FLAG INVESTORS MARYLAND INTERMEDIATE TAX FREE FUND INC/, 497, 1995-08-03

FLAG INVESTORS MARYLAND INTERMEDIATE TAX FREE FUND INC/
497, 1995-08-03

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(LOGO)

FLAG INVESTORS

MARYLAND INTERMEDIATE
TAX FREE INCOME FUND, INC.

This mutual fund (the "Fund") is designed to provide current income exempt
from federal income taxes and Maryland state and local income taxes
consistent with preservation of principal within an intermediate-term
maturity structure. The Fund will invest primarily in municipal obligations
issued by the State of Maryland and its political subdivisions, agencies or
instrumentalities. Under normal circumstances, the dollar weighted expected
average maturity of the portfolio normally will be not less than 3 and not
more than 10 years. (See "Investment Program.")

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

This Prospectus sets forth basic information that investors should know
about the Fund prior to investing and should be retained for future
reference. A Statement of Additional Information dated August 1, 1995, has
been filed with the Securities and Exchange Commission (the "SEC") and is
hereby incorporated by reference. It is available upon request and without
charge by calling the Fund at (800) 767-FLAG.

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

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

PROSPECTUS

The date of this Prospectus is August 1, 1995

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FLAG INVESTORS

MARYLAND INTERMEDIATE TAX FREE INCOME
FUND, INC.

135 EAST BALTIMORE STREET
BALTIMORE, MARYLAND 21202

TABLE OF CONTENTS

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Page

1. Fund Expenses .............................................. 2
2. Financial Highlights ....................................... 3
3. Investment Program ......................................... 4
4. Investment Restrictions .................................... 13
5. How to Invest in the Fund .................................. 13
6. How to Redeem Shares ....................................... 18
7. Telephone Transactions ..................................... 20
8. Dividends and Taxes ........................................ 21
9. Management of the Fund ..................................... 24
10. Investment Advisor ......................................... 25
11. Distributor ................................................ 25
12. Custodian, Transfer Agent, Accounting Services ............. 27
13. Performance Information .................................... 27
14. General Information ........................................ 28

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No person has been authorized to give any information or to make
representations not contained in this Prospectus in connection with any
offering made by this Prospectus and, if given or made, such information
must not be relied upon as having been authorized by the Fund or its
distributor. This Prospectus does not constitute an offering by the Fund or
by its distributor in any jurisdiction in which such offering may not
lawfully be made.

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1. FUND EXPENSES

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

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Maximum Sales Charge Imposed on Purchases ........................... 1.50%*
Maximum Sales Charge Imposed on Reinvested Dividends ................. None
Deferred Sales Charge ................................................ None

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ANNUAL FUND OPERATING EXPENSES (NET OF FEE WAIVERS
AND REIMBURSEMENTS) (as a percentage of average daily net assets):

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Management Fees (net of fee waivers) ................................ .00%**
12b-1 Fees .......................................................... .25%
Other Expenses (net of reimbursements) .............................. .45%**
-----
Total Fund Operating Expenses (net of fee waivers and reimbursements) .70%**
=====

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* Purchases of $1 million or more are not subject to an initial sales
charge. However, a contingent deferred sales charge of .50% will be
imposed on such purchases in the event of redemption within 24 months
following such purchase. (See "How to Invest in the Fund -- Offering
Price.")

** The Fund's investment advisor currently intends to waive its fee or to
reimburse the Fund, on a voluntary basis, to the extent required, so that
Total Fund Operating Expenses do not exceed .70% of the Fund's average
daily net assets. Absent fee waivers and/or reimbursements, Management
Fees would be .35%, Other Expenses would be 1.25% and the Fund's Total
Operating Expenses would be 1.85% of its average daily net assets.

EXAMPLE:

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You would pay the following expenses
on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption
at the end of each time period*: 1 year 3 years 5 Years 10 Years
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$22 $51 $82 $175
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*The example is based on Total Fund Operating Expenses net of fee waivers and
reimbursements. Absent such fee waivers and reimbursements, expenses would
be higher.

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

The purpose of the foregoing table is to describe the various costs and
expenses that an investor in the Fund will bear directly and indirectly. A
person who purchases Shares through a financial institution may be charged
separate fees by the financial institution. (For more complete descriptions
of the various costs and expenses, see "How to Invest in the Fund -- Offering
Price", "Investment Advisor" and "Distributor.") The Total Fund

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Operating Expenses appearing in the table above are based on the Fund's
expenses for the fiscal year ended March 31, 1995 which, net of fee waivers
and reimbursements, were .70% of the Fund's average daily net assets.

The rules of the SEC require that the maximum sales charge (in the Fund's
case, 1.50% of the offering price) be reflected in the above table. However,
certain investors may qualify for reduced sales charges or no sales charge at
all. (See "How to Invest in the Fund -- Offering Price.")

Due to the continuous nature of Rule 12b-1 fees, long-term shareholders of
the Fund may pay more than the equivalent of the maximum front-end sales
charges permitted by the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. The foregoing table has not been audited by
Deloitte & Touche LLP, the Fund's independent auditors.

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2. FINANCIAL HIGHLIGHTS

The Fund has offered the Shares since October 1, 1993. The financial
highlights included in this table are a part of the Fund's financial
statements for the fiscal year ended March 31, 1995 and have been audited by
Deloitte & Touche LLP, independent auditors. The financial statements and
financial highlights for the fiscal year ended March 31, 1995 and the report
thereon of Deloitte & Touche LLP are included in the Statement of Additional
Information. Additional performance information is contained in the Fund's
Annual Report for the fiscal year ended March 31, 1995 which can be obtained
at no charge by calling the Fund at (800) 767-FLAG.

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(For a Share outstanding throughout each period)
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For the Period
For the Year October 1, 1993*
Ended through
March 31, 1995 March 31, 1994
-------------- ----------------
<S> <C> <C>
Per Share Operating Performance: ....................
Net asset value at beginning of period ............ $ 9.50 $ 10.00
-------------- ----------------
Income from Investment Operations: ..................
Net investment income ............................. 0.40 0.14
Net realized and unrealized gain/(loss) on
investments .................................... 0.05 (0.53)
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Total from Investment Operations .................. 0.45 (0.39)
Less Distributions: .................................
Dividends from net investment income .............. (0.43) (0.11)
-------------- ----------------
Net asset value at end of period .................. $ 9.52 $ 9.50
============== ================
Total Return** ...................................... 5.12% (4.06)%
Ratios to Average Net Assets: .......................
Expenses(2) ....................................... 0.70% 0.29%(1)
Net investment income(3) .......................... 4.44% 3.84%(1)
Supplemental Data: ..................................
Net assets at end of period ....................... $12,919 $11,872
Portfolio turnover rate ........................... 33 % 9 %
</TABLE>

- ------
* Commencement of operations.
** Total return represents aggregate total return for the period indicated
and does not reflect any applicable sales charges.
(1)Annualized.
(2) Without the waiver of advisory fees and reimbursement of expenses, the
ratio of expenses to average net assets would have been 1.85% and 2.46%
(annualized) for the year ended March 31, 1995 and the period ended March
31, 1994, respectively.
(3) Without the waiver of advisory fees and reimbursement of expenses, the
ratio of net investment income to average net assets would have been
3.29% and 1.68% (annualized) for the year ended March 31, 1995 and the
period ended March 31, 1994, respectively.

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3. INVESTMENT PROGRAM

INVESTMENT OBJECTIVES, POLICIES AND RISK CONSIDERATIONS

The Fund seeks to provide current income exempt from federal income taxes
and Maryland state and local income taxes consistent with preservation of
principal within an intermediate-term maturity structure. There is no
assurance this objective will be met.

Under normal conditions, the Fund expects to be as fully invested as
practicable in obligations which, in the opinion of bond counsel to the
issuers, produce interest exempt from federal income tax and Maryland

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state and local income tax and at least 65% of the Fund's total assets will
be invested in securities of Maryland issuers. These include municipal
obligations issued by the State of Maryland and its political subdivisions,
agencies or instrumentalities. The Fund may invest up to 35% of its assets in
obligations of other issuers of securities the interest on which is exempt
from Maryland state and local taxes. These issuers would include territories
or possessions of the United States. However, the Fund has no present
intention to invest in securities issued by such territories or possessions.

As a matter of fundamental policy, under normal conditions, the Fund will
invest at least 80% of its total assets in securities the interest on which
is exempt from federal and Maryland state and local income taxes and 80% of
the Fund's assets will be invested in municipal securities the income from
which is not subject to the alternative minimum tax. Income derived from
securities subject to the alternative minimum tax is not included when
computing income exempt from federal and Maryland state and local income
taxes. Under normal conditions, the Fund may invest up to 20% of its net
assets in municipal securities the income from which is not exempt from
Maryland state and local income taxes. For temporary, defensive purposes
when, in the opinion of the Fund's investment advisor, Investment Company
Capital Corp. ("ICC" or the "Advisor"), securities exempt from Maryland state
and local income tax are not readily available or of sufficient quality, the
Fund can invest up to 100% of its assets in securities which pay interest
which is exempt only from federal income taxes or in taxable U.S. Treasury
securities.

The Fund is a non-diversified investment company which means that more
than 5% of its assets may be invested in each of one or more issuers. Since a
relatively high percentage of assets of the Fund may be invested in the
obligations of a limited number of issuers, the value of shares of the Fund
may be more susceptible to any single economic, political or regulatory
occurrence than the shares of a diversified investment company would be. The
Fund intends to satisfy the diversification requirements necessary to qualify
as a regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code").

The Fund currently contemplates that it will not invest more than 25% of
its total assets (at market value at the time of purchase) in municipal
securities, the interest on which is paid from revenues of projects with
similar characteristics. See also "Special Considerations Relating To
Maryland Municipal Securities."

Under normal circumstances the Fund's portfolio will have a dollar
weighted average maturity of not less than 3 and not more than 10 years.

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The value of obligations purchased by the Fund will change as interest rates
change. Thus, a decrease in interest rates generally will result in an
increase in the value of shares of the Fund. Conversely, an increase in
interest rates will generally result in a decrease in the value of the shares
of the Fund. The magnitude of these fluctuations will be greater as the
average maturity of the Fund increases.

Municipal notes in which the Fund may invest will be limited to those
obligations (i) which are rated MIG-1 or VMIG-1 at the time of investment by
Moody's Investors Service, Inc. ("Moody's"), (ii) which are rated SP-1 at the
time of investment by Standard & Poor's Ratings Group ("S&P"), or (iii)
which, if not rated, are of comparable quality in the Advisor's judgement.
Municipal bonds in which the Fund may invest must be rated BBB or better by
S&P or Baa or better by Moody's at the time of investment or, if unrated must
be of comparable quality in the Advisor's judgement. Securities rated Baa or
BBB are deemed to have speculative characteristics. Tax-exempt commercial
paper will be limited to investments in obligations which are rated at least
A-1 by S&P or Prime-1 by Moody's at the time of investment or, if unrated,
are of comparable quality in the Advisor's judgement. These ratings may be
based in part on credit support provided by a bank or other entity.
Accordingly, a decline in the creditworthiness of the entity providing such
support could affect the rating of the security, as well as the payment of
interest and principal. For a description of the above ratings, see the
"Appendix".

The Fund may also enter into futures contracts and options on futures
contracts, although it has no present intention to do so. Gains recognized by
the Fund from such transactions would constitute taxable income to
shareholders.

The Fund may also purchase variable and floating rate demand notes and
bonds. The Advisor will invest in commitments to purchase securities on a
"when-issued" basis and reserves the right to engage in "put" transactions on
a daily, weekly or monthly basis.

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MUNICIPAL SECURITIES

Municipal securities that the Fund may purchase consist of (i) debt
obligations issued by or on behalf of public authorities to obtain funds to
be used for various public facilities, for refunding outstanding obligations,
for general operating expenses and for lending such funds to other public
institutions and facilities, and (ii) certain private activity and industrial
development bonds issued by or on behalf of public authorities to obtain

6
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funds to provide for the construction, equipment, repair or improvement of
privately operated facilities. Municipal notes include general obligation
notes, tax anticipation notes, revenue anticipation notes, bond anticipation
notes, certificates of indebtedness, demand notes, construction loan notes
and participation interests therein. Municipal bonds include general
obligation bonds, revenue or special obligation bonds, private activity
bonds, industrial development bonds and participation interests therein.
General obligation bonds are backed by the taxing power of the issuing
municipality. Revenue bonds are backed by the revenues of a project or
facility, tolls from a toll bridge, or lease payments, for example. The
payment of principal and interest on private activity and industrial
development bonds generally is dependent solely on the ability of the
facility's user to meet its financial obligations and the pledge, if any, of
real and personal property so financed as security for such payment.

The Fund may purchase municipal lease obligations, including certificates
of participation ("COPs") in municipal leases. The Fund may acquire municipal
lease obligations that may be assigned by the lessee to another party
provided the obligation continues to provide tax-exempt interest. The Fund
will not purchase municipal lease obligations to the extent it holds
municipal lease obligations and illiquid securities in an amount exceeding
10% of its net assets unless the Advisor determines that the municipal lease
obligations are liquid pursuant to guidelines established by the Board of
Directors of the Fund. Pursuant to these guidelines, the Advisor, in making
this liquidity determination, will consider, among other factors, the
strength and nature of the secondary market for such obligations, the
prospect for its future marketability and whether such obligations are rated.
The Fund expects that it will purchase only rated municipal lease
obligations. In addition, the Fund may purchase participation interests in
other municipal securities (such as industrial development bonds). (See
"Participation Interests.")

Municipal obligations purchased by the Fund which fall below the above
rating criteria after the purchase by the Fund shall be sold promptly.

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INSURED OBLIGATIONS

The Fund may invest in obligations that are insured as to the scheduled
payment of all installments of principal and interest as they fall due. The
purpose of this insurance is to minimize credit risks to the Fund and its
shareholders associated with defaults in Maryland municipal obligations owned
by the Fund. This insurance does not insure against market risk and therefore
does not guarantee the market value of the obligations in the

7
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Fund's investment portfolio upon which the net asset value of the Fund's
shares is based. The market value will continue to fluctuate in response to
fluctuations in interest rates or the bond market. Similarly, this insurance
does not cover or guarantee the value of the shares of the Fund. The ratings
of the insured obligations may be based in part on insurance provided by an
insurance company. Accordingly, a decline in the creditworthiness of the
insurance company providing the insurance could affect the rating of the
security, as well as the payment of interest and principal.

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PARTICIPATION INTERESTS

The Fund may invest in COPs representing participation interests in
municipal securities (such as AMT-Subject Bonds). A participation interest
may pay a fixed, floating or variable rate of interest and gives the
purchaser an undivided interest in the municipal security in the proportion
that the Fund's participation interest bears to the total principal amount of
the municipal security and provides a demand repurchase feature. Each
participation is backed by an irrevocable letter of credit or guarantee of a
bank that meets the prescribed quality standards of the Fund. The Fund has
the right to sell the instrument back to the issuing bank or draw on the
letter of credit on demand for all or any part of the Fund's participation
interest in the municipal security, plus accrued interest. Banks will retain
or receive a service fee, letter of credit fee and a fee for issuing
repurchase commitments in an amount equal to the excess of the interest paid
on the municipal securities over the negotiated yield at which the
instruments were purchased by the Fund. Participation interests in the form
to be purchased by the Fund are new instruments, and no ruling of the
Internal Revenue Service has been secured relating to their tax-exempt
status. The Fund intends to purchase participation interests based upon
opinions of counsel to the issuer to the effect that income from them is
tax-exempt to the Fund. For purposes of complying with diversification
requirements, the Fund will treat both the trust, or similar entity
established to issue COPs, and the issuers of the underlying municipal
securities as issuers. Also, the Fund will limit its investments in COPs to
less than 25% of its total assets.

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PUTS

A "put" feature permits the Fund to sell a security at a fixed price prior
to maturity. The underlying municipal securities subject to a put may be sold
at any time at the market rates. The Fund will purchase only securities
subject to a put where the put is an integral part of the security as origi-

8
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nally issued. Such puts may not be marketable or assignable. Therefore, the
put would have value only to the Fund. In certain cases a premium may be paid
for put features. The payment of a premium will have the effect of reducing
the yield otherwise payable on the security. The purpose of engaging in
transactions involving puts is to maintain flexibility and liquidity to
permit the Fund to meet redemptions and remain as fully invested as possible
in municipal securities. The Fund's ability to enforce a put obligation is
subject to the risk that the seller may default on its obligation to purchase
the security. The Fund will limit its put transactions to institutions which
the Advisor believes present minimal credit risk. The Fund will ordinarily
invest no more than 40% of its net assets at any time in securities subject
to puts.

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REPURCHASE AGREEMENTS

The Fund may agree to purchase U.S. Treasury securities from financial
institutions, such as banks and broker-dealers, subject to the seller's
agreement to repurchase the securities at an established time and price. U.S.
Treasury securities include Treasury bills, Treasury notes, Treasury bonds
and Separate Trading of Registered Interest and Principal of Securities
("STRIPS"), all of which are direct obligations of the U.S. Government and
are supported by the full faith and credit of the United States. The Fund
will enter into repurchase agreements only with banks and broker-dealers that
have been determined to be creditworthy by the Fund's Board of Directors
under criteria established with the assistance of the Advisor. Default by the
seller may, however, expose the Fund to possible loss because of adverse
market action or delay in connection with the disposition of the underlying
obligations. 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.

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VARIABLE AND FLOATING RATE DEMAND OBLIGATIONS

The Fund may purchase variable and floating 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. Where these
obligations are not secured by letters of credit or other credit support

9
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arrangements, the Fund's right to redeem will be dependent on the ability of
the borrower to pay principal and interest on demand. Each demand note and
bond purchased by the Fund will meet the quality criteria established for the
purchase of other municipal obligations. The Advisor, on behalf of the Fund,
will consider on an ongoing basis the creditworthiness of the issuers of the
floating and variable rate demand obligations in the Fund's portfolio.
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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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,
cash equivalents or U.S. Government securities or other high quality liquid
debt 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. Additional cash or liquid debt securities will be added to the
account when necessary. While the Fund will purchase securities on a
when-issued basis only with the intention of acquiring the securities, the
Fund may sell the securities before the settlement date if it is deemed
advisable to limit the effects of adverse market action. The securities so
purchased or sold are subject to market fluctuation so, 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 municipal obligations purchased on a when-issued basis.

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ZERO COUPON TREASURY SECURITIES

The Fund may invest in "zero coupon" Treasury securities which are U.S.
Treasury bills, notes, and bonds which have been stripped of their

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unmatured interest coupons and receipts or certificates representing
interests in such stripped debt obligations and coupons. A zero coupon
security pays no interest to its holder during its life. Its value to an
investor consists of the difference between its face value at the time of
maturity and the price for which it was acquired, which is generally an
amount significantly less than its face value (sometimes referred to as a
"deep discount" price).

Currently U.S. Treasury securities issued without coupons include Treasury
bills and Treasury STRIPS. In addition, a number of banks and brokerage firms
separate the principal portions from the coupon portions of the U.S. Treasury
bonds and notes and sell them separately in the form of receipts or
certificates representing undivided interests in these instruments (which
instruments are generally held by a bank in a custodial or trust account).

Zero coupon Treasury securities do not entitle the holder to any periodic
payments of interest prior to maturity. Accordingly, those securities usually
trade at a deep discount from their face or par value and will be subject to
greater fluctuations of market value in response to changing interest rates
than debt obligations of comparable maturities which make current
distributions of interest. In certain circumstances, the Fund could fail to
recoup its initial investment in those securities.

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SPECIAL CONSIDERATIONS RELATING TO MARYLAND
MUNICIPAL SECURITIES

The Fund's concentration in securities issued by the State of Maryland and
its political subdivisions involves greater risk than a fund broadly invested
across many states and municipalities. Specifically, the credit quality of
the Fund will depend upon the continued financial strength of the State of
Maryland, as well as the financial condition of numerous public bodies and
municipalities. As of March 8, 1995, the State was rated Aaa by Moody's and
AAA by S&P.

For more than a century, the State of Maryland has paid the principal and
interest on its general obligation bonds when due, and has not issued
short-term tax anticipation notes, or made any other similar short-term
borrowings for its own needs. In 1985, however, the State issued bond
anticipation notes in connection with a savings and loan crisis; all such
notes have been discharged. There is no general debt limit imposed by the
State Constitution or public general laws. State and local debt on a per
capita basis or as a percentage of property values have increased by 27.7%
and 7.1%, respectively, since 1990.

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During fiscal years 1991 through 1993, the national recession and weakened
regional economy caused shortfalls in the State's budgeted revenues and
increases in the demand for State services. During that period the State was
forced both to cut local aid and other State expenditures and to raise taxes.
Showing improvement from prior years, the State ended its fiscal year 1994
with a general fund surplus of $60 million. The State estimates that it
finished its fiscal year 1995 with general fund surplus of $105.9 million and
$283.7 million in the Revenue Stabilization Account.

In April 1995, the General Assembly of the State approved a $14.4 billion
budget for fiscal year 1996, an 8.2% increase over the fiscal year 1995
budget. This budget includes funds sufficient to meet all fiscal year 1995
deficiencies, to provide cost of living adjustments for state employees and
$161 million of increased aid to local governments. When the fiscal year 1996
budget was enacted, the State projected that it would end the fiscal year
with a general fund surplus of $12.8 million and a balance in the Revenue
Stabilization Account and a new Citizens Tax Reduction and Fiscal Reserve
Account of the State Reserve Fund of $370.9 and $190 million, respectively.

The Fund expects to invest a substantial portion of its assets in the debt
obligations of local governments and public authorities. While local
governments in Maryland are predominantly reliant on independent revenue
sources, such as property taxes, they are not immune to budget shortfalls
caused by cutbacks in State aid. The Fund may purchase obligations issued by
public authorities in Maryland which are not backed by the full faith and
credit of the State or a local government and may or may not be subject to
annual appropriations from the State's general fund. In addition, certain
Maryland counties are subject to voter approved limitations on property tax
increases or increases in governmental spending.

The Fund may also invest in certain sectors with unique risks. These
include but are not limited to investments in health care issues, solid waste
revenue issues, and other private activity bonds without governmental
backing. The U.S. hospital industry has been under significant pressure to
reduce expenses and limit length of stay, a phenomenon which has negatively
affected the financial health of many hospitals. There may be substantial
operating, legal, economic and regulatory risks associated with solid waste
facilities which can affect the security for the bonds.

Credit ratings and the financial and economic condition of the State,
local governments, public authorities, and other borrowers in which the Fund
may invest are subject to change at any time.

A more detailed discussion of these and other considerations is contained
in the Statement of Additional Information.

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

4. INVESTMENT RESTRICTIONS

The Fund's investment program is subject to a number of restrictions which
reflect both self imposed standards and federal and state regulatory
limitations. The investment restrictions numbered 1 and 2 below are matters
of fundamental policy and may not be changed without the affirmative vote of
a majority of the outstanding Shares. Investment restriction number 3 may be
changed by a vote of the majority of the Board of Directors. The Fund will
not:

1) Concentrate 25% or more of its total assets in securities of issuers in
any one industry, provided that this limitation does not apply to
investments in tax-exempt securities issued by governments or political
subdivisions of governments (for these purposes the U.S. Government and
its agencies and instrumentalities are not considered an issuer);

2) Borrow money except as a temporary measure to facilitate settlements and
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
equalling 5% or more of the Fund's total assets are outstanding, the Fund
will not purchase securities; and

3) Invest more than 10% of the Fund's net assets in illiquid securities,
including repurchase agreements with maturities of greater than seven
days.

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

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

5. HOW TO INVEST IN THE FUND

Shares may be purchased from Alex. Brown & Sons Incorporated, 135 East
Baltimore Street, Baltimore, Maryland 21202 ("Alex. Brown"), through any
securities dealer which has entered into a dealer agreement with Alex. Brown
("Participating Dealers"), or through any financial institution which has
entered into a shareholder servicing agreement with the Fund ("Shareholder
Servicing Agents"). Shares may also be purchased directly from the Fund by
completing the Application Form attached to this Prospectus and returning it,
together with payment of the purchase price plus any applicable front-end
sales charge, to the Fund at the address shown on the Application Form.

13
<PAGE>

The minimum initial investment is $2,000, except that the minimum initial
investment for shareholders of any other Flag Investors fund or class is $500
and the minimum initial investment for participants in the Fund's Automatic
Investing Plan is $250. Each subsequent investment must be at least $100,
except that the minimum subsequent investment under the Fund's Automatic
Investing Plan is $250 for quarterly investments and $100 for monthly
investments. (See "Purchases through Automatic Investing Plan" below.) Orders
for purchases of Shares are accepted on any day on which the New York Stock
Exchange is open for business ("Business Day"). The Fund reserves the right
to suspend the sale of Shares at any time at the discretion of Alex. Brown
and ICC. Purchase orders for Shares will be executed at a per Share purchase
price equal to the net asset value next determined after receipt of the
purchase order plus any applicable front-end sales charge (the "Offering
Price") on the date such net asset value is determined (the "Purchase Date").
Purchases made directly from the Fund must be accompanied by payment of the
Offering Price. Purchases made through Alex. Brown or a Participating Dealer
or Shareholder Servicing Agent must be in accordance with such entity's
payment procedures. Alex. Brown may, in its sole discretion, refuse to accept
any purchase order.

The net asset value per Share is determined once daily as of the close of
the New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time), on
each Business Day. Net asset value per Share is calculated by valuing all
assets held by the Fund, deducting liabilities, and dividing the resulting
amount by the number of then outstanding Shares. For this purpose portfolio
securities are given their market value where feasible. Portfolio securities
that are actively traded in the over-the-counter market, including listed
securities for which the primary market is believed by the Advisor to be
over-the-counter, are valued at the quoted bid prices provided by principal
market makers. If a portfolio security is traded primarily on a national
exchange on the valuation date, the last quoted sale price is generally used.
Securities or other assets for which market quotations are not readily
available are valued at their fair value as determined in good faith under
procedures established from time to time and monitored by the Fund's Board of
Directors. Such procedures may include the use of an independent pricing
service which uses prices based upon yields or prices of securities of
comparable quality, coupon, maturity and type; indications as to values from
dealers; and general market conditions. Debt obligations with maturities of
60 days or less are valued at amortized cost, which constitutes fair value as
determined by the Fund's Board of Directors.

14
<PAGE>

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

OFFERING PRICE

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

Sales Charge Dealer
as % of Retention
Offering Net Amount as % of
Amount of Purchase Price Invested Offering Price
- -------------------------------------------------------------------------------
Less than $100,000 .............. 1.50% 1.52% 1.25%
$100,000 - $499,999 ............. 1.25% 1.27% 1.00%
$500,000 - $999,999 ............. 1.00% 1.01% .75%
$1,000,000 and over ............. None* None* None*

- ------
* Purchases of $1 million or more may be subject to a contingent deferred
sales charge. (See below.) The distributor may make payments to dealers in
the amount of .50% of the Offering Price.

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

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

An investor may also obtain the reduced sales charges shown above by
executing a written Letter of Intent which states the investor's intention to
invest not less than $100,000 within a 13-month period in Shares. Each
purchase of Shares under a Letter of Intent will be made at the Offering

15
<PAGE>

Price applicable at the time of such purchase to the full amount indicated in
the Letter of Intent. A Letter of Intent is not a binding obligation upon the
investor to purchase the full amount indicated. The minimum initial
investment under a Letter of Intent is 5% of the full amount. Shares
purchased with the first 5% of the full amount will be held in escrow (while
remaining registered in the name of the investor) to secure payment of the
higher sales charge applicable to the Shares actually purchased if the full
amount indicated is not invested. Such escrowed Shares will be involuntarily
redeemed to pay the additional sales charge, if necessary. When the full
amount indicated has been purchased, the escrowed Shares will be released. An
investor who wishes to enter into a Letter of Intent in conjunction with an
investment in Shares may do so by completing the appropriate section of the
Application Form attached to this Prospectus.

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

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

16
<PAGE>

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

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

PURCHASES BY EXCHANGE

As permitted pursuant to any rule, regulation or order promulgated by the
SEC, shareholders of Flag Investors Intermediate-Term Income Fund, Inc. and
shareholders of other mutual funds in the Flag Investors family of funds with
a higher front-end sales charge, may exchange their shares of those funds for
an equal dollar amount of Shares. Shares issued pursuant to this offer will
not be subject to the sales charges described above or any other charge.
Shareholders of Flag Investors Cash Reserve Prime Class A Shares may exchange
into Shares upon payment of the difference in sales charges, as applicable.

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

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

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

In addition, shareholders may exchange their Shares for an equal dollar
amount of shares of any other mutual fund in the Flag Investors family of
funds with a higher front-end sales charge. In connection with such exchange,
shareholders will be required to pay the difference between the sales charge
paid on Shares and the sales charge applicable to the purchase of the shares
of such other fund, except that the exchange will be made at net asset value
(without payment of any sales charge) if the Shares have been held for more
than 24 months following the purchase date.

17
<PAGE>

The exchange privilege with respect to other Flag Investors funds may also be
exercised by telephone. (See "Telephone Transactions" below). The exchange
privilege may be exercised only in those states where the shares of such other
fund may legally be sold. Investors should receive and read the applicable
prospectus prior to tendering shares for exchange. The Fund may modify or
terminate these offers of exchange at any time on 60 days' prior written notice
to shareholders and the exchange offers set forth herein are expressly subject
to modification or termination.

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

PURCHASES THROUGH AUTOMATIC INVESTING PLAN

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

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

6. HOW TO REDEEM SHARES

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

18
<PAGE>

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

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

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

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

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

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

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

SYSTEMATIC WITHDRAWAL PLAN

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

19
<PAGE>

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

7. TELEPHONE TRANSACTIONS

Shareholders may exercise the exchange privilege with respect to other
Flag Investors funds, or redeem Shares in amounts up to $50,000, by notifying
the Transfer Agent by telephone at (800) 553-8080 on any Business Day between
the hours of 8:30 a.m. and 5:30 p.m. (Eastern Time) or by regular or express
mail at its address listed under "Custodian, Transfer Agent, Accounting
Services." Telephone transaction privileges are automatic. Shareholders may
specifically request that no telephone redemptions or exchanges be accepted
for their accounts. This election may be made on the Application Form or at
any time thereafter by completing and returning appropriate documentation
supplied by the Transfer Agent.

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

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

20
<PAGE>

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

8. DIVIDENDS AND TAXES

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

DIVIDENDS AND DISTRIBUTIONS

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

Unless the shareholder elects otherwise, all income dividends (consisting
of dividend and interest income and the excess, if any, of net short-term
capital gains over net long-term capital losses) and net capital gains
distributions, if any, will be reinvested in additional Shares at net asset
value. However, shareholders may elect to terminate automatic reinvestment by
giving written notice to the Transfer Agent (see "Custodian, Transfer Agent,
Accounting Services"), either directly or through their Participating Dealer
or Shareholder Servicing Agent, at least five days before the next date on
which dividends or distributions will be paid.

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

TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS

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

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

The Fund intends to qualify as a "regulated investment company" under the
Code and to distribute to its investors all of its net investment income
(including its net tax-exempt income) and net short-term and long-term
capital gain income, if any, so that it is not required to pay federal taxes
on amounts so distributed. In addition, the Fund expects to make sufficient
distributions prior to the end of each calendar year to avoid liability for
federal excise tax. Shareholders will be advised at least annually as to the
federal income tax consequences of distributions made during the year.

21
<PAGE>

Dividends derived from the Fund's net exempt-interest income and
designated by the Fund as exempt-interest dividends may be treated by the
Fund's shareholders as items of interest excludable from their gross income
for federal income tax purposes if the Fund qualifies as a regulated
investment company and if, at the close of each quarter of the Fund's taxable
year, at least 50% of the value of its total assets consists of securities
the interest on which is excluded from gross income. Although exempt-interest
dividends are excludable from a shareholder's gross income for regular income
tax purposes, they may have collateral federal income tax consequences,
including alternative minimum tax consequences. (See the Statement of
Additional Information.)

Current federal tax law limits the types and volume of bonds qualifying
for the federal income tax exemption of interest, which may have an effect on
the ability of the Fund to purchase sufficient amounts of tax-exempt
securities to satisfy the Code's requirements for the payment of
exempt-interest dividends. All or a portion of the interest on indebtedness
incurred or continued by a shareholder to purchase or carry Shares is not
deductible for federal income tax purposes. Furthermore, entities or persons
who are "substantial users" (or persons related to "substantial users") of
facilities financed by "private activity bonds" or "industrial development
bonds" should consult their tax advisers before purchasing Shares. (See the
Statement of Additional Information.)

Under the Code, dividends attributable to interest on certain "private
activity bonds" issued after August 7, 1986, will be included in alternative
minimum taxable income for the purpose of determining liability (if any) for
the alternative minimum tax for individuals and for corporations.
Additionally, in the case of corporations, all tax-exempt interest dividends
will be taken into account in determining "adjusted current earnings" (as
defined for federal income tax purposes) for purposes of computing the
alternative minimum tax imposed on corporations.

To the extent, if any, that dividends paid to investors are derived from
taxable income, such dividends will be subject to federal income tax. If the
Fund purchases a municipal security at a market discount, any gain realized
by the Fund upon sale or redemption of the municipal obligation shall be
treated as taxable interest income to the extent such gain does not exceed
the market discount and any gain realized in excess of the market discount
will be treated as capital gain. Distributions of net investment income
and/or the excess, if any, of net short-term capital gains over net long-term
capital losses are taxable to investors as ordinary income, regardless of
whether such distributions are paid in cash or reinvested in additional
Shares. Distributions of net capital gains (the excess of net long-term capi-

22
<PAGE>

tal gains over net short-term capital losses) that are designated by the Fund
as capital gain dividends are taxable to investors as long-term capital
gains, regardless of the length of time the investor owned the Shares. Since
substantially all of the net investment income of the Fund is expected to be
derived from earned interest, it is anticipated that no part of the Fund's
distributions will be eligible for the corporate dividends-received
deduction.

Dividends declared payable to shareholders of record in October, November
or December of one year, but paid in January of the following year, will be
deemed for tax purposes to have been paid by the Fund and received by the
shareholders in the year in which the dividends were declared.

Shareholders will be advised annually as to the federal income tax
consequences of distributions made during the year. Shareholders are urged to
consult their tax advisers concerning the application of state and local
taxes to investments in the Fund.

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

MARYLAND TAX DISCLOSURE

To the extent the Fund qualifies as a regulated investment company under
the Code, it will be subject to tax only on (1) that portion of its income on
which tax is imposed for federal income tax purposes under Section 852(b)(1)
of the Code and (2) that portion of its income which consists of federally
tax exempt interest on obligations other than Maryland Exempt Obligations
(hereinafter defined) to the extent such interest is not paid to Fund
shareholders in the form of exempt-interest dividends. To the extent
dividends paid by the Fund represent interest excludable from gross income
for federal income tax purposes, that portion of exempt-interest dividends
that represents interest received by the Fund on obligations issued by the
State of Maryland, its political subdivisions, Puerto Rico, the U.S. Virgin
Islands, or Guam and their respective authorities or municipalities
("Maryland Exempt Obligations"), will be exempt from Maryland state and local
income taxes when allocated or distributed to a shareholder of the Fund
except in the case of a shareholder that is a financial institution. Except
as noted below, all other dividend distributions will be subject to Maryland
state and local income taxes.

Capital gains distributed by the Fund to a shareholder or any gains
realized by a shareholder from a redemption or sale of shares must be
recognized for Maryland state and local income tax purposes to the extent
recognized for federal income tax purposes. However, capital gains
distributions included in the gross income of shareholders for federal income

23
<PAGE>

tax purposes are subtracted from capital gains income for Maryland income tax
purposes to the extent such distributions are derived from the disposition of
debt obligations issued by the State of Maryland, its political subdivisions
and authorities.

Except in the case of a shareholder that is a financial institution,
dividends received by a shareholder from the Fund that are derived from
interest on U.S. government obligations will be exempt from Maryland state
and local income taxes.

In the case of individuals, Maryland presently imposes an income tax on
items of tax preference with reference to such items as defined in the Code
for purposes of calculating the federal alternative minimum tax. Interest
paid on certain private activity bonds is a preference item for purposes of
calculating the federal alternative minimum tax. Accordingly, if the Fund
holds such bonds, the excess of 50% of that portion of exempt interest
dividends which is attributable to interest on such bonds over a threshold
amount may be taxable by Maryland. Interest on indebtedness incurred or
continued (directly or indirectly) by a shareholder in order to purchase or
carry shares of the Fund will not be deductible for Maryland state and local
income tax purposes. Individuals will not be subject to personal property tax
on their shares of the Fund. Shares of the Fund held by a Maryland resident
at death may be subject to Maryland inheritance and estate taxes.

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

9. MANAGEMENT OF THE FUND

The overall business 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, distributor, custodian and transfer
agent. The day-to-day operations of the Fund are delegated to the Fund's
executive officers and to ICC. Two Directors and all of the officers of the
Fund are officers or employees of Alex. Brown or ICC. The other Directors of
the Fund have no affiliation with Alex. Brown or ICC.

The Fund's Directors and officers are as follows:

*Richard T. Hale Chairman M. Elliott Randolph, Jr. President
*Truman T. Semans Director Paul D. Corbin Executive Vice President
James J. Cunnane Director Edward J. Veilleux Vice President
N. Bruce Hannay Director Gary V. Fearnow Vice President
John F. Kroeger Director Monica M. Hausner Vice President
Louis E. Levy Director Brian C. Nelson Vice President and
Secretary
Eugene J. McDonald Director Diana M. Ellis Treasurer
*Rebecca W. Rimel Director
Harry Woolf Director Laurie D. DePrine Assistant Secretary

- ------
* Messrs. Hale and Semans are, and Ms. Rimel may be, "interested persons" of
the Fund.

24
<PAGE>

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

10. INVESTMENT ADVISOR

Investment Company Capital Corp., the Fund's investment advisor, is a
wholly-owned subsidiary of Alex. Brown, the Fund's distributor. ICC is also
the investment advisor to, and Alex. Brown acts as distributor for other
mutual funds in the Flag Investors family of funds and Alex. Brown Cash
Reserve Fund, Inc., which funds had approximately $3.7 billion of net assets
as of June 30, 1995. The address of ICC is 135 East Baltimore Street,
Baltimore, Maryland 21202.

ICC is responsible for the general management of the Fund, as well as 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. ICC
currently intends to waive, on a voluntary basis, its annual fee to the
extent necessary so that the Fund's annual expenses do not exceed .70% of the
Fund's average daily net assets. For the fiscal year ended March 31, 1995,
ICC waived all advisory fees and reimbursed expenses of $90,867.

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

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

PORTFOLIO MANAGERS

Messrs. M. Elliott Randolph, Jr., the Fund's President, and Paul D.
Corbin, the Fund's Executive Vice President, have shared primary
responsibility for managing the Fund's assets since inception.

M. Elliott Randolph has 21 years of investment experience and has been a
portfolio manager with the Advisor since 1991. From 1988-1991 he was a
Principal with Monument Capital Management, Inc.

Paul D. Corbin has over 16 years of investment experience and has been a
portfolio manager with the Advisor since 1991. From 1984-1991 he served as
the Senior Vice President in charge of Fixed Income Portfolio Management at
First National Bank of Maryland.

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

11. DISTRIBUTOR

Alex. Brown acts as distributor of the Shares. Alex. Brown is an
investment banking firm which offers a broad range of investment services to

25
<PAGE>

individual, institutional, corporate and municipal clients. It is a wholly-
owned subsidiary of Alex. Brown Incorporated, which has engaged directly and
through subsidiaries and affiliates in the investment business since 1800.
Alex. Brown is a member of the New York Stock Exchange and other leading
securities exchanges. Headquartered in Baltimore, Maryland, Alex. Brown has
offices throughout the United States and, through subsidiaries, maintains
offices in London, England, Geneva, Switzerland and Tokyo, Japan.

Pursuant to a Distribution Agreement and related Plan of Distribution (the
"Plan") adopted pursuant to Rule 12b-1 under the 1940 Act, the Fund
compensates Alex. Brown for distribution at the rate of .25% of the Fund's
average daily net assets. Alex. Brown expects to allocate on a proportional
basis most of its annual distribution fee to its investment representatives
or up to all of its fee to Participating Dealers as compensation for their
ongoing shareholder services, including processing purchase and sale requests
and responding to shareholder inquiries.

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

26
<PAGE>

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

12. CUSTODIAN, TRANSFER AGENT, ACCOUNTING SERVICES

PNC Bank, National Association ("PNC Bank"), a national banking
association, with offices at Airport Business Park, 200 Stevens Drive,
Lester, Pennsylvania 19113, acts as custodian of the Fund's assets.
Investment Company Capital Corp., 135 East Baltimore Street, Baltimore
Maryland 21202 (telephone: (800) 553-8080) is the Fund's transfer and
dividend disbursing agent. ICC also provides accounting services to the Fund.
As compensation for such accounting services, ICC receives from the Fund an
annual fee equal to $13,000, plus a percentage of the Fund's average daily
net assets in excess of $10 million at a maximum rate of .100% of net assets
and declining at various asset levels to a minimum rate of .001% on net
assets of $1 billion or more. (See the Statement of Additional Information.)
ICC also serves as the Fund's investment advisor.

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

13. PERFORMANCE INFORMATION

From time to time the Fund may advertise its performance including
comparisons to other mutual funds with similar investment objectives and to
relevant indices. Any quotations of yield of the Fund will be determined by
dividing the net investment income earned by the Fund during a 30 day period by
the maximum offering price per Share on the last day of the period and
annualizing the result on a semi-annual basis. The Fund may also advertise a
"tax-equivalent yield", which is calculated by determining the rate of return
that would have to be achieved on a fully taxable investment to produce the
after-tax equivalent of the Fund's yield, assuming certain tax brackets for a
shareholder. All advertisements of performance will show the average annual
total return net of the Fund's maximum sales charge, over one, five and ten year
periods or, if such periods have not yet elapsed, shorter periods corresponding
to the life of the Fund. Such total return quotations will be computed by
finding average annual compounded rates of return over such periods that would
equate an assumed initial investment of $1,000 to the ending redeemable value,
net of the maximum sales charge and other fees according to the required
standardized calculation. The standardized calculation is required by the SEC to
provide consistency and comparability in investment company advertising and is
not equivalent to a yield calculation.

27
<PAGE>

If the Fund compares its performance to other funds or to relevant
indices, the Fund's performance will be stated in the same terms in which
such comparative data and indices are stated, which is normally total return
rather than yield. For these purposes, the performance of the Fund, as well
as the performance of such investment companies or indices, may not reflect
sales charges, which, if reflected, would reduce performance results.

The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Morningstar
Inc., independent services which monitor the performance of mutual funds. The
Fund may also use total return performance data as reported in national
financial and industry publications that monitor the performance of mutual
funds such as Money Magazine, Forbes, Business Week, Barron's, Investor's
Daily, IBC/Donoghue's Money Fund Report and The Wall Street Journal.

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

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

14. GENERAL INFORMATION

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

DESCRIPTION OF SHARES

The Fund was incorporated under the laws of the State of Maryland on July
23, 1993 and is authorized to issue 30 million shares of capital stock, par
value of $.001 per share, all of which Shares are designated common stock.
Each Share has one vote and shall be entitled to dividends and distributions
when and if declared by the Fund. In the event of liquidation or dissolution
of the Fund, each Share would be entitled to its pro rata portion of the
Fund's assets after all debts and expenses have been paid.

The Board of Directors may classify any authorized but unissued Shares
into classes and may establish certain distinctions between classes relating
to additional voting rights, payments of dividends, rights upon liquidation
or distribution of the assets of the Fund and any other restrictions
permitted by law and the Fund's charter.

28
<PAGE>

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

ANNUAL MEETINGS

Unless required under applicable Maryland law, the Fund does not expect to
hold annual meetings of shareholders. However, shareholders of the Fund
retain the right, under certain circumstances to request that a meeting of
shareholders be held for the purpose of considering the removal of a Director
from office, and if such a request is made, the Fund will assist with the
shareholder communications in connection with the meeting.

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

REPORTS

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

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

SHAREHOLDER INQUIRIES

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

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

FUND COUNSEL

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

29
<PAGE>

APPENDIX

The following descriptions or ratings have been published by Standard &
Poor's Ratings Group ("S&P") and Moody's Investors Service, Inc. ("Moody's").

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

DESCRIPTION OF MUNICIPAL BOND RATINGS

Bonds rated AAA have the highest rating S&P assigns to debt obligations.
Such a rating indicates an extremely strong capacity to pay principal and
interest. Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong and in the majority of
instances they differ from AAA issues only in small degree. Bonds rated A
have a strong capacity to pay interest and repay principal although it is
somewhat more susceptible to adverse effects of changes in circumstances and
economic conditions than debt in higher rated categories. Bonds rated BBB
have an adequate capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse economic conditions
or changing circumstances are more likely to lead to a weakened capacity to
pay interest and repay principal for debt in this category than in higher
rate categories.

Bonds which are rated Aaa by Moody's are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as "gilt edged". Interest payments are protected by a large, or an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Bonds rated Aa by Moody's are judged to be of high quality by all standards.
Together with bonds rated Aaa, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risk appear somewhat larger than
the Aaa securities. Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations.
Factors giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment
sometime in the future. Bonds rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.

A-1
<PAGE>

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

DESCRIPTION OF MUNICIPAL NOTE RATINGS

Moody's highest rating for state and municipal and other short-term notes is
MIG-1 and VMIG-1. Short-term municipal securities rated MIG-1 or VMIG-1 are of
the best quality. They have strong protection from established cash flows,
superior liquidity support or demonstrated broad-based access to the market for
refinancing.

An S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note
rating. Notes maturing beyond 3 years will most likely receive a long-term
debt rating. The following criteria will be used in making that assessment:

-- Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
-- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).

Note rating symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.

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

DESCRIPTION OF COMMERCIAL PAPER RATINGS

Commercial paper rated A by S&P is regarded as having the greatest
capacity for timely payment. Issues rated A are further refined by use of the
numbers 1+, 1, 2 and 3 to indicate the relative degree of safety. Issues
rated A-1+ are those with an "overwhelming degree" of credit protection.
Those rated A-1 reflect a "very strong" degree of safety regarding timely
payment. Those rated A-2 reflect a safety regarding timely payment but not as
high as A-1.

Commercial paper issues rated Prime-1 by Moody's are judged by Moody's to
be of the highest quality on the basis of relative repayment capacity.

A-2
<PAGE>

FLAG INVESTORS MARYLAND INTERMEDIATE
TAX FREE INCOME FUND, INC.
NEW ACCOUNT APPLICATION
- -----------------------------------------------------------------------------

Make check payable to "Flag Investors Maryland Intermediate
Tax Free Income Fund, Inc." and mail with this application to:

Flag Investors Funds
P.O. Box 419426
Kansas City, MO 64141-6426
Attn: Flag Investors Maryland Intermediate
Tax Free Income Fund, Inc.

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

To open an IRA account, call 1-800-767-3524 to request an IRA
application

I enclose a check for $_______ payable to "Flag Investors Maryland Intermediate
Tax Free Income Fund, Inc." for the purchase of Fund shares. The minimum initial
purchase is $2,000, except that the minimum initial purchase for shareholders of
any other Flag Investors Fund or Class is $500 and the minimum initial purchase
for participants in the Fund's Automatic Investing Plan is $250. Each subsequent
purchase requires a $100 minimum, except that the minimum subsequent purchase
under the Fund's Automatic Investing Plan is $250 for quarterly purchases and
$100 for monthly purchases. The Fund reserves the right not to accept checks for
more than $50,000 that are not certified or bank checks.

YOUR ACCOUNT REGISTRATION (PLEASE PRINT)

Existing Account No., if any: __________________________________

INDIVIDUAL OR JOINT TENANT

______________________________________________________________________________

First Name Initial Last Name

______________________________________________________________________________
Social Security Number

______________________________________________________________________________
Joint Tenant Initial Last Name

GIFTS TO MINORS

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

______________________________________________________________________________
Minor's Name (only one)

______________________________________________________________________________
Social Security Number of Minor

under the ____________________Uniform Gifts to Minors Act
State of Residence

<PAGE>

CORPORATIONS, TRUSTS, PARTNERSHIPS, ETC.

______________________________________________________________________________
Name of Corporation, Trust or Partnership

______________________________________________________________________________
Tax ID Number Date of Trust

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

______________________________________________________________________________
For the Benefit of

MAILING ADDRESS

______________________________________________________________________________
Street

______________________________________________________________________________
City State Zip

( )
______________________________________________________________________________
Daytime Phone

LETTER OF INTENT (OPTIONAL)

[ ] I agree to the Letter of Intent and Escrow Agreement set forth in the
accompanying prospectus. Although I am not obligated to do so, I intend to
invest over a 13-month period in shares of Flag Investors Maryland
Intermediate Tax Free Income Fund, Inc. in an aggregate amount at least equal
to:
[ ] $100,000 [ ] $500,000 [ ] $1,000,000

RIGHT OF ACCUMULATION (OPTIONAL)

[ ] I already own shares of the Flag Investors Fund(s) (except Class B
shares) set forth below to be applied for a reduced sales charge. List the
Account numbers of other Flag Investors Funds that you or your immediate
family (spouse and children under 21) already own that qualify for reduced
sales charges.

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

______________________________________________________________________________

<PAGE>
DISTRIBUTION OPTIONS

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

Income Dividends

[ ] Reinvested in additional shares
[ ] Paid in Cash

Capital Gains

[ ] Reinvested in additional shares
[ ] Paid in Cash

AUTOMATIC INVESTING PLAN (OPTIONAL)

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

Minimum Initial Investment: $250
Subsequent Investments (check one):

[ ] Monthly ($100 minimum)
[ ] Quarterly ($250 minimum)

______________________________________________________________________________
Bank Name

______________________________________________________________________________
Existing Flag Investors Fund Account No., if any

Please attach a voided check.

______________________________________________________________________________
Depositor's Signature Date

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

SYSTEMATIC WITHDRAWAL PLAN (OPTIONAL)

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

Frequency (check one):

[ ] Monthly
[ ] Quarterly (January, April, July and October)

<PAGE>

TELEPHONE TRANSACTIONS

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

No, I/We do not want

[ ] Telephone redemption privileges
[ ] Telephone exchange privileges

Redemptions effected by telephone will be mailed to the address of record. If
you would prefer redemptions mailed to a predesignated bank account, please
provide the following information:

Bank: ________________________________________________________________________

Address: _____________________________________________________________________

______________________________________________________________________________

Bank Account No: _____________________________________________________________

Bank Account Name: ___________________________________________________________

SIGNATURE AND TAXPAYER CERTIFICATION

I have received a copy of the Fund's prospectus dated August 1, 1995. Unless
the box below is checked, I certify under penalties of perjury, (1) that the
number shown on this form is my correct taxpayer identification number and
(2) that I am not subject to backup withholding as a result of a failure to
report all interest or dividends, or the Internal Revenue Service has
notified me that I am no longer subject to backup withholding. [ ] Check here
if you are subject to backup withholding.
If a non-resident alien, please indicate country of residence:_______________

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

______________________________________________________________________________
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. _________________

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

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

FLAG INVESTORS MARYLAND INTERMEDIATE TAX FREE INCOME FUND, INC.

135 E. Baltimore 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 ANY
PARTICIPATING DEALER OR SHAREHOLDER SERVICING
AGENT OR BY WRITING ALEX. BROWN & SONS
INCORPORATED, 135 EAST BALTIMORE STREET, BALTIMORE,
MARYLAND 21202, OR BY CALLING (800) 767-FLAG.

Statement of Additional Information Dated: August 1, 1995

Relating to Prospectus Dated: August 1, 1995

<PAGE>

TABLE OF CONTENTS

Page

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

2. Investment Objectives and Policies..................... 1

3. Valuation of Shares and Redemption.................... 10

4. Federal Tax Treatment of Dividends and
Distributions...................................... 11

5. Management of the Fund................................ 14

6. Investment Advisory and Other Services............... 18

7. Distribution of Fund Shares......................... 19

8. Brokerage............................................ 22

9. Capital Stock....................................... 23

10. Semi-Annual Reports.................................. 24

11. Custodian, Transfer Agent, Accounting Services ...... 24

12. Independent Auditors ................................ 24

13. Performance Information.............................. 25

14. Control Persons and Principal Holders of
Securities......................................... 27

15. Financial Statements................................. 27

<PAGE>

1. GENERAL INFORMATION AND HISTORY

Flag Investors Maryland Intermediate Tax Free Income Fund, Inc. (the
"Fund") is an open-end management investment company. Under the rules and
regulations of the Securities and Exchange Commission (the "SEC"), all mutual
funds are required to furnish prospective investors with certain information
concerning the activities of the company being considered for investment.
Important information concerning the Fund is included in the Fund's current
Prospectus which may be obtained without charge from Alex. Brown & Sons
Incorporated ("Alex. Brown"), 135 East Baltimore Street, Baltimore, Maryland
21202 (telephone: (800) 767-FLAG) or from Participating Dealers that offer
shares 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 Prospectus. To avoid unnecessary repetition,
references are made to related sections of the Prospectus. In addition, the
Prospectus 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
July 23, 1993. The Fund filed a registration statement with the SEC
registering itself as an open-end non-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.

Under a license agreement dated October 1, 1993 between the Fund and
Alex. Brown Incorporated, Alex. Brown Incorporated licenses to the Fund the
"Flag Investors" name and logo but retains the rights to the name and logo,
including the right to permit other investment companies to use them.

2. INVESTMENT OBJECTIVES AND POLICIES

The Fund is designed to provide current income exempt from federal
income taxes and Maryland state and local income taxes consistent with
preservation of principal within an intermediate-term maturity structure. As
described in the Prospectus, the Fund will attempt to achieve its objective
by investing primarily in municipal obligations issued by the State of
Maryland and its political subdivisions, agencies or instrumentalities.
There can be no assurance that the Fund's investment objective will be
achieved.

Municipal Obligations

Municipal obligations include debt securities issued by or on behalf of
states, territories and possessions of the United States and the District of
Columbia and their political subdivisions, agencies and instrumentalities,
the interest on which is exempt from federal income tax. For a discussion of
quality, maturity and other criteria the Fund applies in investing in
municipal obligations, see "Investment Objectives, Policies and Risk
Considerations" in the Prospectus.

Municipal obligations can be classified into three principal categories:
"general obligation bonds", "revenue bonds" and "notes". General obligation
bonds are secured by the issuer's pledge of its faith, credit and taxing
power for the payment of principal and interest. Revenue bonds are payable
from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise or other specific
revenue source, but not from the general taxing power of the issuer. Revenue
bonds include "tax exempt industrial development bonds", i.e., bonds issued

-1-
<PAGE>

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 or
operating 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.

Other Tax-Exempt Instruments

Other tax-exempt instruments which are permissible investments include
floating rate notes. Investments in such floating rate instruments will
normally involve industrial development or revenue bonds which provide that
the rate of interest is set as a specific percentage of a designated base
rate (such as the prime rate) at a major commercial bank, and that the Fund
can demand payment of the obligation at all times or at stipulated dates on
short notice (not to exceed 30 days) at par plus accrued interest. Such
obligations are frequently secured by letters of credit or other credit
support arrangements provided by banks. The quality of the underlying credit
or of the bank, as the case may be, must, in the opinion of the Fund's
investment advisor, Investment Company Capital Corp. ("ICC" or the "Advisor")
be comparable to the long-term bond or commercial paper ratings stated in the
Prospectus. The Advisor will monitor the earning power, cash flow and
liquidity ratios of the issuers of such instruments and the ability of an
issuer of a demand instrument to pay principal and interest on demand.

Money Market Securities

From time to time the Fund may purchase taxable short-term securities.
These securities include direct obligations of the U.S. Government which
consist of bills, notes and bonds issued by the U.S. Treasury. Obligations
issued by agencies of the U.S. Government, while not direct obligations of
the U.S. Government, are either backed by the full faith and credit of the
U.S. or are guaranteed by the U.S. Treasury or supported by the issuing
agencies' right to borrow from the U.S. Treasury.

The obligations of U.S. commercial banks include certificates of
deposit, time deposits and bankers' acceptances. Certificates of deposit are
negotiable interest-bearing instruments with a specific maturity.
Certificates of deposit are issued by banks and savings and loan institutions
in exchange for the deposit of funds and normally can be traded in the
secondary market, prior to maturity. Time deposits are non-negotiable
receipts issued by a bank in exchange for the deposit of funds. Time
deposits earn a specified rate of interest over a definite period of time;
however time deposits cannot be traded in the secondary market. Bankers'
acceptances are bills of exchange or time drafts drawn on and accepted by a
commercial bank. Bankers' acceptances are used by corporations to finance
the shipment and storage of goods and furnish dollar exchanges. Maturities
are generally six months or less.

The commercial paper which may be purchased includes variable amount
master demand notes which may or may not be backed by bank letters of credit.
These notes permit the investment of fluctuating amounts at varying market
rates of interest pursuant to direct arrangements between the Fund, as
lender, and the borrower. Such notes provide that the interest rate on the
amount outstanding varies on a daily, weekly or monthly basis depending upon
a stated short-term interest rate index. Both the lender and the borrower
have the right to reduce the amount of outstanding indebtedness at any time.
There is no secondary market for the notes. It is not generally contemplated
that such instruments will be traded. Variable or floating rate instruments
bear interest at a rate which varies with changes in market rates. The
holder of an instrument with a demand feature may tender the instrument back
to the issuer at par prior to maturity. A variable amount master demand note
is issued pursuant to a written agreement between the issuer and the holder,

-2-
<PAGE>

its amount may be increased by the holder or decreased by the holder or
issuer, it is payable on demand, and the rate of interest varies based upon
an agreed formula. The quality of the underlying credit must, in the opinion
of the Advisor, be equivalent to the ratings applicable to permitted
investments for the Fund. The Advisor will monitor on an ongoing basis the
earning power, cash flow, and liquidity ratios of the issuers of such
instruments and will similarly monitor the ability of an issuer of a demand
instrument to pay principal and interest on demand.

Puts

The Fund may engage in put transactions. The Advisor has the authority
to purchase securities at a price which would result in a yield to maturity
lower than that generally offered by the seller at the time of purchase when
the Fund can simultaneously acquire the right to sell the securities back to
the seller, the issuer, or a third party (the "writer") at an agreed-upon
price at any time during a stated period or on a certain date. Such a right
is generally denoted as a "standby commitment" or a "put". The purpose of
engaging in transactions involving puts is to maintain flexibility and
liquidity to permit the Fund to meet redemptions and remain as fully invested
as possible in municipal securities. The right to put the securities depends
on the writer's ability to pay for the securities at the time the put is
exercised. The Fund would limit its put transactions to institutions which
the Advisor believes present minimum credit risks, and the Advisor would use
its best efforts initially to determine and continue to monitor the financial
strength of the sellers of the options by evaluating their financial
statements and such other information as is available in the marketplace. It
may, however, be difficult to monitor the financial strength of the writers
because adequate current financial information may not be available. In the
event that any writer is unable to honor a put for financial reasons, the
Fund would be a general creditor (i.e., on a parity with all other unsecured
creditors) of the writer. Furthermore, particular provisions of the contract
between the Fund and the writer may excuse the writer from repurchasing the
securities; for example, a change in the published rating of the underlying
securities or any similar event that has an adverse effect on the issuer's
credit or a provision in the contract that the put will not be exercised
except in certain special cases, for example, to maintain portfolio
liquidity. The Fund could, however, at any time sell the underlying
portfolio security in the open market or wait until the portfolio security
matures, at which time it should realize the full par value of the security.

The securities purchased subject to a put, may be sold to third persons
at any time, even though the put is outstanding, but the put itself, unless
it is an integral part of the security as originally issued, may not be
marketable or otherwise assignable. Therefore, the put would have value only
to the Fund. Sale of the securities to third parties or lapse of time with
the put unexercised may terminate the right to put the securities. Prior to
the expiration of any put option, the Fund could seek to negotiate terms for
the extension of such an option. If such a renewal cannot be negotiated on
terms satisfactory to the Fund, the Fund could, of course, sell the security.
The maturity of the underlying security will generally be different from that
of the put. There will be no limit to the percentage of portfolio securities
that the Fund may purchase subject to a put but the amount paid directly or
indirectly for premiums on all puts outstanding will not exceed 2% of the
value of the total assets of the Fund calculated immediately after any such
put is acquired. For the purpose of determining the "maturity" of securities
purchased subject to an option to put, and for the purpose of determining the
dollar-weighted average maturity of the Fund including such securities the
Fund will consider "maturity" to be the first date on which it has the right
to demand payment from the writer of the put although the final maturity of
the security is later than such date.

Futures Contracts and Options on Futures Contracts

The Fund may invest in futures contracts and related options including
futures contracts on fixed income securities and contracts based on municipal
bond or other financial indices.

-3-
<PAGE>

The Fund may buy or sell financial futures contracts or purchase options
on such futures as a hedge against anticipated interest rate changes. A
futures contract sale creates an obligation by the Fund, as seller, to
deliver the specified type of financial instrument called for in the contract
at a specified future time for a specified price or, in "cash settlement"
futures contracts, to pay to (or receive from) the buyer in cash the
difference between the price in the futures contract and the market price of
the instrument on the specified date, if the market price is higher (or
lower, as the case may be). Options on futures contracts are similar to
options on securities except that an option on a futures contract gives the
purchaser the right for the premium paid to assume a position in a futures
contract (a long position if the option is a call and a short position if the
option is a put).

The Fund's use of futures and options on futures will in all cases be
consistent with applicable regulatory requirements and in particular the
rules and regulations of the Commodity Futures Trading Commission ("CFTC")
with which the Fund must comply in order not to be deemed a commodity pool
operator within the meaning and intent of the Commodity Exchange Act and the
regulations promulgated thereunder.

Typically, an investment in a futures contract requires the Fund to
deposit with the applicable exchange or other specified financial
intermediary as security for its obligations an amount of cash or other
specified debt securities which initially is 1% to 5% of the face amount of
the contract and which thereafter fluctuates on a periodic basis as the value
of the contract fluctuates. An investment in options involves payment of a
premium for the option without any further obligation on the part of the
Fund.

Regulations of the CFTC applicable to the Fund currently require that
all of the Fund's futures and options on futures transactions constitute bona
fide hedging transactions or be undertaken incidental to the Fund's
activities in the securities markets. In accordance with CFTC regulations,
the Fund may not purchase or sell futures contracts or options thereon if
immediately thereafter the sum of the amounts of initial margin deposits on
the Fund's existing futures positions and premiums paid for options on
futures would exceed 5% of the fair market value of the Fund's total assets.
The Advisor reserves the right to comply with such different standard as may
be established by CFTC rules and regulations with respect to the purchase or
sale of futures contracts or options thereon.

The variable degree of correlation between price movements of futures
contracts and price movements in the position being hedged creates the
possibility that losses on the hedge may be greater than gains in the value
of the Fund's position. In addition, futures and futures option markets may
not be liquid in all circumstances. As a result, in volatile markets, the
Fund may not be able to close out a transaction without incurring losses
substantially greater than the initial deposit. Although the contemplated
use of these contracts should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to
limit any potential gain which might result from an increase in the value of
such position. The ability of the Fund to hedge successfully will depend on
the Advisor's ability to forecast pertinent market movements, which cannot be
assured. Finally, the daily deposit requirements in futures contracts create
an ongoing greater potential financial risk than do options purchased by the
Fund, where the exposure is limited to the cost of the initial premium.
Losses due to hedging transactions will reduce net asset value. Income
earned by the Fund from its hedging activities generally will be treated as
capital gains.

Other Investment Practices

In addition, the Fund may enter into repurchase agreements and make
purchases of when-issued securities as described below.

-4-
<PAGE>

Repurchase Agreements. The Fund may enter into repurchase agreements
with financial institutions, such as banks and broker-dealers, deemed to be
creditworthy by the Fund's Board of Directors under criteria established with
the guidance of the Fund's Advisor. A repurchase agreement is a short-term
investment in which the purchaser (i.e., the Fund) acquires ownership of a
debt security and the seller agrees to repurchase the obligation at a future
time and set price, usually not more than seven days from the date of
purchase, thereby determining the yield during the purchaser's holding
period. The value of underlying securities will at least be equal at all
times to the total amount of the repurchase obligation, including the
interest factor. The Fund makes payment for such securities only upon
physical delivery or evidence of book entry transfer to the account of a
custodian or bank acting as agent. The underlying securities, which in the
case of the Fund are securities of the U.S. Treasury only, may have maturity
dates exceeding one year. The Fund does not bear the risk of a decline in
value of the underlying securities unless the seller defaults under its
repurchase obligation. In the event of a bankruptcy or other default of a
seller of a repurchase agreement, the Fund could experience both delays in
liquidating the underlying securities and loss including (a) possible
decline in the value of the underlying security while the Fund seeks to
enforce its rights thereto, (b) possible subnormal levels of income and lack
of access to income during this period and (c) expenses of enforcing its
rights.

When-Issued Securities. The Fund may purchase debt obligations on a
when-issued basis, in which case delivery and payment normally take place
within 45 days after the date of commitment to purchase. The Fund will make
commitments to purchase obligations on a when-issued basis only with the
intention of actually acquiring the securities, but may sell them before the
settlement date. The when-issued securities are subject to market
fluctuation, and no interest accrues to the purchaser during this period.
The payment obligation and the interest rate that will be received on the
securities are each fixed at the time the purchaser enters into the
commitment. Purchasing obligations on a when-issued basis is a form of
leveraging and can involve a risk that the yields available in the market
when the delivery takes place may actually be higher than those obtained in
the transaction itself. In that case there could be an unrealized loss at
the time of delivery.

Segregated accounts will be established with the Fund's custodian and
will maintain liquid assets in an amount at least equal in value to the
Fund's commitments to purchase when-issued securities. If the value of these
assets declines, the Fund will place additional liquid assets in the account
on a daily basis so that the value of the assets in the account is equal to
the amount of such commitments.

Determining Average Portfolio Maturity

For purposes of calculating the Fund's dollar-weighted average portfolio
maturity, the maturity of a portfolio instrument will be deemed to be the
period remaining (calculated from the trade date or such other date on which
the Fund's interest in the instrument is subject to market action) until the
date noted on the face of the instrument as the date on which the principal
amount must be paid, or in the case of an instrument called for redemption,
the date on which the redemption payment must be made. However, because the
maturity of an instrument should correspond to its price and volatility
characteristics, the Fund may shorten the maturity of a variable or floating
rate instrument subject to a demand feature if it determines that there is
not more than a minimal risk that the demand feature will not be honored. In
the case of a demand feature the exercise of which is contingent on the
continued credit quality of the underlying security or other conditions, this
would include a determination that there is minimal risk that any condition
precluding honoring the demand feature will occur.

Therefore, to determine the maturity of portfolio securities, an
instrument that has a variable rate, the principal amount of which is
scheduled on the face of the instrument to be paid in 397 calendar days or
less, will be deemed to have a maturity equal to the period remaining until
the next readjustment of the interest rate. A variable rate instrument that

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is subject to a demand feature will be deemed to have a maturity equal to the
longer of the period remaining until the next readjustment of the interest
rate or the period remaining until the principal amount can be recovered
through demand. A floating rate instrument that is subject to a demand
feature will be deemed to have a maturity equal to the period remaining until
the principal amount can be recovered through demand. A repurchase agreement
will be deemed to have a maturity equal to the period remaining until the
date on which the repurchase of the underlying securities is scheduled to
occur, or, where no date is specified, but the agreement is subject to a
demand, the notice period applicable to a demand for the repurchase of the
securities.

Investment Restrictions

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

1. Invest in real estate or mortgages on real estate;

2. Purchase or sell commodities or commodities contracts, except that
the Fund may invest in financial futures and options thereon;

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

4. Issue senior securities;

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

6. Effect short sales of securities;

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

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

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

1. Purchase any securities of unseasoned issuers which have been in
operation directly or through predecessors for less than three years;

2. Invest in shares of any other investment company registered under
the Investment Company Act, other than in connection with a merger,
consolidation, reorganization or acquisition of assets;

3. Purchase or retain the securities of any issuer if to the knowledge
of the Fund any officer or Director of the Fund or its investment advisor
owns beneficially more than .5% of the outstanding securities of such issuer

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<PAGE>

and together they own beneficially more than 5% of the securities of such
issuer;

4. Invest in companies for the purpose of exercising management or
control;

5. Purchase or sell puts or calls, or any combination thereof, except
that the Fund may purchase put options and invest in futures contracts and
options on futures contracts as disclosed in the Fund's Prospectus;

6. Invest in real estate limited partnerships or oil, gas or mineral
leases; or

7. Purchase warrants.

The percentage limitations contained in these restrictions apply at the
time of purchase of securities.

The Fund's annual portfolio turnover rate (the lesser of the value of
the purchases or sales for the year divided by the average monthly market
value of the portfolio during the year, excluding U.S. Government securities
and securities with maturities of one year or less) may vary from year to
year, as well as within a year, depending on market conditions. For the
fiscal year ended March 31, 1995 and for the fiscal period ended March 31,
1994, the Fund's portfolio turnover rate was 33% and 9%, respectively.

Risk Factors Associated With a Maryland Portfolio

The Fund's concentration in the debt obligations of one state carries a
higher risk than a portfolio that is geographically diversified. In addition
to the State of Maryland and its agencies, there are 23 counties and 156
incorporated municipalities in Maryland (including Baltimore City), many of
which have outstanding debt. As described below, a number of Maryland public
authorities also issue debt.

Economy. The economy of the State of Maryland continues to demonstrate
relatively strong performance, with personal income well above the national
average. Total State employment was 2.68 million in May, 1995 with the
majority of jobs in trade, service, and government sectors. The national
recession caused a loss of jobs in Maryland since employment levels peaked
in mid-1990 but employment levels began to recover in mid-1992. Unemployment
was 5.0% in May, 1995, compared to a national average of 5.8%. The State's
population in 1993 was 5 million, with 83% concentrated in the Baltimore-
Washington corridor.

Debt. The State of Maryland and its political subdivisions issue four
basic types of debt having varying degrees of credit risk: general obligation
bonds backed by the unlimited taxing power of the issuer, revenue bonds
secured by specific pledged taxes or revenue streams, conduit revenue bonds
payable from the repayment of certain loans to entities such as hospitals and
universities, and tax-exempt lease obligations (including certificates of
participation in the same), the payments under which are subject to annual
appropriation. In 1994, $3,420,500,000 in state and local debt was issued in
Maryland, with approximately 44% representing general obligation debt and 56%
revenue bonds or lease-backed debt, compared to 35% general obligation and
65% revenue backed bonds nationally.

Total combined tax supported debt outstanding of the State, Baltimore
City, and all of the counties, municipalities, and special districts within
Maryland totaled $11.4 billion as of June 30, 1994. The State of Maryland
had $2.53 billion in general obligation bonds outstanding as of December 31,
1994. General obligation debt of the State of Maryland is rated Aaa by

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Moody's, AAA by Standard & Poor's and AAA by Fitch; there can be no assurance
that these ratings will continue. There is no general limit on state general
obligation bonds imposed by the State Constitution or laws; state general
obligation bonds are payable from ad valorem taxes and, under the State
Constitution, may not be issued unless the debt is authorized by a law
levying an annual tax or taxes sufficient to pay the debt service within 15
years and prohibiting the repeal of the tax or taxes or their use for another
purpose until the debt has been paid. State and local general obligation
debt on a per capita basis and as a percentage of property values have
increased by 27.7% and 7.1%, respectively since 1990. Although the State may
borrow up to $100 million in short-term notes in anticipation of taxes and
revenues, the State has not made use of this authority.

Many agencies and instrumentalities of the State government are
authorized to borrow money under legislation which expressly provides that
the obligations shall not be deemed to constitute a debt or a pledge of the
faith and credit of the State. The Department of Transportation issues
limited, special obligations payable primarily from fixed-rate excise taxes
and other revenues related mainly to highway use, the amount of which was
limited by the General Assembly to $1.135 billion for fiscal year 1995
(ending June 30, 1995) and $1.054 billion for fiscal year 1996; the principal
amount of such bonds outstanding as of December 31, 1994 was $1,059.5
million. The Maryland Transportation Authority, the Community Development
Administration of the Department of Housing and Community Development, the
Maryland Stadium Authority, the Maryland Environmental Service, the public
educational institutions (which include the University of Maryland System,
Morgan State University, St. Mary's College of Maryland and Baltimore City
Community College), the Maryland Food Center Authority and the Maryland Water
Quality Financing Administration also have issued and have outstanding bonds,
the principal of and interest on which are payable solely from specified
sources, principally fees or loan payments generated from use of the
facilities, enterprises financed by the bonds, or other dedicated fees. None
of these bonds constitute debts or pledges of the faith and credit of the
State. The issuers of these obligations are subject to various economic
risks and uncertainties, and the credit quality of the securities issued by
them may vary considerably from that of the State's general obligation bonds.
Total outstanding revenue and enterprise debt of these State units at
December 31, 1994 was approximately $3.6 billion.

Certain State agencies also execute capital lease or conditional
purchase agreements to finance certain facilities; all of the payments under
these arrangements are subject to annual appropriation by the State. In the
event that appropriations are not made, the State and its agencies may not be
held contractually liable for the lease payments. As of December 31, 1994
$155 million of lease and conditional purchase financings were outstanding.

In addition, the Maryland Health and Higher Educational Facilities
Authority, the Maryland Industrial Development Financing Authority, the
Northeast Maryland Waste Disposal Authority and the Maryland Economic
Development Corporation issue conduit revenue bonds, the proceeds of which
are lent to borrowers eligible under relevant State and federal law. These
bonds are payable solely from the loan payments made by the borrowers, and
their credit quality vary with the financial strengths of the respective
borrowers.

Financial. To a large degree, the risk of the portfolio is dependent
upon the financial strength of the State of Maryland, its political
subdivisions and the obligors on conduit revenue bonds. During the 1991,
1992 and 1993 fiscal years, Maryland experienced the effects of the national
recession and a weakened economy. During this period, the State experienced
unanticipated shortfalls in revenues. At the same time, the State
experienced increased expenditures for public assistance. To address this
situation, the State reduced appropriations, including aid to local
governments, on several instances.

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<PAGE>

As a result of successive rounds of cuts in local and other State
expenditures and increases in taxes, the financial situation of the State
stabilized in fiscal year 1993 with revenues coming in, at or above budgeted
amounts, permitting the State to conclude fiscal year 1993 with a general
fund surplus (budgetary basis) of $10.5 million (after $24.5 million of
transfers to reserve accounts) and a $50.9 million balance in the Revenue
Stabilization Account of the State Reserve Fund. Demonstrating continued
improvement, the State ended its fiscal year 1994 with a general fund surplus
of $60 million. When it enacted its $13.3 billion fiscal year 1995 budget,
the State projected that its general fund surplus would be approximately $9.7
million and a balance in the Revenue Stabilization Account of $219 million;
the current estimates are $105.9 million and $283.7 million, respectively.

In April, 1995 the State's General Assembly approved a $14.4 billion
budget for fiscal year 1996, an 8.2% increase above the fiscal year 1995
spending level. This budget did not include any expenditures based upon
additional revenue from new or broad-based taxes, but included a $330 million
appropriation to the State Reserve Fund, providing $20 million to its Economic
Development Account, $120 million to the Revenue Stabilization Account and
$190 million to a new Citizen Tax Reduction and Fiscal Reserve Account, a
reserve which may be used either to effect future income tax reduction or to
offset the impact of federal fiscal policies. When the fiscal year 1996
budget was enacted, the State projected that it would end the fiscal year
with a general fund surplus of $12.8 million and a balance in the new Citizen
Tax Reduction and Fiscal Reserve Account of the State Reserve Fund of $190
and $370.9 million, respectively.

Other Maryland Issuers

Many local Maryland governments have also suffered from fiscal stress
and general declines in financial performance. Recessionary impacts have
resulted in downturns in real estate related receipts, declines in the growth
of income tax revenues, lower cash positions and reduced interest income. To
compensate for reductions in State aid to local governments, local
governments closed this gap by increasing property and other taxes, program
cuts, and curtailing pay raises. Certain counties in Maryland are subject to
voter approval limitations on property tax levy increases or on increases in
governmental spending which limits their flexibility in responding to
external changes. Various tax initiatives to reform existing tax structures
in certain counties were placed on the November 1992 election ballot and were
adopted. Future initiatives, if proposed and adopted, could create pressure
on the counties and other local governments and their ability to raise
revenues. The Fund cannot predict the impact of any such future tax
limitations on debt quality.

Many Maryland counties have established agencies with bond issuing
authority, such as housing authorities. Maryland municipalities also have
the power to issue conduit revenue bonds. Maryland local governments and
their authorities are subject to various risks and uncertainties, and the
credit quality of the bonds issued by them may vary considerably from that of
State general obligation bonds.

Sectors. Certain areas of potential investment concentration present
unique risks. In recent years, 6 to 12% of tax-exempt debt issues in
Maryland has been for public or non-profit hospitals. A significant portion
of the Fund's assets may be invested in health care issues. Since 1983, the
hospital industry has been under significant pressure to reduce expenses and
limit length of stay, a phenomenon which has negatively affected the
financial health of many hospitals. While each issue is separately secured
by the individual hospital's revenues, third party reimbursement mechanisms
for patient care are common to the group. At the present time Maryland
hospitals operate under a system which reimburses hospitals according to a
State administered set of rates and charges rather than the Federal Diagnosis
Related Group (DRG) system for Medicare payments. Since 1983, Maryland
hospitals have operated below the national average in terms of Medicare cost
increases, allowing them to continue operating under a Medicare waiver.

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However, any loss of this waiver in the future may have an adverse impact
upon the credit quality of Maryland hospitals. Additionally, national focus
on health care reform and any resulting legislation may further impact the
financial condition of hospitals in Maryland and other states.

The Fund may from time to time invest in solid waste revenue bonds which
have exposure to environmental, technological and market risks which could
affect the security and value of the bonds. Such risks include construction
delay or shortfalls in construction funds due to increased regulation, and
market disruption and revenue variability due to recent court decisions and
legislative proposals.

Investments in Puerto Rico

Although the Fund has no present intention to do so, from time to time,
the Fund may invest in obligations of the Commonwealth of Puerto Rico and its
public corporations exempt from federal and Maryland state and local income
taxes. These investments will not be considered Maryland municipal
securities for purposes of the Fund's policy to invest, under normal market
conditions, 65% of its assets in Maryland municipal securities. The majority
of the Commonwealth's debt is issued by ten public agencies that are
responsible for many of the island's public functions, such as water,
wastewater, highways, telecommunications, education, and public construction.
As of May 31, 1995, outstanding public sector debt issued by the Commonwealth
and its public corporations totaled $15.9 billion.

Investment in Puerto Rico obligations requires a careful assessment of
certain risk factors. These include reliance on substantial federal
assistance and favorable tax programs, above average levels of unemployment
and low wealth levels, and an economy vulnerable to adverse shifts in energy
prices and U.S. foreign trade/monetary policies. These risks are countered
by strong security provisions, a long history of timely debt repayment, and
improved financial practices.

3. VALUATION OF SHARES AND REDEMPTION

Valuation of Shares

The net asset value per Share is determined once daily as of 4:00 p.m.
(Eastern Time) each day on which the New York Stock Exchange is open for
business ("Business Day"). The New York Stock Exchange is open for business
on all weekdays except for the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. The Fund reserves the right to suspend
the sale of Shares at any time.

Net asset value per Share is calculated by valuing all assets held by
the Fund, deducting liabilities, and dividing the resulting amount by the
number of then outstanding Shares. For this purpose, portfolio securities
will be given their market value where feasible. Portfolio securities that
are actively traded in the over-the-counter market, including listed
securities for which the primary market is believed by the Advisor to be
over-the-counter, are valued at the quoted bid prices provided by principal
market makers. If a portfolio security is traded primarily on a national
exchange on the valuation date, the last quoted sale price will generally be
used. Securities or other assets for which market quotations are not readily
available are valued at their fair market value as determined in good faith
under procedures established from time to time and monitored by the Fund's
Board of Directors. Such procedures may include (i) the use of an

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<PAGE>

independent pricing service which uses prices based upon yields or prices of
securities of comparable quality, coupon, maturity and type, (ii) indications
as to values from dealers, and (iii) general market conditions. Debt
obligations with maturities of 60 days or less will be valued at amortized
cost, which constitutes fair value as determined by the Fund's Board of
Directors.

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 securities from the portfolio of the Fund in lieu of cash, in conformity
with applicable rules of the SEC, the Fund will make such distributions in
kind. If Shares are redeemed in kind, the redeeming shareholder will incur
brokerage costs in later converting the assets into cash. The method of
valuing portfolio securities is described under "Valuation of Shares" and
such valuation will be made as of the same time the redemption price is
determined. The Fund has elected to be governed by Rule 18f-1 under the
Investment Company Act pursuant to which the Fund is obligated to redeem
Shares solely in cash up to the lesser of $250,000 or 1% of the net asset
value of the Fund during any 90-day period for any one shareholder.

4. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS

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

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

The Fund expects to qualify as a regulated investment company under
Subchapter M of the Code. However, to qualify as a regulated investment
company for any taxable year, the Fund must (1) derive at least 90% of its
gross income from dividends, interest, certain payments with respect to
securities loans and gains from the sale or other disposition of stock,
securities or foreign currencies and other income (including, but not limited
to gains from options, futures or forward contracts) derived with respect to
its business of investing in such stock, securities or currencies (the
"Income Requirement") and (2) derive less than 30% of its gross income each
taxable year (exclusive of certain gains from designated hedging transactions
that are offset by unrealized losses on offsetting positions) from gains on
the sale or other disposition of any of the following investments if such
investments are held for less than three months (the "Short-Short Gain
Test"): (a) stock or securities (as defined in Section 2(a)(36) of the
Investment Company Act); (b) options, futures or forward contracts (other
than options, futures, or forward contracts on foreign currencies), and (c)
foreign currencies (or options, futures, or forward contracts on foreign

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<PAGE>

currencies) but only if such currencies (or options, futures, or forward
contracts on foreign currencies) are not directly related to the regulated
investment company's principal business of investing in stock or securities
(or options and futures with respect to stocks or securities). The Short-
Short Gain Test will not prevent the Fund from disposing of investments at a
loss, since the recognition of a loss before the expiration of the three-
month holding period is disregarded.

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

As noted in the prospectus, exempt-interest dividends are excludable
from a shareholder's gross income for regular federal income tax purposes.
Exempt-interest dividends may nevertheless be subject to the alternative
minimum tax (the "Alternative Minimum Tax") imposed by Section 55 of the Code
or the environmental tax (the "Environmental Tax") imposed by Section 59A of
the Code. The Alternative Minimum Tax is imposed at rates up to 28% in the
case of non-corporate taxpayers and at the rate of 20% in the case of
corporate taxpayers, to the extent it exceeds the taxpayer's regular tax
liability. The Environmental Tax is imposed at the rate of 0.12% and applies
only to corporate taxpayers. The Alternative Minimum Tax and the
Environmental Tax may be imposed 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 for both
corporate and non-corporate taxpayers. Second, exempt-interest dividends,
regardless of when the bonds from which they are derived were issued or
whether they are derived from private activity bonds, will be included in the
corporation's "adjusted current earnings," as defined in Section 56(g) of the
Code, in calculating the corporation's alternative minimum taxable income for
purposes of determining the Alternative Minimum Tax and the Environmental
Tax.

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

For purposes of the Distribution Requirement (as well as for other
purposes), the Fund will be required to treat as interest income any
recognized market discount on debt obligations which it holds. Generally,
market discount is the amount by which the stated redemption price of a bond
exceeds the amount paid by a purchaser of the bond (most common where the
value of a bond decreases after original issue as a result of a decline in
the creditworthiness of the issuer or an increase in prevailing interest
rates). Generally, upon the disposition of a bond bearing market discount or
receipt of any principal payment with respect to such a bond, market discount
is recognized by treating a portion of the proceeds as interest income. The
application of these rules (and the rules regarding original issue discount)

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<PAGE>

to debt obligations held by the Fund could affect (i) the amount and timing
of distributions to shareholders and (ii) the ability of the Fund to satisfy
the Distribution Requirement.

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

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. Individuals whose "modified income" exceeds a base amount will be
subject to federal income tax up to one-half of their social security
benefits. Modified income currently includes adjusted gross income, one-half
of social security benefits and tax-exempt interest, including
exempt-interest dividends paid by the Fund. Beginning in 1994, individuals
whose modified income exceeds certain base amounts are required to include in
gross income up to 85% of their social security benefits.

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. Shareholders
should be aware that exempt-interest dividends may become subject to federal
income taxation retroactively to the date of issuance of the bonds to which
such dividends are attributable if such representations are determined to
have been inaccurate or if the issuers (or the beneficiary) of the bonds fail
to comply with certain covenants made at that time.

If for any taxable year, the Fund does not qualify as a regulated
investment company, 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 generally be taxable as ordinary
dividends to the extent of the Fund's current and accumulated earnings and
profits. However, in the case of corporate shareholders, such distributions
will generally be eligible for the 70% dividends received deduction for
"qualifying dividends."

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

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

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<PAGE>

The Code imposes a nondeductible 4% excise tax on regulated investment
companies that do not distribute in each calendar year an amount equal to 98%
of their ordinary income for the calendar year plus 98% of their capital
gains net income for the one-year period ending on October 31 of such
calendar year. The balance of such income must be distributed during the
next calendar year. For the foregoing purposes, an investment company is
treated as having distributed any amount on which it is subject to income tax
for any taxable year ending in such calendar year.

The Fund intends to make sufficient distributions of its ordinary income
and capital gains net income prior to the end of each calendar year to avoid
liability for excise tax. However, shareholders should note that the Fund
may in certain circumstances be required to liquidate portfolio investments
in order to make sufficient distributions to avoid excise tax liability, and,
in addition, that the liquidation of such investments in such circumstances
may affect the ability of the Fund to satisfy the Short-Short Gain Test.

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 their tax advisers as to the consequences of these and other state
and local tax rules affecting an investment in the Fund and also as to the
application of the rules set forth above to a shareholder's particular
circumstances.

5. MANAGEMENT OF THE FUND

Directors and Officers

The Directors and executive officers of the Fund 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 135 East
Baltimore Street, Baltimore, Maryland 21202.

*RICHARD T. HALE, Chairman and Director
Managing Director, Alex. Brown & Sons Incorporated.

*TRUMAN T. SEMANS, Director
Managing Director, Alex. Brown & Sons Incorporated; Formerly, Vice
Chairman, Alex. Brown & Sons Incorporated.

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

N. BRUCE HANNAY, Director
201 Condon Lane, Port Ludlow, Washington 98365. Formerly, Vice
President, Research and Patents, AT&T Bell Laboratories; Formerly,
Director, Rohm & Haas Company (diversified chemicals), General
Signal Corp. (control equipment & systems) and Plenum Publishing
Corp.

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<PAGE>

JOHN F. KROEGER, Director
Swan Road, P.O. Box 464, Martingham, St. Michaels, Maryland 21663.
Director/Trustee AIM Funds; Formerly, Consultant, Wendell & Stockel
Associates, Inc. (consulting firm) and General Manager, Shell Oil
Company.

LOUIS E. LEVY, Director
26 Farmstead Road, Short Hills, New Jersey 07078. Director,
Kimberly-Clark Corporation (personal consumer products) and
Household International (banking and finance); 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.

EUGENE J. MCDONALD, Director
Duke Management Company, Erwin Square, Suite 1000, 2200 West
Main Street, Durham, North Carolina 27705. President, Duke
Management Company (investments); Executive Vice President,
Duke University (education, research and healthcare).

*REBECCA W. RIMEL, Director
Pew Charitable Trust, One Commerce Square, 2005 Market Street, Suite
1700, Philadelphia, PA 19103. 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.

HARRY WOOLF, Director
Institute for Advanced Study, South Olden Lane, Princeton, New
Jersey 08540. Professor-at-Large Emeritus, Institute for Advanced
Study; Director, Merrill Lynch Cluster C Funds (registered
investment companies) and ATL and Spacelabs Medical Corp. (medical
equipment); Family Health International (nonprofit research and
education).

M. ELLIOTT RANDOLPH, President
Principal, Alex. Brown & Sons Incorporated, 1991 - Present;
Principal, Monument Capital Management, Inc., 1988-1991; Senior Vice
President and Chief Investment Officer, First National Bank of
Maryland, 1976-1988.

PAUL D. CORBIN, Executive Vice President
Principal, Alex. Brown & Sons Incorporated, 1991 - Present; Senior
Vice President, First National Bank of Maryland, 1985-1991.

EDWARD J. VEILLEUX, Vice President
Principal, Alex. Brown & Sons Incorporated; President, Investment
Company Capital Corp. (registered investment advisor); and Vice
President, Armata Financial Corp. (registered broker-dealer).

GARY V. FEARNOW, Vice President
Managing Director, Alex. Brown & Sons Incorporated and Manager,
Special Products Department, Alex. Brown & Sons Incorporated.

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<PAGE>

MONICA M. HAUSNER, Vice President
Vice President, Fixed Income Management Department, Alex. Brown &
Sons Incorporated, March 1992-Present; Formerly, Assistant Vice
President, First National Bank of Maryland, 1984-1992.

BRIAN C. NELSON, Vice President and Secretary
Vice President, Alex. Brown & Sons Incorporated, Investment Company
Capital Corp. (registered investment advisor) and Armata Financial
Corp. (registered broker-dealer).

DIANA M. ELLIS, Treasurer
Manager, Portfolio Accounting Department, Investment Company Capital
Corp. (registered investment advisor); Mutual Fund Accounting
Department, Alex. Brown & Sons Incorporated, 1991-Present;
Formerly, Accounting Manager, Downtown Press Inc. (printer), 1987-
1991.

LAURIE D. DePRINE, Assistant Secretary
Asset Management Department, Alex. Brown & Sons Incorporated,
1991-Present; Formerly, Student 1989-1991.

- -------------
*Messrs. Hale and Semans are Directors who are "interested persons", as
defined in the Investment Company Act. Ms. Rimel will be treated by the
Fund as if she could be deemed to be an "interested person".

Directors and officers of the Fund are also directors and officers of
some or all of the other investment companies managed, administered, advised
or distributed by Alex. Brown or its affiliates. There are currently 12
funds in the Flag Investors/ISI Funds and Alex. Brown Cash Reserve Fund, Inc.
fund complex (the "Fund Complex"). Mr. Semans serves as a Director of seven
funds in the Fund Complex. Mr. Hale serves as President and Director of one
fund, Vice President of one fund and Director of 10 funds in the Fund
Complex. Messrs. Cunnane, Hannay, Kroeger, Levy, McDonald, and Woolf serve
as Directors of each fund in the Fund Complex. Ms. Rimel serves as Director
of five funds in the Fund Complex. Mr. Veilleux serves as Executive Vice
President of one fund and as Vice President of 11 funds in the Fund Complex.
Mr. Nelson serves as Vice President and Secretary, Ms. Ellis serves as
Treasurer and Ms. DePrine serves as Assistant Secretary, respectively, of
each fund in the Fund Complex. Mr. Randolph serves as President of two funds
and Vice President of one fund in the Fund Complex. Mr. Corbin serves as
Vice President of three funds and Mr. Fearnow serves as Vice President of 10
funds in the Fund Complex. Ms. Hausner serves as Vice President of one fund
and Assistant Vice President of one fund in the Fund Complex.

Some of the Directors of the Fund are customers of, and have had normal
brokerage transactions with, Alex. Brown in the ordinary course of business.
All such transactions were made on substantially the same terms as those
prevailing at the time for comparable transactions with unrelated persons.
Additional transactions may be expected to take place in the future.

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 Alex. Brown may be considered to have received remuneration
indirectly. As compensation for his services as Director, each Director who
is not an "interested person" of the Fund (as defined in the Investment
Company Act) (a "Non-Interested Director") receives an aggregate annual fee

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<PAGE>

(plus reimbursement for reasonable out-of-pocket expenses incurred in
connection with his attendance at Board and committee meetings) from all Flag
Investors/ISI Funds and Alex. Brown Cash Reserve Fund, Inc. for which he
serves. 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 March 31, 1995, Non-Interested Directors' fees attributable
to the assets of the Fund totalled approximately $1,000. The following table
shows aggregate compensation paid to each of the Fund's Directors by the Fund
and the Fund Complex, respectively, in the fiscal year ended March 31, 1995.

COMPENSATION TABLE
<TABLE>
<CAPTION>
Name of Person, Position Aggregate Compensation Total Compensation
From the Fund in the From the Fund
Fiscal Year Ended and Fund Complex
March 31, 1995 Paid to Directors
in the Fiscal Year
Ended March 31, 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
*Richard T. Hale, Chairman and Director $0 $0

*Truman T. Semans, Director $0 $0

**James J. Cunnane, Director $33(1)** $9,750 for service on 13
Boards in the Fund Complex**(2)

N. Bruce Hannay, Director $132(1) $39,000 for service on 13
Boards in the Fund Complex(2)

John F. Kroeger, Director $145(1) $42,900 for service on 13
Boards in the Fund Complex(2)

***Louis E. Levy, Director $104(1)*** $29,250 for service on 13
Boards in the Fund Complex ***(2)

Eugene J. McDonald, Director $132(1) $39,000 for service on 13
Boards in the Fund Complex(2)

****Rebecca W. Rimel, Director N/A **** N/A ****

Harry Woolf, Director $132(1) $39,000 for service on 13
Boards in the Fund Complex(2)
</TABLE>
- ---------
* A Director who is an "interested person" as defined in the Investment
Company Act.
** Elected to the Board on December 14, 1994.
*** Elected to the Board on June 17, 1994.
**** Elected to the Board on June 1, 1995.
(1) $0 of this amount has been deferred pursuant to a deferred compensation
plan.
(2) One of these funds ceased operations on May 17, 1995.

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 five years

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<PAGE>

of service, each Participant will be entitled to receive an annual retirement
benefit equal to a percentage of the fee earned by him in his last year of
service. Upon retirement, each Participant will receive annually 10% of such
fee for each year that he served after completion of the first five years, up
to a maximum annual benefit of 50% of the fee earned by him in his last year
of service. The fee will be paid quarterly, for life, by each Fund for which
he serves. The Retirement Plan is unfunded and unvested. Messrs. Hannay,
Kroeger and Woolf have qualified but have not received benefits, and no such
benefits are being accrued for them since they have not yet retired. The
Fund has one Participant, a Director who retired effective December 31, 1994,
who has qualified for the Retirement Plan and who will be paid a quarterly
fee of $4,875 by the Fund Complex for the rest of his life. Such fee is
allocated to each fund in the Fund Complex based upon the relative net assets
of such fund to the Fund Complex.

Beginning in December, 1994, any Director who receives fees from
the Fund is permitted to defer a minimum of 50%, or up to all, of his annual
compensation pursuant to a Deferred Compensation Plan.

Code of Ethics

The Board of Directors of the Fund has adopted a Code of Ethics
pursuant to Rule 17j-1 under the Investment Company Act (the "Code of
Ethics"). The Code of Ethics significantly restricts the personal investing
activities of all employees of ICC and the directors and officers of Alex.
Brown. As described below, the Code of Ethics imposes additional, more
onerous, restrictions on the Fund'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 all employees of ICC, any director
or officer of Alex. Brown, and all Non-Interested Directors, preclear any
personal securities investments (with limited exceptions, such as non-
volitional purchases or purchases which are part of an automatic dividend
reinvestment plan). The preclearance requirement and associated procedures
are designed to identify any substantive prohibition or limitation applicable
to the proposed investment. The substantive restrictions applicable to
investment personnel include a ban on acquiring any securities in an initial
public offering, a prohibition from profiting on short-term trading in
securities and preclearance of the acquisition of securities in private
placements. Furthermore, the Code of Ethics provides for trading "blackout
periods" that prohibit trading by investment personnel and certain other
employees within periods of trading by the Fund in the same security.

6. INVESTMENT ADVISORY AND OTHER SERVICES

On October 1, 1993, the sole shareholder of the Fund approved an
Investment Advisory Agreement between the Fund and ICC. ICC is a wholly-
owned subsidiary of Alex. Brown, the Fund's distributor. ICC is also the
investment advisor to Alex. Brown Cash Reserve Fund, Inc., Flag Investors
Telephone Income Fund, Inc., Flag Investors Value Builder Fund, Inc., Flag
Investors International Fund, Inc., Flag Investors Emerging Growth Fund,
Inc., Flag Investors Intermediate-Term Income Fund, Inc., Flag Investors Real
Estate Securities Fund, Inc. and Flag Investors Equity Partners Fund, Inc.,
which are also distributed by Alex. Brown.

Under the Investment Advisory Agreement, ICC obtains and evaluates
economic, statistical and financial information to formulate and implement
investment policies for the Fund. Any investment program undertaken by ICC
will at all times be subject to policies and control of the Fund's Board of

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<PAGE>

Directors. ICC 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 ICC without reimbursement by the Fund for any costs. ICC shall
not be liable to the Fund or its shareholders for any act or omission by ICC
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, ICC receives an annual fee from the
Fund, payable monthly, at the annual rate of .35% of the Fund's average daily
net assets. ICC has voluntarily agreed to reduce its annual fee, if
necessary, or to make payments to the Fund to the extent required so that the
Fund's annual expenses do not exceed .70% of the Fund's average daily net
assets. The services of ICC to the Fund are not exclusive and ICC is free to
render similar services to others.

ICC has also agreed to reduce its aggregate fees on a monthly basis for
any fiscal year to the extent required so that the amount of the ordinary
expenses of the Fund (excluding brokerage commissions, interest, taxes and
extraordinary expenses such as legal claims, liabilities, litigation costs
and indemnification related thereto) paid or incurred by the Fund for such
fiscal year does not exceed the expense limitations applicable to the Fund
imposed by the securities laws or regulations of the states in which the
Shares are registered or qualified for sale, as such limitations may be
raised or lowered from time to time. Currently, the most restrictive of such
expense limitations requires the Advisor to reduce its fees to the extent
required so that ordinary expenses of the Fund (excluding brokerage
commissions, interest, taxes and extraordinary expenses such as legal claims,
liabilities, litigation costs and indemnification related thereto) do not
exceed 2.5% of the first $30 million of the Fund's average daily net assets,
2.0% of the next $70 million of the Fund's average daily net assets and 1.5%
of the Fund's average daily net assets in excess of $100 million. In
addition, if required to do so by any applicable state securities laws or
regulations, ICC will reimburse the Fund to the extent required to prevent
the expense limitations of any state law or regulation from being exceeded.

The Investment Advisory Agreement has an initial term of two years and
will continue in effect from year to year thereafter if such continuance is
specifically approved at least annually by the Fund's Board of Directors,
including a majority of the Non-Interested Directors who have no direct or
indirect financial interest in such agreement, by votes cast in person at a
meeting called for such purpose, or by a vote of a majority of the
outstanding Shares (as defined under "Capital Stock"). The Fund or ICC may
terminate the Investment Advisory Agreement on sixty days' written notice
without penalty. The Investment Advisory Agreement will terminate
automatically in the event of assignment (as defined in the Investment
Company Act). For the fiscal year ended March 31, 1995 and for the Fund's
initial fiscal period ended March 31, 1994, ICC waived all advisory fees
($45,630 and $12,065, respectively). In addition, for the same period, ICC
reimbursed the Fund for other expenses aggregating $90,867 and $63,115,
respectively. Absent such waivers and reimbursements, the Fund's total
operating expenses would have been 1.85% and 2.46%, respectively, of the
Fund's average daily net assets.

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

7. DISTRIBUTION OF FUND SHARES

The Distribution Agreement provides that Alex. Brown has the exclusive
right to distribute Shares either directly or through other broker-dealers.
The Distribution Agreement further provides that Alex. Brown will: (a)
solicit and receive orders for the purchase of Shares; (b) 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; (c) receive requests for redemptions
and transmit such redemption requests to the Fund's transfer agent as

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<PAGE>

promptly as possible; and (d) respond to inquiries from shareholders
concerning the status of their accounts and the operations of the Fund.
Alex. Brown has not undertaken to sell any specific number of Shares. The
Distribution Agreement further provides that, in connection with the
distribution of Shares, Alex. Brown will be responsible for all of the
promotional expenses. The services provided by Alex. Brown to the Fund are
not exclusive, and Alex. Brown is free to provide similar services to others.
Alex. Brown shall not be liable to the Fund or its shareholders for any act
or omission by Alex. Brown or any losses sustained by the Fund or its
shareholders except in the case of willful misfeasance, bad faith, gross
negligence or reckless disregard of duty.

Alex. Brown and 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.

As compensation for providing distribution as described above, Alex.
Brown receives an annual fee, paid monthly, equal to .25% of the Fund's
average daily net assets. As compensation for providing distribution
services for the fiscal year ended March 31, 1995 and the period from October
1, 1993 (commencement of operations) through March 31, 1994 Alex. Brown
received from the Fund aggregate commissions and fees in the amount of
$32,593 and $8,617, respectively, and from such fees paid $28,431 and $2,667,
respectively, to its investment representatives and $494 and $0,
respectively, to outside broker-dealers as compensation. Alex. Brown expects
to allocate most of its annual fee to its investment representatives and up
to all of its fee to broker-dealers who enter into Sub-Distribution
Agreements with Alex. Brown.

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 (the "Plan"). Under the Plan, the Fund pays a fee to Alex.
Brown for distribution and other shareholder servicing assistance as set
forth in the Distribution Agreement, and Alex. Brown is authorized to make
payments out of its fee to its investment representatives and to
participating broker-dealers. The Distribution Agreement, including the Plan
and a form of Sub-Distribution Agreement, was approved by the sole
shareholder of the Fund on October 1, 1993. The Distribution Agreement has
an initial term of two years and the Distribution Agreement and the
Distribution Plan encompassed therein will remain in effect from year to year
as specifically approved at least annually by the Fund's Board of Directors
and by the affirmative vote of a majority of the Non-Interested Directors by
votes cast in person at a meeting called for such purpose. The Distribution
Plan was most recently approved in this manner by the Fund's Board of
Directors on September 21, 1994.

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

During the continuance of the Plan, the Fund's Board of Directors will
be provided for their review, at least quarterly, a written report concerning

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<PAGE>

the payments made under the Plan to Alex. Brown pursuant to the Distribution
Agreement and to broker-dealers pursuant to Sub-Distribution Agreements.
Such reports will be made by the persons authorized to make such payments.
In addition, during the continuance of the Plan, the selection and nomination
of the Fund's Non-Interested Directors will be committed to the discretion of
the Non-Interested Directors then in office.

In addition, the Fund may enter into Shareholder Servicing Agreements
with certain financial institutions, such as banks, to act as Shareholder
Servicing Agents, pursuant to which Alex. Brown will allocate a portion of
its distribution fee as compensation for such financial institutions' ongoing
shareholder services. Although banking laws and regulations prohibit banks
from distributing shares of open-end investment companies such as the Fund,
according to interpretations 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 this Prospectus 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.

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

The Fund will pay all costs associated with its organization and
registration under the Securities Act of 1933 and the Investment Company Act.
Except as described elsewhere, the Fund pays or causes to be paid all
continuing expenses of the Fund, including, without limitation: investment
advisory and distribution fees; the charges and expenses of any registrar,
any custodian or depository appointed by the Fund for the safekeeping of
cash, portfolio securities and other property, and any transfer, dividend or
accounting agent or agents appointed by the Fund; brokers' commissions
chargeable to the Fund in connection with portfolio securities transactions
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 and expenses of engraving or printing of
certificates representing Shares; all costs and expenses in connection with
the registration and maintenance of registration of the Fund and its Shares
with the SEC and various states and other jurisdictions (including filing
fees, legal fees and disbursements of counsel); the costs and expenses of
printing, including typesetting and distributing prospectuses and statements
of additional information of the Fund and supplements thereto to the Fund's
shareholders; all expenses of shareholders' and Directors' meetings and of
preparing, printing and mailing proxy statements and reports to shareholders;
fees and travel expenses of Directors and Director members of any advisory
board or committee; all expenses incident to the payment of any dividend,
distribution, withdrawal or redemption, whether in Shares or in cash; charges
and expenses of any outside service used for pricing of the Shares; fees and
expenses of legal counsel, including counsel to the Non-Interested Directors,
and of independent auditors, in connection with any matter relating to the
Fund; a portion of membership dues of industry associations; interest payable

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<PAGE>

on Fund borrowings; postage; insurance premiums on property or personnel
(including officers and Directors) of the Fund which inure to its benefit;
extraordinary expenses (including, but not limited to, legal claims and
liabilities and litigation costs and any indemnification related thereto);
and all other charges and costs of the Fund's operation unless otherwise
explicitly assumed by Alex. Brown or ICC.

The address of Alex. Brown is 135 East Baltimore Street, Baltimore,
Maryland 21202.

8. BROKERAGE

ICC is responsible for decisions to buy and sell securities for the
Fund, for the broker-dealer selection and for negotiation of commission
rates. Purchases and sales of securities on a securities exchange are
effected through broker-dealers who charge a commission for their services.
ICC may direct purchase and sale orders to any broker-dealer, including, to
the extent and in the manner permitted by applicable law, Alex. Brown.

In over-the-counter transactions, orders are placed directly with a
principal market maker and such purchases normally include a mark up over the
bid to the broker-dealer based on the spread between the bid and asked price
for the security. Purchases from underwriters of portfolio securities
include a commission or concession paid by the issuer to the underwriter. On
occasion, certain money market instruments may be purchased directly from an
issuer without payment of a commission or concession. The Fund will not deal
with Alex. Brown in any transaction in which Alex. Brown acts as a principal;
that is, an order will not be placed with Alex. Brown if execution of the
trade involves Alex. Brown serving as a principal with respect to any part of
the Fund's order, nor will the Fund buy or sell over-the-counter securities
with Alex. Brown acting as market maker.

If Alex. Brown is participating in an underwriting or selling group, the
Fund may not buy portfolio securities from the group except in accordance
with rules of the SEC. The Fund believes that the limitation will not affect
its ability to carry out its present investment objective.

ICC's primary consideration in effecting securities transactions is to
obtain best price and execution of orders on an overall basis. As described
below, however, ICC may, in its discretion, effect brokerage transactions
with broker-dealers that furnish statistical, research or other information
or services which are deemed by ICC to be beneficial to the Fund's investment
program. Certain research services furnished by broker-dealers may be useful
to ICC with clients other than the Fund. Similarly, any research services
received by ICC through placement of portfolio transactions of other clients
may be of value to ICC in fulfilling its obligations to the Fund. No
specific value can be determined for research and statistical services
furnished without cost to ICC by a broker-dealer. ICC 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
ICC's research and analysis. Therefore, it may tend to benefit the Fund by
improving ICC's investment advice. ICC'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 ICC'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, ICC is also
authorized to pay broker-dealers other than Alex. Brown higher commissions on
brokerage transactions for the Fund in order to secure research and
investment services described above. The allocation of orders among broker-
dealers and the commission rates paid by the Fund will be reviewed
periodically by the Board of Directors.

Subject to the above considerations, the Board of Directors has
authorized the Fund to effect portfolio transactions, on an agency basis,
through Alex. Brown. At the time of such authorization certain policies and
procedures incorporating the standards of Rule 17e-1 under the Investment
Company Act which requires that the commissions paid Alex. Brown must be

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<PAGE>

"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 ICC to furnish reports
and to maintain records in connection with such reviews. The Distribution
Agreement between Alex. Brown and the Fund does not provide for any reduction
in the distribution fee to be received by Alex. Brown from the Fund as a
result of profits resulting from brokerage commissions on transactions of the
Fund effected through Alex. Brown. In the fiscal year ended March 31, 1995,
the Fund paid no brokerage commissions to Alex. Brown

ICC 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 ICC. ICC may
combine such transactions, in accordance with applicable laws and
regulations, in order to obtain the best net price and most favorable
execution. Such simultaneous transactions, however, could adversely affect
the ability of the Fund to obtain or dispose of the full amount of a security
which it seeks to purchase or sell.

During the fiscal year ended March 31, 1995, Alex. Brown directed no
transactions to broker-dealers and paid no related commissions to broker
dealers because of research services provided.

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 March 31, 1995,
the Fund held a 6.10% repurchase agreement issued by Goldman Sachs & Co.
which was valued at $67,000.

9. CAPITAL STOCK

The Fund is authorized to issue 30 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.

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.

-23-
<PAGE>

10. 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 auditors.

11. CUSTODIAN, TRANSFER AGENT, ACCOUNTING SERVICES

PNC Bank, National Association ("PNC Bank"), with offices at Airport
Business Park, 200 Stevens Drive, Lester, Pennsylvania, 19113, has been
retained to act as custodian of the Fund's investments. PNC Bank receives
such compensation from the Fund for its services as Custodian as may be
agreed to from time to time by PNC Bank and the Fund. Investment Company
Capital Corp., 135 East Baltimore 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 $15.00 per account,
plus reimbursement for out of pocket expenses incurred in connection
therewith. ICC has served as the Fund's Transfer Agent since February 28,
1994 and for such services for the fiscal year ended March 31, 1995 received
fees of $6,359.

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

Average Net Assets Accounting Services Fee
------------------ -----------------------
$ 0- $ 10,000,000 $13,000(fixed fee)
$ 10,000,001- $ 20,000,000 .100%
$ 20,000,001- $ 30,000,000 .080%
$ 30,000,001- $ 40,000,000 .060%
$ 40,000,001- $ 50,000,000 .050%
$ 50,000,001- $ 60,000,000 .040%
$ 60,000,001- $ 70,000,000 .030%
$ 70,000,001- $ 99,999,999 .020%
$100,000,001- $ 500,000,000 .015%
$500,000,001- $1,000,000,000 .005%
over $1,000,000,000 .001%

In addition, the Fund will reimburse ICC for the following out of pocket
expenses incurred in connection with provision of ICC's accounting services:
express delivery service, independent pricing and storage.

For the fiscal year ended March 31, 1995 ICC received accounting fees of
$16,037.

ICC also serves as the Fund's investment advisor.

12. INDEPENDENT AUDITORS

The annual financial statements of the Fund are audited by Deloitte &
Touche LLP. Deloitte & Touche LLP has offices at 117 Campus Drive,
Princeton, New Jersey 08540.
-24-
<PAGE>

13. PERFORMANCE INFORMATION

For purposes of quoting and comparing the performance of the Fund to
that of other open-end non-diversified management investment companies and to
stock or other relevant indices or averages in advertisements or in certain
reports to shareholders, performance will generally be stated both in terms of
total return and in terms of yield. However, the Fund may also from time to
time state the performance of the Fund solely in terms of total return.

Total Return Calculations

The total return quotations, under the rules of the SEC, must be
calculated according to the following formula:
n
P(1 + T) = ERV

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

T = average annual total return

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

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

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

The Fund may also from time to time include in such advertising total
return figures that are not calculated according to the formula set forth
above 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., 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 this alternative computation, the Fund assumes that the $10,000 invested
in Shares is net of all sales charges (as distinguished from the computation
required by the SEC where the $1,000 payment is reduced by sales charges
before being invested in Shares). The Fund will, however, disclose the
maximum sales charges and will also disclose that the performance data do not
reflect sales charges and that inclusion of sales charges would reduce the
performance quoted. Such alternative total return information will be given
no greater prominence in such advertising than the information prescribed
under SEC rules, and all advertisements containing performance data will

-25
<PAGE>

include a legend disclosing that such performance data represent past
performance and that the investment return and principal value of an
investment will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.

Calculated according to SEC rules, for the one-year period ended March
31, 1995, the ending redeemable value of a hypothetical $1,000 payment for
the Fund's Shares was $1,035, resulting in a total return for such shares
equal to 3.54%. For the period from the effectiveness of the Fund's
registration statement on October 1, 1993 through the fiscal year ended March
31, 1995 the ending redeemable value of a hypothetical $1,000 payment was
$958 resulting in an average annual total return for such shares equal to
- -4.5%.

Calculated according to the alternative computation, which assumes no
sales charges and reinvestment of all distributions, for the one-year period
ended March 31, 1995, the ending redeemable value of a hypothetical $10,000
investment in Shares was $1,051, resulting in a total return for such shares
equal to 5.1%. For the period from the effectiveness of the Fund's
registration statement on October 1, 1993 through the fiscal year ended March
31, 1995, the ending redeemable value of a hypothetical $10,000 investment
was $10,085 resulting in an average annual total return equal to 7.60%.

Yield Calculations

The Fund's yield for the 30 day period ended March 31, 1995 was 3.66%
and was computed in the manner discussed below. The yield of the Fund is
calculated by dividing the net investment income per Share earned by the Fund
during a 30-day (or one month) period by the maximum offering price per share
on the last day of the period and annualizing the result on a semiannual
basis by adding one to the quotient, raising the sum to the power of six,
subtracting one from the result and then doubling the difference. The Fund's
yield calculations assume a maximum sales charge of 1.50%. The Fund's net
investment income per Share earned during the period is based on the average
daily number of Shares outstanding during the period entitled to receive
dividends and includes dividends and interest earned during the period minus
expenses accrued for the period, net of reimbursements.

The Fund may also advertise a "tax-equivalent yield", which is
calculated by determining the rate of the return that would have to be
achieved on a fully taxable investment to produce the after-tax equivalent of
the Fund's yield, assuming certain tax brackets for a shareholder. The
Fund's tax-equivalent yield based on the 30 day period ended March 31, 1995
was 5.30% for a shareholder in the 31% bracket.

Except as noted below, for the purpose of determining net investment
income earned during the period, interest earned on debt obligations held by
the Fund is calculated by computing the yield to maturity of each obligation
based on the market value of the obligation (including actual accrued
interest) at the close of business on the last business day of each month,
or, with respect to obligations purchased during the month, based on the
purchase price (plus actual accrued interest), dividing the result by 360 and
multiplying the quotient by the market value of the obligation (including
actual accrued interest) in order to determine the interest income on the
obligation for each day of the subsequent month that the obligation is held
by the Fund. For purposes of this calculation, it is assumed that each month
contains 30 days. The maturity of an obligation with a call provision is the
next call date on which the obligation reasonably may be expected to be
called or, if none, the maturity date.

-26-
<PAGE>

Undeclared earned income will be subtracted from the net asset value per
share. Undeclared earned income is net investment income which, at the end
of the base period, has not been declared as a dividend, but is reasonably
expected to be and is declared as a dividend shortly thereafter.

14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of July 7, 1995, the following persons owned of record or
beneficially 5% or more of the Fund's total outstanding Shares:

Alex. Brown & Sons Incorporated, 135 E. Baltimore Street, Baltimore, MD
21202 owned beneficially 93.33% of the Fund's outstanding shares.

As of such date, Directors and officers as a group owned less than 1% of
the Fund's total outstanding shares.

15. FINANCIAL STATEMENTS

See next page.

-27-

<PAGE>

FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND, INC.
Statement of Net Assets March 31, 1995

RATINGS PERCENT
PAR (MOODY'S/ VALUE OF NET
(000) S&P)1 (NOTE A) ASSETS
<S> <C> <C> <C>
MUNICIPAL BONDS - 97.3%

GENERAL OBLIGATION - 65.8%
$500 Anne Arundel County,MD,Solid Waste Project
4.50%,2/1/03................................ Aa/AA+ $467,580 3.6%
500 Baltimore County,MD,Metropolitan District,64th Issue,
Callable 8/1/03 @ $102
4.50%,8/1/06................................ Aaa/AA+ 448,440 3.5
500 Baltimore County,MD Metropolitan District,61st Issue,
6.80%,4/1/00................................ Aaa/AA+ 540,530 4.2
400 Calvert County,MD,Refunding Consolidated Public.
Improvement Project,Callable 7/15/03 @ $102
4.80%,7/15/07............................... Aa/A+ 364,828 2.8
250 Cecil County,MD (FGIC Insured),Refunding Consolidated
Public Improvement Project,Callable 12/1/03 @ $102
5.00%,12/1/06............................... Aaa/AAA 242,457 1.9
500 Charles County,MD,Refunding Consolidated Public
Improvement Project
6.00%,6/1/99................................ Aa/AA- 522,185 4.0
400 Frederick County,MD,Refunding,Series "C"
4.60%,8/1/03................................ Aa/AA- 376,928 2.9
500 Frederick,MD,Refunding and Improvement (FGIC Insured)
5.80%,12/1/02............................... Aaa/AAA 519,045 4.0
350 Harford County,MD,Refunding Consolidated
Public Improvement
4.40%,12/1/01............................... Aa/AA- 333,232 2.6
200 Howard County,MD,Refunding Consolidated
Public Improvement Project,Series "A"
4.875%,8/15/02.............................. Aa1/AA+ 196,890 1.5
Maryland State and Local Facilities Loan,Third Series,
Callable 7/15/01 @ $101
600 4.30%,7/15/03................................................. Aaa/AAA 552,918 4.3
300 6.50%,7/15/04................................................. Aaa/AAA 323,838 2.5
500 Maryland State Capital Improvement and Refunding,
Callable 4/15/03 @ $100
5.00%,4/15/04............................... Aaa/AAA 492,495 3.8
750 Maryland State Capital Improvement and Refunding
4.90%,4/15/03............................... Aaa/AAA 736,800 5.7
</TABLE>

-28-
<PAGE>
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND, INC.
Statement of Net Assets (CONTINUED) March 31, 1995

RATINGS PERCENT
PAR (MOODY'S/ VALUE OF NET
(000) S&P)1 (NOTE A) ASSETS
<S> <C> <C> <C>
GENERAL OBLIGATION - (CONTINUED)

$275 Montgomery County,MD,Maryland National Capital
Park & Planning Commission,Series "N-2"
4.40%,7/1/01................................ Aaa/AAA $ 262,521 2.0%
600 Montgomery County,MD,Refunding Consolidated Public
Improvement Project,Series "A"
4.50%,10/1/03............................... Aaa/AAA 564,354 4.4
500 Ocean City,MD,Refunding (MBIA Insured)
5.00%,3/15/03............................... Aaa/AAA 490,030 3.8
250 Prince George's County,MD,Refunding Consolidated
Improvement Project,Series "A"(MBIA Insured)
Callable 3/1/02 @ $102
5.40%,9/1/02................................ Aaa/AAA 254,415 2.0
250 Prince George's County,MD,Refunding Consolidated
Public Improvement Project,Callable 3/15/03 @ $102
(AMBAC Insured)
5.50%,3/15/05............................... Aaa/AAA 250,560 1.9
300 Rockville, MD, Refunding
4.60%,4/15/01............................... Aa1/AA+ 291,219 2.3
250 Washington Suburban Sanitary District, MD,
Prerefunded 11/1/01 @ $102
6.40%,11/1/04............................... Aaa/AAA 272,290 2.1
8,503,555 65.8
OTHER REVENUE - 29.5%

350 Baltimore County, MD, Mortgage Revenue, Silver Spring
Apartments, Callable 11/1/03 @ $102
6.60%,11/1/14............................... NR*/AAA 361,270 2.8
100 Baltimore, MD Convention Center,
Callable 9/1/04 @ $100 (FGIC Insured)
5.60%,9/1/06................................ Aaa/AAA 101,014 0.8
250 Charles County, MD, Housing Revenue, (MBIA Insured)
Callable 7/1/03 @ $102
5.375%,7/1/09............................... Aaa/AAA 234,237 1.8
200 Maryland State Health and Higher Education Facilities
Authority, Revenue for Frederick Memorial
Hospital (FGIC Insured)
4.70%,7/1/02................................ Aaa/AAA 190,752 1.5
</TABLE>

-29-
<PAGE>
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND, INC.
Statement of Net Assets (CONTINUED) March 31, 1995
<TABLE>
<CAPTION>

RATINGS PERCENT
PAR (MOODY'S/ VALUE OF NET
(000) S&P)1 (NOTE A) ASSETS
<S> <C> <C> <C>
OTHER REVENUE - (CONTINUED)

$500 Maryland State Health and Higher Education Facilities
Authority, Revenue for Good Samaritan
Hospital
5.40%,7/1/04................................ A/A $ 486,485 3.8%
500 Maryland State Health and Higher Education Facilities
Authority, Revenue for Harford Memorial and
Fallston General Hospitals
Callable 7/1/97 @ $102
8.50%,7/1/14................................ Baa1/NR* 530,585 4.1
200 Maryland State Health and Higher Education Facilities
Authority, Revenue for Howard County General
Hospital
4.55%,7/1/98................................ Baa1/BBB 193,132 1.5
300 Maryland State Health and Higher Education Facilities
Authority, Revenue for Peninsula Regional
Medical, Callable 7/1/03 @ $102
5.00%,7/1/06................................ A/A 274,761 2.1
300 Maryland State Health and Higher Education Facilities
Authority, Revenue for Suburban Hospital
4.75%,7/1/03................................ A1/A 279,177 2.2
160 Maryland State Health and Higher Education Facilities
Authority, Revenue for University of Maryland
Medical Systems Callable 7/1/03 @ $102
(FGIC Insured)
5.375%,7/1/13............................... Aaa/AAA 148,312 1.1
250 Maryland State Health and Higher Education Facilities
Authority, Revenue for Washington County
Hospital (MBIA Insured)
4.45%,1/1/02................................ Aaa/AAA 234,940 1.8
400 Maryland State Center for Physics Headquarters
5.80%,1/1/01................................ NR*/BBB 397,640 3.1
100 Maryland State Community Development Administration,
Single Family Program, Third Series
4.55%,4/1/02................................ Aa/NR* 93,273 0.7
300 Montgomery County, MD, Maryland Housing Opportunities
Commission, Callable 7/1/03 @ $102
4.70%,7/1/04................................ Aa/NR* 278,226 2.2
3,803,804 29.5
</TABLE>

-30-

<PAGE>
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND, INC.
Statement of Net Assets (CONCLUDED) March 31, 1995
<TABLE>
<CAPTION>

RATINGS PERCENT
PAR (MOODY'S/ VALUE OF NET
(000) S&P)1 (NOTE A) ASSETS
<S> <C> <C> <C>
TRANSPORTATION REVENUE - 2.0%

$275 Washington,D.C.,Metropolitan Area Transportation Authority
for Gross Revenue (FGIC Insured)
4.50%,1/1/01.............................. Aaa/AAA $ 261,316 2.0%
TOTAL MUNICIPAL BONDS
(Cost $13,017,069)........................ 12,568,675 97.3

REPURCHASE AGREEMENT - 0.5%
67 GOLDMAN SACHS & CO. 6.10%
Dated 3/31/95,to be repurchased on 4/3/95,
collateralized by U.S.Treasury Bonds with a
market value of $69,198
(Cost $67,000)............................... 67,000 0.5

TOTAL INVESTMENT IN SECURITIES
(Cost $13,084,069)**......................... 12,635,675 97.8

OTHER ASSETS IN EXCESS OF LIABILITIES, NET................ 283,423 2.2

NET ASSETS................................................ $12,919,098 100.0%

NET ASSET VALUE AND REDEMPTION PRICE
PER SHARE
($12,919,098 divided by 1,356,953
shares outstanding).......................... $9.52

MAXIMUM OFFERING PRICE PER SHARE
($9.52 divided by .985)...................... $9.66
</TABLE>

1 The Moody's or Standard & Poor's ratings are believed to be the most
recent ratings available as of March 31, 1995.

* Not rated.

** Also aggregate cost for federal tax purposes.

See accompanying Notes to Financial Statements.

-31-
<PAGE>
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND, INC.
Statement of Operations For the Year Ended March 31, 1995
<TABLE>

<S> <C>
INVESTMENT INCOME (NOTE A):

Interest............................................. $ 670,403

EXPENSES:

Investment advisory fee (Note B)..................... 45,630
Legal................................................ 41,366
Distribution fee (Note B)............................ 32,593
Audit................................................ 29,681
Printing and postage................................. 23,071
Custodian fee........................................ 19,876
Accounting fee (Note B).............................. 16,037
Organizational expense (Note A)...................... 10,249
Miscellaneous........................................ 8,619
Registration fees.................................... 7,189
Transfer agent fees (Note B)......................... 6,359
Directors'fees....................................... 1,000
Insurance............................................ 263
Total expenses...................................... 241,933
Less: Fees waived and expenses reimbursed (Note B)... (136,497)
Net expenses........................................ 105,436
Net investment income................................ 564,967

NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:

Net realized loss from security transactions......... (116,538)
Change in unrealized appreciation of
investments........................................ 122,723
Net realized and unrealized gain on investments...... 6,185

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..... $ 571,152
</TABLE>

See accompanying Notes to Financial Statements.

-32-

<PAGE>
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND, INC.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>

FOR THE YEAR FOR THE PERIOD
ENDED OCTOBER 1, 1993*
MARCH 31, THROUGH
1995 MARCH 31, 1994
<S> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income.................................. $ 564,967 $ 133,281
Net realized loss from security transactions........... (116,538) (895)
Change in unrealized appreciation/(depreciation)
of investments........................................ 122,723 (571,117)
Net increase/(decrease) in net assets
resulting from operations......................... 571,152 (438,731)

DIVIDENDS TO SHAREHOLDERS FROM (NOTE F):
Net investment income.................................. (606,205) (92,043)
Distributions in excess of income...................... (8,865) -
Total distributions.................................... (615,070) (92,043)

CAPITAL SHARE TRANSACTIONS (NOTE C):
Proceeds from sale of 617,845 and 1,355,851
shares, respectively................................. 5,832,374 13,460,866
Value of 44,409 and 6,380 shares issued in
reinvestment of dividends,respectively................ 415,255 63,163
Cost of 554,945 and 122,587 shares repurchased,
respectively.......................................... (5,156,129) (1,221,739)
Total increase in net assets derived from capital
share transactions................................... 1,091,500 12,302,290
Total increase in net assets........................ 1,047,582 11,771,516

NET ASSETS:
Beginning of period.................................... 11,871,516 100,000**
End of period.......................................... $12,919,098 $11,871,516
</TABLE>

* Commencement of Operations.

** On October 1, 1993, the Fund sold 10,000 shares to a subsidiary of
Alex.Brown & Sons Incorporated for $100,000.

See accompanying Notes to Financial Statements.

-33-

<PAGE>
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND, INC.
Financial Highlights
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE PERIOD
ENDED OCTOBER 1, 1993*
MARCH 31, THROUGH
1995 MARCH 31, 1994
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of period... $9.50 $10.00

INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................... 0.40 0.14
Net realized and unrealized gain/(loss)
on investments......................... 0.05 (0.53)
Total from Investment Operations....... 0.45 (0.39)

LESS DISTRIBUTIONS:
Dividends from net investment income..... (0.43) (0.11)
Net asset value at end of period......... $9.52 $9.50

TOTAL RETURN............................... 5.12% (4.06)%

RATIOS TO AVERAGE NET ASSETS:
Expenses(2).............................. 0.70% 0.29%(1)
Net investment income(3)................. 4.44% 3.84%(1)

SUPPLEMENTAL DATA:
Net assets at end of period (000)........ $12,919 $11,872
Portfolio turnover rate.................. 33% 9%
</TABLE>
*Commencement of Operations.

(1) Annualized.

(2) Without the waiver of advisory fees and reimbursement of expenses (Note B),
the ratio of expenses to average net assets would have been 1.85% and 2.46%
(annualized) for the year ended March 31,1995 and the period ended March 31,
1994, respectively.

(3) Without the waiver of advisory fees and reimbursement of expenses (Note B),
the ratio of net investment income to average net assets would have been
3.29% and 1.68% (annualized) for the year ended March 31,1995 and the period
ended March 3, 1994, respectively.

See accompanying Notes to Financial Statements.

-34-

<PAGE>
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND, INC.

Notes to Financial Statements

A. SIGNIFICANT ACCOUNTING POLICIES - Flag Investors Maryland Intermediate
Tax-Free Income Fund, Inc. (the "Fund") was organized as a Maryland Corporation
on July 23, 1993 and commenced operations October 1, 1993. The Fund is
registered under the Investment Company Act of 1940 as a non-diversified,
open-end management investment company designed to provide current income
exempt from federal income taxes and Maryland state and local income taxes
consistent with preservation of principal within an intermediate-term maturity
structure by investing primarily in municipal obligations issued by the State of
Maryland and its political subdivisions,agencies or instrumentalities.
The Fund's concentration in securities involves greater risk than one that
broadly invests.

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

REPURCHASE AGREEMENTS - The Fund may agree to purchase money market
instruments subject to the seller's agreement to repurchase them at an agreed
upon date and price. The seller, under a repurchase agreement, will be required
on a daily basis to maintain as collateral the value of the securities subject
to the agreement at no less than the repurchase price. The agreement is
conditional upon the collateral being deposited under the Federal Reserve
book-entry system.

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

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

Costs incurred by the Fund in connection with its organization,
registration, and the initial public offering of shares have been deferred and
are being amortized on the straight-line method over a five-year period
beginning on the date on which the Fund commenced its investment activities.

B. INVESTMENT ADVISORY FEES, TRANSACTIONS WITH AFFILIATES AND OTHER FEES -
Investment Company Capital Corp.("ICC"), a subsidiary of Alex. Brown & Sons
Incorporated ("Alex. Brown"), serves as the Fund's investment advisor. As
compensation for its advisory services, ICC receives from the Fund an annual
fee, calculated daily and paid monthly, at the annual rate of 0.35% of the first
$1 billion of the Fund's average daily net assets; 0.30% of the Fund's average
daily net assets in excess of $1 billion but not exceeding $1.5 billion; and
0.25% of the Fund's average daily net assets in excess of $1.5 billion.

-35-
<PAGE>
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND, INC.

Notes to Financial Statements (CONCLUDED)

ICC has agreed to reduce its aggregate fees attributable to the Fund or
make payments to the Fund, if necessary, to the extent required to satisfy any
expense limitations imposed by any securities laws or regulations thereunder of
any state in which the shares of the Fund are qualified for sale. ICC has
voluntarily agreed to waive its fees to the extent required to maintain expenses
at not more than 0.70% of the Fund's average daily net assets. For the year
ended March 31, 1995, CC waived fees of $45,630 and reimbursed expenses of
$90,867, of which $69,925 is recorded as a receivable due from the advisor.

As compensation for its accounting services, ICC receives from the Fund an
annual fee, calculated daily and paid monthly, from the Fund's average daily net
assets. ICC received $16,037 for accounting services for the year ended March
31, 1995.

As compensation for its transfer agent services, ICC receives from the Fund
a per account fee, calculated and paid monthly. ICC received $6,359 for transfer
agent services for the year ended March 31, 1995.

As compensation for providing distribution services, Alex. Brown receives
from the Fund an annual fee calculated daily and paid monthly, at an annual rate
equal to 0.25% of the Fund's average daily net assets. For the year ended March
31, 1995, distribution fees aggregated $32,593. Alex. Brown received no
commissions from the Fund for the year ended March 31, 1995.

C. CAPITAL SHARE TRANSACTIONS - The Fund is authorized to issue up to 30
million shares of $.001 par value common stock.

D. INVESTMENT TRANSACTIONS - Purchases and sales of investment
securities, other than short-term obligations, aggregated $6,512,463 and
$3,976,886, respectively, for the year ended March 31, 1995.

At March 31, 1995, aggregated gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $29,296 and
aggregate gross unrealized depreciation for all securities in which there is an
excess of tax cost over value was $477,690.

E. NET ASSETS - At March 31, 1995, net assets consisted of:

[S] [C]
Paid-in-capital......... $13,484,925
Accumulated net realized
loss from security
transactions.......... (117,433)
Unrealized depreciation
of investments........ (448,394)
-----------
$12,919,098

F. DISTRIBUTIONS - Of the net investment income distributions paid monthly
by the Fund during the taxable year ended March 31, 1995, 96.30% qualify as
tax-exempt interest dividends for federal income tax purposes. Additionally,
there were no capital gains distributed by the Fund during the year.

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<PAGE>
FLAG INVESTORS
MARYLAND INTERMEDIATE TAX-FREE INCOME FUND, INC.

Independent Auditors' Report

The Board of Directors and Shareholders,
Flag Investors Maryland Intermediate Tax-Free
Income Fund,Inc.:

We have audited the accompanying statement of net assets of Flag Investors
Maryland Intermediate Tax-Free Income Fund, Inc. as of March 31, 1995, the
related statements of operations for the year then ended and changes in net
assets and the financial highlights for the year then ended and for the period
October 1, 1993 (commencement of operations) to March 31, 1994. These financial
statements and the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.

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

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Flag Investors
Maryland Intermediate Tax-Free Income Fund, Inc. as of March 31, 1995, the
results of its operations, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with generally
accepted accounting principles.

DELOITTE & TOUCHE LLP
Princeton,New Jersey
April 30,1995

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