FLAG INVESTORS EQUITY PARTNERS FUND INC, 497, 1997-10-09

FLAG INVESTORS EQUITY PARTNERS FUND INC
497, 1997-10-09

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LOGO
FLAG INVESTORS

EQUITY PARTNERS FUND, INC.
(Class A and Class B Shares)

Prospectus & Application -- October 1, 1997

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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.

Shares of the Fund are available through your securities dealer or the Fund's
transfer agent. This Prospectus relates to Flag Investors Class A Shares
("Class A Shares") and Flag Investors Class B Shares ("Class B Shares") of the
Fund. The separate classes provide investors with alternatives as to sales load
and fund expenses. (See "How to Invest in the Fund.")

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

TABLE OF CONTENTS

Fee Table ................................. 1
Financial Highlights ..................... 2
Investment Program ..................... 3
Investment Restrictions .................. 4
How to Invest in the Fund ............... 4
How to Redeem Shares ..................... 8
Telephone Transactions .................. 9
Dividends and Taxes ..................... 9
Management of the Fund .................. 10
Investment Advisor and Sub-Advisor ...... 10
Distributor .............................. 11
Custodian, Transfer Agent and
Accounting Services .................. 12
Performance Information .................. 12
General Information ..................... 12
Application .............................. A-1

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

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

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FEE TABLE

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Shareholder Transaction Expenses:

<TABLE>
<CAPTION>
Class A Class B
Shares Shares
Initial Sales Deferred
Charge Sales Charge
Alternative Alternative
--------------- ----------------
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) .............................. 4.50%* None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price) ........................... None None
Maximum Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, whichever is lower) ............... 0.50%* 4.00%**
Annual Fund Operating Expenses (net of fee waivers and reimbursements)
(as a percentage of average daily net assets):
Management Fees (net of fee waivers) .............................. 0.78%*** 0.78%***
12b-1 Fees ...................................................... 0.25% 0.75%
Other Expenses (including a 0.25% shareholder
servicing fee for Class B Shares) .............................. 0.32% 0.57%****
---- ----
Total Fund Operating Expenses (net of fee waivers) ............... 1.35%*** 2.10%***
==== ====
</TABLE>

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* Purchases of $1 million or more of Class A Shares by persons not otherwise
eligible for sales load waivers are not subject to an initial sales
charge; however, a contingent deferred sales charge of 0.50% may be
imposed upon redemption. (See "How to Invest in the Fund -- Offering
Price.")
** A declining contingent deferred sales charge will be imposed on redemptions
of Class B Shares made within six years of purchase. Class B Shares will
automatically convert to Class A Shares six years after purchase. (See
"How to Invest in the Fund -- Class B Shares.")
*** The Fund's investment advisor intends, but is not obligated, to waive its
fee to the extent required so that Total Fund Operating Expenses 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. Absent fee waivers,
Management Fees would be 0.91% of the Fund's average daily net assets and
Total Fund Operating Expenses would be 1.48% of the Class A Shares'
average daily net assets and 2.23% of the Class B Shares' average daily
net assets.
**** A portion of the shareholder servicing fee is allocated to member firms of
the National Association of Securities Dealers, Inc. and qualified banks
for services provided and expenses incurred in maintaining shareholder
accounts, responding to shareholder inquiries, and providing information
to shareholders about their investments.

<TABLE>
<CAPTION>
Example: 1 year 3 years 5 years 10 years
- -------- -------- --------- --------- ----------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period:*
Class A Shares .............................. $ 58 $ 86 $ 116 $ 200
Class B Shares .............................. $ 61 $ 96 $ 133 $ 206
</TABLE>

<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
-------- --------- --------- ----------
<S> <C> <C> <C> <C>
You would pay the following expenses on the same
investment, assuming no redemption:*
Class B Shares .............................. $ 21 $ 66 $ 113 $ 206
</TABLE>

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

<PAGE>

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 shares of either class through a financial institution may
be charged separate fees by the financial institution.

The rules of the SEC require that the maximum sales charge be reflected in
the above table. However, certain investors may qualify for reduced sales
charges or no sales charge at all. (See "How to Invest in the Fund -- Class A
Shares.") Due to the continuous nature of Rule 12b-1 fees, long-term
shareholders of the Fund may pay more than the equivalent of the maximum
front-end sales charges permitted by the Conduct Rules of the National
Association of Securities Dealers, Inc. ("NASD Rules").

1
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FINANCIAL HIGHLIGHTS

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The financial highlights included in the following tables are a part of
the Fund's financial statements for the periods indicated and have been audited
by Coopers & Lybrand L.L.P., independent accountants. The financial statements
and financial highlights for the fiscal year ended May 31, 1997 and the report
thereon of Coopers & Lybrand L.L.P. are included in the Statement of Additional
Information. Additional performance information is contained in the Fund's
Annual Report for the fiscal year ended May 31, 1997, which can be obtained at
no charge by calling the Fund at (800) 767-FLAG.

(For a share outstanding throughout each period)
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<TABLE>
<CAPTION>
Class A Shares
-----------------------------------------------
For the
Period
For the Year Feb. 13, 1995(1)
Ended May 31, through
1997 1996 May 31, 1995
-------------- ------------- ----------------
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period ...... $ 13.09 $ 10.77 $ 10.00
------------- ----------- ------------
Income from Investment Operations:
Net investment income ........................ 0.08 0.17 0.12
Net realized and unrealized gain on
investments ................................. 3.96 2.29 0.65
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Total from Investment Operations ............ 4.04 2.46 0.77
Less Distributions:
Distributions from net investment income
and net realized short-term gains ......... (0.13) (0.14) --
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Distributions from net realized long-term
gains .................................... (0.07) -- --
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Total distributions ........................ (0.20) (0.14) --
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Net asset value at end of period ............ $ 16.93 $ 13.09 $ 10.77
============= =========== ============
Total Return(2) ............................... 31.17% 23.05% 7.70%
Ratios to Average Daily Net Assets:
Expenses .................................... 1.35%(4) 1.35%(4) 1.35%(3,4)
Net investment income ........................ 0.61%(5) 1.52%(5) 3.74%(3,5)
Supplemental Data:
Net assets at end of period (000) ............ $ 113,030 $ 64,230 $ 38,612
Portfolio turnover rate ..................... 17.60% 0.73% --
Average commissions per share(8) ........... $ 0.068 -- --
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</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Class B Shares
-----------------------------------------------
For the
Period
For the Year Feb. 13, 19951
Ended May 31, through
1997 1996 May 31, 1995
--------------- ------------- ---------------
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period ...... $ 13.03 $ 10.75 $ 10.00
------------- ------------- ------------
Income from Investment Operations:
Net investment income ........................ (0.04) 0.07 0.07
Net realized and unrealized gain on
investments ................................. 3.96 2.31 0.68
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Total from Investment Operations ............ 3.92 2.38 0.75
Less Distributions:
Distributions from net investment income
and net realized short-term gains ......... (0.04) (0.10) --
------------- ------------- ------------
Distributions from net realized long-term
gains .................................... (0.07) -- --
------------- ------------- ------------
Total distributions ........................ (0.11) (0.10) --
------------- ------------- ------------
Net asset value at end of period ............ $ 16.84 $ 13.03 $ 10.75
============= ============= ============
Total Return(2) ............................... 30.28% 22.17% 7.50%
Ratios to Average Daily Net Assets:
Expenses .................................... 2.10%(6) 2.10%(6) 2.10%(3,6)
Net investment income ........................ (0.16)%(7) 0.71%(7) 1.97%(3,7)
Supplemental Data:
Net assets at end of period (000) ............ $ 15,670 $ 5,302 $ 2,159
Portfolio turnover rate ..................... 17.60% 0.73% --
Average commissions per share(8) ........... $ 0.068 -- --
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</TABLE>

(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Annualized.
(4) Without the waiver of advisory fees, the ratio of expenses to average daily
net assets would have been 1.48%, 1.77% and 3.76% (annualized) for Class A
Shares for the years ended May 31, 1997, 1996 and the period ended May 31,
1995, respectively.
(5) Without the waiver of advisory fees, the ratio of net investment income to
average daily net assets would have been 0.48%, 1.10% and 1.33% (annualized)
for Class A Shares for the years ended May 31, 1997, 1996 and the period
ended May 31, 1995, respectively.
(6) Without the waiver of advisory fees, the ratio of expenses to average daily
net assets would have been 2.23%, 2.52% and 4.22% (annualized) for Class B
Shares for the years ended May 31, 1997, 1996 and the period ended May 31,
1995, respectively.
(7) Without the waiver of advisory fees, the ratio of net investment income to
average daily net assets would have been (0.28)%, 0.29% and (0.15)%
(annualized) for Class B Shares for the years ended May 31, 1997, 1996 and
the period ended May 31, 1995, respectively.
(8) Disclosure is required for fiscal years beginning after September 1, 1995.
Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.

2
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INVESTMENT PROGRAM

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Investment Objective, Policies
and Risk Considerations

The Fund's investment objective is 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. 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.

The Fund's investment advisor (the "Advisor") and the Fund's sub-advisor
(the "Sub-Advisor") (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. In addition, the Fund may invest up to 10% of
its net assets in illiquid securities.

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

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 &
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. In addition, C-rated securities may be regarded as having
extremely poor prospects of ever attaining investment standing. 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 year ended May 31, 1997, the Fund held no below
investment grade bonds.

3
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<PAGE>

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Investments in Repurchase Agreements

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

Investments in Securities of Foreign Issuers

From time to time, the Fund may invest in American Depositary Receipts,
which are interests in securities of foreign companies, and up to 10% of the
Fund's total assets in debt and equity securities of foreign issuers not
publicly traded in the United States when the Advisors believe that such
investments provide good opportunities for achieving income and capital gains
without undue risk.

Nevertheless, foreign investments involve different risks from
investments in the United States, including currency, market and political
risks.

Accordingly, the Advisors intend to seek securities of companies in, and
governments of, developed, stable nations.

INVESTMENT RESTRICTIONS

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The Fund's investment program is subject to a number of restrictions that
reflect both self-imposed standards and federal regulatory limitations. The
investment restrictions recited below are matters of fundamental policy and may
not be changed without shareholder approval. The Fund will not:

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.

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

HOW TO INVEST IN THE FUND

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Class A and Class B Shares may be purchased from the Fund's distributor
(the "Distributor"), through any securities dealer that is authorized to
service shareholder accounts ("Participating Dealers") or through any financial
institution that is authorized to service shareholder accounts ("Shareholder
Servicing Agents"). Shares of either class may also be purchased by completing
the Application Form attached to this Prospectus and returning it, together
with payment of the purchase price, to the address shown on the Application
Form. Participating Dealers or Shareholder Servicing Agents and their
investment representatives may receive different levels of compensation
depending on which class of shares they sell.

The Class A and Class B alternatives permit an investor to choose the
method of purchasing shares that is more beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares, and
other circumstances. Investors should consider whether, during the anticipated
life of their investment in the Fund, the combination of sales charge and
distribution fee on Class A Shares is more favorable than the combination of
distribution/service fees and contingent deferred sales charge on Class B
Shares. In almost all cases, investors planning to purchase $100,000 or more of
Fund shares will pay lower aggregate charges and expenses by purchasing Class A
Shares. Accordingly, the Fund will not accept purchases for Class B Shares in
excess of $100,000 per account. (See "Fee Table.")

The minimum initial investment in shares of either class is $2,000,
except that the minimum initial investment for shareholders of any other Flag
Investors fund or class is $500 and the minimum initial investment for

4
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<PAGE>

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

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

The net asset value per share is determined daily as of the close of the
New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time), on each
Business Day. Net asset value per share of a class is calculated by valuing its
share of the Fund's assets, deducting all liabilities attributable to that
class, and dividing the resulting amount by the number of then outstanding
shares of the class. For this purpose, portfolio securities are given their
market value where feasible. 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. Because of differences between the
classes of shares in distribution/service fees, the net asset value per share
of the classes differs at times.

Offering Price

Shares may be purchased from the Distributor, Participating Dealers or
Shareholder Servicing Agents at the Offering Price, which for Class A Shares
includes a sales charge that is calculated as a percentage of the Offering
Price and for Class B Shares is net asset value.

Class A Shares

The sales charge on Class A Shares, which decreases as the amount of
purchase increases, is shown below:

Sales Charge
as % of Dealer
------------------------- Retention
Offering Net Amount as % of
Amount of Purchase Price Invested Offering Price
- -----------------------------------------------------------------------
Less than $50,000......... 4.50% 4.71% 4.00%
$ 50,000 - $99,999... 3.50% 3.63% 3.00%
$ 100,000 -$249,999... 2.50% 2.56% 2.00%
$ 250,000 -$499,999... 2.00% 2.04% 1.50%
$ 500,000 -$999,999... 1.50% 1.52% 1.25%
$1,000,000 and over ... None* None* None*

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* Purchases of $1 million or more may be subject to a contingent deferred sales
charge. (See below.) The Distributor may make payments to Participating
Dealers and Shareholder Servicing Agents in the amount of up to 0.50% of
the Offering Price.

<PAGE>

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

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

An investor may also obtain the reduced sales charges shown above by
executing a written Letter of

5
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<PAGE>

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Intent that states the investor's intention to invest at least $50,000 within a
13-month period in Class A Shares. Each purchase of Class A Shares under a
Letter of Intent will be made at the Offering Price applicable at the time of
such purchase to the full amount indicated on the Letter of Intent. A Letter of
Intent is not a binding obligation upon the investor to purchase the full
amount indicated. The minimum initial investment under a Letter of Intent is 5%
of the full amount. Shares purchased with the first 5% of the full amount will
be held in escrow (while remaining registered in the name of the investor) to
secure payment of the higher sales charge applicable to the Class A Shares
actually purchased if the full amount indicated is not invested. Such escrowed
shares will be involuntarily redeemed to pay the additional sales charge, if
necessary. When the full amount indicated has been purchased, the escrowed
shares will be released. An investor who wishes to enter into a Letter of
Intent in conjunction with an investment in Class A Shares may do so by
completing the appropriate section of the Application Form attached to this
Prospectus.

No sales charge will be payable at the time of purchase on investments of
$1 million or more of Class A Shares. However, a contingent deferred sales
charge may be imposed on such investments in the event of a redemption within
24 months following the purchase, at the rate of 0.50% on the lesser of the
value of the Class A Shares redeemed or the total cost of such shares. No
contingent deferred sales charge will be imposed on purchases of $3 million or
more of Class A Shares redeemed within 24 months of purchase if the
Participating Dealer and the Distributor have entered into an agreement under
which the Participating Dealer agrees to return any payments received on the
sale of such shares. In determining whether a contingent deferred sales charge
is payable, and, if so, the amount of the charge, it is assumed that shares not
subject to such charge are the first redeemed followed by other Class A Shares
held for the longest period of time.

The Fund may sell Class A Shares at net asset value (without sales
charge) to the following: (i) banks, bank trust departments, registered
investment advisory companies, financial planners and broker-dealers purchasing
shares on behalf of their fiduciary and advisory clients, provided such clients
have paid an account management fee for these services (investors may be
charged a fee if they effect transactions in Fund shares through a broker or
agent); (ii) qualified retirement plans; (iii) participants in a Flag Investors
fund payroll savings plan program; (iv) investors who have redeemed Class A
Shares, or shares of any other mutual fund in the Flag Investors family of
funds with the same or higher sales charges, in an amount that is not more than
the total redemption proceeds, provided that the purchase is within 90 days
after the redemption; and (v) current or retired Directors of the Fund and
directors and employees (and their immediate families) of the Advisor or
Distributor, Participating Dealers and their respective affiliates.

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

Class B Shares

No sales charge will be payable at the time of purchase of Class B
Shares. However, a contingent deferred sales charge will be imposed on certain
Class B Shares redeemed within six years of purchase. The charge is assessed on
an amount equal to the lesser of the then-current market value of the Class B
Shares redeemed or the total cost of such shares. In addition, no charge is
assessed on redemptions of Class B Shares derived from reinvestment of
dividends or capital gains distributions.

In determining whether the contingent deferred sales charge is applicable
to a redemption, the calculation is made in the manner that results in the
lowest possible rate. Therefore, it is assumed that the redemption is first of
any Class B Shares in the shareholder's account that represent reinvested
dividends and distributions and second of Class B Shares held the longest
during the six-year period. The amount of the contingent deferred sales charge,
if any, will vary depending on the number of years from the time of payment for
the purchase of Class B Shares until the redemption of such shares (the
"holding period"). For purposes of determining this holding period, all
payments during a month are aggregated and deemed to have been made on the
first day of the month. The following table sets forth the rates of the
contingent deferred sales charge.

Contingent Deferred
Sales Charge
(as a percentage of
Year Since Purchas the dollar amount
Payment was Made subject to charge)
- ------------------------------------------------------------
First .......................... 4.0%
Second ....................... 4.0%
Third .......................... 3.0%
Fourth ....................... 3.0%
Fifth .......................... 2.0%
Sixth .......................... 1.0%
Thereafter .................... None*

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<PAGE>

* As described more fully below, Class B Shares automatically convert to Class
A Shares six years after the beginning of the calendar month in which the
purchase order was accepted.

Waiver of Contingent Deferred Sales Charge. The contingent deferred sales
charge will be

6
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<PAGE>

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

waived on the redemption of Class B Shares (i) following the death or initial
determination of disability (as defined in the Internal Revenue Code of 1986,
as amended) of a shareholder; or (ii) to the extent that the redemption
represents a minimum required distribution from an individual retirement
account or other retirement plan to a shareholder who has attained the age of
70 1/2. The waiver with respect to (i) above is only applicable in cases where
the shareholder account is registered (a) in the name of an individual person,
(b) as a joint tenancy with rights of survivorship, (c) as community property
or (d) in the name of a minor child under the Uniform Gifts or Uniform
Transfers to Minors Acts. A shareholder, or his or her representative, must
notify the Fund's transfer agent (the "Transfer Agent") prior to the time of
redemption if such circumstances exist and the shareholder is eligible for this
waiver. For information on the imposition and waiver of the contingent deferred
sales charge, contact the Transfer Agent at (800) 553-8080.

Automatic Conversion to Class A Shares. Six years after the beginning of
the calendar month in which the purchase order for Class B Shares is accepted,
such Class B Shares will automatically convert to Class A Shares and will no
longer be subject to the higher distribution and service fees. Such conversion
will be on the basis of the relative net asset values of the two classes,
without the imposition of any sales load, fee or other charge. The conversion
is not a taxable event to the shareholder.

For purposes of conversion to Class A Shares, shares received as
dividends and other distributions paid on Class B Shares in the shareholder's
account will be considered to be held in a separate sub-account. Each time any
Class B Shares in the shareholder's account (other than those in the
sub-account) convert to Class A Shares, an equal pro rata portion of the Class
B Shares in the sub-account will also convert to Class A Shares.

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

Purchases by Exchange

As permitted pursuant to any rule, regulation or order promulgated by the
SEC, shareholders of other Flag Investors funds may exchange their shares of
those funds for an equal dollar amount of Fund shares of the same class with
the same sales load structure. Shares issued pursuant to this offer will not be
subject to the sales charges described above or any other charge. In addition,
shareholders of Class A shares of any mutual fund in the Flag Investors family
of funds with a lower sales charge may exchange into Class A Shares upon
payment of the difference in sales charges except that the exchange will be
made at net asset value if the shares of such funds have been held for more
than 24 months. Shareholders of Flag Investors Cash Reserve Prime Class A
Shares may exchange into Class A Shares upon payment of the difference in sales
charges, as applicable, or into Class B Shares at net asset value, subject
thereafter to any applicable contingent deferred sales charge.

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

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

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

The exchange privilege with respect to other Flag Investors funds may
also be exercised by telephone. (See "Telephone Transactions" below.) The Fund
may modify or terminate this offer of exchange at any time upon 60 days' prior
written notice to shareholders.
<PAGE>

Purchases Through Automatic Investing Plan

Shareholders may purchase either Class A Shares or Class B Shares
regularly by means of an Automatic Investing Plan with a pre-authorized check
drawn on their checking accounts. Under this plan, the shareholder may elect to
have a specified amount invested monthly or quarterly in either Class A Shares
or Class B Shares. The amount specified by the shareholder will be withdrawn
from the shareholder's checking account using the pre-authorized check. This
amount will be

7
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<PAGE>

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

invested in the class of shares selected by the shareholder at the applicable
Offering Price determined on the date the amount is available for investment.
Participation in the Automatic Investing Plan may be discontinued either by the
Fund or the shareholder upon 30 days' prior written notice to the other party.
A shareholder who wishes to enroll in the Automatic Investing Plan or who
wishes to obtain additional purchase information may do so by completing the
appropriate section of the Application Form attached to this Prospectus.

Purchases Through Dividend Reinvestment

Shareholders may elect to have their distributions (capital gains and/or
dividend income) paid by check or reinvested in additional Fund shares of the
same class. Unless the shareholder elects otherwise, all income and capital
gains distributions will be reinvested in additional Fund shares at net asset
value, without a sales charge. Shareholders may elect to terminate automatic
reinvestment by giving written notice to the Transfer Agent at the address
listed on the inside back cover of this Prospectus, either directly or through
their Participating Dealer or Shareholder Servicing Agent, at least five days
before the next date on which dividends or distributions will be paid.

Alternately, shareholders may have their distributions invested in shares
of other funds in the Flag Investors family of funds. Shareholders who are
interested in this option should call the Transfer Agent at (800) 553-8080 for
additional information.

HOW TO REDEEM SHARES

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

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

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

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

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

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

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

<PAGE>

Systematic Withdrawal Plan

Shareholders who hold Class A Shares or Class B Shares having a value of
$10,000 or more may arrange to have a portion of their shares redeemed monthly
or quarterly under the Fund's Systematic Withdrawal Plan. Such payments are
drawn from income dividends, and to the extent necessary, from share
redemptions (which would be a return of principal and, if reflecting a gain,
would be taxable). If redemptions continue, a shareholder's account may
eventually be exhausted. Because Class A Share purchases include a sales charge
that will not be recovered at the time of

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

redemption, a shareholder should not have a withdrawal plan in effect at the
same time he is making recurring purchases of Class A Shares. In addition,
Class B Shares may be subject to a contingent deferred sales charge upon
redemption. (See "How to Invest in the Fund -- Class B Shares.") A shareholder
who wishes to enroll in the Fund's Systematic Withdrawal Plan may do so by
completing the appropriate section of the Application Form attached to this
Prospectus.

TELEPHONE TRANSACTIONS

- --------------------------------------------------------------------------------
Shareholders may exercise the exchange privilege with respect to other
Flag Investors funds, or redeem shares of either class in amounts up to
$50,000, 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 on the inside back cover of this
Prospectus. Telephone transaction privileges are automatic. Shareholders may
specifically request that no telephone redemptions or exchanges be accepted for
their accounts. This election may be made on the Application Form or at any
time thereafter by completing and returning appropriate documentation supplied
by the Transfer Agent.

A telephone exchange or redemption placed by 4:00 p.m. (Eastern Time) or
the close of the New York Stock Exchange, whichever is earlier, is effective
that day. Telephone orders placed after 4:00 p.m. (Eastern Time) will be
effected at the net asset value (less any applicable contingent deferred sales
charge on redemptions) as 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. If these
procedures are employed, neither the Fund nor the Transfer Agent will be
responsible for any loss, liability, cost or expense for following instructions
received by telephone that either of them reasonably believes to be genuine.
During periods of extreme economic or market changes, shareholders may
experience difficulty in effecting telephone transactions. In such event,
requests should be made by regular or express mail. Shares held in certificate
form may not be exchanged or redeemed by telephone. (See "How to Invest in the
Fund -- Purchases by Exchange" and "How to Redeem Shares.")

DIVIDENDS AND TAXES

- --------------------------------------------------------------------------------
Dividends and Distributions

The Fund's policy is to distribute to shareholders substantially all of
its taxable net investment income 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.

Tax Treatment of Dividends and Distributions

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

The Statement of Additional Information sets forth further information
concerning taxes.

The Fund has been and expects to continue to be taxed as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (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 gains from the sale or exchange of a capital asset held
for more than one year 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.

9
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<PAGE>

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

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 in the year in which the dividends were
declared.

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

The sale, exchange, or redemption of Fund shares is a taxable event for
the shareholder.

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. A majority of the Directors of the Fund have no affiliation
with the Distributor or the Advisor.

INVESTMENT ADVISOR AND SUB-ADVISOR

- --------------------------------------------------------------------------------
Investment Company Capital Corp. ("ICC" or the "Advisor") is the Fund's
investment advisor and Alex. Brown Investment Management ("ABIM" or the "Sub-
Advisor") is the Fund's sub-advisor. ICC is also the investment advisor to
other mutual funds in the Flag Investors family of funds and BT Alex. Brown
Cash Reserve Fund, Inc., which funds had approximately $7.1 billion of net
assets as of August 31, 1997. ABIM is a registered investment advisor with
approximately $6.7 billion under management as of August 31, 1997.

Pursuant to the terms of the Investment Advisory Agreement, ICC is
responsible for supervising and managing 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 certain affiliates and the Distributor,
provided that compensation to certain affiliates and the Distributor 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 for the fiscal year ended May 31, 1997,
ICC received from the Fund a fee (net of fee waivers) equal to 0.78% of the
Fund's average daily net assets. From such amounts and from its own resources,
ICC paid ABIM a fee (net of fee waivers) equal to 0.62% of the Fund's average
daily net assets.

ICC is an indirect subsidiary of Bankers Trust New York Corporation. ABIM
is a limited partnership affiliated with the Advisor. 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. BT
Alex. Brown Incorporated ("BT Alex. Brown") owns a 1% general partnership
interest in ABIM and BT Alex. Brown Holdings, Inc. owns the remaining limited
partnership interest.

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

Portfolio Manager

Lee S. Owen -- 25 Years' Investment Experience

10
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<PAGE>

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

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.

Past Performance of ABIM
Annualized Rates of Return
Of Equity Accounts
For Periods Ended June 30, 1997

ABIM
Equity Accounts** S&P 500***
------------------- -----------
3 Years* 30.7% 28.9%
5 Years* 23.9% 19.8%
10 Years* 18.3% 14.7%

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

* Annualized.
** The ABIM performance results described above are based on a composite of
all institutional accounts not subject to tax that have investment
objectives and policies similar to those of the Fund and that were
advised by ABIM during the periods shown. As of June 30, 1997, such
accounts totaled $2.63 billion. Performance results for taxable accounts
are not included because the objectives and policies of such accounts
differ from those of the Fund. Data from all accounts have been
continuous from their inception to the present or to the cessation of the
client relationship with ABIM. Effective January 1, 1993, composites have
been calculated in accordance with standards of the Association for
Investment Management and Research ("AIMR") and have been weighted for
the size of each account. Prior to January 1, 1993, accounts were equal
weighted; that is, every account was given equal weight with every other
account, regardless of size. Therefore, the performance of small accounts
will have a larger impact on the results than would be the case if the
results were dollar weighted. In the period prior to January 1, 1993,
there were from 17 to 33 accounts, ranging in size from $1 million to
$104.6 million. The results for each period reflect the reduction of the
highest management fees (0.75%) charged to the composite accounts and
assume the reinvestment of dividends. The composite accounts are not
subject to the restrictions of the Investment Company Act or the Code,
which, if applicable, might have adversely affected the performance of
such accounts.
*** Source: SEI Corporation.

These results are unaudited.
Past performance should not be interpreted as
indicative of future performance.

DISTRIBUTOR

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

Effective September 1, 1997, ICC Distributors, Inc. ("ICC Distributors"
or the "Distributor") acts as distributor of each class of the Fund's shares.
Prior to September 1, 1997, Alex. Brown & Sons Incorporated served as
distributor for each class of the Fund's shares for the same compensation and
on substantially the same terms and conditions as ICC Distributors. ICC
Distributors is a registered broker-dealer that offers distribution services to
a variety of registered investment companies including other funds in the Flag
Investors family of funds and BT Alex. Brown Cash Reserve Fund, Inc. ICC
Distributors is not affiliated with either the Advisor or the Sub-Advisor.

The Fund has adopted a Distribution Agreement and related Plans of
Distribution, one with respect to the Class A Shares and one with respect to
the Class B Shares (the "Plans"), pursuant to Rule 12b-1 under the Investment
Company Act. In addition, the Fund may enter into Shareholder Servicing
Agreements with certain financial institutions, such as banks, to act as
Shareholder Servicing Agents, pursuant to which ICC Distributors will allocate
a portion of its distribution fee as compensation for such financial
institutions' ongoing shareholder services. Such financial institutions may
impose separate fees in connection with these services and investors should
review this Prospectus in conjunction with any such institution's fee schedule.

As compensation for providing distribution services for the Class A
Shares, ICC Distributors receives a fee equal to 0.25% of the average daily net
assets of the Class A Shares. As compensation for providing distribution and
shareholder services for the Class B Shares, ICC Distributors receives a
distribution fee equal to 0.75% of the Class B Shares' average daily net assets
and a shareholder servicing fee equal to 0.25% of the Class B Shares' average
daily net assets. The distribution fee is used to compensate ICC Distributors
for its services and expenses in distributing the Class B Shares. The
shareholder servicing fee is used to compensate ICC Distributors, Participating
Dealers and Shareholder Servicing Agents for services provided and expenses
incurred in maintaining shareholder accounts, responding to shareholder
inquiries and providing information on their investments.

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

11
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<PAGE>

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

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

ICC is the Fund's transfer and dividend disbursing agent and provides
accounting services to the Fund. As compensation for providing accounting
services to the Fund for the fiscal year ended May 31, 1997, ICC received a fee
equal to 0.05% of the Fund's average daily net assets. (See the Statement of
Additional Information.) Bankers Trust Company, a subsidiary of Bankers Trust
New York Corporation and an affiliate of ICC, acts as custodian of the Fund's
assets.

PERFORMANCE INFORMATION

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

From time to time, the Fund may advertise its performance, including
comparisons to other mutual funds with similar investment objectives and to
stock or other relevant indices. All such advertisements will show the average
annual total return, net of the Fund's maximum sales charge imposed on Class A
Shares or including the contingent deferred sales charge imposed on Class B
Shares redeemed at the end of the specified period covered by the total return
figure, over one-, five- and 10-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, net of the maximum sales charge and
other fees according to the required standardized calculation. The standardized
calculation is required by the SEC to provide consistency and comparability in
investment company advertising and is not equivalent to a yield calculation. If
the Fund compares its performance to other funds or to relevant indices, the
Fund's performance will be stated in the same terms in which such comparative
data and indices are stated, which is normally total return rather than yield.
For these purposes, the performance of the Fund, as well as the performance of
such investment companies or indices, may not reflect sales charges, which, if
reflected, would reduce performance results.

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

GENERAL INFORMATION

- --------------------------------------------------------------------------------
Capital Shares

The Fund is an open-end management investment company organized under the
laws of the State of Maryland on November 29, 1994 and is authorized to issue
75 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 the 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 is entitled to its pro rata portion of the Fund's assets after
all debts and expenses have been paid.

12
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<PAGE>

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

Class A Shares" and "Flag Investors Equity Partners Fund Class B Shares." The
Board has no present intention of establishing any additional series of the
Fund but the Fund does have another class of shares in addition to the shares
offered hereby, "Flag Investors Equity Partners Fund Institutional Shares."
Additional information concerning the Fund's Institutional Shares may be
obtained by calling the Fund at (800) 767-FLAG. Different classes of the Fund
may be offered to certain investors and holders of such shares may be entitled
to certain exchange privileges not offered to Class A or Class B Shares. All
classes of the Fund share a common investment objective, portfolio of
investments and advisory fee, but the classes may have different
distribution/service fees or sales load structures and, accordingly, the net
asset value per share of classes may differ at times.

Annual Meetings

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

Reports

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

Shareholder Inquiries

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

13
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<PAGE>

FLAG INVESTORS EQUITY PARTNERS FUND, INC.
NEW ACCOUNT APPLICATION
- --------------------------------------------------------------------------------

Make check payable to "Flag Investors Equity Partners Fund, Inc." and mail with
this application to:
BT Alex. Brown Incorporated/Flag Investors Funds
P.O. Box 419663
Kansas City, MO 64141-6663
Attn: Flag Investors Equity Partners Fund, Inc.

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

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

I wish to purchase the following class of shares of the Fund, in the amount
indicated below. (Please check the applicable box and indicate the amount of
purchase.)

[ ] Class A Shares (4.5% maximum initial sales charge) in the amount of
$_____________________

[ ] Class B Shares (4.0% maximum contingent deferred sales charge) in the
amount of $________________

The minimum initial purchase for each class of shares is $2,000, except that
the minimum initial purchase for shareholders of any other Flag Investors Fund
or class is $500 and the minimum initial purchase for participants in the
Fund's Automatic Investing Plan is $250 per class. The Fund reserves the right
not to accept checks for more than $50,000 that are not certified or bank
checks.

Your Account Registration (Please Print)

Existing Account No., if any: ___________________

Individual or Joint Tenant Gifts to Minors

<TABLE>
<S> <C>
- --------------------------------------- ------------------------------------------
First Name Initial Last Name Custodian's Name (only one allowed by law)

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

- --------------------------------------- ---------------------------------------
Joint Tenant Initial Last Name Social Security Number of Minor

under the _______________ Uniform Gifts
State of Residence
to Minors Act

Corporations, Trusts, Partnerships, etc. Mailing Address

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

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

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

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

</TABLE>
<PAGE>

Letter of Intent -- Class A Shares only (Optional)

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

[ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $500,000 [ ] $1,000,000

Right of Accumulation -- Class A Shares only (Optional)

[ ] I already own shares of the Flag Investors Fund(s) (except Class B shares)
set forth below to be applied for a reduced sales charge. List the Account
numbers of other Flag Investors Funds that you or your immediate family (spouse
and children under 21) already own that qualify for reduced sales charges.

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

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

Distribution Options

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

Income Dividends Capital Gains
| ] Reinvested in additional shares [ ] Reinvested in additional shares
[ ] Paid in Cash [ ] Paid in Cash

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

A-1
<PAGE>

Automatic Investing Plan (Optional)

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

Minimum Initial Investment: $250 per class
Please attach a voided check.

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

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

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

Systematic Withdrawal Plan (Optional)

[ ] Beginning the month of __________ , 19___ please send me checks on a
monthly or quarterly basis, as indicated below, in the amount of (complete
as applicable) $_______ from Class A Shares and/or $ __________ from Class
B Shares that I own, payable to the account registration address as shown
above. (Participation requires minimum account value of $10,000 per class.)

Frequency (check one): [ ] Monthly [ ] Quarterly
(January, April, July and October)

Telephone Transactions

I understand that I will automatically have telephone redemption privileges
(for amounts up to $50,000) and telephone exchange privileges (with respect to
other Flag Investors Funds) unless I mark one or both of the boxes below:

No, I/We do not want: [ ] Telephone redemption privileges
[ ] Telephone exchange privileges

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

Bank: _______________________ Bank Account No.:________________________

Address: _____________________ Bank Account Name:_______________________

<PAGE>

Signature and Taxpayer Certification

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

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

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

Indicated country of residence for tax purposes: ________________________
Under penalties of perjury, I certify that I am not a U.S. citizen or
resident and I am an exempt foreign person as defined by the Internal
Revenue Service.

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

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

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

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

For Dealer Use Only

Dealer's Name: _______________________ Dealer Code: __________________________

Dealer's Address: ____________________ Branch Code: __________________________

Representative: ______________________ Rep. No.: _____________________________

A-2

<PAGE>

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

FLAG INVESTORS EQUITY PARTNERS FUND, INC.
(Class A and Class B Shares)

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

Sub-Advisor Distributor
ALEX. BROWN INVESTMENT MANAGEMENT ICC DISTRIBUTORS, INC.
One South Street P.O. Box 7558
Baltimore, Maryland 21202 Portland, Maine 04101

Transfer Agent Independent Accountants
INVESTMENT COMPANY CAPITAL CORP. COOPERS & LYBRAND L.L.P.
One South Street 2400 Eleven Penn Center
Baltimore, Maryland 21202 Philadelphia, Pennsylvania 19103
1-800-553-8080

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

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

<PAGE>

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

LOGO
FLAG INVESTORS
EQUITY PARTNERS FUND, INC.
(Institutional Shares)

Prospectus & Application -- October 1, 1997

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

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

TABLE OF CONTENTS

Fee Table ................................. 1
Financial Highlights ........................ 2
Investment Program ........................ 2
Investment Restrictions ..................... 4
How to Invest in Institutional Shares ...... 4
How to Redeem Institutional Shares ......... 5
Telephone Transactions ..................... 5
Dividends and Taxes ........................ 6
Management of the Fund ..................... 6
Investment Advisor and Sub-Advisor ......... 7
Distributor .............................. 8
Custodian, Transfer Agent and
Accounting Services ..................... 8
Performance Information .................. 8
General Information ........................ 9
Application ................................. A-1

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

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

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

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

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

FEE TABLE

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

Shareholder Transaction Expenses:

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

Annual Fund Operating Expenses (net of fee waivers and reimbursements)
(as a percentage of average daily net assets):

Management Fees (net of fee waivers) ..................... 0.78%
12b-1 Fees ............................................. None
Other Expenses .......................................... 0.32%
------
Total Fund Operating Expenses (net of fee waivers) ...... 1.10%*
======

- -----------
* The Fund's investment advisor intends, but is not obligated, to waive its fee
to the extent required 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 0.91% of the Fund's average daily net assets
and Total Fund Operating Expenses would be 1.23% of the Institutional Shares'
average daily net assets.

<TABLE>
<CAPTION>
Example: 1 year 3 years 5 years 10 years
- -------- -------- --------- --------- ----------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 invest-
ment, assuming (1) 5% annual return and (2) redemption
at the end of each time period:* ..................... $ 11 $ 35 $ 61 $ 134
</TABLE>

- -----------
* 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 that institution.

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

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

FINANCIAL HIGHLIGHTS

- --------------------------------------------------------------------------------
The Fund has offered the Institutional Shares since February 12, 1996.
The financial highlights included in this table are a part of the Fund's
financial statements for the periods indicated and have been audited by Coopers
& Lybrand L.L.P., independent accountants. The financial statements and
financial highlights for the fiscal year ended May 31, 1997 and the report
thereon of Coopers & Lybrand L.L.P. are included in the Statement of Additional
Information. Additional performance information is contained in the Fund's
Annual Report for the fiscal year ended May 31, 1997, which can be obtained at
no charge by calling the Fund at (800) 767-FLAG.

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

<TABLE>
<CAPTION>
Institutional
Shares
-----------------------------------
For the
Period
For the Feb. 12, 1996(1)
Year Ended through
May 31, 1997 May 31, 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C>

Per Share Operating Performance:
Net asset value at beginning of period .................. $13.10 $12.72
------------ ------------
Income from Investment Operations:
Net investment income ................................. 0.14 0.04
Net realized and unrealized gain on investments ......... 3.95 0.34
------------ ------------
Total from Investment Operations ........................ 4.09 0.38
Less Distributions:
Distributions from net investment income and net realized
short-term gains ....................................... (0.18) --
Distributions from net realized long-term gains ......... (0.07) --
------------ ------------
Total distributions .................................... (0.25) --
------------ ------------
Net asset value at end of period ........................ $16.94 $13.10
============ ============
Total Return ............................................. 31.58% 3.23%
Ratios to Average Daily Net Assets:
Expenses ................................................ 1.10%(3) 1.10%(2,3)
Net investment income ................................. 0.81%(4) 1.20%(2,4)
Supplemental Data:
Net assets at end of period (000) ..................... $42,115 $4,235
Portfolio turnover rate ................................. 17.60% 0.73%
Average commissions per share5 ........................ $0.068 --
- ---------------------------------------------------------------------------------------------
</TABLE>

(1) Commencement of operations.
(2) Annualized.
(3) Without the waiver of advisory fees, the ratio of expenses to average daily
net assets would have been 1.23% and 1.55% (annualized) for the year ended
May 31, 1997 and the period ended May 31, 1996.
(4) Without the waiver of advisory fees, the ratio of net investment income to
average daily net assets would have been 0.70% and 0.75% (annualized) for
the year ended May 31, 1997 and for the period ended May 31, 1996.
(5) Disclosure is required for fiscal years beginning after September 1, 1995.
Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.

INVESTMENT PROGRAM

- --------------------------------------------------------------------------------
Investment Objective, Policies and Risk
Considerations

The Fund's investment advisor (the "Advisor") and the Fund's sub-advisor
(the "Sub-Advisor") (collectively, the "Advisors") are responsible for managing

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

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

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.

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

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 &
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. In addition, C-rated securities may be regarded as
having extremely poor prospects of ever attaining investment standing. 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 year ended May 31, 1997, the Fund held no below
investment grade bonds.

Investments in Repurchase Agreements

Investments in Securities of Foreign Issuers

Nevertheless, foreign investments involve different risks from
investments in the United States, including currency, market and political
risks.

Accordingly, the Advisors intend to seek securities of companies in, and
governments of, developed, stable nations.

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

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

INVESTMENT RESTRICTIONS

- --------------------------------------------------------------------------------
The Fund's investment program is subject to a number of restrictions that
reflect both self-imposed standards and federal regulatory limitations. The
investment restrictions recited below are matters of fundamental policy and may
not be changed without shareholder approval. 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); or
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.

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

HOW TO INVEST IN INSTITUTIONAL SHARES

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

The minimum initial investment in Institutional Shares is $500,000,
except that the minimum initial investment is $1,000,000 for qualified
retirement plans. There is no minimum for clients of investment advisory
affiliates of BT 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 the Distributor and the Advisors.

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

Purchases by Exchange

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

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

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

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

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

HOW TO REDEEM INSTITUTIONAL SHARES

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

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 an account have been redeemed on a dividend payment date, the
dividend will be remitted by wire to the shareholder's bank or to a
Participating Dealer, as appropriate.

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

TELEPHONE TRANSACTIONS

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

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

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

telephone that either of them reasonably believes to be genuine. During periods
of extreme economic or market changes, shareholders may experience difficulty in
effecting telephone transactions. In such event, requests should be made by
express mail or facsimile. (See "How to Invest in Institutional Shares --
Purchases by Exchange" and "How to Redeem Institutional Shares.")

DIVIDENDS AND TAXES

- --------------------------------------------------------------------------------
Dividends and Distributions

Unless the shareholder elects otherwise, all income 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 at its address listed on the inside
back cover of this Prospectus, either directly or through 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 Statement of Additional Information sets forth further information
concerning taxes.

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 gains from the sale or exchange of a capital asset held
for more than one year regardless of the length of time the shareholder has held
the Institutional 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.

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

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

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. A majority of Directors of the Fund have no affiliation
with the Advisors or the Distributor.

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

INVESTMENT ADVISOR AND SUB-ADVISOR

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

Investment Company Capital Corp. ("ICC" or the "Advisor") is the Fund's
investment advisor and Alex. Brown Investment Management ("ABIM" or the "Sub-
Advisor") is the Fund's sub-advisor. ICC is also the investment advisor to
other mutual funds in the Flag Investors family of funds and BT Alex. Brown
Cash Reserve Fund, Inc., which funds had approximately $7.1 billion of net
assets as of August 31, 1997. ABIM is a registered investment advisor with
approximately $6.7 billion under management as of August 31, 1997.

Pursuant to the terms of the Investment Advisory Agreement, ICC is
responsible for supervising and managing 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 certain affiliates or to the Distributor, provided that
compensation to certain affiliates or to the Distributor 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 Conduct Rules of the National Association of
Securities Dealers, Inc., 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.

ICC is an indirect subsidiary of Bankers Trust New York Corporation. ABIM
is a limited partnership affiliated with the Advisor. 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. BT
Alex. Brown owns a 1% general partnership interest in ABIM and BT Alex. Brown
Holdings, Inc. owns the remaining limited partnership interest.

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

Portfolio Manager

Lee S. Owen -- 25 Years' Investment Experience

Lee S. Owen has been responsible for managing the Fund's assets since
inception. Mr. 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.

Past Performance of ABIM
Annualized Rates of Return
Of Equity Accounts
For Periods Ended June 30, 1997

ABIM
Equity Accounts** S&P 500***
------------------- -----------
3 Years* ...... 30.7% 28.9%
5 Years* ...... 23.9% 19.8%
10 Years* ...... 18.3% 14.7%

- -----------
*Annualized.

**The ABIM performance results described above are based on a composite of all
institutional accounts not subject to tax that have investment objectives
and policies similar to those of the Fund and that were advised by ABIM
during the periods shown. As of June 30, 1997, such accounts totaled $2.63
billion. Performance results for taxable accounts are not included because
the objectives and policies of such accounts differ from those of the
Fund. Data from all accounts have been continuous from their inception to
the present or to the cessation of the client relationship with ABIM.
Effective January 1, 1993, composites have been calculated in accordance
with standards of the Association for Investment Management and Research
("AIMR") and have been weighted for the size of each account. Prior to
January 1, 1993, accounts were equal weighted; that is, every account was
given equal weight with every other account, regardless of size.
Therefore, the performance of small accounts will have a larger impact on
the results than would be the case if the results were dollar weighted. In
the period prior to January 1, 1993, there were from 17 to 33 accounts,
ranging in size from $1 million to $104.6 million. The results for each
period reflect the reduction of the highest management fees (0.75%)
charged to the composite accounts and assume the reinvestment of
dividends. The composite accounts are not subject to the restrictions of
the Investment Company Act or the Code, which, if applicable, might have
adversely affected the performance of such accounts.
***Source: SEI Corporation.

These results are unaudited.
Past performance should not be interpreted as
indicative of future performance.

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

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

DISTRIBUTOR

- --------------------------------------------------------------------------------
Effective September 1, 1997, ICC Distributors, Inc. ("ICC Distributors"
or the "Distributor") acts as distributor of each class of the Fund's shares.
Prior to September 1, 1997, Alex. Brown & Sons Incorporated served as
distributor for each class of the Fund's shares for the same compensation and
on substantially the same terms and conditions as ICC Distributors. ICC
Distributors is a registered broker-dealer that offers distribution services to
a variety of registered investment companies including other funds in the Flag
Investors family of funds and BT Alex. Brown Cash Reserve Fund, Inc. ICC
Distributors is not affiliated with either the Advisor or the Sub-Advisor.

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

CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES

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

PERFORMANCE INFORMATION

- --------------------------------------------------------------------------------
From time to time the Fund may advertise its performance including
comparisons to 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 10-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.

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

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

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

GENERAL INFORMATION

- --------------------------------------------------------------------------------
Capital Shares

The Fund is an open-end management investment company organized under the
laws of the State of Maryland on November 29, 1994 and is authorized to issue
75 million shares of capital stock, with a par value of $.001 per share. Shares
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 the
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 is
entitled to its pro rata portion of the Fund's assets after all debts and
expenses have been paid.

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

Annual Meetings

Reports

Shareholder Inquiries

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

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

FLAG INVESTORS EQUITY PARTNERS FUND, INC.
(INSTITUTIONAL SHARES)
NEW ACCOUNT APPLICATION
- --------------------------------------------------------------------------------

Send completed Application by overnight carrier to:
BT Alex. Brown Incorporated/Flag Investors Funds
330 West 9th Street, First Floor
Kansas City, MO 64105
Attn: Flag Investors Equity Partners Fund, Inc.

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

If you are paying by check, make check payable to "Flag Investors Equity
Partners Fund, Inc." and mail the Application. If you are paying by wire, see
instructions below.
- --------------------------------------------------------------------------------

Your Account Registration (Please Print)

Name on Account Mailing Address

<TABLE>
<S> <C>
- -------------------------------------------- --------------------------------------------
Name of Corporation, Trust or Partnership Name of Individual to Receive Correspondence

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

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

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

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

</TABLE>
<PAGE>

Initial Investment

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

Indiciate 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 BT Alex. Brown
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 BT Alex Brown Incorporation/Flag Investors Funds
Acct. #7528353
ABA # 1010-0362-1
Kansas City, Missouri 64105

Please include the following 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 are selected, all
distributions will be reinvested in additional Institutional Shares of the
Fund.

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

Telephone Transactions

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

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

Bank Account Designation
(This Section Must Be Completed)

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

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

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

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

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

A-1
- --------------------------------------------------------------------------------

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

Acknowledgment, Certificate and Signature

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

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

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

Person(s) Authorized to Conduct Transactions

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

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

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

Certificate of Authority

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

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

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

this __ day of ______________, 199__ Secretary____________________________

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

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

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

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

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

A-2

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

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

FLAG INVESTORS EQUITY PARTNERS, FUND, INC.

(Institutional Shares)

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

Sub-Advisor Distributor
ALEX. BROWN INVESTMENT MANAGEMENT ICC DISTRIBUTORS, INC.
One South Street P.O. Box 7558
Baltimore, Maryland 21202 Portland, Maine 04101

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

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

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

FLAG INVESTORS EQUITY PARTNERS FUND, INC.

One South Street
Baltimore, Maryland 21202

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

Statement of Additional Information Dated:
October 1, 1997
Relating to Prospectuses Dated:
October 1, 1997, relating to the Class A, Class B
and 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............................ 5

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

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

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

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

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

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

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

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

12. Independent Accountants....................................... 21

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

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

15. Financial Statements.......................................... 23

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 "Institutional 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 the Fund's
distributor (the "Distributor") 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 Fund has
offered the Institutional Shares since February 12, 1996.

Under a license agreement dated January 31, 1995 between the Fund
and Alex. Brown & Sons Incorporated, now BT Alex. Brown Incorporated ("BT Alex.
Brown"), Alex. Brown & Sons Incorporated licenses to the Fund the "Flag
Investors" name and logo but retains the rights to the name and logo, including
the right to permit other investment companies to use them.

2. INVESTMENT 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

1
<PAGE>

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.

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 fund's
investment advisor's and the fund's sub-advisor's 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 that 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.

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 Fund's
investment advisor (the "Advisor") and the Fund's sub-advisor (the
"Sub-Advisor") (collectively, 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

2
<PAGE>

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 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 the Advisors 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 the Fund's assets in
American Depositary Receipts and other securities, which are traded in the
United States and represent interests in foreign issuers. The Advisors may also
invest up to 10% of the Fund's assets in securities of foreign companies, and in
debt and equity securities issued by foreign corporate and government issuers
and which are not traded in the United States when the Advisors believe that
such investments provide good opportunities

3
<PAGE>

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. Such investments are usually not denominated in dollars
so changes in the relative values of the dollar and other currencies will affect
the value of foreign investments. 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 in the United States. The settlement periods for foreign
securities, which are often longer than those 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 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 that 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 that 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. 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 equaling 5% or more of the Fund's
total assets are outstanding, the Fund will not purchase securities;

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

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

4
<PAGE>

4. Act as an underwriter of securities within the meaning of the
U.S. federal securities laws except insofar as it might be deemed to be an
underwriter upon disposition of certain portfolio securities acquired within the
limitation on purchases of restricted securities;

5. Issue senior securities;

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

7. Effect short sales of securities;

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

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

10. 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].

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

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

3. VALUATION OF SHARES AND REDEMPTION

Valuation of Shares

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

Redemption

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

Under normal circumstances, the Fund will redeem 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

5
<PAGE>

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.

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 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").

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 that 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.

6
<PAGE>

Under Subchapter M of the Code, 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 12 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.

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 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 gains from the sale or exchange of a capital
asset held for more than one year, 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% of such gains.

In the case of corporate shareholders, Fund distributions (other
than capital gains distributions) generally qualify for the dividends received
deduction to the extent of the gross amount of qualifying dividends received by
the Fund for the year. Generally, and subject to certain limitations, a dividend
will be treated as a qualifying dividend if it has been received from a domestic
corporation. 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

7
<PAGE>

reflected the amount of such distribution.

Generally, gain or loss on the sale or exchange of a Share will
be capital gain or loss that will be long-term if the Share has been held for
more than eighteen months, will be mid-term if held for more than twelve, but
not more than eighteen months, 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 undistributed net capital gains of the Fund that have been included in
determining such shareholder's long-term capital gains). In addition, any loss
realized on a sale or other disposition of Shares will be disallowed to the
extent an investor repurchases (or enters into a contract or option to
repurchase) Shares within a period of 61 days (beginning 30 days before and
ending 30 days after the disposition of the Shares). This loss disallowance rule
will apply to Shares received through the reinvestment of dividends during the
61-day period.

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.

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

8
<PAGE>

5. MANAGEMENT OF THE FUND

Directors and Officers

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

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

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

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

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

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

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

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

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

9
<PAGE>

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

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

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

LAURIE D. COLLIDGE, Assistant Secretary (1/1/66)
Asset Management Department, BT Alex. Brown Incorporated.
- ---------------------
* Messrs. Semans and Hale are directors who are "interested persons" as
defined in the Investment Company Act.

Directors and officers of the Fund are also directors and
officers of other investment companies managed, advised or administrated by
BT Alex. Brown or its affiliates.

There are currently 13 funds in the Flag Investors/ISI Funds and
BT Alex. Brown Cash Reserve Fund, Inc. fund complex (the "Fund Complex"). Mr.
Semans serves as Chairman of five funds and as a Director of six other funds in
the Fund Complex. Mr. Hale serves as Chairman of four funds and as Director of
11 other funds in the Fund Complex. Messrs. Cunnane, Kroeger, Levy and McDonald
serve as Directors of each fund in the Fund Complex. Ms. Rimel and Mr. Vogt each
serve as a director of 11 funds in the Fund Complex. Mr. Woolf serves as
President of seven funds in the Fund Complex. Mr. Finelli serves as Treasurer,
Ms. Olmert serves as Secretary and Ms. Collidge 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, BT Alex. Brown in the ordinary course of
business. All such transactions were made on substantially the same terms as
those prevailing at the time for comparable transactions with unrelated persons.
Additional transactions may be expected to take place in the future.

With the exception of the Fund's President, officers of the Fund
receive no direct remuneration in such capacity from the Fund. Officers and
Directors of the Fund who are officers or directors of BT Alex. Brown may be
considered to have received remuneration indirectly. Mr. Woolf receives an
annual fee for his services from each Flag Investors Fund for which he serves as
President and from BT Alex. Brown Cash Reserve Fund, Inc. As compensation for
his or her services, each Director who is not an "interested person" of the Fund
(as defined in the Investment Company Act) (a "Disinterested Director")
receives an aggregate annual fee (plus reimbursement for reasonable
out-of-pocket expenses incurred in connection with his or her attendance at
board and committee meetings) from each fund in the Fund Complex for which he or
she serves. In addition, the Chairman of the Fund Complex's Audit Committee
receives an aggregate annual fee from the Fund Complex. Payment of such fees and
expenses are allocated among all such funds described above in proportion to
their relative net assets. For the fiscal year ended May 31, 1997, Disinterested
Directors' fees attributable to the assets of the Fund totaled approximately
$5,503.

10
<PAGE>

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

<TABLE>
<CAPTION>
COMPENSATION TABLE
- -----------------------------------------------------------------------------------------------------------------------------------
Name of Person, Position Aggregate Compensation Pension or Retirement Total Compensation
From the Fund Payable to Benefits Accrued as from the Fund
Directors for the Fiscal Year Part of Fund Expenses and Fund Complex
Ended May 31, 1997 Payable to Directors
in the Fiscal Year
Ended May 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Truman T. Semans(1) $0 $0 $0
Chairman and Director

Richard T. Hale, Director(1) $0 $0 $0

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

James J. Cunnane, Director $657(3) (4) $39,000 for service on 12
Boards in the Fund Complex

John F. Kroeger, Director $825(3) (4) $49,000 for service on 12
Boards in the Fund Complex

Louis E. Levy, Director $657(3) (4) $39,000 for service on 12
Boards in the Fund Complex

Eugene J. McDonald, Director $657(3) (4) $39,000 for service on 12
Boards in the Fund Complex

Rebecca W. Rimel, Director $743(3) (4) $39,000 for service on 10(5)
Boards in the Fund Complex

Carl W. Vogt, Esq., Director $753(3) (4) $39,000 for service on 9(5)
Boards in the Fund Complex

Harry Woolf, Director(6) $443(3) (4) $29,250 for service on 12
Boards in the Fund Complex
</TABLE>

(1) A Director who is an "interested person" as defined in the Investment
Company Act.
(2) Retired effective August 13, 1997.
(3) Of this amount, $657, $0, $0, $657, $753, $443, and $743 has been
deferred by Messrs. Cunnane, Kroeger, Levy, McDonald, Vogt and Woolf
and Ms. Rimel, respectively, pursuant to a deferred compensation plan.
(4) The Fund Complex has adopted a retirement plan for eligible Directors,
as described below. The actuarially computed pension expense for the
Fund for the year ended May 31, 1997 was approximately $3,765.
(5) Ms. Rimel and Mr. Vogt receive proportionately higher compensation from
each fund for which they serve.
(6) Retired as Director of the Fund on December 16, 1996 and was appointed
President of the Fund effective September 1, 1997. For serving as
President, Mr. Woolf receives compensation from the Fund and certain
other Funds in the Fund Complex.

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

11
<PAGE>

he or she serves. The Retirement Plan is unfunded and unvested. Mr. Kroeger has
qualified but has not received benefits. The Fund has two Participants, a
Director who retired effective December 31, 1994 and a Director who retired
effective December 31, 1996, who have qualified for the Retirement Plan by
serving 13 and 14 years, respectively, as Directors in the Fund Complex and each
of whom will be paid a quarterly fee of $4,875 by the Fund Complex for the rest
of his life. Another Participant, who retired on January 31, 1996 and died on
June 2, 1996, was paid fees of $8,090 by the Fund Complex under the Retirement
Plan in the period ended December 31, 1996. Such fees are allocated to each fund
in the Fund Complex based upon the relative net assets of such fund to the Fund
Complex.

Set forth in the table below are the estimated annual benefits
payable to a Participant upon retirement assuming various years of service and
payment of a percentage of the fee earned by such Participant in his or her last
year of service, as described above. The approximate credited years of service
are as follows: for Mr. Cunnane, 2 years; for Mr. Kroeger, 14 years; for Mr.
Levy, 2 years; for Mr. McDonald, 4 years; for Ms. Rimel, 1 year; and for
Mr. Vogt, 1 year.

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

Any Director who receives fees from the Fund is permitted to
defer a minimum of 50%, or up to all, of his or her annual compensation pursuant
to a Deferred Compensation Plan. Messrs. Cunnane, Kroeger, Levy, McDonald, Vogt
and Woolf and Ms. Rimel have each executed a Deferred Compensation Agreement.
Currently, the deferring Directors may select various Flag Investors Funds and
the BT Alex. Brown Cash Reserve Fund in which all or part of their deferral
account shall be deemed to be invested. Distributions from the deferring
Directors' deferral accounts will be paid in cash, in generally quarterly
installments over a period of 10 years.

Code of Ethics

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

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

12
<PAGE>

"blackout periods" that prohibit trading by investment personnel and certain
other employees within periods of trading by the Fund in the same security.
Officers, directors and employees of the advisors and the Distributor may comply
with codes instituted by those entities so long as they contain similar
requirements and restrictions.

6. INVESTMENT ADVISORY AND OTHER SERVICES

On June 17, 1997 the Board of Directors of the Fund, including
a majority of the Disinterested Directors, approved an Investment Advisory
Agreement between the Fund and Investment Company Capital Corp. ("ICC" or the
"Advisor") and a Sub-Advisory Agreement among the Fund, ICC and Alex. Brown
Investment Management ("ABIM" or the "Sub-Advisor"), both of which contracts are
described in greater detail below. The Investment Advisory Agreement and the
Sub-Advisory Agreement were approved by a vote of shareholders of the Fund on
August 14, 1997. ICC, the investment advisor, is an indirect subsidiary of
Bankers Trust New York Corporation. ICC is also the investment advisor to BT
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 Short-Intermediate Income Fund, Inc., Flag Investors Value
Builder Fund, Inc., Flag Investors Maryland Intermediate Tax-Free Income Fund,
Inc. and Flag Investors Real Estate Securities Fund, Inc.

ABIM, also the sub-advisor to Flag Investors Telephone Income
Fund, Inc. and Flag Investors Value Builder Fund, Inc., is a registered
investment advisor with approximately $6.7 billion under management as of August
31, 1997. ABIM is a limited partnership affiliated with the Advisor. 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. BT Alex. Brown owns a 1% general partnership interest in ABIM and BT Alex.
Brown Holdings, Inc. owns the remaining limited partnership interest.

Under the Investment Advisory Agreement, ICC is responsible
for obtaining and evaluating 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 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 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 0.75%
of the first $50 million of the Fund's average daily net assets, 0.60% of the
next $150 million of the Fund's average daily net assets, and 0.50% of the
Fund's average daily net assets in excess of $200 million.

13
<PAGE>

Advisory fees paid by the Fund to ICC and sub-advisory fees
paid by ICC to ABIM for the last three fiscal years were as follows:

- ------------------------------------------------------------------------------------------
Year Ended
- ------------------------------------------------------------------------------------------
Fees Paid To: May 31, 1997 May 31, 1996 May 31, 1995(1)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ICC $853,103(2) $318,234(3) $0(4)
ABIM $680,636(5) $365,697 $10,044(5)
</TABLE>

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

(1) For the period from February 13, 1995 (commencement of operations)
through May 31, 1995.
(2) Net of fee waivers. Absent such fee waiver, the Class A Shares total
operating expenses would have been 1.49% of average daily net assets;
the Class B Shares' total operating expenses would have been 2.24% of
average daily net assets, and the Institutional Shares' total operating
expenses would have been 1.24% of average daily net assets.
(3) Net of fee waivers. Absent such fee waiver, the Class A Shares total
operating expenses would have been 1.77% of average daily net assets;
the Class B Shares' total operating expenses would have been 2.52% of
average daily net assets, and the Institutional Shares' total operating
expenses would have been 1.55% (annualized) of average daily net
assets.
(4) Net of fee waivers. Absent such fee waivers, the Class A Shares' total
operating expenses would have been 3.76% (annualized) of average daily
net assets and the Class B Shares' total operating expenses would have
been 4.22% (annualized) of average daily net assets.
(5) Net of fee waivers for the fiscal years ended May 31, 1997 and May 31,
1996 and the period from February 13, 1995 (commencement of operations)
through May 31, 1995 of $49,796, $55,124, and $1,826, respectively.

Each of the Investment Advisory Agreement and the Sub-Advisory
Agreement has an initial term of two years and will continue in effect from year
to year thereafter if such continuance is specifically approved at least
annually by the Fund's Board of Directors, including a majority of the
Disinterested 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 60
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

ICC Distributors, Inc. ("ICC Distributors " or the
"Distributor") serves as the exclusive distributor of the Fund's Shares pursuant
to a Distribution Agreement ("Distribution Agreement") dated August 31, 1997.
Prior to August 31, 1997, Alex. Brown & Sons Incorporated ("Alex. Brown") served
as the Fund's distributor pursuant to three separate Distribution Agreements,
one for each class of the Fund's Shares ("prior Distribution Agreements") for
the same rate of compensation and on substantially the same terms as the current
Distribution Agreement.

The Distribution Agreement provides that ICC Distributors has
the exclusive right to distribute the classes of Flag Investors Equity Partners
Fund Shares either directly or through other

14
<PAGE>

broker-dealers and further provide that ICC Distributors 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; (e) maintain such accounts, books, and
records as may be required by law or deemed appropriate by the Board of
Directors; and (f) take all actions necessary to carry into effect the
distribution of the Shares. ICC Distributors has not undertaken to sell any
specific number of Shares. The Distribution Agreement further provides that, in
connection with the distribution of Shares, ICC Distributors will be responsible
for all of the promotional expenses. The services provided by ICC Distributors
to the Fund are not exclusive, and ICC Distributors is free to provide similar
services to others. ICC Distributors shall not be liable to the Fund or its
shareholders for any act or omission by ICC Distributors 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 Distribution
Agreement further provides that the Fund and ICC Distributors will mutually
indemnify each other for losses relating to the disclosures in the Fund's
registration statement. The Distribution Agreement may be terminated at any time
upon 60 days' written notice by the Fund, without penalty, by the vote of a
majority of the Fund's Disinterested Directors or by a vote of a majority of
the Fund's outstanding Shares of the related class (as defined under "Capital
Stock") or upon 60 days' written notice by the Distributor and shall
automatically terminate in the event of assignment.

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

In addition, with respect to the Class A and Class B Shares,
the Fund may enter into Shareholder Servicing Agreements with certain financial
institutions, including BT Alex. Brown and certain banks, to act as Shareholder
Servicing Agents, pursuant to which ICC Distributors will allocate a portion of
its distribution fee as compensation for such financial institutions' ongoing
shareholder services. 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.
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.

As compensation for providing distribution services as
described above for the Class A Shares, ICC Distributors receives 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, ICC Distributors receives 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, ICC Distributors expects to allocate up to all of
its fee to Participating Dealers. With respect to the Class B Shares, ICC
Distributors expects to retain the entire distribution fee as reimbursement for
front-end payments to Participating Dealers.

15
<PAGE>

Distribution fees paid by the Fund to Alex. Brown, formerly the Fund's
distributor, for the last three fiscal years were as follows:

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Year Ended
- ----------------------------------------------------------------------------------------------
Class May 31, 1997 May 31, 1996 May 31, 1995(1)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
A $206,936 $130,140 $15,976
B $ 65,473 $ 27,369 $ 4,220
</TABLE>

- -----------------
(1) February 13, 1995 (commencement of operations through) May 31, 1995.

In addition, with respect to the Class B Shares, the Fund pays
ICC Distributors a shareholder servicing fee at an annual rate of .25% of the
average daily net assets of the Class B Shares. (See the Prospectus.) For the
fiscal years ended May 31, 1997, May 31, 1996 and for the period from February
13, 1995 (commencement of operations) through May 31, 1995, Alex. Brown received
shareholder servicing fees of $21,824, $9,123 and $1,406, respectively, pursuant
to the prior Distribution Agreements.

ICC Distributors receives no compensation for distributing the
Institutional Shares. Under the prior Distribution Agreements, Alex. Brown
received no compensation for distributing the Institutional Shares.

The Distribution Plans

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 ICC
Distributors for distribution and other shareholder servicing assistance as set
forth in the Distribution Agreement, and ICC Distributors is authorized to make
payments out of its fee to Participating Dealers. The Plans will remain in
effect from year to year thereafter as specifically approved (a) at least
annually by the Fund's Board of Directors and (b) by the affirmative vote of a
majority of the Disinterested Directors by votes cast in person at a meeting
called for such purpose. The Distribution Agreements, including the Plans and
forms of Sub-Distribution Agreements, were approved by the Fund's Board of
Directors, including a majority of Disinterested Directors, on August 4, 1997.

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 Distribution Agreement without the approval of the shareholders
of the Fund. The Plans may be terminated at any time by the vote of a majority
of the Fund's Disinterested Directors or by a vote of a majority of the Fund's
outstanding Shares of the related class (as defined under "Capital Stock").

16
<PAGE>

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 ICC Distributors pursuant
to the Distribution Agreement, 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.

For the fiscal year ended May 31, 1997, the Fund paid $294,223
to Alex. Brown, formerly the Fund's distributor, pursuant to the Plans. Alex.
Brown, in turn, paid the distribution-related expenses of the Fund including one
or more of the following: advertising expenses; printing and mailing of
prospectuses to other than current shareholders; compensation to dealers and
sales personnel; and interest, carrying or other financing charges.

Under the Plans, amounts allocated to Participating Dealers
and Shareholder Servicing Agents may not exceed amounts payable to ICC
Distributors under such Plans. Payments under the Plans are made as described
above regardless of ICC Distributors's actual cost of providing distribution
services and may be used to pay ICC Distributors'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 ICC
Distributors. The Plans do not provide for any charges to the Fund for excess
amounts expended by ICC Distributors and, if either of the Plans is terminated
in accordance with its terms, the obligation of the Fund to make payments to ICC
Distributors 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.

General Information

For the fiscal years ended May 31, 1997 and May 31, 1996, and
for the period from February 13, 1995 through May 31, 1995, Alex. Brown,
formerly the Fund's distributor, received sales commissions on the Class A
Shares of $404,583, $173,816 and $167,000, respectively, and from such amounts
retained $386,114, $163,936 and $157,507 for each such period, respectively. For
the fiscal years ended May 31, 1997 and May 31, 1996 and for the period from
February 13, 1995 through May 31, 1995, Alex. Brown received contingent deferred
sales loads on the Class B Shares of $318,224, $114,113 and $109,638,
respectively, and from such amounts retained $313,208, $114,113 and $109,638,
respectively.

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

17
<PAGE>

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 Disinterested Directors, and of independent auditors,
in connection with any matter relating to the Fund; membership dues of industry
associations; interest payable on Fund borrowings; postage; insurance premiums
on property or personnel (including officers and Directors) of the Fund that
inure to its benefit; extraordinary expenses (including, but not limited to,
legal claims and liabilities and litigation costs and any indemnification
related thereto); and all other charges and costs of the Fund's operation unless
otherwise explicitly assumed by ICC, ABIM or the Distributor.

The address of ICC Distributors is P.O. Box 7558, Portland, Maine 04101.

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, its affiliates, and ICC Distributors.

In over-the-counter transactions, orders are placed directly
with a principal market maker and such purchases normally include a mark up over
the bid to the broker-dealer based on the spread between the bid and asked price
for the security. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter. On occasion,
certain money market instruments may be purchased directly from an issuer
without payment of a commission or concession. The Fund will not deal with the
Advisors or their affiliates in any transaction in which the Advisors or their
affiliates acts as a principal; that is, an order will not be placed with the
Advisors or their affiliates if execution of the trade involves the Advisors or
their affiliates 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 the
Advisors or their affiliates acting as market maker.

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

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 that 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

18
<PAGE>

charged if a different broker-dealer had been chosen when, in ABIM's opinion,
this policy furthers the overall objective of obtaining best price and
execution. Subject to periodic review by the Fund's Board of Directors, ABIM is
also authorized to pay broker-dealers other than BT 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 the Advisors or their affiliates. 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 the Advisor or its affiliates 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.
In the fiscal year ended May 31, 1997, the Fund paid no brokerage commissions to
the Advisors or their affiliates.

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 that it seeks to purchase or sell.

During the fiscal years ended May 31, 1997, May 31, 1996 and
the fiscal period ended May 31, 1995, ABIM directed $84,859,723, $25,187,450 and
$27,535,000, respectively, principal amount of transactions to broker-dealers
and paid $168,045, $64,808 and $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) that the Fund has acquired during its most recent fiscal year. As of May
31, 1997, the Fund held a 5.30% repurchase agreement issued by Goldman Sachs &
Co. valued at $26,759,870 and 70,000 shares of Travelers Group Inc., parent
company of Smith Barney, valued at $2,178,750.

9. CAPITAL STOCK

The Fund is authorized to issue 75 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

19
<PAGE>

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) are prorated between all classes of a series based
upon the relative net assets of each class. Any matters affecting any class
exclusively would be voted on by the holders of such class.

Shareholders of the Fund do not have cumulative voting rights,
and therefore the holders of more than 50% of the outstanding Shares voting
together for election of Directors may elect all the members of the Board of
Directors of the Fund. In such event, the remaining holders cannot elect any
members of the Board of Directors of the Fund.

There are no preemptive, conversion or exchange rights
applicable to any of the Shares. The issued and outstanding Shares are fully
paid and non-assessable. In the event of liquidation or dissolution of the Fund,
each Share is entitled to its portion of the Fund's assets (or the assets
allocated to a separate series of Shares if there is more than one series) after
all debts and expenses have been paid.

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

10. SEMI-ANNUAL REPORTS

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

11. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES

Bankers Trust Company ("Bankers Trust"), 130 Liberty Street,
New York, New York 10006, has been retained to act as custodian of the Fund's
investments. Bankers Trust receives such compensation from the Fund for its
services as Custodian as may be agreed to from time to time by Bankers Trust and
the Fund. Investment Company Capital Corp., One South 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 year ended May 31, 1997, ICC
received transfer agency fees of $59,840.

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 Daily Net Assets Incremental Fee
- ------------------------ ---------------
0 - $10,000,000 $13,000 (fixed fee)

20
<PAGE>

$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 fiscal year ended May 31, 1997, ICC received accounting
fees of $55,940.

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:

P(1 + T)n = ERV

Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value at the end of the 1, 5, or 10
year periods (or fractional portion thereof) of a
hypothetical $1,000 payment made at the beginning of the
1-, 5- or 10-year periods.

Under the foregoing formula, the time periods used in advertising
will be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover one-, five-, and 10-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)

21
<PAGE>

commenced operations (provided such date is subsequent to the date the
registration statement became effective). In calculating the ending redeemable
value, the maximum sales load (for the Class A Shares: 4.5%, and for the 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.

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

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
One-Year Period Since Inception*
Ended May 31, 1997
- --------------------------------------------------------------------------------------------------------------
Class Ending Average Annual Ending Average Annual
Redeemable Total Return Redeemable Total Return
Value Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A 1252.70 25.27% 1660.08 24.70%
Class B 1262.80 26.28% 1671.08 25.06%
Institutional 1315.80 31.58% 1358.36 26.79%
</TABLE>

- -------------------
*February 13, 1996 for Class A and B Shares; February 12, 1996 for Institutional
Shares.

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.

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,

22
<PAGE>

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. In the fiscal year ended May 31, 1997, the Fund's portfolio
turnover rate was 17.60%.

14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

To Fund management's knowledge, the following persons held
beneficially or of record 5% or more of the Fund's outstanding shares, as of
September 2, 1997:

BT Alex. Brown Incorporated 9.54%
FBO 250-10766-16
P.O. Box 1346
Baltimore, MD 21203-1346

T. Rowe Price Trustee 5.86%
Alex. Brown & Sons Inc. Plan 100460
Flag Investors Quality Growth
ATTN: Asset Record
P.O. Box 17215
Baltimore, MD 2129-0354

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

15. FINANCIAL STATEMENTS

See next page.

23
<PAGE>

FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
Statement of Net Assets May 31, 1997

Market Value
Shares (Note 1)
- --------------------------------------------------------------------------------
COMMON STOCK: 85.2%
Banking: 5.0%
30,600 Citicorp $ 3,499,875
19,500 Wells Fargo & Company 5,138,250
- --------------------------------------------------------------------------------
8,638,125
- --------------------------------------------------------------------------------
Basic Industry: 3.9%
84,100 Hercules, Inc. 3,942,187
60,000 Monsanto Co. 2,640,000
- --------------------------------------------------------------------------------
6,582,187
- --------------------------------------------------------------------------------
Business Services: 3.7%
90,000 First Data Corp. 3,600,000
80,000 Heritage Media Corp.* 1,460,000
58,000 SEI Corporation 1,305,000
- --------------------------------------------------------------------------------
6,365,000
- --------------------------------------------------------------------------------
Capital Goods: 3.8%
29,900 Briggs & Stratton Corporation 1,543,587
24,200 Caterpillar, Inc. 2,362,525
32,500 Eaton Corporation 2,591,875
- --------------------------------------------------------------------------------
6,497,987
- --------------------------------------------------------------------------------
Consumer Durables/Non-Durables: 12.0%
100,000 Blyth Industries, Inc.* 4,450,000
160,000 Ford Motor Company 6,000,000
97,500 Philip Morris Companies, Inc. 4,290,000
115,000 Richfood Holdings, Inc. 2,659,375
93,000 Sunbeam Corp. 3,138,750
- --------------------------------------------------------------------------------
20,538,125
- --------------------------------------------------------------------------------
Consumer Services: 5.1%
80,000 America Online, Inc.* 4,420,000
25,000 Gannett Company, Inc. 2,312,500
36,000 Times Mirror Company - Class A 2,020,500
- --------------------------------------------------------------------------------
8,753,000
- --------------------------------------------------------------------------------
Defense/Aerospace: 5.2%
58,700 Lockheed Martin Corp. 5,495,787
51,600 McDonnell Douglas Corp. 3,321,750
- --------------------------------------------------------------------------------
8,817,537
- --------------------------------------------------------------------------------

<PAGE>

FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------

Market Value
Shares (Note 1)
- --------------------------------------------------------------------------------
COMMON STOCK (continued)
Energy: 2.8%
48,000 MAPCO, Inc. $ 1,524,000
75,500 Noble Affiliates, Inc. 3,180,437
- --------------------------------------------------------------------------------
4,704,437
- --------------------------------------------------------------------------------
Financial Services: 7.4%
60,200 American Express Company 4,183,900
108,000 Federal Home Loan Mortgage Corporation 3,564,000
11,000 Transamerica Corp. 999,625
70,000 Travelers Group, Inc. 3,841,250
- --------------------------------------------------------------------------------
12,588,775
- --------------------------------------------------------------------------------
Health Care: 1.8%
25,000 Amgen, Inc.* 1,671,875
22,000 Johnson & Johnson 1,317,250
- --------------------------------------------------------------------------------
2,989,125
- --------------------------------------------------------------------------------
Hotels/Gaming: 3.0%
130,000 Harrah's Entertainment, Inc.* 2,421,250
61,600 Hilton Hotels Corporation 1,740,200
16,400 ITT Corporation* 977,850
- --------------------------------------------------------------------------------
5,139,300
- --------------------------------------------------------------------------------
Housing: 6.6%
327,500 Champion Enterprises, Inc.* 6,017,813
148,300 USG Corporation* 5,171,963
- --------------------------------------------------------------------------------
11,189,776
- --------------------------------------------------------------------------------
Insurance: 5.2%
130,000 Conseco Inc. 5,200,000
82,200 Mid Ocean Limited 3,729,825
- --------------------------------------------------------------------------------
8,929,825
- --------------------------------------------------------------------------------
Multi-Industry: 4.5%
56,000 American Standard Co., Inc.* 2,807,000
25,000 Loews Corporation 2,431,250
24,200 Tenneco, Inc. 1,082,950
17,800 United Technologies Corp. 1,430,675
- --------------------------------------------------------------------------------
7,751,875
- --------------------------------------------------------------------------------

<PAGE>

FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
Statement of Net Assets (concluded) - May 31, 1997

Shares/ Market Value
Par (000) (Note 1)
- --------------------------------------------------------------------------------
COMMON STOCK (concluded)
Retail: 4.2%
82,550 J.C. Penney Co., Inc. $ 4,251,325
210,000 Kmart Corporation* 2,940,000
- --------------------------------------------------------------------------------
7,191,325
- --------------------------------------------------------------------------------
Technology: 8.7%
56,000 International Business Machines Corporation 4,844,000
97,500 Millipore Corporation 4,204,688
34,000 Varian Associates, Inc. 1,802,000
59,500 Xerox Corporation 4,031,125
- --------------------------------------------------------------------------------
14,881,813
- --------------------------------------------------------------------------------
Transportation: 2.3%
95,800 Canadian National Railway Company 3,999,650
- --------------------------------------------------------------------------------
Total Common Stock
(Cost $106,416,210) 145,557,862
- --------------------------------------------------------------------------------

REPURCHASE AGREEMENT: 15.4%
$26,235 Goldman Sachs & Co., 5.30%
Dated 5/30/97, to be repurchased on
6/2/97, collateralized by U.S. Treasury
Notes with a market value of $26,759,870.
(Cost $26,235,000) 26,235,000
- --------------------------------------------------------------------------------

<PAGE>

FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Total Investment in Securities: 100.6%
(Cost $132,651,210)** $171,792,862
Liabilities in Excess of Other Assets, Net: (0.6%) (977,793)
- --------------------------------------------------------------------------------
Net Assets: 100.0% $170,815,069
================================================================================
Net Asset Value and Redemption Price Per:
Class A Share
($113,029,663 / 6,677,416 shares outstanding) $16.93
================================================================================
Class B Share
($15,670,213 / 930,703 shares outstanding) $16.84***
================================================================================
Institutional Share
($42,115,193 / 2,486,105 shares outstanding) $16.94
================================================================================
Maximum Offering Price Per:
Class A Share
($16.93 / .955) $17.73
================================================================================
Class B Share $16.84
================================================================================
Institutional Share $16.94
================================================================================

- ----------
* Non-income producing security.
** Also aggregate cost for federal tax purposes.
*** Redemption value is $16.17 following a 4% maximum contingent deferred sales
charge.

See Notes to Financial Statements.

<PAGE>

FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
Statement of Operations

For the
Year Ended
May 31,
- --------------------------------------------------------------------------------
1997
Investment Income (Note 1):
Dividends $ 1,495,289
Interest 636,462
- --------------------------------------------------------------------------------
Total income 2,131,751
- --------------------------------------------------------------------------------

Expenses:
Investment advisory fee (Note 2) 994,751
Distribution fee (Note 2) 294,233
Registration fees 72,607
Transfer agent fee (Note 2) 59,840
Accounting fee (Note 2) 55,940
Legal 52,053
Printing and postage 36,499
Audit 29,785
Custodian fee 20,170
Organizational expense (Note 1) 10,209
Directors' fees 5,503
Miscellaneous 4,870
Insurance 1,910
- --------------------------------------------------------------------------------
Total expenses 1,638,370
Less: Fees waived (Note 2) (141,648)
- --------------------------------------------------------------------------------
Net expenses 1,496,722
- --------------------------------------------------------------------------------
Net investment income 635,029
- --------------------------------------------------------------------------------

Realized and unrealized gain/(loss) on investments:
Net realized gain from security transactions 2,887,321
Change in unrealized appreciation or depreciation of
investments 27,900,712
- --------------------------------------------------------------------------------
Net gain on investments 30,788,033
- --------------------------------------------------------------------------------
Net increase in net assets resulting from operations $31,423,062
================================================================================

See Notes to Financial Statements.

<PAGE>

FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets

For the Year Ended May 31,
- --------------------------------------------------------------------------------
1997 1996
Increase/(Decrease) in Net Assets:
Operations:
Net investment income $ 635,029 $ 821,246
Net realized gain/(loss)
from security transactions 2,887,321 (24,094)
Change in unrealized appreciation or
depreciation of investments 27,900,712 10,744,023
- --------------------------------------------------------------------------------
Net increase in net assets resulting
from operations 31,423,062 11,541,175
- --------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income:
Class A Shares (551,174) (598,906)
Class B Shares (5,815) (27,629)
Institutional Shares (112,532) --
Net realized short-term gains:
Class A Shares (168,249) --
Class B Shares (17,444) --
Institutional Shares (36,622) --
Net realized long-term gains:
Class A Shares (392,581) --
Class B Shares (40,703) --
Institutional Shares (85,452) --
- --------------------------------------------------------------------------------
Total distributions (1,410,572) (626,535)
- --------------------------------------------------------------------------------
Capital Share Transactions (Note 3):
Proceeds from sale of shares 73,706,538 28,046,908
Value of shares issued in reinvestment
of dividends 1,249,105 560,846
Cost of shares repurchased (7,920,313) (6,525,825)
- --------------------------------------------------------------------------------
Increase in net assets derived from
capital share transactions 67,035,330 22,081,929
- --------------------------------------------------------------------------------
Total increase in net assets 97,047,820 32,996,569

Net Assets:
Beginning of year 73,767,249 40,770,680
- --------------------------------------------------------------------------------
End of year $170,815,069 $73,767,249
================================================================================
See Notes to Financial Statements.

<PAGE>

FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
Financial Highlights -- Class A Shares
(For a share outstanding throughout each period)
For the Period
Feb. 13, 1995(1)
For the Year through
Ended May 31, May 31,
- ------------------------------------------------------------------------------
1997 1996 1995
Per Share Operating Performance:
Net asset value at beginning of period $ 13.09 $ 10.77 $ 10.00
------- ------- -------
Income from Investment Operations:
Net investment income 0.08 0.17 0.12
Net realized and unrealized gain
on investments 3.96 2.29 0.65
------- ------- -------
Total from Investment Operations 4.04 2.46 0.77
Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.13) (0.14) --
Distributions from net realized
long-term gains (0.07) -- --
------- ------- -------
Total distributions (0.20) (0.14) --
------- ------- -------
Net asset value at end of period $ 16.93 $ 13.09 $ 10.77
======= ======= =======
Total Return(2) 31.17% 23.05% 7.70%

Ratios to Average Daily Net Assets:
Expenses(3) 1.35% 1.35% 1.35%(5)
Net investment income(4) 0.61% 1.52% 3.74%(5)

Supplemental Data:
Net assets at end of period (000) $113,030 $64,230 $38,612
Portfolio turnover rate 17.60% 0.73% --
Average commissions per share(6) $ 0.0677 -- --

- ---------
(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 1.48%, 1.77% and 3.76%
(annualized) for the years ended May 31, 1997, 1996 and the period ended
May 31, 1995, respectively.
(4) Without the waiver of advisory fees (Note 2), the ratio of net
investment income to average daily net assets would have been 0.48%,
1.10% and 1.33% (annualized) for the years ended May 31, 1997, 1996 and the
period ended May 31, 1995, respectively.
(5) Annualized.
(6) Disclosure is required for fiscal years beginning after September 1, 1995.
Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.

See Notes to Financial Statements.

<PAGE>

FLAG INVESTORS EQUITY PARTNERS FUND
- -------------------------------------------------------------------------------
Financial Highlights -- Class B Shares
(For a share outstanding throughout each period)

<TABLE>
<CAPTION>
For the Period
Feb. 13, 1995(1)
For the Year through
Ended May 31, May 31,
- --------------------------------------------------------------------------------------
1997 1996 1995
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 13.03 $10.75 $10.00
------- ------ ------
Income from Investment Operations:
Net investment income/(expenses in
excess of income) (0.04) 0.07 0.07
Net realized and unrealized gain
on investments 3.96 2.31 0.68
------- ------ ------
Total from Investment Operations 3.92 2.38 0.75
Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.04) (0.10) --
Distributions from net realized
long-term gains (0.07) -- --
------- ------ ------
Total distributions (0.11) (0.10) --
------- ------ ------
Net asset value at end of period $ 16.84 $13.03 $10.75
======= ====== ======
Total Return(2) 30.28% 22.17% 7.50%

Ratios to Average Daily Net Assets:
Expenses(3) 2.10% 2.10% 2.10%(5)
Net investment income/(expenses in
excess of income)(4) (0.16)% 0.71% 1.97%(5)

Supplemental Data:
Net assets at end of period (000) $15,670 $5,302 $2,159
Portfolio turnover rate 17.60% 0.73% --
Average commissions per share(6) $ 0.0677 -- --
</TABLE>

- ---------
(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 2.23%, 2.52% and 4.22%
(annualized) for the years ended May 31, 1997, 1996 and the period ended
May 31, 1995, respectively.
(4) Without the waiver of advisory fees (Note 2), the ratio of net
investment income to average daily net assets would have been (0.28)%,
0.29% and (0.15)% (annualized) for the years ended May 31, 1997, 1996 and
the period ended May 31, 1995, respectively.
(5) Annualized.
(6) Disclosure is required for fiscal years beginning after September 1, 1995.
Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.

See Notes to Financial Statements.

<PAGE>

FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
Financial Highlights -- Institutional Shares
(For a share outstanding throughout each period)

<TABLE>
<CAPTION>
For the Period
For the Feb. 12, 1996(1)
Year Ended through
May 31, May 31,
- --------------------------------------------------------------------------------------
1997 1996
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of period $ 13.10 $12.72
------- ------

Income from Investment Operations:
Net investment income 0.14 0.04
Net realized and unrealized gain on investments 3.95 0.34
------- ------
Total from Investment Operations 4.09 0.38

Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.18) --
Distributions from net realized long-term gains (0.07) --
------- ------
Total distributions (0.25) --
------- ------
Net asset value at end of period $ 16.94 $13.10
======= ======
Total Return 31.58% 3.23%

Ratios to Average Daily Net Assets:
Expenses(2) 1.10% 1.10%(4)
Net investment income(3) 0.81% 1.20%(4)

Supplemental Data:
Net assets at end of period (000) $42,115 $4,235
Portfolio turnover rate 17.60% 0.73%(4)
Average commissions per share(5) $ 0.0677 --
</TABLE>
- ---------
(1) Commencement of operations.
(2) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 1.23% and 1.55% (annualized) for
the year ended May 31, 1997 and the period ended May 31, 1996,
respectively.
(3) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 0.70% and 0.75%
(annualized) for the year ended May 31, 1997 and the period ended May 31,
1996, respectively.
(4) Annualized.
(5) Disclosure is required for fiscal years beginning after September 1, 1995.
Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.

See Notes to Financial Statements.

<PAGE>

FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements

NOTE 1 -- Significant Accounting Policies

Flag Investors Equity Partners Fund, Inc. (the "Fund"), which was
organized as a Maryland Corporation on November 30, 1994, commenced operations
February 13, 1995. The Fund is registered under the Investment Company Act of
1940 as a diversified, open-end Investment Management Company. Its objective is
to seek long-term growth of capital and, secondarily, current income primarily
through a policy of diversified investments in equity securities, including
common stocks and convertible securities.

The Fund consists of three share classes: Class A Shares and Class B
Shares, which both commenced February 13, 1995, and Institutional Shares, which
commenced February 12, 1996.

The Class A and Class B Shares are subject to different sales charges. The
Class A Shares have a 4.50% maximum front-end sales charge and the Class B
Shares have a 4.00% maximum contingent deferred sales charge. The Institutional
Shares have neither a front-end sales charge nor a contingent deferred sales
charge. In addition, each class has a different distribution fee.

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

A. Security Valuation--The Fund values a portfolio security that is
primarily traded on a national exchange by using the last price reported for the
day. If there are no sales or the security is not traded on a listed exchange,
the Fund values the security at its last bid price in the over-the-counter
market. When a market quotation is unavailable, the Investment Advisor
determines a fair value using procedures that the Board of Directors establishes
and monitors. The Fund values short-term obligations with maturities of 60 days
or less at amortized cost.

<PAGE>

FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------

Notes to Financial Statements (continued)

NOTE 1 -- concluded

B. Repurchase Agreements--The Fund may enter into tri-party repurchase
agreements with broker-dealers and domestic banks. A repurchase
agreement is a short-term investment in which the Fund buys a debt
security that the broker agrees to repurchase at a set time and price.
The third party, which is the broker's custodial bank, holds the
collateral in a separate account until the repurchase agreement
matures. The agreement ensures that the collateral's market value,
including any accrued interest, is sufficient if the broker defaults.
The Fund's access to the collateral may be delayed or limited if the
broker defaults and the value of the collateral declines or if the
broker enters into an insolvency proceeding.

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

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

D. Securities Transactions, Investment Income, Distributions and Other--
The Fund uses the trade date to account for security transactions and
the specific identification method for financial reporting and income
tax purposes to determine the cost of investments sold or redeemed.
Interest income and expenses are recorded on an accrual basis. Income
and common expenses are allocated to each class based on its respective
average net assets. Class specific expenses are charged directly to
each class. Dividend income and distributions to shareholders are
recorded on the ex-dividend date. The Fund has deferred the costs
incurred by its organization and the initial public offering of shares.
These costs are being amortized on the straight-line method over a
five-year period, which began when the Fund commenced investment
activities.

<PAGE>

FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------

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

Investment Company Capital Corp. ("ICC"), a subsidiary of Alex. Brown
Financial Corp., is the Fund's investment advisor and Alex. Brown Investment
Management ("ABIM") is the Fund's subadvisor. As compensation for its advisory
services, the Fund pays ICC an annual fee based on the Fund's average daily net
assets. This fee is calculated daily and paid monthly at the following annual
rates: 1.00% of the first $50 million, 0.85% of the next $50 million, 0.80% of
the next $100 million and 0.70% of the amount over $200 million.

As compensation for its subadvisory services, ICC pays ABIM a fee from its
advisory fee based on the Fund's average daily net assets. This fee is
calculated daily and paid monthly at the following annual rates: 0.75% of the
first $50 million, 0.60% of the next $150 million and 0.50% of the amount over
$200 million.

ICC has agreed to waive a portion of its fees and reimburse expenses so
that the Fund's total operating expenses for any fiscal year do not exceed 1.35%
of the Class A Shares' average daily net assets, 2.10% of the Class B Shares'
average daily net assets and 1.10% of the Institutional Shares' average daily
net assets. ICC waived fees of $141,648 for the year ended May 31, 1997.

As compensation for its accounting services, the Fund pays ICC an annual
fee that is calculated daily and paid monthly based on the Fund's average daily
net assets. The Fund paid ICC $55,940 for accounting services for the year ended
May 31, 1997.

As compensation for its transfer agent services, the Fund pays ICC a per
account fee that is calculated and paid monthly. The Fund paid ICC $59,840 for
transfer agent services for the year ended May 31, 1997.

As compensation for providing distribution services, the Fund pays Alex.
Brown & Sons Incorporated ("Alex. Brown") an annual fee that is calculated daily
and paid monthly. This fee is paid at an annual rate equal to 0.25% of the Class
A Shares' average daily net assets and 1.00% (including a 0.25% shareholder
servicing fee) of the Class B Shares' average daily net assets. For the year
ended May 31, 1997, distribution fees aggregated $294,233, of which $206,936
were attributable to the Class A Shares and $87,297 were attributable to the
Class B Shares. The Fund did not pay Alex. Brown any commissions for the year
ended May 31, 1997.

The Fund's complex offers a retirement plan for eligible Directors. The
actuarially computed pension expense allocated to the Fund for the year ended
May 31, 1997 was $3,765, and the accrued liability was $7,114.

<PAGE>

FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)

NOTE 3 -- Capital Share Transactions

The Fund is authorized to issue up to 35 million shares of $.001 par value
capital stock (20 million Class A, 5 million Class B, 5 million Institutional
and 5 million undesignated). Transactions in shares of the Fund were as follows:

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

Shares sold 2,175,983 1,801,793
Shares issued to shareholders on
reinvestment of dividends 71,468 46,324
Shares redeemed (477,782) (526,068)
----------- -----------
Net increase in shares outstanding 1,769,669 1,322,049
=========== ===========

Proceeds from sale of shares $32,665,187 $21,242,051
Value of reinvested dividends 1,040,589 537,705
Cost of shares redeemed (7,100,783) (6,296,438)
----------- -----------
Net increase from capital share transactions $26,604,993 $15,483,318
=========== ===========

Class B Shares
------------------------------
For the For the
Year Ended Year Ended
May 31, 1997 May 31, 1996
------------------------------

Shares sold 545,380 221,303
Shares issued to shareholders on
reinvestment of dividends 3,986 2,003
Shares redeemed (25,717) (17,025)
----------- -----------
Net increase in shares outstanding 523,649 206,281
=========== ===========

Proceeds from sale of shares $8,263,270 $2,641,798
Value of reinvested dividends 60,224 23,141
Cost of shares redeemed (375,286) (208,673)
----------- -----------
Net increase from capital share transactions $7,948,208 $2,456,266
=========== ===========

<PAGE>

FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------

NOTE 3 -- concluded

Institutional Shares
------------------------------
For the Period
For the Feb. 12, 1996*
Year Ended through
May 31, 1997 May 31, 1996
------------ -------------
Shares sold 2,182,989 324,964
Shares issued to shareholders on
reinvestment of dividends 9,854 --
Shares redeemed (30,115) (1,587)
----------- ----------
Net increase in shares outstanding 2,162,728 323,377
=========== ==========

Proceeds from sale of shares $32,778,081 $4,163,059
Value of reinvested dividends 148,292 --
Cost of shares redeemed (444,244) (20,714)
----------- ----------
Net increase from capital share transactions $32,482,129 $4,142,345
=========== ==========

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

NOTE 4 -- Investment Transactions

Excluding short-term obligations, purchases of investment securities
aggregated $65,969,366 and sales of investment securities aggregated $17,571,900
for the year ended May 31, 1997.

On May 31, 1997, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $39,257,851
and aggregate gross unrealized depreciation for all securities in which there is
an excess of tax cost over value was $116,199.

<PAGE>

FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------

Notes to Financial Statements (concluded)

NOTE 5 -- Net Assets

On May 31, 1997, net assets consisted of:

Paid-in capital:
Class A Shares $ 80,226,147
Class B Shares 12,442,655
Institutional Shares 36,624,474
Accumulated net realized gain from security transactions 2,122,176
Unrealized appreciation of investments 39,141,652
Undistributed net investment income 257,965
------------
$170,815,069
============

NOTE 6 -- Merger Agreement

On April 6, 1997, Bankers Trust New York Corporation and Alex. Brown
Incorporated announced that they had signed a definitive agreement to merge. The
merger, which is expected to be completed by the fourth quarter of 1997, is
subject to customary closing conditions, including certain regulatory and
shareholder approvals.

<PAGE>

FLAG INVESTORS EQUITY PARTNERS FUND
- --------------------------------------------------------------------------------

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, 1997 and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended and the financial highlights for
each of the respective periods presented. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free 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, 1997 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 audits provide 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, 1997, the results of its
operations for the year then ended, and the changes in its net assets and its
financial highlights for each of the respective periods presented, in conformity
with generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
June 20, 1997

39
<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 that 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 10 years; (7) financial strength of a parent
company and the relationship that 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.

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

A-1
<PAGE>

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
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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