FLAG INVESTORS COMMUNICATIONS FUND INC, 497, 1998-05-06

FLAG INVESTORS COMMUNICATIONS FUND INC
497, 1998-05-06

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[GRAPHIC OMITTED]
FLAG INVESTORS
COMMUNICATIONS FUND, INC.
(Class A and Class B Shares)
(formerly, Flag Investors Telephone Income Fund, Inc.)

Prospectus & Application -- May 1, 1998
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This mutual fund (the "Fund") is designed to maximize total return. The Fund
will seek to achieve this objective through a combination of long-term growth of
capital and, to a lesser extent, current income. In seeking to achieve this
objective, the Fund invests primarily in common stock, securities convertible
thereto and debt obligations of companies in the communications field.

Shares of the Fund are available through your securities dealer or the Fund's
transfer agent. This Prospectus relates to Flag Investors Class A Shares ("Class
A Shares") and Flag Investors Class B Shares ("Class B Shares") of the Fund. The
separate classes provide you with alternatives as to sales load and Fund
expenses. (See "How to Invest in the Fund.")

This Prospectus sets forth basic information that you should know about the Fund
prior to investing. You should retain it for future reference. A Statement of
Additional Information dated May 1, 1998 has been filed with the Securities and
Exchange Commission (the "SEC") and is hereby incorporated by reference. It is
available upon request and without charge by calling the Fund at (800) 767-FLAG.

TABLE OF CONTENTS

Fee Table .................................. 1
Financial Highlights ....................... 2
Investment Program ......................... 5
Investment Restrictions .................... 7
The Fund's Net Asset Value ................. 7
How to Buy Shares .......................... 7
How to Redeem Shares ....................... 9
Telephone Transactions ..................... 10
How to Choose the Class That Is
Right For You ........................... 11
Dealer Compensation ........................ 11
Dividends and Taxes ........................ 11
Management of the Fund ..................... 12
Investment Advisor and Sub-Advisor ......... 12
Distributor ................................ 13
Custodian, Transfer Agent and
Accounting Services ..................... 14
Performance Information .................... 14
General Information ........................ 14
Application ................................ A-1

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

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

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

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Shareholder Transaction Expenses:
<TABLE>
<CAPTION>
Class A Class B
Shares Shares
Initial Sales Deferred
Charge Sales Charge
Alternative Alternative
--------------- ----------------
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) ........................................... 4.50%* None
Maximum Sales Charge Imposed on Reinvested Dividends ........................... None None
Maximum Deferred Sales Charge (as a percentage of original purchase price
or redemption proceeds, whichever is lower) ................................... 0.50%* 4.00%**
Annual Fund Operating Expenses (as a percentage of average daily net assets):
Management Fees ................................................................ 0.70% 0.70%
12b-1 Fees ..................................................................... 0.25% 0.75%
Other Expenses (including a 0.25% shareholder servicing fee for Class B Shares) 0.16% 0.41%***
----- -------
Total Fund Operating Expenses .................................................. 1.11% 1.86%
===== =======
</TABLE>
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* If you purchase $1 million or more of Class A Shares, you will not have to
pay an initial sales charge. You may, however, be required to pay a
contingent deferred sales charge when you redeem your shares. (See "How to
Buy Shares" and "How to Redeem Shares.")
** You will be required to pay a contingent deferred sales charge if you
redeem your Class B Shares within six years of purchase. The amount of the
charge declines in relation to the time you hold your shares. Class B
Shares will automatically convert to Class A Shares six years after
purchase. (See "How to Redeem Shares.")
*** A portion of the shareholder servicing fee is allocated to your securities
dealer and qualified banks for services provided and expenses incurred in
maintaining your account, responding to your inquiries and providing you
with information about your investment.
<TABLE>
<S> <C> <C> <C> <C>
Example: 1 year 3 years 5 years 10 years
- ------- -------- --------- --------- ------------
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each time period:
Class A Shares ............................................. $56 $79 $103 $ 174
Class B Shares ............................................. $59 $88 $121 $ 180*
You would pay the following expenses on the same investment,
assuming no redemption:
Class B Shares ............................................. $19 $58 $101 $ 180*
</TABLE>
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* 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.

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

The purpose of the above table is to describe the various costs and
expenses that you will bear directly and indirectly when you invest in the Fund.
If you purchase shares of either class through a financial institution, you may
be charged separate fees by that institution.

The rules of the SEC require that the maximum sales charge be reflected in
the above table. However, you may qualify for reduced sales charges or no sales
charge at all. (See "How to Buy Shares.") Due to the continuous nature of Rule
12b-1 fees, you may pay more than the equivalent of the maximum sales charges
permitted by the Conduct Rules of the National Association of Securities
Dealers, Inc. ("NASD Rules") if you hold your shares for a long time.

1
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FINANCIAL HIGHLIGHTS

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The financial highlights included in the following tables are a part of the
Fund's financial statements for the periods indicated and have been audited by
Coopers & Lybrand L.L.P., independent accountants. The financial statements and
financial highlights for the year ended December 31, 1997 and the report thereon
of Coopers & Lybrand L.L.P. are included in the Statement of Additional
Information. Additional performance information is contained in the Fund's
Annual Report for the fiscal year ended December 31, 1997, which can be obtained
at no charge by calling the Fund at (800) 767-FLAG.

(For a Class A Share outstanding throughout each year)
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<TABLE>
<CAPTION>
---------------------------------------------
1997 1996 1995
------------ ------------ ----------------
Per Share Operating Performance:
<S> <C> <C> <C>
Net asset value at beginning of year ......... $ 15.59 $ 14.87 $ 12.30
------- ------- --------

Income from Investment Operations:
Net investment income ........................ 0.27 0.27 0.40
Net realized and unrealized gain/(loss) on
investments ................................ 5.41 1.67 3.58
------- ------- --------
Total from Investment Operations ............. 5.68 1.94 3.98
------- ------- --------

Less Distributions:
Dividends from net investment income and net
realized short-term gains .................. (0.40) (0.38) (0.41)
Distributions from net realized mid-term and
long-term gains ............................ (1.50) (0.84) (1.00)
------- ------- --------
Total distributions .......................... (1.90) (1.22) (1.41)
------- ------- --------
Net asset value at end of year ............... $ 19.37 $ 15.59 $ 14.87
======= ======= ========
Total Return(3) ............................... 37.36% 13.46% 33.44%
Ratios to Average Daily Net Assets:
Expenses ..................................... 1.11% 1.14% 0.93%(4)
Net investment income ........................ 1.07% 1.74% 2.85%(5)

Supplemental Data:
Net assets at end of year (000) .............. $622,865 $ 505,371 $492,454
Portfolio turnover rate ...................... 26% 20% 24%
Average commissions per share(6) ............. $ 0.0598 $ 0.0696 --
</TABLE>
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(1) Restated for two-for-one stock split, effected in the form of a stock
dividend to shareholders of record on October 27, 1989.
(2) Investment Company Capital Corp. became Investment Advisor to the Fund on
January 19, 1989.
(3) Total return excludes the effect of sales charge.
(4) Without the waiver of advisory fees, the ratio of expenses to average daily
net assets would have been 0.99%, 0.99%, 0.98%, 1.07%, 1.17%, 1.13% and
1.07% for the years ended December 31, 1995, 1994, 1993, 1992, 1991, 1990
and 1989, respectively.
(5) Without the waiver of advisory fees, the ratio of net investment income to
average daily net assets would have been 2.79%, 3.07%, 3.06%, 3.66%, 4.13%,
4.32% and 4.28% for the years ended December 31, 1995, 1994, 1993, 1992,
1991, 1990 and 1989, respectively.
(6) Disclosure is required for fiscal years beginning after September 1, 1995.
Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.

2
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FINANCIAL HIGHLIGHTS(continued)

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<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989(1)(2) 1988(1)
---- ---- ---- ---- ---- ---------- -------

<S> <C> <C> <C> <C> <C> <C>
$ 13.70 $ 12.20 $ 11.28 $ 9.57 $ 10.98 $ 8.24 $ 7.50
-------- -------- -------- -------- -------- -------- --------

0.41 0.42 0.42 0.45 0.46 0.52 0.46
(1.27) 1.78 0.93 1.74 (1.29) 3.38 0.97
--------- -------- -------- -------- -------- -------- --------
(0.86) 2.20 1.35 2.19 (0.83) 3.90 1.43
--------- -------- -------- -------- -------- -------- --------

(0.44) (0.42) (0.42) (0.46) (0.45) (0.52) (0.46)
(0.10) (0.28) (0.01) (0.02) (0.13) (0.64) (0.23)
--------- -------- -------- -------- -------- -------- --------
(0.54) (0.70) (0.43) (0.48) (0.58) (1.16) (0.69)
--------- -------- -------- -------- -------- -------- --------
$ 12.30 $ 13.70 $ 12.20 $ 11.28 $ 9.57 $ 10.98 $ 8.24
========= ======== ======== ======== ======== ======== ========
(6.32)% 18.12% 12.35% 23.08% (7.55)% 48.86% 19.90%

0.92%(4) 0.92%(4) 0.92%(4) 0.92%(4) 0.92%(4) 0.93%(4) 0.92%
3.14%(5) 3.12%(5) 3.81%(5) 4.38%(5) 4.54%(5) 4.41%(5) 5.35%

$ 435,805 469,163 $307,641 $238,571 $177,963 $162,449 $102,483
23% 14% 6% 7% 2% 27% 11%
-- -- -- -- -- -- --
</TABLE>

3
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FINANCIAL HIGHLIGHTS (concluded)

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(For a Class B Share outstanding throughout each period)
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<TABLE>
<CAPTION>

For the Year Ended December For the Period
31, January 3, 1995(1)
--------------------------- through
1997 1996 December 31, 1995
---- ---- -------------------
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period .................. $ 15.51 $ 14.83 $ 12.28
--------- --------- ----------
Income from Investment Operations:
Net investment income ................................... 0.18 0.19 0.30
Net realized and unrealized gain on investments ......... 5.34 1.63 3.56
--------- --------- ----------
Total from Investment Operations ........................ 5.52 1.82 3.86
--------- --------- ----------
Less Distributions:
Dividends from net investment income and net
realized short-term gains ............................. (0.31) (0.30) (0.31)
Distributions from net realized mid-term and long-term
gains ................................................. (1.50) (0.84) (1.00)
---------- ---------- ----------
Total distributions ..................................... (1.81) (1.14) (1.31)
---------- ---------- ----------
Net asset value at end of period ........................ $ 19.22 $ 15.51 $ 14.83
========== ========== ==========
Total Return(2) .......................................... 36.36% 12.60% 32.42%
Ratios to Average Daily Net Assets:
Expenses ................................................ 1.86% 1.92% 1.70%(3)(4)
Net investment income ................................... 0.29% 0.95% 2.13%(3)(5)

Supplemental Data:
Net assets at end of period (000) ....................... $ 32,474 $ 17,661 $ 7,504
Portfolio turnover rate ................................. 26% 20% 24%
Average commissions per share(6) ........................ $ 0.0598 $ 0.0696 --
</TABLE>
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(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Annualized.
(4) Without the waiver of advisory fees, the ratio of expenses to average daily
net assets would have been 1.74% (annualized) for the period ended December
31, 1995.
(5) Without the waiver of advisory fees, the ratio of net investment income to
average daily net assets would have been 2.09% (annualized) for the period
ended December 31, 1995.
(6) Disclosure is required for fiscal years beginning after September 1, 1995.
Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.

4
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INVESTMENT PROGRAM

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Investment Objective, Policies and Risk
Considerations

The Fund's investment objective is to maximize total return. The Fund will
seek to achieve this objective through a combination of long-term growth of
capital and, to a lesser extent, current income. In seeking this objective, the
Fund invests primarily in common stock, securities convertible thereto and debt
obligations of companies in the communications field. For this purpose,
companies would be considered to be in the "communications field" if they were
engaged in the research, development, manufacture or sale of communications
services, technology, equipment or products. Effective communication through the
transmission of voice, pictures and data is becoming increasingly important and
the communications field now embraces a wide variety of products and services,
such as local and long distance telephone service, wireless service (e.g.,
cellular telephone or paging services), video, telecommunications equipment,
media, and information technology. There can be no assurance that the Fund's
investment objective will be met. Concentration in the communications field will
subject the Fund to the risks associated with that field (e.g., regulatory and
technological change) and may result in greater fluctuation in the Fund's net
asset value than is experienced in less concentrated portfolios. The Fund will
be non-diversified for purposes of the Investment Company Act of 1940, as
amended (the "Investment Company Act") which means that the performance of one
or a small number of portfolio holdings can affect overall performance more than
would otherwise be the case.

The Fund's investment advisors believe that investing in a portfolio of
securities of companies in the communications field affords an attractive
opportunity for achieving the Fund's investment objective. The Fund's emphasis
is investment in companies offering products and services that both support
traditional communications and facilitate new information-based applications.
Information technology combines data processing and telecommunications to
support more efficient and economical business processes and consumer
activities. The rapidly improving performance and declining cost of transmission
have helped the global expansion of information technology. For example,
businesses have an increasing need to connect to remote users such as employees,
suppliers and customers. Consumers are increasingly relying on telephone-based
applications like on-line banking and shopping to save time and money.

Worldwide telecommunications market expansion will create opportunities
for established and emerging providers of telecommunications products and
services. Although new, high growth technologies are being adopted at an
increasing rate, commercial acceptance still lags the introduction of new
products and services. Traditional communications companies, such as telephone
companies, are positioned to serve the existing and developing needs of their
customer base with a combination of current and new offerings. Evolving user
requirements have also led to the development of separate industry segments,
outside the local telephone and long distance businesses, which enable
non-traditional telecommunications providers a chance to benefit from the
growing worldwide demand for voice, data and video services.

Under normal market conditions at least 65% of the Fund's total assets
will be invested in common stock, securities convertible thereto and debt
obligations of companies in the communications field, as defined above.
Depending on the circumstances, the Fund may temporarily and for defensive
purposes invest up to 100% of its net assets in money market instruments and in
other income-producing securities.

In general, the Fund will invest in investment grade debt obligations that
are rated, at the time of purchase, BBB or higher by Standard and Poor's Ratings
Group ("S&P") or Baa or higher by Moody's Investors Service, Inc. ("Moody's"),
or, if unrated, determined to be of comparable quality by the Fund's investment
advisors, under criteria approved by the Fund's Board of Directors. Investment
grade securities (securities rated BBB or higher by S&P or Baa or higher by
Moody's) are generally thought to provide the highest credit quality and the
smallest risk of default. Securities rated BBB by S&P or Baa by Moody's have
speculative characteristics. Up to 10% of the Fund's total assets (measured at
the time of the investment) may be invested in lower quality debt obligations
(securities rated BB or lower by S&P or Ba or lower by Moody's and unrated
securities of comparable quality). Securities that were investment grade at the
time of purchase but are subsequently downgraded to BB/Ba or lower will be
included in the 10% category. In the event any security owned by the Fund is
downgraded, the Fund's investment advisors will review the situation and take
appropriate action, but will not be automatically required to sell any such
security. If such a downgrade causes the 10% limit to be exceeded, the Fund will
be precluded from investing further in debt obligations that are below
investment grade. (See "Investments in Non-Investment Grade Securities" below.)

5
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Investments in Non-Investment Grade Securities

Lower rated debt obligations, also known as "junk bonds," are considered
to be speculative and involve greater risk of default or price changes due to
changes in the issuer's creditworthiness. Securities in the lowest rating
category that the Fund may purchase (securities rated C by either S&P or
Moody's) may present a particular risk of default, or may be in default or
arrears in the payment of principal and interest. In addition, C-rated
securities may be regarded as having extremely poor prospects of ever attaining
any real investment standing. Yields and market values of these bonds will
fluctuate over time reflecting changing interest rates and the market's
perception of credit quality and the outlook for economic growth. When economic
conditions appear to be deteriorating, lower rated bonds may decline in value,
regardless of prevailing interest rates. Accordingly, adverse economic
developments, including a recession or substantial period of rising interest
rates, may disrupt the high-yield bond market, affecting both the value and
liquidity of such bonds. The market prices of these securities may fluctuate
more than those of higher rated securities, and may decline significantly in
periods of general economic difficulty, which may follow periods of rising
interest rates. An economic downturn could adversely affect the ability of
issuers of such bonds to make payments of principal and interest to a greater
extent than issuers of higher rated bonds might be affected. The ratings
categories of S&P and Moody's are described more fully in the Appendix to the
Statement of Additional Information.

The following table provides a summary of ratings assigned by S&P to debt
obligations in the Fund's portfolio. These figures are dollar-weighted averages
of month-end portfolio holdings during the fiscal year ended December 31, 1997,
presented as a percentage of total investments. These percentages are historical
and are not necessarily indicative of the quality of current or future portfolio
holdings, which may vary.

S&P
Rating Average
------ -------
AAA 1.68%
AA 0.00%
A 0.00%
BBB 0.00%
BB 0.88%
B 0.00%
Unrated 0.00%

Investments in Repurchase Agreements

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

Investment in Securities of Foreign Issuers

From time to time, the Fund may invest in American Depositary Receipts
("ADRs"), which are interests in securities of foreign companies, and up to 10%
of the Fund's total assets in debt and equity securities of issuers not publicly
traded in the United States, when the Fund's investment advisors believe that
such investments provide good opportunities for achieving income and capital
gains without undue risk.

Loans of Portfolio Securities

The Fund has the right to lend portfolio securities to approved
institutional borrowers for the purpose of increasing its net investment income.
These loans must be secured continuously by cash or equivalent collateral, or by
a letter of credit at least equal to the market value of the securities loaned
plus accrued interest or income. There may be a risk of delay in recovery of the
securities or even loss of rights in the collateral should the borrower of the
securities fail financially. The Fund's custodian or another affiliate may act
as securities lending agent.

Other Investments

The Fund may write covered call options if each such option is traded on a
national securities exchange (and may purchase calls in related closing
transactions). The Fund may also invest in securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933, as amended ("Rule 144A
Securities") that have been determined to be liquid by the Fund's advisors under
standards approved by the Fund's Board of Directors, and may invest up to 10% of
its net assets in Rule 144A Securities that are illiquid (see "Investment
Restrictions" in the Statement of Additional Information). Rule 144A Securities
may become illiquid if qualified institutional buyers are not interested in
acquiring the securities.

6
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INVESTMENT RESTRICTIONS

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The following investment restriction is a matter of fundamental policy and
may not be changed without shareholder approval. Accordingly, the Fund will not
invest less than 65% of its total assets in the communications field, except as
described in this Prospectus (otherwise the Fund will not concentrate more than
25% of its total assets in securities of issuers in any industry).

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

THE FUND'S NET ASSET VALUE

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The following sections describe how to buy and redeem shares of the Fund.

The price you pay or receive is based on the Fund's net asset value per
share. When you buy Class A Shares, the price you pay may be increased by a
sales charge. When you redeem shares of either class, the price you receive may
be reduced by a sales charge. Read the sections on how to buy shares and how to
redeem shares for details on how and when these charges may or may not be
imposed.

The net asset value per share of each class is determined on each business
day as of the close of trading on the New York Stock Exchange (ordinarily 4:00
p.m. Eastern Time). It is calculated by subtracting the liabilities attributable
to a class from its proportionate share of the Fund's assets and dividing the
result by the outstanding shares of the class. Because the different classes
have different distribution or service fees, their net asset values may differ
from time to time.

In valuing the Fund's assets, its investments are priced at their market
value which is normally based on current prices but which may be determined
according to "fair value" procedures approved by the Fund's Board of Directors.

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

HOW TO BUY SHARES

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

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

Investment Minimums

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

o If you are investing in an IRA account, your initial investment may be
as low as $1,000.

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

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

o There is no minimum investment requirement for qualified retirement
plans such as 401(k), pension or profit sharing plans.

7
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<PAGE>
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Purchase Price

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

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

Although you do not pay an initial sales charge when you invest
$1,000,000 or more in Class A Shares or when you buy any amount of Class B
Shares, you may have to pay a sales charge when you redeem your shares. Refer
to the section on how to redeem shares for details.

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

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

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

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

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

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

(ii) A qualified retirement plan;

(iii) A Flag Investors fund payroll savings plan program.

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

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

4) If you are a current or retired Director of the Fund, a director, an
employee or a member of the immediate family of an employee of any of the
following (or their respective affiliates): the Distributor, the Advisors
and any broker-dealer authorized to sell shares of the Fund.
<PAGE>

Purchases by Exchange

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

You may request an exchange through your securities dealer or servicing
agent. Contact them for details on how to enter your order. If your shares are

8
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<PAGE>
- --------------------------------------------------------------------------------

in an account with the Fund's Transfer Agent, you may also request an exchange
directly through the Transfer Agent by mail or by telephone.

Investing Regularly

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

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

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

Systematic Purchase Plan. You may also purchase either class of shares
through a Systematic Purchase Plan. Contact your securities dealer or servicing
agent for details.

HOW TO REDEEM SHARES

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

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

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

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

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

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

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

Redemption Price

The price you receive when you redeem shares will be the net asset value
of the class of shares you are redeeming less any applicable sales charge. The
amount of any sales charge deducted from your redemption price will be
determined according to the following schedule.

Sales Charge as a Percentage of the Dollar Amount Subject to Charge
- -------------------------------------------------------------------------------
Class A Class B
Years Since Purchase Shares Shares
- -------------------------------------------------------------------------------
First ..................................... 0.50%* 4.00%
Second .................................... 0.50%* 4.00%
Third ..................................... None 3.00%
Fourth .................................... None 3.00%
Fifth ..................................... None 2.00%
Sixth ..................................... None 1.00%
Thereafter ................................ None None
- -------------------------------------------------------------------------------

* You will pay a sales charge when you redeem Class A Shares only if you bought
those shares at net asset value as part of an investment of $1,000,000 or
more.

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

1) The sales charge is applied to the lesser of the cost of the shares or
their current market value.

2) No sales charge will be applied to shares you own as a result of
reinvesting dividends or distributions.

9
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<PAGE>
- --------------------------------------------------------------------------------

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

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

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

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

2) If your redemption represents the minimum required distribution from an
individual retirement account or other retirement plan.

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

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

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

4) If you are redeeming Class A Shares, your original investment was at least
$3,000,000 and your securities dealer has agreed to return to the
Distributor any payments received when you bought your shares.

Automatic Conversion of Class B Shares. Your Class B Shares, along with
any reinvested dividends or distributions associated with those shares, will be
automatically converted to Class A Shares six years after your purchase. This
conversion will be made on the basis of the relative net asset values of the
classes and will not be a taxable event to you.

Other Redemption Information

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

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

If you redeem sufficient shares to reduce your investment to $500 or less,
the Fund has the power to redeem the remaining shares after giving you 60 days'
notice.

TELEPHONE TRANSACTIONS

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

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

The Fund and the Transfer Agent will employ reasonable procedures to
confirm that telephoned instructions are genuine. These procedures include
requiring you to provide certain personal identification information at the time
your account is opened and prior to effecting each telephone transaction. You
may be required to provide additional telecopied instructions. If these
procedures are employed, neither the Fund nor the Transfer Agent will bear any
liability for following instructions received by telephone that they reasonably
believe to be genuine. Your telephone transaction request will be recorded.

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

10
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------

HOW TO CHOOSE THE CLASS THAT IS RIGHT FOR YOU

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

Your decision as to which class of the Fund's shares is best for you
should be based upon a number of factors including the amount of money you
intend to invest and the length of time you intend to hold your shares.

If you choose Class A Shares, you will pay a sales charge when you buy
your shares but the amount of the charge declines as the amount of your
investment increases. You will pay lower expenses while you hold the shares and,
except in the case of investments of $1,000,000 or more, no sales charge if you
redeem them.

If you choose Class B Shares, you will pay no sales charge when you buy
your shares but your annual expenses will be higher than Class A Shares. You
will pay a sales charge if you redeem your shares within six years of purchase,
but the amount of the charge declines the longer you hold your shares and, at
the end of six years, your shares convert to Class A Shares thus eliminating the
higher expenses.

In general, if you intend to invest more than $100,000, your combined
sales charges and expenses are lower with Class A Shares. If you intend to
invest less than $100,000 and expect to hold your shares for more than six
years, your combined sales charges and expenses are lower with Class B Shares.

Your securities dealer or servicing agent may receive different levels of
compensation depending upon which class of shares you buy.

DEALER COMPENSATION

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

Your securities dealer is paid a commission when you buy shares and is
paid a servicing fee for as long as you hold your shares.

Dealer Compensation as a % of Offering Price
----------------------------------------------
Amount of Purchase Class A Shares Class B Shares
- --------------------------------------------------------------------------
Less than $ 50,000 ..... 4.00% 4.00%
$ 50,000 - $ 99,999 ..... 3.00% 4.00%
$ 100,000 - $249,999 ..... 2.00% 4.00%
$ 250,000 - $499,999 ..... 1.50% 4.00%
$ 500,000 - $999,999 ..... 1.25% 4.00%
$1,000,000 and over ..... * 4.00%
- -------------------------------------------------------------------------

* Your securities dealer may be paid up to 1.00% of the Offering Price

In addition to the commissions shown above, your securities dealer may be
paid an annual fee equal to 0.25% of the value of your Class A Shares or Class B
Shares for as long as you hold them. The annual fee will begin when you buy your
shares.

DIVIDENDS AND TAXES

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

Dividends and Distributions

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

Tax Treatment of Dividends and Distributions

The following summary of certain federal income tax consequences affecting
the Fund and its shareholders is based on current tax laws and regulations,
which may be changed by legislative, judicial, or administrative action. No
attempt has been made to present a detailed explanation of the federal, state or
local tax treatment of the Fund or its shareholders, and the discussion here is
not intended as a substitute for careful tax planning. Accordingly, you are
advised to consult with your tax advisor regarding specific questions.
<PAGE>

The Statement of Additional Information sets forth further information
concerning taxes.

The Fund has been and expects to continue to be taxed as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended. As long as the Fund qualifies for this tax treatment, it will not pay
federal income tax on amounts distributed to shareholders. Unless you are
otherwise exempt, you will be generally subject to federal income tax on the
amounts distributed to you, regardless of whether such distributions are paid in
cash or reinvested in additional shares.

11
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<PAGE>
- --------------------------------------------------------------------------------

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

The Fund intends to make sufficient distributions of its ordinary income
and capital gain net income prior to the end of each calendar year to avoid
liability for federal excise tax.

The sale, exchange or redemption of Fund shares is a taxable event for
you.

MANAGEMENT OF THE FUND

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

The overall business and affairs of the Fund are managed by its Board of
Directors. The Board approves all significant agreements between the Fund and
persons or companies furnishing services to the Fund, including the Fund's
agreements with its investment advisor, sub-advisor, distributor, custodian and
transfer agent. The day-to-day operations of the Fund are delegated to the
Fund's executive officers, to the Fund's advisors and to the Distributor. A
majority of the Directors are not affiliated with the Fund's advisors or the
Distributor.

INVESTMENT ADVISOR AND SUB-ADVISOR

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

Investment Company Capital Corp. ("ICC" or the "Advisor") is the Fund's
investment advisor and Alex. Brown Investment Management ("ABIM" or the "Sub-
Advisor") is the Fund's sub-advisor. ICC is the investment advisor to mutual
funds with approximately $6.5 billion of net assets as of December 31, 1997. In
addition to this Fund, these include other funds in the Flag Investors family of
funds and BT Alex. Brown Cash Reserve Fund, Inc. ABIM is a registered investment
advisor with approximately $7.2 billion under management as of December 31,
1997.

Pursuant to the terms of the Investment Advisory Agreement, ICC supervises
and manages all of the Fund's operations. Under the Investment Advisory and
Sub-Advisory Agreements, ICC delegates to ABIM certain of its duties, provided
that ICC continues to supervise the performance of ABIM and report thereon to
the Fund's Board of Directors. Pursuant to the terms of the Sub-Advisory
Agreement, ABIM is responsible for decisions to buy and sell securities for the
Fund, for broker-dealer selection, and for negotiation of commission rates. The
Board has established procedures under which ABIM may allocate transactions to
certain affiliates, provided that compensation to such affiliates on each
transaction is reasonable and fair compared to the commission, fee or other
remuneration received or to be received by other broker-dealers in connection
with comparable transactions involving similar securities during a comparable
period of time. In addition, consistent with NASD Rules, and subject to seeking
the most favorable price and execution available and such other policies as the
Board may determine, ABIM may consider services in connection with the sale of
shares as a factor in the selection of broker-dealers to execute portfolio
transactions for the Fund.

As compensation for providing investment advisory services to the Fund for
the fiscal year ended December 31, 1997, ICC received a fee equal to 0.70% of
the Fund's average daily net assets. From such amounts ICC paid ABIM a fee equal
to 0.49% of the Fund's average daily net assets. ICC may from time to time
voluntarily waive a portion of its fee to improve performance.

ICC is an indirect subsidiary of Bankers Trust Corporation. ABIM is a
limited partnership affiliated with the Advisor. Buppert, Behrens & Owen, Inc.,
a company organized and owned by three employees of ABIM, owns a 49% limited
partnership interest and a 1% general partnership interest in ABIM. BT Alex.
Brown Incorporated owns a 1% general partnership interest in ABIM and BT Alex.
Brown Holdings owns the remaining 49% limited partnership interest.

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

Portfolio Managers

Messrs. Bruce E. Behrens and Liam D. Burke have shared primary
responsibility for managing the

12
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<PAGE>
- --------------------------------------------------------------------------------

Fund's assets since May 1, 1997. From the Fund's inception through April 30,
1997, Mr. Behrens shared that responsibility with Hobart C. Buppert, II, who
remains at ABIM.

Bruce E. Behrens -- 30 Years' Investment Experience

Mr. Behrens has been a Vice President and a Principal of ABIM since 1981.
Prior to joining ABIM, Mr. Behrens was a Senior Vice President and Principal of
Corbyn Associates from 1978 to 1981 and a Vice President at Investment
Counselors of Maryland from 1972 to 1978. Prior thereto, he was a Securities
Analyst at Citibank from 1968 to 1972. Mr. Behrens received his B.A. from
Denison University in 1966 and an M.B.A. from the University of Michigan in
1968. He is a member and past President of the Baltimore Security Analysts
Society and a member of the Financial Analysts Federation.

Liam D. Burke -- 9 Years' Investment Experience

Mr. Burke joined ABIM in 1994 with primary responsibility as a
telecommunications analyst for the Fund. Prior to joining ABIM, Mr. Burke worked
as a telecommunications industry analyst at a regional broker-dealer, Ferris,
Baker, Watts, Inc., from 1992 to 1994 and as managing director of Frey & Co., a
Baltimore-based private investment bank, from 1989 to 1992. Mr. Burke began his
professional career at AT&T and spent eight years in positions that included
operations, regional staff management and national account sales. He is a
graduate of Georgetown University and received his MBA from The George
Washington University.

DISTRIBUTOR

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

ICC Distributors, Inc. ("ICC Distributors" or the "Distributor") has
served as the Fund's distributor since August 31, 1997. The Distributor is a
registered broker-dealer that offers distribution services to a variety of
registered investment companies including other funds in the Flag Investors
family of funds and BT Alex. Brown Cash Reserve Fund, Inc. The Distributor is
not affiliated with the Advisors.

The Fund has adopted a Distribution Agreement and two separate Plans of
Distribution, one with respect to the Class A Shares and one with respect to the
Class B Shares (the "Plans") pursuant to Rule 12b-1 under the Investment Company
Act. In addition, the Fund may enter into agreements with certain financial
institutions, including certain banks and BT Alex. Brown Incorporated, to
provide shareholder services, pursuant to which the Distributor may allocate on
a proportional basis up to all of its distribution fee as compensation for such
financial institutions' ongoing shareholder services. Such financial
institutions may charge you separately for these services.

As compensation for providing distribution services for the Class A Shares
for the period from August 31, 1997 through December 31, 1997, the Distributor
received a fee equal to 0.25% (annualized) of the Class A Shares' average daily
net assets.

As compensation for providing distribution and shareholder services for
the Class B Shares for the period from August 31, 1997 through December 31,
1997, the Distributor received a distribution fee equal to 0.75% (annualized) of
the Class B Shares' average daily net assets and a shareholder servicing fee
equal to 0.25% (annualized) of the Class B Shares' average daily net assets. The
distribution fee is used to compensate the Distributor for its services and
expenses in distributing the Class B Shares. The shareholder servicing fee is
used to compensate the Distributor, securities dealers and servicing agents for
services provided and expenses incurred in maintaining your account, responding
to your inquiries and providing you with information on your investments.

Payments under the Plans are made as described above regardless of the
Distributor's actual cost of providing distribution services. If the cost of
providing distribution services is less than the payments received, the
Distributor may retain the unexpended portion of the distribution fee. The
Advisor or the Distributor, and their respective affiliates, may make payments
from their own resources to securities dealers and servicing agents. Payments by
the Distributor may include additional discounts or promotional incentives in
the form of cash or other compensation (including merchandise or travel).

13
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------

CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES

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

Investment Company Capital Corp. is the Fund's transfer and dividend
disbursing agent and provides accounting services to the Fund. As compensation
for providing accounting services to the Fund for the fiscal year ended December
31, 1997, ICC received a fee equal to 0.02% of the Fund's average daily net
assets. Bankers Trust Company, a subsidiary of Bankers Trust Corporation, acts
as custodian of the Fund's assets. (See the Statement of Additional
Information.)

PERFORMANCE INFORMATION

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

From time to time, the Fund may advertise its performance, including
comparisons to other mutual funds with similar investment objectives and to
stock or other relevant indices. All such advertisements will show the average
annual total return, net of the Fund's maximum sales charge imposed on Class A
Shares or including the contingent deferred sales charge imposed on Class B
Shares redeemed at the end of the specified period covered by the total return
figure, over one-, five- and ten-year periods or, if such periods have not yet
elapsed, shorter periods corresponding to the life of the Fund. Such total
return quotations will be computed by finding the average annual compounded
rates of return over such periods that would equate an assumed initial
investment of $1,000 to the ending redeemable value, net of the maximum sales
charge and other fees, according to the required standardized calculation. The
standardized calculation is required by the SEC to provide consistency and
comparability in investment company advertising and is not equivalent to a yield
calculation. If the Fund compares its performance to other funds or to relevant
indices, the Fund's performance will be stated in the same terms in which such
comparative data and indices are stated, which is normally total return rather
than yield. For these purposes, the performance of the Fund, as well as the
performance of such investment companies or indices, may not reflect sales
charges, which, if reflected, would reduce performance results.

The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Morningstar,
Inc., independent services that monitor the performance of mutual funds. The
performance of the Fund may also be compared to the Lehman Brothers Government
Corporate Bond Index, the Consumer Price Index, the return on 90-day U.S.
Treasury bills, the Standard & Poor's 500 Stock Index and the Dow Jones
Industrial Average. The Fund may also use total return performance data as
reported in the following national financial and industry publications that
monitor the performance of mutual funds: Money Magazine, Forbes, Business Week,
Barrons, Investor's Daily, IBC/Donoghue's Money Fund Report and The Wall Street
Journal.

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

GENERAL INFORMATION

- --------------------------------------------------------------------------------
Capital Shares

The Fund is an open-end non-diversified management investment company. The
Fund reorganized as a Maryland corporation on January 19, 1989 and is authorized
to issue 85 million shares of capital stock, with a par value of $.001 per
share. Shares of the Fund have equal rights with respect to voting. Voting
rights are not cumulative, so the holders of more than 50% of the outstanding
shares voting together for election of Directors may elect all the members of
the Board of Directors of the Fund. In the event of liquidation or dissolution
of the Fund, each share is entitled to its pro rata portion of the Fund's assets
after all debts and expenses have been paid. The fiscal year-end of the Fund is
December 31.

The Board of Directors is authorized to establish additional "series" of
shares of capital stock, each of which would evidence interests in a separate
portfolio of securities, and separate classes of each series of the Fund. The
shares offered by this Prospectus have been designated: "Flag Investors
Communications Fund Class A Shares" and "Flag Investors Communications

14
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<PAGE>
- --------------------------------------------------------------------------------

Fund Class B Shares." The Board has no present intention of establishing any
additional series of the Fund but the Fund does have two other classes of
shares, "Flag Investors Communications Fund Institutional Shares," which are
offered by a separate prospectus and "Flag Investors Communications Fund Class D
Shares," which are not currently being offered. Additional information
concerning the Fund's Institutional Shares may be obtained by calling the Fund
at (800) 767-FLAG. Different classes of the Fund may be offered to certain
investors and holders of such shares may be entitled to certain exchange
privileges not offered to Class A or Class B Shares. All classes of the Fund
share a common investment objective, portfolio of investments and advisory fee,
but to the extent the classes have different distribution/service fees or sales
load structures, performance may differ.

Annual Meetings

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

Reports

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

Shareholder Inquiries

If you have questions concerning your shares, contact the Fund at (800)
767-FLAG, the Transfer Agent at (800) 553-8080, or your securities dealer or
servicing agent.

15
- --------------------------------------------------------------------------------
<PAGE>

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

FLAG INVESTORS COMMUNICATIONS FUND, INC.
(Class A and Class B Shares)

Investment Advisor
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202

Sub-Advisor Distributor
ALEX. BROWN INVESTMENT MANAGEMENT ICC DISTRIBUTORS, INC.
One South Street P.O. Box 7558
Baltimore, Maryland 21202 Portland, Maine 04101

Transfer Agent Independent Accountants
INVESTMENT COMPANY CAPITAL CORP. COOPERS & LYBRAND L.L.P.
One South Street 2400 Eleven Penn Center
Baltimore, Maryland 21202 Philadelphia, Pennsylvania 19103
1-800-553-8080

Custodian Fund Counsel
BANKERS TRUST COMPANY MORGAN, LEWIS & BOCKIUS LLP
130 Liberty Street 2000 One Logan Square
New York, New York 10006 Philadelphia, Pennsylvania 19103

16
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<PAGE>
- --------------------------------------------------------------------------------
FLAG INVESTORS COMMUNICATIONS FUND, INC.
NEW ACCOUNT APPLICATION
- --------------------------------------------------------------------------------
Make check payable to "Flag Investors Communications Fund, Inc." and mail with
this Application to:
Flag Investors Funds
P.O. Box 419663
Kansas City, MO 64141-6663
Attn: Flag Investors Communications Fund, Inc.

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

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

I wish to purchase the following class of shares of the Fund, in the amount
indicated below. (Please check the applicable box and indicate amount of
purchase)

[ ] Class A Shares (4.5% maximum initial sales charge) in the amount of
$ ____________
[ ] Class B Shares (4.0% maximum contingent deferred sales charge) in the
amount of $ _________________

Your Account Registration (Please Print)

Existing Account No., if any: __________________________________

Individual or Joint Tenant

__________________________________________________________________
First Name Initial Last Name

__________________________________________________________________
Social Security Number

__________________________________________________________________
Joint Tenant Initial Last Name

Corporations, Trusts, Partnerships, etc.

__________________________________________________________________
Name of Corporation, Trust or Partnership

_________________ _________________________________________________
Tax ID Number Date of Trust

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

__________________________________________________________________
For the Benefit of

Gifts to Minors

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

__________________________________________________________________
Minor's Name (only one) Minor's Date of Birth (Mo./Day/Yr.)

__________________________________________________________________
Social Security Number of Minor

under the __________________ Uniform Gifts to Minors Act
State of Residence

Mailing Address

__________________________________________________________________
Street

__________________________________________________________________
City State Zip

(____)____________________________________________________________
Daytime Phone
<PAGE>

Letter of Intent (Optional)

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

Right of Accumulation (Optional)

List the Account numbers of other Flag Investors Funds that you or your
immediate family already own that qualify for reduced sales charges.
Fund Name Account No. Owner's Name Relationship
--------- ----------- ------------ ------------

_______________________________________________________________________________

Distribution Options

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

Income Dividends Capital Gains

[ ] Reinvested in additional shares [ ] Reinvested in additional shares
[ ] Paid in Cash [ ] Paid in Cash
Call (800) 553-8080 for information about reinvesting your dividends in other
funds in the Flag Investors Family of Funds.

A-1
<PAGE>

Automatic Investing Plan (Optional)

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

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

Please attach a voided check.

__________________________________ _________________________________________
Bank Name Depositor's Signature Date

__________________________________ _________________________________________
Existing Flag Investors Fund Account Depositor's Signature Date
No., if any (if joint acct., both must sign)

Systematic Withdrawal Plan (Optional)

[ ] Beginning the month of ____________, 19__ please send me checks on a
monthly or quarterly basis, as indicated below, in the amount of (complete as
applicable) $___________ from Class A Shares and/or $___________ from Class B
Shares that I own, payable to the account registration address as shown above.
(Participation requires minimum account value of $10,000 per class.)

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

Telephone Transactions

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

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

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

Bank: _________________________ Bank Account No.: ________________________
Address: _________________________ Bank Account Name: ________________________
_________________________
<PAGE>

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

By signing this Application, I hereby certify under penalties of perjury that
the information on this Application is complete and correct and that as
required by federal law: (Please check applicable boxes)
[ ] U.S. Citizen/Taxpayer:
[ ] I certify that (1) the number shown above on this form is the correct
Social Security Number or Tax ID Number and (2) I am not subject to any
backup withholding either because (a) I am exempt from backup
withholding, or (b) I have not been notified by the Internal Revenue
Service ("IRS") that I am subject to backup withholding as a result
of a failure to report all interest or dividends, or (c) the IRS has
notified me that I am no longer subject to backup withholding.
[ ] If no Tax ID Number or Social Security Number has been provided above, I
have applied, or intend to apply, to the IRS or the Social Security
Administration for a Tax ID Number or a Social Security Number, and I
understand that if I do not provide either number to the Transfer Agent
within 60 days of the date of this Application or if I fail to furnish
my correct Social Security Number or Tax ID Number, I may be subject to
a penalty and a 31% backup withholding on distributions and redemption
proceeds. (Please provide either number on IRS Form W-9. You may request
such form by calling the Transfer Agent at 800-553-8080).
[ ] Non-U.S. Citizen/Taxpayer:
Indicated country of residence for tax purposes:___________________________
Under penalties of perjury, I certify that I am not a U.S. citizen or
resident and I am an exempt foreign person as defined by the Internal
Revenue Service.
- --------------------------------------------------------------------------------
I acknowledge that I am of legal age in the state of my residence. I have
received a copy of the Fund's prospectus. I acknowledge that the telephone
redemption and exchange privileges are automatic and will be effected as
described in the Fund's current prospectus (see "Telephone Transactions"). I
also acknowledge that I may bear the risk of loss in the event of fraudulent use
of such privileges. If I do not want telephone redemption or exchange
privileges, I have so indicated on this Application.
- --------------------------------------------------------------------------------
The Internal Revenue Service does not require your consent to any provision of
this document other than the certifications required to avoid backup
withholding.
- --------------------------------------------------------------------------------

__________________________________ __________________________________________
Signature Date Signature (if joint acct., both Date
must sign)
- --------------------------------------------------------------------------------
For Dealer Use Only

Dealer's Name: ______________________ Dealer Code: _______________________
Dealer's Address: ______________________ Branch Code: _______________________
______________________
Representative: ______________________ Rep. No.: _______________________

A-2
<PAGE>

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

LOGO
FLAG INVESTORS

COMMUNICATIONS FUND, INC.
(Institutional Shares)
(formerly, Flag Investors Telephone Income Fund, Inc.)

Prospectus & Application -- May 1, 1998
- --------------------------------------------------------------------------------

This mutual fund (the "Fund") is designed to maximize total return. The Fund
will seek to achieve this objective through a combination of long-term growth
of capital and, to a lesser extent, current income. In seeking to achieve this
objective, the Fund invests primarily in common stock, securities convertible
thereto and debt obligations of companies in the communications field.

Flag Investors Institutional Shares of the Fund ("Institutional Shares") are
available through your securities dealer or the Fund's transfer agent and may
be purchased only by eligible institutions, certain qualified retirement plans,
or investment advisory affiliates of BT Alex. Brown Incorporated ("BT Alex.
Brown"). (See "How to Buy Institutional Shares.")

This Prospectus sets forth basic information that you should know about the
Fund prior to investing. You should retain it for future reference. A Statement
of Additional Information dated May 1, 1998 has been filed with the Securities
and Exchange Commission (the "SEC") and is hereby incorporated by reference. It
is available upon request and without charge by calling the Fund at (800)
767-FLAG.

TABLE OF CONTENTS

Fee Table .................................. 1
Financial Highlights ....................... 2
Investment Program ......................... 4
Investment Restrictions .................... 6
The Fund's Net Asset Value ................. 6
How to Buy Institutional Shares ............ 6
How to Redeem Institutional Shares ......... 7
Telephone Transactions ..................... 7
Dividends and Taxes ........................ 7
Management of the Fund ..................... 8
Investment Advisor and Sub-Advisor ......... 8
Distributor ................................ 9
Custodian, Transfer Agent and
Accounting Services ..................... 9
Performance Information .................... 9
General Information ........................ 10
Application ................................ A-1

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

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

- --------------------------------------------------------------------------------
<PAGE>

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

FEE TABLE
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
Shareholder Transaction Expenses:

Maximum Sales Charge Imposed on Purchases ................................... None
Maximum Sales Charge Imposed on Reinvested Dividends ........................ None
Maximum Deferred Sales Charge ............................................... None

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

Management Fees ............................................................. 0.70%
12b-1 Fees .................................................................. None
Other Expenses .............................................................. 0.16%
--------
Total Fund Operating Expenses ............................................... 0.86%
========
</TABLE>

<TABLE>
<S> <C> <C>
Example: 1 Year 3 Years
- --------------------------------------------------------- -------- --------
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period: ................ $9 $27
</TABLE>

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

The purpose of the above table is to describe the various costs and
expenses that you will bear indirectly when you invest in Institutional Shares.
If you purchase Institutional Shares through a financial institution, you may
be charged separate fees by that institution. The Expenses and Example for the
Institutional Shares, which have been offered since February 26, 1998, are
based on the Fund's expenses for the Class A Shares, another class of shares
offered by the Fund, less the 12b-1 fees charged to that class.

1
- --------------------------------------------------------------------------------
<PAGE>

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

FINANCIAL HIGHLIGHTS

- --------------------------------------------------------------------------------
The Fund has offered the Institutional Shares since February 26, 1998.
However, the Fund has offered Class A Shares since January 18, 1984. Historical
financial information is not fully applicable to the Institutional Shares
because the expenses paid by the Fund in the past differ from those the
Institutional Shares will incur. (See "Fee Table.") Nevertheless, historical
information about the Fund may be useful to investors if they take into account
the differences in expenses. Accordingly, the financial highlights included in
the following table are a part of the Fund's financial statements for the Class
A Shares for the periods indicated and have been audited by Coopers & Lybrand
L.L.P., independent accountants. The financial statements and financial
highlights for the Class A Shares for the year ended December 31, 1997 and the
report thereon of Coopers & Lybrand L.L.P. are included in the Statement of
Additional Information. Additional performance information for the Class A
Shares is contained in the Fund's Annual Report for the fiscal year ended
December 31, 1997, which can be obtained at no charge by calling the Fund at
(800) 767-FLAG.

(For a share outstanding throughout each year)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
1997 1996 1995 1994
------------ ------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of year ......... $ 15.59 $ 14.87 $ 12.30 $ 13.70
-------- -------- -------- --------

Income from Investment Operations:
Net investment income ........................ 0.27 0.27 0.40 0.41
Net realized and unrealized gain/(loss)
on investments ............................. 5.41 1.67 3.58 ( 1.27)
-------- -------- -------- --------
Total from Investment Operations ............. 5.68 1.94 3.98 ( 0.86)
-------- -------- -------- --------

Less Distributions:
Dividends from net investment income and net
realized short-term gains .................. ( 0.40) ( 0.38) ( 0.41) ( 0.44)
Distributions from net realized mid-term and
long-term gains ............................ ( 1.50) ( 0.84) ( 1.00) ( 0.10)
--------- --------- -------- --------
Total distributions .......................... ( 1.90) ( 1.22) ( 1.41) ( 0.54)
--------- --------- -------- --------
Net asset value at end of year ............... $ 19.37 $ 15.59 $ 14.87 $ 12.30
========= ========= ======== ========
Total Return(3) ............................... 37.36% 13.46% 33.44% ( 6.32)%
Ratios to Average Daily Net Assets:
Expenses ..................................... 1.11% 1.14% 0.93%(4) 0.92%(4)
Net investment income ........................ 1.07% 1.74% 2.85%(5) 3.14%(5)

Supplemental Data:
Net assets at end of year (000) .............. $622,865 $ 505,371 $492,454 $435,805
Portfolio turnover rate ...................... 26% 20% 24% 23%
Average commissions per share(6) ............. $ 0.0598 $ 0.0696 -- --
</TABLE>

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

(1) Restated for two-for-one stock split, effected in the form of a stock
dividend to shareholders of record on October 27, 1989.
(2) Investment Company Capital Corp. became Investment Advisor to the Fund on
January 19, 1989.
(3) Total return excludes the effect of sales charge.
(4) Without the waiver of advisory fees, the ratio of expenses to average daily
net assets would have been 0.99%, 0.99%, 0.98%, 1.07%, 1.17%, 1.13% and
1.07% for the years ended December 31, 1995, 1994, 1993, 1992, 1991, 1990
and 1989, respectively.
(5) Without the waiver of advisory fees, the ratio of net investment income to
average daily net assets would have been 2.79%, 3.07%, 3.06%, 3.66%,
4.13%, 4.32% and 4.28% for the years ended December 31, 1995, 1994, 1993,
1992, 1991, 1990 and 1989, respectively.
(6) Disclosure is required for fiscal years beginning after September 1, 1995.
Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.

2
- --------------------------------------------------------------------------------
<PAGE>

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

FINANCIAL HIGHLIGHTS(concluded)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Class A Shares
- -------------------------------------
For the Year Ended December 31,
- -------------------------------------
1993 1992 1991 1990 1989(1)(2) 1988(1)
- ------------------ ---------------- ---------------- ---------------- ---------------- -----------

<S> <C> <C> <C> <C> <C>
$ 12.20 $ 11.28 $ 9.57 $ 10.98 $ 8.24 $ 7.50
--------- -------- -------- -------- -------- --------

0.42 0.42 0.45 0.46 0.52 0.46

1.78 0.93 1.74 (1.29) 3.38 0.97
------ -------- -------- -------- -------- --------
2.20 1.35 2.19 (0.83) 3.90 1.43
--------- -------- -------- -------- -------- --------

(0.42) (0.42) (0.46) (0.45) (0.52) (0.46)

(0.28) (0.01) (0.02) (0.13) (0.64) (0.23)
-------- -------- -------- -------- -------- --------
(0.70) (0.43) (0.48) (0.58) (1.16) (0.69)
-------- -------- -------- -------- -------- --------
$ 13.70 $12.20 $11.28 $9.57 $10.98 $8.24
======== ======== ======== ======== ======== ========
18.12% 12.35% 23.08% (7.55)% 48.86% 19.90%

0.92%(4) 0.92%(4) 0.92%(4) 0.92%(4) 0.93%(4) 0.92%
3.12%(5) 3.81%(5) 4.38%(5) 4.54%(5) 4.41%(5) 5.35%

$469,163 $307,641 $238,571 $177,963 $162,449 $102,483
14% 6% 7% 2% 27% 11%
-- -- -- -- -- --
</TABLE>

3
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------

INVESTMENT PROGRAM

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

Investment Objective, Policies and Risk
Considerations

The Fund's investment objective is to maximize total return. The Fund
will seek to achieve this objective through a combination of long-term growth
of capital and, to a lesser extent, current income. In seeking this objective,
the Fund invests primarily in common stock, securities convertible thereto and
debt obligations of companies in the communications field. For this purpose,
companies would be considered to be in the "communications field" if they were
engaged in the research, development, manufacture or sale of communications
services, technology, equipment or products. Effective communication through
the transmission of voice, pictures and data is becoming increasingly important
and the communications field now embraces a wide variety of products and
services, such as local and long distance telephone service, wireless service
(e.g., cellular telephone or paging services), video, telecommunications
equipment, media, and information technology. There can be no assurance that
the Fund's investment objective will be met. Concentration in the
communications field will subject the Fund to the risks associated with that
field (e.g., regulatory and technological change) and may result in greater
fluctuation in the Fund's net asset value than is experienced in less
concentrated portfolios. The Fund will be non-diversified for purposes of the
Investment Company Act of 1940, as amended (the "Investment Company Act") which
means that the performance of one or a small number of portfolio holdings can
affect overall performance more than would otherwise be the case.

The Fund's investment advisors believe that investing in a portfolio of
securities of companies in the communications field affords an attractive
opportunity for achieving the Fund's investment objective. The Fund's emphasis
is investment in companies offering products and services that both support
traditional communications and facilitate new information-based applications.
Information technology combines data processing and telecommunications to
support more efficient and economical business processes and consumer
activities. The rapidly improving performance and declining cost of
transmission have helped the global expansion of information technology. For
example, businesses have an increasing need to connect to remote users such as
employees, suppliers and customers. Customers are increasingly relying on
telephone-based applications like on-line banking and shopping to save time and
money.

In general, the Fund will invest in investment grade debt obligations
that are rated, at the time of purchase, BBB or higher by Standard and Poor's
Ratings Group ("S&P") or Baa or higher by Moody's Investors Service, Inc.
("Moody's"), or, if unrated, determined to be of comparable quality by the
Fund's investment advisors, under criteria approved by the Fund's Board of
Directors. Investment grade securities (securities rated BBB or higher by S&P
or Baa or higher by Moody's) are generally thought to provide the highest
credit quality and the smallest risk of default. Securities rated BBB by S&P or
Baa by Moody's have speculative characteristics. Up to 10% of the Fund's total
assets (measured at the time of the investment) may be invested in lower
quality debt obligations (securities rated BB or lower by S&P or Ba or lower by
Moody's and unrated securities of comparable quality). Securities that were
investment grade at the time of purchase but are subsequently downgraded to
BB/Ba or lower will be included in the 10% category. In the event any security
owned by the Fund is downgraded, the Fund's investment advisors will review the
situation and take appropriate action, but will not be automatically required
to sell any such security. If such a downgrade causes the 10% limit to be
exceeded, the Fund will be precluded from investing further in debt obligations
that are below investment grade. (See "Investments in Non-Investment Grade
Securities" below.)

Investments in Non-Investment Grade Securities

Lower rated debt obligations, also known as "junk bonds," are considered
to be speculative and involve

4
- --------------------------------------------------------------------------------
<PAGE>

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

greater risk of default or price changes due to changes in the issuer's
creditworthiness. Securities in the lowest rating category that the Fund may
purchase (securities rated C by either S&P or Moody's) may present a particular
risk of default, or may be in default or arrears in the payment of principal
and interest. In addition, C-rated securities may be regarded as having
extremely poor prospects of ever attaining any real investment standing. Yields
and market values of these bonds will fluctuate over time reflecting changing
interest rates and the market's perception of credit quality and the outlook
for economic growth. When economic conditions appear to be deteriorating, lower
rated bonds may decline in value, regardless of prevailing interest rates.
Accordingly, adverse economic developments, including a recession or
substantial period of rising interest rates, may disrupt the high-yield bond
market, affecting both the value and liquidity of such bonds. The market prices
of these securities may fluctuate more than those of higher rated securities,
and may decline significantly in periods of general economic difficulty, which
may follow periods of rising interest rates. An economic downturn could
adversely affect the ability of issuers of such bonds to make payments of
principal and interest to a greater extent than issuers of higher rated bonds
might be affected. The ratings categories of S&P and Moody's are described more
fully in the Appendix to the Statement of Additional Information.

The following table provides a summary of ratings assigned by S&P to debt
obligations in the Fund's portfolio. These figures are dollar-weighted averages
of month-end portfolio holdings during the fiscal year ended December 31, 1997,
presented as a percentage of total investments. These percentages are
historical and are not necessarily indicative of the quality of current or
future portfolio holdings, which may vary.

S&P
Rating Average
- ------------- ----------
AAA 1.68%
AA 0.00%
A 0.00%
BBB 0.00%
BB 0.88%
B 0.00%
Unrated 0.00%

Investments in Repurchase Agreements

Investment in Securities of Foreign Issuers

From time to time, the Fund may invest in American Depositary Receipts
("ADRs"), which are interests in securities of foreign companies, and up to 10%
of the Fund's total assets in debt and equity securities of issuers not
publicly traded in the United States, when the Fund's investment advisors
believe that such investments provide good opportunities for achieving income
and capital gains without undue risk.

Loans of Portfolio Securities

The Fund has the right to lend portfolio securities to approved
institutional borrowers for the purpose of increasing its net investment
income. These loans must be secured continuously by cash or equivalent
collateral, or by a letter of credit at least equal to the market value of the
securities loaned plus accrued interest or income. There may be a risk of delay
in recovery of the securities or even loss of rights in the collateral should
the borrower of the securities fail financially. The Fund's custodian or
another affiliate may act as securities lending agent.

Other Investments

The Fund may write covered call options if each such option is traded on
a national securities exchange (and may purchase calls in related closing
transactions). The Fund may also invest in securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933, as amended ("Rule 144A
Securities") that have been determined to be liquid by the Fund's advisors
under standards approved by the Fund's Board of Directors, and may invest up to
10% of its net assets in Rule 144A Securities that are illiquid (see
"Investment Restrictions" in the Statement of Additional Information). Rule
144A Securities may become illiquid if qualified institutional buyers are not
interested in acquiring the securities.

5
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS

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

The following investment restriction is a matter of fundamental policy
and may not be changed without shareholder approval. Accordingly, the Fund will
not invest less than 65% of its total assets in the communications field,
except as described in this Prospectus (otherwise the Fund will not concentrate
more than 25% of its total assets in securities of issuers in any industry).

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

THE FUND'S NET ASSET VALUE

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

The following sections describe how to buy and redeem shares of the Fund.

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

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

HOW TO BUY INSTITUTIONAL SHARES

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

You may buy Institutional Shares if you are any of the following:

o An eligible institution (e.g., a financial institution, corporation,
investment counselor, trust, estate or educational, religious or
charitable institution).

o A qualified retirement plan with assets of at least $75 million.

o An investment advisory affiliate of BT Alex. Brown purchasing shares for
the accounts of your investment advisory clients.

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

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

Investment Minimums

If you are an eligible institution, your initial investment must be at
least $500,000. There are no minimum initial investments for qualified
retirement plans or investment advisory affiliates of BT Alex. Brown. There are
no minimums for subsequent investments.

Purchases by Exchange

You may exchange Institutional shares of any other Flag Investors fund
for an equal dollar amount of Institutional Shares of the Fund. The Fund may
modify or terminate this offer of exchange at any time on 60 days' prior
written notice to shareholders.

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

Other Information

In the interest of economy and convenience and because of the operating
procedures for the Institutional Shares, certificates representing such shares
will not be issued.

6
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------

HOW TO REDEEM INSTITUTIONAL SHARES

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

You may redeem your shares through your securities dealer or your
servicing agent. Contact them for details on how to enter your order. If your
shares are in an account with the Fund, you may also redeem them by contacting
the Transfer Agent by telephone (if you are redeeming less than $500,000). You
will be paid for redeemed shares by wire transfer of funds to your securities
dealer, servicing agent or bank upon receipt of a duly authorized redemption
request as promptly as feasible and, under most circumstances, within three
Business Days.

Any dividends payable on shares you redeem will be paid on the next
dividend payable date. If you have redeemed all of your shares by that time,
the dividend will be remitted by wire to your securities dealer, servicing
agent or bank.

If you redeem sufficient shares to reduce your investment to $500 or
less, the Fund has the power to redeem the remaining shares after giving you 60
days' notice.

TELEPHONE TRANSACTIONS

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

If your shares are in an account with the Transfer Agent, you may redeem
them in any amount up to $500,000 or exchange them for Institutional Shares of
another Flag Investors fund by calling the Transfer Agent on any Business Day
between the hours of 8:30 a.m. and 5:30 p.m. (Eastern Time). You are
automatically entitled to telephone transaction privileges unless you
specifically request that no telephone redemptions or exchanges be accepted for
your account. You may make this election when you complete the Application Form
or at any time thereafter by completing and returning documentation supplied by
the Transfer Agent.

The Fund and the Transfer Agent will employ reasonable procedures to
confirm that telephoned instructions are genuine. These procedures include
requiring you to provide certain personal identification information at the
time your account is opened and prior to effecting each telephone transaction.
You may be required to provide additional telecopied instructions. If these
procedures are employed, neither the Fund nor the Transfer Agent will bear any
liability for following instructions received by telephone that they reasonably
believe to be genuine. Your telephone transaction request will be recorded.

During periods of extreme economic or market changes, you may experience
difficulty in contacting the Transfer Agent by telephone. In such event, you
should make your request by express mail or facsimile. (See "How to Buy
Institutional Shares -- Purchases by Exchange" and "How to Redeem Institutional
Shares.")

DIVIDENDS AND TAXES

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

Dividends and Distributions

Unless you elect otherwise, all income dividends and net capital gains
distributions will be reinvested in additional Institutional Shares at net
asset value. You may elect to terminate automatic reinvestment by giving
written notice to the Transfer Agent, either directly or through your
securities dealer or servicing agent, at least five days before the next date
on which dividends or distributions will be paid.

Tax Treatment of Dividends and Distributions

The following summary of certain federal income tax consequences
affecting the Fund and its shareholders is based on current tax laws and
regulations, which may be changed by legislative, judicial, or administrative
action. No attempt has been made to present a detailed explanation of the
federal, state or local tax treatment of the Fund or its shareholders, and the
discussion here is not intended as a substitute for careful tax planning.
Accordingly, you are advised to consult with your tax advisor regarding
specific questions.

The Statement of Additional Information sets forth further information
concerning taxes.
7
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------

The Fund has been and expects to continue to be taxed as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended. As long as the Fund qualifies for this tax treatment, it will not pay
federal income tax on
amounts distributed to shareholders. Unless you are otherwise exempt, you will
be generally subject to federal income tax on the amounts distributed to you,
regardless of whether such distributions are paid to you in cash or reinvested
in additional Institutional Shares.

Capital gains distributions from the Fund are classified as either
short-term, long-term or mid-term depending upon how long the Fund held the
securities it sold to generate the gains. You will be taxed on the
distributions according to the category stipulated by the Fund regardless of
how long you have held your Fund shares. You will be taxed on all other income
distributions as ordinary income. If you are a corporate shareholder, you may
be entitled to the dividends received deduction on a portion of dividends
received from the Fund. You will be advised annually as to the federal income
tax status of all distributions.

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

The Fund intends to make sufficient distributions of its ordinary income
and capital gain net income prior to the end of each calendar year to avoid
liability for federal excise tax.

The sale, exchange or redemption of Institutional Shares is a taxable
event for you.

MANAGEMENT OF THE FUND

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

The overall business and affairs of the Fund are managed by its Board of
Directors. The Board approves all significant agreements between the Fund and
persons or companies furnishing services to the Fund, including the Fund's
agreements with its investment advisor, sub-advisor, distributor, custodian and
transfer agent. The day-to-day operations of the Fund are delegated to the
Fund's executive officers, to the Fund's investment advisors and its
distributor. A majority of the Directors are not affiliated with the Fund's
investment advisors or its distributor.

INVESTMENT ADVISOR AND SUB-ADVISOR

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

Investment Company Capital Corp. ("ICC" or the "Advisor") is the Fund's
investment advisor and Alex. Brown Investment Management ("ABIM" or the "Sub-
Advisor") is the Fund's sub-advisor. ICC is the investment advisor to mutual
funds with approximately $6.5 billion of net assets as of December 31, 1997. In
addition to this Fund, these include other funds in the Flag Investors family
of funds and BT Alex. Brown Cash Reserve Fund, Inc. ABIM is a registered
investment advisor with approximately $7.2 billion under management as of
December 31, 1997.

Pursuant to the terms of the Investment Advisory Agreement, ICC
supervises and manages all of the Fund's operations. Under the Investment
Advisory and Sub-Advisory Agreements, ICC delegates to ABIM certain of its
duties, provided that ICC continues to supervise the performance of ABIM and
report thereon to the Fund's Board of Directors. Pursuant to the terms of the
Sub-Advisory Agreement, ABIM is responsible for decisions to buy and sell
securities for the Fund, for broker-dealer selection, and for negotiation of
commission rates. The Board has established procedures under which ABIM may
allocate transactions to certain affiliates, provided that compensation to such
affiliates on each transaction is reasonable and fair compared to the
commission, fee or other remuneration received or to be received by other
broker-dealers in connection with comparable transactions involving similar
securities during a comparable period of time. In addition, consistent with
NASD Rules, and subject to seeking the most favorable price and execution
available and such other policies as the Board may determine, ABIM may consider
services in connection with the sale of shares as a factor in the selection of
broker-dealers to execute portfolio transactions for the Fund.

As compensation for providing investment advisory services to the Fund
for the fiscal year ended December 31, 1997, ICC received a fee equal to 0.70%
of the Fund's average daily net assets and from such fee paid ABIM a
sub-advisory fee equal to 0.49% of the Fund's average daily net assets. ICC may
from time to time voluntarily waive a portion of its fee to improve
performance.

8
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------

BT Alex. Brown owns a 1% general partnership interest in ABIM and BT Alex.
Brown Holdings, Inc. owns the remaining 49% limited partnership interest.

Portfolio Managers

Messrs. Bruce E. Behrens and Liam D. Burke have shared primary
responsibility for managing the Fund's assets since May 1, 1997. From the
Fund's inception through April 30, 1997, Mr. Behrens shared that responsibility
with Hobart C. Buppert, II, who remains at ABIM.

Bruce E. Behrens -- 30 Years' Investment Experience

Mr. Behrens has been a Vice President and a Principal of ABIM since 1981.
Prior to joining ABIM, Mr. Behrens was a Senior Vice President and Principal of
Corbyn Associates from 1978 to 1981 and a Vice President at Investment
Counselors of Maryland from 1972 to 1978. Prior thereto, he was a Security
Analyst at Citibank from 1968 to 1972. Mr. Behrens received his B.A. from
Denison University in 1966 and an M.B.A. from the University of Michigan in
1968. He is a member and past President of the Baltimore Security Analysts
Society and a member of the Financial Analysts Federation.

Liam D. Burke -- 9 Years' Investment Experience

Mr. Burke joined ABIM in 1994 with primary responsibility as a
telecommunications analyst for the Fund. Prior to joining ABIM, Mr. Burke
worked as a telecommunications industry analyst at a regional broker-dealer,
Ferris, Baker, Watts, Inc., from 1992 to 1994 and as managing director of Frey
& Co., a Baltimore-based private investment bank, from 1989 to 1992. Mr. Burke
began his professional career at AT&T and spent eight years in positions that
included operations, regional staff management and national account sales. He
is a graduate of Georgetown University and received his MBA from The George
Washington University.

DISTRIBUTOR

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

ICC Distributors, Inc. ("ICC Distributors" or the "Distributor") serves
as distributor of each class of the Fund's shares. ICC Distributors receives no
compensation for distributing the Institutional Shares. ICC Distributors is a
registered broker-dealer that offers distribution services to a variety of
registered investment companies including other funds in the Flag Investors
family of funds and BT Alex. Brown Cash Reserve Fund, Inc. ICC Distributors is
not affiliated with either the Advisor or the Sub-Advisor.

ICC Distributors bears all expenses associated with advertisements,
promotional materials, sales literature and printing and mailing prospectuses
to other than Fund shareholders. The Advisor or its affiliates may make
payments from their own resources to securities dealers and servicing agents.

CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES

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

Investment Company Capital Corp. is the Fund's transfer and dividend
disbursing agent and provides accounting services to the Fund. As compensation
for providing accounting services to the Fund for the fiscal year ended
December 31, 1997, ICC received a fee equal to 0.02% of the Fund's average
daily net assets. Bankers Trust Company, a subsidiary of Bankers Trust
Corporation, acts as custodian of the Fund's assets. (See the Statement of
Additional Information.)

PERFORMANCE INFORMATION

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

From time to time, the Fund may advertise its performance, including
comparisons to other mutual funds with similar investment objectives and to
stock or other relevant indices. All such advertisements will show the average
annual total return over one-, five- and ten-year periods or, if such periods
have not yet elapsed, shorter periods corresponding to the life of the Fund.
Such total return quotations will be computed by finding the average annual
compounded rates of return over such periods that would equate an assumed
initial investment

9
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------

of $1,000 to the ending redeemable value according to the required standardized
calculation. The standardized calculation is required by the SEC to provide
consistency and comparability in investment company advertising and is not
equivalent to a yield calculation. If the Fund compares its performance to other
funds or to relevant indices, the Fund's performance will be stated in the same
terms in which such comparative data and indices are stated, which is normally
total return rather than yield.

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

GENERAL INFORMATION

- --------------------------------------------------------------------------------
Capital Shares

The Fund is an open-end non-diversified management investment company.
The Fund reorganized as a Maryland corporation on January 19, 1989 and is
authorized to issue 85 million shares of capital stock, with a par value of
$.001 per share. Shares of the Fund have equal rights with respect to voting.
Voting rights are not cumulative, so the holders of more than 50% of the
outstanding shares voting together for election of Directors may elect all the
members of the Board of Directors of the Fund. In the event of liquidation or
dissolution of the Fund, each share is entitled to its pro rata portion of the
Fund's assets after all debts and expenses have been paid. The fiscal year-end
of the Fund is December 31.

The Board of Directors is authorized to establish additional series of
shares of capital stock, each of which would evidence interests in a separate
portfolio of securities, and separate classes of each series of the Fund. The
shares offered by this Prospectus have been designated "Flag Investors
Communications Fund Institutional Shares." The Board has no present intention
of establishing any additional series of the Fund but the Fund has three other
classes of shares, "Flag Investors Communications Fund Class A Shares" and
"Flag Investors Communications Fund Class B Shares," which are offered by a
separate prospectus and "Flag Investors Communications Fund Class D Shares,"
which are not currently being offered. Additional information concerning the
Fund's Class A and Class B Shares may be obtained by calling the Fund at (800)
767-FLAG. Different classes of the Fund may be offered to certain investors and
holders of such shares may be entitled to certain exchange privileges not
offered to Institutional Shares. All classes of the Fund share a common
investment objective, portfolio of investments and advisory fee, but to the
extent the classes have different distribution/service fees or sales load
structures, performance may differ.

Annual Meetings

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

Reports

Shareholder Inquiries

If you have any questions concerning your Institutional Shares, contact
the Fund at (800) 767-FLAG, the Transfer Agent at (800) 553-8080, or your
securities dealer or servicing agent.

10
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------

FLAG INVESTORS COMMUNICATIONS FUND, INC.

(Institutional Shares)

Investment Advisor
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202

Sub-Advisor Distributor
ALEX. BROWN INVESTMENT MANAGEMENT ICC DISTRIBUTORS, INC.
One South Street P.O. Box 7558
Baltimore, Maryland 21202 Portland, Maine 04101

Custodian Fund Counsel
BANKERS TRUST COMPANY MORGAN, LEWIS & BOCKIUS LLP
130 Liberty Street 2000 One Logan Square
New York, New York 10006 Philadelphia, Pennsylvania 19103

- --------------------------------------------------------------------------------
<PAGE>

FLAG INVESTORS COMMUNICATIONS FUND, INC.
(INSTITUTIONAL SHARES)
NEW ACCOUNT APPLICATION
- --------------------------------------------------------------------------------
Make check payable to "Flag Investors Communications Fund Inc.
and mail with this Application to:
Flag Investors Funds
330 West 9th Street, First Floor
Kansas City, MO 64105
Attn: Flag Investors Communications Fund, Inc.

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

If you are paying by check, make check payable to "Flag Investors
Communications Fund, Inc." and mail with this Application. If you are paying by
wire, see instructions below.
- --------------------------------------------------------------------------------
Your Account Registration (Please Print)
- --------------------------------------------------------------------------------

Name on Account

- -------------------------------------------------------------
Name of Corporation, Trust or Partnership

- --------------------------
Tax ID Number

[ ] Corporation [ ] Partnership [ ] Trust

[ ] Non-Profit or Charitable Organization [ ] Other__________

If a Trust, please provide the following:

- --------------------------------------------------------------------------------
Date of Trust For the Benefit of

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

- --------------------------------------------------------------------------------
Mailing Address

- -------------------------------------------------------------
Name of Individual to Receive Correspondence

- -------------------------------------------------------------
Street

- -------------------------------------------------------------
City State Zip

( )
- -------------------------------------------------------------
Daytime Phone

Initial Investment
- --------------------------------------------------------------------------------
Indicate the amount to be invested and the method of payment:
__ A. By Mail: Enclosed is a check in the amount of $__________ payable to
Flag Investors Communications Fund, Inc.

__ B. By Wire: A bank wire in the amount of $__________ has been sent from

________________________ ________________________________
Name of Bank Wire Control Number

Wire Instructions
Follow the instructions below to arrange for a wire transfer for initial
investment:
o Send completed Application by overnight carrier to Flag Investors
Funds at the address listed above.
o Call 1-800-553-8080 to obtain new investor's Fund account number.
o Wire payment of the purchase price to Investors Fiduciary Trust
Company ("IFTC"), as follows:

IFTC
a/c Flag Investors Funds
Acct. # 7519206
ABA # 1010-0362-1
Kansas City, Missouri 64105

Please include the following information in the wire:
o Flag Investors Communications Fund, Inc. -- Institutional Shares
o The amount to be invested
o "For further credit to ________________________________."
(Investor's Fund Account Number)
- --------------------------------------------------------------------------------
Distribution Options
- --------------------------------------------------------------------------------

Please check appropriate boxes. If none of the options are selected, all
distributions will be reinvested in additional Institutional Shares of the
Fund.
Income Dividends
[ ] Reinvested in additional shares
[ ] Paid in cash

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

- --------------------------------------------------------------------------------
Telephone Transactions
- --------------------------------------------------------------------------------

I understand that I will automatically have telephone redemption privileges
(for amounts up to $500,000) and exchange privileges (with respect to
Institutional Shares of other Flag Investors Funds) unless I mark one or both
of the boxes below:
No, I do not want: [ ] Telephone redemption privileges
[ ] Telephone exchange privileges

Redemptions effected by telephone will be wired to the bank account designated
below.
- --------------------------------------------------------------------------------
Bank Account Designation (This Section Must Be Completed)
- --------------------------------------------------------------------------------
Please attach a blank, voided check to provide account and bank routing
information.

- --------------------------------------------------------------------------------
Name of Bank Branch

- --------------------------------------------------------------------------------
Bank Address City/State/Zip

- --------------------------------------------------------------------------------
Name(s) on Account

- --------------------------------------------------------------------------------
Account Number A.B.A. Number
A-1
<PAGE>
- --------------------------------------------------------------------------------
Acknowledgment, Certificate and Signature
- --------------------------------------------------------------------------------

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

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

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

[ ] Non-U.S. Citizen/Taxpayer: Indicated country of residence for tax
purposes: _________________________
Under penalties of perjury, I certify that I am not a U.S. citizen or
resident and I am an exempt foreign person as defined by the Internal Revenue
Service.
- --------------------------------------------------------------------------------
I have received a copy of the Fund's prospectus. I acknowledge that the
telephone redemption and exchange privileges are automatic and will be effected
as described in the Fund's current prospectus (see "Telephone Transactions"). I
also acknowledge that I may bear the risk of loss in the event of fraudulent
use of such privileges. If I do not want telephone redemption or exchange
privileges, I have so indicated on this Application.
- --------------------------------------------------------------------------------
The Internal Revenue Service does not require your consent to any provision of
this document other than the certifications required to avoid backup
withholding.

- --------------------------------------------------------------------------------
Signature of Corporate Officer, General Partner, Trustee, etc. Date

- --------------------------------------------------------------------------------
Person(s) Authorized to Conduct Transactions
- --------------------------------------------------------------------------------
The following person(s) ("Authorized Person(s)") are currently officers,
trustees, general partners or other authorized agents of the investor. Any
- --- * of the Authorized Person(s) is, by lawful and appropriate action of the
investor, a person entitled to give instructions regarding purchases and
redemptions or make inquiries regarding the Account.

- ------------------------------------ ------------------------------------
Name/Title Signature Date

<PAGE>

The signature appearing to the right of each Authorized Person is that person's
signature. Investment Company Capital Corp. ("ICC") may, without inquiry, act
upon the instructions (whether verbal, written, or provided by wire,
telecommunication, or any other process) of any person claiming to be an
Authorized Person. Neither ICC nor any entity on behalf of which ICC is acting
shall be liable for any claims or expenses (including legal fees) or for any
losses resulting from actions taken upon any instructions believed to be
genuine. ICC may continue to rely on the instructions made by any person
claiming to be an Authorized Person until it is informed through an amended
Application that the person is no longer an Authorized Person and it has a
reasonable period (not to exceed one week) to process the amended Application.
Provisions of this Application shall be equally Applicable to any successor of
ICC.
* If this space is left blank, any one Authorized Person is authorized to give
instructions and make inquiries. Verbal instructions will be accepted from
any one Authorized Person. Written instructions will require signatures of
the number of Authorized Persons indicated in this space.
- --------------------------------------------------------------------------------
Certificate of Authority
- --------------------------------------------------------------------------------

Investors must complete one of the following two Certificates of Authority.

Certificate A: FOR CORPORATIONS AND UNINCORPORATED ASSOCIATIONS (With a Board
of Directors or Board of Trustees.)

I ______________________ , Secretary of the above-named investor, do hereby
certify that at a meeting on _________________ , at which a quorum was present
throughout, the Board of Directors (Board of Trustees) of the investor duly
adopted a resolution which is in full force and effect and in accordance with
the investor's charter and by-laws, which resolution did the following: (1)
empowered the officers/trustees executing this Application (or amendment) to do
so on behalf of the investor; (2) empowered the above-named Authorized Person(s)
to effect securities transactions for the investor on the terms described above;
(3) authorized the Secretary to certify, from time to time, the names and titles
of the officers of the investor and to notify ICC when changes in officers
occur; and (4) authorized the Secretary to certify that such a resolution has
been duly adopted and will remain in full force and effect until ICC receives a
duly-executed amendment to the Certification form.

Witness my hand and seal on behalf of the investor.

this __ day of _______, 199__ Secretary______________________________

The undersigned officer (other than the Secretary) hereby certifies that the
foregoing instrument has been signed by the Secretary of the investor.

- --------------------------------------------------------------------------------
Signature and title Date

Certificate B: FOR PARTNERSHIPS AND TRUSTS (Even if you are the sole trustee)

The undersigned certify that they are all general partners/trustees of the
investor and that they have done the following under the authority of the
investor's partnership agreement/trust instrument: (1) empowered the general
partner/trustee executing this Application (or amendment) to do so on behalf of
the investor; (2) empowered the above-named Authorized Person(s) to effect
securities transactions for the investor on the terms described above; (3)
authorized the Secretary to certify, from time to time, the names of the
general partners/trustees of the investor and to notify ICC when changes in
general partners/trustees occur. This authorization will remain in full force
and effect until ICC receives a further duly-executed certification. (If there
are not enough spaces here for all necessary signatures, complete a separate
certificate containing the language of this Certificate B and attach it to the
Application).

- --------------------------------------------------------------------------------
Signature and title Date

A-2

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

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

FLAG INVESTORS COMMUNICATIONS FUND, INC.

One South Street
Baltimore, Maryland 21202

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

THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A
PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH A
PROSPECTUS, WHICH MAY BE OBTAINED FROM ANY
PARTICIPATING DEALER OR SHAREHOLDER SERVICING AGENT
OR BY WRITING OR CALLING THE FUND, ONE SOUTH
STREET, BALTIMORE, MARYLAND 21202, (800) 767-FLAG.

Statement of Additional Information Dated: May 1, 1998
for the Prospectuses Dated: May 1, 1998
for the
Flag Investors Class A Shares
Flag Investors Class B Shares
and
Flag Investors Institutional Shares

<PAGE>

TABLE OF CONTENTS

Page

1. General Information and History.............................. 1
2. Investment Objective and Policies............................ 2
3. Valuation of Shares and Redemption........................... 7
4. Federal Tax Treatment of Dividends and Distributions......... 8
5. Management of the Fund....................................... 10
6. Investment Advisory and other Services....................... 15
7. Distribution of Fund Shares.................................. 17
8. Brokerage.................................................... 21
9. Capital Stock................................................ 22
10. Semi-Annual Reports.......................................... 23
11. Custodian, Transfer Agent and Accounting Services............ 23
12. Independent Accountants...................................... 24
13. Legal Matters................................................ 24
14. Performance Information...................................... 24
15. Control Persons and Principal Holders of Securities.......... 27
16. Financial Statements ........................................ 27

Appendix..................................................... A-1

<PAGE>
1. GENERAL INFORMATION AND HISTORY

Flag Investors Communications Fund, Inc. (the "Fund") is an
open-end management investment company that was originally designed to provide
both convenience and professional investment management to shareholders of the
former American Telephone and Telegraph Company ("AT&T") after AT&T's
divestiture and reorganization in January 1984. Prior to May 1, 1998 the Fund
was known as the Flag Investors Telephone Income Fund, Inc.

Under the rules and regulations of the Securities and Exchange
Commission (the "SEC"), all mutual funds are required to furnish prospective
investors with certain information concerning the activities of the company
being considered for investment. The Fund currently offers three classes of
shares: Flag Investors Communications Fund Class A Shares ("Class A Shares"),
Flag Investors Communications Fund Class B Shares ("Class B Shares") and Flag
Investors Communications Fund Institutional Shares ("Institutional Shares")
(collectively, "Shares"). As used herein, the "Fund" refers to Flag Investors
Communications Fund, Inc. and specific references to any class of the Fund's
shares will be made using the name of such class. Important information
concerning the Fund is included in the Fund's Prospectuses which may be obtained
without charge from the Fund's distributor (the "Distributor") or from
Participating Dealers that offer shares of the respective classes of the Fund
("Shares") to prospective investors. Prospectuses may also be obtained from
Shareholder Servicing Agents. Some of the information required to be in this
Statement of Additional Information is also included in the Fund's current
Prospectuses. To avoid unnecessary repetition, references are made to related
sections of the Prospectuses. In addition, the Prospectuses and this Statement
of Additional Information omit certain information about the Fund and its
business that is contained in the Registration Statement for the Fund and its
Shares filed with the SEC. Copies of the Registration Statement as filed,
including such omitted items, may be obtained from the SEC by paying the charges
prescribed under its rules and regulations.

The Fund was organized as a Maryland corporation on October
18, 1983 and commenced operations on January 18, 1984. On May 20, 1985, the Fund
reorganized as a Massachusetts business trust and on January 19, 1989, it
reorganized as a Maryland corporation pursuant to an Agreement and Plan of
Reorganization and Liquidation approved by shareholders on December 6, 1988. The
Fund commenced offering the Class B Shares on January 3, 1995 and the
Institutional Shares on February 26, 1998.

For the period from April 6, 1993 through November 18, 1994,
the Fund offered another class of shares: Flag Investors Telephone Income Fund
Class D Shares, which were reclassified as Flag Investors Communications Fund
Class D Shares on May 1, 1998. Shares of that class are not currently being
offered although shares remain outstanding.

Under a license agreement dated January 19, 1989 between the
Fund and Alex. Brown Incorporated (now BT Alex. Brown Incorporated), BT Alex.
Brown Incorporated licenses to the Fund the "Flag Investors" name and logo but
retains rights to that name and logo, including the right to permit other
investment companies to use them.

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

-1-
<PAGE>

2. INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is to maximize total return.
The Fund will seek to achieve this objective through a combination of long-term
growth of capital and, to a lesser extent, current income. In seeking this
objective, the Fund invests primarily in common stock, securities convertible
thereto and debt obligations of companies in the communications field. For this
purpose, companies would be considered to be in the "communications field" if
they were engaged in the research, development, manufacture or sale of
communications services, technology, equipment or products. Companies would be
considered to be "engaged" in the research, development, manufacture or sale of
communications services, technology, equipment or products if they derived at
least 50% of their revenues from such activites. The Fund's investment advisor
(the "Advisor") and sub-advisor (the "Sub-Advisor"), collectively, (the
"Advisors"), believe that investing in a portfolio of securities of companies in
the communications field affords an attractive opportunity for achieving this
investment objective. There can be no assurance, however, that the Fund's
investment objective will be achieved. The Fund's investment objective may not
be changed by the Board of Directors without shareholder approval.

Depending on the circumstances, the Fund may temporarily and
for defensive purposes, invest up to 100% of its net assets in money market
instruments and in other income-producing securities. The Fund may also enter
into repurchase agreements, may loan portfolio securities, and may write covered
call options. In general, the Fund will invest in investment grade debt
obligations that are rated, at the time of purchase, BBB or higher by Standard &
Poor's Ratings Group ("S&P") or Baa or higher by Moody's Investors Service, Inc.
("Moody's"). Up to 10% of the Fund's assets may be invested in lower quality
debt obligations (securities rated BB or lower by S&P or Ba or lower by
Moody's). (See "Below Investment Grade Securities" below.) The ratings
categories of S&P and Moody's are described more fully in Appendix A.

Below Investment Grade Securities

The Fund may purchase debt obligations that carry ratings
lower than those assigned to investment grade bonds by Moody's or S&P, or that
are unrated if such bonds, in the Advisors' judgment, meet the quality criteria
established by the Board of Directors. These bonds are generally known as "junk
bonds." These securities may trade at substantial discounts from their face
values. Accordingly, if the Fund is successful in meeting its objectives,
investors may receive a total return consisting not only of income dividends
but, to a lesser extent, capital gain distributions. Appendix A to this
Statement of Additional Information sets forth a description of the S&P and
Moody's rating categories, which indicate the rating agency's opinion as to the
probability of timely payment of interest and principal. These ratings range in
descending order of quality from AAA to D (though the Fund will not purchase
securities rated, at the time of purchase, below C), in the case of S&P, and
from Aaa to C, in the case of Moody's. Generally, securities that are rated
lower than BBB by S&P or Baa by Moody's are described as below investment grade.
Securities rated lower than investment grade may be of a predominantly
speculative character and their future cannot be considered well-assured. The
issuer's ability to make timely payments of principal and interest may be
subject to material contingencies. Securities in the lowest rating categories
may be unable to make timely interest or principal payments and may be in
default and in arrears in interest and principal payments.

Ratings of S&P and Moody's represent their opinions of the
quality of bonds and other debt securities they undertake to rate at the time of
issuance. However, these ratings are not absolute standards of quality and may
not reflect changes in an issuer's creditworthiness. Accordingly, the Advisors
do not rely exclusively on ratings issued by S&P or Moody's in selecting
portfolio securities but supplement such ratings with independent and ongoing
review of credit quality. In addition, the total return the Fund may earn from
investments in high-yield securities will be significantly affected not only by
credit quality but by fluctuations in the markets in which such securities are
traded. Accordingly, selection and supervision by the Advisors of investments in
lower rated securities involves continuous analysis of individual issuers,
general business conditions, activities in the high-yield bond market and other
factors. The analysis of issuers may include, among other things, historic and
current financial conditions, strength of management, responsiveness to business
conditions, credit standing and current and anticipated results of operations.
Analysis of general business conditions and other factors may include
anticipated changes in economic activity in interest rates, the availability of
new investment opportunities and the economic outlook for specific industries.

-2-

<PAGE>

Investing in higher yield, lower rated bonds entails
substantially greater risk than investing in investment grade bonds, including
not only credit risk, but potentially greater market volatility and lower
liquidity. Yields and market values of high-yield bonds will fluctuate over
time, reflecting not only changing interest rates but the bond market's
perception of credit quality and the outlook for economic growth. When economic
conditions appear to be deteriorating, lower rated bonds may decline in value
due to heightened concern over credit quality, regardless of prevailing interest
rates. In adverse economic conditions, the liquidity of the secondary market for
junk bonds may be significantly reduced. In addition, adverse economic
developments could disrupt the high-yield market, affecting both price and
liquidity, and could also affect the ability of issuers to repay principal and
interest, thereby leading to a default rate higher than has been the case
historically. Even under normal conditions, the market for junk bonds may be
less liquid than the market for investment grade corporate bonds. There are
fewer securities dealers in the high-yield market and purchasers of high-yield
bonds are concentrated among a smaller group of securities dealers and
institutional investors. In periods of reduced market liquidity, the market for
junk bonds may become more volatile and there may be significant disparities in
the prices quoted for high-yield securities by various dealers. Under conditions
of increased volatility and reduced liquidity, it would become more difficult
for the Fund to value its portfolio securities accurately because there might be
less reliable, objective data available.

Finally, prices for high-yield bonds may be affected by
legislative and regulatory developments. For example, from time to time,
Congress has considered legislation to restrict or eliminate the corporate tax
deduction for interest payments or to regulate corporate restructurings such as
takeovers, mergers or leveraged buyouts. Such legislation may significantly
depress the prices of outstanding high-yield bonds.

Repurchase Agreements

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

-3-

<PAGE>

Lending of Portfolio Securities

The Fund may lend its investment securities to approved institutional
borrowers who need to borrow securities in order to complete certain
transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its investment
securities, the Fund attempts to increase its net investment income through the
receipt of interest on the loan. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan would be for the
account of the Fund. The Fund may lend its investment securities so long as the
terms, structure and the aggregate amount of such loans are not inconsistent
with the Investment Company Act of 1940, as amended (the "1940 Act") or the
Rules and Regulations or interpretations of the SEC thereunder, which currently
require that (a) the borrower pledge and maintain with the Fund collateral
consisting of liquid, unencumbered assets having a value at all times not less
than 100% of the value of the securities loaned, (b) the borrower add to such
collateral whenever the price of the securities loaned rises (i.e., the borrower
"marks to the market" on a daily basis), (c) the loan be made subject to
termination by the Fund at any time, and (d) the Fund receive reasonable
interest on the loan (which may include the Fund investing any cash collateral
in interest bearing short-term investments), and distributions on the loaned
securities and any increase in their market value. There may be risks of delay
in recovery of the securities or even loss of rights in the collateral should
the borrower of the securities fail financially. However, loans will be made
only to borrowers deemed by the Advisors to be of good standing and when, in the
judgment of the Advisors, the consideration which can be earned currently from
such securities loans justifies the attendant risk. All relevant facts and
circumstances, including the creditworthiness of the borrower, will be
considered in making decisions with respect to the lending of securities,
subject to review by the Board of Directors of the Fund.

At the present time, the staff of the SEC does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Board of Directors. In addition, voting
rights may pass with the loaned securities, but if a material event will occur
affecting an investment on loan, the loan must be called and the securities
voted.

Covered Call Options

In an attempt to earn additional income, and as a means of
protecting the Fund's assets against market declines, the Fund may, to a limited
extent, write covered call option contracts on certain of its securities and
purchase call options for the purpose of terminating its outstanding obligations
with respect to securities upon which call option contracts have been written.

When the Fund writes a call option on securities that it owns,
it gives the purchaser of the option the right to buy the securities at the
price specified in the option (the "Exercise Price") at any time prior to the
expiration of the option. In the strategy to be employed by the Fund, the
Exercise Price, plus the option premium paid by the purchaser, is almost always
greater than the market price of the underlying security at the time the option
is written. If any option is exercised, the Fund will realize the long-term or
short-term gain or loss from the sale of the underlying security and the
proceeds of the sale will be increased by the net premium originally received.
By writing a covered option, the Fund may forego, in exchange for the net
premium, the opportunity to profit from an increase in value of the underlying
security above the Exercise Price. Thus, options will be written when the
Advisors believe the security should be held for the long term but expect no
appreciation or only moderate appreciation within the option period. The Fund
also may write covered options on securities that have a current value above the
original purchase price but which, if then sold, would not normally qualify for
a long-term capital gains treatment. Such activities will normally take place
during periods when market volatility is expected to be high.

Only call options that are traded on a national securities
exchange will be written. Call options are issued by the Options Clearing
Corporation, which also serves as the clearing

-4-

<PAGE>

house for transactions with respect to options. The price of a call option is
paid to the writer without refund on expiration or exercise, and no portion of
the price is retained by The Options Clearing Corporation or the exchanges
listed above. Writers and purchasers of options pay the transaction costs, which
may include commissions charged or incurred in connection with such option
transactions.

The Fund may write options contracts on its securities up to
an amount not in excess of 20% of the value of its net assets at the time such
options are written. The Fund will not sell the securities against which options
have been written (uncover the options) until after the option period has
expired, the option has been exercised or a closing purchase has been executed.

Call options may be purchased by the Fund, but only to
terminate an obligation as a writer of a call option. This is accomplished by
making a closing purchase transaction, that is, the purchase of a call option on
the same security with the same Exercise Price and expiration date as specified
in the call option that had been written previously. A closing purchase
transaction with respect to calls traded on a national securities exchange has
the effect of extinguishing the obligation of a writer. Although the cost to the
Fund of such a transaction may be greater than the net premium received by the
Fund upon writing the original option, the Directors believe that it is
appropriate for the Fund to have the ability to make closing purchase
transactions in order to prevent its portfolio securities from being purchased
pursuant to the exercise of a call. The Advisors may also permit the call option
to be exercised. A profit or loss from a closing purchase transaction will be
realized depending on whether the amount paid to purchase a call to close a
position is less or more than the amount received from writing the call. A
profit or loss from an option exercised will be realized depending upon whether
the cost of the stock sold through the exercise, minus the premium received on
the option, is less or more than the proceeds of the exercise.

Investment Restrictions

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

1. Invest in the securities of a single issuer if, as a
result, the Fund would hold more than 10% of the outstanding voting securities
of such issuer.

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

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

4. Purchase or sell commodities or commodities
contracts;

-5-

<PAGE>

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

6. Issue senior securities;

7. Make loans, except that the Fund may purchase or hold debt
instruments in accordance with its investment objectives and policies, and may
loan portfolio securities and enter into repurchase agreements as described in
this Registration Statement;

8. Effect short sales of securities;

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

-6-

<PAGE>

10. Purchase participations or other interests in oil, gas or
other mineral exploration or development programs; or

11. Invest more than 10% of the value of its net assets in
illiquid securities (as defined under federal and state securities laws),
including repurchase agreements with remaining maturities in excess of seven
days.

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

1. Invest in shares of any other investment company registered
under the Investment Company Act of 1940, except as permitted by federal law.

3. VALUATION OF SHARES AND REDEMPTION

Valuation of Shares

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

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

Redemption

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

-7-

<PAGE>

Under normal circumstances, the Fund will redeem shares by
check or by wire transfer of funds. However, if the Board of Directors
determines that it would be in the best interests of the remaining shareholders
of the Fund to make payment of the redemption price in whole or in part by a
distribution in kind of readily marketable securities from the portfolio of the
Fund in lieu of cash, in conformity with applicable rules of the SEC, the Fund
will make such distributions in kind. If Shares are redeemed in kind, the
redeeming shareholder will incur brokerage costs in later converting the assets
into cash. The method of valuing portfolio securities is described in the
Prospectus under "How to Invest in the Fund," and such valuation will be made as
of the same time the redemption price is determined. The Fund, however, has
elected to be governed by Rule 18f-1 under the 1940 Act pursuant to which the
Fund is obligated to redeem Shares solely in cash up to the lesser of $250,000
or 1% of the net asset value of the Fund during any 90-day period for any one
shareholder.

4. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS

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

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

Qualification as a Regulated Investment Company

The Fund has elected to be, and intends to be, taxed as a
regulated investment company ("RIC") under Subchapter M of the Code. In order to
qualify as a RIC for any taxable year, the Fund must generally derive at least
90% of its gross income from dividends, interest, certain payments with respect
to securities loans, and gains from the sale or other disposition of stock,
securities, or foreign currencies and other income (including, but not limited
to, gains from options, futures or forward contracts) derived with respect to
its business of investing in stocks, securities or currencies (the "Income
Requirement").

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

-8-

<PAGE>

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

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

If for any taxable year, the Fund does not qualify as a
regulated investment company, all of its taxable income will be subject to tax
at regular corporate income tax rates without any deduction for distributions to
shareholders, and all such distributions generally will be taxable to
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the 70% dividends received deduction for corporate shareholders.

Fund Distributions

Distributions of investment company taxable income will be
taxable to shareholders as ordinary income, regardless of whether such
distributions are paid in cash or are reinvested in additional Shares.

The Fund may either retain or distribute to shareholders its
excess of net long-term capital gains over net short-term capital losses ("net
capital gain") for each taxable year. If such gains are distributed as a capital
gains distribution, they are taxable to shareholders as long-term gains from the
sale or exchange of a capital asset held for more than one year, regardless of
the length of time the shareholder has held the Shares, whether or not such
gains were recognized by the Fund prior to the date on which a shareholder
acquired the Shares and whether or not the distribution was paid in cash or
reinvested in Shares. In the unlikely event the Fund elects to retain its net
capital gains, it is expected that the Fund will elect to have shareholders
treated as having received a distribution of such gains, with the result that
shareholders will be required to report such gains on their returns as long-term
capital gains, will receive a tax credit for their allocable share of capital
gains tax paid by the Fund on the gains, and will increase the tax basis for
their Shares by an amount equal to 65% of such gains.

Generally, gain or loss on the sale or exchange of Shares will
be capital gain or loss, which will be long-term if the Shares have been held
for eighteen months or more, mid-term if the Shares have been held for more than
twelve but less than eighteen months, and otherwise will be short-term. However,
a shareholder who realizes a loss on the sale, exchange or redemption of Shares
held for six months or less and has previously received a capital gains
distribution with respect to the Shares (or has included in income any
undistributed net capital gains of the Fund with respect to such Shares) must
treat the loss as a long-term capital loss to the extent of the amount of the
prior capital gains distribution (or any undistributed net capital gains of the
Fund with respect to such Shares that have been included in the shareholder's
income). In addition, any loss realized on a sale or other disposition of Shares
will be disallowed to the extent an investor repurchases (or enters into a
contract or option to repurchase) Shares within a period of 61 days (beginning
30 days

-9-

<PAGE>

before and ending 30 days after the disposition of the Shares). This loss
disallowance rule will apply to Shares received through the reinvestment of
dividends during the 61-day period.

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

In the case of corporate shareholders, Fund distributions
(other than capital gains distributions) generally qualify for the 70% dividends
received deduction to the extent of the gross amount of certain qualifying
dividends received by the Fund for the year. Generally, a dividend will be
treated as a qualifying dividend if it has been received from a domestic
corporation. For purposes of the alternative minimum tax and the environmental
tax, corporate shareholders generally will be required to take the full amount
of any dividend received from the Fund into account in determining their
adjusted current earnings for purposes of computing "alternative minimum taxable
income."

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

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

Federal Excise Tax; Miscellaneous Considerations

The Code imposes a nondeductible 4% federal excise tax on RICs
that do not distribute in each calendar year an amount equal to 98% of their
ordinary income for the calendar year plus 98% of their capital gain net income
(the excess of long- and short-term capital gain over long- and short-term
capital loss) for the one-year period ending on October 31 of such calendar
year. The excise tax is imposed on the undistributed part of this required
distribution. In addition, the balance of such income must be distributed during
the next calendar year to avoid liability for the excise tax in that year. For
the foregoing purposes, an investment company is treated as having distributed
any amount on which it is subject to income tax for any taxable year ending in
such calendar year.

The Fund intends to make sufficient distributions of its
ordinary income and capital gain net income prior to the end of each calendar
year to avoid liability for excise tax. In certain circumstances the Fund may be
required to liquidate portfolio investments in order to make sufficient
distributions to avoid excise tax liability.

Rules of state and local taxation of dividend and capital
gains distributions from regulated investment companies often differ from the
rules for federal income taxation described above. Shareholders are urged to
consult their tax advisors as to the consequences of these and other state and
local tax rules affecting investment in the Fund.

5. MANAGEMENT OF THE FUND

Directors and Officers

The Directors and executive officers of the Fund, their
respective dates of birth and their principal occupations during the last five
years are set forth below. Unless otherwise indicated, the address of each
Director and executive officer is One South Street, Baltimore, Maryland 21202.

*TRUMAN T. SEMANS, Chairman (10/27/26)
Managing Director Emeritus, BT Alex. Brown Incorporated; Formerly, Vice
Chairman, Alex. Brown Incorporated (now BT Alex. Brown Incorporated);
Vice Chairman, Alex. Brown Capital Advisory & Trust Company; and
Director, Investment Company Capital Corp. (registered investment
advisor).

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<PAGE>

*RICHARD T. HALE, Director (7/17/45)
Managing Director, BT Alex. Brown Incorporated; Director and President,
Investment Company Capital Corp. (registered investment advisor); and
Chartered Financial Analyst.

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

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

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

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

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

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<PAGE>

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

HARRY WOOLF, President (8/12/23)
Institute for Advanced Study, Olden Lane, Princeton, New Jersey 08540.
Professor-at- Large Emeritus, Institute for Advanced Study; Director,
ATL and Spacelabs Medical Corp. (medical equipment); and Family Health
International (non-profit research and education); Director, Research
America (non-profit medical research); Formerly, Director, Flag
Investors/ISI/BT Alex. Brown Family of Funds; Trustee, Rockefeller
Foundation; Director, Merrill Lynch Cluster C Funds (registered
investment companies); and Trustee, Reed College (education).

AMY M. OLMERT, Secretary (5/14/63)
Vice President, BT Alex. Brown Incorporated, June 1997-Present.
Formerly, Senior Manager, Coopers & Lybrand L.L.P., September 1988 -
June 1997.

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

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

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

* Messrs. Semans and Hale are directors who are "interested persons,"
as defined in the 1940 Act.

Directors and officers of the Fund are also directors and
officers of some or all of the other investment companies managed, administered
or advised by BT Alex. Brown Incorporated ("BT Alex. Brown") or its affiliates.
There are currently 13 funds in the Flag Investors/ISI Funds and BT Alex. Brown
Cash Reserve Fund, Inc. fund complex (the "Fund Complex"). Mr. Hale serves as
Chairman of four funds and Director of eight other funds in the Fund Complex.
Mr. Semans serves as Chairman of five funds and as a Director of six other funds
in the Fund Complex. Messrs. Cunnane, Kroeger, Levy and McDonald serve as
Directors of each fund in the Fund Complex. Ms. Rimel and Mr. Vogt serve as
Directors of 11 funds in the Fund Complex. Mr. Woolf serves as President of
seven funds in the Fund Complex. Ms. Olmert serves as Secretary, Mr. Finelli
serves as Treasurer and Mr. Liotta serves as Assistant Secretary of each of the
funds in the Fund Complex.

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<PAGE>

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

With the exception of the Fund's President, officers of the
Fund receive no direct remuneration in such capacity from the Fund. Officers and
Directors of the Fund who are officers or directors of BT Alex. Brown or its
affiliates may be considered to have received remuneration indirectly. As
compensation for his or her services as director, each Director who is not an
"interested person" of the Fund (as defined in the 1940 Act) (an "Independent
Director") and Mr. Woolf, the Fund's President, receives an aggregate annual fee
(plus reimbursement for reasonable out-of-pocket expenses incurred in connection
with his or her attendance at board and committee meetings) from each fund in
the Fund Complex for which he or she serves. In addition, the Chairman of the
Fund Complex's Audit Committee receives an aggregate annual fee from the Fund
Complex. Payment of such fees and expenses is allocated among all such funds
described above in direct proportion to their relative net assets. For the
fiscal year ended December 31, 1997, Independent Directors' fees attributable to
the assets of the Fund totaled $28,152.

The following table shows aggregate compensation payable to each of the
Fund's Directors by the Fund and the Fund Complex, respectively, and pension or
retirement benefits accrued as part of Fund expenses in the fiscal year ended
December 31, 1997.

COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------------------------
Total Compensation
Name of Person, Position Aggregate Compensation Pension or Retirement From the Fund
From the Fund Payable to Benefits Accrued As and Fund Complex
Directors for the Fiscal Year Part of Fund Expenses Payable to Directors
Ended December 31, 1997 for the Fiscal Year
Ended December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Truman T. Semans, Chairman (1) $0 $0 $0

Richard T. Hale, Director(1) $0 $0 $0

Charles W. Cole, Jr., Director (1), (2) $0 $0 $0

James J. Cunnane, Director $3,600 (3) (4) $39,000 for service on 13
Boards in the Fund Complex

John F. Kroeger, Director $4,523 (4) $49,000 for service on 13
Boards in the Fund Complex

Louis E. Levy, Director $3,600 (3) (4) $39,000 for service on 13
Boards in the Fund Complex

Eugene J. McDonald, Director $3,600 (3) (4) $39,000 for service on 13
Boards in the Fund Complex

Rebecca W. Rimel, Director $3,656 (3) (4) $39,000 for service on 11(5)
Boards in the Fund Complex

Carl W. Vogt, Esq., Director $3,714 (3) (4) $39,000 for service on 11(5)
Boards in the Fund Complex
</TABLE>

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<PAGE>

(1) A Director who is an "interested person" as defined in the 1940 Act.
(2) Resigned effective September 1, 1997.
(3) Of amounts payable to Messrs. Cunnane, Levy, McDonald and Vogt,
and to Ms. Rimel, $0, $3,600, $3,714 and $3,656, respectively, was
deferred pursuant to a deferred compensation plan.
(4) The Fund Complex has adopted a Retirement Plan for eligible Directors, as
described below. The actuarially computed pension expense for the Fund
for the year ended December 31, 1997 was approximately $62,142.
(5) Ms. Rimel and Mr. Vogt receive proportionately higher compensation from
each fund for which they serve as a Director.

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

Set forth in the table below are the estimated annual benefits
payable to a Participant upon retirement assuming various years of service and
payment of a percentage of the fee earned by such Participant in his or her last
year of service, as described above. The approximate credited years of service
at December 31, 1997 are as follows: for Mr. Cunnane, 3 years; for Mr. Kroeger,
15 years; for Mr. Levy, 3 years; for Mr. McDonald, 5 years; for Ms. Rimel, 2
years; and for Mr. Vogt, 2 years.

Years of Service Estimated Annual Benefits Payable By Fund Complex Upon Retirement
- ---------------- -----------------------------------------------------------------

Chairman of Audit Committee Other Participants
--------------------------- ------------------
<S> <C> <C>
6 years $4,900 $3,900
7 years $9,800 $7,800
8 years $14,700 $11,700
9 years $19,600 $15,600
10 years or more $24,500 $19,500
</TABLE>

Any Director who receives fees from the Fund is permitted to
defer a minimum of 50%, or up to all, of his or her annual compensation pursuant
to a Deferred Compensation Plan. Messrs. Cunnane, Levy, McDonald and Vogt and
Ms. Rimel have each executed a Deferred Compensation Agreement. Currently, the
deferring Directors may select from among various Flag Investors funds and BT
Alex. Brown Cash Reserve Fund, Inc. in which all or part of their deferral
account shall be deemed to be invested. Distributions from the deferring
Directors' deferral accounts will be paid in cash, in generally equal quarterly
installments over a period of ten years.

-14-

<PAGE>

Code of Ethics

The Board of Directors of the Fund has adopted a Code of Ethics
pursuant to Rule 17j-1 under the 1940 Act. The Code of Ethics applies to the
personal investing activities of all the directors and officers of the Fund, as
well as to designated officers, directors and employees of the Advisors and the
Distributor. As described below, the Code of Ethics imposes additional
restrictions on the Advisors' investment personnel, including the portfolio
managers and employees who execute or help execute a portfolio manager's
decisions or who obtain contemporaneous information regarding the purchase or
sale of a security by the Fund.

The Code of Ethics requires that any officer, director or
employee of the Fund, or the Advisors or, if they are access persons in the case
of the Distribu tor, preclear personal securities investments (with certain
exceptions, such as non-volitional purchases or purchases that are part of an
automatic dividend reinvestment plan). The preclearance requirement and
associated procedures are designed to identify any substantive prohibition or
limitation applicable to the proposed investment. The substantive restrictions
applicable to investment personnel include a ban on acquiring any securities in
an initial public offering, a prohibition from profiting on short-term trading
in securities and special preclearance of the acquisition of securities in
private placements. Furthermore, the Code of Ethics provides for trading
"blackout periods" that prohibit trading by investment personnel and certain
other employees within periods of trading by the Fund in the same security.
Trading by investment personnel and certain other employees of the Advisor or
Sub-Advisor, as appropriate, would be exempt from this "blackout period"
provided that (1) the market capitalization of a particular security exceeds $2
billion; and (2) orders of such entity (including trades of both clients and
covered persons) do not exceed ten percent of the daily average trading volume
of the security for the prior 15 days. Officers, directors and employees of the
Advisors and the Distributor may comply with codes instituted by those entities
so long as they contain similar requirements and restrictions.

6. INVESTMENT ADVISORY AND OTHER SERVICES

On June 17, 1997, the Board of Directors of the Fund, including a
majority of the Independent Directors, approved an Investment Advisory Agreement
between the Fund and Investment Company Capital Corp. ("ICC" or the "Advisor")
and a Sub-Advisory Agreement among the Fund, ICC and Alex. Brown Investment
Management ("ABIM" or the "Sub-Advisor"), both of which contracts are described
in greater detail below. The Investment Advisory Agreement and the Sub-Advisory
Agreement were approved by a vote of shareholders of the Fund on August 14,
1997. ICC, the investment advisor, is an indirect subsidiary of Bankers Trust
New York Corporation. ABIM is a limited partnership affiliated with the Advisor.
Buppert, Behrens & Owens, Inc. a company organized and owned by three employees
of ABIM, owns a 49% limited partnership interest and a 1% general partnership
interest in ABIM. BT Alex. Brown owns a 1% general partnership interest in ABIM
and BT Alex. Brown Holdings, Inc. owns the remaining limited partnership
interest. ICC also serves as investment advisor and ABIM serves as sub-advisor
to other funds in the Flag Investors family of funds.

-15-

<PAGE>

Under the Investment Advisory Agreement, ICC obtains and
evaluates economic, statistical and financial information to formulate and
implement investment policies for the Fund. ICC has delegated this
responsibility to ABIM provided that ICC continues to supervise the performance
of ABIM and report thereon to the Fund's Board of Directors. Any investment
program undertaken by ICC or ABIM will at all times be subject to policies and
control of the Fund's Board of Directors. ICC will provide the Fund with office
space for managing its affairs, with the services of required executive
personnel and with certain clerical and bookkeeping services and facilities.
These services are provided by ICC without reimbursement by the Fund for any
costs. Neither ICC nor ABIM shall be liable to the Fund or its shareholders for
any act or omission by ICC or ABIM or any losses sustained by the Fund or its
shareholders except in the case of willful misfeasance, bad faith, gross
negligence, or reckless disregard of duty. The services of ICC and ABIM to the
Fund are not exclusive and ICC and ABIM are free to render similar services to
others.

As compensation for its services, ICC is entitled to receive a
fee from the Fund, calculated daily and paid monthly, at the following annual
rates based upon the Fund's average daily net assets: 0.85% of the first $100
million, 0.75% of the next $100 million, 0.70% of the next $100 million, 0.65%
of the next $200 million, 0.58% of the next $500 million, 0.53% of the next $500
million and 0.50% of that portion exceeding $1.5 billion. Prior to April 11,
1995, the annual rates based upon the Fund's average daily net assets were:
0.65% of the first $100 million, 0.55% of the next $100 million, 0.50% of the
next $100 million and 0.45% of that portion in excess of $300 million. As
compensation for its services, ABIM is entitled to receive a fee from ICC,
payable from its advisory fee, calculated daily and paid monthly, at the
following annual rates based upon the Fund's average daily net assets: 0.60% of
the first $100 million, 0.55% of the next $100 million, 0.50% of the next $100
million, 0.45% of the next $200 million, 0.40% of the next $500 million, 0.37%
of the next $500 million and 0.35% of that portion in excess of $1.5 billion.

Each of the Investment Advisory Agreement and the Sub-Advisory
Agreement has an initial term of two years and will continue in effect from year
to year thereafter if such continuance is specifically approved at least
annually by the Fund's Board of Directors, including a majority of the
Independent Directors who have no direct or indirect financial interest in such
agreements, by votes cast in person at a meeting called for such purpose, and by
a vote of a majority of the outstanding Shares (as defined under "Capital
Stock"). The Fund or ICC may terminate the Investment Advisory Agreement on
sixty days' written notice without penalty. The Investment Advisory Agreement
will terminate automatically in the event of assignment (as defined in the 1940
Act). The Sub-Advisory Agreement has similar termination provisions.

-16-

<PAGE>

Advisory fees paid by the Fund to ICC and sub-advisory fees paid
by ICC to ABIM for the last three fiscal years were as follows:

Year Ended December 31,
-----------------------
Fees Paid to: 1997 1996 1995
- ------------- ---- ---- ----
ICC $ 4,172,769 $ 3,562,609 $ 2,297,474*
ABIM $ 2,944,897 $ 2,430,407 $ 1,541,505

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

* Net of fee waivers. Such voluntary fee waivers were discontinued on October
6, 1995.

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

7. DISTRIBUTION OF FUND SHARES

ICC Distributors, Inc. ("ICC Distributors" or the "Distributor") serves
as the distributor of each class of the Fund's Shares pursuant to a Distribution
Agreement (the "Distribution Agreement") effective August 31, 1997. Prior to
August 31, 1997, Alex. Brown & Sons Incorporated ("Alex. Brown") served as the
Fund's distributor for the same rate of compensation and on substantially the
same terms as the current Distribution Agreement.

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

The Distribution Agreement may be terminated at any time upon 60
days' written notice by the Fund, without penalty, by the vote of a majority of
the Fund's Independent Directors or by a vote of a majority of the Fund's
outstanding Shares of the related class (as defined under "Capital Stock") or
upon 60 days' written notice by the Distributor and shall automatically
terminate in the event of an assignment. The Distribution Agreement has an
initial term of one year from the date of effectiveness. It shall continue in
effect thereafter with respect to each class of the Fund provided that it is
approved at least annually by (i) a vote of a majority of the outstanding voting
securities of the related class of the Fund or (ii) a vote of a majority of the
Fund's Board of Directors including a majority of the Independent Directors and,
with respect to each class of the Fund for which there is a plan of
distribution, so long as such plan of distribution is approved at least annually
by the Independent Directors in person at a meeting called for the purpose of
voting on such approval. The Distribution Agreement, including the form of Sub-
Distribution Agreement, was initially approved by the Board of Directors,
including a majority of the Independent Directors, on August 4, 1997 and most
recently on March 27, 1998.

-17-

<PAGE>

ICC Distributors and certain broker-dealers ("Participating
Dealers") have entered into Sub-Distribution Agreements under which such
broker-dealers have agreed to process investor purchase and redemption orders
and respond to inquiries from Fund shareholders concerning the status of their
accounts and the operations of the Fund. Any Sub-Distribution Agreement may be
terminated in the same manner as the Distribution Agreement and shall
automatically terminate in the event of an assignment.

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

As compensation for providing distribution services as described
above, the Fund will pay ICC Distributors for the Class A Shares, an annual fee,
paid monthly equal to 0.25% of the average daily net assets of the Class A
Shares. As compensation for providing distribution services as described above
for the Class B Shares, the Fund will pay ICC Distributors, an annual fee, paid
monthly, equal to 0.75% of the average daily net assets of the Class B Shares.
With respect to the Class A Shares, ICC Distributors expects to allocate up to
all of its fee to Participating Dealers and Shareholder Servicing Agents. With
respect to the Class B Shares, ICC Distributors expects to retain the entire
distribution fee as reimbursement for front-end payments to Participating
Dealers. In addition, with respect to the Class B Shares, the Fund will pay ICC
Distributors a shareholder servicing fee at an annual rate of 0.25% of the
average daily net assets of the Class B Shares. (See the Prospectus.) ICC
Distributors expects to allocate most of its shareholder servicing fee to
Participating Dealers and Shareholder Servicing Agents. ICC Distributors does
not receive compensation for distributing Institutional Shares.

-18-

<PAGE>

As compensation for providing distribution and shareholder
services to the Fund for the last three fiscal years, the Fund's distributor
received aggregate fees in the following amounts:
<TABLE>
<CAPTION>
Fiscal Year Ended December 31,
------------------------------
Fee 1997 1996 1995
--- ---- ---- ----
<S> <C> <C> <C>
12b-1 Fee $ 1,545,188(1) $ 1,350,396(3) $ 1,180,141(3)
Shareholder Servicing Fee $ 59,629(2) $ 32,943(3) $8,783(3,4)
(Class B Shares)
</TABLE>
- -------------------------------------------------------
(1) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $974,875 and ICC Distributors, the Fund's distributor
effective August 31, 1997, received $570,313.
(2) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $35,479 and ICC Distributors, the Fund's distributor
effective August 31, 1997, received $24,150.
(3) Fees received by Alex. Brown, the Fund's distributor for the fiscal years
ended December 31, 1996 and December 31, 1995.
(4) For the period from January 3, 1995 (commencement of operations of Class
B Shares) through December 31, 1995.

Pursuant to Rule 12b-1 under the 1940 Act, which provides that
investment companies may pay distribution expenses, directly or indirectly, only
pursuant to a plan adopted by the investment company's board of directors and
approved by its shareholders, the Fund has adopted a Plan of Distribution for
each class of Shares (except Institutional Shares) (the "Plans"). Under the
Plans, the Fund pays a fee to ICC Distributors for distribution and other
shareholder servicing assistance as set forth in the Distribution Agreement, and
ICC Distributors is authorized to make payments out of its fees to Participating
Dealers and Shareholder Servicing Agents. The Plans remain in effect from year
to year thereafter as specifically approved (a) at least annually by the Fund's
Board of Directors and (b) by the affirmative vote of a majority of the
Independent Directors, by votes cast in person at a meeting called for such
purpose. The Plans were most recently approved by the Board of Directors,
including a majority of the Independent Directors, on September 16, 1997.

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

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

If either Plan is terminated in accordance with its terms, the
obligation of the Fund to make payments to ICC Distributors pursuant to the Plan
will cease and the Fund will not be required to make any payments past the date
the Distribution Agreement terminates with respect to that class. In return for
payments received pursuant to the Plans for the last three fiscal years, the
Fund's distributor paid the distribution related expenses of the related classes
including one or more of the following: printing and mailing of prospectuses to
other than current shareholders; compensation to dealers and sales personnel;
and interest, carrying, or other financing charges.

-19-

<PAGE>

The Fund's distributor received commissions on the sale of Class
A and contingent deferred sales loads on the Class B Shares and from such
commissions and sales charges retained the following amounts:
<TABLE>
<CAPTION>
Fiscal Year Ended December 31,
------------------------------
Class 1997 1996 1995
----- ---- ---- ----
Received Retained Received Retained Received Retained
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Class A $469,945(1) $61,823(3) $717,441(5) $255,062(5) $146,261(5) $73,667(5)
Commissions
Class B $350,133(2) $34,414(4) $377,125(5) $377,125(5) $ 78,146(5),(6) 78,146(5),(6)
Contingent
Deferred Sales
Charge
</TABLE>
- -------------
(1) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $307,092 and ICC Distributors, the Fund's distributor
effective August 31, 1997 received $66,419.
(2) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $202,841 and ICC Distributors, the Fund's distributor
effective August 31, 1997 received $147,292.
(3) Of commissions received, Alex. Brown retained $61,823 and ICC
Distributors retained $0, respectively.
(4) Of sales charges received, Alex. Brown retained $34,414 and
ICC Distributors retained $0, respectively.
(5) By Alex. Brown, the Fund's distributor for the fiscal years ended
December 31, 1996 and December 31, 1995.
(6) For the period from January 3, 1995 (commencement of operations of Class
B Shares) through December 31, 1995.

Except as described elsewhere, the Fund pays or causes to be paid
all continuing expenses of the Fund, including, without limitation: investment
advisory and distribution fees; the charges and expenses of any registrar, any
custodian or depository appointed by the Fund for the safekeeping of cash,
portfolio securities and other property, and any transfer, dividend or
accounting agent or agents appointed by the Fund; brokers' commissions
chargeable to the Fund in connection with portfolio securities transactions to
which the Fund is a party; all taxes, including securities issuance and transfer
taxes, and fees payable by the Fund to federal, state or other governmental
agencies; the costs and expenses of engraving or printing of certificates
representing Shares; all costs and expenses in connection with the registration
and maintenance of registration of the Fund and its Shares with the SEC and
various states and other jurisdictions (including filing fees, legal fees and
disbursements of counsel); the costs and expenses of printing, including
typesetting and distributing prospectuses and statements of additional
information of the Fund and supplements thereto to the Fund's shareholders; all
expenses of shareholders' and Directors' meetings and of preparing, printing and
mailing proxy statements and reports to shareholders; fees and travel expenses
of Directors and Director members of any advisory board or committee; all
expenses incident to the payment of any dividend, distribution, withdrawal or
redemption, whether in Shares or in cash; charges and expenses of any outside
service used for pricing of the Shares; fees and expenses of legal counsel,
including counsel to the Independent Directors, 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 that inure to its benefit; extraordinary expenses
(including, but not limited to, legal claims and liabilities and litigation
costs and any indemnification related thereto); and all other charges and costs

-20-

<PAGE>

of the Fund's operation unless otherwise explicitly assumed by ICC, ABIM, or ICC
Distributors.

8. BROKERAGE

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

In over-the-counter transactions, orders are placed directly with
a principal market maker and such purchases normally include a mark up over the
bid to the broker-dealer based on the spread between the bid and asked price for
the security. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter. On occasion,
certain money market instruments may be purchased directly from an issuer
without payment of a commission or concession. The Fund will not deal with
affiliates of the Advisors in any transaction in which they act as a principal,
nor will the Fund buy or sell over-the-counter securities with them acting as
market maker.

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

ABIM's primary consideration in effecting securities transactions
is to obtain best price and execution of orders on an overall basis. As
described below, however, ABIM may, in its discretion, effect transactions with
dealers that furnish statistical, research or other information or services that
are deemed by ABIM to be beneficial to the Fund's investment program. Certain
research services furnished by broker-dealers may be useful to ABIM with clients
other than the Fund. Similarly, any research services received by ABIM through
placement of portfolio transactions of other clients may be of value to ABIM in
fulfilling its obligations to the Fund. No specific value can be determined for
research and statistical services furnished without cost to ABIM by a
broker-dealer. ABIM is of the opinion that because the material must be analyzed
and reviewed by its staff, its receipt does not tend to reduce expenses, but may
be beneficial in supplementing ABIM's research and analysis. Therefore, it may
tend to benefit the Fund by improving ABIM's investment advice. ABIM's policy is
to pay a broker-dealer higher commissions for particular transactions than might
be charged if a different broker-dealer had been chosen when, in ABIM's opinion,
this policy furthers the overall objective of obtaining best price and
execution. Subject to periodic review by the Fund's Board of Directors, ABIM is
also authorized to pay broker-dealers (other than affiliates of the Advisors)
higher commissions than another broker might have charged on brokerage
transactions for the Fund for brokerage or research services. The allocation of
orders among broker-dealers and the commission rates paid by the Fund will be
reviewed periodically by the Board.

Subject to the above considerations, the Board of Directors has
authorized the Fund to effect portfolio transactions, on an agency basis,
through affiliates of the Advisors. At the time of such authorization the
Board adopted certain policies and procedures incorporating the standards of
Rule 17e-1 under the 1940 Act which requires that the commissions paid the
Advisors or their affiliates must be "reasonable and fair compared to the
commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
during a comparable period of time." Rule 17e-1 also contains requirements for
the review of such transactions by the Board of Directors and requires ICC and
ABIM to furnish reports and to maintain records in connection with such reviews.

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

-21-

<PAGE>

ICC directed transactions to broker-dealers and paid related
commissions because of research services in the following amounts:

Fiscal Year Ended December 31,
------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Transactions Directed $312,672,931 $ 191,851,754 $ 288,166,553
Commissions Paid $406,249 $ 396,046 $ 386,539
</TABLE>

For the period from September 1, 1997 through December 31, 1997,
the Fund paid no brokerage commissions to BT Alex. Brown or its affiliates. For
the period from January 1, 1997 through August 31, 1997 and in the fiscal year
ended December 31, 1996, the Fund paid Alex. Brown brokerage commissions in the
aggregate amount of $0 and $7,000, which represented 0% and 1.9% of the Fund's
aggregate brokerage commissions for the periods and which were paid on
transactions that represented 0% and 2.9% respectively, of the aggregate dollar
amount of transactions that incurred commissions paid by the Fund during the
respective periods. The Fund is required to identify any securities of its
"regular brokers or dealers" (as such term is defined in the 1940 Act) that the
Fund has acquired during its most recent fiscal year. As of December 31, 1997,
the Fund held a 6.25% repurchase agreement issued by Goldman Sachs valued at
$7,848,000. Goldman Sachs is a "regular broker or dealer" of the Fund.

9. CAPITAL STOCK

Under the Fund's Articles of Incorporation, the Fund has 85
million authorized Shares of common stock, with a par value of $.001 per share.
The Board of Directors may increase or decrease the number of authorized Shares
without shareholder approval. On October 11, 1989, the Fund declared a two for
one stock dividend payable to shareholders of record on October 27, 1989.

The Fund's Articles of Incorporation provide for the
establishment of separate series and separate classes of Shares by the Directors
at any time. The Fund currently has one Series and the Board has designated four
classes of Shares: Flag Investors Communications Fund Class A Shares, Flag
Investors Communications Fund Class B Shares; Flag Investors Communications Fund
Class D Shares and Flag Investors Communications Fund Institutional Shares. The
Flag Investors Communications Fund Class D Shares are not currently being
offered. In the event separate series are established, all Shares of the Fund,
regardless of series or class, would have equal rights with respect to voting,
except that with respect to any matter affecting the rights of the holders of a
particular series or class, the holders of each series or class would vote
separately. In general, each such series would be managed separately and
shareholders of each series would have an undivided interest in the net assets
of that series. For tax purposes, the series would be treated as separate
entities. Generally, each class of Shares issued by a particular series would be
identical to every other class and expenses of the Fund (other than 12b-1 fees
and any applicable services fees) are prorated between all classes of a series
based upon the relative net assets of each class. Any matters affecting any
class exclusively will be voted on by the holders of such class.

Shareholders of the Fund do not have cumulative voting rights,
and therefore the holders of more than 50% of the outstanding Shares voting
together for election of Directors may elect all the members of the Board of
Directors of the Fund. In such event, the remaining holders cannot elect any
members of the Board of Directors of the Fund. There are no preemptive,
conversion or exchange

-22-

<PAGE>

rights applicable to any of the Shares. The issued and outstanding Shares are
fully paid and non-assessable. In the event of liquidation or dissolution of the
Fund, each Share is entitled to its portion of the Fund's assets (or the assets
allocated to a separate series of shares if there is more than one series) after
all debts and expenses have been paid.

As used in this Statement of Additional Information, the term
"majority of the outstanding Shares" means the vote of the lesser of (i) 67% or
more of the Shares present at a meeting, if the holders of more than 50% of the
outstanding Shares are present or represented by proxy, or (ii) more than 50% of
the outstanding Shares.

10. SEMI-ANNUAL REPORTS

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

11. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES

Bankers Trust Company ("Bankers Trust") has been retained to act
as custodian of the Fund's investments. Bankers Trust receives such compensation
from the Fund for its services as custodian as may be agreed to from time to
time by Bankers Trust and the Fund. For the period from September 22, 1997
through December 31, 1997, Bankers Trust accrued fees of $18,189. Investment
Company Capital Corp. has been retained to act as transfer and dividend
disbursing agent. As compensation for providing these services, the Fund pays
ICC up to $15.12 per account per year, plus reimbursement for out-of-pocket
expenses incurred in connection therewith. For the fiscal year ended December
31, 1997, such fees totaled $501,719.

ICC also provides certain accounting services to the Fund under a
Master Services Agreement between the Fund and ICC. As compensation for these
services, ICC receives an annual fee, calculated daily and paid monthly as shown
below.

Average Daily Net Assets Incremental Annual Accounting Fee

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

In addition, the Fund reimburses ICC for certain out-of-pocket expenses
incurred in connection with ICC's provision of accounting services under the
Master Services Agreement.

As compensation for providing accounting services to the Fund for the
fiscal year ended December 31, 1997, ICC received fees of $119,938.

-23-

<PAGE>

12. INDEPENDENT ACCOUNTANTS

The annual financial statements of the Fund are audited by Coopers &
Lybrand L.L.P. whose report thereon appears elsewhere herein, and have been
included herein in reliance upon the report of such firm of accountants given on
their authority as experts in accounting and auditing.

13. LEGAL MATTERS

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

14. PERFORMANCE INFORMATION

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

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

T = average annual total return

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

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

Under the foregoing formula, the time periods used in advertising
will be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover one-, five- and ten-year periods or a shorter period dating from the
effectiveness of the Fund's registration statement (or the later commencement of
operations of the series or class). In calculating the ending redeemable value
for the Class A Shares, the maximum sales load (4.5%) is deducted from the
initial $1,000 payment and all dividends and distributions by the Fund are
assumed to have been reinvested at net asset value as described in the
Prospectus on the reinvestment dates during the period. In calculating the
performance of the Class B Shares, the applicable contingent deferred sales
charge (4.0% for the one-year period, 2.0% for the five-year period and no sales
charge thereafter) is deducted from the ending redeemable value and all
dividends and distributions by the Fund are assumed to have been reinvested at
net asset value as described in the prospectus on the reinvestment dates during
the period. "T" in the formula above is calculated by finding the average annual
compounded rate of return over the period that would equate an assumed initial
payment of $1,000 to the ending redeemable value. Any sales loads that might in
the future be made applicable at the time to reinvestments would be included as
would any recurring account charges that might be imposed by the Fund.

-24-

<PAGE>

Calculated according to SEC rules, the ending redeemable value and
average annual total return of a hypothetical $1,000 payment for the periods
ended December 31, 1997 were as follows:

One-Year Period Ended Five-Year Period Ended Ten-Year Period Ended Inception Through
December 31, 1997 December 31, 1997 December 31, 1997 December 31, 1997
----------------- ----------------- ----------------- -----------------
Ending Average Ending Average Ending Average Ending Average
Redeemable Annual Redeemable Annual Redeemable Annual Redeemable Annual
Value Total Value Total Value Total Value Total
Class Return Return Return Return
- ----- ---------- ------ ---------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A $1,311.79 31.18% $2,197.34 17.05% $5,022.39 17.52% $9,475.49* 17.46%*
January 18, 1984+
Class B $1,323.64 32.36% N/A N/A N/A N/A $2,003.18 26.14%
January 3, 1995+
Class D $1,339.06 33.90% N/A N/A N/A N/A $2,012.22 15.91%
April 6, 1993+
</TABLE>

+ Inception Date.
* Not required since more than ten years have elapsed since inception.

The Fund may also from time to time include in such advertising
total return figures that are not calculated according to the formula set forth
above in order to compare more accurately the Fund's performance with other
measures of investment return. For example, in comparing the Fund's total return
with data published by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. or Morningstar Inc., or with the performance of the Lehman
Brothers Government Corporate Bond Index, the Consumer Price Index, the return
on 90-day U.S. Treasury bills, the Standard and Poor's 500 Stock Index or the
Dow Industrial Average, the Fund calculates its aggregate and average annual
total return for the specified periods of time by assuming the investment of
$10,000 in Shares and assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. For this alternative
computation, the Fund assumes that the $10,000 invested in Shares is net of all
sales charges. The Fund will, however, disclose the maximum sales charges and
will also disclose that the performance data do not reflect sales charges and
that inclusion of sales charges would reduce the performance quoted. Such
alternative total return information will be given no greater prominence in such
advertising than the information prescribed under SEC rules, and all
advertisements containing performance data will include a legend disclosing that
such performance data represent past performance and that the investment return
and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.

-25-

<PAGE>

The Fund's annual portfolio turnover rate (the lesser of the value
of the purchases or sales for the year divided by the average monthly market
value of the portfolio during the year, excluding U.S. Government and short-term
securities) may vary from year to year, as well as within a year, depending on
market conditions. The Fund's portfolio turnover rate in fiscal year 1997 was
26% and in fiscal year 1996 was 20%.

Morningstar Mutual Fund Advisory Service ("Morningstar") assigned
the Fund their "5" Best in Category, rating among the ten funds in the
communications funds category for the three-year period ended December 31, 1997.
As of December 31, 1997, Morningstar assigned the Fund a weighted overall
risk-adjusted rating of four stars based on the three-, five- and ten-year
ratings (see explanation below). As of December 31, 1997, the Fund's ratings for
separate periods within its investment category

-26-

<PAGE>

of domestic equity funds, were three stars among 2,332 funds for three years,
three stars among 1,292 funds for five years and four stars among 676 funds for
ten years.

The Morningstar risk-adjusted rating is expressed on a scale of 1
to 5 stars. The star rating is neither a predictive measure nor a "buy/sell"
recommendation. It is a purely descriptive representation of how well a fund has
balanced risk and return in the past. If the fund scores in the top 10% of its
investment category, it receives 5 stars (Highest); if it falls in the next
22.5%, it receives 4 stars (Above Average); if it falls in the middle 35%, it
receives 3 stars (Neutral or Average); if it falls in the next 22.5%, it
receives two stars (Below Average); and if it falls in the bottom 10%, it
receives 1 star (Lowest). The star ratings are recalculated monthly. The Fund's
overall risk-adjusted star rating is a weighted average of the Fund's three-,
five-, and 10-year histories, relative to other funds in its broad investment
category (i.e, equity). The three time periods are combined as a weighted
average. The 10-year rating accounts for 50% of the overall rating, the
five-year figure for 30%, and the three-year period 20%.

15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

To Fund management's knowledge, no persons held beneficially or of
record 5% or more of the Fund's outstanding shares, as of February 2, 1998:

As of February 2, 1998, the Directors and officers as a group owned
less than 1% of the Fund's total outstanding shares.

16. FINANCIAL STATEMENTS

See next page.

-27-

<PAGE>

FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------

Statement of Net Assets December 31, 1997

<TABLE>
<CAPTION>
Market Value
Shares Security (Note 1)
- -------------------------------------------------------------------------------------
<S><C>
TELECOMMUNICATIONS INDUSTRY -- 92.4%

Common Stock -- 92.4%
320,408 AirTouch Communications Inc.* $ 13,316,957
600,000 America Online, Inc.* 53,512,500
320,000 Ameritech Corporation 25,760,000
416,608 Bell Atlantic Corporation 37,911,328
366,428 BlackBox Corporation* 12,962,390
200,000 Brooks Fiber Properties, Inc.* 11,000,000
172,500 CellStar Corporation* 3,428,437
1,130,100 Cincinnati Bell Inc. 35,033,100
469,700 Clearnet Communications Inc.-- Class A* 5,342,838
200,000 DSC Communications Corporation* 4,800,000
470,300 First Data Corporation 13,756,275
993,400 Frontier Corporation 23,903,687
500,000 General Communications, Inc.* 3,312,500
693,820 GTE Corporation 36,252,095
315,235 Lucent Technologies Inc. 25,179,396
200,000 MCI Communications Corporation 8,562,500
405,000 Mobile Telecommunication Technologies
Corporation* 8,910,000
265,000 Motorola Inc. 15,121,563
200,000 NEXTEL Communications Inc.-- Class A* 5,200,000
1,495,000 Novell Inc.* 11,212,500
520,347 Orbital Sciences Corporation* 15,480,323
200,000 Pacific Gateway Exchange, Inc.* 10,762,500
312,200 Qwest Communications International Inc.* 18,575,900
1,544,760 SBC Communications Inc. 113,153,670
250,000 Sprint Corporation 14,656,250
53,400 TCA Cable TV, Inc. 2,456,400
128,000 Telefonica de Espana SA ADR 11,656,000
285,000 Telefonos de Mexico SA ADR-- Series L 15,977,813
184,100 Teleglobe Inc. 5,592,038
573,000 U.S. West Communications Group 25,856,625
150,000 Vimpel-Communications-- SP ADR* 5,343,750
1,031,300 WorldCom, Inc.* 31,196,825
259,000 3Com Corporation* 9,048,813
------------
Total Common Stock of Telecommunications Industry
(Cost $336,509,211) 634,234,973
------------
</TABLE>
-28-

<PAGE>

FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------

Statement of Net Assets (concluded) December 31, 1997

Shares/ Market Value
Par (000) Security (Note 1)
- -------------------------------------------------------------------------------------
<S><C>
NON-TELECOMMUNICATIONS INDUSTRY - 6.5%

Common Stock -- 5.7%
626,900 Alexander Haagen Properties, Inc. $ 10,931,569
620,548 Conseco Inc. 28,196,149
------------
Total Common Stock of Non-Telecommunications
Industry (Cost $10,960,927) 39,127,718
------------

Corporate Bond -- 0.8%
$5,000 HMH Properties, 9.5%, 5/15/05
(Cost $4,917,676) 5,325,000
------------

Total Non-Telecommunications Industry
(Cost $15,878,603) 44,452,718
------------

REPURCHASE AGREEMENT -- 1.1%
7,848 Goldman Sachs & Co., 6.25%
Dated 12/31/97, to be repurchased at $7,850,725
on 1/2/98, collateralized by U.S. Treasury Notes
with a market value of $8,005,743.
(Cost $7,848,000) 7,848,000
------------

Total Investments in Securities -- 100.0%
(Cost $360,235,814)** 686,535,691

Liabilities in Excess of Other Assets, Net-- (0.0)% (265,252)
------------

Net Assets-- 100.0% $686,270,439
============
</TABLE>
-29-

<PAGE>

FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Net Asset Value Per:
Class A Share
($622,865,153 / 32,149,145 shares outstanding) $19.37(1)
======
Class B Share
($32,474,116 / 1,689,565 shares outstanding) $19.22(2)
======
Class D Share
($30,931,170 / 1,597,845 shares outstanding) $19.36(3)
======

Maximum Offering Price Per:
Class A Share
($19.37 / 0.955) $20.28
======
Class B Share $19.22
======
Class D Share
($19.36 / 0.985) $19.65
======

- ------

* Non-income producing security.
** Aggregate cost for federal tax purposes was $358,380,658.
(1) Redemption value is $19.37.
(2) Redemption value is $18.45 following a 4.00% maximum contingent deferred
sales charge.
(3) Redemption value is $19.17 following a 1.00% maximum contingent deferred
sales charge.

See Notes to Financial Statements.

-30-

<PAGE>

FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------

Statement of Operations

<TABLE>
<CAPTION>
For the
Year Ended
December 31,
- -----------------------------------------------------------------------------------
1997
<S><C>
Investment Income (Note 1):
Dividends $ 12,090,126
Interest 1,073,514
Less: Foreign taxes withheld (119,424)
------------
Total income 13,044,216
------------

Expenses:
Investment advisory fee (Note 2) 4,172,769
Distribution fee (Note 2) 1,775,102
Transfer agent fee (Note 2) 501,719
Accounting fee (Note 2) 119,938
Custodian fee (Note 2) 65,443
Directors' pension 62,142
Printing and postage 61,407
Registration fees 34,821
Legal 32,727
Audit 29,988
Directors' fees 28,152
Miscellaneous 9,962
------------
Total expenses 6,894,170
------------
Net investment income 6,150,046
------------

Realized and unrealized gain/(loss) on investments:
Net realized gain from security transactions 53,763,750
Change in unrealized appreciation or depreciation of investments 132,712,907
------------
Net gain on investments 186,476,657
------------
Net increase in net assets resulting from operations $192,626,703
============
</TABLE>

See Notes to Financial Statements.

-31-

<PAGE>

FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------

Statements of Changes in Net Assets

<TABLE>
<CAPTION>
For the Year Ended December 31,
- ------------------------------------------------------------------------------------
1997 1996
<S><C>
Increase/(Decrease) in Net Assets:
Operations:
Net investment income $ 6,150,046 $ 9,222,665
Net realized gain from security
transactions 53,763,750 44,618,521
Change in unrealized appreciation or
depreciation of investments 132,712,907 13,950,633
------------ ------------
Net increase in net assets resulting
from operations 192,626,703 67,791,819
------------ ------------

Distributions to Shareholders from:
Net investment income and short-term gains:
Class A Shares (12,292,592) (8,654,688)
Class B Shares (438,661) (157,647)
Class D Shares (560,042) (410,330)
Net realized mid-term and long-term gains:
Class A Shares (45,697,778) (29,498,290)
Class B Shares (2,233,281) (1,015,396)
Class D Shares (2,314,208) (1,607,601)
------------ ------------
Total distributions (63,536,562) (41,343,952)
------------ ------------

Capital Share Transactions (Note 3):
Proceeds from sale of shares 32,057,019 36,388,229
Value of shares issued in reinvestment
of dividends 52,863,614 33,751,356
Cost of shares repurchased (78,344,677) (77,258,035)
------------ ------------
Increase/(decrease) in net assets derived from
capital share transactions 6,575,956 (7,118,450)
------------ ------------
Total increase in net assets 135,666,097 19,329,417

Net Assets:
Beginning of year 550,604,342 531,274,925
------------ ------------
End of year $686,270,439 $550,604,342
============ ============
</TABLE>

See Notes to Financial Statements.

-32-

<PAGE>

FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Financial Highlights -- Class A Shares
(For a share outstanding throughout each year)

For the
Year Ended
December 31,
- -------------------------------------------------------------------------------
1997
Per Share Operating Performance:
Net asset value at beginning of year $ 15.59
--------
Income from Investment Operations:
Net investment income 0.27
Net realized and unrealized gain/(loss) on investments 5.41
--------
Total from Investment Operations 5.68
--------
Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.40)
Distributions from net realized mid-term and long-term gains (1.50)
--------
Total distributions (1.90)
--------
Net asset value at end of year $ 19.37
========
Total Return(1) 37.36%
Ratios to Average Daily Net Assets:
Expenses 1.11%
Net investment income 1.07%
Supplemental Data:
Net assets at end of year (000) $622,865
Portfolio turnover rate 26%
Average commissions per share(4) $ 0.0598

- -------
(1) Total return excludes the effect of sales charge.
(2) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 0.99%, 0.99% and 0.98% for the
years ended December 31, 1995, 1994 and 1993, respectively.
(3) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 2.79%, 3.07% and 3.06%
for the years ended December 31, 1995, 1994 and 1993, respectively.
(4) Disclosure is required for fiscal years beginning after September 1, 1995.
Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.

-33-

<PAGE>

FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of year $ 14.87 $ 12.30 $ 13.70 $ 12.20
------- ------- ------- -------
Income from Investment Operations:
Net investment income 0.27 0.40 0.41 0.42
Net realized and unrealized gain/(loss) on investments 1.67 3.58 (1.27) 1.78
------- ------- ------- -------
Total from Investment Operations 1.94 3.98 (0.86) 2.20
------- ------- ------- -------
Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.38) (0.41) (0.44) (0.42)
Distributions from net realized mid-term and long-term gains (0.84) (1.00) (0.10) (0.28)
------- ------- ------- -------
Total distributions (1.22) (1.41) (0.54) (0.70)
------- ------- ------- -------
Net asset value at end of year $ 15.59 $ 14.87 $ 12.30 $ 13.70
======= ======= ======= =======
Total Return(1) 13.46% 33.44% (6.32)% 18.12%
Ratios to Average Daily Net Assets:
Expenses 1.14% 0.93%(2) 0.92%(2) 0.92%(2)
Net investment income 1.74% 2.85%(3) 3.14%(3) 3.12%(3)
Supplemental Data:
Net assets at end of year (000) $505,371 $492,454 $435,805 $469,163
Portfolio turnover rate 20% 24% 23% 14%
Average commissions per share(4) $ 0.0696 -- -- --
</TABLE>

See Notes to Financial Statements.

-34-

<PAGE>

FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Financial Highlights -- Class B Shares
(For a share outstanding throughout each period)
For the
Year Ended
December 31,
- --------------------------------------------------------------------------------
1997

Per Share Operating Performance:
Net asset value at beginning of period $ 15.51
-------
Income from Investment Operations:
Net investment income 0.18
Net realized and unrealized gain on investments 5.34
-------
Total from Investment Operations 5.52
-------
Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.31)
Distributions from net realized mid-term and long-term gains (1.50)
-------
Total distributions (1.81)
-------
Net asset value at end of period $ 19.22
=======
Total Return(2) 36.36%
Ratios to Average Daily Net Assets:
Expenses 1.86%
Net investment income 0.29%
Supplemental Data:
Net assets at end of period (000) $32,474
Portfolio turnover rate 26%
Average commissions per share(6) $0.0598

- ---------
(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 1.74% (annualized) for the period
ended December 31, 1995.
(4) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 2.09% (annualized) for
the period ended December 31, 1995.
(5) Annualized.
(6) Disclosure is required for fiscal years beginning after September 1, 1995.
Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.

-35-

<PAGE>

FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
For the Year January 3, 1995(1)
Ended December 31, through December 31,
- ---------------------------------------------------------------------------------------------------------
1996 1995

<S> <C>

Per Share Operating Performance:
Net asset value at beginning of period $ 14.83 $12.28
Income from Investment Operations: ------- ------
Net investment income 0.19 0.30
Net realized and unrealized gain on investments 1.63 3.56
------- ------
Total from Investment Operations 1.82 3.86
------- ------
Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.30) (0.31)
Distributions from net realized mid-term and long-term gains (0.84) (1.00)
------- ------
Total distributions (1.14) (1.31)
------- ------
Net asset value at end of period $ 15.51 $14.83
======= ======
Total Return(2) 12.60% 32.42%
Ratios to Average Daily Net Assets:
Expenses 1.92% 1.70%(3,5)
Net investment income 0.95% 2.13%(4,5)
Supplemental Data:
Net assets at end of period (000) $17,661 $7,504
Portfolio turnover rate 20% 24%
Average commissions per share(6) $0.0696 --

</TABLE>

See Notes to Financial Statements.

-36-
<PAGE>

FLAG INVESTORS TELEPHONE INCOME FUND
- -----------------------------------------------------------------------------
Financial Highlights -- Class D Shares
(For a share outstanding throughout each period)
For the
Year Ended
December 31,
- -----------------------------------------------------------------------------
1997

Per Share Operating Performance:
Net asset value at beginning of period $ 15.59
-------
Income from Investment Operations:
Net investment income 0.23
Net realized and unrealized gain/(loss) on investments 5.40
-------
Total from Investment Operations 5.63
-------
Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.36)
Distributions in excess of net investment income --
Distributions from net realized long-term gains (1.50)
-------
Total distributions (1.86)
-------
Net asset value at end of period $ 19.36
=======
Total Return(2) 36.94%
Ratios to Average Daily Net Assets:
Expenses 1.46%
Net investment income 0.73%
Supplemental Data:
Net assets at end of period (000) $30,931
Portfolio turnover rate 26%
Average commissions per share(6) $ 0.0598

- --------------------------------------------------------------------------------
(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 1.34%, 1.34% and 1.31% for the
years ended December 31, 1995, 1994 and the period ended December 31, 1993,
respectively.
(4) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 2.44%, 2.74% and 1.98%
for the years ended December 31, 1995, 1994 and the period ended December
31, 1993, respectively.
(5) Annualized.
(6) Disclosure is required for fiscal years beginning after September 1, 1995.
Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.

-37-

<PAGE>

FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
April 6, 1993(1)
through
For the Year Ended December 31, December 31,
- -------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 14.87 $ 12.30 $ 13.67 $ 13.21
------- ------- ------- -------
Income from Investment Operations:
Net investment income 0.22 0.34 0.37 0.25
Net realized and unrealized gain/(loss) on investments 1.67 3.58 (1.20) 0.80
------- ------- ------- -------
Total from Investment Operations 1.89 3.92 (0.83) 1.05
------- ------- ------- -------
Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.33) (0.35) (0.42) (0.31)
Distributions in excess of net investment income -- -- (0.02) --
Distributions from net realized long-term gains (0.84) (1.00) (0.10) (0.28)
------- ------- -------- -------
Total distributions (1.17) (1.35) (0.54) (0.59)
------- ------- -------- -------
Net asset value at end of period $ 15.59 $ 14.87 $ 12.30 $ 13.67
======= ======= ======== =======
Total Return(2) 13.00% 32.91% (6.13)% 8.01%
Ratios to Average Daily Net Assets:
Expenses 1.49% 1.28%(3) 1.27%(3) 1.27%(3,5)
Net investment income 1.40% 2.50%(4) 2.81%(4) 2.73%(4,5)
Supplemental Data:
Net assets at end of period (000) $27,573 $31,317 $31,696 $23,481
Portfolio turnover rate 20% 24% 23% 14%
Average commissions per share(6) $0.0696 -- -- --
</TABLE>

See Notes to Financial Statements.

-38-
<PAGE>

FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------

Notes to Financial Statements

NOTE 1--Significant Accounting Policies

Flag Investors Telephone Income Fund, Inc. (the "Fund"), which is organized
as a Maryland Corporation and commenced operations January 18, 1984, is
registered under the Investment Company Act of 1940 as a non-diversified,
open-end investment management company. On January 18, 1984 (the exchange date),
investors received five Fund shares for each American Telephone & Telegraph
Company (AT&T) share, with rights to the divested Bell regional operating
companies attached, in a tax-free exchange. The Fund's objective is to provide
current income and long-term growth of capital without undue risk primarily by
investing in common stock, securities convertible thereto and debt obligations
of companies in the telephone industry and in income-producing securities
(including debt obligations) of issuers in the telephone or other industries.

The Fund consists of three share classes: Class A Shares, which commenced
January 18, 1984; Class D Shares, which commenced April 6, 1993; and Class B
Shares, which commenced January 3, 1995. The Fund has not sold Class D Shares
since November 18, 1994, but existing shareholders may reinvest their dividends.

The Class A, Class B and Class D Shares are subject to different sales
charges. The Class A Shares have a front-end sales charge, the Class B Shares
have a contingent deferred sales charge and the Class D Shares have both a
front-end sales charge and a contingent deferred sales charge. In addition, each
class has a different distribution fee.

When preparing the Fund's financial statements, management makes estimates
and assumptions to comply with generally accepted accounting principles. These
estimates affect 1) the assets and liabilities that we report at the date of the
financial statements; 2) the contingent assets and liabilities that we disclose
at the date of the financial statements; and 3) the revenues and expenses that
we report for the period. Our estimates could be different from the actual
results. The Fund's significant accounting policies are:

A. SECURITY VALUATION--The Fund values a portfolio security that is
primarily traded on a national exchange by using the last price reported
for the day. If there are no sales or the security is not traded on a
listed exchange, the Fund values the security at the average of the last
bid and asked prices in the over-the-counter market. When a market
quotation is unavailable, the Investment Advisor determines a fair value
using procedures that the Board of Directors establishes and monitors.

-39-

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FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------

NOTE 1--continued

As of December 31, 1997, there were no Board valued securities. The Fund
values short-term obligations with maturities of 60 days or less at
amortized cost.

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

C. FEDERAL INCOME TAX--The Fund determines its distributions according to
income tax regulations, which may be different from generally accepted
accounting principles. As a result, the Fund occasionally makes
reclassifications within its capital accounts to reflect income and
gains that are available for distribution under income tax regulations.

The Fund is organized as a regulated investment company. As long as it
maintains this status and distributes to its shareholders substantially
all of its taxable net investment income and net realized capital gains,
it will be exempt from most, if not all, federal income and excise
taxes. As a result, the Fund has made no provisions for federal income
taxes.

D. SECURITIES TRANSACTIONS, INVESTMENT INCOME, DISTRIBUTIONS AND OTHER--The
Fund uses the trade date to account for security transactions and the
specific identification method for financial reporting and income tax
purposes to determine the cost of investments sold or redeemed. For
financial reporting purposes, the cost includes the value of the
securities received in the exchange. For income tax purposes, the tax
cost is based on the AT&T shares in the hands of the exchanging AT&T
shareholders on the exchange date. Interest income is recorded on an
accrual basis and includes the pro rata amortization of premiums and
accretion of discounts when appropriate. Income and common expenses are
allocated to each class based on its respective average net assets.
Class specific expenses are charged directly to each class. Dividend
income and distributions to shareholders are recorded on the ex-dividend
date.

-40-

<PAGE>

FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------

Notes to Financial Statements (continued)

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

Investment Company Capital Corp. ("ICC"), a subsidiary of Bankers Trust New
York Corporation, is the Fund's investment advisor and Alex. Brown Investment
Management ("ABIM") is the Fund's subadvisor. As compensation for its advisory
services, the Fund pays ICC an annual fee based on the Fund's average daily net
assets. This fee is calculated daily and paid monthly at the following annual
rates: 0.85% of the first $100 million, 0.75% of the next $100 million, 0.70% of
the next $100 million, 0.65% of the next $200 million, 0.58% of the next $500
million, 0.53% of the next $500 million and 0.50% of the amount over $1.5
billion.

As compensation for its subadvisory services, ICC pays ABIM a fee from its
advisory fee based on the Fund's average daily net assets. This fee is
calculated daily and paid monthly at the following annual rates: 0.60% of the
first $100 million, 0.55% of the next $100 million, 0.50% of the next $100
million, 0.45% of the next $200 million, 0.40% of the next $500 million, 0.37%
of the next $500 million and 0.35% of the amount over $1.5 billion.

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

As compensation for its accounting services, the Fund pays ICC an annual
fee that is calculated daily and paid monthly from the Fund's average daily net
assets. The Fund paid ICC $119,938 for accounting services for the year ended
December 31, 1997.

As compensation for its transfer agent services, the Fund pays ICC a per
account fee that is calculated and paid monthly. The Fund paid ICC $501,719 for
transfer agent services for the year ended December 31, 1997.

Effective September 22, 1997, Bankers Trust Company became the Fund's
custodian. Prior to September 22, 1997, PNCBank served as the Fund's custodian.
From September 22, 1997 to December 31, 1997, the Fund accrued $18,189 in
custody expenses.

As compensation for providing distribution services, the Fund pays ICC
Distributors ("ICC Distributors"), which is not related to ICC, an annual fee
that is calculated daily and paid monthly. This fee is paid at an annual rate
equal to 0.25% of the Class A Shares' average daily net assets, 1.00% (including
a

-41-

<PAGE>

FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------

NOTE 2--concluded

0.25% shareholder servicing fee) of the Class B Shares' average daily net assets
and 0.60% of the Class D Shares' average daily net assets. For the year ended
December 31, 1997, distribution fees aggregated $1,775,102, of which $1,366,303
was attributable to the Class A Shares, $238,514 was attributable to the Class B
Shares and $170,285 was attributable to the Class D Shares. Prior to September
1, 1997, Alex. Brown & Sons Incorporated served as the Fund's distributor for
the same compensation and on substantially the same terms as ICC Distributors
and earned $497, 863 for Class A Shares, $96,600 for Class B Shares and $60,149
for Class D Shares.

The Fund's complex offers a retirement plan for eligible Directors. The
actuarially computed pension expense allocated to the Fund for the year ended
December 31, 1997 was $62,142, and the accrued liability was $78,065.

NOTE 3--Capital Share Transactions

The Fund is authorized to issue up to 70 million shares of $.001 par value
capital stock (60 million Class A, 5 million Class B, 3 million Class D and 2
million undesignated). Transactions in shares of the Fund were as follows:

Class A Shares
--------------------------------
For the For the
Year Ended Year Ended
Dec. 31, 1997 Dec. 31, 1996
------------- -------------

Shares sold 1,332,424 1,730,953
Shares issued to shareholders on
reinvestment of dividends 2,595,376 2,022,300
Shares redeemed (4,200,351) (4,451,593)
------------ ------------
Net decrease in shares outstanding (272,551) (698,340)
============ ============
Proceeds from sale of shares $ 23,153,177 $ 26,738,906
Value of reinvested dividends 47,729,473 30,812,547
Cost of shares redeemed (71,340,867) (69,090,064)
------------ ------------
Net decrease from capital share transactions $ (458,217) $(11,538,611)
============ ============

-42-
<PAGE>

FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (concluded)
NOTE 3--concluded

Class B Shares
--------------------------------
For the For the
Year Ended Year Ended
Dec. 31, 1997 Dec. 31, 1996
------------- -------------
Shares sold 506,254 628,129
Shares issued to shareholders on
reinvestment of dividends 138,015 73,229
Shares redeemed (93,315) (68,656)
----------- -----------
Net increase in shares outstanding 550,955 632,702
=========== ===========
Proceeds from sale of shares $ 8,903,842 $ 9,649,323
Value of reinvested dividends 2,533,345 1,109,830
Cost of shares redeemed (1,625,592) (1,071,919)
----------- -----------
Net increase from capital share transactions $ 9,811,595 $ 9,687,234
=========== ===========

Class D Shares
-------------------------------
For the For the
Year Ended Year Ended
Dec. 31, 1997 Dec. 31, 1996
------------- -------------
Shares sold -- --
Shares issued to shareholders on
reinvestment of dividends 141,577 120,074
Shares redeemed (312,350) (456,901)
----------- -----------
Net decrease in shares outstanding (170,773) (336,827)
=========== ===========
Proceeds from sale of shares $ -- $ --
Value of reinvested dividends 2,600,796 1,828,979
Cost of shares redeemed (5,378,218) (7,096,052)
----------- -----------
Net decrease from capital share transactions $(2,777,422) $(5,267,073)
=========== ===========

-43-
<PAGE>

FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------

NOTE 4--Investment Transactions

Excluding short-term and U.S. government obligations, purchases of
investment securities aggregated $151,901,940 and sales of investment securities
aggregated $203,875,781 for the year ended December 31, 1997.
On December 31, 1997, aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $328,155,033
of which $331,656,230 related to appreciated securities and $3,501,197 related
to depreciated securities.

NOTE 5--Net Assets

On December 31, 1997, net assets consisted of:

Paid-in capital:
Class A Shares $302,344,862
Class B Shares 26,428,649
Class D Shares 20,882,375
Accumulated net realized gain from security transactions 10,314,676
Unrealized appreciation of investments 326,299,877
------------
$686,270,439
============

NOTE 6--Shareholder Meeting

Alex. Brown Incorporated, which was the parent corporation of the Fund's
investment advisor, merged into a subsidiary of Bankers Trust New York
Corporation on September 1, 1997. Due to the change in control of Alex. Brown
Incorporated, the Flag Investors Telephone Income Fund held a special meeting
for its shareholders on August 14, 1997. During the meeting, shareholders
approved a new Investment Advisory Agreement between the Fund and ICC and a new
Sub-Advisory Agreement among the Fund, ICC and ABIM. The new agreements are
substantially the same as the former agreements.

-44-
<PAGE>

FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------

Report of Independent Accountants

To the Shareholders and Board of Directors of
Flag Investors Telephone Income Fund, Inc.

We have audited the accompanying statement of net assets of Flag Investors
Telephone Income Fund, Inc., ("the Fund"), as of December 31, 1997 and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended and the
financial highlights for each of the five years in the period then ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
December 31, 1997 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Flag
Investors Telephone Income Fund, Inc. as of December 31, 1997, the results of
its operations for the year then ended, the changes in its net assets and its
financial highlights for each of the five years in the period then ended in
conformity with generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.

Philadelphia, Pennsylvania
January 29, 1998

-45-
<PAGE>

APPENDIX A

CORPORATE BOND RATINGS

Standard & Poor's Bond Ratings

AAA -- The highest rating assigned by Standard & Poor's. Capacity
to pay interest and repay principal is extremely strong.

AA -- Very strong capacity to pay interest and repay principal
and, in the majority of instances, differs from the higher rated issues only in
small degree.

A -- Strong capacity to pay interest and repay principal although
it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.

BBB -- Regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.

BB, B, CCC, CC and C -- Regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and C the highest degree of speculation. While such debt will likely
have some quality and protective characteristics, these may be outweighed by
large uncertainties or major risk exposures to adverse conditions.

C -- This rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action taken, but payments on this
obligation are being continued.

D -- In payment default. The D rating category is used when
interest payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.

Moody's Bond Ratings

Aaa -- Judged to be of the best quality. Carries the smallest
degree of investment risk and generally referred to as "gilt edge." Interest
payments are protected by a large or exceptionally stable margin and principal
is secure. While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the fundamentally
strong position of such issues.

Aa -- Judged to be of high quality by all standards. Together
with the Aaa group, comprise what are generally known as high grade bonds. Rated
lower than the Aaa bonds because margins of protection may not be as large as in
Aaa securities or the fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.

A -- Possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment some time in the future.

A-1

<PAGE>

Baa -- Considered as medium-grade obligations, that is, neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.

Ba -- Judged to have speculative elements; their future cannot be
considered as well-assured. Often the protection of interest and principal
payments may be very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.

B -- Generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or maintenance of other terms of
the contract over any long period of time may be small.

Caa -- Of poor standing. May be in default or there may be
present elements of danger with respect to principal or interest.

Ca -- Represent obligations that are speculative in a high
degree. Often in default or have other marked shortcomings.

C -- The lowest rated class of bonds. Can be regarded as having
extremely poor prospects of ever attaining any real investment standing.

A-2