FLAG INVESTORS REAL ESTATE SECURITIES FUND INC, 497, 1997-01-23

FLAG INVESTORS REAL ESTATE SECURITIES FUND INC
497, 1997-01-23

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LOGO

FLAG INVESTORS

REAL ESTATE SECURITIES FUND, INC.

(Institutional Shares)

Prospectus & Application -- January 20, 1997

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This mutual fund (the "Fund") is designed to seek total return primarily
through investments in equity securities of companies that are principally
engaged in the real estate industry.

Flag Investors Institutional Shares of the Fund ("Institutional Shares") are
available through Alex. Brown & Sons Incorporated ("Alex. Brown"), as well as
through Participating Dealers and may be purchased only by eligible
institutions or by clients of investment advisory affiliates of Alex. Brown.
(See "How to Invest in Institutional Shares.")

This Prospectus sets forth basic information that investors should know about
the Fund prior to investing and should be retained for future reference. A
Statement of Additional Information dated May 1, 1996, as amended through
January 20, 1997, has been filed with the Securities and Exchange Commission
(the "SEC") and is hereby incorporated by reference. It is available upon
request and without charge by calling the Fund at (800) 767-FLAG.

No person has been authorized to give any information or to make
representations not contained in this Prospectus in connection with any
offering made by this Prospectus and, if given or made, such information must
not be relied upon as having been authorized by the Fund or its distributor.
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TABLE OF CONTENTS
Fee Table ............................... 1
Financial Highlights .................... 2
Investment Program ...................... 3
Risk Factors ............................ 4
Investment Restrictions ................. 5
How to Invest in Institutional Shares ... 5
How to Redeem Institutional Shares ...... 6
Telephone Transactions .................. 6
Dividends and Taxes ..................... 7
Management of the Fund .................. 8
Investment Advisor and Sub-Advisor ...... 8
Distributor ............................. 9
Custodian, Transfer Agent and
Accounting Services .................... 9
Performance Information ................. 9
General Information ..................... 10
Application ............................. A-1

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

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

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

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

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

Annual Fund Operating Expenses (net of fee waivers and reimbursements):
(as a percentage of average daily net assets)
Management Fees (net of fee waivers and reimbursements) ................. .00%*
12b-1 Fees .............................................................. None
Other Expenses .......................................................... 1.00%
Total Fund Operating Expenses (net of fee waivers and reimbursements) ... 1.00%*
======
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* The Fund's investment advisor currently intends to waive its fee or to
reimburse the Fund on a voluntary basis to the extent required so that
Total Fund Operating Expenses do not exceed 1.00% of the Institutional
Shares' average daily net assets. Absent fee waivers and reimbursements,
Management Fees would be .65% of the Fund's average daily net assets and
Total Fund Operating Expenses would be 2.01% of the Institutional Shares'
average daily net assets.

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Example: 1 year 3 years 5 years 10 years
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You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each time period:* ................................... $10 $32 $55 $122
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* The Example is based on Total Fund Operating Expenses, net of fee waivers
and reimbursements. Absent such fee waivers and reimbursements, expenses
would be higher.

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

The purpose of the foregoing table is to describe the various costs and
expenses that an investor in the Fund will bear directly and indirectly. A
person who purchases Institutional Shares through a financial institution may
be charged separate fees by the financial institution. (For more complete
descriptions of the various costs and expenses, see "How to Invest in
Institutional Shares", "Investment Advisor and Sub-Advisor" and
"Distributor.") The Expenses and Example appearing in the table above are
based on the Fund's expenses for the Class A Shares, another class of shares
offered by the Fund, for the fiscal year ended December 31, 1995, less 12b-1
fees of .25%.

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FINANCIAL HIGHLIGHTS
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The Fund has not offered the Institutional Shares prior to the date of
this Prospectus. However, the Fund has offered Class A Shares since January
3, 1995. Historical financial information about the Fund is not fully
applicable to the Institutional Shares because the expenses paid by the Fund
in the past differ from those the Institutional Shares will incur. (See "Fee
Table") Nevertheless, historical information about the Fund may be useful to
investors if they take into account the differences in expenses. Accordingly,
the financial highlights included in this table have been derived from the
Fund's financial statements for the Class A Shares for the periods indicated
and, except for the financial statements for the six-month period ended June
30, 1996, which are unaudited, have been audited by Coopers & Lybrand L.L.P.,
independent accountants. The financial statements and financial highlights
for the fiscal year ended December 31, 1995 and the report thereon of Coopers
& Lybrand L.L.P., and the unaudited financial statements for the six-month
period ended June 30, 1996, are included in the Statement of Additional
Information. Additional performance information for the Fund's Class A Shares
is contained in the Fund's Annual Report for the fiscal year ended December
31, 1995 and its Semi-Annual Report for the six-month period ended June 30,
1996, which can be obtained at no charge by calling the Fund at (800)
767-FLAG.

(For a share outstanding throughout each period)*
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Class A Shares
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For the
Six-Month For the Period
Period ended January 3, 1995**
June 30, 1996 through
(Unaudited) December 31, 1995
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Per Share Operating Performance:
Net asset value at beginning of period ............................... $ 11.20 $ 10.00
---------- ---------
Income from Investment Operations:
Net investment income ................................................. 0.31 0.56
Net realized and unrealized gain on
investments ........................................................ 0.37 1.21
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Total from Investment Operations ...................................... 0.68 1.77
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Less Distributions:
Dividends from net investment income .................................. (0.30) (0.52)
Distributions from short-term capital
gains .............................................................. -- (0.05)
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Total distributions ................................................... (0.30) (0.57)
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Net asset value at end of period ...................................... $ 11.58 $ 11.20
========== =========
Total Return*** ......................................................... 6.20% 18.19%

Ratios to Average Daily Net Assets:
Expenses .............................................................. 1.25%(1,2) 1.25%(2,4)
Net investment income ................................................. 5.61%(1,3) 5.95%(1,3)

Supplemental Data:
Net assets at end of period (000) ..................................... $12,425 $7,171
Portfolio turnover rate ............................................... 9%(1) 28%
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* Computed based upon average shares outstanding.
** Commencement of operations.
*** Total return excludes the effect of sales charge.
(1) Annualized.
(2) Without the waiver of advisory fees, the ratio of expenses to average
daily net assets would have been 2.26% (annualized) and 3.25%
(annualized) for the periods ended June 30, 1996 and
December 31, 1995, respectively.
(3) Without the waiver of advisory fees, the ratio of net investment income
to average daily net assets would have been 4.60% (annualized) and 3.98%
(annualized) for the periods ended June 30, 1996 and
December 31, 1995, respectively.
(4) Annualized ratios based upon average monthly net assets would be 1.19%.

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INVESTMENT PROGRAM
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INVESTMENT OBJECTIVES AND POLICIES

The investment objective of the Fund is total return primarily through
investments in equity securities of companies that are principally engaged in
the real estate industry. This investment objective is a fundamental policy
of the Fund and cannot be changed without shareholder approval.

Under normal conditions at least 65% of the Fund's total assets will be
invested in the equity securities of companies principally engaged in the
real estate industry. A company is "principally engaged" in the real estate
industry if (i) it derives at least 50% of its revenues or profits from the
ownership, construction, management, financing or sale of residential,
commercial or industrial real estate or (ii) it has at least 50% of the fair
market value of its assets invested in residential, commercial or industrial
real estate. Companies in the real estate industry may include among others:
real estate investment trusts ("REITs"), master limited partnerships that
invest in interests in real estate and which are traded on a national
securities exchange; real estate brokers or developers; and companies with
substantial real estate holdings, such as paper and lumber producers. By
investing in master limited partnerships through the Fund, shareholders
indirectly bear a proportionate share of the operating expenses of the
underlying master limited partnership, in addition to the similar expenses of
the Fund. Equity securities include common stock, rights or warrants to
purchase common stock, preferred stock, and securities convertible into
common stock. The Fund may invest up to 10% of its total assets in securities
of foreign real estate companies.

The Fund may invest in securities of REITs. REITs pool investors' funds
for investment primarily in income producing real estate or real estate
related loans or interests. A REIT is not taxed on income distributed to its
shareholders or unitholders if it complies with regulatory requirements
relating to its organization, ownership, assets and income, and with a
regulatory requirement that it distribute to its shareholders or unitholders
at least 95% of its taxable income for each taxable year. Generally, REITs
can be classified as Equity REITs, Mortgage REITs and Hybrid REITs. Equity
REITs invest the majority of their assets directly in real property and
derive their income primarily from rents and capital gains from appreciation
realized through property sales. Mortgage REITs invest the majority of their
assets in real estate mortgages and derive their income primarily from
interest payments. Hybrid REITs combine the characteristics of both Equity

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and Mortgage REITs. By investing in REITs indirectly through the Fund, a
shareholder will bear not only his proportionate share of the expenses of the
Fund, but also indirectly, similar expenses of underlying REITs.

Under normal conditions the portfolio may invest up to 35% of its total
assets in securities of companies outside the real estate industry and
nonconvertible debt securities such as bonds. Investment Company Capital
Corp. ("ICC"), the Fund's investment advisor, and ABKB/LaSalle Securities
Limited Partnership ("ABKB/LaSalle"), the Fund's sub-advisor (collectively,
the "Advisors"), currently anticipate that investments outside the real
estate industry will be primarily in securities of companies whose products
and services are related to the real estate industry. They may include
manufacturers and distributors of building supplies, financial institutions
which make or service mortgages and companies whose real estate assets are
substantial relative to their stock market valuations, such as retailers and
railroads. The Fund may invest up to 5% of its net assets in zero coupon or
other original issue discount securities. The debt securities purchased by
the Fund will be of investment grade or better quality (i.e., of a quality
equivalent to the ratings Baa or better of Moody's Investors Service, Inc.
("Moody's") or BBB or better of Standard & Poor's Ratings Group ("S&P").
While classified as "investment grade," securities rated Baa by Moody's or
BBB by S&P have speculative characteristics. The ratings categories of S&P
and Moody's are described more fully in the Appendix to the Statement of
Additional Information.

For temporary defensive purposes the Fund may invest up to 100% of its
assets in short-term money market instruments consisting of securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities,
repurchase agreements, certificates of deposit and bankers' acceptances
issued by banks or savings and loan associations having net assets of at
least $500 million as of the end of their most recent fiscal year, high-grade
commercial paper rated, at time of purchase, in the top two categories by a
national rating agency or determined to be of comparable quality by ICC or
ABKB/LaSalle at the time of purchase and other long- and short-term debt
instruments which are rated A or higher by S&P or Moody's at the time of
purchase, and may hold a portion of its assets in cash. The Fund has the
ability to invest in warrants, futures contracts and options, but has no
intention to do so during the coming year.

Subject to the Fund's overall investment limitations on investing in
illiquid securities and restricted

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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 may affect the value of the Rule 144A
Securities. The Fund's Board of Directors has established guidelines and
procedures to be utilized to determine the liquidity of such securities.

REPURCHASE AGREEMENTS

The Fund may agree to purchase U.S. Treasury securities from financial
institutions, such as banks and broker-dealers, subject to the seller's
agreement to repurchase the securities at an established time and price. U.S.
Treasury securities include Treasury bills, Treasury notes, Treasury bonds
and Separate Trading of Registered Interest and Principal of Securities
("STRIPS"), all of which are direct obligations of the U.S. Government and
are supported by the full faith and credit of the United States. The Fund
will enter into repurchase agreements only with banks and broker-dealers that
have been determined to be creditworthy by the Fund's Board of Directors
under criteria established with the assistance of the Advisors. Default by
the seller may, however, expose the Fund to possible loss because of adverse
market action or delay in connection with the disposition of the underlying
obligations. In addition, if bankruptcy proceedings are commenced with
respect to the seller of the security, the Fund may be delayed or limited in
its ability to sell the collateral.

WHEN-ISSUED SECURITIES

The Fund may purchase securities on a when-issued basis, which means that
delivery and payment for such securities normally take place within 45 days
after the date of the commitment to purchase. The payment obligation and the
interest rate that will be received on a when-issued security are fixed at
the time the purchase commitment is entered into, although no interest on
such security accrues to the Fund prior to payment and delivery. A segregated
account of the Fund consisting of cash, cash equivalents or U.S. Government
securities or other high quality liquid debt 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. Additional cash or liquid debt
securities will be added to the account when necessary. While the Fund will
purchase securities on a when-issued basis only with the intention of
acquiring the securities, the Fund may sell the securities before the
settlement date if it is deemed advisable to limit the effects of adverse
market action. The securities so purchased or sold are subject to market
fluctuation so, at the time of delivery of the securities, their value may be
more or less than the purchase or sale price.
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RISK FACTORS
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Because the Fund invests primarily in the real estate industry, its
investments may be subject to certain risks. These risks include: declines in
the value of real estate, risks related to general and local economic
conditions, overbuilding and increased competition, increases in property
taxes and operating expenses, demographic trends and variations in rental
income. Generally, increases in interest rates will decrease the value of
high yielding securities and increase the costs of obtaining financing, which
could directly and indirectly decrease the value of the Fund's investments.
The Fund's share price and investment return fluctuate, and a shareholder's
investment when redeemed may be worth more or less than his original cost.

Because the Fund may invest in REITs, it may also be subject to certain
risks associated with the direct investments of the REITs. Equity REITs may
be affected by changes in the value of the underlying property owned by the
REITs, while Mortgage REITs may be affected by the quality of credit
extended. Equity and Mortgage REITs are dependent upon management skill, have
limited diversification and are subject to the risks of financing projects.
Such REITs are also subject to heavy cash flow dependency, defaults by
borrowers, self liquidation and the possibility of failing to qualify for
tax-free pass-through of income under the Internal Revenue Code of 1986, as
amended or failing to maintain their exemptions from registration under the
Investment Company Act of 1940.

Investing in securities issued by foreign corporations involves
considerations and possible risks not typically associated with investing in
securities issued by domestic corporations. The values of foreign investments
are affected by changes in currency rates or exchange control regulations,
application of foreign tax laws, including withholding taxes, changes in
governmental administration or economic or monetary policy (in the United
States or abroad) or changed circumstances in dealings between nations. Costs
are incurred in connection with conversions between various currencies. In
addition, foreign brokerage commissions are generally higher than in the
United States, and foreign securities markets may be less liquid, more
volatile and less subject to governmental supervision than in the United
States. Investments in foreign countries could be affected by other factors
not present in

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the United States, including expropriation, confiscatory taxation, lack of
uniform accounting and auditing standards, potential difficulties in
enforcing contractual obligations and the possibility of extended settlement
periods. For additional risk disclosure see "Repurchase Agreements" and
"When-Issued Securities."

INVESTMENT RESTRICTIONS
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The Fund's investment program is subject to a number of restrictions which
reflect both self imposed standards and federal and state regulatory
limitations. The investment restrictions numbered 1 through 3 below are
matters of fundamental policy and may not be changed without the affirmative
vote of a majority of the outstanding shares. The vote of a majority of the
outstanding shares of the Fund means the lesser of: (i) 67% or more of the
shares present at a shareholder meeting at which the holders of more than 50%
of the shares are present or represented or (ii) more than 50% of the
outstanding shares of the Fund. Investment restriction number 4 may be
changed by a vote of the majority of the Board of Directors. The Fund will
not:

1) With respect to 75% of its total assets, purchase more than 10% of the
outstanding voting securities of any one issuer or invest more than 5% of
the value of its total assets in the securities of any one issuer, except
the U.S. Government, its agencies and instrumentalities;

2) Concentrate 25% or more of its total assets in securities of issuers in
any one industry, except that the Fund will concentrate in the real estate
industry (for these purposes the U.S. Government and its agencies and
instrumentalities are not considered an issuer);

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

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

The Fund is subject to further investment restrictions that are set forth
in the Statement of Additional Information.
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HOW TO INVEST IN INSTITUTIONAL SHARES
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Institutions (e.g., banks and trust companies, savings institutions,
corporations, insurance companies, investment counsellors, pension funds
employee benefit plans, trusts, estates and educational, religious and
charitable institutions) and clients of investment advisory affiliates of
Alex. Brown may purchase Institutional Shares through Alex. Brown, 1 South
Street, Baltimore, Maryland 21202 (telephone: (800) 553-8080), through any
securities dealer which has entered into a dealer agreement with Alex. Brown
("Participating Dealers"), or by completing the Application Form attached to
this Prospectus and returning it, together with payment of the purchase
price, as instructed in the Application.

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

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

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

PURCHASES BY EXCHANGE

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

The exchange privilege may be exercised by notifying the Fund's transfer
agent (the "Transfer Agent") by telephone at (800) 553-8080 on any Business
Day between the hours of 8:30 a.m. and 5:30 p.m. (Eastern Time) (See
"Telephone Transactions" below) or by regular or express mail at its address
listed under "Custodian, Transfer Agent and Accounting Services." The Fund
may modify or terminate this offer of exchange at any time on 60 days' prior
written notice to shareholders.

OTHER INFORMATION

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

In the interest of economy and convenience and because of the operating
procedures for the Institutional Shares, certificates representing such
shares will not be issued. All purchases of Institutional Shares are
confirmed and credited to the shareholder's account on the Fund's books
maintained by ICC or its agents. Shareholders will have the same rights and
ownership with respect to such shares as if certificates had been issued.
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HOW TO REDEEM INSTITUTIONAL SHARES
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Shareholders may redeem all or part of their Institutional Shares on any
Business Day by transmitting a redemption order through Alex. Brown or a
Participating Dealer, or by regular or express mail to the Transfer Agent at
its address listed under "Custodian, Transfer Agent and Accounting Services."
Shareholders may also redeem Institutional Shares by telephone (in amounts up
to $500,000). (See "Telephone Transactions" below.) A redemption request is
effected at the net asset value per share next determined after receipt of
the order in proper form. Redemption orders received after 4:00 p.m. (Eastern
Time) or the close of the New York Stock Exchange, whichever is earlier, will
be effected at the net asset value next determined on the following Business
Day. Payment for redeemed Institutional Shares will be made by wire transfer
of funds to the shareholder's bank, or to a Participating Dealer, as
appropriate, upon receipt of a duly authorized redemption request as promptly
as feasible and, under most circumstances, within three Business Days.

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

The Fund has the power under its Articles of Incorporation to redeem
shareholder accounts amounting to less than $500 (as a result of redemptions)
upon 60 days' written notice.

TELEPHONE TRANSACTIONS
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Shareholders may exercise the exchange privilege with respect to other
Flag Investors funds, or redeem Institutional Shares in amounts up to
$500,000, by notifying the Transfer Agent by telephone at (800) 553-8080 on
any Business Day between the hours of 8:30 a.m. and 5:30 p.m. (Eastern Time)
or by regular or express mail at its address listed under "Custodian,
Transfer Agent and Accounting Services." Telephone transaction privileges are
automatic. Shareholders may specifically request that no telephone
redemptions or exchanges be accepted for their accounts. This election may be
made on the Application Form or at any time thereafter by completing and
returning appropriate documentation supplied by the Transfer Agent.

A telephone exchange or redemption placed by 4:00 p.m. (Eastern Time) or
the close of the New York

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Stock Exchange, whichever is earlier, is effective that day. Telephone orders
placed after 4:00 p.m. (Eastern Time) will be effected at the net asset value
as determined on the following Business Day.

The Fund and the Transfer Agent will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. These
procedures include requiring the investor to provide certain personal
identification information at the time an account is opened and prior to
effecting each transaction requested by telephone. In addition, all telephone
transaction requests will be recorded and investors may be required to
provide additional telecopied instructions of such transaction requests. If
these procedures are employed, neither the Fund nor the Transfer Agent will
be responsible for any loss, liability, cost or expense for following
instructions received by telephone that either of them reasonably believes to
be genuine. During periods of extreme economic or market changes,
shareholders may experience difficulty in effecting telephone transactions.
In such event, requests should be made by express mail or facsimile. (See
"How to Invest in Institutional Shares--Purchases by Exchange" and "How to
Redeem Institutional Shares.")

DIVIDENDS AND TAXES
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DIVIDENDS AND DISTRIBUTIONS

The Fund's policy is to distribute to shareholders substantially all of
its net investment company taxable income (including net short-term capital
gains) in the form of monthly dividends. The Fund also intends to distribute
to shareholders any net capital gains (the excess of net long-term capital
gains over net short-term capital losses) on an annual basis.

Unless the shareholder elects otherwise, all income dividends (consisting
of dividend and interest income and the excess, if any, of net short-term
capital gains over net long-term capital losses) and net capital gains
distributions, if any, will be reinvested in additional Institutional Shares
at net asset value. However, shareholders may elect to terminate automatic
reinvestment by giving written notice to the Transfer Agent (see "Custodian,
Transfer Agent and Accounting Services"), either directly or through their
Participating Dealer or Shareholder Servicing Agent, at least five days
before the next date on which dividends or distributions will be paid.
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TAXES

The following summary of federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative,
judicial, or administrative action. The following is only a general summary
of certain federal income tax considerations affecting the Fund and its
shareholders. No attempt is made to present a detailed explanation of the
federal, state, or local tax treatment of the Fund or its shareholders.
Accordingly, shareholders are urged to consult their tax advisers regarding
specific questions as to federal, state, and local taxes.

TAX TREATMENT OF THE FUND

The Fund is treated as a separate entity for federal income tax purposes.
The Fund intends to qualify for the special tax treatment afforded regulated
investment companies under the Internal Revenue Code of 1986, as amended, so
that the Fund will be relieved of federal income tax on net investment
company taxable income and net capital gains distributed to its shareholders.
In addition, the Fund expects to make sufficient distributions prior to the
end of each calendar year to avoid liability for federal excise tax.

TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS

Dividends from the Fund's net investment company taxable income are
taxable to its shareholders as ordinary income (whether received in cash or
in additional shares) to the extent of the Fund's earnings and profits.
Distributions of net capital gains that are designated by the Fund as capital
gains dividends are taxable to shareholders as long-term capital gains,
regardless of how long shareholders have held their shares and regardless of
whether the distributions are received in cash or in additional shares. Only
a portion of the dividends paid by the Fund is expected to qualify for the
dividends received deduction available to corporate shareholders. The Fund
makes annual reports to shareholders describing the federal income tax status
of all distributions.

Dividends declared payable to shareholders of record in December of one
year, but paid in January of the following year, will be deemed for tax
purposes to have been paid by the Fund and received by the shareholders on
December 31 of the year in which the dividends were declared.

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

7
<PAGE>

MANAGEMENT OF THE FUND
- -------------------------------------------------------------------------------

The overall business affairs of the Fund are managed by its Board of
Directors. The Board approves all significant agreements between the Fund and
persons or companies furnishing services to the Fund, including the Fund's
agreements with its investment advisor, sub-advisor, distributor, custodian
and transfer agent. The day-to-day operations of the Fund are delegated to
the Fund's executive officers and to ICC and ABKB/LaSalle. Four Directors and
all of the officers of the Fund are officers or employees of Alex. Brown, ICC
or ABKB/LaSalle. The other Directors of the Fund have no affiliation with
Alex. Brown, ICC or ABKB/LaSalle.

The Fund's Directors and officers are as follows:

Richard T. Hale Chairman William K. Morrill, Jr. President
Truman T. Semans Director Keith R. Pauley Executive Vice
Charles W. Cole, Jr. Director President
James J. Cunnane Director Edward J. Veilleux Vice President
Robert S. Killebrew, Jr. Director Gary V. Fearnow Vice President
John F. Kroeger Director Scott J. Liotta Vice President
Louis E. Levy Director Joseph A. Finelli Treasurer
Eugene J. McDonald Director Edward J. Stoken Secretary
Rebecca W. Rimel Director Laurie D. Collidge Assistant
Carl W. Vogt Director Secretary

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

Investment Company Capital Corp. is the Fund's investment advisor and
ABKB/LaSalle Securities Limited Partnership is the Fund's Sub-Advisor. ICC is
the investment advisor to, and Alex. Brown acts as distributor for, other
mutual funds in the Flag Investors family of funds and Alex. Brown Cash
Reserve Fund, Inc., which funds had approximately $5.2 billion of net assets
as of December 31, 1996. The address of ICC is 1 South Street, Baltimore,
Maryland 21202. ABKB/LaSalle is a registered investment advisor and together
with its affiliates had, as of December 31, 1996, approximately $600 million
in real estate securities under management, almost all of which is in
domestic real estate securities. ABKB/LaSalle was formed on November 1, 1994
to acquire the real estate securities investment advisory business of Alex.
Brown Kleinwort Benson Realty Advisors Corporation. ABKB/LaSalle, together
with its predecessors, has provided investment advice to pension funds and
other institutional investors with respect to investments in real estate
securities since 1985, although it had not previously acted as investment
advisor or sub-advisor to a mutual fund. ABKB/LaSalle currently provides
sub-advisory services to three mutual funds which had approximately $71
million of combined net assets as of December 31, 1996. The address of
ABKB/LaSalle is 100 East Pratt Street, Baltimore, Maryland 21202.
<PAGE>

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

ICC and ABKB/LaSalle currently intend to waive, on a voluntary basis,
their annual fees to the extent necessary so that the Fund's annual expenses
do not exceed 1.00% of the Institutional Shares' average daily net assets.
For the period ended December 31, 1995, ICC waived all advisory fees and
reimbursed expenses of $91,068. For the same period ABKB/LaSalle waived all
sub-advisory fees.

ICC is an indirect subsidiary of Alex. Brown Incorporated. ABKB/LaSalle, a
Maryland limited partnership, is one of several entities through which
LaSalle Partners Limited Partnership and its affiliates conduct real estate
investment advisory and related businesses. ABKB/LaSalle is controlled
indirectly by DEL-LPL Limited Partnership, a Delaware limited partnership,
whose general partners are M.G. Rose and seven cor-

8
<PAGE>

porations, each of which is owned by one of the following persons: Kenneth M.
Campia; Daniel W. Cummings; Wade W. Judge; Stuart L. Scott; Robert C.
Spoerri; Lynn C. Thurber; and Robert F. Works.

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

PORTFOLIO MANAGERS

William K. Morrill, Jr., the Fund's President, and Keith R. Pauley, the
Fund's Executive Vice President, have shared primary responsibility for
managing the Fund's assets from its inception.

William K. Morrill, Jr., Managing Director of ABKB/LaSalle, has nearly 16
years of investment experience and has been a portfolio manager with
ABKB/LaSalle or its predecessors since 1986.

Keith R. Pauley, Senior Vice President of ABKB/LaSalle, has over ten years
of investment experience and has been a portfolio manager with ABKB/LaSalle
or its predecessors since 1986.

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

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

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

The address of Alex. Brown is 1 South Street, Baltimore, Maryland 21202.
<PAGE>

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

PNC Bank, National Association ("PNC Bank"), a national banking
association, with offices at Airport Business Park, 200 Stevens Drive,
Lester, Pennsylvania 19113, acts as custodian of the Fund's assets.
Investment Company Capital Corp., 1 South Street, Baltimore, Maryland 21202
(telephone: (800) 553-8080) is the Fund's transfer and dividend disbursing
agent. ICC also provides accounting services to the Fund. As compensation for
such accounting services for the period ended December 31, 1995, ICC received
a fee equal to .20% (annualized) of the Fund's average daily net assets. (See
the Statement of Additional Information.) ICC also serves as the Fund's
investment advisor.

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

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

If the Fund compares its performance to other funds or to relevant
indices, such as the Wilshire Real Estate Index, its performance will be
stated in the same terms in which such comparative data and indices are
stated, which is normally total return rather than yield.

9
<PAGE>

For these purposes, the performance of the Fund, as well as the performance
of such investment companies or indices, may not reflect sales charges,
which, if reflected, would reduce performance results.

The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Morningstar
Inc., independent services which monitor the performance of mutual funds. The
Fund may also use total return performance data as reported in national
financial and industry publications that monitor the performance of mutual
funds such as Money Magazine, Forbes, Business Week, Barron's, Investor's
Daily, IBC/Donoghue's Money Fund Report and The Wall Street Journal.

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

GENERAL INFORMATION
- -------------------------------------------------------------------------------

DESCRIPTION OF SHARES

The Fund is an open-end management investment company organized under the
laws of the State of Maryland on May 2, 1994 and is authorized to issue 15
million shares of capital stock, par value of $.001 per share, all of which
shares are designated common stock. Each share has one vote and shall be
entitled to dividends and distributions when and if declared by the Fund. In
the event of liquidation or dissolution of the Fund, each share is entitled
to its pro rata portion of the Fund's assets after all debts and expenses
have been paid. The fiscal year end of the Fund is December 31.
<PAGE>

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

ANNUAL MEETINGS

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

REPORTS

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

FUND COUNSEL

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

SHAREHOLDER INQUIRIES

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

<PAGE>

FLAG INVESTORS REAL ESTATE SECURITIES FUND, INC.
(INSTITUTIONAL SHARES)
NEW ACCOUNT APPLICATION
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
Send completed Application by overnight carrier to: For assistance in completing this application please call:
Alex. Brown & Sons Incorporated/Flag Investors Funds 1-800-553-8080, Monday through Friday, 8:30 a.m. to 5:30 p.m.
1004 Baltimore Avenue, 4th Floor (Eastern Time).
Kansas City, MO 64105
Attn: Flag Investors Real Estate Securities Fund, Inc.
</TABLE>

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

YOUR ACCOUNT REGISTRATION (PLEASE PRINT)
<TABLE>

<S> <C>
Name on Account Mailing Address

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

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

------------------------------------------------
/ / Corporation / / Partnership / / Trust City State Zip

/ / Non-Profit or Charitable Organization / / Other _________
( )
If a Trust, please provide the following: -------------------------------------------------
Daytime Phone

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

- -------------------------------------------------------------------------------------------------------------------
Name of Trustees (If to be included in the Registration)
</TABLE>

- -------------------------------------------------------------------------------
INITIAL INVESTMENT

The minimum initial purchase for the Institutional Shares of the Fund is
$500,000, except that the minimum initial purchase is $1,000,000 for
qualified retirement plans. There is no minimum for clients of investment
advisory affiliates of Alex. Brown or for subsequent investments.

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 Real Estate Securities Fund, Inc.
- ------ B. By Wire: A bank wire in the amount of $_______has been sent
from_______________________________ ____________________________
Name of Bank Wire Control Number

Wire Instructions
Follow the instructions below to arrange for a wire transfer for
initial investment:
o Send completed Application by overnight carrier to Alex. Brown &
Sons Incorporated/Flag Investors Funds at the address listed
above.
o Call 1-800-553-8080 to obtain new investor's Fund account number.
o Wire payment of the purchase price to Investors Fiduciary Trust
Company ("IFTC"), as follows:
IFTC
a/c Alex. Brown & Sons Incorporated/Flag Investors Funds
Acct. # 7518625
ABA # 1010-0362-1
Kansas City, Missouri 64105

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

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

<PAGE>

DISTRIBUTION OPTIONS

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

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

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

Redemptions effected by telephone will be wired to the bank
account designated below.
- -----------------------------------------------------------------------------

BANK ACCOUNT DESIGNATION
(THIS SECTION MUST BE COMPLETED)

Please attach a blank, voided check to provide account and bank routing
information.

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

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

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

- -----------------------------------------------------------------------------
Account Number A.B.A. Number

A-1
<PAGE>

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

- --------------------------------------------------------------------------------
I have received a copy of the Fund's prospectus dated January 20, 1997. I
acknowledge that the telephone redemption and exchange privileges are
automatic and will be effected as described in the Fund's current prospectus
(see "Telephone Transactions"). I also acknowledge that I may bear the risk
of loss in the event of fraudulent use of such privileges. If I do not want
telephone redemption or exchange privileges, I have so indicated on this
Application.
- --------------------------------------------------------------------------------
The Internal Revenue Service does not require your consent to any provision
of this document other than the certifications required to avoid backup
withholding.
- --------------------------------------------------------------------------------

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

- --------------------------------------------------------------------------------
PERSON(S) AUTHORIZED TO CONDUCT TRANSACTIONS

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

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

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

<PAGE>
- --------------------------------------------------------------------------------
CERTIFICATE OF AUTHORITY

Investors must complete one of the following two Certificates of Authority.
Certificate A: FOR CORPORATIONS AND UNINCORPORATED ASSOCIATIONS (With a Board
of Directors or Board of Trustees.)

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

Witness my hand and seal on behalf of the investor.
this __________ day of__________, 199___
Secretary____________________________________________________________________

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

_______________________________________________________________________________
Signature and title Date

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

_______________________________________________________________________________
Signature and title Date

A-2

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

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

FLAG INVESTORS REAL ESTATE SECURITIES FUND, INC.

1 South Street
Baltimore, Maryland 21202

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

THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A
PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH THE
PROSPECTUS, WHICH MAY BE OBTAINED FROM ANY
PARTICIPATING DEALER OR SHAREHOLDER SERVICING AGENT
OR BY WRITING ALEX. BROWN & SONS INCORPORATED, 135
EAST BALTIMORE STREET, BALTIMORE, MARYLAND 21202, OR
BY CALLING (800) 767-FLAG.

Statement of Additional Information Dated: May 1, 1996 as amended
through January 20, 1997

Relating to Prospectuses Dated:
May 1, 1996 for the Class A and Class B Shares
and
January 20, 1997 for the Institutional Shares

<PAGE>

TABLE OF CONTENTS

Page
----
<S> <C> <C>

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

2. Investment Objective and Policies...................................................................... 1

3. Valuation of Shares and Redemption..................................................................... 7

4. Federal Tax Treatment of Dividends and
Distributions........................................................................................ 8

5. Management of the Fund................................................................................. 10

6. Investment Advisory and Other Services................................................................. 15

7. Distribution of Fund Shares............................................................................ 16

8. Brokerage.............................................................................................. 19

9. Capital Stock.......................................................................................... 21

10. Semi-Annual Reports.................................................................................... 21

11. Custodian, Transfer Agent, and Accounting Services .................................................... 22

12. Independent Accountants ............................................................................... 22

13. Performance Information................................................................................ 22

14. Control Persons and Principal Holders of
Securities........................................................................................... 25

15. Financial Statements................................................................................... 25

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

</TABLE>

<PAGE>

1. GENERAL INFORMATION AND HISTORY

Flag Investors Real Estate Securities Fund, Inc. (the "Fund") is an
open-end management investment company. Under the rules and regulations of the
Securities and Exchange Commission (the "SEC"), all mutual funds are required to
furnish prospective investors with certain information concerning the activities
of the company being considered for investment. The Fund currently offers three
classes of shares: Flag Investors Real Estate Securities Fund Class A Shares
("Class A Shares"), Flag Investors Real Estate Securities Fund Class B Shares
("Class B Shares") and Flag Investors Real Estate Securities Fund Institutional
Shares ("Institutional Shares") (collectively, the "Shares"). As used herein,
the "Fund" refers to Flag Investors Real Estate Securities 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
current Prospectuses which may be obtained without charge from Alex. Brown &
Sons Incorporated ("Alex. Brown"), 1 South Street, Baltimore, Maryland 21202
(telephone: (800) 767-FLAG) or from Participating Dealers that offer shares of
the respective classes of the Fund ("Shares") to prospective investors.
Prospectuses for the Class A Shares and the Class B Shares 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 respecting the Fund
and its Shares filed with the SEC. Copies of the Registration Statement as
filed, including such omitted items, may be obtained from the SEC by paying the
charges prescribed under its rules and regulations.

The Fund was incorporated under the laws of the State of Maryland on May
2, 1994. 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. The Fund commenced operations on January 3,
1995. The Institutional Shares have not been offered prior to the date of this
Statement of Additional Information.

Under a license agreement dated August 23, 1994 between the Fund and
Alex. Brown Incorporated, Alex. Brown Incorporated licenses to the Fund the
"Flag Investors" name and logo but retains the rights to the name and logo,
including the right to permit other investment companies to use them.

2. INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is total return primarily through
investments in equity securities of companies that are principally engaged in
the real estate industry. As described in the Prospectus, the Fund will attempt
to achieve its objective by investing primarily in equity securities of
companies that are principally engaged in the real estate industry. There can be
no assurance that the Fund's investment objective will be achieved.

Real Estate Investment Trusts

Real estate investment trusts ("REITs") pool investors' funds for
investment primarily in income producing commercial real estate or real estate
related loans. A REIT is not taxed on income distributed to shareholders if it
complies with several requirements relating to its organization, ownership,
assets, and

-1-

<PAGE>

income and a requirement that it distribute to its shareholders at least 95% of
its taxable income (other than net capital gains) for each taxable year.

REITs can generally be classified as follows:

- Equity REITs, which invest the majority of their assets
directly in real property and derive their income primarily
from rents. Equity REITs can also realize capital gains by
selling properties that have appreciated in value.

- Mortgage REITs, which invest the majority of their assets in
real estate mortgages and derive their income primarily from
interest payments.

- Hybrid REITs, which combine the characteristics of both equity
REITs and mortgage REITs.

REITs are like closed-end investment companies in that they are essentially
holding companies which rely on professional managers to supervise their
investments. Investors in REITs indirectly through the Fund, will bear not only
a proportionate share of the expenses of the Fund, but also, indirectly, similar
expenses of underlying REITs.

Master Limited Partnerships

The Fund intends to invest in partnership units of real estate companies
organized as master limited partnerships whose ownership interests are publicly
traded. For federal income tax purposes, an entity treated as a partnership is
not itself a taxpaying entity. Instead, each partner in a partnership is
required to take into account in computing his income tax liability his
allocable share of the income, gain, loss, deductions and credits of the
partnership. Master limited partnerships often own several properties or
businesses which are related to real estate development or are themselves
heavily invested in real estate. Generally, a master limited partnership is
operated under the supervision of one or more managing general partners. As in
the case of REITs, a shareholder in the Fund will indirectly bear his
proportionate share of the operating expenses of the underlying master limited
partnerships in addition to the similar expenses of the Fund. The Fund will
invest only in partnership units of master limited partnerships that are traded
on a national securities exchange.

Debt Securities

Up to 35% of the Fund's total assets may be invested in debt securities
(which do not include for purposes of this investment policy convertible debt
securities which the Advisor or Sub-Advisor believes have attractive equity
characteristics). The Fund may invest in debt securities rated BBB or better by
Standard & Poor's Ratings Group ("S&P") or Baa or better by Moody's Investors
Service, Inc. ("Moody's") or, if not rated, of comparable quality as determined
by the Advisor or Sub-Advisor. (See the Appendix to this Statement of Additional
Information for a description of the ratings categories of S&P and Moody's.) In
choosing debt securities for purchase by the Fund, the Advisor will employ the
same analytical and valuation techniques utilized in managing the equity portion
of the Fund's portfolio (see "Investment Advisory and Other Services") and will
invest in debt securities only of companies that satisfy the Advisor's or
Sub-Advisor's investment criteria.

Certain of the debt securities in which the Fund may invest may be zero
coupon or other original issue discount securities which pay no current interest
but are purchased at a deep discount from the

-2-

<PAGE>

amount due at maturity. When held to maturity, the entire return, which consists
of the amortization of discount, is the difference between the purchase price
and the amount due at maturity.

The value of the Fund's investments in debt securities will change as
interest rates fluctuate. When interest rates decline, the values of such
securities generally can be expected to increase and when interest rates rise,
the values of such securities can generally be expected to decrease. The
lower-rated and comparable unrated debt securities described above are subject
to greater risks of loss of income and principal than are higher-rated fixed
income securities. The market value of lower-rated securities generally tends to
reflect the market's perception of the creditworthiness of the issuer and
short-term market developments to a greater extent than more highly rated
securities, which reflect primarily fluctuations in general levels of interest
rates.

Risks of Investment in Real Estate Securities

Even though the Fund will not invest in real estate directly, it may be
subject to risks similar to those associated with the direct ownership of real
estate because of its policy of concentrating in the securities of companies in
the real estate industry. These include declines in the value of real estate,
risks related to general and local economic conditions, dependency on management
skill, heavy cash flow dependency, possible lack of availability of long-term
mortgage funds, overbuilding, extended vacancies of properties, decreased
occupancy rates and increased competition, increases in property taxes and
operating expenses, changes in zoning laws, casualty or condemnation losses,
limitations on rents, changes in neighborhood values and the appeal of
properties to tenants and changes in interest rates.

The risks of ownership of partnership units of master limited
partnerships include those related to changes in economic conditions or changes
in real estate and specific property values. One added risk of master limited
partnerships is that they do not allow for election of independent directors or
trustees to oversee the policies of the partnership. Rather, they rely on a
general partner to exercise fiduciary responsibilities.

In addition to these risks, equity REITs may be affected by changes in
the value of the underlying property owned by the trusts, while mortgage REITs
may be affected by the quality of any credit extended. Further, equity and
mortgage REITs are dependent upon management skills and generally are not
diversified. Equity and mortgage REITs are also subject to heavy cash flow
dependency, defaults by borrowers and self-liquidation. In addition, equity and
mortgage REITs could possibly fail to qualify for tax free pass-through of
income under the Internal Revenue Code of 1986, as amended (the "Code") or to
maintain their exemptions from registration under the Investment Company Act.
The above factors may also adversely affect a borrower's or a lessee's ability
to meet its obligations to the REIT. In the event of a default by a borrower or
lessee, the REIT may experience delays in enforcing its rights as a mortgagee or
lessor and may incur substantial costs associated with protecting its
investments.

Money Market Securities

From time to time the Fund may purchase high quality short-term debt
securities, commonly known as money market securities. These securities include
direct obligations of the U.S. Government which consist of bills, notes and
bonds issued by the U.S. Treasury. Obligations issued by agencies of the U.S.
Government, while not direct obligations of the U.S. Government, are either
backed by the full faith and credit of the U.S. or are guaranteed by the U.S.
Treasury or supported by the issuing agencies' right to borrow from the U.S.
Treasury.

The obligations of U.S. commercial banks include certificates of
deposit, time deposits and bankers' acceptances. Certificates of deposit are
negotiable interest-bearing instruments with a specific maturity. Certificates
of deposit are issued by banks and savings and loan institutions in exchange for
the

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<PAGE>

deposit of funds and normally can be traded in the secondary market, prior to
maturity. Time deposits are non-negotiable receipts issued by a bank in exchange
for the deposit of funds. Time deposits earn a specified rate of interest over a
definite period of time; however time deposits cannot be traded in the secondary
market. Bankers' acceptances are bills of exchange or time drafts drawn on and
accepted by a commercial bank. Bankers' acceptances are used by corporations to
finance the shipment and storage of goods and furnish dollar exchange.
Maturities are generally six months or less.

The commercial paper which may be purchased includes variable amount
master demand notes which may or may not be backed by bank letters of credit.
These notes permit the investment of fluctuating amounts at varying market rates
of interest pursuant to direct arrangements between the Fund, as lender, and the
borrower. Such notes provide that the interest rate on the amount outstanding
varies on a daily, weekly or monthly basis depending upon a stated short-term
interest rate index. Both the lender and the borrower have the right to reduce
the amount of outstanding indebtedness at any time. There is no secondary market
for the notes. It is not generally contemplated that such instruments will be
traded. Variable or floating rate instruments bear interest at a rate which
varies with changes in market rates. The holder of an instrument with a demand
feature may tender the instrument back to the issuer at par prior to maturity. A
variable amount master demand note is issued pursuant to a written agreement
between the issuer and the holder, its amount may be increased by the holder or
decreased by the holder or issuer, it is payable on demand, and the rate of
interest varies based upon an agreed formula. The quality of the underlying
credit must, in the opinion of the Advisor or Sub-Advisor, be equivalent to the
ratings applicable to permitted investments for the Fund. The Advisor or
Sub-Advisor will monitor on an ongoing basis the earning power, cash flow, and
liquidity ratios of the issuers of such instruments and will similarly monitor
the ability of an issuer of a demand instrument to pay principal and interest on
demand.

Futures Contracts and Options on Futures Contracts

The Fund may buy or sell financial futures contracts or purchase options
on such futures as a hedge against anticipated interest rate changes. A futures
contract sale creates an obligation by the Fund, as seller, to deliver the
specified type of financial instrument called for in the contract at a specified
future time for a specified price or, in "cash settlement" futures contracts, to
pay to (or receive from) the buyer in cash the difference between the price in
the futures contract and the market price of the instrument on the specified
date, if the market price is higher (or lower, as the case may be). Options on
futures contracts are similar to options on securities except that an option on
a futures contract gives the purchaser the right for the premium paid to assume
a position in a futures contract (a long position if the option is a call and a
short position if the option is a put).

The Fund's use of futures and options on futures will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission ("CFTC") with which
the Fund must comply in order not to be deemed a commodity pool operator within
the meaning and intent of the Commodity Exchange Act and the regulations
promulgated thereunder.

Typically, an investment in a futures contract requires the Fund to
deposit with the applicable exchange or other specified financial intermediary
as security for its obligations an amount of cash or other specified debt
securities which initially is 1% to 5% of the face amount of the contract and
which thereafter fluctuates on a periodic basis as the value of the contract
fluctuates. A purchase of an option involves payment of a premium for the option
without any further obligation on the part of the Fund.

Regulations of the CFTC applicable to the Fund currently require that
all of the Fund's futures and options on futures transactions are (1) for bona
fide hedging purposes, or (2) for other purposes to the extent that the
aggregate initial margin deposits and premiums do not exceed 5% of the
liquidation value of the Fund's net assets (after taking into account unrealized
profits and unrealized losses on any such

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<PAGE>

contracts it has entered into). Margins and premiums on bona fide hedging
positions are excluded from this 5% limit. The Advisor reserves the right to
comply with such different standard as may be established by CFTC rules and
regulations with respect to the purchase or sale of futures contracts or options
thereon.

The variable degree of correlation between price movements of futures
contracts and price movements in the position being hedged creates the
possibility that losses on the hedge may be greater than gains in the value of
the Fund's position. In addition, futures and futures option markets may not be
liquid in all circumstances. As a result, in volatile markets, the Fund may not
be able to close out a transaction without incurring losses substantially
greater than the initial deposit. Although the contemplated use of these
contracts should tend to minimize the risk of loss due to a decline in the value
of the hedged position, at the same time they tend to limit any potential gain
which might result from an increase in the value of such position. The Fund will
establish a segregated account to cover its positions in options and futures
transactions. These segregated accounts will be maintained with the Fund's
custodian and will contain liquid assets such as cash, U.S. Government
securities, or other high grade debt obligations. The ability of the Fund to
hedge successfully will depend on the Advisor's ability to forecast pertinent
market movements, which cannot be assured. Finally, the daily deposit
requirements in futures contracts create an ongoing greater potential financial
risk than do options purchased by the Fund, where the exposure is limited to the
cost of the initial premium. Losses due to hedging transactions will reduce net
asset value. Income earned by the Fund from its hedging activities generally
will be treated as capital gains.

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 Advisor or Sub-Advisor. A repurchase agreement is a
short-term investment in which the purchaser (i.e., the Fund) acquires ownership
of a debt security and the seller agrees to repurchase the obligation at a
future time and set price, usually not more than seven days from the date of
purchase, thereby determining the yield during the purchaser's holding period.
The value of underlying securities will be at least equal at all times to the
total amount of the repurchase obligation, including the interest factor. The
Fund makes payment for such securities only upon physical delivery or evidence
of book entry transfer to the account of a custodian or bank acting as agent.
The underlying securities, which in the case of the Fund must be issued by the
U.S. Treasury, 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.

When-Issued Securities. This practice involves the purchase of debt
obligations on a when-issued basis, in which case delivery and payment normally
take place within 45 days after the date of commitment to purchase. The Fund
will make commitments to purchase obligations on a when-issued basis only with
the intention of actually acquiring the securities, but may sell them before the
settlement date. The when-issued securities are subject to market fluctuation,
and no interest accrues to the purchaser during this period. The payment
obligation and the interest rate that will be received on the securities are
each fixed at the time the purchaser enters into the commitment. Purchasing
obligations on a when-issued basis is a form of leveraging and can involve a
risk that the yields available in the market

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<PAGE>

when the delivery takes place may actually be higher than those obtained in the
transaction itself. In that case there could be an unrealized loss at the time
of delivery.

Segregated accounts will be established with the Fund's custodian and
will maintain liquid assets in an amount at least equal in value to the Fund's
commitments to purchase when-issued securities. If the value of these assets
declines, the Fund will place additional liquid assets in the account on a daily
basis so that the value of the assets in the account is equal to the amount of
such commitments.

Investment Restrictions

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

1. Invest in real estate, real estate limited partnership interests or
mortgages on real estate, provided that the Fund may invest in marketable
securities of companies that invest in real estate, real estate investment
trusts and exchange-traded master limited partnerships and may purchase
securities secured or otherwise supported by interests in real estate.

2. Purchase or sell commodities or commodities contracts, provided that
the Fund may invest in financial futures and options on such futures.

3. 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.

4. Issue senior securities, provided that the Fund may invest in
financial futures and options on such futures.

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

6. Effect short sales of securities.

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

8. Purchase participations or other direct interests in oil, gas or
other mineral exploration or development programs or oil, gas or mineral leases.

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.

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<PAGE>

3. VALUATION OF SHARES AND REDEMPTION

Valuation of Shares

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

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

-7-

<PAGE>

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 Class A Shares and
Class B Shares by check and Institutional Shares by wire transfer of funds, as
described in the Prospectuses relating to such Shares. However, if the Board of
Directors determines that it would be in the best interests of the remaining
shareholders to make payment of the redemption price in whole or in part by a
distribution in kind of securities from the portfolio of the Fund in lieu of
cash, in conformity with applicable rules of the SEC, the Fund will make such
distributions in kind. If Shares are redeemed in kind, the redeeming Shareholder
will incur brokerage costs in later converting the assets into cash. The method
of valuing portfolio securities is described 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 Prospectus. No attempt is made to present a detailed
explanation of the federal, state or local tax treatment of the Fund or its
shareholders, and the discussion here and in the Fund's Prospectus is not
intended as a substitute for careful tax planning.

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

The Fund expects to qualify as a regulated investment company ("RIC")
under Subchapter M of the Code. However, to qualify as a RIC for any taxable
year, the Fund must (1) derive at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans and gains from the
sale or other disposition of stock, securities or foreign currencies and other
income (including, but not limited to gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "Income Requirement") and (2) derive less than 30%
of its gross income each taxable year (exclusive of certain gains from
designated hedging transactions that are offset by unrealized losses on
offsetting positions) from gains on the sale or other disposition of any of the
following investments if such investments are held for less than three months
(the "Short-Short Gain Test"): (a) stock or securities (as defined in Section
2(a)(36) of the Investment Company Act); (b) options, futures or forward
contracts (other than options, futures, or forward contracts on foreign
currencies), and (c) foreign currencies (or options, futures, or forward
contracts on foreign currencies) but only if such currencies (or options,
futures, or forward contracts on foreign currencies) are not directly related to
the RIC's principal business of investing in stock or securities (or options and
futures with respect to stocks or securities). The Short-Short Gain Test will
not prevent the Fund from disposing of investments at a loss, since the
recognition of a loss before the expiration of the three-month holding period is
disregarded.

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<PAGE>

In addition, at the close of each quarter of the Fund's taxable year,
(1) at least 50% of the value of its assets must consist of cash and cash items,
U.S. government securities, securities of other RICs, and securities of other
issuers (as to which the Fund has not invested more than 5% of the value of its
total assets in securities of such issuer and as to which the Fund does not hold
more than 10% of the outstanding voting securities of such issuer), and (2) no
more than 25% of the value of its total assets may be invested in the securities
of any one issuer (other than U.S. government securities and securities of other
RICs), or in two or more issuers which the Fund controls and which are engaged
in the same or similar trades or businesses or related trades or businesses (the
"Asset Diversification Test"). Generally, the Fund will not lose its status as a
RIC if it fails to meet the Asset Diversification Test solely as a result of a
fluctuation in value of portfolio assets not attributable to a purchase.

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

If capital gain distributions have been made with respect to Shares that
are sold at a loss after being held for six months or less, then the loss is
treated as a long-term capital loss to the extent of the capital gain
distributions. Any gain or loss recognized on a sale or redemption of Shares of
the Fund by a shareholder who is not a dealer in securities generally will be
treated as a long-term capital gain or loss if the Shares have been held for
more than twelve months and otherwise generally will be treated as a short-term
capital gain or loss.

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

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

The Code imposes a nondeductible 4% excise tax on RICs that do not
distribute in each calendar year an amount equal to 98% of their ordinary income
for the calendar year plus 98% of their capital gains net income for the
one-year period ending on October 31 of such calendar year. The balance of such
income must be distributed during the next calendar year. For the foregoing
purposes, a RIC will include in the amount distributed any amount taxed to the
RIC as investment company taxable income or capital gains for any taxable year
ending in such calendar year. The Fund intends to make sufficient distributions
of its ordinary income and capital gains net income prior to the end of each
calendar year to avoid liability for excise tax. However, shareholders should
note that the Fund may in certain circumstances be required to liquidate
portfolio investments in order to make sufficient distributions to avoid excise
tax liability, and, in addition, that the liquidation of such investments in
such circumstances may affect the ability of the Fund to satisfy the Short-Short
Gain Test.

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<PAGE>

The Fund's investments in partnership units of master limited
partnerships, which are taxable as partnerships, will generally not produce
income of a type required for qualification as a RIC as discussed above. Holders
of partnership units of such master limited partnerships are required to take
into account their allocable share of each item of the partnership's income and
loss in computing their individual tax liabilities. Further, each such item of
income generally retains the same tax attributes in the hands of the unitholder
as it has in the hands of the partnership. Accordingly, items of income derived
from such master limited partnership units generally will not qualify as
"interest" or "dividends" and if the aggregate of such income and any other
nonqualifying income of the Fund exceeds 10% of the Fund's gross income, the
Fund would not be eligible for the special tax treatment afforded RICs. As a
result, the Fund intends to limit its investments in partnership units of master
limited partnerships.

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

5. MANAGEMENT OF THE FUND

Directors and Officers

The Directors and executive officers of the Fund, their respective dates
of birth and their principal occupations during the last five years are set
forth below. Unless otherwise indicated, the address of each Director and
executive officer is 1 South Street, Baltimore, Maryland 21202.

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

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

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

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

*ROBERT S. KILLEBREW, JR., Director (4/9/39)
Managing Director, Alex. Brown & Sons Incorporated; Certified Financial
Analyst and Investment Advisor; Formerly, Senior Portfolio Manager,
Brown Asset Management (registered investment advisor), 1974-1995.

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<PAGE>

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

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

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

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

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

WILLIAM K. MORRILL, JR., President (6/2/37)
Managing Director, ABKB/LaSalle Securities Limited Partnership, 100 East
Pratt Street, Baltimore, Maryland 21202. Portfolio Manager with
ABKB/LaSalle or its predecessors since 1985.

KEITH R. PAULEY, Executive Vice President (9/27/63)
Senior Vice-President, ABKB/LaSalle Securities Limited Partnership, 100
East Pratt Street, Baltimore, Maryland 21202. Portfolio Manager with
ABKB/LaSalle or its predecessors since 1986.

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

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<PAGE>

GARY V. FEARNOW, Vice President (12/6/44)
Managing Director, Alex. Brown & Sons Incorporated and Manager, Special
Products Department, Alex. Brown & Sons Incorporated.

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

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

EDWARD J. STOKEN, Secretary (8/7/47)
Compliance Officer, Alex. Brown & Sons Incorporated, April 1995-Present;
Formerly, Legal Advisor, Federated Investors (registered investment
advisor), 1991-1995.

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

- --------------------
* Messrs. Hale, Semans, Cole and Killebrew are Directors who are
"interested persons", as defined in the Investment Company Act.
+ Mr. Liotta is Mr. Cole's Son in law.

Directors and officers of the Fund are also directors and officers of
some or all of the other investment companies managed, administered, advised or
distributed by Alex. Brown or its affiliates.

There are currently 12 funds in the Flag Investors/ISI Funds and Alex.
Brown Cash Reserve Fund, Inc. fund complex (the "Fund Complex"). Mr. Hale serves
as President and Director of one fund and as a Director of each of the other
funds in the Fund Complex. Mr. Semans serves as a Director of eight funds in the
Fund Complex. Mr. Cole serves as a Director of four funds in the Fund Complex.
Messrs. Cunnane, Kroeger, Levy and McDonald serve as Directors of each fund in
the Fund Complex. Ms. Rimel serves as a Director of six funds in the Fund
Complex. Mr. Vogt serves as a Director of five funds in the Fund Complex.
Mr. Fearnow serves as Vice President of 10 funds in the Fund Complex. Mr.
Veilleux serves as Executive Vice President of one fund and as Vice President of
11 funds in the Fund Complex. Mr. Liotta serves as Vice President, Mr. Finelli
serves as Treasurer, Mr. Stoken serves as Secretary and Ms. Collidge serves as
Assistant Secretary of each of the funds in the Fund Complex.

Some of the Directors of the Fund are customers of, and have had normal
brokerage transactions with, 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.

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 Alex. Brown may be considered to have received remuneration indirectly. As
compensation for his or her services as director, each Director who is not an
"interested person" of the Fund (as defined in the Investment Company Act) (a
"Non-Interested Director") receives an aggregate annual fee (plus reimbursement
for reasonable out-of-pocket expenses incurred in

-12-

<PAGE>

connection with his or her attendance at Board and committee meetings) from all
Flag Investors/ISI Funds and Alex. Brown Cash Reserve Fund, Inc. for which he or
she serves. In addition, the Chairman of the Fund Complex's Audit Committee
receives an aggregate annual fee from the Fund Complex. Payment of such fees and
expenses is allocated among all such funds described above in direct proportion
to their relative net assets.

For the fiscal year ended December 31, 1995, Directors' fees
attributable to the assets of the Fund totalled approximately $1,142. 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, 1995.

COMPENSATION TABLE
- -----------------------------------------------------------------------------------------------------------------------------------
Total Compensation
From the Fund and Fund
Aggregate Compensation Pension or Complex Payable to
From the Fund for the Retirement Benefits Directors for the Fiscal
Name of Person, Fiscal Year Ended Accrued as Part Year Ended December
Position December 31, 1995 of Fund Expenses 31, 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>

*Richard T. Hale, Chairman $0 $0 $0

*Truman T. Semans, Director $0 $0 $0

*Charles W. Cole, Jr., Director $0 $0 $0

James J. Cunnane, Director $56.48(1) + $39,000 for service on 13
Boards in the Fund
Complex(2)

N. Bruce Hannay, Director** $56.48(1) + $39,000 for service on 13
Boards in the Fund
Complex(2)

*Robert S. Killebrew, Jr., $0 $0 $0
Director

John F. Kroeger, Director $64.91(1) + $44,425 for service on 13
Boards in the Fund
Complex(2)

Louis E. Levy, Director $56.48(1) + $39,000 for service on 13
Boards in the Fund
Complex(2)

Eugene J. McDonald $56.48(1) + $39,000 for service on 13
Director Boards in the Fund
Complex(2)

Rebecca W. Rimel, Director $48.93(1) + $19,500 for service on 5
Boards in the Fund
Complex(3)

Carl W. Vogt, Director N/A(4) + N/A(4)

Harry Woolf*** $56.48(1) + $39,000 for service on 13
Director Boards in the Fund
Complex(2)
</TABLE>

- ------------------
* A Director who is an "interested person" as defined in the Investment
Company Act.
** Retired, effective January 31, 1996, and is now deceased.
*** Retired on December 31, 1996.
+ 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, 1995 was approximately $513.
(1) Of amounts payable to Messrs. Cunnane, Hannay, Kroeger, Levy, McDonald
and Woolf, no amount was deferred pursuant to the deferred compensation
plan.
(2) One of these funds ceased operations on May 17, 1995.
(3) Ms. Rimel was elected to a sixth Board on April 10, 1996.
(4) Elected to the Board on January 30, 1996.

-13-

<PAGE>

The Fund Complex has adopted a Retirement Plan (the "Retirement Plan")
for Directors who are not employees of the Fund, the Fund's Advisor or their
respective affiliates (the "Participants"). After completion of six years of
service, each Participant will be entitled to receive an annual retirement
benefit equal to a percentage of the fee earned by the Participant in his or her
last year of service. Upon retirement, each Participant will receive annually
10% of such fee for each year that he or she served after completion of the
first five years, up to a maximum annual benefit of 50% of the fee earned by the
Participant in his or her last year of service. The fee will be paid quarterly,
for life, by each Fund for which he or she serves. The Retirement Plan is
unfunded and unvested. Mr. Kroeger has qualified but has not received benefits.
The Fund has one Participant, a Director who retired on December 31, 1996 who
qualified for the Retirement Plan by serving fourteen years as a Director in
the Fund Complex and who will be paid a quarterly fee of $4,875 by the Fund
Complex for the rest of his life. Another Participant, who retired on
January 31, 1996 and died on June 2, 1996 was paid fees of $8,090 by the Fund
Complex under the Retirement Plan in the fiscal year ended December 31, 1996.
Such fee is 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, 1996 are as follows: for Mr. Cunnane, 2 years; for Mr. Kroeger, 14
years; for Mr. Levy, 2 years; for Mr. McDonald, 4 years; for Ms. Rimel, 1 year;
and for Mr. Vogt, 1 year, respectively.

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

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

</TABLE>

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

Code of Ethics

The Board of Directors of the Fund has adopted a Code of Ethics
pursuant to Rule 17j-1 under the Investment Company Act. The Code of Ethics
applies to the personal investing activities of all directors and officers of
the Fund, as well as to designated officers, directors and employees of the
Advisors and Alex. Brown. 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 covered employees of the Advisors,
certain directors or officers of Alex. Brown, and all Fund Directors who are
"interested persons", preclear personal securities investments (with certain
exceptions, such as non-volitional purchases or purchases which are part of an
automatic dividend

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<PAGE>

reinvestment plan). The preclearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to the
proposed investment. The substantive restrictions applicable to investment
personnel include a ban on acquiring any securities in an initial public
offering, a prohibition from profiting on short-term trading in securities and
special preclearance of the acquisition of securities in private placements.
Furthermore, the Code of Ethics provides for trading "blackout periods" that
prohibit trading by investment personnel and certain other employees within
periods of trading by the Fund in the same security. Officers, directors and
employees of the Advisors and Alex. Brown may comply with codes instituted by
those entities so long as they contain similar requirements and restrictions.

6. INVESTMENT ADVISORY AND OTHER SERVICES

The shareholders of the Fund have approved an Investment Advisory
Agreement between the Fund and Investment Company Corp. ("ICC") and a
Sub-Advisory Agreement among the Fund, ICC and ABKB/LaSalle Securities Limited
Partnership. ("ABKB/LaSalle"), both of which contracts are described in greater
detail below. ICC, the investment advisor, is a wholly owned subsidiary of Alex.
Brown Financial Corporation and an indirect subsidiary of Alex. Brown
Incorporated. ICC is also the investment advisor to Flag Investors Value Builder
Fund, Inc., Alex. Brown Cash Reserve Fund, Inc., Flag Investors International
Fund, Inc., Flag Investors Emerging Growth Fund, Inc., Flag Investors
Intermediate-Term Income Fund, Inc., Flag Investors Telephone Income Fund, Inc.,
Flag Investors Maryland Intermediate Tax Free Income Fund, Inc. and Flag
Investors Equity Partners Fund, Inc. which are distributed by Alex. Brown, the
Fund's distributor. ABKB/LaSalle is a registered investment advisor and together
with its affiliates had, as of December 31, 1996 approximately $600 million in
real estate securities under management, almost all of which is in domestic real
estate securities. ABKB/LaSalle, a Maryland limited partnership, was formed on
November 1, 1994 to acquire the real estate securities investment advisory
business of Alex. Brown Kleinwort Benson Realty Advisors Corporation. (See
"Investment Advisor and Sub-Advisor" in the Prospectus.) ABKB/LaSalle currently
provides sub-advisory services to three other mutual funds which had
approximately $71 million of combined net assets as of December 31, 1996. The
address of ABKB/LaSalle is 100 East Pratt Street, Baltimore, Maryland 21202.

Under the Investment Advisory Agreement, ICC has agreed to obtain and
evaluate economic, statistical and financial information and to formulate and
implement investment policies for the Fund. ICC has delegated this latter
responsibility to ABKB/LaSalle. Any investment program undertaken by ICC or
ABKB/LaSalle 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
ABKB/LaSalle shall be liable to the Fund or its shareholders for any act or
omission by ICC or ABKB/LaSalle 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 ABKB/LaSalle
to the Fund are not exclusive and ICC and ABKB/LaSalle are free to render
similar services to others.

As compensation for its services, ICC is entitled to receive a fee from
the Fund, calculated daily and paid monthly, at the annual rate of .65% of the
first $100 million of the Fund's average daily net assets, .55% of the next $100
million of the Fund's average daily net assets, .50% of the next $100 million of
the Fund's average daily net assets, and .45% of the Fund's average daily net
assets exceeding $300 million. As compensation for its services, ABKB/LaSalle is
entitled to receive a fee from ICC, payable from its advisory fee, calculated
daily and paid monthly, at the annual rate of .40% of the first $100 million of
the Fund's average daily net assets, .35% of the next $100 million of the Fund's
average daily net assets, .30% of the next $100 million of the Fund's average
daily net assets, and .25% of the Fund's average daily net assets over $300
million.

-15-

<PAGE>

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
Non-Interested 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. The Investment Advisory
Agreement and the Sub-Advisory Agreement were most recently approved by the
Board of Directors in the foregoing manner on October 1, 1996. 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. The Sub-Advisory Agreement has similar termination
provisions. For investment advisory services for the period from January 3, 1995
(commencement of operations) through December 31, 1995, ICC waived all fees due
it ($38,795) and reimbursed expenses of $91,068. Absent such fee waivers and
reimbursements, the Fund's Total Operating Expenses would have been 3.25% of the
Class A Shares' average daily net assets and 4.05% of the Class B Shares'
average daily net assets. During the same period, ABKB/LaSalle waived all sub-
advisory fees.

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

7. DISTRIBUTION OF FUND SHARES

Alex. Brown serves as the exclusive distributor of the Fund's Shares
pursuant to three separate Distribution Agreements, one for the Class A Shares,
one for the Class B Shares and one for the Institutional Shares (collectively,
the "Distribution Agreements").

The Distribution Agreements provide that Alex. Brown has the exclusive
right to distribute the related class of Flag Investors Real Estate Securities
Fund Shares either directly or through other broker-dealers and further provide
that Alex. Brown will: (a) solicit and receive orders for the purchase of
Shares; (b) accept or reject such orders on behalf of the Fund in accordance
with the Fund's currently effective prospectus and transmit such orders as are
accepted to the Fund's transfer agent as promptly as possible; (c) receive
requests for redemptions and transmit such redemption requests to the Fund's
transfer agent as promptly as possible; and (d) respond to inquiries from
shareholders concerning the status of their accounts and the operations of the
Fund. Alex. Brown has not undertaken to sell any specific number of Shares. The
Distribution Agreements further provide that, in connection with the

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<PAGE>

distribution of Shares, Alex. Brown will be responsible for all of the
promotional expenses. The services provided by Alex. Brown to the Fund are not
exclusive, and Alex. Brown is free to provide similar services to others. Alex.
Brown shall not be liable to the Fund or its shareholders for any act or
omission by Alex. Brown or any losses sustained by the Fund or its shareholders
except in the case of willful misfeasance, bad faith, gross negligence or
reckless disregard of duty.

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

As compensation for providing distribution services for the Class A
Shares as described above, Alex. Brown receives an annual fee, calculated and
paid monthly, equal to .25% of the Class A Shares' average daily net assets.
Alex. Brown expects to allocate a substantial portion of its annual fee to its
investment representatives and to Participating Dealers. As compensation for
providing distribution services for the Class A Shares for the period from
January 3, 1995 (commencement of operations) through December 31, 1995, Alex.
Brown received from the Fund distribution fees in the amount of $9,662.

As compensation for providing distribution services for the Class B
Shares as described above, Alex. Brown receives an annual fee equal to .75% of
the Class B Shares' average daily net assets. Alex. Brown expects to retain the
entire distribution fee as reimbursement for front-end payments to its
investment representatives and to Participating Dealers. As compensation for
providing distribution services for the Class B Shares for the period from
January 3, 1995 (commencement of operations) through December 31, 1995, Alex.
Brown received from the Fund distribution fees in the amount of $21,264. In
addition, with respect to the Class B Shares, Alex. Brown receives a shareholder
servicing fee at an annual rate of .25% of the average daily net assets of the
Class B Shares. (See the Prospectus.) For the period from January 3, 1995
(commencement of operations) through December 31, 1995, such shareholder
servicing fees totalled $5,316.

Alex. Brown receives no compensation for distributing the Institutional
Shares.

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

In approving the Plans, the Directors concluded, in the exercise of
reasonable business judgment, that there was a reasonable likelihood that the
Plans would benefit the Fund and its shareholders. The Plans will be renewed
only if the Directors make a similar determination in each subsequent year. The
Plans may not be amended to increase materially the fee to be paid pursuant to
the related Distribution Agreement without the approval of the shareholders of
the class. The Plans may be terminated at any

-17-

<PAGE>

time and the Class A and Class B Distribution Agreements may be terminated at
any time upon sixty days' notice, in either case without penalty, by the vote of
a majority of the Fund's Non-Interested Directors or by a vote of a majority of
the outstanding class of Shares (as defined under "Capital Stock"). Any Sub-
Distribution Agreement may be terminated in the same manner at any time. The
Class A and Class B Distribution Agreements and any Sub-Distribution Agreements
shall automatically terminate in the event of assignment.

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

In the fiscal period ended December 31, 1995, the Fund paid $30,926 to
Alex. Brown pursuant to the Plans. Alex. Brown in turn paid the
distribution-related expenses of the Fund including one or more of the
following: advertising expenses; printing and mailing of prospectuses to other
than current shareholders; compensation to dealers and sales personnel; and
interest, carrying or other financing charges.

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

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

In the period ended December 31, 1995, Alex. Brown received sales
commissions on the Class A Shares of $137,648 and from such amount retained
$124,915. During the same period, Alex. Brown received contingent deferred sales
loads on the Class B Shares of $116,236 and retained all of this amount.

The Institutional Distribution Agreement was approved by the
Fund's Board of Directors on December 18, 1996. It has an initial term of two
years and will remain in effect from year to year thereafter, if specifically
approved at least annually by the Fund's Board of Directors and by the
affirmative vote of a majority of the Non-Interested

-18-

<PAGE>

Directors by votes cast at a meeting called for such purpose. It may be
terminated at any time upon sixty days' written notice, without penalty, by the
vote of a majority of the Fund's Non-Interested Directors or by a vote of a
majority of the outstanding Institutional Shares (as defined under Capital
Stock). The Institutional Distribution Agreement and any Sub-Distribution
Agreement shall automatically terminate in the event of assignment.

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 Non-
Interested Directors, and of independent certified public accountants, 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
which inure to its benefit; extraordinary expenses (including, but not limited
to, legal claims and liabilities and litigation costs and any indemnification
related thereto); and all other charges and costs of the Fund's operation unless
otherwise explicitly assumed by Alex. Brown, ICC or ABKB/LaSalle.

The address of Alex. Brown is 1 South Street, Baltimore, Maryland 21202.

8. BROKERAGE

ICC and ABKB/LaSalle are 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
and ABKB/LaSalle may direct purchase and sale orders to any broker-dealer,
including, to the extent and in the manner permitted by applicable law, Alex.
Brown.

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

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<PAGE>

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

ICC's and ABKB/LaSalle'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 and ABKB/LaSalle may, in their
discretion, effect agency transactions with broker-dealers that furnish
statistical, research or other information or services which are deemed by ICC
or ABKB/LaSalle to be beneficial to the Fund's investment program. Certain
research services furnished by broker-dealers may be useful to ICC and
ABKB/LaSalle with clients other than the Fund. Similarly, any research services
received by ICC or ABKB/LaSalle through placement of portfolio transactions of
other clients may be of value to ICC and ABKB/LaSalle in fulfilling their
obligations to the Fund. No specific value can be determined for research and
statistical services furnished without cost to ICC or ABKB/LaSalle by a
broker-dealer. ICC and ABKB/LaSalle are 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 and ABKB/LaSalle's
research and analysis. Therefore, it may tend to benefit the Fund by improving
ICC's and ABKB/LaSalle's investment advice. ICC's and ABKB/LaSalle'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 or
ABKB/LaSalle'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 and ABKB/LaSalle are also authorized to pay broker-dealers other
than Alex. Brown higher commissions on brokerage transactions for the Fund in
order to secure research and investment services described above. The allocation
of orders among broker-dealers and the commission rates paid by the Fund will be
reviewed periodically by the Board of Directors. The foregoing policy under
which the Fund may pay higher commissions to certain broker-dealers in the case
of agency transactions, does not apply to transactions effected on a principal
basis.

Subject to the above considerations, the Board of Directors has
authorized the Fund to effect portfolio transactions, on an agency basis,
through Alex. Brown. At the time of such authorization certain policies and
procedures incorporating the standards of Rule 17e-1 under the Investment
Company Act which requires that the commissions paid Alex. Brown must be
"reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time."
Rule 17e-1 also contains requirements for the review of such transactions by the
Board of Directors and requires ICC and ABKB/LaSalle to furnish reports and to
maintain records in connection with such reviews. The Distribution Agreement
between Alex. Brown and the Fund does not provide for any reduction in the
distribution fee to be received by Alex. Brown from the Fund as a result of
profits resulting from brokerage commissions on transactions of the Fund
effected through Alex. Brown.

During the period ended December 31, 1995, Alex. Brown directed
$11,298,553 of transactions to broker-dealers and paid $25,703 to broker-dealers
in related commissions because of research services provided. In the same
period, the Fund paid Alex. Brown brokerage commissions in the aggregate amount
of $1,988, which represented 7.73% of the Fund's aggregate brokerage commissions
and which were paid on transactions that represented 8.96% of the aggregate
dollar amount of transactions that incurred commissions paid by the Fund. The
Fund is required to identify any securities of its "regular brokers or dealers"
(as such term is defined in the Investment Company Act) which the Fund has
acquired during its most recent fiscal year. As of December 31, 1995, the Fund
held a 5.70% repurchase agreement issued by Goldman Sachs & Co. valued at
$347,000. Goldman Sachs & Co. is a "regular broker or dealer" of the Fund.

ICC and ABKB/LaSalle each manage 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

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<PAGE>

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 or ABKB/LaSalle. ICC and ABKB/LaSalle 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 which it seeks to purchase or sell.

9. CAPITAL STOCK

The Fund is authorized to issue 15 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. The
Fund currently has one Series and the Board has designated three classes of
Shares: "Flag Investors Real Estate Securities Fund Class A Shares", "Flag
Investors Real Estate Securities Fund Class B Shares" and "Flag Investors Real
Estate Securities Fund Institutional Shares". In the event separate series are
established, all Shares of the Fund, regardless of series or class, would have
equal rights with respect to voting, except that with respect to any matter
affecting the rights of the holders of a particular series or class, the holders
of each series or class would vote separately. In general, each such series
would be managed separately and shareholders of each series would have an
undivided interest in the net assets of that series. For tax purposes, the
series would be treated as separate entities. Generally, each class of Shares
issued by a particular series would be identical to every other class and
expenses of the Fund (other than 12b-1 and any applicable service fees) are
prorated between all classes of a series based upon the relative net assets of
each class. Any matters affecting any class exclusively would be voted on by the
holders of such class.

Shareholders of the Fund do not have cumulative voting rights, and
therefore the holders of more than 50% of the outstanding Shares voting together
for election of Directors may elect all the members of the Board of Directors of
the Fund. In such event, the remaining holders cannot elect any members of the
Board of Directors of the Fund. There are no preemptive, conversion or exchange
rights applicable to any of the Shares. The issued and outstanding Shares are
fully paid and non-assessable. In the event of liquidation or dissolution of the
Fund, each Share is entitled to its portion of the Fund's assets (or the assets
allocated to a separate series of shares if there is more than one series) after
all debts and expenses have been paid.

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

10. SEMI-ANNUAL REPORTS

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

-21-

<PAGE>

11. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES

PNC Bank, National Association ("PNC Bank"), with offices at Airport
Business Park, 200 Stevens Drive, Lester, Pennsylvania, 19113, has been retained
to act as custodian of the Fund's investments. PNC Bank receives such
compensation from the Fund for its services as Custodian as may be agreed to
from time to time by PNC Bank and the Fund.

Investment Company Capital Corp. ("ICC"), 1 South Street, Baltimore,
Maryland 21202, serves as the Fund's transfer and dividend disbursing agent and
provides certain accounting services under a Master Services Agreement between
the Fund and ICC. As compensation for providing transfer and dividend disbursing
services, ICC receives from the Fund up to $10.62 per account per year plus
reimbursement for out-of-pocket expenses incurred in connection therewith. For
the period ended December 31, 1995, such fees totalled $19,350. As compensation
for providing accounting services, ICC receives an annual fee, calculated and
paid monthly as shown below.

Average Net Assets Accounting Services Fee
------------------ -----------------------

<S> <C> <C>
$ 0 - $ 10,000,000 $13,000(fixed fee)
$ 10,000,001 - $ 20,000,000 .100%
$ 20,000,001 - $ 30,000,000 .080%
$ 30,000,001 - $ 40,000,000 .060%
$ 40,000,001 - $ 50,000,000 .050%
$ 50,000,001 - $ 60,000,000 .040%
$ 60,000,001 - $ 70,000,000 .030%
$ 70,000,001 - $ 99,999,999 .020%
$100,000,000 - $ 500,000,000 .015%
$500,000,001 - $ 1,000,000,000 .005%
over $1,000,000,000 .001

</TABLE>

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

As compensation for providing accounting services to the Fund for the
period ended December 31, 1995, ICC received fees of $12,360.

ICC also serves as the Fund's investment advisor. See "Investment
Advisory and Other Services."

12. INDEPENDENT ACCOUNTANTS

The annual financial statements of the Fund are audited by Coopers &
Lybrand L.L.P. Coopers & Lybrand L.L.P. has offices at 2400 Eleven Penn Center,
Philadelphia, Pennsylvania 19103.

13. PERFORMANCE INFORMATION

The Fund may compare its performance to other funds or to relevant
indices, such as the Wilshire Real Estate Index, the NAREIT Equity Index, the
S&P 500, the Russell 2000, the S&P Utilities Index and the Lehman Brothers Fixed
Income Index.

-22-

<PAGE>

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 or averages 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 the series or class). In calculating the ending redeemable value
for the Class A Shares, the maximum sales load (4.5%) is deducted from the
initial $1,000 payment and all dividends and distributions by the Fund are
assumed to have been reinvested at net asset value as described in the
Prospectus on the reinvestment dates during the period. In calculating the
performance of the Class B Shares, the applicable contingent deferred sales
charge (4.0% for the one year period, 2.0% for the five year period and no sales
charge thereafter) is deducted from the ending redeemable value and all
dividends and distributions by the Fund are assumed to be reinvested at net
asset value as described in the Prospectus on the reinvestment dates during the
period. "T" in the formula above is calculated by finding the average annual
compounded rate of return over the period that would equate an assumed initial
payment of $1,000 to the ending redeemable value. Any sales loads that might in
the future be made applicable at the time to reinvestments would be included as
would any recurring account charges that might be imposed by the Fund. The
Institutional Shares are sold without a sales load.

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., the Fund calculates its aggregate and average annual total return for the
specified periods of time by assuming the investment of $10,000 in Shares and
assuming the reinvestment of each dividend or other distribution at net asset
value on the reinvestment date.

For this alternative computation, the Fund assumes that the $10,000
invested in Shares is net of all sales charges (as distinguished from the
computation required by the SEC where in the case of Class A Shares, the $1,000
payment is reduced by sales charges before being invested in such Shares or, in
the case of Class B Shares, the applicable contingent deferred sales charge is
deducted from the ending redeemable value). The Fund will, however, disclose the
maximum sales charges and will also disclose

-23-

<PAGE>

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.

Calculated according to SEC rules, for the period from the
effectiveness of the Fund's registration statement on January 3, 1995 through
the fiscal period ended December 31, 1995, the ending redeemable value of a
hypothetical $1,000 payment for the Class A Shares was $1,129, resulting in an
aggregate total return for such shares equal to 12.87%.

Calculated according to SEC rules, for the period from the
effectiveness of the Fund's registration statement on January 3, 1995 through
the fiscal period ended December 31, 1995, the ending redeemable value of a
hypothetical $1,000 payment for the Class B Shares was $1,134, resulting in an
aggregate total return for such shares equal to 13.40%.

Calculated according to the alternative computation, which assumes no
sales charges and reinvestment of all distributions, for the period from the
effectiveness of the Fund's registration statement on January 3, 1995 through
the fiscal period ended December 31, 1995, the ending redeemable value of a
hypothetical $10,000 investment in Class A Shares or Class B Shares was $11,819
resulting in an aggregate total return for such shares equal to 18.19%.

Yield Calculations

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 semiannual 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 yield calculations for the Class A Shares assume a
maximum front-end sales charge of 4.50%. 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.

Calculated in the manner described above, the Fund's yield for the 30
day period ended December 31, 1995 was 5.64% for the Class A Shares and 5.13%
for the Class B Shares.

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

-24-

<PAGE>

Undeclared earned income will be subtracted from the net asset value
per share. Undeclared earned income is net investment income which, 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. For the period ended
December 31, 1995, the Fund's portfolio turnover rate was 28%.

14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of November 14, 1996, the following shareholders owned of record or
beneficially 5% or more of the Fund's total outstanding Shares:

T. Rowe Price, tr. 11.75%
Alex. Brown & Sons Inc. Plan 100460
ATTN: Asset Recon
P.O. Box 17215
Baltimore, MD 21203-7215

Alex. Brown & Sons Incorporated 67.02%*
1 South Street
Baltimore, MD 21202

- -------------------
* As of such date, Alex. Brown owned beneficially less than 5%
of such shares.

As of November 14, 1996, Directors and officers as a group owned less
than 1% of the Fund's total outstanding Shares.

15. FINANCIAL STATEMENTS

See next page.

-25-

<PAGE>

[LOGO]

FLAG INVESTORS
REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------

Statement of Net Assets December 31, 1995

Market Percent
No. of Market Value of Net Unrealized
Shares Security Cost Price (Note A) Assets Gain/(Loss)
- ----------------------------------------------------------------------------------------------------------------
Common Stock: 95.6%
Real Estate Investment Trusts: 94.5%
Apartments: 31.0%
<S> <C> <C> <C> <C> <C>
18,200 Avalon Properties Inc. $ 355,762 $21.50 $391,300 3.9% $ 35,538
11,900 Bay Apartment Communities 236,718 24.25 288,575 2.8 51,857
11,100 Equity Residential Property Trust 309,273 30.63 339,938 3.3 30,665
16,200 Evans Withycomb Residential 319,599 21.50 348,300 3.4 28,701
14,800 Merry Land & Investment Co. 306,749 23.63 349,650 3.4 42,901
14,100 Oasis Residential Inc. 313,184 22.75 320,775 3.2 7,591
10,100 Post Properties Inc. 306,666 31.88 321,937 3.2 15,271
15,300 Security Capital Pacific Trust 270,859 19.75 302,175 3.0 31,316
14,600 Southwest Property Trust 178,624 13.50 197,100 1.9 18,476
19,700 United Dominion Realty Trust 271,724 15.00 295,500 2.9 23,776
---------- ---------- ---- --------
2,869,158 3,155,250 31.0 286,092
Diversified: 0.4%
1,700 Colonial Properties Trust 40,710 25.50 43,350 0.4 2,640
---------- ---------- ---- --------
Factory Outlets: 3.0%
10,300 Chelsea GCA Realty Inc. 276,551 30.00 309,000 3.0 32,449
---------- ---------- ---- --------
Health Care: 7.6%
10,600 Health Care Properties
Investment Inc. 325,024 35.13 372,325 3.7 47,301
9,400 Nationwide Health Properties Inc. 350,027 42.00 394,800 3.9 44,773
---------- ---------- ---- --------
675,051 767,125 7.6 92,074
Hotels: 5.2%
8,900 Felcor Suite Hotels 246,907 27.75 246,975 2.4 68
7,400 Patriot American Hospitality 181,381 25.75 190,550 1.9 9,169
3,000 Starwood Lodging Trust 82,600 29.75 89,250 0.9 6,650
---------- ---------- ---- --------
510,888 526,775 5.2 15,887
Mobile Homes: 5.3%
13,000 Manufactured Home Communities 224,090 17.50 227,500 2.2 3,410
4,000 ROC Communities Inc. 85,603 24.00 96,000 1.0 10,397
8,100 Sun Communities Inc. 189,821 26.38 213,637 2.1 23,816
---------- ---------- ---- --------
499,514 537,137 5.3 37,623
</TABLE>

-26-
<PAGE>

[LOGO]

FLAG INVESTORS
REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------

Statement of Net Assets (continued) December 31, 1995

<S> <C> <C> <C> <C> <C>
Real Estate Investment Trusts (continued)
Office/Industrial/Self-storage: 19.7%
3,300 Cali Realty Corporation $ 64,245 $21.88 $ 72,187 0.7% $ 7,942
9,200 Duke Realty Investments Inc. 258,183 32.38 288,650 2.8 30,467
10,300 Highwood Properties Inc. 231,968 28.25 290,975 2.8 59,007
13,700 Security Capital Industries 223,585 17.50 239,750 2.4 16,165
8,200 Shurgard Storage Centers--
Class A 194,423 27.00 221,400 2.2 26,977
12,600 Spieker Properties 266,992 25.13 316,575 3.1 49,583
10,200 Storage USA Inc. 292,530 32.63 332,775 3.3 40,245
9,700 Weeks Corp. 218,377 25.13 243,713 2.4 25,336
---------- ---------- ---- --------
1,750,303 2,006,025 19.7 255,722
Regional Malls: 9.3%
11,300 DeBartolo Realty Corp. 158,622 13.00 146,900 1.4 (11,722)
6,400 JP Realty Inc. 129,198 21.88 140,000 1.4 10,802
11,500 Simon Property Group Inc. 278,664 24.38 280,313 2.8 1,649
24,600 Taubman Centers Inc. 236,545 10.00 246,000 2.4 9,455
6,400 Urban Shopping Centers Inc. 132,492 21.38 136,800 1.3 4,308
---------- ---------- ---- --------
935,521 950,013 9.3 14,492
Retail: 13.0%
9,100 Developers Diversified
Realty Corp. 261,921 30.00 273,000 2.7 11,079
10,300 Federal Realty Investment Trust 218,820 22.75 234,325 2.3 15,505
6,450 Kimco Realty Corp. 166,125 27.25 175,763 1.7 9,638
5,600 Regency Realty Corp. 94,405 17.25 96,600 0.9 2,195
7,500 Vornado Realty Trust 264,925 37.50 281,250 2.8 16,325
7,000 Weingarten Realty Investment 248,255 38.00 266,000 2.6 17,745
---------- ---------- ---- --------
1,254,451 1,326,938 13.0 72,487
Real Estate Operating Companies: 1.1%
Hotels: 1.1%
600 Bristol Hotel Company 12,300 24.38 14,625 0.1 2,325
7,600 Host Marriott Corp. 94,454 13.25 100,700 1.0 6,246
---------- ---------- ---- --------
106,754 115,325 1.1 8,571
Total Common Stocks 8,918,901 9,736,938 95.6 818,037
---------- ---------- ---- --------
</TABLE>

-27-
<PAGE>

[LOGO]

FLAG INVESTORS
REAL ESTATE SECURITIES FUND

Statement of Net Assets (concluded) December 31, 1995
- --------------------------------------------------------------------------------

Market Percent
Par Market Value of Net
(000) Security Cost Price (Note A) Assets
- --------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C>
REPURCHASE AGREEMENT: 3.4%
$347 Goldman Sachs & Co., 5.70%
Dated 12/29/95, to be
repurchased on 1/2/96,
collateralized by U.S.
Treasury Notes with
market value of $354,780. $ 347,000 100 $ 347,000 3.4%
---------- --- ----------- -----
Total Investment in Securities 9,265,901* 10,083,938 99.0
Other Assets in Excess of Liabilities, Net 103,739 1.0
----------- -----
Net Assets $10,187,677 100.0%
=========== =====
Net Asset Value Per:
Class A Share
($7,171,372 / 640,093 shares outstanding) $11.20(1)
======
Class B Share
($3,016,305 / 269,768 shares outstanding) $11.18(2)
======

Maximum Offering Price Per:
Class A Share
($11.20 / .955) $11.73
======
Class B Share $11.18
======
- --------------------------------------------------------------------------------------------------
</TABLE>
* Also aggregate cost for federal tax purposes.
1 Redemption value is $11.20.
2 Redemption value is $10.73 after 4.00% maximum contingent deferred sales
charge.

See accompanying Notes to Financial Statements.

-28-
<PAGE>

[LOGO]

FLAG INVESTORS
REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------

Statement of Operations For the Period January 3, 1995*
through December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Investment income (Note A):
Dividends $ 429,814
Interest 12,833
-----------
Total income 442,647
-----------

EXPENSES:
Investment advisory fee (note b)................................. 38,795
Distribution fees (Note B)....................................... 30,926
Legal............................................................ 30,020
Audit............................................................ 23,766
Transfer agent fees (Note B)..................................... 19,350
Registration fees................................................ 17,683
Organizational expense (Note A).................................. 17,683
Custodian fees................................................... 16,500
Accounting fee (Note B).......................................... 12,360
Printing and postage............................................. 9,032
Miscellaneous.................................................... 1,834
Directors' fees.................................................. 1,142
-----------
Total expenses................................................. 219,091
Less: Fees waived and expenses reimbursed (Note B)............... (129,863)
-----------
Net expenses................................................... 89,228
-----------
Net investment income............................................ 353,419
-----------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain from security transactions..................... 47,282
Change in unrealized appreciation of investments................. 818,037
-----------
Net realized and unrealized gain on investments.................. 865,319
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............. $1,218,738
==========
- --------------------------------------------------------------------------------
</TABLE>

*Commencement of operations.
See accompanying Notes to Financial Statements.

-29-
<PAGE>

[LOGO]

FLAG INVESTORS
REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------

Statement of Changes in Net Assets
<TABLE>
<CAPTION>

For the Period
January 3, 1995*
through
December 31, 1995
- --------------------------------------------------------------------------------
<S> <C>
Operations:
Net investment income............................. $ 353,419
Net realized gain from security transactions...... 47,282
Change in unrealized appreciation of investments.. 818,037
-------------
Net increase in net assets resulting
from operations............................. 1,218,738
-------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Class A Shares.................................. (216,537)
Class B Shares.................................. (107,851)
Short-term capital gains:
Class A Shares.................................. (27,959)
Class B Shares.................................. (11,617)
-------------
Total distributions............................... (363,964)
-------------
CAPITAL SHARE TRANSACTIONS (NOTE C):
Proceeds from sale of shares...................... 9,712,132
Value of shares issued in reinvestment of dividends 246,856
Cost of shares repurchased........................ (726,085)
-------------
Increase in net assets derived from
capital share transactions...................... 9,232,903
-------------
Total increase in net assets.................. 10,087,677
NET ASSETS:
Beginning of period............................... 100,000**
-------------
End of period..................................... $10,187,677
=============
- -------------------------------------------------------------------------------

</TABLE>
* Commencement of operations.
** On July 28, 1994, the Fund sold 10,000 shares to a subsidiary of Alex.
Brown & Sons Incorporated for $100,000.

See accompanying Notes to Financial Statements.

-30-
<PAGE>

[LOGO]

FLAG INVESTORS
REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------

Financial Highlights
(For a share outstanding throughout the period)*
<TABLE>
<CAPTION>

For the Period January 3, 1995**
through December 31, 1995
Class A Class B
- --------------------------------------------------------------------------------
<S> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period.. $10.00 $10.00
------ ------
Income from Investment Operations:
Net investment income................... 0.56 0.50
Net realized and unrealized gain
on investments........................ 1.21 1.20
------ ------
Total from Investment Operations 1.77 1.70
------ ------
Less Distributions:
Dividends from net investment income.... (0.52) (0.47)
Distributions from short-term capital gains (0.05) (0.05)
------ ------
Total distributions..................... (0.57) (0.52)
------ ------
Net asset value at end of period........ $11.20 $11.18
====== ======
Total Return (Aggregate).................. 18.19% 17.40%
Ratios to Average Net Assets:
Expenses(2)............................. 1.19%(1) 1.90%(1)
Net investment income(3)................ 5.95%(1) 5.25%(1)
Supplemental Data:
Net assets at end of period (000)....... $7,171 $3,016
Portfolio turnover rate................. 28% 28%
- --------------------------------------------------------------------------------
</TABLE>

*Computed based upon average shares outstanding.
**Commencement of operations.
1 Annualized.
2 Without the waiver of advisory fees (Note B), the ratio of expenses to average
net assets would have been 3.25% (annualized) for Class A Shares and 4.05%
(annualized) for Class B Shares.
3 Without the waiver of advisory fees (Note B), the ratio of net investment
income to average net assets would have been 3.89% (annualized) for Class A
Shares and 3.09% (annualized) for Class B Shares.

See accompanying Notes to Financial Statements.

-31-
<PAGE>

[LOGO]

FLAG INVESTORS
REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------

Notes to Financial Statements

A. Significant Accounting Policies - Flag Investors Real Estate Securities Fund,
Inc. (the "Fund") was organized as a Maryland Corporation on May 2, 1994 and
commenced operations January 3, 1995. The Fund is registered under the
Investment Company Act of 1940 as a non-diversified, open-end management
investment company designed to seek total return primarily through
investments in equity securities of companies that are principally engaged in
the real estate industry.

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

Security Valuation - Portfolio securities are valued on the basis of their
last sale price. In the event that there are no sales or the security is not
listed, it is valued at its latest bid quotation. Short-term obligations with
maturities of 60 days or less are valued at amortized cost.

Repurchase Agreements - The Fund may agree to purchase money market
instruments subject to the seller's agreement to repurchase them at an agreed
upon date and price. The seller, under a repurchase agreement, will be
required on a daily basis to maintain the value of the securities subject to
the agreement at no less than the repurchase price. The agreement is
conditional upon the collateral being deposited under the Federal Reserve
book-entry system.

Federal Income Tax - No provision is made for federal income taxes as it is
the Fund's intention to continue to qualify as a regulated investment company
and to make requisite distributions to the shareholders that will be
sufficient to relieve it from all or substantially all federal income and
excise taxes. The Fund's policy is to distribute to shareholders
substantially all of its taxable net investment income and net realized
capital gains.

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

A portion of the dividend income recorded by the Fund is from Real Estate
Investment Trusts ("REITs"). For tax purposes, a portion of these dividends
consists of capital gains and return of capital. For financial reporting
purposes, these dividends are recorded as dividend income, and the investment
in the REIT is reported at market value. For the period ended December 31,
1995, no return of capital portion of such distribution has been determined
due to the lack of notification from the REITs held by the Fund.

B. Investment Advisory Fees, Transactions with Affiliates and Other Fees -
Investment Company Capital Corp. ("ICC"), a subsidiary of Alex. Brown & Sons
Incorporated ("Alex. Brown"), serves as the Fund's investment advisor and
ABKB/LaSalle Securities Limited Partnership is the Fund's sub-advisor. As
compensation for its advisory services, ICC receives from the Fund an annual
fee, calculated daily and paid monthly, at the annual rate of 0.65% of the
first $100 million of the Fund's average daily net assets; 0.55% of the next
$100 million of the Fund's average daily net assets; 0.50% of the next $100
million of the Funds average daily net assets; and 0.45% of the Fund's
average daily net assets exceeding $300 million.

-32-
<PAGE>
[LOGO]

FLAG INVESTORS
REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------

Notes to Financial Statements (concluded)

ICC has agreed to reduce its aggregate fees attributable to the Fund or make
payments to the Fund, if necessary, to the extent required to satisfy any
expense limitations imposed by any securities laws or regulations thereunder
of any state in which the shares of the Fund are qualified for sale. ICC has
voluntarily agreed to waive its fees to the extent required to maintain
expenses at no more than 1.25% of the Fund's average daily net assets for
Class A Shares and 2.00% for Class B Shares. For the period ended December
31, 1995, ICC waived fees of $38,795 and reimbursed expenses of $91,068.

As compensation for its accounting services, ICC receives from the Fund an
annual fee, calculated daily and paid monthly, from the Fund's average daily
net assets. ICC received $12,360 for accounting services for the period ended
December 31, 1995.

As compensation for its transfer agent services, ICC receives from the Fund a
per account fee, calculated daily and paid monthly. ICC received $19,350 for
transfer agent services for the period ended December 31, 1995.

As compensation for providing distribution services, Alex. Brown receives
from the Fund an annual fee, calculated daily and paid monthly, at an annual
rate equal to 0.25% of the average daily net assets for Class A Shares and
1.00% (includes 0.25% shareholder servicing fee) of the average daily net
assets for Class B Shares. For the period ended December 31, 1995,
distribution fees aggregated $30,926, of which $9,662 was attributable to the
Class A Shares and $21,264 was attributable to the Class B Shares.

C. Capital Share Transactions - The Fund is authorized to issue up to 10 million
shares of common stock (7 million Class A, 2 million Class B and 1 million
undesignated), par value $.001 per share. Transactions in shares of the Fund
were as follows:

<PAGE>

<TABLE>
<CAPTION>
For the Period
January 3, 1995*
to December 31, 1995
--------------------
Class A Class B
------- -------
<S> <C> <C>
Shares sold........... 655,079 290,349
Shares issued to
shareholders on
reinvestment of
dividends........... 16,704 6,473
Shares redeemed....... (41,690) (27,054)
----------- -----------
Net increase in shares
outstanding......... 630,093 269,768
=========== ===========
Proceeds from sale
of shares........... $6,763,257 $2,948,875
Value of reinvested
dividends........... 178,010 68,846
Cost of shares
redeemed............ (439,765) (286,320)
----------- -----------
Net increase from
capital share
transactions........ $6,501,502 $2,731,401
========== ===========
- -------------------------------------------------
</TABLE>

*Commencement of operations.

D. Investment Transactions - Purchases and sales of investment securities, other
than short-term obligations, aggregated $10,766,776 and $1,895,157,
respectively, for the period ended December 31, 1995.

At December 31, 1995, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $829,759
and aggregate gross unrealized depreciation for all securities in which there
is an excess of tax cost over value was $11,722.

E. Net Assets - At December 31, 1995, net assets consisted of:
Paid-in capital:
<TABLE>
<CAPTION>
<S> <C>
Flag Investors Class A Shares.......... $ 6,601,502
Flag Investors Class B Shares.......... 2,731,401
Undistributed net investment
income................................. 29,031
Accumulated net realized
gains from security
transactions........................... 7,706
Unrealized appreciation
of investments......................... 818,037
-----------
$10,187,677
===========
</TABLE>

-33-
<PAGE>
[LOGO]

FLAG INVESTORS
REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------

Report of Independent Accountants

To the Shareholders and Directors of
Flag Investors Real Estate Securities Fund, Inc.:

We have audited the accompanying statement of net assets of Flag Investors Real
Estate Securities Fund, Inc. as of December 31, 1995 and the related statements
of operations and changes in net assets and financial highlights for the period
January 3, 1995 (commencement of operations) through December 31, 1995. 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 audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards required that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of investments owned as of December 31, 1995,
by correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Flag
Investors Real Estate Securities Fund, Inc. as of December 31, 1995 and the
results of its operations and the changes in its net assets and its financial
highlights for the period January 3, 1995 (commencement of operations) through
December 31, 1995 in conformity with generally accepted accounting principles.

COOPERS & LYBRAND, L.L.P.

Philadelphia, Pennsylvania
February 2, 1996

-34-

<PAGE>

[Logo]

FLAG INVESTORS
REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------

Statement of Net Assets June 30, 1996
(Unaudited)

<TABLE>
<CAPTION>
Market Percent
Market Value of Net Unrealized
Shares Security Cost Price (Note A) Assets Gain/(Loss)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
COMMON STOCKS: 97.4%
Real Estate Investment Trusts: 94.2%
Apartments: 28.7%
25,100 Avalon Properties, Inc. $ 505,221 $21.75 $ 545,925 3.4% $ 40,704
17,500 Bay Apartment Communities, Inc. 371,758 25.88 452,812 2.8 81,054
15,600 Equity Residential Properties Trust 448,751 32.88 512,850 3.2 64,099
24,900 Evans Withycombe Residential, Inc. * 505,902 20.88 519,787 3.3 13,885
17,000 Irvine Apartment Communities, Inc. 339,044 20.13 342,125 2.1 3,081
22,700 Merry Land & Investment Company, Inc. 480,611 21.00 476,700 3.0 (3,911)
17,200 Oasis Residential, Inc. 382,266 21.88 376,250 2.4 (6,016)
14,700 Post Properties, Inc. 457,484 35.38 520,013 3.3 62,529
16,600 Security Capital Pacific Trust 304,514 21.75 361,050 2.3 56,536
31,900 United Dominion Realty Trust 452,550 14.38 458,562 2.9 6,012
--------- --------- ---- -------
4,248,101 4,566,074 28.7 317,973
Factory Outlets: 3.3%
16,700 Chelsea GCA Realty, Inc. 465,220 31.75 530,225 3.3 65,005
--------- --------- ---- -------
Health Care: 7.7%
18,200 Health Care Property Investors, Inc. 579,406 33.75 614,250 3.9 34,844
28,600 Nationwide Health Properties, Inc. 555,285 21.13 604,175 3.8 48,890
--------- --------- ---- -------
1,134,691 1,218,425 7.7 83,734
Hotels: 6.3%
12,500 FelCor Suite Hotels, Inc. 353,552 30.50 381,250 2.4 27,698
16,100 Patriot American Hospitality, Inc. 426,876 29.63 476,963 3.0 50,087
3,900 Starwood Lodging Trust 111,624 36.38 141,862 0.9 30,238
--------- --------- ---- -------
892,052 1,000,075 6.3 108,023
Mobile Homes: 3.7%
16,900 Manufactured Home Communities, Inc. 295,201 19.25 325,325 2.1 30,124
9,500 Sun Communities, Inc. 226,573 26.88 255,313 1.6 28,740
--------- --------- ---- -------
521,774 580,638 3.7 58,864
Office/Industrial/Self-Storage: 21.4%
16,500 Beacon Properties Corp. 111,445 25.63 110,188 0.7 (1,257)
16,500 Duke Realty Investments, Inc. 479,427 30.25 499,125 3.1 19,698
18,600 Highwoods Properties, Inc. 469,695 27.63 513,825 3.2 44,130
24,800 Security Capital Industrial Trust 416,899 17.63 437,100 2.8 20,201
15,800 Shurgard Storage Centers, Inc. - Class A 391,481 25.25 398,950 2.5 7,469
19,900 Spieker Properties, Inc. 455,645 27.25 542,275 3.4 86,630
</TABLE>

<PAGE>

[Logo]

FLAG INVESTORS
REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------

Statement of Net Assets (continued) June 30, 1996
(Unaudited)

<TABLE>
<CAPTION>
Market Percent
Market Value of Net Unrealized
Shares Security Cost Price (Note A) Assets Gain/(Loss)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Real Estate Investment Trusts (continued)
Office/Industrial/Self-Storage (continued)
15,700 Storage USA, Inc. $ 468,637 $32.25 $ 506,325 3.2% $ 37,688
15,000 Weeks Corp. 353,353 26.00 390,000 2.5 36,647
---------- ---------- ---- ---------
3,146,582 3,397,788 21.4 251,206
Regional Malls: 10.7%
18,800 DeBartolo Realty Corp. 267,593 16.13 303,150 1.9 35,557
10,900 JP Realty, Inc. 220,993 21.38 232,988 1.5 11,995
18,300 Simon Property Group, Inc. 438,523 24.50 448,350 2.8 9,827
46,000 Taubman Centers, Inc. 448,604 11.13 511,750 3.2 63,146
8,700 Urban Shopping Centers, Inc. 181,561 23.75 206,625 1.3 25,064
---------- ---------- ---- ---------
1,557,274 1,702,863 10.7 145,589
Retail: 12.4%
13,800 Developers Diversified Realty Corp. 402,867 31.88 439,875 2.8 37,008
14,700 Federal Realty Investment Trust 312,779 22.50 330,750 2.1 17,971
11,050 Kimco Realty Corp. 290,226 28.25 312,163 2.0 21,937
7,900 Regency Realty Corp. 132,520 21.00 165,900 1.0 33,380
9,800 Vornado Realty Trust 351,481 40.88 400,575 2.5 49,094
8,100 Weingarten Realty Investors 289,688 38.75 313,875 2.0 24,187
---------- ---------- ---- ---------
1,779,561 1,963,138 12.4 183,577
Real Estate Operating Companies: 3.2%
Hotels: 2.2%
12,500 Host Marriott Corp.* 145,357 13.13 164,062 1.0 18,705
800 Interstate Hotels Corp.* 16,800 22.25 17,800 0.1 1,000
11,900 Red Roof Inns, Inc.* 188,841 14.13 168,088 1.1 (20,753)
---------- ---------- ---- ---------
350,998 349,950 2.2 (1,048)
Regional Malls: 1.0%
6,100 The Rouse Company 136,862 25.88 157,837 1.0 20,975
---------- ---------- ---- ---------
Total Common Stocks 14,233,115 15,467,013 97.4 1,233,898
---------- ---------- ---- ---------
</TABLE>

<PAGE>

[Logo]

FLAG INVESTORS
REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------

Statement of Net Assets (concluded) June 30, 1996
(Unaudited)

<TABLE>
<CAPTION>
Market Percent
Market Value of Net
Par Cost Price (Note A) Assets
- ------------------------------------------------------------------------------------------------------
<S> <C>
REPURCHASE AGREEMENT: 1.1%
$176,000 Goldman Sachs & Co., 5.05%
Dated 6/28/96, to be repurchased
on 7/1/96, collateralized by
U.S. Treasury Notes with
a market value of $180,037.
(Cost $176,000) $ 176,000 $100.00 $ 176,000 1.1%
----------- ------- ----------- ------
Total Investment in Securities 14,409,115** 15,643,013 98.5
Other Assets in Excess of Liabilities, Net 235,339 1.5
----------- ------
Net Assets $15,878,352 100.0%
=========== ======

Net Asset Value and Redemption Price Per:
Class A Share
($12,425,103 / 1,073,293 shares outstanding) $11.58
======
Class B Share
($3,453,249 / 299,078 shares outstanding) $11.55+
======

Maximum Offering Price Per:
Class A Share
($11.58 / .955) $12.13
======
Class B Share $11.55
======
- --------------------------------------------------------------------------------------------------------
</TABLE>

* Non-income producing security.
** Also aggregate cost for federal tax purposes.
+ Redemption value is $11.09 following a maximum 4% contingent deferred
sales charge.
See accompanying Notes to Financial Statements.

<PAGE>

[Logo]

FLAG INVESTORS
REAL ESTATE SECURITIES FUND
<TABLE>
<CAPTION>

- --------------------------------------------------------------------------------
Statement of Operations For the Six Months Ended June 30, 1996
(Unaudited)

- --------------------------------------------------------------------------------
INVESTMENT INCOME (NOTE A):

<S> <C>
Dividends............................................ $434,093
Interest............................................. 5,765
--------
Total income....................................... 439,858
--------

EXPENSES:

Investment advisory fee (Note B)..................... 42,029
Distribution fee (Note B)............................ 28,250
Legal................................................ 14,959
Transfer agent fee (Note B).......................... 13,650
Custodian fee........................................ 12,649
Audit................................................ 12,465
Organizational expense (Note A)...................... 9,298
Registration fees.................................... 9,275
Accounting fee (Note B).............................. 7,956
Printing andpostage.................................. 4,738
Miscellaneous........................................ 2,493
Directors' fees...................................... 599
Insurance............................................ 87
--------
Total expenses..................................... 158,448
Less:Fees waived and expenses reimbursed (Note B).... (65,540)
--------
Net expenses....................................... 92,908
--------
Net investment income................................ 346,950
--------

REALIZED AND UNREALIZED GAIN ON INVESTMENTS:

Net realized gain from security transactions......... 62,545
Change in unrealized appreciation of investments..... 415,861
--------
Net gain on investments.............................. 478,406
--------

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS...... $825,356
========
- -------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.

<PAGE>

[Logo]

FLAG INVESTORS
REAL ESTATE SECURITIES FUND
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Statement of Changes in Net Assets
For the Six For the Period
Months Ended January 3, 1995*
June 30, 1996 through
(Unaudited) December 31, 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income................................... $ 346,950 $ 353,419
Net realized gain from security transactions............ 62,545 47,282
Change in unrealized appreciation of investments........ 415,861 818,037
------------- -----------
Net increase in net assets resulting from operations.... 825,356 1,218,738
------------- -----------

DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Class A Share......................................... (252,154) (216,537)
Class B Shares........................................ (75,890) (107,851)
Short-term capital gains:
Class A Shares........................................ -- (27,959)
Class B Shares........................................ -- (11,617)
------------- -----------
Total distributions..................................... (328,044) (363,964)
------------- -----------

CAPITAL SHARE TRANSACTIONS (NOTE C):
Proceeds from sale of shares............................ 5,484,186 9,712,132
Value of shares issued in reinvestment of dividends..... 249,315 246,856
Cost of shares repurchased.............................. (540,138) (726,085)
------------- -----------
Increase in net assets derived from capital share
transactions.......................................... 5,193,363 9,232,903
------------- -----------
Total increase in net assets........................ 5,690,675 10,087,677

NET ASSETS:
Beginning of period..................................... 10,187,677 100,000**
------------- -----------
End of period........................................... $15,878,352 $10,187,677
============= ===========

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

* Commencement of operations.
** On July 28, 1994, the Fund sold 10,000 shares to a subsidiary of Alex. Brown
& Sons Incorporated for $100,000.
See accompanying Notes to Financial Statements.

<PAGE>

[Logo]

FLAG INVESTORS
REAL ESTATE SECURITIES FUND
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Financial Highlights
(For a share outstanding throughout each period)
Class A Shares Class B Shares
--------------------------- -------------------------
For the For the
For the Six Period For the Six Period
Months Ended Jan. 3, 1995* Months Ended Jan. 3, 1995*
June 30, 1996 through June 30, 1996 through
(Unaudited) Dec. 31, 1995 (Unaudited) Dec. 31, 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>

Per Share Operating Performance:
Net asset value at beginning of period............. $ 11.20 $10.00 $11.18 $10.00
------- ------ ------ ------
Income from Investment Operations:
Net investment income.............................. 0.31 0.56 0.26 0.50
Net realized and unrealized gain
on investments................................... 0.37 1.21 0.37 1.20
------- ------ ------ ------
Total from Investment Operations................... 0.68 1.77 0.63 1.70
------- ------ ------ ------
Less Distributions:
Dividends from net investment income............... (0.30) (0.52) (0.26) (0.47)
Distributions from net realized
short-term gains................................. -- (0.05) -- (0.05)
------- ------ ------ ------
Total distributions................................ (0.30) (0.57) (0.26) (0.52)
------- ------ ------ ------
Net asset value at end of period................... $ 11.58 $11.20 $11.55 $11.18
======= ====== ====== ======

Total Return**....................................... 6.20% 18.19% 5.78% 17.40%
Ratios to Average Daily Net Assets:
Expenses........................................... 1.25%(1,2) 1.25%(2,6) 2.00%(1,2) 2.00%(4,6)
Net investment income.............................. 5.61%(1,3) 5.95%(1,3) 4.63%(1,5) 5.25%(1,5)
Supplemental Data:
Net assets at end of period (000).................. $12,425 $7,171 $3,453 $3,016
Portfolio turnover rate............................ 9%(1) 28% 9%(1) 28%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>

*Commencement of operations.
**Total return excludes the effect of sales charge.
(1) Annualized.
(2) Without the waiver of advisory fees (Note B), the ratio of expenses to
average daily net assets would have been 2.26% (annualized) and 3.25%
(annualized) for Class A Shares for the periods ended June 30,1996
and December 31,1995, respectively.
(3) Without the waiver of advisory fees (Note B), the ratio of net investment
income to average daily net assets would have been 4.60% (annualized) and
3.89% (annualized) for Class A Shares for the periods ended June 30,1996 and
December 31,1995, respectively.
(4) Without the waiver of advisory fees (Note B), the ratio of expenses to
average daily net assets would have been 3.02% (annualized) and 4.05%
(annualized) for Class B Shares for the periods ended June 30,1996 and
December 31,1995, respectively.
(5) Without the waiver of advisory fees (Note B), the ratio of net
investment income to average daily net assets would have been 3.61%
(annualized) and 3.09% (annualized) for Class B Shares for the periods
ended June 30,1996 and December 31,1995, respectively.
(6) Annualized, ratios based upon the SEC NI-A formula would be 1.19% for Class
A Shares and 1.90% for Class B Shares.
See accompanying Notes to Financial Statements.

<PAGE>

[Logo]

FLAG INVESTORS
REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Notes to FinancialStatements

A. Significant Accounting Policies - Flag Investors Real Estate Securities
Fund, Inc. (the "Fund") was organized as a Maryland Corporation on May 2,
1994 and commenced operations January 3, 1995. The Fund is registered under
the Investment Company Act of 1940 as a non-diversified, open-end management
investment company designed to seek total return primarily through
investments in equity securities of companies that are principally engaged
in the real estate industry.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant accounting policies are as follows:

Security Valuation - Portfolio securities are valued on the basis of their
last sale price. In the event that there are no sales or the security is not
listed, it is valued at its latest bid quotation. Short-term obligations
with maturities of 60 days or less are valued at amortized cost.

Repurchase Agreements - The Fund may agree to enter into tri-party
repurchase agreements. Securities held as collateral for tri-party
repurchase agreements are maintained by the broker's custodial bank in a
segregated account until maturity of the repurchase agreement. The agreement
ensures that the market value of the collateral, including accrued interest
thereon, is sufficient in the event of default. If the counterparty defaults
and the value of the collateral declines or if the counterparty enters into
an insolvency proceeding, realization of the collateral by the Fund may be
delayed or limited.

Federal Income Tax - No provision is made for federal income taxes as it is
the Fund's intention to continue to qualify as a regulated investment
company and to make requisite distributions to the shareholders that will be
sufficient to relieve it from all or substantially all federal income and
excise taxes. The Fund's policy is to distribute to shareholders
substantially all of its taxable net investment income and net realized
capital gains.

Other - Security transactions are accounted for on the trade date and the
cost of investments sold or redeemed is determined by use of the specific
identification method for both financial reporting and income tax purposes.
Interest income is recorded on an accrual basis. Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Costs
incurred by the Fund in connection with its organization, registration and
the initial public offering of shares have been deferred and are being
amortized on the straight-line method over a five-year period beginning on
the date on which the Fund commenced its investment activities.

B. Investment Advisory Fees, Transactions with Affiliates and Other Fees -
Investment Company Capital Corp. ("ICC"), a subsidiary of Alex. Brown
Financial Corp., serves as the Fund's investment advisor and ABKB/LaSalle
Securities Limited Partnership is the Fund's sub-advisor. As compensation
for its advisory services, ICC receives from the Fund an annual fee,
calculated daily and paid monthly, at the following annual rates based upon
the Fund's average daily net assets: 0.65% of the first $100 million, 0.55%
of the next $100 million, 0.50% of the next $100 million and 0.45% of that
portion in excess of $300 million.

ICC has agreed to reduce its aggregate fees attributable to the Fund or make
payments to the Fund,

<PAGE>

[Logo]

FLAG INVESTORS
REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)

if necessary, to the extent required to satisfy any expense limitations
imposed by any securities laws or regulations thereunder of any state in
which the shares of the Fund are qualified for sale. ICC has voluntarily
agreed to waive its fees to the extent required to maintain expenses at
no more than 1.25% of the Fund's average daily net assets for Class A Shares
and 2.00% for Class B Shares. For the period ended June 30, 1996, ICC
waived fees of $42,029 and reimbursed expenses of $23,511.

As compensation for its accounting services, ICC receives from the Fund an
annual fee, calculated daily and paid monthly, from the Fund's average daily
net assets. ICC received $7,956 for accounting services for the period ended
June 30, 1996.

As compensation for its transfer agent services, ICC receives from the Fund
a per account fee, calculated daily and paid monthly. ICC received $13,650
for transfer agent services for the period ended June 30, 1996.

As compensation for providing distribution services, Alex. Brown & Sons
Incorporated ("Alex. Brown") receives from the Fund an annual fee,
calculated daily and paid monthly, at an annual rate equal to 0.25% of the
average daily net assets for Class A Shares and 1.00% (includes 0.25%
shareholder servicing fee) of the average daily net assets for Class B
Shares. For the period ended June 30, 1996, distribution fees aggregated
$28,250, of which $12,134 was attributable to the Class A Shares and $16,116
was attributable to the Class B Shares.

The fund complex of which the Fund is a part has adopted a retirement plan
for eligible Directors. The actuarially computed pension expense allocated
to the Fund for the six months ended June 30, 1996 was $75.

C. Capital Share Transactions - The Fund is authorized to issue up to 10
million shares of common stock (7 million Class A, 2 million Class B and 1
million undesignated), par value $.001 per share. Transactions in shares of
the Fund were as follows:

Class A Shares
--------------------------------
For the Six
Months Ended For the Period
June 30, 1996 Jan. 3. 1995*
(Unaudited) to Dec. 31, 1995
-------------- ----------------
<S> <C> <C>

Shares sold....... 441,421 655,079
Shares issued to
shareholders on
reinvestment of
dividends....... 17,705 16,704
Shares redeemed... (25,925) (41,690)
---------- ----------
Net increase in shares
outstanding..... 433,201 630,093
========== ==========
Proceeds from sale
of shares....... $4,958,535 $6,763,257
Value of reinvested
dividends....... 198,150 178,010
Cost of shares
redeemed........ (293,014) (439,765)
---------- ----------
Net increase from
capital share
transactions.... $4,863,671 $6,501,502
========== ==========
</TABLE>

<PAGE>

Class B Shares
-------------------------------
For the Six
Months Ended For the Period
June 30, 1996 Jan. 3. 1995*
(Unaudited) to Dec. 31, 1995
------------- ----------------
<S> <C> <C>

Shares sold...... 46,626 290,349
Shares issued to
shareholders on
reinvestment of
dividends...... 4,583 6,473
Shares redeemed.. (21,900) (27,054)
-------- -----------
Net increase in shares
outstanding.... 29,309 269,768
======== ===========
Proceeds from sale
of shares...... $525,651 $2,948,875
Value of reinvested
dividends...... 51,165 68,846
Cost of shares
redeemed....... (247,124) (286,320)
-------- ----------
Net increase from
capital share
transactions... $329,692 $2,731,401
======== ==========
</TABLE>

*Commencement of operations.

<PAGE>

[Logo]

FLAG INVESTORS
REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (concluded)

D. Investment Transactions - Purchases and sales of investment securities,
other than short-term obligations, aggregated $5,808,697 and $557,027,
respectively, for the six months ended June 30, 1996.

At June 30, 1996, aggregate gross unrealized appreciation for all securities
in which there was an excess of value over tax cost was $1,265,835 and
aggregate gross unrealized depreciation of all securities in which there was
an excess of tax cost over value was $31,937.

E. Net Assets - At June 30, 1996, net assets consisted of:
Paid-in capital:

Flag Investors Class A Shares $11,465,173
Flag Investors Class B Shares 3,061,094
Undistributed net investment
income....................... 47,937
Accumulated net realized
gain from security
transactions................. 70,250
Unrealized appreciation
of investments............... 1,233,898
-----------
$15,878,352
===========
</TABLE>

<PAGE>

Appendix

The following descriptions or ratings have been published by Standard & Poor's
Ratings Group ("S&P") and Moody's Investors Service, Inc. ("Moody's").

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

Description of Commercial Paper Ratings

S&P - Commercial paper rated A by S&P is regarded as having the
greatest capacity for timely payment. Issues rated A are further refined by use
of the numbers 1+, 1, 2 and 3 to indicate the relative degree of safety. Issues
rated A-1+ are those with an "overwhelming degree" of credit protection. Those
rated A-1 reflect a "very strong" degree of safety regarding timely payment.
Those rated A-2 reflect a safety regarding timely payment but not as high as
A-1.

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

Description of Corporate Bond Ratings

S&P - Services rated AAA by S&P have the highest rating assigned by
S&P. Capacity to pay interest and repay principal is extremely strong.
Securities rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
Securities rated A have 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 securities in higher rated
categories. Securities rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for securities in this category than for securities in higher rated categories.

Moody's - Bonds which are rated Aaa by Moody's are judged to be 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. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment some time in the future. Bonds which are
rated Baa are considered as medium-grade obligations (i.e., they are neither
highly protected nor poorly secured). Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.

A-1