MANAGED MUNICIPAL FUND INC, 497, 1999-03-05

MANAGED MUNICIPAL FUND INC
497, 1999-03-05

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

Prospectus & Application -- March 1, 1999
- --------------------------------------------------------------------------------
This mutual fund (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.

The Fund offers shares through securities dealers and financial institutions
that act as shareholder servicing agents. You may also buy shares through the
Fund's Transfer Agent. This Prospectus describes Flag Investors Class A Shares
("Class A Shares") of the Fund.

TABLE OF CONTENTS

Investment Summary............................................................2

Fees and Expenses of the Fund.................................................4

Investment Program............................................................5

The Fund's Net Asset Value....................................................6

How to Buy Shares.............................................................7

How to Redeem Shares..........................................................8

Telephone Transactions........................................................9

Sales Charges................................................................10

Dividends and Taxes..........................................................14

Investment Advisor...........................................................14

Administrator................................................................15

Financial Highlights.........................................................16

Application.................................................................A-1

Flag Investors Funds
P.O. Box 515
Baltimore, MD 21203

The Securities and Exchange Commission has neither approved nor disapproved
these securities nor has it passed upon the adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.

<PAGE>

INVESTMENT SUMMARY

Objectives and Strategies

The Fund's investment objective is a high level of total return with
relative stability of principal and, secondarily, high current income exempt
from federal income tax. To achieve this objective, the Fund will invest
primarily in tax-exempt municipal obligations of state and local governments in
the United States and their political subdivisions, agencies and
instrumentalities. These securities will usually be rated within the three
highest ratings categories of Moody's Investors Services, Inc. or Standard &
Poor's Ratings Group. In selecting investments for the Fund, the Fund's
investment advisor (the "Advisor") will be free to take full advantage of the
entire range of maturities offered by municipal obligations. The Advisor will
consider both a security's yield and its potential for capital gain resulting
from changes in interest rates.

Risk Profile

The Fund is suited for you if you are seeking a high level of
total return including some income exempt from federal income taxes, but you
want the value of your investment to remain relatively stable.

The value of an investment in the Fund will vary from day to day based
on the prices of the municipal obligations in the Fund's portfolio. 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. The prices of
municipal obligations will respond to economic and market factors, especially
interest rate changes.

Interest Rate Risk. The value of the Fund's shares can be expected to
increase during periods of falling interest rates and decrease during periods of
rising interest rates.

Maturity Risk. Longer-term securities are generally more volatile
(i.e., experience greater price fluctuations), so the average maturity or
duration of these securities affects risk. Therefore, these price fluctuations
will generally be greater at times when the average maturity of the Fund's
portfolio securities is longer.

Style Risk. The success of the Fund's investment approach will depend
on the Advisor's ability to determine which direction interest rates are likely
to move.

Special Tax Features. While income distributions from the Fund will
generally be tax exempt, distributions of capital gains will be taxable.

An investment in the Fund could lose money. An investment in the Fund
is not a bank deposit and is not guaranteed by the FDIC or any other government
agency.

Fund Performance

The following bar chart and table show the performance of the Fund both
year-by-year and as an average over different periods of time. The variability
of performance over time provides an indication of the risks of investing in the
Fund. This is an historical record and does not necessarily indicate how the
Fund will perform in the future.

2
<PAGE>

Class A Shares*
For years ended December 31,

1991 11.02%
1992 6.65%
1993 11.41%
1994 -6.28%
1995 17.78%
1996 2.72%
1997 8.40%
1998 6.05%

* The bar chart does not reflect sales charges. If it did, returns would
be less than those shown.

During the 8-year period shown in the bar chart, the highest return for
a quarter was 7.29% (quarter ended 3/31/95) and the lowest return for a quarter
was -5.67% (quarter ended 3/31/94).

Average Annual Total Return (for periods ended December 31, 1998)

Lehman
Brothers Lehman
General Brothers Consumer
Class A Obligation Prerefunded Price
Shares(1) Index(2) Index(2) Index(2)

Past One Year ..... 1.28% 6.67% 5.67% 1.61%

Past Five Years.... 4.48% 6.13% 5.10% 2.36%

Since Inception.... 6.74% (10/23/90) 7.89%(3) 6.67%(3) 2.59%(3)

- ---------------
(1) These figures assume the reinvestment of dividends and capital gains
distributions and include the impact of the maximum sales charges.

(2) The Lehman Brothers General Obligation Index reflects general municipal
market performance. The Lehman Brothers Prerefunded Index is a better
indicator of the Fund's performance due to its higher quality
characteristics. These indices are passive measurements of municipal bond
performance. They do not factor in the costs of buying, selling and holding
securities -- costs which are reflected in the Funds results. The Consumer
Price Index is a widely used measure of inflation.

(3) For the period from 10/31/90 through 12/31/98.

<PAGE>

FEES AND EXPENSES OF THE FUND

This table describes the fees and expenses that you may pay if you buy
and hold Class A Shares.

Shareholder Transaction Expenses (fees paid directly from your investment):

Maximum Sales Charge (Load) Imposed on Purchases (as a
percentage of offering price)......................................... 4.50%*
Maximum Deferred Sales Charge (Load)(as a percentage of original purchase
price or redemption proceeds, whichever is lower)..................... 0.50%*
Maximum Sales Charge (Load) Imposed on Reinvested Dividends............. None
Redemption Fee ......................................................... None
Exchange Fee............................................................ None

Annual Fund Operating Expenses (expenses that are deducted from Fund assets):

Management Fees........................................................ 0.40%
Distribution and/or Service (12b-1) Fees............................... 0.25%
Other Expenses ........................................................ 0.48%
Total Annual Fund Operating Expenses................................... 1.13%
-----
Less Fee Waivers.......................................................(0.23%)**
-----
Net Expenses .......................................................... 0.90%
=====

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* You will pay no sales charge on purchases of $1 million or more of Class A
Shares but, unless you are otherwise eligible for a sales charge waiver or
reduction, you may pay a contingent deferred sales charge when you redeem
your shares. (See "Sales Charges -- Redemption Price.")
** The Advisor and the Fund's administrator have contractually agreed to limit
their fees proportionately so that the Fund's Total Annual Fund Operating
Expenses do not exceed 0.90% of the Fund's average daily net assets. This
agreement will continue until at least February 29, 2000 and may be
extended.

Example:

This Example is intended to help you compare the cost of investing in the
Class A Shares with the cost of investing in other mutual funds.

The Example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:

4
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<TABLE>
<CAPTION>

1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A Shares................................. $538* $772* $1,025* $1,756*
</TABLE>

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* Based on Total Annual Fund Operating Expenses after fee waivers and
reimbursements for year 1 only.

Assuming no redemption, expenses for Class A Shares would be the same
as in the above Example.

Federal regulations require that the table above reflect the maximum
sales charge. However, you may qualify for reduced sales charges or no sales
charge at all. (Refer to the section on sales charges.) If you hold your shares
for a long time, the combination of the initial sales charge you paid and the
recurring 12b-1 fees may exceed the maximum sales charges permitted by the
Conduct Rules of the National Association of Securities Dealers, Inc.

INVESTMENT PROGRAM

Investment Objective, Policies and Risk Considerations

The Fund's investment objective 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.

The Fund will invest primarily in tax-exempt securities of state and
local governments in the United States and their political subdivisions,
agencies and instrumentalities. These securities will usually be rated within
the three highest ratings categories of Moody's Investors Services, Inc. or
Standard & Poor's Ratings Group. The Advisor buys and sells securities with a
view toward, first, a high level of total return with relative stability of
principal and, second, high current income. Therefore, in addition to yield, the
Advisor will consider a security's potential for capital gain resulting from
changes in interest rates when choosing an investment for the Fund.

In selecting investments, the Advisor will be free to take full
advantage of the entire range of maturities offered by municipal obligations. At
certain times the average maturity of the Fund's 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). The portfolio's average maturity will
depend on the Advisor's assessment of the relative yields available on
securities of different maturities and its expectations of future changes in
interest rates. In determining which direction interest rates are likely to
move, the Advisor relies on the forecast of its chairman, Edward S. Hyman. Mr.
Hyman has been rated a "first team" economist by the periodical Institutional
Investor in each of the last 19 years. He writes a variety of international and
domestic economic research reports that follow trends that may determine the
direction of interest rates.

<PAGE>

An investment in the Fund entails risk. Municipal obligations are
subject to interest rate risk. The value of municipal obligations changes as
interest rates fluctuate. The value of the Fund's shares can be expected to
increase during periods of falling interest rates and decrease during periods of
rising interest rates. The magnitude of the fluctuations will generally be
greater at times when the Fund's average maturity is longer. While income
distributions from the Fund 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 distributions will be taxable than
would be the case if the Fund placed a greater emphasis on earning tax-free
income. There can be no guarantee that the Advisor's economic analysis will
accurately predict interest rate trends or that portfolio strategies based on
Mr. Hyman's economic analysis will be effective. There can be no assurance that
the Fund will achieve its goals.

Even under normal market conditions, the Fund may invest to a limited
extent in taxable obligations. To protect the Fund under adverse market
conditions, the Advisor may make temporary, defensive investments in short-term
U.S. Government and agency securities, bank and corporate securities, and
repurchase agreements fully collateralized by these securities. These temporary,
defensive investments may include taxable investments that would not ordinarily
be consistent with the Fund's objectives. While engaged in a temporary defensive
strategy, the Fund may not achieve its investment objective. The Advisor would
follow such a strategy only if it believed the risk of loss outweighed the
opportunity for gain.

Year 2000 Issues

The Fund depends on the smooth functioning of computer systems in
almost every aspect of its business. The Fund could be adversely affected if the
computer systems used by its service providers do not properly process dates on
and after January 1, 2000 and distinguish between the year 2000 and the year
1900. The Fund has asked its service providers whether they expect to have their
computer systems adjusted for the year 2000 transition, and has received
assurances from each that its system is expected to accommodate the year 2000
without material adverse consequences to the Fund. The Fund and its shareholders
may experience losses if these assurances prove to be incorrect or if issuers of
portfolio securities or third parties, such as custodians, banks, broker-dealers
or others, with which the Fund does business experience difficulties as a result
of year 2000 issues.

THE FUND'S NET ASSET VALUE

The price you pay when you buy shares or receive when you redeem shares
is based on the Fund's net asset value per share. When you buy Class A Shares,
the price you pay may be increased by a sales charge. When you redeem Class A
Shares, the amount you receive may be

<PAGE>
reduced by a sales charge. Read the section on sales charges for details on how
and when these charges may or may not be imposed.

The net asset value per share of the Fund is determined at the close of
regular trading on the New York Stock Exchange (ordinarily 4:00 p.m. Eastern
Time) on each day the Exchange is open for business. It is calculated by
subtracting the liabilities attributable to a class from its proportionate share
of the Fund's assets and dividing the result by the outstanding shares of the
class.

In valuing the Fund's assets, its investments are priced at their
market value. When price quotes for a particular security are not readily
available, investments are priced at their "fair value" using procedures
approved by the Fund's Board of Directors.

You may buy or redeem Class A Shares on any day the New York Stock
Exchange is open for business (a "Business Day"). If your order is entered
before the net asset value per share is determined for that day, the price you
pay or receive will be based on that day's net asset value per share. If your
order is entered after the net asset value per share is determined for that day,
the price you pay or receive will be based on the next Business Day's net asset
value per share.

The following sections describe how to buy and redeem Class A Shares.

HOW TO BUY SHARES

You may buy Class A Shares through your securities dealer or through
any financial institution that is authorized to act as a shareholder servicing
agent. Contact them for details on how to enter and pay for your order. You may
also buy shares by sending your check (along with a completed Application Form)
directly to the Fund. The Application Form, which includes instructions, is
attached to this Prospectus.

You may invest in Class A Shares unless you are a defined contribution
plan with assets of $75 million or more.

Your purchase order may not be accepted if the sale of Fund shares has
been suspended or if it is determined that your purchase would be detrimental to
the interests of the Fund's shareholders.

Investment Minimums

Your initial investment must be at least $2,000. Subsequent investments
must be at least $100. The following are exceptions to these minimums:

<PAGE>

o If you are a shareholder of any other Flag Investors fund, your
initial investment in this Fund may be as low as $500.

o If you are a participant in the Fund's Automatic Investing Plan,
your initial investment may be as low as $250. If you participate in
the monthly plan, your subsequent investments may be as low as $100.
If you participate in the quarterly plan, your subsequent
investments may be as low as $250. Refer to the section on the
Fund's Automatic Investing Plan for details.

Investing Regularly

You may make regular investments in the Fund through any of the
following methods. If you wish to enroll in any of these programs or if you need
any additional information, complete the appropriate section of the attached
Application Form or contact your securities dealer, your servicing agent, or the
Transfer Agent.

Automatic Investing Plan. You may elect to make a regular monthly or
quarterly investment in Class A Shares. The amount you decide upon will be
withdrawn from your checking account using a pre-authorized check. When the
money is received by the Transfer Agent, it will be invested in Class A Shares
at that day's offering price. Either you or the Fund may discontinue your
participation upon 30 days' notice.

Dividend Reinvestment Plan. Unless you elect otherwise, all income and
capital gains distributions will be reinvested in additional Class A Shares at
net asset value. You may elect to receive your distributions in cash or to have
your distributions invested in shares of other Flag Investors funds. To make
either of these elections or to terminate automatic reinvestment, complete the
appropriate section of the attached Application Form or notify the Transfer
Agent, your securities dealer or your servicing agent at least five days before
the date on which the next dividend or distribution will be paid.

Systematic Purchase Plan. You may also purchase Class A Shares through
a Systematic Purchase Plan. Contact your securities dealer or servicing agent
for details.

HOW TO REDEEM SHARES

You may redeem Class A Shares through your securities dealer or
servicing agent. Contact them for details on how to enter your order and for
information as to how you will be paid. If you have an account with the Fund
that is in your name, you may also redeem shares by contacting the Transfer
Agent by mail or (if you are redeeming less than $50,000) by telephone. The
Transfer Agent will mail your redemption check within seven days after it
receives your order in proper form. Refer to the section on telephone
transactions for more information on this method of redemption.

<PAGE>

Your securities dealer, your servicing agent or the Transfer Agent may
require the following documents before they redeem your shares:

1) A letter of instructions specifying your account number and the number of
Class A Shares or dollar amount you wish to redeem. The letter must be
signed by all owners of the Class A Shares exactly as their names appear on
the account.

2) If you are redeeming more than $50,000, a guarantee of your signature by a
member of the Federal Deposit Insurance Corporation, a trust company,
broker, dealer, securities exchange or association, clearing agency, savings
association or (if authorized by state law) credit union.

3) Any stock certificates representing the Class A Shares you are redeeming.
The certificates must be either properly endorsed or accompanied by a duly
executed stock power.

4) Any additional documents that may be required if your account is in the name
of a corporation, partnership, trust or fiduciary.

Other Redemption Information

Any dividends payable on Class A Shares you redeem will be paid on the
next dividend payable date. If you have redeemed all of your Class A Shares by
that time, the dividend will be paid to you by check whether or not that is the
payment option you have selected.

If you redeem sufficient Class A Shares to reduce your investment to
$500 or less, the Fund has the power to redeem the remaining Class A Shares
after giving you 60 days' notice. The Fund reserves the right to redeem Class A
Shares in kind under certain circumstances.

If you own Class A Shares having a value of at least $10,000, you may
arrange to have some of your Class A Shares redeemed monthly or quarterly under
the Fund's Systematic Withdrawal Plan. Each redemption under this plan involves
all the tax and sales charge implications normally associated with Fund
redemptions. Contact your securities dealer, your servicing agent or the
Transfer Agent for information on this plan.

TELEPHONE TRANSACTIONS

If your Class A Shares are in an account with the Transfer Agent, you
may redeem them in any amount up to $50,000 or exchange them for Class A Shares
in another Flag Investors fund by calling the Transfer Agent on any Business Day
between the hours of 8:30 a.m. and 5:30 p.m. (Eastern Time). You are
automatically entitled to telephone transaction privileges but you may
specifically request that no telephone redemptions or exchanges be accepted for
your

9
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account. You may make this election when you complete the Application Form
or at any time thereafter by completing and returning documentation supplied by
the Transfer Agent.

The Fund and the Transfer Agent will employ reasonable procedures to
confirm that telephoned instructions are genuine. These procedures include
requiring you to provide certain personal identification information when you
open your account and before you effect each telephone transaction. You may be
required to provide additional telecopied instructions. If these procedures are
employed, neither the Fund nor the Transfer Agent will bear any liability for
following telephone instructions that it reasonably believes to be genuine. Your
telephone transaction request will be recorded.

During periods of extreme economic or market changes, you may
experience difficulty in contacting the Transfer Agent by telephone. In such
event, you should make your request by mail. If you hold your Class A Shares in
certificate form, you may not exchange or redeem them by telephone.

SALES CHARGES

Purchase Price

The price you pay to buy Class A Shares will be the offering price
which is calculated by adding any applicable sales charges to the Class A
Shares' net asset value per share. The amount of any sales charge included in
your purchase price will be according to the following schedule:

Class A
Sales Charge
as % of
------------------------------

Offering Net Amount
Amount of Purchase Price Invested
- --------------------------------------------------------------------------------
Less than $ 50,000 .......................... 4.50% 4.71%
$ 50,000 - $ 99,999 .......................... 3.50% 3.63%
$ 100,000 - $249,999........................... 2.50% 2.56%
$ 250,000 - $499,999........................... 2.00% 2.04%
$ 500,000 - $999,999........................... 1.50% 1.52%
$1,000,000 and over .......................... None None
- --------------------------------------------------------------------------------

Although you do not pay an initial sales charge when you invest
$1,000,000 or more in Class A Shares, you may pay a sales charge when you redeem
your Class A Shares. Refer to the section on redemption price for details. Your
securities dealer may be paid a commission at the time of your purchase.

<PAGE>

The sales charge you pay on your current purchase of Class A Shares may
be reduced under the circumstances listed below.

Rights of Accumulation. If you are purchasing additional Class A Shares
of this Fund or Class A shares of any other Flag Investors fund or if you
already have investments in Class A shares, you may combine the value of your
purchases with the value of your existing investments to determine whether you
qualify for a reduced sales charge. (For this purpose your existing investments
will be valued at the higher of cost or current value.) You may also combine
your purchases and investments with those of your spouse and your children under
the age of 21 for this purpose. You must be able to provide sufficient
information to verify that you qualify for this right of accumulation.

Letter of Intent. If you anticipate making additional purchases of Class
A Shares over the next 13 months, you may combine the value of your current
purchase with the value of your anticipated purchases to determine whether you
qualify for a reduced sales charge. You will be required to sign a letter of
intent specifying the total value of your anticipated purchases and to initially
purchase at least 5% of the total. When you make each purchase during the
period, you will pay the sales charge applicable to their combined value. If, at
the end of the 13-month period, the total value of your purchases is less than
the amount you indicated, you will be required to pay the difference between the
sales charges you paid and the sales charges applicable to the amount you
actually did purchase. Some of the Class A Shares you own will be redeemed to
pay this difference.

Purchases at Net Asset Value. You may buy Class A Shares without paying a sales
charge under the following circumstances:

1) If you are reinvesting some or all of the proceeds of a redemption of Class
A Shares made within the last 90 days.

2) If you are exchanging an investment in another Flag Investors fund for an
investment in this Fund (see "Purchases by Exchange" for a description of
the conditions).

3) If you are a current or retired Fund Director, a director, an employee or a
member of the immediate family of an employee of any of the following (or
their respective affiliates): the Fund's distributor, the Advisor, the
Fund's administrator, or a broker-dealer authorized to sell Class A Shares.

4) If you are buying shares in any of the following types of accounts:

(i) A qualified retirement plan;

(ii) A Flag Investors fund payroll savings plan program;

11
<PAGE>

(iii) A fiduciary or advisory account with a bank, bank trust department,
registered investment advisory company, financial planner or
securities dealer purchasing shares on your behalf. To qualify for
this provision you must be paying an account management fee for the
fiduciary or advisory services. You may be charged an additional fee
by your securities dealer or servicing agent if you buy shares in this
manner.

Purchases by Exchange

You may exchange Class A shares of any other Flag Investors fund with
the same sales charge structure for an equal dollar amount of Class A Shares,
without payment of the sales charges described above or any other charge. If you
exchange Class A shares of any Flag Investors fund with a lower sales charge
structure into Class A Shares, you will be charged the difference in sales
charges unless (with the exception of Flag Investors Cash Reserve Prime Class A
Shares) you have owned the shares for at least 24 months. You may enter both
your redemption and purchase orders on the same Business Day or, if you have
already redeemed the shares of the other fund, you may enter your purchase order
within 90 days of the redemption. The Fund may modify or terminate these offers
of exchange upon 60 days' notice.

You may request an exchange through your securities dealer or servicing
agent. Contact them for details on how to enter your order. If your shares are
in an account with the Fund's Transfer Agent, you may also request an exchange
directly through the Transfer Agent by mail or by telephone.

Redemption Price

The amount of any sales charge deducted from your redemption price will
be determined according to the following schedule.

Sales Charge as a Percentage of the
Dollar Amount Subject to Charge

Years Since Purchase (As % of Cost or Value)
- --------------------------------------------------------------------------------
First ................................................ 1.00%*
Second ............................................... 0.50%*
Thereafter ........................................... None
- --------------------------------------------------------------------------------

* You will pay a sales charge when you redeem Class A Shares only if you bought
those shares at net asset value as part of an investment of $1 million or
more.

Determination of Sales Charge. The sales charge applicable to your
redemption is calculated in a manner that results in the lowest possible rate:

<PAGE>

1) No sales charge will be applied to Class A Shares you own as a result of
reinvesting dividends or distributions.

2) If you have purchased Class A Shares at various times, the sales charge will
be applied first to the Class A Shares you have owned for the longest period
of time.

3) If you acquired your Class A Shares through an exchange of Class A shares of
another Flag Investors fund, the period of time you held the original Class
A shares will be combined with the period of time you held the Class A
Shares being redeemed to determine the years since purchase.

4) The sales charge is applied to the lesser of the cost of the Class A Shares
or their value at the time of your redemption.

Waiver of Sales Charge. You may redeem Class A Shares without paying a
sales charge under any of the following circumstances:

1) If you are exchanging your Class A Shares for Class A shares of another Flag
Investors fund with the same sales charge structure.

2) If your redemption represents a distribution from a Systematic Withdrawal
Plan. This waiver applies only if the annual withdrawals under your Plan are
12% or less of your Class A Share balance.

3) If Class A Shares are being redeemed in your account following your death or
a determination that you are disabled. This waiver applies only under the
following conditions:

(i) The account is registered in your name either individually, as a joint
tenant with rights of survivorship, as a participant in community
property, or as a minor child under the Uniform Gifts or Uniform
Transfers to Minors Acts.

(ii) Either you or your representative notifies your securities dealer,
servicing agent or the Transfer Agent that such circumstances exist.

4) If your original investment was at least $3,000,000 and your securities
dealer has agreed to return to the Fund's distributor any payments received
when you bought your shares.

Distribution Plan

The Fund has adopted a plan under Rule 12b-1 that allows the Fund to
pay your securities dealer or shareholder servicing agent distribution and other
fees for the sale of its shares and for shareholder service. Class A Shares pay
an annual distribution fee equal to

<PAGE>

0.25% of average daily net assets. Because these fees are paid out of net assets
on an on-going basis, they will, over time, increase the cost of your investment
and may cost you more than paying other types of sales charges.

DIVIDENDS AND TAXES

Dividends and Distributions

The Fund's policy is to distribute to shareholders substantially all of
its taxable net investment income in the form of monthly dividends and to
distribute taxable net capital gains on an annual basis.

Certain Federal Income Tax Consequences

The dividends and distributions you receive from the Fund may be
subject to federal, state and local taxation, depending on your tax situation.
The tax treatment of dividends and distributions is the same whether or not you
reinvest them. Dividends are taxed as ordinary income and capital gains
distributions are taxed at various rates based on how long the Fund held the
assets. The Fund intends to generate and pay to shareholders income that is
exempt from federal income tax. The Fund may, however, invest a portion of its
assets in securities that generate income that is not exempt from federal income
tax. The Fund will tell you annually how to treat dividends and distributions.

If you redeem Class A Shares, you will be subject to tax on any gain.
The character of such gain will generally be based on your holding period for
the shares. An exchange of Class A Shares of the Fund for Class A shares of
another fund is a sale of Fund shares for tax purposes. More information about
taxes is in the Statement of Additional Information.

Because each investor's tax circumstances are unique and because the
tax laws are subject to change, you should consult your tax advisor about your
investment. In particular, the state and local taxation of tax-exempt income
paid by the Fund may differ from the rules for federal income taxation described
above.

INVESTMENT ADVISOR

International Strategy & Investment Inc. ("ISI" or the "Advisor") is
the Fund's investment advisor. ISI is also the investment advisor to Total
Return U.S. Treasury Fund, Inc., North American Government Bond Fund, Inc. and
ISI Strategy Fund, Inc. These funds, together with the Fund, had approximately
$510 billion of net assets as of December 31, 1998.

<PAGE>

As compensation for its services for the fiscal year ended October 31,
1998, ISI received from the Fund a fee equal to 0.25% (net of fee waivers) of
the Fund's average daily net assets.

The Advisor and the Fund's administrator, have contractually agreed to
reduce proportionately their respective annual fees if necessary, so that the
Fund's annual expenses do not exceed 0.90% of its average daily net assets.
This agreement will continue until at least February 29, 2000 and may be
extended.

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 nineteen 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 to that, 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.

ADMINISTRATOR

Investment Company Capital Corp. ("ICC") 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 Fund's shares are distributed and oversight of the
relationship between the Fund and its other service providers. ICC is also the
Fund's transfer and dividend disbursing agent and provides accounting services
to the Fund.

<PAGE>

FINANCIAL HIGHLIGHTS

The financial highlights table is intended to help you understand the
Fund's financial performance for the past five fiscal years. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned on an investment in
the Fund (assuming reinvestment of all dividends and distributions). This
information is part of the Fund's financial statements which have been audited
by PricewaterhouseCoopers LLP. These financial statements are included in the
Statement of Additional Information, which is available upon request.

(For a share outstanding throughout each period)
- -------------------------------------------------------------------------------------------------------
Class A Shares
---------------------------------------------------
For the Year Ended October
---------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of year...... $10.79 $10.58 $10.65 $9.81 $11.10
------ ------ ------ ----- ------
Income from Investment Operations:
Net investment income..................... 0.46 0.52 0.48 0.48 0.46
Net realized and unrealized gain/(loss)
on investments......................... 0.33 0.24 -- 0.98 (1.15)
---- ---- ---- ---- ------
Total from Investment Operations.......... 0.79 0.76 0.48 1.46 (0.69)
---- ---- ---- ---- ------

Less Distributions:
Distributions from net investment income
and net realized short-term gains....... (0.54) (0.52) (0.54) (0.54) (0.56)
Distributions from net realized mid-term
and long-term gains..................... (0.03) (0.03) (0.01) (0.08) (0.04)
------ ------ ------ ------ ------

Total distributions....................... (0.57) (0.55) (0.55) (0.62) (0.60)
------ ------ ------ ------ ------
Net asset value at end of year ........... $11.01 $10.79 $10.58 $10.65 $9.81
======= ======= ======= ======= =====

Total Return(1).............................. 7.51% 7.43% 4.67% 15.42% (6.49)%

Ratios to Average Daily Net Assets:
Expenses(2) .............................. 0.90% 0.90% 0.90% 0.90% 0.90%
Net investment income(3).................. 4.24% 4.46% 4.48% 4.72% 4.37%

Supplemental Data:
Net assets at end of year (000):
ISI Class Shares.......................... $80,749 $79,003 $84,712 $86,292 $83,607
Flag Investors Class A Shares............. $37,212 $38,390 $41,193 $45,980 $49,903
Portfolio turnover rate................... 18% 26% 32% 55% 37%

</TABLE>

- ---------------------------
(1) Total return excludes the effect of sales charge.
(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%, 1.13%
1.10% and 1.11% for the years ended October 31, 1998, 1997, 1996, 1995 and
1994, respectively.
(3) Without the waiver of advisory and administration fees, the ratio of net
investment income to average daily net assets would have been 4.01%, 4.26%,
4.25%, 4.52% and 4.16% for the years ended October 31, 1998, 1997, 1996,
1995 and 1994, respectively.

<PAGE>

FLAG INVESTORS MANAGED MUNICIPAL FUND CLASS A SHARES
NEW ACCOUNT APPLICATION

<TABLE>
<CAPTION>
<S> <C>
Make check payable to "Flag Investors Managed Municipal For assistance in completing this Application
Fund Class A Shares" and mail with this Application to: please call: 1-800-553-8080,
Monday through Friday, 8:30 a.m. to
5:30 p.m. (Eastern Time).
</TABLE>

Flag Investors Funds
P.O. Box 419663
Kansas City, MO 64141-6663
Attn: Flag Investors Managed Municipal Fund Class A Shares

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.
----------------------------------------
Your Account Registration (Please Print)
----------------------------------------

Existing Account No., if any:_____________________________________

<TABLE>
<CAPTION>
<S> <C>
Individual or Joint Tenant Gifts to Minors

_________________________________________________ __________________________________________
First Name Initial Last Name Custodian's Name (only one allowed by law)

_________________________________________________ __________________________________________
Social Security Number Minor's Name (only one)

__________________________________________________ _______________________________ ___________________________________
Joint Tenant Initial Last Name Social Security Number of Minor Minor's Date of Birth (Mo./Day/Yr.)

under the____________________ Uniform Gifts to Minors Act
(State of Residence)

Corporations, Trusts, Partnerships, etc. Mailing Address

____________________________________________________ _____________________________________________
Name of Corporation, Trust or Partnership Street

__________________________________ ________________ _______________________________________________
Tax ID Number Date of Trust City State Zip

( )
________________________________________________________ _______________________________________________
Name of Trustees (if to be included in the Registration) Daytime Phone

________________________________________________________
For the Benefit of

</TABLE>
<PAGE>
---------------------------
Letter of Intent (Optional)
---------------------------

|_| I intend to invest at least the amount indicated below in Class A Shares of
Managed Municipal Fund, Inc. I understand that if I satisfy the conditions
described in the attached prospectus, this Letter of Intent entitles me to the
applicable level of reduced sales charges on my purchases.

|_|$50,000 |_|$100,000 |_|$250,000 |_|$500,000 |_|$1,000,000

--------------------------------
Right of Accumulation (Optional)
--------------------------------

List the Account numbers of other Flag Investors Funds that you or your
immediate family already own that qualify you for reduced sales charges.

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

_______________________________________________________________________________

--------------------
Distribution Options
--------------------

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

Income Dividends Capital Gains
|_| Reinvested in additional shares |_| Reinvested in additional shares
|_| Paid in cash |_| Paid in cash

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

A-1
<PAGE>
-----------------------------------
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)

-----------------------------
Please attach a voided check.
-----------------------------
<TABLE>
<CAPTION>
<S> <C>

________________________________________________ ____________________________________________________________________
Bank Name Depositor's Signature Date

________________________________________________ _____________________________________________________________________
Existing Flag Investors Fund Account No., if any Depositor's Signature (if joint acct., both must sign) Date
</TABLE>
-------------------------------------
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 (complete as applicable)
$________, from Class A Shares that I own, payable to the account registration
address as shown above. (Participation requires minimum account value of $10,000
per class.)

Frequency (check one): |_| Monthly |_| Quarterly (January, April, July
and October)

----------------------
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 predesignated bank account, please
provide the following information:

Bank:___________________________ Bank Account No.:_____________________

Address:________________________ Bank Account Name:____________________

________________________

------------------------------------
Signature and Taxpayer Certification
------------------------------------
- --------------------------------------------------------------------------------
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 your
ultimate U.S. tax liability.

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 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.
<PAGE>
|_| 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.
- --------------------------------------------------------------------------------

I acknowledge that I am of legal age in the state of my residence. I have
received a copy of the Fund's prospectus.

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

____________________________ __________________________________________________
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>

Investment Advisor
INTERNATIONAL STRATEGY & INVESTMENT INC.
717 Fifth Avenue
New York, New York 10022

Administrator Distributor
INVESTMENT COMPANY CAPITAL CORP. ICC DISTRIBUTORS, INC.
One South Street Two Portland Square
Baltimore, Maryland 21202 Portland, Maine 04101

Transfer Agent Independent Accountants
INVESTMENT COMPANY CAPITAL CORP. PRICEWATERHOUSECOOPERS LLP
One South Street 250 West Pratt Street
Baltimore, Maryland 21202 Baltimore, Maryland 21201
1-800-553-8080

Custodian Fund Counsel
BANKERS TRUST COMPANY MORGAN, LEWIS & BOCKIUS LLP
130 Liberty Street 1701 Market Street
New York, New York 10006 Philadelphia, Pennsylvania 19103

<PAGE>

[FLAG INVESTORS LOGO]
Flag Investors Funds
P.O. Box 515
Baltimore, Maryland 21203
(800) 767-FLAG

- --------------------------------------------------------------------------------
You may obtain the following additional information about the Fund, free of
charge, from your securities dealer or servicing agent or by calling (800)
767-FLAG:

o A statement of additional information (SAI) about the Fund that is
incorporated by reference into the prospectus.

o The Fund's most recent annual and semi-annual reports containing
detailed financial information and, in the case of the annual report, a
discussion of market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal
year.

In addition you may review information about the Fund (including the SAI) at the
Securities and Exchange Commission's Public Reference Room in Washington, D.C.
(Call 1-800-SEC-0330 to find out about the operation of the Public Reference
Room.) The Commission's Internet site at http://www.sec.gov has reports and
other information about the Fund. You may get copies of this information by
writing the Public Reference Section of the Commission, Washington, D.C.
20549-5009. You will be charged for duplicating fees.

For other shareholder inquiries, contact the Transfer Agent at (800) 553-8080.
For Fund information, call (800) 767-FLAG or your securities dealer or servicing
agent.
Investment Company Act File No. 811-6023
- --------------------------------------------------------------------------------

MMPRS

<PAGE>

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

This mutual fund (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.

The Fund offers shares through securities dealers and financial
institutions that act as shareholder servicing agents. You may also buy Shares
through the Fund's Transfer Agent. (See "How to Buy Shares"). This Prospectus
describes the ISI class (the "Shares") of the Fund

TABLE OF CONTENTS
Page
----
Investment Summary............................................................2
Fees and Expenses of the Fund.................................................4
Investment Program............................................................5
The Fund's Net Asset Value....................................................6
How to Buy Shares.............................................................7
How to Redeem Shares..........................................................8
Telephone Transactions........................................................9
Sales Charges.................................................................9
Dividends and Taxes..........................................................12
Investment Advisor...........................................................12
Administrator................................................................13
Financial Highlights.........................................................14

The date of this Prospectus is March 1, 1999

<PAGE>

INVESTMENT SUMMARY

Objectives and Strategies

Risk Profile

The Fund is suited for you if you are seeking a high level of total
return including some income exempt from federal income taxes, but you want the
value of your investment to remain relatively stable.

Interest Rate Risk. The value of the Fund's shares can be expected to
increase during periods of falling interest rates and decrease during periods of
rising interest rates.

Style Risk. The success of the Fund's investment approach will depend
on the Advisor's ability to determine which direction interest rates are likely
to move.

Special Tax Features. While income distributions from the Fund will
generally be tax exempt, distributions of capital gains will be taxable.

An investment in the Fund could lose money. An investment in the Fund
is not a bank deposit and is not guaranteed by the FDIC or any other government
agency.

Fund Performance

The following bar chart and table show the performance of the Shares
both year-by-year and as an average over different periods of time. The
variability of performance over time provides an indication of the risks of
investing in the Fund. This is an historical record and does not necessarily
indicate how the Fund will perform in the future.

-2-

<PAGE>

ISI Shares*
For years ended December 31,

1991 11.02%
1992 6.65%
1993 11.41%
1994 -6.28%
1995 17.78%
1996 2.72%
1997 8.40%
1998 6.05%

* The bar chart does not reflect sales charges. If it did, returns would be less
than those shown.

During the 8-year period shown in the bar chart, the highest return for
a quarter was 7.29% (quarter ended 3/31/95) and the lowest return for a quarter
was -5.67% (quarter ended 3/31/94).

Average Annual Total Return (for the periods ended December 31, 1998)

Lehman
Brothers Lehman
General Brothers Consumer
ISI Obligation Prerefunded Price
Shares(1) Index(2) Index(2) Index(2)

Past One Year ..... 1.33% 6.67% 5.67% 1.61%

Past Five Years.... 4.49% 6.13% 5.10% 2.36%

Since Inception.... 6.53% (2/26/90) 7.70%(3) 6.65%(3) 2.87%(3)

- --------------------
(1) These figures assumes the reinvestment of dividends and capital gains
distributions and include the impact of the maximum sales charges.
(2) The Lehman Brothers General Obligation Index reflects general municipal
market performance. The Lehman Brothers Prerefunded Index is a better
indicator of the Fund's performance due to its higher quality
characteristics. These indices are passive measurements of municipal bond
performance. They do not factor in the costs of buying, selling and holding
securities -- costs which are reflected in the Fund's results. The Consumer
Price Index is a widely used measure of inflation.
(3) For the period from 2/28/90 through 12/31/98.

-3-

<PAGE>

FEES AND EXPENSES OF THE FUND

This table describes the fees and expenses that you may pay if you buy and hold
Shares.

<TABLE>
<CAPTION>
<S> <C>
Shareholder Fees (fees paid directly from your investment):

Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)............... 4.45%

Maximum Deferred Sales Charge (Load)............................................................... None

Maximum Sales Charge (Load) Imposed on Reinvested Dividends........................................ None

Redemption Fee .................................................................................... None

Exchange Fee ...................................................................................... None

Annual Fund Operating Expenses (expenses that are deducted from Fund assets):

Management Fees ................................................................................... 0.40%

Distribution and/or Service (12b-1) Fees........................................................... 0.25%

Other Expenses..................................................................................... 0.48%
------

Total Annual Fund Operating Expenses............................................................... 1.13%
------

Less Fee Waivers................................................................................... (0.23%)*
------

Net Expenses ...................................................................................... 0.90%
======
</TABLE>

- --------------
* The Advisor and the Fund's administrator have contractually agreed to limit
their fees proportionately to the extent necessary so that the Fund's Total
Annual Fund Operating Expenses do not exceed 0.90% of the Fund's average
daily net assets. This agreement will continue until at least February 29,
2000 and may be extended.

Example:

This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds.

The Example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your Shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions, your costs would be:

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
$538* $772* $1,025* $1,756*
</TABLE>
- ----------------
* Based on Total Annual Fund Operating Expenses, after fee waivers and
reimbursements for year 1 only.

<PAGE>

-4-
<PAGE>

charge you paid and the recurring 12b-1 fees may exceed the maximum sales
charges permitted by the Conduct Rules of the National Association of Securities
Dealers, Inc.

INVESTMENT PROGRAM

Investment Objective, Policies and Risk Considerations

-5-
<PAGE>

and corporate securities, and repurchase agreements fully collateralized by
these securities. These temporary, defensive investments may include taxable
investments that would not ordinarily be consistent with the Fund's objectives.
While engaged in a temporary defensive strategy, the Fund may not achieve its
investment objective. The Advisor would follow such a strategy only if it
believed the risk of loss outweighed the opportunity for gain.

Year 2000 Issues

THE FUND'S NET ASSET VALUE

The price you pay when you buy shares or receive when you redeem shares
is based on the Fund's net asset value per share. When you buy Shares, the price
you pay may be increased by a sales charge. Read the section on sales charges
for details on how and when this charge may or may not be imposed.

You may buy or redeem Shares on any day the New York Stock Exchange is
open for business (a "Business Day"). If your order is entered before the net
asset value per share is determined for that day, the price you pay or receive
will be based on that day's net asset value per share. If your order is entered
after the net asset value per share is determined for that day, the price you
pay or receive will be based on the next Business Day's net asset value per
share.

The following sections describe how to buy and redeem Shares.

-6-

<PAGE>

HOW TO BUY SHARES

You may buy Shares through your securities dealer or through any
financial institution that is authorized to act as a shareholder servicing
agent. You may also buy Shares by sending your check (along with a completed
Application Form) directly to the Fund. The Application Form, which includes
instructions, is attached to this Prospectus.

Your purchase order may not be accepted if the sale of Fund shares has
been suspended or if it is determined that your purchase would be detrimental to
the interests of the Fund's shareholders.

Investment Minimums

Your initial investment must be at least $5,000. Subsequent investments
must be at least $250. The following is an exception to this minimum:

o If you are a participant in the Fund's Automatic Investing Plan, your
initial investment may be as low as $250. If you participate in the monthly
plan, your subsequent investments may be as low as $100. If you participate
in the quarterly plan, your subsequent investments may be as low as $250.
Refer to the section on the Fund's Automatic Investing Plan for details.

Investing Regularly

-7-
<PAGE>

Automatic Investing Plan. You may elect to make a regular monthly or
quarterly investment in Shares. The amount you decide upon will be withdrawn
from your checking account using a pre-authorized check. When the money is
received by the Transfer Agent, it will be invested in Shares at that day's
offering price. Either you or the Fund may discontinue your participation upon
30 days' notice.

Dividend Reinvestment Plan. Unless you elect otherwise, all income and
capital gains distributions will be reinvested in additional Shares at net asset
value. You may elect to receive your distributions in cash or to have your
distributions invested in shares of other funds in the ISI family of funds. To
make either of these elections or to terminate automatic reinvestment, complete
the appropriate section of the attached Application Form or notify the Transfer
Agent, your securities dealer or your servicing agent at least five days before
the date on which the next dividend or distribution will be paid.

HOW TO REDEEM SHARES

You may redeem all or part of your investment through your securities
dealer or servicing agent. Contact them for details on how to enter your order
and for information as to how you will be paid. If you have an account with the
Fund that is in your name, you may also redeem Shares by contacting the Transfer
Agent by mail or (if you are redeeming less than $50,000) by telephone. The
Transfer Agent will mail your redemption check within seven days after it
receives your order in proper form. Refer to the section on telephone
transactions for more information on this method of redemption.

Your securities dealer, your servicing agent or the Transfer Agent may
require the following documents before they redeem your Shares:

1) A letter of instructions specifying your account number and the number of
Shares or dollar amount you wish to redeem. The letter must be signed by all
owners of the Shares exactly as their names appear on the account.

3) Any stock certificates representing the Shares you are redeeming. The
certificates must be either properly endorsed or accompanied by a duly
executed stock power.

4) Any additional documents that may be required if your account is in the name
of a corporation, partnership, trust or fiduciary.

-8-

<PAGE>

Other Redemption Information

Any dividends payable on Shares you redeem will be paid on the next
dividend payable date. If you have redeemed all of your Shares by that time, the
dividend will be paid to you by check whether or not that is the payment option
you have selected.

If you redeem sufficient Shares to reduce your investment to $500 or
less, the Fund has the power to redeem the remaining Shares after giving you 60
days' notice. The Fund reserves the right to redeem Shares in kind under certain
circumstances.

TELEPHONE TRANSACTIONS

If your Shares are in an account with the Transfer Agent, you may
redeem them in any amount up to $50,000 or exchange them for shares in another
ISI fund by calling the Transfer Agent on any Business Day between the hours of
8:30 a.m. and 5:30 p.m. (Eastern Time). You are automatically entitled to
telephone transaction privileges unless you specifically request that no
telephone redemptions or exchanges be accepted for your account. You may make
this election when you complete the Application Form or at any time thereafter
by completing and returning documentation supplied by the Transfer Agent.

The Fund and the Transfer Agent will employ reasonable procedures to
confirm that telephoned instructions are genuine. These procedures include
requiring you to provide certain personal identification information when you
open your account and before you effect each telephone transaction. You may be
required to provide additional telecopied instructions. If these procedures are
employed, neither the Fund nor the Transfer Agent will bear any liability for
following telephone instructions that it reasonably believes to be genuine.
Your telephone transaction request will be recorded.

During periods of extreme economic or market changes, you may
experience difficulty in contacting the Transfer Agent by telephone. In such
event, you should make your request by mail. If you hold your Shares in
certificate form, you may not exchange or redeem them by telephone.

SALES CHARGES

Purchase Price

The price you pay to buy Shares will be the Fund's offering price which
is calculated by adding any applicable sales charges to the net asset value per
share. The amount of any sales charge included in your purchase price will be
according to the following schedule:

-9-

<PAGE>

Sales Charge as % of
- --------------------------------------------------------------------------------
Offering Net Amount
Amount of Purchase Price Invested
- --------------------------------------------------------------------------------
Less than $ 50,000 ............................ 4.45% 4.66%
$ 50,000 - $ 99,999 ............................ 3.50% 3.63%
$ 100,000 - $ 249,999 ............................ 2.50% 2.56%
$ 250,000 - $ 499,999 ............................ 2.00% 2.04%
$ 500,000 - $ 999,999 ............................ 1.50% 1.52%
$1,000,000 - $1,999,999 ............................ 0.75% 0.76%
$2,000,000 - $2,999,999 ............................ 0.50% 0.50%
$3,000,000 - and over .............................. None None
- --------------------------------------------------------------------------------
The sales charge you pay on your current purchase of Shares may be
reduced under the circumstances listed below.

Rights of Accumulation. If you are purchasing additional Shares of this
Fund or shares of any other mutual fund in the ISI family of funds, you may
combine the value of your purchases with the value of your existing investments
to determine whether you qualify for a reduced sales charge. (For this purpose
your existing investments will be valued at the higher of cost or current
value.) You may also combine your purchases and investments with those of your
spouse and your children under the age of 21 for this purpose. You must be able
to provide sufficient information to verify that you qualify for this right of
accumulation.

Letter of Intent. If you anticipate making additional purchases of
Shares over the next 13 months, you may combine the value of your current
purchase with the value of your anticipated purchases to determine whether you
qualify for a reduced sales charge. You will be required to sign a letter of
intent specifying the total value of your anticipated purchases and to initially
purchase at least 5% of the total. When you make each purchase during the
period, you will pay the sales charge applicable to their combined value. If, at
the end of the 13-month period, the total value of your purchases is less than
the amount you indicated, you will be required to pay the difference between the
sales charges you paid and the sales charges applicable to the amount you
actually did purchase. Some of the Shares you own will be redeemed to pay this
difference.

Purchases at Net Asset Value. You may buy Shares without paying a sales
charge under the following circumstances:

1) If you are reinvesting some or all of the proceeds of a redemption of Shares
made within the last six months, provided that the amount you are
reinvesting is at least $5,000.

2) If you are exchanging an investment in another ISI fund for an investment in
this Fund (see "Purchases by Exchange" for a description of the conditions).

<PAGE>

3) If you are a current or retired Fund Director, a director, employee or a
member of the immediate family of an employee of any of the following or
their respective affiliates: the Advisor, the Fund's administrator, or a
broker-dealer authorized to sell shares of the Fund.

4) If you purchase Shares in a fiduciary or advisory account with a bank, bank
trust department, registered investment advisory company, financial planner
or securities dealer purchasing shares on your behalf. To qualify for this
provision you must be paying an account management fee for the fiduciary or
advisory services. You may be charged an additional fee by your securities
dealer or servicing agent if you buy shares in this manner.

5) If you pay for your purchase with the proceeds from a redemption of shares
of any other mutual fund on which you have paid a sales charge, or from a
sale of shares of any closed-end fund. In order to qualify for this
provision, you must purchase your shares by February 29, 2000 and provide
documentation of your redemption or sale.

Purchases by Exchange

You may exchange shares of any other fund in the ISI family of funds
with the same sales charge structure for an equal dollar amount of Shares
without payment of the sales charges described above or any other charge. In
addition, you may exchange shares of any fund in the ISI family of funds with a
lower sales charge structure or that were purchased through a special offer, for
an equal dollar amount of Shares if you have owned the shares you are redeeming
for at least 24 months. If you have owned them for less than 24 months, you will
be charged the difference in sales charges. You may enter both your redemption
and purchase orders on the same Business Day or, if you have already redeemed
the shares of the other fund, you may enter your purchase order within six
months of the redemption provided the amount of the purchase order is at least
$5,000. The Fund may modify or terminate these offers of exchange upon 60 days'
notice.

You may request an exchange through your securities dealer or servicing
agent. Contact them for details on how to enter your order. If your Shares are
in an account with the Fund's Transfer Agent, you may also request an exchange
directly through the Transfer Agent by mail or by telephone.

Redemption Price

The price you receive when you redeem Shares will be the net asset
value per share.

Distribution Plan

The Fund has adopted a plan under Rule 12b-1 that allows the Fund to
pay your securities dealer or shareholder servicing agent distribution and other
fees for the sale of its Shares and for shareholder service. Shares pay an
annual distribution fee equal to 0.25% of average daily net

-11-
<PAGE>

assets. Because these fees are paid out of net assets on an on-going basis, they
will, over time, increase the cost of your investment and may cost you more than
paying other types of sales charges.

DIVIDENDS AND TAXES

Dividends and Distributions

Certain Federal Income Tax Consequences

If you redeem Shares of the Fund you will be subject to tax on any
gain. The character of such gain will generally be based on your holding period
for the shares. An exchange of Shares of the Fund for shares of another fund is
a sale of Fund shares for tax purposes. More information about taxes is in the
Statement of Additional Information.

INVESTMENT ADVISOR

International Strategy & Investment Inc. ("ISI" or the "Advisor") is
the Fund's investment advisor. ISI is also the investment advisor to Total
Return U.S. Treasury Fund, Inc., ISI Strategy Fund, Inc. and North American
Government Bond Fund, Inc. These funds, together with the Fund, had
approximately $510 billion of net assets as of December 31, 1998.

As compensation for its services for the fiscal year ended October 31,
1998, ISI received from the Fund a fee equal to 0.25% (net of fee waivers) of
the Fund's average daily net assets.

-12-
<PAGE>

The Advisor and the Fund's administrator, have contractually agreed to
reduce proportionately their respective annual fees if necessary, so that the
Fund's annual expenses do not exceed 0.90% of its average daily net assets. This
agreement will continue until at least February 29, 2000 and may be extended.

Portfolio Managers

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 nineteen years.

ADMINISTRATOR

Investment Company Capital Corp. ("ICC") 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. ICC is also the Fund's
transfer and dividend disbursing agent and provides accounting services to the
Fund.

-13-
<PAGE>

FINANCIAL HIGHLIGHTS

The financial highlights table is intended to help you understand the
Fund's financial performance for the past five fiscal years. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned on an investment in
the Fund (assuming reinvestment of all dividends and distributions). This
information is a part of the Fund's financial statements, which have been
audited by PricewaterhouseCoopers LLP. These financial statements are included
in the Statement of Additional Information, which is available upon request.

<TABLE>
<CAPTION>
(For a share outstanding throughout each period)
- ------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of year................... $10.79 $10.58 $10.65 $9.81 $11.10
------- ------- ------- ------- -------
Income from Investment Operations:
Net investment income.................................. 0.46 0.52 0.48 0.48 0.46
Net realized and unrealized gain/(loss) on investments. 0.33 0.24 -- 0.98 (1.15)
------- ------- ------- ------- -------
Total from Investment Operations....................... 0.79 0.76 0.48 1.46 (0.69)
------- ------- ------- ------- -------
Less Distributions:
Distributions from net investment income and net
realized short-term gains............................ (0.54) (0.52) (0.54) (0.54) (0.56)
Distributions from net realized mid-term and long-term
gains................................................ (0.03) (0.03) (0.01) (0.08) (0.04)
Total distributions.................................... (0.57) (0.55) (0.55) (0.62) (0.60)
------- ------- ------- ------- -------
Net asset value at end of year ........................ $11.01 $10.79 $10.58 $10.65 $9.81
======= ======= ======= ======= =======

Total Return(1)............................................ 7.51% 7.43% 4.67% 15.42% (6.49)%

Ratios to Average Daily Net Assets:
Expenses(2)............................................ 0.90% 0.90% 0.90% 0.90% 0.90%
Net investment income(3)............................... 4.24% 4.46% 4.48% 4.72% 4.37%

Supplemental Data:
Net assets at end of year:
ISI Class Shares....................................... $80,749 $79,003 $84,712 $86,292 $83,607
Flag Investors Class A Shares.......................... $37,212 $38,390 $41,193 $45,980 $49,903
Portfolio turnover rate................................ 18% 26% 32% 55% 37%
</TABLE>
- ------------
(1) Total return excludes the effect of sales charge.
(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%, 1.13%,
1.10% and 1.11% for the years ended October 31, 1998, 1997, 1996, 1995 and
1994, respectively.
(3) Without the waiver of advisory and administration fees, the ratio of net
investment income to average daily net assets would have been 4.01%, 4.26%,
4.25%, 4.52% and 4.16% for the years ended October 31, 1998, 1997, 1996,
1995 and 1994, respectively.

-14-

<PAGE>

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

Make check payable to "ISI Managed Municipal Fund Shares" and mail with this
Application to:
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. To open an IRA account, call ISI at (800) 955-7175 to request an
application.
<TABLE>
<CAPTION>
<S> <C>
Your Account Registration (Please Print) __________________________________________
Existing Account No., if any

- -------------------------- ---------------
Individual or Joint Tenant Gifts to Minors
- -------------------------- ---------------

________________________________________________________ _______________________________________________________________
First Name Initial Last Name Custodian's Name (only one allowed by law)

________________________________________________________ _______________________________________________________________
Social Security Number Minor's Name (only one)

________________________________________________________ _______________________________________________________________
Joint Tenant Initial Last Name Social Security Number of Minor Minor's Date of Birth
(Mo./Day/Yr.)
________________________________________________________
Social Security Number under the ______________________ Uniform Gifts to Minors Act
State of Residence

- ---------------------------------------- ---------------
Corporations, Trusts, Partnerships, etc. Mailing Address
- ---------------------------------------- ---------------

________________________________________________________ _______________________________________________________________
Name of Corporation, Trust or Partnership Street

________________________________________________________ _______________________________________________________________
Tax ID Number City State Zip

( )
________________________________________________________ _______________________________________________________________
Name of Trustees (If to be included in the Registration) Daytime Phone

Statement of Intention (Optional)

|_| I intend to invest at least the amount indicated below in ISI Shares of Managed Municipal Fund, Inc. I understand that if
I satisfy the conditions described in the attached prospectus, this Letter of Intent entitles me to the applicable level of
reduced sales charges on my purchases.

___$50,000 ___$100,000 ___$250,000 ___$500,000 ___$1,000,000 ___$2,000,000 ___$3,000,000
</TABLE>
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
--------- ----------- ------------ ------------
________________________________________________________________________________

________________________________________________________________________________

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 Capital Gains
|_| Reinvested in additional shares |_| Reinvested in additional shares
|_| Paid in Cash |_| Paid in Cash

Call (800) 882-8585 for information about reinvesting your dividends in other
funds in the ISI Family of Funds.
<PAGE>

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)
-----------------------------
Please attach a voided check.
-----------------------------

<TABLE>
<CAPTION>
<S> <C>
_______________________________________________________ ______________________________________________________
Bank Name Depositor's Signature Date

_______________________________________________________ ______________________________________________________
Existing ISI Managed Municipal Fund Account No., if any Depositor's Signature Date
(If joint acct., both must sign)
</TABLE>

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: ____________________
_____________________________________

Signature and Taxpayer Certification
- --------------------------------------------------------------------------------

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 your
ultimate U.S. tax liability. 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.
- --------------------------------------------------------------------------------

I acknowledge that I am of legal age in the state of my residence. I have
received a copy of the Fund's prospectus.
<PAGE>
- --------------------------------------------------------------------------------
The Internal Revenue Service does not require your consent to any provision of
this document other than the certifications required to avoid backup
withholding.
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
<S> <C>
____________________________________________ _________________________________________________________
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.:_________________________________________________
</TABLE>

<PAGE>

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

Investment Advisor
INTERNATIONAL STRATEGY & INVESTMENT INC.
717 Fifth Avenue
New York, New York 10022

Administrator Distributor
INVESTMENT COMPANY CAPITAL CORP. INTERNATIONAL STRATEGY
One South Street & INVESTMENT GROUP INC.
Baltimore, Maryland 21202 717 Fifth Avenue
New York, New York 10022
1-800-955-7175

Custodian Fund Counsel
BANKERS TRUST COMPANY MORGAN, LEWIS & BOCKIUS LLP
130 Liberty Street 1701 Market Street
New York, New York 10006 Philadelphia, Pennsylvania 19103

<PAGE>

ISI
MANAGED
MUNICIPAL FUND
SHARES

(A Class of Managed
Municipal Fund, Inc.)

You may obtain the following additional information about the Fund,
free of charge, from your securities dealer or servicing agent or by calling
(800) 955-7175:

o A statement of additional information (SAI) about the Fund that is
incorporated by reference into the prospectus.

o The Fund's most recent annual report containing detailed financial
information and a discussion of market conditions and investment
strategies that significantly affected the Fund's performance during
its last fiscal year.

In addition you may review information about the Fund (including the
SAI) at the Securities and Exchange Commission's Public Reference Room in
Washington, D.C. (Call 1-800-SEC-0330 to find out about the operation of the
Public Reference Room.) The Commission's Internet site at http://www.sec.gov has
reports and other information about the Fund. You may get copies of this
information by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-5009. You will be charged for duplicating fees.

For other shareholder inquiries, contact the Transfer Agent at (800)
882-8585. For Fund information, call (800) 955-7175 or your securities dealer or
servicing agent.

Investment Company Act File No. 811-6023

<PAGE>

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 exempt from federal income tax through investment in a portfolio
consisting primarily of tax-free municipal obligations.

March 1, 1999

[PROSPECTUS]

<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 SECURITIES DEALER OR SHAREHOLDER
SERVICING AGENT OR BY CALLING THE FUND AT (800) 767-FLAG (FOR
THE FLAG INVESTORS CLASS A SHARES CLASS) OR (800) 955-7175
(FOR THE ISI SHARES).

Statement of Additional Information Dated: March 1, 1999
Relating to Prospectuses
of
Flag Investors Managed Municipal Fund Class A Shares Dated: March 1, 1999
and
ISI Managed Municipal Fund Shares Dated: March 1, 1999

<PAGE>

TABLE OF CONTENTS

Page
----

1. GENERAL INFORMATION AND HISTORY...................................1

2. INVESTMENT OBJECTIVE AND POLICIES.................................1

3. VALUATION OF SHARES AND REDEMPTION................................9

4. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS.............10

5. MANAGEMENT OF THE FUND...........................................14

6. INVESTMENT ADVISORY AND OTHER SERVICES...........................19

7. ADMINISTRATION...................................................20

8. DISTRIBUTION OF FUND SHARES......................................21

9. BROKERAGE........................................................25

10. CAPITAL STOCK....................................................27

11. SEMI-ANNUAL REPORTS..............................................28

12. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES................28

13. INDEPENDENT ACCOUNTANTS..........................................28

14. LEGAL MATTERS....................................................29

15. PERFORMANCE INFORMATION..........................................29

16. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES..............31

17. FINANCIAL STATEMENTS.............................................31

<PAGE>

1. GENERAL INFORMATION AND HISTORY

Managed Municipal Fund, Inc. (the "Fund") is an open-end diversified
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 "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 Class A Shares and one
for the ISI Shares.

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. Important information concerning the Fund is included in the Fund's
Prospectuses, which may be obtained without charge from the Fund by calling
(800) 767-FLAG (for a Prospectus for the Flag Investors Class A Shares) or (800)
955-7175 (for a prospectus for the ISI Shares), or from Participating Dealers
that offer shares of the respective classes of the Fund ("Shares") to
prospective investors. 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, as amended (the
"Securities Act"), 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 & Sons Incorporated (predecessor to BT Alex. Brown Incorporated),
Alex. Brown & Sons 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

- 1 -

<PAGE>

primarily of municipal obligations ("Municipal Obligations"). There can be no
assurance that the Fund will achieve its investment objective.

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. 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.

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.

The Fund will invest at least 75% of its portfolio of Municipal
Obligations in securities rated, on the date of investment, A-1 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 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

- 2 -

<PAGE>

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 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. 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.

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
other 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 to limit the effects of adverse market action. The
value of when-issued securities is subject to market fluctuation. Although the
Fund does not intend to make such purchases for speculative purposes, purchases
of securities on a when-issued 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

- 3 -

<PAGE>

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. The
Fund will ordinarily invest no more than 40% of its net assets at any time in
when-issued securities.

Acquisition of 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.

Purchase of 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.

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Investments in Futures Contracts

The Fund may purchase and sell U.S. exchange traded futures contracts
on 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.

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.
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.

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. CFTC regulations 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. The Fund will not enter into
Futures Contracts if obligations under all Futures Contracts would amount to
more than 30% of its total assets.

Futures Contracts 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. 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

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<PAGE>
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 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.

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<PAGE>

Investments in 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. 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.

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 you.
(See "Federal 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.

Investment Restrictions

The Fund's investment program is subject to a number of investment
restrictions that reflect self-imposed standards as well as 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. The vote of a majority of the outstanding
Shares of the Fund means the lesser of: (i) 67% or more of the Shares present at
a shareholder meeting at which the holders of more than 50% of the Shares are
present or represented or (ii) more than 50% of the outstanding Shares of the
Fund. 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);

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<PAGE>

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);

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;

4. 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;

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

6. 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;

7. 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;

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

9. Effect short sales of securities;

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

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

12. Invest more than 10% of its total assets in illiquid securities,
including repurchase agreements with remaining 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 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.

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<PAGE>

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 (or the days on which they are observed): New Year's
Day, Martin Luther King, Jr. 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
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.

The Fund may enter into agreements that allow a third party, as agent
for the Fund, to accept orders from its customers up until the Fund's close of
business which is ordinarily 4:00 p.m. (Eastern Time). So long as a third party
receives an order prior to the Fund's close of business, the order is deemed to
have been received by the Fund and, accordingly, may receive the net asset value
computed at the close of business that day. These "late day" agreements are
intended to permit shareholders placing orders with third parties to place
orders up to the same time as other shareholders.

Redemption

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.

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 readily
marketable 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

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<PAGE>
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.

4. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS

The following is only a summary of certain additional federal income
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. For example, under certain specified circumstances, state
income tax laws may exempt from taxation distributions of a regulated investment
company to the extent that such distributions are derived from interest on
federal obligations. Investors are urged to consult with their tax advisor
regarding whether such exemption is available.

The following general discussion of certain 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 qualify and elect to be treated for each taxable
year as a regulated investment company ("RIC") under Subchapter M of the Code.
Accordingly, the Fund must, among other things, (a) derive at least 90% of its
gross income each taxable year from dividends, interest, payments with respect
to securities loans, gains from the sale or other disposition of stock,
securities or foreign currencies, and certain other related income, including,
generally, certain gains from options, futures and forward contracts; and (b)
diversify its holdings so that, at the end of each fiscal quarter of the Fund's
taxable year, (i) at least 50% of the market value of the Fund's total assets is
represented by cash and cash items, United States Government securities,
securities of other RICs, and other securities, with such other securities
limited, in respect to any one issuer, to an amount not greater than 5% of the
value of the Fund's total assets or 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its total assets is
invested in the securities (other than United States Government securities or
securities of other RICs) of any one issuer or two or more issuers that the Fund
controls and which are engaged in the same, similar, or related trades or
business. For purposes of the 90% of gross income requirement described above,
foreign currency gains that are not directly related to the Fund's principal
business of investing in stock or securities (or options or futures with respect
to stock or securities) may be excluded from income that qualifies under the 90%
requirement.

In addition to the requirements described above, in order to qualify as
a RIC, the Fund must distribute at least 90% of its net investment income (that
generally includes dividends, taxable interest, and the excess of net short-term
capital gains over net long-term capital losses less operating expenses) and at
least 90% of its net tax-exempt interest income, for each tax year, if any, to
its shareholders. If the Fund meets all of the RIC requirements, it will not be
subject to federal income tax on any of its net investment income or capital
gains that it distributes to shareholders.

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<PAGE>

Although the Fund intends to distribute substantially all of its net
investment income and may distribute its capital gains for any taxable year, the
Fund will be subject to federal income taxation to the extent any such gains are
not distributed.

Fund Distributions

Distributions of investment company taxable income will be taxable to
shareholders as ordinary income, regardless of whether such distributions are
paid in cash or are invested in additional Shares, to the extent of the Fund's
earnings and profits.

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
consist 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 your gross income for federal income tax purposes. Exempt
interest dividends may, however, have collateral deferral income tax
consequences, including alternative minimum tax consequences, as discussed
below.

Exempt-interest dividends may be subject to the alternative minimum tax
imposed by Section 55 of the Code (the "Alternative Minimum 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
Alternative Minimum 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. 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.

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 that are individuals at a maximum rate of 20% regardless
of the length of time the shareholder has held Shares. If any such gains are
retained, the Fund will pay federal income tax thereon, and, if the Fund makes
an election, the shareholders will include such undistributed gains in their
income, will increase their basis in Fund shares by the difference between the
amount of such includable gains and the tax deemed paid by such shareholder and
will be able to claim their share of the tax paid by the Fund as a refundable
credit.

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<PAGE>

In the case of corporate shareholders, Fund distributions (other than
capital gains distributions) generally qualify for the dividends-received
deduction to the extent of the gross amount of qualifying dividends received by
the Fund for the year. Generally, and subject to certain limitations, a dividend
will be treated as a qualifying dividend if it has been received from a domestic
corporation. Accordingly, it is not expected that any Fund distributions will
qualify for the corporate dividends-received deduction.

Ordinarily, investors should include all dividends 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 shareholder and paid by the
Fund in the year in which the dividends were declared.

The sale or exchange of a Share is a taxable event for the shareholder.
Generally, gain or loss on the sale or exchange of a Share will be capital gain
or loss that will be long-term if the Share has been held for more than twelve
months, and otherwise will be short-term capital gain or loss. For individuals,
long-term capital gains are currently taxed at a rate of 20% and short-term
capital gains are currently taxed at ordinary income tax rates. However, if a
shareholder realizes a loss on the sale, exchange or redemption of a Share held
for six months or less and has previously received a capital gains distribution,
with respect to the Share (or any undistributed net capital gains of the Fund
with respect to such Share are included in determining the shareholder's
long-term capital gains), the shareholder must treat the loss as a long-term
capital loss to the extent of the amount of the prior capital gains distribution
(or any undistributed net capital gains of the Fund that have been included in
determining such shareholder's long-term capital gains). In addition, any loss
realized 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 the Fund fails to qualify for any taxable year 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 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, including the amount of dividends eligible for the corporate
dividends received deduction.

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In certain cases, the Fund will be required to withhold, and remit to
the United States Treasury 31% of distributions payable to any shareholder who
(1) has failed to provide a correct tax identification number, (2) is subject to
backup withholding by the Internal Revenue Service for failure to report the
receipt of interest or dividend income properly, or (3) has failed to certify to
the Fund that such shareholder is not subject to backup withholding.

Federal Excise Tax; Miscellaneous Considerations

If the Fund fails to distribute in a calendar year at least 98% of its
ordinary income for the year and 98% of its capital gain net income (the excess
of short and long term capital gains over short and long term capital losses)
for the one-year period ending October 31 of that year (and any retained amount
from the prior calendar year), the Fund will be subject to a nondeductible 4%
Federal excise tax on the undistributed amounts. The Fund intends to make
sufficient distributions to avoid imposition of this tax, or to retain, at most
its net capital gains and pay tax thereon.

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.

Current federal 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.

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 dividend and capital gains
distributions from regulated investment companies often differ from the rules
for federal income taxation described above. Shareholders are urged to consult

- 13 -

<PAGE>

their tax advisors as to the consequences of these and other state and local tax
rules affecting an investment in the Fund.

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.

5. MANAGEMENT OF THE FUND

Directors and Officers

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, custodian and transfer
agent.

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 & Investment Inc. (registered
investment advisor), and Chairman and President, International Strategy
& Investment Group Inc. (registered investment advisor and registered
broker-dealer) 1991-Present.

*R. ALAN MEDAUGH, Director and President (8/20/43)
President, International Strategy & Investment Inc. (registered
investment advisor) 1991- Present.

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

JAMES J. CUNNANE, Director (3/11/38)
60 Seagate Drive, Unit P106, Naples, Florida 34103. Managing Director,
CBC Capital (merchant banking), 1993-Present; Director, Net.World
(telecommunications) 1998- Present; Formerly, Senior Vice President and
Chief Financial Officer, General Dynamics Corporation (defense),
1989-1993 and Director, The Arch Fund (registered investment company).

JOSEPH R. HARDIMAN, Director (5/27/37)
8 Bowen Mill Road, Baltimore, Maryland 21212. Private Equity Investor
and Capital Markets Consultant; Director, The Nevis Fund (registered
investment company) and Circon Corp. (medical instruments). Formerly,
President and Chief Executive Officer, The National Association of
Securities Dealers, Inc. and The NASDAQ Stock Market, Inc., 1987-1997;
Chief Operating Officer of Alex. Brown & Sons Incorporated (now BT
Alex. Brown Incorporated) 1985-1987; General Partner, Alex. Brown &
Sons Incorporated (now BT Alex. Brown Incorporated) 1976-1985.

- 14 -

<PAGE>

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; and 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 health care); Executive Vice Chairman and
Director, Central Carolina Bank & Trust (banking) and Director, Victory
Funds (registered investment companies). Formerly, Director, AMBAC
Treasurers Trust (registered investment company) and DP Mann Holdings
(insurance).

REBECCA W. RIMEL, Director (4/10/51)
The Pew Charitable Trusts, One Commerce Square, 2005 Market Street,
Suite 1700, Philadelphia, Pennsylvania 19103-7017; President and Chief
Executive Officer, The Pew Charitable Trusts; Director and Executive
Vice President, The Glenmede Trust Company; Formerly, Executive
Director, The Pew Charitable Trusts.

CARL W. VOGT, ESQ., Director (4/20/36)
Fulbright & Jaworski L.L.P., 801 Pennsylvania Avenue, N.W., Washington,
D.C. 20004- 2604; Senior Partner, Fulbright & Jaworski L.L.P. (law);
Director, Yellow Corporation (trucking) and American Science &
Engineering (x-ray detection equipment); Formerly, Chairman and Member,
National Transportation Safety Board; Director, National Railroad
Passenger Corporation (Amtrak) and Member, Aviation System Capacity
Advisory Committee (Federal Aviation Administration).

NANCY LAZAR, Vice President (8/1/57)
Executive Vice President and Secretary, International Strategy &
Investment Inc. (registered investment advisor) 1991-Present.

CARRIE L. BUTLER, Vice President (5/1/67)
Assistant Vice President, International Strategy & Investment Inc.
(registered investment advisor) 1991-Present.

MARGARET M. BEELER, Assistant Vice President (3/1/67)
Assistant Vice President, International Strategy & Investment Inc.,
1996-Present. Formerly, Marketing Representative, U.S. Healthcare,
Inc., 1995-1996; Sales Manager, Donna Maione, Inc., 1994-1995; and
Deborah Wiley California, 1989-1994.

KEITH C. REILLY, Assistant Vice President (6/2/66)
Assistant Vice President, International Strategy & Investment Inc.,
1996-Present. Formerly, Select Private Banking Officer, Assistant
Manager, Chemical Bank, 1995-1996; Financial Consultant, Dreyfus
Corporation, 1989-1995.

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

- 15 -

<PAGE>

AMY M. OLMERT, Secretary (5/14/63)
BT Alex. Brown Incorporated, One South Street, Baltimore, MD 21202.
Vice President, BT Alex. Brown Incorporated, 1997-Present. Formerly,
Senior Manager, Coopers & Lybrand L.L.P. (now PricewaterhouseCoopers
LLP), 1988 -1997.

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

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

Directors and officers of the Fund are also directors and officers of
some or all of the other investment companies managed, advised or administered
by BT Alex. Brown Incorporated ("BT Alex. Brown") or its affiliates. There are
currently 12 funds in the Flag Investors/ISI Funds and BT Alex. Brown Cash
Reserve Fund, Inc. fund complex (the "Fund Complex"). Mr. Hyman serves as a
Chairman of four funds in the Fund Complex. Mr. Medaugh serves as Director and
President of two funds and as President of two other funds in the Fund Complex.
Mr. Hale serves as Chairman of three funds and as a director of seven other
funds in the Fund Complex. Messrs. Cunnane, Hardiman, Levy, McDonald and Vogt
serve as Directors of each of the funds in the Fund Complex. Ms. Rimel serves as
director of 11 funds in the Fund Complex. Ms. Lazar and Ms. Butler serve as Vice
Presidents and Ms. Beeler and Mr. Reilly serve as Assistant Vice Presidents of
four funds in the Fund Complex. Ms. Olmert serves as Secretary, Mr. Finelli
serves as Treasurer and Mr. Liotta serves as Assistant Secretary 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 BT Alex. Brown or the Advisor or the Fund's administrator may be considered
to have received remuneration indirectly. As compensation for his or her
services, each Director who is not an "interested person" of the Fund (as
defined in the Investment Company Act) (an "Independent Director") receives an
aggregate annual fee (plus reimbursement for reasonable out-of-pocket expenses
incurred in connection with his or her attendance at board and committee
meetings) from each fund in the Fund Complex for which he or she serves. In
addition, the Chairmen of the Fund Complex's Audit Committee and Executive
Committee receive an aggregate annual fee from the Fund Complex. Payment of such
fees and expenses are allocated among all such funds described above in direct
proportion to their relative net assets. For the fiscal year ended October 31,
1998, Independent Directors' fees attributable to the assets of the Fund totaled
$3,518.

The following table shows aggregate compensation and retirement
benefits 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, 1998.

- 16 -

<PAGE>

COMPENSATION TABLE
<TABLE>
<CAPTION>

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

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, 1998 Fund Expenses Ended October 31, 1998

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

<S> <C> <C> <C>
Edward S. Hyman(1) $0 $0 $0
Chairman

R. Alan Medaugh(1) $0 $0 $0
Director & President

Richard T. Hale(1) $0 $0 $0
Vice Chairman

James J. Cunnane $591(2) (3) $39,000 for service on
Director 13 Boards in Fund Complex(4)

Joseph R. Hardiman(5) N/A N/A $9,750 for service on
Director 9 Boards in Fund Complex(6)

John F. Kroeger(7) $742 (3) $49,000 for service on
Director 13 Boards in Fund Complex(4)

Louis E. Levy $626 (3) $44,000 for service on
Director 13 Boards in Fund Complex(4)

Eugene J. McDonald $591(2) (3) $39,000 for service on
Director 13 Boards in Fund Complex(4)

Rebecca W. Rimel(5) N/A N/A $39,000 for service on
Director 11 Boards in Fund Complex(4,6)

Carl W. Vogt, Esq.(5) N/A N/A $39,000 for service on
Director 11 Boards in Fund Complex(4,6)

</TABLE>
- --------
(1) A Director who is an "interested person" as defined in the Investment
Company Act.
(2) Of the amounts payable to Messrs. Cunnane and McDonald, $591 and $591,
respectively, was deferred pursuant to a deferred compensation plan.
(3) 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 fiscal year ended October 31, 1998 was approximately $9,669.
(4) One of these funds ceased operations on July 29, 1998.
(5) Elected to the Fund's Board effective October 23, 1998.
(6) Mr. Hardiman and Ms. Rimel receive, and Mr. Vogt received, proportionately
higher compensation from each fund for which they serve.
(7) Retired effective September 27, 1998.

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 the Participant in his or her
last year of service. Upon retirement, each Participant will receive annually
10% of such fee for each year that he or she served after completion of the
first five years, up to a maximum annual benefit of 50% of the fee earned by the
Participant in his or her last year of service. The fee will be paid quarterly,
for life, by each Fund for which he or she serves. The Retirement Plan is
unfunded and unvested. The Fund has two Participants, a Director who retired
effective December 31, 1994 and a Director who retired effective December 31,
1996, who have qualified for the Retirement Plan

- 17 -

<PAGE>

by serving thirteen years and fourteen years, respectively, as Directors in the
Fund Complex and each of whom will be paid a quarterly fee of $4,875 by the Fund
Complex for the rest of his life. Such fees are 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 or her last year of
service, as described above. The approximate credited years of service at
December 31, 1998 are as follows: for Mr. Cunnane, 4 years; for Mr. Levy, 4
years; for Mr. McDonald, 6 years; for Ms. Rimel, 3 years; for Mr. Vogt, 3 years;
and for Mr. Hardiman, 0 years.

Years of Service Estimated Annual Benefits Payable By Fund Complex Upon Retirement
- ---------------- -----------------------------------------------------------------
Chairmen of Audit and Executive Committees Other Participants
------------------------------------------ ------------------
<S> <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>

Any Director who receives fees from the Fund is permitted to defer
50% to 100% of his or her annual compensation pursuant to a Deferred
Compensation Plan. Messrs. Cunnane, Levy, McDonald, Vogt and Ms. Rimel have each
executed a Deferred Compensation Agreement. Currently, the deferring Directors
may select from among various Flag Investors funds, BT Alex. Brown Cash Reserve
Fund, Inc. and BT International Equity Fund 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
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
applies to the personal investing activities of all of the directors and
officers of the Fund, as well as to designated officers, directors and employees
of the Advisor and the Fund's distributors. As described below, the Code of
Ethics imposes additional 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 any officer, director or employee of
the Fund, International Strategy & Investment Group, Inc. or the Advisor,
preclear any personal securities investments (with certain exceptions, such as
non-volitional purchases or purchases that are part of an automatic dividend
reinvestment plan). The foregoing would apply to any officer, director or
employee of ICC Distributors, Inc. that is an access person. 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

- 18 -

<PAGE>

same security. Trading by investment personnel and certain other employees of
the Advisor would be exempt from the "blackout period" provided that (1) the
market capitalization of a particular security exceeds $2 billion; and (2)
orders of such entity do not exceed ten percent of the daily average trading
volume of the security for the prior 15 days. Officers, directors and employees
of the Advisor and the Fund's 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 & 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.; North American Government Bond Fund, Inc. and ISI Strategy 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 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 0.40% of the
Fund's average daily net assets. The Advisor and the Administrator have
contractually agreed to reduce proportionately their respective annual fees, if
necessary, so that the Fund's annual expenses do not exceed 0.90% of the average
daily net assets of either the Flag Investors Shares or the ISI Shares Classes.
This agreement will continue until at least February 29, 2000 and may be
extended. 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 Independent Directors who have no direct or indirect financial
interest in such agreements, by votes cast in person at a meeting called for

- 19 -

<PAGE>

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 September 29,
1998. 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).

Advisory fees paid by the Fund to ISI for the last three fiscal years
were as follows:

Year Ended October 31,
----------------------
1998 1997 1996
---- ---- ----
$284,908(1) $ 323,888(2) $323,403(3)

(1) Net of fee waivers of $180,209.
(2) Net of fee waivers of $157,087.
(3) Net of fee waivers of $192,777.

7. ADMINISTRATION

Investment Company Capital Corp., One South Street, Baltimore, Maryland
21202, ("ICC" or the "Administrator") provides administration services to the
Fund. Such services include: 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 plans, 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 its administration services, the
Administrator is entitled to receive an annual fee, calculated daily and payable
monthly equal to 0.20% of the Fund's average daily net assets. The Administrator
and the Advisor have contractually 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 0.90% of such classes'
respective average daily net assets. This agreement will continue until at least
February 29, 2000 and may be extended.

Administration fees paid by the Fund to ICC for the last three fiscal
years were as follows:

Year Ended October 31,
----------------------
1998 1997 1996
---- ---- ----
$142,454(1) $164,190(2) $159,950(3)

(1) Net of fee waivers of $90,105.
(2) Net of fee waivers of $76,298.
(3) Net of fee waivers of $98,140.

ICC also serves as the Fund's transfer and dividend disbursing agent
and provides accounting services to the Fund. An affiliate of ICC serves as the
Fund's custodian. (See "Custodian, Transfer Agent and Accounting Services.") ICC
is an indirect subsidiary of Bankers Trust Corporation.

- 20 -

<PAGE>

8. DISTRIBUTION OF FUND SHARES

International Strategy & Investment Group Inc. ("ISI Group") serves as
Distributor for the ISI Shares pursuant to a Distribution Agreement effective
April 1, 1997 ("ISI Distribution Agreement"). ICC Distributors Inc. ("ICC
Distributors") serves as Distributor for the Flag Investors Shares pursuant to
an agreement effective August 31, 1997 ("Flag Distribution Agreement"). The
Distribution Agreements provide that ICC Distributors (in the case of the Flag
Investors Shares) or ISI Group (in the case of the ISI Shares) has the exclusive
right to distribute the related class of Shares either directly or through other
broker-dealers.

The ISI Distribution Agreement provides that ISI Group on behalf of the
ISI Shares (i) will solicit and receive orders for the purchase of ISI Shares
(ii) 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 (iii) receive requests for
redemption and transmit such redemption requests to the Fund's transfer agent as
promptly as possible (iv) respond to inquiries from the Fund's shareholders
concerning the status of their accounts with the Fund; (v) provide the Fund's
Board of Directors for their review with quarterly reports required by Rule
12b-1; (vi) maintain such accounts, books and records as may be required by law
or be deemed appropriate by the Fund's Board of Directors; and (vii) take all
actions deemed necessary to carry into effect the distribution of the Shares.
Pursuant to the ISI Distribution Agreement, ISI has not undertaken to sell any
specific number of ISI Shares. The ISI Distribution Agreement further provides
that, in connection with the distribution of Shares, ISI Group will be
responsible for all promotional expenses. The services by ISI Group to the Fund
are not exclusive, and ISI Group shall not be liable to the Fund or its
shareholders for any act or omission by ISI Group 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.

The Flag Distribution Agreement provides that ICC Distributors shall;
(i) use reasonable efforts to sell Flag Investors Shares upon the terms and
conditions contained in the Flag Distribution Agreement and the Fund's then
current Prospectus; (ii) use its best efforts to conform with the requirements
of all federal and state laws relating to the sale of the Flag Investors Shares;
(iii) adopt and follow procedures as may be necessary to comply with the
requirements of the National Association of Securities Dealers, Inc. and any
other applicable self-regulatory organization; (iv) perform its duties under the
supervision of and in accordance with the directives of the Fund's Board of
Directors and the Fund's Articles of Incorporation and By-Laws; and (v) provide
the Fund's Board of Directors with a written report of the amounts expended in
connection with the Flag Distribution Agreement. ICC Distributors shall devote
reasonable time and effort to effect sales of Flag Investors Shares but shall
not be obligated to sell any specific number of Shares. The services of ICC
Distributors are not exclusive and ICC Distributors shall not be liable to the
Fund or its shareholders for any error of judgment or mistake of law, for any
losses arising out of any investment, or for any action or inaction of ICC
Distributors in the absence of bad faith, willful misfeasance or gross
negligence in the performance of ICC Distributors' duties or obligations under
the Flag Distribution Agreement or by reason of ICC Distributors' reckless
disregard of its duties and obligations under the Flag Distribution Agreement.
The Flag Distribution Agreement further provides that the Fund and ICC
Distributors will mutually indemnify each other for losses relating to
disclosures in the Fund's registration statement.

- 21 -

<PAGE>

The Distribution Agreements may be terminated at any time upon 60 days'
written notice by the Fund, without penalty, by the vote of a majority of the
Fund's Independent Directors or by a vote of a majority of the Fund's
outstanding Shares of the related class (as defined under "Capital Stock") or
upon 60 days' written notice by the Distributor and shall automatically
terminate in the event of an assignment. The Flag Distribution Agreement has an
initial term of one year from the date of effectiveness. It shall continue in
effect from year to year with respect to each class of the Fund provided that it
is approved at least annually by (i) a vote of a majority of the outstanding
voting securities of the related class of the Fund or (ii) a vote of a majority
of the Fund's Board of Directors including a majority of the Independent
Directors and, with respect to each Flag Investors' class of the Fund for which
there is a plan of distribution, so long as such plan of distribution is
approved at least annually by the Independent Directors in person at a meeting
called for the purpose of voting on such approval (see below). The ISI
Distribution Agreement has an initial term of two years and will remain in
effect from year to year provided that it is specifically approved (a) at least
annually by the Fund's Board of Directors and (b) by the affirmative vote of a
majority of the Independent Directors by votes cast in person at a meeting
specifically called for such purpose. The Flag Distribution Agreement, including
the form of Sub-Distribution Agreement, was initially approved by the Board of
Directors, including a majority of the Independent Directors, on August 4, 1997.
Each Distribution Agreement, including the form of Sub-Distribution Agreement,
was most recently approved by the Board of Directors, including a majority of
the Independent Directors, on September 29, 1998.

ICC Distributors and ISI Group and certain broker-dealers
("Participating dealers") have entered into Sub-Distribution Agreements under
which such broker-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. Any Sub-Distribution
Agreement may be terminated in the same manner as the Distribution Agreements at
any time and shall automatically terminate in the event of an assignment.

In addition, the Fund may enter into Shareholder Servicing Agreements
with certain financial institutions, such as BT Alex. Brown and certain banks,
to act as Shareholder Servicing Agents, pursuant to which ICC Distributors and
ISI Group will allocate a portion of their respective distribution fees as
compensation for such financial institutions' ongoing shareholder services. The
Fund may also enter into Shareholder Servicing Agreements pursuant to which the
Distributors or the Fund's administrator or their respective affiliates will
provide compensation out of their own resources. Although banking laws and
regulations prohibit banks from distributing shares of open-end investment
companies such as the Fund, according to interpretations by 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 the
Prospectus and this Statement of Additional Information in conjunction with any
such institution's fee schedule. In addition, state securities laws on this
issue may differ from the interpretations of federal law expressed herein, and
banks and financial institutions may be required to register as dealers pursuant
to state law.

As compensation for providing distribution and related administrative
services as described above, the Fund will pay ICC Distributors for the Flag
Investors Class A Shares and ISI Group for the ISI Shares, on a monthly basis,
an annual fee, equal to 0.25% of the average daily net assets of the respective
class of Shares. The Distributors expect to allocate up to all of their fees to
Participating Dealers and Shareholder Servicing Agents.

- 22 -

<PAGE>
As compensation for providing distribution and shareholder services to
the Fund for the last three fiscal years, the Fund's distributors received fees
in the following amounts:
<TABLE>
<CAPTION>

Fiscal Year Ended October 31,
-----------------------------

Fee 1998 1997 1996
----- ---- ---- ----
<S> <C> <C> <C>
Flag Investors Class A 12b-1 $93,549(1) $98,275(3) $109,247(5)
ISI Shares 12b-1 $197,149(2) $202,335(4) $213,366(6)
</TABLE>
- ------------
(1) By ICC Distributors, the Flag Investors Shares' distributor.
(2) By ISI Group, the ISI Shares' distributor.
(3) Of this amount, Alex. Brown, the Flag Investors Shares' distributor prior
to August 31, 1997, received $82,194 and ICC Distributors, the Flag
Investors Shares' distributor effective August 31, 1997, received $16,081.
(4) Of this amount, Armata, the ISI Shares' distributor prior to April 1, 1997,
received $85,542 and ISI Group, the ISI Shares' distributor effective April
1, 1997, received $116,793.
(5) Fees received by Alex. Brown, the Flag Investors Shares' distributor.
(6) Fees received by Armata, the ISI Shares' distributor.

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
fees to ICC Distributors or ISI Group for distribution and other shareholder
servicing assistance as set forth in the related Distribution Agreement, and ICC
Distributors and ISI Group are authorized to make payments out of their fees to
Participating Dealers and Shareholder Servicing Agents. The Plans will remain in
effect from year to year as specifically approved (a) at least annually by the
Fund's Board of Directors and (b) by the affirmative vote of a majority of the
Independent Directors, by votes cast in person at a meeting called for such
purpose. The Plans were most recently approved by the Fund's Board of Directors,
including a majority of the Independent Directors, on September 29, 1998.

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 Agreements without the approval of the shareholders of the
respective classes of the Fund. The Plans may be terminated at any time by a
vote of a majority of the Fund's Independent Directors or by a vote of a
majority of the outstanding Shares of the related class (as defined under
"Capital Stock").

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 ICC Distributors or ISI Group pursuant to
the Distribution Agreements, to broker-dealers pursuant to any Sub-Distribution
Agreements and to Shareholder Servicing Agents pursuant to Shareholder Servicing
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 Independent Directors shall be committed to the
discretion of the Independent Directors then in office.

- 23 -

<PAGE>

Under the Plans, amounts allocated to Participating Dealers and
Shareholder Servicing Agents may not exceed amounts payable to ICC Distributors
or ISI Group under such Plans, as appropriate, with respect to shares held by or
on behalf of customers of such entities. Payments under the Plans are made as
described above regardless of the distributor's actual cost of providing
distribution services and may be used to pay such distributor'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 0.25% of such Shares' average daily net assets for any period the
unexpended portion of the distribution fee may be retained by the distributor.
The Plans do not provide for any charges to the Fund for excess amounts expended
by the distributor and, if a Plan is terminated in accordance with its terms,
the obligation of the Fund to make payments to the distributor pursuant to such
Plan will cease and the Fund will not be required to make any payments past the
date the related Distribution Agreement terminates with respect to such Plan. In
return for payments received pursuant to the Plans in the fiscal years ended
October 31, 1998, October 31, 1997 and October 31, 1996, respectively, the
Fund's distributors, 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 last three fiscal years, the Fund's distributors received the
following commissions or contingent deferred sales charges, and from such
commissions or sales charges, the distributor retained the following amounts:

Year Ended October 31,
-------------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------- ---------------------------- ---------------------------
Class Received Retained Received Retained Received Retained
----- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Class A $19,669(1) $0 $13,936(3) $12,636(5) $27,710(6) $26,210(6)
Commissions
ISI Shares $61,689(2) $0 $38,812(4) $ 0 $92,720(7) $30,319(7)
Commissions
</TABLE>
- -------------
(1) By ICC Distributors, the Flag Investors Shares' distributor.
(2) By ISI Group, the ISI Shares' distributor.
(3) Of this amount, Alex. Brown, the Flag Investors Shares' distributor prior
to August 31, 1997, received $13,936 and ICC Distributors, the Flag
Investors Shares' distributor effective August 31, 1997, received $0.
(4) Of this amount, Armata, the ISI Shares' distributor prior to April 1, 1997,
received $13,150 and ISI Group, the ISI Shares' distributor effective April
1, 1997 received $25,662.
(5) Of commissions received, Alex. Brown retained $1,300 and ICC Distributors
retained $0, respectively.
(6) By Alex. Brown, the Flag Investors Shares' distributor.
(7) By Armata, the ISI Shares' distributor.

The Fund will pay all costs associated with its organization and
registration under the Securities Act 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, administration
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, if any, chargeable to the
Fund in connection with portfolio securities transactions to which the Fund is a
party; all taxes, including securities issuance and transfer taxes, and fees
payable by the Fund to federal, state or other governmental agencies; the costs

- 24 -

<PAGE>

and expenses of engraving or printing of certificates representing Shares; all
costs and expenses in connection with the 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 Independent Directors, or
independent accountants, in connection with any matter relating to the Fund;
membership dues of industry associations; interest payable on Fund borrowings;
postage; insurance premiums on property or personnel (including officers and
Directors) of the Fund that 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 ISI, ICC, ISI
Group or ICC Distributors.

The address of ICC Distributors is Two Portland Square, Portland, Maine
04101. The address of ISI Group, Inc. is 717 Fifth Avenue, New York, New York
10022.

9. BROKERAGE

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
agency transactions with broker-dealers that furnish statistical, research or
other information or services that 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.

- 25 -

<PAGE>

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 transactions 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 other than affiliates of the Advisor higher
commissions than another broker might have charged on brokerage transactions for
the Fund for brokerage or research services. The allocation of orders among
broker-dealers and the commission rates paid by the Fund will be reviewed
periodically by the Board. The foregoing policy under which the Fund may pay
higher commissions to certain broker-dealers in the case of agency transactions,
does not apply to transactions effected on a principal basis. In addition,
consistent with NASD Rules, and subject to seeking the most favorable price and
execution available and such other policies as the Board may determine, the
Advisor may consider services in connection with the sale of shares as a factor
in the selection of broker-dealers to execute portfolio transactions for the
Fund.

Subject to the above considerations, the Board of Directors has
authorized the Fund to effect portfolio transactions through affiliates of the
Advisors. At the time of such authorization, the Board adopted certain policies
and procedures incorporating the standards of Rule 17e-1 under the Investment
Company Act, which requires that the commissions paid affiliates of the Advisors
must be "reasonable and fair compared to the commission, fee or other
remuneration received or to be received by other brokers in connection with
comparable transactions involving similar securities during a comparable period
of time." Rule 17e-1 also contains requirements for the review of such
transactions by the Board of Directors and requires the Advisor to furnish
reports and to maintain records in connection with such reviews. During the
fiscal years ended October 31, 1998, October 31, 1997 and October 31, 1996 no
brokerage commissions were paid by the Fund for research services.

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; 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 that it seeks to purchase or sell.

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, 1998,
the Fund held a 5.25% repurchase agreement issued by Goldman Sachs & Co. valued
at $1,042,000. Goldman Sachs & Co. is a "regular broker or dealer" of the Fund.

- 26 -

<PAGE>
10. CAPITAL STOCK

The Fund is authorized to issue 55 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 five 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,
Flag Investors Managed Municipal Fund Class C 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 C Shares have not
been offered prior to the date of this Statement of Additional Information. The
Flag Investors Managed Municipal Fund Class D Shares are not currently being
offered. In the event separate series or classes are established, all Shares of
the Fund, regardless of series or 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 or class
would vote separately. Each such series would be managed separately and
shareholders of each series would have an undivided interest in the net assets
of that series. For tax purposes, each 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 and
any applicable service fees) are prorated between 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.

- 27 -

<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

Bankers Trust Company ("Bankers Trust"), 130 Liberty Street, New York,
New York 10006, has been retained to act as custodian of the Fund's investments.
Bankers Trust receives such compensation from the Fund for its services as
Custodian as may be agreed to from time to time by Bankers Trust and the Fund.
For the fiscal year ended October 31, 1998, Bankers Trust was paid $17,763 as
compensation for providing custody services to the Fund. Investment Company
Capital Corp., One South Street, Baltimore, Maryland 21202, has been retained to
act as transfer and dividend disbursing agent. As compensation for providing
these services, the Fund pays ICC up to $15.62 per account per year plus
reimbursement for out-of-pocket expenses incurred in connection therewith. For
the fiscal year ended October 31, 1998, such fees totaled $44,009.

ICC also provides certain accounting services to the Fund. As
compensation for these services, ICC receives 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 0.100%
$ 20,000,000 - $ 30,000,000 0.080%
$ 30,000,000 - $ 40,000,000 0.060%
$ 40,000,000 - $ 50,000,000 0.050%
$ 50,000,000 - $ 60,000,000 0.040%
$ 60,000,000 - $ 70,000,000 0.030%
$ 70,000,000 - $ 100,000,000 0.020%
$100,000,000 - $ 500,000,000 0.015%
$500,000,000 - $1,000,000,000 0.005%
over $1,000,000,000 0.001%

In addition, the Fund will reimburse ICC for the following
out-of-pocket expenses incurred in connection with ICC's performance of its
services under the Master Services Agreement: express delivery service,
independent pricing and storage. As compensation for providing accounting
services for the fiscal year ended October 31, 1998, ICC received fees of
$57,444.

13. INDEPENDENT ACCOUNTANTS

PricewaterhouseCoopers LLP, 250 West Pratt Street, Baltimore, Maryland,
21201, are independent accountants to the Fund.

- 28 -

<PAGE>

14. LEGAL MATTERS

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

15. 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:

P(1 + T)n = 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).

Calculated according to SEC rules, the ending redeemable value and average
annual total return of a hypothetical $1,000 investment for the periods ended
October 31, 1998 were as follows:

- 29 -

One-Year Period Ended Five-Year Period Ended
October 31, 1998 October 31, 1998 Since Inception
-------------------------- ---------------------------- --------------------------
Average Average
Ending Ending Annual Ending Annual
Redeemable Total Redeemable Total Redeemable Total
Class Value Return Value Return Value Return
- ----- ----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Flag Investors
Class A Shares $1,027 2.70% $1,246 4.50% $1,695 6.81%
*October 23, 1990
ISI Shares
*February 26, 1990 $1,027 2.76% $1,246 4.51% $1,739 6.59%
</TABLE>

- -----------
* Inception Date

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
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 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.

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, 1998, the yield for the ISI
Shares was 3.55% and the yield for the Flag Investors Class A Shares was 3.55%.
For the same 30-day period, the taxable-equivalent yield (for an investor in the
31% tax bracket) was 5.14% for the ISI Shares and 5.14% for the Flag Investors
Class A Shares.

- 30 -
<PAGE>

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. The Fund's portfolio
turnover rate in fiscal year 1998 was 18% and in fiscal year 1997 was 26%,
respectively.

16. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

To Fund management's knowledge, the following owned 5% or more of the
outstanding Shares of a class of the Fund, as of December 1, 1998.
<TABLE>
<CAPTION>

Name and Address Owned as of Record Beneficially Owned Percentage Owned
---------------- ------------------ ------------------ ----------------
<S> <C> <C> <C>
BT Alex. Brown X X 7.69% of Class A
Incorporated Shares
FBO 201-57665-18
PO Box 1346
Baltimore, MD
21203-1346

Dain Rauscher X X 5.12% of ISI Shares
Incorporated
FBO Frederick W.
Stolz, Emily Stolz
Tenant Common
P.O Box 406
Port Angeles, WA
98362-0065

</TABLE>

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.

17. FINANCIAL STATEMENTS

See next page.

- 31 -

<PAGE>

FLAG INVESTORS MANAGED MUNICIPAL FUND SHARES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Statement of Net Assets October 31, 1998
Rating* Par Market
Issuer (Moody's/S&P) (000) Value
- -------------------------------------------------------------------------------------------
Municipal Bonds--97.4%
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>

General Obligation--72.4%
Arlington County, VA
5.000%, 10/01/14 ........................ Aaa/AAA $2,000 $2,063,420
Arlington Texas School District
5.750%, 02/15/21 ........................ Aaa/NR** 1,465 1,542,938
Charlotte, NC:
5.300%, 04/01/11 ........................ Aaa/AAA 1,590 1,698,438
5.300%, 04/01/12 ........................ Aaa/AAA 3,445 3,661,966
Dallas, TX:
5.000%, 02/15/10 ........................ Aaa/AAA 1,750 1,808,993
5.000%, 02/15/13 ........................ Aaa/AAA 1,755 1,795,523
Delaware St., Series "A"
5.120%, 04/01/16 ........................ Aa1/AA+ 2,150 2,191,882
Dupage County, IL, Jail Project
5.600%, 01/01/21 ........................ Aaa/AAA 1,600 1,743,456
Florida Board of Education
6.125%, 06/01/12 ........................ Aa2/AA+ 2,250 2,426,130
Florida State Brd Cap Outlay, Series "C"
5.500%, 06/01/21 ........................ Aa2/AA+ 2,000 2,081,600
Florida State Board of Education GO
5.125%, 06/01/22 ........................ Aa2/AA+ 3,000 3,015,030
Franklin County, OH:
5.450%, 12/01/09 ........................ Aaa/AAA 1,500 1,626,420
5.500%, 12/01/13 ........................ Aaa/AAA 1,000 1,081,840
Georgia State, Series "D":
5.250%, 08/01/09 ........................ Aaa/AAA 1,580 1,726,545
5.000%, 08/01/10 ........................ Aaa/AAA 2,000 2,133,680
Grand Prairie, TX, School District
5.200%, 02/15/18 ........................ Aaa/AAA 2,000 2,029,160
King County, WA:
5.200%, 12/01/15 ........................ Aa1/AA+ 2,500 2,574,325
5.000%, 12/01/17 ........................ Aa1/AA+ 2,565 2,579,774
Maryland State & Local Facilities,
Second Series
5.125%, 10/15/10 ........................ Aaa/AAA 3,000 3,197,670
</TABLE>

- 32 -

<PAGE>

FLAG INVESTORS MANAGED MUNICIPAL FUND SHARES
<TABLE>
<CAPTION>

General Obligation--continued
Metropolitan Government Nashville &
Davidson County, TN
5.125%, 11/15/19 ........................ Aa2/AA $2,000 $2,000,720
Minneapolis, MN, Sports Arena Project
5.000%, 10/01/11 ........................ Aaa/AAA 1,710 1,785,685
Minneapolis, MN, Ref - Series "B"
5.200%, 03/01/13 ........................ Aaa/AAA 3,200 3,359,552
Minneapolis, MN, Sports Arena Project
5.000%, 10/01/12 ........................ Aaa/AAA 1,920 1,991,482
Minnesota State
5.000%, 11/01/14 ........................ Aaa/AAA 2,500 2,557,925
Missouri State, Series "A":
5.000%, 06/01/19 ........................ Aaa/AAA 2,000 2,022,700
5.000%, 06/01/23 ........................ Aaa/AAA 2,000 2,005,960
Montgomery County, MD,
Cons Pub Series "A"
4.875%, 05/01/18 ........................ Aaa/AAA 2,000 2,000,860
Plano, TX, Independent School District
5.000%, 02/15/11 ........................ Aaa/AAA 3,000 3,064,080
Portland, OR, Metro Regional
Government Ult
5.250%, 09/01/07 ........................ Aa/AA+ 1,500 1,602,285
Salt Lake County, UT
5.250%, 12/15/10 ........................ Aaa/AAA 2,000 2,139,500
South Carolina Capital Improvement:
5.000%, 03/01/09 ........................ Aaa/AAA 2,700 2,858,247
5.625%, 07/01/14 ........................ Aaa/AAA 2,700 2,942,595
Tennessee State:
5.500%, 03/01/09 ........................ Aaa/AAA 1,535 1,655,528
5.550%, 03/01/10 ........................ Aaa/AAA 1,000 1,081,290
Washington State:
Series "A", 5.600%, 07/01/10 .......... Aa1/AA+ 1,500 1,623,300
Series "E", 5.000%, 07/01/22 .......... Aa1/AA+ 2,000 1,964,460
Series "R", 5.000%, 07/01/14 .......... Aa1/AA+ 2,250 2,286,248
</TABLE>

- 33 -
<PAGE>

FLAG INVESTORS MANAGED MUNICIPAL FUND SHARES
<TABLE>
<CAPTION>

Wisconsin State:
Series 1, 5.000%, 05/01/15 ............ Aa2/AA $ 1,000 $ 1,011,850
Series "B", 5.000%, 05/01/16 .......... Aa2/AA 3,500 3,536,925
Series "B", 5.000%, 05/01/18 .......... Aa2/AA 1,000 993,840
------------
85,463,822
------------
Electric and Gas Utility Revenue--0.3%
San Antonio, TX, Electric & Gas Revenue
6.500%, 02/01/12 ........................ Aaa/AA 315 322,056
------------
Prerefunded Issues--12.9%
Arlington, TX, School District
5.750%, 02/15/21 ........................ Aaa/NR** 3,535 3,877,930
Charlotte, NC
5.800%, 02/01/16 ........................ Aaa/AAA 2,500 2,765,550
Chicago, IL, Metropolitan Water
Reclamation District-Greater Chicago
6.300%, 12/01/09 ........................ Aa2/AA 1,000 1,140,000
Indianapolis, IN, Public Improvement
Board Revenue
6.000%, 01/10/18 ........................ Aaa/AAA 1,500 1,622,505
Lower Colorado River Authority, Jr. Lien
5.250%, 01/01/15 ........................ #AAA/AAA 2,000 2,125,820
San Antonio, TX, Prerefunded Series "A"
6.500%, 02/01/12 ........................ Aaa/AA 685 701,145
State of Hawaii Prerefunded
7.000%, 06/10/06 ........................ #AAA/++ 750 790,725
Texas State
6.000%, 10/01/14 ........................ Aa2/AA 2,000 2,222,020
------------
15,245,695
------------
Transportation Revenue--9.3%
Florida Transportation
5.800%, 07/01/18 ........................ Aa2/AA+ 2,000 2,158,300
Kansas Transportation
5.400%, 03/01/09 ........................ Aa2/AA+ 4,500 4,811,900
</TABLE>

- 34 -
<PAGE>

FLAG INVESTORS MANAGED MUNICIPAL FUND SHARES
<TABLE>
<CAPTION>

- -------------------------------------------------------------------------------------------
Statement of Net Assets (continued) Rating* Par Market
Issuer (Moody's/S&P) (000) Value
- -------------------------------------------------------------------------------------------
Municipal Bonds--continued
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Transportation Revenue--concluded
Virginia State Transportation Board
5.125%, 05/15/21 ........................ Aa2/AA $4,000 $ 3,981,360
------------
10,951,560
------------
Other Revenue--2.5%
Texas Water Development Board Rev
4.750%, 07/15/20 ........................ Aa1/AAA 3,000 2,893,440
------------
Total Municipal Bonds
(Cost $108,251,337)....................................................... 114,876,573
------------
- -------------------------------------------------------------------------------------------
U.S. Treasury Bill -- 0.4%
- -------------------------------------------------------------------------------------------

U.S. Treasury Bill
4.17%+, 01/14/99 .................................................. 500 496,057
------------
Total U.S. Treasury Bill
(Cost $496,057)........................................................... 496,057
------------
- -------------------------------------------------------------------------------------------
Repurchase Agreement -- 0.9%
- -------------------------------------------------------------------------------------------

Goldman Sachs & Co., 5,25%
Dated 10/30/98, to be repurchased @$1,042,456 on 11/02/98, collateralized
by U.S. Treasury Bond with a market value of $1,063,482.
(Cost $1,042,000) ................................................ 1,042 1,042,000
------------
Total Investments in Securities--98.7%
(Cost $109,789,394)*** .................................................... 116,414,630
Other Assets in Excess of Liabilities--1.3% ................................ 1,545,991
------------
Net Assets--100.0%.......................................................... $117,960,621
============
</TABLE>

- 35 -
<PAGE>

FLAG INVESTORS MANAGED MUNICIPAL FUND SHARES
Statement of Net Assets (concluded) October 31, 1998

Market
Value
- --------------------------------------------------------------------------------
Net Asset Value and Redemption Price Per:
Flag Investors Class A Share
($37,211,361 / 3,381,290 shares outstanding) ................... $11.01
======

ISI Class Share
($80,749,260 / 7,336,051 shares outstanding).................... $11.01
======
Maximum Offering Price Per:
Flag Investors Class A Share
($11.01 / 0.9550) .............................................. $11.53
======
ISI Class Share
($11.01 / 0.9555) .............................................. $11.52
======
- --------
* The Moody's or Standard & Poor's ratings indicated are believed to
be the most recent ratings available as of October 31, 1998. Ratings of
issues have not been audited by PricewaterhouseCoopers LLP
** Not Rated.
*** Also aggregate cost for federal tax purposes.
+ Yield as of October 31, 1998.
++ Prerefunded bonds backed by U.S. Treasury securities. Absent prerefunding,
this obligation is rated Aa3/A+.

Moody's Municipal Bond Ratings:
Aaa Judged to be of the best quality.
Aa Judged to be of high quality by all standards. Issues are sometimes rated
with a 1,2 or 3, which denote a high, medium, or low ranking within the
rating.
#AAA Advance refunded issues secured by escrowed funds held in cash, held in a
trust or invested in direct non-callable U.S. government obligations or
non-callable obligations unconditionally guaranteed by the U.S. government.
NR Not rated.

S&P Municipal Bond Ratings:

AAA Of the highest quality.
AA The second strongest capacity for payment of debt service. Those issues
determined to possess very strong safety characteristics are denoted with a
plus (+) sign.
A The third strongest capacity for payment of debt service. Those determined
to possess very strong safety characteristics are denoted with a
plus (+) sign.
NR Not rated.

See Notes to Financial Statements.

- 36 -
<PAGE>

FLAG INVESTORS MANAGED MUNICIPAL FUND SHARES
- --------------------------------------------------------------------------------
Statement of Operations
For the
Year Ended
October 31,
1998
- --------------------------------------------------------------------------------
Investment Income:
Interest ....................................................... $5,977,969
----------
Expenses:
Investment advisory fee ......................................... 465,117
Distribution fee ................................................ 290,698
Administration fee .............................................. 232,559
Professional Fees ............................................... 291,608
Custodian fee ................................................... 17,763
Miscellaneous ................................................... 19,100
----------
Total expenses .................................... 1,316,845
Less: Fees waived ................................................ (270,314)
----------
Net expenses ..................................................... 1,046,531
----------
Net investment income ........................................... 4,931,438
----------
Net realized and unrealized gain on investments:
Net realized gain from security transactions ..................... 910,737
----------
Change in unrealized appreciation/(depreciation)
of investments .................................................. 2,598,160
----------
Net gain on investments .......................................... 3,508,897
----------
Net increase in net assets resulting from operations ............. $8,440,335
==========
See Notes to Financial Statements.

- 37 -
<PAGE>

Statement of Changes in Net Assets

For the Year
Ended October 31,
- --------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
Increase/(Decrease) in Net Assets:
Operations:
Net investment income........................... $ 4,931,438 $ 5,357,775
Net realized gain from security transactions.... 910,737 1,002,650
Change in unrealized appreciation/
depreciation of investments................... 2,598,160 2,249,576
------------- ------------
Net increase in net assets resulting
from operations............................... 8,440,335 8,610,001
------------- ------------
Dividends to Shareholders from:
Net investment income and net realized
short-term gains..............................
Flag Investors Class A Shares................. (1,861,540) (1,919,815)
ISI Class Shares.............................. (3,912,967) (3,948,488)
Net realized mid-term and long-term gains:
Flag Investors Class A Shares................. (106,065) (129,060)
ISI Class Shares.............................. (218,689) (267,980)
------------- ------------
Total distributions............................. (6,099,261) (6,265,349)
------------- ------------
Capital Shares Transactions:
Proceeds from sale of shares.................... 7,880,427 5,846,126
Value of shares issued in
reinvestment of dividends..................... 3,000,727 3,443,291
Cost of shares repurchased...................... (12,655,343) (20,144,490)
------------ ------------
Decrease in net assets derived from capital
share transactions.............................. (1,774,189) (10,855,073)
------------ ------------
Total increase/(decrease) in net assets......... 556,885 (8,510,415)

Net Assets:
Beginning of year............................... 117,393,736 125,904,151
------------ ------------
End of year..................................... $117,960,621 $117,393,736
============ ============

</TABLE>

See Notes to Financial Statements

- 38 -
<PAGE>

This page intentionally left blank

- 39 -
<PAGE>

FLAG INVESTORS MANAGED MUNICIPAL FUND SERIES
- --------------------------------------------------------------------------------
Financial Highlights -- Flag Investors Class A and ISI Class Shares (For a share
outstanding throughout each year)

For the Years Ended October 31,
- --------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of year ................. $ 10.79 $ 10.58 $ 10.65 $ 9.81 $ 11.10
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income ................................ 0.46 0.52 0.48 0.48 0.46
Net realized and unrealized gain/(loss) on
investments......................................... 0.33 0.24 -- 0.98 (1.15)
-------- -------- -------- -------- --------
Total from Investment Operations ..................... 0.79 0.76 0.48 1.46 (0.69)

Less Distributions:
Distributions from net investment income
and net realized short-term gains ................. (0.54) (0.52) (0.54) (0.54) (0.56)
Distributions from net realized paid-term and
long-term gains ................................... (0.03) (0.03) (0.01) -- (0.04)
-------- -------- -------- -------- --------
Total distributions .................................. (0.57) (0.55) (0.55) (0.08) (0.60)
-------- -------- -------- -------- --------
Net asset value at end of year ....................... $ 11.01 $ 10.79 $ 10.58 $ 10.65 $ 9.81
======== ======== ======== ======== ========

Total Return(1) ......................................... 7.51% 7.43% 4.67% 15.42% (6.49)%
Ratios to Average Daily Net Assets:
Expenses(2) .......................................... 0.90% 0.90% 0.90% 0.90% 0.90%
Net investment income(3) ............................. 4.24% 4.46% 4.48% 4.72% 4.37%
Supplemental Data:
Net assets at end of year (000):
Flag Investors Class A Shares ..................... $ 37,212 $ 38,390 $ 41,193 $ 45,980 $ 49,903
ISI Class Shares .................................. $ 80,749 $ 79,003 $ 84,712 $ 86,292 $ 83,607
Portfolio turnover rate .............................. 18% 26% 32% 55% 37%
</TABLE>

- -----------
(1) Total return excludes the effect of sales charge.

- 40 -
<PAGE>

FLAG INVESTORS MANAGED MUNICIPAL FUND SHARES
- --------------------------------------------------------------------------------
Notes to Financial Statements
NOTE 1--Significant Accounting Policies

Managed Municipal Fund, Inc. (the "Fund"), which was organized as a
Maryland Corporation on January 5, 1990 and commenced operations February 26,
1990, is registered under the Investment Company Act of 1940 as a diversified,
open-end investment management company. It is designed to provide a high level
of total return with relative stability of principal as well as the secondary
objective of high current income exempt from federal income tax through
investment in a portfolio consisting primarily of tax-free municipal
obligations.

The Fund consists of two share classes: ISI Managed Municipal Fund Shares
("ISI Class Shares"), which commenced February 26, 1990, and Flag Investors
Managed Municipal Fund Class A Shares ("Flag Investors Class A Shares"), which
commenced October 23, 1990.

The ISI Class Shares have a 4.45% maximum front-end sales charge and the
Flag Investors Class A Shares have a 4.50% maximum front-end sales charge. Both
classes have a 0.25% distribution fee.

When preparing the Fund's financial statements, management makes estimates
and assumptions to comply with generally accepted accounting principles. These
estimates affect 1) the assets and liabilities that we report at the date of the
financial statements; 2) the contingent assets and liabilities that we disclose
at the date of the financial statements; and 3) the revenues and expenses that
we report for the period. Our estimates could be different from the actual
results. Under certain circumstances, it is necessary to reclassify prior year
information in order to conform to the current year's presentation. The Fund's
significant accounting policies are:

A. Security Valuation--Municipal obligations are usually traded in the
over-the-counter market. When there is an available market quotation, the
Fund values a municipal obligation by using the most recent quoted bid
price provided by an investment dealer. The Fund utilizes the services of
an independent pricing vendor to obtain prices when such prices are
determined by the Investment Advisor to reflect the fair market value of
such municipal obligations. When a market quotation is not readily
available, the Investment Advisor determines a fair value using procedures
that the Board of Directors establishes and monitors. The Fund values
short-term obligations with maturities of 60 days or less at amortized
cost.

- 41 -
<PAGE>

FLAG INVESTORS MANAGED MUNICIPAL FUND SHARES
- --------------------------------------------------------------------------------
NOTE 1--concluded

B. Repurchase Agreements--The Fund may enter into tri-party repurchase
agreements with broker-dealers and domestic banks. A repurchase agreement
is a short-term investment in which the Fund buys a debt security that the
broker agrees to repurchase at a set time and price. The third party, which
is the broker's custodial bank, holds the collateral in a separate account
until the repurchase agreement matures. The agreement ensures that the
collateral's market value, including any accrued interest, is sufficient if
the broker defaults. The Fund's access to the collateral may be delayed or
limited if the broker defaults, the value of the collateral declines or the
broker enters into an insolvency proceeding.

C. Federal Income Taxes--The Fund determines its distributions according to
income tax regulations, which may be different from generally accepted
accounting principles. As a result, the Fund occasionally makes
reclassifications within its capital accounts to reflect income and gains
that are available for distribution under income tax regulations. The Fund
is organized as a regulated investment company. As long as it maintains
this status and distributes to its shareholders substantially all of its
taxable net investment income and net realized capital gains, it will be
exempt from most, if not all, federal income and excise taxes. As a result,
the Fund has made no provisions for federal income taxes.

D. Security Transactions, Investment Income, Distributions and Other--The Fund
uses the trade date to account for security transactions and the specific
identification method for financial reporting and income tax purposes to
determine the gain or loss of investments sold or redeemed. Interes= t
income is recorded on an accrual basis and includes amortization of
premiums and accretion of discounts when appropriate. Income and common
expenses are allocated to each class based on its respective average net
assets. Class specific expenses are charged directly to each class.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.

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

International Strategy & Investment Inc. ("ISI") is the Fund's
investment advisor and Investment Company Capital Corp. ("ICC"), an indirect
subsidiary of Bankers Trust Corporation, is the Fund's administrator. As
compensation for

- 42 -
<PAGE>

FLAG INVESTORS MANAGED MUNICIPAL FUND SHARES
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
NOTE 2--continued

its advisory services, the Fund pays ISI an annual fee based on the Fund's
average daily net assets. This fee is calculated daily and paid monthly at the
annual rate of 0.40%. At October 31, 1998, the Fund owed $13,770 of advisory
fees. As compensation for its administrative services, the Fund pays ICC an
annual fee based on the Fund's average daily net assets. This fee is calculated
daily and paid monthly at the annual rate of 0.20%. At October 31, 1998, the
Fund owed $6,880 of administration fees.

ISI and ICC have agreed to reduce their fees proportionately when necessary
so that the Fund's annual expenses are no more than 0.90% of the Fund's average
daily net assets. For the year ended October 31, 1998, ISI waived fees of
$180,209 and ICC waived fees of $90,105.

Certain officers and directors of the Fund are also officers or directors
of the Fund's investment advisor or administrator.

As compensation for its accounting services, the Fund pays ICC an annual
fee that is calculated daily based upon its average daily net assets and paid
monthly. The Fund paid ICC $57,444 for accounting services for the year ended
October 31, 1998. At October 31, 1998, the Fund owed $4,899 of accounting
services fees.

As compensation for its transfer agent services, the Fund pays ICC a per
account fee that is calculated and paid monthly. The Fund paid ICC $44,009 for
transfer agent services for the year ended October 31, 1998. At October 31,
1998, the Fund owed $10,740 of transfer agent services fees.

As compensation for providing distribution services for the ISI Class, the
Fund pays ISI Group Inc. ("ISI Group"), which is affiliated with ISI, an annual
fee that is calculated daily and paid monthly. This fee is paid at an annual
rate equal to 0.25% of the ISI Class' average daily net assets. As compensation
for providing distribution services for the Flag Investors Class A = Shares, the
Fund pays ICC Distributors, Inc. ("ICC Distributors"), a member of the Forum
Financial Group of companies, an annual fee that is calculated daily = and paid
monthly. This fee is paid at an annual rate equal to 0.25% of the Flag Investors
Class A Shares' average daily net assets. For the year ended October 31, 1998,
distribution fees aggregated $290,698, of which $197,149 was = attributable to
the ISI Class Shares and $93,549 was attributable to the Flag Investors Class A
Shares. At October 31, 1998, the Fund owed distribution fees in the amount of
$25,020, of which $7,887 was attributable to Flag Investors Class A shares and
$17,133 was attributable to ISI shares.

- 43 -
<PAGE>

FLAG INVESTORS MANAGED MUNICIPAL FUND SHARES
- --------------------------------------------------------------------------------
NOTE 2--concluded

The Fund's complex offers a retirement plan for eligible Directors. The
actuarially computed pension expense allocated to the Fund for the year ended
October 31, 1998 was $9,669, and the accrued liability was $22,435.

NOTE 3--Capital Share Transactions

The Fund is authorized to issue up to 37 million shares of $.001 par value
capital stock (15 million Flag Investors Class A, 20 million ISI Class, and 2
million undesignated). Transactions in shares of the Fund are listed below.

Flag Investors Class A Shares
------------------------------------
For the For the
Year Ended Year Ended
October 31, 1998 October 31, 1997
---------------- ----------------
Shares sold ......................... 206,924 167,474
Shares issued to shareholders on
reinvestment of dividends ........ 87,142 101,621
Shares redeemed ..................... (470,241) (606,069)
------------ -----------
Net decrease in shares outstanding .. (176,175) (336,974)
============ ===========

Proceeds from sale of shares ........ $ 2,245,321 $1,785,725
Value of reinvested dividends ....... 943,497 1,072,730
Cost of shares redeemed ............. (5,115,075) (6,423,913)
------------ -----------
Net decrease from capital share
transactions ....................... $ (1,926,257) $(3,565,458)
============ ===========

ISI Class Shares
---------------------------------------
For the For the
Year Ended Year Ended
October 31, 1998 October 31, 1997
---------------- ----------------
Shares sold ....................... 518,215 382,670
Shares issued to shareholders on
reinvestment of dividends ...... 190,021 224,594
Shares redeemed ................... (695,012) (1,295,279)
------------ ------------
Net increase/(decrease) in
shares outstanding ............. 13,224 (688,015)
============ ============

Proceeds from sale of shares ...... $ 5,635,106 $ 4,060,401
Value of reinvested dividends ..... 2,057,230 2,370,561
Cost of shares redeemed ........... (7,540,268) (13,720,577)
------------ ------------
Net increase/(decrease) from
capital share transactions .... $ 152,068 $(7,289,615)
============ ============

- 44 -
<PAGE>

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

NOTE 4--Investment Transactions

Excluding short-term obligations, purchases of investment securities
aggregated $21,658,111 and sales of investment securities aggregated $20,035,415
for the year ended October 31, 1998.

On October 31, 1998, aggregate net unrealized appreciation over tax cost
for portfolio securities was $6,625,236, of which $6,706,173 related to
appreciated securities and $80,937 related to depreciated securities.

NOTE 5--Net Assets

On October 31, 1998, net assets consisted of:

Paid-in capital:
Flag Investors Class A Shares .................... $34,201,512
ISI Class Shares ................................. 77,101,755
Accumulated undistributed net investment income ..... 32,118
Unrealized appreciation of investments ............. 6,625,236
------------
$117,960,621
============

NOTE 6--Shareholder Meeting

On October 23, 1998, the Managed Municipal Fund held a special meeting
for its shareholders. During the meeting, shareholders elected the following
directors: Edward S. Hyman, Richard T. Hale, Jospeh R. Hardiman, Eugene J.
McDonald, R. Alan Medaugh, James J. Cunnane, Louis E. Levy, Rebecca W. Rimel,
and CarlW. Vogt,Esq.

- 45 -
<PAGE>

FLAG INVESTORS MANAGED MUNICIPAL FUND SHARES
- --------------------------------------------------------------------------------
Report of Independent Accountants

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

In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Managed Municipal Fund, Inc. (the "Fund") at October 31, 1998, and the results
of its operations, the changes in its net assets and the financial highlights
for each of the fiscal periods presented, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at October 31, 1998 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.

PRICEWATERHOUSECOOPERS LLP
Baltimore, Maryland
December 1, 1998

- 46 -