FLAG INVESTORS TELEPHONE INCOME FUND INC, PRES14A, 1996-02-02

FLAG INVESTORS TELEPHONE INCOME FUND INC
PRES14A, 1996-02-02

Previous: DNA PLANT TECHNOLOGY CORP, 8-K, 1996-02-02

Next: INTERNATIONAL TECHNOLOGY CORP, S-8, 1996-02-02

<PAGE>

SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934

[Amendment No. ............................]

Filed by the Registrant /X/
Filed by a Party other than the Registrant / /

Check the appropriate box:

/X/ Preliminary Proxy Statement
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12

FLAG INVESTORS TELEPHONE INCOME FUND, INC.
-----------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)

-----------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)

Payment of Filing Fee (Check the appropriate box):

/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2).

/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).

/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

1) Title of each class of securities to which transaction applies:

----------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:

----------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:*

----------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:

----------------------------------------------------------------------
*Set forth the amount on which the filing fee is calculated and state how it
was determined.

/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.

1) Amount Previously Paid:_______________________________________________

2) Form Schedule or Registration Statement No.:__________________________

3) Filing Party:_________________________________________________________

4) Date Filed:___________________________________________________________

<PAGE>

(Alex. Brown)

__________, 1996

Dear Shareholder:

The directors of the Flag Investors Telephone Income Fund, Inc. have called for
an important shareholder's meeting on April 10, 1996. This letter summarizes the
items that will come before that meeting. The points are explained more fully in
the attached proxy.

First, we are required to elect directors to provide for the scheduled
retirement of several of the existing directors. We believe that you will be
most pleased with the caliber of the new directors as described in the proxy.

Second, we want to modify the Fund's investment objective from "high current
income and, secondarily, long-term growth of capital" to "current income and
long-term growth of capital." This change will bring the objective into
alignment with the changing telecommunications industry which has become more
growth oriented as investment opportunities have expanded. The Fund's dividend
policy will remain unchanged.

Third, the sub-advisor's fee would be increased to reflect the growing
complexity of the telecommunications industry and the extra resources and
efforts required by the sub-advisor. There will be a corresponding increase in
the advisor's fee but the net fee to the advisor will remain the same. In
approving these proposals, the directors considered the performance of the Fund,
expenses of similar funds, and other factors.

Your Fund is using [Shareholders Communications Corporation ("SCC")], a proxy
solicitation firm, to assist shareholders in the voting process. As the date of
the meeting approaches and if we have not yet received your proxy card, you may
receive a telephone call from [SCC] reminding you to exercise your right to
vote.

Your vote is important. Please read the proxy material carefully. We ask you
join with the Fund's directors and vote in favor of all proposals but in any
event please vote.

Sincerely yours,

W. James Price Bruce E. Behrens
Chairman President
<PAGE>

PRELIMINARY COPY

FLAG INVESTORS TELEPHONE INCOME FUND, INC.

135 East Baltimore Street
Baltimore, Maryland 21202

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

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
APRIL 10, 1996

TO THE SHAREHOLDERS OF FLAG INVESTORS TELEPHONE INCOME FUND, INC.

You are cordially invited to a Special Meeting of the Shareholders of
Flag Investors Telephone Income Fund, Inc. (the "Fund") on Wednesday, April 10,
1996 at 4:00 p.m. (Baltimore Time) in the Audio-Visual Room of Alex. Brown &
Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland, 21202, for
the purpose of considering the proposals set forth below and for the transaction
of such other business as may be properly brought before the meeting:

PROPOSAL 1: To consider and act upon a proposal to elect a
Board of Directors;

PROPOSAL 2: To approve or disapprove a change in the Fund's
investment objective from "high current income and,
secondarily, long-term growth of capital without
undue risk" to "current income and long-term growth
of capital without undue risk";

PROPOSAL 3: To approve or disapprove an amended investment
advisory agreement between the Fund and Investment
Company Capital Corp. ("ICC"), increasing the
advisory fee paid by the Fund to ICC; and

PROPOSAL 4: To approve or disapprove an amended investment
sub-advisory agreement among the Fund, ICC and Alex.
Brown Investment Management ("ABIM"), increasing the
sub-advisory fee paid by ICC to ABIM.

Proposals 3 and 4 are mutually contingent. Accordingly, unless both are
approved, neither will take effect. Only shareholders of the Fund at the close
of business on January 29, 1996 are entitled to notice of, and to vote at, this
meeting or any adjournment thereof.

WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE SPECIAL MEETING, PLEASE
COMPLETE AND PROMPTLY RETURN THE ENCLOSED PROXY CARD. A POSTAGE PAID ENVELOPE IS
ENCLOSED FOR YOUR CONVENIENCE SO THAT YOU MAY RETURN YOUR PROXY CARD AS SOON AS
POSSIBLE. IT IS MOST IMPORTANT AND IN YOUR INTEREST FOR YOU TO SIGN YOUR PROXY
CARD AND RETURN IT SO THAT A QUORUM WILL BE PRESENT AND A MAXIMUM NUMBER OF
SHARES MAY BE VOTED. THE PROXY IS REVOCABLE AT ANY TIME PRIOR TO ITS USE.

Brian C. Nelson
Vice President and Secretary
Dated: [_______________], 1996
<PAGE>

PRELIMINARY COPY

FLAG INVESTORS TELEPHONE INCOME FUND, INC.

135 East Baltimore Street
Baltimore, Maryland 21202

---------------------------
PROXY STATEMENT
---------------------------

SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD

APRIL 10, 1996

This Proxy Statement is furnished by the Directors of Flag Investors
Telephone Income Fund, Inc. (the "Fund") in connection with their solicitation
of proxies for use at the Special Meeting of Shareholders of the Fund (the
"Meeting") to be held on Wednesday, April 10, 1996 at 4:00 p.m. (Baltimore
Time), or at any adjournment thereof, in the Audio-Visual Room of Alex. Brown &
Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland, 21202. It is
expected that the Notice of Special Meeting, the Proxy Statement and the Proxy
Card will be mailed to shareholders on or about February 16, 1996.

If you do not expect to be present at the Meeting and wish your shares
to be voted, please date and sign the enclosed Proxy Card ("Proxy") and mail it
in the enclosed reply envelope, allowing sufficient time for the card to be
received on or before 4:00 p.m. (Baltimore Time) on April 10, 1996. If the
accompanying Proxy is executed properly and returned, shares represented by it
will be voted at the Meeting in accordance with the instructions on the Proxy.
However, if no instructions are specified, shares will be voted FOR the election
of the Directors of the Fund (the "Directors") (Proposal 1), FOR the change in
the Fund's investment objective (Proposal 2), FOR the amended investment
advisory agreement (Proposal 3) and FOR the amended investment sub-advisory
agreement (Proposal 4). Proposals 3 and 4 are mutually contingent. Accordingly,
unless both are approved, neither will take effect. All shareholders of the Fund
are entitled to vote on each proposal. Shareholders may revoke their Proxies at
any time prior to the time they are voted by giving written notice to the
Secretary of the Fund, by delivering a subsequently dated Proxy or by attending
and voting at the Meeting.

The close of business on January 29, 1996 has been fixed as the record
date for the determination of shareholders entitled to notice of, and to vote
at, the Meeting and at any adjournment thereof. On that date, the Fund had
35,617,175 shares outstanding, consisting of 32,980,236 Class A Shares
outstanding, 563,823 Class B Shares outstanding and 2,073,116 Class D Shares
outstanding. Each full share will be entitled to one vote at the Meeting and
each fraction of a share will be entitled to the fraction of a vote equal to the
proportion of a full share represented by the fractional share.

1
<PAGE>

The expenses of the Meeting will be borne by the Fund, except that the
incremental costs associated with Proposals 3 and 4 will be borne by Investment
Company Capital Corp. ("ICC") and Alex. Brown Investment Management ("ABIM")
(collectively, the "Advisors"), respectively, and will include reimbursement to
brokerage firms and others for expenses in forwarding proxy solicitation
materials to beneficial owners. The solicitation of Proxies will be largely by
mail, but may include, without cost to the Fund, telephonic, telegraphic or oral
communication by employees and officers of the Advisors. [In addition, the Fund
and the Advisors have engaged Shareholder Communication Corporation to perform
certain solicitation services at an anticipated cost of $[__________], half to
be paid by the Fund and half by the Advisors.]

THE FUND'S ANNUAL REPORT FOR ITS FISCAL YEAR ENDED DECEMBER 31, 1995
ACCOMPANIES THIS PROXY STATEMENT.

The Fund is registered as an open-end diversified management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act")
and its shares (the "Shares") are registered under the Securities Act of 1933,
as amended.

2
<PAGE>

PROPOSAL 1: To consider and act upon a proposal to elect a Board of Directors

At the Meeting, it is proposed that eleven Directors be elected to hold
office until their successors are duly elected and qualified. The persons named
in the accompanying Proxy intend, in the absence of contrary instructions, to
vote all proxies on behalf of the shareholders for the election of W. James
Price, Charles W. Cole, Jr., James J. Cunnane, Richard T. Hale, John F. Kroeger,
Louis E. Levy, Eugene J. McDonald, Rebecca W. Rimel, Truman T. Semans, Carl W.
Vogt, and Harry Woolf. Messrs. Price, Semans, Cunnane, Kroeger, Levy, McDonald
and Woolf are currently members of the Board of Directors. Messrs. Price,
Semans, Kroeger and Woolf were last elected by the sole shareholder of the Fund
in connection with the Fund's reorganization on January 19, 1989. Mr. McDonald
was elected by the Board on June 17, 1992. Mr. Levy was elected by the Board on
June 17, 1994. Mr. Cunnane was elected by the Board on December 14, 1994. N.
Bruce Hannay retired from the Board effective January 31, 1996. Robert S.
Killebrew, Jr. has resigned from the board, effective upon the election of his
successor by shareholders. Mr. Hale has served as Vice President of the Fund
since [1990] but has not previously served on the Board and has not previously
been elected by shareholders. Messrs. Cole and Vogt and Ms. Rimel have not
previously served on the Board and have not previously been elected by the
shareholders.

The proposal to elect the Board of Directors is being presented for
shareholder approval pursuant to requirements under the 1940 Act. Under the 1940
Act, Directors may not fill vacancies unless at least two-thirds of the
Directors holding office after such vacancies are filled have been elected by
the shareholders. Accordingly, even prior to the departure of Messrs. Hannay and
Killebrew, the Board could not appoint Messrs. Cole, Hale and Vogt and Ms. Rimel
or other future Directors. The meeting will provide the Board with operating
flexibility by making it possible for the Board of Directors to fill vacancies
caused by expected future retirements.

Because the corporation does not hold regular annual shareholder
meetings, each nominee, if elected, will hold office until his or her successor
is elected and qualified. Under Maryland General Corporation Law, a corporation
registered under the 1940 Act is not required to hold an annual meeting in any
year in which the election of Directors is not required to be acted upon under
such Act. The Fund has availed itself of this provision and achieves cost
savings by eliminating printing costs, mailing charges and other expenses
involved in routine annual meetings.

Even with the elimination of routine annual meetings, the Board of
Directors may call special meetings of shareholders for action by shareholder
vote as may be required by the 1940 Act, or required or permitted by the
Articles of Incorporation and By-Laws of the Fund. As described above,
shareholder meetings will be held to elect Directors under certain circumstances
in compliance with the 1940 Act. Shareholder meetings may also be held by the
Fund in order to approve investment policy changes, a new investment advisory
agreement or other matters requiring shareholder action under the 1940 Act.

A meeting may also be called by shareholders holding at least 10% of
the shares entitled to vote at the meeting for the purpose of voting upon the
removal of Directors, in which case shareholders may receive assistance in
communicating with other shareholders as if the provisions contained in Section
16(c) of the 1940 Act applied. In addition, Maryland General Corporation Law
provides for the calling of a special meeting by the written request of
shareholders holding at least 25% of the shares entitled to vote at the meeting.

Each of the nominees has consented to being named in this Proxy
Statement and to serving as a Director if elected. The Fund knows of no reason
why any nominee would be unable or unwilling to serve if elected. Should any of
the nominees become unable or unwilling to accept nomination or election, the
persons named in the Proxy will exercise their voting power to vote for such
person or persons as the management of the Fund may recommend.

3
<PAGE>

Information Regarding Nominees

The following information is provided for each nominee. It includes his
or her name, position with the Fund, length of directorship (if applicable),
age, principal occupations or employment during the past five years,
directorships with other companies which file reports periodically with the
Securities and Exchange Commission, number of Shares beneficially owned and
percentage of Shares beneficially owned.
<TABLE>
<CAPTION>
Business Experience Shares
Name and Position During the Past Five Years, Beneficially Owned
with the Fund Age Including all Directorships as of December 31, 1995** Percentage
-------------- --- --------------------------- ----------------------- ----------
<S> <C> <C> <C> <C>
W. James Price* 71 Managing Director Emeritus, 3,112 Class A Shares ***
Director and Chairman of Alex. Brown & Sons
the Board since 1983 Incorporated; Director, Boca
Research, Inc. (computer
peripherals); Formerly,
Director, CSX Corp.
(transportation and natural
resources) and PHH
Corporation (business
services).

Charles W. Cole, Jr.* 60 Vice Chairman, Alex. Brown None ***
Nominee for Director Capital Advisory & Trust
Company (registered
investment advisor); Director,
Provident Bankshares
Corporation & Provident
Bank of Maryland; Formerly,
President, Chief Executive
Officer, Chief Administrative
Officer, and Director, First
Maryland Bancorp, The First
National Bank of Maryland
and First Omni Bank, and,
formerly, Director, York Bank
and Trust Company.

James J. Cunnane 57 Managing Director, CBC None ***
Director since 1994 Capital (investment banking);
Formerly, Senior Vice-President
and Chief Financial Officer,
General Dynamics Corporation
(defense) and Director, The Arch
Fund (mutual funds).

Richard T. Hale* 50 Managing Director, Alex. 1,793 Class A Shares ***
Nominee for Director; Vice Brown & Sons Incorporated;
President since [1990] Chartered Financial Analyst.
</TABLE>
4
<PAGE>

<TABLE>
<CAPTION>
Business Experience Shares
Name and Position During the Past Five Years, Beneficially Owned
with the Fund Age Including all Directorships as of December 31, 1995** Percentage
-------------- --- --------------------------- ----------------------- ----------
<S> <C> <C> <C> <C>
John F. Kroeger 71 Director/Trustee, AIM Funds 3,247 Class A Shares ***
Director since 1983 (mutual funds);
Formerly, Consultant,
Wendell & Stockel
Associates, Inc. (consulting)
and General Manager, Shell
Oil Company.

Louis E. Levy 63 Director, Kimberly-Clark 1,316 Class A Shares ***
Director since 1994 Corporation (personal
consumer products) and
Household International
(banking and finance);
Chairman, Quality Control
Inquiry Committee, American
Institute of Certified Public
Accountants; Formerly,
Trustee, Merrill Lynch Funds
for Institutions (mutual
funds), Adjunct Professor,
Columbia University-Graduate
School of Business, and
Partner, KPMG Peat Marwick
(accounting).

Eugene J. McDonald 63 President, Duke Management None ***
Director since 1992 Company (investments);
Executive Vice President, Duke
University (education, research
and health care).

Rebecca W. Rimel* 44 President and Chief Executive None ***
Nominee for Director Officer, The Pew Charitable
Trusts; Director and Executive
Vice President, The Glenmede
Trust Company.

Truman T. Semans* 68 Managing Director, Alex. 10,490 Class A Shares ***
Director since 1987 Brown & Sons Incorporated;
Formerly, Vice Chairman,
Alex. Brown Incorporated.
</TABLE>
5
<PAGE>

<TABLE>
<CAPTION>
Business Experience Shares
Name and Position During the Past Five Years, Beneficially Owned
with the Fund Age Including all Directorships as of December 31, 1995** Percentage
-------------- --- --------------------------- ----------------------- ----------
<S> <C> <C> <C> <C>
Carl W. Vogt 59 Senior Partner, Fulbright & None ***
Nominee for Director Jaworski L.L.P. (law);
Formerly, Chairman, National
Transportation Safety Board;
Director, National Railroad
Passenger Corporation (Amtrak)
and Member, Aviation System
Capacity Advisory Committee
(Federal Aviation Administration).

Harry Woolf 72 Professor-at-Large Emeritus, 1,694 Class A Shares ***
Director since 1983 Institute for Advanced Study;
Director, ATL and Spacelabs
Medical Corp. (medical
equipment), Family Health
International (non-profit
research and education) and
Research America (non-profit
medical research); Formerly,
Director, Merrill Lynch Cluster
C Funds (mutual funds) and
Trustee, Rockefeller Foundation.
</TABLE>
- ---------------------

* Denotes an individual who may be an "interested person" within the meaning
of the 1940 Act. Mr. Price and Ms. Rimel will be treated by the Fund as if
each could be deemed to be an "interested person." Messrs. Semans and Hale
are Managing Directors of Alex. Brown & Sons Incorporated, the Fund's
Distributor ("Alex. Brown" or the "Distributor"). Mr. Cole is Vice Chairman
of Alex. Brown Capital Advisory & Trust Company, an affiliate of the
Distributor and the Advisor.

** This information has been provided by each nominees for Director of the
Fund.

*** As of December 31, 1995, Directors and nominees of the Fund beneficially
owned in the aggregate less than 1% of the Shares.

The aggregate compensation paid by the Fund to each of the Fund's
Directors serving during the fiscal year ended December 31, 1995 is set forth in
the compensation table below. The aggregate compensation paid to such Directors
during calendar year 1995 by all registered investment companies to which ICC or
an affiliated person of ICC provides investment advisory services (collectively,
the "Fund Complex") is also set forth in the compensation table below.

6
<PAGE>

COMPENSATION TABLE
<TABLE>
<CAPTION>
Total Compensation
Aggregate From the Fund and Number of Funds in Fund
Compensation Fund Complex Paid Complex for Which
Name and Position from the Fund to Directors Director Serves
- ----------------- ------------- ------------------ -----------------------
<S> <C> <C> <C>
W. James Price, Director* -- -- 7
James J. Cunnane, Director $4,402** $39,000 13***
N. Bruce Hannay, Director+ $4,402** $39,000 13***
Robert S. Killebrew, Director*++ -- -- 2
John F. Kroeger, Director $5,000 $44,425 13***
Louis E. Levy, Director $4,402 $39,000 13***
Eugene J. McDonald, Director $4,402** $39,000 13***
Truman T. Semans, Director* -- -- 8
Harry Woolf, Director $4,402** $39,000 13***
</TABLE>

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

* "Interested person," within the meaning of the 1940 Act, of the Fund
and all other U.S. registered investment companies in the Fund Complex for
which he serves as a director or trustee. Mr. Price is treated by the Fund
as if he could be deemed to be an "interested person".

** Of such aggregate compensation, Messrs. Cunnane, Hannay, McDonald and Woolf
each deferred the full amount pursuant to the Fund's Deferred Compensation
Plan.

*** One of these funds ceased operations on May 17, 1995.

+ Retired, effective January 31, 1996.

++ Resigned, effective upon the election of his successor by shareholders.

Each Director who is not an "interested person" receives an aggregate
annual fee (plus reimbursement for reasonable out-of-pocket expenses incurred in
connection with his attendance at Board and committee meetings) from the Fund
and all funds in the Fund Complex for which he serves. If elected, Ms. Rimel
will receive compensation from the Fund for her services. Payment of such fees
and expenses are allocated among all such funds described above in proportion to
their relative net assets. For the fiscal year ended December 31, 1995,
Non-Interested Directors fees attributable to the assets of the Fund totalled
$27,009. Officers of the Fund receive no direct remuneration in such capacity
from the Fund. Officers of the Fund who are employees of Alex. Brown may be
considered to have received remuneration indirectly. As of December 31, 1995,
the Directors and officers of the Fund as a group beneficially owned an
aggregate of less than 1% of the Shares.

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 of
service, each Participant will be entitled to receive an annual retirement
benefit equal to a percentage of the fees 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. Kroeger and Woolf
have qualified but have not yet received benefits. The Fund has two
Participants, a Director who retired effective December 31, 1994 and a Director
who retired effective January 31, 1996, who have qualified for the Retirement
Plan by serving thirteen years and eleven years, respectively, as Directors in
the Fund Complex and each of whom will be paid a quarterly fee of $4,875 by the
Fund Complex for the rest of his life. Such fee is allocated to each fund in the
Fund Complex based upon the relative net assets of such fund to the Fund
Complex.

7
<PAGE>

There were four meetings of the Board of Directors held during the
fiscal year ended December 31, 1995. In such fiscal year, [all Directors
attended at least 75%] of the meetings of the Board of Directors held during
their respective terms.

The Board of Directors has an Audit and Compliance Committee. The Audit
and Compliance Committee makes recommendations to the full Board of Directors
with respect to the engagement of independent accountants and reviews, with the
independent accountants, the results of the audit engagement and matters having
a material effect on the Fund's financial operations. The members of the Audit
and Compliance Committee are Messrs. [Cunnane, Kroeger, Levy, McDonald and
Woolf], each of whom is not an "interested person" within the meaning of the
1940 Act. The Audit and Compliance Committee met four times during the fiscal
year ended December 31, 1995. In such fiscal year, [all members attended at
least 75%] of the meetings of the Audit and Compliance Committee held during
their respective terms. The Chairman of the Audit and Compliance Committee
receives an aggregate annual fee of $10,000 from the Fund and all funds in the
Fund Complex for which he serves as such chairman. Payment of such fees are
allocated among all such funds described above in proportion to their relative
net assets.

The Board of Directors has a Nominating Committee. The Nominating
Committee makes recommendations to the full Board of Directors with respect to
candidates for and policies of the Board of Directors. The members of the
Nominating Committee are Messrs. [Cunnane, Kroeger, Levy, McDonald and Woolf],
each of whom is not an "interested person" within the meaning of the 1940 Act.
The Nominating Committee met [_____] during the fiscal year ended December 31,
1995. In such fiscal year, [all members attended at least 75%] of the meetings
of the Nominating Committee held during their respective terms.

The Board of Directors has a Compensation Committee. The Compensation
Committee makes recommendations to the full Board of Directors with respect to
compensation of Directors. The members of the Compensation Committee are Messrs.
[Cunnane, Kroeger, Levy, McDonald and Woolf], each of whom is not an "interested
person" within the meaning of the 1940 Act. The Compensation Committee met
[_____] during the fiscal year ended December 31, 1995. In such fiscal year,
[all members attended at least 75%] of the meetings of the Compensation
Committee held during their respective terms.

Please refer to Proposal 3 -- "Investment Company Capital Corp." on
page [__] for information regarding ownership in Alex. Brown Incorporated by
Directors and officers of the Fund.

Board Approval of the Election of Directors

At a meeting of the Board of Directors held December 13, 1995,
supplemented by a Unanimous Consent of Directors dated January 30, 1996, the
Board recommended that shareholders vote for each of the nominees for Director
named herein. In recommending that shareholders elect the nominees as Directors
of the Fund, the Board considered the nominees' experience and qualifications.

Shareholder Approval of the Election of Directors

The election of the Directors requires the favorable vote of a majority
of all votes cast at the Meeting provided that a majority of shareholders
entitled to vote is present in person or by proxy at the Meeting. If you give no
voting instructions, your Shares will be voted for all nominees named herein. If
the Directors are not approved by the shareholders of the Fund, the Board will
consider alternative nominations.

THE BOARD OF DIRECTORS OF THE FUND RECOMMENDS THAT SHAREHOLDERS OF THE FUND VOTE
FOR THE ELECTION OF THE DIRECTORS.

8
<PAGE>

PROPOSAL 2: To approve or disapprove a change in the investment objective
of the Fund

The Directors of the Fund have determined that it would be in the best
interest of the Fund and its shareholders to restate the Fund's investment
objective. The investment objective of the Fund would be changed from "high
current income and, secondarily, long-term growth of capital without undue risk"
to "current income and long-term growth of capital without undue risk."

The Directors believe this change is appropriate in light of changes
in the telephone industry since the Fund's inception (1984). The seven Regional
Bell Operating Companies ("RBOCs"), which are still important holdings for the
Fund and which are the primary companies for generating dividend income for the
Fund, have increasingly deployed their assets to expand their businesses and to
compete vigorously for a share of the growing and rapidly evolving telephone
industry. As a result, dividend yields of the RBOCs have generally decreased but
their growth prospects have increased. Other telephone industry participants
tend to pay substantially lower dividends and some pay no dividend. The impact
of the new telecommunications legislation on the telephone and
telecommunications industries is likely to accelerate changes already occurring:
many new entrants in the telephone and telecommunications industries that have
growth characteristics similar to those of the RBOCs; exploration of new
opportunities by existing telephone companies; and new combinations involving
these companies. These developments entail both opportunities and risks and
could lead to significant impact on the value of securities held or acquired by
the Fund. The proposed change in the Fund's objective reflects these realities
by giving equal weight to growth of capital and to current income.

Shareholder Approval of the Change in Investment Objective

The change in investment objective of the Fund requires the favorable
vote of a majority of all votes cast at the Meeting provided that a majority of
shareholders entitled to vote is present in person or by proxy at the Meeting.
If this proposal is approved by the shareholders at the Meeting, the Fund's
prospectus and statement of additional information will be amended or
supplemented in due course in order to reflect the change in the investment
objective. If the proposal is not approved, the investment objective as
currently stated will remain in effect.

THE BOARD OF DIRECTORS OF THE FUND RECOMMENDS THAT SHAREHOLDERS OF THE FUND
VOTE FOR APPROVAL OF THE CHANGE IN THE INVESTMENT OBJECTIVE OF THE FUND.

9
<PAGE>

PROPOSAL 3: To approve or disapprove an amended investment advisory agreement
between the Fund and Investment Company Capital Corp., increasing
the advisory fee paid by the Fund to ICC

The Board has approved, and is recommending that shareholders approve,
requests by ICC and ABIM that their respective fees be increased as described
below. The proposed increase in ICC's fee would provide ICC with funds to pay
the increase in ABIM's fee. The rationale for the proposed increase in ABIM's
fee is discussed under Proposal 4. Neither fee increase will go into effect
unless both are approved by shareholders.

General

On December 13, 1995, the Directors unanimously approved, subject to
the approval of the Fund's shareholders, an Amended Investment Advisory
Agreement (the "Amended Advisory Agreement") to increase the rate of the fee
payable to Investment Company Capital Corp. ("ICC"), the Fund's advisor. Under
the current advisory agreement (the "Current Advisory Agreement"), ICC receives
a fee from the Fund, calculated daily and paid at the end of each calendar
month, at the annual rate of .65% of the first $100 million of the Fund's
average daily net assets, .55% of the next $100 million of the Fund's average
daily net assets, .50% of the next $100 million of the Fund's average daily net
assets and .45% of that portion of the Fund's average daily net assets in excess
of $300 million.

Under the Amended Advisory Agreement, ICC would receive a fee from the
Fund, calculated daily and paid at the end of each calendar month, at the annual
rate of .85% of the first $100 million of the Fund's average daily net assets,
.75% of the next $100 million of the Fund's average daily net assets, .70% of
the next $100 million of the Fund's average daily net assets, .65% of the next
$200 million of the Fund's average daily net assets, .58% of the next $500
million of the Fund's average daily net assets, .53% of the next $500 million of
the Fund's average daily net assets and .50% of that portion of the Fund's
average daily net assets in excess of $1.5 billion. The effect of this change is
to increase the rate paid by the Fund by .20% on Fund assets up to $500 million,
.13% on Fund assets from $500 million up to $1 billion, .08% on Fund assets from
$1 billion up to $1.5 billion, and .05% on Fund assets in excess of $1.5
billion. A copy of the Amended Advisory Agreement, as it is proposed to be
approved by the shareholders, is attached hereto as Exhibit A.

Evaluation and Recommendation

To assist the Directors in their consideration of the Amended Advisory
Agreement at the Board meeting held on December 13, 1995, ICC presented a
comparative analysis, under the existing and pro forma advisory fees, of the
performance and expenses of the Fund. The Directors took into account (1) the
nature and quality of the advisory services rendered and the results achieved by
ICC in the management of the Fund, giving due consideration to the likely impact
of the proposed fee on relative performance; (2) the relationship of the
proposed advisory fee schedule to the fee schedules of comparable mutual funds,
the impact of the proposed increase in advisory fees on the Fund's expense ratio
and the relationship of the Fund's pro forma expense ratio to the expense ratios
of comparable mutual funds; (3) the costs borne by ICC in providing investment
advisory services to the Fund; (4) the profits of ICC in providing services to
the Fund; (5) the extent to which the economies of scale that ICC might
experience as a result of growth in the Fund's assets would be shared with the
Fund; and (6) research services received in return for allocation of brokerage.
With respect to the nature and quality of services and the results achieved, the
Directors noted the success of the Fund since inception (1984) in maintaining
highly competitive portfolio performance.

10
<PAGE>

Description of the Current Advisory Agreement

The Current Advisory Agreement, dated as of January 19, 1989, was last
approved by the shareholders on December 6, 1988.

The Current Advisory Agreement provides that ICC, in return for its
fee, will (a) supervise and manage all aspects of the Fund's operations, except
for distribution services; (b) formulate and implement continuing programs for
the purchases and sales of securities, consistent with the investment objective
and policies of the Fund; (c) provide the Fund with such executive,
administrative and clerical services as are deemed advisable by the Fund's Board
of Directors; (d) provide the Fund with, or obtain for it, adequate office space
and all necessary office equipment and services; (e) obtain and evaluate
pertinent information about significant developments and economic, statistical
and financial data, domestic, foreign and otherwise, whether affecting the
economy generally or the Fund, and whether concerning the individual issuers
whose securities are included in the Fund's portfolio or the activities in which
they engage, or with respect to securities which ICC considers desirable for
inclusion in the Fund's portfolio; (f) determine which issuers and securities
shall be represented in the Fund's portfolio and regularly report thereon to the
Fund's Board of Directors (g) take all actions necessary to carry into effect
the Fund's purchase and sale programs; (h) supervise the operations of the
Fund's transfer and dividend disbursing agent; (i) provide the Fund with such
administrative and clerical services for the maintenance of certain shareholder
records as are deemed advisable by the Fund's Board of Directors; and (j)
arrange, but not pay for, the periodic updating of prospectuses and supplements
thereto, proxy materials, tax returns, reports to the Fund's shareholders and
reports to and filings with the SEC and state Blue Sky authorities. Subject to
the approval of the Board and the Fund's shareholders, ICC may delegate certain
of its duties enumerated above to a sub-advisor.

The Current Advisory Agreement provides for compensation to ICC, as
discussed above.

The Current Advisory Agreement provides that ICC will furnish, at its
expense and without cost to the Fund, the services of one or more officers of
the Fund to the extent that such officers may be required by the Fund for the
proper conduct of its affairs. The Fund assumes and pays or causes to be paid
all other expenses of the Fund, including, without limitation: payments to the
Fund's distributor under the Fund's plan of distribution; the charges and
expenses of any registrar, any custodian or depository appointed by the Fund for
the safekeeping of its 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 of the Fund; 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 of proxy statements and reports to shareholders;
fees and travel expenses of Directors or 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 Fund's Shares;
charges and expenses of legal counsel, including counsel to the Directors of the
Fund who are not interested persons (as defined in the 1940 Act) of the Fund and
of independent accountants, in connection with any matter relating to the Fund;
membership dues of industry associations; interest payable on Fund borrowings;
postage; insurance premiums on property or personnel (including officers and
Directors) of the Fund 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 provided herein.

11
<PAGE>

The Current Advisory Agreement provides for expense limitations. In the
event the operating expenses of the Fund, including all investment advisory and
administrative fees, for any fiscal year ending on a date on which the agreement
is in effect exceed the expense limitations applicable to the Fund imposed by
the securities laws or regulations thereunder of any state in which the Fund's
Shares are qualified for sale, as such limitations may be raised or lowered from
time to time, ICC will reduce its investment advisory fee to the extent of its
share of such excess expenses and, if required pursuant to any such laws or
regulations, will reimburse the Fund for its share of annual operating expenses
in excess of any expense limitation that may be applicable. Excluded from such
expenses are the amounts of any interest, taxes, brokerage commissions and
extraordinary expenses (including, but not limited to, legal claims and
liabilities and litigation costs and any indemnification related thereto) paid
or payable by the Fund. Such reduction, if any, will be computed and accrued
daily, will be settled on a monthly basis and will be based upon the expense
limitation applicable to the Fund.

The services of ICC are not to be deemed exclusive, and ICC is free to
render investment advisory and other services to others, including other
investment companies, and to engage in other activities, so long as its services
under the agreement are not impaired thereby. ICC's officers or directors may
serve as officers or Directors of the Fund, the Fund's officers or Directors may
serve as officers or directors of ICC, to the extent permitted by law, and
officers and directors of ICC are not prohibited from engaging in any other
business activity or from rendering services to any other person, or from
serving as partners, officers, trustees or directors of any other firm, trust or
corporation, including other investment companies.

Following the expiration of its initial two-year term, the Current
Advisory Agreement continues in force and effect from year to year, provided
that such continuance is approved at least annually by the Fund's Board or by
the vote of a majority of the outstanding voting securities of the Fund, and by
the affirmative vote of a majority of the Directors who are not parties to the
agreement or "interested persons" of a party to the agreement (other than as
Directors of the Fund) by votes cast in person at a meeting specifically called
for such purpose.

The Current Advisory Agreement may be terminated, without the payment
of any penalty, by the Fund upon a vote of the Fund's Board of Directors, by a
vote of a majority of Fund's outstanding voting securities or by ICC, upon sixty
days' written notice to the other party. The agreement automatically terminates
in the event of its assignment.

The Current Advisory Agreement obligates ICC, in the performance of its
duties under the agreement, to exercise care and diligence and to act in good
faith and to use its best efforts within reasonable limits to ensure the
accuracy of all services performed under the agreement, but ICC is not liable
for any act or omission which does not constitute willful misfeasance, bad faith
or gross negligence on the part of ICC or its officers, directors or employees,
or reckless disregard by ICC of its duties under the agreement.

Investment Company Capital Corp.

ICC is a registered investment advisor that had under management as of
January 31, 1996 approximately $[____] billion, including assets of the Fund and
the assets of ICC's other clients. ICC is a wholly-owned subsidiary of Alex.
Brown, which is in turn a wholly-owned subsidiary of Alex. Brown Incorporated.
The principal address of each is 135 East Baltimore Street, Baltimore, Maryland,
21202.

12
<PAGE>

The following information is provided for each Director and the
principal executive officer of ICC. It includes his or her name, position with
ICC, address and principal occupation.
<TABLE>
<CAPTION>
Name and Position
with the Advisor Address Principal Occupation
----------------- ------- --------------------
<S> <C> <C>
Alvin B. Krongard 135 East Baltimore Street Chairman and Chief Executive Officer,
Director Baltimore, Maryland 21202 Alex. Brown Incorporated

Mayo A. Shattuck III 135 East Baltimore Street President, Alex. Brown Incorporated
Director Baltimore, Maryland 21202

Benjamin Howell Griswold, IV 135 East Baltimore Street Chairman Emeritus, Alex. Brown
Director Baltimore, Maryland 21202 Incorporated

Edward J. Veilleux 135 East Baltimore Street Principal, Alex. Brown & Sons
President Baltimore, Maryland 21202 Incorporated; Vice President, Armata
Financial Corp.
</TABLE>

For the fiscal year ended December 31, 1995, the Fund paid ICC an
aggregate fee (net of voluntary fee waivers of $287,343) of $2,297,474 for
advisory services. For such fiscal year, the Fund also paid ICC aggregate fees
of $550,000 for transfer agency services provided to the Fund and $113,878 for
accounting services provided to the Fund. For the fiscal year ended December 31,
1995, the Fund paid the Distributor an aggregate distribution fee of $1,378,330.
For such fiscal year, ICC paid ABIM, the sub-advisor to the Fund, an aggregate
fee of $1,541,502 for advisory services. Such services will continue to be
provided after the approvals of Proposals 3 and 4.

[As of December 31, 1995, to Fund management's knowledge as provided by
the Directors and officers of the Fund, the following Directors and officers of
the Fund beneficially owned shares of Alex. Brown Incorporated. Messrs. Price
and Semans, Directors of the Fund, beneficially owned 66,443 shares and 29,495
shares, respectively, of Alex. Brown Incorporated. Mr. Cole, a nominee for
Director of the Fund, and Mr. Hale, a nominee for Director and currently Vice
President of the Fund, beneficially owned 1,700 shares and 62,397 shares,
respectively, of Alex. Brown Incorporated. Mr. Bruce E. Behrens, President of
the Fund and Vice President of ABIM, beneficially owned 11,613 shares of Alex.
Brown Incorporated. Mr. J. Dorsey Brown, III, Executive Vice President of the
Fund and Chief Executive Officer of ABIM, beneficially owned 63,700 shares of
Alex. Brown Incorporated. Mr. Hobart C. Buppert, Vice President of the Fund and
Vice President of ABIM, beneficially owned 23,376 shares of Alex. Brown
Incorporated. Mr. Lee S. Owen, Vice President of the Fund and Vice President of
ABIM, beneficially owned 8,106 shares of Alex. Brown Incorporated. Mr. Edward J.
Veilleux, Vice President of the Fund and President of ICC, beneficially owned
300 shares of Alex. Brown Incorporated.]

Comparison between the Amended Advisory Agreement and the Current Advisory
Agreement

The terms of the Amended Advisory Agreement and the Current Advisory
Agreement are effectively the same, except for provisions regarding
compensation, as discussed above.

The following tables compare the existing fees and expenses of each
class of the Fund under the Current Advisory Agreement and the pro forma fees
and expenses of each class under the Amended Advisory Agreement. There are
currently three classes of the Fund, designated as the Class A Shares, the Class
B Shares and the Class D Shares. Class D Shares are no longer being offered
although Class D Shares remain outstanding. The percentages shown below
expressing existing Annual Fund Operating Expenses are based on the actual
expenses of each class of the Fund for the fiscal year ended December 31, 1995.

13
<PAGE>

Flag Investors Telephone Income Class A Shares
<TABLE>
<CAPTION>

Annual Fund Operating Expenses (as a percentage of average net assets) Existing Pro Forma
- --------------------------------------------------------------------- -------- ---------
<S> <C> <C>

Management Fees ................................................................. .52% .72%
Advisory Fee Retained................................................... .21% .21%
Sub-Advisory Fee........................................................ .31% .51%
12b-1 Fees....................................................................... .25% .25%
Other Expenses................................................................... .22% .22%
---- ---
Total Fund Operating Expenses.................................................... .99% 1.19%
==== =====
</TABLE>

Example

Assuming a hypothetical investment of $1,000, a 5% annual return and redemption
at the end of each time period, an investor in Flag Investors Telephone Income
Fund Class A Shares would have paid transaction and operating expenses at the
end of each year as follows:

Existing Pro Forma
-------- ---------
1 year.................................. $ 55 $ 57
3 years................................. $ 76 $ 82
5 years................................. $ 99 $109
10 years................................ $167 $192

THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

Flag Investors Telephone Income Class B Shares
<TABLE>
<CAPTION>
Annual Fund Operating Expenses (as a percentage of average net assets) Existing Pro Forma
- --------------------------------------------------------------------- -------- ---------
<S> <C> <C>
Management Fees.................................................................. .52% .72%
Advisory Fee Retained................................................... .21% .21%
Sub-Advisory Fee........................................................ .31% .51%
12b-1 Fees....................................................................... .75% .75%
Other Expenses (including a .25% shareholder servicing fee)...................... .47% .47%
---- ---
Total Fund Operating Expenses.................................................... 1.74% 1.94%
===== ======
</TABLE>

Example

Assuming a hypothetical investment of $1,000, a 5% annual return and redemption
at the end of each time period, an investor in Flag Investors Telephone Income
Fund Class B Shares would have paid transaction and operating expenses at the
end of each year as follows:

Existing Pro Forma
-------- ---------
1 year.................................. $ 58 $ 60
3 years................................. $ 86 $ 93
5 years................................. $119 $130
10 years................................ $192* $206*

* Expenses assume that Class B Shares are converted to Class A Shares at the
end of six years. Therefore, the expense figures assume six years of
Class B expenses and four years of Class A expenses.

<PAGE>

An investor would pay the following expenses on the same investment assuming no
redemption:

Existing Pro Forma
-------- ---------
1 year.................................. $ 17 $ 20
3 years................................. $ 56 $ 63
5 years................................. $ 99 $110
10 years................................ $192* $206*

- -------------------------
* Expenses assume that Class B Shares are converted to Class A Shares at
the end of six years. Therefore, the expense figures assume six years
of Class B expenses and four years of Class A expenses.

THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

Flag Investors Telephone Income Class D Shares
<TABLE>
<CAPTION>

Annual Fund Operating Expenses (as a percentage of average net assets) Existing Pro Forma
- --------------------------------------------------------------------- -------- ---------
<S> <C> <C>

Management Fees.................................................................. .52% .72%
Advisory Fee Retained................................................... .21% .21%
Sub-Advisory Fee........................................................ .31% .51%
12b-1 Fees....................................................................... .60% .60%
Other Expenses................................................................... .22% .22%
----- -----
Total Fund Operating Expenses.................................................... 1.34% 1.54%
===== =====
</TABLE>

Example

Assuming a hypothetical investment of $1,000, a 5% annual return and redemption
at the end of each time period, an investor in Flag Investors Telephone Income
Fund Class D Shares would have paid transaction and operating expenses at the
end of each year as follows:

Existing Pro Forma
-------- ---------
1 year.................................. $ 39 $ 41
3 years................................. $ 68 $ 79
5 years................................. $ 90 $101
10 years................................ $185 $211

An investor would pay the following expenses on the same investment assuming no
redemption:

Existing Pro Forma
-------- ---------
1 year.................................. $ 29 $ 31
3 years................................. $ 58 $ 64
5 years................................. $ 90 $101
10 years................................ $185 $211

THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

15
<PAGE>

As compensation for providing investment advisory services to the Fund
for the fiscal year ended December 31, 1995, ICC was entitled to receive an
aggregate fee equal to $2,584,817 and from such amount waived $287,343. Waivers
were terminated by ICC on [_______________], 1995. Had the proposed fees been in
effect, ICC would have received $3,578,977 in fees, which equals a 38% increase
over the fees ICC is entitled to receive under the Current Advisory Agreement.

Other Funds Advised by ICC with Similar Investment Objectives

ICC acts as advisor to two funds which have investment objectives
similar to those of the Fund. The following table provides comparative
information on fees paid to ICC pursuant to advisory agreements in effect for
such funds.
<TABLE>
<CAPTION>
Management Fee
Assets (as a percentage of
Fund (000's) average net assets)
- ---- ------ ------------------
<S> <C> <C>
Flag Investors Value Builder Fund, Inc.* $147,327 .88% (net of fee
waivers)**

Flag Investors Equity Partners Fund, Inc. *** $ 40,771 .65% (net of fee
waivers)****
</TABLE>

- -------------------------
* Information given for fiscal year ended March 31, 1995.
** Absent fee waivers, Management Fees would be .93% of the fund's average
net assets.
*** Information given for fiscal period ended May 31, 1995.
**** Absent fee waivers, Management Fees would be 1.00% of the fund's average
net assets.

Shareholder Approval of the Amended Advisory Agreement

Approval of the Amended Advisory Agreement requires the affirmative
vote of a majority of the outstanding Shares of the Fund. For purposes of this
proposal, "majority of the outstanding Shares" means the vote of (i) 67% or more
of the Fund's outstanding Shares present at the Meeting, if the holders of more
than 50% of the outstanding Shares of the Fund are present or represented by
proxy, or (ii) more than 50% of the Fund's outstanding Shares, whichever is
less.

Proposals 3 and 4 are mutually contingent. Accordingly, unless both are
approved, neither will take effect.

THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS OF THE FUND VOTE
FOR APPROVAL OF THE AMENDED ADVISORY AGREEMENT

16
<PAGE>

PROPOSAL 4: To approve or disapprove an amended investment sub-advisory
agreement among the Fund, Investment Company Capital Corp. and
Alex. Brown Investment Management, increasing the advisory fee paid
by ICC to ABIM

General

On December 13, 1995, the Directors unanimously approved, subject to
the approval of the Fund's shareholders, an Amended Investment Sub-Advisory
Agreement (the "Amended Sub-Advisory Agreement") to increase the rate of the fee
payable to the Fund's sub-advisor, Alex. Brown Investment Management ("ABIM").
Under the current sub-advisory agreement (the "Current Sub-Advisory Agreement"),
ABIM receives a fee from ICC, calculated daily and paid at the end of each
calendar month, at the annual rate of .40% of the first $100 million of the
Fund's average daily net assets, .35% of the next $100 million of the Fund's
average daily net assets, .30% of the next $100 million of the Fund's average
daily net assets and .25% of that portion of the Fund's average daily net assets
in excess of $300 million.

Under the Amended Advisory Agreement, ABIM would receive a fee from
ICC, calculated daily and paid at the end of each calendar month, at the annual
rate of .60% of the first $100 million of the Fund's average daily net assets,
.55% of the next $100 million of the Fund's average daily net assets, .50% of
the next $100 million of the Fund's average daily net assets, .45% of the next
$200 million of the Fund's average daily net assets, .40% of the next $500
million of the Fund's average daily net assets, .37% of the next $500 million of
the Fund's average daily net assets and .35% of that portion of the Fund's
average daily net assets in excess of $1.5 billion. The effect of this change is
to increase the rate paid by ICC by .20% on Fund assets up to $500 million, .15%
on Fund assets from $500 million up to $1 billion, .12% on Fund assets from $1
billion up to $1.5 billion, and .10% on Fund assets in excess of $1.5 billion. A
copy of the Amended Sub-Advisory Agreement, as it is proposed to be approved by
the shareholders, is attached hereto as Exhibit B.

Evaluation and Recommendation

To assist the Directors in their consideration of the Amended
Sub-Advisory Agreement at the Board meeting held on December 13, 1995, ABIM
presented a comparative analysis, under the existing and pro forma advisory
fees, of the performance and expenses of the Fund. The Directors took into
account (1) the nature and quality of the advisory services rendered and the
results achieved by ABIM in the management of the Fund, giving due consideration
to the likely impact of the proposed fee on relative performance; (2) the
relationship of the proposed advisory fee schedule to the fee schedules of
comparable mutual funds, the impact of the proposed increase in advisory fees on
the Fund's expense ratio and the relationship of the Fund's pro forma expense
ratio to the expense ratios of comparable mutual funds; (3) the costs borne by
ABIM in providing investment advisory services to the Fund, including the
expansion of ABIM's research and administrative efforts; (4) the profits of ABIM
in providing services to the Fund; (5) the extent to which the economies of
scale that ICC might experience as a result of growth in the Fund's assets would
be shared with the Fund; and (6) research services received in return for
allocation of brokerage. With respect to the nature and quality of services and
the results achieved, the Directors noted the success of the Fund since
inception (1984) in maintaining a highly competitive portfolio.

17
<PAGE>

Description of the Current Sub-Advisory Agreement

The Current Sub-Advisory Agreement, dated as of January 19, 1989, was
last approved by the shareholders on December 6, 1988.

The Current Sub-Advisory Agreement provides that ABIM, in return for
its fee, will (a) provide the Fund with such executive, administrative and
clerical services as are deemed advisable by the Fund's Board of Directors; (b)
determine which issuers and securities shall be represented in the Fund's
portfolio and regularly report thereon to the Fund's Board of Directors; (c)
formulate and implement continuing programs for the purchases and sales of the
securities of such issuers and regularly report thereon to the Fund's Board of
Directors; (d) take, on behalf of the Fund, all actions which appear to the Fund
necessary to carry into effect such purchase and sale programs as aforesaid,
including the placing of orders for the purchase and sale of securities of the
Fund; and (e) obtain and evaluate pertinent information about significant
developments and economic, statistical and financial data, domestic, foreign and
otherwise, whether affecting the economy generally or the Fund, and whether
concerning the individual issuers whose securities are included in the Fund's
portfolio or the activities in which they engage, or with respect to securities
which ICC considers desirable for inclusion in the Fund's portfolio.

The Current Sub-Advisory Agreement provides for compensation to ABIM,
as discussed above.

The Current Sub-Advisory Agreement provides that ABIM will furnish, at
its expense and without cost to the Fund, the services of the President and
certain Vice Presidents of the Fund to the extent that such officers may be
required by the Fund for the proper conduct of its affairs. ABIM will maintain,
at its expense and without cost to the Fund, a trading function in order to
place orders for the purchase and sale of portfolio securities of the Fund. The
Fund assumes and pays or causes to be paid all other expenses of the Fund,
including, without limitation: payments to ICC under the Current Advisory
Agreement, payments to the Fund's distributor under the Fund's plan of
distribution; the charges and expenses of any registrar, any custodian or
depository appointed by the Fund for the safekeeping of its 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 of the
Fund; 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 of
proxy statements and reports to shareholders; fees and travel expenses of
Directors or 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 Fund's Shares; charges and expenses of legal counsel,
including counsel to the Directors of the Fund who are not interested persons
(as defined in the 1940 Act) of the Fund and of independent accountants, in
connection with any matter relating to the Fund; membership dues of industry
associations; interest payable on Fund borrowings; postage; insurance premiums
on property or personnel (including officers and Directors) of the Fund 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 provided herein.

18
<PAGE>

The Current Sub-Advisory Agreement provides for expense limitations.
If, for any fiscal year of the Fund, the amount of the fee which ICC would
otherwise receive from the Fund pursuant to the Current Advisory Agreement
between the Fund and ICC is reduced pursuant to the expense limitation
provisions of the Current Advisory Agreement, the fee which ABIM would otherwise
receive from ICC will also be reduced proportionately. For example, if ICC's fee
from the Fund is reduced by one-third, ABIM's fee from ICC will also be reduced
by one-third. Such reduction will be deducted from the monthly fee otherwise
payable to ABIM by ICC and, if such amount should exceed such monthly fee, ABIM
agrees to repay ICC such amount of its fee previously received with respect to
such fiscal year as may be required to make up the deficiency no later than the
last day of the following month. In no event will ABIM be required to reimburse
ICC for any amount in excess of the fee it receives pursuant to the agreement
during the fiscal year of the Fund in which the reimbursement is required.

The services of ABIM are not to be deemed exclusive, and ABIM is free
to render investment advisory and other services to others, including other
investment companies, and to engage in other activities, so long as its services
under the agreement are not impaired thereby. Partners of ABIM may serve as
officers or Directors of the Fund, the Fund's officers or Directors may serve as
officers or partners of ABIM, to the extent permitted by law, and partners of
ABIM are not prohibited from engaging in any other business activity or from
rendering services to any other person, or from serving as partners, officers,
trustees or directors of any other firm, trust or corporation, including other
investment companies.

Following the expiration of its initial two-year term, the Current
Sub-Advisory Agreement continues in force and effect from year to year, provided
that such continuance is approved at least annually by the Fund's Board or by
the vote of a majority of the outstanding voting securities of the Fund, and by
the affirmative vote of a majority of the Directors who are not parties to the
agreement or "interested persons" of a party to the agreement (other than as
Directors of the Fund) by votes cast in person at a meeting specifically called
for such purpose.

The Current Sub-Advisory Agreement may be terminated, without the
payment of any penalty, by the Fund upon a vote of the Fund's Board of
Directors, by a vote of a majority of Fund's outstanding voting securities or by
ICC, upon sixty days' written notice to the other party. The agreement
automatically terminates in the event of its assignment.

The Current Sub-Advisory Agreement obligates ABIM, in the performance
of its duties under the agreement, to exercise care and diligence and to act in
good faith and to use its best efforts within reasonable limits to ensure the
accuracy of all services performed under the agreement, but ABIM is not liable
for any act or omission which does not constitute willful misfeasance, bad faith
or gross negligence on the part of ABIM or its officers, partners or employees,
or reckless disregard by ABIM of its duties under the agreement.

Alex. Brown Investment Management

ABIM is a registered investment advisor that had under management as of
January 31, 1996 approximately $4.4 billion, including assets of the Fund and
the assets of ABIM's other clients. Buppert, Behrens & Owen, Inc., 135 East
Baltimore Street, Baltimore, Maryland 21202, which is a company organized and
owned by three employees of ABIM, owns a 49% limited partnership interest and a
1% general partnership interest in ABIM. Alex. Brown, 135 East Baltimore Street,
Baltimore, Maryland 21202, which is a wholly-owned subsidiary of Alex. Brown
Incorporated, owns a 1% general partnership interest in ABIM. Alex. Brown
Incorporated, which is also located at 135 East Baltimore Street, Baltimore,
Maryland, 21202, owns the remaining 49% limited partnership interest.

19
<PAGE>

The following information is provided for each general partner and the
principal executive officer of ABIM. It includes his or her name, position with
ABIM, address and principal occupation.
<TABLE>
<CAPTION>
Name and Position
with ABIM Address Principal Occupation
------------------ -------- --------------------
<S> <C> <C>
Buppert, Behrens & Owen, Inc. 135 East Baltimore Street N/A
General Partner Baltimore, Maryland 21202

Alex. Brown & Sons 135 East Baltimore Street N/A
Incorporated Baltimore, Maryland 21202
General Partner

J. Dorsey Brown, III 135 East Baltimore Street Managing Director, Alex. Brown & Sons
Chief Executive Officer Baltimore, Maryland 21202 Incorporated
</TABLE>

For the fiscal year ended December 31, 1995, ICC paid ABIM an aggregate
fee of $1,541,502 for sub-advisory services. For such fiscal year, the Fund
paid ICC an aggregate fee (net of voluntary fee waivers of $287,343) of
$2,297,474 for advisory services, an aggregate fee of $550,000 for transfer
agency services and an aggregate fee of $113,878 for accounting services. For
the fiscal year ended March 31, 1995, the Fund paid the Distributor an aggregate
distribution fee of $1,541,502. Such services will continue to be provided after
the approvals of Proposals 3 and 4.

Please refer to Proposal 3 -- "Investment Company Capital Corp." on
page [__] for information regarding ownership in Alex. Brown Incorporated by
Directors and officers of the Fund.

Comparison between the Amended Sub-Advisory Agreement and the Current
Sub-Advisory Agreement

The terms of the Amended Sub-Advisory Agreement and the Current
Sub-Advisory Agreement are effectively the same, except for provisions regarding
compensation, as discussed above. The sub-advisory fee is paid by the Advisor
and therefore does not have a direct effect on Fund expenses. A comparison of
the existing and pro forma advisory fees appears under Proposal 3 -- "Comparison
between the Amended Advisory Agreement and the Current Advisory Agreement.

For the fiscal year ended December 31, 1995, the aggregate fee paid by
ICC to ABIM was $1,541,502. If the proposed fee had been in effect, ABIM would
have received $2,535,662, which equals a 64% increase.

20
<PAGE>

Other Funds Advised by ABIM with Similar Investment Objectives

ICC acts as advisor and ABIM acts as sub-advisor to two funds which
have investment objectives similar to those of the Fund. The following table
provides comparative information on fees paid by ICC to ABIM pursuant to
sub-advisory agreements in effect for such funds.
<TABLE>
<CAPTION>
Sub-Advisory Fee
Size of Fund (as a percentage of
Fund (000's) average net assets)
- ---- ------------- -------------------
<S> <C>
Flag Investors Value Builder Fund, Inc.* $147,327 .65% (net of fee
waivers)**

Flag Investors Equity Partners Fund, Inc. *** $ 40,771 .65% (net of fee
waivers)****
</TABLE>

- -------------------------
* Information given for fiscal year ended March 31, 1995.
** Absent fee waivers, sub-advisory fees would be ___% of the fund's average
net assets.
*** Information given for fiscal period ended May 31, 1995.
**** Absent fee waivers, sub-advisory fees would be ___% of the fund's average
net assets.

Shareholder Approval of the Amended Sub-Advisory Agreement

Approval of the Amended Sub-Advisory Agreement requires the affirmative
vote of a majority of the outstanding Shares of the Fund. For purposes of this
proposal, "majority of the outstanding Shares" means the vote of (i) 67% or more
of the Fund's outstanding Shares present at the Meeting, if the holders of more
than 50% of the outstanding Shares of the Fund are present or represented by
proxy, or (ii) more than 50% of the Fund's outstanding Shares, whichever is
less.

Proposals 3 and 4 are mutually contingent. Accordingly, unless both are
approved, neither will take effect.

THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS OF THE FUND VOTE FOR
APPROVAL OF THE AMENDED SUB-ADVISORY AGREEMENT

21
<PAGE>

ADDITIONAL INFORMATION

Directors and Executive Officers

Information about the Fund's current Directors and principal executive
officers, including their names, positions with the Fund, length of such
positions, ages, principal occupations or employment during the past five years
and amount of Shares beneficially owned is set forth below. Each officer of the
Fund will hold such office until a successor has been elected by the Board of
Directors.

W. James Price* Director and 71 See "Information ***
Chairman of the Regarding Nominees."
Board since 1983.

James J. Cunnane Director since 57 See "Information ***
1994. Regarding Nominees."

Robert S. Killebrew, Jr.* Director since 56 Managing Director, ***
1987. Alex. Brown & Sons
Incorporated; Certified
Financial Analyst
and Investment
Advisor; Formerly,
Senior Portfolio
Manager, Brown
Asset Management,
a division of Alex.
Brown & Sons
Incorporated (registered
investment advisor),
1974-1995.

John F. Kroeger Director since 71 See "Information ***
1983. Regarding Nominees."

Louis E. Levy Director since 63 See "Information ***
1994. Regarding Nominees."

Eugene J. McDonald Director since 63 See "Information ***
1992. Regarding Nominees."

Truman T. Semans* Director since 68 See "Information ***
1987. Regarding Nominees."

Harry Woolf Director since 72 See "Information ***
1983 Regarding Nominees."

Bruce E. Behrens President since 51 Vice President and ***
[19__]. Portfolio Manager,
Alex. Brown Investment
Management; Vice
President and
Treasurer, Buppert,
Behrens & Owen, Inc.
(registered investment
advisor)
</TABLE>

22
<PAGE>

J. Dorsey Brown, III Executive Vice 56 Managing Director, ***
President since Alex. Brown & Sons
[19__]. Incorporated; Chief
Executive Officer and,
formerly, General
Partner, Alex. Brown
Investment Management.

Richard T. Hale Vice President 50 See "Information ***
since [1990]. Regarding Nominees."

Hobart C. Buppert Vice President 49 Vice President and ***
since 1983. Portfolio Manager,
Alex. Brown Investment
Management; President,
Buppert, Behrens &
Owen, Inc.

Lee S. Owen Vice President 48 Vice President and ***
since [19__]. Portfolio Manager,
Alex. Brown Investment
Management (registered
investment advisor);
Vice President and
Secretary, Buppert,
Behrens & Owen, Inc.

Edward J. Veilleux Vice President 52 Principal, Alex. Brown ***
since 1983. & Sons Incorporated;
President, Investment
Company Capital Corp.
(registered investment
advisor); Vice President,
Armata Financial Corp.
(registered Broker-
dealer).

Liam D. Burke Vice President 40 Telecommunications ***
since 1995. Analyst, Alex. Brown
Investment
Management, 1994 -
Present; Formerly,
Telecommunications
Analyst, Ferris, Baker
Watts, Inc. (brokerage
services)and Managing
Director, Frey and Co.
(investment banking).

</TABLE>

23
<PAGE>

Business Experience Shares
Position With during the Past Five Years, Beneficially Owned
Name the Fund Age including all Directorships as of December 31, 1995**
---- ---------- --- ----------------------------- -------------------------
<S> <C> <C> <C> <C>
Gary V. Fearnow Vice President 51 Managing Director, ***
since 1986. Alex. Brown & Sons
Incorporated and
Manager, Special
Products Department,
Alex. Brown & Sons
Incorporated.

Brian C. Nelson Vice President and 36 Vice President, Alex. ***
Secretary since Brown & Sons
1987. Incorporated,
Investment Company
Capital Corp.
(registered investment
advisor) and Armata
Financial Corp.
(registered broker-
dealer).

Joseph A. Finelli Treasurer since 39 Vice President, Alex. ***
1995. Brown & Sons
Incorporated and
Treasurer, The
Glenmede Fund, Inc.
and The Glenmede
Portfolios (mutual
funds), 1995 - Present;
Formerly, Vice
President and
Treasurer, The
Delaware Group of
Funds (mutual funds)
and Vice President,
Delaware Management
Company Inc.
(investments), 1980 -
1995.

Laurie D. DePrine Assistant Secretary 30 Asset Management ***
since [1992]. Department, Alex.
Brown & Sons
Incorporated, 1991 -
Present; Formerly,
student.
</TABLE>
- ---------------------

* "Interested person" within the meaning of the 1940 Act. Mr. Price
will be treated by the Fund as if he could be deemed to be an
"interested person". Messrs. Killebrew and Semans are Managing
Directors of the Distributor.

** This information has been provided by each Director and officer of
the Fund.

*** As of December 31, 1995, to Fund management's knowledge, the Directors
and executive officers (nineteen persons) of the Fund, individually and
as a group, beneficially owned less than 0.05% of the outstanding
Shares.

24
<PAGE>

Independent Accountants

A majority of the Fund's Board of Directors who are not "interested
persons" of the Fund have selected Coopers & Lybrand L.L.P. as the independent
accountants of the Fund for the fiscal year ending December 31, 1996. If
requested by a shareholder either in writing or by telephone in advance of the
Meeting, a representative of Coopers & Lybrand L.L.P. will be present at the
Meeting to make a statement if desired and to be available to respond to
appropriate questions from shareholders. Such request should be directed to the
Fund by writing to the Fund, P.O. Box 17250, Baltimore, Maryland, 21203, or by
calling the Fund at 1-800-553-8080.

Beneficial Owners

To the knowledge of Fund Management, as of January 11, 1996, the
following were beneficial owners of 5% or more of the outstanding Shares.
<TABLE>
<CAPTION>

Amount of Percent of
Name and Address Beneficial Ownership Total Shares Outstanding
- ---------------- -------------------- -------------------------
<S> <C> <C>
Alex. Brown & Sons Incorporated Class A- 9,441,322.199 Shares 28.56%
135 East Baltimore Street Class B- 114,258.650 Shares 22.24%
Baltimore, Maryland 21202 Class D- 391,466.389 Shares 18.75%
</TABLE>

Submission of Shareholder Proposals

As a Maryland corporation, the Fund is not required to hold annual
shareholder meetings, except in certain limited circumstances. Shareholders who
wish to present a proposal for action at the next meeting or suggestions as to
nominees for the Board of Directors should submit the proposal or suggestions to
be considered to the Fund within a reasonable time in advance of any such
meeting for inclusion in the Fund's proxy statement and form of proxy for such
meeting as is held. The Nominating Committee of the Board of Directors will give
consideration to shareholder suggestions as to nominees for the Board of
Directors. Shareholders retain the right, under limited circumstances, to
request that a meeting of shareholders be held for the purpose of considering
the removal of a Director from office, and if such a request is made, the Fund
will assist with shareholder communications in connection with the meeting.

Required Vote

Approval of Proposal 1 requires the affirmative vote of a majority of
all votes cast at the meeting provided that a majority of shareholders entitled
to vote is present in person or by proxy at the Meeting. Proposals 2, 3 and 4
require the affirmative vote of a majority of the outstanding Shares of the
Fund. As defined in the Act, "majority of the outstanding shares" means the vote
of (i) 67% or more of the Fund's outstanding Shares present at a meeting, if the
holders of more than 50% of the outstanding Shares of the Fund are present or
represented by proxy, or (ii) more than 50% of the Fund's outstanding Shares,
whichever is less. Proposals 3 and 4 are mutually contingent.

Abstentions and "broker non-votes" will not be counted for or against
any proposal to which they relate, but will be counted for purposes of
determining whether a quorum is present. Abstentions [and "broker non-votes"]
will be counted as votes present for purposes of determining a "majority of
votes cast" and a "majority of the outstanding voting securities" present at the
Meeting, and will therefore have the effect of counting against the proposal to
which they relate.

Other Matters

No business other than the matters described above is expected to come
before the Meeting, but should any other matter requiring a vote of shareholders
arise, including any question as to an adjournment of the Meeting, the persons
named in the enclosed proxy will vote thereon according to their best judgment
in the interest of the Fund.

SHAREHOLDERS WHO DO NOT EXPECT TO BE PRESENT AT THE SPECIAL MEETING AND WHO
WISH TO HAVE THEIR SHARES VOTED ARE REQUESTED TO FILL IN, DATE AND SIGN THE
ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED
IF MAILED IN THE UNITED STATES.

By Order of the Directors,

Brian C. Nelson
Vice President and Secretary

Dated: [_____________], 1996

25
<PAGE>

EXHIBIT A

FORM OF
AMENDED INVESTMENT ADVISORY AGREEMENT

THIS AGREEMENT is made as of the ____ day of _______, 1996 by and
between FLAG INVESTORS TELEPHONE INCOME FUND, INC., a Maryland corporation (the
"Fund"), and INVESTMENT COMPANY CAPITAL CORP., a Maryland corporation (the
"Advisor").

WHEREAS, the Fund is registered as an open-end, diversified, management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"); and

WHEREAS, the Advisor is registered as an investment advisor under the
Investment Advisers Act of 1940, as amended, and engages in the business of
acting as an investment advisor; and

WHEREAS, the Fund and the Advisor desire to enter an agreement to
provide investment advisory and administrative services for the Fund on the
terms and conditions hereinafter set forth.

NOW THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, the receipt whereof is
hereby acknowledged, the parties hereto agree as follows:

1. Appointment of Investment Advisor. The Fund hereby appoints the
Advisor to act as the Fund's investment advisor. The Advisor shall manage the
Fund's affairs and shall supervise all aspects of the Fund's operations (except
as otherwise set forth herein), including the investment and reinvestment of the
cash, securities or other properties comprising the Fund's assets, subject at
all times to the policies and control of the Fund's Board of Directors. The
Advisor shall give the Fund the benefit of its best judgment, efforts and
facilities in rendering its services as Advisor.

2. Delivery of Documents. The Fund has furnished the Advisor with
copies properly certified or authenticated of each of the following:

(a) The Fund's Articles of Incorporation, filed with
the Secretary of State of the State of Maryland on November 4, 1988 and
all amendments thereto (such Articles of Incorporation, as presently in
effect and as they shall from time to time be amended, are herein
called the "Articles of Incorporation");

(b) The Fund's By-Laws and all amendments thereto
(such By-Laws, as presently in effect and as they shall from time to
time be amended, are herein called the "By-Laws");

(c) Resolutions of the Fund's Board of Directors and
shareholders authorizing the appointment of the Advisor and approving
this Agreement;

(d) The Fund's Notification of Registration Filed
Pursuant to Section 8(a) of the Investment Company Act of 1940 on Form
N-8A under the 1940 Act as filed with the Securities and Exchange
Commission (the "SEC") on October 21, 1983;

26
<PAGE>

(e) The Fund's Registration Statement on Form N-1
under the Securities Act of 1933, as amended (the "1933 Act") (File No.
2-87336) and under the 1940 Act as filed with the SEC on October 21,
1983 relating to the shares of the Fund, and all amendments thereto;
and

(f) The Fund's most recent prospectus (such
prospectus, as presently in effect and all amendments and supplements
thereto are herein called "Prospectus").

The Fund will furnish the Advisor from time to time with copies,
properly certified or authenticated, of all amendments or supplements to the
foregoing, if any, and all documents, notices and reports filed with the SEC.

3. Duties of Investment Advisor. In carrying out its obligations under
Section I hereof, the Advisor shall:

(a) supervise and manage all aspects of the Fund's
operations, except for distribution services;

(b) formulate and implement continuing programs for
the purchases and sales of securities, consistent with the investment
objective and policies of the Fund;

(c) provide the Fund with such executive,
administrative and clerical services as are deemed advisable by the
Fund's Board of Directors;

(d) provide the Fund with, or obtain for it, adequate
office space and all necessary office equipment and services, including
telephone service, utilities, stationery, supplies and similar items
for the Fund's principal office;

(e) obtain and evaluate pertinent information about
significant developments and economic, statistical and financial data,
domestic, foreign or otherwise, whether affecting the economy generally
or the Fund, and whether concerning the individual issuers whose
securities are included in the Fund's portfolio or the activities in
which they engage, or with respect to securities which the Advisor
considers desirable for inclusion in the Fund's portfolio;

(f) determine which issuers and securities shall be
represented in the Fund's portfolio and regularly report thereon to the
Fund's Board of Directors;

(g) take all actions necessary to carry into effect
the Fund's purchase and sale programs;

(h) supervise the operations of the Fund's transfer
and dividend disbursing agent;

(i) provide the Fund with such administrative and
clerical services for the maintenance of certain shareholder records,
as are deemed advisable by the Fund's Board of Directors; and,

(j) arrange, but not pay for, the periodic updating
of prospectuses and supplements thereto, proxy material, tax returns,
reports to the Fund's shareholders and reports to and filings with the
SEC and state Blue Sky authorities.

27
<PAGE>

4. Broker-Dealer Relationships. In the event that the Advisor is
responsible for decisions to buy and sell securities for the Fund, broker-dealer
selection, and negotiation of its brokerage commission rates, the Advisor's
primary consideration in effecting a security transaction will be execution at
the most favorable price. In performing this function the Advisor shall comply
with applicable policies established by the Board of Directors and shall provide
the Board of Directors with such reports as the Board of Directors may require
in order to monitor the Fund's portfolio transaction activities. In certain
instances the Advisor may make purchases of underwritten issues at prices which
include underwriting fees. In selecting a broker-dealer to execute each
particular transaction, the Advisor will take the following into consideration:
the best net price available; the reliability, integrity and financial condition
of the broker-dealer; the size of and difficulty in executing the order; and the
value of the expected contribution of the broker-dealer to the investment
performance of the Fund on a continuing basis. Accordingly, the price to the
Fund in any transaction may be less favorable than that available from another
broker-dealer if the difference is reasonably justified by other aspects of the
portfolio execution, services offered. Subject to such policies as the Board of
Directors may determine, the Advisor shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of its having caused the Fund to pay a broker-dealer that
provides brokerage and research services to the Advisor an amount of commission
for effecting a portfolio investment transaction in excess of the amount of
commission another broker-dealer would have charged for effecting that
transaction, if the Advisor determines in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker-dealer, viewed in terms of either that
particular transaction or the Advisor's overall responsibilities with respect to
the Fund. The Advisor is further authorized to allocate the orders placed by it
on behalf of the Fund to such broker-dealers who also provide research or
statistical material or other services to the Fund or the Advisor. Such
allocation shall be in such amounts and proportions as the Advisor shall
determine and the Advisor will report on said allocation regularly to the Board
of Directors of the Fund, indicating the broker-dealers to whom such allocations
have been made and the basis therefor.

Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc., and subject to seeking the most favorable price and
execution available and such other policies as the Directors may determine, the
Advisor may consider services in connection with the sale of shares of the Fund
as a factor in the selection of broker-dealers to execute portfolio transactions
for the Fund.

Subject to the policies established by the Board of Directors in
compliance with applicable law, the Advisor may direct Alex. Brown & Sons
Incorporated ("Alex. Brown") to execute portfolio transactions for the Fund on
an agency basis. The commissions paid to Alex. Brown must be, as required by
Rule 17e-1 under the 1940 Act, "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." If the purchase or sale of securities consistent
with the investment policies of the Fund or one or more other account of the
Advisor is considered at or about the same time, transactions in such securities
will be allocated among the accounts in a manner deemed equitable by the
Advisor. Alex. Brown and the Advisor may combine such transactions, in
accordance with applicable laws and regulations, in order to obtain the best net
price and most favorable execution.

The Fund will not deal with the Advisor or Alex. Brown in any
transaction in which the Advisor or Alex. Brown acts as a principal with respect
to any part of the Fund's order. 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 policies established by the Board of
Directors in compliance with rules of the SEC.

5. Control by Board of Directors. Any management or supervisory
activities undertaken by the Advisor pursuant to this Agreement, as well as any
other activities undertaken by the Advisor on behalf of the Fund pursuant
thereto, shall at all times be subject to any applicable directives of the Board
of Directors of the Fund.

28
<PAGE>

6. Compliance with Applicable Requirements. In carrying out its
obligations under this Agreement, the Advisor shall at all times conform to:

(a) all applicable provisions of the 1940 Act and any
rules and regulations adopted thereunder;

(b) the provisions of the Registration Statement of
the Fund under the 1933 Act and the 1940 Act;

(d) the provisions of the By-Laws; and

(e) any other applicable provisions of state and
federal law.

7. Expenses. The expenses connected with the Fund shall be allocable
between the Fund and the Advisor as follows:

(a) The Advisor shall furnish, at its expense and
without cost to the Fund, the services of and one or more officers of
the Fund, to the extent that such officers may be required by the Fund
for the proper conduct of its affairs.

(b) The Fund assumes and shall pay or cause to be
paid all other expenses of the Fund, including, without limitation:
payments to the Fund's distributor under the Fund's plan of
distribution; the charges and expenses of any registrar, any custodian
or depository appointed by the Fund for the safekeeping of its 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 of the
Fund; 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 of proxy statements and
reports to shareholders; fees and travel expenses of Directors or
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 Fund's shares; charges and
expenses of legal counsel, including counsel to the Directors of the
Fund who are not interested persons (as defined in the 1940 Act) of the
Fund and of independent certified public accountants, in connection
with any matter relating to the Fund; membership dues of industry
associations; interest payable on Fund borrowings; postage; insurance
premiums on property or personnel (including officers and Directors) of
the Fund 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 provided
herein.

8. Delegation of Responsibilities.

(a) Subject to the approval of the Board of Directors
and shareholders of the Fund, the Advisor may delegate to a sub-advisor
certain of its duties enumerated in Section 2 hereof, provided that the
Advisor shall continue to supervise the performance of any such
sub-advisor and shall report regularly thereon to the Fund's Board of
Directors. The Advisor shall not be responsible for any such
sub-advisor's performance under a sub-advisory agreement.

29
<PAGE>

(b) The Advisor may, but shall not be under any duty
to, perform services on behalf of the Fund which are not required by
this Agreement upon the request of the Fund's Board of Directors. Such
services will be performed on behalf of the Fund and the Advisor's
charge in rendering such services may be billed monthly to the Fund,
subject to examination by the Fund's independent certified public
accountants. Payment or assumption by the Advisor of any Fund expense
that the Advisor is not required to pay or assume under this Agreement
shall not relieve the Advisor of any of its obligations to the Fund nor
obligate the Advisor to pay or assume any similar Fund expenses on any
subsequent occasions.

9. Compensation. For the services to be rendered and the expenses
assumed by the Advisor, the Fund shall pay to the Advisor monthly compensation
at an annual rate of: .85% of the first $100 million of the Fund's average daily
net assets, .75% of the next $100 million of the Fund's average daily net
assets, .70% of the next $100 million of the Fund's average daily net assets,
.65% of the next $200 million of the Fund's average daily net assets, .58% of
the next $500 million of the Fund's average daily net assets, .53% of the next
$500 million of the Fund's average daily net assets, and .50% of that portion of
the Fund's average daily net assets in excess of $1.5 billion.

Except as hereinafter set forth, compensation under this Agreement
shall be calculated and accrued daily and the amounts of the daily accruals
shall be paid monthly. If this Agreement becomes effective subsequent to the
first day of a month or shall terminate before the last day of a month,
compensation for that part of the month this Agreement is in effect shall be
prorated in a manner consistent with the calculation of the fees as set forth
above. Subject to the provisions of Section 10 hereof, payment of the Advisor's
compensation for the preceding month shall be made as promptly as possible after
completion of the computations contemplated by Section 10 hereof.

10. Expense Limitation. In the event the operating expenses of the
Fund, including all investment advisory and administrative fees, for any fiscal
year ending on a date on which this Agreement is in effect, exceed the expense
limitations applicable to the Fund imposed by the securities laws or regulations
thereunder of any state in which the Fund's shares are qualified for sale, as
such limitations may be raised or lowered from time to time, the Advisor shall
reduce its investment advisory fee to the extent of its share of such excess
expenses and, if required pursuant to any such laws or regulations, will
reimburse the Fund for its share of annual operating expenses in excess of any
expense limitation that may be applicable; provided, however, there shall be
excluded from such expenses the amounts of any interest, taxes, brokerage
commissions and extraordinary expenses (including, but not limited to, legal
claims and liabilities and litigation costs and any indemnification related
thereto) paid or payable by the Fund. Such reduction, if any, shall be computed
and accrued daily, shall be settled on a monthly basis and shall be based upon
the expense limitation applicable to the Fund.

11. Non-Exclusivity. The services of the Advisor to the Fund are not to
be deemed to be exclusive, and the Advisor shall be free to render investment
advisory or other services to others (including other investment companies) and
to engage in other activities, so long as its services under this Agreement are
not impaired thereby. It is understood and agreed that officers or directors of
the Advisor may serve as officers or Directors of the Fund, and that officers or
Directors of the Fund may serve as officers or directors of the Advisor to the
extent permitted by law; and that the officers and directors of the Advisor are
not prohibited from engaging in any other business activity or from rendering
services to any other person, or from serving as partners, officers, trustees or
directors of any other firm, trust or corporation, including other investment
companies.

12. Term. This Agreement shall become effective at 12:01 a.m. on the
date hereof and shall continue in force and effect, subject to Section 14
hereof, for two years from the date hereof.

30
<PAGE>

13. Renewal. Following the expiration of its initial two-year term,
this Agreement shall continue in force and effect from year to year, provided
that such continuance is specifically approved at least annually:

(a) (i) by the Fund's Board of Directors or (ii) by
the vote of a majority of the outstanding voting securities of the Fund
(as defined in Section 2(a)(42) of the 1940 Act); and

(b) by the affirmative vote of a majority of the
Directors who are not parties to this Agreement or "interested persons"
of a party to this Agreement (other than as Directors of the Fund) by
votes cast in person at a meeting specifically called for such purpose.

14. Termination. This Agreement may be terminated, without the payment
of any penalty, by the Fund upon a vote of the Fund's Board of Directors or a
vote of a majority of the Fund's outstanding voting securities (as defined in
Section 2(a)(42) of the 1940 Act) or by the Advisor, upon sixty (60) days'
written notice to the other party. The notice provided for herein may be waived
by either party. This Agreement shall automatically terminate in the event of
its assignment (as defined in Section 2(a)(4) of the 1940 Act).

15. Liability of Advisor. In the performance of its duties hereunder,
the Advisor shall be obligated to exercise care and diligence and to act in good
faith and to use its best efforts within reasonable limits to ensure the
accuracy of all services performed under this Agreement, but the Advisor shall
not be liable for any act or omission which does not constitute willful
misfeasance, bad faith or gross negligence on the part of the Advisor or its
officers, directors or employees, or reckless disregard by the Advisor of its
duties under this Agreement.

16. Notices. Any notices under this Agreement shall be in writing,
addressed and delivered or mailed postage paid to the other party at such
address as such other party may designate for the receipt of such notice. Until
further notice to the other party, it is agreed that the address of the Fund and
the Advisor for this purpose shall be 135 East Baltimore Street, Baltimore,
Maryland 21202.

17. Questions of Interpretation. Any question of interpretation of any
term or provision of this Agreement having a counterpart in or otherwise derived
from a term or provision of the 1940 Act shall be resolved by reference to such
term or provision of the 1940 Act and to interpretations thereof, if any, by the
United States Courts or in the absence of any controlling decision of any such
court, by rules, regulations or orders of the SEC issued pursuant to the 1940
Act. In addition, where the effect of a requirement of the 1940 Act reflected in
any provision of this Agreement is revised by rule, regulation or order of the
SEC, such provision shall be deemed to incorporate the effect of such rule,
regulation or order. Otherwise the provisions of this Agreement shall be
interpreted in accordance with the laws of Maryland.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate by their respective officers on the day and year first
above written.

Attest: FLAG INVESTORS TELEPHONE
INCOME FUND, INC.

___________________________ By:___________________________
Asst. Secretary Vice President and Secretary

Attest: INVESTMENT COMPANY CAPITAL
CORP.

___________________________ By:___________________________
Asst. Secretary

31
<PAGE>

EXHIBIT B

FORM OF
AMENDED SUB-ADVISORY AGREEMENT

THIS AGREEMENT is made as of the ____ day of _______, 1996 by and among
FLAG INVESTORS TELEPHONE INCOME FUND, INC., a Maryland corporation (the "Fund"),
INVESTMENT COMPANY CAPITAL CORP., a Maryland corporation (the "Advisor"), and
ALEX. BROWN INVESTMENT MANAGEMENT, a Maryland limited partnership (the
"Sub-Advisor").

WHEREAS, the Advisor is the investment advisor to the Fund, which is an
open-end, diversified management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"); and

WHEREAS, the Fund and the Advisor wish to retain the Sub-Advisor for
purposes of rendering advisory services to the Fund and the Advisor in
connection with the Advisor's responsibilities to the Fund on the terms and
conditions hereinafter set forth.

NOW THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, the receipt whereof is
hereby acknowledged, the parties hereto agree as follows:

1. Appointment of Sub-Advisor. The Fund hereby appoints the Sub-Advisor
to act as the Fund's Sub-Advisor under the supervision of the Fund's Board of
Directors and the Advisor, and the Sub-Advisor hereby accepts such appointment,
all subject to the terms and conditions contained herein.

2. Delivery of Documents. The Fund has furnished the Sub-Advisor with
copies properly certified or authenticated of each of the following:

(b) The Fund's By-Laws and all amendments thereto
(such By-Laws, as presently in effect and as they shall from time to
time be amended, are herein called the "By-Laws");

(c) Resolutions of the Fund's Board of Directors and
shareholders authorizing the appointment of the Sub-Advisor and
approving this Agreement;

(d) The Fund's Notification of Registration filed
pursuant to Section 8(a) of the Investment Company Act of 1940 on Form
N-8A under the 1940 Act as filed with the Securities and Exchange
Commission (the "SEC") on October 21, 1983;

32
<PAGE>

(f) The Fund's most recent prospectus (such
prospectus, as presently in effect and all amendments and supplements
thereto are herein called "Prospectus").

The Fund will furnish the Sub-Advisor from time to time with copies,
properly certified or authenticated, of all amendments or supplements to the
foregoing, if any, and all documents, notices and reports filed with the SEC.

3. Duties of Sub-Advisor. In carrying out its obligations under Section
I hereof, the Sub-Advisor shall:

(a) provide the Fund with such executive,
administrative and clerical services as are deemed advisable by the
Fund's Board of Directors;

(b) determine which issuers and securities shall be
represented in the Fund's portfolio and regularly report thereon to the
Fund's Board of Directors;

(c) formulate and implement continuing programs for
the purchases and sales of the securities of such issuers and regularly
report thereon to the Fund's Board of Directors;

(d) take, on behalf of the Fund, all actions which
appear to the Fund necessary to carry into effect such purchase and
sale programs as aforesaid, including the placing of orders for the
purchase and sale of securities of the Fund; and

4. Broker-Dealer Relationships. In circumstances when the Sub-Advisor
is responsible for decisions to buy and sell securities for the Fund,
broker-dealer selection, and negotiation of its brokerage commission rates, the
Sub-Advisor's primary consideration in effecting a security transaction will be
execution of orders at the most favorable price on an overall basis. In
performing this function the Sub-Advisor shall comply with applicable policies
established by the Board of Directors and shall provide the Board of Directors
with such reports as the Board of Directors may require in order to monitor the
Fund's portfolio transaction activities. In selecting a broker-dealer to execute
each particular transaction, the Sub-Advisor will take the following into
consideration: the best net price available; the reliability, integrity and
financial condition of the broker-dealer; the size of and difficulty in
executing the order; and the value of the expected contribution of the
broker-dealer to the investment performance of the Fund on a continuing basis.
Accordingly, the price to the Fund in any transaction may be less favorable than
that available from another broker-dealer if the difference is reasonably
justified by other aspects of the portfolio execution services offered. Subject
to such policies as the Board of Directors may determine, the Sub-Advisor shall
not be deemed to have acted unlawfully or to have breached any duty created by
this Agreement or otherwise solely by reason of its having caused the Fund to
pay a broker-dealer that provides brokerage and research services to the
Sub-Advisor an amount of commission for effecting a portfolio investment
transaction in excess of the amount of commission another broker-dealer would
have charged for effecting that transaction, if the Sub-Advisor determines in
good faith that such amount of commission was reasonable in relation to the
value of the brokerage and research services provided by such broker-dealer,
viewed in terms of either that particular transaction or the Sub-Advisor's
overall responsibilities with respect to the Fund. The Sub-Advisor is further
authorized to allocate the orders placed by it on behalf of the Fund to such
broker-dealers who also provide research or statistical material or other
services to the Fund or the Sub-Advisor. Such allocation shall be in such
amounts and proportions as the Sub-Advisor shall determine and the Sub-Advisor
will report on said allocation regularly to the Board of Directors of the Fund,
indicating the brokers to whom such allocations have been made and the basis
therefor.

33
<PAGE>

Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc., and subject to seeking the most favorable price and
execution available and such other policies as the Directors may determine, the
Sub-Advisor may consider services in connection with the sale of shares of the
Fund as a factor in the selection of broker-dealers to execute portfolio
transactions for the Fund.

Subject to the policies established by the Board of Directors in
compliance with applicable law, the Advisor may direct Alex. Brown & Sons
Incorporated ("Alex. Brown") to execute portfolio transactions for the Fund on
an agency basis. The commissions paid to Alex. Brown must be, as required by
Rule 17e-1 under the 1940 Act, "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." If the purchase or sale of securities consistent
with the investment policies of the Fund or one or more other accounts of the
Sub-Advisor is considered at or about the same time, transactions in such
securities will be allocated among the accounts in a manner deemed equitable by
the Sub-Advisor. Alex. Brown and the Sub-Advisor may combine such transactions,
in accordance with applicable laws and regulations, in order to obtain the best
net price and most favorable execution.

The Fund will not deal with the Sub-Advisor or Alex. Brown in any
transaction in which the Sub-Advisor or Alex. Brown acts as a principal with
respect to any part of the Fund's order. 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 policies established by the Board of
Directors in compliance with rules of the SEC.

5. Control by Fund's Board of Directors. Any recommendations concerning
the Fund's investment program for the Fund proposed by the Sub-Advisor to the
Fund and the Advisor pursuant to this Agreement, as well as any other activities
undertaken by the Sub-Advisor on behalf of the Fund pursuant hereto, shall at
all times be subject to any applicable directives of the Board of Directors of
the Fund.

6. Compliance with Applicable Requirements. In carrying out its
obligations under this Agreement, the Sub-Advisor shall at all times conform to:

(a) all applicable provisions of the 1940 Act and any
rules and regulations adopted thereunder, as amended;

(b) the provisions of the Registration Statement of
the Fund under the 1933 Act and the 1940 Act;

(d) the provision of the By-Laws; and

(e) any other applicable provisions of state and
federal law.

7. Expenses. The expenses connected with the Fund shall be allocable
between the Fund, the Sub-Advisor and the Advisor as follows:

(a) The Sub-Advisor shall furnish, at its expense and
without cost to the Fund, the services of the President and certain
Vice Presidents of the Fund, to the extent that such officers may be
required by the Fund for the proper conduct of its affairs.

34
<PAGE>

(b) The Sub-Advisor shall maintain, at its expense
and without cost to the Fund, a trading function in order to carry out
its obligations under Section 3 hereof to place orders for the purchase
and sale of portfolio securities for the Fund.

(c) The Fund assumes and shall pay or cause to be
paid all other expenses of the Fund, including, without limitation:
payments to the Advisor under the Investment Advisory Agreement between
the Fund and the Advisor, payments to the Fund's distributor under the
Fund's plan of distribution; the charges and expenses of any registrar,
any custodian or depository appointed by the Fund for the safekeeping
of its 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 of the Fund; 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 of proxy statements and reports to shareholders; fees and
travel expenses of Directors or 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
Fund's shares; charges and expenses of legal counsel, including counsel
to the Directors of the Fund who are not "interested persons" (as
defined in the 1940 Act) of the Fund and of independent certified
public accountants, in connection with any matter relating to the Fund;
membership dues of industry associations; interest payable on Fund
borrowings; postage; insurance premiums on property or personnel
(including officers and Directors) of the Fund 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 provided herein.

8. Compensation. For the services to be rendered hereunder by the
Sub-Advisor, the Advisor shall pay to the Sub-Advisor monthly compensation equal
to the sum of the amounts determined by applying the following annual rates to
the Fund's average daily net assets: .60% of the first $100 million of the
Fund's average daily net assets, .55% of the next $100 million of the Fund's
average daily net assets, .50% of the next $100 million of the Fund's average
daily net assets, .45% of the next $200 million of the Fund's average daily net
assets, .40% of the next $500 million of the Fund's average daily net assets,
.37% of the next $500 million of the Fund's average daily net assets, and .35%
of that portion of the Fund's average daily net assets in excess of $1.5
billion. Except as hereinafter set forth, compensation under this Agreement
shall be calculated and accrued daily and the amounts of the daily accruals paid
monthly. If this Agreement becomes effective subsequent to the first day of a
month or shall terminate before the last day of a month, compensation for that
part of the month this Agreement is in effect shall be prorated in a manner
consistent with the calculations of the fees as set forth above. Subject to the
provisions of Section 10 hereof, payment of the Sub-Advisor's compensation for
the preceding month shall be made as promptly as possible after completion of
the computations contemplated in Section 10 hereof.

9. Delegation of Responsibilities. The Sub-Advisor may, but shall not
be under any duty to, perform services on behalf of the Fund which are not
required by this Agreement upon the request of the Fund's Board of Directors.
Such services will be performed on behalf of the Fund and the Sub-Advisor's
charges in rendering such services will be billed monthly to the Fund, subject
to examination by the Fund's independent certified public accountants. Payment
or assumption by the Sub-Advisor of any Fund expense that the Sub-Advisor is not
required to pay or assume under this Agreement shall not relieve the Sub-Advisor
of any of its obligations to the Fund nor obligate the Sub-Advisor to pay or
assume any similar Fund expenses on any subsequent occasions.

35
<PAGE>

10. Expense Limitation. If, for any fiscal year of the Fund, the amount
of the fee which the Advisor would otherwise receive from the Fund pursuant to
the Investment Advisory Agreement between the Fund and the Advisor is reduced
pursuant to the expense limitation provisions of the Investment Advisory
Agreement, the fee which the Sub-Advisor would otherwise receive from the
Advisor pursuant to Section 8 of this Agreement shall also be reduced
proportionately. For example, if the Advisor's fee from the Fund is reduced by
1/3, the Sub-Advisor's fee from the Advisor will also be reduced by 1/3. Such
reduction shall be deducted from the monthly fee otherwise payable to the
Sub-Advisor by the Advisor and, if such amount should exceed such monthly fee,
the Sub-Advisor agrees to repay the Advisor such amount of its fee previously
received with respect to such fiscal year as may be required to make up the
deficiency no later than the last day of the following month. In no event will
the Sub-Advisor be required to reimburse the Advisor for any amount in excess of
the fee it receives pursuant to this Agreement during the fiscal year of the
Fund in which the reimbursement is required.

11. Term. This Agreement shall become effective at 12:01 a.m. on the
date hereof and shall remain in force and effect, subject to Section 13 hereof,
for two years from the date hereof.

12. Renewal. Following the expiration of its initial two-year term,
this Agreement shall continue in force and effect from year to year, provided
that such continuance is specifically approved at least annually:

(a) (i) by the Fund's Board of Directors or (ii) by
the vote of a majority of the outstanding voting securities of the Fund
(as defined in Section 2(a)(42) of the 1940 Act); and

13. Termination. This Agreement may be terminated at any time, without
the payment of any penalty, by vote of the Fund's Board of Directors or by vote
of a majority of the outstanding voting securities of the Fund (as defined in
Section 2(a)(42) of the 1940 Act), on sixty (60) days' written notice to the
Advisor and the Sub-Advisor. This Agreement may be terminated at any time,
without the payment of any penalty, by the Sub-Advisor on sixty (60) days'
written notice to the Fund and the Advisor. The notice provided for herein may
be waived by any person to whom such notice is required. This Agreement shall
automatically terminate in the event of its assignment (as defined in Section
2(a)(4) of the 1940 Act).

14. Non-Exclusivity. The services of the Sub-Advisor to the Advisor and
the Fund are not to be deemed to be exclusive, and the Sub-Advisor shall be free
to render investment advisory or other services to others (including other
investment companies) and to engage in other activities, so long as its services
under this Agreement are not impaired thereby. It is understood and agreed that
partners of the Sub-Advisor may serve as officers or Directors of the Fund, and
that officers or Directors of the Fund may serve as officers or partners of the
Sub-Advisor to the extent permitted by law; and that the partners of the
Sub-Advisor are not prohibited from engaging in any other business activity or
from rendering services to any other person, or from serving as partners,
officers or directors of any other firm or corporation, including other
investment companies.

15. Liability of Sub-Advisor. In the performance of its duties
hereunder, the Sub-Advisor shall be obligated to exercise care and diligence and
to act in good faith and to use its best efforts within reasonable limits to
ensure the accuracy of all services performed under this Agreement, but the Sub-
Advisor shall not be liable for any act or omission which does not constitute
willful misfeasance, bad faith or gross negligence on the part of the
Sub-Advisor or its officers, directors or employees, or reckless disregard by
the Sub-Advisor of its duties under this Agreement.

36
<PAGE>

16. Notices. Any notices under this Agreement shall be in writing,
addressed and delivered or mailed postage paid to the other party at such
address as such other party may designate for the receipt of such notice. Until
further notice to the other party, it is agreed that the address of the
Sub-Advisor, of the Advisor and of the Fund for this purpose shall be 135 East
Baltimore Street, Baltimore, Maryland 21202.

17. Questions of Interpretation. Any question of interpretation of any
term or provision of this Agreement having a counterpart in or otherwise derived
from a term or provision of the 1940 Act shall be resolved by reference to such
term or provision of the 1940 Act and to interpretations thereof, if any, by the
United States Courts or in the absence of any controlling decision of any such
court, by rules, regulations or orders of the SEC issued pursuant to said Act.
In addition, where the effect of a requirement of the 1940 Act reflected in any
provision of this Agreement is revised by rule, regulation or order of the SEC,
such provision shall be deemed to incorporate the effect of such rule,
regulation or order. Otherwise the provisions of this Agreement shall be
interpreted in accordance with the laws of Maryland.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate by their respective officers on the day and year first
above written.

Attest: FLAG INVESTORS TELEPHONE
INCOME FUND, INC.

_______________________ By:______________________________
Vice President and Secretary

Attest: INVESTMENT COMPANY CAPITAL CORP.

_______________________ By:______________________________

Attest: ALEX. BROWN INVESTMENT
MANAGEMENT
By Alex. Brown & Sons
Incorporated, Its General
Partner

_______________________ By:_______________________________

37
<PAGE>

FLAG INVESTORS TELEPHONE INCOME FUND, INC.
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
April 10, 1996

THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF
FLAG INVESTORS TELEPHONE INCOME FUND, INC.

This Proxy is for your use in voting on various matters relating to Flag
Investors Telephone Income Fund, Inc. (the "Fund"). The undersigned
shareholder(s) of the Fund, revoking previous proxies, hereby appoint(s) Edward
J. Veilleux, Brian C. Nelson and Mary E. Connell and each of them (with full
power of substitution) the proxy or proxies of the undersigned to attend the
Special Meeting of Shareholders of the Fund to be held on April 10, 1996 and any
adjournments thereof, to vote all of the shares of the Fund that the signer
would be entitled to vote if personally present at the Special Meeting of
Shareholders and on any other matters brought before the Meeting, all as set
forth in the Notice of Special Meeting of Shareholders. Said proxies are
directed to vote or refrain from voting pursuant to the Proxy Statement as
indicated upon the matters set forth below:

(1) To consider and act upon a proposal to elect a Board of Directors.

____ FOR all nominees listed below ____ WITHHOLD AUTHORITY to vote
for all nominees listed below.

____ FOR all nominees listed below except
those whose names have been stricken.

(Instructions: To withhold authority to vote for any or all of the nominees,
strike a line through the names of such nominee(s) below.)

W. James Price, Charles W. Cole, Jr., James J. Cunnane, Richard T. Hale,
John F. Kroeger, Louis E. Levy, Eugene J. McDonald, Rebecca W. Rimel,
Truman T. Semans, Carl W. Vogt, Harry Woolf

(2) To approve or disapprove a change in the Fund's investment objective
from "high current income and, secondarily, long-term growth of capital
without undue risk" to "current income and long-term growth of capital
without undue risk."

____ FOR ____ AGAINST ____ ABSTAIN

(3) To approve or disapprove an amended investment advisory agreement
between the Fund and Investment Company Capital Corp. ("ICC"),
increasing the advisory fee paid by the Fund to ICC.

____ FOR ____ AGAINST ____ ABSTAIN

(4) To approve or disapprove an amended investment sub-advisory agreement
among the Fund, ICC and Alex. Brown Investment Management ("ABIM"),
increasing the sub-advisory fee paid by ICC to ABIM.

____ FOR ____ AGAINST ____ ABSTAIN

This Proxy will be voted as indicated above. If no indication is made, this
Proxy will be voted FOR the proposals set forth above. The undersigned
acknowledges receipt with this proxy of a copy of the Notice of Special Meeting
of Shareholders and the Proxy Statement of the Board of Directors.

Please Date: Date: _________________, 1996

Please print and sign your name in the space provided
to authorize the voting of your shares as indicated
and return promptly. When signing on behalf of a
corporation, partnership, estate, trust, or in any other
representative capacity, please sign your name and title.
For joint accounts, each joint owner must sign.

_____________________________________ __________________________________
(Signature of Shareholder) (Co-owner signature, if any)

_____________________________________ __________________________________
(Printed Name of Shareholder) (Printed name of co-owner, if any)

PLEASE COMPLETE, SIGN, DATE, AND RETURN THIS PROXY PROMPTLY
USING THE ENCLOSED ENVELOPE.