FLAG INVESTORS SHORT INTERMEDIATE INCOME FUND INC, 497, 1998-05-06

FLAG INVESTORS SHORT INTERMEDIATE INCOME FUND INC
497, 1998-05-06

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[GRAPHIC OMITTED]
FLAG INVESTORS

SHORT-INTERMEDIATE INCOME FUND, INC.

(Class A Shares)

Prospectus & Application -- May 1, 1998

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This mutual fund (the "Fund") seeks 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 Buy Shares.")

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

TABLE OF CONTENTS

Fund Expenses ...................... 1
Financial Highlights ............... 2
Investment Program ................. 3
Investment Restrictions ............ 5
The Fund's Net Asset Value ......... 5
How to Buy Shares .................. 5
How to Redeem Shares ............... 7
Telephone Transactions ............. 8
Dealer Compensation ................ 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 ................ 11
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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<PAGE>

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FUND EXPENSES
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Shareholder Transaction Expenses:

<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) ............ 1.50%*
Maximum Sales Charge Imposed on Reinvested Dividends ..................................... 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):

<S> <C>
Management Fees (net of fee waivers) ..................................................... 0.09%**
12b-1 Fees ................................................................................ 0.25%
Other Expenses ............................................................................ 0.36%
-----
Total Fund Operating Expenses (net of fee waivers) ....................................... 0.70%**
=====
</TABLE>

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* If you purchase $1 million or more of Class A Shares, you will not have to
pay a sales charge. You may, however, be required to pay a contingent
deferred sales charge when you redeem your shares. (See "How to Buy Shares"
and "How to Redeem Shares.")
** 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 0.70% of the Class A Shares'
average daily net assets. Absent fee waivers, Management Fees would be
0.35% and Total Fund Operating Expenses would be 0.96% of the Class A
Shares' average daily net assets.

<TABLE>
<S> <C> <C> <C> <C>
Example: 1 year 3 years 5 years 10 years
- -------------------------------------------------------- -------- --------- --------- ---------
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period:* ............. $22 $37 $53 $101
</TABLE>
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* 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 above table is to describe the various costs and
expenses that you will bear, directly and indirectly. If you purchase Class A
Shares through a financial institution, you 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, you may qualify for reduced sales charges or no sales charge at all.
(see "How to Buy Shares") Due to the continuous nature of Rule 12b-1 fees, you
may pay more than the equivalent of the maximum sales charges permitted by the
Conduct Rules of the National Association of Securities Dealers, Inc. if you
hold your shares for a long time. The above table has not been audited by
Deloitte & Touche LLP, the Fund's independent auditors.

1
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FINANCIAL HIGHLIGHTS

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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, 1997 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, 1997 which can
be obtained at no charge by calling the Fund at (800) 767-FLAG.

(For a Class A Share outstanding throughout each period)
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<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value at beginning of
period ........................ $ 10.28 $ 10.48 $ 9.62 $ 10.57 $ 10.37 $ 10.54
-------- -------- -------- --------- -------- --------
Income from Investment
Operations:
Net investment income ........... 0.61 0.63 0.62 0.57 0.57 0.63
Net realized and unrealized
gain/(loss) on investments 0.10 (0.23) 0.84 (0.92) 0.34 (0.05)
-------- --------- -------- --------- -------- ---------
Total from Investment
Operations ..................... 0.71 0.40 1.46 (0.35) 0.91 0.58
-------- --------- -------- --------- -------- ---------
Less Distributions:
Dividends from net investment
income and short-term
gains ......................... (0.60) (0.60) (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) (0.60) (0.60) (0.71) (0.75)
--------- --------- --------- --------- -------- ---------
Net asset value at end of
period ........................ $ 10.39 $ 10.28 $ 10.48 $ 9.62 $ 10.57 $ 10.37
========= ========= ========= ========= ======== =========
Total Return2 .................... 7.13% 4.04% 15.43% (3.32)% 8.98% 5.68%
Ratios to Average Daily Net
Assets:
Expenses3 ....................... 0.70% 0.70% 0.70% 0.70% 0.70% 0.70%
Net investment income5 .......... 5.92% 6.11% 6.00% 5.57% 5.43% 6.01%
Supplemental Data:
Net assets at end of period
(000) ......................... $ 45,569 $ 58,584 $ 67,116 $ 78,789 $112,520 $ 78,706
Portfolio turnover rate ......... 65% 42% 46% 50% 86% 107%
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
For the Period
May 13, 1991 1
through
December 31, 1991
------------------
<S> <C>
Per Share Operating
Performance:
Net asset value at beginning of
period ........................ $ 10.00
--------
Income from Investment
Operations:
Net investment income ........... 0.32
Net realized and unrealized
gain/(loss) on investments 0.64
--------
Total from Investment
Operations ..................... 0.96
--------
Less Distributions:
Dividends from net investment
income and short-term
gains ......................... (0.42)
Return of capital ............... --
Distributions from net realized
long-term gains ............... --
---------
Total distributions ............. (0.42)
---------
Net asset value at end of
period ........................ $ 10.54
=========
Total Return2 .................... 9.79%
Ratios to Average Daily Net
Assets:
Expenses3 ....................... 0.70%(4)
Net investment income5 .......... 5.97%(4)
Supplemental Data:
Net assets at end of period
(000) ......................... $ 64,327
Portfolio turnover rate ......... 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 0.96%, 0.99%, 0.93%, 0.84%, 0.85%, 0.87% and
1.73% (annualized) for the years ended December 31, 1997, 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 5.66%, 5.83%, 5.77%, 5.43%, 5.28%,
5.83% and 4.94% (annualized) for the years ended December 31, 1997, 1996,
1995, 1994, 1993 and 1992 and for the period ended December 31, 1991,
respectively.

2
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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.

Type of Permitted Minimum Rating1
Investment S&P2 Moody's3
- ---------------------------------- -------------- -------------
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)

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(1) In the event any security owned by the Fund is downgraded, the Fund's
investment 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.

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.

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.
<PAGE>

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.

Asset-Backed Securities. The Fund may also invest in securities backed by
assets other than mortgages, including company receivables, truck and auto

3
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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 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. Second, if the
Advisor believes the Fund should hedge against risk of loss in the value of
those portfolio securities denominated in foreign currencies.

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.
<PAGE>

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 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. The Fund may purchase securities, at
their current market value, 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 choose to sell the
securities before the settlement date. 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 due to the
possibility that prepayments on home mortgages will alter their cash flow.
During periods of declining interest rates, prepayments are passed through to
holders of mortgage-backed securities who may then have to reinvest at lower
interest rates. In periods of rising interest rates, prepayments tend to slow,
with the result that the average life of mortgage-backed securities may be
lengthened. Consequently, 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
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<PAGE>

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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

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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.

THE FUND'S NET ASSET VALUE

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

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

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

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

<PAGE>

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

HOW TO BUY SHARES

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

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

Investment Minimums

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

5
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<PAGE>

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

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

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

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

Purchase Price

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

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

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

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

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

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

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

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

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

(ii) A qualified retirement plan;

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

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

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

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

Purchases by Exchange

You may exchange shares of any other Flag Investors fund with the same or
higher sales charge structure for an equal dollar amount of Class A Shares,
without payment of the sales charges described above or

6
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<PAGE>

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any other charge. If you own Flag Investors Cash Reserve Prime Class A Shares,
you may exchange into Class A Shares upon payment of the difference in sales
charges. You may enter both your redemption and purchase orders on the same
Business Day or, if you have already redeemed the shares of the other fund, you
may enter your purchase order within 90 days of the redemption. The Fund may
modify or terminate these offers of exchange at any time on 60 days' prior
written notice. You may request an exchange through your securities dealer or
servicing agent. Contact them for details on how to enter your order. If your
shares are in an account with the Fund's Transfer Agent, you may also request
an exchange directly through the Transfer Agent by mail or by telephone.

Investing Regularly

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

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

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

Systematic Purchase Plan. You may also purchase Class A Shares through a
Systematic Purchase Plan. Contact your securities dealer or servicing agent for
details.

<PAGE>

HOW TO REDEEM SHARES

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

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

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

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

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

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

Redemption Price

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

Years Since Purchase
Sales Charge as a Percentage of
the Dollar Amount Subject to
Charge
- -----------------------------------------
First ........................... 0.50%*
Second .......................... 0.50%*
Thereafter ...................... None
- -----------------------------------------

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

7
- --------------------------------------------------------------------------------
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

<PAGE>

Other Redemption Information

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

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

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

TELEPHONE TRANSACTIONS

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

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

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

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

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

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

DEALER COMPENSATION

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

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

Dealer Compensation as
Amount of Purchase a % of Offering Price
- ---------------------------------------------------------
Less than $100,000......... 1.25%
$ 100,000 - $499,999......... 1.00%
$ 500,000 - $999,999......... 0.75%
$1,000,000 and over .......... *
- ---------------------------------------------------------

* Your securities dealer may be paid up to 0.50% of the Offering Price

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

DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
Dividends and Distributions

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

The Statement of Additional Information sets forth further information
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 not pay U.S. federal income tax on amounts distributed to shareholders.
Unless you are otherwise exempt, you will pay income or capital gains tax on the
amounts distributed to you, regardless of whether such distributions are paid in
cash or reinvested in additional Class A Shares.

Capital gains distributions from the Fund are classified as either
short-term, long-term or mid-term depending upon how long the Fund held the
securities it sold to generate the gains. You will be taxed on the distributions
according to the category stipulated by the Fund regardless of how long you have
held your Fund shares. You will be taxed on all other income distributions as
ordinary income. Distributions from the Fund generally will not qualify for the
corporate dividends received deduction.

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

<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.

You 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
you.

9
- --------------------------------------------------------------------------------

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

MANAGEMENT OF THE FUND

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

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

INVESTMENT ADVISOR

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

Investment Company Capital Corp. ("ICC" or the "Advisor"), an indirect
subsidiary of Bankers Trust Corporation, is the Fund's investment advisor. ICC
is the investment advisor to mutual funds with approximately $6.5 billion of net
assets as of December 31, 1997. In addition to this Fund, these include other
funds in the Flag Investors family and BT Alex. Brown Cash Reserve Fund, Inc.

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.

As compensation for its services for the fiscal year ended December 31,
1997, ICC received from the Fund a fee (net of fee waivers) equal to 0.09% 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 0.70% 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. An affiliate of ICC provides custody
services to the Fund. (See "Custodian, Transfer Agent and Accounting
Services.")

Portfolio Managers

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

Mr. Randolph has nearly 24 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.

Mr. Corbin has 20 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.

<PAGE>

DISTRIBUTOR

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

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

The Fund has adopted a Distribution Agreement and related Plan of
Distribution (the "Plan") pursuant to Rule 12b-1 under the Investment Company
Act of 1940, as amended. In addition, the Fund may enter into agreements with
certain financial institutions, including certain banks and BT Alex. Brown
Incorporated, to provide shareholder services, pursuant to which the Distributor
may allocate on a proportional basis up to all of its distribution fee as
compensation for such financial institutions' ongoing shareholder services. Such
financial institutions may charge you separately for these services.

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

Payments under the Plan are made as described above regardless of the
Distributor's actual cost of providing distribution services and may be used to
pay the Distributor's overhead expenses. If the cost of providing distribution
services to the Fund is less than the payments received, the Distributor may
retain the unexpended portion of the distribution fee. ICC Distributors or the
Advisor and their respective affiliates may make payments from their own

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

- --------------------------------------------------------------------------------
resources to securities dealers and servicing agents. Payments by the
Distributor may include additional discounts or promotional incentives in the
form of cash or other compensation (including merchandise or travel).

CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
- --------------------------------------------------------------------------------

Investment Company Capital Corp. is the Fund's transfer and dividend
disbursing agent and provides accounting services to the Fund. As compensation
for providing accounting services to the Fund for the fiscal year ended
December 31, 1997, ICC received a fee equal to 0.08% of the Fund's average
daily net assets. Bankers Trust Company, a subsidiary of Bankers Trust
Corporation, acts as custodian of the Fund's assets. (See the Statement of
Additional Information.)

PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Fund may advertise its performance including
comparisons to other mutual funds with similar investment objectives and to
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.

<PAGE>

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

The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Morningstar
Inc., independent services 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.

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

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 is entitled to dividends and distributions when and if declared by the
Fund. In the event of liquidation or dissolution of the Fund, each share is
entitled to its pro rata portion of the Fund's assets after all debts and
expenses have been paid. The fiscal year-end of the Fund is December 31. Prior
to February 14, 1997, the Fund was known as Flag Investors Intermediate-Term
Income Fund, Inc.

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

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

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

Annual Meetings

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

Reports

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

Shareholder Inquiries

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

12
- --------------------------------------------------------------------------------
<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
ICC DISTRIBUTORS, INC. DELOITTE & TOUCHE LLP
P.O. Box 7558 117 Campus Drive
Portland, Maine 04101 Princeton, New Jersey 08540

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

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

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

FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND, INC.
NEW ACCOUNT APPLICATION
- --------------------------------------------------------------------------------

Make check payable to "Flag Investors Short-Intermediate
Income Fund, Inc." and mail with this Application to:
Flag Investors Funds
P.O. Box 419663
Kansas City, MO 64141-6663
Attn: Flag Investors Short-Intermediate Income Fund, Inc.

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

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

I enclose a check for $______ payable to "Flag Investors Short-Intermediate
Income Fund, Inc." for the purchase of Class A Shares of the Fund.

Your Account Registration (Please Print)

Existing Account No., if any:

Individual or Joint Tenant

- -------------------------------------------------------
First Name Initial Last Name

- -------------------------------------------------------
Social Security Number

- -------------------------------------------------------
Joint Tenant Initial Last Name

Corporations, Trusts, Partnerships, etc.

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

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

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

- --------------------------------------------------------
For the Benefit of

<PAGE>

Gifts to Minors

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

- --------------------------------------------------------
Minor's Name (only one)

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

Social Security Number of Minor Minor's Date of Birth (Mo./Day/Yr.)

under the ------------------- Uniform Gifts to Minors Act
State of Residence

Mailing Address

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

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

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

Letter of Intent (Optional)

|B) 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 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
<PAGE>

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 [ ] Monthly ($100 minimum) [ ] Quarterly
($250 minimum)
Please attach a voided check.
Subsequent Investments (check one):

- ---------------------------------- -------------------------------------------
Bank Name Depositor's Signature Date

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

Systematic Withdrawal Plan (Optional)

|B) Beginning the month of ---------- , 19- please send me checks on a
monthly or quarterly basis, as indicated below, in the amount of $---------- ,
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: -----------------------------

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

Signature and Taxpayer Certification

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

[ ] 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.

I acknowledge that I am of legal age in the state of my residence. I have
received a copy of the Fund's prospectus. I acknowledge that the telephone
redemption and exchange privileges are automatic and will be 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.

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

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

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

Dealer's Name: ________________________ Dealer Code:_________________________

Dealer's Address:______________________ Branch Code:_________________________

Representative:________________________ Rep. No.:____________________________
- --------------------------

A-2

<PAGE>

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

[GRAPHIC OMITTED]

FLAG INVESTORS

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

Prospectus & Application -- May 1, 1998

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

This mutual fund (the "Fund") seeks 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, certain qualified retirement plans, or investment
advisory affiliates of BT Alex. Brown Incorporated ("BT Alex. Brown"). (See
"How to Buy Institutional Shares.")

TABLE OF CONTENTS
Fund Expenses .............................. 1
Financial Highlights ....................... 2
Investment Program ......................... 3
Investment Restrictions .................... 5
The Fund's Net Asset Value ................. 5
How to Buy Institutional Shares ............ 5
How to Redeem Institutional Shares ......... 6
Telephone Transactions ..................... 6
Dividends and Taxes ........................ 6
Management of the Fund ..................... 7
Investment Advisor ......................... 7
Distributor ................................ 8
Custodian, Transfer Agent and
Accounting Services ..................... 8
Performance Information .................... 8
General Information ........................ 9
Application ................................ A-1

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

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

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.

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

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

FUND EXPENSES

- --------------------------------------------------------------------------------
Shareholder Transaction Expenses:

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

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

Management Fees (net of fee waivers) ........................................ 0.09%*
12b-1 Fees .................................................................. None
Other Expenses .............................................................. 0.36%
-----
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 0.45% of the Institutional Shares' average
daily net assets. Absent fee waivers, Management Fees would be 0.35% and
Total Fund Operating Expenses would be 0.72% of the Institutional Shares'
average daily net assets.

<TABLE>
<S> <C> <C> <C> <C>
Example: 1 year 3 years 5 years 10 years
- -------- ------ ------- ------- --------
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period:* ... $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 above table is to describe the various costs and
expenses that you will bear indirectly when you invest in Institutional Shares.
If you purchase Institutional Shares through a financial institution, you may
be charged separate fees by the financial institution.

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

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

FINANCIAL HIGHLIGHTS

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

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, 1997 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, 1997 which can be obtained
at no charge by calling the Fund at (800) 767-FLAG.

(For a share outstanding throughout each period)

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

<TABLE>
<CAPTION>
For the Year
Ended For the Period
December 31, November 2, 1995(1)
------------------------- through
1997 1996 December 31,1995
----------- ----------- --------------------
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period ............................ $ 10.38 $ 10.58 $ 10.42
------- ------- --------
Income from Investment Operations:
Net investment income ............................................. 0.61 0.59 0.09
Net realized and unrealized gain/(loss) on investments ............ 0.13 ( 0.17) 0.12
------- ------- --------
Total from Investment Operations .................................. 0.74 0.42 0.21

Less Distributions:
Dividends from net investment income and short-term gains ......... ( 0.62) ( 0.62) ( 0.05)
------- ------- --------
Net asset value at end of period .................................. $ 10.50 $ 10.38 $ 10.58
======= ======= ========
Total Return ...................................................... 7.40% 4.20% 12.47%(2)

Ratios to Average Daily Net Assets:
Expenses(3) ....................................................... 0.45% 0.45% 0.45%(2)
Net investment income(4) .......................................... 6.17% 6.35% 6.52%(2)

Supplemental Data:
Net assets at end of period (000) ................................. $32,056 $17,507 $ 2,186
Portfolio turnover rate ........................................... 65% 42% 46%
</TABLE>

- -------------------
(1) Commencement of operations.
(2) Annualized.
(3) Without the waiver of advisory fees, the ratio of expenses to average daily
net assets would have been 0.72%, 0.76% and 0.72% (annualized) for the
years ended December 31, 1997 and 1996 and the period ended December 31,
1995, respectively.
(4) Without the waiver of advisory fees, the ratio of net investment income to
average daily net assets would have been 5.90%, 6.04% and 6.27%
(annualized) for the years ended December 31, 1997 and 1996 and the period
ended December 31, 1995, respectively.

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

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

INVESTMENT PROGRAM

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

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.

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:
<TABLE>
<CAPTION>
Type of Permitted Minimum Rating(1)
Investment S&P(2) Moody's(3)
- -------------------------------------------- -------------- -------------
<S> <C> <C>
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 Interna-
tional Organizations ..................... AAA(4) Aaa(4)
Non-Dollar U.S. Government
Securities ............................... AAA(4) Aaa(4)
Securities of Foreign Corporations ......... AAA(4) Aaa(4)
</TABLE>

<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

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

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

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.

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.

Purchase of When-Issued Securities. The Fund may purchase securities at
their current market value 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 choose to sell the
securities before the settlement date. The value of securities so purchased or
sold is subject to market fluctuation and no interest accrues to the purchaser
during this period.

<PAGE>

Purchasing foreign securities may subject the Fund to additional risks
associated with the holding of property abroad. Such risks include future
political and

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

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

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

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.

THE FUND'S NET ASSET VALUE

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

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

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

<PAGE>

HOW TO BUY INSTITUTIONAL SHARES

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

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

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

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

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

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

Investment Minimums

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

5
- --------------------------------------------------------------------------------
<PAGE>

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

Purchases by Exchange

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

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

Other Information

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

HOW TO REDEEM INSTITUTIONAL SHARES

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

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

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

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

TELEPHONE TRANSACTIONS

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

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

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

DIVIDENDS AND TAXES

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

Dividends and Distributions

Unless you elect otherwise, all income dividends and net capital gains
distributions, if any, will be

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

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

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

Tax Treatment of Dividends and Distributions

The 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 not pay U.S. federal income tax on amounts distributed to shareholders.
Unless you are otherwise exempt, you will pay income or capital gains tax on
the amounts distributed to you, regardless of whether such distributions are
paid in cash or reinvested in additional Institutional Shares.

Capital gains distributions from the Fund are classified as either
short-term, long-term or mid-term depending upon how long the Fund held the
securities it sold to generate the gains. You will be taxed on the
distributions according to the category stipulated by the Fund regardless of
how long you have held your Fund shares. You will be taxed on all other income
distributions as ordinary income. Distributions from the Fund generally will
not qualify for the corporate dividends received deduction.

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

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

You 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 you.

MANAGEMENT OF THE FUND

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

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

<PAGE>

INVESTMENT ADVISOR

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

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.

As compensation for its services for the fiscal year ended December 31,
1997, ICC received a fee (net of fee waivers) equal to 0.09% 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 0.45% of the Institutional Shares' average daily net assets.

7
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------

Portfolio Managers

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

Mr. Randolph has nearly 24 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.

DISTRIBUTOR

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

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

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

CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES

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

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.
<PAGE>

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 your bank
with respect to the account through which your Institutional Shares may be
purchased, although not included in calculations of performance, will reduce
your performance results.

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

GENERAL INFORMATION

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

Description of Shares

The Board of Directors is authorized to establish additional series of
shares of capital stock, each of which would evidence interests in a separate
portfolio of securities, and separate classes of each series of the Fund. The
shares offered by this Prospectus have been designated "Flag Investors
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 another class of shares, "Flag Investors Short-Intermediate Income Fund
Class A Shares." Additional information concerning this class may be obtained
by calling the Fund at (800) 767-FLAG. Different classes of the Fund may be
offered to certain investors and holders of such shares may be entitled to
certain exchange privileges not offered to Institutional Shares. All classes of
the Fund share a common investment objective, portfolio of investments and
advisory fee, but the classes may have different distribution fees or sales
load structures, and accordingly, the net asset value per share of the classes
may differ at times.

Annual Meetings

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

Reports

Shareholder Inquiries

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

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

FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND, INC.
(INSTITUTIONAL SHARES)
NEW ACCOUNT APPLICATION
- --------------------------------------------------------------------------------

Send completed Application by overnight For assistance in completing this
carrier to: Application please call:
Flag Investors Funds 1-800-553-8080,
330 West 9th Street, First Floor Monday through Friday, 8:30 a.m. to
Kansas City, MO 64105 5:30 p.m. (Eastern Time).

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 Name of Individual to Receive
Partnership Correspondence

______________________________________ _____________________________________
Tax ID Number Street

/ / Corporation / / Partnership / / Trust _____________________________________
/ / Non-Profit or Charitable Organization City State Zip
/ / 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

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 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

<PAGE>

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 The amount to be invested
o "For further credit to _________________________________."
(Investor's Fund Account Number)

Distribution Options

Please check appropriate boxes. If none of the options are selected, all
distributions will be reinvested in additional Institutional Shares of the
Fund.
Income Dividends 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
<PAGE>

Acknowledgment, Certificate and Signature

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

By signing this Application, I hereby certify under penalties of perjury that
the information on this Application is complete and correct and that as required
by federal law: (Please check applicable boxes)
/ / U.S. Citizen/Taxpayer:
/ / I certify that (1) the number shown above on this form is the correct
Tax ID Number and (2) I am not subject to any backup withholding either
because (a) I am exempt from backup withholding, or (b) I have not been
notified by the Internal Revenue Service ("IRS") that I am subject to
backup withholding as a result of a failure to report all interest or
dividends, or (c) the IRS has notified me that I am no longer subject to
backup withholding.
/ / If no Tax ID Number has been provided above, I have applied, or intend
to apply, to the IRS for a Tax ID Number, and I understand that if I do
not provide such number to the Transfer Agent within 60 days of the date
of this Application or if I fail to furnish my correct Tax ID Number, I
may be subject to a penalty and a 31% backup withholding on distributions
and redemption proceeds. (Please provide your Tax ID Number on IRS Form
W-9. You may request such form by calling the Transfer Agent at
800-553-8080).
/ / Non-U.S. Citizen/Taxpayer: Indicated country of residence for tax
purposes:______________________________
Under penalties of perjury, I certify that I am not a U.S. citizen or
resident and I am an exempt foreign person as defined by the Internal Revenue
Service.

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

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

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

Person(s) Authorized to Conduct Transactions

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

__________________________________ ______________________________________
Name/Title Signature Date

<PAGE>

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

* If this space is left blank, any one Authorized Person is authorized to give
instructions and make inquiries. Verbal instructions will be accepted from
any one Authorized Person. Written instructions will require signatures of
the number of Authorized Persons indicated in this space.

Certificate of Authority

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

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

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

Witness my hand and seal on behalf of the investor:

this __ day of ______, 199__ Secretary_________________________________

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

________________________________________________________________________________
Signature and title Date

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

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

________________________________________________________________________________
Signature and title Date

A-2
<PAGE>

FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND, INC.

(Institutional Shares)

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

Distributor Independent Auditors
ICC DISTRIBUTORS, INC. DELOITTE & TOUCHE LLP
P.O. Box 7558 117 Campus Drive
Portland, Maine 04101 Princeton, New Jersey 08540

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

Transfer Agent
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202
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 THE FUND, ONE SOUTH STREET, BALTIMORE,
MARYLAND 21202, OR BY CALLING (800) 767-FLAG.

Statement of Additional Information Dated: May 1, 1998

Relating to the Prospectuses Dated:
May 1, 1998 -- Relating to the Flag Investors Class A Shares
and the Flag Investors Institutional Shares

<PAGE>

TABLE OF CONTENTS

Page
-----
1. General Information and History................................. 1

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

3. Valuation of Shares and Redemption.............................. 5

4. Federal Tax Treatment of Dividends and
Distributions................................................. 6

5. Management of the Fund.......................................... 8

6. Investment Advisory and Other Services......................... 13

7. Distribution of Fund Shares.................................... 14

8. Brokerage...................................................... 17

9. Capital Stock.................................................. 18

10. Semi-Annual Reports............................................ 19

11. Custodian, Transfer Agent and Accounting Services ............. 19

12. Independent Auditors .......................................... 19

13. Legal Matters.....................................................20

14. Performance Information........................................ 20

15. Control Persons and Principal Holders of
Securities................................................... 22

16. Financial Statements........................................... 22

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 two
classes of shares: Flag Investors Short-Intermediate Income Fund Class A Shares
(the "Flag Investors Class A Shares") and Flag Investors Short-Intermediate
Income Fund Institutional Shares (the "Flag Investors Institutional 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 two separate prospectuses for the Fund's Shares: one for the
Flag Investors Class A Shares, one for the Flag Investors Institutional 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, from Participating Dealers and Shareholder
Servicing Agents. As used herein, the term "Prospectus" describes information
common to the prospectuses of the two 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.

Under a license agreement dated May 10, 1991 between the Fund and Alex.
Brown Incorporated (now BT 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.

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

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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 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

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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.

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.

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").

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. 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

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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.

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

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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.

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, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.

The Fund may enter into agreements that allow a third party, as agent
for the Fund, to accept orders from its customers up until the Fund's close of
business which is ordinarily 4:00 p.m. (Eastern Time). So long as a third party
receives an order prior to the Fund's close of business, the order is deemed to
have

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been received by the Fund and, accordingly, may receive the NAV computed at the
close of business that day. These "late day" agreements are intended to permit
shareholders placing orders with a third party to place orders up to the same
time as other shareholders.

Redemption

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

Under normal circumstances, the Fund will redeem shares by check or wire
transfer of funds. However, if the Board of Directors determines that it would
be in the best interests of the remaining shareholders to make payment of the
redemption price in whole or in part by a distribution 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 "The Fund's Net Asset Value" 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 derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans and gains
from the sale or other disposition of stock, securities or foreign currencies
and other income (including, but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement").

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

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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).

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 at a rate of 20% or at a rate of 28%, depending upon the holding
period of the Fund in the underlying asset generating the net capital gain and
regardless of the length of time the shareholder 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 eighteen months, will be mid-term if the Share is held for more than twelve
but not more than eighteen months and otherwise will be short-term capital
gains. 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.

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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 to avoid excise tax liability.

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

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

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

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

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

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

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

HARRY WOOLF, President (8/12/23)
Institute for Advanced Study, Olden Lane, Princeton, New Jersey 08540.
Professor-at-Large Emeritus, Institute for Advanced Study; Director, ATL
and Spacelabs Medical Corp. (medical equipment) and Family Health
International (non-profit research and education); Director, Research
America (non-profit medical research); Formerly, Trustee, Reed College
(education);

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Trustee, Rockefeller Foundation; Director, Merrill Lynch Cluster C
Funds (registered investment companies) and Director, Flag Investors/ISI
and BT Alex. Brown Family of funds.

JOSEPH A. FINELLI, Treasurer (1/24/57)
Vice President, BT Alex. Brown 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.

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

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

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

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

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

With the exception of the Fund's President, officers of the Fund receive
no direct remuneration in such capacity from the Fund. Officers and Directors of
the Fund who are officers or directors of BT Alex. Brown or its affiliates may
be considered to have received remuneration indirectly. As compensation for his
or her services as Director, each Director who is not an "interested person" of
the Fund (as defined in the Investment Company Act) (an "Independent Director")
and Mr. Woolf 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, 1997, Independent Directors' fees attributable to the assets of the
Fund totaled approximately $4,976.

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

-10-

<PAGE>

COMPENSATION TABLE

- -------------------------------------------------------------------------------------------------------------------------------
Name of Person, Position Aggregate Compensation Pension or Retirement Total Compensation
From the Fund Payable to Benefits Accrued As From the Fund
Directors for the Fiscal Year Part of Fund Expenses and Fund Complex
Ended December 31, 1997 Payable to Directors
for the Fiscal Year
Ended December 31, 1997

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

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

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

James J. Cunnane, Director $465 (3) (4) $39,000 for service on 13
Boards in the Fund Complex

John F. Kroeger, Director $584 (4) $49,000 for service on 13
Boards in the Fund Complex

Louis E. Levy, Director $465 (3) (4) $39,000 for service on 13
Boards in the Fund Complex

Eugene J. McDonald, Director $465 (3) (4) $39,000 for service on 13
Boards in the Fund Complex

Rebecca W. Rimel, Director $475 (3) (4) $39,000 for service on 11
Boards in the Fund Complex (5)

Carl W. Vogt, Esq., Director $480 (3) (4) $39,000 for service on 11
Boards in the Fund Complex (5)

</TABLE>

(1) A Director who is an "interested person" as defined in the Investment
Company Act.
(2) Retired on September 1, 1997.
(3) Of the amounts payable to Messrs. Cunnane, Levy, McDonald and Vogt and
Ms. Rimel, $465, $0, $465, $480, and $475 respectively, was
deferred pursuant to a deferred compensation plan.
(4) The Fund Complex has adopted a Retirement Plan for eligible Directors, as
described below. The actuarially computed pension expense for the Fund for
the year ended December 31, 1997 was approximately $4,620.
(5) Ms. Rimel and Mr. Vogt receive proportionately higher compensation from
each fund for which they serve as a director.

The Fund Complex has adopted a Retirement Plan (the "Retirement Plan")
for Directors who are not employees of the Fund, the 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, 1994 and Mr. Woolf,
who have qualified for the Retirement Plan by serving thirteen years and
fourteen years, respectively, as Directors in the Fund Complex and each of whom
will be paid a quarterly fee of $4,875 by the Fund Complex for the rest of his
life. Such fees are allocated to each fund in the Fund Complex based upon the
relative net assets of such fund to the Fund Complex.

Set forth in the table below are the estimated annual benefits payable
to a Participant upon retirement assuming various years of service and payment
of a percentage of the fee earned by such Participant in his or her last year of
service, as described above. The approximate credited years of

-11-
<PAGE>

service at December 31, 1997 was as follows: for Mr. Cunnane, 3 years; for Mr.
Kroeger, 15 years; for Mr. Levy, 3 years; for Mr. McDonald, 5 years; for Ms.
Rimel, 2 years; and for Mr. Vogt, 2 years.

Years of Service Estimated Annual Benefits Payable By Fund Complex
Upon Retirement -------------------------------------------------------------
- ---------------
Chairman of Audit Committee Other Participants
--------------------------- -------------------
<S> <C> <C>
6 years $4,900 $3,900
7 years $9,800 $7,800
8 years $14,700 $11,700
9 years $19,600 $15,600
10 years or more $24,500 $19,500
</TABLE>

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

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

-12-
<PAGE>

6. INVESTMENT ADVISORY AND OTHER SERVICES

On June 17, 1997 the Board of Directors of the Fund, including a
majority of the Independent Directors, approved an Investment Advisory Agreement
between the Fund and Investment Company Capital Corp. ("ICC" or the "Advisor")
which is described in greater detail below. The Investment Advisory Agreement
was approved by a vote of shareholders of the Fund on August 14, 1997. ICC is an
indirect subsidiary of Bankers Trust Corporation. ICC is also the investment
advisor to other funds in the Flag Investors family of funds and BT Alex. Brown
Cash Reserve Fund, Inc.

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 0.70% of the Flag Investors Class A Shares'
average daily net assets and 0.45% of the Flag Investors Institutional Shares'
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,
- ---------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Contractual Fee $268,092 $245,318 $252,372
- ---------------------------------------------------------------------------------------------------------------
Less amount waived (203,590) (201,059) (162,943)
- ---------------------------------------------------------------------------------------------------------------
Fee after waivers $ 64,502* $ 44,259* $ 89,429*
- ---------------------------------------------------------------------------------------------------------------
</TABLE>

- ---------------
* Absent fee waivers for the fiscal years ended December 31, 1997, December
31, 1996 and December 31, 1995, the Fund's Total Operating Expenses would
have been 0.96%, 0.99% and 0.93%, 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 Independent
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 16, 1997. 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. An affiliate of ICC provides custody services. (See
"Custodian, Transfer Agent and Accounting Services.")

-13-

<PAGE>

7. DISTRIBUTION OF FUND SHARES

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

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

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

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

In addition, the Fund may enter into Shareholder Servicing Agreements
with certain financial institutions, such as BT Alex. Brown and certain banks,
to act as Shareholder Servicing Agents, pursuant to which ICC Distributors will
allocate a portion of its distribution fee as compensation for such financial
institutions' ongoing shareholder services. The Fund may also enter into
Shareholder Servicing Agreements pursuant to which the Advisor, the Distributor,
or their respective affiliates, will provide compensation out of their own
resources for ongoing shareholder services. Although banking laws and
regulations prohibit banks from distributing shares of open-end investment

-14-

<PAGE>

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.

As compensation for providing distribution services for the Flag
Investors Class A Shares as described above, ICC Distributors receives an annual
fee, paid monthly, equal to 0.25% of the average daily net assets of the Flag
Investors Class A Shares. ICC Distributors expects to allocate most of its
annual fee to Participating Dealers and Shareholder Servicing Agents. ICC
Distributors receives no compensation for distributing the Flag Investors
Institutional Shares.

As compensation for providing distribution and shareholder services to
the Fund for the last three fiscal years, the Fund's distributor received fees
in the following amounts:

Fiscal Year Ended December 31,

Class 1997 1996 1995
------ ---- ---- -----
Class A 12b-1 Fee $136,962(1) $151,753(2) $179,666(2)

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

(1) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $93,060 and ICC Distributors, the Fund's distributor
effective August 31, 1997, received $43,902.

(2) Fees received by Alex. Brown, the Fund's distributor for the fiscal years
ended December 31, 1996 and December 31, 1995.

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 ICC
Distributors for distribution and other shareholder servicing assistance as set
forth in the Distribution Agreement, and ICC Distributors is authorized to make
payments out of its fee to Participating Dealers and Shareholder Servicing
Agents. The Flag Investors Class A Plan was most recently approved by the Fund's
Board of Directors, including a majority of the Independent Directors, on
September 16, 1997. The Flag Investors Class A Plan 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
Independent 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 Distribution Agreement without the approval of the
shareholders of the Fund. The Flag Investors Class A Plan may be terminated at
any time upon sixty days' notice, without penalty, by the vote of a majority of
the Fund's Independent Directors or by a vote of a majority of the outstanding
Shares (as defined under "Capital Stock").

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 ICC Distributors pursuant to the Distribution Agreement and to
broker-dealers pursuant to Sub-Distribution Agreements. Such reports shall be
made by the persons authorized to make such payments. In addition, during the
continuance of the Flag Investors Class A Plan, the selection and nomination of
the Fund's Independent Directors shall be committed to the discretion of the
Independent Directors then in office.

Under the Plan, amounts allocated to Participating Dealers and
Shareholder Servicing Agents may not exceed amounts payable to ICC Distributors
under the Plan with respect to shares held by or on behalf of customers of such
entities. Payments under the Plan are made as described above regardless of ICC
Distributors' actual cost of providing distribution services and may be used to
pay ICC Distributors' overhead expenses. If the cost of providing distribution
services to the Fund in connection with the sale of the Flag Investors Class A
Shares is less than 0.25% of the Flag Investors Class A Shares' average daily
net assets for any period, the unexpended portion of the distribution fee may be
retained by ICC Distributors. The Plan does not provide for any charges to the
Fund for excess amounts expended by ICC Distributors and, if the Plan is
terminated in accordance with its terms, the obligation of the Fund to make
payments to ICC Distributors pursuant to the Plan will cease and the Fund will
not be required to make any payments past the date the Distribution Agreement
terminates with respect to the class of the Fund. In return for payments
received pursuant to the Plan for the last three years, the fund's distributor
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.

The Fund's distributor received commissions on the sale of Class A
Shares (of which only a portion was retained) in the following amounts:
<TABLE>
<CAPTION>

Fiscal Year Ended December 31,
------------------------------
Class 1997 1996 1995
----- ---- ---- ----

Received Retained Received Retained Received Retained
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>

Class A $13,144(1) $6,190(2) $26,849(3) $24,060(3) $11,196(3) $11,088(3)
Commissions ======== ======= ======== ======== ======== ========
</TABLE>

- -------------
(1) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $6,926 and ICC Distributors, the Fund's distributor
effective August 31, 1997 received $6,188.
(2) Of commissions received, Alex. Brown retained $6,190 and ICC Distributors
retained $0, respectively.
(3) By Alex. Brown, the Fund's distributor for the fiscal years ended
December 31, 1996 and December 31, 1995.

-16-

<PAGE>

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 the Fund and its Shares with the SEC and various states and other
jurisdictions (including filing fees, legal fees and disbursements of counsel);
the costs and expenses of printing, including typesetting and distributing
prospectuses and statements of additional information of the Fund and
supplements thereto to the Fund's shareholders; all expenses of shareholders'
and Directors' meetings and of preparing, printing and mailing proxy statements
and reports to shareholders; fees and travel expenses of Directors and Director
members of any advisory board or committee; all expenses incident to the payment
of any dividend, distribution, withdrawal or redemption, whether in Shares or in
cash; charges and expenses of any outside service used for pricing of the
Shares; fees and expenses of legal counsel, including counsel to the Independent
Directors, and of independent 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 ICC Distributors 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, its affiliates and ICC Distributors.

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

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

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 affiliates of
the Advisor higher commissions than other brokers might have charged on
brokerage transactions for the Fund for brokerage or research services. The
allocation of orders among broker-dealers and the commission rates paid by the
Fund will be reviewed periodically by the Board of Directors. For the fiscal
years ended December 31, 1997, December 31, 1996 and December 31, 1995, ICC
directed no brokerage transactions to broker-dealers and paid no related
commissions because of research services provided to the Fund.

-17-

<PAGE>

Subject to the above considerations, the Board of Directors has
authorized the Fund to effect portfolio transactions, on an agency basis,
through affiliates of the Advisor. At the time of such authorization, the Board
adopted certain policies and procedures incorporating the standards of Rule
17e-1 under the Investment Company Act, which requires that the commissions paid
to affiliates of the Advisor must be "reasonable and fair compared to the
commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
during a comparable period of time." Rule 17e-1 also contains requirements for
the review of such transactions by the Board of Directors and requires ICC to
furnish reports and to maintain records in connection with such reviews. For the
period from September 1, 1997 through December 31, 1997, the Fund did not pay
brokerage commissions to BT Alex. Brown or its affiliates. For the period from
January 1, 1997 through August 31, 1997 and for the fiscal years ended December
31, 1996 and December 31, 1995, the Fund did not pay 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,
1997, the Fund held a 6.25% repurchase agreement issued by Goldman Sachs & Co.
valued at $6,585,000. 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 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

-18-

<PAGE>

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

Bankers Trust Company ("Bankers Trust") serves as custodian of the
Fund's investments. Bankers Trust receives such compensation from the Fund for
its services as custodian as may be agreed to from time to time by Bankers Trust
and the Fund. For the period from September 22, 1997 to December 31, 1997,
Bankers Trust accrued $4,671 as compensation for providing custody services to
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 $15.62
per account per year, plus reimbursement for out-of-pocket expenses incurred in
connection therewith. For the fiscal year ended December 31, 1997, such fees
totaled $31,985.

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

Average Net Assets
Accounting Fee Incremental Annual
------------------ ------------------
$ 0 - $ 10,000,000 $15,000 (fixed fee)
$ 10,000,000 - $ 25,000,000 0.080%
$ 25,000,000 - $ 50,000,000 0.077%
$ 50,000,000 - $ 75,000,000 0.050%
$ 75,000,000 - $ 100,000,000 0.030%
$100,000,000 - $ 500,000,000 0.020%
$500,000,000 - $1,000,000,000 0.008%
over $1,000,000,000 0.003%

In addition, the Fund reimburses ICC for certain out-of-pocket expenses.
For the fiscal year ended December 31, 1997, ICC received accounting fees of
$59,200.

12. INDEPENDENT AUDITORS

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

-19-

<PAGE>

13. LEGAL MATTERS

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

14. PERFORMANCE INFORMATION

For purposes of quoting and comparing the performance of the Fund to
that of other open-end diversified management investment companies and to stock
or other relevant indices in advertisements or in certain reports to
shareholders, performance will 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:

P(1 + T)n = 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). In calculating the ending redeemable value,
the maximum sales load is deducted from the initial $1,000 payment and all
dividends and distributions by the Fund are assumed to have been reinvested at
net asset value as described in the 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.

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

-20-

<PAGE>

One-Year Period Ended Five-Year Period Ended Inception Through
December 31, 1997 December 31, 1997 December 31, 1997
------------------- ------------------- ------------------
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 $1,055.22 5.52% $1,336.08 5.97% $1,550.26 6.83%
May 31, 1991 +
Flag Investors Institutional $1,074.00 7.40% N/A N/A $1,141.68 6.32%
November 2, 1995 +
- ---------------
</TABLE>

+ Inception Date.

The Fund may also from time to time include in such advertising total
return figures that are not calculated according to the formula set forth above
to compare more accurately the Fund's performance with other measures of
investment return. For example, in comparing the Fund's total return with data
published by Lipper Analytical Services, Inc., 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, 1997 was
5.62% and 5.99%, 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 result and then doubling the
difference. 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

-21-

<PAGE>

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 65% for the fiscal year ended December 31, 1997 and 42% for
the fiscal year ended December 31, 1996. 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.

15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

To Fund management's knowledge, the following persons owned of record or
beneficially 5% or more of the Fund's outstanding Shares, as of April 17, 1998:

Name and Address % Ownership

Chase Manhattan Bank TR. 5.78%
Wells Aluminum Corp.
Master Trust 29400333
770 Broadway
New York, NY 10003-9522

BT Alex. Brown Incorporated* 7.93%
FBO 201-95002-10 and 201-95002-28
P.O. Box 1346
Baltimore, MD 21203-1346

BT Alex. Brown Incorporated* 24.80%
FBO 250-10788-16
P.O. Box 1346
Baltimore, MD 21203-1346

* As of such date, BT 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 23, 1998.

16. FINANCIAL STATEMENTS
(See next page.)

-22-

<PAGE>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
Statement of Net Assets December 31, 1997

<TABLE>
<CAPTION>
S&P Par Market Value
Security Rating* (000) (Note 1)
- -------------------------------------------------------------------------------------
<S> <C>
CORPORATE BONDS--27.8%
Banc One Columbus
7.375%, 12/1/02 AA- $1,000 $ 1,043,750
Bear Stearns Company Incorporated
6.50%, 8/1/02 A 2,000 2,015,000
Block Financial Corporation
6.75%, 11/1/04 A 2,000 2,032,500
Countrywide Home Loan
7.26%, 5/10/04 A 2,000 2,092,500
First Maryland Bancorp
7.20%, 7/1/07 A- 2,000 2,090,000
Ford Motor Credit
6.05%, 3/31/98 A+ 2,000 2,000,300
General Motors Acceptance Corporation
5.625%, 2/15/01 A- 1,000 987,500
International Lease Finance
6.43%, 9/15/00 A+ 2,000 2,015,000
Norwest Corporation
7.68%, 5/10/02 AA- 1,048 1,054,550
Pacific Gas & Electric
6.25%, 3/1/04 AA- 2,000 2,010,000
Philip Morris Cos., Inc.
6.95%, 6/1/06 A 2,000 2,050,000

Sears Roebuck Acceptance Corporation
6.34%, 9/19/00 A- 2,190 2,203,687
-----------
Total Corporate Bonds
(Cost $21,390,553) 21,594,787
-----------

U.S. GOVERNMENT AGENCY SECURITIES--25.5%

Federal Home Loan Banks Board - 7.7%
Debentures
7.151%, 9/13/05 (Callable 3/13/98) AAA 3,000 2,999,880
6.900%, 4/28/00 (Callable 4/28/98) AAA 3,000 3,011,550

Federal National Mortgage Assoc. - 7.1%
Debentures
6.250%, Due 8/12/03 AAA 3,500 3,494,785
7.120%, Due 4/19/02 AAA 2,000 2,023,820

Mortgage-Backed Securities - 9.4%
Federal Home Loan Mortgage Corp.
Pool #G10049, 8.00%, 10/1/07 AAA 844 871,922
</TABLE>

-23-
<PAGE>

FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
Statement of Net Assets (concluded) December 31, 1997

<TABLE>
<CAPTION>
S&P Par Market Value
Security Rating* (000) (Note 1)
- --------------------------------------------------------------------------------
<S> <C>
U.S. GOVERNMENT AGENCY SECURITIES (concluded)
Mortgage-Backed Securities (concluded)
Federal Home Loan Mortgage Corp.
Pool #G10543, 6.00%, 6/1/11 AAA $2,649 $ 2,607,868
Pool #M19094, 7.00%, 2/1/98 AAA 792 803,591
Federal National Mortgage Assoc.
Pass-through
Pool #326570, 7.00%, Due 2/1/08 AAA 2,980 3,025,905

Guaranteed Export Trust - 1.3%
8.187%, 12/15/04 AAA 913 971,339
-----------
Total U.S. Government Agency Securities
(Cost $19,492,391) 19,810,660
-----------

U.S. TREASURY SECURITIES--16.9%
U.S. Treasury Notes
5.875%, 2/15/00 AAA 1,000 1,004,150
6.250%, 2/15/03 AAA 5,000 5,115,700
5.750%, 8/15/03 AAA 2,000 2,001,720
5.750%, 10/31/03 AAA 5,000 5,005,800
-----------
Total U.S. Treasury Securities
(Cost $12,751,849) 13,127,370
-----------

ASSET-BACKED SECURITIES--17.9%
Aesop Funding II Limited Liability Company
6.22%, 10/20/01 AAA 2,500 2,514,500
California Infrastructure Pacific Gas &
Electric, 97-1-A4
6.16%, 6/25/03 AAA 2,000 2,002,109
FHLMC Structured Pass-through, Series T-9
6.43%, 2/25/13 AAA 1,500 1,469,590
Green Tree Financial Corporation
8.25%, 1/15/20 NR** 3,000 3,190,980
Metris Master Trust
6.87%, 10/20/05 AAA 3,000 3,084,492
Premier Auto Trust, 94-1-A3
4.75%, 2/2/00 AAA 54 53,813
Premier Auto Trust, 96-3-A4
6.75%, 11/6/00 AAA 1,500 1,529,130
-----------
Total Asset-Backed Securities
(Cost $13,697,185) 13,844,614
-----------
</TABLE>

-24-

<PAGE>

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

<TABLE>
<CAPTION>
S&P Par Market Value
Security Rating* (000) (Note 1)
- ------------------------------------------------------------------------------------
<S> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS--3.2%

Federal Home Loan Mortgage Corp. - 2.1%
Multi-Class Mortgage Certificates
Series 106-F, 8.50%, 12/15/20 AAA $1,615 $ 1,647,006

Federal National Mortgage Assoc. - 1.1%
Multi-Class Mortgage Certificates
Series 88-18-B, 9.40%, 7/25/03 AAA 125 131,027
Series 91-11-G, 7.00%, 11/25/19 AAA 705 703,859
-----------
Total Collateralized Mortgage Obligations
(Cost $2,468,052) 2,481,892
-----------

REPURCHASE AGREEMENT--8.5%
Goldman Sachs & Co., 6.25%
Dated 12/31/97, to be repurchased on 1/2/98, collateralized by U.S. Treasury
Bonds with a market value of $6,716,883.
(Cost $6,585,000) NR 6,585 6,585,000
----------
Total Investment in Securities--99.8%
(Cost $76,385,030)*** 77,444,323
Other Assets in Excess of Liabilities, Net--0.2% 181,175
-----------
Net Assets--100.0% $77,625,498
===========

Net Asset Value and Redemption Price Per:
Class A Share
($45,569,338 / 4,386,630 shares outstanding) $10.39
======
Institutional Share
($32,056,160 / 3,052,560 shares outstanding) $10.50
======
MAXIMUM OFFERING PRICE PER:
Class A Share ($10.39 / 0.985) $10.55
======

Institutional Share $10.50
======
</TABLE>

- ----------

* The Standard & Poor's rating indicated is believed to be the most recent
rating available as of December 31, 1997. The U.S. Government Agency
Securities and U.S. Treasury Securities are assumed to have AAA ratings
because they are backed by the full faith and credit of the U.S.
government. These ratings have not been audited by Deloitte & Touche LLP.
** Although this holding is not rated by S&P, it is rated Aaa by Moody's and
AAA by Fitch.
*** Also aggregate cost for federal tax purposes.

See Notes to Financial Statements.

-25-
<PAGE>

FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
Statement of Operations

For the Year Ended
December 31,
- --------------------------------------------------------------------------------
1997
Investment Income (Note 1):
Interest $5,072,268
----------
Expenses:
Investment advisory fee (Notes 2 and 7) 268,092
Distribution fee (Note 2) 136,962
Legal 76,448
Accounting fee (Note 2) 59,200
Transfer agent fee (Note 2) 31,985
Registration fees 31,620
Printing and postage 26,951
Audit 25,025
Custodian fee (Note 2) 16,089
Directors' fees 4,976
Pricing fee 4,820
Miscellaneous 2,309
Insurance 745
----------
Total expenses 685,222

Less: Fees waived (Note 2) (203,590)
----------
Net expenses 481,632
----------
Net investment income 4,590,636
----------
Realized and unrealized gain/(loss) on investments (Note 1):
Net realized gain from security transactions 95,306
Change in unrealized appreciation
or depreciation of investments 680,823
----------
Net gain on investments 776,129
----------
Net increase in net assets resulting from operations $5,366,765
==========

See Notes to Financial Statements.

-26-

<PAGE>

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

Statements of Changes in Net Assets

For the Year Ended December 31,
- --------------------------------------------------------------------------------
1997 1996
Increase/(Decrease) in Net Assets:
Operations:
Net investment income $ 4,590,636 $ 4,307,970
Net gain/(loss) from security transactions 95,306 (141,613)
Change in unrealized appreciation or
depreciation of investments 680,823 (1,267,527)
------------ ------------
Net increase in net assets resulting
from operations 5,366,765 2,898,830
------------ ------------
Dividends to Shareholders From:
Net investment income:
Class A Shares (3,165,854) (3,528,967)
Institutional Shares (1,359,289) (602,635)
------------ ------------
Total distributions (4,525,143) (4,131,602)
------------ ------------
Capital Share Transactions (Note 3):
Proceeds from sale of shares 23,594,729 24,144,316
Value of shares issued in reinvestment of
dividends 2,514,042 2,641,312
Cost of shares repurchased (25,416,223) (18,763,222)
------------ ------------
Increase in net assets derived from
capital share transactions 692,548 8,022,406
------------ ------------
Total increase in net assets 1,534,170 6,789,634

Net Assets:
Beginning of year 76,091,328 69,301,694
------------ ------------
End of year $ 77,625,498 $ 76,091,328
============ ============

See Notes to Financial Statements.

-27-
<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,
- --------------------------------------------------------------------------------
1997

Per Share Operating Performance:
Net asset value at beginning of year $ 10.28
-------
Income from Investment Operations:
Net investment income 0.61
Net realized and unrealized gain/(loss) on investments 0.10
-------
Total from Investment Operations 0.71
Less Distributions:
Distributions 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 $ 10.39
=======
Total Return(1) 7.13%
Ratios to Average Daily Net Assets:
Expenses(2) 0.70%
Net investment income(3) 5.92%
Supplemental Data:
Net assets at end of year (000) $45,569
Portfolio turnover rate 65%

- ----------
(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 0.96%, 0.99%, 0.93%, 0.84% and
0.85% for the years ended December 31, 1997, 1996, 1995, 1994 and 1993,
respectively.
(3) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 5.66%, 5.83%, 5.77%,
5.43% and 5.28% for the years ended December 31, 1997, 1996, 1995, 1994 and
1993, respectively.

-28-

<PAGE>

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

<TABLE>
<CAPTION>
For the Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of year $ 10.48 $ 9.62 $ 10.57 $ 10.37
------- ------- ------- -------
Income from Investment Operations:
Net investment income 0.63 0.62 0.57 0.57
Net realized and unrealized gain/(loss) on investments (0.23) 0.84 (0.92) 0.34
------- ------- ------- -------
Total from Investment Operations 0.40 1.46 (0.35) 0.91
Less Distributions:
Distributions from net investment income
and short-term gains (0.60) (0.60) (0.57) (0.69)
Return of capital -- -- (0.03) --
Distributions from net realized long-term gains -- -- -- (0.02)
------- -------- ------- -------
Total distributions (0.60) (0.60) (0.60) (0.71)
------- -------- ------- -------
Net asset value at end of year $ 10.28 $ 10.48 $ 9.62 $ 10.57
======= ======== ======= =======
Total Return(1) 4.04% 15.43% (3.32)% 8.98%
Ratios to Average Daily Net Assets:
Expenses(2) 0.70% 0.70% 0.70% 0.70%
Net investment income(3) 6.11% 6.00% 5.57% 5.43%
Supplemental Data:
Net assets at end of year (000) $58,584 $67,116 $78,789 $112,520
Portfolio turnover rate 42% 46% 50% 86%
</TABLE>

See Notes to Financial Statements.

-29-
<PAGE>

FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
Financial Highlights--Institutional Shares
(For a share outstanding throughout each period)

<TABLE>
<CAPTION>
For the Period
November 2,
For the Year Ended 1995(1) through
December 31, December 31,
- -----------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value at
beginning of period $ 10.38 $ 10.58 $10.42
------- ------- ------
Income from Investment Operations:
Net investment income 0.61 0.59 0.09
Net realized and unrealized
gain/(loss) on investments 0.13 (0.17) 0.12
------- ------- ------
Total from Investment Operations 0.74 0.42 0.21
Less Distributions:
Distributions from net investment
income and short-term gains (0.62) (0.62) (0.05)
------- ------- ------
Net asset value at end of period $ 10.50 $ 10.38 $10.58
======= ======= ======
Total Return 7.40% 4.20% 12.47%(2)
Ratios to Average Daily Net Assets:
Expenses(3) 0.45% 0.45% 0.45%(2)
Net investment income(4) 6.17% 6.35% 6.52%(2)
Supplemental Data:
Net assets at end of period (000) $32,056 $17,507 $2,186
Portfolio turnover rate 65% 42% 46%
</TABLE>

- ----------
(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 0.72%, 0.76% and 0.72%
(annualized) for the years ended December 31, 1997 and 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 5.90%, 6.04% and 6.27%
(annualized) for the years ended December 31, 1997 and 1996 and the period
ended December 31, 1995, respectively.

See Notes to Financial Statements.

-30-

<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"), formerly
Flag Investors Intermediate-Term Income Fund, Inc., was organized as a Maryland
Corporation on April 16, 1990 and commenced operations May 13, 1991. The Fund is
registered under the Investment Company Act of 1940 as a diversified, open-end
investment management company. It is designed to provide a high level of current
income consistent with preservation of principal within an intermediate-term
maturity structure.

The Fund consists of two share classes: Class A Shares, which commenced May
13, 1991, and Institutional Shares, which commenced November 2, 1995.

The Class A Shares have a 1.50% maximum front-end sales charge and a 0.25%
distribution fee. The Institutional Shares have neither a front-end sales charge
nor a distribution fee.

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

A. SECURITY VALUATION--The Fund values a debt security based on
quotations provided by a pricing service, which uses transactions on
bonds, quotations from bond dealers, market transactions in comparable
securities and various relationships between securities to determine
value. The Fund values a portfolio security that is primarily traded
on a national exchange by using the last sale price reported for the
day. When a market quotation is unavailable, the Investment Advisor
determines a fair value using procedures that the Board of Directors
establishes and monitors. The Fund values short-term obligations with
maturities of 60 days or less at amortized cost.

B. REPURCHASE AGREEMENTS--The Fund may enter into tri-party repurchase
agreements with broker-dealers and domestic banks. A repurchase
agreement is a short-term investment in which the Fund buys a debt
security that the broker agrees to repurchase at a set time and price.
The third party, which is the broker's custodial bank, holds the

-31-

<PAGE>

FLAG INVESTORS SHORT-INTERMDIATE INCOME FUND
- --------------------------------------------------------------------------------

NOTES TO FINANCIAL STATEMENT (CONTINUED)

NOTE 1--concluded

collateral in a separate account until the repurchase agreement
matures. The agreement ensures that the collateral's market value,
including any accrued interest, is sufficient if the broker defaults.
The Fund's access to the collateral may be delayed or limited if the
broker defaults and the value of the collateral declines or if the
broker enters into an insolvency proceeding.

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

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

D. SECURITY TRANSACTIONS, INVESTMENT INCOME, DISTRIBUTIONS AND OTHER--The
Fund uses the trade date to account for security transactions and the
specific identification method for financial reporting and income tax
purposes to determine the cost of investments sold or redeemed.
Interest income is recorded on an accrual basis and includes the pro
rata scientific method for amortization of premiums and accretion of
discounts when appropriate. Income and common expenses are allocated
to each class based on its respective average net assets. Class
specific expenses are charged directly to each class. 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 different tax treatments of
dividends declared.

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<PAGE>

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

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

Investment Company Capital Corp. ("ICC"), a subsidiary of Bankers Trust New
York Corporation, is the Fund's investment advisor. As compensation for its
advisory services, the Fund pays ICC an annual fee. This fee is based on the
Fund's average daily net assets and is calculated daily and paid monthly at the
following annual rates: 0.35% of the first $1 billion, 0.30% of the next $500
million and 0.25% of the amount over $1.5 billion.

ICC has agreed to reduce its aggregate fees so that ordinary Fund expenses
for any fiscal year do not exceed 0.70% of the Class A Shares' average daily net
assets and 0.45% of the Institutional Shares' average daily net assets. For the
year ended December 31, 1997, ICC waived fees of $203,590.

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

As compensation for its accounting services, the Fund pays ICC an annual
fee that is calculated daily and paid monthly from the Fund's average daily net
assets. The Fund paid ICC $59,200 for accounting services for the year ended
December 31, 1997.

As compensation for its transfer agent services, the Fund pays ICC a per
account fee that is calculated and paid monthly. The Fund paid ICC $31,985 for
transfer agent services for the year ended December 31, 1997.

Effective September 22, 1997, Bankers Trust Company, a subsidiary of
Bankers Trust New York Corporation, became the Fund's custodian. Prior to
September 22, 1997, PNC Bank served as the Fund's custodian. From September 22,
1997 to December 31, 1997, the Fund accrued $4,671 in custody expenses.

As compensation for providing distribution services, the Fund pays ICC
Distributors, Inc. ("ICC Distributors"), which is not related to ICC, an annual
fee that is calculated daily and paid monthly. This fee is paid at an annual
rate equal to 0.25% of the Class A Shares' average daily net assets. Prior to
September 1, 1997, Alex. Brown & Sons Incorporated served as the Fund's
distributor for the same compensation and on substantially the same terms as ICC
Distributors. For the year ended December 31, 1997, distribution fees aggregated
$136,962.

The Fund's complex offers a retirement plan for eligible Directors. The
actuarially computed pension expense allocated to the Fund for the year ended
December 31, 1997 was $4,620, and the accrued liability was $5,029.

-33-

<PAGE>

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

NOTES TO FINANCIAL STATEMENTS (CONCLUDED)

NOTE 3--Capital Share Transactions

The Fund is authorized to issue up to 60 million shares of $.001 par value
capital stock (45 million Class A, 2 million Class B, 5 million Institutional, 5
million Alex. Brown Capital Advisory & Trust and 3 million undesignated).
Transactions in shares of the Fund are listed below.

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

Shares sold 643,871 824,212
Shares issued to shareholders on
reinvestment of dividends 188,623 223,342
Shares redeemed (2,147,036) (1,752,832)
------------ ------------
Net decrease in shares outstanding (1,314,542) (705,278)
============ ============
Proceeds from sale of shares $ 6,656,537 $ 8,509,093
Value of reinvested dividends 1,939,315 2,288,737
Cost of shares redeemed (22,186,651) (18,054,319)
------------ ------------
Net decrease from capital share transactions $(13,590,799) $ (7,256,489)
============ ============

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

Shares sold 1,621,803 1,513,443
Shares issued to shareholders on
reinvestment of dividends 55,315 34,119
Shares redeemed (310,716) (67,989)
----------- -----------
Net increase in shares outstanding 1,366,402 1,479,573
=========== ===========
Proceeds from sale of shares $16,938,192 $15,635,223
Value of reinvested dividends 574,727 352,575
Cost of shares redeemed (3,229,572) (708,903)
----------- -----------
Net increase from capital share transactions $14,283,347 $15,278,895
=========== ===========

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<PAGE>

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

NOTE 4--Investment Transactions

Excluding short-term obligations, purchases of investment securities
aggregated $47,383,704 and sales of investment securities aggregated $46,467,965
for the year ended December 31, 1997.

On December 31, 1997, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $1,116,074 and
aggregate gross unrealized depreciation for all securities in which there is an
excess of tax cost over value was $56,781.

NOTE 5--Net Assets

On December 31, 1997, net assets consisted of:

Paid-in capital:
Class A Shares.......................................... $48,313,133
Institutional Shares.................................... 31,719,118
Accumulated net realized loss from security transactions..... (3,409,521)
Unrealized appreciation of investments....................... 1,059,293
Distributions in excess of net investment income............. (56,525)
-----------
$77,625,498
===========

NOTE 6--Federal Income Tax Information

Generally accepted accounting principles require that we reclassify certain
components of net assets to reflect permanent differences between financial
reporting and tax purposes. We have reclassified permanent book/tax differences
of $69,801 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, 1997, there was a tax capital loss carryforward of
$3,406,552 of which $260,038 expires in 2002, $3,111,390 expires in 2003 and
$35,124 expires in 2004. This carryforward will be used to offset any future net
capital gains.

NOTE 7--Shareholder Meeting

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

-35-
<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, 1997, 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, 1997 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, 1997, 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, 1998

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<PAGE>

APPENDIX

Corporate Bond Rating Definitions

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

Standard & Poor's Ratings Group

AAA - Highest rating assigned by Standard & Poor's to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.

AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only to a small degree.

A - Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.

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

Moody's Investors Service, Inc.

Aaa - Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or 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 - Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than Aaa securities.

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

Commercial Paper Rating Definitions

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

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 "extremely strong" safety characteristics. Those rated A-1
reflect a " strong" degree of safety regarding timely payment.

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

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