------------

______________________________________________________________________________

______________________________________________________________________________
A-1

<PAGE>

DISTRIBUTION OPTIONS

Please check appropriate boxes. If none of the options are selected, all
distributions will be reinvested in additional Class A Shares of the Fund at no
sales charge.

Income Dividends
[ ] Reinvested in additional shares
[ ] Paid in Cash

Capital Gains
[ ] Reinvested in additional shares
[ ] Paid in Cash

Call (800)553-8080 for information about reinvesting your dividends in other
funds in the Flag Investors Family of Funds.

- ------------------------------------------------------------------------------
AUTOMATIC INVESTING PLAN (OPTIONAL)

[ ] I authorize you as Agent for the Automatic Investing Plan to
automatically invest $______ for me, on a monthly or quarterly basis, on or
about the 20th of each month or if quarterly, the 20th of January, April,
July and October, and to draw a bank draft in payment of the investment
against my checking account. (Bank drafts may be drawn on commercial banks
only.)

Minimum Initial Investment: $250
Subsequent Investments (check one):
[ ] Monthly ($100 minimum)
[ ] Quarterly ($250 minimum)

______________________________________________________________________________
Bank Name

______________________________________________________________________________
Existing Flag Investors Fund Account No., if any

Please attach a voided check.

______________________________________________________________________________
Depositor's Signature Date

______________________________________________________________________________
Depositor's Signature Date
(if joint acct., both must sign)

- ------------------------------------------------------------------------------
SYSTEMATIC WITHDRAWAL PLAN (OPTIONAL)

[ ] Beginning the month of ______, 19____ please send me checks on a
monthly or quarterly basis, as indicated below, in the amount of $______, from
Class A Shares that I own, payable to the account registration address as
shown above. (Participation requires minimum account value of $10,000.)

Frequency (check one):
[ ] Monthly
[ ] Quarterly (January, April, July, and October)

<PAGE>

- ------------------------------------------------------------------------------
TELEPHONE TRANSACTIONS

I understand that I will automatically have telephone redemption privileges
(for amounts up to $50,000) and telephone exchange privileges (with respect
to other Flag Investors Funds) unless I mark one or both of the boxes below.

No, I/we do not want
[ ] Telephone redemption privileges
[ ] Telephone exchange privileges
Redemptions effected by telephone will be mailed to the address of record. If
you would prefer redemptions mailed to a pre-designated bank account, please
provide the following information:

Bank: _________________________ Account No.: ______________________

Address: _________________________ Bank Account Name: ________________

- ------------------------------------------------------------------------------
SIGNATURE AND TAXPAYER CERTIFICATION

[The following information appears in a box.]

The Fund may be required to withhold and remit to the U.S. Treasury 31% of any
taxable dividends, capital gains distributions and redemption proceeds paid to
any individual or certain other non-corporate shareholders who fail to provide
the information and/or certifications required below. This backup withholding is
not an additional tax, and any amounts withheld may be credited against the
shareholder's ultimate U.S. tax liability.

[ ] U.S. Citizen/Taxpayer:

[ ] I certify that (1) the number shown above on this form is the correct
Social Security Number or Tax ID Number and (2) I am not subject to any
backup withholding either because (a) I am exempt from backup
withholding, or (b) I have not been notified by the Internal Revenue
Service ("IRS") that I am subject to backup withholding as a result of a
failure to report all interest or dividends, or (c) the IRS has notified
me that I am no longer subject to backup withholding.

[ ] If no Tax ID Number or Social Security Number has been provided above,
I have applied, or intend to apply, to the IRS or the Social Security
Administration for a Tax ID Number or a Social Security Number, and I
understand that if I do not provide either number to the Transfer Agent
within 60 days of the date of this Application or if I fail to furnish
my correct Social Security Number or Tax ID Number, I may be subject to
a penalty and a 31% backup withholding on distributions and redemption
proceeds. (Please provide either number on IRS Form W-9. You may request
such form by calling the Transfer Agent at 800-553-8080.)

[ ] Non-U.S. Citizen/Taxpayer:
Indicated country of residence for tax purposes:_______________________
Under penalties of perjury, I certify that I am not a U.S. citizen or
resident and I am an exempt foreign person as defined by the Internal
Revenue Service.
[end of box]

I have received a copy of the Fund's prospectus dated March 1, 1997. I
acknowledge that the telephone redemption and exchange privileges are
automatic and will be effected as described in the Fund's current prospectus
(see "Telephone Transactions"). I also acknowledge that I may bear the risk
of loss in the event of fraudulent use of such privileges. If I do not want
telephone redemption or exchange privileges, I have so indicated on this
Application.

<PAGE>

[The following information appears in a box.]

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

_____________________________________________________________________________
Signature Date

______________________________________________________________________________
Signature (if joint acct., both must sign) Date

For Dealer Use Only

Dealer's Name: ____________________ Dealer Code: __________________________
Dealer's Address: ____________________ Branch Code: __________________________
____________________
Representative: ____________________ Rep. No.: __________________________

A-2

<PAGE>

ISI
MANAGED
MUNICIPAL FUND
SHARES
(A Class of Managed
Municipal Fund, Inc.)
No person has been authorized to give any information or to make
representations not contained in this Prospectus and, if given or made, such
information must not be relied upon as having been authorized by the Fund or
the Distributor.

TABLE OF CONTENTS
PAGE

1. Fund Expenses ................................................. 2
2. Financial Highlights .......................................... 3
3. Investment Program ............................................ 4
4. Investment Restrictions ....................................... 7
5. How to Invest in the Fund ..................................... 7
6. How to Redeem Shares .......................................... 9
7. Telephone Transactions ........................................ 10
8. Dividends and Taxes ........................................... 10
9. Management of the Fund ........................................ 12
10. Investment Advisor ............................................ 12
11. Administrator ................................................. 12
12. Distributor ................................................... 13
13. Custodian, Transfer Agent and
Accounting Services ........................................... 13
14. Performance Information ....................................... 13
15. General Information ........................................... 14

<PAGE>
LOGO

ISI
MANAGED
MUNICIPAL FUND
SHARES
(A Class of Managed
Municipal Fund, Inc.)

A mutual fund with the investment objective of a high level of total
return with relative stability of principal and secondarily, high current
income through investment in a portfolio consisting primarily of municipal
obligations the interest on which is exempt from federal income tax.

MARCH 1, 1997

LOGO

<PAGE>

ISI MANAGED MUNICIPAL FUND SHARES
(A Class of Managed Municipal Fund, Inc.)
717 Fifth Avenue
New York, NY 10022
For information call (800) 955-7175

The investment objective of this mutual fund (the "Fund") is a high level
of total return with relative stability of principal and, secondarily, high
current income through investment in a portfolio consisting primarily of
municipal obligations the interest on which is exempt from federal income
tax. To achieve this objective, the Fund invests primarily in municipal
obligations rated within the three highest rating categories of Moody's
Investors Service, Inc. or Standard & Poor's Ratings Group.

Shares of the ISI class of the Fund ("Shares") are available through
Armata Financial Corp., the distributor of the Shares (the "Distributor"), as
well as Participating Dealers and Shareholder Servicing Agents. (See "How to
Invest in the Fund.") This Prospectus sets forth basic information that
investors should know about the Fund prior to investing and should be retained
for future reference. A Statement of Additional Information dated March 1, 1997,
has been filed with the Securities and Exchange Commission (the "SEC") and is
hereby incorporated by reference. It is available upon request and without
charge by contacting the Fund at the above address or telephone number.

THE FUND'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK. THE SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THE SHARES
INVOLVES RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL.

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

The date of this Prospectus is March 1, 1997.

<PAGE>

[This page intentionally left blank]

<PAGE>

1. Fund Expenses

SHAREHOLDER TRANSACTION EXPENSES:
(as a percentage of offering price)

<S> <C>
Maximum Sales Charge Imposed on Purchases .................... 4.45%
Maximum Sales Charge Imposed on Reinvested Dividends ......... None
Maximum Deferred Sales Charge ................................ None

</TABLE>

<TABLE>
<CAPTION>
<S> <C>
Annual Fund Operating Expenses (net of fee waivers):
(as a percentage of average daily net assets)
Management Fees (net of fee waivers) ........................... .25%*
12b-1 Fees ..................................................... .25%
Other Expenses (net of fee waivers) ............................ .40%*
---
Total Fund Operating Expenses (net of fee waivers) ............. .90%*
===

</TABLE>

- ------
*The Fund's investment advisor and administrator intend, but are not
obligated, to waive their fees proportionately to the extent required so
that Total Fund Operating Expenses do not exceed .90% of the Fund's average
daily net assets. Absent fee waivers, Management Fees would be .40%, Other
Expenses (including administration fees) would be .48% and Total Fund
Operating Expenses would be 1.13%, respectively, of the Fund's average daily
net assets.

EXAMPLE:

<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
-------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period:* $53 $72 $92 $150

</TABLE>

- ------
*The Example is based on Total Fund Operating Expenses, net of fee waivers.
Absent fee waivers, expenses would be higher.

The Example should not be considered a representation of future expenses.
Actual expenses may be greater or less than those shown.

The purpose of the foregoing table is to describe the various costs and
expenses that an investor in the Fund will bear directly and indirectly. A
person who purchases Shares through a financial institution may be charged
separate fees by the financial institution. (For more complete descriptions
of the various costs and expenses, see "How to Invest in the Fund -- Offering
Price", "Investment Advisor", "Administrator" and "Distributor.") The
Expenses and Example appearing in the table above are based on the Fund's
expenses for the fiscal year ended October 31, 1996. The rules of the SEC
require that the maximum sales charge (in the Shares' case, 4.45% of the
offering price) be reflected in the above table. However, certain investors
may qualify for reduced sales charges. (See "How to Invest in the Fund --
Offering Price.") Due to the continuous nature of Rule 12b-1 fees, long-term
shareholders of the Fund may pay more than the equivalent of the maximum
front-end sales charges permitted by the Conduct Rules of the National
Association of Securities Dealers, Inc.

2
<PAGE>

2. Financial Highlights

The Fund was organized as a corporation under the laws of the State of
Maryland on January 5, 1990 and commenced operations on February 26, 1990.
The financial highlights included in this table are a part of the Fund's
financial statements for the periods indicated and have been audited by
Coopers & Lybrand L.L.P., the Fund's independent accountants. The financial

statements and financial highlights for the fiscal year ended October 31,
1996 and the report thereon of Coopers & Lybrand L.L.P. are included in the
Statement of Additional Information. Additional performance information is
contained in the Fund's Annual Report for the fiscal year ended October 31,
1996, which is available at no cost by calling the Fund at (800) 955-7175.

(For a Share outstanding throughout each period)

Year Ended October 31, February 26, 1990*
--------------------------------------------------------------- through
1996 1995 1994 1993 1992 1991 October 31, 1990
--------- --------- --------- --------- --------- --------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of
period .......................... $ 10.65 $ 9.81 $ 11.10 $ 10.31 $ 10.36 $ 9.99 $ 10.00
--------- --------- --------- --------- --------- --------- ---------
Income from Investment Operations:
Net investment income ............ 0.48 0.48 0.46 0.50 0.50 0.57 0.38
Net realized and unrealized
gain/(loss) on investments ...... -- 0.98 (1.15) 0.94 0.22 0.49 (0.02)
--------- --------- --------- --------- --------- --------- ---------
Total from Investment Operations .. 0.48 1.46 (0.69) 1.44 0.72 1.06 0.36
--------- --------- --------- --------- --------- --------- ---------
Less Distributions:
Distributions from net investment
income and net realized short-
term gains....................... (0.54) (0.54) (0.56) (0.61) (0.65) (0.69) (0.37)
Distributions from net realized
long-term gains ................ (0.01) (0.08) (0.04) (0.04) (0.12) -- --
--------- --------- --------- --------- --------- --------- ---------
Total distributions ............... (0.55) (0.62) (0.60) (0.65) (0.77) (0.69) (0.37)
--------- --------- --------- --------- --------- --------- ---------
Net asset value at end of period .. $ 10.58 $ 10.65 $ 9.81 $ 11.10 $ 10.31 $ 10.36 $ 9.99
========= ========== ========= ========= ========= ========= =========
Total Return:**
ISI Class Shares .................. 4.67% 15.42% (6.49)% 14.36% 6.06% 10.85% 3.78%
Flag Investors Class A Shares ..... 4.67% 15.42% (6.49)% 14.36% 6.06% 10.85% 1.21%***
Ratios to Average Daily Net Assets:
Expenses(2) ....................... 0.90% 0.90% 0.90% 0.90% 0.90% 0.90% 0.90%(1)
Net investment income(3) .......... 4.48% 4.72% 4.37% 4.38% 4.78% 5.57% 6.12%(1)
Supplemental Data:
Net assets at end of period (000):
ISI Class Shares ............... $84,712 $86,292 $83,607 $88,378 $51,420 $20,053 $17,290
Flag Investors Class A Shares .. $41,193 $45,980 $49,903 $53,486 $45,536 $38,491 $ 5,698
Portfolio turnover rate ........... 32% 55% 37% 68% 95% 86% 99%
</TABLE>

- ------
* Commencement of operations
** Total return excludes the effect of sales charge.
*** Flag Investors Class A Shares commenced operations on October 23, 1990.
(1) Annualized.
(2) Without the waiver of advisory and administration fees, the ratio of
expenses to average daily net assets would have been 1.13%, 1.10%, 1.11%,
1.14%, 1.27%, 1.47% and 1.92% for the periods ended October 31, 1996,
1995, 1994, 1993, 1992, 1991 and 1990, respectively.
(3) Without the waiver of advisory and administration fees, the ratio of net
investment income to average daily net assets would have been 4.25%,
4.52%, 4.16%, 4.14%, 4.41%, 4.99% and 5.11% for the periods ended October
31, 1996, 1995, 1994, 1993, 1992, 1991 and 1990, respectively.

3
<PAGE>

3. Investment Program

INVESTMENT OBJECTIVE, POLICIES AND RISK
CONSIDERATIONS

The investment objective of the Fund is a high level of total return, with
relative stability of principal, and secondarily, high current income,
through an investment in a portfolio consisting primarily of municipal
obligations the interest on which is exempt from federal income tax
("Municipal Obligations"). Municipal Obligations include securities of
states, territories and possessions of the United States and the District of
Columbia, and their political subdivisions, agencies and instrumentalities,
the interest on which is exempt from federal income tax in the opinion of
bond counsel for the issuer. Under normal market conditions, the Fund will
invest at least 80% of its net assets in Municipal Obligations. This policy
is fundamental and may be changed only by a majority vote of shareholders.
The Fund does not currently intend to acquire Municipal Obligations that are
subject to alternative minimum tax but may so invest up to 20% of its net
assets. There can be no assurance that the Fund will achieve its investment
objective.

The Fund will invest at least 75% of its portfolio of Municipal Obligations
in securities rated, on the date of investment, A1 or higher (in the case of
municipal bonds) and higher than MIG 3 (in the case of municipal notes) by
Moody's Investors Service, Inc. ("Moody's") or rated A+ or higher (in the
case of municipal bonds) and higher than SP-2 (in the case of municipal
notes) by Standard & Poor's Ratings Group ("S&P") or, if unrated, of
comparable quality as determined by the Fund's investment advisor under
criteria approved by the Board of Directors. The Fund may invest up to 25% of
its portfolio of Municipal Obligations in securities rated A (in the case of
municipal bonds) or MIG 3 (in the case of municipal notes) by Moody's or
rated A (in the case of municipal bonds) or SP-2 (in the case of municipal
notes) by S&P or, if unrated, of comparable quality as determined by the
investment advisor under criteria approved by the Board of Directors.

SELECTION OF INVESTMENTS

The Advisor will be free to take full advantage of the entire range of
maturities offered by Municipal Obligations and may adjust the average maturity
of the Fund's portfolio from time to time, depending on its assessment of the
relative yields available on securities of different maturities and its
expectations of future changes in interest rates. Thus, at certain times the
average maturity of the portfolio may be relatively short (under five years, for
example) and at other times may be relatively long (in the 20-30 year range, for
example). In determining which direction interest rates are likely to move, the
Advisor relies on the economic analysis made by its chairman, Edward S. Hyman.
There is no assurance that such economic analysis will accurately predict
interest rate trends or that the portfolio strategies based on Mr. Hyman's
economic analysis will be effective.

4
<PAGE>

SPECIAL RISK CONSIDERATIONS

As with other debt securities, the value of Municipal Obligations changes as
interest rates fluctuate. Changes in the value of portfolio securities will
not affect interest income from those securities but will be reflected in the
Fund's net asset value. Thus, a decrease in interest rates will generally
result in an increase in the value of the Shares. Conversely, during periods
of rising interest rates, the value of the Shares will generally decline. The
magnitude of these fluctuations will generally be greater at times when the
average maturity of the Fund's portfolio securities is longer.

PURCHASE OF WHEN-ISSUED SECURITIES

STAND-BY COMMITMENTS

VARIABLE AND FLOATING RATE DEMAND OBLIGATIONS

The Fund may purchase floating and variable rate demand notes and bonds, which
are tax-exempt obligations normally having stated maturities in excess of one
year, but which permit the holder to demand payment of principal either at any
time or at specified intervals. The interest rates on these obligations
fluctuate from time to time in response to changes in the market interest rates.
Frequently, such obligations are secured by letters of credit or other credit
support arrangements provided by banks. Each demand note and bond purchased by
the Fund will meet the quality criteria established for the purchase of other
Municipal Obligations. Because these obligations are direct lending arrangements
between the lender and borrower, it is not contemplated that such instruments
generally will be traded, and there generally is no established secondary market
for these obligations, although they are redeemable at face value. The Fund will
not invest more than 10% of its net assets in floating or variable rate demand
obligations as to which the Fund cannot exercise the demand feature on less than
seven days' notice if there is no secondary market available for these
obligations.

FUTURES CONTRACTS

The Fund may purchase and sell U.S. exchange traded futures contracts on bond
indices ("Futures Contracts"). At the same time a Futures Contract is
purchased or sold, the Fund must allocate cash or securities as a deposit
payment ("initial deposit"). The initial deposit varies but may be as low as
5% or less of the value of the contract. Daily thereafter, the Futures
Contract is valued and the payment of

5
<PAGE>

"variation margin" may be required, so each day the Fund would provide or
receive cash that reflects any decline or increase in the contract's value.

These instruments will be used only to protect against anticipated future
changes in interest rates which otherwise might either adversely affect the
value of the Fund's portfolio securities or adversely affect the prices of
securities which the Fund intends to purchase at a later date. Should
interest rates move in an unexpected manner, the Fund may not achieve the
anticipated benefits of the Futures Contract and may realize a loss on the
Futures Contract in excess of any corresponding gain in the hedged portfolio
positions. Futures transactions involve other risks as well. For example, a
lack of correlation between the index and the assets being hedged, or
unexpected adverse price movements, could render the Fund's hedging strategy
unsuccessful and could result in losses on the Futures Contract in excess of
any corresponding gain in the hedged portfolio positions. In addition, there
can be no assurance that a liquid secondary market will exist for any Futures
Contract purchased or sold, and the Fund may be required to maintain a
position until exercise or expiration, which could result in losses on the
Futures Contract in excess of any corresponding gain in the hedged portfolio
positions.

Regulations of the Commodity Futures Trading Commission (the "CFTC") permit
the use of futures transactions for bona fide hedging purposes without regard
to the percentage of assets committed to futures margin and options premiums.
In addition, CFTC regulations also allow funds to employ futures transactions
for other "non-hedging" purposes to the extent that aggregate initial futures
margins and options premiums do not exceed 5% of total assets. In addition,
the Fund will not enter into Futures Contracts if obligations under all
Futures Contracts would amount to more than 30% of its total assets.

REPURCHASE AGREEMENTS

TAXABLE INVESTMENTS

From time to time, the Fund may invest in securities, the interest on which is
subject to federal income tax. The Fund may make such investments (a) pending
investment of proceeds from sales of Shares or portfolio securities in
tax-exempt securities, (b) pending settlement of purchases of portfolio
securities, (c) to maintain liquidity for meeting anticipated redemptions, or
(d) when in the Advisor's opinion it is advisable because of adverse conditions
affecting the market for Municipal Obligations. The taxable investments in which
the Fund may invest consist of U.S. Treasury Securities and repurchase
agreements fully collateralized by U.S. Treasury Securities (collectively, the
"Taxable Investments"). The Fund may invest up to 20% of its net assets in
Taxable Investments. The Fund may earn taxable income from other sources.
Dividends paid by the Fund that are attributable to interest earned from Taxable
Investments and to taxable income from other investments will be taxable to
investors. (See "Dividends and Taxes -- Tax Treatment of Dividends and
Distributions.")

SIZE OF FUND

The Fund currently intends to limit the size of the Fund and to accept share
purchases only from existing shareholders at such time as the assets of the
Fund are in excess of $200 million but less than $250 million, and thereafter
not to accept any share purchases other than dividend reinvestments.

6
<PAGE>

4. Investment Restrictions

1) Concentrate 25% or more of its total assets in securities of issuers in
any one industry (for this purpose the U.S. Government or any state or
local government or their agencies and instrumentalities are not
considered to be an industry);

3) Borrow money except as a temporary measure for extraordinary or emergency
purposes and then only from banks and in an amount not exceeding 10% of
the value of the total assets of the Fund at the time of such borrowing,
provided that, while borrowings by the Fund equaling 5% or more of the
Fund's total assets are outstanding, the Fund will not purchase
securities; or

The Fund is subject to further investment restrictions that are set forth in
the Statement of Additional Information.

5. How To Invest in the Fund

Shares may be purchased from the Distributor, through any securities dealer
which has entered into a dealer agreement with the Distributor ("Participating
Dealers") or through any financial institution which has entered into a
shareholder servicing agreement with the Fund ("Shareholder Servicing Agents").
Shares may also be purchased by completing the Application Form attached to this
Prospectus and returning it, together with payment of the purchase price
(including any applicable front-end sales charge), to the address shown on the
Application Form. As used herein, the "Fund" refers to Managed Municipal Fund,
Inc., whereas references to the "Shares" shall mean ISI Managed Municipal Fund
Shares which is a class of shares of the Fund.

The minimum initial investment is $5,000, except that the minimum initial
investment for participants in the Fund's Automatic Investing Plan is $250. Each
subsequent investment must be at least $250, except that the minimum subsequent
investment for participants in the Fund's Automatic Investing Plan is $100 for
monthly investments and $250 for quarterly investments. (See "Purchases through
Automatic Investing Plan" below.) Orders for purchases of Shares are accepted on
any day on which the New York Stock Exchange is open for business (a "Business
Day"). The Fund reserves the right to suspend the sale of Shares at any time at
the discretion of the Distributor. Purchase orders for Shares will be executed
at a per Share purchase price equal to the net asset value next determined after
receipt of the purchase order plus any applicable front-end sales charge (the
"Offering Price") on the date such net asset value is determined (the "Purchase
Date"). Purchases made by mail must be accompanied by payment of the Offering
Price. Purchases made through the Distributor or a Participating Dealer or
Shareholder Servicing Agent must be in accordance with such entity's payment
procedures. The Distributor may, in its sole discretion, refuse to accept any
purchase order.

The net asset value per Share is determined daily as of the close of the New
York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time), on each
Business Day. Net asset value per share of a class is calculated by valuing
its share of the Fund's assets, deducting all liabilities attributable to
that class, and dividing the resulting amount by the number of then
outstanding shares of the class. For this purpose, portfolio securities will
be given their market value where feasible based on quotations furnished by a
pricing service approved by the Board of Directors. Options and futures are
valued at the settlement price, or if no sales are reported, at the average
of the last reported bid and asked prices. Securities or other assets for
which market quotations are not readily available are valued at their fair
value as determined in good faith under procedures established

7
<PAGE>
from time to time and monitored by the Fund's Board of Directors. Debt
obligations with maturities of 60 days or less are valued at amortized cost
which constitutes fair value as determined by the Fund's Board of Directors.

OFFERING PRICE

Shares may be purchased from the Distributor, Participating Dealers or
Shareholder Servicing Agents at the Offering Price which includes a sales charge
which is calculated as a percentage of the Offering Price and decreases as the
amount of purchase increases as shown below:

<TABLE>
<CAPTION>
Sales Sales
Charge as Charge as Dealer
Percentage Percentage Retention as
of of Net Percentage
Offering Amount of Offering
Amount of Purchase Price Invested Price*
--------------------------- -------------- -------------- ----------------
<S> <C> <C> <C>
Less than $ 50,000 ...... 4.45% 4.66% 4.00%
$50,000 - $ 99,999 ...... 3.50% 3.63% 3.00%
$100,000 - $ 249,999 ...... 2.50% 2.56% 2.00%
$250,000 - $ 499,999 ...... 2.00% 2.04% 1.50%
$500,000 - $ 999,999 ...... 1.50% 1.52% 1.25%
$1,000,000 - $1,999,999 ...... 0.75% 0.76% 0.75%
$2,000,000 - $2,999,999 ...... 0.50% 0.50% 0.50%
$3,000,000 and over .......... None None None
</TABLE>

- ------
* The Distributor may from time to time reallow to Participating Dealers up to
100% of the sales charge included in the Offering Price of Shares. Dealers
that receive a reallowance of 100% of the sales charge may be considered
underwriters for purposes of the federal securities laws.

A shareholder who purchases additional Shares may obtain reduced sales charges
as set forth in the table above through a right of accumulation. In addition, an
investor may obtain reduced sales charges as set forth above through a right of
accumulation of purchases of Shares and purchases of shares of other mutual
funds in the ISI family of funds. The applicable sales charge will be determined
based on the total of (a) the investor's current purchase plus (b) an amount
equal to the then current net asset value or cost, whichever is higher, of all
Shares and of all shares of such other mutual funds in the ISI family of funds
held by the shareholder. To obtain the reduced sales charge through a right of
accumulation, the shareholder must provide the Distributor, either directly or
through a Participating Dealer or Shareholder Servicing Agent, as applicable,
with sufficient information to verify that the shareholder has such a right. The
Fund may amend or terminate this right of accumulation at any time as to
subsequent purchases. The term "purchase" refers to an individual purchase by a
single purchaser, or to concurrent purchases, which will be aggregated, by a
purchaser, the purchaser's spouse and their children under the age of 21 years
purchasing Shares for their own account.

An investor may also obtain the reduced sales charges shown above by
executing a written Letter of Intent which states the investor's intention to
invest at least $50,000 within a 13-month period in Shares. Each purchase of
Shares under a Letter of Intent will be made at the Offering Price applicable
at the time of such purchase to the full amount indicated on the Letter of
Intent. A Letter of Intent is not a binding obligation upon the investor to
purchase the full amount indicated. The minimum initial investment under a
Letter of Intent is 5% of the full amount. Shares purchased with the first 5%
of the full amount will be held in escrow (while remaining registered in the
name of the investor) to secure payment of the higher sales charge applicable
to the Shares actually purchased if the full amount indicated is not
invested. Such escrowed Shares will be involuntarily redeemed to pay the
additional sales charge, if necessary. When the full amount indicated has
been purchased, the escrowed Shares will be released. An investor who wishes
to enter into a Letter of Intent in conjunction with an investment in Shares
may do so by completing the appropriate section of the Application Form
attached to this Prospectus.

The Fund may sell Shares at net asset value (without sales charge) to the
following: (i) banks, bank trust departments, registered investment advisory
companies, financial planners and broker-dealers purchasing Shares on behalf of
their fiduciary and advisory clients, provided such clients have paid an account
management fee for these services; (ii) investors who have redeemed Shares, or
shares of any other mutual fund in the ISI family of funds that have similar
sales charges, in an amount that is not more than the total redemption proceeds,
provided that the purchase is within six months after the redemption and the
amount of the purchase is at least $5,000; and (iii) current or retired
Directors of the Fund, directors and employees (and their immediate families) of
the Advisor, the Fund's administrator, and their respective affiliates, and
employees of Participating Dealers. In addition, investors who have redeemed
shares of funds in the ISI family of funds that have lower sales charges may
purchase Shares at net asset value in an amount that is not more than the total
redemption proceeds, provided that they held the shares of such funds for more

8
<PAGE>

than 24 months prior to the redemption, the purchase is within six months
after the redemption and the amount of the purchase is at least $5,000.

PURCHASES BY EXCHANGE

As permitted pursuant to any rule, regulation or order promulgated by the
SEC, shareholders of other mutual funds in the ISI family of funds that have
similar sales charges may exchange their shares of those funds for an equal
dollar amount of Shares. Shares issued pursuant to this offer will not be
subject to the sales charges described above or any other charge. In
addition, shareholders of funds in the ISI family of funds that have lower
sales charges may exchange into other funds in the family upon payment of the
difference in sales charges, except that the exchange will be made at net
asset value if the shares have been held for at least 24 months. The net
asset value of shares purchased and redeemed in an exchange request received
on a Business Day will be determined on the same day, provided that the
exchange request is received prior to 4:00 p.m. (Eastern Time) or the close
of the New York Stock Exchange, whichever is earlier. Exchange requests
received after 4:00 p.m. (Eastern Time) will be effected on the next Business
Day.

Until February 28, 1998, shareholders of any other mutual fund who have paid a
sales charge on their shares of such fund, and shareholders of any closed-end
fund, may exchange shares of such funds for an equal dollar amount of Shares by
submitting to the Distributor or a Participating Dealer, the proceeds of the
redemption or sale of shares of such funds, together with evidence of the
payment of a sales charge (for mutual funds only) and the source of such
proceeds. Shares issued pursuant to this offer will not be subject to the sales
charges described above or any other charge.

The Fund may modify or terminate these offers of exchange at any time and
will provide shareholders with 60 days' written notice prior to any such
modification or termination. The exchange privilege with respect to other ISI
funds may also be exercised by telephone. (See "Telephone Transactions"
below.)

PURCHASES THROUGH AUTOMATIC INVESTING PLAN

Shareholders may purchase Shares regularly by means of an Automatic Investing
Plan with a pre-authorized check drawn on their checking accounts. Under this
plan, the shareholder may elect to have a specified amount invested monthly
or quarterly in Shares. The minimum initial investment is $250. Each
subsequent investment must be at least $100 for monthly investments and $250
for quarterly investments. The amount specified will be withdrawn from the
shareholder's checking account using the pre-authorized check and will be
invested in Shares at the applicable Offering Price determined on the date
the amount is available for investment. Participation in the Automatic
Investing Plan may be discontinued either by the Fund or the shareholder upon
30 days' prior written notice to the other party. A shareholder who wishes to
enroll in the Automatic Investing Plan or who wishes to obtain additional
purchase information may do so by completing the appropriate section of the
Application Form attached to this Prospectus.

PURCHASES THROUGH DIVIDEND REINVESTMENT

Shareholders may elect to have their distributions (capital gains and/or
dividend income) paid by check or reinvested in additional Shares. Unless the
shareholder elects otherwise, all income dividends and capital gains
distributions will be reinvested in additional Shares at net asset value,
without a sales charge. Shareholders may elect to terminate automatic
reinvestment by giving written notice to the Fund's transfer agent (the
"Transfer Agent") (see "Custodian, Transfer Agent and Accounting Services"),
either directly or through their Participating Dealer or Shareholder
Servicing Agent, at least five days before the next date on which dividends
or distributions will be paid.

Alternately, shareholders may have their distributions invested in shares of
other funds in the ISI family of funds. Shareholders who are interested in
this option should call the Transfer Agent for additional information.

6. How to Redeem Shares

9
<PAGE>

$50,000). (See "Telephone Transactions" below.) A redemption order is effected
at the net asset value per Share next determined after receipt of the order (or,
if stock certificates have been issued for the Shares to be redeemed, after the
tender of the stock certificates for redemption). Redemption orders received
after 4:00 p.m. (Eastern Time) or the close of the New York Stock Exchange,
whichever is earlier, will be effected at the net asset value next determined on
the following Business Day. Payment for redeemed Shares will be made by check
and will be mailed within seven days after receipt of a duly authorized
telephone redemption request or of a redemption order fully completed and, as
applicable, accompanied by the documents described below:

1) A letter of instructions, specifying the shareholder's account number with
a Participating Dealer or Shareholder Servicing Agent, if applicable, and
the number of Shares or dollar amount to be redeemed, signed by all owners
of the Shares in the exact names in which their account is maintained;

3) If Shares are held in certificate form, stock certificates either properly
endorsed or accompanied by a duly executed stock power for Shares to be
redeemed; and

4) Any additional documents required for redemption by corporations,
partnerships, trusts or fiduciaries.

Dividends payable up to the date of redemption of Shares will be paid on the
next dividend payable date. If all of the Shares in a shareholder's account
have been redeemed on a dividend payable date, the dividend will be remitted
by check to the shareholder.

The Fund has the power, under its Articles of Incorporation, to redeem
shareholder accounts amounting to less than $500 (as a result of redemptions)
upon 60 days' written notice.

7. Telephone Transactions

Shareholders may exercise the exchange privilege with respect to other ISI
funds, or redeem Shares in amounts up to $50,000, by notifying the Transfer
Agent by telephone on any Business Day between the hours of 8:30 a.m. and 5:30
p.m. (Eastern Time) or by regular or express mail at its address listed under
"Custodian, Transfer Agent and Accounting Services." Telephone transaction
privileges are automatic. Shareholders may specifically request that no
telephone redemptions or exchanges be accepted for their accounts. This election
may be made on the Application Form or at any time thereafter by completing and
returning appropriate documentation supplied by the Transfer Agent.

A telephone exchange or redemption placed by 4:00 p.m. (Eastern Time) or the
close of the New York Stock Exchange, whichever is earlier, is effective that
day. Telephone orders placed after 4:00 p.m. (Eastern Time) will be effected
at the net asset value as determined on the next Business Day.

The Fund and the Transfer Agent will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. These procedures
include requiring the investor to provide certain personal identification
information at the time an account is opened and prior to effecting each
transaction requested by telephone. In addition, all telephone transaction
requests will be recorded and investors may be required to provide additional
telecopied instructions of such transaction requests. If these procedures are
employed, neither the Fund nor the Transfer Agent will be responsible for any
loss, liability, cost or expense for following instructions received by
telephone that either of them reasonably believes to be genuine. During periods
of extreme economic or market changes, shareholders may experience difficulty in
effecting telephone transactions. In such event, requests should be made by
regular or express mail. Shares held in certificate form may not be exchanged or
redeemed by telephone. (See "How to Invest in the Fund -- Purchases by Exchange"
and "How to Redeem Shares.")

8. Dividends and Taxes

DIVIDENDS AND DISTRIBUTIONS

The Fund's policy is to distribute to shareholders substantially all of its
net investment income in the form of monthly dividends. The Fund may
distribute to shareholders any net capital gains (the excess of net long-term
capital gains over net short-term capital losses) on an annual basis or,
alternatively, may elect to retain such net capital gains and pay tax
thereon.

10
<PAGE>
TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS

The following is only a general summary of certain federal tax considerations
affecting the Fund and the shareholders. No attempt is made to present a
detailed explanation of the tax treatment of the Fund or the shareholders,
and the discussion here is not intended as a substitute for careful tax
planning.

The following summary is based on current tax laws and regulations, which may
be changed by legislative, judicial, or administrative action. The Statement
of Additional Information sets forth further information concerning taxes.

The Fund intends to qualify to pay "exempt-interest dividends" to its
shareholders by satisfying the Code's requirements that at the close of each
quarter of its taxable year at least 50% of the value of its total assets
consists of obligations the interest on which is exempt from federal income
tax.

As long as this and certain other requirements are met, dividends derived
from the Fund's net tax-exempt interest income will be "exempt-interest
dividends" that are excluded from the gross income of the Fund's shareholders
for federal income tax purposes. Exempt-interest dividends may, however, have
collateral federal income tax consequences, including alternative minimum tax
consequences. Furthermore, the Fund may not be an appropriate investment for
persons who are "substantial users" of facilities financed with industrial
development bonds or private activity bonds (or related parties to
"substantial users"). (See the Statement of Additional Information.)

Current federal tax law limits the type and volumes of bonds qualifying for
the federal income tax exemption of interest, which may have an effect on the
ability of the Fund to purchase sufficient amounts of tax-exempt securities
to satisfy the Code's requirements for the payment of exempt-interest
dividends.

Distributions to shareholders of net capital gains of the Fund are taxable to
shareholders as long-term capital gains, whether received in cash or
additional Shares, and regardless of how long a shareholder has held the
Shares. Shareholders will be advised annually as to the federal income tax
status of distributions made during the year.

The sale, exchange or redemption of Shares is a taxable event for the
shareholder.

Any gain or loss recognized on a sale, exchange or redemption of Shares by a
shareholder who is not a dealer in securities will generally be treated as a
long-term capital gain or loss if the Shares have been held for more than twelve
months and otherwise will be generally treated as a short-term capital gain or
loss. Any loss recognized by a shareholder upon the sale of Shares held for six
months or less, however, will be disallowed to the extent of any exempt-interest
dividends received by the shareholder with respect to such Shares. If Shares on
which a capital gains distribution has been received are subsequently sold or
redeemed and such Shares have been held for six months or less, any loss
recognized will be treated as long-term capital loss to the extent of the
capital gains distribution.

Interest on indebtedness incurred or continued by shareholders to purchase or
carry Shares will not be deductible for federal income tax purposes.

11
<PAGE>

Shareholders are encouraged to consult with their tax advisors concerning the
application of the rules set forth above to their particular circumstances
and the application of state and local taxes to an investment in the Fund.

9. Management of the Fund

The Fund's Directors and officers are as follows:

Edward S. Hyman Chairman
Richard T. Hale Vice Chairman
R. Alan Medaugh Director and President
James J. Cunnane Director
John F. Kroeger Director
Louis E. Levy Director
Eugene J. McDonald Director
Edward J. Veilleux Vice President
Scott J. Liotta Vice President
Nancy Lazar Vice President
Carrie L. Butler Vice President
Joseph A. Finelli Treasurer
Edward J. Stoken Secretary
Laurie D. Collidge Assistant Secretary

10. Investment Advisor

For the fiscal year ended October 31, 1996, the Advisor received a fee (net of
fee waivers) equal to .25% of the Fund's average daily net assets. ISI and the
Fund's administrator have voluntarily agreed to reduce proportionately their
respective annual fees if necessary, so that the Fund's annual expenses do not
exceed .90% of it's average daily net assets. (See "Fund Expenses.")

The address of the Advisor is 717 Fifth Avenue, New York, New York 10022
(telephone: (800) 955-7175).

<PAGE>

PORTFOLIO MANAGERS

Edward S. Hyman, Chairman of ISI and the Fund, and R. Alan Medaugh, President
of ISI and President and a Director of the Fund, have shared direct portfolio
management responsibility for the Fund since its inception. Mr. Hyman is
responsible for developing the economic analysis upon which the Fund's
selection of investments is based. (See "Investment Program.") Before joining
ISI, Mr. Hyman was a vice chairman and member of the Board of C.J. Lawrence
Inc. and prior thereto, an economic consultant at Data Resources. He writes a
variety of international and domestic economic research reports which follow
trends that may determine the direction of interest rates. These
international and domestic reports are sent to ISI's private institutional
clients in the United States and overseas. The periodical Institutional
Investor, which rates analysts and economists on an annual basis, has rated
Mr. Hyman as its "first team" economist, which is its highest rating, in each
of the last seventeen years.

Mr. Medaugh is responsible for day-to-day portfolio management. Prior to joining
ISI, Mr. Medaugh was Managing Director of C.J. Lawrence Fixed Income Management
and prior thereto Senior Vice President and bond portfolio manager at Fiduciary
Trust International. While at Fiduciary Trust International, Mr. Medaugh led
their Fixed-Income Department which managed $5 billion of international fixed
income portfolios for institutional clients. Mr. Medaugh also had prior
experience as a bond portfolio manager at both Putnam Management Company and
Fidelity Management and Research.

11. Administrator

Investment Company Capital Corp. ("ICC"), One South Street, Baltimore,
Maryland 21202, provides administration services to the Fund. ICC is an
indirect subsidiary of Alex. Brown Incorporated and an affiliate of the
Distributor.

12
<PAGE>

ICC supervises the day-to-day operations of the Fund, including the preparation
of registration statements, proxy materials, shareholder reports, compliance
with all requirements of securities laws in the states in which the Shares are
distributed and oversight of the relationship between the Fund and its other
service providers. For its services as administrator of the Fund for the fiscal
year ended October 31, 1996, ICC received a fee (net of fee waivers) equal to
.12% of the Fund's average daily net assets. ICC and ISI have voluntarily agreed
to reduce proportionately their respective annual fees if necessary, so that the
Fund's annual expenses do not exceed .90% of its average daily net assets. (See
"Fund Expenses.")

ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund. (See "Custodian, Transfer Agent and
Accounting Services.")

12. Distributor

Armata Financial Corp. ("Armata" or the "Distributor"), P.O. Box 515, Baltimore,
Maryland 21203, acts as distributor of the Shares pursuant to a Distribution
Agreement and related Plan of Distribution (the "Plan") adopted pursuant to Rule
12b-1 under the Investment Company Act of 1940, as amended. Armata is a
broker-dealer that was formed in 1983 and is an affiliate of the Administrator.
As compensation for its services for the fiscal year ended October 31, 1996,
Armata received a fee equal to .25% of the Shares' average daily net assets.
Armata expects to allocate on a proportional basis up to all of its fee to
selected Participating Dealers as compensation for their ongoing shareholder
services, including processing redemption and sale requests and responding to
shareholder inquiries.

Payments under the Plan are made as described above regardless of Armata's
actual cost of providing distribution services and may be used to pay
Armata's overhead expenses. If the cost of providing distribution services to
the Fund in connection with the sale of the Shares is less than .25% of the
average daily net assets invested in Shares for any period, the unexpended
portion of the distribution fee may be retained by Armata. Armata or its
associated persons will from time to time and from its own resources pay or
allow additional discounts or promotional incentives in the form of cash or
other compensation (including merchandise or travel) to Participating
Dealers.

13. Custodian, Transfer Agent and Accounting Services

Investment Company Capital Corp., One South Street, Baltimore, Maryland 21202
(telephone: (800) 882-8585), is the Fund's transfer and dividend disbursing
agent and provides accounting services to the Fund. As compensation for
providing accounting services for the fiscal year ended October 31, 1996, ICC
received from the Fund a fee equal to .05% of the Fund's average daily net
assets. (See the Statement of Additional Information.)

PNC Bank, National Association, a national banking association with offices at
Airport Business Park, 200 Stevens Drive, Lester, Pennsylvania 19113, acts as
custodian of the Fund's assets.

14. Performance Information

The Fund may also advertise yield and tax-equivalent yield quotations. Any
yield quotation of the Fund is based on the

13
<PAGE>

annualized net investment income per share of the Fund over a 30-day period.
The yield for the Fund is calculated by dividing the net investment income
per share of the Fund earned during the period by the maximum offering price
per share of the Fund on the last day of that period. The resulting figure is
then annualized. The Fund's yield calculations assume a maximum sales charge
of 4.45% for the Shares. The Fund's taxable-equivalent yield is calculated by
determining the rate of return that would have to be achieved on a fully
taxable investment to produce the after tax-equivalent of the Fund's yield.
In calculating taxable-equivalent yield, the Fund assumes certain tax
brackets for shareholders.

If the Fund compares its performance to other funds or to relevant indices,
its performance will be stated in the same terms in which such comparative
data and indices are stated.

The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Morningstar
Inc., independent services which monitor the performance of mutual funds. The
performance of the Fund may also be compared to the Lehman Brothers Municipal
Bond Index, the Consumer Price Index, the return on 90-day U.S. Treasury
Bills, long-term U.S. Treasury bonds, bank certificates of deposit, the
Standard & Poor's 500 Stock Index and the Dow Jones Industrial Average. The
Fund may also use total return performance data as reported in the following
national financial and industry publications that monitor the performance of
mutual funds: Money Magazine, Forbes, Business Week, Barron's, Investor's
Daily, IBC/Donoghue's Money Fund Report and The Wall Street Journal. For
these purposes, the performance of the Fund, as well as the performance of
such indices, may not reflect sales charges, the inclusion of which would
reduce performance results.

Performance will fluctuate, and any statement of performance should not be
considered as representative of the future performance of the Fund. Performance
is generally a function of the type and quality of investments held by the Fund,
operating expenses and market conditions. Any fees charged by banks with respect
to customer accounts through which Shares may be purchased, although not
included in calculations of performance, will reduce performance results.

15. General Information

CAPITAL SHARES

The Fund is an open-end diversified management investment company organized
under the laws of the State of Maryland on January 5, 1990 and is authorized
to issue 40 million shares of capital stock, with a par value of $.001 per
share. Shares have equal rights with respect to voting. Voting rights are not
cumulative, so the holders of more than 50% of the outstanding Shares voting
together for election of Directors may elect all the members of the Board of
Directors of the Fund. In the event of liquidation or dissolution of the
Fund, each Share is entitled to its portion of the Fund's assets after all
debts and expenses have been paid. The fiscal year end of the Fund is October
31.

The Board of Directors of the Fund is authorized to establish additional
"series" of shares of capital stock, each of which would evidence interests in a
separate portfolio of securities, and separate classes of each series of the
Fund. The shares offered by this Prospectus have been designated "ISI Managed
Municipal Fund Shares." The Board has no present intention of establishing any
additional series of the Fund but the Fund does have another class of shares in
addition to the Shares offered hereby, "Flag Investors Managed Municipal Fund
Class A Shares." Shares of that class are sold through broker-dealers and have
similar 12b-1 fees and front-end sales charges as the Shares. Different classes
of the Fund may be offered to certain investors and holders of such shares may
be entitled to certain exchange privileges not offered to Shares. All classes of
the Fund share a common investment objective, portfolio and advisory fee, but
the classes may have different distribution expenses and sales charges and,
accordingly, performance may differ.

ANNUAL MEETINGS

14
<PAGE>

a meeting of shareholders be held for the purpose of considering the removal
of a Director from office, and if such a request is made, the Fund will
assist with shareholder communications in connection with the meeting.

REPORTS

FUND COUNSEL

Morgan, Lewis & Bockius LLP serves as counsel to the Fund.

SHAREHOLDER INQUIRIES

Shareholders with inquiries concerning their Shares should contact the Transfer
Agent at (800) 882-8585, the Fund at (800) 955-7175, the Advisor, a
Participating Dealer or Shareholder Servicing Agent, as appropriate.

15
<PAGE>

ISI MANAGED MUNICIPAL FUND SHARES
NEW ACCOUNT APPLICATION
- -----------------------------------------------------------------------------

Make check payable to "ISI Managed Municipal Fund Shares" and mail with this
Application to:

Armata Financial Corp./ISI Mutual Funds
P.O. Box 419426
Kansas City, MO 64141-6426

For assistance in completing this form, please call the Transfer Agent at
(800) 882-8585.
The minimum initial purchase is $5,000, except that the minimum initial
purchase for participants in the Fund's Automatic Investing Plan is $250.
Each subsequent purchase requires a $250 minimum, except that the minimum
subsequent purchase under the Fund's Automatic Investing Plan is $100 for
monthly purchases and $250 for quarterly purchases. The Fund reserves the
right not to accept checks for more than $50,000 that are not certified or
bank checks.

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

YOUR ACCOUNT REGISTRATION (PLEASE PRINT)

INDIVIDUAL OR JOINT TENANT

_____________________________________________________________________________
First Name Initial Last Name

_____________________________________________________________________________
Social Security Number

_____________________________________________________________________________
Joint Tenant Initial Last Name

_____________________________________________________________________________
Social Security Number

CORPORATIONS, TRUSTS, PARTNERSHIPS, ETC.

_____________________________________________________________________________
Name of Corporation, Trust or Partnership

_____________________________________________________________________________
Tax ID Number

_____________________________________________________________________________
Name of Trustees (If to be included in the Registration)

_____________________________________________________________________________
Existing Account No., if any

GIFTS TO MINORS
_____________________________________________________________________________
Custodian's Name (only one allowed by law)

_____________________________________________________________________________
Minor's Name (only one)

_____________________________________________________________________________
Social Security Number of Minor

under the ___________________ Uniform Gifts to Minors Act
State of Residence

MAILING ADDRESS
_____________________________________________________________________________
Street
_____________________________________________________________________________
City State Zip
( )
_____________________________________________________________________________
Daytime Phone
- --------------------------------------------------------------------------------

<PAGE>

STATEMENT OF INTENTION (OPTIONAL)

[ ] I agree to the Letter of Intent and Escrow Agreement set forth in the
accompanying prospectus. I intend to invest over a 13-month period in shares
of ISI Managed Municipal Fund Shares in an aggregate amount at least equal
to:
__ $50,000 __ $100,000 __ $250,000 __ $500,000 __ $1,000,000 __ $2,000,000
__ $3,000,000
- --------------------------------------------------------------------------------
RIGHT OF ACCUMULATION (OPTIONAL)

List the Account numbers of other ISI Funds that you or your immediate family
already own that qualify for this purchase.

Fund Name Account No. Owner's Name Relationship
--------- ----------- ------------ ------------
_______________________________________________________________________________

_______________________________________________________________________________

_______________________________________________________________________________
<PAGE>

DISTRIBUTION OPTIONS

Please check appropriate boxes. There is no sales charge for reinvested
dividends. If none of the options are selected, all distributions will be
reinvested.
Income Dividends
[ ] Reinvested in additional shares
[ ] Paid in Cash

Capital Gains
[ ] Reinvested in additional shares
[ ] Paid in Cash

Call (800) 882-8585 for information about reinvesting your dividends in other
funds in the ISI Family of Funds.
- --------------------------------------------------------------------------------
AUTOMATIC INVESTING PLAN (OPTIONAL)

[ ] I authorize you as Agent for the Automatic Investing Plan to automatically
invest $_______ for me, on a monthly or quarterly basis, on or about the 20th of
each month or if quarterly, the 20th of January, April, July and October, and to
draw a bank draft in payment of the investment against my checking account.
(Bank drafts may be drawn on commercial banks only.)

Minimum Initial Investment: $250
Subsequent Investments (check one):
[ ] Monthly ($100 minimum)
[ ] Quarterly ($250 minimum)

________________________________________________________________________________
Bank Name

________________________________________________________________________________
Existing ISI Managed Municipal Fund Account No., if any

Please attach a voided check.

________________________________________________________________________________
Depositor's Signature Date

________________________________________________________________________________
Depositor's Signature Date
(if joint acct., both must sign)

- --------------------------------------------------------------------------------
TELEPHONE TRANSACTIONS

I understand that I will automatically have telephone redemption privileges
(for amounts up to $50,000) and telephone exchange privileges (with respect
to other ISI Funds) unless I mark one or both of the boxes below.

No, I/We do not want
[ ] Telephone redemption privileges
[ ] Telephone exchange privileges

Redemptions effected by telephone will be mailed to the address of record. If
you would prefer redemptions mailed to a pre-designated bank account, please
provide the following information:
Bank: _____________________ Bank Account No.: ____________________

Address: _____________________ Bank Account Name: ____________________

<PAGE>

SIGNATURE AND TAXPAYER CERTIFICATION

[The following information appears in a box]

By signing this Application, I hereby certify under penalties of perjury that
the information on this Application is complete and correct and that as
required by federal law: (Please check applicable boxes)
[ ] U.S. Citizen/Taxpayer:
[ ] I certify that (1) the number shown above on this form is the correct
Social Security Number or Tax ID Number and (2) I am not subject to any
backup withholding either because (a) I am exempt from backup
withholding, or (b) I have not been notified by the Internal Revenue
Service ("IRS") that I am subject to backup withholding as a result of
a failure to report all interest or dividends, or (c) the IRS has
notified me that I am no longer subject to backup withholding.
[ ] If no Tax ID Number or Social Security Number has been provided above,
I have applied, or intend to apply, to the IRS or the Social Security
Administration for a Tax ID Number or a Social Security Number, and I
understand that if I do not provide either number to the Transfer Agent
within 60 days of the date of this Application or if I fail to furnish
my correct Social Security Number or Tax ID Number, I may be subject to
a penalty and a 31% backup withholding on distributions and redemption
proceeds. (Please provide either number on IRS Form W-9. You may
request such form by calling the Transfer Agent at 800-882-8585.)
[ ] Non-U.S. Citizen/Taxpayer:
Indicated country of residence for tax purposes: ________
Under penalties of perjury, I certify that I am not a U.S. citizen or
resident and I am an exempt foreign person as defined by the Internal
Revenue Service.
[end of box]

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

________________________________________________________________________________
Signature Date

________________________________________________________________________________
Signature (if a joint account, both must sign) Date

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

FOR DEALER USE ONLY

Dealer's Name: _______________________________ Dealer Code: ________________
Dealer's Address: _______________________________ Branch Code: ________________
_______________________________
Representative: _______________________________ Rep. No.: ________________

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

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

MANAGED MUNICIPAL FUND, INC.

One South Street
Baltimore, Maryland 21202

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

THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS.
IT SHOULD BE READ IN CONJUNCTION WITH A PROSPECTUS, WHICH MAY
BE OBTAINED FROM YOUR PARTICIPATING DEALER OR SHAREHOLDER
SERVICING AGENT OR BY WRITING OR CALLING ALEX. BROWN & SONS
INCORPORATED, ONE SOUTH STREET, BALTIMORE, MARYLAND 21202,
(800) 767-FLAG (FOR THE FLAG INVESTORS CLASS A SHARES CLASS)
OR BY WRITING OR CALLING ARMATA FINANCIAL CORP., P.O. BOX 515,
MARYLAND 21203, (410) 727-1700 (FOR THE ISI SHARES).

Statement of Additional Information Dated: March 1, 1997
Relating to Prospectuses
of
Flag Investors Managed Municipal Fund Class A Shares Dated: March 1, 1997
and
ISI Managed Municipal Fund Shares Dated: March 1, 1997

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TABLE OF CONTENTS

Page
----

1. General Information and History ..................................1

2. Investment Objective and Policies ................................1

3. Valuation of Shares and Redemption................................6

4. Federal Tax Treatment of Dividends
and Distributions.................................................7

5. Management of the Fund...........................................11

6. Investment Advisory and Other Services...........................16

7. Administration...................................................17

8. Distribution of Fund Shares .................................... 17

9. Portfolio Transactions...........................................20

10. Capital Stock ...................................................21

11. Semi-Annual Reports..............................................22

12. Custodian, Transfer Agent and Accounting Services .............. 22

13. Independent Accountants .........................................23

14. Performance Information .........................................23

15. Control Persons and Principal Holders of
Securities .....................................................26

16. Financial Statements .........................................26

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1. GENERAL INFORMATION AND HISTORY

Managed Municipal Fund, Inc. (the "Fund") is an open-end
management investment company. Under the rules and regulations of the Securities
and Exchange Commission (the "SEC"), all mutual funds are required to furnish
prospective investors with certain information concerning the activities of the
company being considered for investment. The Fund currently offers two classes
of shares: Flag Investors Managed Municipal Fund Class A Shares, (the "Flag
Investors Class A Shares") and ISI Managed Municipal Fund Shares (the "ISI
Shares"). There are two separate prospectuses for the Fund's shares: one for the
Flag Investors Class A Shares and one for the ISI Shares. Each prospectus
contains important information concerning the classes of shares offered thereby
and the Fund, and may be obtained without charge from Alex. Brown & Sons
Incorporated, One South Street, Baltimore, Maryland 21202
(telephone: (800) 767-FLAG), or Armata Financial Corp., P.O. Box 515,
Baltimore, Maryland 21203 (telephone: (410) 727-1700) (collectively, the
"Distributors") or from Participating Dealers which offer shares of the
respective classes of the Fund ("Shares") to prospective investors. As used
herein the term "Prospectus" describes information common to the prospectuses of
the two classes of the Fund's shares. Otherwise the term "Prospectus" will be
modified by the appropriate class designation. As used herein, the "Fund" refers
to Managed Municipal Fund, Inc. and specific references to any class of the
Fund's shares will be made by using the name of such class. Prospectuses may
also be obtained from Shareholder Servicing Agents. Some of the information
required to be in this Statement of Additional Information is also included in
the Fund's current Prospectuses. To avoid unnecessary repetition, references are
made to related sections of the Prospectuses. In addition, the Prospectuses and
this Statement of Additional Information omit certain information about the Fund
and its business that is contained in the Registration Statement respecting the
Fund and its Shares filed with the SEC. Copies of the Registration Statement as
filed, including such omitted items, may be obtained from the SEC by paying the
charges prescribed under its rules and regulations.

The Fund was incorporated under the laws of the State of
Maryland on January 5, 1990. The Fund filed a registration statement with the
SEC registering itself as an open-end diversified management investment company
under the Investment Company Act of 1940, as amended (the "Investment Company
Act") and its Shares under the Securities Act of 1933, and commenced operations
on February 26, 1990. The Fund has offered the Flag Investors Class A Shares
since October 23, 1990.

For the period from November 9, 1992 through February 27,
1994, the Fund offered another class of shares: Flag Investors Managed Municipal
Fund Class B Shares. Shares of that class were renamed the Flag Investors
Managed Municipal Fund Class D Shares and are no longer being offered.

Under a License Agreement dated October 23, 1990, between the
Fund and Alex. Brown Incorporated, Alex. Brown Incorporated licenses to the Fund
the "Flag Investors" name and logo, but retains rights to that name and logo,
including the right to permit other investment companies to use them.

2. INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is a high level of total
return with relative stability of principal, and secondarily, a high level of
current income exempt from federal income tax through investing in a portfolio
consisting primarily of municipal obligations ("Municipal Obligations"). There
can be no assurance that the Fund will achieve its investment objective.

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Municipal Obligations include debt securities 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 on which is exempt from federal income tax. For
a discussion of quality, maturity and other criteria the Fund applies in
investing in Municipal Obligations, see "Investment Objective and Policies" in
the Prospectus.

Municipal Obligations can be classified into three principal
categories: "general obligation bonds", "revenue bonds" and "notes". 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 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, but not from the general taxing power of the issuer.
Revenue bonds include, in most cases, "tax exempt industrial development bonds",
i.e., bonds issued by or on behalf of public authorities to obtain funds for
privately-operated facilities. Tax-exempt industrial development bonds do not
generally carry the pledge of the credit of the issuing municipality, but are
generally guaranteed by the corporate entity on whose behalf they are issued.
Notes are short-term instruments used to provide for short-term capital needs.
They are obligations of the issuing municipalities or agencies and are sold in
anticipation of a bond sale, collection of taxes or receipt of other revenues.

At least 75% of the Fund's portfolio of Municipal Obligations
will be invested in securities rated, at the time of purchase, higher than A by
Moody's or S&P or municipal notes rated at the time of purchase, MIG-1 or MIG-2
by Moody's or SP-1 by S&P. The ratings of Moody's for tax-exempt bonds in which
the Fund may invest are Aaa, Aa1, Aa, and A1. Bonds rated Aaa are judged by
Moody's to be of the "best quality". The rating of Aa is assigned by Moody's to
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 bonds. The Aaa and Aa rated bonds comprise what are generally known as
"high grade bonds". Bonds rated A by Moody's possess many favorable investment
attributes and are considered as upper- medium-grade obligations. The numerical
modifier 1, in the generic rating classifications of A and Aa indicates that the
obligation ranks in the higher end of its generic rating category. The ratings
of S&P for tax-exempt bonds in which the Fund may invest are AAA, AA+, AA, AA-,
and A+. Bonds rated AAA bear the highest rating assigned by S&P to a debt
obligation. Such rating is intended to indicate an extremely strong capacity to
repay principal and pay interest. Bonds rated AA by S&P are also intended to
qualify as high-quality debt obligations. Such rating is intended to indicate a
very strong capacity to repay principal and pay interest, and in the majority of
instances bonds with such rating differ from AAA issues to a small degree. Bonds
rated A by S&P have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in the higher rated categories.
The addition of a plus or minus sign to the A or AA categories shows relative
standing within these rating categories. The two highest rating categories by
Moody's for tax-exempt notes are MIG 1 and MIG 2. Notes bearing the designation
MIG 1 are judged by Moody's to be of the best quality, enjoying strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancings. Notes bearing the designation
MIG 2 are judged by Moody's to be of high quality, with margins of protection
ample although not so large as in the preceding group. The highest S&P rating
for municipal notes issued on or after July 29, 1984 is "SP-1". Prior to July
29, 1984, municipal notes carried the same symbols as municipal bonds. The
designation "SP-1" is intended to indicate a very strong capacity to pay
principal and interest. A "+" is added for those issues determined by S&P to
possess very strong characteristics. Only municipal note issues with a rating by
S&P of SP-1 or higher will qualify for the 75% requirement.

The Fund may invest up to 25% of its portfolio of Municipal
Obligations in municipal bonds rated A by Moody's or S&P or in municipal notes
bearing the designation MIG 3 by Moody's

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or SP-2 by S&P. Notes bearing the MIG 3 are judged by Moody's to be of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
S&P grants a rating of SP-2 to a note when it believes the issuer has a
satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.

The ratings of Moody's and S&P represent each service's
opinion as to the quality of the municipal bonds or notes rated. It should be
emphasized that ratings are general and are not absolute standards of quality or
guarantees as to the creditworthiness of an issuer. Subsequent to its purchase
by the Fund, an issue of municipal bonds or notes may cease to be rated, or its
ratings may be reduced. Neither event requires the elimination of that
obligation from the Fund's portfolio, but will be a factor in determining
whether the Fund should continue to hold that issue in its portfolio.

From time to time, proposals have been introduced before
Congress for the purpose of restricting or eliminating the federal income tax
exemption for interest on Municipal Obligations. See "Federal Tax Treatment of
Dividends and Distributions" for the effect of current federal tax law on this
exemption.

"When-Issued" Securities: The Fund may purchase securities on
a "when-issued" basis. When the Fund commits to purchase a security on a
"when-issued" basis, it will set up procedures consistent with the General
Statement of Policy of the SEC concerning such purchases. Since that policy
currently recommends that an amount of the Fund's assets equal to the amount of
the purchase be held aside or segregated to be used to pay for the commitment,
the Fund will always have cash, cash equivalents or U.S. Government securities
or other high quality debt securities sufficient to cover any commitments or to
limit any potential risk. However, although the Fund does not intend to make
such purchases for speculative purposes and intends to adhere to the provisions
of the SEC policy, purchases of securities on such basis may involve more risks
than other types of purchases. For example, the Fund may have to sell assets
which have been set aside in order to meet redemptions. Also, if the Fund
determines it is necessary to sell the "when-issued" securities before delivery,
the Fund may incur a loss because of market fluctuations since the time the
commitment to purchase such securities was made and any gain would not be
tax-exempt. At the time the Fund makes the commitment to purchase or sell
securities on a "when-issued" basis, it will record the transaction and
thereafter reflect the value of such security purchased in determining its net
asset value. At the time of delivery of the securities, their value may be more
or less than the purchase or sale price.

Futures Contracts: The Fund may enter into futures contracts
based on municipal bond indices ("Futures Contracts"). Each such Futures
Contract provides for a cash payment, equal to the amount, if any, by which the
value of the index at maturity is above or below the value of the index at the
time the contract was entered into, times a fixed index "multiplier". The index
underlying such a Futures Contract is generally a broad based index of
securities designed to reflect movements in the relevant market as a whole. The
index assigns weighted values to the securities included in the index, and its
composition is changed periodically. Futures Contracts have been designed by
exchanges which have been designated as "contract markets" by the Commodity
Futures Trading Commission (the "CFTC"), and must be executed through a futures
commission merchant, or brokerage firm, which is a member of the relevant
contract market. The exchanges guarantee performance of the contracts as between
the clearing members of the exchange.

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At the same time a Futures Contract is purchased or sold, the
Fund must allocate cash or securities as a deposit payment ("initial deposit").
The initial deposit varies but may be as low as 5% or less of the value of the
contract. Daily thereafter, the Futures Contract is valued and the payment of
"variation margin" may be required since each day the Fund would provide or
receive cash that reflects any decline or increase in the contract's value.

Although Futures Contracts call for the making or acceptance
of a cash settlement at a specified future time, the contractual obligation is
usually fulfilled before such date by buying or selling, as the case may be, on
a commodities exchange, an identical Futures Contract calling for settlement in
the same month, subject to the availability of a liquid secondary market. The
Fund incurs brokerage fees when it purchases and sells Futures Contracts. The
purpose of the acquisition or sale of a Futures Contract, in the case of a
portfolio such as that of the Fund which holds or intends to acquire long-term
fixed income securities, is to attempt to protect the Fund from fluctuations in
interest rates without actually buying or selling long-term fixed income
securities. For example, if the Fund owns long-term bonds and interest rates
were expected to increase, the Fund might sell index Futures Contracts. Such a
sale would have much the same effect as selling an equivalent value of the
long-term bonds owned by the Fund. If interest rates did increase, the value of
the debt securities in the portfolio would decline but the value of the Futures
Contracts would increase at approximately the same rate, thereby keeping the net
asset value of the Fund from declining as much as it otherwise would have. The
Fund could accomplish similar results by selling bonds with long maturities and
investing in bonds with short maturities when interest rates are expected to
increase. However, the use of Futures Contracts as an investment technique
allows the Fund to maintain a hedging position without having to sell its
portfolio securities.

Similarly, when it is expected that interest rates may
decline, Futures Contracts may be purchased to attempt to hedge against
anticipated purchases of long-term bonds at higher prices. Since the
fluctuations in the value of Futures Contracts should be similar to that of
long-term bonds, the Fund could take advantage of the anticipated rise in the
value of long-term bonds without actually buying them until the market had
stabilized. At that time, the Futures Contracts could be liquidated and the Fund
could then buy long-term bonds on the cash market. To the extent the Fund enters
into Futures Contracts for this purpose, the assets in the segregated asset
account maintained to cover the Fund's obligations with respect to such Futures
Contracts will consist of liquid assets from its portfolio in an amount equal to
the difference between the fluctuating market value of such Futures Contracts
and the aggregate value of the initial and variation margin payments made by the
Fund with respect to such Futures Contracts.

Although the Fund will invest in Futures Contracts for hedging
purposes, Futures Contracts entail risks. Although the Fund believes that use of
such contracts will benefit the Fund, if the investment judgment of the Fund's
investment advisor, (the "Advisor") about the general direction of interest
rates is incorrect, the Fund's overall performance would be poorer than if it
had not entered into any such contract. For example, if the Fund has hedged
against the possibility of an increase in interest rates which would adversely
affect the price of bonds held in its portfolio and interest rates decrease
instead, the Fund will lose part or all of the benefit of the increased value of
its bonds which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Fund has insufficient
cash, it may have to sell bonds from its portfolio to meet daily variation
margin requirements. Such sales of bonds may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it may be disadvantageous to do so.

Various additional risks exist with respect to the trading of
futures. For example, the Fund's ability effectively to hedge all or a portion
of its portfolio through transactions in such instruments will depend on the
degree to which price movements in the underlying index correlate

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with price movements in the relevant portion of the Fund's portfolio. The
trading of futures entails the additional risk of imperfect correlation between
movements in the futures price and the price of the underlying index. The Fund's
ability to engage in futures strategies will also depend on the availability of
liquid markets in such instruments. Transactions in these instruments are also
subject to the risk of brokerage firm or clearing house insolvencies. The
liquidity of a secondary market in a Futures Contract may be adversely affected
by "daily price fluctuation limits", established by exchanges, which limit the
amount of fluctuation in the price of a contract during a single trading day and
prohibit trading beyond such limit. In addition, the exchanges on which futures
are traded may impose limitations governing the maximum number of positions on
the same side of the market and involving the same underlying instrument which
may be held by a single investor, whether acting alone or in concert with others
(regardless of whether such contracts are held on the same or different
exchanges or held or written in one or more accounts or through one or more
brokers). In addition, the ordinary spreads between prices in the cash and
futures markets, due to differences in the natures of those markets, are subject
to distortions. First, all participants in the futures market are subject to
initial deposit and variation margin requirements. Rather than meeting
additional variation margin requirements, investors may close out Futures
Contracts through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, from the point of
view of speculators, the margin deposit requirements in the futures market are
less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may cause temporary
price distortions. Due to the possibility of distortion, a correct forecast of
general interest rate trends by the Advisor may still not result in a successful
transaction.

Repurchase Agreements: The Fund may agree to purchase
securities issued by the United States Treasury ("U.S. Treasury Securities")
from financial institutions, such as banks and broker-dealers, subject to the
seller's agreement to repurchase the securities at an established time and
price. Such repurchase agreements will be fully collateralized and the Fund will
enter into such agreements only with banks and broker-dealers which are judged
creditworthy by the Fund's Board of Directors under criteria established with
the assistance of the Advisor. The collateral for these repurchase agreements
will be held by the Fund's custodian or by a duly appointed sub-custodian. The
list of approved banks and broker-dealers will be monitored regularly by the
Advisor and reviewed at least quarterly by the Fund's Board of Directors. The
seller under a repurchase agreement may be required to maintain the value of the
securities subject to the repurchase agreement at not less than the repurchase
price. Default by the seller would, however, expose the Fund to possible loss
because of adverse market action or delay in connection with the disposition of
the underlying obligations. In addition, if bankruptcy proceedings are commenced
with respect to the seller of the security, the Fund may be delayed or limited
in its ability to sell the collateral.

Investment Restrictions

The Fund's investment program is subject to a number of
investment restrictions which reflect self-imposed standards as well as federal
and state regulatory limitations. The investment restrictions recited below are
in addition to those described in the Fund's Prospectus, and are matters of
fundamental policy and may not be changed without the affirmative vote of a
majority of the outstanding Shares. Accordingly, the Fund will not:

1. Invest in real estate or mortgages on real estate, provided
that the Fund may purchase securities secured or otherwise supported by
interests in real estate;

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2. Purchase or sell commodities or commodities contracts,
provided that for purposes of this restriction financial futures contracts are
not considered commodities or commodities contracts.

3. Act as an underwriter of securities within the meaning of
the U.S. federal securities laws except insofar as it might be deemed to be an
underwriter upon disposition of certain portfolio securities acquired within the
limitation on purchases of restricted securities;

4. Issue senior securities, provided that investments in
financial futures contracts and when-issued securities shall not be deemed to
involve issuance of a senior security;

5. Make loans, except that the Fund may purchase or hold debt
instruments in accordance with its investment objectives and policies;

6. Effect short sales of securities;

7. Purchase securities on margin except that the Fund may
obtain such short-term credits as may be necessary for the clearance of
transactions;

8. Purchase participations or other direct interests in oil,
gas or other mineral exploration or development programs or leases; or

9. Invest more than 10% of the value of its net assets in
illiquid securities, including repurchase agreements with remaining maturities
in excess of seven days.

The following investment restriction may be changed by a vote
of a majority of the Board of Directors. The Fund will not:

1. Invest in shares of any other investment company registered
under the Investment Company Act, except as permitted by federal law.

3. VALUATION OF SHARES AND REDEMPTION

Valuation of Shares

The net asset value per Share is determined daily as of the
close of the New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern
Time) each day on which the New York Stock Exchange is open for business (a
"Business Day"). The New York Stock Exchange is open for business on all
weekdays except for the following holidays: New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.

Net asset value per share of a class is calculated by valuing
its share of the Fund's assets, deducting all liabilities attributable to that
class, and dividing the resulting amount by the number of then outstanding
shares of the class. For this purpose, portfolio securities will be given their
market value where feasible. Debt securities (other than short-term
obligations), including listed issues, are valued on the basis of valuations
furnished by a pricing service which utilizes both dealer-supplied valuations
and electronic data processing techniques which take into account appropriate
factors such as institution-size trading in similar groups of securities, yield,
quality, coupon rate, maturity, type of issue, trading characteristics and other
market data, without exclusive reliance upon exchange or over-the-counter
prices, because such valuations are believed to reflect more accurately the fair
value of such securities. Use of the pricing service has been approved by the
Board of Directors. Short-term obligations (i.e., those with maturities of
60 days or

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less) are valued at amortized cost, which constitutes fair value as
determined by the Board of Directors. Futures Contracts will normally be valued
at the settlement price on the exchange on which they are primarily traded.
Portfolio securities for which there are no such valuations are valued at fair
value as determined in good faith by or at the direction of the Board of
Directors.

Redemption

Under normal circumstances, the Fund will redeem Shares by
check as described in the Prospectus. However, if the Board of Directors
determines that it would be in the best interests of the remaining shareholders
to make payment of the redemption price in whole or in part by a distribution in
kind of securities from the portfolio of the Fund in lieu of cash, in conformity
with applicable rules of the SEC, the Fund will make such distributions in kind.
If Shares are redeemed in kind, the redeeming shareholder will incur brokerage
costs in later converting the assets into cash. The method of valuing portfolio
securities is described under "Valuation of Shares" and such valuation will be
made as of the same time the redemption price is determined. The Fund has
elected to be governed by Rule 18f-1 under the Investment Company Act pursuant
to which the Fund is obligated to redeem Shares solely in cash up to the lesser
of $250,000 or 1% of the net asset value of the Fund during any 90-day period
for any one shareholder.

The Fund may suspend the right of redemption or postpone the
date of payment during any period when (a) trading on the New York Stock
Exchange is restricted by applicable rules and regulations of the SEC; (b) the
New York Stock Exchange is closed for other than customary weekend and holiday
closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC so that valuation of the net assets of
the Fund is not reasonably practicable.

4. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS

The following is only a summary of certain additional federal
tax considerations generally affecting the Fund and its shareholders that are
not described in the Fund's Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussion here and in the Fund's Prospectus is not intended as a substitute for
careful tax planning.

The following discussion of federal income tax consequences is
based on the Internal Revenue Code of 1986, as amended (the "Code") and the
regulations issued thereunder as in effect on the date of this Statement of
Additional Information. New legislation, as well as administrative changes or
court decisions, may significantly change the conclusions expressed herein, and
may have a retroactive effect with respect to the transactions contemplated
herein.

Qualification as a Regulated Investment Company

The Fund intends to be taxed as a regulated investment company
(a "RIC") under Subchapter M of the Code. In order to qualify as a RIC for any
taxable year, the Fund must (1) derive at least 90% of its gross income from
dividends, interest, gains from the sale or other disposition of stocks or
securities, and other income (including but not limited to gains from options,
futures, or forward contracts) derived with respect to its business in investing
in such stocks or securities (the "Income Requirement"), and (2) derive less
than 30% of its gross income from gains on the sale or other disposition of
stocks or securities held for less than three months ("Short-Short Gain Test").

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In addition, at the close of each quarter of the Fund's
taxable year, at least 50% of the value of its assets must consist of cash and
cash items, U.S. government securities, securities of other RICs, and securities
of other issuers (as to which the Fund has not invested more than 5% of the
value of its total assets in securities of any one issuer and as to which the
Fund does not hold more than 10% of the outstanding voting securities of any one
issuer). In addition, at the close of each quarter of the Fund's taxable year,
no more than 25% of the value of its total assets may be invested in the
securities (other than U.S. government securities and securities of other RICs),
of any one issuer or of two or more issuers which the Fund controls and which
are engaged in the same or similar trades or businesses or related trades or
businesses (the "Asset Diversification Test"). The Fund will not lose its status
as a RIC if it fails to meet the Asset Diversification Test solely as a result
of a fluctuation in value of portfolio assets not attributable to a purchase.

Under Subchapter M, the Fund is exempt from federal income tax
on its net investment income and net capital gains (the excess of net long-term
capital gains over net short-term capital losses) which it distributes to
shareholders, provided that it distributes each year at least 90% of its
investment company taxable income (net investment income and the excess of net
short-term capital gains over net long-term capital losses) and 90% of its net
tax-exempt interest income (the "Distribution Requirement"), and complies with
certain other requirements of the Code. The Distribution Requirement for any
year may be waived if the Fund establishes to the satisfaction of the Internal
Revenue Service that it is unable to satisfy the Distribution Requirement by
reason of distributions previously made for the purpose of avoiding liability
for federal excise tax (discussed below).

The Fund will be subject to federal income taxation to the
extent any such income or gains are not distributed.

Fund Distributions

Distributions of investment company taxable income will
generally be taxable to shareholders as ordinary income, regardless of whether
such distributions are paid in cash or are reinvested in Shares. Fund
distributions will not be eligible for the corporate dividends received
deduction.

As noted in the Prospectus, exempt-interest dividends are
excludable from a shareholder's gross income for regular federal income tax
purposes. Exempt-interest dividends may nevertheless be subject to the
alternative minimum tax imposed by Section 55 of the Code (the "Alternative
Minimum Tax") or the environmental tax imposed by Section 59A of the Code (the
"Environmental Tax"). The Alternative Minimum Tax is imposed at a rate of up to
28% in the case of non-corporate taxpayers and at the rate of 20% in the case of
corporate taxpayers, to the extent it exceeds the taxpayer's regular tax
liability. The Environmental Tax is imposed at the rate of 0.12% and applies
only to corporate taxpayers. The Alternative Minimum Tax and the Environmental
Tax may be affected by the receipt of exempt-interest dividends in two
circumstances. First, exempt-interest dividends derived from certain "private
activity bonds" issued after August 7, 1986, will generally be an item of tax
preference and therefore potentially subject to the Alternative Minimum Tax and
the Environmental Tax. The Fund intends, when possible, to avoid investing in
private activity bonds. Second, in the case of exempt-interest dividends
received by corporate shareholders, all exempt-interest dividends, regardless of
when the bonds from which they are derived were issued or whether they are
derived from private activity bonds, will be included in the corporation's
"adjusted current earnings," as defined in Section 56(g) of the Code, in
calculating the corporation's alternative minimum taxable income for purposes of
determining the Alternative Minimum Tax and the Environmental Tax.

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The percentage of income that constitutes "exempt-interest
dividends" will be determined for each year for the Fund and will be applied
uniformly to all dividends declared with respect to the Fund during that year.
This percentage may differ from the actual percentage for any particular day.

The Fund may either retain or distribute to shareholders its
excess of net long-term capital gains over net short-term capital losses ("net
capital gains"). If such gains are distributed as a capital gains distribution,
they are taxable to shareholders as long-term capital gains, regardless of the
length of time the shareholder has held Fund Shares. Conversely, if the Fund
elects to retain its net capital gains, it will be taxed thereon at the
applicable corporate tax rate. In this event, it is expected that the Fund also
will elect to have shareholders treated as having received a distribution of
such gains, with the result that they will be required to report such gains on
their returns as long-term capital gains, will receive a refundable tax credit
for their allocable share of federal income tax paid by the Fund on the gains,
and will increase the tax basis for their Shares by an amount equal to 65% of
the deemed distribution.

Generally, gain or loss on the sale, exchange or redemption of
a Share will be capital gain or loss which will be long-term if the Share has
been held for more than one year and otherwise will be short-term. However, if a
shareholder recognizes a loss on the sale, exchange or redemption of a Share
held for six months or less, such loss will be treated as a long-term capital
loss to the extent that any capital gains distributions have been paid with
respect to such Share (or any undistributed net capital gains of the Fund with
respect to such Share is included in determining the shareholder's long-term
capital gains). Similarly, any loss recognized by a shareholder with respect to
Shares held for six months or less will be disallowed to the extent of any
exempt-interest dividends received by the shareholder with respect to such
Shares. In addition, any loss recognized on a sale or other disposition of
Shares will be disallowed to the extent an investor repurchases (or enters into
a contract or option to repurchase) Shares within a period of 61 days (beginning
30 days before and ending 30 days after the disposition of the Shares).
This loss disallowance rule will apply to Shares received through the
reinvestment of dividends during the 61-day period.

Investors should be careful to consider the tax implications
of purchasing Shares just prior to the ex-dividend date of any ordinary income
dividend or capital gains distribution. Those purchasing just prior to an
ordinary income dividend or capital gains distribution will be taxable on the
entire amount of the dividend or distribution received, even though the net
asset value per Share on the date of such purchase may have reflected the amount
of such forthcoming dividend or distribution.

If for any taxable year the Fund does not qualify as a RIC,
all of its taxable income will be subject to tax at regular corporate rates
without any deduction for distributions to shareholders, and such distributions
will be taxable to shareholders as ordinary dividends to the extent of the
Fund's current and accumulated earnings and profits. In this event, such
distributions will generally be eligible for the dividends received deduction in
the case of corporate shareholders.

The Fund generally will be required in certain cases to
withhold and remit to the United States Treasury 31% of distributions payable to
any shareholder (1) who has provided either an incorrect tax identification
number or no number at all, (2) who is subject to backup withholding by the
Internal Revenue Service for failure to report the receipt of interest or
dividend income property, or (3) who has failed to certify to the Fund that such
shareholder is not subject to backup withholding.

The Fund will provide a statement annually to shareholders as
to the federal tax status of distributions paid (or deemed to be paid) by the
Fund during the year.

- 9 -

<PAGE>

Federal Excise Tax; Miscellaneous Considerations

The Code imposes a nondeductible 4% federal excise tax on RICs
that do not distribute in each calendar year an amount equal to 98% of their
ordinary income for the calendar year plus 98% of their capital gains net income
for the one-year period ending on October 31 of such calendar year. The excise
tax is imposed on the undistributed part of this required distribution. In
addition, the balance of such income must be distributed during the next
calendar year to avoid liability for the excise tax in that year. For the
foregoing purposes, a company is treated as having distributed any amount on
which it is subject to income tax for any taxable year ending in such calendar
year. For this purpose, in determining its capital gain net income for the
one-year period ending on October 31 of such calendar year, the Fund must reduce
its capital gain net income by the amount of any net ordinary loss for the
calendar year (but not below the net capital gains for the one-year period
ending on October 31). Because the Fund intends to distribute all of its income
currently (or to retain at most its "net capital gains" and pay tax thereon),
the Fund does not anticipate incurring any liability for this excise tax.
However, investors should note that the Fund may in certain circumstances be
required to liquidate portfolio investments in order to make sufficient
distributions to avoid excise tax liability and, in addition, that the
liquidation of such investments in such circumstances may affect the ability of
the Fund to satisfy the Short-Short Gain Test.

Interest on indebtedness incurred or continued by shareholders
to purchase or carry Shares of the Fund will not be deductible for federal
income tax purposes. The deduction otherwise allowable to property and casualty
insurance companies for "losses incurred" will be reduced by an amount equal to
a portion of exempt-interest dividends received or accrued during any taxable
year. Foreign corporations engaged in a trade or business in the United States
will be subject to a "branch profits tax" on their "dividend equivalent amount"
for the taxable year, which will include exempt-interest dividends. Certain
Subchapter S corporations may also be subject to taxes on their "passive
investment income," which could include exempt-interest dividends. Up to 85% of
the Social Security benefits or railroad retirement benefits received by an
individual during any taxable year will be included in the gross income of such
individual if the individual's "modified adjusted gross income" (which includes
exempt-interest dividends) plus one-half of the Social Security benefits or
railroad retirement benefits received by such individual during that taxable
year exceeds the base amount described in Section 86 of the Code.

Entities or persons who are "substantial users" (or persons
related to "substantial users") of facilities financed by industrial development
bonds or private activity bonds should consult their tax advisors before
purchasing Shares. "Substantial user" is defined generally as including a
"non-exempt person" who regularly uses in trade or business a part of such a
facility.

Issuers of bonds purchased by the Fund (or the beneficiary of
such bonds) may have made certain representations or covenants in connection
with the issuance of such bonds to satisfy certain requirements of the Code that
must be satisfied subsequent to the issuance of such bonds. Investors should be
aware that exempt-interest dividends derived from such bonds may become subject
to federal income taxation retroactively to the date thereof if such
representations are determined to have been inaccurate or if the issuer of such
bonds (or the beneficiary of such bonds) fails to comply with such covenants.

Rules of state and local taxation of distributions from
regulated investment companies often differ from the rules for federal income
taxation described above. Shareholders of the Fund should consult with their tax
advisors regarding the application of the rules set forth above to their
particular circumstances and also regarding the application of state and local
tax laws to an investment in the Fund.

- 10 -
<PAGE>

5. MANAGEMENT OF THE FUND

Directors and Officers
The Directors and executive officers of the Fund, their
respective dates of birth and their principal occupations during the last five
years are set forth below. Unless otherwise indicated, the address of each
Director and executive officer is 717 Fifth Avenue, New York, New York 10022.

*EDWARD S. HYMAN, Chairman and Director (4/8/45)
Chairman, International Strategy and Investment Inc.
(registered investment advisor), Chairman, ISI Inc.
(investments) and Chairman and President, ISI Group Inc.
(registered investment advisor and registered broker-dealer).

*R. ALAN MEDAUGH, Director and President (8/20/43)
President, International Strategy and Investment Inc.
(registered investment advisor).

*RICHARD T. HALE, Vice Chairman and Director (7/17/45)
Alex. Brown & Sons Incorporated, One South Street, Baltimore,
MD 21202. Managing Director, Alex. Brown & Sons Incorporated;
Director and President, Investment Company Capital Corp.
(registered investment advisor); Chartered Financial Analyst.

JAMES J. CUNNANE, Director (3/11/38)
CBC Capital, 264 Carlyle Lake Drive, St. Louis, Missouri
63141. Managing Director, CBC Capital (merchant banking),
1993-Present; Formerly, Senior Vice President and Chief
Financial Officer, General Dynamics Corporation (defense),
1989-1993 and Director, The Arch Fund (registered investment
company).

JOHN F. KROEGER, Director (8/11/24)
37 Pippins Way, Morristown, New Jersey 07960.
Director/Trustee, AIM Funds (registered investment companies);
Formerly, Consultant, Wendell & Stockel Associates, Inc.
(consulting firm) and General Manager, Shell Oil Company.

LOUIS E. LEVY, Director (11/16/32)
26 Farmstead Road, Short Hills, New Jersey 07078. Director,
Kimberly-Clark Corporation (personal consumer products) and
Household International (finance and banking); Chairman of the
Quality Control Inquiry Committee, American Institute of
Certified Public Accountants; Formerly, Trustee, Merrill Lynch
Funds for Institutions, 1991-1993; Adjunct Professor, Columbia
University-Graduate School of Business, 1991-1992; Partner,
KPMG Peat Marwick, retired 1990.

EUGENE J. MCDONALD, Director (7/14/32)
Duke Management Company, Erwin Square, Suite 1000, 2200 West
Main Street, Durham, North Carolina 27705. President, Duke
Management Company (investments); Executive Vice President,
Duke University (education, research and healthcare);
Director, Central Carolina Bank & Trust (banking), Key Funds
(registered investment companies), and AMBAC Treasurers Trust
(registered investment company).

- 11 -

<PAGE>

EDWARD J. VEILLEUX, Vice President (8/26/43)
Alex. Brown & Sons Incorporated, One South Street, Baltimore,
MD 21202. Principal, Alex. Brown & Sons Incorporated; Vice
President, Armata Financial Corp. (registered broker-dealer)
and Executive Vice President, Investment Company Capital Corp.
(registered investment advisor).

NANCY LAZAR, Vice President (8/1/57)
Executive Vice President and Secretary, International Strategy
and Investment Inc. (registered investment advisor).

SCOTT J. LIOTTA, Vice President (3/18/65)
Alex. Brown & Sons Incorporated, One South Street, Baltimore,
MD 21202. Manager, Fund Administration, Alex. Brown & Sons
Incorporated, July 1996-Present; Formerly, Manager and
Foreign Markets Specialist, Putnam Investments Inc.
(registered investment companies), April 1994-July 1996; and
Supervisor, Brown Brothers Harriman & Co. (domestic and global
custody), August 1991-April 1994.

CARRIE L. BUTLER, Vice President (5/1/67)
Assistant Vice President, International Strategy and
Investment Inc. (registered investment advisor).

JOSEPH A. FINELLI, Treasurer (1/24/57)
Alex. Brown & Sons Incorporated, One South Street, Baltimore,
MD 21202. Vice President, Alex. Brown & Sons Incorporated and
Vice President, Investment Company Capital Corp. (registered
investment advisor), September 1995-Present; Formerly, Vice
President and Treasurer, The Delaware Group of Funds
(registered investment companies) and Vice President, Delaware
Management Company Inc. (investments), 1980-August 1995.

EDWARD J. STOKEN, Secretary (8/7/47)
Alex. Brown & Sons Incorporated, One South Street, Baltimore,
MD 21202. Compliance Officer, Alex. Brown & Sons Incorporated,
April 1995-Present; Formerly, Legal Advisor, Federated
Investors (registered investment advisor), 1991-1995.

LAURIE D. COLLIDGE, Assistant Secretary (1/1/66)
Alex. Brown & Sons Incorporated, One South Street, Baltimore,
MD 21202. Asset Management Department, Alex. Brown & Sons
Incorporated, 1991 to Present.

- ---------------------------
* A Director who is an "interested person" as defined in the Investment
Company Act.

Directors and officers of the Fund are also directors or
officers of some or all of the other investment companies advised, distributed,
administered or managed by the Distributors, or by any of their respective
affiliates. There are currently twelve funds in the Flag Investors/ISI Funds and
Alex. Brown Cash Reserve Fund, Inc. fund complex (the "Fund Complex"). Mr. Hyman
serves as a Chairman of three funds in the Fund Complex. Mr. Medaugh serves as
Director and President of one fund and as President of two other funds in the
Fund Complex. Mr. Hale serves as President and Director of one fund, as Chairman
of three funds and as a director of each of the other funds in the Fund Complex.
Messrs. Cunnane, Kroeger, Levy and McDonald serve as Directors of each of the
funds in the Fund Complex. Ms. Lazar and Ms.

- 12 -
<PAGE>

Butler serve as Vice Presidents of three funds in the Fund Complex. Mr. Veilleux
serves as Executive Vice President of one fund and as Vice President of each of
the other funds in the Fund Complex. Mr. Liotta serves as Vice President, Mr.
Stoken serves as Secretary, Mr. Finelli serves as Treasurer and Ms. Collidge
serves as Assistant Secretary, respectively, of each of the funds in the Fund
Complex.

Officers of the Fund receive no direct remuneration in such
capacity from the Fund. Officers and Directors of the Fund who are officers or
directors of the Distributors, the Advisor or the Fund's administrator may be
considered to have received remuneration indirectly. As compensation from the
Fund, each Director who is not an "interested person" of the Fund (as defined in
the Investment Company Act) (a "Non-Interested Director") receives an aggregate
annual fee (plus reimbursement for reasonable out-of-pocket expenses incurred in
connection with his attendance at Board and committee meetings) from all Flag
Investors/ISI Funds and Alex. Brown Cash Reserve Fund, Inc. for which he serves.
In addition, the Chairman of the Fund Complex's Audit Committee receives an
aggregate annual fee from the Fund Complex. Payment of such fees and expenses is
allocated among all such funds described above in direct proportion to their
relative net assets. For the fiscal year ended October 31, 1996, Non-Interested
Directors' fees attributable to the assets of the Fund totalled $10,808. The
following table shows aggregate compensation payable to each of the Fund's
Directors by the Fund and the Fund Complex, respectively, and pension or
retirement benefits accrued as part of Fund expenses in the fiscal year ended
October 31, 1996.

COMPENSATION TABLE

- -------------------------------------------------------------------------------------------------------------------
Name of Person, Aggregate Compensation Pension or Total Compensation From the
Position From the Fund for the Retirement Benefits Fund and Fund Complex Payable
Fiscal Year Ended Accrued as Part of to Directors for the Fiscal Year
October 31, 1996 Fund Expenses Ended October 31, 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
*Edward S. Hyman $0 $0 $0
Chairman

*R. Alan Medaugh $0 $0 $0
Director & President

*Richard T. Hale $0 $0 $0
Vice Chairman

*W. James Price*** $0 $0 $0
Vice Chairman

James J. Cunnane $956(1) + $39,000 for service on
Director 12 Boards in Fund Complex

N. Bruce Hannay** $348(1) + $13,071 for service on
Director 12 Boards in Fund Complex

John F. Kroeger $1,202(1) + $49,000 for service on
Director 12 Boards in Fund Complex

Louis E. Levy $956(1) + $39,000 for service on
Director 12 Boards in Fund Complex

Eugene J. McDonald $956(1) + $39,000 for service on
Director 12 Boards in Fund Complex
</TABLE>

- 13 -
<PAGE>

Harry Woolf*** $956(1) + $39,000 for service on
Director 12 Boards in Fund Complex

</TABLE>

* A Director who is an "interested person" as defined in the Investment
Company Act.
** Retired, effective January 31, 1996 and is now deceased.
*** Retired, effective December 31, 1996.
(1) Of the amounts payable to Messrs. Cunnane, Hannay, Kroeger, Levy, McDonald
and Woolf, $956, $0, $0, $0, $956 and $956, respectively, was deferred
pursuant to a deferred compensation plan.
+ The Fund Complex has adopted a retirement plan for eligible Directors, as
described below. The actuarially computed pension expense allocated to the
Fund for the period from January 1, 1996 through October 31, 1996 was
approximately $4,543.

The Fund Complex has adopted a retirement plan (the
"Retirement Plan") for Directors who are not employees of the Fund, the Fund's
Advisor or their respective affiliates (the "Participants"). After completion of
six years of service, each Participant will be entitled to receive an annual
retirement benefit equal to a percentage of the fee earned by him in his last
year of service. Upon retirement, each Participant will receive annually 10% of
such fee for each year that he served after completion of the first five years,
up to a maximum annual benefit of 50% of the fee earned by him in his last year
of service. The fee will be paid quarterly, for life, by each Fund for which he
serves. The Retirement Plan is unfunded and unvested. Mr. Kroeger has qualified
but has not received benefits. The Fund has two Participants, a Director who
retired effective December 31, 1994 and a Director who retired effective
December 31, 1996, each of whom has qualified for the Retirement Plan by serving
thirteen years and fourteen years, respectively, as Directors in the Fund
Complex and who will be paid a quarterly fee of $4,875 by the Fund Complex for
the rest of his life. Another Participant, who retired on January 31, 1996 and
died on June 2, 1996, was paid fees of $8,090 by the Fund Complex under the
Retirement Plan for the fiscal year ended October 31, 1996. Such fee is
allocated to each fund in the Fund Complex based upon the relative net assets of
such fund to the Fund Complex.

Set forth in the table below are the estimated annual benefits
payable to a Participant upon retirement assuming various years of service and
payment of a percentage of the fee earned by such Participant in his last year
of service, as described above. The approximate credited years of service at
December 31, 1996 are as follows: for Mr. Cunnane, 2 years; for Mr. Kroeger, 14
years; for Mr. Levy, 2 years; and for Mr. McDonald, 4 years.
<TABLE>
<CAPTION>

Years of Service Estimated Annual Benefits Payable By Fund Complex Upon Retirement
- ---------------- -----------------------------------------------------------------
Chairman of Audit Committee Other Participants
--------------------------- ------------------
<C> <C> <C>
6 years $4,900 $3,900

7 years $9,800 $7,800

8 years $14,700 $11,700

9 years $19,600 $15,600

10 years or more $24,500 $19,500

</TABLE>

- 14 -

<PAGE>

Any Director who receives fees from the Fund is permitted to
defer a minimum of 50%, or up to all, of his annual compensation pursuant to a
Deferred Compensation Plan.

Messrs. Cunnane, Kroeger, Levy and McDonald have each executed
a Deferred Compensation Agreement. Currently, the deferring Directors may select
various Flag Investors and Alex. Brown Cash Reserve Funds in which all or part
of their deferral account shall be deemed to be invested. Distributions from the
deferring Directors deferral accounts will be paid in cash, in generally equal
quarterly installments over a period of ten years.

Code of Ethics

The Board of Directors of the Fund has adopted a Code of
Ethics pursuant to Rule 17j-1 under the Investment Company Act (the "Code of
Ethics"). The Code of Ethics applies to the personal investing activities of
directors and officers of the Fund, as well as to designated officers, directors
and employees of the Advisor and the Distributors. As described below, the Code
of Ethics imposes significant restrictions on the Advisor's investment
personnel, including the portfolio managers and employees who execute or help
execute a portfolio manager's decisions or who obtain contemporaneous
information regarding the purchase or sale of a security by the Fund.

The Code of Ethics requires that covered employees of the Advisor,
certain directors or officers of the Distributors, and all Fund Directors who
are "interested persons" preclear any personal securities investments (with
certain exceptions, such as non-volitional purchases or purchases which are part
of an automatic dividend reinvestment plan). The preclearance requirement and
associated procedures are designed to identify any substantive prohibition or
limitation applicable to the proposed investment. The substantive restrictions
applicable to investment personnel include a ban on acquiring any securities in
an initial public offering, a prohibition from profiting on short-term trading
in securities and special preclearance of the acquisition of securities in
private placements. Furthermore, the Code of Ethics provides for trading
"blackout periods" that prohibit trading by investment personnel and certain
other employees within periods of trading by the Fund in the same security.
Officers, directors and employees of the Advisor and the Distributors may comply
with codes of ethics instituted by those entities so long as they contain
similar requirements and restrictions.

6. INVESTMENT ADVISORY AND OTHER SERVICES

International Strategy and Investment Inc. ("ISI" or the
"Advisor") serves as the Fund's investment advisor pursuant to an investment
advisory agreement dated as of April 1, 1991 (the "Investment Advisory
Agreement"). ISI is a registered investment advisor that was formed in January,
1991. ISI employs Messrs. Edward S. Hyman, the Fund's Chairman and R. Alan
Medaugh, the Fund's President. ISI is also the investment advisor to Total
Return U.S. Treasury Fund, Inc. and North American Government Bond Fund, Inc.

Under the Investment Advisory Agreement, the Advisor obtains
and evaluates economic, statistical and financial information to formulate and
implement investment policies for the Fund. Any investment program undertaken by
the Advisor will at all times be subject to policies and control of the Fund's
Board of Directors. The Advisor will provide the Fund with office space for
managing its affairs, with the services of required executive personnel and with
certain clerical and bookkeeping services and facilities. These services are
provided by the Advisor without reimbursement by the Fund for any costs. The
Advisor shall not be liable to the Fund or its shareholders for any act or
omission by the Advisor or any losses sustained by the Fund or its shareholders
except in the case of willful misfeasance, bad faith, gross negligence, or
reckless

- 15 -

<PAGE>

disregard of duty. As compensation for its services, the Advisor is
entitled to receive an annual fee from the Fund, payable monthly, at the annual
rate of .40% of the Fund's average daily net assets. The Advisor and the
Administrator have voluntarily agreed to reduce proportionately their respective
annual fees, if necessary, so that the Fund's annual expenses do not exceed .90%
of the average daily net assets of either the Flag Investors Shares or the
ISI Shares Classes. The services of the Advisor to the Fund are not exclusive
and the Advisor is free to render similar services to others.

The Advisor is responsible for decisions to buy and sell
securities for the Fund, for broker-dealer selection, and for negotiation of
commission rates under standards established and periodically reviewed by the
Board of Directors. Because purchases and sales of securities by the Fund will
usually be principal transactions, the Fund will incur little, if any, brokerage
commission expense. The Advisor's primary consideration in effecting securities
transactions will be to obtain best price and execution. To the extent that the
execution and prices of more than one dealer are comparable, the Advisor may, in
its discretion, effect transactions with dealers that furnish statistical
research or other information or services that may benefit the Fund's investment
program.

The Investment Advisory Agreement will continue in effect from
year to year after its initial two year term if such continuance is specifically
approved at least annually by the Fund's Board of Directors, including a
majority of the Non-Interested Directors who have no direct or indirect
financial interest in such agreements, by votes cast in person at a meeting
called for such purpose, and by a vote of a majority of the outstanding Shares
(as defined under "Capital Stock"). The Investment Advisory Agreement was most
recently approved by the Board of Directors in the foregoing manner on October
1, 1996. The Fund or the Advisor may terminate the Investment Advisory Agreement
on 60 days' written notice without penalty. The Investment Advisory Agreement
will terminate automatically in the event of assignment (as defined in the
Investment Company Act). For the fiscal years ended October 31, 1996, October
31, 1995 and October 31, 1994, ISI received fees from the Fund of $516,180,
$531,628 and $563,840, respectively and from such amounts waived fees of
$192,777, $177,885 and $191,665, respectively.

7. ADMINISTRATION

Investment Company Capital Corp. ("ICC" or the
"Administrator"), One South Street, Baltimore, Maryland 21202 provides
administration services to the Fund including: monitoring the Fund's regulatory
compliance, supervising all aspects of the Fund's service providers, arranging,
but not paying for, the printing and mailing of prospectuses, proxy materials
and shareholder reports, preparing and filing all documents required by the
securities laws of any state in which the Shares are sold, establishing the
Fund's budgets, monitoring the Fund's distribution plan, preparing the Fund's
financial information and shareholder reports, calculating dividend and
distribution payments and arranging for the preparation of state and federal tax
returns.

As compensation for providing administration services to the
Fund, the Administrator is entitled to receive an annual fee, calculated daily
and paid monthly, at the annual rate of .20% of the Fund's average daily net
assets. The Administrator and the Advisor have voluntarily agreed to reduce
proportionately their respective fees, if necessary, so that the annual expenses
for the Flag Investors Shares and the ISI Shares Classes do not exceed .90% of
such classes' respective average daily net assets. For the fiscal year ended
October 31, 1996, October 31, 1995 and for the period from January 1, 1994
through October 31, 1994, ICC received fees of $258,090, $265,814 and $234,666,
respectively, and from such amounts waived fees of $98,140,

- 16 -
<PAGE>

$88,942 and $80,446, respectively. Prior to January 1, 1994, Alex. Brown
provided administration services to the Fund. For the period from November 1,
1993 through December 31, 1993, Alex. Brown received fees (net of fee waivers)
of $31,868.

ICC also serves as the Fund's transfer and dividend disbursing
agent and provides accounting services to the Fund. (See "Custodian, Transfer
Agent and Accounting Services.") ICC is a wholly-owned subsidiary of Alex. Brown
Financial Corp. and an indirect subsidiary of Alex. Brown Incorporated. ICC is
an affiliate of Armata Financial Corp.

8. DISTRIBUTION OF FUND SHARES

The Flag Investors Class A Shares Distribution Agreement
provides that Alex. Brown & Sons Incorporated ("Alex. Brown") has the exclusive
right to distribute the Flag Investors Class A Shares either directly or through
other broker-dealers. The ISI Shares Distribution Agreement provides that Armata
Financial Corp. ("Armata") has the exclusive right to distribute ISI Shares,
either directly or through other broker-dealers. Armata is a broker-dealer that
was formed in 1983 and is an affiliate of Alex. Brown and ICC. (The ISI Shares
Distribution Agreement and the Flag Investors Class A Shares Distribution
Agreement are herein collectively referred to as the "Distribution Agreements").
The Distribution Agreements further provide that the distributors on behalf of
the relevant class, will: solicit and receive orders for the purchase of Shares;
accept or reject such orders on behalf of the Fund in accordance with the Fund's
currently effective Prospectus and transmit such orders as are accepted to the
Fund's transfer agent as promptly as possible; receive requests for redemptions
and transmit such redemption requests to the Fund's transfer agent as promptly
as possible; and respond to inquiries from shareholders concerning the status of
their accounts and the operations of the Fund. Neither Alex. Brown nor Armata
have undertaken to sell any specific number of Shares. The Distribution
Agreements further provide that, in connection with the distribution of Shares,
Alex. Brown and Armata will be responsible for all of their respective
promotional expenses. The services provided by Alex. Brown and Armata to the
Fund are not exclusive, and they are free to provide similar services to others.
Alex. Brown and Armata shall not be liable to the Fund or its shareholders for
any act or omission by them or any losses sustained by the Fund or its
shareholders except in the case of willful misfeasance, bad faith, gross
negligence or reckless disregard of duty.

Alex. Brown and Armata have entered into Sub-Distribution
Agreements with certain broker-dealers ("Participating Dealers") under which the
Participating Dealers have agreed to process investor purchase and redemption
orders and respond to inquiries from shareholders concerning the status of their
accounts and the operations of the Fund.

As compensation for providing distribution services as
described above, Alex. Brown and Armata each receive an annual fee, paid
monthly, equal to .25% of the average daily net assets of the Flag Investors
Class A Shares and the ISI Shares, respectively. Alex. Brown and Armata expect
to allocate most of their annual fees to investment representatives and up to
all of their fees to Participating Dealers who enter into Sub-Distribution
Agreements with Alex. Brown or Armata, respectively.

Pursuant to Rule 12b-1 under the Investment Company Act, which
provides that investment companies may pay distribution expenses, directly or
indirectly, only pursuant to a plan adopted by the investment company's board of
directors and approved by its shareholders, the Fund has adopted a Plan of
Distribution for each of its classes of shares (the "Plans"). Under the Plans,
the Fund pays a fee to Alex. Brown and Armata for distribution and other
shareholder servicing assistance as set forth in the Distribution Agreements,
and Alex. Brown and Armata are authorized to make payments out of the fee to
their investment representatives and to Participating Dealers. The Distribution
Agreements, including the Distribution Plans

- 17 -
<PAGE>

were most recently approved by the Fund's Board of Directors, including a
majority of the Non-Interested Directors on October 1, 1996. The Distribution
Agreements and the Plans encompassed therein will remain in effect from year to
year as specifically approved at least annually by the Fund's Board of Directors
and by the affirmative vote of a majority of the Non-Interested Directors by
votes cast in person at a meeting called for such purpose.

In approving the Plans, the Directors concluded, in the
exercise of reasonable business judgment, that there was a reasonable likelihood
that the Plans would benefit the Fund and its shareholders. The Plans will be
renewed only if the Directors make a similar determination in each subsequent
year. The Plans may not be amended to increase materially the fee to be paid
pursuant to the Distribution Agreement without the approval of the shareholders
of the Fund. The Plans may be terminated at any time and the Distribution
Agreements may be terminated at any time upon 60 days' notice, in either case
without penalty, by the vote of a majority of the Fund's Non-Interested
Directors or by a vote of a majority of the outstanding Shares (as defined under
"Capital Stock"). Any Sub-Distribution Agreement may be terminated in the same
manner at any time. The Distribution Agreements and any Sub-Distribution
Agreement shall automatically terminate in the event of assignment.

During the continuance of the Plans, the Fund's Board of
Directors will be provided for their review, at least quarterly, a written
report concerning the payments made under the Plans to Alex. Brown and Armata
pursuant to the Distribution Agreements and to broker-dealers pursuant to
Sub-Distribution Agreements. Such reports shall be made by the persons
authorized to make such payments. In addition, during the continuance of the
Plans, the selection and nomination of the Fund's Non-Interested Directors shall
be committed to the discretion of the Non-Interested Directors then in office.

In addition, the Fund may enter into Shareholder Servicing
Agreements with certain financial institutions, such as banks, to act as
Shareholder Servicing Agents, pursuant to which Alex. Brown and Armata will
allocate a portion of their respective distribution fees as compensation for
such financial institutions' ongoing shareholder services. Although banking laws
and regulations prohibit banks from distributing shares of open-end investment
companies such as the Fund, according to interpretations from various bank
regulatory authorities, financial institutions are not prohibited from acting in
other capacities for investment companies, such as the Shareholder Servicing
capacities described above. Should future legislative, judicial or
administrative action prohibit or restrict the activities of the Shareholder
Servicing Agents in connection with the Shareholder Servicing Agreements, the
Fund may be required to alter materially or discontinue its arrangements with
the Shareholder Servicing Agents. Such financial institutions may impose
separate fees in connection with these services and investors should review this
Prospectus in conjunction with any such institution's fee schedule.

Under the Plans, amounts allocated to Participating Dealers
and Shareholder Servicing Agents may not exceed amounts payable to Alex. Brown
and Armata under the Plans. Payments under the Plans are made as described above
regardless of Alex. Brown's or Armata's actual cost of providing distribution
services and may be used to pay Alex. Brown's and Armata's overhead expenses. If
the cost of providing distribution services to the Fund in connection with the
sale of the Flag Investors Class A Shares or the ISI Shares is less than .25% of
the respective classes' average daily net assets for any period, the unexpended
portion of the distribution fee may be retained by Alex. Brown and Armata, as
appropriate. The Plans do not provide for any charges to the Fund for excess
amounts expended by Alex. Brown and Armata and, if the Plans are terminated in
accordance with their terms, the obligation of the Fund to make payments to
Alex. Brown and Armata pursuant to the Plans will cease and the Fund will not be
required to make any payments past the date the related Distribution Agreement
terminates.

- 18 -
<PAGE>

As compensation for distributing the ISI Shares for the fiscal
years ended October 31, 1996, October 31, 1995 and October 31, 1994, Armata
received from the Fund 12b-1 fees of $213,366, $212,053 and $217,473,
respectively. As compensation for distributing the Flag Investors Class A Shares
for the fiscal years ended October 31, 1996, October 31, 1995 and October 31,
1994, Alex. Brown received from the Fund 12b-1 fees of $109,247, $120,214 and
$130,687, respectively. In return, Alex. Brown and Armata, as appropriate, paid
the distribution-related expenses of the Fund including one or more of the
following: advertising expenses; printing and mailing of prospectuses to other
than current shareholders; compensation to dealers and sales personnel; and
interest, carrying or other financing charges. For the period from November 9,
1992 through February 28, 1994, Alex. Brown was also distributor for the Flag
Investors Class D Shares (known at such time as the Flag Investors Class B
Shares) pursuant to a Plan of Distribution in effect for such class. For
distribution services for such shares for the period from November 1, 1993
through October 19, 1994, Alex. Brown received from the Fund 12b-1 fees of
$10,173.

For the fiscal years ended October 31, 1996, October 31, 1995
and October 31, 1994, Alex. Brown received sales commissions on the Flag
Investors Class A Shares of $27,710, $63,394 and $128,141, and from such amounts
retained $26,210, $62,002 and $125,181 in each such year, respectively. For the
fiscal years ended October 31, 1996, October 31, 1995 and October 31, 1994,
Armata received sales commissions on the ISI Shares of $92,720, $353,850 and
$184,450 and from such amounts retained $30,319, $18,641 and $28,864 in each
such year, respectively.

Neither Armata nor Alex. Brown received brokerage commissions
from the Fund in the fiscal years ended October 31, 1996, October 31, 1995 or
October 31, 1994.

The Fund has paid all costs associated with its organization
and registration under the Securities Act of 1933 and the Investment Company
Act. Except as described elsewhere, the Fund pays or causes to be paid all
continuing expenses of the Fund, including, without limitation: investment
advisory and distribution fees; the charges and expenses of any registrar, any
custodian or depository appointed by the Fund for the safekeeping of cash,
portfolio securities and other property, and any transfer, dividend or
accounting agent or agents appointed by the Fund; brokers' commissions
chargeable to the Fund in connection with portfolio securities transactions;
all taxes, including securities issuance and transfer taxes, and fees payable by
the Fund to federal, state or other governmental agencies; the costs and
expenses of engraving or printing of certificates representing Shares; all costs
and expenses in connection with the registration and maintenance of registration
of the Fund and its Shares with the SEC and various states and other
jurisdictions (including filing fees, legal fees and disbursements of counsel);
the costs and expenses of printing, including typesetting and distributing
prospectuses and statements of additional information of the Fund and
supplements thereto to the Fund's shareholders; all expenses of shareholders'
and Directors' meetings and of preparing, printing and mailing proxy statements
and reports to shareholders; fees and travel expenses of Directors and Director
members of any advisory board or committee; all expenses incident to the payment
of any dividend, distribution, withdrawal or redemption, whether in Shares or in
cash; charges and expenses of any outside service used for pricing of the
Shares; fees and expenses of legal counsel, including counsel to the
Non-Interested Directors, and of independent public accountants, in connection
with any matter relating to the Fund; a portion of membership dues of industry
associations; interest payable on Fund borrowings; postage; insurance premiums
on property or personnel (including officers and Directors) of the Fund which
inure to its benefit; extraordinary expenses (including, but not limited to,
legal claims and liabilities and litigation costs and any indemnification
related thereto); and all other charges and costs of the Fund's operation unless
otherwise explicitly assumed by

- 19 -
<PAGE>

Alex. Brown, ICC or Armata. Absent fee waivers for the fiscal year ended October
31, 1996, the Fund's Total Operating Expenses were 1.13% of its average daily
net assets.

9. PORTFOLIO TRANSACTIONS

The Advisor is responsible for decisions to buy and sell
securities for the Fund, for broker-dealer selection and for negotiation of
commission rates. The Advisor may direct purchase and sale orders to any
broker-dealer.

Municipal obligations and other debt securities are traded
principally in the over-the-counter market on a net basis through dealers acting
for their own account and not as brokers. The cost of securities purchased from
underwriters includes an underwriter's commission or concession, and the prices
at which securities are purchased and sold from and to dealers include a
dealer's mark-up or mark-down. The Advisor attempts to negotiate with
underwriters to decrease the commission or concession for the benefit of the
Fund. The Advisor normally seeks to deal directly with the primary market makers
unless, in its opinion, better prices are available elsewhere. Securities firms
or futures commission merchants may receive brokerage commissions on
transactions involving Futures Contracts. On occasion, certain money market
instruments may be purchased directly from an issuer without payment of a
commission or concession.

The Advisor's primary consideration in effecting securities
transactions is to obtain best price and execution of orders on an overall
basis. As described below, however, the Advisor may, in its discretion, effect
transactions with broker-dealers that furnish statistical, research or other
information or services which are deemed by the Advisor to be beneficial to the
Fund's investment program. Certain research services furnished by broker-dealers
may be useful to the Advisor with clients other than the Fund.

Similarly, any research services received by the Advisor
through placement of portfolio transactions of other clients may be of value to
the Advisor in fulfilling its obligations to the Fund. No specific value can be
determined for research and statistical services furnished without cost to the
Advisor by a broker-dealer. The Advisor is of the opinion that because the
material must be analyzed and reviewed by its staff, its receipt does not tend
to reduce expenses, but may be beneficial in supplementing the Advisor's
research and analysis. Therefore, it may tend to benefit the Fund by improving
the Advisor's investment advice. The Advisor's policy is to pay a broker-dealer
higher commissions for particular brokerage transactions, if any, than might be
charged if a different broker-dealer had been chosen when, in the Advisor's
opinion, this policy furthers the overall objective of obtaining best price and
execution. Subject to periodic review by the Fund's Board of Directors, the
Advisor is also authorized to pay broker-dealers higher commissions on brokerage
transactions for the Fund in order to secure research and investment services
described above. The allocation of orders among broker-dealers and the
commission rates paid by the Fund will be reviewed periodically by the Board.
During the fiscal years ended October 31, 1996, October 31, 1995 and October 31,
1994 no brokerage commissions were paid by the Fund for research services.

The Fund is required to identify any securities of its
"regular brokers or dealers" (as such term is defined in the Investment Company
Act) which the Fund has acquired during its most recent fiscal year. As of
October 31, 1996, the Fund held a 5.45% repurchase agreement issued by Goldman
Sachs & Co. valued at $6,863,000. Goldman Sachs & Co. is a "regular broker or
dealer" of the Fund.

The Advisor manages other investment accounts. It is possible
that, at times, identical securities will be acceptable for the Fund and one or
more of such other accounts;

- 20 -
<PAGE>

however, the position of each account in the securities of the same issuer may
vary and the length of time that each account may choose to hold its investment
in such securities may likewise vary. The timing and amount of purchase by each
account will also be determined by its cash position. If the purchase or sale of
securities consistent with the investment policies of the Fund or one or more of
these accounts is considered at or about the same time, transactions in such
securities will be allocated among the accounts in a manner deemed equitable by
the Advisor. The Advisor may combine such transactions, in accordance with
applicable laws and regulations, in order to obtain the best net price and most
favorable execution. Such simultaneous transactions, however, could adversely
affect the ability of the Fund to obtain or dispose of the full amount of a
security which it seeks to purchase or sell.

10. CAPITAL STOCK

The Fund is authorized to issue 40 million Shares of common
stock, par value $.001 per Share. The Board of Directors may increase or
decrease the number of authorized Shares without shareholder approval.

The Fund's Articles of Incorporation provide for the
establishment of separate series and separate classes of shares by the Directors
at any time without shareholder approval. The Fund has created four classes of
Shares: ISI Shares, Flag Investors Class A Shares (formerly known as Flag
Investors Managed Municipal Fund Shares), Flag Investors Managed Municipal Fund
Class B Shares and Flag Investors Managed Municipal Fund Class D Shares. The
Flag Investors Managed Municipal Fund Class B Shares and the Flag Investors
Managed Municipal Fund Class D Shares are not currently being offered. All
Shares of the Fund regardless of class would have equal rights with respect to
voting, except that with respect to any matter affecting the rights of the
holders of a particular series or class, the holders of each series would vote
separately. Any such series would be a separately managed portfolio and
shareholders of each series would have an undivided interest in the net assets
of that series. For tax purposes, the series would be treated as separate
entities. Generally, each class of shares issued by a particular series will be
identical to every other class and expenses of the Fund (other than 12b-1 fees)
are prorated among all classes of a series based upon the relative net assets of
each class. Any matters affecting any class exclusively would be voted on by the
holders of such class.

Shareholders of the Fund do not have cumulative voting rights,
and therefore the holders of more than 50% of the outstanding Shares voting
together for election of Directors may elect all the members of the Board of
Directors of the Fund. In such event, the remaining holders cannot elect any
members of the Board of Directors of the Fund. There are no preemptive,
conversion or exchange rights applicable to any of the Shares. The issued and
outstanding Shares are fully paid and non-assessable. In the event of
liquidation or dissolution of the Fund, each Share is entitled to its portion of
the Fund's assets (or the assets allocated to a separate series of shares if
there is more than one series) after all debts and expenses have been paid.

As used in this Statement of Additional Information, the term
"majority of the outstanding Shares" means the vote of the lesser of (i) 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 (ii) more than 50% of
the outstanding Shares.

- 21 -
<PAGE>

11. SEMI-ANNUAL REPORTS

The Fund furnishes shareholders with semi-annual reports
containing information about the Fund and its operations, including a list of
investments held in the Fund's portfolio and financial statements. The annual
financial statements are audited by the Fund's independent accountants.

12. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES

PNC Bank, National Association ("PNC Bank"), Airport Business
Park, 200 Stevens Drive, Lester, Pennsylvania 19113, a subsidiary of PNC Bank
Corp. has been retained to act as custodian of the Fund's investments. PNC Bank
receives such compensation from the Fund for its services as custodian as may be
agreed to from time to time by PNC Bank and the Fund. Investment Company Capital
Corp., One South Street, Baltimore, Maryland 21202 (telephone: (800) 553-8080
for the Flag Investors Shares Class and (800) 882-8585 for the ISI Shares Class)
has been retained to act as the Fund's transfer and dividend disbursing agent.
As compensation for these services, ICC receives up to $10.62 per account per
year plus reimbursement for out-of-pocket expenses incurred in connection
therewith. For the fiscal year ended October 31, 1996, such fees totalled
$54,959.

ICC also provides accounting services to the Fund. As
compensation for providing accounting services, ICC is entitled to receive an
annual fee, calculated daily and paid monthly as shown below.

Average Net Assets Incremental Annual Accounting Fee
------------------ ---------------------------------

$ 0 - $ 10,000,000 $13,000 (fixed fee)
$ 10,000,000 - $ 20,000,000 .100%
$ 20,000,000 - $ 30,000,000 .080%
$ 30,000,000 - $ 40,000,000 .060%
$ 40,000,000 - $ 50,000,000 .050%
$ 50,000,000 - $ 60,000,000 .040%
$ 60,000,000 - $ 70,000,000 .030%
$ 70,000,000 - $ 100,000,000 .020%
$100,000,000 - $ 500,000,000 .015%
$500,000,000 - $1,000,000,000 .005%
over $1,000,000,000 .001%

In addition, the Fund will reimburse ICC for the following
out-of-pocket expenses incurred in connection with ICC's provision of accounting
services: express delivery service, independent pricing and storage. As
compensation for providing accounting services for the fiscal year ended October
31, 1996, ICC received fees of $59,356.

- 22 -
<PAGE>

13. INDEPENDENT ACCOUNTANTS

The annual financial statements of the Fund are audited by
Coopers & Lybrand L.L.P. whose report thereon appears elsewhere herein, and has
been included herein in reliance upon the report of such firm of accountants
given on their authority as experts in accounting and auditing. Coopers &
Lybrand L.L.P. has offices at 2400 Eleven Penn Center, Philadelphia,
Pennsylvania 19103.

14. PERFORMANCE INFORMATION

For purposes of quoting and comparing the performance of the
Fund to that of other open-end diversified management investment companies and
to stock or other relevant indices in advertisements or in certain reports to
shareholders, performance will be stated in terms of total return rather than in
terms of yield. The total return quotations, under the rules of the SEC, must be
calculated according to the following formula:

n
P(1 + T) = ERV

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

T = average annual total return

n = number of years (1, 5 or 10)

ERV = ending redeemable value at the end of the
1, 5, or 10 year periods (or fractional
portion thereof) of a hypothetical $1,000
payment made at the beginning of the 1, 5 or
10 year periods.

Under the foregoing formula, the time periods used in
advertising will be based on rolling calendar quarters, updated to the last day
of the most recent quarter prior to submission of the advertising for
publication, and will cover one, five, and ten year periods or a shorter period
dating from the effectiveness of the Fund's registration statement or the date
the Fund (or a series) commenced operations (provided such date is subsequent to
the date the registration statement became effective). In calculating the ending
redeemable value, the maximum sales load is deducted from the initial $1,000
payment and all dividends and distributions by the Fund are assumed to have been
reinvested at net asset value as described in the prospectus on the reinvestment
dates during the period. "T" in the formula above is calculated by finding the
average annual compounded rate of return over the period that would equate an
assumed initial payment of $1,000 to the ending redeemable value. Any sales
loads that might in the future be made applicable at the time to reinvestments
would be included as would any recurring account charges that might be imposed
by the Fund.

The Fund may also from time to time include in such
advertising total return figures that are not calculated according to the
formula set forth above in order to compare more accurately the Fund's
performance with other measures of investment return. For example, in comparing
the Fund's total return with data published by Lipper Analytical Services, Inc.,
CDA Investment Technologies, Inc. or Morningstar, Inc., with the performance of
the Lehman Brothers Municipal Bond Index, the Consumer Price Index, the return
on 90 day U.S. Treasury bills, the Standard and Poor's 500 Stock Index or the
Dow Jones Industrial Average, the Fund calculates its aggregate and average
annual total return for the specified periods of time by assuming the investment
of $10,000

- 23 -
<PAGE>

in Shares and assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. For the purpose of
other comparisons, the Fund performs a second alternative computation for its
aggregate and average annual total return by assuming the investment of $10,000
in Shares and assuming no reinvestment of dividends or other distributions.

For these alternative computations, the Fund assumes that the
$10,000 invested in Shares is net of all sales charges (as distinguished from
the computation required by the SEC where the $1,000 payment is reduced by sales
charges before being invested in Shares). The Fund will, however, disclose the
maximum sales charges and will also disclose that the performance data do not
reflect sales charges and that inclusion of sales charges would reduce the
performance quoted. Such alternative total return information will be given no
greater prominence in such advertising than the information prescribed under SEC
rules, and all advertisements containing performance data will include a legend
disclosing that such performance data represent past performance and that the
investment return and principal value of an investment will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.

Calculated according to SEC rules, for the one year period
ended September 30, 1996, the ending redeemable value of a hypothetical $1,000
payment for ISI Shares was $1,006, resulting in a total return for such Shares
equal to 0.58%. For the five year period ended September 30, 1996, the ending
redeemable value of a hypothetical $1,000 payment for ISI Shares was $1,360,
resulting in an average annual total return for such Shares equal to 6.34%. For
the period from February 26, 1990 (effectiveness of the Fund's registration
statement) through the end of the Fund's most recent calendar quarter on
September 30, 1996, the ending redeemable value of a hypothetical $1,000 payment
for ISI Shares was $1,485, resulting in an average annual total return for such
Shares equal to 6.18%.

Calculated according to SEC rules for the one year period
ended September 30, 1996, the ending redeemable value of a hypothetical $1,000
payment for Flag Investors Class A Shares was $1,005, resulting in an annual
return for such Shares equal to 0.52%. For the five year period ended September
30, 1996, the ending redeemable value of a hypothetical $1,000 payment for Flag
Investors Class A Shares was $1,300, resulting in an average annual total return
for such shares equal to 5.39%. For the period from October 23, 1990 (initial
public offering of the Flag Investors Class A Shares) through the end of the
Fund's most recent calendar quarter on September 30, 1996, the ending redeemable
value of a hypothetical $1,000 payment for Flag Investors Class A Shares was
$1,448, resulting in an average annual total return for such Shares equal to
6.43%.

Calculated according to the first alternative computation,
which assumes no sales charge and reinvestment of all distributions, for the one
year period ended October 31, 1996, the ending redeemable value of a
hypothetical $10,000 investment in either ISI Shares or Flag Investors Class A
Shares was $10,457, resulting in an average total return equal to 4.57%. For the
five year period ended October 31, 1996, the ending redeemable value of a
hypothetical $10,000 investment in either ISI Shares or Flag Investors Class A
Shares was $13,688, resulting in an average annual total return equal to 6.48%.
For the period from February 26, 1990 (effectiveness of the Fund's registration
statement) through the end of the Fund's most recent fiscal year on October 31,
1996, the ending redeemable value of a hypothetical $10,000 investment in ISI
Shares was $15,747, resulting in an average annual total return for such Shares
equal to 7.03%. For the period from October 23, 1990 (initial public offering of
the Flag Investors Class A Shares) through the end of the Fund's most recent
fiscal year on October 31, 1996, the ending redeemable value of a hypothetical
$10,000 investment in Flag Investors Class A Shares was $15,357, resulting in an
average annual total return for such Shares equal to 7.38%.

-24-
<PAGE>

Any yield quotation of the Fund is based on the annualized net
investment income per share of the Fund over a 30 day period. The yield for the
Fund is calculated by dividing the net investment income per share of the Fund
earned during the period by the maximum offering price per share of the Fund on
the last day of that period. The resulting figure is then annualized. Net
investment income per share is determined by dividing (i) the dividends and
interest earned by the Fund during the period, minus accrued expenses for the
period, by (ii) the average number of Fund shares entitled to receive dividends
during the period multiplied by the maximum offering price per share on the last
day of the period. The Fund's yield calculations assume a maximum sales charge
of 4.45% for the ISI Shares and 4.50% for the Flag Investors Class A Shares. The
Fund's taxable-equivalent yield is calculated by determining the rate of return
that would have to be achieved on a fully taxable investment to produce the
after-tax equivalent on the Fund's yield. In calculating taxable-equivalent
yield, the Fund assumes certain brackets for shareholders.

For the 30 day period ended October 31, 1996, the yield for
the ISI Shares was 4.24% and the yield for the Flag Investors Class A Shares was
4.24%. For the same 30 day period, the taxable-equivalent yield (for an investor
in the 31% tax bracket) was 6.14% for the ISI Shares and 6.14% for the Flag
Investors Class A Shares.

The Fund's annual portfolio turnover rate (the lesser of the
value of the purchases or sales for the year divided by the average monthly
market value of the portfolio during the year, excluding U.S. Government
securities and securities with maturities of one year or less) may vary from
year to year, as well as within a year, depending on market conditions. For the
fiscal years ended October 31, 1996 and October 31, 1995, the Fund's portfolio
turnover rate was 32% and 55%, respectively.

15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

To Fund management's knowledge, no persons owned beneficially
5% or more of the Fund's outstanding Shares, as of January 31, 1997.

As of such date directors and officers, as a group, owned
beneficially and of record less than 1% of the Fund's outstanding Shares of
either class.

16. FINANCIAL STATEMENTS.

See next page.

- 25 -

<PAGE>

FLAG INVESTORS MANAGED MUNICIPAL FUND
- --------------------------------------------------------------------------------

Statement of Net Assets October 31, 1996

<TABLE>
<CAPTION>
Rating*
(Moody's/ Par Market Value
S&P) (000) (Note 1)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MUNICIPAL BONDS--93.4%
General Obligation--61.2%
Arlington, Texas, Independent School
District, 5.75%, 2021 Aaa/NR $5,000 $ 5,015,850
Charlotte, NC:
5.30%, 2011 Aaa/AAA 1,590 1,598,220
5.30%, 2012 Aaa/AAA 1,120 1,119,014
5.30%, 2012 Aaa/AAA 2,325 2,322,954
5.80%, 2016 Aaa/AAA 2,500 2,590,025
Dallas, TX, 5.00%, 2010 Aa1/AAA 1,750 1,692,128
Delaware State, Series "A",
5.125%, 2016 Aa1/AA+ 2,150 2,056,905
DuPage County, IL, Jail Project,
5.60%, 2021 Aaa/AAA 1,600 1,595,664
Florida Board of Education,
Refunding Public Education:
6.125%, 2012 Aa/AA 2,250 2,339,258
5.50%, 2021 Aa/AA 2,000 1,957,700
5.125%, 2022 Aa/AA 5,000 4,653,250
Franklin County, OH:
5.45%, 2009 Aaa/AAA 1,500 1,520,730
5.50%, 2013 Aaa/AAA 1,000 1,003,490
Georgia State, Series "D":
5.25%, 2009 Aaa/AA+ 1,580 1,584,234
5.00%, 2010 Aaa/AA+ 2,000 1,953,220
Grand Prairie, TX, School District,
5.20%, 2018 Aaa/AAA 2,000 1,891,540
Henrico County, VA:
5.20%, 2008 Aaa/AAA 1,200 1,208,592
5.25%, 2009 Aaa/AAA 1,000 1,004,550
Maryland State & Local Facilities,
Second Series, 5.125%, 2010 Aaa/AAA 3,000 2,971,920
Minneapolis, MN, Sports Arena:
5.00%, 2011 Aaa/AAA 1,710 1,650,646
5.00%, 2012 Aaa/AAA 1,920 1,840,570
Missouri State Building,
Series "A", 5.00%, 2010 Aaa/AAA 2,000 1,957,040
</TABLE>

-26-
<PAGE>

FLAG INVESTORS MANAGED MUNICIPAL FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Rating*
(Moody's/ Par Market Value
S&P) (000) (Note 1)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
General Obligation--continued
Montgomery County, MD:
5.60%, 2004 Aaa/AAA $1,000 $ 1,059,290
5.00%, 2009 Aaa/AAA 1,500 1,476,120
5.00%, 2010 Aaa/AAA 1,500 1,464,675
Plano, TX, Independent
School District, 5.00%, 2011 Aaa/AAA 3,000 2,864,070
Salt Lake County, UT, 5.25%, 2010 Aaa/AA+ 2,000 1,995,920
South Carolina Capital
Improvement, 5.00%, 2009 Aaa/AAA 2,700 2,655,909
South Carolina State Highway,
Series "B", 5.625%, 2014 Aaa/AAA 2,700 2,747,169
State of Tennessee:
Series "A", 5.50%, 2009 Aaa/AA+ 1,535 1,564,656
Series "A", 5.55%, 2010 Aaa/AA+ 1,000 1,019,550
Series "B", 6.00%, 2005 Aaa/AA+ 2,000 2,170,260
State of Texas:
5.25%, 2013 Aa/AA 3,250 3,147,203
6.00%, 2014 Aa/AA 2,000 2,062,460
State of Virginia, 5.375%, 2016 Aaa/AAA 2,500 2,484,900
State of Washington:
Series "A", 5.60%, 2010 Aa/AA 1,500 1,518,630
Series "B", 5.50%, 2008 Aa/AA 1,500 1,523,475
Washington Suburban Sanitary
District, MD, 5.375%, 2010 Aa1/AA 1,810 1,817,945
------------
77,099,732
------------
Electric and Gas Utility Revenue--5.4%
Jacksonville Electric Authority
Revenue, FL, St. John's
River Power, 5.25%, 2028 Aa1/AA 2,000 1,890,680
San Antonio, TX, Electric
& Gas Revenue:
Series "A", 4.90%, 2008 Aa1/AA 4,000 3,869,320
Series "A", 6.50%, 2012 Aa1/AA 1,000 1,043,130
------------
6,803,130
------------
Pre-refunded Issues--8.4%
Arizona Highway Transportation
Board, 6.00%, 2010 Aaa/AAA 3,480 3,703,381
</TABLE>

-27-
<PAGE>

FLAG INVESTORS MANAGED MUNICIPAL FUND
- --------------------------------------------------------------------------------

Statement of Net Assets (concluded)

<TABLE>
<CAPTION>
Rating*
(Moody's/ Par Market Value
S&P) (000) (Note 1)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pre-refunded Issues--continued
Florida Board of Education,
Refunding Public Education,
6.50%, 2012 Aaa/AA $2,500 $ 2,761,225
Howard County, MD,
Consolidated Public Improvements,
Series "A", 6.90%, 2002 Aaa/AAA 1,000 1,083,810
Jacksonville, FL, Electric
Authority Revenue,
Scherer 4-1-A, 6.75%, 2021 Aaa/AA 1,000 1,098,580
State of Hawaii, General Obligation:
7.00%, 2006 Aaa/AA 750 814,478
6.125%, 2010 NR/AA 1,000 1,069,020
------------
10,530,494
------------
Transportation Revenue--8.5%
Florida Transportation Revenue,
5.80%, 2018 Aa/AA 2,000 2,020,440
Kansas Transportation Revenue:
5.40%, 2009 Aa/AA 2,000 2,012,640
5.40%, 2009 Aa/AA 2,500 2,515,800
Maryland State Department of
Transportation, 5.375%, 2006 Aa/AA 1,500 1,545,240
Portland, OR, Metro, 5.25%, 2007 Aa/AA+ 1,500 1,517,865
Virginia State Transportation
Authority, 6.00%, 2010 Aa/AA 1,000 1,025,780
------------
10,637,765
------------
Water and Sewer Utility Revenue--5.4%
Chicago, IL, 6.30%, 2009 Aa/AA 1,000 1,076,530
DuPage, IL, Water Commission,
5.25%, 2011 Aa1/AA 2,500 2,433,250
Orlando, FL, Utility Commission,
5.125%, 2019 Aa1/AA 3,500 3,252,585
------------
6,762,365
------------
Other Revenue--4.5%
Indianapolis, IN, Local Public
Improvement Board, 6.00%, 2018 Aaa/AA+ 1,500 1,515,300
</TABLE>

-28-
<PAGE>

REPURCHASE AGREEMENT--5.4%
Goldman Sachs & Co., 5.45%
Dated 10/31/96, to be repurchased on 11/1/96,
collateralized by U.S. Treasury
Notes with a market value of $7,000,891.
(Cost $6,863,000) 6,863 6,863,000
------------

Total Investment in Securities--98.8%
(Cost $122,596,425)** 124,373,926

Other Assets in Excess of Liabilities, Net--1.2% 1,530,225
------------

Net Assets-100.0% $125,904,151
============

Net Asset Value and Redemption Price Per:
Flag Investors Class A Share
($41,192,545 / 3,894,438 shares outstanding) $10.58
======

ISI Class Share
($84,711,606 / 8,010,842 shares outstanding) $10.58
======

Maximum Offering Price Per:
Flag Investors Class A Share
($10.58 / .955) $11.08
======

ISI Class Share
($10.58 / .9555) $11.07
======
</TABLE>
- -----------
* The Moody's or Standard & Poor's ratings indicated are believed to be the
most recent ratings available as of October 31, 1996. Ratings of issues have
not been audited by Coopers & Lybrand L.L.P.
** Also aggregate cost for federal tax purposes.
See Notes to Financial Statements.

-29-
<PAGE>

FLAG INVESTORS MANAGED MUNICIPAL FUND
- --------------------------------------------------------------------------------

Statement of Operations

<TABLE>
<CAPTION>
For the Year Ended
October 31,
1996
- --------------------------------------------------------------------------------------
<S> <C>
Investment Income (Note 1):
Interest $6,948,446
----------
Expenses:
Investment advisory fee (Note 2) 516,180
Distribution fee (Note 2) 322,613
Administration fees (Note 2) 258,090
Printing and postage 63,994
Accounting fee (Note 2) 59,356
Transfer agent fee (Note 2) 54,959
Registration fees (Note 1) 46,384
Audit 40,132
Legal 28,676
Custodian fee 25,543
Miscellaneous 22,018
Directors' fees 10,808
Insurance 3,561
----------
Total expenses 1,452,314
Less:Fees waived (Note 2) (290,917)
----------
Net expenses 1,161,397
----------
Net investment income 5,787,049
----------
Net realized and unrealized gain/(loss) on investments:
Net realized gain from security transactions 281,659
Change in unrealized appreciation or depreciation of investments (272,341)
----------
Net gain on investments 9,318
----------

Net increase in net assets resulting from operations $5,796,367
==========
</TABLE>

See Notes to Financial Statements.

-30-
<PAGE>

FLAG INVESTORS MANAGED MUNICIPAL FUND
- --------------------------------------------------------------------------------

Statement of Changes in Net Assets

<TABLE>
<CAPTION>
For the Year Ended October 31,
1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C>
Increase/(Decrease) in Net Assets:
Operations:
Net investment income $ 5,787,049 $ 6,268,902
Net realized gain from security transactions 281,659 599,805
Change in appreciation or
depreciation of investments (272,341) 12,223,598
------------ ------------
Net increase in net assets resulting
from operations 5,796,367 19,092,305
------------ ------------
Dividends to Shareholders from:
Net investment income:
Flag Investors Class A Shares (1,958,320) (3,998,176)
ISI Class Shares (3,828,729) (2,270,726)
Net realized short-term gains:
Flag Investors Class A Shares (286,075) (267,415)
ISI Class Shares (545,496) (471,717)
Net realized long-term gains:
Flag Investors Class A Shares (43,313) (418,234)
ISI Class Shares (82,292) (691,139)
------------ ------------
Total distributions (6,744,225) (8,117,407)
------------ ------------
Capital Share Transactions (Note 3):
Proceeds from sale of shares 8,278,327 11,188,171
Value of shares issued in
reinvestment of dividends 3,789,940 4,794,976
Cost of shares repurchased (17,488,342) (28,195,599)
------------ ------------
Decrease in net assets derived from capital
share transactions (5,420,075) (12,212,452)
------------ ------------
Total decrease in net assets (6,367,933) (1,237,554)

Net Assets:
Beginning of year 132,272,084 133,509,638
------------ ------------
End of year $125,904,151 $132,272,084
============ ============
</TABLE>

See Notes to Financial Statements.

-31-
<PAGE>

FLAG INVESTORS MANAGED MUNICIPAL FUND
- --------------------------------------------------------------------------------

Financial Highlights -- Flag Investors Class A and ISI Class Shares (For a share
outstanding throughout each year)(1)

<TABLE>
<CAPTION>
For the Year Ended
October 31, For the Year Ended October 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of year $ 10.65 $ 9.81 $ 11.10 $ 10.31 $ 10.36
------- ------ ------- ------- -------
Income from Investment Operations:
Net investment income 0.48 0.48 0.46 0.50 0.50
Net realized and unrealized gain/(loss) on investments -- 0.98 (1.15) 0.94 0.22
------- ------ ------- ------- -------
Total from Investment Operations 0.48 1.46 (0.69) 1.44 0.72
------- ------ ------- ------- -------
Less Distributions:
Distributions from net investment income
and short-term gains (0.54) (0.54) (0.56) (0.61) (0.65)
Distributions from net realized long-term gains (0.01) (0.08) (0.04) (0.04) (0.12)
------- ------ ------- ------- -------
Total distributions (0.55) (0.62) (0.60) (0.65) (0.77)
------- ------ ------- ------- -------
Net asset value at end of year $ 10.58 $ 10.65 $ 9.81 $ 11.10 $ 10.31
======= ======= ======= ======= =======

Total Return(2) 4.67% 15.42% (6.49)% 14.36% 6.06%
Ratios to Average Daily Net Assets:
Expenses(3) 0.90% 0.90% 0.90% 0.90% 0.90%
Net investment income(4) 4.48% 4.72% 4.37% 4.38% 4.78%
Supplemental Data:
Net assets at end of year:
Flag Investors Class A Shares $41,193 $45,980 $49,903 $53,486 $45,536
ISI Class Shares $84,712 $86,292 $83,607 $88,378 $51,420
Portfolio turnover rate 32% 55% 37% 68% 95%
</TABLE>

- ------------
(1) Computed based on average shares outstanding.
(2) Total return excludes the effect of sales charge.
(3) Without the waiver of advisory and administration fees (Note 2), the ratio
of expenses to average daily net assets would have been 1.13%, 1.10%, 1.11%,
1.14% and 1.27% for the years ended October 31, 1996, 1995, 1994, 1993 and
1992, respectively.
(4) Without the waiver of advisory and administration fees (Note 2), the ratio
of net investment income to average daily net assets would have been 4.25%,
4.52%, 4.16%, 4.14% and 4.41% for the years ended October 31, 1996, 1995,
1994, 1993 and 1992, respectively.

See Notes to Financial Statements.

-32-
<PAGE>

FLAG INVESTORS MANAGED MUNICIPAL FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements

NOTE 1--SIGNIFICANT ACCOUNTING POLICIES

Managed Municipal Fund, Inc. (the "Fund") was organized as a Maryland
Corporation on January 15, 1990 and commenced operations on February 26, 1990.
The Fund is registered under the Investment Company Act of 1940 as a
diversified, open-end management investment company. On October 31, 1996, the
Fund consisted of two classes of shares: ISI Managed Municipal Fund Shares ("ISI
Class") and Flag Investors Managed Municipal Fund Class A Shares ("Flag
Investors Class A").

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
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
accounting policies are as follows:

A. Security Valuation--Municipal bonds are valued on the basis of
quotations provided by a pricing service, which uses information with
respect to transactions on bonds, quotations from bond dealers,
market transactions in comparable securities and various
relationships between securities in determining value.
Securities or other assets for which market quotations are not readily
available are valued at their face value so determined in good faith by
the Investment Advisor under procedures established and monitored
by the Board of Directors. Short-term obligations with maturities of
60 days or less are valued at amortized cost which approximates market.

B. Repurchase Agreements -- The Fund may agree to enter into tri-party
repurchase agreements. Securities held as collateral for tri-party
repurchase agreements are maintained by the broker's custodial bank in
a segregated account until maturity of the repurchase agreement.
The agreement ensures that the market value of the collateral,
including accrued interest thereon, is sufficient in the event of
default. If the counterparty defaults and the value of the
collateral declines or if the counterparty enters into an
insolvency proceeding, realization of the collateral by the Fund may be
delayed or limited.

C. Federal Income Tax--No provision is made for federal income taxes as it
is the Fund's intention to continue to qualify as a regulated
investment company and to make requisite distributions to the
shareholders that will be sufficient to relieve it from all or
substantially all federal income and excise taxes. The Fund's policy is
to distribute to shareholders substantially all of its taxable net
investment income and net realized capital gains.

-33-
<PAGE>

FLAG INVESTORS MANAGED MUNICIPAL FUND
- --------------------------------------------------------------------------------

NOTE 1--concluded

Distributions are determined in accordance with income tax regulations,
which may differ from generally accepted accounting principles.
Accordingly, periodic reclassifications are made within the Fund's
capital accounts to reflect income and capital gains available for
distribution under income tax regulations.

D. Other--Security transactions are accounted for on the trade date and
the cost of investments sold or redeemed is determined by use of the
specific identification method for both financial reporting and income
tax purposes. Interest income is recorded on an accrual basis.

NOTE 2--Investment Advisory Fee, Transactions with Affiliates and Other Fees

International Strategy & Investment Inc. ("ISI") serves as the Fund's
advisor and Investment Company Capital Corp. ("ICC") serves as the Fund's
administrator. As compensation for its advisory services, ISI receives from the
Fund an annual fee, calculated daily and paid monthly, at the annual rate of
.40% of the average daily net assets. As compensation for its administrative
services, ICC receives from the Fund an annual fee, calculated daily and paid
monthly, at the annual rate of .20% of the average daily net assets.
ISI and ICC have agreed to reduce their respective annual fees
proportionately, if necessary, so that ordinary expenses of the Fund for any
fiscal year do not exceed .90% of the Fund's daily net assets. For the year
ended October 31, 1996, ISI and ICC waived fees of $192,777 and $98,140,
respectively.
As compensation for its accounting services, ICC receives from the Fund an
annual fee, calculated daily and paid monthly, based on the Fund's average daily
net assets. ICCreceived $59,356 for accounting services for the year ended
October 31, 1996.
As compensation for its transfer agent services, ICC receives from the Fund
a per account fee, calculated and paid monthly. ICCreceived $54,959 for transfer
agent services for the year ended October 31, 1996.
As compensation for providing distribution services, Armata Financial Corp.
receives from the Fund an annual fee, calculated daily and paid monthly, at the
annual rate of .25% of the average daily net assets of the ISI Class Shares.
Alex. Brown & Sons Incorporated receives from the Fund an annual fee, calculated
daily and paid monthly, at an annual rate equal to .25% of the average daily net
assets of the Flag Investors Class A Shares. For the year ended October 31,
1996, distribution fees were $322,613, of which $213,366 were allocated to ISI
Class Shares and $109,247 were allocated to Flag Investors Class A Shares.

-34-
<PAGE>

FLAG INVESTORS MANAGED MUNICIPAL FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (concluded)

NOTE 2--concluded

The fund complex of which the Fund is a part has adopted a retirement plan
for eligible Directors. The actuarially computed pension expense allocated to
the Fund for the period January 1, 1996 through October 31, 1996 was
approximately $4,543, and the accrued liability was approximately $17,863.

NOTE 3--Capital Share Transactions

The Fund is authorized to issue up to 40 million shares of capital stock,
par value, $.001 per share, all of which shares are designated as common stock
(15 million Flag Investors Class A, 20 million ISI Class, 2.5 million Flag
Investors Class B, 500,000 Flag Investors Class D and 2 million undesignated).
Transactions in shares of the Fund were as follows:

Flag Investors Class A Shares
For the For the
Year Ended Year Ended
Oct. 31, 1996 Oct. 31, 1995

Shares sold 200,140 323,698
Shares issued to shareholders on
reinvestment of dividends 114,250 161,945
Shares redeemed (736,822) (1,256,958)
----------- ------------
Net decrease in shares outstanding (422,432) (771,315)
=========== ============
Proceeds from sale of shares $ 2,079,607 $ 3,206,244
Value of reinvested dividends 1,200,959 1,628,993
Cost of shares redeemed (7,734,234) (12,775,509)
----------- ------------
Net decrease from capital share
transactions $(4,453,668) $ (7,940,272)
=========== ============

-35-
<PAGE>

FLAG INVESTORS MANAGED MUNICIPAL FUND
- --------------------------------------------------------------------------------
NOTE 3--concluded

ISI Class Shares
For the For the
Year Ended Year Ended
Oct. 31, 1996 Oct. 31, 1995

Shares sold 585,014 794,506
Shares issued to shareholders on
reinvestment of dividends 246,345 314,194
Shares redeemed (924,026) (1,531,414)
----------- -----------
Net decrease in shares outstanding (92,667) (422,714)
=========== ===========
Proceeds from sale of shares $ 6,198,720 $ 7,981,927
Value of reinvested dividends 2,588,981 3,165,983
Cost of shares redeemed (9,754,108) (15,420,090)
----------- -----------
Net decrease from capital share
transactions $ (966,407) $ (4,272,180)
=========== ===========

NOTE 4--Investment Transactions

Purchases and sales of investment securities, other than short-term
obligations, aggregated $37,410,967 and $37,816,283, respectively, for the year
ended October 31, 1996.

At October 31, 1996, aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost was
$2,651,116 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over market value was $873,615.

NOTE 5--Net Assets

At October 31, 1996, net assets consisted of:

Paid-in capital:
Flag Investors Class A Shares $ 39,693,227
ISI Class Shares 84,239,302
Undistributed net realized short-term gains
from security transactions 194,121
Unrealized appreciation of investments 1,777,501
------------
$125,904,151
============

-36-
<PAGE>

FLAG INVESTORS MANAGED MUNICIPAL FUND
- --------------------------------------------------------------------------------

Report of Independent Accountants

To the Shareholders and Directors of
Managed Municipal Fund, Inc.:

We have audited the accompanying statement of net assets of Managed
Municipal Fund, Inc. as of October 31, 1996, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended and the financial highlights for
each of the five years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.

We conducted our audits 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 investments owned as of
October 31, 1996, 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 provide 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
Managed Municipal Fund, Inc. as of October 31, 1996, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and its financial highlights for the
period then ended, in conformity with generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.
Baltimore,Maryland
December 2, 1996

-37-