FLAG INVESTORS SHORT INTERMEDIATE INCOME FUND INC, 497, 1999-05-03

FLAG INVESTORS SHORT INTERMEDIATE INCOME FUND INC
497, 1999-05-03

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Short-Intermediate Income Fund Inc.
(Class A Shares)

Prospectus & Application -- May 1, 1999

================================================================================

This mutual fund (the "Fund") seeks a high level of current income consistent
with preservation of principal within an intermediate-term maturity structure.

The Fund offers shares through securities dealers and through financial
institutions that act as shareholder servicing agents. You may also buy shares
through the Fund's Transfer Agent. This Prospectus describes Flag Investors
Class A Shares ("Class A Shares") of the Fund.

TABLE OF CONTENTS

Investment Summary ......................... 1
Fees and Expenses of the Fund .............. 2
Investment Program ......................... 3
The Fund's Net Asset Value ................. 4
How to Buy Shares .......................... 4
How to Redeem Shares ....................... 5
Telephone Transactions ..................... 6
Sales Charges .............................. 6
Dividends and Taxes ........................ 8
Investment Advisor and Sub-Advisor ......... 8
Financial Highlights ....................... 10
Application ................................ A-1

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

================================================================================

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

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INVESTMENT SUMMARY
- --------------------------------------------------------------------------------

Objectives and Strategies

The Fund seeks a high level of current income consistent with
preservation of principal within an intermediate-term maturity structure. The
Fund's investment advisor and sub-advisor (the "Advisors") select U.S.
Government securities, corporate debt and mortgage-backed and asset-backed
securities for the Fund's portfolio subject to quality, maturity and duration
criteria. Corporate debt will be rated at least "A" by either Moody's Investors
Services, Inc. or Standard & Poors Ratings Group. Mortgage and asset-backed
securities will be rated at least "AAA" by S&P or "Aaa" by Moody's. Under
normal circumstances, the Fund's portfolio will have a dollar-weighted average
maturity at the time of investment of three to five years and a maximum
duration of four years.

Risk Profile

The Fund is suited for you if you are seeking a high level of current
income but are willing to sacrifice some of that income to reduce your risk of
capital loss.

The value of your investment in the Fund will vary from day to day based
on changes in the prices of the securities the Fund holds. These prices will,
in turn, change in response to economic and market factors and especially in
response to changes in interest rates.

Interest Rate Risk. The value of the Fund's shares can be expected to
increase during periods of falling interest rates and decrease during periods
of rising interest rates.

Maturity, Duration and Credit Risk. Prices of securities with longer
maturities generally increase or decrease more sharply in response to interest
rate changes. A portfolio with a lower average duration generally will
experience less price volatility in response to changes in interest rates.
Lower quality securities also react more sharply to changes in interest rates.

Prepayment Risk. Unexpected prepayment of principal by mortgage-backed
securities in the Fund's portfolio may negatively impact the assumptions which
guided the advisor when it selected the Fund's investments.

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

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Fund Performance

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

- --------------------------------------------------------------------------------
Class A Shares*
For years ended December 31,

20.00%
15.43%

15.00%

10.00%
8.98% 7.13% 6.81%
5.68% 4.04%
5.00%

0%--------------------------------------------------------------------------
-3.32%

- -5.00%

1992 1993 1994 1995 1996 1997 1998
- --------------------------------------------------------------------------------

- -----------
* The bar chart does not reflect sales charges. If it did, returns would be
less than those shown. For the period from December 31, 1998 through March
31, 1999, the year-to-date return for Class A Shares was 0.2%.

During the 7-year period shown in the bar chart, the highest return for a
quarter was 4.98% (quarter ended 6/30/95) and the lowest return for a quarter
was -2.55% (quarter ended 3/31/94).

1
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Average Annual Total Return (for periods ended December 31, 1998)

Lehman Brothers
Intermediate
Government/
Corporate Bond
Class A Shares(1) Index(2)
----------------------------- ----------------
Past One Year ........... 5.20% 8.44%
Past Five Years ......... 5.54% 6.60%
Since Inception ......... 6.83% (5/13/91) 7.77%(3)

- -----------
(1) These figures assume the reinvestment of dividends and capital gains
distributions and include the impact of the maximum sales charges.
(2) The Lehman Brothers Intermediate Government/Corporate Bond Index is an
unmanaged index that is widely recognized as an indicator of performance in
the intermediate-term government and corporate bond sector. The index does
not factor in the costs of buying, selling and holding securities -- costs
which are reflected in the Fund's results.
(3) For the period from 5/31/91 through 12/31/98.

FEES AND EXPENSES OF THE FUND
- --------------------------------------------------------------------------------
This table describes the fees and expenses that you may pay if you buy and
hold Class A Shares.

<TABLE>
<CAPTION>
<S> <C>
Shareholder Transaction Expenses (fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) ................................... 1.50%*
Maximum Deferred Sales Charge (Load) (as a percentage
of original purchase price or redemption proceeds, whichever is lower) 0.50%*
Maximum Sales Charge (Load) Imposed on Reinvested Dividends ............ None
Redemption Fee ......................................................... None
Exchange Fee ........................................................... None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets):
Management Fees ........................................................ 0.35%
Distribution and/or Service (12b-1) Fees ............................... 0.25%
Other Expenses ......................................................... 0.32%
-----
Total Annual Fund Operating Expenses ................................... 0.92%
Less Fee Waivers and Expense Reimbursements ............................ (0.22)%**
-----
Net Expenses ........................................................... 0.70%
=====
</TABLE>

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* You will pay no sales charge on purchases of $1 million or more of Class A
Shares but, unless you are otherwise eligible for a sales charge waiver or
reduction, you may pay a contingent deferred sales charge when you redeem
your shares. (See "Sales Charges -- Redemption Price.")
** The Advisor has contractually agreed to limit its fees and reimburse
expenses to the extent necessary so that the Fund's Total Annual Fund
Operating Expenses do not exceed 0.70% of the Class A Shares' average daily
net assets. This agreement will continue until at least April 30, 2000 and
may be extended.

2
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Example:

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

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

<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
---------- --------- --------- ------------
<S> <C> <C> <C> <C>
Class A Shares .......... $220* $420* $637* $1,266*
</TABLE>

- ------------------------
* Based on Total Annual Fund Operating Expenses after fee waivers and expense
reimbursements for year 1 only.

Assuming no redemption, expenses for Class A Shares would be the same as
in the above Example.

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

INVESTMENT PROGRAM
- --------------------------------------------------------------------------------

Investment Objective, Policies and
Risk Considerations

The Fund seeks a high level of current income consistent with
preservation of principal within an intermediate-term maturity structure by
investing primarily in U.S. Government securities, corporate debt and
mortgage-backed and asset-backed securities.

The Advisors are responsible for managing the Fund's investments. In
selecting investments for the Fund, the Advisors first focus on a security's
quality. They will only purchase securities that have been granted certain
minimum credit ratings by an independent rating agency. Corporate debt will be
rated at least "A" by either S&P or Moody's. Mortgage and asset-backed
securities will be rated at least "AAA" by S&P or "Aaa" by Moody's. Then the
Advisors focus on maturity and duration. Under normal circumstances, the Fund's
portfolio will have an average maturity of three to five years and a maximum
duration of four years. Average maturity measures the average time until which
the bonds in the Fund's portfolio are payable. Average duration measures the
Fund's exposure to the risk of changing interest rates. Some of the securities
selected by the Advisors will be mortgage-backed and asset-backed securities. A
mortgage-backed security represents an interest in a pool of underlying
mortgage loans. An asset-backed security represents an interest in an
underlying pool of assets, such as auto loans or credit card receivables.

An investment in the Fund entails risk.

Interest Rate Risk. The primary risk of the Fund is interest rate risk.
The value of the Fund's shares can be expected to increase during periods of
falling interest rates and decrease during periods of rising interest rates.

Maturity, Duration and Credit Risk. The magnitude of increases and
decreases in the value of the Fund's shares in response to changes in interest
rates will generally be larger if the Fund's portfolio has a longer duration,
if the Fund holds securities with longer maturities or if the Fund holds lower
quality securities.

Prepayment Risk. In addition to the interest rate risk experienced by all
fixed income securities,
mortgage-backed securities are exposed to prepayment risk. Rising interest
rates tend to discourage refinancings, a primary source of prepayments. As a
result, in a rising interest rate environment, the average life and volatility
of mortgage-backed securities will increase and their market price will
decrease. Falling interest rates tend to encourage refinancings. As a result,
in a falling interest rate environment, the market price of mortgage-backed
securities will not increase as much as other debt securities and the cash
generated by the prepayments will have to be reinvested at the lower prevailing
rates. Prepayment changes may make it difficult to calculate the average
maturity of a portfolio of these securities and, therefore, the ability to
assess the volatility risk of the
portfolio.

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There can be no guarantee that the Fund will achieve its goals.

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

Year 2000 Issues

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

THE FUND'S NET ASSET VALUE
- --------------------------------------------------------------------------------

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

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

In valuing the Fund's assets, its investments are priced at their market
value. When price quotes for a particular security are not readily available,
investments are priced at their "fair value" using procedures approved by the
Fund's Board of Directors.

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

The following sections describe how to buy and redeem Class A Shares.

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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 shares by sending your check (along with a completed Application Form)
directly to the Fund. The Application Form, which includes instructions, is
attached to this Prospectus.

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

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

Investment Minimums

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

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

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

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

4
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quarterly plan, your subsequent investments may be as low as $250. Refer
to the section on the Fund's Automatic Investing Plan for details.

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

Investing Regularly

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

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 Class A 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.

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

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

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

1) A letter of instructions specifying your account number and the number of
Class A 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 Class A 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.

Other Redemption Information

Any dividends payable on Class A Shares you redeem will be paid on the
next dividend payable date. If you have redeemed all of your Class A 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 Class A Shares to reduce your investment to $500
or less, the Fund has the power to redeem the remaining Class A Shares after
giving you 60 days' notice. The Fund reserves the right to redeem Class A
Shares in kind under certain circumstances.

If you own Class A Shares having a value of at least $10,000, you may
arrange to have some of your Class A 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.

<PAGE>

TELEPHONE TRANSACTIONS
- --------------------------------------------------------------------------------

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

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

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

SALES CHARGES
- --------------------------------------------------------------------------------

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

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

Rights of Accumulation. If you are purchasing additional Class A Shares
of this Fund or Class A shares of any other Flag Investors fund or if you
already have investments in Class A shares you may combine the value of your
purchases with the value of your existing investments to determine whether you
qualify for reduced sales charges. (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 Class A Shares you own will be
redeemed to pay this difference.

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

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

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<PAGE>

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

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

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

(i) A qualified retirement plan;

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

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

Purchases by Exchange

You may exchange Class A shares of any other Flag Investors fund with a
higher sales charge structure for an equal dollar amount of Class A Shares
without payment of the sales charges described above or 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 upon 60 days' notice.

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

Redemption Price

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

<PAGE>

Sales Charge as a Percentage
of the Dollar Amount
Subject to Charge
(as % of
Years Since Purchase Cost or Value)
- ------------------------------------------------------
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 million or more.

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

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

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

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

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

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

1) If you are exchanging your Class A Shares for Class A shares of another Flag
Investors fund with a higher sales charge structure and have held your Class
A Shares for at least 24 months.

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

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

4) If Class A 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 Minor Acts.

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<PAGE>

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

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

Distribution Plan

The Fund has adopted a plan under Rule 12b-1 that allows the Fund to pay
your securities dealer or shareholder servicing agent distribution and other
fees for the sale of its shares and for shareholder services. Class A Shares
pay an annual distribution fee equal to 0.25% of average daily net assets.
Because this fee is paid out of net assets on an ongoing basis, it will, over
time, increase the cost of your investment and may cost you more than paying
other types of sales charges.

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

Dividends and Distributions

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

Certain Federal Income Tax Consequences

The dividends and distributions you receive from the Fund may be subject
to federal, state and local taxation, depending on your tax situation. The tax
treatment of dividends and distributions is the same whether or not you
reinvest them. Dividends are taxed as ordinary income and capital gains
distributions are taxed at various rates based on how long the Fund held the
assets. The Fund will tell you annually how to treat dividends and
distributions. If you redeem Class A Shares, you will be subject to tax on any
gains. The character of such gain will generally be based on your holding
period for the shares. An exchange of Class A Shares for Class A shares of
another fund is a sale of Fund shares for tax purposes. More information about
taxes is in the Statement of Additional Information.

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

INVESTMENT ADVISOR AND SUB-ADVISOR
- --------------------------------------------------------------------------------

Investment Company Capital Corp. ("ICC" or the "Advisor") is the Fund's
investment advisor and Brown Investment Advisory & Trust Company (formerly,
Alex. Brown Capital Advisory & Trust Company)("Brown Trust" or the
"Sub-Advisor") is the Fund's sub-advisor. ICC is also the investment advisor to
other mutual funds in the Flag Investors family of funds and BT Alex. Brown
Cash Reserve Fund, Inc. These funds, together with the Fund, had approximately
$10.2 billion of net assets as of March 31, 1999. Brown Trust is a Maryland
trust company with approximately $3.4 billion under management as of March 31,
1999.

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

As compensation for its services for the fiscal year ended December 31,
1998, ICC received from the Fund a fee equal to 0.12% (net of fee waivers) of
the Fund's average daily net assets. ICC compensates Brown Trust out of its
advisory fee. ICC has contrac-tually agreed to waive its fees and reimburse
expenses to the extent necessary so that the Fund's total annual operating
expenses do not exceed 0.70% of average daily net assets. This agreement will
continue until at least April 30, 2000 and may be extended.

The Advisor is an indirect subsidiary of Bankers Trust Corporation. On
November 30, 1998, Bankers Trust Corporation entered into an Agreement and Plan
of Merger with Deutsche Bank AG under which Bankers Trust Corporation would
merge with and into a subsidiary of Deutsche Bank AG. Deutsche Bank AG is a
major global banking institution that is engaged in a wide range of financial
services, including investment management, mutual funds, retail and commercial
banking, investment banking and insurance. The transaction is contingent upon
various regulatory approvals, and continuation of the Fund's advisory
relationship with ICC and sub-advisory relationship with Brown Trust thereafter
is subject to the

8
<PAGE>

approval of Fund shareholders. On March 30, 1999, the Board of Directors
approved, subject to shareholder approval, a new advisory agreement between ICC
and the Fund and a new sub-advisory agreement among the Fund, ICC and Brown
Trust in the event the merger is approved and completed. If the transaction is
approved and completed, Deutsche Bank AG, as ICC's new parent company, will
control its operations as investment advisor. ICC believes that, under this new
arrangement, the services provided to the Fund will be maintained at their
current level.

On March 11, 1999, Bankers Trust Company ("Bankers Trust"), a separate
subsidiary of Bankers Trust Corporation, announced that it had reached an
agreement with the United States Attorney's Office in the Southern District of
New York to resolve an investigation concerning inappropriate transfers of
unclaimed funds and related record-keeping problems that occurred between 1994
and early 1996. ICC became a subsidiary of Bankers Trust Corporation in a
merger that occurred after these events took place. Pursuant to its agreement
with the U.S. Attorney's Office, Bankers Trust pleaded guilty to misstating
entries in the bank's books and records and agreed to pay a $60 million fine to
federal authorities. Separately, Bankers Trust agreed to pay a $3.5 million
fine to the State of New York. The events leading up to the guilty pleas did
not arise out of the investment advisory or mutual fund management activities
of Bankers Trust or its affiliates.

As a result of the plea, absent an order from the SEC, ICC may not be
able to continue to provide investment advisory services to the Fund. The SEC
has granted a temporary order to permit Bankers Trust and its affiliates to
continue to provide investment advisory services to registered investment
companies. There is no assurance that the SEC will grant a permanent order.

Portfolio Managers

Messrs. M. Elliott Randolph, Jr., and Paul D. Corbin have shared primary
responsibility for managing the Fund's assets since its inception in 1991.
Prior to October 1998, they managed the Fund while employed at BT Alex. Brown
Incorporated and since October 1998, they have managed the Fund while employed
at Brown Trust.

Mr. Randolph has nearly 25 years of investment experience. He is a
Principal at Brown Trust. From 1988-1991 he was a Principal with Monument
Capital Management, Inc.

Mr. Corbin has 21 years of investment experience. He is a Principal at
Brown Trust. From 1984-1991 he served as the Senior Vice President in charge of
Fixed Income Portfolio Management at First National Bank of Maryland.

9
<PAGE>

FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the
Fund's financial performance for the past five fiscal years. Certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate that an investor would have earned on
an investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Deloitte & Touche LLP,
whose report, along with the Fund's financial statements for the Class A
Shares, is included in the Statement of Additional Information, which is
available upon request.

(For a Class A Share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Shares
-------------------------------------------------------------------
For the Year Ended December 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value at beginning of
year .................................. $10.39 $10.28 $10.48 $ 9.62 $10.57
------ ------ ------- ------- ------
Income from Investment
Operations:
Net investment income ................... 0.58 0.61 0.63 0.62 0.57
Net realized and unrealized
gain/(loss) on investments ............ 0.11 0.10 (0.23) 0.84 (0.92)
------ ------ ------- ------- ------
Total from Investment
Operations ............................ 0.69 0.71 0.40 1.46 (0.35)
Less Distributions:
Distributions from net
investment income ..................... (0.58) (0.60) (0.60) (0.60) (0.57)
Distributions in excess of net
investment income ..................... (0.02) -- -- -- --
Return of capital ....................... -- -- -- -- (0.03)
------ ------ ------- ------- ------
Total distributions ..................... (0.60) (0.60) (0.60) (0.60) (0.60)
------ ------ ------- ------- ------
Net asset value at end of year .......... $10.48 $10.39 $10.28 $ 10.48 $ 9.62
====== ====== ======= ======= ======
Total Return(1) .......................... 6.81% 7.13% 4.04% 15.43% (3.32)%
Ratios to Average Daily Net
Assets:
Expenses(2) ............................. 0.70% 0.70% 0.70% 0.70% 0.70%
Net investment income(3) ................ 5.57% 5.92% 6.11% 6.00% 5.57%
Supplemental Data:
Net assets at end of year (000) ......... $47,107 $45,569 $58,584 $67,116 $78,789
Portfolio turnover rate ................. 40% 65% 42% 46% 50%
</TABLE>

- -----------
(1) Total return excludes the effect of sales charge.
(2) Without the waiver of advisory fees, the ratio of expenses to average daily
net assets would have been 0.93%, 0.96%, 0.99%, 0.93% and 0.84% for the
years ended December 31, 1998, 1997, 1996, 1995 and 1994, respectively.
(3) Without the waiver of advisory fees, the ratio of net investment income to
average daily net assets would have been 5.34%, 5.66%, 5.83%, 5.77% and
5.43% for the years ended December 31, 1998, 1997, 1996, 1995 and 1994,
respectively.

<PAGE>

<TABLE>
<CAPTION>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND, INC.
NEW ACCOUNT APPLICATION
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Make check payable to "Flag Investors Short-Intermediate For assistance in completing this Application please call:
Income Fund, Inc." and mail with this Application to: 1-800-553-8080, Monday through Friday, 8:30 a.m. to
Flag Investors Funds 5:30 p.m. (Eastern Time).
P.O. Box 419663
Kansas City, MO 64141-6663
Attn: Flag Investors Short-Intermediate Income Fund, Inc. 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.

-------------------------------------------------
Your Account Registration (Please Print)
-------------------------------------------------

Existing Account No., if any: ___________________

Individual or Joint Tenant Gifts to Minors

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

- ---------------------------------------------------------- ----------------------------------------------------------
Social Security Number Minor's Name (only one)

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

under the __________________ Uniform Gifts to Minors Act
State of Residence

Corporations, Trusts, Partnerships, etc. Mailing Address

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

- ------------------------------------------ -------------- ----------------------------------------------------------
Tax ID Number Date of Trust City State Zip

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

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

<PAGE>

-------------------------------------------------
Letter of Intent (Optional)
-------------------------------------------------

[ ] I intend to invest at least the amount indicated below in Class A Shares of Flag Investors Short-Intermediate Income Fund, Inc.
I understand that if I satisfy the conditions described in the attached prospectus, this Letter of Intent entitles me to the
applicable level of reduced sales charges on my purchases.

[ ] $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 you for reduced
sales charges.

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

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

-------------------------------------------------
Distribution Options
-------------------------------------------------

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

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

Call (800) 553-8080 for information about reinvesting your dividends in other funds in the Flag Investors Family of Funds.

A-1
<PAGE>
-------------------------------------------------
Automatic Investing Plan (Optional)
-------------------------------------------------

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

Minimum Initial Investment: $250

Subsequent Investments (check one): [ ] Monthly ($100 minimum) [ ] Quarterly ($250 minimum)

------------------------------
Please attach a voided check.
------------------------------

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

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

-------------------------------------------------
Systematic Withdrawal Plan (Optional)
-------------------------------------------------

[ ] Beginning the month of ________________, _____ (year) please send me checks on a monthly or quarterly basis, as indicated below,
in the amount of (complete as applicable) $________________ , 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 redemption privileges [ ] Telephone exchange privileges

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

Bank: _________________________________________________ Bank Account No.: _________________________________________________

Address: _________________________________________________ Bank Account Name: _________________________________________________

<PAGE>

-------------------------------------------------
Signature and Taxpayer Certification
-------------------------------------------------

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

By signing this Application, I hereby certify under penalties of perjury that the information on this Application is complete and
correct and that as required by federal law: (Please check applicable boxes)

[ ] U.S. Citizen/Taxpayer:

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

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

[ ] Non-U.S. Citizen/Taxpayer:

Indicated country of residence for tax purposes:________________________________________________________________________________

Under penalties of perjury, I certify that I am not a U.S. citizen or resident and I am an exempt foreign person as defined by
the Internal Revenue Service.
- ------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

Dealer's Name: __________________________________________________________ Dealer Code: __________________________________________

Dealer's Address: _______________________________________________________ __________________________________________

_______________________________________________________ Branch Code: __________________________________________

Representative: _______________________________________________________ Rep. No.: __________________________________________

A-2

</TABLE>

<PAGE>

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

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

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

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

<PAGE>

[GRAPHIC OMITTED]

Flag Investors Funds
P.O. Box 515
Baltimore, Maryland 21203
(800) 767-FLAG

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

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

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

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

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

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

Investment Company Act File No. 811-6084
- --------------------------------------------------------------------------------
SHORTPRS
(5/99)

<PAGE>

[GRAPHIC OMITTED]

Short-Intermediate Income Fund, Inc.
(Institutional Shares)

Prospectus & Application -- May 1, 1999
- - - - - - - - - - - - - - - - - - - - - - - - - - - -

This mutual fund (the "Fund") seeks a high level of current income consistent
with preservation of principal within an intermediate-term maturity structure.

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

TABLE OF CONTENTS

Investment Summary .................................. 1
Fees and Expenses of the Institutional Shares ....... 2
Investment Program .................................. 2
The Fund's Net Asset Value .......................... 3
How to Buy Institutional Shares ..................... 4
How to Redeem Institutional Shares .................. 4
Telephone Transactions .............................. 4
Dividends and Taxes ................................. 5
Investment Advisor and Sub-Advisor .................. 5
Financial Highlights ................................ 7
Application ......................................... A-1

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

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

<PAGE>

[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>

INVESTMENT SUMMARY
- --------------------------------------------------------------------------------
Objectives and Strategies

Risk Profile

The Fund is suited for you if you are seeking a high level of current
income but are willing to sacrifice some of that income to reduce your risk of
capital loss.

Interest Rate Risk. The value of the Fund's shares can be expected to
increase during periods of falling interest rates and decrease during periods
of rising interest rates.

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

1
<PAGE>

Fund Performance

- --------------------------------------------------------------------------------
Institutional Shares*
For years ended December 31,

8.00%
7.40%
7.07%
6.00%

4.20%
4.00%

2.00%

0.00%---------------------------------------------------------------------------

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

- -----------------------
* For the period from December 31, 1998 through March 31, 1999, the
year-to-date total return for the Institutional Shares was 0.3%.

During the 3-year period shown in the bar chart, the highest return for a
quarter was 3.69% (quarter ended 9/30/98) and the lowest return for a quarter
was -0.82% (quarter ended 3/31/96).

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

Lehman Brothers
Intermediate
Government/
Institutional Corporate
Shares(1) Bond Index(2)
----------------------------- ----------------
Past One Year ........... 7.07% 8.44%
Since Inception ......... 6.56% (11/2/95) 7.19%(3)

- ------------------------
(1) These figures assume the reinvestment of dividends and capital gains
distributions.
(2) The Lehman Brothers Intermediate Government/Corporate Bond Index is an
unmanaged index that is widely recognized as an indicator of performance in
the intermediate-term government and corporate bond sector. The index does
not factor in the costs of buying, selling and holding securities -- costs
which are reflected in the Fund's results.
(3) For the period from 10/31/95 through 12/31/98.

<PAGE>

FEES AND EXPENSES OF THE INSTITUTIONAL SHARES

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

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

Annual Fund Operating Expenses(expenses that are deducted from Fund assets):
Management Fees ..................................................... 0.35%
Distribution and/or Service (12b-1) Fees ............................ None
Other Expenses ...................................................... 0.32%
----
Total Annual Fund Operating Expenses ................................ 0.67%
Less Fee Waivers and Expense Reimbursements ........................ (0.22)%
----
Net Expenses ........................................................ 0.45%
====

</TABLE>

- ------------------------
* The Advisor has contractually agreed to limit its fees and reimburse expenses
to the extent necessary so that the Funds's Total Annual Fund Operating
Expenses do not exceed 0.45% of the Institutional Shares' average daily net
assets. This agreement will continue until at least April 30, 2000 and may
be extended.

Example:

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

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

<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Institutional Shares .......... $ 46* $ 194* $ 357* $ 841*
</TABLE>

- ------------------------
* Based on Total Annual Fund Operating Expenses after fee waivers and expense
reimbursements for year 1 only.

INVESTMENT PROGRAM
- --------------------------------------------------------------------------------

Investment Objective, Policies and Risk
Considerations

The Advisors are responsible for managing the Fund's investments. In
selecting investments for the Fund, the Advisors first focus on a security's
quality. They will only purchase securities that have been granted certain
minimum credit ratings by an inde-pendent rating agency. Corporate debt will be
rated at least "A" by either S&P or Moody's. Mortgage and asset-backed
securities will be rated at least "AAA" by S&P or "Aaa" by Moody's. Then the
Advisors focus on maturity and duration. Under normal circumstances, the Fund's
portfolio will have an average maturity of three to five years and a maximum
duration of four years. Average maturity measures the average time until which
the bonds in the Fund's portfolio are payable. Average duration measures the
Fund's exposure to the risk of changing interest rates. Some of the securities
selected by the Advisors will be mortgage-backed and asset-backed securities. A
mortgage-backed security represents an interest in a pool of underlying
mortgage loans. An asset-backed security represents an interest in an
underlying pool of assets, such as auto loans or credit card receivables.

An investment in the Fund entails risk.

3
<PAGE>

Prepayment Risk. In addition to the interest rate risk experienced by all
fixed income securities, mortgage-backed securities are exposed to prepayment
risk. Rising interest rates tend to discourage refinancings, a primary source of
prepayments. As a result, in a rising interest rate environment, the average
life and volatility of mortgage-backed securities will increase and their market
price will decrease. Falling interest rates tend to encourage refinancings. As a
result, in a falling interest rate environment, the market price of
mortgage-backed securities will not increase as much as other debt securities
and the cash generated by the prepayments will have to be reinvested at the
lower prevailing rates. Prepayment changes may make it difficult to calculate
the average maturity of a portfolio of these securities and, therefore, the
ability to assess the volatility risk of the portfolio.

There can be no guarantee that the Fund will achieve its goals.

Year 2000 Issues

THE FUND'S NET ASSET VALUE
- --------------------------------------------------------------------------------

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

In valuing the Fund's assets, its investments are priced at their market
value. When price quotes for a particular security are not readily available,
invest-ments are priced at their "fair value" using procedures approved by the
Fund's Board of Directors.

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

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

4
<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 or a qualified retirement plan other than a defined
contribution plan).

o A defined contribution plan with assets of at least $75 million.

o An investment advisory affiliate of BT Alex. Brown Incorporated 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

Your initial investment must be at least $500,000.

The following are exceptions to this minimum:

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

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

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

There are no minimums for subsequent investments.

Purchases by Exchange

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

<PAGE>

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

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

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. The Fund reserves the right to redeem shares in kind under
certain circumstances.

TELEPHONE TRANSACTIONS
- --------------------------------------------------------------------------------

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

5
<PAGE>

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.

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

Dividends and Distributions

Certain Federal Income Tax Consequences

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

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

INVESTMENT ADVISOR AND SUB-ADVISOR
- --------------------------------------------------------------------------------

Investment Company Capital Corp. ("ICC" or the "Advisor") is the Fund's
investment advisor and Brown Investment Advisory & Trust Company (formerly,
Alex. Brown Capital Advisory & Trust Company) ("Brown Trust" or the
"Sub-Advisor") is the Fund's sub-advisor. ICC is also the investment advisor to
other mutual funds in the Flag Investors family of funds and BT Alex. Brown
Cash Reserve Fund, Inc. These funds, together with the Fund, had approximately
$10.2 billion of net assets as of March 31, 1999. Brown Trust is a Maryland
trust company with approximately $3.4 billion under management as of March 31,
1999.

As compensation for its services for the fiscal year ended December 31,
1998, ICC received from the Fund a fee equal to 0.12% (net of fee waivers) of
the Fund's average daily net assets. ICC compensates Brown Trust out of its
advisory fee. ICC has contractually agreed to waive its fees and reimburse
expenses to the extent necessary so that the Fund's total annual operating
expenses do not exceed 0.45% of average daily net assets. This agreement will
continue until at least April 30, 2000 and may be extended.

<PAGE>

the Board of Directors approved, subject to shareholder approval, a new
advisory agreement between ICC and the Fund and a new sub-advisory agreement
among the Fund, ICC and Brown Trust in the event the merger is approved and
completed. If the transaction is approved and completed, Deutsche Bank AG, as
ICC's new parent company, will control its operations as investment advisor.
ICC believes that, under this new arrangement, the services provided to the
Fund will be maintained at their current level.

On March 11, 1999, Bankers Trust Company ("Bankers Trust"), a separate
subsidiary of Bankers Trust Corporation, announced that it had reached an
agreement with the United States Attorney's Office in the Southern District of
New York to resolve an investigation concerning inappropriate transfers of
unclaimed funds and related record-keeping problems that occurred between 1994
and early 1996. ICC became a subsidiary of Bankers Trust Corportion in a merger
that occurred after these events took place. Pursuant to its agreement with the
U.S. Attorney's Office, Bankers Trust pleaded guilty to misstating entries in
the bank's books and records and agreed to pay a $60 million fine to federal
authorities. Separately, Bankers Trust agreed to pay a $3.5 million fine to the
State of New York. The events leading up to the guilty pleas did not arise out
of the investment advisory or mutual fund management activities of Bankers
Trust or its affiliates.

As a result of the plea, absent an order from the SEC, ICC may not be
able to coninue to provide investment advisory services to the Fund. The SEC
has granted a temporary order to permit Bankers Trust and its affiliates to
continue to provide investment advisory services to registered investment
companies. There is no assurance that the SEC will grant a permanent order.

Portfolio Managers

Mr. Randolph has nearly 25 years of investment experience. He is a
Principal at Brown Trust. From 1988-1991 he was a Principal with Monument
Capital Management, Inc.

7
<PAGE>

FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the
Fund's financial performance since it began operations. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned on an investment in
the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by Deloitte & Touche LLP, whose report, along with
the Fund's financial statements, is included in the Statement of Additional
Information, which is available upon request.

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

<TABLE>
<CAPTION>
For the Period
For the Year November 2, 1995(1)
Ended through
December 31, December 31, 1995
--------------------------------------- ------------------
<S> <C> <C> <C> <C>
1998 1997 1996
Per Share Operating Performance:
Net asset value at beginning of period ................... $ 10.50 $ 10.38 $ 10.58 $ 10.42
------- ------- ------- -------
Income from Investment Operations:
Net investment income .................................... 0.61 0.61 0.59 0.09
Net realized and unrealized gain/(loss)
on investments ......................................... 0.11 0.13 (0.17) 0.12
------- ------- ------- -------
Total from Investment Operations ......................... 0.72 0.74 0.42 0.21
Less Distributions:
Distributions from net investment income ................. (0.61) (0.62) (0.62) (0.05)
Distributions in excess of net investment income ......... (0.01) -- -- --
------- ------- ------- -------
Total Distributions ...................................... (0.62) (0.62) (0.62) (0.05)
------- ------- ------- -------
Net asset value at end of period ......................... $ 10.60 $ 10.50 $ 10.38 $ 10.58
======= ======= ======= =======
Total Return(2) ........................................... 7.07% 7.40% 4.20% 12.47%
Ratios to Average Daily Net Assets:
Expenses(3) .............................................. 0.45% 0.45% 0.45% 0.45%(5)
Net investment income(4) ................................. 5.81% 6.17% 6.35% 6.52%(5)
Supplemental Data:
Net assets at end of period (000) ........................ $45,112 $32,056 $17,507 $ 2,186
Portfolio turnover rate .................................. 40% 65% 42% 46%
</TABLE>

- -----------
(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Without the waiver of advisory fees, the ratio of expenses to average daily
net assets would have been 0.67%, 0.72%, 0.76% and 0.72% (annualized) for
the years ended December 31, 1998, 1997 and 1996 and for 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 5.58%, 5.90%, 6.04% and 6.27%
(annualized) for the years ended December 31, 1998, 1997 and 1996 and for
the period ended December 31, 1995, respectively.
(5) Annualized.

FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND, INC.
(INSTITUTIONAL SHARES)
NEW ACCOUNT APPLICATION
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Send completed Application by overnight carrier to: For assistance in completing this Application please call: 1-800-553-
Flag Investors Funds 8080, Monday through Friday, 8:30 a.m. to 5:30 p.m. (Eastern Time).
330 West Ninth Street, First Floor
Kansas City, MO 64105
Attn: Flag Investors Short-Intermediate Income Fund, Inc.

If you are paying by check, make check payable to "Flag Investors Short-Intermediate Income Fund, Inc." and mail with this
Application. If you are paying by wire, see instructions below.

Your Account Registration (Please Print)

Name on Account Mailing Address

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

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

/ / Corporation / / Partnership / / Trust -----------------------------------------------------------------------
/ / Non-Profit or Charitable Organization / / Other City State Zip
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
a/c 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.

<PAGE>

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

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

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

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

A-1
<PAGE>

<TABLE>
<CAPTION>
Acknowledgement, Certificate and Signature

<S> <C>
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 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.
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
Signature of Corporate Officer, General Partner, Trustee, etc. Date

Person(s) Authorized to Conduct Transactions

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

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

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

Certificate of Authority

<S> <C> <C> <C> <C> <C> <C>
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 ______ , ________ (Day/Mo./Yr.) Secretary___________________________________________________________
The undersigned officer (other than the Secretary) hereby certifies that the foregoing instrument has been signed by the Secretary
of the investor.

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

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

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

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

A-2

<PAGE>

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

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

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

<PAGE>

[GRAPHIC OMITTED]

Flag Investors Funds
P.O. Box 515
Baltimore, Maryland 21203
(800) 767-FLAG

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

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

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

For other shareholder inquiries, contact the Transfer Agent at (800) 553-8080.
For Fund information, call (800) 767-FLAG or your securities dealer or servicing
agent.
Investment Company Act File No. 811-6084
- --------------------------------------------------------------------------------

SHORTIPRS
(5/99)

<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 YOUR SECURITIES
DEALER OR SHAREHOLDER SERVICING AGENT OR BY WRITING
OR CALLING THE FUND, ONE SOUTH STREET, BALTIMORE,
MARYLAND 21202, OR BY CALLING (800) 767-FLAG.

Statement of Additional Information Dated: May 1, 1999

Relating to the Prospectuses Dated:
May 1, 1999

<PAGE>

TABLE OF CONTENTS

Page

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

2. INVESTMENT OBJECTIVES AND POLICIES...............................1

3. VALUATION OF SHARES AND REDEMPTION...............................7

4. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS.............8

5. MANAGEMENT OF THE FUND..........................................11

6. INVESTMENT ADVISORY AND OTHER SERVICES..........................16

7. DISTRIBUTION OF FUND SHARES.....................................17

8. BROKERAGE.......................................................20

9. CAPITAL STOCK...................................................22

10. SEMI-ANNUAL REPORTS.............................................23

11. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES...............23

12. INDEPENDENT AUDITORS............................................23

13. LEGAL MATTERS...................................................23

14. PERFORMANCE INFORMATION.........................................24

15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.............26

16. FINANCIAL STATEMENTS............................................27

APPENDIX ...............................................................A-1

<PAGE>

1. GENERAL INFORMATION AND HISTORY

Flag Investors Short-Intermediate Income Fund, Inc. (the "Fund") is an
open-end diversified management investment company. 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.
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.

Important information concerning the Fund is included in the Fund's
Prospectuses, which may be obtained without charge from the Fund's distributor
(the "Distributor"), or, from Participating Dealers that offer Shares to
prospective investors. Prospectuses may also be obtained from Shareholder
Servicing Agents. Some of the information required to be in this Statement of
Additional Information is also included in the Fund's current Prospectuses. To
avoid unnecessary repetition, references are made to related sections of the
Prospectuses. In addition, the Prospectuses and this Statement of Additional
Information omit certain information about the Fund and its business that is
contained in the Registration Statement for the Fund and its Shares filed with
the SEC. Copies of the Registration Statement as filed, including such omitted
items, may be obtained from the SEC by paying the charges prescribed under its
rules and regulations.

The Fund was 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 began 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 & Sons Incorporated (predecessor to BT Alex. Brown Incorporated), Alex.
Brown & Sons Incorporated licenses to the Fund the "Flag Investors" name and
logo but retains the rights to the name and logo, including the right to permit
other investment companies to use them.

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. 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:

-1-

<PAGE>

Type of Permitted Investment Minimum Rating(1)
---------------------------- -----------------
S&P(2) Moody's(3)
<S> <C> <C>
U.S. Government and Agency Securities...................... N/A N/A
CMO's...................................................... AAA Aaa4
Corporate Debt............................................. A or better(4) A or better(4)
Other Asset-Backed Securities.............................. AAA4 Aaa4
Securities of Non-U.S. Governmental Issuers................ AAA4 Aaa4
Securities of Designated International Organization........ AAA4 Aaa4
Non-Dollar U.S. Government Securities...................... AAA4 Aaa4
Securities of Foreign Corporations......................... AAA4 Aaa4
</TABLE>

- --------------------
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.

To meet its short-term liquidity needs, the Fund may invest in
repurchase agreements 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.

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.

Purchases of 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

-2-

<PAGE>

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.

U.S. Government Securities.

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

Mortgage-Backed Securities

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 the 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

-3-

<PAGE>

the timely payment of interest and ultimate collection of principal. FHLMC
Participation Certificates are assumed to be prepaid in full in the twelfth
year.

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

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

Interests in 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

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 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

-4-

<PAGE>

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

Other Investment Practices

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

Repurchase Agreements.
----------------------

The Fund may enter into repurchase agreements with financial
institutions, such as banks and broker-dealers, deemed to be creditworthy by the
Fund's Board of Directors under criteria established with the guidance of the
Fund's investment advisor and sub-advisor (the "Advisors"). A repurchase
agreement is a short-term investment in which the Fund acquires ownership of a
debt security and the seller agrees to repurchase the obligation at a future
time and set price, usually not more than seven days from the date of purchase,
thereby determining the yield during the Fund's holding period. The value of
underlying securities will be at least equal at all times to the total amount of
the repurchase obligation, including the interest factor. The 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 is authorized to use forward foreign currency exchange
contracts to protect against uncertainty in the level of future foreign exchange
rates. The Fund may conduct its foreign currency exchange transactions through
forward contracts to purchase or sell foreign currencies. A forward foreign
currency exchange contract involves an obligation to purchase or sell a
specified currency at a future date (which may be any fixed number of days from
the date the contract is entered into by the parties) at the price set at the
time of the contract. These contracts are traded directly between currency
traders (usually large commercial banks) and their customers. The Fund may use
such forward contracts only under two circumstances. First, if the Advisors
believe the Fund should fix the U.S. dollar price of the foreign security when
the Fund enters into a contract for the purchase of sale, at a future date, of a
security denominated in a foreign currency. Second, if the Advisors believe the
Fund should hedge against risk of loss in the value of those portfolio
securities denominated in foreign currencies.

-5-

<PAGE>

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.

Rule 144A Securities

Subject to the Fund's overall investment limitations on investment 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.

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.

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. 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);

3. Borrow money except as a temporary measure to facilitate settlements
and for extraordinary or emergency purposes and then only from banks and in an
amount not exceeding 10% of the value of the

-6-

<PAGE>

total assets of the Fund at the time of such borrowing, provided that, while
borrowings by the Fund equaling 5% or more of the Fund's total assets are
outstanding, the Fund will not purchase securities;

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

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

6. 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;

7. Issue senior securities;

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

9. Effect short sales of securities;

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

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

12. 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 (or the days on which they are observed): New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.

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

-7-

<PAGE>

deemed to have 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 third parties to place
orders up to the same time as other shareholders.

Redemption

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

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

4. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS

The following is only a summary of certain additional federal income tax
considerations generally affecting the Fund and its shareholders that are not
described in the Fund's Prospectuses. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussion here and in the Fund's Prospectuses is not intended as a substitute
for careful tax planning. For example, under certain specified circumstances,
state income tax laws may exempt from taxation distributions of a regulated
investment company to the extent that such distributions are derived from
interest on federal obligations. Investors are urged to consult with their tax
advisor regarding whether such exemption is available.

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

Qualification as a Regulated Investment Company

The Fund intends to qualify and elect to be treated for each taxable
year as a regulated investment company ("RIC") under Subchapter M of the Code.
Accordingly, the Fund must, among other things, (a) derive at least 90% of its
gross income each taxable year from dividends, interest, payments with respect
to securities loans, gains from the sale or other disposition of stock,
securities or foreign currencies, and certain other related income, including,
generally, certain gains from options, futures and forward contracts; and (b)
diversify its holdings so that, at the end of each fiscal quarter of the Fund's
taxable year, (i) at least 50% of the market value of the Fund's total assets is
represented by cash and cash items, United States Government securities,
securities of other RICs, and other securities, with such other

-8-

<PAGE>

securities limited, in respect to any one issuer, to an amount not greater than
5% of the value of the Fund's total assets or 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
assets is invested in the securities (other than United States Government
securities or securities of other RICs) of any one issuer or two or more issuers
that the Fund controls and which are engaged in the same, similar, or related
trades or business. For purposes of the 90% gross income requirement described
above, foreign currency gains that are not directly related to the Fund's
principal business of investing in stock or securities (or options or futures
with respect to stock or securities) may be excluded from income that qualifies
under the 90% requirement.

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

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

If the Fund fails to qualify for any taxable year as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate income tax rates without any deduction for distributions to
shareholders, and such distributions generally will be taxable to shareholders
as ordinary dividends to the extent of the Fund's current and accumulated
earnings and profits. In this event, such distributions generally will be
eligible for the dividends-received deduction for corporate shareholders.

Fund Distributions

Distributions of investment company taxable income will be taxable to
shareholders as ordinary income, regardless of whether such distributions are
paid in cash or are reinvested in additional Shares to the extent of the Fund's
earnings and profits. The Fund anticipates that it will distribute substantially
all of its investment company taxable income for each taxable year.

The Fund may either retain or distribute to shareholders its excess of
net long-term capital gains over net short-term capital losses ("net capital
gains"). If such gains are distributed as a capital gains distribution, they are
taxable to shareholders that are individuals at a maximum rate of 20%,
regardless of the length of time the shareholder has held Shares. If any such
gains are retained, the Fund will pay federal income tax thereon, and, if the
Fund makes an election, the shareholders will include such undistributed gains
in their income, will increase their basis in Fund shares by the difference
between the amount of such includable gains and the tax deemed paid by such
shareholder and will be able to claim their share of the tax paid by the Fund as
a refundable credit.

In the case of corporate shareholders, Fund distributions (other than
capital gains distributions) generally qualify for the dividends-received
deduction to the extent of the gross amount of qualifying dividends received by
the Fund for the year. Generally, and subject to certain limitations, a dividend
will be treated as a qualifying dividend if it has been received from a domestic
corporation. Accordingly, it is not expected that any Fund distribution will
qualify for the corporate dividends-received deduction.

Ordinarily, investors should include all dividends as income in the year
of payment. However, dividends declared payable to shareholders of record in
December of one year, but paid in January of the

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<PAGE>

following year, will be deemed for tax purposes to have been received by the
shareholder and paid by the Fund in the year in which the dividends were
declared.

Investors should be careful to consider the tax implications of
purchasing Shares just prior to the ex-dividend date of any ordinary income
dividend or capital gains distribution. Those investors will be taxable on the
entire amount of the dividend or distribution received, even though the net
asset value per share on the date of such purchase may have reflected the amount
of such distribution.

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

Sale or Exchange of Fund Shares

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

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

Federal Excise Tax; Miscellaneous Considerations; Effect of Future Legislation

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

State and Local Tax Considerations

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

-10-

<PAGE>

5. MANAGEMENT OF THE FUND

Directors and Officers

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

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

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

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

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

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

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<PAGE>

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

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

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

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

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

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

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

* 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 12 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 three funds, and as a Director of seven funds in the Fund Complex.
Mr. Semans serves as Chairman of five

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<PAGE>

funds and as a Director of five other funds in the Fund Complex. Messrs.
Cunnane, Hardiman, Levy, McDonald and Vogt serve as Directors of each fund in
the Fund Complex. Ms. Rimel serves as Director of 11 funds in the Fund Complex.
Mr. Woolf serves as President of seven funds in the Fund Complex. 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 Chairmen of the Fund Complex's
Audit Committee and Executive Committee receive an annual fee from the Fund
Complex. Payment of such fees and expenses are allocated among all such funds
described above in direct proportion to their relative net assets. For the
fiscal year ended December 31, 1998, Independent Directors' fees attributable to
the assets of the Fund totaled approximately $2,441.

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, 1998.

-13-

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, 1998 Payable to Directors
for the Fiscal Year
Ended December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------

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

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

James J. Cunnane, Director $446(2) 3 $39,000 for service on 13(4)
Boards in the Fund Complex

Joseph R. Hardiman, Director(5) $ 0 3 $19,500 for services on 11(6)
Boards in the Fund Complex

John F. Kroeger, Director(7) $560 3 $49,000 for service on 13(4)
Boards in the Fund Complex

Louis E. Levy, Director $503(2) 3 $44,000 for service on 13(4)
Boards in the Fund Complex

Eugene J. McDonald, Director $446(2) 3 $39,000 for service on 13(4)
Boards in the Fund Complex

Rebecca W. Rimel, Director $453(2) 3 $39,000 for service on 12(4,6)
Boards in the Fund Complex

Carl W. Vogt, Esq., Director $456(2) 3 $39,000 for service on 13(4,6)
Boards in the Fund Complex
</TABLE>
- -----------
1 A Director who is an "interested person" as defined in the Investment
Company Act.
2 Of the amounts payable to Messrs. Cunnane, Levy, McDonald and Vogt and Ms.
Rimel, $446, $0, $446, $456, and $453 respectively, was deferred pursuant
to a deferred compensation plan.
3 The Fund Complex has adopted a Retirement Plan for eligible Directors, as
described below. The actuarially computed pension expense for the Fund for
the year ended December 31, 1998 was approximately $5,362.
4 One of these funds ceased operations on July 29, 1998.
5 Elected to Fund's board effective October 1, 1998.
6 Ms. Rimel receives and Messrs. Hardiman and Vogt, prior to their
appointment or election as Director to all 12 Funds in the Fund Complex,
received proportionately higher compensation from each fund for which they
serve as Director.
7 Retired from the Fund's board on October 1, 1998; Deceased, November 26,
1998.

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

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<PAGE>

allocated to each fund in the Fund Complex based upon the relative net assets of
such fund to the Fund Complex.

Set forth in the table below are the estimated annual benefits payable
to a Participant upon retirement assuming various years of service and payment
of a percentage of the fee earned by such Participant in his or her last year of
service, as described above. The approximate credited years of service at
December 31, 1998 was as follows: for Mr. Cunnane, 4 years; for Mr. Levy, 4
years; for Mr. McDonald, 6 years; for Ms. Rimel, 3 years; for Mr. Vogt, 3 years;
and for Mr. Hardiman, 0 years.

Years of Service Estimated Annual Benefits Payable By
- ---------------- Fund Complex Upon Retirement
------------------------------------
Chairmen of Audit and
Executive Committees Other Participants
---------------------- ------------------
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

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

Code of Ethics

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

The Code of Ethics requires that any officer, director or employee of
the Fund or the Advisors preclear any personal securities investments (with
certain exceptions, such as non-volitional purchases or purchases that are part
of an automatic dividend reinvestment plan). The foregoing would apply to any
officer, director or employee of the Distributor that is an access person. The
preclearance requirement and associated procedures are designed to identify any
substantive prohibition or limitation applicable to the proposed investment. The
substantive restrictions applicable to investment personnel include a ban on
acquiring any securities in an initial public offering, a prohibition from
profiting on short-term trading in securities and special preclearance of the
acquisition of securities in private placements. Furthermore, the Code of Ethics
provides for trading "blackout periods" that prohibit trading by investment
personnel and certain other employees within periods of trading by the Fund in
the same security. Trading by investment personnel and certain other employees
of the Advisor or Sub-Advisor, as appropriate, would be exempt from this
"blackout period" provided that (1) the market capitalization of a particular
security exceeds $2 billion; and (2) orders of such entity (including trades of
both clients

-15-

<PAGE>

and covered persons) do not exceed ten percent of the daily average trading
volume of the security for the prior 15 days. Officers, directors and employees
of the Advisors and the Distributor may comply with codes of ethics instituted
by those entities so long as they contain similar requirements and restrictions.

6. INVESTMENT ADVISORY AND OTHER SERVICES

On June 17, 1997, the Board of Directors of the Fund, including a
majority of the Independent Directors, approved an Investment Advisory Agreement
between the Fund and Investment Company Capital Corp. ("ICC" or the "Advisor")
The Investment Advisory Agreement was approved by a vote of shareholders of the
Fund on August 14, 1997. On September 25, 1998, a Sub-Advisory Agreement among
the Fund, ICC and Brown Investment Advisory & Trust Company (formerly, Alex.
Brown Capital Advisory & Trust Company) ("Brown Trust") was approved by a vote
of shareholders of the Fund. ICC, the investment advisor, is an indirect
subsidiary of Bankers Trust Corporation. Brown Trust is a trust company
chartered under the laws of the State of Maryland. Brown Trust is a wholly-owned
subsidiary of Brown Capital Holdings Incorporated ("Brown Capital Holdings"), a
Maryland corporation whose principal executive officer is Michael D. Hankin.
Brown Capital Holdings is owned by management and employees of Brown Trust and
outside investors. ICC also serves as investment advisor and Brown Trust serves
as sub-advisor to other funds in the Flag Investors family of funds.

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

Advisory Fees For the Fiscal Year Ended December 31,
1998 1997 1996
Contractual Fee $323,196 $268,092 $245,318
Less amount waived ($208,010) ($203,590) ($201,059)
Fee after waivers $115,186* $64,502* $44,259*
- ---------------

* Absent fee waivers for the fiscal years ended December 31, 1998, December
31, 1997 and December 31, 1996, the Fund's Total Operating Expenses would
have been 0.93%, 0.96% and 0.99%, respectively, of the Flag Investors Class
A Shares' average daily net assets.

For the period from October 1, 1998 through December 31, 1998, Brown
Trust received $24,083 ( net of fee waivers of $32,281) for sub-advisory
services.

-16-

<PAGE>

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
contractually agreed to reduce its annual fee, if necessary, or to reimburse
expenses of the Fund to the extent 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. This
agreement will continue until at least April 30, 2000 and may be extended. As
compensation for providing sub-advisory services, Brown Trust is entitled to
receive a fee from ICC, calculated daily and payable monthly, at the annual rate
of 0.23% of the first $1 billion of the Fund's average daily net assets, 0.20%
of the next $500 million of the Fund's average daily net assets, and 0.16% of
that portion of the Fund's average daily net assets in excess of $1.5 billion.
Brown Trust has voluntarily agreed to waive its fees in proportion to any fee
waivers by ICC.

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

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.")

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.

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.

-17-

<PAGE>

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 most recently approved by the Board of
Directors, including a majority of the Independent Directors, on September 29,
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, including BT Alex. Brown and certain banks,
to act as Shareholder Servicing Agents, pursuant to which ICC Distributors will
allocate a portion of its distribution fee as compensation for such financial
institutions' ongoing shareholder services. The Fund may also enter into
Shareholder Servicing Agreements pursuant to which the Advisor, the Distributor,
or their respective affiliates, will provide compensation out of their own
resources for ongoing shareholder services. Although banking laws and
regulations prohibit banks from distributing shares of open-end investment
companies such as the Fund, according to interpretations by various bank
regulatory authorities, financial institutions are not prohibited from acting in
other capacities for investment companies, such as the shareholder servicing
capacities described above. Should future legislative, judicial or
administrative action prohibit or restrict the activities of the Shareholder
Servicing Agents in connection with the Shareholder Servicing Agreements, the
Fund may be required to alter materially or discontinue its arrangements with
the Shareholder Servicing Agents.

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 1998 1997 1996
<S> <C> <C> <C>
Class A 12b-1 Fee $124,577(1) $136,962(2) $151,753(3)
</TABLE>

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

1 Received by ICC Distributors, the Fund's distributor.

-18-

<PAGE>

2 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.
3 Received by Alex. Brown, the Fund's distributor.

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 "Plan"). Under the 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 Plan was most recently approved by
the Fund's Board of Directors, including a majority of the Independent
Directors, on September 29, 1998. The 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.

In approving the Plan, the Directors concluded, in the exercise of
reasonable business judgment, that there was a reasonable likelihood that the
Plan would benefit the Fund and its shareholders. The Plan will be renewed only
if the Directors make a similar determination in each subsequent year. The 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
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 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 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 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:

-19-

<PAGE>

Fiscal Year Ended December 31,
Class 1998 1997 1996
Received Retained Received Retained Received Retained
<S> <C> <C> <C> <C> <C> <C>

Class A $35,645(1) $0 $13,144(2) $6,190(3) $26,849(3) $24,060(3)
Commissions
</TABLE>

- -------------
1 By ICC Distributors, the Fund's distributor.
2 Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $6,926 and ICC Distributors, the Fund's distributor
effective August 31, 1997 received $6,188.
3 By Alex. Brown, the Fund's distributor.

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.

-20-

<PAGE>

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.

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, 1998, December 31, 1997 and December 31, 1996, ICC
directed no brokerage transactions to broker-dealers and paid no related
commissions because of research services provided to the Fund.

Subject to the above considerations, the Board of Directors has
authorized the Fund to effect portfolio transactions, on an agency basis,
through 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
fiscal year ended December 31, 1998 and 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 year ended December 31, 1996, 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, 1998, the Fund held a 4.5% repurchase agreement
issued by Goldman Sachs & Co. valued at $1,482,845. Goldman Sachs & Co. is a
"regular broker or dealer" of the Fund.

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<PAGE>

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 85 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 Class C Shares and Flag
Investors Short-Intermediate Income Fund Institutional Shares. The Flag
Investors Class B Shares and the Flag Investors Class C 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 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.

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<PAGE>

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"), 130 Liberty Street, New York,
New York 10006, has been retained to act as custodian of the Fund's investments.
Bankers Trust receives such compensation from the Fund for its services as
custodian as may be agreed to from time to time by Bankers Trust and the Fund.
For the fiscal year ended December 31, 1998, Bankers Trust was paid $24,372 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, 1998, ICC received transfer agency fees
of $17,722.

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

Average Net Assets Incremental Annual Accounting Fee

$ 0 - $ 10,000,000 $15,000 (fixed fee)
$ 10,000,000 - $ 25,000,000 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, 1998, ICC received accounting fees of
$63,952.

12. INDEPENDENT AUDITORS

The annual financial statements of the Fund are audited by Deloitte &
Touche LLP, independent auditors, whose report thereon appears elsewhere herein,
and have been included herein in reliance upon the report of such firm given on
their authority as experts in accounting and auditing. Deloitte & Touche LLP has
offices at University Square, 117 Campus Drive, Princeton, New Jersey 08540.

13. LEGAL MATTERS

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

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<PAGE>

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, 1998 were as follows:

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<PAGE>

One-Year Period Ended Five-Year Period Ended Inception Through
December 31, 1998 December 31, 1998 December 31, 1998
------------------- ------------------- ------------------
Ending Ending Average Ending Average
Class Redeemable Redeemable Annual Total Redeemable Annual Total
Value Total Return Value Return Value Return

<S> <C> <C> <C> <C> <C> <C>
Flag Investors Class A $1,052 5.20% $1,309 5.54% $1,656 6.83%
May 13, 1991 +
Flag Investors Institutional $1,071 7.07% N/A N/A $1,222 6.56%
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, 1998 was
5.00% and 5.33%, 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 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

-25-

<PAGE>

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 40% for the fiscal year ended December 31, 1998 and 65% for
the fiscal year ended December 31, 1997. 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 outstanding shares of a class of the Fund, as of
February 1, 1999*:

-26-

<PAGE>

Owned of Beneficially
Name and Address Record Owned Percentage Owned
---------------- ------ ----- ----------------
<S> <C> <C> <C>
Mercantile TR X 5.15% of Class A Shares
U/A 08/01/96
Keswick Pension Plan
FBO Keswick Home Pension Plan
P.O. Box 17002
Baltimore, MD 21297-0300

BT Alex. Brown Incorporated X 5.60% of Class A Shares
FBO 204-16943-12
The Gettysburg Hospital Operating
Investment Acct.
P.O. Box 1346
Baltimore, MD 21203-1346

Chase Manhattan Bank TR X 6.74% of Institutional Shares
Well Aluminum Corp
Master Trust 29400333
770 Broadway
New York, NY 10003-9522

Brown Investment Advisory X 8.73% of Institutional Shares
FBO 170-7036337
19 South Street
Baltimore, MD 21202

Brown Investment Advisory X 6.69% of Institutional Shares
FBO 170-7118000
19 South Street
Baltimore, MD 21202
</TABLE>

The following amounts represent shares held by Brown Trust in
discretionary accounts. Accordingly, Brown Trust may be deemed to be controlling
person of the Fund.
<TABLE>
<CAPTION>
Owned of Beneficially
Name and Address Record Owned Percentage Owned
---------------- ------ ----- ----------------
<S> <C> <C> <C>
BT Alex. Brown Incorporated X X 37.95% of the Fund
FBO 250-10788-16
Brown Investment Advisory
House Acct.
P.O. Box 1346
Baltimore, MD 21203-1346

</TABLE>

*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 February 1, 1999.

16. FINANCIAL STATEMENTS

(See next page.)

-27-

<PAGE>

FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Statement of Net Assets December 31, 1998

S&P Par
Security Rating* (000) Market Value
- ------------------------------------------------------------------------------------
<S> <C> <C>
CORPORATE NOTES--38.7%

Atlantic City Electric
6.00%, 1/15/03 ............................. A- $ 2,000 $ 2,040,000
Baltimore Gas & Electric
6.75%, 6/5/12 .............................. A 1,000 1,110,000
Bear Stearns Company Incorporated
6.50%, 8/1/02 .............................. A 2,000 2,040,000
Block Financial Corporation
6.75%, 11/1/04 ............................. A 2,000 2,057,500
Computer Associates International
6.375%, 4/15/05 ............................ A- 2,805 2,769,937
Countrywide Home Loan
7.26%, 5/10/04 ............................. A 2,900 3,034,125
Dana Corporation
6.50%, 3/15/08 ............................. A- 2,000 2,090,000
First Maryland Bancorp
7.20%, 7/1/07 .............................. A- 3,000 3,258,750
Ford Motor Credit
6.00%, 1/14/03 ............................. A 2,000 2,037,500
General Motors Acceptance Corporation
5.625%, 2/15/01 ............................ A- 1,000 1,003,750
International Lease Finance
6.43%, 9/15/00 ............................. A+ 2,000 2,037,500
New York Telephone
7.375%, 12/15/11 ........................... A+ 1,700 1,736,125
Pacific Gas & Electric
6.25%, 3/1/04 .............................. A 2,000 2,062,500
Philip Morris, Inc. ...........................
6.95%, 6/1/06 .............................. A 2,000 2,052,500
Sears Roebuck Acceptance Corporation
6.34%, 9/19/00 ............................. A- 2,290 2,324,350
Sony Corporation
6.125%, 3/4/03 ............................. A 2,000 2,047,500
Tyco International Corporation
5.875%, 11/1/04 ............................ A- 2,000 2,007,500
-----------
Total Corporate Notes
(Cost $34,980,231) .......................... 35,709,537
-----------
</TABLE>

-28-
<PAGE>

Federal Home Loan Banks Board - 2.2%
Debentures
FHLB Board
5.12%, 9/15/03 .............................. AAA $ 2,000 $2,003,560

FEDERAL NATIONAL MORTGAGE ASSOC. - 4.4%
Debentures
FNMA-Govt
7.12%, 4/19/02 .............................. AAA 2,000 2,011,820
5.75%, 2/15/08 .............................. AAA 2,000 2,074,500

FEDERAL HOME LOAN MORTGAGE CORP. - 2.2%
Debentures
FHLMC
5.12%, 10/15/08 ............................. AAA 2,000 1,982,400

MORTGAGE BACKED-SECURITIES - 27.3%
FHLMC Pool #C00210
8.00%, 1/1/23 ............................... AAA 555 574,480
FHLMC Pool #E20099
6.50%, 5/1/09 ............................... AAA 3,674 3,729,189
FHLMC Pool #G10049
8.00%, 10/1/07 .............................. AAA 579 596,820
FHLMC Pool #G10543
6.00%, 6/1/11 ............................... AAA 2,271 2,280,797
FHLMC Pool #G50334
6.50%, 2/1/01 ............................... AAA 1,070 1,080,838
FHLMC T-5 A3
7.15%, 1/25/12 .............................. AAA 2,500 2,546,250
FHLMC T-9 A2
6.43%, 2/25/13 .............................. AAA 3,000 3,002,250
FNMA Pool #326570
7.00%, 2/1/08 ............................... AAA 2,340 2,392,213
FNMA Pool #362537
6.50%, 10/1/03 .............................. AAA 2,079 2,106,256
FNMA Pool #433646
6.00%, 10/1/13 .............................. AAA 5,508 5,527,069
FNGL Pool #409589
9.50%, 11/1/15 .............................. AAA 1,287 1,374,594
</TABLE>

-29-

<PAGE>

FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Statement of Net Assets (concluded) December 31, 1998

S&P Par
Security Rating* (000) Market Value
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GUARANTEED EXPORT TRUST - 0.9%
Guaranteed Export Trust , 94-F-A
8.18%, 12/15/04 .............................. AAA $ 764 $ 821,776
-----------
Total U.S. Government Agency Securities
(Cost $33,863,955) ............................ 34,104,812
-----------
U.S. TREASURY SECURITIES--2.3%

U.S. Treasury Notes
5.75%, 8/15/03 ............................... AAA 2,000 2,089,460
-----------
Total U.S. Treasury Securities
(Cost $1,913,253) ............................. 2,089,460
-----------
ASSET BACKED SECURITIES--20.9%

Aesop Funding II Limited Liability
Company, 1997-1-A1
6.22%, 10/20/01 .............................. AAA 3,000 3,049,680
CPS Auto Trust , 1998-2-A
6.09%, 11/15/03 .............................. AAA 2,753 2,766,196
Discover Card Master , Trust I, 1998-4-A
5.75%, 10/15/03 .............................. AAA 3,500 3,537,625
Green Tree Financial Corporation, 1994-6-A5
8.25%, 1/15/20 ............................... NR** 3,000 3,089,010
Metris Master Trust , 97-1-A
6.87%, 10/20/05 .............................. AAA 3,000 3,099,240
PG&E Rate Reduction Bonds, California
Infrastructure, 97-1-A4
6.16%, 6/25/03 ............................... AAA 3,700 3,761,050
-----------
Total Asset Backed Securities
(Cost $19,100,826) ............................ 19,302,801
-----------
COLLATERALIZED MORTGAGE OBLIGATIONS--0.6%
FEDERAL NATIONAL MORTGAGE ASSOC. - 0.1%
FNMA Series 1988-18B
9.40%, 7/25/03 ............................... AAA 84 86,649

</TABLE>
See Notes to Financial Statements

-30-
<PAGE>

FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
S&P Par
Security Rating* (000) Market Value
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation - 0.5%
FHLMC Series 106-F
8.50%, 12/15/20 ................................ AAA $ 518 $ 519,760
------------
Total Collateralized Mortgage Obligations
(Cost $613,489) ................................. 606,409
------------
REPURCHASE AGREEMENT--1.6%

Goldman Sachs & Co., 4.50%
Dated 12/31/98, to be repurchased on
01/04/99, collateralized by U.S. Treasury
Bond with a par value of $1,447,000,
Coupon rate of 4.50%, due 1/11/01
with a market value of $1,482,845
(Cost $1,453,000) .............................. NR 1,453 1,453,000
------------
Total Investments--101.1%
(Cost $91,924,754) *** .......................... $ 93,266,019
------------
Other Liabilities in Excess of Other
Assets--(1.1%).................................. (1,047,540)
------------
Total Net Assets--100.0% .......................... $ 92,218,479
============
Net Asset Value and Redemption Price Per:
Class A Share
($47,106,899 divided 4,496,031 shares
outstanding).................................... $ 10.48
============
Institutional Share
($45,111,580 divided 4,254,449 shares
outstanding).................................... $ 10.60
============
Maximum Offering Price Per:
Class A Share ($10.48 divided 0.985)............ $ 10.64
============
Institutional Share ............................ $ 10.60
============
</TABLE>
- ---------
* The Standard & Poor's rating indicated is believed to be the most
recent rating available as of December 31, 1998. 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.

-31-
<PAGE>

<TABLE>
<CAPTION>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the
Year Ended
December 31,
- --------------------------------------------------------------------------------
1998
<S> <C>
Investment Income:
Interest ...................................................... $ 5,779,577
-----------
Expenses:
Investment advisory fee ....................................... 323,196
Distribution fee .............................................. 124,577
Professional fees ............................................. 111,420
Accounting fee ................................................ 63,952
Registration fees ............................................. 43,180
Custodian fee ................................................. 24,372
Printing and postage .......................................... 24,178
Transfer agent fee ............................................ 17,722
Miscellaneous ................................................. 15,548
-----------
Total expenses ....................................... 748,145

Less: Fees waived ................................................ (208,010)
-----------
Net expenses ......................................... 540,135
-----------
Net investment income ............................................ 5,239,442
-----------
Realized and unrealized gain on investments:
Net realized gain from security transactions .................. 626,662
Change in unrealized appreciation/depreciation of investments.. 281,972
-----------
Net gain on investments .............................. 908,634
-----------
Net increase in net assets resulting from operations ............. $ 6,148,076
===========
</TABLE>

See Notes to Financial Statements.
-32-

<PAGE>

<TABLE>
<CAPTION>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS

For the Year Ended December 31,
- --------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
Increase/(Decrease) in Net Assets:
Operations:
Net investment income ........................ $ 5,239,442 $ 4,590,636
Net gain from security transactions .......... 626,662 95,306
Change in unrealized appreciation/
depreciation of investments ................ 281,972 680,823
------------ ------------
Net increase in net assets resulting
from operations ............................ 6,148,076 5,366,765
------------ ------------
Dividends to Shareholders from:
Net investment income:
Class A Shares ............................. (2,783,314) (3,165,854)
Institutional Shares ....................... (2,456,128) (1,359,289)
Distributions in excess of net investment income:
Class A Shares ............................. (84,080) --
Institutional Shares ....................... (74,196) --
------------ ------------
Total distributions .......................... (5,397,718) (4,525,143)
------------ ------------
Capital Share Transactions:
Proceeds from sale of shares ................. 46,758,290 23,594,729
Value of shares issued in reinvestment of
dividends .................................. 2,730,265 2,514,042
Cost of shares repurchased ................... (35,645,932) (25,416,223)
------------ ------------
Increase in net assets derived from
capital share transactions ................. 13,842,623 692,548
------------ ------------
Total increase in net assets ................. 14,592,981 1,534,170

Net Assets:
Beginning of year ............................ 77,625,498 76,091,328
------------ ------------
End of year .................................. $ 92,218,479 $ 77,625,498
============ ============
</TABLE>
See Notes to Financial Statements.

-33-
<PAGE>

<TABLE>
<CAPTION>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
For the
Year Ended
December 31, For the Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of year ............... $ 10.39 $ 10.28 $ 10.48 $ 9.62 $ 10.57
------------- ------------- ------------- ------------- -------------
Income from Investment Operations:
Net investment income .............................. 0.58 0.61 0.63 0.62 0.57
Net realized and unrealized gain/(loss) on
investments........................................ 0.11 0.10 (0.23) 0.84 (0.92)
------------- ------------- ------------- ------------- -------------
Total from Investment Operations ................... 0.69 0.71 0.40 1.46 (0.35)
Less Distributions:
Distributions from net investment income ........... (0.58) (0.60) (0.60) (0.60) (0.57)
Distributions in excess of net investment income ... (0.02) -- -- -- --
Return of capital .................................. -- -- -- -- (0.03)
------------- ------------- ------------- ------------- -------------
Total distributions ................................ (0.60) (0.60) (0.60) (0.60) (0.60)
------------- ------------- ------------- ------------- -------------

Net asset value at end of year ..................... $ 10.48 $ 10.39 $ 10.28 $ 10.48 $ 9.62
============= ============= ============= ============= =============

Total Return(1) ....................................... 6.81% 7.13% 4.04% 15.43% (3.32)%
Ratios to Average Daily Net Assets:
Expenses(2) ........................................ 0.70% 0.70% 0.70% 0.70% 0.70%
Net investment income(3) ........................... 5.57% 5.92% 6.11% 6.00% 5.57%
Supplemental Data:
Net assets at end of year (000) .................... $ 47,107 $ 45,569 $ 58,584 $ 67,116 $ 78,789
Portfolio turnover rate ............................ 40% 65% 42% 46% 50%
</TABLE>

- ----------------
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 0.93%, 0.96%, 0.99%, 0.93%, and
0.84%, for the years ended December 31, 1998, 1997, 1996, 1995 and 1994,
respectively.
3 Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 5.34%, 5.66%, 5.83%,
5.77%, and 5.43%, for the years ended December 31, 1998, 1997, 1996, 1995
and 1994, respectively.

See Notes to Financial Statements.

34 and 35

<PAGE>

For the For the Period
Year Ended For the Years November 2, 1995(1)
December 31, Ended December 31, through December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period ................ $ 10.50 $ 10.38 $ 10.58 $ 10.42
--------- --------- --------- ----------
Income from Investment Operations:
Net investment income ................................. 0.61 0.61 0.59 0.09
Net realized and unrealized gain/(loss) on investments. 0.11 0.13 (0.17) 0.12
--------- --------- --------- ----------
Total from Investment Operations ...................... 0.72 0.74 0.42 0.21
Less Distributions:
Distributions from net investment income .............. (0.61) (0.62) (0.62) (0.05)
Distributions in excess of net investment income ...... (0.01) -- -- --
--------- --------- --------- ----------
Total distributions ................................... (0.62) (0.62) (0.62) (0.05)
--------- --------- --------- ----------

Net asset value at end of period ...................... $ 10.60 $ 10.50 $ 10.38 $ 10.58
========= ========= ========= ==========

Total Return(2)........................................... 7.07% 7.40% 4.20% 12.47%
Ratios to Average Daily Net Assets:
Expenses(3)............................................ 0.45% 0.45% 0.45% 0.45%(5)
Net investment income(4)............................... 5.81% 6.17% 6.35% 6.52%(5)
Supplemental Data:
Net assets at end of period (000) ..................... $ 45,112 $ 32,056 $ 17,507 $ 2,186
Portfolio turnover rate ............................... 40% 65% 42% 46%
</TABLE>

- --------------
1 Commencement of operations
2 Total return excluded the effect of sales charge.
3 Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 0.67%, 0.72%, 0.76%, and 0.72%
(annualized) for the years ended December 31, 1998, 1997 and 1996 and for 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 5.58%, 5.90%, 6.04%, and
6.27% (annualized) for the years ended December 31, 1998, 1997 and 1996, and
for the period ended December 31, 1995, respectively.
5 Annualized

See Notes to Financial Statements.

36 and 37

<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"), 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 in accordance 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 debt securities 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 portfolio securities that are 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. At December 31, 1998 there are no Board
valued securities. The Fund values short-term obligations with
maturities of 60 days or less at amortized cost.

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

-38-
<PAGE>

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

NOTE 1--concluded

matures. The agreement requires that the collateral's market value,
including any accrued interest, exceeds the broker's repurchase
obligation. 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
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 occur when taxable income exceeds
income under generally accepted accounting principles.

NOTE 2--INVESTMENT ADVISORY FEE, TRANSACTIONS WITH AFFILIATES AND
OTHER FEES

Investment Company Capital Corp. ("ICC"), an indirect subsidiary of Bankers
Trust 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

-39-
<PAGE>

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

NOTE 2--CONTINUED

million and 0.25% of the amount over $1.5 billion. For the year ended December
31, 1998, ICC's advisory fees amounted to $323,196, of which $8,697 was payable
at the end of the period.

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, 1998, ICC waived fees of $208,010.

ICC also provides accounting services to the Fund for which the Fund pays
ICC an annual fee that is calculated daily and paid monthly from the Fund's
average daily net assets. For the year ended December 31, 1998 ICC's fees were
$63,952, of which $5,504 was payable at the end of the period.

ICC also provides transfer agent services to the Fund for which the Fund
pays ICC a per account fee that is calculated and paid monthly. For the year
ended December 31, 1998 ICC's fees were $17,722, of which $3,450 was payable at
the end of the period.

Certain officers and directors of the Fund are also officers or directors
of ICC.

ICC Distributors, Inc., a member of the Forum Group of companies, provides
distribution services to the Fund for which the Fund pays ICC Distributors an
annual fee, pursuant to rule 12b-1, 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.

Effective September 22, 1997 Bankers Trust Corporation became the Fund's
custodian. For the year ended December 31, 1998 Bankers Trust fees were $24,372
of which $3,272 was payable at the end of the period.

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, 1998 was approximately $5,362, and the accrued liability was
approximately $12,254.
-40-

<PAGE>

FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
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, 1998 Dec. 31, 1997
------------ -------------
Shares sold .................................... 1,491,889 643,871
Shares issued to shareholders on
reinvestment of dividends ................... 203,462 188,623
Shares redeemed ................................ (1,585,950) (2,147,036)
------------ ------------
Net increase/(decrease) in shares outstanding .. 109,401 (1,314,542)
============ ============
Proceeds from sale of shares ................... $ 15,616,738 $ 6,656,537
Value of reinvested dividends .................. 2,128,706 1,939,315
Cost of shares redeemed ........................ (16,609,172) (22,186,651)
------------ ------------
Net increase/(decrease) from capital share
transactions ................................ $ 1,136,272 $(13,590,799)
============ ============

Institutional Shares
----------------------------
For the For the
Year Ended Year Ended
Dec. 31, 1998 Dec. 31, 1997
------------ -------------
Shares sold .................................... 2,941,098 1,621,803
Shares issued to shareholders on
reinvestment of dividends ................... 56,983 55,315
Shares redeemed ................................ (1,796,192) (310,716)
------------ ------------
Net increase in shares outstanding ............. 1,201,889 1,366,402
============ ============
Proceeds from sale of shares ................... $ 31,141,552 $ 16,938,192
Value of reinvested dividends .................. 601,559 574,727
Cost of shares redeemed ........................ (19,036,760) (3,229,572)
------------ ------------
Net increase from capital share transactions ... $ 12,706,351 $ 14,283,347
============ ============

-41-
<PAGE>

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

NOTE 4--INVESTMENT TRANSACTIONS

Excluding short-term obligations, purchases of investment securities
aggregated $64,786,573 and sales of investment securities aggregated $34,192,004
for the year ended December 31, 1998.

At December 31, 1998, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $1,484,580,
and aggregate gross unrealized depreciation for all securities in which there is
an excess of tax cost over value was $143,315.

NOTE 5--NET ASSETS

At December 31, 1998, net assets consisted of:

Paid-in Capital:
Flag Investors Class A Shares ............................ $ 49,449,406
Flag Investors Institutional Shares ...................... 44,425,466
Distributions in excess of net investment income ............. (214,183)
Accumulated net realized loss from security transactions ..... (2,783,475)
Net unrealized appreciation of investments ................... 1,341,265
------------
$ 92,218,479
============
NOTE 6--FEDERAL INCOME TAX INFORMATION

At December 31, 1998, there was a tax capital loss carryforward of
$2,757,728, of which $2,722,604 expires in 2003 and $35,124 expires in 2004.
This carryforward will be used to offset future net capital gains, if any.

-42-

<PAGE>

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

REPORT OF INDEPENDENT ACCOUNTANTS

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, 1998, 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 financial
highlights are free from 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, 1998, by correspondence with the custodian and broker. 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. at December 31, 1998, the results of its
operations, the changes in its net assets, and the financial highlights for the
stated periods in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP
Princeton, New Jersey
February 2, 1999

-43-

<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 - 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 - 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 - 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 - 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 - 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