FLAG INVESTORS SHORT INTERMEDIATE INCOME FUND INC, 497, 1997-05-07

FLAG INVESTORS SHORT INTERMEDIATE INCOME FUND INC
497, 1997-05-07

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________________________________________________________________________________

LOGO

FLAG INVESTORS

SHORT-INTERMEDIATE INCOME FUND, INC.

(CLASS A SHARES)

PROSPECTUS & APPLICATION -- MAY 1, 1997

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

THIS MUTUAL FUND (THE "FUND") IS DESIGNED TO PROVIDE A HIGH LEVEL OF CURRENT
INCOME CONSISTENT WITH PRESERVATION OF PRINCIPAL WITHIN AN INTERMEDIATE-TERM
MATURITY STRUCTURE.

Class A Shares of the Fund ("Class A Shares") are available through your
securities dealer or the Fund's transfer agent. (See "How to Invest in the
Fund.")

This Prospectus sets forth basic information that investors should know about
the Fund prior to investing and should be retained for future reference. A
Statement of Additional Information dated May 1, 1997 has been filed with the
Securities and Exchange Commission (the "SEC") and is hereby incorporated by
reference. It is available upon request and without charge by calling the
Fund at (800) 767-FLAG.

TABLE OF CONTENTS

Fund Expenses .............................. 1
Financial Highlights ....................... 2
Investment Program ......................... 3
Investment Restrictions .................... 5
How to Invest in the Fund .................. 5
How to Redeem Shares ....................... 8
Telephone Transactions ..................... 9
Dividends and Taxes ........................ 9
Management of the Fund ..................... 10
Investment Advisor ......................... 10
Distributor ................................ 10
Custodian, Transfer Agent and Accounting
Services .................................. 11
Performance Information .................... 11
General Information ........................ 12
Application ................................ A-1

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

Flag Investors Funds
P.O. Box 515
Baltimore, Maryland 21203
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

________________________________________________________________________________

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FUND EXPENSES
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SHAREHOLDER TRANSACTION EXPENSES:

<TABLE>
<CAPTION>
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) ...................... 1.50%*
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price) ........... None
Maximum Deferred Sales Charge (as a percentage of original purchase price or redemption proceeds,
whichever is lower) ............................................................................... 0.50%*

</TABLE>

ANNUAL FUND OPERATING EXPENSES (as a percentage of average daily net assets):

<TABLE>
<CAPTION>
<S> <C>
Management Fees (net of fee waivers) ............. 0.07%**
12b-1 Fees ....................................... 0.25%
Other Expenses ................................... 0.38%
--------
Total Fund Operating Expenses (net of fee waivers) 0.70%**
========
</TABLE>

- ------
* Purchases of $1 million or more of Class A Shares by persons not otherwise
eligible for sales load waivers are not subject to an initial sales
charge; however, a contingent deferred sales charge of .50% may be imposed
upon redemption. (See "How to Invest in the Fund -- Offering Price.")
** The Fund's investment advisor currently intends to waive its fee or to
reimburse the Fund on a voluntary basis to the extent required so that
Total Fund Operating Expenses do not exceed .70% of the Class A Shares'
average daily net assets. Absent fee waivers, Management Fees would be
.35% and Total Fund Operating Expenses would be .98% of the Class A
Shares' average daily net assets.

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------- ---------- ----------- ----------- ------------
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each time period:* ................................... $22 $37 $53 $101
</TABLE>

- ------
* Absent fee waivers, expenses would be higher.

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

The purpose of the foregoing table is to describe the various costs and
expenses that Fund investors may pay, either directly or indirectly. A person
who purchases Class A Shares through a financial institution may be charged
separate fees by that institution.

The rules of the SEC require that the maximum sales charge (in the Class A
Shares' case, 1.50% of the offering price) be reflected in the above table.
However, certain investors may qualify for reduced sales charges or no sales
charge at all. (See "How to Invest in the Fund -- Offering Price.") Due to the
continuous nature of Rule 12b-1 fees, long-term shareholders of the Fund may pay
more than the equivalent of the maximum front-end sales charges permitted by the
Conduct Rules of the National Association of Securities Dealers, Inc. The
foregoing table has not been audited by Deloitte & Touche LLP, the Fund's
independent auditors.

1
<PAGE>

FINANCIAL HIGHLIGHTS
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The Fund was organized as a corporation under the laws of the State of
Maryland on April 16, 1990 and commenced operations on May 13, 1991. The
financial highlights included in this table have been derived from the Fund's
financial statements for the periods indicated and have been audited by
Deloitte & Touche LLP, independent auditors. The financial statements and
related notes for the fiscal year ended December 31, 1996 and the independent
auditors' report thereon of Deloitte & Touche LLP are included in the
Statement of Additional Information. Additional performance information is
contained in the Fund's Annual Report for the fiscal year ended December 31,
1996 which can be obtained at no charge by calling the Fund at (800)
767-FLAG.

(FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
For the Year Ended December 31, May 13, 1991(1)
----------------------------------------------------------- through
1996 1995 1994 1993 1992 December 31, 1991
--------- --------- --------- ---------- --------- -----------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value at beginning of
period ................... $ 10.48 $ 9.62 $ 10.57 $ 10.37 $ 10.54 $ 10.00
--------- --------- --------- ---------- --------- -------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income ....... 0.63 0.62 0.57 0.57 0.63 0.32
Net realized and unrealized
gain/(loss) on investments . (0.23) 0.84 (0.92) 0.34 (0.05) 0.64
--------- --------- --------- ---------- --------- --------------
Total from Investment Operations 0.40 1.46 (0.35) 0.91 0.58 0.96
--------- --------- --------- ---------- --------- --------------
LESS DISTRIBUTIONS:
Dividends from net investment
income and short-term gains (0.60) (0.60) (0.57) (0.69) (0.75) (0.42)
Return of capital ........... -- -- (0.03) -- -- --
Distributions from net realized
long-term gains .......... -- -- -- (0.02) -- --
--------- --------- --------- ---------- --------- --------------
Total distributions ......... (0.60) (0.60) (0.60) (0.71) (0.75) (0.42)
--------- --------- --------- ---------- --------- --------------
Net asset value at end of period $ 10.28 $ 10.48 $ 9.62 $ 10.57 $ 10.37 $ 10.54
========= ========= ========= ========== ========= ==============
TOTAL RETURN(2) ............... 4.04% 15.43% (3.32)% 8.98% 5.68% 9.79%
RATIOS TO AVERAGE DAILY NET ASSETS:
Expenses(3) ................. 0.70% 0.70% 0.70% 0.70% 0.70% 0.70%(4)
Net investment income(5) .... 6.11% 6.00% 5.57% 5.43% 6.01% 5.97%(4)
SUPPLEMENTAL DATA:
Net assets at end of period (000) $ 58,584 $ 67,116 $ 78,789 $ 112,520 $ 78,706 $ 64,327
Portfolio turnover rate ..... 42% 46% 50% 86% 107% 46%

</TABLE>
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(1) Commencement of operations.
(2) Total return excludes the effect of sales loads.
(3) Without the waiver of advisory fees, the ratio of expenses to average
daily net assets would have been 0.99%, 0.93%, 0.84%, 0.85%, 0.87% and
1.73% (annualized) for the years ended December 31, 1996, 1995, 1994,
1993 and 1992 and for the period ended December 31, 1991, respectively.
(4) Annualized.
(5) Without the waiver of advisory fees, the ratio of net investment income
to average daily net assets would have been 5.83%, 5.77%, 5.43%, 5.28%,
5.83% and 4.94% (annualized) for the years ended December 31, 1996, 1995,
1994, 1993 and 1992 and for the period ended December 31, 1991,
respectively.

2
<PAGE>
INVESTMENT PROGRAM
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INVESTMENT OBJECTIVE, POLICIES AND RISK
CONSIDERATIONS

The Fund's investment objective is to provide a high level of current
income consistent with preservation of principal within an intermediate-term
maturity structure. This investment objective is a fundamental policy and may
not be changed without shareholder approval.

In seeking this objective the Fund will, under normal circumstances,
invest at least 65% of its total assets in U.S. Government Securities
(including certain mortgage-backed securities) and in collateralized mortgage
obligations ("CMOs") and corporate debt securities. The Fund may also invest
in other asset-backed securities and (subject to an overall 20% limit) non-U.S.
dollar-denominated securities. Quality criteria applicable to certain of the
Fund's investments are as follows:

TYPE OF PERMITTED MINIMUM RATING(1)
INVESTMENT S&P(2) MOODY'S(3)
----------------- ------ ----------
U.S. Government and Agency Securities N/A N/A
CMO's ........................... AAA(4) Aaa(4)
Corporate Debt .................. A or better(4) A or better(4)
Other Asset-Backed Securities ... AAA(4) Aaa(4)
Securities of Non-U.S. Governmental
Issuers ........................ AAA(4) Aaa(4)
Securities of Designated
International Organizations .... AAA(4) Aaa(4)
Non-Dollar U.S. Government
Securities ..................... AAA(4) Aaa(4)
Securities of Foreign
Corporations ................... AAA(4) Aaa(4)

(2) Standard & Poor's Ratings Group.

(3) Moody's Investors Service, Inc.

(4) Or, if unrated, determined to be of comparable quality by the Fund's
investment advisor.

Under normal circumstances the Fund's portfolio will have a dollar
weighted expected average maturity of approximately three to five years and a
maximum dollar weighted average duration of four years. For purposes of
determining the dollar weighted expected average maturity of the Fund's
portfolio, the maturity of a mortgage-backed security will be deemed to be
equal to its assumed life, in recognition of the fact that such securities
are subject to prepayment.

<PAGE>

To meet its short-term liquidity needs, the Fund may invest in repurchase
agreements with respect to U.S. Treasury securities, in variable amount
master demand notes and in commercial paper rated A-1 by S&P or Prime-1 by
Moody's, or if not rated, determined to be of comparable quality by the Fund's
investment advisor (the "Advisor"). For temporary, defensive purposes, the Fund
may invest up to 100% of its assets in such instruments.

U.S. GOVERNMENT SECURITIES. U.S. Government securities include obligations
issued and backed by the full faith and credit of the United States Treasury,
as well as obligations issued by agencies or instrumentalities of the U.S.
Government (including securities of the Government National Mortgage
Association ("GNMA")). These obligations may or may not be backed by the full
faith and credit of the U.S. Government. Certain agencies or
instrumentalities of the U.S. Government (such as the United States Postal
Service) have the right to borrow from the United States Treasury to meet
their obligations, but in other instances the obligations of the issuing
agency or instrumentality (such as the Federal Farm Credit System and the
Federal National Mortgage Association ("FNMA")) are supported only by the
credit of the agency or instrumentality.

MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are obligations
backed by mortgage loans made by lenders, such as commercial banks and
savings and loan institutions, and then assembled into pools for sale to
investors. One type of mortgage-backed security in which the Fund may invest
is a pass-through certificate that provides monthly payments to the
certificate holders, consisting of both interest and principal payments,
which in effect "pass-through" the monthly interest and principal payments
made on the underlying mortgage loans. These certificates are backed as to
the timely payment of principal and interest by GNMA, FNMA and the Federal
Home Loan Mortgage Corporation. (See "U.S. Government Securities" above.)

Mortgage-backed securities may also take the form of a CMO, a bond or
similar obligation backed by pools of mortgages. A CMO is not insured or
guaranteed by the agency or instrumentality of the U.S. Government which
issues the mortgage-backed securities that collateralize the CMO. Payment of
principal and interest on the underlying mortgages, and any reinvestment
income thereon, provide the funds to pay debt service on the CMOs. If there
is a default in the payment of principal and interest, there can be no
assurance that the underlying collateral will be sufficient to effect full
repayment. CMOs may be issued by agencies or instrumentalities of the U.S.
Government, or by private originators of, or investors in, mortgage loans.

3
<PAGE>

ASSET-BACKED SECURITIES. The Fund may also invest in securities backed by
assets other than mortgages, including company receivables, truck and auto
loans, leases, and credit card receivables, subject to certain quality
requirements. Through the use of trusts and special purpose corporations,
these types of assets are being securitized in pass-through structures
similar to the mortgage pass-through structure or in pay-through structures
similar to the CMO structure, both as described above. In general, the
collateral supporting asset-backed securities is of shorter maturity than
mortgage loans and is less likely to experience substantial prepayments.
However, asset-backed securities do not generally have the benefit of the
same security interest in the related collateral as either mortgage-backed
securities or CMOs, and may therefore present certain risks not associated
with other such securities.

VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand notes
are unsecured demand notes that permit investment of fluctuating amounts of
money at variable rates of interest pursuant to arrangements with issuers who
meet the foregoing quality criteria discussed above. All variable amount
master demand notes acquired by the Fund will be payable within a prescribed
notice period not to exceed seven days.

NON-U.S. DOLLAR-DENOMINATED SECURITIES. Non-U.S. dollar-denominated
securities include debt obligations denominated in foreign or composite
currencies (such as the European Currency Unit) issued by (i) foreign
national, provincial, state or municipal governments or their political
subdivisions; (ii) international organizations designated or supported by
governmental entities (e.g., the World Bank and the European Steel and Coal
Community); (iii) the U.S. Government (non-dollar securities only); and (iv)
foreign corporations.

FORWARD FOREIGN CURRENCY EXCHANGE TRANSACTIONS. The Fund is authorized to
use forward foreign currency exchange contracts to protect against
uncertainty in the level of future foreign exchange rates. A forward foreign
currency exchange contract is an obligation to purchase or sell a specific
currency at a future date at a price set at the time the contract is entered
into. The Fund may use such forward contracts only under two circumstances.
First, if the Advisor believes the Fund should fix the U.S. dollar price of
the foreign security when the Fund enters into a contract for the purchase or
sale, at a future date, of a security denominated in a foreign currency, the
Fund may enter into forward contracts. Second, if the Advisor believes the
Fund should hedge against risk of loss in the value of those portfolio
securities denominated in foreign currencies, the Fund may enter into a
forward contract to sell or purchase an amount of the foreign currency
approximating the value of some or all of those securities.

RULE 144A SECURITIES. Subject to the Fund's overall investment limitations
on investing in illiquid securities and restricted securities, the Fund may
purchase Rule 144A Securities. Rule 144A Securities are restricted securities
in that they have not been registered under the Securities Act of 1933, but
they may be traded between certain qualified institutional investors,
including investment companies. The presence or absence of a secondary market
in these securities may affect their value. The Fund's Board of Directors has
established guidelines and procedures to be utilized to determine the
liquidity of such securities.

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

PURCHASE OF WHEN-ISSUED SECURITIES. From time to time, in the ordinary
course of business, the Fund may purchase securities, at the current market
value of the securities, on a forward commitment or "when-issued" basis. A
segregated account of the Fund, consisting of cash or other liquid securities
equal at all times to the amount of the when-issued commitments will be
established and maintained by the Fund at the Fund's custodian. While the
Fund will purchase securities on a forward commitment or "when-issued" basis
only with the intention of acquiring the securities, the Fund may sell the
securities before the settlement date if it is deemed advisable. The value of
securities so purchased or sold is subject to market fluctuation and no
interest accrues to the purchaser during this period.

RISK CONSIDERATIONS. The market value of the Fund's debt securities will
change in response to interest rate changes and other factors. During periods
of falling interest rates, the value of outstanding debt securities generally
rises. Conversely, during periods of rising interest rates, the value of such
securities generally declines. Prices of longer term securities generally
increase or decrease more sharply in response to interest rate changes than
those of shorter term securities. Mortgage-backed securities are subject to
special risks because some or conceivably all of the underlying mortgages may
be prepaid, especially during periods of declining interest rates. These
prepayments are passed through to holders of mortgage-backed securities who
may then have to reinvest at lower interest rates. Moreover, the possibility
of prepayment makes it difficult to assess the actual maturity and duration
of mortgage-

4
<PAGE>
backed securities, which, in turn, makes it difficult to predict both the
direction and magnitude of changes in the value of mortgage-backed securities
in response to changes in interest rates.

Purchasing foreign securities may subject the Fund to additional risks
associated with the holding of property abroad. Such risks include future
political and economic developments, currency fluctuations, the possible
withholding of tax payments, the possible seizure or nationalization of
foreign assets, the possible establishment of exchange controls or the
adoption of other foreign government restrictions that might adversely affect
the payment of principal or interest on foreign securities held by the Fund.

INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------

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

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

2) Invest more than 5% of its total assets in the securities of any single
issuer or acquire more than 10% of the voting securities of any issuer
(for these purposes the U.S. Government and its agencies and
instrumentalities are not considered an issuer); and

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

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

HOW TO INVEST IN THE FUND
- --------------------------------------------------------------------------------
Class A Shares may be purchased from the Fund's distributor (the
"Distributor"), through any securities dealer that is authorized to
distribute Class A Shares ("Participating Dealers"), or through any financial
institution that is authorized to service shareholder accounts ("Shareholder
Servicing Agents"). Class A Shares may also be purchased by completing the
Application Form attached to this Prospectus and returning it, together with
payment of the purchase price, to the address shown on the Application Form.

The minimum initial investment is $2,000, except that the minimum initial
investment for shareholders of any other Flag Investors fund or class is $500
and the minimum initial investment for participants in the Fund's Automatic
Investing Plan is $250. Each subsequent investment must be at least $100,
except that the minimum subsequent investment under the Fund's Automatic
Investment Plan is $250 for quarterly investments and $100 for monthly
investments. (See "Purchases through Automatic Investing Plan" below.) There
is no minimum investment requirement for qualified retirement plans (i.e.,
401(k) plans or pension and profit sharing plans). IRA accounts are, however,
subject to the $2,000 minimum initial investment requirement. There is no
minimum investment requirement for spousal IRA accounts.

The Fund reserves the right to suspend the sale of Class A Shares at any time
at the discretion of the Distributor and the Advisor. Orders for purchases of
Class A Shares are accepted on any day on which the New York Stock Exchange is
open for business (a "Business Day"). Purchase orders for Class A Shares will be
executed at a per share purchase price equal to the net asset value next
determined after receipt of the purchase order plus any applicable front-end
sales charge (the "Offering Price") on the date such net asset value is
determined (the "Purchase Date"). Purchases made by mail must be accompanied by
payment of the Offering Price. Purchases made through the Distributor or a
Participating Dealer or Shareholder Servicing Agent must be in accordance with
such entity's payment procedures. The Distributor may, in its sole discretion,
refuse to accept any purchase order.

5
<PAGE>

provided by principal market makers. If a portfolio security is traded
primarily on a national exchange on the valuation date, the last quoted sale
price is generally used. Securities or other assets for which market
quotations are not readily available are valued at their fair value as
determined in good faith under procedures established from time to time and
monitored by the Fund's Board of Directors. Such procedures may include the
use of an independent pricing service which uses prices based upon yields or
prices of securities of comparable quality, coupon, maturity and type;
indications as to values from dealers; and general market conditions. Debt
obligations with maturities of 60 days or less are valued at amortized cost,
which constitutes fair value as determined by the Fund's Board of Directors.

OFFERING PRICE

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

Sales Charge
as Percentage of Dealer
------------------------------ Compensation
Offering Net Amount as Percentage of
Amount of Purchase Price Invested Offering Price
- --------------------------------------------------------------------------------
Less than
$100,000......... 1.50% 1.52% 1.25%
$100,000 -
$499,999......... 1.25% 1.27% 1.00%
$500,000 -
$999,999......... 1.00% 1.01% 0.75%
$1,000,000 and
over............. None* None* None*
- ------
* Purchases of $1 million or more may be subject to a contingent deferred
sales charge. (See below.) The Distributor may make payments to dealers in
the amount of .50% of the Offering Price.

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

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

An investor may also obtain the reduced sales charges shown above by
executing a written Letter of Intent which states the investor's intention to
invest at least $100,000 within a 13-month period in Class A Shares. Each
purchase of Class A Shares under a Letter of Intent will be made at the
Offering Price applicable at the time of such purchase to the full amount
indicated in the Letter of Intent. A Letter of Intent is not a binding
obligation upon the investor to purchase the full amount indicated. The
minimum initial investment under a Letter of Intent is 5% of the full amount.
Class A Shares purchased with the first 5% of the full amount will be held in
escrow (while remaining registered in the name of the investor) to secure
payment of the higher sales charge applicable to the Class A Shares actually
purchased if the full amount indicated is not invested. Such escrowed shares
will be involuntarily redeemed to pay the additional sales charge, if
necessary. When the full amount indicated has been purchased, the escrowed
shares will be released. An investor who wishes to enter into a Letter of
Intent in conjunction with an investment in Class A Shares may do so by
completing the appropriate section of the Application Form attached to this
Prospectus.

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

The Fund may sell Class A Shares at net asset value (without sales charge)
to the following: (i) banks, bank trust departments, registered investment
advisory companies, financial planners and broker-dealers purchasing Class A
Shares on behalf of their fiduciary and advisory clients, provided such
clients have paid an account management fee for these services (investors

<PAGE>

may be charged a fee if they effect transactions in Fund shares through a
broker or agent); (ii) qualified retirement plans; (iii) participants in a
Flag Investors fund payroll savings plan program; (iv) investors who have
redeemed Class A Shares or Class A shares of any other mutual fund in the
Flag Investors family of funds with a higher front-end sales charge, or Class
A shares of Flag Investors Maryland Intermediate Tax-Free Income Fund, Inc.,
in an amount that is not more than the total redemption proceeds, provided
that the purchase is within 90 days after the redemption; and (v) current or
retired Directors of the Fund, and directors and employees (and their
immediate families) of the Distributor and Participating Dealers, and their
respective affiliates.

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

PURCHASES BY EXCHANGE

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

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

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

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

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

This exchange privilege with respect to other Flag Investors funds may
also be exercised by telephone. (See "Telephone Transactions" below.) The
Fund may modify or terminate these offers of exchange at any time on 60 days'
prior written notice to shareholders and the exchange offers set forth herein
are expressly subject to modification or termination.

PURCHASES THROUGH AUTOMATIC INVESTING PLAN

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

PURCHASES THROUGH DIVIDEND REINVESTMENT

Shareholders may elect to have their distributions (capital gains and/or
dividend income) paid by check or reinvested in additional Class A Shares.
Unless the shareholder elects otherwise, all income dividends and net capital
gains distributions, if any, will be reinvested in additional Class A Shares at
net asset value (without a sales charge).
7
<PAGE>

Shareholders may elect to terminate automatic reinvestment by giving
written notice to the Funds transfer agent (the "Transfer Agent") (at the
address listed on page 13 of this Prospectus), either directly or through
their Participating Dealer or Shareholder Servicing Agent, at least five days
before the next date on which dividends or distributions will be paid.

Alternatively, shareholders may have their distributions invested in
shares of other funds in the Flag Investors family of funds. Shareholders who
are interested in this option should call the Transfer Agent for additional
information.

HOW TO REDEEM SHARES
- --------------------------------------------------------------------------------

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

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

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

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

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

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

The Fund has the power, under its Articles of Incorporation, to redeem
shareholder accounts amounting to less than $500 upon 60 days' written notice.
Class A Shares will not be redeemed involuntarily as a result of a decline in
account value due to a decline in net asset value alone.

SYSTEMATIC WITHDRAWAL PLAN

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

<PAGE>

TELEPHONE TRANSACTIONS
- --------------------------------------------------------------------------------
Shareholders may exercise the exchange privilege with respect to other Flag
Investors funds, or redeem Class A Shares in amounts up to $50,000, by notifying
the Transfer Agent by telephone on any Business Day between the hours of 8:30
a.m. and 5:30 p.m. (Eastern Time) or by regular or express mail at its address
listed on page 13 of this Prospectus. Telephone transaction privileges are
automatic. Shareholders may specifically request that no telephone redemptions
or exchanges be accepted for their accounts. This election may be made on the
Application Form or at any time thereafter by completing and returning
appropriate documentation supplied by the Transfer Agent.

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

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

DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS

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

TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS

The following summary of certain federal income tax consequences is based
on current tax laws and regulations, which may be changed by legislative,
judicial, or administrative action. No attempt has been made to present a
detailed explanation of the federal, state or local income tax treatment of
the Fund or the shareholders, and the discussion here is not intended as a
substitute for careful tax planning. Accordingly, shareholders are urged to
consult their tax advisors regarding specific questions as to federal, state
and local income taxes. The Statement of Additional Information sets forth
further information regarding taxes.

The Fund has been and expects to continue to be taxed as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986,
as amended. Generally, as long as the Fund qualifies for this tax treatment,
it will be relieved of U.S. federal income tax on amounts distributed to
shareholders, but U.S. shareholders, unless otherwise exempt, will pay income
or capital gains tax on the amounts so distributed, regardless of whether
such distributions are paid in cash or reinvested in additional Class A
Shares.

Distributions from the Fund out of net capital gains (the excess of
long-term capital gains over short-term capital losses), if any, are treated
by shareholders as long-term capital gains regardless of the length of time
the shareholder has held the Class A Shares. All other income distributions
are taxed to shareholders as ordinary income. Distributions from the Fund
generally will not qualify for the corporate dividends received deduction.

Ordinarily, shareholders will include all dividends declared by the Fund
in 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 to have been received by the shareholders and
paid by the Fund in the year in which the dividends were declared.

9
<PAGE>

Investors purchasing Class A Shares just prior to a distribution will be
taxable on the entire amount of the distribution received, even though the
net asset value per share on the date of such purchase may have reflected the
amount of such forthcoming distribution.

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

Shareholders will be advised annually as to the federal income tax
consequences of distributions made during the year.

The sale, exchange or redemption of Class A Shares is a taxable event for
the shareholder.

MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
The overall business affairs of the Fund are managed by its Board of
Directors. The Board approves all significant agreements between the Fund and
persons or companies furnishing services to the Fund, including the Fund's
agreements with its investment advisor, distributor, custodian and transfer
agent. A majority of the Directors are not affiliated with the Advisor or the
Distributor.

The Fund's Directors and officers are as follows:

Richard T. Hale Chairman M. Elliott Randolph, Jr. President
Charles W. Cole, Jr. Director Paul D. Corbin Executive Vice President
James J. Cunnane Director Edward J. Veilleux Vice President
John F. Kroeger Director Gary V. Fearnow Vice President
Louis E. Levy Director Monica M. Hausner Vice President
Eugene J. McDonald Director Scott J. Liotta Vice President and
Rebecca W. Rimel Director Secretary
Truman T. Semans Director Joseph A. Finelli Treasurer
Carl W. Vogt Director Laurie D. Collidge Assistant
Secretary
INVESTMENT ADVISOR
- --------------------------------------------------------------------------------
Investment Company Capital Corp. ("ICC" or the "Advisor"), an indirect
subsidiary of Alex. Brown Incorporated, is the Fund's investment advisor. ICC
is also the investment advisor to other mutual funds in the Flag Investors
family of funds and Alex. Brown Cash Reserve Fund, Inc., which funds had
approximately $5.7 billion of net assets as of December 31, 1996.

ICC is responsible for the general management of the Fund, as well as for
decisions to buy and sell securities for the Fund, for broker-dealer
selection, and for negotiation of commission rates under standards
established and periodically reviewed by the Board of Directors.

As compensation for its services for the fiscal year ended December 31,
1996, ICC received a fee (net of fee waivers) equal to .07% of the Fund's
average daily net assets. ICC currently intends to waive, on a voluntary
basis, its annual fee to the extent necessary so that the Fund's annual
expenses do not exceed .70% of the Class A Shares' average daily net assets.

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

PORTFOLIO MANAGERS

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

M. Elliott Randolph has nearly 23 years of investment experience and has
been a portfolio manager with the Advisor since 1991. From 1988-1991 he was a
Principal with Monument Capital Management, Inc.

Paul D. Corbin has 19 years of investment experience and has been a
portfolio manager with the Advisor since 1991. From 1984-1991 he served as
the Senior Vice President in charge of Fixed Income Portfolio Management at
First National Bank of Maryland.

DISTRIBUTOR
- --------------------------------------------------------------------------------
Alex. Brown & Sons Incorporated ("Alex. Brown" or the "Distributor") acts
as distributor of the Fund's shares. Alex. Brown is an investment banking
firm that offers a broad range of investment services to individual,
institutional, corporate and municipal clients. It is a wholly-owned
subsidiary of Alex. Brown Incorporated, which has engaged directly and
through subsidiaries and affiliates in the investment business since 1800.
Alex. Brown is a member of the New York Stock Exchange and other leading
securities exchanges. Headquartered in Baltimore, Maryland, Alex. Brown has
offices throughout the United States and, through subsidiaries, maintains
offices in London, England, Geneva, Switzerland and Tokyo, Japan.

10
<PAGE>

The Fund has adopted a Distribution Agreement and related Plan of
Distribution (the "Plan") pursuant to Rule 12b-1 under the 1940 Act. As
compensation for providing distribution services for the Class A Shares for
the fiscal year ended December 31, 1996, Alex. Brown received a fee from the
Fund that represented .25% of the Class A Shares' average daily net assets.
Alex. Brown expects to allocate on a proportional basis most of its annual
distribution fee to its investment representatives or up to all of its fee to
Participating Dealers as compensation for their ongoing shareholder services,
including processing purchase and sale requests and responding to shareholder
inquiries.

In addition, the Fund may enter into agreements with certain financial
institutions, such as banks, to provide shareholder services, pursuant to
which Alex. Brown will allocate up to all of its distribution fee as
compensation for such services. Such financial institutions may impose
separate fees in connection with these services and investors should review
this Prospectus in conjunction with any such institution's fee schedule.

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

CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
- --------------------------------------------------------------------------------
Investment Company Capital Corp. is the Fund's transfer and dividend
disbursing agent and provides accounting services to the Fund. As
compensation for providing accounting services to the Fund for the fiscal
year ended December 31, 1996, ICC received a fee equal to .06% of the Fund's
average daily net assets. (See the Statement of Additional Information.) PNC
Bank, National Association, a national banking association, acts as custodian
of the Fund's assets.

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

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

The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Morningstar
Inc., independent services that monitor the performance of mutual funds. The
performance of the Fund may also be compared to the Lehman Brothers
Intermediate Aggregate Bond Index, the Merrill Lynch 1-3 Year Treasury Index
and the Lehman Brothers Government Corporate Intermediate-Term Bond Index.
The Fund may also use total return performance data as reported in national
financial and industry publications that monitor the performance of mutual
funds such as Money Magazine, Forbes, Business Week, Barron's, Investor's
Daily, IBC/Donoghue's Money Fund Report and The Wall Street Journal.

11
<PAGE>

instruments held by the Fund, operating expenses and market conditions. Any
fees charged by banks with respect to customer accounts through which Class A
Shares may be purchased, although not included in calculations of
performance, will reduce performance results.

GENERAL INFORMATION
- --------------------------------------------------------------------------------
DESCRIPTION OF SHARES

The Fund is an open-end diversified management investment company
incorporated under the laws of the State of Maryland on April 16, 1990 and is
authorized to issue 60 million shares of capital stock, par value of $.001
per share, all of which shares are designated common stock. Each share has
one vote and shall be entitled to dividends and distributions when and if
declared by the Fund. In the event of liquidation or dissolution of the Fund,
each share would be entitled to its pro rata portion of the Fund's assets
after all debts and expenses have been paid. The fiscal year-end of the Fund
is December 31. Prior to February 14, 1997, the Fund was known as Flag
Investors Intermediate-Term Income Fund, Inc.

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

The shares offered by this Prospectus have been designated "Flag Investors
Short-Intermediate Income Fund Class A Shares." The Fund has two other
classes of shares in addition to the shares offered hereby: "Flag Investors
Short-Intermediate Income Fund Institutional Shares" and "Alex. Brown Capital
Advisory & Trust Short-Intermediate Income Shares." Additional information
concerning the Fund's other classes may be obtained by calling the
Distributor at (800) 767-FLAG. Different classes of the Fund may be offered
to certain investors and holders of such shares may be entitled to certain
exchange privileges not offered to Class A Shares. All classes of the Fund
share a common investment objective, portfolio of investments and advisory
fee, but to the extent the classes have different sales load structures,
distribution fees or other expenses, the net asset value per share of the
classes may differ at times.

ANNUAL MEETINGS

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

REPORTS

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

SHAREHOLDER INQUIRIES

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

<PAGE>

<TABLE>
<CAPTION>
<S> <C>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND, INC.
NEW ACCOUNT APPLICATION
- -----------------------------------------------------------------------------------------------------------------------------------
Make check payable to "Flag Investors Short-Intermediate FOR ASSISTANCE IN COMPLETING THIS APPLICATION PLEASE CALL: 1-800-553-8080,
Income Fund, Inc." and mail with this Application to: MONDAY THROUGH FRIDAY, 8:30 A.M. TO 5:30 P.M. (EASTERN TIME).
Alex. Brown & Sons Incorporated/Flag Investors Funds
P.O. Box 419663 TO OPEN AN IRA ACCOUNT, PLEASE CALL 1-800-767-3524 FOR AN IRA INFORMATION
Kansas City, MO 64141-6663 KIT.
Attn: Flag Investors Short-Intermediate Income Fund, Inc.

I enclose a check for $_______ payable to "Flag Investors Short-Intermediate Income Fund, Inc." for the purchase of Class A Shares
of the Fund. THE MINIMUM INITIAL PURCHASE IS $2,000, EXCEPT THAT THE MINIMUM INITIAL PURCHASE FOR SHAREHOLDERS OF ANY OTHER FLAG
INVESTORS FUND OR CLASS IS $500 AND THE MINIMUM INITIAL PURCHASE FOR PARTICIPANTS IN THE FUND'S AUTOMATIC INVESTING PLAN IS $250.
The Fund reserves the right not to accept checks for more than $50,000 that are not certified or bank checks.
----------------------------------------
YOUR ACCOUNT REGISTRATION (PLEASE PRINT)
----------------------------------------
Existing Account No., if any: _______________

INDIVIDUAL OR JOINT TENANT 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

under the __________________ Uniform Gifts to Minors Act
State of Residence

CORPORATIONS, TRUSTS, PARTNERSHIPS, ETC.

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

- ------------------- ------------------- ---------------------------------------------------------
Tax ID Number Date of Trust Street

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

( )
- ------------------------------------------------------------------------ ---------------------------------------------------------
For the Benefit of Daytime Phone

----------------------------------------
LETTER OF INTENT (OPTIONAL)
----------------------------------------

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

----------------------------------------
RIGHT OF ACCUMULATION (OPTIONAL)
----------------------------------------
List the Account numbers of other Flag Investors Funds (except Class B shares) that you or your immediate family already own that
qualify for this purchase.
Fund Name Account No. Owner's Name Relationship

____________________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________________
----------------------------------------
DISTRIBUTION OPTIONS
----------------------------------------
Please check the appropriate boxes. If none of the options are selected, all distributions will be reinvested in additional Class A
Shares at no sales charge.
INCOME DIVIDENDS CAPITAL GAINS
[ ] Reinvested in additional shares [ ] Reinvested in additional shares
[ ] Paid in Cash [ ] Paid in Cash

Call (800) 553-8080 for information about reinvesting your dividends in other funds in the Flag Investors Family of Funds.
A-1
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
<S> <C>
-----------------------------------
AUTOMATIC INVESTING PLAN (OPTIONAL)
-----------------------------------
[ ] I authorize you as Agent for the Automatic Investing Plan to automatically invest $_______for me, on a monthly or quarterly
basis, on or about the 20th of each month or if quarterly, the 20th of January, April, July and October, and to draw a bank draft in
payment of the investment against my checking account. (Bank drafts may be drawn on commercial banks only.)
MINIMUM INITIAL INVESTMENT: $250 ----------------------------
SUBSEQUENT INVESTMENTS (CHECK ONE): [ ] Monthly ($100 MINIMUM) [ ] Quarterly ($250 MINIMUM) PLEASE ATTACH A VOIDED CHECK.
----------------------------
- -------------------------------------------------- ---------------------------------------------------------------------------
Bank Name Depositor's Signature Date

- -------------------------------------------------- ---------------------------------------------------------------------------
Existing Flag Investors Fund Account No., if any Depositor's Signature Date
(if joint acct., both must sign)
-------------------------------------
SYSTEMATIC WITHDRAWAL PLAN (OPTIONAL)
-------------------------------------
[ ] Beginning the month of _______ , 19___ please send me checks on a ________________________________________________ monthly or
quarterly basis, as indicated below, in the amount of $_______, Bank Name from Class A Shares that I own, payable to the account
registration address as shown above. (Participation requires minimum account value of $10,000.)

FREQUENCY (CHECK ONE): [ ] Monthly [ ] Quarterly (January, April, July and October)
----------------------
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 exchange privileges [ ] Telephone redemption privileges
Redemptions effected by telephone will be mailed to the address of record. If you would prefer redemptions mailed to a
pre-designated bank account, please provide the following information:

Bank: Bank Account No.:
--------------------------------------------- -------------------------------------------------------

Address: Bank Account Name:
--------------------------------------------- -------------------------------------------------------
------------------------------------
SIGNATURE AND TAXPAYER CERTIFICATION
------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
[THE FOLLOWING TEXT APPEARS IN A BOX]
THE FUND MAY BE REQUIRED TO WITHHOLD AND REMIT TO THE U.S. TREASURY 31% OF ANY TAXABLE DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND
REDEMPTION PROCEEDS PAID TO ANY INDIVIDUAL OR CERTAIN OTHER NON-CORPORATE SHAREHOLDERS WHO FAIL TO PROVIDE THE INFORMATION AND/OR
CERTIFICATIONS REQUIRED BELOW. THIS BACKUP WITHHOLDING IS NOT AN ADDITIONAL TAX, AND ANY AMOUNTS WITHHELD MAY BE CREDITED AGAINST
THE SHAREHOLDER'S ULTIMATE U.S. TAX LIABILITY.
BY SIGNING THIS APPLICATION, I HEREBY CERTIFY UNDER PENALTIES OF PERJURY THAT THE INFORMATION ON THIS APPLICATION IS COMPLETE AND
CORRECT AND THAT AS REQUIRED BY FEDERAL LAW: (PLEASE CHECK APPLICABLE BOXES)
[ ] U.S. CITIZEN/TAXPAYER:
[ ] I CERTIFY THAT (1) THE NUMBER SHOWN ABOVE ON THIS FORM IS THE CORRECT SOCIAL SECURITY NUMBER OR TAX ID NUMBER AND (2) I AM
NOT SUBJECT TO ANY BACKUP WITHHOLDING EITHER BECAUSE (A) I AM EXEMPT FROM BACKUP WITHHOLDING, OR (B) I HAVE NOT BEEN
NOTIFIED BY THE INTERNAL REVENUE SERVICE ("IRS") THAT I AM SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO REPORT
ALL INTEREST OR DIVIDENDS, OR (C) THE IRS HAS NOTIFIED ME THAT I AM NO LONGER SUBJECT TO BACKUP WITHHOLDING.
[ ] IF NO TAX ID NUMBER OF SOCIAL SECURITY NUMBER HAS BEEN PROVIDED ABOVE, I HAVE APPLIED, OR INTEND TO APPLY, TO THE IRS OR
THE SOCIAL SECURITY ADMINISTRATION FOR A TAX ID NUMBER OR A SOCIAL SECURITY NUMBER, AND I UNDERSTAND THAT IF I DO NOT
PROVIDE EITHER NUMBER TO THE TRANSFER AGENT WITHIN 60 DAYS OF THE DATE OF THIS APPLICATION OR IF I FAIL TO FURNISH MY
CORRECT SOCIAL SECURITY NUMBER OR TAX ID NUMBER, I MAY BE SUBJECT TO A PENALTY AND A 31% BACKUP WITHHOLDING ON DISTRIBUTIONS
AND REDEMPTION PROCEEDS. (PLEASE PROVIDE EITHER NUMBER ON IRS FORM W-9. YOU MAY REQUEST SUCH FORM BY CALLING THE TRANSFER
AGENT AT 800-553- 8080).
[ ] NON-U.S. CITIZEN/TAXPAYER:
INDICATED COUNTRY OF RESIDENCE FOR TAX PURPOSES:____________________
UNDER PENALTIES OF PERJURY, I CERTIFY THAT I AM NOT A U.S. CITIZEN OR RESIDENT AND I AM AN EXEMPT FOREIGN PERSON AS DEFINED
BY THE INTERNAL REVENUE SERVICE.
[END OF BOX]
- -----------------------------------------------------------------------------------------------------------------------------------
I have received a copy of the Fund's prospectus dated May 1, 1997. I acknowledge that the telephone redemption and exchange
privileges are automatic and will be effective as described in the Fund's current prospectus (see "Telephone Transactions"). I also
acknowledge that I may bear the risk of loss in the event of fraudulent use of such privileges. If I do not want telephone
redemption or exchange privileges, I have so indicated on this Application.
</TABLE>

<PAGE>

- -----------------------------------------------------------------------------------------------------------------------------------
[THE FOLLOWING TEXT APPEARS IN A BOX]
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED
TO AVOID BACKUP WITHHOLDING.
[END OF BOX]
- -----------------------------------------------------------------------------------------------------------------------------------

- ---------------------------------------- ---------------------------------------------------------------------------------------
Signature Date Signature (if joint acct., both must sign) Date
- -----------------------------------------------------------------------------------------------------------------------------------
- --------------------
FOR DEALER USE ONLY
- --------------------
Dealer's Name: _________________________________________________ Dealer Code:_________________________________________________

Dealer's Address:_________________________________________________ Branch Code:_________________________________________________

_________________________________________________

Representative: _________________________________________________ Rep. No.:____________________________________________________

A-2
</TABLE>

<PAGE>

FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND, INC.

(Class A Shares)

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

Distributor Independent Auditors
ALEX. BROWN & SONS INCORPORATED DELOITTE & TOUCHE LLP
One South Street 117 Campus Drive
Baltimore, Maryland 21202 Princeton, New Jersey 08540
1-800-767-FLAG

Custodian Fund Counsel
PNC BANK, NATIONAL ASSOCIATION MORGAN, LEWIS & BOCKIUS LLP
Airport Business Park 2000 One Logan Square
200 Stevens Drive Philadelphia, Pennsylvania 19103
Lester, Pennsylvania 19113

Transfer Agent
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202
1-800-553-8080

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

FLAG INVESTORS

SHORT-INTERMEDIATE INCOME FUND, INC.
(INSTITUTIONAL SHARES)

PROSPECTUS & APPLICATION -- MAY 1, 1997

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

THIS MUTUAL FUND (THE "FUND") IS DESIGNED TO PROVIDE A HIGH LEVEL OF CURRENT
INCOME CONSISTENT WITH PRESERVATION OF PRINCIPAL WITHIN AN INTERMEDIATE-TERM
MATURITY STRUCTURE.

Institutional Shares of the Fund ("Institutional Shares") are available
through your securities dealer or the Fund's transfer agent and may be
purchased only by eligible institutions or by clients of investment advisory
affiliates of Alex. Brown & Sons Incorporated. (See "How to Invest in
Institutional Shares.")

This Prospectus sets forth basic information that investors should know about
the Fund prior to investing and should be retained for future reference. A
Statement of Additional Information dated May 1, 1997 has been filed with
the Securities and Exchange Commission (the "SEC") and is hereby incorporated
by reference. It is available upon request and without charge by calling the
Fund at (800) 767-FLAG.

TABLE OF CONTENTS

Fund Expenses ............................. 1
Financial Highlights ...................... 2
Investment Program ........................ 3
Investment Restrictions ................... 5
How to Invest in Institutional Shares ..... 5
How to Redeem Institutional Shares ........ 6
Telephone Transactions .................... 6
Dividends and Taxes ....................... 7
Management of the Fund .................... 7
Investment Advisor ........................ 8
Distributor ............................... 8
Custodian, Transfer Agent and Accounting
Services ................................. 8
Performance Information ................... 9
General Information ....................... 9
Application ............................... A-1

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

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

FUND EXPENSES
- ------------------------------------------------------------------------------

SHAREHOLDER TRANSACTION EXPENSES:
<TABLE>
<CAPTION>
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) .................... None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price) ......... None
Maximum Deferred Sales Charge (as a percentage of original purchase price or redemption proceeds,
whichever is lower) .............................................................................. None

ANNUAL FUND OPERATING EXPENSES (as a percentage of average daily net assets):
Management Fees (net of fee waivers) .............................................................. 0.07%*
12b-1 Fees ........................................................................................ None
Other Expenses .................................................................................... 0.38%
-------
Total Fund Operating Expenses (net of fee waivers) ................................................ 0.45%*
=======
</TABLE>
- ------
* The Fund's investment advisor currently intends to waive its fee or
reimburse the Fund on a voluntary basis, to the extent required so that
Total Fund Operating Expenses do not exceed .45% of the Institutional
Shares' average daily net assets. Absent fee waivers, Management Fees would
be .35% and Total Fund Operating Expenses would be .73% of the
Institutional Shares' average daily net assets.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------- ---------- ----------- ----------- ------------
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each time period:* ................................... $5 $14 $25 $57
</TABLE>
- ------
* Absent fee waivers, expenses would be higher.

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

The purpose of the foregoing table is to describe the various costs and
expenses that an investor in the Fund will bear directly and indirectly. A
person who purchases Institutional Shares through a financial institution may
be charged separate fees by the financial institution.

1
<PAGE>

FINANCIAL HIGHLIGHTS
- ----------------------------------------------------------------------------

The Fund has offered the Institutional Shares since November 2, 1995.
However, the Fund has offered another class of shares since 1991. Historical
financial information about the Fund is not fully applicable to the
Institutional Shares because the expenses paid by the Fund in the past differ
from those the Institutional Shares will incur. (See "Fund Expenses.")
Nevertheless, historical information about the Fund may be useful to
investors if they take into account the differences in expenses. Accordingly,
the financial highlights included in this table have been derived from the
Fund's financial statements for the periods indicated and have been audited
by Deloitte & Touche LLP, independent auditors. The financial statements and
related notes for the fiscal year ended December 31, 1996 and the report
thereon of Deloitte & Touche LLP are included in the Statement of Additional
Information. Additional performance information is contained in the Fund's
Annual Report for the fiscal year ended December 31, 1996 which can be
obtained at no charge by calling the Fund at (800) 767-FLAG.

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional
Shares Class A Shares
--------------------------------- -----------------------------------------------------------
For the Year For the Period For the Period
Ended November 2, 1995(1) For the Year Ended December 31, May 13, 1991(1)
December 31, through ---------------------------------------- through
1996 December 31, 1995 1995 1994 1993 1992 December 31, 1991
-------------- ----------------- --------- --------- ---------- --------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of
period ......................... $ 10.58 $ 10.42 $ 9.62 $ 10.57 $ 10.37 $ 10.54 $ 10.00
---------- --------- -------- -------- --------- -------- ----------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income ........... 0.59 0.09 0.62 0.57 0.57 0.63 0.32
Net realized and unrealized
gain/(loss) on investments ..... (0.17) 0.12 0.84 (0.92) 0.34 (0.05) 0.64
---------- --------- -------- -------- --------- -------- ----------
Total from Investment Operations . 0.42 0.21 1.46 (0.35) 0.91 0.58 0.96
---------- --------- -------- -------- --------- -------- ----------
LESS DISTRIBUTIONS:
Dividends from net investment income
and short-term gains ........... 0.62 (0.05) (0.60) (0.57) (0.69) (0.75) (0.42)
Return of capital ............... -- -- -- (0.03) -- -- --
Distributions from net
realized long-term gains ....... -- -- -- -- (0.02) -- --
---------- --------- -------- -------- --------- -------- ----------
Total distributions ............. (0.62) (0.05) (0.60) (0.60) (0.71) (0.75) (0.42)
---------- --------- -------- -------- --------- -------- ----------
Net asset value at end of period . $ 10.38 $ 10.58 $ 10.48 $ 9.62 $ 10.57 $ 10.37 $ 10.54
========== ========= ======== ======== ========= ======== ==========
TOTAL RETURN(2) ................. 4.20% 12.47%(3) 15.43% (3.32)% 8.98% 5.68% 9.79%(3)
RATIOS TO AVERAGE DAILY NET ASSETS:
EXPENSES(4) ..................... 0.45% 0.45%(3) 0.70% 0.70% 0.70% 0.70% 0.70%(3)
Net investment income(5) ........ 6.35% 6.52%(3) 6.00% 5.57% 5.43% 6.01% 5.97%(3)
SUPPLEMENTAL DATA:
Net assets at end of period (000) . $ 17,507 $ 2,186 $ 67,116 $ 78,789 $ 112,520 $ 78,706 $ 64,327
Portfolio turnover rate ......... 42% 46% 46% 50% 86% 107% 46%
</TABLE>
- -------------------------------------------------------------------------------
(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Annualized.
(4) Without the waiver of advisory fees, the ratio of expenses to average
daily net assets would have been 0.93%, 0.84%, 0.85%, 0.87% and 1.73%
(annualized) for the Class A Shares for the years ended December 31, 1995,
1994, 1993 and 1992, and for the period ended December 31, 1991,
respectively and 0.76% and 0.72% (annualized) for the Institutional Shares
for the year ended December 31, 1996 and the period ended December 31,
1995, respectively.
(5) Without the waiver of advisory fees, the ratio of net investment income to
average daily net assets would have been 5.77%, 5.43%, 5.28%, 5.83% and
4.94% (annualized) for the Class A Shares for the years ended December 31,
1995, 1994, 1993 and 1992 and for the period ended December 31, 1991,
respectively and 6.04% and 6.27% (annualized) for the Institutional Shares
for the year ended December 31, 1996 and the period ended December 31,
1995, respectively.

2
<PAGE>
INVESTMENT PROGRAM
- -----------------------------------------------------------------------------

INVESTMENT OBJECTIVE, POLICIES AND RISK
CONSIDERATIONS

Type of Permitted Investment Minimum Rating(1)
---------------------------- S&P(2) Moody's(3)
------ ----------
U.S. Government and Agency
Securities ............................. N/A N/A
CMO's ................................... AAA(4) Aaa(4)
Corporate Debt .......................... A or better(4) A or better(4)
Other Asset-Backed Securities ........... AAA(4) Aaa(4)
Securities of Non-U.S. Governmental
Issuers ................................ AAA(4) Aaa(4)
Securities of Designated International
Organizations .......................... AAA(4) Aaa(4)
Non-Dollar U.S. Government
Securities ............................. AAA(4) Aaa(4)
Securities of Foreign Corporations ...... AAA(4) Aaa(4)

- ------
1 In the event any security owned by the Fund is downgraded, the Fund's
investment advisor (the "Advisor") will review the situation and take
appropriate action, but will not be automatically required to sell any such
security. For a discussion of the above ratings, see the Appendix to the
Statement of Additional Information.
2 Standard & Poor's Ratings Group.
3 Moody's Investors Service, Inc.
4 Or, if unrated, determined to be of comparable quality by the Fund's
investment advisor.

<PAGE>

to be of comparable quality by the Fund's investment advisor (the "Advisor").
For temporary, defensive purposes, the Fund may invest up to 100% of its assets
in such instruments.

U.S. GOVERNMENT SECURITIES. U.S. Government securities include obligations
issued and backed by the full faith and credit of the United States Treasury, as
well as obligations issued by agencies or instrumentalities of the U.S.
Government (including securities of the Government National Mortgage Association
("GNMA")). These obligations may or may not be backed by the full faith and
credit of the U.S. Government. Certain agencies or instrumentalities of the U.S.
Government (such as the United States Postal Service) have the right to borrow
from the United States Treasury to meet their obligations, but in other
instances the obligations of the issuing agency or instrumentality (such as the
Federal Farm Credit System and the Federal National Mortgage Association
("FNMA")) are supported only by the credit of the agency or instrumentality.

Mortgage-backed securities may also take the form of a CMO, a bond or
similar obligation backed by pools of mortgages. A CMO is not insured or
guaranteed by the agency or instrumentality of the U.S. Government which
issues the mortgage-backed securities that collateralize the CMO. Payment of
principal and interest on the underlying mortgages, and any reinvestment
income thereon, provide the funds to pay debt service on the CMOs. If there
is a default in the payment of principal and interest there can be no
assurance that the underlying collateral will be sufficient to effect full
repayment. CMOs may be issued by agencies or instrumentalities of the U.S.
Government, or by private originators of, or investors in, mortgage loans.

3
<PAGE>

and special purpose corporations, these types of assets are being securitized
in pass-through structures similar to the mortgage pass-through structure or
in pay-through structures similar to the CMO structure, both as described
above. In general, the collateral supporting asset-backed securities is of
shorter maturity than mortgage loans and is less likely to experience
substantial prepayments. However, asset-backed securities do not generally
have the benefit of the same security interest in the related collateral as
either mortgage-backed securities or CMOs, and may therefore present certain
risks not associated with other such securities.

RULE 144A SECURITIES. Subject to the Fund's overall investment limitations
on investing in illiquid

<PAGE>

securities and restricted securities, the Fund may purchase Rule 144A
Securities. Rule 144A Securities are restricted securities in that they have not
been registered under the Securities Act of 1933, but they may be traded between
certain qualified institutional investors, including investment companies. The
presence or absence of a secondary market in these securities may affect their
value. The Fund's Board of Directors has established guidelines and procedures
to be utilized to determine the liquidity of such securities.

4
<PAGE>

Purchasing foreign securities may subject the Fund to additional risks
associated with the holding of property abroad. Such risks include future
political and economic developments, currency fluctuations, the possible
withholding of tax payments, the possible seizure or nationalization of
foreign assets, the possible establishment of exchange controls or the
adoption of other foreign government restrictions which might adversely
affect the payment of principal or interest on foreign securities held by the
Fund.

INVESTMENT RESTRICTIONS
- -------------------------------------------------------------------------------
The Fund's investment program is subject to a number of restrictions that
reflect both self-imposed standards and federal regulatory limitations. The
following investment restrictions numbered 1 and 2 are matters of fundamental
policy and may not be changed without shareholder approval. Investment
restriction number 3 may be changed by a vote of the majority of the Board of
Directors. The Fund will not:

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

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

HOW TO INVEST IN INSTITUTIONAL SHARES
- -------------------------------------------------------------------------------
Institutions (e.g., banks and trust companies, savings institutions,
corporations, insurance companies, investment counselors, pension funds,
employee benefit plans, trusts, estates and educational, religious and
charitable institutions) and clients of investment advisory affiliates of
Alex. Brown & Sons Incorporated ("Alex. Brown" or the "Distributor") may
purchase Institutional Shares through Alex. Brown, through any securities
dealer that is authorized to distribute Institutional Shares ("Participating
Dealers"), or by completing the Application Form attached to this Prospectus
and returning it, together with payment of the purchase price, as instructed
in the Application.

The minimum initial investment in Institutional Shares is $500,000, except
that the minimum initial investment is $1,000,000 for qualified retirement
plans. There is no minimum for clients of investment advisory affiliates of
Alex. Brown or for subsequent investments. The Fund reserves the right to
suspend the sale of Institutional Shares at any time at the discretion of
Alex. Brown and the Advisor.

<PAGE>

Orders for purchases of Institutional Shares are accepted on any day on
which the New York Stock Exchange is open for business (a "Business Day").
Purchase orders for Institutional Shares will be executed at the net asset
value per share next determined after receipt of the purchase order.
Purchases made through Alex. Brown or a Participating Dealer must be in
accordance with such entity's payment procedures. Alex. Brown may, in its
sole discretion, refuse to accept any purchase order.

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

5
<PAGE>

PURCHASES BY EXCHANGE

Shareholders of other Flag Investors funds that offer Institutional shares
may exchange their Institutional shares of those funds for an equal dollar
amount of Institutional Shares. The net asset value of shares purchased and
redeemed in an exchange request received on a Business Day will be determined
on the same day, provided that the exchange request is received prior to 4:00
p.m. (Eastern Time), or the close of the New York Stock Exchange, whichever
is earlier. Exchange requests received after 4:00 p.m. (Eastern Time) will be
effected on the next Business Day.

The exchange privilege may be exercised by notifying the Fund's transfer
agent (the "Transfer Agent") by telephone on any Business Day between the
hours of 8:30 a.m. and 5:30 p.m. (Eastern Time) (see "Telephone Transactions"
below) or by regular or express mail at its address listed on the inside back
cover of this Prospectus.

The Fund may modify or terminate this offer of exchange at any time on 60
days' prior written notice to shareholders.

OTHER INFORMATION

Periodic statements of account from the Fund will reflect all dividends,
purchases and redemptions of Institutional Shares.

In the interest of economy and convenience and because of the operating
procedures for the Institutional Shares, certificates representing such
shares will not be issued. All purchases of Institutional Shares are
confirmed and credited to the shareholder's account on the Fund's books
maintained by the Transfer Agent or its agents. Shareholders will have the
same rights and ownership with respect to such shares as if certificates had
been issued.

HOW TO REDEEM INSTITUTIONAL SHARES
- -------------------------------------------------------------------------------
Shareholders may redeem all or part of their Institutional Shares on any
Business Day by transmitting a redemption order through the Distributor or a
Participating Dealer, or by regular or express mail to the Transfer Agent at
its address listed on the inside back cover of this Prospectus. Shareholders
may also redeem Institutional Shares by telephone (in amounts up to
$500,000). (See "Telephone Transactions" below.) A redemption request is
effected at the net asset value per share next determined after receipt of
the order in proper form. Redemption orders received after 4:00 p.m. (Eastern
Time), or the close of the New York Stock Exchange, whichever is earlier,
will be effected at the net asset value next determined on the following
Business Day. Payment for redeemed Institutional Shares will be made by wire
transfer of funds to the shareholder's bank, or to a Participating Dealer, as
appropriate, upon receipt of a duly authorized redemption request as promptly
as feasible and, under most circumstances within three Business Days.

<PAGE>

Dividends payable up to the date of the redemption of Institutional Shares
will be paid on the next dividend payment date. If all of the Institutional
Shares in an account have been redeemed on the dividend payment date, the
dividend will be remitted by wire to the shareholder's bank or to a
Participating Dealer, as appropriate.

The Fund has the power, under its Articles of Incorporation, to redeem
shareholder accounts amounting to less than $500 upon 60 days' written
notice. Shares will not be redeemed involuntarily as a result of a decline in
net asset value alone.

TELEPHONE TRANSACTIONS
- -------------------------------------------------------------------------------
Shareholders may exercise the exchange privilege with respect to other
Flag Investors funds, or redeem Institutional Shares in amounts up to
$500,000, by notifying the Transfer Agent by telephone on any Business Day
between the hours of 8:30 a.m. and 5:30 p.m. (Eastern Time) or by regular or
express mail at its address listed on the inside back cover of this
Prospectus. Telephone transaction privileges are automatic. Shareholders may
specifically request that no telephone redemptions or exchanges be accepted
for their accounts. This election may be made on the Application Form or at
any time thereafter by completing and returning appropriate documentation
supplied by the Transfer Agent.

6
<PAGE>

transaction requests will be recorded and investors may be required to
provide additional telecopied instructions of such transaction requests. If
these procedures are employed, neither the Fund nor the Transfer Agent will
be responsible for any loss, liability, cost or expense for following
instructions received by telephone that either of them reasonably believes to
be genuine. During periods of extreme economic or market changes,
shareholders may experience difficulty in effecting telephone transactions.
In such event, requests should be made by express mail or facsimile. (See
"How to Invest in Institutional Shares -- Purchases by Exchange" and "How to
Redeem Institutional Shares.")

DIVIDENDS AND TAXES
- -------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS

Unless the shareholder elects otherwise, all income dividends and net
capital gains distributions, if any, will be reinvested in additional
Institutional Shares at net asset value. Shareholders may elect to terminate
automatic reinvestment by giving written instructions to the Transfer Agent,
either directly or through their Participating Dealer, at least five days
before the next date on which dividends or distributions will be paid.

TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS

The following summary of certain federal income tax consequences is based
on current tax laws and regulations, which may be changed by legislative,
judicial, or administrative action. No attempt has been made to present a
detailed explanation of the federal, state or local income tax treatment of
the Fund or the shareholders, and the discussion here is not intended as a
substitute for careful tax planning. Accordingly, shareholders are urged to
consult their tax advisors regarding specific questions as to federal, state
and local taxes. The Statement of Additional Information sets forth further
information regarding taxes.

Distributions from the Fund out of net capital gains (the excess of
long-term capital gains over short-term capital losses), if any, are treated
by shareholders as long-term capital gains regardless of the length of time
the shareholder has held the Institutional Shares. All other income
distributions are taxed to shareholders as ordinary income. Distributions
from the Fund generally will not qualify for the corporate dividends received
deduction.

<PAGE>

Investors purchasing Institutional Shares just prior to a distribution
will be taxable on the entire amount of the distribution received, even
though the net asset value per share on the date of such purchase may have
reflected the amount of such forthcoming distribution.

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

Shareholders will be advised annually as to the federal income tax
consequences of distributions made during the year.

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

MANAGEMENT OF THE FUND
- -------------------------------------------------------------------------------
The overall business affairs of the Fund are managed by its Board of
Directors. The Board approves all significant agreements between the Fund and
persons or companies furnishing services to the Fund, including the Fund's
agreements with its investment advisor, distributor, custodian and transfer
agent. A majority of the Directors are not affiliated with the Distributor or
the Advisor.

7
<PAGE>

The Fund's Directors and officers are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Richard T. Hale Chairman M. Elliott Randolph, Jr. President
Charles W. Cole, Jr. Director Paul D. Corbin Executive Vice President
James J. Cunnane Director Edward J. Veilleux Vice President
John F. Kroeger Director Gary V. Fearnow Vice President
Louis E. Levy Director Monica M. Hausner Vice President
Eugene J. McDonald Director Scott J. Liotta Vice President and Secretary
Rebecca W. Rimel Director Joseph A. Finelli Treasurer
Truman T. Semans Director Laurie D. Collidge Assistant Secretary
Carl W. Vogt Director
</TABLE>

INVESTMENT ADVISOR
- -------------------------------------------------------------------------------
Investment Company Capital Corp. ("ICC" or the "Advisor"), an indirect
subsidiary of Alex. Brown Incorporated, is the Fund's investment advisor. ICC
is also the investment advisor to other mutual funds in the Flag Investors
family of funds and Alex. Brown Cash Reserve Fund, Inc., which funds had
approximately $5.7 billion of net assets as of December 31, 1996.

As compensation for its services for the fiscal year ended December 31,
1996, ICC received a fee (net of fee waivers) equal to .07% of the Fund's
average daily net assets. ICC currently intends to waive, on a voluntary
basis, its annual fee to the extent necessary so that the Fund's annual
expenses do not exceed .45% of the Institutional Shares' average daily net
assets.

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

PORTFOLIO MANAGERS

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

M. Elliott Randolph has nearly 23 years of investment experience and has
been a portfolio manager with the Advisor since 1991. From 1988-1991 he was a
Principal with Monument Capital Management, Inc.

<PAGE>

DISTRIBUTOR
- -------------------------------------------------------------------------------

Alex. Brown & Sons Incorporated ("Alex. Brown" or the "Distributor") acts
as distributor of the Fund's shares. Alex. Brown is an investment banking
firm that offers a broad range of investment services to individual,
institutional, corporate and municipal clients. It is a wholly-owned
subsidiary of Alex. Brown Incorporated, which has engaged directly and
through subsidiaries and affiliates in the investment business since 1800.
Alex. Brown is a member of the New York Stock Exchange and other leading
securities exchanges. Headquartered in Baltimore, Maryland, Alex. Brown has
offices throughout the United States and, through subsidiaries, maintains
offices in London, England, Geneva, Switzerland and Tokyo, Japan. Alex. Brown
receives no compensation for distributing the Institutional Shares.

Alex. Brown bears all expenses associated with advertisements, promotional
materials, sales literature and printing and mailing prospectuses to other
than Fund shareholders.

CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
- -------------------------------------------------------------------------------
Investment Company Capital Corp. is the Fund's transfer and dividend
disbursing agent and provides accounting services to the Fund. As compensation
for providing accounting services to the Fund for the fiscal year ended December
31, 1996, ICC received a fee equal to .06% of the Fund's average daily net
assets. (See the Statement of Additional Information.) PNC Bank, National
Association, a national banking association, acts as custodian of the Fund's
assets.

8
<PAGE>

PERFORMANCE INFORMATION
- -------------------------------------------------------------------------------

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

The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Morningstar
Inc., independent services which monitor the performance of mutual funds. The
performance of the Fund may also be compared to the Lehman Brothers
Intermediate Aggregate Bond Index, the Merrill Lynch 1-3 Year Treasury Index
and the Lehman Brothers Government Corporate Intermediate-Term Bond Index.
The Fund may also use total return performance data as reported in national
financial and industry publications that monitor the performance of mutual
funds such as Money Magazine, Forbes, Business Week, Barron's, Investor's
Daily, IBC/Donoghue's Money Fund Report and The Wall Street Journal.

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

<PAGE>

GENERAL INFORMATION
- -------------------------------------------------------------------------------
DESCRIPTION OF SHARES

The Fund is an open-end diversified management investment company
incorporated under the laws of the State of Maryland on April 16, 1990 and is
authorized to issue 60 million shares of capital stock, par value of $.001
per share, all of which shares are designated common stock. Each share has
one vote and shall be entitled to dividends and distributions when and if
declared by the Fund. In the event of liquidation or dissolution of the Fund,
each share would be entitled to its pro rata portion of the Fund's assets
after all debts and expenses have been paid. The fiscal year- end of the Fund
is December 31. Prior to February 14, 1997, the Fund was known as Flag
Investors Intermediate-Term Income Fund, Inc.

The shares offered by this Prospectus have been designated "Flag Investors
Short-Intermediate Income Fund Institutional Shares." The Board has no
present intention of establishing any additional series of the Fund but the
Fund does have two other classes of shares in addition to the shares offered
hereby: "Flag Investors Short-Intermediate Income Fund Class A Shares" and
"Alex. Brown Capital Advisory & Trust Short-Intermediate Income Shares."
Additional information concerning the Fund's other classes may be obtained by
calling the Distributor at (800) 767-FLAG. Different classes of the Fund may
be offered to certain investors and holders of such shares may be entitled to
certain exchange privileges not offered to Institutional Shares. All classes
of the Fund share a common investment objective, portfolio of investments and
advisory fee, but to the extent the classes have different distribution fees
or sales load structures, the net asset value per share of the classes may
differ at times.

ANNUAL MEETINGS

9
<PAGE>

REPORTS

SHAREHOLDER INQUIRIES

Shareholders with inquiries concerning their Institutional Shares should
contact the Fund at (800) 767- FLAG, the Transfer Agent at (800) 553-8080 or
a Participating Dealer, as appropriate.

10
<PAGE>

<TABLE>
<CAPTION>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND, INC.
(INSTITUTIONAL SHARES)
NEW ACCOUNT APPLICATION
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
SEND COMPLETED APPLICATION BY OVERNIGHT CARRIER TO: FOR ASSISTANCE IN COMPLETING THIS APPLICATION PLEASE CALL: 1-800-553-8080,
Alex. Brown & Sons Incorporated/Flag Investors Funds MONDAY THROUGH FRIDAY, 8:30 A.M. TO 5:30 P.M. (EASTERN TIME).
1004 Baltimore Avenue, 4th Floor
Kansas City, MO 64105
Attn: Flag Investors Short-Intermediate Income Fund, Inc.
IF YOU ARE PAYING BY CHECK, MAKE CHECK PAYABLE TO "FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND, INC." AND MAIL WITH THIS
APPLICATION.
IF YOU ARE PAYING BY WIRE, SEE INSTRUCTIONS BELOW.
- -----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------
YOUR ACCOUNT REGISTRATION (PLEASE PRINT)
-----------------------------------------
NAME ON ACCOUNT MAILING ADDRESS

- --------------------------------------------------------- ---------------------------------------------------------------------
Name of Corporation, Trust or Partnership Name of Individual to Receive Correspondence

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

[ ] Corporation [ ] Partnership [ ] Trust ---------------------------------------------------------------------
City State Zip
[ ] Non-Profit or Charitable Organization [ ] Other______ ( )
---------------------------------------------------------------------
If a Trust, please provide the following: Daytime Phone

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

- -----------------------------------------------------------------------------------------------------------------------------------
Name of Trustees (If to be included in the Registration)
------------------
INITIAL INVESTMENT
------------------
THE MINIMUM INITIAL PURCHASE FOR THE INSTITUTIONAL SHARES OF THE FUND IS $500,000, EXCEPT THAT THE MINIMUM INITIAL PURCHASE IS
$1,000,000 FOR QUALIFIED RETIREMENT PLANS. THERE IS NO MINIMUM FOR CLIENTS OF INVESTMENT ADVISORY AFFILIATES OF ALEX. BROWN.
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 Short-Intermediate Income 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 Alex. Brown & Sons Incorporated/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 Alex. Brown & Sons Incorporated/Flag Investors Funds
Acct. # 7528175
ABA # 1010-0362-1
Kansas City, Missouri 64105
Please include the following information in the wire:
o Flag Investors Short-Intermediate Income Fund, Inc. -- Institutional Shares
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 privileges [ ] Telephone exchange privileges
Redemptions effected by telephone will be wired to the bank account designated below.
---------------------------------
BANK ACCOUNT DESIGNATION
(THIS SECTION MUST BE COMPLETED)
---------------------------------
Please attach a blank, voided check to provide account and bank routing information.

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

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

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

- -----------------------------------------------------------------------------------------------------------------------------------
Account Number A.B.A. Number
A-1
</TABLE>

-----------------------------------------
ACKNOWLEDGMENT, CERTIFICATE AND SIGNATURE
-----------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
[THE FOLLOWING TEXT APPEARS IN A BOX]
THE FUND MAY BE REQUIRED TO WITHHOLD AND REMIT TO THE U.S. TREASURY 31% OF ANY TAXABLE DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND
REDEMPTION PROCEEDS PAID TO ANY INDIVIDUAL OR CERTAIN OTHER NON-CORPORATE SHAREHOLDERS WHO FAIL TO PROVIDE THE INFORMATION AND/OR
CERTIFICATIONS REQUIRED BELOW. THIS BACKUP WITHHOLDING IS NOT AN ADDITIONAL TAX, AND ANY AMOUNTS WITHHELD MAY BE CREDITED AGAINST
THE SHAREHOLDER'S ULTIMATE U.S. TAX LIABILITY.
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 TAX ID NUMBER AND (2) I AM NOT SUBJECT TO ANY BACKUP
WITHHOLDING EITHER BECAUSE (A) I AM EXEMPT FROM BACKUP WITHHOLDING, OR (B) I HAVE NOT BEEN NOTIFIED BY THE INTERNAL REVENUE
SERVICE ("IRS") THAT I AM SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO REPORT ALL INTEREST OR DIVIDENDS, OR (C)
THE IRS HAS NOTIFIED ME THAT I AM NO LONGER SUBJECT TO BACKUP WITHHOLDING.
[ ] IF NO TAX ID NUMBER HAS BEEN PROVIDED ABOVE, I HAVE APPLIED, OR INTEND TO APPLY, TO THE IRS FOR A TAX ID NUMBER, AND I
UNDERSTAND THAT IF I DO NOT PROVIDE SUCH NUMBER TO THE TRANSFER AGENT WITHIN 60 DAYS OF THE DATE OF THIS APPLICATION OR IF I
FAIL TO FURNISH MY CORRECT TAX ID NUMBER, I MAY BE SUBJECT TO A PENALTY AND A 31% BACKUP WITHHOLDING ON DISTRIBUTIONS AND
REDEMPTION PROCEEDS. (PLEASE PROVIDE YOUR TAX ID NUMBER ON IRS FORM W-9. YOU MAY REQUEST SUCH FORM BY CALLING THE TRANSFER
AGENT AT 800-553-8080).
[ ] NON-U.S. CITIZEN/TAXPAYER: INDICATED COUNTRY OF RESIDENCE FOR TAX PURPOSES:
UNDER PENALTIES OF PERJURY, I CERTIFY THAT I AM NOT A U.S. CITIZEN OR RESIDENT AND I AM AN EXEMPT FOREIGN PERSON AS DEFINED BY THE
INTERNAL REVENUE SERVICE.
[END OF BOX]
- -----------------------------------------------------------------------------------------------------------------------------------
I have received a copy of the Fund's prospectus dated May 1, 1997. I acknowledge that the telephone redemption and exchange
privileges are automatic and will be effected as described in the Fund's current prospectus (see "Telephone Transactions"). I also
acknowledge that I may bear the risk of loss in the event of fraudulent use of such privileges. If I do not want telephone
redemption or exchange privileges, I have so indicated on this Application.
- -----------------------------------------------------------------------------------------------------------------------------------
[THE FOLLOWING TEXT APPEARS IN A BOX]
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED
TO AVOID BACKUP WITHHOLDING.
[END OF BOX]
- -----------------------------------------------------------------------------------------------------------------------------------

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

- --------------------------------------------------------- -------------------------------------------------------------------
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 a resolution has been duly adopted and will remain in full
force and effect until ICC receives a duly-executed amendment to the Certification form.
Witness my hand and seal on behalf of the investor:
this ______ day of ______, 199__ Secretary _________________________________________________________________________________
The undersigned officer (other than the Secretary) hereby certifies that the foregoing instrument has been signed by the Secretary
of the investor.

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

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

- -----------------------------------------------------------------------------------------------------------------------------------
Signature and title Date
A-2
</TABLE>

<PAGE>

FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND, INC.
(Institutional Shares)

Investment Advisor Distributor
INVESTMENT COMPANY CAPITAL CORP. ALEX. BROWN & SONS INCORPORATED
One South Street One South Street
Baltimore, Maryland 21202 Baltimore, Maryland 21202
1-800-767-FLAG

Transfer Agent Independent Auditors
INVESTMENT COMPANY CAPITAL CORP. DELOITTE & TOUCHE LLP
One South Street 117 Campus Drive
Baltimore, Maryland 21202 Princeton, New Jersey 08540
1-800-553-8080

<PAGE>

LOGO

ALEX. BROWN
CAPITAL ADVISORY
& TRUST
SHORT-INTERMEDIATE INCOME SHARES
(A CLASS OF FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND, INC.)

This mutual fund (the "Fund") is designed to provide a high level of
current income consistent with preservation of principal within an
intermediate-term maturity structure. The Fund will invest exclusively in
high quality debt securities, primarily U.S. Government securities (including
agency securities), corporate bonds, collateralized mortgage obligations and
other asset-backed securities. Under normal circumstances, the dollar
weighted expected average maturity of the portfolio will be approximately
three to five years and the maximum dollar weighted average duration will be
four years. (See "Investment Program.")

Alex. Brown Capital Advisory & Trust Shares of the Fund ("ABCAT Shares")
are available solely for the discretionary accounts of Alex. Brown Capital
Advisory & Trust Company and its affiliates. (See "How to Invest in ABCAT
Shares.")

This Prospectus sets forth basic information that investors should know
about the Fund prior to investing and should be retained for future
reference. A Statement of Additional Information dated May 1, 1997 has been
filed with the Securities and Exchange Commission (the "SEC") and is hereby
incorporated by reference. It is available upon request and without charge by
calling the Fund at (800) 767-3524.

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

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

The date of this Prospectus is May 1, 1997

<PAGE>

ALEX. BROWN
CAPITAL ADVISORY
& TRUST
SHORT-INTERMEDIATE
INCOME SHARES

(A CLASS OF FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND, INC.)

One South Street
Baltimore, Maryland 21202

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
<S> <C>
1. Fund Expenses ..................................... 2
2. Financial Highlights .............................. 3
3. Investment Program ................................ 5
4. Investment Restrictions ........................... 9
5. How to Invest in ABCAT Shares ..................... 10
6. How to Redeem ABCAT Shares ........................ 11
7. Dividends and Taxes ............................... 11
8. Management of the Fund ............................ 13
9. Investment Advisor ................................ 13
10. Distributor ....................................... 14
11. Custodian, Transfer Agent and Accounting Services .. 15
12. Performance Information ........................... 15
13. General Information ............................... 16

</TABLE>

1
<PAGE>
=============================================================================
1. FUND EXPENSES

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

<TABLE>
<CAPTION>
<S> <C>
Maximum Sales Charge Imposed on Purchases .............. None
Maximum Sales Charge Imposed on Reinvested Dividends ... None
Maximum Deferred Sales Charge .......................... None

</TABLE>
- -----------------------------------------------------------------------------

ANNUAL FUND OPERATING EXPENSES:
(as a percentage of average daily net assets)
- -----------------------------------------------------------------------------

<TABLE>
<CAPTION>
<S> <C>
Management Fees (net of fee waivers) ................. 0.07%*
12b-1 Fees ........................................... None
Other Expenses ....................................... 0.38%
------
Total Fund Operating Expenses (net of fee waivers) ... 0.45%*
======
</TABLE>
- -----------------------------------------------------------------------------

*Alex. Brown Capital Advisory & Trust Company intends, consistent with
applicable legal requirements, to reimburse its clients at the account level
in an amount such that the additional cost for client assets invested in
ABCAT Shares is .20%. Absent this arrangement, clients would be subject to
the expenses of the Fund shown above. In this regard, the Fund's investment
advisor currently intends to waive its fee or to reimburse the Fund, on a
voluntary basis, to the extent required so that Total Fund Operating
Expenses do not exceed .45% of the ABCAT Shares' average daily net assets.
Absent fee waivers, Management Fees would be .35% and Total Fund Operating
Expenses would be .68% of the ABCAT Shares' average daily net assets.

EXAMPLE:

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual
return and (2) redemption at the end of each
time period:* 1 year 3 years 5 years 10 years
- --------------------------------------------------------------------------------------------------------
$5 $14 $25 $57

</TABLE>

- -----------------------------------------------------------------------------
*Absent fee waivers, expenses would be higher.

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

The purpose of the foregoing table is to describe the various costs and
expenses that an investor in the Fund will bear directly and indirectly. (For
more complete descriptions of the various costs and expenses, see "How to
Invest in ABCAT Shares," "Investment Advisor" and "Distributor.") The ABCAT
Shares have not been offered prior to the date of this Prospectus.
Accordingly, the Expenses and Example appearing in the table above are based
on the Fund's expenses (net of fee waivers) for the Flag Investors Class A
Shares, another class of shares offered by the Fund, for the fiscal year
ended December 31, 1996, less 12b-1 fees of .25%.

2
<PAGE>

=============================================================================
2. Financial Highlights
.............................................................................

The Fund has not offered the ABCAT Shares prior to the date of this
Prospectus. However, the Fund has offered Flag Investors Institutional Shares
since November 2, 1995 and Flag Investors Class A Shares since May 13, 1991.
Historical financial information about the Fund is not fully applicable to
the ABCAT Shares because the expenses paid by the Fund in the past differ
from those the ABCAT Shares will incur. (See "Fund Expenses.") Nevertheless,
historical information about the Fund may be useful to investors if they take
into account the differences in expenses. Accordingly, the financial
highlights included in this table have been derived from the Fund's financial
statements for its other classes of shares for the periods indicated and have
been audited by Deloitte & Touche LLP, independent auditors. The financial
statements and related notes for the fiscal year ended December 31, 1996 and
the report thereon of Deloitte & Touche LLP are included in the Statement of
Additional Information. Additional performance information for the Fund's
other classes is contained in the Fund's Annual Report for the fiscal year
ended December 31, 1996 which can be obtained at no charge by calling the
Fund at (800) 767-3524.

3
<PAGE>

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

<TABLE>
<CAPTION>
FLAG INVESTORS
INSTITUTIONAL
SHARES FLAG INVESTORS CLASS A SHARES
---------------------------- -------------------------------------------------------------------

FOR THE FOR THE PERIOD FOR THE PERIOD
YEAR ENDED NOV. 2, 1995* FOR THE YEAR ENDED DECEMBER 31, MAY 13, 1991*
DECEMBER THROUGH --------------------------------------------------- THROUGH
31, 1996 DEC. 31, 1995 1996 1995 1994 1993 1992 DEC. 31, 1991
----------- --------------- --------- --------- --------- ---------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value at
beginning of period .. $ 10.58 $ 10.42 $ 10.48 $ 9.62 $ 10.57 $ 10.37 $ 10.54 $ 10.00
--------- --------- --------- ------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment
income ............... 0.59 0.09 0.63 0.62 0.57 0.57 0.63 0.32
Net realized and
unrealized gain/(loss)
on
investments .......... (0.17) 0.12 (0.23) 0.84 (0.92) 0.34 (0.05) 0.64
--------- --------- --------- ------- -------- -------- -------- --------

Total from Investment
Operations ........... 0.42 0.21 0.40 1.46 (0.35) 0.91 0.58 0.96
--------- --------- --------- ------- -------- -------- -------- --------

LESS DISTRIBUTIONS:
Dividends from net
investment income and
short-term
gains ................ (0.62) (0.05) (0.60) (0.60) (0.57) (0.69) (0.75) (0.42)
Return of capital ..... -- -- -- -- (0.03) -- -- --
Distributions from net
realized long-term
gains ................ -- -- -- -- -- (0.02) -- --
--------- --------- --------- ------- -------- -------- -------- --------

Total distributions ... (0.62) (0.05) (0.60) (0.60) (0.60) (0.71) (0.75) (0.42)
--------- --------- --------- ------- -------- -------- -------- --------

Net asset value at end
of period ............ $ 10.38 $ 10.58 $ 10.28 $ 10.48 $ 9.62 $ 10.57 $ 10.37 $ 10.54
========= ========= ========= ======= ======== ======== ======== ========

TOTAL RETURN(1) ....... 4.20% 12.47%** 4.04% 15.43% (3.32)% 8.98% 5.68% 9.79%**
RATIOS TO AVERAGE
DAILY NET
ASSETS:
Expenses(2) ........... 0.45%** 0.45%** 0.70% 0.70% 0.70% 0.70% 0.70% 0.70%**
Net investment
income(3) ........... 6.35%** 6.52%** 6.11% 6.00% 5.57% 5.43% 6.01% 5.97%**
SUPPLEMENTAL DATA:
Net assets at end of
period (000) ........ $17,507 $ 2,186 $58,584 $67,116 $78,789 $112,520 $78,706 $64,327
Portfolio turnover rate . 42% 46% 42% 46% 50% 86% 107% 46%
</TABLE>

- ------
* Commencement of operations.
** Annualized.
(1) Total return excludes the effect of sales charge.
(2) Without the waiver of advisory fees, the ratio of expenses to average
daily net assets would have been 0.99%, 0.93%, 0.84%, 0.85%, 0.87% and
1.73% (annualized) for the Flag Investors Class A Shares for the years
ended December 31, 1996, 1995, 1994, 1993 and 1992, and for the period
ended December 31, 1991, respectively and 0.76% and 0.72% (annualized)
for the Flag Investors Institutional Shares for the year ended December
31, 1996 and the period ended December 31, 1995, respectively.
(3) Without the waiver of advisory fees, the ratio of net investment income
to average daily net assets would have been 5.83%, 5.77%, 5.43%, 5.28%,
5.83% and 4.94% (annualized) for the Flag Investors Class A Shares for
the years ended December 31, 1996, 1995, 1994, 1993 and 1992 and for the
period ended December 31, 1991, respectively and 6.04% and 6.27%
(annualized) for the Flag Investors Institutional Shares for the year
ended December 31, 1996 and the period ended December 31, 1995,
respectively.

4
<PAGE>

=============================================================================
3. INVESTMENT PROGRAM
.............................................................................

INVESTMENT OBJECTIVE, POLICIES AND RISK

CONSIDERATIONS

Type of Permitted Investment Minimum Rating(1)
S&P(2) MOODY'S(3)
<S> <C> <C>
U.S. Government and Agency Securities ......... N/A N/A
CMOs .......................................... AAA(4) Aaa(4)
Corporate Debt ................................ A or better(4) A or better(4)
Other Asset-Backed Securities ................. AAA(4) Aaa(4)
Securities of Non-U.S. Governmental Issuers ... AAA(4) Aaa(4)
Securities of Designated International
Organizations ................................ AAA(4) Aaa(4)
Non-Dollar U.S. Government Securities ......... AAA(4) Aaa(4)
Securities of Foreign Corporations ............ AAA(4) Aaa(4)
</TABLE>

- ------
(1) In the event any security owned by the Fund is downgraded, the Fund's
investment advisor (the "Advisor") will review the situation and take
appropriate action, but will not be automatically required to sell any
such security. For a discussion of the above ratings, see the Appendix to
the Statement of Additional Information.
(2) Standard & Poor's Ratings Group.
(3) Moody's Investors Service, Inc.
(4) Or, if unrated, determined to be of comparable quality by the Fund's
investment advisor.

To meet its short-term liquidity needs, the Fund may invest in repurchase
agreements with respect to U.S. Treasury securities, in variable amount master
demand notes and in commercial paper rated A-1 by S&P or Prime-1 by Moody's, or
if not rated, determined to be of comparable quality by the Fund's investment
advisor (the "Advisor"). For temporary, defensive purposes, the Fund may invest
up to 100% of its assets in such instruments.

<PAGE>

..............................................................................
U.S. GOVERNMENT SECURITIES

U.S. Government securities include obligations issued and backed by the
full faith and credit of the United States Treasury, as well as obligations
issued by agencies or instrumentalities of the U.S. Government (including
securities of the Government National Mortgage Association ("GNMA"). These
obligations may or may not be backed by the full faith and credit of the U.S.
Government. Certain agencies or instrumentalities of the U.S. Government
(such as the United States Postal Service) have the right to borrow from the
United States Treasury to meet their obligations, but in other instances the
obligations of the issuing agency or instrumentality (such as the Federal
Farm Credit System and the Federal National Mortgage Association ("FNMA"))
are supported only by the credit of the agency or instrumentality.

..............................................................................
MORTGAGE-BACKED SECURITIES

Mortgage-backed securities are obligations backed by mortgage loans made
by lenders, such as commercial banks and savings and loan institutions, and
then assembled into pools for sale to investors. One type of mortgage-backed
security in which the Fund may invest is a pass-through certificate that
provides monthly payments to the certificate holders, consisting of both
interest and principal payments, which in effect "pass-through" the monthly
interest and principal payments made on the underlying mortgage loans. These
certificates are backed as to the timely payment of principal and interest by
GNMA, FNMA and the Federal Home Loan Mortgage Corporation. See "U.S. Government
Securities" above.

Mortgage-backed securities may also take the form of a CMO, a bond or
similar obligation backed by pools of mortgages. A CMO is not insured or
guaranteed by the agency or instrumentality of the U.S. Government which
issues the mortgage-backed securities that collateralize the CMO. Payment of
principal and interest on the underlying mortgages, and any reinvestment
income thereon, provide the funds to pay debt service on the CMOs. If there
is a default in the payment of principal and interest there can be no
assurance that the underlying collateral will be sufficient to effect full
repayment. CMOs may be issued by agencies or instrumentalities of the U.S.
Government, or by private originators of, or investors in, mortgage loans.

<PAGE>

..............................................................................
ASSET-BACKED SECURITIES

The Fund may also invest in securities backed by assets other than
mortgages, including company receivables, truck and auto loans, leases, and
credit card receivables, subject to certain quality requirements. Through the
use of trusts and special purpose corporations, these types of assets are
being securitized in pass-through structures similar to the mortgage
pass-through structure or in pay-through structures similar to the CMO
structure, both as described above. In general, the collateral supporting
asset-backed securities is of shorter maturity than mortgage loans and is
less likely to experience substantial prepayments. However, asset-backed
securities do not generally have the benefit of the same security interest in
the related collateral as either mortgage-backed securities or CMOs, and may
therefore present certain risks not associated with other such securities.

..............................................................................
VARIABLE AMOUNT MASTER DEMAND NOTES

Variable amount master demand notes are unsecured demand notes that permit
investment of fluctuating amounts of money at variable rates of interest
pursuant to arrangements with issuers who meet the foregoing quality criteria
discussed above. All variable amount master demand notes acquired by the Fund
will be payable within a prescribed notice period not to exceed seven days.

...............................................................................
NON-U.S. DOLLAR-DENOMINATED SECURITIES

Non-U.S. dollar-denominated securities include debt obligations
denominated in foreign or composite currencies (such as the European Currency
Unit) issued by (i) foreign national, provincial, state or municipal
governments or their political subdivisions; (ii) international organizations
designated or supported by governmental entities (e.g., the World Bank and
the European Steel and Coal Community); (iii) the U.S. Government (non-dollar
securities only); and (iv) foreign corporations.

...............................................................................
FORWARD FOREIGN CURRENCY EXCHANGE TRANSACTIONS

The Fund is authorized to use forward foreign currency exchange contracts
to protect against uncertainty in the level of future foreign exchange rates.
A forward foreign currency exchange contract is an obligation to purchase or
sell a specific currency at a future date at a price set at the time the
contract is entered into. The Fund may use such forward contracts only under
two circumstances. First, if the Advisor believes the Fund should fix the
U.S. dollar price of the foreign security when the Fund enters into a

<PAGE>

contract for the purchase or sale, at a future date, of a security
denominated in a foreign currency, the Fund may enter into forward contracts.
Second, if the Advisor believes the Fund should hedge against risk of loss in
the value of those portfolio securities denominated in foreign currencies,
the Fund may enter into a forward contract to sell or purchase an amount of
the foreign currency approximating the value of some or all of those
securities.

..............................................................................
RULE 144A SECURITIES

Subject to the Fund's overall investment limitations on investing in
illiquid securities and restricted securities, the Fund may purchase Rule
144A Securities. Rule 144A Securities are restricted securities in that they
have not been registered under the Securities Act of 1933, but they may be
traded between certain qualified institutional investors, including
investment companies. The presence or absence of a secondary market in these
securities may affect their value. The Fund's Board of Directors has
established guidelines and procedures to be utilized to determine the
liquidity of such securities.

..............................................................................
REPURCHASE AGREEMENTS

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

..............................................................................
PURCHASE OF WHEN-ISSUED SECURITIES

From time to time, in the ordinary course of business, the Fund may
purchase securities, at the current market value of the securities, on a
forward commitment or "when-issued" basis. A segregated account of the Fund,
consisting of cash or other liquid securities equal at all times to the
amount of the when-issued commitments will be established and maintained by
the Fund at the Fund's custodian. While the Fund will purchase securities on
a forward commitment or "when-issued" basis only with the intention of
acquiring the securities, the Fund may sell the securities before the
settlement date if it is deemed advisable. The value of securities so
purchased or sold is subject to market fluctuation and no interest accrues to
the purchaser during this period.

<PAGE>

..............................................................................
RISK CONSIDERATIONS

The market value of the Fund's debt securities will change in response to
interest rate changes and other factors. During periods of falling interest
rates, the value of outstanding debt securities generally rises. Conversely,
during periods of rising interest rates, the value of such securities
generally declines. Prices of longer term securities generally increase or
decrease more sharply in response to interest rate changes than those of
shorter term securities. Mortgage-backed securities are subject to special
risks because some or conceivably all of the underlying mortgages may be
prepaid, especially during periods of declining interest rates. These
prepayments are passed through to holders of mortgage-backed securities who
may then have to reinvest at lower interest rates. Moreover, the possibility
of prepayment makes it difficult to assess the actual maturity and duration
of mortgage-backed securities, which, in turn, makes it difficult to predict
both the direction and magnitude of changes in the value of mortgage-backed
securities in response to changes in interest rates.

==============================================================================
4. INVESTMENT RESTRICTIONS
..............................................................................

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

9
<PAGE>

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

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

==============================================================================
5. HOW TO INVEST IN ABCAT SHARES
..............................................................................

Alex. Brown Capital Advisory & Trust Company and its affiliates may
acquire ABCAT Shares on behalf of their discretionary accounts by placing
orders with the Fund's distributor (the "Distributor"). Beneficial ownership
of ABCAT Shares will be reflected on books maintained by Alex. Brown Capital
Advisory & Trust Company, an affiliate, or another financial institution.
There is no minimum for initial or subsequent investments in ABCAT Shares.

It is the responsibility of Alex. Brown Capital Advisory & Trust Company
and its affiliates to transmit orders for ABCAT Share purchases and deliver
required funds to the Distributor. Orders for purchases of ABCAT Shares are
accepted on any day on which the New York Stock Exchange is open for business
(a "Business Day"). Purchase orders for ABCAT Shares will be executed at the
net asset value per share next determined after receipt of the purchase order
and immediately available funds. The Fund reserves the right to suspend the
sale of ABCAT Shares at any time or reject any order.

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

10
<PAGE>

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

In the interest of economy and convenience and because of the operating
procedures for the ABCAT Shares, certificates representing such shares will
not be issued. Beneficial owners of ABCAT Shares ("Shareholders") will have
the same rights and ownership with respect to such shares as if certificates
had been issued.

==============================================================================
6. HOW TO REDEEM ABCAT SHARES
..............................................................................

ABCAT Shares may be redeemed by, or at the direction of, Alex. Brown
Capital Advisory & Trust Company or an affiliate, as appropriate, on any
Business Day by transmission of a redemption order through the Distributor,
or by regular or express mail to the Fund's transfer agent (the "Transfer
Agent") at its address listed on the inside back cover of this Prospectus. A
redemption is effected at the net asset value per share next determined after
receipt of the order in proper form. Redemption orders received after 4:00
p.m. (Eastern Time), or the close of the New York Stock Exchange, whichever
is earlier, will be effected at the net asset value next determined on the
following Business Day. Payment for redeemed ABCAT Shares will be made to, or
at the direction of, Alex. Brown Capital Advisory & Trust Company or an
affiliate, as appropriate, for the benefit of Shareholders. Payment will be
made as promptly as feasible and, under most circumstances within three
Business Days.

Dividends payable up to the date of the redemption of ABCAT Shares will be
paid on the next dividend payment date.

==============================================================================
7. DIVIDENDS AND TAXES
..............................................................................

DIVIDENDS AND DISTRIBUTIONS

11
<PAGE>

Unless other arrangements are made, all income dividends (consisting of
dividend and interest income and the excess, if any, of net short-term
capital gains over net long-term capital losses) and net capital gains
distributions, if any, will be reinvested in additional ABCAT Shares at the
net asset value per share on the payment date.

..............................................................................
TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS

The following summary of certain federal income tax consequences is based
on current tax laws and regulations, which may be changed by legislative,
judicial, or administrative action. No attempt has been made to present a
detailed explanation of the tax treatment of the Fund or the Shareholders,
and the discussion here is not intended as a substitute for careful tax
planning. Accordingly, shareholders are urged to consult their tax advisors
regarding specific questions as to federal, state and local taxes. The
Statement of Additional Information sets forth further information regarding
taxes.

The Fund has been and expects to continue to be taxed as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986,
as amended. Generally, as long as the Fund qualifies for this tax treatment,
it will be relieved of U.S. federal income tax on amounts distributed to
Shareholders, but U.S. Shareholders, unless otherwise exempt, will pay income
or capital gains tax on the amounts so distributed, regardless of whether
such distributions are paid in cash or reinvested in additional ABCAT Shares.

Distributions from the Fund out of net capital gains (the excess of
long-term capital gains over short-term capital losses), if any, are treated
by Shareholders as long-term capital gains regardless of the length of time
the Shareholder has held the ABCAT Shares. All other income distributions are
taxed to Shareholders as ordinary income. Distributions from the Fund
generally will not qualify for the corporate dividends received deduction.

Ordinarily, Shareholders will include all dividends declared by the Fund
in 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 to have been received by the Shareholders and
paid by the Fund in the year in which the dividends were declared.

Investors purchasing ABCAT Shares just prior to a distribution will be
taxable on the entire amount of the distribution received, even though the
net asset value per share on the date of such purchase may have reflected the
amount of such forthcoming distribution.

12
<PAGE>

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

The Fund will provide advice annually as to the federal income tax
consequences of distributions made during the year.

The sale, exchange or redemption of ABCAT Shares is a taxable event for
the Shareholder.

==============================================================================
8. MANAGEMENT OF THE FUND
..............................................................................

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

The Fund's Directors and officers are as follows:
<TABLE>
<CAPTION>

<S> <C> <C> <C>
Richard T. Hale Chairman M. Elliott Randolph, Jr. President
Charles W. Cole, Jr. Director Paul D. Corbin Executive Vice President
James J. Cunnane Director Edward J. Veilleux Vice President
John F. Kroeger Director Gary V. Fearnow Vice President
Louis E. Levy Director Monica M. Hausner Vice President
Eugene J. McDonald Director Scott J. Liotta Vice President and Secretary
Rebecca W. Rimel Director Joseph A. Finelli Treasurer
Truman T. Semans Director Laurie D. Collidge Assistant Secretary
Carl W. Vogt Director
</TABLE>

===============================================================================
9. INVESTMENT ADVISOR
...............................................................................

Investment Company Capital Corp. ("ICC" or the "Advisor"), an indirect
subsidiary of Alex. Brown Incorporated and an affiliate of Alex. Brown
Capital Advisory & Trust Company, is the Fund's investment advisor. ICC is
also the investment advisor to, and the Distributor acts as distributor for,
other mutual funds in the Flag Investors family of funds and Alex. Brown Cash
Reserve Fund, Inc., which funds had approximately $5.7 billion of net assets
as of December 31, 1996.

13
<PAGE>

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

..............................................................................
PORTFOLIO MANAGERS

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

M. Elliott Randolph has nearly 23 years of investment experience and has
been a portfolio manager with the Advisor since 1991. From 1988-1991 he was
a Principal with Monument Capital Management, Inc.

==============================================================================
10. DISTRIBUTOR
..............................................................................

Alex. Brown & Sons Incorporated ("Alex. Brown" or the "Distributor"), acts
as distributor of the Fund's shares. Alex. Brown is an investment banking
firm that offers a broad range of investment services to individual,
institutional, corporate and municipal clients. It is a wholly-owned
subsidiary of Alex. Brown Incorporated, which has engaged directly and
through subsidiaries and affiliates in the investment business since 1800.
Alex. Brown is a member of the New York Stock Exchange and other leading
securities exchanges. Headquartered in Baltimore, Maryland, Alex. Brown has
offices throughout the United States and, through subsidiaries, maintains
offices in London, England, Geneva, Switzerland and Tokyo, Japan. Alex. Brown
receives no compensation for distributing the ABCAT Shares.

Alex. Brown bears all expenses associated with advertisements, promotional
materials, sales literature and printing and mailing prospectuses to other
than Fund shareholders.

14
<PAGE>

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

Investment Company Capital Corp. is the Fund's transfer and dividend
disbursing agent and provides accounting services to the Fund. As compensation
for providing accounting services to the Fund for the fiscal year ended December
31, 1996, ICC received a fee equal to .06% of the Fund's average daily net
assets. (See the Statement of Additional Information.) PNC Bank, National
Association, a national banking association, acts as custodian of the Fund's
assets.

==============================================================================
12. PERFORMANCE INFORMATION
..............................................................................

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

15
<PAGE>

mance data as reported in national financial and industry publications that
monitor the performance of mutual funds such as Money Magazine, Forbes,
Business Week, Barron's, Investor's Daily, IBC/Donoghue's Money Fund Report
and The Wall Street Journal.

==============================================================================
13. GENERAL INFORMATION
..............................................................................

DESCRIPTION OF SHARES

The Fund is an open-end diversified management investment company
organized under the laws of the State of Maryland on April 16, 1990 and is
authorized to issue 60 million shares of capital stock, par value of $.001
per share, all of which shares are designated common stock. Each share has
one vote and shall be entitled to dividends and distributions when and if
declared by the Fund. In the event of liquidation or dissolution of the Fund,
each share would be entitled to its pro rata portion of the Fund's assets
after all debts and expenses have been paid. The fiscal year-end of the Fund
is December 31. Prior to February 14, 1997, the Fund was known as Flag
Investors Intermediate-Term Income Fund, Inc.

The Board of Directors is authorized to establish additional series of
shares of capital stock, each of which would evidence interests in a separate
portfolio of securities, and separate classes of each series of the Fund. The
shares offered by this Prospectus have been designated "Alex. Brown Capital
Advisory & Trust Short-Intermediate Income Shares." The Board has no present
intention of establishing any additional series of the Fund but the Fund does
have two other classes of shares in addition to the shares offered hereby:
Flag Investors Short-Intermediate Income Fund Class A Shares and Flag
Investors Short-Intermediate Income Fund Institutional Shares. Additional
information concerning the Fund's other classes of shares may be obtained by
calling Alex. Brown at (800) 767-3524. Different classes of the Fund may be
offered to certain investors and holders of such shares may be entitled to
certain exchange privileges not offered to ABCAT Shares. All classes of the
Fund share a common investment objective, portfolio of investments and
advisory fee, but to the extent the classes have different distribution fees
or sales load structures, the net asset value per share of the classes may
differ at times.

16
<PAGE>
..............................................................................
ANNUAL MEETINGS

..............................................................................
REPORTS

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

..............................................................................
SHAREHOLDER INQUIRIES

Shareholders with inquiries concerning their ABCAT Shares should contact
their account manager at Alex. Brown Capital Advisory & Trust Company.

17
<PAGE>

ALEX. BROWN CAPITAL ADVISORY & TRUST
SHORT-INTERMEDIATE INCOME SHARES

(A Class of Flag Investors Short-Intermediate Income Fund, Inc.)

Investment Advisor Distributor
INVESTMENT COMPANY CAPITAL CORP. ALEX. BROWN & SONS INCORPORATED
One South Street One South Street
Baltimore, Maryland 21202 Baltimore, Maryland 21202
(Telephone: 1-800-727-3524)

Transfer Agent Independent Auditors
INVESTMENT COMPANY CAPITAL CORP. DELOITTE & TOUCHE LLP
One South Street 117 Campus Drive
Baltimore, Maryland 21202 Princeton, New Jersey 08540
(Telephone: 1-800-553-8080)

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND, INC.

One South Street
Baltimore, Maryland 21202

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

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

Statement of Additional Information Dated: May 1, 1997

Relating to the Prospectuses Dated:
May 1, 1997 -- Relating to the Flag Investors Class A Shares,
the Flag Investors Institutional Shares and the Alex.
Brown Capital Advisory & Trust Shares

<PAGE>

TABLE OF CONTENTS

Page
----

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

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

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.................. 14

7. Distribution of Fund Shares............................. 15

8. Brokerage............................................... 18

9. Capital Stock........................................... 19

10. Semi-Annual Reports..................................... 20

11. Custodian, Transfer Agent and Accounting Services ...... 20

12. Independent Auditors ................................... 21

13. Performance Information................................. 21

14. Control Persons and Principal Holders of
Securities............................................ 23

15. Financial Statements.................................... 24

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

<PAGE>

1. GENERAL INFORMATION AND HISTORY

Flag Investors Short-Intermediate Income Fund, Inc. (the "Fund") is an
open-end management investment company. Under the rules and regulations of the
Securities and Exchange Commission (the "SEC"), all mutual funds are required to
furnish prospective investors with certain information concerning the activities
of the company being considered for investment. The Fund currently offers three
classes of shares: Flag Investors Short-Intermediate Income Fund Class A Shares
(the "Flag Investors Class A Shares"), Flag Investors Short-Intermediate Income
Fund Institutional Shares (the "Flag Investors Institutional Shares") and Alex.
Brown Capital Advisory & Trust Short-Intermediate Income Shares (the "ABCAT
Shares") (collectively, the "Shares"). The Flag Investors Class A Shares were
formerly known as the Flag Investors Shares. Prior to February 14, 1997, the
Fund was known as Flag Investors Intermediate- Term Income Fund, Inc.

There are three separate prospectuses for the Fund's Shares: one for the
Flag Investors Class A Shares, one for the Flag Investors Institutional Shares
and one for the ABCAT Shares. Each prospectus contains important information
concerning the class of Shares offered thereby and the Fund and may be obtained
without charge from the Fund's distributor (the "Distributor"), or, with respect
to the Flag Investors Class A Shares and the Flag Investors Institutional
Shares, from Participating Dealers that offer Shares to prospective investors.
Prospectuses for the Flag Investors Class A Shares may also be obtained from
Shareholder Servicing Agents. As used herein, the term "Prospectus" describes
information common to the prospectuses of the three classes of the Fund's
shares, unless the term "Prospectus" is modified by the appropriate class
designation. As used herein, the "Fund" refers to Flag Investors
Short-Intermediate Income Fund, Inc. and specific references to any class of the
Fund's Shares will be made using the name of such class. Some of the information
required to be in this Statement of Additional Information is also included in
the Fund's current Prospectuses. To avoid unnecessary repetition, references are
made to related sections of the Prospectuses. In addition, the Prospectuses and
this Statement of Additional Information omit certain information about the Fund
and its business that is contained in the Registration Statement for the Fund
and its Shares filed with the SEC. Copies of the Registration Statement as
filed, including such omitted items, may be obtained from the SEC by paying the
charges prescribed under its rules and regulations.

The Fund was incorporated under the laws of the State of Maryland on
April 16, 1990. The Fund filed a registration statement with the SEC registering
itself as an open-end diversified management investment company under the
Investment Company Act of 1940, as amended (the "Investment Company Act"), and
its Shares under the Securities Act of 1933, as amended, and commenced
operations on May 13, 1991. The Fund has offered the Flag Investors Class A
Shares since its inception on May 13, 1991 and the Flag Investors Institutional
Shares since November 2, 1995. The ABCAT Shares have not been offered prior to
the date of this Statement of Additional Information.

Under a license agreement dated May 10, 1991 between the Fund and Alex.
Brown Incorporated, Alex. Brown Incorporated licenses to the Fund the "Flag
Investors" name and logo but retains the rights to the name and logo, including
the right to permit other investment companies to use them.

2. INVESTMENT OBJECTIVES AND POLICIES

The Fund is designed to provide a high level of current income
consistent with preservation of principal within an intermediate-term maturity
structure. As described in the Prospectus, the Fund will attempt to achieve its
objective by investing in high-quality debt obligations, primarily securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, corporate bonds, collateralized

-1-
<PAGE>

mortgage obligations and other asset-backed securities. There can be no
assurance that the Fund's investment objective will be achieved.

Mortgage-Backed Securities

As indicated in the Prospectus, the Fund may invest in mortgage-backed
securities representing ownership interests in a pool of mortgage loans which
securities are issued or guaranteed by the Government National Mortgage
Association ("GNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") or
the Federal National Mortgage Association ("FNMA").

GNMA Certificates.

GNMA Certificates are mortgage-backed securities that evidence an
undivided ownership interest in a pool of mortgage loans. Principal and interest
is paid back monthly by the borrower over the term of the underlying loans. The
National Housing Act authorizes GNMA to guarantee the timely payment of
principal and interest on securities backed by a pool of mortgages insured by
the Federal Housing Administration or the Farmers' Home Administration or
guaranteed by the Veterans Administration. The GNMA guarantee is backed by the
full faith and credit of the U.S. Government. The GNMA is also empowered to
borrow without limitation from the U.S. Treasury if necessary to make any
payments required under its guarantees.

The average life of a GNMA Certificate is likely to be substantially
less than the original maturity of the mortgage pools underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures will usually
result in the return of the greater part of principal investment substantially
before maturity of the mortgages in the pool. Because prepayment rates of
individual mortgage pools vary, it is not possible to predict accurately the
average life of a particular issue of GNMA Certificates. However, statistics
published by the FHA indicate that the average life of single-family home
mortgage loans with 25 to 30 year maturities (the type of mortgage underlying
most GNMA Certificates) is approximately 12 years. It is customary, therefore,
to treat GNMA Certificates as 30-year mortgage-backed securities that prepay in
full in the twelfth year.

FHLMC and FNMA Certificates.

The FHLMC is a corporate instrumentality of the U.S. Government and was
created in 1970 for the purpose of increasing the availability of mortgage
credit for residential housing through the development of a nationwide secondary
market in conventional residential mortgages. The FHLMC issues Participation
Certificates that represent a pro rata share of all interest and principal
payments made and owed on the underlying pool (which consists of mortgages from
FHLMC's national portfolio). The FHLMC guarantees the timely payment of interest
and ultimate collection of principal. FHLMC Participation Certificates are
assumed to be prepaid in full in the twelfth year.

The FNMA is a government-sponsored corporation owned by private
stockholders that was established in 1938 to create a secondary market in
mortgages issued by the FHA. FNMA Certificates resemble GNMA Certificates in
that each Certificate represents a pro rata share of all interest and principal
payments made and owed on the underlying pool. FNMA guarantees timely payment of
interest on FNMA Certificates and full return of principal. FNMA Certificates
are assumed to be prepaid in full in the twelfth year.

Risk of foreclosure of the underlying mortgages is greater with FHLMC
and FNMA securities because, unlike GNMA securities, FHLMC and FNMA securities
are not backed by the full faith and credit of the U.S. Government.

-2-
<PAGE>

Interests in such mortgage-backed securities differ from other forms of
debt securities, which typically provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates.
Mortgage-backed securities provide monthly payments to the certificate holders,
consisting of both interest and principal payments, which in effect
"pass-through" the monthly interest and principal payments made on the
underlying mortgage loans. Although the underlying mortgage loans are
for specified periods of time (such as 20 or 30 years), borrowers can repay
their loans sooner and the certificate holders would receive any such prepayment
of principal in addition to the principal that is part of the monthly payment. A
borrower is more likely to prepay a mortgage that bears a relatively high rate
of interest. Accordingly, during periods of declining interest rates, prepayment
of mortgages underlying mortgage-backed securities can be expected to
accelerate. Because prepayment of the underlying mortgages may vary, it is not
possible to predict accurately the average life or realized yield of a
particular issue of pass-through certificates. When the prepayments of principal
are included in the monthly payments to the Fund as a certificate holder, the
Fund reinvests the prepaid amounts in securities, the yield of which reflects
interest rates prevailing at the time. Prepayments of mortgages that underlie
securities purchased at a premium could result in capital losses.

Changes in market yields will affect the value of securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities
(including mortgage-backed securities) because the price of fixed income
securities generally increases when interest rates decline and decreases when
interest rates rise. Prices of longer term securities generally increase or
decrease more sharply in response to interest rate changes than those of shorter
term securities. In addition, prepayments of principal on mortgage pass-through
securities may make it difficult to fix interest rates for a specified period of
time. To the extent that mortgage-backed securities are purchased at prices that
differ from par, such prepayments (which are received at par) may make up a
significant portion of the pass-through total return.

Collateralized Mortgage Obligations

As indicated in the Prospectus, the Fund may invest in collateralized
mortgage obligations ("CMOs") that are collateralized by mortgage-backed
securities issued by GNMA, FHLMC or FNMA (collectively, "Mortgage Assets") and
that are rated AAA by Standard & Poor's Ratings Group ("S&P") or Aaa by Moody's
Investors Service, Inc. ("Moody's") or are determined to be of comparable
quality by the Fund's investment advisor.

In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche", is issued at a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the Mortgage Assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on a
monthly, quarterly or semi-annual basis. Payments of principal of and interest
on the Mortgage Assets are commonly applied to the classes of a series of the
CMO in the order of their respective stated maturities or final distribution
dates, so that no payment of principal will be made on any class of a CMO until
all other classes having an earlier stated maturity or final distribution date
have been paid in full. Because CMOs are collateralized by mortgage-backed
securities, they are subject to similar risks and uncertainties associated with
the prepayment of principal and the ability to accurately predict yield
described above with respect to mortgage-backed securities.

Asset-Backed Securities

The Fund may also invest in securities backed by assets other than
mortgages, including company receivables, truck and auto loans, leases, and
credit card receivables, which securities are rated AAA by S&P or Aaa by
Moody's, or if not rated, are determined by the Advisor to be of comparable
quality.

-3-
<PAGE>

Through the use of trusts and special purpose corporations, these types of
assets are being securitized in pass-through structures similar to the mortgage
pass-through structure or in pay-through structures similar to the CMO
structure, both as described above. In general, the collateral supporting
asset-backed securities is of shorter maturity than mortgage loans and is less
likely to experience substantial prepayments. However, asset-backed securities
do not generally have the benefit of the same security interest in the related
collateral as either mortgage-backed securities or CMOs, and may therefore
present certain risks not associated with such other securities. If the
asset-backed security is issued in a pay-through structure similar to a CMO, the
cash flow generated by the underlying assets is applied to make required
payments on the securities and to pay related administrative expenses. The
residual in an asset-backed security pay-through structure represents the
interest in any excess cash flow remaining after making the foregoing payments,
and will depend on, among other things, the characteristics of the underlying
assets, the coupon rates on the securities, prevailing interest rates, the
amount of administrative expenses and the actual prepayment experience on the
underlying assets.

Other Investment Practices

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

Repurchase Agreements.

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

Foreign Currency Exchange Transactions.

The Fund may conduct its foreign currency exchange transactions through
forward contracts to purchase or sell foreign currencies. A forward foreign
currency exchange contract involves an obligation to purchase or sell a
specified currency at a future date (which may be any fixed number of days from
the date the contract is entered into by the parties) at the price set at the
time of the contract. These contracts are traded directly between currency
traders (usually large commercial banks) and their customers.

The Fund may use such forward contracts only under two circumstances:
first, if the Advisor believes that the Fund should fix the U.S. dollar price of
the foreign security when the Fund enters into a contract for the purchase or
sale, at a future date, of a security denominated in a foreign currency; and
second, if the Advisor believes that the Fund should hedge against risk of loss
in the value of its portfolio securities denominated in foreign currencies, the
Fund may enter into a forward contract to purchase or

-4-
<PAGE>

sell an amount of the foreign currency approximating the value of some or all of
the Fund's portfolio securities denominated in such foreign currency.

Investment Restrictions

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

1. 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;

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

3. Purchase or sell commodities or commodities contracts or futures
contracts;

4. 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;

5. Issue senior securities;

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

7. Effect short sales of securities;

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

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

10. Invest more than 10% of the value of its net assets in illiquid
securities, including repurchase agreements with remaining maturities in excess
of seven days.

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

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

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

-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) on each
day on which the New York Stock Exchange is open for business (a "Business
Day"). The New York Stock Exchange is open for business on all weekdays except
for the following holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.

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 Flag Investors Class A
Shares by check, Flag Investors Institutional Shares by wire transfer of funds
and ABCAT Shares by transfer of funds by, or at the direction of, Alex. Brown
Capital Advisory & Trust Company or an affiliate, as described in the Prospectus
relating to each class of Shares. However, if the Board of Directors determines
that it would be in the best interests of the remaining shareholders to make
payment of the redemption price in whole or in part by a distribution in kind of
securities from the portfolio of the Fund in lieu of cash, in conformity with
applicable rules of the SEC, the Fund will make such distributions in kind. If
Shares are redeemed in kind, the redeeming shareholder will incur brokerage
costs in later converting the assets into cash. The method of valuing portfolio
securities is described in the Prospectus under "How to Invest" 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 Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussion here and in the Fund's Prospectus is not intended as a substitute for
careful tax planning.

The following 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
Prospectus. New legislation, as well as administrative changes or court
decisions, may significantly change the conclusions expressed herein, and may
have a retroactive effect with respect to the transactions contemplated herein.

The Fund intends to continue to qualify as a regulated investment
company ("RIC") under Subchapter M of the Code. In order to qualify as a RIC for
any taxable year, the Fund must (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans

-6-
<PAGE>

and gains from the sale or other disposition of stock, securities or foreign
currencies and other income (including, but not limited to gains from options,
futures or forward contracts) derived with respect to its business of investing
in such stock, securities or currencies (the "Income Requirement") and (2)
derive less than 30% of its gross income (exclusive of certain gains from
designated hedging transactions that are offset by unrealized losses on
offsetting positions) from gains on the sale or other disposition of any of the
following investments if such investments are held for less than three months
(the "Short-Short Gain Test"): (a) stock or securities (as defined in Section
2(a)(36) of the Investment Company Act); (b) options, futures or forward
contracts (other than options, futures, or forward contracts on foreign
currencies), and (c) foreign currencies (or options, futures, or forward
contracts on foreign currencies) but only if such currencies (or options,
futures, or forward contracts on foreign currencies) are not directly related to
the regulated investment company's principal business of investing in stock or
securities (or options and futures with respect to stocks or securities). The
Short-Short Gain Test will not prevent the Fund from disposing of investments at
a loss, since the recognition of a loss before the expiration of the three-month
holding period is disregarded.

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

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

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

The Fund may either retain or distribute to shareholders its excess of
net long-term capital gains over net short-term capital losses ("net capital
gain"). If such gains are distributed as capital gains, they are taxable to
shareholders as long-term capital gains, regardless of the length of time the
shareholder

-7-
<PAGE>

has held the Shares. Conversely, if the Fund elects to retain its net capital
gains, it will be taxed thereon at the applicable corporate capital gains tax
rate. In this event, it is expected that the Fund also will elect to have
shareholders treated as having received a distribution of such gains, with the
result that they will be required to report such gains on their returns as
long-term capital gains, will receive a tax credit for their allocable share of
capital gains tax paid by the Fund on the gains, and will increase the tax basis
for their Shares by an amount equal to 65% of the deemed distribution.

Generally, gains or losses on the sale or exchange of a Share will be
capital gains or losses, which will be long-term if the Share is held for more
than one year. 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 investor'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 purchasing Shares just prior to the ex-dividend date of any
ordinary income dividend or capital gains distribution will be taxable on the
entire amount of the dividend received, even though the net asset value per
Share on the date of such purchase reflected the amount of such distribution.

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

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

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

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

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

-8-
<PAGE>

to avoid excise tax liability, and, in addition, that the liquidation of such
investments in such circumstances may affect the ability of the Fund to satisfy
the Short-Short Gain Test.

Rules of state and local taxation of dividend and capital gains
distributions from regulated investment companies often differ from the rules
for federal income taxation described above. Shareholders are urged to consult
their tax advisors as to the consequences of these and other state and local tax
rules affecting an investment in the Fund and also as to the application of the
rules set forth above to a shareholder's particular circumstances.

5. MANAGEMENT OF THE FUND

Directors and Officers

The Directors and executive officers of the Fund, 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.

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

*CHARLES W. COLE, JR., Director (11/11/35)+
Vice Chairman, Alex. Brown Capital Advisory & Trust Company (registered
investment advisor); Chairman, Investment Company Capital Corp.
(registered investment advisor); Director, Provident Bankshares
Corporation and Provident Bank of Maryland; Formerly, President and
Chief Executive Officer, Chief Administrative Officer, and Director,
First Maryland Bancorp, The First National Bank of Maryland and First
Omni Bank; Director, York Bank and Trust Company.

*TRUMAN T. SEMANS, Director (10/27/27)
Managing Director, Alex. Brown & Sons Incorporated; Director, Investment
Company Capital Corp. (registered investment advisor); Formerly, Vice
Chairman, Alex. Brown & Sons Incorporated.

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

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

LOUIS E. LEVY, Director (11/16/32)
26 Farmstead Road, Short Hills, New Jersey 07078, Director,
Kimberly-Clark Corporation (personal consumer products) and Household
International (finance and banking); Chairman of the Quality Control
Inquiry Committee, American Institute of Certified Public Accountants;
Formerly,

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<PAGE>

Trustee, Merrill Lynch Funds for Institutions, 1991-1993;
Adjunct Professor, Columbia University-Graduate School of Business,
1991-1992; Partner, KPMG Peat Marwick, retired 1990.

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

REBECCA W. RIMEL, Director (4/10/51)
The Pew Charitable Trusts, One Commerce Square, 2005 Market Street,
Suite 1700, Philadelphia, PA 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, 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); Formerly, Chairman and Member,
National Transportation Safety Board; Director, National Railroad
Passenger Corporation (Amtrak) and Member, Aviation System Capacity
Advisory Committee (Federal Aviation Administration).

M. ELLIOTT RANDOLPH, President (1/10/42)
Principal, Alex. Brown & Sons Incorporated.

PAUL D. CORBIN, Executive Vice President (7/24/52)
Principal, Alex. Brown & Sons Incorporated.

EDWARD J. VEILLEUX, Vice President (8/26/43)
Principal, Alex. Brown & Sons Incorporated; Vice President, Armata
Financial Corp. (registered broker-dealer); Executive Vice President,
Investment Company Capital Corp., (registered investment advisor).

GARY V. FEARNOW, Vice President (12/6/44)
Managing Director, Alex. Brown & Sons Incorporated and Manager, Private
Client Marketing, Alex. Brown & Sons Incorporated.

MONICA M. HAUSNER, Vice President (10/26/61)
Vice President, Fixed Income Management Department, Alex. Brown & Sons
Incorporated, March 1992-Present; Formerly, Assistant Vice President,
First National Bank of Maryland, 1984-1992.

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

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

-10-
<PAGE>

LAURIE D. COLLIDGE, Assistant Secretary (1/1/66)
Asset Management Department, Alex. Brown & Sons Incorporated, 1991-
Present.

- ----------
* Messrs. Hale, Cole and Semans are Directors who are "interested persons,"
as defined in the Investment Company Act.

+ Mr. Liotta is Mr. Cole's son-in-law.

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

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

Officers of the Fund receive no direct remuneration in such capacity
from the Fund. Officers and Directors of the Fund who are officers or directors
of the Distributor may be considered to have received remuneration indirectly.
As compensation for his or her services as Director, each Director who is not an
"interested person" of the Fund (as defined in the Investment Company Act) (a
"Non-Interested Director") receives an aggregate annual fee (plus reimbursement
for reasonable out-of-pocket expenses incurred in connection with his or her
attendance at Board and committee meetings) from each fund in the Fund Complex
for which he or she serves. In addition, the Chairman of the Fund Complex's
Audit Committee receives an aggregate annual fee from the Fund Complex. Payment
of such fees and expenses are allocated among all such funds described above in
direct proportion to their relative net assets. For the fiscal year ended
December 31, 1996, Non-Interested Directors' fees attributable to the assets of
the Fund totaled approximately $111.

The following table shows aggregate compensation payable to each of the
Fund's Directors by the Fund and the Fund Complex, respectively, and pension or
retirement benefits accrued as part of Fund expenses in the fiscal year ended
December 31, 1996.

-11-

COMPENSATION TABLE
- -----------------------------------------------------------------------------------------------------------------------------------

Name of Person, Position Aggregate Compensation Pension or Retirement Total Compensation
From the Fund Payable Benefits Accrued As From the Fund
to Directors for the Part of Fund Expenses and Fund Complex
Fiscal Year Ended Payable to Directors
December 31, 1996 for the Fiscal Year
Ended December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C>
Richard T. Hale, Chairman (1) $0 $0 $0

W. James Price, Director (1, 2) $0 $0 $0

Charles W. Cole, Jr., Director (1, 3) $0 $0 $0

Truman T. Semans, Director (1, 3) $0 $0 $0

James J. Cunnane, Director $488 (4) (5) $39,000 for service on 12
Boards in the Fund Complex

N. Bruce Hannay, Director (6) $ 39 (4) (5) $3,321 for service on 12
Boards in the Fund Complex

John F. Kroeger, Director $613 (4) (5) $49,000 for service on 12
Boards in the Fund Complex

Louis E. Levy, Director $488 (4) (5) $39,000 for service on 12
Boards in the Fund Complex

Eugene J. McDonald, Director $488 (4) (5) $39,000 for service on 12
Boards in the Fund Complex

Rebecca W. Rimel, Director (3) N/A (5) $39,000 for service on 6
Boards in the Fund Complex (7)

Carl W. Vogt, Director (3) N/A (5) $39,000 for service on 5
Boards in the Fund Complex (7)

Harry Woolf, Director (2) $488 (4) (5) $39,000 for service on 12
Boards in the Fund Complex
</TABLE>

- ----------
(1) A Director who is an "interested person" as defined in the Investment
Company Act.
(2) Retired on December 31, 1996.
(3) Elected to the Fund's Board of Directors on March 7, 1997.
(4) Of the amounts payable to Messrs. Cunnane, Hannay, Kroeger, Levy, McDonald
and Woolf, $488, $0, $0, $0, $488, and $488 respectively, was deferred
pursuant to a deferred compensation plan.
(5) The Fund Complex has adopted a Retirement Plan for eligible Directors, as
described below. The actuarially computed pension expense for the Fund for
the year ended December 31, 1996 was approximately $2,511.
(6) Retired on January 31, 1996 and is now deceased.
(7) Ms. Rimel and Mr. Vogt receive proportionately higher compensation from
each fund for which they serve as a director.

The Fund Complex has adopted a Retirement Plan (the "Retirement Plan")
for Directors who are not employees of the Fund, the 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 in his or her last year of
service. Upon retirement, each Participant will receive annually 10% of such fee
for each year that he or she served after completion of the first five years, up
to a maximum annual benefit of 50% of the fee earned by the Participant in his
or her last year of service. The fee will be paid quarterly, for life, by each
Fund for which he or she serves. The Retirement Plan is unfunded and unvested.
Mr. Kroeger has qualified but has not received benefits. The Fund has two
Participants, a Director who retired effective December 31,

-12-
<PAGE>

1994 and a Director 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. Another
Participant, who retired on January 31, 1996 and died on June 2, 1996, was paid
fees of $8,090 by the Fund Complex under the Retirement Plan in the fiscal year
ended December 31, 1996. 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
of the Fund's non-interested directors at December 31, 1996 was as follows: for
Mr. Cunnane, 1 year; for Mr. Kroeger, 14 years; for Mr. Levy, 2 years; for Mr.
McDonald, 4 years; for Ms. Rimel, 1 year; and for Mr. Vogt, 1 year.

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

Chairman of Audit Committee Other Participants
--------------------------- ------------------

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

</TABLE>

Any Director who receives fees from the Fund is permitted to defer a
minimum of 50%, or up to all, of his or her annual compensation pursuant to a
Deferred Compensation Plan. Messrs. Cunnane, Kroeger, Levy, McDonald and Vogt,
and Ms. Rimel have each executed a Deferred Compensation Agreement. Currently,
the deferring Directors may select various Flag Investors and Alex. Brown Cash
Reserve Funds 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 directors and officers of
the Fund, as well as to designated officers, directors and employees of the
Advisor and the Distributor. As described below, the Code of Ethics imposes
significant restrictions on the Advisor's investment personnel, including the
portfolio managers and employees who execute or help execute a portfolio
manager's decisions or who obtain contemporaneous information regarding the
purchase or sale of a security by the Fund.

The Code of Ethics requires that covered employees of the Advisor,
certain directors or officers of the Distributor, and all Fund Directors who are
"interested persons", preclear personal securities investments (with certain
exceptions, such as non-volitional purchases or purchases that are part of an
automatic dividend reinvestment plan). The preclearance requirement and
associated procedures are designed to identify any substantive prohibition or
limitation applicable to the proposed investment. The substantive restrictions
applicable to investment personnel include a ban on acquiring any securities in
an initial public offering, a prohibition from profiting on short-term trading
in securities and special preclearance of the acquisition of securities in
private placements. Furthermore, the Code of Ethics provides for trading
"blackout periods" that prohibit trading by investment personnel and

-13-
<PAGE>

certain other employees within periods of trading by the Fund in the same
security. Officers, directors and employees of the Advisor and the Distributor
may comply with codes of ethics instituted by those entities so long as they
contain similar requirements and restrictions.

6. INVESTMENT ADVISORY AND OTHER SERVICES

On May 9, 1991, the sole shareholder of the Fund approved an Investment
Advisory Agreement between the Fund and Investment Company Capital Corp ("ICC"or
the "Advisor"). ICC, a registered investment advisor, is a wholly-owned
subsidiary of Alex. Brown Financial Corporation and an indirect subsidiary of
Alex. Brown Incorporated. (See "Investment Advisor" in the Prospectus)

Under the Investment Advisory Agreement, ICC obtains and evaluates
economic, statistical and financial information to formulate and implement
investment policies for the Fund. Any investment program undertaken by ICC will
at all times be subject to policies and control of the Fund's Board of
Directors. ICC will provide the Fund with office space for managing its affairs,
with the services of required executive personnel and with certain clerical and
bookkeeping services and facilities. These services are provided by ICC without
reimbursement by the Fund for any costs. ICC shall not be liable to the Fund or
its shareholders for any act or omission by ICC or any losses sustained by the
Fund or its shareholders, except in the case of willful misfeasance, bad faith,
gross negligence, or reckless disregard of duty. As compensation for its
services, ICC receives an annual fee from the Fund, payable monthly, at the
following annual rates based upon the Fund's average daily net assets: 0.35% of
the first $1 billion, 0.30% of the next $500 million and 0.25% of that portion
in excess of $1.5 billion. ICC has voluntarily agreed to reduce its annual fee,
if necessary, or to make payments to the Fund to the extent required so that the
Fund's annual expenses do not exceed .70% of the Flag Investors Class A Shares'
average daily net assets and .45% of the Flag Investors Institutional Shares'
and the ABCAT Shares' respective average daily net assets. The services of ICC
to the Fund are not exclusive and ICC is free to render similar services to
others. Investment advisory fees paid to ICC for the last three fiscal years are
shown below.

<TABLE>
<CAPTION>
Advisory Fees for the Fiscal Year Ended December 31,

1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Contractual Fee $245,318 $252,372 $357,585
Less amount waived (201,059) (162,943) (141,214)
-------- -------- -------
Fee After Waivers $ 44,259* $ 89,429* $216,371*

</TABLE>

- ----------------
*Absent such waivers for the fiscal years ended December 31, 1996, December 31,
1995 and December 31, 1994, the Fund's Total Operating Expenses would have been
.99%, .93% and .84%, respectively, of the Flag Investors Class A Shares' average
daily net assets.

The Investment Advisory Agreement will continue in effect from year to
year thereafter if such continuance is specifically approved at least annually
by the Fund's Board of Directors, including a majority of the Non-Interested
Directors who have no direct or indirect financial interest in such agreement,
by votes cast in person at a meeting called for such purpose, or by a vote of a
majority of the outstanding Shares (as defined under "Capital Stock"). The
Investment Advisory Agreement was approved in the foregoing manner by the Fund's
Board of Directors most recently on September 30, 1996 and by a majority of the
outstanding Shares on July 31, 1992. 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).

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

-14-
<PAGE>

7. DISTRIBUTION OF FUND SHARES

Alex. Brown & Sons Incorporated ("Alex. Brown" or the "Distributor")
serves as the exclusive distributor of the Fund's Shares pursuant to three
separate Distribution Agreements, one for each class of the Fund's shares
(collectively, the "Distribution Agreements").

The Flag Investors Class A Shares

The Flag Investors Class A Distribution Agreement provides that Alex.
Brown has the exclusive right to distribute Flag Investors Class A Shares either
directly or through other broker-dealers. The Flag Investors Class A
Distribution Agreement further provides that Alex. Brown will: (a) solicit and
receive orders for the purchase of Flag Investors Class A Shares; (b) accept or
reject such orders on behalf of the Fund in accordance with the Fund's currently
effective Prospectus and transmit such orders as are accepted to the Fund's
transfer agent as promptly as possible; (c) receive requests for redemptions and
transmit such redemption requests to the Fund's transfer agent as promptly as
possible; and (d) respond to inquiries from shareholders concerning the status
of their accounts and the operations of the Fund. Alex. Brown has not undertaken
to sell any specific number of Flag Investors Class A Shares. The Flag Investors
Class A Shares Distribution Agreement further provides that, in connection with
the distribution of Shares, Alex. Brown will be responsible for all of the
promotional expenses. The services provided by Alex. Brown to the Fund are not
exclusive, and Alex. Brown is free to provide similar services to others. Alex.
Brown shall not be liable to the Fund or its shareholders for any act or
omission by Alex. Brown or any losses sustained by the Fund or its shareholders
except in the case of willful misfeasance, bad faith, gross negligence or
reckless disregard of duty.

Alex. Brown and certain broker-dealers ("Participating Dealers") have
entered into Sub-Distribution Agreements under which such broker-dealers have
agreed to process investor purchase and redemption orders and respond to
inquiries from shareholders concerning the status of their accounts and the
operations of the Fund.

As compensation for providing distribution services for the Flag
Investors Class A Shares as described above, Alex. Brown receives an annual fee,
paid monthly, equal to .25% of the average daily net assets of the Flag
Investors Class A Shares. Alex. Brown expects to allocate most of its annual fee
to its investment representatives and up to all of its fee to Participating
Dealers. For the fiscal years ended December 31, 1996, December 31, 1995 and
December 31, 1994, Alex. Brown received distribution fees of $151,753, $179,666
and $255,418, respectively. Alex. Brown, in return, paid the
distribution-related expenses of the Fund including one or more of the
following: printing and mailing of prospectuses to other than current
shareholders; compensation to dealers and sales personnel; and interest,
carrying, or other financing charges.

Pursuant to Rule 12b-1 under the Investment Company Act, which provides
that investment companies may pay distribution expenses, directly or indirectly,
only pursuant to a plan adopted by the investment company's board of directors
and approved by its shareholders, the Fund has adopted a Plan of Distribution
for the Fund's Flag Investors Class A Shares (the "Flag Investors Class A
Plan"). Under the Flag Investors Class A Plan, the Fund pays a fee to Alex.
Brown for distribution and other shareholder servicing assistance as set forth
in the Flag Investors Class A Distribution Agreement, and Alex. Brown is
authorized to make payments out of its fee to its investment representatives and
to participating broker-dealers. The Flag Investors Class A Distribution
Agreement, including the Flag Investors Class A Plan and a form of
Sub-Distribution Agreement, was most recently approved by the Fund's Board of
Directors, including a majority of the Non-Interested Directors, on September
30, 1996. The Flag Investors Class A Distribution Agreement and the Flag
Investors Class A Plan encompassed therein will remain in effect from year to
year thereafter, if specifically approved at least annually by the Fund's Board
of Directors and by the affirmative vote of a majority of the Non-Interested
Directors by votes cast in person at a meeting called for such purpose.

-15-
<PAGE>

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

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

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

Under the Flag Investors Class A Plan, amounts allocated to
Participating Dealers and Shareholder Servicing Agents may not exceed amounts
payable to Alex. Brown under the Flag Investors Class A Plan. The Flag Investors
Class A Plan does not provide for any charges to the Fund for excess amounts
expended by Alex. Brown and, if the Flag Investors Class A Plan is terminated in
accordance with its terms, the obligation of the Fund to make payments to Alex.
Brown pursuant to the Flag Investors Class A Plan will cease and the Fund will
not be required to make any payments past the date the related Flag Investors
Class A Distribution Agreement terminates.

In the fiscal years ended December 31, 1996, December 31, 1995 and
December 31, 1994, Alex. Brown received sales commissions on the Flag Investors
Class A Shares of $26,849, $11,196 and $134,543 and from such amounts retained
$24,060, $11,088 and $132,337 for each such year, respectively.

-16-
<PAGE>

The Flag Investors Institutional Shares and the ABCAT Shares

The Flag Investors Institutional Distribution Agreement and the ABCAT
Distribution Agreement provide that Alex. Brown has the exclusive right to
distribute the related class of shares, either directly or through Participating
Dealers, and further provide that Alex. Brown will solicit and receive orders
for the purchase of Flag Investors Institutional Shares or ABCAT Shares, as
appropriate, accept or reject such orders on behalf of the Fund in accordance
with the Fund's currently effective Prospectus for the related class of shares
and transmit such orders as are accepted to the Fund's transfer agent as
promptly as possible, receive requests for redemption and transmit such
redemption requests to the Fund's transfer agent as promptly as possible,
respond to inquiries from the Fund's shareholders concerning the status of their
accounts with the Fund, maintain such accounts, books and records as may be
required by law or be deemed appropriate by the Fund's Board of Directors, and
take all actions deemed necessary to carry into effect the distribution of the
related class of shares. Alex. Brown has not undertaken to sell any specific
number of Flag Investors Institutional Shares or ABCAT Shares. The Flag
Investors Institutional Distribution Agreement and the ABCAT Distribution
Agreement further provide that, in connection with the distribution of the
related class of shares, Alex. Brown will be responsible for all of the
promotional expenses. The services provided by Alex. Brown to the Fund are not
exclusive, and Alex. Brown is free to provide similar services to others. Alex.
Brown shall not be liable to the Fund or its shareholders for any act or
omission by Alex. Brown or any losses sustained by the Fund or its shareholders,
except in the case of willful misfeasance, bad faith, gross negligence or
reckless disregard of duty.

Alex. Brown receives no compensation for distributing the Flag
Investors Institutional Shares or the ABCAT Shares.

With respect to the Flag Investors Institutional Shares, Alex. Brown
and Participating Dealers have entered into Sub-Distribution Agreements under
which such Participating 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 Alex. Brown will enter into Sub-Distribution Agreements for the
ABCAT Shares.

The Flag Investors Institutional Distribution Agreement and the ABCAT
Distribution Agreement were approved by the Fund's Board of Directors on
September 25, 1995 and September 30, 1996, respectively. Each such Agreement has
an initial term of two years and will remain in effect from year to year
thereafter, if specifically approved at least annually by the Fund's Board of
Directors and by the affirmative vote of a majority of the Non-Interested
Directors by votes cast at a meeting called for such purpose. Each Agreement may
be terminated at any time upon sixty days' written notice, without penalty, by
the vote of a majority of the Fund's Non-Interested Directors or by a vote of a
majority of the outstanding shares of the class (as defined under Capital
Stock). The Flag Investors Institutional Distribution Agreement, the ABCAT
Distribution Agreement and any Sub-Distribution Agreement shall automatically
terminate in the event of assignment.

General Information

The Fund will pay all costs associated with its organization and
registration under the Securities Act of 1933 and the Investment Company Act.
Except as described elsewhere, the Fund pays or causes to be paid all continuing
expenses of the Fund, including, without limitation: investment advisory and
distribution fees; the charges and expenses of any registrar, any custodian or
depository appointed by the Fund for the safekeeping of cash, portfolio
securities and other property, and any transfer, dividend or accounting agent or
agents appointed by the Fund; brokers' commissions chargeable to the Fund in
connection with portfolio securities transactions to which the Fund is a party;
all taxes, including securities issuance and transfer taxes, and fees payable by
the Fund to federal, state or other governmental agencies; the costs and
expenses of engraving or printing of certificates representing Shares; all costs
and expenses in connection with the registration and maintenance of registration
of

-17-
<PAGE>

the Fund and its Shares with the SEC and various states and other jurisdictions
(including filing fees, legal fees and disbursements of counsel); the costs and
expenses of printing, including typesetting and distributing prospectuses and
statements of additional information of the Fund and supplements thereto to the
Fund's shareholders; all expenses of shareholders' and Directors' meetings and
of preparing, printing and mailing proxy statements and reports to shareholders;
fees and travel expenses of Directors and Director members of any advisory board
or committee; all expenses incident to the payment of any dividend,
distribution, withdrawal or redemption, whether in Shares or in cash; charges
and expenses of any outside service used for pricing of the Shares; fees and
expenses of legal counsel, including counsel to the Non-Interested Directors,
and of independent auditors, in connection with any matter relating to the Fund;
a portion of membership dues of industry associations; interest payable 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 Alex.
Brown or ICC.

8. BROKERAGE

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

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

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

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

-18-
<PAGE>

allocation of orders among broker-dealers and the commission rates paid by the
Fund will be reviewed periodically by the Board of Directors. For the fiscal
years ended December 31, 1996, December 31, 1995 and December 31, 1994, ICC
directed no brokerage transactions to broker-dealers and paid no related
commissions because of research services provided to the Fund.

Subject to the above considerations, the Board of Directors has
authorized the Fund to effect portfolio transactions, on an agency basis,
through Alex. Brown. At the time of such authorization, 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 Alex. Brown
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. The Distribution Agreements
between Alex. Brown and the Fund do not provide for any reduction in the
distribution fee to be received by Alex. Brown from the Fund as a result of
profits resulting from brokerage commissions on transactions of the Fund
effected through Alex. Brown. For the fiscal years ended December 31, 1996,
December 31, 1995 and December 31, 1994, the Fund paid no brokerage commissions
to Alex. Brown. 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 December 31,
1996, the Fund held a 6.00% repurchase agreement issued by Goldman Sachs & Co.
valued at $6,171,000. Goldman Sachs & Co. is a "regular broker or dealer" of the
Fund.

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.

9. CAPITAL STOCK

The Fund is authorized to issue 60 million shares of common stock, par
value $.001 per share. The Board of Directors may increase or decrease the
number of authorized Shares without shareholder approval.

The Fund's Articles of Incorporation provide for the establishment of
separate series and separate classes of Shares by the Directors at any time
without shareholder approval. The Fund currently has one Series and the Board
has designated four classes of shares: Flag Investors Short-Intermediate Income
Fund Class A Shares, Flag Investors Short-Intermediate Income Fund Class B
Shares, Flag Investors Short-Intermediate Income Fund Institutional Shares and
Alex. Brown Capital Advisory & Trust Short-Intermediate Income Shares. The ABCAT
Shares and the Flag Investors Class B Shares are not currently being offered.
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

-19-
<PAGE>

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

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

10. SEMI-ANNUAL REPORTS

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

11. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES

PNC Bank, National Association ("PNC Bank") has been retained to act as
custodian of the Fund's investments. PNC Bank receives such compensation from
the Fund for its services as custodian as may be agreed to from time to time by
PNC Bank and the Fund. Investment Company Capital Corp. serves as the Fund's
transfer and dividend disbursing agent and provides certain accounting services
to the Fund under a Master Services Agreement between the Fund and ICC. As
compensation for providing dividend and transfer agency services, the Fund pays
ICC up to $10.62 per account per year, plus reimbursement for out-of-pocket
expenses incurred in connection therewith. For the fiscal year ended December
31, 1996, such fees totaled $32,766.

As compensation for providing accounting services, ICC receives an
annual fee, calculated daily and paid monthly, as shown below.

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

$ 0 - $ 10,000,000 $15,000 (fixed fee)
$ 10,000,000 - $ 25,000,000 .080%
$ 25,000,000 - $ 50,000,000 .077%
$ 50,000,000 - $ 75,000,000 .050%
$ 75,000,000 - $ 100,000,000 .030%
$ 100,000,000 - $ 500,000,000 .020%
$ 500,000,000 - $1,000,000,000 .008%
over $1,000,000,000 .003%

In addition, the Fund reimburses ICC for certain out-of-pocket expenses.
For the fiscal year ended December 31, 1996, ICC received accounting fees of
$56,244.

-20-
<PAGE>

12. INDEPENDENT AUDITORS

The annual financial statements of the Fund are audited by Deloitte &
Touche LLP.

13. 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 generally be stated both in terms of total return
and in terms of yield. However, the Fund may also from time to time state the
performance of the Fund solely in terms of total return.

Total Return Calculations

The total return quotations, under the rules of the SEC, must be
calculated according to the following formula:

n
P(1 + T) = ERV

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

T = average annual total return

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

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

Under the foregoing formula, the time periods used in advertising will be based
on rolling calendar quarters, updated to the last day of the most recent quarter
prior to submission of the advertising for publication, and will cover one-,
five-, and ten-year periods or a shorter period dating from the effectiveness of
the Fund's registration statement (or the later commencement of operations of a
Series or class). During its first year of operations, the Fund may, in lieu of
annualizing its total return, use an aggregate total return calculated in the
same manner. In calculating the ending redeemable value, the maximum sales load
(1.50% for the Flag Investors Class A Shares) is deducted from the initial
$1,000 payment and all dividends and distributions by the Fund are assumed to
have been reinvested at net asset value as described in the Prospectuses on the
reinvestment dates during the period. "T" in the formula above is calculated by
finding the average annual compounded rate of return over the period that would
equate an assumed initial payment of $1,000 to the ending redeemable value. Any
sales loads that might in the future be made applicable at the time to
reinvestments would be included as would any recurring account charges that
might be imposed by the Fund. The Flag Investors Institutional Shares and the
ABCAT Shares are sold without a sales load.

Calculated according to SEC rules, the ending redeemable value and average
annual total return of a hypothetical $1,000 payment for the periods ended
December 31, 1996 were as follows:

-21-
<PAGE>
<TABLE>
<CAPTION>

One-Year Period Ended Five-Year Period Ended Inception Through
December 31, 1996 December 31, 1996 December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Ending Average Ending Average Ending Average
Class Redeemable Annual Total Redeemable Annual Total Redeemable Annual Total
Value Return Value Return Value Return
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Flag Investors Class A $1,024.82 2.48% $1,318.02 5.68% $1,447.10 6.78%
May 31, 1991 +
- -----------------------------------------------------------------------------------------------------------------------------------
Flag Investors Institutional $1,042.01 4.20% N/A N/A $1,063.01 5.40%
November 2, 1995 +
- -----------------------------------------------------------------------------------------------------------------------------------
ABCAT* N/A N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

+ Inception Date.
* ABCAT Shares were not offered in any period ended December 31, 1996.

The Fund may also from time to time include in such advertising total
return figures that are not calculated according to the formula set forth above
to compare more accurately the Fund's performance with other measures of
investment return. For example, in comparing the Fund's total return with data
published by Lipper Analytical Services, Inc., CDA/Weisenberger or Morningstar
Inc., or with the performance of the Lehman Brothers Intermediate Aggregate Bond
Index, the Lehman Brothers Government Intermediate-Term Bond Index or the
Merrill Lynch 1-3 Year Treasury Index, the Fund calculates its aggregate and
average annual total return for the specified periods of time by assuming the
investment of $10,000 in Shares and assuming the reinvestment of each dividend
or other distribution at net asset value on the reinvestment date.

For this alternative computation, the Fund assumes that the $10,000
invested in Shares is net of all sales charges. The Fund will, however, disclose
the maximum sales charges and will also disclose that the performance data do
not reflect sales charges and that inclusion of sales charges would reduce the
performance quoted. Such alternative total return information will be given no
greater prominence in such advertising than the information prescribed under SEC
rules, and all advertisements containing performance data will include a legend
disclosing that such performance data represent past performance and that the
investment return and principal value of an investment will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.

Yield Calculations

The Fund's yield for the Flag Investors Class A Shares and the Flag
Investors Institutional Shares for the 30 day period ended December 31, 1996 was
5.77% and 6.12%, respectively, and was computed in the manner discussed below.
The yield of the Fund is calculated by dividing the net investment income per
Share earned by the Fund during a 30-day (or one month) period by the maximum
offering price per share on the last day of the period and annualizing the
result on a semi-annual basis by adding one to the quotient, raising the sum to
the power of six, subtracting one from the

-22-
<PAGE>

result and then doubling the difference. The Fund's yield calculations assume a
maximum sales charge of 1.50% for the Flag Investors Class A Shares and no sales
charge for the Flag Investors Institutional Shares or the ABCAT Shares. The
Fund's net investment income per Share earned during the period is based on the
average daily number of Shares outstanding during the period entitled to receive
dividends and includes dividends and interest earned during the period minus
expenses accrued for the period, net of reimbursements.

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

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

The Fund's annual portfolio turnover rate (the lesser of the value of
the purchases or sales for the year divided by the average monthly market value
of the portfolio during the year, excluding U.S. Government securities and
securities with maturities of one year or less) may vary from year to year, as
well as within a year, depending on market conditions. The Fund's portfolio
turnover rate was 42% for the fiscal year ended December 31, 1996 and 46% for
the fiscal year ended December 31, 1995. A high level of portfolio turnover may
generate relatively high transaction costs and may increase the amount of taxes
payable by the Fund's shareholders.

14. 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 Fund's outstanding Shares, as of April 15, 1997:

-23-
<PAGE>

Name and Address % Ownership
---------------- -----------

Olicon A/S 13.15%
Attn: Jorgen Nielsen
Nyerovy 114
DK 2800
Lynqby Denmark

Lauer & Co. Cust. 9.49%
127931-9
BAT Customers
c/o Glenmede Income Collection Dept.
1650 Market Street, Ste. 1200
Philadelphia, PA 19103

Alex. Brown & Sons Incorporated 59.85%*
One South Street
Baltimore, MD 21202

-------------
* As of such date, Alex. Brown owned beneficially less than
1% of such Shares.

Directors and officers as a group owned less than 1% of the
Fund's total outstanding Shares, as of April 15, 1997.

15. FINANCIAL STATEMENTS
(See next page.)

-24-
<PAGE>

Alex. Brown Flag Inv. Short-Intermed. Inc. Fund AR

FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
Statement of Net Assets December 31, 1996

S&P Par Value
Security Rating* (000) (Note 1)
- --------------------------------------------------------------------------------
CORPORATE BONDS--17.8%
Banc One Columbus
7.375%, 12/1/02 AA- $1,000 $ 1,036,250
Countrywide Funding
8.25%, 7/15/02 A- 3,250 3,461,250
Ford Motor Credit
6.05%, 3/31/98 A+ 2,000 2,002,500
General Motors Acceptance Corporation
5.625%, 2/15/01 A- 1,000 968,750
Pacific Gas & Electric
6.25%, 3/1/04 A 2,000 1,947,500
Philip Morris Cos., Inc.
6.95%, 6/1/06 A 2,000 2,027,500
Societe Nationale Elf Aquitaine
7.75%, 5/1/99 AA- 2,000 2,065,000
- --------------------------------------------------------------------------------
Total Corporate Bonds

(Cost $13,310,342) 13,508,750
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY SECURITIES--24.6%
Federal Home Loan Banks Board - 3.9%
Debentures
7.151%, 9/13/05 (Callable 9/13/97) AAA 3,000 2,976,780

Federal National Mortgage Assoc. - 4.5%
Debentures
6.250%, Due 8/12/03 AAA 3,500 3,400,285

Mortgage-Backed Securities - 14.7%
Federal Home Loan Mortgage Corp.
Pool #G10049, 8.00%, 10/1/07 AAA 1,078 1,109,772
Federal National Mortgage Assoc.
Pass-through
Pool #326570, 7.00%, Due 2/1/08 AAA 3,589 3,586,454
Government National Mortgage Assoc.
Pass-throughs
Pool #194615, 8.00%, Due 3/15/17 AAA 155 158,702
Pool #204405, 8.00%, Due 4/15/17 AAA 156 158,891
Pool #371200, 8.00%, Due 12/15/23 AAA 1,588 1,621,390
Pool #371206, 8.00%, Due 12/15/23 AAA 1,746 1,782,888
Pool #780195, 8.00%, Due 7/15/25 AAA 2,691 2,757,210

-25-
<PAGE>

FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONCLUDED)

S&P Par Value
Security Rating* (000) (Note 1)
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY SECURITIES--continued
Guaranteed Export Trust - 1.5%
8.187%, 12/15/04 AAA $1,063 $ 1,129,524
- --------------------------------------------------------------------------------
Total U.S. Government Agency Securities
(Cost $18,623,161) 18,681,896
- --------------------------------------------------------------------------------
U.S. TREASURY SECURITIES--21.9%
U.S. Treasury Notes
4.750%, 9/30/98 AAA 2,000 1,965,120
5.250%, 1/31/01 AAA 2,000 1,938,560
6.250%, 2/15/03 AAA 5,000 4,999,550
5.750%, 8/15/03 AAA 4,000 3,882,040
5.875%, 2/15/04 AAA 4,000 3,896,600
- --------------------------------------------------------------------------------
Total U.S. Treasury Securities
(Cost $16,610,814) 16,681,870
- --------------------------------------------------------------------------------
ASSET-BACKED SECURITIES--18.2%

Banc One Credit Card Master Trust
6.30%, 10/15/02 AAA 3,000 2,995,440
Discover Credit Card Trust, 93-A-A
6.25%, 8/16/00 AAA 3,000 3,005,760
Green Tree Financial Corporation, 94-6-A5
8.25%, 1/15/20 NR** 3,000 3,207,210
NationsBank Auto Owner Trust, 96-A-B1
6.75%, 6/15/01 AAA 2,706 2,734,927
Premier Auto Trust, 94-1-A3
4.75%, 2/2/00 AAA 413 411,276
Premier Auto Trust, 96-3-A4
6.75%, 11/6/00 AAA 1,500 1,520,145
- --------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $13,834,317) 13,874,758
- --------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS--8.3%
Federal Home Loan Mortgage Corp. - 3.2%
Multi-Class Mortgage Certificates
Series 106-F, 8.50%, 12/15/20 AAA 2,379 2,428,933

-26-
<PAGE>

FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------

S&P Par Value
Security Rating* (000) (Note 1)
- --------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS--continued
Federal National Mortgage Assoc. - 5.1%
Multi-Class Mortgage Certificates
Series 88-18-B, 9.40%, 7/25/03 AAA $ 173 $ 180,952
Series 149-D, 12.00%, 4/25/19 AAA 847 857,502
Series 91-11-G, 7.00%, 11/25/19 AAA 1,678 1,678,490
Series 95-W1-A2, 8.20%, 4/25/25 AAA 1,204 1,212,413
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations
(Cost $6,348,460) 6,358,290
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT--8.1%
Goldman Sachs & Co., 6.00%
Dated 12/31/96, to be repurchased on 1/2/97, collateralized by U.S. Treasury
Bonds with a market value of $6,294,544.
(Cost $6,171,000) NR** 6,171 6,171,000
- --------------------------------------------------------------------------------

Total Investment in Securities--98.9%
(Cost $74,898,094)*** 75,276,564

Other Assets in Excess of Liabilities, Net--1.1% 814,764
- --------------------------------------------------------------------------------

Net Assets--100.0% $76,091,328
================================================================================

Net Asset Value and Redemption Price Per:
Class A Share
($58,584,058 / 5,701,172 shares outstanding) $10.28
================================================================================
Institutional Share
($17,507,270 / 1,686,158 shares outstanding) $10.38
================================================================================

Maximum Offering Price Per:
Class A Share ($10.28 / .985) $10.44
================================================================================
Institutional Share $10.38
================================================================================

- ----------
* The Standard & Poor's ratings indicated are believed to be the most recent
ratings available as of December 31, 1996.
** Not rated.
*** Also aggregate cost for federal tax purposes.

See Notes to Financial Statements.

-27-
<PAGE>

FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------

Statement of Operations

For the Year Ended
December 31,
- --------------------------------------------------------------------------------
1996
Investment Income (Note 1):
Interest $ 4,776,889

Expenses:
Investment advisory fee (Note 2) 245,318
Distribution fee (Note 2) 151,753
Accounting fee (Note 2) 56,244
Printing and postage 47,714
Legal 38,582
Audit 32,964
Transfer agent fees 32,766
Registration fees 28,304
Custodian fee 14,116
Miscellaneous 10,986
Pricing service 4,798
Organizational expense (Note 1) 3,786
Insurance 2,536
Directors' fees 111
- --------------------------------------------------------------------------------
Total expenses 669,978
Less: Fees waived (Note 2) (201,059)
- --------------------------------------------------------------------------------
Net expenses 468,919
- --------------------------------------------------------------------------------
Net investment income 4,307,970
- --------------------------------------------------------------------------------
Realized and unrealized gain/(loss) on investments (Note 1):
Net realized loss from securities transactions (141,613)
Change in unrealized appreciation or depreciation
of investments (1,267,527)
- --------------------------------------------------------------------------------
Net loss on investments (1,409,140)
- --------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 2,898,830
================================================================================

See Notes to Financial Statements.

-28-
<PAGE>

FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets

For the Year Ended December 31,
- --------------------------------------------------------------------------------
1996 1995
Increase/(Decrease) in Net Assets:
Operations:
Net investment income $ 4,307,970 $ 4,324,862
Net loss from security transactions (141,613) (1,018,416)
Change in unrealized appreciation or
depreciation of investments (1,267,527) 7,179,328
Change in unrealized appreciation or
depreciation of assets and liabilities
denominated in foreign currency -- 1,216
- --------------------------------------------------------------------------------
Net increase in net assets resulting
from operations 2,898,830 10,486,990
- --------------------------------------------------------------------------------
Dividends to Shareholders From:
Net investment income:
Class A Shares (3,528,967) (4,208,250)
Institutional Shares (602,635) (7,962)
- --------------------------------------------------------------------------------
Total distributions (4,131,602) (4,216,212)
- --------------------------------------------------------------------------------
Capital Share Transactions (Note 3):
Proceeds from sale of shares 24,144,316 4,986,795
Value of shares issued in reinvestment of
dividends 2,641,312 2,635,861
Cost of shares repurchased (18,763,222) (23,380,739)
- --------------------------------------------------------------------------------
Increase/(decrease) in net assets derived from
capital share transactions 8,022,406 (15,758,083)
- --------------------------------------------------------------------------------
Total increase/(decrease) in net assets 6,789,634 (9,487,305)

Net Assets:
Beginning of period 69,301,694 78,788,999
- --------------------------------------------------------------------------------
End of period $ 76,091,328 $ 69,301,694
================================================================================
See Notes to Financial Statements.

-29-
<PAGE>

FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------

Financial Highlights -- Class A Shares
(For a share outstanding throughout each year)
For the Year Ended
December 31,
- --------------------------------------------------------------------------------
1996

Per Share Operating Performance:
Net asset value at beginning of year $ 10.48
- --------------------------------------------------------------------------------
Income from Investment Operations:
Net investment income 0.63
Net realized and unrealized gain/(loss) on investments (0.23)
- --------------------------------------------------------------------------------
Total from Investment Operations 0.40
Less Distributions:
Dividends from net investment income and
short-term gains (0.60)
Return of capital --
Distributions from net realized long-term gains --
- --------------------------------------------------------------------------------
Total distributions (0.60)
- --------------------------------------------------------------------------------
Net asset value at end of year $ 10.28
================================================================================
Total Return(1) 4.04%
Ratios to Average Daily Net Assets:
Expenses(2) 0.70%
Net investment income(3) 6.11%
Supplemental Data:
Net assets at end of year (000) $58,584
Portfolio turnover rate 42%

- ----------
(1) Total return excludes the effect of sales charge.
(2) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 0.99%, 0.93%, 0.84%, 0.85% and
0.87% for the years ended December 31, 1996, 1995, 1994, 1993 and 1992,
respectively.
(3) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 5.83%, 5.77%, 5.43%,
5.28% and 5.83% for the years ended December 1996, 1995, 1994, 1993 and
1992, respectively.

-30-
<PAGE>

FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
For the Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of year $ 9.62 $ 10.57 $ 10.37 $ 10.54
- ---------------------------------------------------------------------------------------------------------------------------------
Income from Investment Operations:
Net investment income 0.62 0.57 0.57 0.63
Net realized and unrealized gain/(loss) on investments 0.84 (0.92) 0.34 (0.05)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.46 (0.35) 0.91 0.58
Less Distributions:
Dividends from net investment income and
short-term gains (0.60) (0.57) (0.69) (0.75)
Return of capital -- (0.03) -- --
Distributions from net realized long-term gains -- -- (0.02) --
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.60) (0.60) (0.71) (0.75)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value at end of year $ 10.48 $ 9.62 $ 10.57 $ 10.37
=================================================================================================================================
Total Return(1) 15.43% (3.32)% 8.98% 5.68%
Ratios to Average Daily Net Assets:
Expenses(2) 0.70% 0.70% 0.70% 0.70%
Net investment income(3) 6.00% 5.57% 5.43% 6.01%
Supplemental Data:
Net assets at end of year (000) $67,116 $78,789 $112,520 $78,706
Portfolio turnover rate 46% 50% 86% 107%

See Notes to Financial Statements.
</TABLE>

-31-
<PAGE>

FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------

Financial Highlights --Institutional Shares
(For a share outstanding throughout each period)

For the Year For the Period
Ended November 2, 1995(1)
December 31, through December 31,
- --------------------------------------------------------------------------------
1996 1995
Per Share Operating Performance:
Net asset value at beginning of period $ 10.58 $10.42
- --------------------------------------------------------------------------------
Income from Investment Operations:
Net investment income 0.59 0.09
Net realized and unrealized gain/(loss)
on investments (0.17) 0.12
- --------------------------------------------------------------------------------
Total from Investment Operations 0.42 0.21
Less Distributions:
Distributions from net investment income
and short-term gains (0.62) (0.05)
- --------------------------------------------------------------------------------
Net asset value at end of period $ 10.38 $10.58
================================================================================
Total Return 4.20% 12.47%(2)
Ratios to Average Daily Net Assets:
Expenses(3) 0.45% 0.45%(2)
Net investment income(4) 6.35% 6.52%(2)
Supplemental Data:
Net assets at end of period (000) $17,507 $2,186
Portfolio turnover rate 42% 46%

- --------------------------------------------------------------------------------
(1) Commencement of operations.
(2) Annualized.
(3) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 0.76% and 0.72% (annualized) for
the year ended December 31, 1996 and the period ended December 31,
1995, respectively.
(4) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 6.04% and 6.27%
(annualized) for the year ended December 31, 1996 and the period
ended December 31, 1995, respectively.

See Notes to Financial Statements.

-32-
<PAGE>

FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------

Notes to Financial Statements

NOTE 1--Significant Accounting Policies

Flag Investors Short-Intermediate Income Fund, Inc. (the "Fund"), formally
Flag Investors Intermediate-Term Income Fund, Inc., is registered under the
Investment Company Act of 1940 as an open-end, diversified management investment
company designed to provide a high level of current income consistent with
preservation of capital within an intermediate-term maturity structure. The Fund
commenced operations on May 13, 1991, consisting of Class A Shares, which are
subject to a maximum front-end sales charge of 1.50% and a 0.25% distribution
fee. On November 2, 1995, the Fund began offering Institutional Shares, which
are not subject to a front-end sales charge or a distribution fee.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
following is a summary of significant accounting policies followed by the Fund.

A. Security Valuation--Debt securities are valued on the basis of
quotations provided by a pricing service, which uses information with
respect to transactions on bonds, quotations from bond dealers,
market transactions in comparable securities and various
relationships between securities in determining value. Portfolio
securities that are listed on a national securities exchange are valued
on the basis of their last sale price or, in the absence of recorded
sales, at the average of readily available closing bid and asked
prices. Securities or other assets for which market quotations are not
readily available are valued at their fair value so determined in
good faith by the investment advisor under procedures established and
monitored by the Board of Directors. Short-term obligations with
maturities of 60 days or less are valued at amortized cost which
approximates market.

B. Federal Income Tax--No provision is made for federal income taxes as it
is the Fund's intention to continue to qualify as a regulated investment
company under Subchapter M of the Internal Revenue Code and to
make requisite distributions to shareholders that will be sufficient
to relieve it from all or substantially all federal income and excise
taxes. The Fund's policy is to distribute to shareholders
substantially all of its taxable net investment income on a monthly
basis and net realized long-term capital gains annually, if any.

-33-
<PAGE>

FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--concluded

C. Dividends and Distributions--Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are
recorded on the ex-dividend dates. Distributions in excess of net
investment income are due to differing tax treatments of dividends
declared.

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

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

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

Investment Company Capital Corp. ("ICC"), a subsidiary of Alex. Brown
Financial Corp., serves as the Fund's investment advisor. As compensation for
its advisory services, ICC receives from the Fund an annual fee, calculated
daily and paid monthly, at the following annual rates based upon the Fund's
average daily net assets: 0.35% of the first $1 billion, 0.30% of the next $500
million and 0.25% of that portion in excess of $1.5 billion.

ICC has agreed to reduce its aggregate fees so that ordinary expenses of
the Fund for any fiscal year do not exceed 0.70% of the Fund's average daily net
assets for Class A Shares and 0.45% for Institutional Shares. For the year ended
December 31, 1996, ICC waived fees of $201,059.

As compensation for its transfer agent services, ICC receives from the
Fund a per account fee, calculated and paid monthly. ICC received $32,766 for
transfer agent services for the year ended December 31, 1996.

As compensation for its accounting services, ICC receives from the Fund an
annual fee, calculated daily and paid monthly, from the Fund's average daily net
assets. ICC received $56,244 for accounting services for the year ended December
31, 1996.

-34-
<PAGE>

FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------

NOTE 2--concluded

As compensation for providing distribution services, ICC receives from the
Fund an annual fee, calculated daily and paid monthly, at an annual rate equal
to 0.25% of the Fund's average daily net assets of Class A Shares. For the year
ended December 31, 1996, distribution fees aggregated $151,753.

The Fund complex of which the Fund is a part has adopted a retirement plan
for eligible Directors. The actuarially computed pension expense allocated to
the Fund for the period January 1, 1996 through December 31, 1996 was
approximately $2,500, and the accrued liability was approximately $10,000.

NOTE 3--Capital Share Transactions

The Fund is authorized to issue up to 55 million shares of capital stock
(45 million Class A, 5 million Institutional, 2 million Class B and 3 million
undesignated), par value, $.001 per share, all of which shares are designated as
common stock. Transactions in shares of the Fund were as follows:

Class A Shares
----------------------------
For the For the
Year Ended Year Ended
Dec. 31, 1996 Dec. 31, 1995
------------- -------------
Shares sold 824,212 267,783
Shares issued to shareholders on
reinvestment of dividends 223,342 261,580
Shares redeemed (1,752,832) (2,317,104)
- --------------------------------------------------------------------------
Net decrease in shares outstanding (705,278) (1,787,741)
==========================================================================
Proceeds from sale of shares $ 8,509,093 $ 2,690,780
Value of reinvested dividends 2,288,737 2,635,861
Cost of shares redeemed (18,054,319) (23,241,599)
- --------------------------------------------------------------------------
Net decrease from capital share
transactions $ (7,256,489) $(17,914,958)
==========================================================================

-35-
<PAGE>

FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (concluded)

NOTE 3--concluded

Institutional Shares
----------------------------
For the Period
For the Nov. 2, 1995*
Year Ended through
Dec. 31, 1996 Dec. 31, 1995
------------- -------------
Shares sold 1,513,443 219,797
Shares issued to shareholders on
reinvestment of dividends 34,119 --
Shares redeemed (67,989) (13,212)
- --------------------------------------------------------------------------------
Net increase in shares outstanding 1,479,573 206,585
================================================================================
Proceeds from sale of shares $15,635,223 $2,296,015
Value of reinvested dividends 352,575 --
Cost of shares redeemed (708,903) (139,140)
- --------------------------------------------------------------------------------
Net increase from capital share
transactions $15,278,895 $2,156,875
================================================================================

- ----------
*Commencement of operations.

NOTE 4--Investment Transactions

Purchases and sales of investment securities, other than short-term
obligations, aggregated $31,232,448 and $27,853,065, respectively, for the year
ended December 31, 1996.

On December 31, 1996, aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost was
$792,050, and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over market value was $413,580.

-36-
<PAGE>

FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
NOTE 5--Federal Income Tax Information

Generally accepted accounting principles require that certain components
of net assets be reclassified to reflect permanent differences between financial
reporting and tax purposes. Accordingly, current year's permanent book/tax
difference of $81,463 has been reclassified to undistributed net investment
income from accumulated net realized loss from security transactions. This
reclassification has no effect on net assets or net asset values per share.

On December 31, 1996, there was a tax capital loss carryforward of
$3,529,873, of which $383,359 expires in 2002, $3,111,390 expires in 2003 and
$35,124 expires in 2004. This carryforward will be used to offset future net
capital gains, if any.

NOTE 6--Net Assets

On December 31, 1996, net assets consisted of:

Paid-in capital:
Class A Shares $61,903,932
Institutional Shares 17,435,771
Accumulated net realized loss from security transactions (3,574,628)
Unrealized appreciation of investments 378,470
Overdistribution of net investment income (52,217)
------------
$76,091,328
============

-37-
<PAGE>

FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------

Independent Auditors' Report

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

We have audited the accompanying statement of net assets of the Flag
Investors Short-Intermediate Income Fund, Inc. as of December 31, 1996, and the
related statements of operations for the year then ended and changes in net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1996 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Flag Investors
Short-Intermediate Income Fund, Inc. as of December 31, 1996, the results of its
operations, the changes in its net assets and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.

DELOITTE & TOUCHE LLP
Princeton, New Jersey
January 29, 1997

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APPENDIX

Corporate Bond Rating Definitions

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Standard & Poor's Ratings Group

AAA--The highest rating assigned by S&P. Capacity to pay interest and repay
principal is extremely strong.

AA--Very strong capacity to pay interest and repay principal. Differs from the
highest rated issues only in small degree.

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

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Moody's Investors Service, Inc.

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

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

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

Commercial Paper Rating Definitions

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Standard & Poor's Ratings Group

Commercial paper rated A by S&P is regarded by S&P as having the greatest
capacity for timely payment. Issues rated A are further refined by use of the
numbers 1+, 1, 2 and 3 to indicate the relative degree of safety. Issues rated
A-1+ are those with an "overwhelming degree" of credit protection. Those rated
A-1 reflect a "very strong" degree of safety regarding timely payment.

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Moody's Investors Service, Inc.

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

A-1