FLAG INVESTORS EQUITY PARTNERS FUND INC, 497, 1996-02-14

FLAG INVESTORS EQUITY PARTNERS FUND INC
497, 1996-02-14

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LOGO

FLAG INVESTORS

EQUITY PARTNERS FUND, INC.

(Institutional Shares)

This mutual fund (the "Fund") is designed to seek long-term growth of capital
and, secondarily, current income. The Fund seeks to achieve this objective
primarily through a policy of diversified investments in equity securities,
including common stocks and convertible securities.

Flag Investors Institutional Shares of the Fund ("Institutional Shares")
are available through Alex. Brown & Sons Incorporated ("Alex. Brown") or
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 October 1, 1995, as amended through
February 12, 1996 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.

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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.

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

The date of this Prospectus is February 12, 1996

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FLAG INVESTORS

EQUITY PARTNERS FUND, INC.
(INSTITUTIONAL SHARES)

135 East Baltimore Street
Baltimore, Maryland 21202

TABLE OF CONTENTS

------

Page

1. Fee Table ........................................ 2
2. Financial Highlights ............................. 3
3. Investment Program ............................... 4
Investment Objective, Policies
and Risk Considerations .......................... 4
4. Investment Restrictions .......................... 7
5. How to Invest in Institutional Shares ............ 8
6. How to Redeem Institutional Shares ............... 10
7. Telephone Transactions ........................... 10
8. Dividends and Taxes .............................. 11
9. Management of the Fund ........................... 13
10. Investment Advisor and Sub-Advisor ............... 13
11. Distributor ...................................... 15
12. Custodian, Transfer Agent, Accounting Services ... 16
13. Performance Information .......................... 16
14. General Information .............................. 17

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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. This Prospectus does not constitute an offering by the Fund
or by its distributor in any jurisdiction in which such offering may not
lawfully be made. Institutional Shares may be offered only to residents of
those states in which such shares are eligible for purchase.

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1. FEE TABLE

.............................................................................

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
Deferred Sales Charge .................................. None
==============================================================================
ANNUAL FUND OPERATING EXPENSES (NET OF FEE WAIVERS):
(as a percentage of average daily net assets)

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Management Fees (net of fee waivers) ................. .65%*
12b-1 Fees ........................................... None
Other Expenses ....................................... .45%
----------
Total Fund Operating Expenses (net of fee waivers) ... 1.10%*
==========
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* The Fund's investment advisor intends, but is not obligated, to waive its fee
to the extent required for at least the current fiscal year so that Total Fund
Operating Expenses do not exceed 1.10% of the Institutional Shares' average
daily net assets. Absent fee waivers, Management Fees would be 1.00% of the
Fund's average daily net assets and Total Fund Operating Expenses would be
1.45% of the Institutional Shares' average daily net assets.

EXAMPLE

You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period:* ..... 1 Year 3 Years
============================================================================

$12 $34
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* The Example is based on Total Fund Operating Expenses, net of fee waivers.
Absent fee waivers, expenses would be higher.

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

The purpose of the foregoing table is to describe the various costs and
expenses that an investor in the Fund will bear directly and indirectly. A
person who purchases Institutional Shares through a financial institution may be
charged separate fees by the financial institution. (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
estimated amounts (net of fee waivers) for the Class A Shares, another class of
shares offered by the Fund, for the current fiscal year ending May 31, 1996,
less 12b-1 fees of .25%.

<PAGE>

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2. FINANCIAL HIGHLIGHTS

The Fund was organized as a corporation under the laws of the state of
Maryland on November 29, 1994. The Fund has not offered the Institutional Shares
prior to the date of this Prospectus. However, the Fund has offered Class A
Shares since February 13, 1995. Historical financial information 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 are a part of the Fund's
financial statements for the Class A Shares for the period indicated and have
been audited by Coopers & Lybrand L.L.P., independent accountants. The financial
statements and financial highlights for the Class A Shares for the period ended
May 31, 1995 and the report thereon of Coopers & Lybrand L.L.P. are included in
the Statement of Additional Information. Additional performance information for
the Class A Shares is contained in the Fund's Annual Report for the fiscal
period ended May 31, 1995 which can be obtained at no charge by calling the Fund
at (800) 767-FLAG.

<PAGE>

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

(Based on average shares outstanding during the period)

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Class A Shares

For the Period February 13, 1995*

through May 31, 1995

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Per Share Operating Performance:

Net asset value at beginning of period ........ $ 10.00
----------
Income from Investment Operations:
Net investment income ......................... 0.12
Net realized and unrealized gain on investments 0.65
----------
Total from Investment Operations .............. 0.77

Less Distributions:
Dividends from net investment income .......... --
----------
Net asset value at end of period .............. $ 10.77
==========
Total Return** ................................. 7.70%

Ratios to Average Net Assets:
Expenses(2) ................................... 1.35%(1)
Net investment income(3) ...................... 3.74%(1)

Supplemental Data:
Net assets at end of period (000) ............. $38,612
Portfolio turnover rate ....................... --
- --------------------------------------------------------------------------------
* Commencement of Operations.
** Total return represents aggregate total return for the periods indicated and
does not reflect any applicable sales charges.
(1)Annualized.
(2)Without the waiver of advisory fees, the ratio of expenses to average net
assets would have been 3.76% (annualized) for Class A Shares.
(3)Without the waiver of advisory fees, the ratio of net investment income to
average net assets would have been 1.33% (annualized) for Class A Shares.

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3. INVESTMENT PROGRAM
...............................................................................
Investment Objective, Policies
and Risk Considerations

The investment objective of the Fund is to seek long-term growth of capital
and, secondarily, high current income. The Fund seeks to achieve this objective
primarily through a policy of diversified investments in equity securities,
including common stocks and convertible securities. The Fund's investment
objective is a fundamental policy of the Fund and may not be changed without
shareholder approval. There can be no assurance, however, that the Fund will
achieve its investment objective.

Investment Company Capital Corp. ("ICC"), the Fund's investment advisor,
and Alex. Brown Investment Management ("ABIM"), the Fund's sub-advisor

<PAGE>

(collectively, the "Advisors"), are responsible for managing the Fund's
investments. (See "Investment Advisor and Sub-Advisor.") The Advisors
consider both the opportunity for gain and the risk of loss in making
investments.

Under normal market conditions, the Fund will invest as fully as feasible in
common stocks and other equity investments (including preferred stocks,
convertible debt, warrants and other securities convertible into or exchangeable
for common stocks). At least 65% of the Fund's total assets will be so invested.
Convertible securities are securities that may be converted either at a stated
price or rate within a specified period of time into a specified number of
shares of common stock. Preferred stock is a class of capital stock that pays
dividends at a specified rate and that has preference over common stock in the
payment of dividends and the liquidation of assets. Warrants are instruments
giving holders the right, but not the obligation, to buy shares of a company at
a given price during a specified period. In selecting securities for the Fund's
portfolio, the Advisors expect to apply a "flexible value" approach to the
selection of equity investments. Under this approach, the Advisors will attempt
to identify securities that are undervalued in the marketplace but will also
consider such factors as current and expected earnings, dividends, cash flows
and asset values in their evaluation of a security's investment potential.

The Fund may invest up to 10% of its total assets in non-convertible debt
securities. Up to all of any such investments may be in securities that are
rated below investment grade. (See "Investments in Non-Investment Grade
Securities" below.) Any remaining assets of the Fund not invested as described
above may be invested in high quality money market instruments. For temporary,
defensive purposes, the Fund may invest up to 100% of its assets in high quality
short-term money market instruments, including repurchase agreements, and in
bills, notes or bonds issued by the U.S. Treasury Department or by agencies of
the U.S. Government.

The Fund may invest up to 10% of its net assets in illiquid securities,
including illiquid restricted securities. In addition, the Fund may invest up to
15% of its net assets, in the aggregate, in illiquid securities and in
restricted securities that are determined to be liquid under standards approved
by the Fund's Board of Directors.

...............................................................................
INVESTMENTS IN NON-INVESTMENT GRADE SECURITIES

Where deemed appropriate by the Advisors, the Fund may invest up to 10% of
its total assets (measured at the time of the investment) in lower quality
non-convertible debt securities (securities rated BB or lower by Standard &

<PAGE>

Poor's Ratings Group ("S&P") or Ba or lower by Moody's Investors Service, Inc.
("Moody's") and unrated securities of comparable quality). Lower rated debt
securities, also known as "junk bonds," are considered to be speculative and
involve greater risk of default or price changes due to changes in the issuer's
creditworthiness. Securities in the lowest rating category that the Fund may
purchase (securities rated C by either S&P or Moody's) may present a particular
risk of default, or may be in default and in arrears in payment of principal and
interest. Yields and market values of these bonds will fluctuate over time,
reflecting changing interest rates and the market's perception of credit quality
and the outlook for economic growth. When economic conditions appear to be
deteriorating, lower rated bonds may decline in value, regardless of prevailing
interest rates. Accordingly, adverse economic developments, including a
recession or a substantial period of rising interest rates, may disrupt the high
yield bond market, affecting both the value and liquidity of such bonds. An
economic downturn could adversely affect the ability of issuers of such bonds to
make payments of principal and interest to a greater extent than issuers of
higher rated bonds might be affected. The ratings categories of S&P and Moody's
are described more fully in the Appendix to the Statement of Additional
Information. During the fiscal period ended May 31, 1995 the Fund held no below
investment grade bonds.

...............................................................................
INVESTMENTS IN REPURCHASE AGREEMENTS

The Fund may enter into repurchase agreements with domestic banks or
broker-dealers deemed creditworthy under guidelines approved by the Directors. 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 the underlying securities will be at
least equal at all times to the total amount of the repurchase agreement
obligation, including the interest factor. If the seller were to default on its
obligation to repurchase the underlying instrument, the Fund could experience
loss due to delay in liquidating the collateral and to adverse market action.

...............................................................................
INVESTMENTS IN SECURITIES OF FOREIGN ISSUERS

In addition, from time to time, the Advisors may invest up to 10% of the
Fund's total assets in American Depository Receipts, which are U.S. exchange
listed interests in securities of foreign companies, and debt and equity
securities issued by foreign corporate and government issuers when the Advisors

<PAGE>

believe that such investments provide good opportunities for achieving income
and capital gains without undue risk.

Foreign investments involve different risks from investments in the United
States. In general, less information is publicly available about foreign
companies than is available about companies in the United States. Most foreign
companies are not subject to uniform audit and financial reporting standards,
practices and requirements comparable to those in the United States. In most
foreign markets volume and liquidity are less than in the United States and, at
times, volatility of price can be greater than in the United States. Fixed
commissions on foreign stock exchanges are generally higher than the negotiated
commissions on U.S. exchanges. There is generally less government supervision
and regulation of foreign stock exchanges, brokers, and companies than in the
United States. The settlement period for foreign securities, which is often
longer than that for securities of U.S. issuers, may affect portfolio liquidity.
Portfolio securities held by the Fund which are listed on foreign exchanges may
be traded on days that the Fund does not value its securities, such as Saturdays
and the customary U.S. business holidays on which the New York Stock Exchange is
closed. As a result, the net asset value of Fund shares may be significantly
affected on days when shareholders do not have access to the Fund.

The Advisors intend to invest in securities of companes in, and governments
of, developed, politically stable nations, but there exists the possibility of
adverse changes in investment or exchange control regulations, expropriation or
confiscatory taxation which could adversely affect the investments of the Fund
in such foreign country. When considering whether to invest in foreign equity or
debt securities, the Advisors will consider the risk of investment described
above in addition to the criteria they apply to all investments in equity or
debt securities.

===============================================================================
4. Investment Restrictions

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 recited below are matters of
fundamental policy and may not be changed without the affirmative vote of a
majority of the outstanding shares of the Fund. The vote of a majority of the
outstanding shares of the Fund means the lesser of: (i) 67% or more of the
shares present at a shareholder meeting at which the holders of more than 50% of
the shares are present or represented or (ii) more than 50% of the outstanding
shares of the Fund. The Fund will not:

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

<PAGE>

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

3) Borrow money except as a temporary measure 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.

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

===============================================================================
5. How to Invest in Institutional Shares

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, 135 East Baltimore
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 and
$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 ("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 once daily as of the close of
the New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time), on

<PAGE>

each Business Day. Net asset value per share of a class is calculated by valuing
all assets held by the Fund, deducting all liabilities, including liabilities
attributable to that specific class, and dividing the resulting amount by the
number of then outstanding shares of the class. For this purpose, portfolio
securities are given their market value where feasible. If a portfolio security
is traded on a national exchange or on an automated dealer quotation system,
such as NASDAQ, on the valuation date, the last quoted sale price is generally
used. Securities or other assets for which market quotations are not readily
available are valued at their fair value as determined in good faith under
procedures established from time to time and monitored by the Fund's Board of
Directors. 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). 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, Accounting Services." The exchange privilege may be
exercised only in those states where the Institutional shares of such other
funds may legally be sold. Investors should receive and read the applicable
prospectus prior to tendering shares for exchange. The Fund may modify or
terminate this offer of exchange at any time upon 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.

<PAGE>

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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6. HOW TO REDEEM INSTITUTIONAL SHARES

Shareholders may redeem all or part of their Institutional Shares on any
Business Day by transmitting a redemption order through Alex. Brown or a
Participating Dealer, or by regular or express mail to the Transfer Agent at its
address listed under "Custodian, Transfer Agent, Accounting Services."
Shareholders may also redeem Institutional Shares by telephone (in amounts up to
$500,000). (See "Telephone Transactions" below.) A redemption order 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) 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 redemption of Institutional Shares will
be paid on the next dividend payable date. If all of the Institutional Shares in
a shareholder's account have been redeemed on a dividend payable 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.

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7. TELEPHONE TRANSACTIONS

Shareholders may exercise the exchange privilege with respect to other Flag
Investors funds, or redeem Institutional Shares in amounts up to $500,000, by
notifying the Transfer Agent by telephone 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, Accounting
Services." Telephone transaction privileges are

<PAGE>

automatic. Shareholders may specifically request that no telephone redemptions
or exchanges be accepted for their accounts. This election may be made on the
Application Form or at any time thereafter by completing and returning
appropriate documentation supplied by the Transfer Agent.

A telephone exchange or redemption placed by 4:00 p.m. (Eastern Time) or the
close of the New York Stock Exchange, whichever is earlier, is effective that
day. Telephone orders placed after 4:00 p.m. (Eastern Time) will be effected at
the net asset value as next 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. The Fund or the Transfer
Agent may be liable for any losses due to unauthorized or fraudulent telephone
instructions if either of them does not employ these procedures. 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. Shares held in certificate
form may not be exchanged or redeemed by telephone. (See "How to Invest in
Institutional Shares -- Purchases by Exchange" and "How to Redeem Institutional
Shares.")

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8. DIVIDENDS AND TAXES
...............................................................................
Dividends and Distributions

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

Unless the shareholder elects otherwise, all income and capital gains
distributions will be reinvested in additional Institutional Shares at net asset
value. Shareholders may elect to terminate automatic reinvestment by giving
written notice to the Transfer Agent (see "Custodian, Transfer Agent,

<PAGE>

Accounting Services"), either directly or through Alex. Brown or a Participating
Dealer, at least five days before the next date on which dividends or
distributions will be paid.

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

The following is only a general summary of certain federal income tax
considerations affecting the Fund and the shareholders. No attempt is made to
present a detailed explanation of the tax treatment of the Fund or the
shareholders, and the discussion here is not intended as a substitute for
careful tax planning.

The following summary is based on current tax laws and regulations, which may
be changed by legislative, judicial, or administrative action. The Statement of
Additional Information sets forth further information concerning taxes.

The Fund expects to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). As
long as the Fund qualifies for this tax treatment, it will be relieved of
federal income tax on amounts distributed to shareholders. Shareholders, unless
otherwise exempt, generally will be subject to income tax on the amounts so
distributed regardless of whether such distributions are paid in cash or
reinvested in additional shares.

Distributions from the Fund out of net capital gains (the excess of net
long-term capital gains over net short-term capital losses), if any, will be
taxed to shareholders as long-term capital gains regardless of the length of
time the shareholder has held the shares. All other income distributions will be
taxed to shareholders as ordinary income. Corporate shareholders may be entitled
to the dividends received deduction on a portion of dividends received from the
Fund. Shareholders will be advised annually as to the tax status of all
distributions.

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

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

<PAGE>

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

Shareholders are encouraged to consult with their tax advisors concerning the
application of the rules described above to their particular circumstances and
the application of state and local taxes to an investment in the Fund.

===============================================================================
9. MANAGEMENT OF THE FUND

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

The Fund's Directors and officers are as follows:

<TABLE>
<CAPTION>
<S> <C> <C> <C>
* Truman T. Semans Chairman Lee S. Owen President
* Richard T. Hale Director J. Dorsey Brown, III Executive Vice President
* Charles W. Cole, Jr. Director Hobart C. Buppert, II Vice President
James J. Cunnane Director Bruce E. Behrens Vice President
John F. Kroeger Director Edward J. Veilleux Vice President
Louis E. Levy Director Gary V. Fearnow Vice President
Eugene J. McDonald Director Brian C. Nelson Vice President and Secretary
* Rebecca W. Rimel Director Joseph A. Finelli Treasurer
Carl W. Vogt Director Laurie D. DePrine Assistant Secretary
Harry Woolf Director
</TABLE>

- ------
* Messrs. Semans, Hale and Cole are, and Ms. Rimel may be, Directors who are
"interested persons" of the Fund within the meaning of Section 2(a)(19)
under the Investment Company Act.

===============================================================================
10. INVESTMENT ADVISOR AND SUB-ADVISOR

ICC is the Fund's investment advisor and ABIM is the Fund's sub-advisor. ICC
is also 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 $3.9 billion of net assets
as of December 31, 1995. ABIM is a registered investment advisor with
approximately $4.1 billion under management as of December 31, 1995.

<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 ABIM certain of its duties, provided
that ICC continues to supervise the performance of ABIM and report thereon to
the Fund's Board of Directors. Pursuant to the terms of the Sub-Advisory
Agreement, ABIM 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 ABIM 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 NASD Rules, and subject to seeking the most favorable
price and execution available and such other policies as the Board may
determine, ABIM 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.

As compensation for its services, ICC is entitled to receive a fee from the
Fund, calculated daily and payable monthly, at the annual rate of 1.00% of the
first $50 million of the Fund's average daily net assets, .85% of the next $50
million of the Fund's average daily net assets, .80% of the next $100 million of
the Fund's average daily net assets, and .70% of the Fund's average daily net
assets in excess of $200 million. As compensation for its services, ABIM is
entitled to receive a fee from ICC payable from its advisory fee, calculated
daily and payable monthly, at the annual rate of .75% of the first $50 million
of the Fund's average daily net assets, .60% of the next $150 million of the
Fund's average daily net assets, and .50% of the Fund's average daily net assets
in excess of $200 million. The fee paid to ICC is higher than that paid by most
mutual funds, but ICC has voluntarily agreed to waive a portion of the fee so
that the total operating expenses of the Fund do not exceed 1.10% of the
Institutional Shares' average daily net assets. (See "Fee Table.") ABIM has also
agreed to waive, on a voluntary basis, that portion of its fee payable from ICC
in excess of the amount equal to .65% of the Fund's average daily net assets.

ICC is a wholly-owned subsidiary of Alex. Brown, the Fund's distributor.
ABIM is a limited partnership affiliated with Alex. Brown. Buppert, Behrens &
Owen, Inc., a company organized and owned by three employees of ABIM, owns a
49% limited partnership interest and a 1% general partnership interest in
ABIM. Alex. Brown owns a 1% general partnership interest in ABIM and Alex. Brown

<PAGE>

Incorporated owns the remaining 49% limited partnership interest. The address of
both ICC and ABIM is 135 East Baltimore Street, Baltimore, Maryland 21202.

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

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

Messrs. Lee S. Owen, the Fund's President, and J. Dorsey Brown, III,
Executive Vice President of the Fund, have shared primary responsibility for
managing the Fund's assets since inception.

Lee S. Owen -- 23 Years Investment Experience

Lee Owen joined ABIM as a Vice President in 1983. From 1972 to 1983, Mr.
Owen was a Vice President and Portfolio Manager for T. Rowe Price Associates.
Mr. Owen is a 1970 graduate of Williams College and received his M.B.A. from
the University of Virginia in 1972. He is a member of the Baltimore Security
Analysts Society and the Financial Analysts Federation.

J. Dorsey Brown, III -- 28 Years Investment Experience

Dorsey Brown is the Chief Executive Officer of ABIM, which he founded in
1974. From 1967 to 1974, he was a member of the Research and Investment Advisory
Department of the Baltimore-based investment firm, Robert Garrett & Sons. Mr.
Brown received his B.A. from Trinity College in Hartford, Connecticut, in 1962
and studied at New York University Business School in 1966. He is a member of
the Baltimore Security Analysts Society and the Financial Analysts Federation.

===============================================================================
11. DISTRIBUTOR

Alex. Brown, 135 East Baltimore Street, Baltimore, Maryland 21202, 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.

<PAGE>

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

===============================================================================
12. CUSTODIAN, TRANSFER AGENT, 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.,
135 East Baltimore Street, Baltimore, Maryland 21202 (telephone: (800)
553-8080), is the Fund's transfer and dividend disbursing agent and provides
accounting services to the Fund. As compensation for providing accounting
services, ICC receives from the Fund an annual fee equal to $13,000, plus a
percentage of the Fund's average daily net assets in excess of $10 million at a
maximum rate of .10% of net assets, and declining at various asset levels to a
minimum rate of .001% on assets in excess of $1 billion. (See the Statement of
Additional Information.)

===============================================================================
13. PERFORMANCE INFORMATION

From time to time, the Fund may advertise its performance, including
comparisons with other mutual funds with similar investment objectives and to
stock or other relevant indices. All such advertisements 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, the Fund's performance will be stated in the
same terms in which such comparative data and indices are stated, which is
normally total return rather than yield.

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

<PAGE>

performance of mutual funds. The performance of the Fund may also be compared to
the Consumer Price Index, the Standard & Poor's 500 Stock Index and other market
indices such as NASDAQ and the Wilshire 500. The Fund may also use total return
performance data as reported in the following national financial and industry
publications that monitor the performance of mutual funds: 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. Shareholders
should remember that 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 shares may
be purchased, although not included in calculations of performance, will reduce
performance results.

===============================================================================
14. GENERAL INFORMATION
...............................................................................
CAPITAL SHARES

The Fund is a Maryland corporation, authorized to issue thirty-five million
shares of capital stock, with a par value of $.001 per share. Shares of the Fund
have equal rights with respect to voting. Voting rights are not cumulative, so
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 the event of liquidation or dissolution of the Fund, each share would
be entitled to its portion of the Fund's assets after all debts and expenses
have been paid.

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
Equity Partners 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
Equity Partners Fund Class A Shares, which are subject to a maximum front-end
sales charge of 4.5% and a .25% 12b-1 fee and Flag Investors Equity Partners
Fund Class B Shares, which are subject to a declining contingent deferred sales
charge with a maximum charge of 4.0%, a .75% 12b-1 fee and a .25% shareholder
servicing fee. 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.

<PAGE>

All classes of the Fund share a common investment objective, portfolio of
investments and advisory fee, but the classes may have different distribution
expenses or sales load structures and the net asset value per share of the
classes may differ at times.

...............................................................................
ANNUAL MEETINGS

The Fund does not expect to hold annual meetings of shareholders, but special
meetings of shareholders may be held under certain circumstances. 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
shareholder communications in connection with the meeting.

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

The Fund furnishes shareholders with semi-annual and 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 EQUITY PARTNERS FUND, INC.
(INSTITUTIONAL SHARES)
NEW ACCOUNT APPLICATION

- ------------------------------------------------------------------------------
Send completed Application by overnight carrier to:
Alex. Brown & Sons Incorporated/Flag Investors Funds
1004 Baltimore Avenue, 4th Floor
Kansas City, MO 64105
Attn: Flag Investors Equity Partners Fund, Inc.

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

If you are paying by check, make check payable to "Flag Investors Equity
Partners Fund, Inc." and mail with this Application. If you are paying by wire,
see instructions below.
- -------------------------------------------------------------------------------
YOUR ACCOUNT REGISTRATION (PLEASE PRINT)

Name on Account

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

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

/ / Corporation / / Partnership / / Trust

/ / Non-Profit or Charitable Organization / / Other _______________ If a Trust,
please provide the following:

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

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

Mailing Address

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

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

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

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

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

The minimum initial purchase for the Institutional Shares of the Fund is
$500,000 and $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 Equity Partners 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. # 7528353
ABA # 1010-0362-1
Kansas City, Missouri 64105

Please include the following information in the wire:
o Flag Investors Equity Partners 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

- -------------------------------------------------------------------------------
ACKNOWLEDGEMENT, CERTIFICATE AND SIGNATURE

I have received a copy of the Fund's prospectus dated February 12, 1996. Unless
the box below is checked, I certify under penalties of perjury, (1) that the
number shown on this form is my correct taxpayer identification number and (2)
that I am not subject to backup withholding as a result of a failure to report
all interest or dividends, or the Internal Revenue Service has notified me that
I am no longer subject to backup withholding. [ ]

Check here if you are subject to backup withholding. If a non-resident alien,
please indicate country of residence:

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

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.

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

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

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

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

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

FLAG INVESTORS EQUITY PARTNERS FUND, INC.

135 E. Baltimore Street
Baltimore, Maryland 21202

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

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

Statement of Additional Information Dated:
October 1, 1995, as amended through February 12, 1996
Relating to the Prospectuses Dated:
October 1, 1995, relating to the Class A and Class B Shares
and
February 12, 1996, relating to the Institutional Shares

<PAGE>

TABLE OF CONTENTS

Page
----

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

2. Investment Objectives, Policies and Risk Considerations . 1

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

4. Federal Tax Treatment of Dividends and
Distributions ......................................... 7

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

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

7. Distribution of Fund Shares ............................. 17

8. Brokerage ............................................... 20

9. Capital Stock ........................................... 22

10. Semi-Annual Reports ..................................... 22

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

12. Independent Accountants ................................. 23

13. Performance Information ................................. 23

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

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

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

<PAGE>

1. GENERAL INFORMATION AND HISTORY

Flag Investors Equity Partners 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 Equity Partners Fund Class A Shares (the "Class A
Shares"), Flag Investors Equity Partners Fund Class B Shares (the "Class B
Shares") and Flag Investors Equity Partners Fund Institutional Shares (the
"Intitutional Shares") (collectively the "Shares"). As used herein, the "Fund"
refers to Flag Investors Equity Partners Fund, Inc. and specific references to
any class of the Fund's Shares will be made using the name of such class.

Important information concerning the Fund is included in the Fund's
Prospectuses which may be obtained without charge from Alex. Brown & Sons
Incorporated ("Alex. Brown"), 135 East Baltimore Street, Baltimore, Maryland
21202 (telephone: (800) 767-FLAG) or from Participating Dealers that offer
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
November 29, 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, as amended (the
"Securities Act"), and commenced operations on February 13, 1995. The
Institutional Shares, which were not offered prior to the date of this Statement
of Additional Information, are offered only to certain eligible institutions and
to clients of investment advisory affiliates of Alex. Brown.

Under a license agreement dated January 31, 1995 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, POLICIES AND RISK CONSIDERATIONS

The Fund has the investment objective of seeking long-term growth of
capital and, secondarily, current income. The Fund seeks to achieve this
objective primarily through a policy of diversified investments in equity
securities, including common stocks and convertible securities. Under normal
market conditions, the Fund will invest as fully as feasible in equity
securities and at least 65% of the Fund's total assets will be so invested, all
as more fully described in the Prospectus. There can be no assurance that the
Fund's investment objective will be achieved.

In addition, the Fund may purchase a limited amount, up to 10% of its
total assets in non-convertible debt securities. Up to all of any such
investments may be in securities that are rated below investment grade by
Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Group
("S&P") or are unrated and of similar quality. A description of the rating
categories of S&P and Moody's is set forth in Appendix A to this Statement of
Additional Information. Any remaining assets of the Fund not invested as
described above may be invested in high quality money market instruments. For
temporary, defensive purposes, the Fund may invest up to 100% of its assets in
high quality short-term money market instruments, including repurchase
agreements, and in bills, notes or bonds issued by the U.S. Treasury Department
or by other agencies of the U.S. Government.

<PAGE>

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

Convertible Securities

As described in the Prospectus, the Fund may invest in convertible
securities. In general, the market value of a convertible security is at least
the higher of its "investment value" (i.e., its value as a fixed-income
security) or its "conversion value" (i.e., the value of the underlying shares of
common stock if the security is converted). As a fixed-income security, a
convertible security tends to increase in market value when interest rates
decline and tends to decrease in value when interest rates rise. However, the
price of a convertible security also is influenced by the market value of the
security's underlying common stock. Thus, the price of a convertible security
tends to increase as the market value of the underlying common stock increases,
whereas it tends to decrease as the market value of the underlying stock
declines. Investments in convertible securities generally entail less risk than
investment in common stock of the same issuer.

Below Investment Grade Corporate Bonds

The Fund may purchase corporate bonds, including convertible
securities, that carry ratings lower than those assigned to investment grade
bonds by Moody's or S&P, or that are unrated if such bonds, in the Advisors'
judgment, meet the quality criteria established by the Board of Directors. These
bonds are generally known as "junk bonds." These securities may trade at
substantial discounts from their face values. Accordingly, if the Fund is
successful in meeting its objectives, investors may receive a total return
consisting not only of income dividends but, to a lesser extent, capital gain
distributions. Appendix A to this Statement of Additional Information sets forth
a description of the S&P and Moody's rating categories, which indicate the
rating agency's opinion as to the probability of timely payment of interest and
principal. These ratings range in descending order of quality from AAA to D, in
the case of S&P, and from Aaa to C, in the case of Moody's. Generally,
securities which are rated lower than BBB by S&P or Baa by Moody's are described
as below investment grade. Securities rated lower than investment grade may be
of a predominantly speculative character and their future cannot be considered
well-assured. The issuer's ability to make timely payments of principal and
interest may be subject to material contingencies. Securities in the lowest
rating categories may be unable to make timely interest or principal payments
and may be in default and in arrears in interest and principal payments.

The following summarizes the Moody's and S&P definitions for
speculative grade debt obligations in which the Fund may invest. Bonds which are
rated Ba by Moody's are judged to have speculative elements; their future cannot
be considered well-assured. Often the protection of interest and principal
payments may be very moderate, and thereby not well safeguarded during both good
and bad times. Uncertainty of position characterizes bonds in this class. Bonds
rated B generally lack characteristics of a desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small. Caa rated bonds are of poor standing.
Such issues may be in default or there may be present elements of danger with
respect to principal or interest. Bonds rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings. Bonds rated C are the lowest rated class of bonds and can
be regarded as having extremely poor prospects of ever attaining any real

<PAGE>

investment standing. In the case of S&P, BB rated bonds have less near-term
vulnerability to default than other speculative issues. However, it faces major
ongoing uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely interest and
principal payments. The BB rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BBB- rating. B rated bonds
have a greater vulnerability to default but currently have the capacity to meet
interest payments and principal repayments. Adverse business, financial or
economic conditions will likely impair capacity or willingness to pay interest
and repay principal. The B rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BB or BB- rating. CCC rated
bonds have a currently identifiable vulnerability to default and, without
favorable business, financial and economic conditions, will be unable to repay
interest and principal. In the event of adverse business, financial or economic
conditions, it is not likely to have the capacity to pay interest and repay
principal. The CCC rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied B or B- rating. The rating CC
typically is applied to debt subordinated to senior debt that is assigned an
actual or implied CCC rating. The rating C typically is applied to debt
subordinated to senior debt which is assigned an actual or implied CCC- debt
rating. The C rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued. The rating CI
is reserved for income bonds on which no interest is being paid. Debt rated D is
in payment default. The D rating category is used when interest payments or
principal payments are not made on the date due even if the applicable grace
period has not expired, unless S&P believes that such payments will be made
during such grace period. The D rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.

Ratings of S&P and Moody's represent their opinions of the quality of
bonds and other debt securities they undertake to rate at the time of issuance.
However, these ratings are not absolute standards of quality and may not reflect
changes in an issuer's creditworthiness. Accordingly, the Advisors do not rely
exclusively on ratings issued by S&P or Moody's in selecting portfolio
securities but supplement such ratings with independent and ongoing review of
credit quality. In addition, the total return the Fund may earn from investments
in high yield securities will be significantly affected not only by credit
quality but by fluctuations in the markets in which such securities are traded.
Accordingly, selection and supervision by the Advisors of investments in lower
rated securities involves continuous analysis of individual issuers, general
business conditions, activities in the high yield bond market and other factors.
The analysis of issuers may include, among other things, historic and current
financial conditions, strength of management, responsiveness to business
conditions, credit standing and current and anticipated results of operations.
Analysis of general business conditions and other factors may include
anticipated changes in economic activity in interest rates, the availability of
new investment opportunities and the economic outlook for specific industries.

Investing in higher yield, lower rated bonds entails substantially
greater risk than investing in investment grade bonds, including not only credit
risk, but potentially greater market volatility and lower liquidity. Yields and
market values of high yield bonds will fluctuate over time, reflecting not only
changing interest rates but also the bond market's perception of credit quality
and the outlook for economic growth. When economic conditions appear to be
deteriorating, lower rated bonds may decline in value due to heightened concern
over credit quality, regardless of prevailing interest rates. In addition, in
adverse economic conditions, the liquidity of the secondary market for junk
bonds may be significantly reduced. In addition, adverse economic developments

<PAGE>

could disrupt the high yield market, affecting both price and liquidity, and
could also affect the ability of issuers to repay principal and interest,
thereby leading to a default rate higher than has been the case historically.
Even under normal conditions, the market for high yield bonds may be less liquid
than the market for investment grade corporate bonds. There are fewer securities
dealers in the high yield market and purchasers of high yield bonds are
concentrated among a smaller group of securities dealers and institutional
investors. In periods of reduced market liquidity, the market for high yield
bonds may become more volatile and there may be significant disparities in the
prices quoted for high yield securities by various dealers. Under conditions of
increased volatility and reduced liquidity, it would become more difficult for
the Fund to value its portfolio securities accurately because there might be
less reliable, objective data available.

Finally, prices for high yield bonds may be affected by legislative and
regulatory developments. For example, from time to time, Congress has considered
legislation to restrict or eliminate the corporate tax deduction for interest
payments or to regulate corporate restructurings such as takeovers, mergers or
leveraged buyouts. Such legislation may significantly depress the prices of
outstanding high yield bonds.

Repurchase Agreements

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

Foreign Investment Risk Considerations

From time to time, the Advisors may invest up to 10% of the Fund's
assets in American Depository Receipts, which are U.S. exchange listed interests
in securities of foreign companies, and in debt and equity securities issued by
foreign corporate and government issuers when the Advisors believe that such
investments provide good opportunities for achieving income and capital gains
without undue risk. Foreign investments involve substantial and different risks
which should be carefully considered by any potential investor. In general, less
information is publicly available about foreign companies than is available
about companies in the United States. Most foreign companies are not subject to
uniform audit and financial reporting standards, practices and requirements
comparable to those in the United States. In most foreign markets volume and
liquidity are less than in the United States and, at times, volatility of price
can be greater than in the United States. Fixed commissions on foreign stock
exchanges are generally higher than the negotiated commissions on United States
exchanges. There is generally less government supervision and regulation of
foreign stock exchanges, brokers, and companies than in the United States. The
settlement period for foreign securities, which are often longer than those for
securities of U.S. issuers, may affect portfolio liquidity. Portfolio securities

<PAGE>

held by the Fund which are listed on foreign exchanges may be traded on days
that the Fund does not value its securities, such as Saturdays and the customary
United States business holidays on which the New York Stock Exchange is closed.
As a result, the net asset value of Shares may be significantly affected on days
when shareholders do not have access to the Fund.

Although the Fund intends to invest in securities of companies and
governments of developed, stable nations, there is also the possibility of
adverse changes in investment or exchange control regulations, expropriation or
confiscatory taxation, limitations on the removal of funds or other assets,
political or social instability, or diplomatic developments which could
adversely affect investments, assets or securities transactions of the Fund in
some foreign countries. The dividends and interest payable on certain of the
Fund's foreign portfolio securities may be subject to foreign withholding taxes,
thus reducing the net amount available for distribution to the Fund's
shareholders. When the Fund invests directly in foreign securities, investors
should understand that the expense ratio of the Fund can be expected to be
higher than those of investment companies investing in domestic securities due
to the additional cost of custody of foreign securities. When considering
whether to invest in foreign equity or debt securities, the Advisor will
consider the risk of foreign investment in addition to the criteria it applies
to all investments in equity or debt securities, as described above.

Investment Restrictions

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

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

2. Purchase or sell commodities or commodities contracts, including
financial futures contracts;

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;

5. Make loans, except that the Fund may purchase or hold debt
instruments and enter into repurchase agreements in accordance with its
investment objective and policies;

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 leases or exploration or development programs; or

<PAGE>

9. Invest more than 10% of its net assets in illiquid securities
(defined as securities that cannot be sold in the ordinary course of business
within seven days at approximately the value at which the Fund is carrying the
securities), including securities that the Fund is restricted from selling to
the public without registration under the Securities Act (excluding restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act
("Rule 144A Securities") that have been determined to be liquid by the Fund's
Board of Directors based upon the trading markets for such securities). In
addition, as long as necessary to comply with certain state requirements, the
Fund will not invest more than 15% of its net assets in restricted securities
that include (i) illiquid securities subject to the 10% limitation as described
above and (ii) Rule 144A Securities whether or not such securities have been
deemed to be liquid.

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

1. Purchase any securities of unseasoned issuers which have been in
operation directly or through predecessors for less than three years;

2. Invest in shares of any other investment company other than in
connection with a merger, consolidation, reorganization or acquisition of
assets;

3. Purchase or retain the securities of any issuer if any officer or
Director of the Fund or its investment advisor owns beneficially more than .5%
of the outstanding securities of such issuer and together they own beneficially
more than 5% of the securities of such issuer;

4. Invest in companies for the purpose of exercising management or
control;

5. Invest in puts, calls or any combination thereof;

6. Purchase warrants, if by reason of such purchase more than 5% of the
Fund's net assets (taken at market value) will be invested in warrants, valued
at the lower of cost or market. Included within this amount, but not to exceed
2% of the value of the Fund's net assets, may be warrants that are not listed on
the New York or American Stock Exchange. For the purpose of the foregoing
calculations, warrants acquired by the Fund in units or attached to securities
will be deemed to be without value and therefore not included within the
preceding limitations; or

7. Invest in real estate limited partnerships.

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

The Fund's annual portfolio turnover rate (the lesser of the value of
the purchases or sales for the year divided by the average monthly market value
of the portfolio during the year, excluding U.S. Government securities and
securities with maturities of one year or less) may vary from year to year, as
well as within a year, depending on market conditions. The Fund anticipates that
its portfolio turnover rate is not expected to exceed 100% in the fiscal year
ending May 31, 1996.

6
<PAGE>

3. VALUATION OF SHARES AND REDEMPTION

Valuation of Shares

The net asset value per Share is determined once daily as of 4:00 p.m.
(Eastern Time) each day on which the New York Stock Exchange is open for
business ("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 all
assets held by the Fund, deducting liabilities attributable to all shares and
any liabilities attributable to the specific class, and dividing the resulting
amount by the number of then outstanding shares of the class. For this purpose,
portfolio securities will be given their market value where feasible. If a
portfolio security is traded on a national exchange or on an automated dealer
quotation system, such as NASDAQ, on the valuation date, the last quoted sale
price will generally be used. Securities or other assets for which market
quotations are not readily available are valued at their fair value as
determined in good faith under procedures established from time to time and
monitored by the Fund's Board of Directors. 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.

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 readily marketable 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 tax
considerations generally affecting the Fund and its shareholders that are not
described in the Fund's Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussion here and in the Fund's Prospectus is not intended as a substitute for
careful tax planning.

<PAGE>

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

Qualification as a Regulated Investment Company

The Fund expects to be taxed as a regulated investment company under
Subchapter M of the Code. However, in order to qualify as a regulated investment
company for any taxable year, the Fund generally must (1) derive at least 90% of
its gross income from dividends, interest, certain payments with respect to
securities loans, 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 stocks, securities or currencies (the "Income Requirement"), and
(2) derive less than 30% of its gross income (exclusive of certain gains from
designated hedging transactions that are offset by realized or 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) are not directly related to the Fund's principal
business of investing in stock or securities (or options and futures with
respect to stocks or securities).

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

Under Subchapter M, the Fund is exempt from federal income tax on its
net investment income and capital gains which it distributes to shareholders,
provided 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 losses) for the year (the "Distribution Requirement")
and complies with the other requirements of the Code described above.
Distributions of investment company taxable income made during the taxable year
or, under certain specified circumstances, within twelve months after the close
of the taxable year will satisfy the Distribution Requirement. The Distribution
Requirement for any year may be waived if a regulated investment company
establishes to the satisfaction of the Internal Revenue Service that it is
unable to satisfy the Distribution Requirement by reason of distributions
previously made for the purpose of avoiding liability for Federal excise tax.

<PAGE>

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

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

Fund Distributions

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

The Fund may either retain or distribute to shareholders its excess of
net long-term capital gains over net short-term capital losses ("net capital
gains"). If such gains are distributed as a capital gains distribution, they are
taxable to shareholders as long-term capital gains, regardless of the length of
time the shareholder has held Shares. Conversely, if the Fund elects to retain
its net capital gains, it will be taxed thereon (except to the extent of any
available capital loss carryovers) at the applicable corporate capital gains tax
rate. In this event, it is expected that the Fund also will elect to have
shareholders treated as having received a distribution of such gains, with the
result that shareholders will be required to report such gains on their returns
as long-term capital gains, will receive a tax credit for their allocable share
of capital gains tax paid by the Fund on the gains, and will increase the tax
basis for their Shares by an amount equal to 65 percent of such gains.

In the case of corporate shareholders, Fund distributions (other than
capital gains distributions) generally qualify for the 70% dividends received
deduction to the extent of the gross amount of qualifying dividends received by
the Fund for the year. Generally, and subject to certain limitations, a dividend
will be treated as a qualifying dividend if it has been received from a domestic
corporation. For purposes of the alternative minimum tax and the environmental
tax, corporate shareholders generally will be required to take the full amount
of any dividend received from the Fund into account in determining their
adjusted current earnings for purposes of computing "alternative minimum taxable
income."

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

Generally, gain or loss on the sale or exchange of a Share will be
capital gain or loss which will be long-term if the Share has been held for more
than one year and otherwise will be short-term. However, if a shareholder
realizes a loss on the sale, exchange or redemption of a Share held for six
months or less and has previously received a capital gains distribution with
respect to the Share (or any undistributed net capital gains of the Fund with
respect to such Share are included in determining the shareholder's long-term
capital gains), the shareholder must treat the loss as a long-term capital loss
to the extent of the amount of the prior capital gains distribution (or any

<PAGE>

undistributed net capital gains of the Fund which have been included in
determining such shareholder's long-term capital gains). In addition, any loss
realized on a sale or other disposition of Shares will be disallowed to the
extent an investor repurchases (or enters into a contract or option to
repurchase) Shares within a period of 61 days (beginning 30 days before and
ending 30 days after the disposition of the Shares). Investors should
particularly note that this loss disallowance rule will apply to Shares received
through the reinvestment of dividends during the 61-day period.

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

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

Federal Excise Tax; Miscellaneous Considerations

The Code imposes a nondeductible 4% excise tax on regulated investment
companies 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 gain net
income for the one-year period ending on October 31 of such calendar year. The
excise tax is imposed on the undistributed part of this required distribution.
In addition, the balance of such income must be distributed during the next
calendar year to avoid liability for the excise tax in that year. For the
foregoing purposes, an investment company is treated as having distributed any
amount on which it is subject to income tax for any taxable year ending in such
calendar year. For this purpose, in determining its capital gain net income for
the one-year period ending on October 31 of such calendar year, the Fund must
reduce its capital gain net income by the amount of any net ordinary loss for
the calendar year (but not below the net capital gain for the one-year period
ending on October 31). Because the Fund intends to distribute all of its income
currently (or to retain, at most its net capital gains and pay tax thereon), the
Fund does not anticipate incurring any liability for this excise tax. However,
investors 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.

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

5. MANAGEMENT OF THE FUND

Directors and Officers

The 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 135 East Baltimore Street, Baltimore, Maryland 21202.

<PAGE>

*TRUMAN T. SEMANS, Chairman (10/27/27)
Chairman Managing Director, Alex. Brown & Sons Incorporated; Formerly, Vice
Chairman, Alex. Brown & Sons Incorporated.

*RICHARD T. HALE, Director (7/17/45)
Managing Director, Alex. Brown & Sons Incorporated; Chartered Financial
Analyst.

*CHARLES W. COLE, JR. (11/11/35)
Vice Chairman, Alex. Brown Capital Advisory & Trust Company (registered
investment advisor); Director, Provident Bankshares Corporation and
Provident Bank of Maryland; Formerly, President, Chief Executive Officer,
Chief Administrative Officer and Director, First Maryland Bancorp, The
First National Bank of Maryland and First Omni Bank; Formerly, 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 (a merchant banking firm), 1993-Present; Formerly,
Senior Vice President and Chief Financial Officer, General Dynamics
Corporation (defense), 1989-1993, and Director, The Arch Fund (mutual
fund).

JOHN F. KROEGER, Director (8/11/24)
P.O. Box 464, Swan Road-Martingham, St. Michaels, Maryland 21663.
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).

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

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

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

<PAGE>

LEE S. OWEN, President (10/27/47)
Vice President and Portfolio Manager, Alex. Brown Investment Management
(registered investment advisor); Vice President and Secretary, Buppert,
Behrens & Owen, Inc.

J. DORSEY BROWN, III, Executive Vice President (8/26/39)
Managing Director, Alex. Brown & Sons Incorporated; Chief Executive Officer
and Formerly, General Partner, Alex. Brown Investment Management.

HOBART C. BUPPERT, Vice President (8/1/46)
Vice President and Portfolio Manager, Alex. Brown Investment Management
(registered investment advisor), 1984-Present; President, Buppert, Behrens
& Owen, Inc. 1987-Present.

BRUCE E. BEHRENS, Vice President (4/20/44)
Vice President and Portfolio Manager, Alex. Brown Investment Management
(registered investment advisor); Vice President and Treasurer, Buppert,
Behrens & Owen, Inc.

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

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

BRIAN C. NELSON, Vice President and Secretary (7/31/59)
Vice President, Alex. Brown & Sons Incorporated, Investment Company Capital
Corp. (registered investment advisor) and Armata Financial Corp.
(registered broker-dealer); Assistant Secretary, The Glenmede Fund, Inc.
and the Glenmede Portfolios (mutual funds).

JOSEPH A, FINELLI, Treasurer (1/24/57)
Vice President, Alex. Brown & Sons Incorporated, September 1995 - Present;
Treasurer, The Glenmede Fund, Inc. and The Glenmede Portfolios (mutual
funds), December 1995 - Present; Formerly, Vice President and Treasurer,
The Delaware Group of Funds (mutual funds) and Vice President, Delaware
Management Company, Inc., 1980 - August 1995.

LAURIE D. DePRINE, Assistant Secretary (1/1/66)
Asset Management Department, Alex. Brown & Sons Incorporated, 1991-
Present; Formerly, Student 1989-1991.

_____________________
* Messrs. Semans, Hale and Cole are, and Ms. Rimel may be, directors who are
"interested persons", as defined in the Investment Company Act.

Directors and officers of the Fund are also directors and officers of
some or all of the other investment companies managed, administered, 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. Semans serves as a Director of eight funds in
the Fund Complex. Mr. Hale serves as President and Director of one fund and as
Director of each of the other funds in the Fund Complex. Messrs. Cunnane,
Kroeger, Levy, McDonald and Woolf serve as Directors of each fund in the Fund
Complex. Mr. Cole serves as a director of four funds in the Fund Complex. Ms.
Rimel serves as a director of six funds in the Fund Complex. Mr. Owen serves as

<PAGE>

President of one fund, Executive Vice President of one fund, and Vice President
of one fund in the Fund Complex. Mr. Brown serves as President of one fund and
Executive Vice President of two funds in the Fund Complex. Mr. Buppert serves as
Executive Vice President of one fund and Vice President of two funds in the Fund
Complex. Mr. Behrens serves as President of one fund and Vice President of two
funds in the Fund Complex. Mr. Fearnow serves as Vice President of ten funds in
the Fund Complex. Mr. Veilleux serves as Executive Vice President of one fund
and Vice President of eleven funds in the Fund Complex. Mr. Nelson serves as
Vice President and Secretary, Mr. Finelli serves as Treasurer and Ms. DePrine
serves as Assistant Secretary, respectively, 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 from the Fund, each Director who is not an "interested person" of
the Fund (as defined in the Investment Company Act) (a "Non-Interested
Director") and Ms. Rimel receives an aggregate annual fee (plus reimbursement
for reasonable out-of-pocket expenses incurred in connection with his or her
attendance at board and committee meetings) from all Flag Investors/ISI Funds
and Alex. Brown Cash Reserve Fund, Inc. for which he or she serves. Payment of
such fees and expenses are allocated among all such funds described above in
proportion to their relative net assets. For the fiscal period ended May 31,
1995, Non-Interested Directors' fees attributable to the assets of the Fund
totalled $316. The following table shows aggregate compensation paid to each of
the Fund's Directors by the Fund and the Fund Complex, respectively, in the
fiscal year ended May 31, 1995.

13
<PAGE>

COMPENSATION TABLE

<TABLE>
<CAPTION>
__________________________________________________________________________________________________________________________

Name of Person, Position Aggregate Compensation Total Compensation
From the Fund in the From the Fund
Fiscal Year Ended and Fund Complex
May 31, 1995 Paid to Directors
in the Fiscal Year
Ended May 31, 1995

_____________________________________________________________________________________________________________________________
<S> <C> <C>

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

*Richard T. Hale, Director $0 $0

*Charles W. Cole, Jr., Director(1) N/A(1) N/A(1)

**James J. Cunnane, Director $9(3) $9,750 for service on 13(4)
Boards in the Fund Complex

N. Bruce Hannay, Director(5) $9(3) $39,000 for service on 13(4)
Boards in the Fund Complex

John F. Kroeger, Director $10(3) $42,900 for service on 13(4)
Boards in the Fund Complex

***Louis E. Levy, Director $9(3) $29,250 for service on 13(4)
Boards in the Fund Complex

Eugene J. McDonald, Director $9(3) $39,000 for service on 13(4)
Boards in the Fund Complex

*/****Rebecca W. Rimel, Director N/A **** N/A ****

Carl W. Vogt(2) N/A(2) N/A(2)

Harry Woolf, Director $9(3) $39,000 for service on 13(4)
Boards in the Fund Complex
</TABLE>
- ----------
* A Director who is or may be an "interested person" as defined in the
Investment Company Act.
** Commenced service in Fund Complex on December 14, 1994.
*** Commenced service in Fund Complex on June 17, 1994.
**** Commenced service in Fund Complex on June 1, 1995.
(1) Elected by the Board on December 13, 1995.
(2) Elected by the Board on January 30, 1996.
(3) $0 of this amount has been deferred pursuant to a deferred compensation
plan.
(4) One fund ceased operations on May 17, 1995.
(5) Retired, effective January 31, 1996.

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 five 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 served. The Retirement Plan is
unfunded and unvested. Messrs. Kroeger and Woolf have qualified but have not yet
received benefits. The Fund has two Participants, a Director who retired
effective December 31, 1994, and a Director who retired effective January 31,
1996, who have qualified for the Retirement Plan and each of whom will be paid a
quarterly fee of $4,875 by the Fund Complex for the rest of his life. Such fee
is allocated to each fund in the Fund Complex based upon the relative net assets
of such fund to the Fund Complex.

<PAGE>

Beginning in December, 1994, 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.

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
significantly restricts the personal investing activities of all employees of
ICC and the directors and officers of Alex. Brown. As described below, the Code
of Ethics imposes additional, more onerous, restrictions on the Fund's
investment personnel, including the portfolio managers and employees who execute
or help execute a portfolio manager's decisions or who obtain contemporaneous
information regarding the purchase or sale of a security by the Fund.

The Code of Ethics requires that all employees of ICC, any director or
officer of Alex. Brown, and all Non-Interested Directors, preclear any personal
securities investments (with limited exceptions, such as non-volitional
purchases or purchases which are part of an automatic dividend reinvestment
plan). The preclearance requirement and associated procedures are designed to
identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to investment personnel
include a ban on acquiring any securities in an initial public offering, a
prohibition from profiting on short-term trading in securities and 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.

6. INVESTMENT ADVISORY AND OTHER SERVICES

On December 14, 1994, the Board of Directors of the Fund, including a
majority of the Non-Interested Directors, approved an Investment Advisory
Agreement between the Fund and ICC and a Sub-Advisory Agreement among the Fund,
ICC and ABIM, both of which contracts are described in greater detail below. The
Investment Advisory Agreement and the Sub-Advisory Agreement were approved by
the sole shareholder of the Fund on January 30, 1995. ICC, the investment
advisor, is a wholly-owned subsidiary of Alex. Brown, the Fund's distributor.
ICC is also the investment advisor to Alex. Brown Cash Reserve Fund, Inc., Flag
Investors Telephone Income Fund, Inc., Flag Investors International Fund, Inc.,
Flag Investors Emerging Growth Fund, Inc., Flag Investors Intermediate-Term
Income Fund, Inc., Flag Investors Value Builder Fund, Inc. and Flag Investors
Maryland Intermediate Tax Free Income Fund, Inc. and Flag Investors Real Estate
Securities Fund, Inc., which are also distributed by Alex. Brown.

ABIM is a limited partnership affiliated with Alex. Brown. Buppert,
Behrens & Owens, Inc., a company organized and owned by three employees of ABIM,
owns a 49% limited partnership interest and a 1% general partnership interest in
ABIM. Alex. Brown owns a 1% general partnership interest in ABIM and Alex. Brown
Incorporated owns the remaining 49% limited partnership interest. ABIM, also the
sub-advisor to Flag Investors Telephone Income Fund, Inc. and Flag Investors
Value Builder Fund, Inc., is a registered investment advisor.

15
<PAGE>

Under the Investment Advisory Agreement, ICC obtains and evaluates
economic, statistical and financial information to formulate and implement
investment policies for the Fund. ICC has delegated this responsibility to ABIM,
provided that ICC continues to supervise the performance of ABIM and report
thereon to the Fund's Board of Directors. Any investment program undertaken by
ICC or ABIM 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 ABIM shall
be liable to the Fund or its shareholders for any act or omission by ICC or ABIM
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 ABIM to the Fund are not exclusive and ICC and ABIM are
free to render similar services to others.

As compensation for its services, ICC is entitled to receive an annual
fee from the Fund, calculated daily and payable monthly, at the annual rate of
1.00% of the first $50 million of the Fund's average daily net assets, .85% of
the next $50 million of the Fund's average daily net assets, .80% of the next
$100 million of the Fund's average daily net assets and .70% of the Fund's
average daily net assets in excess of $200 million. As compensation for its
services, ABIM is entitled to a fee from ICC, calculated daily and payable
monthly, at the annual rate of .75% of the first $50 million of the Fund's
average daily net assets, .60% of the next $150 million of the Fund's average
daily net assets, and .50% of the Fund's average daily net assets in excess of
$200 million.

This fee is higher than that paid by most mutual funds, but ICC has
voluntarily agreed to waive a portion of its fee from time to time so that the
total operating expenses of the Fund do not exceed 1.35% of the Class A Shares'
average daily net assets and 2.10% of the Class B Shares' average daily net
assets. ABIM has also agreed to waive, on a voluntary basis, that portion of its
fee payable from ICC for sub-advisory services in excess of the amount equal to
.65% of the Fund's average daily net assets. For the period from February 13,
1995 (commencement of operations) through May 31, 1995, ICC waived all advisory
fees and reimbursed expenses aggregating $30,753. Absent such fee waivers and
reimbursements, the Fund's total operating expenses would have been 3.76%
(annualized) for Class A Shares and 4.22% (annualized) for Class B Shares.
During this period, ICC paid ABIM fees of $11,870 and ABIM waived fees of
$1,826.

In addition, ICC has agreed to reduce its aggregate fees on a monthly
basis for any fiscal year to the extent required so that the amount of the
ordinary expenses of the Fund (excluding brokerage commissions, interest, taxes
and extraordinary expenses such as legal claims, liabilities, litigation costs
and indemnification related thereto) paid or incurred by the Fund for such
fiscal year does not exceed the expense limitations applicable to the Fund
imposed by the securities laws or regulations of the states in which the Shares
are registered or qualified for sale, as such limitations may be raised or
lowered from time to time. Currently, the most restrictive of such expense
limitations requires ICC to reduce its fees to the extent required so that
ordinary expenses of the Fund (excluding brokerage commissions, interest, taxes,
and extraordinary expenses such as legal claims, liabilities, litigation costs
and indemnification related thereto) do not exceed 2.5% of the first $30 million
of the Fund's average daily net assets, 2.0% of the next $70 million of the
Fund's average daily net assets and 1.5% of the Fund's average daily net assets
in excess of $100 million. In addition, if required to do so by any applicable
state securities laws or regulations, ICC will reimburse the Fund to the extent
required to prevent the expense limitations of any state law or regulation from
being exceeded.

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

<PAGE>

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, or by
a vote of a majority of the outstanding Shares (as defined under "Capital
Stock"). The Fund or ICC may terminate the Investment Advisory Agreement on
sixty days' written notice without penalty. The Investment Advisory Agreement
will terminate automatically in the event of assignment (as defined in the
Investment Company Act).

ICC also serves as the Fund's transfer and dividend disbursing agent
and provides accounting services to the Fund. (See "Custodian, Transfer Agent,
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 each class of the
Fund's Shares.

The Class A Shares and the Class B Shares.

The Distribution Agreements for the Class A Shares and the Class B
Shares (collectively, the "Class A and Class B Distribution Agreements") provide
that Alex. Brown has the exclusive right to distribute the related class of Flag
Investors Equity Partners 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 Class A and Class B Shares. The Class A and Class B
Distribution Agreements further provide that, in connection with the
distribution of Class A and Class B 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 as described above
for the Class A Shares, Alex. Brown will receive an annual fee, paid monthly,
equal to .25% of the average daily net assets of the Class A Shares. As
compensation for providing distribution services as described above for the
Class B Shares, Alex. Brown will receive an annual fee, paid monthly, equal to
.75% of the average daily net assets of the Class B Shares. With respect to the
Class A Shares, Alex. Brown expects to allocate most of its annual distribution
fee to its investment representatives and up to all of its fee to Participating
Dealers. With respect to the Class B Shares, Alex. Brown expects to retain the
entire distribution fee as reimbursement for front-end payments to its
investment representatives and to Participating Dealers.

In addition, with respect to the Class B Shares, the Fund will pay
Alex. Brown a shareholder servicing fee at an annual rate of .25% of the average
daily net assets of the Class B Shares. (See the Prospectus.) Alex. Brown
expects to allocate most of its shareholder servicing fee to its investment
representatives or to Participating Dealers.

For the fiscal period from February 13, 1995 (commencement of
operations) through May 31, 1995, Alex. Brown received from the Fund aggregate
commissions and fees in the amount of $10,196, of which $5,976 were attributable
to the Class A Shares and $4,220 were attributable to the Class B Shares. From

<PAGE>

such amounts received for the Class A Shares, Alex. Brown paid $873 to its
investment representatives and $130 to outside broker-dealers. From amounts
received for the Class B Shares, Alex. Brown paid $0 to its investment
representatives and $0 to outside broker-dealers.

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
Class A and Class B Distribution Agreements, and Alex. Brown is authorized to
make payments out of its fee to its investment representatives and to
participating broker-dealers. Each of the Class A and Class B Distribution
Agreements has an initial term of two years. The Class A and Class B
Distribution Agreements and the Plans 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 approved by the Fund's Board of Directors,
including a majority of the Non-Interested Directors, on December 14, 1994 and
by the sole shareholder of the respective classes on January 30, 1995. The Plans
were most recently approved for continuance in the foregoing manner on September
25, 1995.

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 Class A and Class B Distribution Agreements without the approval of the
shareholders of the Fund. The Plans may be terminated at any 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 Fund's
outstanding Shares of the related Class (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 Agreement
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 Plan to Alex. Brown pursuant to the Class A and
Class B Distribution Agreements, to broker-dealers pursuant to any
Sub-Distribution Agreements and to Shareholder Servicing Agents pursuant to
Shareholder Servicing Agreements. Such reports shall be made by the persons
authorized to make such payments. In addition, during the continuance of the
Plans, the selection and nomination of the Fund's Non-Interested Directors shall
be committed to the discretion of the Non-Interested Directors then in office.

In addition, with respect to the Class A and 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.

<PAGE>

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

Under the Plans, amounts allocated to Participating Dealers and
Shareholder Servicing Agents may not exceed amounts payable to Alex. Brown under
such Plans. Payments under the Plans are made as described above regardless of
Alex. Brown's actual cost of providing distribution services and may be used to
pay Alex. Brown's overhead expenses. If the cost of providing distribution
services to the Class A Shares is less than .25% of the average daily net assets
invested in that Class or Class B Shares is less than .75% of the average daily
net assets invested in that Class for any period, the unexpended portion of the
distribution fees may be retained by Alex. Brown. The Plans do not provide for
any charges to the Fund for excess amounts expended by Alex. Brown and, if
either of the Plans is terminated in accordance with its terms, the obligation
of the Fund to make payments to Alex. Brown pursuant to such Plan will cease and
the Fund will not be required to make any payments past the date the
Distribution Agreement terminates with respect to such Plan.

The Institutional Shares

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

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

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

The Institutional Distribution Agreement was approved by the Fund's
Board of Directors on December 13, 1995 and by the sole shareholder of the class
on February 9, 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 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.

<PAGE>

General Information

The Fund will pay all costs associated with its organization and
registration under the Securities Act of 1933 and the Investment Company Act.
Except as described elsewhere, the Fund pays or causes to be paid all continuing
expenses of the Fund, including, without limitation: investment advisory and
distribution fees; the charges and expenses of any registrar, any custodian or
depository appointed by the Fund for the safekeeping of cash, portfolio
securities and other property, and any transfer, dividend or accounting agent or
agents appointed by the Fund; brokers' commissions chargeable to the Fund in
connection with portfolio securities transactions to which the Fund is a party;
all taxes, including securities issuance and transfer taxes, and fees payable by
the Fund to federal, state or other governmental agencies; the costs and
expenses of engraving or printing of certificates representing Shares; all costs
and expenses in connection with the registration and maintenance of registration
of the Fund and its Shares with the SEC and various states and other
jurisdictions (including filing fees, legal fees and disbursements of counsel);
the costs and expenses of printing, including typesetting and distributing
prospectuses and statements of additional information of the Fund and
supplements thereto to the Fund's shareholders; all expenses of shareholders'
and Directors' meetings and of preparing, printing and mailing proxy statements
and reports to shareholders; fees and travel expenses of Directors and Director
members of any advisory board or committee; all expenses incident to the payment
of any dividend, distribution, withdrawal or redemption, whether in Shares or in
cash; charges and expenses of any outside service used for pricing of the
Shares; fees and expenses of legal counsel, including counsel to the
Non-Interested Directors, and of independent auditors, in connection with any
matter relating to the Fund; a portion of membership dues of industry
associations; interest payable on Fund borrowings; postage; insurance premiums
on property or personnel (including officers and Directors) of the Fund 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 ABIM.

The address of Alex. Brown is 135 East Baltimore Street, Baltimore,
Maryland 21202.

8. BROKERAGE

ABIM is responsible for decisions to buy and sell securities for the
Fund, for the broker-dealer selection and for negotiation of commission rates,
subject to the supervision of ICC. Purchases and sales of securities on a
securities exchange are effected through broker-dealers who charge a commission
for their services. Brokerage commissions are subject to negotiation between
ABIM and the broker-dealers. ABIM 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.

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.

ABIM's primary consideration in effecting securities transactions is to
obtain best price and execution of orders on an overall basis. As described
below, however, ABIM may, in its discretion, effect agency transactions with
broker-dealers that furnish statistical, research or other information or
services which are deemed by ABIM to be beneficial to the Fund's investment
program. Certain research services furnished by broker-dealers may be useful to
ABIM with clients other than the Fund. Similarly, any research services received
by ABIM through placement of portfolio transactions of other clients may be of
value to ABIM in fulfilling its obligations to the Fund. No specific value can
be determined for research and statistical services furnished without cost to
ABIM by a broker-dealer. ABIM is of the opinion that because the material must
be analyzed and reviewed by its staff, its receipt does not tend to reduce
expenses, but may be beneficial in supplementing ABIM's research and analysis.
Therefore, it may tend to benefit the Fund by improving ABIM's investment
advice. In over-the-counter transactions, ABIM will not pay any commission or
other remuneration for research services. ABIM's policy is to pay a
broker-dealer higher commissions effected on an agency (but not on a principal)
basis for particular transactions than might be charged if a different
broker-dealer had been chosen when, in ABIM's opinion, this policy furthers the

<PAGE>

overall objective of obtaining best price and execution. Subject to periodic
review by the Fund's Board of Directors, ABIM is also authorized to pay
broker-dealers other than Alex. Brown higher commissions on brokerage
transactions for the Fund in order to secure research and investment services
described above. The allocation of orders among broker-dealers and the
commission rates paid by the Fund will be reviewed periodically by the Board.
The foregoing policy under which the Fund may pay higher commissions to certain
broker-dealers in the case of agency transactions, does not apply to
transactions effected on a principal basis.

Subject to the above considerations, the Board of Directors has
authorized the Fund to effect portfolio transactions, on an agency basis,
through Alex. Brown. At the time of such authorization, the Board adopted
certain policies and procedures incorporating the standards of Rule 17e-1 under
the Investment Company Act which requires that the commissions paid Alex. Brown
must be "reasonable and fair compared to the commission, fee or other
remuneration received or to be received by other brokers in connection with
comparable transactions involving similar securities during a comparable period
of time." Rule 17e-1 also contains requirements for the review of such
transactions by the Board of Directors and requires ICC and ABIM 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 from brokerage commissions on transactions of the Fund
effected through Alex. Brown. In the fiscal period ended May 31, 1995, the Fund
paid no brokerage commissions to Alex. Brown.

ABIM manages other investment accounts. It is possible that, at times,
identical securities will be acceptable for the Fund and one or more of such
other accounts; however, the position of each account in the securities of the
same issuer may vary and the length of time that each account may choose to hold
its investment in such securities may likewise vary. The timing and amount of
purchase by each account will also be determined by its cash position. If the
purchase or sale of securities consistent with the investment policies of the
Fund or one or more of these accounts is considered at or about the same time,
transactions in such securities will be allocated among the accounts in a manner
deemed equitable by ABIM. ABIM 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.

During the fiscal period ended May 31, 1995, ABIM directed $382,478,184
principal amount of transactions to broker-dealers and paid $17,724 in related
commissions because of research services provided.

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 May 31, 1995, the
Fund held a 6.0% repurchase agreement issued by Goldman Sachs & Co. valued at
$6,397,000.

<PAGE>

9. CAPITAL STOCK

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

The Fund's Articles of Incorporation provide for the establishment of
separate series and separate classes of Shares by the Directors at any time
without shareholder approval. The Fund currently has one Series and the Board
has designated three classes of Shares: Flag Investors Equity Partners Fund
Class A Shares, Flag Investors Equity Partners Fund Class B Shares and Flag
Investors Equity Partners Fund Institutional Shares. In the event separate
series or classes 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. 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, each
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) would be
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.

10. SEMI-ANNUAL REPORTS

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

11. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES

PNC Bank, National Association ("PNC Bank"), 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., 135 East Baltimore Street,
Baltimore, Maryland 21202, has been retained to act as transfer and dividend
disbursing agent. As compensation for providing these services, the Fund pays
ICC up to $10.12 per account per year, plus reimbursement for out-of-pocket
expenses incurred in connection therewith. For the fiscal period from February
13, 1995 (commencement of operations) through May 31, 1995, ICC received
transfer agency fees of $1,670.

<PAGE>

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

Average Net Assets Incremental Fee
------------------ ---------------
0 - $10,000,000 $13,000 (fixed fee)
$10,000,000 - $20,000,000 .100%
$20,000,000 - $30,000,000 .080%
$30,000,000 - $40,000,000 .060%
$40,000,000 - $50,000,000 .050%
$50,000,000 - $60,000,000 .040%
$60,000,000 - $70,000,000 .030%
$70,000,000 - $100,000,000 .020%
$100,000,000 - $500,000,000 .015%
$500,000,000 - $1,000,000,000 .005%
over $1,000,000,000 .001%

For the period from February 13, 1995 (commencement of operations)
through May 31, 1995, ICC received accounting fees of $4,570.

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

ICC also serves as the Fund's investment advisor.

12. INDEPENDENT ACCOUNTANTS

The annual financial statements of the Fund are audited by Coopers &
Lybrand L.L.P., whose report thereon appears elsewhere herein, and have been
included herein in reliance upon the report of such firm of accountants given on
their authority as experts in accounting and auditing. Coopers & Lybrand L.L.P.
has offices at 2400 Eleven Penn Center, Philadelphia, Pennsylvania 19103.

13. PERFORMANCE INFORMATION

For purposes of quoting and comparing the performance of the Fund to
that of other open-end diversified management investment companies and to stock
or other relevant indices in advertisements or in certain reports to
shareholders, performance will be stated in terms of total return rather than in
terms of yield. The total return quotations, under the rules of the SEC, must be
calculated according to the following formula:
n
P(1 + T) = ERV

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

T = average annual total return

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

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

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

<PAGE>

operation the Fund may, in lieu of annualizing its total return, use an
aggregate total return calculated in the same manner. In calculating the ending
redeemable value, the maximum sales load (for the Flag Investors Equity Partners
Class A Shares: 4.5%, and for the Flag Investors Equity Partners Class B Shares:
4.0% for the one year period, 2.0% for the five year period and no sales charge
thereafter) 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. "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 Investment Technologies Inc.,
Morningstar Inc., or SEI Corporation or with the performance of the Consumer
Price Index, the Standard and Poor's 500 Stock Index and other market indices
such as NASDAQ and the Wilshire 5000. The Fund calculates its aggregate and
average annual total return for the specified periods of time by assuming the
investment of $10,000 in Shares and assuming the reinvestment of each dividend
or other distribution at net asset value on the reinvestment date. For this
alternative computation, the Fund assumes that the $10,000 invested in Shares is
net of all sales charges (as distinguished from the computation required by the
SEC where the $1,000 payment is reduced by sales charges before being invested
in Shares). The Fund will, however, disclose the maximum sales charges and will
also disclose that the performance data do not reflect sales charges and that
inclusion of sales charges would reduce the performance quoted. Such alternative
total return information will be given no greater prominence in such advertising
than the information prescribed under SEC rules, and all advertisements
containing performance data will include a legend disclosing that such
performance data represent past performance and that the investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.

Calculated according to SEC rules for the period from February 13, 1995
(commencement of operations) through May 31, 1995, the ending redeemable value
of a hypothetical $1,000 payment for Class A Shares was $1,028, resulting in an
aggregate total return equal to 2.85%.

Calculated according to SEC rules for the period from February 13, 1995
(commencement of operations) through May 31, 1995, the ending redeemable value
of a hypothetical $1,000 payment for Class B Shares was $1,075, resulting in an
aggregate total return equal to 3.50%.

Calculated according to the alternative computation, which assumes no
sales charges and reinvestment of all distributions, for the period from
February 13, 1995 (commencement of operations) through May 31, 1995, the ending
redeemable value of a hypothetical $10,000 investment in Class A Shares was
$10,770, resulting in an aggregate total return equal to 7.70%.

Calculated according to the alternative computation, which assumes no
sales charges and reinvestment of all distributions, for the period from
February 13, 1995 (commencement of operations) through May 31, 1995, the ending
redeemable value of a hypothetical $10,000 investment in Class B Shares was
$10,750, resulting in an aggregate total return equal to 7.50%.

The Institutional Shares were not offered prior to the date of this
Statement of Additional Information.

<PAGE>

14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of November 8, 1995, to Fund management's knowledge, the following
persons held beneficially or of record 5% or more of the Fund's outstanding
shares of any class:

Class A

T. Rowe Price, Trustee for Alex. Brown & Sons Incorporated, Plan
100460, Attn: Asset Recon, P.O. Box 17215, Baltimore, MD 21203-7215, owned of
record 10.54% of the Fund's outstanding Class A Shares.

Alex. Brown & Sons Incorporated, 135 E. Baltimore Street, Baltimore, MD
21202, owned of record 78.73% of the Fund's outstanding Class A Shares.

Class B

Alex. Brown & Sons Incorporated, FBO 201-14669-15, P.O. Box 1346,
Baltimore, MD 21203-1346, owned of record 6.77% of the Fund's outstanding Class
B Shares.

Alex. Brown & Sons Incorporated, 135 E. Baltimore Street, Baltimore, MD
21202, owned of record 98.78% of the Fund's outstanding Class B Shares.

As of such date, Directors and officers as a group owned less than 1%
of the Fund's total outstanding Shares of either class.

The Institutional Shares were not offered prior to the date of this
Statement of Additional Information.

15. FINANCIAL STATEMENTS

See next page.

<PAGE>

FLAG INVESTORS
EQUITY PARTNERS FUND, INC.

Statement of Net Assets May 31,1995
<TABLE>
<CAPTION>

PERCENT
NO. OF VALUE OF NET
SHARES SECURITY (NOTE A) ASSETS
<S> <C> <C> <C>
COMMON STOCK-28.2%
BANKING-1.2%

16,000 KeyCorp. $ 490,000 1.2%
CAPITAL GOODS-3.1%
17,900 Briggs & Stratton 635,450 1.6
2,900 Caterpillar,Inc. 174,725 0.4
7,100 Eaton Corp. 433,987 1.1
1,244,162 3.1
CONSUMER DURABLES/
NON-DURABLES-7.4%
15,000 Eckerd Corp.* 485,625 1.2
11,700 Gannett Co. 625,950 1.6
13,800 J.C.Penney Company,Inc. 650,325 1.6
5,000 Philip Morris Cos.,Inc. 364,375 0.9
18,500 Reebok International Ltd. 619,750 1.5
11,000 Times Mirror 255,750 0.6
3,001,775 7.4

DEFENSE/AEROSPACE-0.3%
2,200 Lockheed Martin Corp. 130,900 0.3

ENERGY-0.4%
3,400 MAPCO, Inc. 200,175 0.4

FINANCIAL SERVICES-4.2%
11,200 American Express Co. 399,000 1.0
10,600 Citicorp 567,100 1.4
5,800 Federal Home Loan
Mortgage Corp. 395,125 1.0
8,000 Travelers Inc. 338,000 0.8
1,699,225 4.2
HOUSING-1.7%

7,000 Ryland Group Inc. $ 111,125 0.3%
24,300 USG Corp.* 586,238 1.4
697,363 1.7
INSURANCE-3.4%
15,800 Bankers Life
Holding Corp. 308,100 0.8
12,000 Conseco Inc. 510,000 1.2
20,300 Mid Ocean Ltd.* 576,012 1.4
1,394,112 3.4
MULTI-INDUSTRY-2.6%
4,500 ITT Corp. 503,438 1.2
8,200 Tenneco Inc. 393,600 1.0
1,900 United Technologies 144,163 0.4
1,041,201 2.6
TECHNOLOGY-2.8%
5,000 International Business
Machines Corp. 466,250 1.1
6,000 Xerox Corp. 680,250 1.7
1,146,500 2.8
TRANSPORTATION-1.1%
8,400 Conrail Inc. 453,600 1.1
TOTAL COMMON
STOCKS
(Cost $11,002,096) 11,499,013 28.2

U.S. GOVERNMENT SECURITIES-61.3%
$25,000 U.S.Treasury Bills
5.61%, 6/1/95
(Cost $25,000,000) 25,000,000 61.3
</TABLE>

26
<PAGE>
FLAG INVESTORS
EQUITY PARTNERS FUND, INC.
Statement of Net Assets (CONCLUDED) May 31,1995
<TABLE>
<CAPTION>
PERCENT
PAR VALUE OF NET
(000) SECURITY (NOTE A) ASSETS
<S> <C> <C> <C>
REPURCHASE AGREEMENT-15.7%

$6,397 Goldman Sachs & Co., 6.00%
Dated 5/31/95,to be
repurchased on 6/1/95,
collateralized by U.S.
Treasury Notes with
a market value
of $6,525,213.
(Cost $6,397,000) 6,397,000 15.7%

TOTAL INVESTMENT IN
SECURITIES
(Cost $42,399,096)** 42,896,013 105.2

LIABILITIES IN
EXCESS OF
OTHER ASSETS, NET (2,125,333) (5.2)

NET ASSETS $40,770,680 100.0%

NET ASSET VALUE PER:
CLASS A SHARE
($38,611,880 (divided by)
3,585,698 shares
outstanding) $10.77(1)
CLASS B SHARE
($2,158,800 (divided by)
200,773 shares
outstanding) $10.75(2)

MAXIMUM OFFERING PRICE PER:
CLASS A SHARE
($10.77 (divided by) .955) $ 11.28
CLASS B SHARE $ 10.75
</TABLE>

*Non-income producing security.

**Also aggregate cost for federal tax purposes.

(1) Redemption value is $10.77.

(2) Redemption value is $10.32 following a maximum 4.00% contingent deferred
sales charge.

See accompanying Notes to Financial Statements.

27
<PAGE>

FLAG INVESTORS
EQUITY PARTNERS FUND, INC.
Statement of Operations For the Period February 13,1995*
through May 31,1995

<TABLE>
<S> <C>
INVESTMENT INCOME (NOTE A):

Interest.............................................. $115,108
Dividends............................................. 23,773
Total income......................................... 138,881

EXPENSES:

Investment advisory fee (Note B)...................... 28,126
Registration fees..................................... 23,644
Audit................................................. 19,575
Distribution fees (Note B)............................ 10,196
Legal................................................. 7,890
Accounting fee (Note B)............................... 4,570
Organizational expense (Note A)....................... 3,958
Custodian fees........................................ 3,946
Printing and postage.................................. 2,499
Transfer agent fees (Note B).......................... 1,670
Miscellaneous......................................... 1,316
Directors'fees........................................ 316
Total expenses....................................... 107,706
Less: Fees waived and expenses reimbursed (Note B).... (66,571)
Net expenses......................................... 41,135
Net investment income................................. 97,746

NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:

Net realized gain/(loss) from security
transactions........................................ -
Change in unrealized appreciation of
investments......................................... 496,917
Net realized and unrealized gain on investments....... 496,917

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS...... $594,663
</TABLE>
*Commencement of Operations.

See accompanying Notes to Financial Statements.

28
<PAGE>
FLAG INVESTORS
EQUITY PARTNERS FUND, INC.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
FOR THE PERIOD
FEBRUARY 13, 1995*
THROUGH
MAY 31, 1995
<S> <C>
INCREASE/(DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income.................................. $ 97,746
Net realized loss from security transactions........... -
Change in unrealized appreciation of
investments........................................... 496,917
Net increase in net assets resulting
from operations....................................... 594,663

DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Class A Shares........................................ -
Class B Shares........................................ -
Total distributions.................................... -

CAPITAL SHARE TRANSACTIONS (NOTE D):
Proceeds from sale of shares........................... 40,494,354
Value of shares issued in reinvestment of
dividends............................................. -
Cost of shares repurchased............................. (418,337)
Increase in net assets derived from capital share
transactions.......................................... 40,076,017
Total increase in net assets........................... 40,670,680

NET ASSETS:
Beginning of period.................................... 100,000**
End of period.......................................... $ 40,770,680
</TABLE>
* Commencement of Operations.

** On January 26,1995,the Fund sold 10,000 shares to a subsidiary of
Alex.Brown & Sons Incorporated for $100,000.

See accompanying Notes to Financial Statements.

29
<PAGE>
FLAG INVESTORS
EQUITY PARTNERS FUND, INC.
Financial Highlights
(BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD)
<TABLE>
<CAPTION>
FOR THE PERIOD FEBRUARY 13, 1995*
THROUGH MAY 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............................. 0.12 0.07
Net realized and unrealized gain on investments... 0.65 0.68
Total from Investment Operations.................. 0.77 0.75

LESS DISTRIBUTIONS:
Dividends from net investment income.............. - -
Net asset value at end of period.................. $10.77 $10.75

TOTAL RETURN........................................ 7.70% 7.50%

RATIOS TO AVERAGE NET ASSETS:
Expenses(2)....................................... 1.35%(1) 2.10%(1)
Net investment income(3).......................... 3.74%(1) 1.97%(1)

SUPPLEMENTAL DATA:
Net assets at end of period (000)................. $38,612 $2,159
Portfolio turnover rate........................... - -
</TABLE>
*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 3.76% (annualized) for Class
A Shares and 4.22% (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 1.33% (annualized) for
Class A Shares and (0.15)% (annualized) for Class B Shares.

See accompanying Notes to Financial Statements.

30
<PAGE>
FLAG INVESTORS
EQUITY PARTNERS FUND, INC.
Notes to Financial Statements

A. SIGNIFICANT ACCOUNTING POLICIES - Flag Investors Equity Partners
Fund,Inc.(the "Fund") was organized as a Maryland Corporation on November
30,1994 and commenced operations on February 13,1995. The Fund is registered
under the Investment Company Act of 1940 as a diversified,open-end Management
Investment Company designed to seek long-term growth of capital and current
income through diversified investments in a professionally managed balanced
portfolio of equity and debt securities.

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 qualify as a regulated investment company and to make
requisite distributions to the shareholders which 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 & Sons
Incorporated ("Alex.Brown"), is the Fund's investment advisor and Alex.Brown
Investment Management ("ABIM") is the Fund's subadvisor. As compensation for
its advisory services,ICC receives from the Fund an annual fee, calculated daily
and paid monthly,at the annual rate of 1.00% of the first $50 million of the
Fund's average daily net assets;0.85% of the next $50 million of the Fund's
average daily net assets;0.80% of the next $100 million of the Fund's average
daily net assets;and 0.70% of the Fund's average daily net assets exceeding $200
million.

As compensation for its subadvisory services, ABIM receives a fee from
ICC,payable from its advisory fee,calculated daily and paid monthly,at an annual
rate of .75% of the first $50 million of the Fund's average daily net
assets;.60% of the next $150 million of the Fund's average daily net assets;and
.50% of the Fund's average daily net assets in excess of $200 million.

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 1.35% of the Fund's average daily net assets for Class A Shares
and 2.10% for Class B Shares.For the period ended May 31,1995,ICC waived fees
and reimbursed expenses aggregating $30,753.

ICC also serves as the Fund's accounting and transfer agent. As compensation
for its accounting services,ICC receives from the Fund an annual fee, calculated

31
<PAGE>
FLAG INVESTORS
EQUITY PARTNERS FUND, INC.
Notes to Financial Statements (CONCLUDED)

daily and paid monthly, from the Fund's average daily net assets. ICC received
$3,704 for accounting services for the period ended May 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 $1,670 for
transfer agent services for the period ended May 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 .25% of the average daily net assets for Class A Shares,and 1.00%
(including a .25% shareholder servicing fee) of the average daily net assets for
Class B Shares.For the period ended May 31,1995,distribution fees aggregated
$10,196,of which $5,976 were attributable to the Class A Shares and $4,220 were
attributable to Class B Shares.

C. CAPITAL SHARE TRANSACTIONS - The Fund is authorized to issue up to 10
million shares of $.001 par value common stock.Transactions in shares of the
Fund were as follows:
<TABLE>
<CAPTION>
For the Period
February 13, 1995* through
May 31, 1995
Class A Shares Class B Shares
<S> <C> <C>
Shares sold 3,614,724 200,772
Shares issued to
shareholders on
reinvestment of
dividends - -
Shares redeemed (39,025) -
Net increase in shares
outstanding 3,575,699 200,772
Proceeds from sale
of shares $38,469,554 $2,038,171
Value of reinvested
dividends - -
Cost of shares redeemed (418,337) -
Net increase from capital
share transactions $38,051,217 $2,038,171

</TABLE>

*Commencement of Operations.

Sales of Class A Shares include $31,660,000 (2,950,000 shares) issued
on May 17,1995 in exchange for cash from Flag Investors Quality Growth Fund in
connection with the reorganization of that Fund.

D. INVESTMENT TRANSACTIONS - Purchases of investment securities,other than
short-term obligations,aggregated $11,002,096 for the period ended May 31,1995.

At May 31,1995,aggregate gross unrealized appreciation for all securities
in which there is an excess of value over tax cost was $544,899 and aggregate
gross unrealized depreciation for all securities in which there is an excess of
tax cost over value was $47,982.

E. NET ASSETS - At May 31,1995,net assets consisted of:
<TABLE>
<S> <C>
Paid-in-capital:
Flag Investors Class A.... $38,137,836
Flag Investors Class B.... 2,038,181
Undistributed net investment
income.................... 97,746
Unrealized appreciation
on investments............ 496,917

$40,770,680
</TABLE>
32
<PAGE>
FLAG INVESTORS
EQUITY PARTNERS FUND, INC.

Report of Independent Accountants

To the Shareholders and Directors of
Flag Investors Equity Partners Fund,Inc.:

We have audited the accompanying statement of net assets of Flag Investors
Equity Partners Fund,Inc. as of May 31,1995 and the related statements of
operations and changes in net assets and financial highlights for the period
February 13,1995 (commencement of operations) through May 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 May
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 Equity Partners Fund,Inc.as of May 31, 1995 and the results of its
operations and the changes in its net assets and its financial highlights for
the period February 13,1995 (commencement of operations) through May 31,1995 in
conformity with generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.
Philadelphia,Pennsylvania
June 30,1995

<PAGE>

APPENDIX A

BOND AND COMMERCIAL PAPER RATINGS

Standard & Poor's Commercial Paper Ratings

S & P - Commercial paper rated A-1+ or A-1 by S&P has the following
characteristics. Liquidity ratios are adequate to meet cash requirements.
Long-term senior debt is rated "A" or better, although in some cases "BBB"
credits may be allowed. The issuer has access to at least two channels of
borrowing. Basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances. Typically, the issuer's industry is well established
and the issuer has a strong position within the industry. The reliability and
quality of management is unquestioned. Relative strength or weakness of the
above factors determines whether the issuer's commercial paper is rated A-1, A-2
or A-3.

Moody's Commercial Paper Ratings

Moody's - The rating Prime-1 (P-1) is the highest commercial paper
rating assigned by Moody's. Among the factors considered by Moody's in assigning
ratings are the following: (1) evaluation of the management of the issuer; (2)
economic evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationship which exists with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations. These factors are all
considered in determining whether the commercial paper is rated P-1, P-2 or P-3.

CORPORATE BOND RATINGS

Standard & Poor's Bond Ratings

AAA - Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.

AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.

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

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BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits 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
debt in this category than in higher rated categories.

BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the lowest degree of speculation and
C the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.

CI - The rating CI is reserved for income bonds on which no interest is being
paid.

D - Debt rated D is in default. The D rating category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.

Moody's Bond Ratings

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

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

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

Baa - Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments

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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.

Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterize bonds in this class.

B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.

Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.

C - Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

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