FLAG INVESTORS EMERGING GROWTH FUND INC, 497, 1999-03-05

FLAG INVESTORS EMERGING GROWTH FUND INC
497, 1999-03-05

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<PAGE>

[FLAG INVESTORS LOGO]
EMERGING GROWTH FUND, INC.
(Class A and Class B Shares )

Prospectus & Application -- March 1, 1999
- --------------------------------------------------------------------------------

This mutual fund (the "Fund") seeks to achieve long-term capital appreciation
primarily through investment in a diversified portfolio of small and mid-sized
emerging growth companies.

The Fund offers shares through securities dealers and financial institutions
that act as shareholder servicing agents. You may also buy shares through the
Fund's Transfer Agent. This Prospectus describes Flag Investors Class A Shares
(the "Class A Shares") and Flag Investors Class B Shares (the "Class B Shares")
of the Fund. These separate classes give you a choice as to sales charge and
fund expenses. (Refer to the section on sales charges and the attached
Application.)

TABLE OF CONTENTS

Page
----

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

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

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

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

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

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

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

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

How to Choose the Class That Is Right for You.................................13

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

Investment Advisor and Sub-Advisor............................................15

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

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

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

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

1
<PAGE>

INVESTMENT SUMMARY

Objectives and Strategies

The Fund seeks to achieve long-term capital appreciation primarily
through investment in a diversified portfolio of common stocks of small and
mid-sized emerging growth companies. These companies have relatively small
market capitalizations. The Fund's investment advisor and sub-advisor
(collectively, the "Advisors") will attempt to identify emerging growth
companies, that is, companies that they believe have the ability or potential to
sustain a high level of growth in their revenue, earnings, assets and cash flow.
The Advisors will focus on a number of key selection criteria including a
company's industry position, management quality and experience, accounting and
financial policies, marketing and service capabilities, and product development
efforts.

Risk Profile

The Fund is suited for you if you are willing to accept the risks and
uncertainties of investing in emerging growth companies in the hope of achieving
above average long-term capital appreciation.

General Stock Risk. The value of an investment in the Fund will vary
from day to day, based on changes in the prices of securities the Fund holds.
Those prices, in turn, reflect investor perceptions of the economy, the markets
and the companies represented in the Fund's portfolio.

Emerging Growth and Small Cap Stock Risks. The stocks of small and
mid-sized companies may experience greater price volatility than those of larger
companies. The market for such stocks may be more limited and the companies
themselves may be more vulnerable to economic or company specific problems. In
particular, these small companies may have limited product lines, markets and
financial resources, and may depend on a relatively small management group.

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

Fund Performance

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

2
<PAGE>

Class A Shares*
For years ended December 31,

<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
50.00% 49.62%

40.00% 37.34%
32.20%
30.00%
20.74%
20.00% 18.20%

10.00% 6.61%
5.03%
0% -0.77%
-9.18%
- -10.00%

- -20.00% -21.07%

- -30.00%

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
</TABLE>

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

During the 10-year period shown in the bar chart, the highest return
for a quarter was 33.33% (quarter ended 12/31/98) and the lowest return for a
quarter was -29.50% (quarter ended 4/30/90).

Average Annual Total Return (for periods ended December 31, 1998)
<TABLE>
<CAPTION>

Class A Shares(1) S&P 500(2) Russell 2000(5)
-------------- ------- ------------
<S> <C> <C> <C>
Past One Year....... 1.81% 28.58% -2.55%

Past Five Years..... 15.95% 24.06% 11.47%

Past Ten Years...... 11.42% 19.21% 12.92%

Since Inception..... 11.00% (12/30/87) 18.97%(3) 13.97%

</TABLE>

Class B Shares(1) S&P 500(2) Russell 2000(5)
-------------- ------- ------------
<S> <C> <C> <C>
Past One Year....... 1.86% 28.58% -2.55%

Since Inception..... 9.39% (6/20/96) 29.68%(4) 9.64%

</TABLE>

- ----------
(1) These figures assume the reinvestment of dividends and capital gains
distributions and include the impact of the maximum sales charges.
(2) The Standard & Poor's 500 Composite Index is an unmanaged index that is a
widely recognized benchmark of general market performance. The index is a
passive measure of equity market returns. It does not factor in the costs of
buying, selling and holding securities -- costs which are reflected in the
Fund's results.
(3) For the period from 12/31/87 through 12/31/98.
(4) For the period from 6/30/96 through 12/31/98.
(5) The Russell 2000 Index is an unmanaged index that is a widely recognized
benchmark of small company stock performance. The Russell 2000's performance
may be a better comparison for the Fund that the S&P 500 which tracks
larger, more developed stocks.

<PAGE>

FEES AND EXPENSES OF THE FUND

This table describes the fees and expenses that you may pay if you buy
and hold shares of the Fund.

Class A Shares Class B Shares
Initial Sales Deferred Sales
Charge Charge
Alternative Alternative
----------- -----------
<S> <C> <C>
Shareholder Transaction Expenses:
(fees paid directly from your investment)

Maximum Sales Charge (Load) Imposed on Purchases (as a
percentage of offering price)................................................ 4.50%* None
Maximum Deferred Sales Charge (Load) (as a percentage of original purchase
price or redemption proceeds, whichever is lower)
For purchases made before May 1, 1999...................................... 0.50%* 4.00%**
For purchases made on or after May 1, 1999................................. 1.00%* 4.00%**
Maximum Sales Charge (Load) Imposed on Reinvested Dividends..................... None None
Redemption Fee ................................................................. None None
Exchange Fee.................................................................... None None

Annual Fund Operating Expenses:
(expenses that are deducted from Fund assets)
Management Fees................................................................. 0.85% 0.85%
Distribution and/or Service (12b-1) Fees........................................ 0.25% 0.75%
Other Expenses (including a 0.25% shareholder servicing fee for Class B
Shares) ..................................................................... 0.31% 0.56%
---- ----
Total Annual Fund Operating Expenses............................................ 1.41% 2.16%
==== ====
</TABLE>

- ----------
* You will pay no sales charge on purchases of $1 million or more of Class A
Shares but, unless you are otherwise eligible for a sales charge waiver or
reduction, you may pay a contingent deferred sales charge when you redeem
your shares. (See "Sales Charges -- Redemption Price.")
** Contingent deferred sales charges decline over time and reach zero after
six years. At that time, Class B Shares convert automatically to Class A
Shares. (See "Sales Charges" and "How to Choose the Class That Is Right for
You.")

Example:

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

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

<PAGE>

1 year 3 years 5 years 10 years
------ ------- ------- --------

<S> <C> <C> <C> <C>
Class A Shares................................. $587 $876 $1,186 $2,065
Class B Shares................................. $619 $976 $1,359 $2,128
</TABLE>

You would pay the following expenses if you did not redeem your shares:

<TABLE>
<S> <C> <C> <C> <C>
Class A Shares................................. $587 $876 $1,186 $2,065
Class B Shares................................. $219 $676 $1,159 $2,128
</TABLE>

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

INVESTMENT PROGRAM

Investment Objective, Policies and Risk Considerations

The Fund seeks to achieve long-term capital appreciation primarily
through investment in a diversified portfolio of small and mid-sized emerging
growth companies.

The Advisors are responsible for managing the Fund's investments.
(Refer to the section on the Investment Advisor and Sub-Advisor.) The Advisors
will seek to identify companies that, in their opinion, are well managed and
have experienced or have the potential to experience rapid growth in their
revenue, earnings, assets and cash flow. The selection criteria will include a
company's industry position, management qualifications and experience,
accounting and financial policies, marketing and service capabilities, and
product development efforts. The Advisors will invest in a broad cross-section
of industries in an effort to limit the Fund's volatility. The Fund will invest
primarily, but not exclusively, in the businesses of technology, health care,
business services, energy, transportation, financial services, consumer products
and services and capital goods.

An investment in the Fund involves risk. Over time, common stocks have
shown greater potential for growth than other types of securities, but in the
short run stocks can be more volatile than other types of securities. In
general, stock prices are sensitive to developments affecting particular
companies and to general economic conditions that affect particular industry
sectors or the securities markets as a whole. In addition to the general risks
of the stock markets, investing in small to mid-size companies entails special
risks. The stock prices of emerging growth companies tend to be more volatile
than investments in larger, more established companies making such investments
more speculative. In particular, the companies that the Fund invests in may have
limited product lines, markets, and financial resources, and may depend on a
relatively small management group. There can be no guarantee that the Fund will
achieve its goals.

<PAGE>

To protect the Fund under adverse market conditions, the Advisors may
make temporary, defensive investments in money market instruments, investments
that would not ordinarily be consistent with the Fund's objectives. While
engaged in a temporary defensive strategy, the Fund may not achieve its
investment objective. The Advisors would follow such a strategy only if they
believed the risk of loss outweighed the opportunity for gain.

Year 2000 Issues

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

THE FUND'S NET ASSET VALUE

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

The net asset value per share of the Fund is determined at the close of
regular trading on the New York Stock Exchange (ordinarily 4:00 p.m. Eastern
Time) on each day the Exchange is open for business. It is calculated by
subtracting the liabilities attributable to a class from its proportionate share
of the Fund's assets and dividing the result by the outstanding shares of the
class. 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. When price quotes for a particular security are not readily
available, investments are priced at their "fair value" using procedures
approved by the Fund's Board of Directors.

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

<PAGE>

The following sections describe how to buy and redeem shares.

HOW TO BUY SHARES

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.

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

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

Investment Minimums

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

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.

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.

<PAGE>

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 you have an
account with the Fund that is in your name, you may also redeem shares by
contacting the Transfer Agent by mail or (if you are redeeming less than
$50,000) by telephone. The Transfer Agent will mail your redemption check within
seven days after it receives your order in proper form. Refer to the section on
telephone transactions for more information on this method of redemption.

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

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

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>

Other Redemption Information

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

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

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.

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 but you may specifically request
that no telephone redemptions or exchanges be accepted for your account. You may
make this election when you complete the Application Form or at any time
thereafter by completing and returning documentation supplied by the Transfer
Agent.

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

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

<PAGE>

SALES CHARGES

Purchase Price

The price you pay to buy shares will be the Fund's offering price which
is calculated by adding any applicable sales charges to the net asset value per
share 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
Amount of Purchase Price Invested Sales Charge
------------------ -------- ---------- ------------
<S> <C> <C> <C> <C>
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
</TABLE>

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 pay a sales charge when you redeem your shares. Refer to the
section on redemption price for details. Your securities dealer may be paid a
commission at the time of your purchase.

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

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

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

<PAGE>

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 reinvesting some or all of the proceeds of a redemption of
Class A Shares made within the last 90 days.

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

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

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

(i) A qualified retirement plan;

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

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

Purchases by Exchange

You may exchange 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 upon 60 days' notice.

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

<PAGE>

Redemption Price

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

<TABLE>
<CAPTION>
Sales Charge as a Percentage of the Dollar Amount Subject to Charge
-------------------------------------------------------------------
Class A Sales Charge Class B Sales Charge
(as % of (as % of
Years Since Purchase Cost or Value) Cost or Value)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First ......................................... 1.00%* 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
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* You will pay a sales charge when you redeem Class A Shares only if you bought
those shares at net asset value as part of an investment of $1 million or
more. For purchases of $1 million or more of Class A Shares made before May
1, 1999, you will pay a sales charge of 0.50% if you redeem them within the
first year of purchase instead of the 1.00% reflected in the above table.

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

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

2) 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.

3) If you acquired your 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.

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

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.

<PAGE>

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

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

4) 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.

5) 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
Fund's 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.

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.

<PAGE>

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 is paid a commission when you buy your shares
and is paid a servicing fee for as long as you hold your shares. Your securities
dealer or servicing agent may receive different levels of compensation depending
upon which class of shares you buy.

Distribution Plans

The Fund has adopted plans under Rule 12b-1 that allow the Fund to pay
your securities dealer or shareholder servicing agent distribution and other
fees for the sale of its shares and for shareholder service. Class A Shares pay
an annual distribution fee equal to 0.25% of average daily net assets. Class B
Shares pay an annual distribution fee equal to 0.75% of average daily net assets
and an annual shareholder servicing fee equal to 0.25% of average daily net
assets. Because these fees are paid out of net assets on an on-going basis, they
will, over time, increase the cost of your investment and may cost you more than
paying other types of sales charges.

DIVIDENDS AND TAXES

Dividends and Distributions

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

Certain Federal Income Tax Consequences

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

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

Because each investor's tax circumstances are unique and because the
tax laws are subject to change, you should consult your tax advisor about your
investment.

<PAGE>

INVESTMENT ADVISOR AND SUB-ADVISOR

Investment Company Capital Corp. ("ICC" or the "Advisor") is the Fund's
investment advisor and Brown Investment Advisory & Trust Company (formerly,
Alex. Brown Capital Advisory & Trust Company) ("Brown Trust" or the
"Sub-Advisor") is the Fund's sub-advisor. ICC is also the investment advisor to
other mutual funds in the Flag Investors family of funds and BT Alex. Brown Cash
Reserve Fund, Inc. These funds, together with the Fund, had approximately $8.8
billion of net assets as of December 31, 1998. Brown Trust is a Maryland trust
company with approximately $3.2 billion under management as of December 31,
1998.

ICC is responsible for supervising and managing all of the Fund's
operations, including overseeing the performance of Brown Trust. Brown Trust is
responsible for decisions to buy and sell securities for the Fund, for
broker-dealer selection, and for negotiation of commission rates.

As compensation for its advisory services for the fiscal year ended
October 31, 1998, ICC received from the Fund a fee equal to 0.85% of the Fund's
average daily net assets. ICC compensates Brown Trust out of its advisory fee.

The Advisor is a wholly owned subsidiary of Bankers Trust Corporation
("Bankers Trust"). Bankers Trust has entered into an Agreement and Plan of
Merger with Deutsche Bank AG ("Deutsche Bank"), dated as of November 30, 1998,
under which Bankers Trust would merge with and into a subsidiary of Deutsche
Bank. Deutsche Bank is a major global banking institution that is engaged in a
wide range of financial services, including retail and commercial banking,
investment banking and insurance. The transaction is contingent upon various
regulatory approvals, as well as the approval of the Fund's Board of Directors
and the Fund's shareholders. If the transaction is approved and completed,
Deutsche Bank, as the Advisor's new parent company, will control the operations
of the Advisor. Bankers Trust believes that, under this new arrangement, the
services provided to the Fund will be maintained at their current level.

Portfolio Manager

Frederick L. Meserve, Jr. has been responsible for managing the Fund's
assets since November, 1993. Mr. Meserve is a Managing Director at Brown Trust
where he has served as the Fund's portfolio manager since October, 1998. Prior
thereto, Mr. Meserve served as the Fund's portfolio manager while employed at BT
Alex. Brown Incorporated. In addition, Mr. Meserve has published a number of
investment strategy reports on growth stocks. Mr. Meserve received a B.S. & E.
from Princeton University in 1960 and an M.B.A. from Columbia School of Business
in 1962.

15
<PAGE>

FINANCIAL HIGHLIGHTS

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

(For a share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

Class A Shares Class B Shares
----------------------------------------- -----------------------------------
For the
Period
June 20, 1996(1)
For the Year through
For the Year Ended October 31, Ended October 31, October 31,
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1998 1997 1996
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of
period......................... $23.17 $19.14 $17.09 $12.90 $14.02 $22.88 $19.10 $19.22
------ ------ ------ ------ ------ ------ ------ ------

Income from Investment Operations:
Expenses in excess of income...... (0.22) (0.18) (0.15) (0.09) (0.08) (0.37)(2) (0.18) (0.12)
Net realized and unrealized
gain/(loss) on investments...... (2.82) 4.95 3.10 4.32 0.47 (2.77) 4.70 --
------ ---- ---- ---- ---- ------ ----- ------
Total from Investment Operations.. (3.04) 4.77 2.95 4.23 0.39 (3.14) 4.52 (0.12)
------ ---- ---- ---- ---- ------ ----- ------

Less Distributions:
Distributions from net realized
short-term gains................ (0.21) (0.21) (0.30) -- -- (0.21) (0.21) --
Distributions from net realized
mid-term and long-term gains.... (0.84) (0.53) (0.60) (0.04) (1.51) (0.84) (0.53) --
------ ------ ------ ------ ------ ------ ------ ------
Total distributions............... (1.05) (0.74) (0.90) (0.04) (1.51) (1.05) (0.74) --
------ ------ ------ ------ ------ ------ ------ ------

Net asset value at end of period . $19.08 $23.17 $19.14 $17.09 $12.90 $18.69 $22.88 $19.10
====== ====== ====== ====== ====== ====== ====== ======

Total Return(3)........................... (13.48)% 25.93% 18.19% 32.92% 3.75% 14.11% 24.69% (0.62)%

Ratios to Average Daily Net Assets:
Expenses.......................... 1.41% 1.44% 1.50% 1.50% 1.50% 2.16% 2.19% 2.25%(4)
Expenses in excess of income...... (1.03)% (0.97)% (0.83)% (0.64)% (0.73)% (1.77)% (1.73)% (1.67)%(4)

Supplemental Data:
Net assets at end of period (000): $65,247 $71,123 $45,325 $38,127 $5,155 $5,719 $23,302 $772
Portfolio turnover rate........... 23% 42% 24% 39% 86% 23% 42% 24%(4)

</TABLE>

- ----------
(1) Commencement of operations.
(2) Calculation based on average shares.
(3) Total return excludes the effect of sales charge.
(4) Annualized.

<PAGE>

FLAG INVESTORS EMERGING GROWTH FUND, INC.
NEW ACCOUNT APPLICATION
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Make check payable to "Flag Investors Emerging Growth For assistance in completing this Application please call: 1-800-553-8080,
Fund, Inc." and mail with this Application to: Monday through Friday, 8:30 a.m. to 5:30 p.m. (Eastern Time).

Flag Investors Funds To open an IRA account, please call 1-800-767-3524 for an
P.O. Box 419663 IRA information kit.
Kansas City, MO 64141-6663
Attn: Flag Investors Emerging Growth Fund, Inc.

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

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

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

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

under the __________________ Uniform Gifts to Minors Act
(State of Residence)

Corporations, Trusts, Partnerships, etc. Mailing Address

_______________________________________________________ ________________________________________________________
Name of Corporation, Trust or Partnership Street

____________________ ________________________ ________________________________________________________
Tax ID Number Date of Trust City State Zip

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

_______________________________________________________
For the Benefit of

Letter of Intent (Optional)

|_| I intend to invest at least the amount indicated below in Class A Shares of Flag Investors Emerging Growth Fund, Inc. I
understand that if I satisfy the conditions described in the attached prospectus, this Letter of Intent entitles me to the
applicable level of reduced sales charges on my purchases.
|_|$50,000 |_|$100,000 |_|$250,000 |_|$500,000 |_|$1,000,000

Right of Accumulation (Optional)

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

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

Distribution Options

Please check appropriate boxes. If none of the options are selected, all distributions will be reinvested in additional shares
of the same class of the Fund at no sales charge.
Income Dividends Capital Gains
|_| Reinvested in additional shares |_| Reinvested in additional shares
|_| Paid in cash |_| Paid in cash
Call (800) 553-8080 for information about reinvesting your dividends in other funds in the Flag Investors Family of Funds.
</TABLE>
A-1
<PAGE>

<TABLE>
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.

<S> <C>
_________________________________________________ _________________________________________________________________________
Bank Name Depositor's Signature Date

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

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
predesignated bank account, please provide the following information:
Bank: ______________________________________ Bank Account No.: __________________________________

Address: ___________________________________ Bank Account Name: _________________________________

___________________________________

Signature and Taxpayer Certification

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

By signing this Application, I hereby certify under penalties of perjury that the information on this Application is complete and
correct and that as required by federal law: (Please check applicable boxes)
|_| U.S. Citizen/Taxpayer:
|_| I certify that (1) the number shown above on this form is the correct Social Security Number or Tax ID Number and
(2) I am not subject to any backup withholding because (a) I am exempt from backup withholding, or (b) I have not been
notified by the Internal Revenue Service ("IRS") that I am subject to backup withholding as a result of a failure to
report all interest or dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding.
|_| 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 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
either number, I may be subject to a penalty and a 31% backup withholding on distributions and redemption proceeds.
(Please provide either number on IRS Form W- 9. You may request such form by calling the Transfer Agent at 800-553-8080.)
|_| Non-U.S. Citizen/Taxpayer: Indicated country of residence for tax purposes: __________________________________________
Under penalties of perjury, I certify that I am not a U.S. citizen or resident and I am an exempt foreign person as defined
by the Internal Revenue Service.
- ------------------------------------------------------------------------------------------------------------------------------------

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

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

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

- ------------------------------------------------------------------------------------------------------------------------------------
For Dealer Use Only

Dealer's Name: _____________________________________ Dealer Code: _____________________________________________________
Dealer's Address: __________________________________ Branch Code: _____________________________________________________
__________________________________ Rep. No.: ________________________________________________________
Representative: ____________________________________
</TABLE>

A-2
<PAGE>

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

Sub-Advisor Distributor
BROWN INVESTMENT ADVISORY & TRUST COMPANY ICC DISTRIBUTORS, INC.
Furness House Two Portland Square
19 South Street Portland, Maine 04101
Baltimore, Maryland 21202

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

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

<PAGE>

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

________________________________________________________________________________

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

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

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

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

For other shareholder inquiries, contact the Transfer Agent at (800) 553-8080.
For Fund information, call (800) 767-FLAG or your securities dealer or servicing
agent.

Investment Company Act File No. 811-5320
________________________________________________________________________________

EGPRS

<PAGE>
[FLAG INVESTORS LOGO]
EMERGING GROWTH FUND, INC.
(Institutional Shares)

Prospectus & Application -- March 1, 1999
- --------------------------------------------------------------------------------
This mutual fund (the "Fund") seeks to achieve long-term capital appreciation
primarily through investment in a diversified portfolio of small and mid-sized
emerging growth companies.

The Fund offers shares through securities dealers and financial institutions
that act as shareholder servicing agents. You may also buy shares through the
Fund's Transfer Agent. This Prospectus describes Flag Investors Institutional
Shares (the "Institutional Shares") of the Fund. Institutional Shares may be
purchased only by eligible institutions, certain qualified retirement plans or
by investment advisory affiliates of BT Alex. Brown Incorporated on behalf of
their clients. (See "How to Buy Institutional Shares.")

TABLE OF CONTENTS
Page
----
Investment Summary............................................................2
Fees and Expenses of the Institutional Shares.................................4
Investment Program............................................................4
The Fund's Net Asset Value....................................................6
How to Buy Institutional Shares...............................................6
How to Redeem Institutional Shares............................................7
Telephone Transactions........................................................8
Dividends and Taxes...........................................................8
Investment Advisor and Sub-Advisor............................................9
Financial Highlights.........................................................10
Application.................................................................A-1

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

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

1
<PAGE>
INVESTMENT SUMMARY

Objectives and Strategies

The Fund seeks to achieve long-term capital appreciation primarily
through investment in a diversified portfolio of common stocks of small and
mid-sized emerging growth companies. The Fund's investment advisor and
sub-advisor (collectively, the "Advisors") will attempt to identify emerging
growth companies, that is, companies that they believe have the ability or
potential to sustain a high level of growth in their revenue, earnings, assets
and cash flow. The Advisors will focus on a number of key selection criteria
including a company's industry position, management quality and experience,
accounting and financial policies, marketing and service capabilities, and
product development efforts.

Risk Profile

The Fund is suited for you if you are willing to accept the risks and
uncertainties of investing in emerging growth companies in the hope of achieving
above average long-term capital appreciation.

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

Fund Performance

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

2
<PAGE>

Institutional Shares
For years ended December 31,
21.08% 6.72%
1997 1998

During the 2-year period shown in the bar chart, the highest return for
a quarter was 33.41% (quarter ended 12/31/98) and the lowest return for a
quarter was -23.02% (quarter ended 9/30/98).

Average Annual Total Return (for periods ended December 31, 1998)
<TABLE>
<CAPTION>
Institutional Shares(1) S&P 500(2) Russell 2000(4)
---------------------------------------------------------------------
<S> <C> <C> <C>
Past One Year ............... 6.72% 28.58% -2.55%
Since Inception ............. 14.70%(11/2/95) 29.07%(3) 13.32%(3)
</TABLE>

- --------------
(1) These figures assume the reinvestment of dividends and capital gains
distributions.
(2) The Standard & Poor's 500 Composite Index is an unmanaged index that is a
widely recognized benchmark of general market performance. The index is a
passive measure of equity market returns. It does not factor in the costs of
buying, selling and holding securities -- costs which are reflected in the
Fund's results.
(3) For the period from 10/31/95 through 12/31/98.
(4) The Russell 2000 Index is an unmanaged index that is a widely recognized
benchmark of small company stock performance. The Russell 2000's performance
may be a better comparison for the performance of the Fund than the S&P 500
which tracks larger, more developed stocks.

3
<PAGE>
FEES AND EXPENSES OF THE INSTITUTIONAL SHARES

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

<TABLE>
<CAPTION>
<S> <C>
Shareholder Transaction Expenses (fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed on Purchases .................................... None
Maximum Deferred Sales Charge (Load)................................................. None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends.......................... None
Redemption Fee ...................................................................... None
Exchange Fee......................................................................... None

Annual Fund Operating Expenses (expenses that are deducted from Fund assets):
Management Fees...................................................................... 0.85%
Distribution and/or Service (12b-1) Fees............................................. None
Other Expenses....................................................................... 0.31%
-----
Total Annual Fund Operating Expenses................................................. 1.16%
=====
</TABLE>
Example:

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

The Example assumes that you invest $10,000 in the Institutional Shares
for the time periods indicated and then redeem all of your shares at the end of
those periods. The Example also assumes that your investment has a 5% return
each year and that the Fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Institutional Shares............................. $118 $369 $638 $1,409
</TABLE>

INVESTMENT PROGRAM

Investment Objective, Policies and Risk Considerations

The Fund seeks to achieve long-term capital appreciation primarily
through investment in a diversified portfolio of small and mid-sized emerging
growth companies.

4
<PAGE>
The Advisors are responsible for managing the Fund's investments.
(Refer to the section on the Investment Advisor and Sub-Advisor.) The Advisors
will seek to identify companies that, in their opinion, are well managed and
have experienced or have the potential to experience rapid growth in their
revenue, earnings, assets and cash flow. The selection criteria will include a
company's industry position, management qualifications and experience,
accounting and financial policies, marketing and service capabilities, and
product development efforts. The Advisors will invest in a broad cross-section
of industries in an effort to limit the Fund's volatility. The Fund will invest
primarily, but not exclusively, in the businesses of technology, health care,
business services, energy, transportation, financial services, consumer products
and services and capital goods.

Year 2000 Issues

5
<PAGE>
THE FUND'S NET ASSET VALUE

The price you pay when you buy shares or receive when you redeem shares
is based on the Fund's net asset value per share. The net asset value per share
of the Fund is determined at the close of regular trading on the New York Stock
Exchange (ordinarily 4:00 p.m. Eastern Time) on each day the Exchange is open
for business. It is calculated by subtracting the liabilities attributable to
the Institutional Shares from their proportionate share of the Fund's assets and
dividing the result by the outstanding Institutional Shares.

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

The following sections describe how to buy and redeem Institutional
Shares.

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 or a qualified retirement plan other than a
defined contribution plan).

o A defined contribution 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.

6
<PAGE>
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 $500,000.

The following are exceptions to this minimum:

o There is no minimum initial investment for investment advisory
affiliates of BT Alex. Brown purchasing shares for the accounts of
their investment advisory clients.

o There is no minimum initial investment for defined contribution plans
with assets of at least $75 million.

o The minimum initial investment for all other qualified retirement
plans is $1 million.

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 upon 60 days' notice.

HOW TO REDEEM INSTITUTIONAL SHARES

You may redeem Institutional 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 them by contacting the Transfer Agent by mail or
(if you are redeeming less than $500,000) by telephone. 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.

7
<PAGE>
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.

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 but you may
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.

DIVIDENDS AND TAXES

Dividends and Distributions

Certain Federal Income Tax Consequences

The dividends and distributions you receive from the Fund may be
subject to federal, state and local taxation, depending on your tax situation.
The tax treatment of dividends and

8
<PAGE>
distributions is the same whether or not you reinvest them. Dividends are taxed
as ordinary income and capital gains distributions are taxed at various rates
based on how long the Fund held the assets. The Fund will tell you annually how
to treat dividends and distributions.

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

Because each investor's tax circumstances are unique and because the
tax laws are subject to change, you should consult your tax advisor about your
investment.

INVESTMENT ADVISOR AND SUB-ADVISOR

As compensation for its services for the fiscal year ended October 31,
1998, ICC received from the Fund a fee equal to 0.85% of the Fund's average
daily net assets. ICC compensates Brown Trust out of its advisory fee.

Portfolio Manager

9
<PAGE>
FINANCIAL HIGHLIGHTS

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

<TABLE>
<CAPTION>
(For a share outstanding throughout each period)
- ---------------------------------------------------------------------------------------------------------------
Institutional Shares

For the Year For the Period
Ended November 2, 1995(1)
October 31, through October 31,
------------ -------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period................. $23.25 $ 19.15 $ 17.45
------ ------ ------
Income from Investment Operations:
Expenses in excess of investment income................ (0.17)(2) (0.26) (0.12)
Net realized and unrealized gain/(loss) on investments. (2.86) 5.10 2.72
------ ------ ------
Total from Investment Operations....................... (3.03) 4.84 2.60
------ ------ ------
Less Distributions:
Distributions from net realized short-term gains....... (0.21) (0.21) (0.30)
Distributions from net realized mid-term and long-term gains... (0.84) (0.53) (0.60
------ ------ ------
Total distributions.................................... (1.05) (0.74) (0.90)
------ ------ ------
Net asset value at end of period ...................... $19.17 $23.25 $19.15
====== ====== ======

Total Return............................................... (13.39)% 26.36% 16.48%

Ratios to Average Daily Net Assets:
Expenses............................................... 1.16% 1.19% 1.25%(3)
Expenses in excess of income........................... (0.76)% (0.74)% (0.61)%(3)

Supplemental Data:
Net assets at end of period (000)...................... $6,243 $13,068 $19,751
Portfolio turnover rate................................ 23% 42% 24%(3)
</TABLE>
- ------------
(1) Commencement of operations.
(2) Calculations based on average shares.
(3) Annualized.

10
<PAGE>
FLAG INVESTORS EMERGING GROWTH FUND, INC.
(INSTITUTIONAL SHARES)
NEW ACCOUNT APPLICATION
- --------------------------------------------------------------------------------
Send completed Application by overnight carrier to:
Flag Investors Funds
330 West Ninth Street, First Floor
Kansas City, MO 64105
Attn: Flag Investors Emerging Growth 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 Emerging
Growth 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_____

Mailing Address

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

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

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

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

If a Trust, please provide the following:

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

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

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 Emerging Growth 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. #7528183
ABA #1010-0362-1
Kansas City, Missouri 64105
Please include the following information in the wire:
o Flag Investors Emerging Growth Fund, Inc. -- Institutional Shares
o The amount to be invested
o "For further credit to ___________________________________."
(Investor's Fund Account Number)

<PAGE>

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 Capital Gains
[ ] Reinvested in additional shares [ ] Reinvested in additional shares
[ ] Paid in cash [ ] 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 [ ] Telephone exchange
privileges 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>

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.

[ ] 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.
- --------------------------------------------------------------------------------
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

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.

<PAGE>

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 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 the general partners/trustees of the
investor and that they have done the following under the authority of the
investor's partnership agreement/trust agreement: (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

- --------------------------------------------------------------------------------
Signature and title Date
A-2

<PAGE>

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

Sub-Advisor Distributor
BROWN INVESTMENT ADVISORY ICC DISTRIBUTORS, INC.
& TRUST COMPANY Two Portland Square
Furness House Portland, Maine 04101
19 South Street
Baltimore, Maryland 21202

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

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

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

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

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

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

For other shareholder inquiries, contact the Transfer Agent at (800) 553-8080.
For Fund information, call (800) 767-FLAG or your securities dealer or servicing
agent.

Investment Company Act File No. 811-5320

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

EGIPRS

<PAGE>

BROWN INVESTMENT ADVISORY & TRUST
EMERGING GROWTH SHARES
(A Class of Flag Investors Emerging Growth Fund, Inc.)
(formerly, Alex. Brown Capital Advisory & Trust Emerging Growth Shares)

Prospectus -- March 1, 1999

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

This mutual fund (the "Fund") seeks to achieve long-term capital appreciation
primarily through investment in a diversified portfolio of small and mid-sized
emerging growth companies.

The Fund offers Brown Investment Advisory & Trust Shares (the "Shares") solely
for the discretionary accounts of Brown Investment Advisory & Trust Company and
its affiliates. (See "How to Buy Shares.")

TABLE OF CONTENTS

Page

Investment Summary.............................................................2
Fees and Expenses of the Shares................................................4
Investment Program.............................................................5
The Fund's Net Asset Value.....................................................6
How to Buy Shares..............................................................6
How to Redeem Shares...........................................................7
Dividends and Taxes............................................................7
Investment Advisor and Sub-Advisor.............................................7
Financial Highlights...........................................................9

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

<PAGE>

INVESTMENT SUMMARY

Objectives and Strategies

Risk Profile

The Fund is suited for you if you are willing to accept the
risks and uncertainties of investing in emerging growth companies in the hope of
achieving above average long-term capital appreciation.

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

Fund Performance

The following bar chart and table show the performance of the Shares
for the calendar year ended December 31, 1998 and as an average over different
periods of time. The variability of performance over time provides an indication
of the risks of investing in the Fund. This is an historical record and does not
necessarily indicate how the Fund will perform in the future.

<PAGE>

Brown Investment Advisory & Trust Shares
For year ended December 31, 1998

100.00% ---------------------------------------------------------------------
|
|
|
80.00% ---------------------------------------------------------------------
|
|
|
60.00% ---------------------------------------------------------------------
|
|
|
40.00% ---------------------------------------------------------------------
|
|
|
20.00% ---------------------------------------------------------------------
|
|
|
0% ---------------------------------------------------------------------
|
6.86%

During the 1-year period shown in the bar chart, the highest return for a
quarter was 33.45% (quarter ended 12/31/98) and the lowest return for a quarter
was -23.04% (quarter ended 9/30/98).

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

<TABLE>
<CAPTION>
Brown Investment Advisory
& Trust Shares(1) S&P 500(2) Russell 2000(4)
----------------------------------------------------------------------
<S> <C> <C> <C>
Past One Year ............. 6.86% 28.58% -2.55%
Since Inception ........... 17.74% (5/9/97) 31.38%(3) 14.54%(3)
</TABLE>

- ----------------
(1) These figures assume the reinvestment of dividends and capital gains
distributions.
(2) The Standard & Poor's 500 Composite Index is an unmanaged index that is a
widely recognized benchmark of general market performance. The index is a
passive measure of equity market returns. It does not factor in the costs
of buying, selling and holding securities -- costs which are reflected in
the Fund's results.
(3) For the period from 4/30/97 through 12/31/98.
(4) The Russell 2000 Index is an unmanaged index that is a widely recognized
benchmark of small company stock performance. The Russell 2000's
performance may be a better comparison for the performance of the Fund
than the S&P 500 which tracks larger, more developed stocks.

<PAGE>

FEES AND EXPENSES OF THE SHARES

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

Shareholder Transaction Expenses (fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed on Purchases..................... None
Maximum Deferred Sales Charge (Load)................................. None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends.......... None
Redemption Fee....................................................... None
Exchange Fee......................................................... None

Annual Fund Operating Expenses (expenses that are deducted from Fund assets):
Management Fees...................................................... 0.85%*
Distribution and/or Service (12b-1) Fees............................. None
Other Expenses....................................................... 0.31%
-----
Total Annual Fund Operating Expenses................................. 1.16%
=====
- -----------
* Brown Investment Advisory & Trust Company intends to waive its advisory fee
at the account level for client assets invested in Shares.

Example:

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

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

1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>

Brown Investment Advisory & Trust Shares........ $118 $369 $639 $1,409
</TABLE>

<PAGE>

INVESTMENT PROGRAM

Investment Objective, Policies and Risk Considerations

The Fund seeks to achieve long-term capital appreciation primarily
through investment in a diversified portfolio of small and mid-sized emerging
growth companies.

Year 2000 Issues

<PAGE>

consequences to the Fund. The Fund and its shareholders may experience losses if
these assurances prove to be incorrect or if issuers of portfolio securities or
third parties, such as custodians, banks, broker-dealers or others, with which
the Fund does business experience difficulties as a result of year 2000 issues.

THE FUND'S NET ASSET VALUE

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

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

The following sections describe how to buy and redeem Shares.

HOW TO BUY SHARES

Only Brown Investment Advisory & Trust Company and its affiliates may
acquire Shares on behalf of their discretionary accounts by placing orders with
the Fund's distributor. There is no minimum for initial or subsequent
investments in Shares.

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.

<PAGE>

HOW TO REDEEM SHARES

Shares may be redeemed by, or at the direction of, Brown Investment
Advisory & Trust Company, or an affiliate, by transmitting an order through the
Fund's distributor or the Transfer Agent. Contact them for details. Payment for
redeemed shares will be made by, or at the direction of, Brown Investment
Advisory & Trust Company, or an affiliate. Payment will be made 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.

DIVIDENDS AND TAXES

Dividends and Distributions

Certain Federal Income Tax Consequences

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

Because each investor's tax circumstances are unique and because the
tax laws are subject to change, you should consult your tax advisor about your
investment.

INVESTMENT ADVISOR AND SUB-ADVISOR

<PAGE>

approximately $8.8 billion of net assets as of December 31, 1998. Brown Trust
is a Maryland trust company with approximately $3.2 billion under management
as of December 31, 1998.

Portfolio Manager

<PAGE>

FINANCIAL HIGHLIGHTS

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

(For a share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year For the Period
Ended May 9, 1997(1) through
October 31, October 31,
1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period...................... $23.24 $18.64
------ ------

Income from Investment Operations:
Expenses in excess of income................................ (0.17)(2) (0.06)
Net realized and unrealized gain/(loss)on investments....... (2.83) 4.66
------ ------
Total from Investment Operations............................ (3.00) 4.60
------ ------

Less Distributions:
Distributions from net realized short-term gains............ (0.21) --
Distributions from net realized mid-term and long-term
gains.................................................... (0.84) --
------ ------
Total Distributions......................................... (1.05) --
------ ------
Net asset value at end of period............................ $19.19 $23.24
====== ======

Total Return.................................................... (13.26)% 24.68%

Ratios to Average Daily Net Assets:
Expenses.................................................... 1.16% 1.19%(3)
Expenses in excess of income................................ (0.80)% (0.69)%(3)

Supplemental Data:
Net assets at end of period (000)........................... $46,628 $35,653
Portfolio turnover rate..................................... 23% 42%
</TABLE>

- ------------
(1) Commencement of operations.
(2) Calculation based on average shares.
(3) Annualized.

<PAGE>

FLAG INVESTORS EMERGING GROWTH FUND, INC.
(Brown Investment Advisory & Trust Shares)

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

Sub-Advisor Distributor
BROWN INVESTMENT ADVISORY ICC DISTRIBUTORS, INC.
& TRUST COMPANY Two Portland Square
Furness House Portland, Maine 04101
19 South Street
Baltimore, Maryland 21202

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

- --------------------------------------------------------------------------------
You may obtain the following additional information about the Fund, free of
charge, from your securities dealer or servicing agent or by calling (800)
767-3524:

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

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

For other shareholder inquiries, contact the Transfer Agent at (800) 553-8080.
For Fund information, call (800) 767-3524 or your securities dealer or servicing
agent.

Investment Company Act File No. 811-5320
- --------------------------------------------------------------------------------

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

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

FLAG INVESTORS EMERGING GROWTH FUND, INC.

One South Street
Baltimore, Maryland 21202

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

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

Statement of Additional Information Dated: March 1, 1999
Relating to Prospectuses dated March 1, 1999 for:
Flag Investors Class A Shares, Flag Investors Class B Shares
Flag Investors Institutional Shares
and
Brown Investment Advisory & Trust Emerging Growth Shares

<PAGE>

TABLE OF CONTENTS

Page
----

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

2. INVESTMENT OBJECTIVES AND POLICIES.................................2

3. VALUATION OF SHARES AND REDEMPTION.................................6

4. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS...............6

5. MANAGEMENT OF THE FUND.............................................9

6. INVESTMENT ADVISORY AND OTHER SERVICES............................13

7. DISTRIBUTION OF FUND SHARES.......................................14

8. BROKERAGE.........................................................18

9. CAPITAL STOCK.....................................................20

10. SEMI-ANNUAL REPORTS...............................................21

11. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES.................21

12. LEGAL MATTERS.....................................................22

13. INDEPENDENT ACCOUNTANTS...........................................22

14. PERFORMANCE INFORMATION...........................................22

15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES...............23

16. FINANCIAL STATEMENTS..............................................25

<PAGE>

1. GENERAL INFORMATION AND HISTORY

Flag Investors Emerging Growth Fund, Inc. (the "Fund") is an open-end
management investment company. Under the rules and regulations of the Securities
and Exchange Commission (the "SEC"), all mutual funds are required to furnish
prospective investors with certain information concerning the activities of the
company being considered for investment. The Fund currently offers four classes
of shares: Flag Investors Emerging Growth Fund Class A Shares (the "Class A
Shares"), Flag Investors Emerging Growth Fund Class B Shares (the "Class B
Shares"), Flag Investors Emerging Growth Fund Institutional Shares (the
"Institutional Shares") and Brown Investment Advisory & Trust Emerging Growth
Shares (formerly "Alex. Brown Capital Advisory & Trust Emerging Growth Shares"
("ABCAT Shares")) (the "Brown Investment Advisory & Trust Shares")
(collectively, the "Shares").

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, with respect to each class except the Brown Investment
Advisory & Trust Shares class, from Participating Dealers that offer such Shares
to prospective investors. Some of the information required to be in this
Statement of Additional Information is also included in the Fund's current
Prospectuses. To avoid unnecessary repetition, references are made to related
sections of the Prospectuses. In addition, the Prospectuses and this Statement
of Additional Information omit certain information about the Fund and its
business that is contained in the registration statement respecting the Fund and
its Shares filed with the SEC. Copies of the registration statement as filed,
including such omitted items, may be obtained from the SEC by paying the charges
prescribed under its rules and regulations.

The Fund was incorporated under the laws of the State of Maryland on
July 2, 1987. The Fund filed a registration statement with the SEC registering
itself as an open-end diversified management investment company under the
Investment Company Act of 1940, as amended (the "Investment Company Act") and
its Shares under the Securities Act of 1933, as amended. The Fund's registration
statement was declared effective by the SEC on June 15, 1988 and the Fund began
operations as an open-end diversified management investment company. The Fund
has offered the Class A Shares since its inception on December 30, 1987, the
Institutional Shares since November 2, 1995, the Class B Shares since June 20,
1996 and the Brown Investment Advisory & Trust Shares since May 9, 1997.

Under a license agreement dated December 29, 1987 between the Fund and
Alex. Brown & Sons Incorporated (predecessor to BT Alex. Brown Incorporated),
Alex. Brown & Sons Incorporated licenses to the Fund the "Flag Investors" name
and logo but retains the rights to the name and logo, including the right to
permit other investment companies to use them.

Size of the Fund

The allocation of the Fund's assets in emerging growth companies
requires substantial research and analysis in respect of such companies and the
Fund's management believes that the size of the Fund should be limited so that
the investment advisor can perform the appropriate research and analysis of
investment opportunities. Accordingly, at such time as the assets of the Fund
are in excess of $400 million, the Fund will accept Share purchases only from
existing shareholders (including reinvestment of dividends and capital gains
distributions). Further, at such time as the assets of the Fund are in excess of
$500 million, the Fund will discontinue sales of Shares with the exception of
purchases made by pre-existing IRA accounts.

-1-
<PAGE>

2. INVESTMENT OBJECTIVES AND POLICIES

Investment Objective and Policies of the Fund

The Fund has the investment objective of long-term capital appreciation.
Realization of income is not a significant investment consideration and any
income realized on the Fund's investments therefore will be incidental to the
Fund's objective. There can be no assurance that the Fund's investment objective
will be achieved.

The Fund seeks to achieve its investment objective through investments
in small and mid-sized emerging growth companies. In general, an emerging growth
company with $250 million or less in annual sales would be considered to be a
small company, while an emerging growth company with approximately $250 million
to $1 billion in annual sales would be considered to be a mid-sized company.
While the Fund intends to invest in emerging growth companies that are small to
mid-sized at the time of investment, it may retain the securities of these
companies even after they reach a larger size if the Fund's investment advisor
(the "Advisor") believes they continue to have growth potential. Investments in
such emerging growth companies involve certain risks. (See "Special Risk
Considerations.")

The Fund will attempt to reduce the volatility inherent in the price of
individual investments in this sector of the market by investing in a
diversified portfolio of securities of companies that the Advisor believes are
well managed and have experienced or have the potential to experience rapid
growth in revenues, earnings, assets and cash flow. As an additional attempt to
limit volatility, the Fund will invest in a broad cross-section of industries.
While the Fund's investments in particular industries will change from time to
time as investment opportunities change, it will invest primarily, but not
exclusively, in companies in the businesses of technology, health care, business
services, energy, transportation, financial services, consumer products and
services and capital goods.

The Advisor will seek to identify companies which, in its opinion, have
the ability to sustain a relatively high level of growth and profitability. In
selecting such companies, the Advisor will focus on a number of key criteria
including: industry position, management quality and experience, accounting and
financial policies, marketing and service capabilities and the productivity of
the product development effort.

Under normal circumstances Fund assets will be invested as fully as
possible in the common stocks and securities convertible into common stocks of
small and mid-sized emerging growth companies (and at least 65% of the Fund's
assets will be so invested). However, up to 25% of the Fund's assets may from
time to time be invested in "other investments" which do not otherwise meet the
criteria set forth above, but which the Advisor believes offer improved
opportunities for growth not yet fully appreciated by investors. Such
investments may arise, for example, because of a new product developed by a
mature company or a new opportunity in an established business line of a mature
company that shows growth potential similar to that of emerging growth
companies.

In addition, the Fund may invest up to 20% of its net assets in
securities convertible into the common stock of high quality growth companies.
Convertible securities are fixed-income securities which may be converted at a
stated price, within a specified period of time, into a specified number of
shares of common stock of the same or a different issuer. While providing a
fixed income stream (generally higher in yield than the income derivable from a
common stock but lower than that afforded by a non-convertible debt security), a
convertible security also affords an investor the opportunity, through its
conversion feature, to participate in the capital appreciation of the common
stock into which it is convertible. In general, the market value of a
convertible security is at least the higher of its "investment value" (i.e., its
value as a fixed-income security) or its "conversion value" (i.e., the value of
the underlying shares of common stock if the security is converted). As a

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<PAGE>

fixed-income security, a convertible security tends to increase in market value
when interest rates decline and tends to decrease in value when interest rates
rise. However, the price of a convertible security also is influenced by the
market value of the security's underlying common stock. Thus, the price of a
convertible security tends to increase as the market value of the underlying
stock increases, whereas it tends to decrease as the market value of the
underlying stock declines. Investments in convertible securities generally
entail less risk than investments in the common stock of the same issuer.

In addition, up to 35% of the Fund's assets may be invested in
U.S. Government securities, corporate bonds and debentures rated in one of the
three highest rating categories of Standard & Poor's Ratings Group ("S&P") or
Moody's Investors Service, Inc. ("Moody's") (or, if unrated, determined by the
Advisor to be of equivalent quality), preferred stocks or money market
instruments when the Advisor believes doing so is appropriate in light of the
Fund's investment objective and market conditions.

Additional information about certain of the Fund's investment policies
and practices are described below.

Restricted Securities

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 Advisor 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" below.)
Rule 144A Securities may become illiquid if qualified institutional buyers are
not interested in acquiring the securities.

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 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 Fund'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 collateral for these repurchase
agreements will be held by the Fund's custodian or by a duly appointed
sub-custodian. The Fund makes payment for such securities only upon physical
delivery or evidence of book-entry transfer to the account of a custodian or
bank acting as agent. The underlying securities, which in the case of the Fund
are securities of the U.S. 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 while the Fund seeks to enforce its rights thereto, (b)
possible subnormal levels of income and lack of access to income during this
period and (c) expenses of enforcing its rights.

Loans 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

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<PAGE>

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 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 only be made 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.
The Fund's custodian or another affiliate may act as securities lending agent.

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.

Special Risk Considerations

Although the Advisor will seek to invest in quality emerging growth
companies, there are risks to investors inherent in the characteristics of
emerging growth companies. Many of the companies that the Fund invests in are
small capitalization or "small cap" companies. Securities of small companies
often have only a small proportion of their outstanding securities held by the
general public. Securities held by the Fund may have limited trading markets
that may be subject to wide price fluctuations. In view of such factors, the net
asset value of a share may vary significantly. Accordingly, you should not
consider investing in this Fund if you are unable or unwilling to assume the
risk of loss inherent in such a program, nor should you consider an investment
in the Fund to be a balanced or complete investment program.

The companies in which the Fund may invest may have relatively small
revenues and lack depth of management. Investments in such companies tend to be
volatile and are therefore speculative. They may have a small share of the
market for their products or services and they may provide goods or services to
a regional or limited market. Small companies may be unable to internally
generate funds necessary for growth or potential development or to generate such
funds through external financing on favorable terms. In addition, they may be
developing or marketing new products or services for which markets are not yet
established and may never become established. Such companies may have or may
develop only a regional market for products or services and thus be affected by
local or regional market conditions. Moreover, small companies may have
insignificant market share in their industries and may have difficulty
maintaining or increasing their market share in competition with larger
companies. Due to these and other factors, small companies may suffer
significant losses.

Investment Restrictions

The Fund's investment program is subject to a number of investment
restrictions that reflect self-imposed standards as well as federal and state
regulatory limitations. The investment restrictions recited below are matters of
fundamental policy and may not be changed without the affirmative vote of a
majority of the Fund's outstanding Shares. The vote of a majority of the
outstanding Shares of the Fund means the lesser of: (i) 67% or more of the
Shares present at a shareholder meeting at which the holders of more than 50% of
the Shares are present or represented or (ii) more than 50% of the outstanding
Shares of the Fund. The Fund will not:

-4-
<PAGE>

1) Concentrate 25% or more of its total assets in securities of
issuers in any one industry (for these purposes the U.S. Government and
its agencies and instrumentalities are not considered an industry);

2) With respect to 75% of its total assets, invest more than 5%
of its total assets in the securities of any single issuer (for these
purposes the U.S. Government and its agencies and instrumentalities are
not considered an issuer);

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

4) Invest in the securities of any single issuer if, as a
result, the Fund would hold more than 10% of the outstanding voting
securities of such issuer;

5) Invest in real estate or mortgages on real estate except that
the Fund may invest in the securities of companies that invest in real
estate or mortgages;

6) Purchase or sell commodities or commodities contracts;

7) 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;

8) Issue senior securities;

9) Make loans, except that the Fund may purchase or hold debt
instruments and enter into repurchase agreements in accordance with its
investment objective and policies and may lend portfolio securities and
enter into repurchase agreements as described in the Registration
Statement;

10) Effect short sales of securities;

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

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

The following are investment restrictions that may be changed by a vote
of the majority of the Board of Directors. The percentage limitations contained
in these restrictions apply at the time of purchase of securities. The Fund will
not:

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

-5-
<PAGE>

3. VALUATION OF SHARES AND REDEMPTION

Valuation of Shares

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

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

Redemption

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

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

4. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS

The following is only a summary of certain additional federal income
tax considerations generally affecting the Fund and its shareholders that are
not described in the Fund's Prospectuses. 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 Prospectuses is not intended as a
substitute for careful tax planning. For example, under certain specified
circumstances, state income tax laws may exempt from taxation distributions of a
regulated investment company to the extent that such distributions are derived
from interest on federal obligations. Investors are urged to consult with their
tax advisor regarding whether such exemption is available.

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

-6-
<PAGE>

Qualification as a Regulated Investment Company

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

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

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

If the Fund fails to qualify for any taxable year 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 such distributions generally will be taxable to shareholders
as ordinary dividends to the extent of the Fund's current and accumulated
earnings and profits. In this event, such distributions generally will be
eligible for the 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 to the extent of the Fund's
earnings and profits. The Fund anticipates that it will distribute substantially
all of its investment company taxable income for each taxable year.

The Fund may either retain or distribute to shareholders its excess of
net long-term capital gains over net short-term capital losses ("net capital
gains"). If such gains are distributed as a capital gains distribution, they are
taxable to shareholders that are individuals at a maximum rate of 20%,

-7-
<PAGE>

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

In the case of corporate shareholders, Fund distributions (other than
capital gains distributions) generally qualify for the dividends-received
deduction to the extent of the gross amount of qualifying dividends received by
the Fund for the year. Generally, and subject to certain limitations, a dividend
will be treated as a qualifying dividend if it has been received from a domestic
corporation. Accordingly, such distributions will generally qualify for the
corporate dividends-received deduction.

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

The sale or exchange of a share is a taxable event for the shareholder.
Generally, gain or loss on the sale or exchange of a Share will be capital gain
or loss that will be long-term if the Share has been held for more than twelve
months and otherwise will be short-term. For individuals, long-term capital
gains are currently taxed at a rate of 20% and short-term capital gains are
currently taxed at ordinary income tax rates. However, if a shareholder realizes
a loss on the sale, exchange or redemption of a Share held for six months or
less and has previously received a capital gains distribution with respect to
the Share (or any undistributed net capital gains of the Fund with respect to
such Share are included in determining the shareholder's long-term capital
gains), the shareholder must treat the loss as a long-term capital loss to the
extent of the amount of the prior capital gains distribution (or any
undistributed net capital gains of the Fund that have been included in
determining such shareholder's long-term capital gains). In addition, any loss
realized on a sale or other disposition of Shares will be disallowed to the
extent an investor repurchases (or enters into a contract or option to
repurchase) Shares within a period of 61 days (beginning 30 days before and
ending 30 days after the disposition of the Shares). This loss disallowance rule
will apply to Shares received through the reinvestment of dividends during the
61-day period.

Investors should be careful to consider the tax implications of
purchasing Shares just prior to the ex-dividend date of any ordinary income
dividend or capital gains distribution. Those investors 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 distribution.

The Fund will provide a statement annually to shareholders as to the
federal tax status of distributions paid (or deemed to be paid) by the Fund
during the year, including the amount of dividends eligible for the corporate
dividends-received deduction.

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<PAGE>

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

Federal Excise Tax; Miscellaneous Considerations; Effect of Future Legislation

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

State and Local Tax Considerations

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 an investment in the Fund.

5. MANAGEMENT OF THE FUND

Directors and Officers

The overall business and affairs of the Fund are managed by its Board
of Directors. The Board approves all significant agreements between the Fund and
persons or companies furnishing services to the Fund, including the Fund's
agreements with its investment advisor, sub-advisor, distributor, custodian and
transfer agent.

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

*TRUMAN T. SEMANS, Chairman and Director (10/27/26)
Vice Chairman, Brown Investment Advisory & Trust Company (formerly,
Alex. Brown Capital Advisory & Trust Company); Director,
Investment Company Capital Corp. (registered investment advisor); and
Director, Virginia Hot Springs, Inc. (property management); Formerly,
Managing Director, BT Alex. Brown Incorporated; Vice Chairman, Alex.
Brown & Sons Incorporated (now BT Alex. Brown Incorporated).

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

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

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<PAGE>

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

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

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

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

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

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, Trustee, Reed College
(education); Trustee, Rockefeller Foundation; and Director, Merrill
Lynch Cluster C Funds and Flag Investors/ISI and BT Alex. Brown Cash
Reserve Fund, Inc. Family of Funds (registered investment companies).

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

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

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<PAGE>

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

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

Directors and officers of the Fund are also directors and officers of
some or all of the other investment companies managed, administered or advised
by BT Alex. Brown Incorporated ("BT Alex. Brown") or its affiliates. There are
currently 12 funds in the Flag Investors/ISI Funds and BT Alex. Brown Cash
Reserve Fund, Inc. fund complex (the "Fund Complex"). Mr. Semans serves as
Chairman of five funds and as a Director of five other funds in the Fund
Complex. Mr. Hale serves as Chairman of three funds and as a Director of seven
other funds in the Fund Complex. Messrs. Cunnane, Hardiman, Levy, McDonald and
Vogt serve as Directors of each fund in the Fund Complex. Ms. Rimel serves as
Director of 11 funds in the Fund Complex. Mr. Woolf serves as President of seven
funds in the Fund Complex. Mr. Finelli serves as Treasurer, Ms. Olmert serves as
Secretary and Mr. Liotta serves as Assistant Secretary of each of the funds in
the Fund Complex.

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

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 the
Advisor may be considered to have received remuneration indirectly. As
compensation for his or her services, each Director who is not an "interested
person" of the Fund (as defined in the Investment Company Act) (an "Independent
Director") 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 Chairmen of the
Fund Complex's Audit Committee and Executive Committee receive an annual fee
from the Fund Complex. Payment of such fees and expenses are allocated among all
such funds described above in direct proportion to their relative net assets.
For the fiscal year ended October 31, 1998, Independent Directors' fees
attributable to the assets of the Fund totaled $5,951. 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 year ended October 31, 1998.
<TABLE>
<CAPTION>

COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------------------
Name of Person, Position Aggregate Compensation Pension or Retirement Total Compensation
From the Fund for Benefits Accrued as from the Fund and Fund
the Fiscal Year Ended Part of Fund Complex Payable to
October 31, 1998 Expenses Directors
for the Fiscal
Year Ended
October 31, 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Truman T. Semans, Chairman(1) $0 $0 $0

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

James J. Cunnane, Director $676(2) (3) $39,000 for service on 13(4)
Boards in the Fund Complex

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

</TABLE>

-11-
<PAGE>

COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------------------
Name of Person, Position Aggregate Compensation Pension or Retirement Total Compensation
From the Fund for Benefits Accrued as from the Fund and Fund
the Fiscal Year Ended Part of Fund Complex Payable to
October 31, 1998 Expenses Directors and President
for the Fiscal
Year Ended
October 31, 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
John F. Kroeger, Director(7) $849 (3) $49,000 for service on 13(4)
Boards in the Fund Complex

Louis E. Levy, Director $715(2) (3) $44,000 for service on 13(4)
Boards in the Fund Complex

Eugene J. McDonald, Director $676(2) (3) $39,000 for service on 13(4)
Boards in the Fund Complex

Rebecca W. Rimel, Director $693(2) (3) $39,000 for service on 11(4,6)
Boards in the Fund Complex

Carl W. Vogt, Esq., Director $687(2) (3) $39,000 for service on 11(4,6)
Boards in the Fund Complex
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Denotes an individual who is an "interested person" as defined in the
Investment Company Act.
(2) Of amounts payable to Messrs. Cunnane, Levy, McDonald and Vogt and Ms.
Rimel, $676, $0, $676, $687 and $693, respectively, was deferred pursuant
to a Deferred Compensation Plan.
(3) The Fund Complex has adopted a Retirement Plan for eligible Directors, as
described below. The actuarially computed pension expense allocated to the
Fund for the fiscal year ended October 31,1998 was approximately $2,643.
(4) One of these funds ceased operations on July 29, 1998.
(5) Elected to the Fund's Board effective October 1, 1998.
(6) Mr. Hardiman and Ms. Rimel receive, and Mr. Vogt received, proportionally
higher compensation from each fund for which they serve.
(7) Retired effective October 1, 1998.

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

Set forth in the table below are the estimated annual benefits payable
to a Participant upon retirement assuming various years of service and payment
of a percentage of the fee earned by such Participant in his or her last year of
service, as described above. The approximate credited years of service for each
Participant at December 31, 1997, are as follows: for Mr. Cunnane, 4 years; for
Mr. Levy, 4 years; for Mr. McDonald, 6 years; for Ms. Rimel, 3 years; for Mr.
Vogt, 3 years; and for Mr. Hardiman, 0 years.

<TABLE>
<CAPTION>
Years of Service Estimated Annual Benefits Payable By Fund Complex Upon Retirement
- ---------------- -----------------------------------------------------------------

Chairmen of Audit and Executive Committees Other Participants
------------------------------------------ ------------------

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

-12-
<PAGE>

Any Director who receives fees from the Fund is permitted to defer 50%
to 100% of his or her annual compensation pursuant to a Deferred Compensation
Plan. Messrs. Cunnane, Levy, McDonald and Vogt and Ms. Rimel have each executed
a Deferred Compensation Agreement. Currently, the deferring Directors may select
from among various Flag Investors funds, BT Alex. Brown Cash Reserve Fund, Inc.
and BT International Equity Fund in which all or part of their deferral account
shall be deemed to be invested. Distributions from the deferring Directors'
deferral accounts will be paid in cash, in generally equal quarterly
installments over a period of ten years.

Code of Ethics

The Board of Directors of the Fund has adopted a Code of Ethics
pursuant to Rule 17j-1 under the Investment Company Act. The Code of Ethics
applies to the personal investing activities of all of the directors and
officers of the Fund, as well as to designated officers, directors and employees
of the 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 preclear any personal securities investments (with
certain exceptions, such as non-volitional purchases or purchases that are part
of an automatic dividend reinvestment plan). The foregoing would apply to any
officer, director or employee of the Distributor that is an access person. The
preclearance requirement and associated procedures are designed to identify any
substantive prohibition or limitation applicable to the proposed investment. The
substantive restrictions applicable to investment personnel include a ban on
acquiring any securities in an initial public offering, a prohibition from
profiting on short-term trading in securities and special preclearance of the
acquisition of securities in private placements. Furthermore, the Code of Ethics
provides for trading "blackout periods" that prohibit trading by investment
personnel and certain other employees within periods of trading by the Fund in
the 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 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")
The Investment Advisory Agreement was approved by a vote of shareholders of the
Fund on August 14, 1997. On September 25, 1998, a Sub-Advisory Agreement among
the Fund, ICC and Brown Investment Advisory & Trust Company (formerly, Alex.
Brown Capital Advisory & Trust Company) ("Brown Trust") was approved by a vote
of shareholders of the Fund. ICC, the investment advisor, is an indirect
subsidiary of Bankers Trust Corporation. Brown Trust is a trust company
chartered under the laws of the State of Maryland. Brown Trust is a wholly-owned
subsidiary of Brown Capital Holdings Incorporated ("Brown Capital Holdings"), a
Maryland corporation whose principal executive officer is Michael D. Hankin.
Brown Capital Holdings is owned by management and employees of Brown Trust and
outside investors. ICC also serves as investment advisor and Brown Trust serves
as sub-advisor to other funds in the Flag Investors family of funds.

-13-
<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 Brown
Trust provided that ICC continues to supervise the performance of Brown Trust
and report thereon to the Fund's Board of Directors. Any investment program
undertaken by ICC or Brown Trust 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 Brown Trust shall be liable to the Fund or its
shareholders for any act or omission by ICC or Brown Trust 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 Brown Trust to the Fund are not exclusive and ICC and Brown
Trust are free to render similar services to others.

As compensation for its services, ICC receives a maximum annual fee,
payable monthly, representing 0.85% of the Fund's average daily net assets.
However, the actual amount of the fee is contractually limited to an amount that
would result in total expenses on Class A Shares of no more than 1.50% of the
Class A Shares' average daily net assets. As compensation for providing
sub-advisory services, Brown Trust is entitled to receive a fee from ICC,
calculated daily and payable monthly, at the annual rate of 0.55% of the Fund's
average daily net assets, provided that, if necessary, Brown Trust's annual
compensation will be reduced in an amount proportional to the Advisor's waiver.

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
Investment Company Act). The Sub-Advisory Agreement has similar termination
provisions.

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

Fiscal Year Ended October 31,
-----------------------------
1998 1997 1996
---- ---- ----

$ 1,103,023 $ 782,095 $ 381,086

For the period from October 1, 1998 through October 31, 1998, Brown
Trust received $49,625 as compensation for sub-advisory services.

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 exclusive distributor of each class of the Fund's Shares pursuant to a
Distribution Agreement (the "Distribution Agreement") effective August 31, 1997.

-14-
<PAGE>

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 ICC Distributors' duties
or obligations under the Distribution Agreement or by reason of ICC
Distributors' 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 outstanding
Shares of the Fund (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 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, so long as the Fund's 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 September 29, 1998.

With respect to the Class A, Class B and Institutional Shares, 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
shareholders concerning the status of their accounts and the operations of the
Fund. It is not currently anticipated that ICC Distributors will enter into
Sub-Distribution Agreements for the Brown Trust Shares. Any Sub-Distribution
Agreement may be terminated in the same manner as the Distribution Agreement at
any time and shall automatically terminate in the event of an assignment.

In addition, with respect to the Class A and Class B Shares, the Fund
may enter into Shareholder Servicing Agreements with certain financial
institutions, including 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. 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

-15-
<PAGE>

such institution's fee schedule. In addition, state securities laws on this
issue may differ from the interpretations of federal law expressed herein, and
banks and financial institutions may be required to register as dealers pursuant
to state law.

As compensation for providing distribution services as described above
for the Class A Shares, ICC Distributors receives 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, ICC Distributors receives 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. 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 equal to 0.25% of the Class B Shares' average daily net assets. ICC
Distributors expects to allocate most of its shareholder servicing fee to
Participating Dealers and Shareholder Servicing Agents. ICC Distributors
receives no compensation for distributing the Institutional Shares or the Brown
Investment Advisory & Trust Shares.

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:

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

Fee 1998 1997 1996
--- ---- ---- ----

12b-1 Fees $223,094(1) $161,564(2) $ 100,956(4)

Class B Shareholder
Servicing Fee $ 14,536(1) $ 6,398(3) $ 255(4,5)

- -------------
(1) Received by ICC Distributors, the Fund's distributor.
(2) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $124,346 and ICC Distributors, the Fund's distributor
effective August 31, 1997, received $37,218.
(3) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $4,330 and ICC Distributors, the Fund's distributor
effective August 31, 1997, received $2,068.
(4) Received by Alex. Brown, the Fund's distributor.
(5) For Class B Shares, amounts represent fees received for the period from
June 20, 1996 (commencement of offering of Class B Shares) through October
31, 1996.

Pursuant to Rule 12b-1 under the Investment Company Act, which provides
that investment companies may pay distribution expenses, directly or indirectly,
only pursuant to a plan adopted by the investment company's board of directors
and approved by its shareholders, the Fund has adopted two separate Plans of
Distribution, one for the Class A Shares (the "Class A Plan") and one for the
Class B Shares (the "Class B Plan") (collectively, the "Plans"). Under the
Plans, the Fund pays fees as described above 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 fee to Participating Dealers and Shareholder Servicing Agents. The Plans
will 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
Fund's Board of Directors, including a majority of the Independent Directors, on
September 29, 1998.

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

-16-
<PAGE>

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, to broker-dealers pursuant to any Sub-Distribution
Agreements and to Shareholder Servicing Agents pursuant to Shareholder Servicing
Agreements. Such reports shall be made by the persons authorized to make such
payments. In addition, during the continuance of the Plans, the selection and
nomination of the Fund's Independent Directors shall be committed to the
discretion of the Independent Directors then in office.

Under the Plans, amounts allocated to Participating Dealers and
Shareholder Servicing Agents may not exceed amounts payable to ICC Distributors
under such Plans. Payments under the Plans are made as described above
regardless of ICC Distributors' actual cost of providing distribution services
and may be used to pay ICC Distributors' overhead expenses. If the cost of
providing distribution services to the Class A Shares is less than 0.25% of the
average daily net assets invested in that Class or Class B Shares is less than
0.75% of the average daily net assets invested in that Class for any period, the
unexpended portion of the distribution fees may be retained by ICC Distributors.
The Plans do not provide for any charges to the Fund for excess amounts expended
by ICC Distributors and, if any of the Plans is terminated in accordance with
its terms, the obligation of the Fund to make payments to ICC Distributors
pursuant to such Plan will cease and the Fund will not be required to make any
payments past the date the Distribution Agreement terminates with respect to
such Plan.

The Fund's distributor received commissions on the sale of the Class A
Shares and contingent deferred sales charges on the Class B Shares and retained
such commissions or sales charges in the following amounts:
<TABLE>
<CAPTION>

Fiscal Year Ended October 31,
-----------------------------
1998 1997 1996
---- ---- ----
Class Received Retained Received Retained Received Retained
----- -------- -------- -------- -------- -------- --------

<S> <C> <C> <C> <C> <C> <C>
Class A Commissions $278,417(1) $0 $293,651(2) $213,280(4) $210,390(6) $201,445(6)

Class B Contingent $ 35,662(1) $0 $180,270(3) $78,625(5) $ 29,712(6,7) $29,712(6,7)
Deferred Sales
Charge

</TABLE>
- -------------
(1) By ICC Distributors, the Fund's distributor.
(2) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $227,165 and ICC Distributors, the Fund's distributor
effective August 31, 1997 received $66,486.
(3) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $89,798 and ICC Distributors, the Fund's distributor
effective August 31, 1997 received $90,472.
(4) Of commissions received, Alex. Brown retained $213,280 and ICC Distributors
retained $0, respectively.
(5) Of sales charges received, Alex. Brown retained $78,625 and ICC
Distributors retained $0, respectively.
(6) By Alex. Brown, the Fund's distributor.
(7) For the period from June 20, 1996 (commencement of offering of Flag
Investors Class B Shares) through October 31, 1996.

-17-
<PAGE>

The Fund will pay all costs associated with its organization and
registration under the Securities Act of 1933 and the Investment Company Act.
Except as described elsewhere, the Fund pays or causes to be paid all continuing
expenses of the Fund, including, without limitation: investment advisory and
distribution fees; the charges and expenses of any registrar, any custodian or
depository appointed by the Fund for the safekeeping of cash, portfolio
securities and other property, and any transfer, dividend or accounting agent or
agents appointed by the Fund; brokers' commissions chargeable to the Fund in
connection with portfolio securities transactions to which the Fund is a party;
all taxes, including securities issuance and transfer taxes, and fees payable by
the Fund to federal, state or other governmental agencies; the costs and
expenses of engraving or printing of certificates representing Shares; all costs
and expenses in connection with the registration and maintenance of 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 accountants, in connection with any matter relating to the Fund;
membership dues of industry associations; interest payable on Fund borrowings;
postage; insurance premiums on property or personnel (including officers and
Directors) of the Fund that inure to its benefit; extraordinary expenses
(including, but not limited to, legal claims and liabilities and litigation
costs and any indemnification related thereto); and all other charges and costs
of the Fund's operation unless otherwise explicitly assumed by ICC or ICC
Distributors.

The address of ICC Distributors is Two Portland Square, Portland, Maine
04101.

8. BROKERAGE

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 ICC and the broker-dealers. ICC
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 the
Advisor or its affiliates in any transaction in which the Advisor or its
affiliates acts as a principal.

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

ICC's primary consideration in effecting securities transactions is to
obtain the best price and execution of orders on an overall basis. As described
below, however, ICC may, in its discretion, effect agency transactions with
broker-dealers that furnish statistical, research or other information or
services that are deemed by ICC to be beneficial to the Fund's investment
program. ICC is also authorized to pay higher commissions on brokerage
transactions for the Fund to non-affiliated brokers in order to secure research
and investment services described below, subject to periodic review by the

-18-
<PAGE>

Fund's Board of Directors. Research services may include the following:
statistical and background information on the U.S. economy, industry groups and
individual small and mid-sized companies; forecasts and interpretations with
respect to specific industry groups and individual small and mid-sized
companies; information on federal, state, local and foreign political
developments; portfolio management strategies; performance information on
securities, indices and investment accounts; information concerning prices of
securities; provision of equipment used to communicate research information;
arrangement of meetings with management of companies; and provision of access to
consultants who supply research information. Certain research services furnished
by broker-dealers may be useful to ICC with clients other than the Fund.
Similarly, any research services received by ICC through placement of portfolio
transactions of other clients may be of value to ICC in fulfilling its
obligations to the Fund. No specific value can be determined for research and
statistical services furnished without cost to ICC by a broker-dealer. ICC is of
the opinion that because the material must be analyzed and reviewed by its
staff, its receipt does not tend to reduce expenses, but may be beneficial in
supplementing ICC's research and analysis. Therefore, it may tend to benefit the
Fund by improving ICC's investment advice. In over-the-counter transactions, ICC
will not pay any commission or other remuneration for research services. ICC's
policy is to pay a broker-dealer higher commissions for particular transactions
than might be charged if a different broker-dealer had been chosen when, in
ICC's opinion, this policy furthers the overall objective of obtaining best
price and execution. Subject to periodic review by the Fund's Board of
Directors, ICC is also authorized to pay broker-dealers other than affiliates of
the Advisor higher commissions than another broker may have charged on brokerage
transactions for the Fund for brokerage or research services. The allocation of
orders among broker-dealers and the commission rates paid by the Fund will be
reviewed periodically by the Board. The foregoing policy under which the Fund
may pay higher commissions to certain broker-dealers in the case of agency
transactions, does not apply to transactions effected on a principal basis. In
addition, consistent with NASD Rules, and subject to seeking the most favorable
price and execution available and such other policies as the Board may
determine.

Subject to the above considerations, the Board of Directors has
authorized the Fund to effect portfolio transactions through affiliates of the
Advisor. At the time of such authorization, the Board adopted certain policies
and procedures incorporating the standards of Rule 17e-1 under the Investment
Company Act, which requires that the commissions paid affiliates of the Advisor
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 to furnish reports and
to maintain records in connection with such reviews. In the fiscal year ended
October 31, 1998, the Fund paid no brokerage commissions to affiliates of the
Advisor.

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

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

-19-
<PAGE>

Fiscal Year Ended October 31,
-----------------------------
1998 1997 1996
---- ---- ----

Transactions Directed $ 4,112,107 $98,445,406 $ 4,091,824

Commissions Paid $ 13,081 $ 13,853 $ 11,346

- ----------------------------
The increasing amounts of commissions reflects the growth of the Fund.

The Fund is required to identify any securities of its "regular brokers
or dealers" (as such term is defined in the Investment Company Act) that the
Fund has acquired during its most recent fiscal year. As of October 31, 1998,
the Fund held a 5.25% repurchase agreement issued by Goldman Sachs & Co. valued
at $5,490,000. Goldman Sachs & Co. is a "regular broker or dealer" of the Fund.

9. CAPITAL STOCK

The Fund is authorized to issue 35 million Shares of capital stock, par
value of $.001 per Share, all of which Shares are designated common stock. The
Board of Directors may increase or decrease the number of authorized Shares
without shareholder approval.

The Fund's Articles of Incorporation provide for the establishment of
separate series and separate classes of Shares by the Directors at any time
without shareholder approval. The Fund currently has one Series and the Board
has designated five classes of shares: Flag Investors Emerging Growth Fund Class
A Shares (formerly known as the Flag Investors Emerging Growth Fund Shares),
Flag Investors Emerging Growth Fund Class B Shares, Flag Investors Emerging
Growth Fund Class C Shares, Flag Investors Emerging Growth Fund Institutional
Shares and Brown Investment Advisory & Trust Emerging Growth Shares (formerly
known as Alex. Brown Capital Advisory & Trust Shares). The Flag Investors
Institutional Shares are offered only to certain eligible institutions and to
clients of investment advisory affiliates of BT Alex. Brown. The Brown
Investment Advisory & Trust Emerging Growth Shares are offered only to clients
of Brown Investment Advisory & Trust Company and its affiliates. The Flag
Investors Emerging Growth Fund Class C Shares have not been offered prior to the
date of this Statement of Additional Information. 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 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 would be identical
to every other class in a particular series and expenses of the Fund (other than
12b-1 and any applicable service fees) would be 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 rights applicable to
any of the Shares. In the event of liquidation or dissolution of the Fund, each
Share is entitled to its pro rata 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.

-20-
<PAGE>

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") 130 Liberty Street, New York,
New York 10006, has been retained to act as custodian of the Fund's investments.
Bankers Trust receives such compensation from the Fund for its services as
Custodian as may be agreed to from time to time by Bankers Trust and the Fund.
For the fiscal year ended October 31, 1998, Bankers Trust was paid $25,373 as
compensation for providing custody services to the Fund. Investment Company
Capital Corp., One South Street, Baltimore, Maryland 21202, has been retained to
act as transfer and dividend disbursing agent. As compensation for providing
these services, the Fund pays ICC up to $15.67 per account per year, plus
reimbursement for out-of-pocket expenses. For the fiscal year ended October 31,
1998, ICC received transfer agency fees of $87,294.

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

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

$ 0 - $ 10,000,000 $ 13,000(fixed fee)
$ 10,000,000 - $ 20,000,000 0.100%
$ 20,000,000 - $ 30,000,000 0.080%
$ 30,000,000 - $ 40,000,000 0.060%
$ 40,000,000 - $ 50,000,000 0.050%
$ 50,000,000 - $ 60,000,000 0.040%
$ 60,000,000 - $ 70,000,000 0.030%
$ 70,000,000 - $ 100,000,000 0.020%
$100,000,000 - $ 500,000,000 0.015%
$500,000,000 - $1,000,000,000 0.005%
over $1,000,000,000 0.001%

For the fiscal years ended October 31, 1998, 1997 and 1996 ICC received
accounting fees of $59,460, $53,054 and $41,911, respectively.

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

ICC also serves as the Fund's investment advisor.

-21-
<PAGE>

12. LEGAL MATTERS

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

13. INDEPENDENT ACCOUNTANTS

PricewaterhouseCoopers LLP, 250 West Pratt Street, Baltimore, Maryland
21201, are independent accountants 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(1 + T) = ERV

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

T = average annual total return

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

ERV = ending redeemable value at the end of the

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

Under the foregoing formula, the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover one-, five- and ten- year periods or a shorter period dating from the
effectiveness of the Fund's registration statement or the date the Fund (or a
class or series) commenced operations (or the later commencement of operations
of the series or class).

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

One-Year Period Five-Year Period Ten-Year Period
Ended Ended Ended
October 31, 1998 October 31, 1998 October 31, 1998
---------------- ---------------- ----------------

Average Average
Ending Ending Annual Ending Annual
Redeemable Total Redeemable Total Redeemable Total
Class Value Return Value Return Value Return
- ----- ----- ------ ----- ------ ----- ------

<S> <C> <C> <C> <C> <C> <C>
Class A
*December 30, 1987 $826.30 -17.37% $1,695.90 11.14% $2,619.40 10.11%
</TABLE>

-22-
<PAGE>

One-Year Period
Ended
October 31, 1998 Since Inception
---------------- ----------------------

Average
Ending Ending Annual
Redeemable Total Redeemable Total
Class Value Return Value Return
- ----- ---------- ------- ---------- ------
Class B
*June 20, 1996 $818.90 -18.11% $1,033.70 1.41%

Institutional
*November 2, 1995 $866.10 -13.39% $1,274.80 8.44%

Brown Investment
Advisory &
Trust Shares
*May 9, 1997 $867.40 -13.26% $1,081.50 5.44%

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

The Fund may also from time to time include in such advertising total
return figures that are not calculated according to the formula set forth above
to compare more accurately the Fund's performance with other measures of
investment return. For example, in comparing the Fund's total return with data
published by Lipper Analytical Services, Inc., the Fund calculates its aggregate
and average annual total return for the specified periods of time by assuming
the investment of $10,000 in Shares and assuming the reinvestment of each
dividend or other distribution at net asset value on the reinvestment date. For
this alternative computation, the Fund assumes that the $10,000 invested in
Shares is net of all sales charges (as distinguished from the computation
required by the SEC where the $1,000 payment is reduced by sales charges before
being invested in Shares). The Fund will, however, disclose the maximum sales
charges and will also disclose that the performance data do not reflect sales
charges and that inclusion of sales charges would reduce the performance quoted.
Such alternative total return information will be given no greater prominence in
such advertising than the information prescribed under SEC rules and all
advertisements containing performance data will 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.

The Fund's annual portfolio turnover rate (the lesser of the value of
the purchases or sales for the year divided by the average monthly market value
of the portfolio during the year, excluding U.S. Government securities and
securities with maturities of one year or less) may vary from year to year, as
well as within a year, depending on market conditions. In the fiscal year ended
October 31, 1998, the Fund's portfolio turnover rate was 23% and in the fiscal
year ended 1997, the Fund's portfolio turnover rate was 42%.

15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

To Fund management's knowledge, the following persons owned of record
or beneficially 5% or more of the outstanding Shares of a class of the Fund, as
of December 1, 1998.

-23-
<PAGE>
<TABLE>
<CAPTION>

Name and Address Owned of Record Beneficially Owned Percentage Owned
---------------- --------------- ------------------ ----------------

Brown Trust Custodian |X| 5.48% of Brown Investment Advisory & Trust Shares
FBO/01011707200019
19 South Street
Baltimore, MD 21202

T Rowe Price TR |X| 17.99% of Class A Shares
Alex. Brown & Sons Inc. Plan
#100460
Flag Investors Emerging Growth
Attn Asset Recon
P.O. Box 17215
Baltimore, MD 21297-1215

Mercantile Safe Deposit & Trust Co. |X| |X| 6.53% of Institutional Shares
Cus U/A 04/28/93
Physicians Mem Hospital Pension Plan
2 Hopkins Plaza
Baltimore, MD 21201-2930

Mercantile Safe Deposit & Trust TR |X| |X| 26.93% of Institutional Shares
College of Notre Dame
Attn Custody
2 Hopkins Plaza
Baltimore, MD 21201-2930

Frank Nominees LTD |X| 6.03% of Institutional Shares
P.O. Box 919
10 Fenchurch St
London EC 3M 3LB
United Kingdom

Light & Co |X| 8.11% of Institutional Shares
c/o First National Bank of Maryland
Attn Trust Operations #101-610
PO Box 1596
Baltimore, MD 21203-1596

The Haron Dahan Foundation Inc |X| |X| 9.35% of Institutional Shares
2231 Conowingo Rd
Bel Air, MD 21015-1436

BT Alex. Brown Incorporated |X| 5.26% of Institutional Shares
FBO 201-97155-11
PO Box 1346
Baltimore, MD 21203-1346
</TABLE>

-24-
<PAGE>

Name and Address Owned of Record Beneficially Owned Percentage Owned
---------------- --------------- ------------------ ----------------

<S> <C> <C> <C>
BT Alex. Brown Incorporated |X| |X| 25.81% of Institutional Shares
FBO 601-20603-12
PO Box 1346
Baltimore, MD 21203-1346

Lewco Securities Corp |X| |X| 5.21% of Class B Shares
FBO A/C #H34-100700-3-01
34 Exchange Pl Fl 4
Jersey City, NJ 07302-3885
</TABLE>

----------------
* As of such date, to Fund management's knowledge, BT Alex. Brown
Incorporated owned beneficially less than 1% of such shares.

To Fund management's knowledge, the Directors and Officers of the Fund
as a group (12 persons) beneficially owned less than 1% of the Fund's total
outstanding shares, as of December 1, 1998.

16. FINANCIAL STATEMENTS

See next page.

-25-

<PAGE>

FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Statement of Net Assets October 31, 1998

No. of Value Percent of
Shares Security (Note 1) Net Assets
------ -------- -------- ----------

- --------------------------------------------------------------------------------
Common Stock: 94.9%

Business Services: 18.5%
80,550 AHL Services, Inc.* $ 2,718,562 2.2%
160,500 Central Garden & Pet Co.* 3,169,875 2.6
99,700 Dialogic Corp.* 2,243,250 1.8
149,400 Manugistics* 2,147,625 1.7
117,400 MemberWorks, Inc.* 2,714,875 2.2
145,600 QRS Corporation* 5,532,800 4.5
173,850 Wilmar Industries, Inc.* 4,302,787 3.5
------------ -----
22,829,774 18.5
Capital Goods: 2.5%
208,300 Advanced Lighting Technologies, Inc.* 1,692,437 1.4
101,400 ATMI, Inc.* 1,394,250 1.1
------------ -----
3,086,687 2.5
Consumer Services: 19.2%
91,037 Apollo Group, Inc. Cl-A* 2,924,564 2.4
331,150 Avado Brands, Inc. 2,607,806 2.1
69,800 Il Fornaio (America) Corp.* 558,400 0.5
236,000 Just For Feet* 3,997,250 3.2
299,112 O'Charleys, Inc.* 3,589,344 2.9
60,625 Papa John's International* 2,301,855 1.9
301,400 PETsMART, Inc.* 2,166,313 1.8
65,750 Starbucks Corp.* 2,851,906 2.3
85,725 Sylvan Learning Systems, Inc.* 2,646,759 2.1
------------ -----
23,644,197 19.2
Health Care Services: 10.9%
357,100 American Oncology Resources, Inc.* 4,753,894 3.9
34,900 Guilford Pharmaceuticals, Inc.* 571,487 0.5
24,900 Incyte Pharmaceuticals, Inc.* 759,450 0.6
267,350 PSS World Medical, Inc.* 5,915,119 4.8
132,700 Transition Systems, Inc.* 1,385,056 1.1
------------ -----
13,385,006 10.9

26
<PAGE>

FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Statement of Net Assets October 31, 1998

No. of Value Percent of
Shares Security (Note 1) Net Assets
------ -------- -------- ----------

- -------------------------------------------------------------------------------
Common Stock (concluded)

Health Equipment and Services: 4.0%
81,950 Arthrocare Corp* $ 1,454,613 1.2%
53,900 Bionx Implants, Inc.* 380,669 0.3
56,350 Heartport, Inc.* 239,488 0.2
117,775 Perclose* 2,811,878 2.3
------------ ----
4,886,648 4.0
Media/ Communications: 0.3%
32,900 Getty Images, Inc.* 405,081 0.3
------------ -----
Technology -- Software/Services: 15.0%
93,400 Aspect Development, Inc.* 2,950,856 2.4
153,600 Broadvision Inc.* 2,304,000 1.9
312,525 Integrated Systems, Inc.* 3,515,906 2.8
104,650 Mapics* 1,975,269 1.6
67,900 Summit Design, Inc.* 568,663 0.5
158,146 Synopsys, Inc.* 7,156,107 5.8
------------ -----
18,470,801 15.0
Technology -- Systems/Semiconductors: 13.1%
186,200 Applied Digital Access, Inc.* 581,875 0.5
197,925 Level One Communications, Inc.* 5,207,902 4.2
224,700 Security Dynamics Technologies, Inc.* 2,303,175 1.9
291,500 Sipex Corp.* 8,089,125 6.5
------------ -----
16,182,077 13.1
Telecommunication -- Long Distance: 4.9%
118,400 Geotel Communications Corp.* 3,078,400 2.5
102,500 Pacific Gateway Exchange, Inc.* 2,959,688 2.4
------------ -----
6,038,088 4.9
Transportation: 6.5%
161,150 Atlantic Coast Airlines, Inc.* 3,867,600 3.1
102,050 Coach USA, Inc.* 2,736,216 2.2
69,075 Forward Air Corporation* 1,062,028 0.9
69,075 Landair Services, Inc.* 345,375 0.3
------------ -----
8,011,219 6.5
Total Common Stock
(Cost $99,511,758) 116,939,578 94.9
------------ -----

27
<PAGE>

FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Statement of Net Assets (concluded) October 31, 1998

Par Value Percent of
(000) Security (Note 1) Net Assets

Repurchase Agreement: 4.4%
- --------------------------------------------------------------------------------
$5,490 Goldman Sachs & Co. 5.25%
Dated 10/30/98, to be repurchased
@ 5, 718,402 on 11/02/98, collater-
alized by U.S Treasury Bonds with
a market value of $5,600,451
(Cost $5,490,000) $ 5,490,000 4.4%
------------ -----
Total Investments in Securities
(Cost $105,001,758)** 122,429,578 99.3
------------
Other Assets in Excess of Liabilities 843,699 0.7
------------ -----
Net Assets $123,273,277 100.0%

Net Asset Value and Redemption Price Per:
Class A Share
($65,247,480 / 3,419,651 shares outstanding) $19.08

Class B Share
($5,154,618 / 275,767 shares outstanding) $18.69***

Institutional Share
($6,242,969 / 325,623 shares outstanding) $19.17

ABCAT Share
($46,628,210 / 2,430,133 shares outstanding) $19.19

Maximum Offering Price Per:
Class A Share
($19.08 / 0.955) $19.98

Class B Share $18.69

Institutional Share $19.17

ABCAT Share $19.19

- --------------------
* Non-income producing security.
** Aggregate cost for federal tax purposes was $105,001,758.
*** Redemption value is $17.94 following a 4% maximum contingent =
deferred sales charge.

See Notes to Financial Statements.

28
<PAGE>

FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Statement of Operations
For the
Year Ended
October 31,
- --------------------------------------------------------------------------------
1998
Investment Income:
Dividends ................................................ $ 11,447
Interest ................................................. 480,434
-----------
Total income .................................... 491,881
-----------
Expenses:
Investment advisory fee .................................. 1,103,023
Distribution fee ......................................... 237,630
Legal .................................................... 88,253
Transfer agent fee ....................................... 87,294
Accounting fee ........................................... 59,460
Registration fees ........................................ 55,889
Printing and postage ..................................... 43,716
Audit fees ............................................... 29,226
Custodian fee ............................................ 25,373
Directors' fees .......................................... 5,951
Miscellaneous ............................................ 8,726
------------
Total expenses .................................. 1,744,541
------------
Expenses in excess of investment income .................. (1,252,660)
------------
Realized and unrealized loss on investments:
Net realized lossfrom security transactions .............. (1,729,647)
Change in unrealized appreciation/depreciation
of investments ........................................ (15,958,185)
------------
Net loss on investments .................................. (17,687,832)
------------

Net decrease in net assets resulting from operations ........ $(18,940,492)
=============

See Notes to Financial Statements.

29
<PAGE>

FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets

For the Years Ended October 31,
- --------------------------------------------------------------------------------
1998 1997
---- ----
Increase/(Decrease) in Net Assets:
Operations:
Expenses in excess of investment income . $ (1,252,660) $ (831,973)
Net realized gain/(loss) from security
transactions (1,729,647) 6,273,549
Change in unrealized appreciation/
depreciation of investments (15,958,185) 17,299,788
------------- -------------
Net increase/(decrease) in net assets
resulting from operations (18,940,492) 22,741,364
------------- -------------
Dividends to Shareholders from:
Net realized short-term gains:
Class A Shares (655,545) (509,733)
Class B Shares (53,761) (12,155)
Institutional Shares (117,815) (262,737)
ABCAT Shares (320,098) --
Net realized mid-term and long-term gains:
Class A Shares (2,622,180) (1,286,527)
Class B Shares 215,043) (28,797)
Institutional Shares (471,259) (663,099)
ABCAT Shares (1,280,392) --
------------- -------------
Total distributions (5,736,093) (2,763,048)
------------- -------------
Capital Share Transactions:
Proceeds from sale of shares 51,002,445 77,654,561
Value of shares issued in
reinvestment of dividends 5,494,066 2,667,198
Cost of shares repurchased (34,109,172) (40,585,610)
------------- -------------
Increase in net assets derived from capital
share transactions 22,387,339 39,736,149
------------- -------------
Total increase/(decrease) in net assets .. (2,289,246) 9,714,465

Net Assets:
Beginning of year 125,562,523 65,848,058
------------- -------------
End of year $ 123,273,277 $ 125,562,523
============= =============

See Notes to Financial Statements

30
<PAGE>

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

For the
Year Ended
October 31, 1998
Per Share Operating Performance:
Net asset value at beginning of year $ 23.17
--------
Income from Investment Operations:
Expenses in excess of investment income (0.22)
Net realized and unrealized gain/(loss) on investments (2.82)
--------
Total from Investment Operations (3.04)
Less Distributions:
Distributions from net realized short-term gains (0.21)
Distributions from net realized mid-term and long-term gains (0.84)
--------
Total distributions (1.05)
--------
Net asset value end of year $ 19.08
========

Total Return(1) (13.48)%
Ratios to Average Daily Net Assets:
Expenses 1.41%
Expenses in excess of investment income (1.03)%
Supplemental Data:
Net assets at end of year (000) $ 65,247
Portfolio turnover rate 23%

31
<PAGE>
<TABLE>
<CAPTION>

For the Year Ended October 31,
- -----------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994
------ --------- --------- ---------
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of year $19.14 $ 17.09 $ 12.90 $ 14.02
------ --------- --------- ---------
Income from Investment Operations:
Expenses in excess of investment income (0.18) (0.15) (0.09) (0.08)
Net realized and unrealized gain/(loss) on investments 4.95 3.10 4.32 0.47
------ --------- --------- ---------
Total from Investment Operations 4.77 2.95 4.23 0.39
Less Distributions:
Distributions from net realized short-term gains (0.21) (0.30) -- --
Distributions from net realized mid-term and long-term gains (0.53) (0.60) (0.04) (1.51)
------ --------- --------- ---------
Total distributions (0.74) (0.90) (0.04) (1.51)
------ --------- --------- ---------
Net asset value end of year $23.17 $ 19.14 $ 17.09 $ 12.90
====== ========= ========= =========
Total Return(1) 25.93% 18.19% 32.92% 3.75%
Ratios to Average Daily Net Assets:
Expenses 1.44% 1.50% 1.50% 1.50%
Expenses in excess of investment income (0.97)% (0.83)% (0.64)% (0.73)%
Supplemental Data:
Net assets at end of year (000) $71,123 $ 45,325 $ 38,127 $ 23,302
Portfolio turnover rate 42% 24% 39% 86%

</TABLE>

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

(2) Calculation based on average shares.

See Notes to Financial Statements.

32
<PAGE>

FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Financial Highlights -- Class B Shares
(For a share outstanding throughout each period)

- -----------------------------------------------------------------------------------------
For the Period
June 20, 1996(1)
through
For the Years Ended October 31, October 31,
1998 1997 1996
---- ---- ----

<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 22.88 $ 19.10 $ 19.22
------------ ----------- ----------
Income from Investment Operations:
Expenses in excess of income .......... (0.37)(2) (0.18) (0.12)
Net realized and unrealized gain/(loss)
on investments ..................... (2.77) 4.70 --
------------ ----------- ----------
Total from Investment Operations ...... (3.14) 4.52 (0.12)
------------ ----------- ----------
Less Distributions:
Distributions from net realized
short-term gains ................... (0.21) (0.21) --
Distributions from net realized
mid-term and long-term gains ....... (0.84) (0.53) --
------------ ---------- ----------
Total distributions ................... (1.05) (0.74) --
------------ ---------- ----------
Net asset value at end of period ...... $ 18.69 $ 22.88 $ 19.10
============ ========= ==========

Total Return(2) .......................... (14.11)% 24.69% (0.62)%
Ratios to Average Daily Net Assets:
Expenses .............................. 2.16% 2.19% 2.25%(3)
Expenses in excess of income .......... (1.77)% (1.73)% (1.67)%(3)
Supplemental Data:
Net assets at end of period (000) ..... $ 5,155 $ 5,719 $ 772
Portfolio turnover rate ............... 23% 42% 24%

</TABLE>

- ------------
(1) Commencement of operations.
(2) Calculation based on average shares.
(3) Total return excludes the effect of sales charge.
(4) Annualized.

See Notes to Financial Statements.

33
<PAGE>

FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Financial Highlights -- Institutional Shares
(For a share outstanding throughout each period)

- -------------------------------------------------------------------------------------
For the Period
November 2,
1995(1) through
For the Years Ended October 31, October 31,
1998 1997 1996
---- ---- ----

<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period $23.25 $ 19.15 $ 17.45
------ ------- -------
Income from Investment Operations:
Expenses in excess of investment
income ............................. (0.17)(2) (0.26) (0.12)
Net realized and unrealized gain/(loss)
on investments ..................... (2.86) 5.10 2.72
------ ------- -------
Total from Investment Operations ...... (3.03) 4.84 2.60
------ ------- -------
Less Distributions:
Distributions from net realized
short-term gains ................... (0.21) (0.21) (0.30)
Distributions from net realized
mid-term and long-term gains ....... (0.84) (0.53) (0.60)
------ ------- -------
Total distributions ................... (1.05) (0.74) (0.90)
------ ------- -------
Net asset value at end of period ...... $19.17 $ 23.25 $ 19.15
====== ====== =======

Total Return ............................. (13.39)% 26.36% 16.48%
Ratios to Average Daily Net Assets:
Expenses .............................. 1.16% 1.19% 1.25%(2)
Expenses in excess of income .......... (0.76)% (0.74)% (0.61)%(2)
Supplemental Data:
Net assets at end of period (000) ..... $6,243 $ 13,068 $ 19,751
Portfolio turnover rate ............... 23% 42% 24%

</TABLE>

- ------------
(1) Commencement of operations.
(2) Calculation based on average shares.
(3) Annualized.

See Notes to Financial Statements.

34
<PAGE>

FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Financial Highlights -- ABCAT Shares
(For a share outstanding throughout each period)

For the Period
For the May 9, 1997(1)
Year Ended through
October 31, October 31,
---------- --------------
1998 1997
---- ----
Per Share Operating Performance:
Net asset value at beginning of period $ 23.24 $ 18.64
-------- --------
Income from Investment Operations:
Expenses in excess of income (0.17)(2) (0.06)
Net realized and unrealized
gain/(loss) on investments (2.83) 4.66
-------- -------
Total from Investment Operations (3.00) 4.60
-------- --------
Less Distributions:
Distributions from net realized
short-term gains (0.21) --
Distributions from net realized
mid-term and long-term gains (0.84) --
-------- --------
Total Distributions (1.05) --
-------- --------
Net asset value at end of period $ 19.19 $ 23.24
======== =======

Total Return (13.26)% 24.68%
Ratios to Average Daily Net Assets:
Expenses 1.16% 1.19%(2)
Expenses in excess of income (0.80)% (0.69)%(2)
Supplemental Data:
Net assets at end of period (000) $46,628 $35,653
Portfolio turnover rate 23% 42%

- ------------
(1) Commencement of operations.
(2) Calculation based on average shares.
(3) Annualized.

See Notes to Financial Statements.

35
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FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements
NOTE 1 -- Significant Accounting Policies

Flag Investors Emerging Growth Fund, Inc. (the "Fund"), which was organized
as a Maryland Corporation on July 2, 1987 and commenced operations December 30,
1987, is registered under the Investment Company Act of 1940 as a diversified,
open-end management investment company. Its objective is to seek long-term
capital appreciation primarily through investment in a diversified portfolio of
small and mid-sized emerging growth companies.

The Fund consists of four share classes: Class A Shares, which commenced
June 15, 1988; Institutional Shares, which commenced November 2, 1995; Class B
Shares, which commenced June 20, 1996; and Alex. Brown Capital Advisory & Trust
Shares (ABCAT Shares), which commenced May 9, 1997.

The Class A and Class B Shares are subject to different sales charges and
distribution fees. The Class A Shares have a front-end sales charge and the
Class B Shares have a contingent deferred sales charge. The Institutional Shares
and ABCAT Shares do not have a front-end sales charge, a contingent deferred
sales charge or a 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 not readily available,
the Investment Advisor determines a fair value using procedures that the Board
of Directors establishes and monitors. The Fund values short-term obligations
with maturities of 60 days or less at amortized cost.

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

36
<PAGE>

FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
NOTE 1 -- concluded

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 Taxes -- The Fund determines its distributions according
to income tax regulations, which may be different from generally accepted
accounting principles. As a result, the Fund occasionally makes
reclassifications within its capital accounts to reflect income and gains that
are available for distribution under income tax regulations. The fund has a
capital loss carryforward in the amount of $1,873,591 expiring in 2006.

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 or excise 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. Interest income is
recorded on an accrual basis and includes the amortization of premiums and
accretion of discounts when appropriate. Income and common expenses are
allocated to each class based on its respective average net assets. Class
specific expenses are charged directly to each class. Dividend income and
distributions to shareholders are recorded on the ex-dividend date.

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

Investment Company Capital Corp. ("ICC"), an indirect subsidiary of Bankers
Trust Corporation, is the Fund's investment advisor. The Advisory

37
<PAGE>

FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
NOTE 2 -- concluded

Agreement provides for ICC to receive an annual fee equal to 0.85% of the Fund's
average daily net assets. However, the actual amount of the fee is contractually
limited to an amount that would result in total expenses on Class A Shares of no
more than 1.50%. The Fund paid ICC $1,103,023 in fees, which was equal to 0.85%
of the Fund's average daily net assets, for advisory services for the year ended
October 31, 1998. At October 31, 1998, the Fund owed $76,693 in advisory fees.

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 based upon its average daily net assets and paid
monthly. The Fund paid ICC $59,460 for accounting services for the year ended
October 31, 1998. At October 31, 1998, the Fund owed $4,744 in accounting
services fees.

As compensation for its transfer agent services, the Fund pays ICC a per
account fee that is calculated and paid monthly. The Fund paid ICC $87,294 for
transfer agent services for the year ended October 31, 1998. At October 31,
1998, the Fund owed $16,361 in transfer agent services fees.

As compensation for providing distribution services, the Fund pays ICC
Distributors, Inc. ("ICC Distributors"), a member of the Forum Financial Group
of companies, an annual fee that is calculated daily and paid monthly. This fee
is paid at an annual rate equal to 0.25% of the Class A Shares' average daily
net assets and 1.00% (including a 0.25% shareholder servicing fee) of the Class
B Shares' average daily net assets. For the year ended October 31, 1998,
distribution fees aggregated $237,630, of which $179,510 was attributable to the
Class A Shares and $58,120 was attributable to the Class B Shares. No
distribution fees were charged to the Institutional and ABCAT Shares. At October
31, 1998, the Fund owed $15,703 in distribution fees of which $11,992 was
attributable to Class A and $3,711 was attributable to Class B.

The Fund's complex offers a retirement plan for eligible Directors. The
actuarially computed pension expense allocated to the Fund for the year ended
October 31, 1998 was $2,643, and the accrued liability was $5,974.

38
<PAGE>

FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
NOTE 3 -- Capital Share Transactions

The Fund is authorized to issue up to 20 million shares of $.001 par value
capital stock (8 million Class A, 1 million Class B, 5 million Institutional, 5
million Alex. Brown Capital Advisory and Trust and 1 million undesignated).
Transactions in shares of the Fund are listed below.

Class A Shares
------------------------------
For the For the
Year Ended Year Ended
Oct. 31, 1998 Oct. 31, 1997
------------ -----------
Shares sold 1,026,573 1,220,895
Shares issued to shareholders on
reinvestment of dividends 148,041 92,972
Shares redeemed (823,988) (612,803)
------------ -----------
Net increase in shares outstanding 350,626 701,064
======= =======

Proceeds from sale of shares $ 21,111,802 $24,515,195
Value of reinvested dividends 3,068,894 1,709,779
Cost of shares redeemed (16,839,860) (12,465,235)
------------ -----------
Net increase from capital share
transactions $ 7,340,836 $13,759,739
============ ===========

Class B Shares
------------------------------
For the For the
Year Ended Year Ended
Oct. 31, 1998 Oct. 31, 1997
------------ -----------
Shares sold 107,106 234,480
Shares issued to shareholders on
reinvestment of dividends 12,906 2,231
Shares redeemed (94,232) (27,166)
------------ -----------
Net increase in shares outstanding 25,780 209,545
============ ===========

Proceeds from sale of shares $ 2,245,546 $ 5,012,881
Value of reinvested dividends 263,666 40,890
Cost of shares redeemed (1,909,628) (564,373)
------------ -----------
Net increase from capital share
transactions $ 599,584 $ 4,489,398
============ ===========

39
<PAGE>

FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
NOTE 3 -- concluded

Institutional Shares
------------------------------
For the For the
Year Ended Year Ended
Oct. 31, 1998 Oct. 31, 1997
------------- ------------
Shares sold 20,073 834,599
Shares issued to shareholders on
reinvestment of dividends 27,198 49,811
Shares redeemed (283,690) (1,353,795)(2)
------------ -----------
Net decrease in shares
outstanding (236,419) (469,385)
=========== =============

Proceeds from sale of shares $ 509,820 $16,289,665
Value of reinvested dividends 566,256 916,529
Cost of shares redeemed (6,892,979) (26,372,242)(2)
------------ -----------
Net decrease from capital share
transactions $(5,816,903) $ (9,166,048)
=========== =============

ABCAT Shares
----------------------------------
For the For the Period
Year Ended May 9, 1997(1) to
Oct. 31, 1998 Oct. 31, 1997
------------- -----------------
Shares sold 1,257,491 1,587,453(3)
Shares issued to shareholders on
reinvestment of dividends 76,695 --
Shares redeemed (437,945) (53,561)
------------ -----------
Net increase in shares outstanding 896,241 1,533,892
=========== =============

Proceeds from sale of shares $27,135,277 $31,836,820(3)
Value of reinvested dividends 1,595,250 --
Cost of shares redeemed (8,466,705) (1,183,760)
------------ -----------
Net increase from capital share
transactions $ 20,263,822 $30,653,060
=========== =============
- -----------
(1) Commencement of operations.

(2) The number of shares redeemed and cost of shares redeemed for the year
ended October 31, 1998 include an exchange of shares from Institutional
Shares into ABCAT Shares.

(3) The number of shares sold and proceeds from sale of shares for the year
ended October 31, 1998 include an exchange of shares from Institutional
Shares into ABCAT Shares.

40
<PAGE>

FLAG INVESTORS EMERGING GROWTH FUND

- --------------------------------------------------------------------------------
Notes to Financial Statements (concluded)
NOTE 4 -- Investment Transactions

Excluding short-term obligations, purchases of investment securities
aggregated $49,818,578 and sales of investment securities aggregated $28,611,680
for the year ended October 31, 1998.

For federal income tax purposes, the tax cost of investments held at
October 31, 1998 was $105,293,620. On October 31, 1998, aggregate net unrealized
appreciation over tax cost for portfolio securities was $17,427,820 of which
$30,217,516 related to appreciated securities and $12,789,696 related to
depreciated securities.

NOTE 5 -- Net Assets

On October 31, 1998, net assets consisted of:

Paid-in capital
Class A Shares $48,166,449
Class B Shares 5,797,620
Institutional Shares 3,726,681
ABCAT Shares 50,324,632
Accumulated net realized loss from security transactions (2,169,925)
Unrealized appreciation of investments 17,427,820
------------
$123,273,277
============

NOTE 6 -- Risks of Investing Small and Emerging Growth Companies

There are risks to investors inherent in the characteristics of emerging
growth companies. The companies in which the Fund may invest may have relatively
small revenues and lack depth of management. Investments in such companies tend
to be volatile and are therefore speculative. They may have a small share of the
market for their products or services and they may provide goods or services to
a regional or limited market. Small companies may be unable to internally
generate funds necessary for growth or potential development or to generate such
funds through external financing on favorable terms. In addition, they may be
developing or marketing new products or services for which markets are not yet
established and may never become established. Such companies may have or may
develop only a regional market for products or services and thus be affected by
local or regional market conditions. Moreover, small companies may have
insignificant market share in their industries and may have difficulty
maintaining or increasing their market share in competition with larger
companies. Due to these and other factors, small companies may suffer
significant losses.

41
<PAGE>

FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
NOTE 7 -- Federal Income Tax Information

On October 31, 1998, there was a tax capital loss carryforward of
approximately $1,828,277, expiring October 31, 2006. This carryforward will be
used to offset future net capital gains.

NOTE 8 -- Tax Information (Unaudited)

The following information summarizes all per share distributions paid by
the Fund during the taxable period ending October 31, 1998.

Total
Record Payable Ordinary Long-Term
Date Date Income Capital Gains
-------- -------- -------- -----------
12/15/97 12/19/97 $0.21 $0.84

NOTE 9 -- Shareholder Meeting

On September 25, 1998, the Flag Investors Emerging Growth Fund held a
special meeting for its shareholders. During the meeting, the shareholders
elected the following directors: Truman T. Semans, James J. Cunnane, Richard T.
Hale, Joseph R. Hardiman, Louis E. Levy, Rebecca W. Rimel, and Carl W. Vogt. The
shareholders also approved a new sub-advisory agreement amongst the Fund,
Investment Conference Capital Corp., and Alex. Brown Capital Advisory and Trust
Company.

42
<PAGE>

FLAG INVESTORS EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Report of Independent Accountants
To the Shareholders and Directors of
Flag Investors Emerging Growth Fund, Inc.

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

PRICEWATERHOUSECOOPERS LLP
Baltimore, Maryland
December 1, 1998