FLAG INVESTORS EQUITY PARTNERS FUND INC, 497, 1998-10-01

FLAG INVESTORS EQUITY PARTNERS FUND INC
497, 1998-10-01

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

Prospectus & Application -- October 1, 1998

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This mutual fund (the "Fund") seeks to achieve long-term growth of capital and,
secondarily, current income by investing primarily in a diversified portfolio of
common stocks and other equity securities.

The Fund offers shares through securities dealers and financial institutions
that act as shareholder servicing agents. You may also buy shares through the
Fund's Transfer Agent. This Prospectus describes Flag Investors Class A Shares
("Class A Shares"), Flag Investors Class B Shares ("Class B Shares") and Flag
Investors Class C Shares ("Class C Shares") of the Fund. These separate classes
give you a choice as to sales charge and fund expenses. (Refer to the section on
sales charges and the attached Application.)

TABLE OF CONTENTS

Investment Summary ......................... 1
Fees and Expenses of the Fund .............. 2
Investment Program ......................... 3
The Fund's Net Asset Value ................. 3
How to Buy Shares .......................... 4
How to Redeem Shares ....................... 4
Telephone Transactions ..................... 5
Sales Charges .............................. 5
Redemption Price ........................... 7
How to Choose the Class that is Right
for You ................................. 8
Dividends and Taxes ........................ 8
Investment Advisor and Sub-Advisor ......... 9
Financial Highlights ....................... 10
Application ................................ A-1

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

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

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INVESTMENT SUMMARY

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Objectives and Strategies

The Fund seeks to achieve long-term growth of capital and, secondarily,
current income by investing primarily in a diversified portfolio of common
stocks and other equity securities. The Fund's investment advisor and
sub-advisor use a "flexible value" approach in choosing securities. With this
approach, they try to find securities that are undervalued in the marketplace.
In evaluating a security's potential, they also consider such factors as
current and expected earnings, dividends, cash flows and asset values. The
Advisors' strategy is distinctive because of their flexibility in selecting
portfolio companies, which include traditional value stocks as well as high
growth rate companies.

Risk Profile

The Fund is best suited for investors who are willing to accept the risks
and uncertainties of the stock markets in the hope of achieving above-average
long-term capital appreciation. The value of an investment in the Fund will
vary from day-to-day based on changes in the prices of the securities the Fund
holds. Those prices, in turn, reflect investor perceptions of the economy, the
markets and the companies represented in the Fund's portfolio. As with any
investment approach, the Advisors' "flexible value" strategy will, at times,
perform better than or worse than other investment styles and the overall
market. A risk associated with the "flexible value" approach is misjudging the
value or the return potential of one or more securities and thereby
underperforming the general equity market. An investment in the Fund is not a
bank deposit and is not guaranteed by the FDIC or any government agency.

Fund Performance

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

Class A Shares*
For years ended December 31

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* The bar chart does not reflect sales charges. If it did, returns would be
less than those shown. For the period from December 31, 1997 through August
31, 1998, the year-to-date return for Class A Shares was -10.23%.

During the 2-year period shown in the bar chart, the highest return for a
quarter was 14.22% (quarter ended June 30, 1997) and the lowest return for a
quarter was 0.34% (quarter ended December 31, 1997).

Average Annual Total Return (for periods ended December 31, 1997)

<TABLE>
<CAPTION>
Class A Shares(1) Class B Shares(1) Class C Shares(1,2) S&P 500(3)
----------------- ----------------- ------------------- ----------
<S> <C> <C> <C> <C>
Past One Year ............ 18.89% 19.61% 19.61% 33.36%
Since Inception .......... 23.75% (2/13/95) 23.94% (2/13/95) 23.94% 31.02%(4)
</TABLE>
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(1) These figures assume the reinvestment of dividends and capital gains
distributions and include the impact of the maximum sales charges.
(2) Performance information for the Class C Shares, which have not been offered
prior to the date of this Prospectus, is expected to be similar to that
of the Class B Shares. Performance will differ only to the extent Class C
Shares do not have the same expenses.
(3) The S&P 500 Composite is an unmanaged index that is a widely recognized
benchmark of general market performance.
(4) For the period from 1/31/95 through 12/31/97.

1
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FEES AND EXPENSES OF THE FUND
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This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
Initial Deferred Deferred
Sales Charge Sales Charge Sales Charge
Shareholder Transaction Expenses: Alternative Alternative Alternative
(fees paid directly from your investment) -------------- -------------- ----------------
<S> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) .......................... 4.50%* None None
Maximum Deferred Sales Charge (Load) for purchases made before
May 1, 1999 (as a percentage of original purchase price
or redemption proceeds, whichever is lower) .................. 0.50%* 4.00%** 1.00%***
Maximum Deferred Sales Charge (Load) for purchases made on
or after May 1, 1999 (as a percentage of original purchase
price or redemption proceeds, whichever is lower) ............ 1.00%* 4.00%** 1.00%***
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends .................................................... None None None
Redemption Fee ................................................ None None None
Exchange Fee .................................................. None None None

Annual Fund Operating Expenses:
(expenses that are deducted from Fund assets)
Management Fees ............................................... 0.83% 0.83% 0.83%
Distribution and/or Service (12b-1) Fees ...................... 0.25% 0.75% 0.75%
Other Expenses (including a 0.25% shareholder servicing fee for
Class B and Class C Shares) .................................. 0.15% 0.40% 0.40%
----- ----- -----
Total Annual Fund Operating Expenses .......................... 1.34% 1.98% 1.98%
===== ===== =====
</TABLE>
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* You will pay no sales charge on purchases of $1 million or more of Class A
Shares but, unless you are otherwise eligible for a sales charge waiver or
reduction, you may pay a contingent deferred sales charge when you redeem
your shares. (See "Sales Charges -- Redemption Price.")
** Contingent deferred sales charges decline over time and reach zero after six
years. At that time, Class B Shares convert automatically to Class A Shares.
(See "Sales Charges -- How to Choose the Class that is Right for You.")
*** You will be required to pay a contingent deferred sales charge if you redeem
your Class C Shares within one year after purchase. (See "Sales Charges --
Redemption Price.")

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

The Example assumes that you invest $10,000 inthe Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. The expenses for Class C Shares,
which have not been offered prior to the date of this Prospectus, areexpected to
be the same as those of the Class B Shares. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A Shares ............................................................ $570 $823 $1,095 $1,872
Class B Shares ............................................................ $613 $949 $1,300 $2,306
Class C Shares ............................................................ $304 $621 N/A N/A
</TABLE>
<TABLE>
<CAPTION>
You would pay the following expenses if you did not redeem your shares:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A Shares ............................................................ $570 $823 $1,095 $1,872
Class B Shares ............................................................ $201 $621 $1,068 $2,306
Class C Shares ............................................................ $201 $621 N/A N/A
</TABLE>
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The rules of the SEC require that the maximum sales charge be reflected in the
foregoing table. However, you may qualify for reduced sales charges or no sales
charge at all. (Refer to the section on sales charges.) If you hold your shares
for a long time, the combination of the initial sales charge you paid and the
recurring 12b-1 fees may exceed the maximum sales charges permitted by the
Conduct Rules of the National Association of Securities Dealers, Inc. ("NASD
Rules").

INVESTMENT PROGRAM
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Investment Objective, Policies
and Risk Considerations

The Fund seeks to achieve long-term growth of capital and, secondarily,
current income by investing primarily in a diversified portfolio of common
stocks.

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. (Refer to the section on Investment Advisor and
Sub-Advisor.) In selecting equity investments for the Fund's portfolio, the
Advisors use a "flexible value" approach. With this approach, the Advisors look
for undervalued companies with strong financial characteristics and
shareholder-oriented managements. In evaluating a security's potential, they
also consider such factors as current and expected earnings, dividends, cash
flows and asset values. As a result, the Advisors may select high growth rate
stocks as well as traditional value stocks for the Fund's portfolio. The
Advisors consider both the opportunity for gain and the risk of loss in making
investments.

An investment in the Fund involves risk. Over time, common stocks have
shown greater potential for growth than other types of securities, but in the
short run stocks can be volatile. Stock prices are sensitive to developments
affecting particular companies and to general economic conditions that affect
particular industry sectors or the securities markets as a whole. No one can
predict how the markets will behave in the future. As with any investment
approach, the Advisors' "flexible value" strategy will, at times, perform better
than or worse than other investment styles and the overall market. A risk
associated with the "flexible value" appproach is misjudging the value or return
potential of one or more securities and thereby underperforming the general
equity market. There can be no guarantee that the Fund will achieve its goals.

To protect the Fund under adverse market conditions, the Advisors may make
temporary, defensive investments in money market instruments and U.S. Government
obligations, investments that would not ordinarily be consistent with the Fund's
objectives. The Advisors would do so only if they believed the risk of loss
outweighed the opportunity for gain.

THE FUND'S NET ASSET VALUE
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The following sections describe how to buy and redeem shares of the Fund.

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

The net asset value per share of each class is determined on each business
day as of the close of trading on the New York Stock Exchange (ordinarily 4:00
p.m. Eastern Time). It is calculated by subtracting the liabilities attributable
to a class from its proportionate share of the Fund's assets and dividing the
result by the outstanding shares of the class. Because the different classes
have different distribution or service fees, their net asset values may differ
from time to time.

In valuing the Fund's assets, its investments are priced at their market
value.

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

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

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

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

Investment Minimums

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

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

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

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

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

Investing Regularly

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

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

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

Systematic Purchase Plan. You may also purchase any class of shares
through a Systematic Purchase Plan. Contact your securities dealer or servicing
agent for details.

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

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

4
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1) A letter of instructions specifying your account number and the number of
shares or dollar amount you wish to redeem. The letter must be signed by
all owners of the shares exactly as their names appear on the account.

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

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

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

Other Redemption Information

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

If you redeem sufficient shares to reduce your investment to $500 or less,
the Fund has the power to redeem the remaining shares after giving you 60 days'
notice. The Fund reserves the right to redeem shares in kind under certain
circumstances.

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

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

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

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

SALES CHARGES
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Purchase Price

The price you pay to buy shares will be the Fund's offering price which is
calculated by adding any applicable sales charges to the net asset value per
share of the class you are buying. The amount of any sales charge included in
your purchase price will be according to the following schedule:
<TABLE>
<CAPTION>
Class A
Sales Charge
as % of
-------------------------
Offering Net Amount Class B Class C
Amount of Purchase Price Invested Sales Charge Sales Charge
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<S> <C> <C> <C> <C>
Less than $ 50,000 ......... 4.50% 4.71% None None
$50,000 - $ 99,999 ......... 3.50% 3.63% None None
$100,000 - $249,999 ......... 2.50% 2.56% None None
$250,000 - $499,999 ......... 2.00% 2.04% None None
$500,000 - $999,999 ......... 1.50% 1.52% None None
$1,000,000 and over ......... None None None None
</TABLE>
5
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Although you do not pay an initial sales charge when you invest $1,000,000
or more in Class A Shares or when you buy any amount of Class B or Class C
Shares, you may pay a sales charge when you redeem your shares. Refer to the
section on sales charges on redemptions for details.

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

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

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

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

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

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

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

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

(i) A qualified retirement plan.

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

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

Purchases by Exchange

You may exchange shares of any other Flag Investors fund with the same
sales charge structure for an equal dollar amount of Class A, Class B or Class C
Shares, as applicable, without payment of the sales charges described above or
any other charge. If you exchange Class A shares of any Flag Investors fund with
a lower sales charge structure into Class A Shares, you will be charged the
difference in sales charges unless (with the exception of Flag Investors Cash
Reserve Prime Class A Shares) you have owned the shares for at least 24 months.
You may enter both your redemption and purchase orders on the same Business Day
or, if you have already redeemed the shares of the other fund, you may enter
your purchase order within 90 days of the redemption. The Fund may modify or
terminate these offers of exchange upon 60 days' notice.

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

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REDEMPTION PRICE
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The amount of any sales charge deducted from your redemption price will be
determined according to the following schedule.
<TABLE>
<CAPTION>
Sales Charge as a Percentage of the Dollar Amount Subject to Charge
Class A Sales Class B Sales Class C Sales
Charge (as % of Charge (as % of Charge (as % of
Years Since Purchase Cost or Value) Cost or Value) Cost or Value)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
First ................................................................ 1.00%* 4.00% 1.00%
Second ............................................................... 0.50%* 4.00% None
Third ................................................................ None 3.00% None
Fourth ............................................................... None 3.00% None
Fifth ................................................................ None 2.00% None
Sixth ................................................................ None 1.00% None
Thereafter ........................................................... None None None
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* You will pay a sales charge when you redeem Class A Shares only if you bought
those shares at net asset value as part of an investment of $1,000,000 or
more. For purchases of $1 million or more of Class A Shares made before May
1, 1999, you will pay a sales charge of 0.50% if you redeem them within the
first year of purchase instead of the 1.00% reflected in the above table.

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

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

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

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

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

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

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

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

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

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

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

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

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

Automatic Conversion of Class B Shares. Your Class B Shares, along with
any reinvested dividends or distributions associated with those shares, will be
automatically converted to Class A Shares six years after your purchase. This
conversion will be made on the basis of the relative net asset values of the
classes and will not be a taxable event to you.

7
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HOW TO CHOOSE THE CLASS THAT IS RIGHT FOR YOU
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Your decision as to which class of the Fund's shares is best for you
should be based upon a number of factors including the amount of money you
intend to invest and the length of time you intend to hold your shares.

If you choose Class A Shares, you will pay a sales charge when you buy
your shares but the amount of the charge declines as the amount of your
investment increases. You will pay lower expenses while you hold the shares and,
except in the case of investments of $1,000,000 or more, no sales charge if you
redeem them.

If you choose Class B Shares, you will pay no sales charge when you buy
your shares but your annual expenses will be higher than Class A Shares. You
will pay a sales charge if you redeem your shares within six years of purchase,
but the amount of the charge declines the longer you hold your shares and, at
the end of six years, your shares convert to Class A Shares thus eliminating the
higher expenses.

If you choose Class C Shares, you will pay no sales charge when you buy
your shares or if you redeem them after holding them for at least a year. On the
other hand, expenses on Class C Shares are the same as those on Class B Shares
and, since there is no conversion to Class A Shares at the end of six years, the
higher expenses continue for as long as you own your shares.

In general, if you intend to invest more than $100,000 your combined sales
charges and expenses are lower with Class A Shares. If you intend to invest less
than $100,000 and expect to hold your shares for more than six years, your
combined sales charges and expenses are lower with Class B Shares. If you intend
to buy less than $100,000 and expect to hold your shares for less than six
years, your combined sales charges and expenses are lower with Class C Shares.

Your securities dealer or servicing agent may receive different levels of
compensation depending upon which class of shares you buy.

Distribution Plans

The Fund pays your securities dealer or shareholder servicing agent
distribution and other fees for the sale of its shares and for shareholder
service. Class A Shares pay an annual distribution fee equal to 0.25% of average
daily net assets. Class B and Class C Shares pay an annual distribution fee of
0.75% of average daily net assets of the respective class and an annual
shareholder servicing fee of 0.25% of average daily net assets of the respective
class. Because these fees are paid out of net assets on an on-going basis, they
will, over time, increase the cost of your investment and may cost you more than
paying other types of sales charges.

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

Dividends and Distributions

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

Tax Treatment of Dividends and Distributions

The dividends and distributions you receive from the Fund may be subject
to federal, state and local taxation, depending on your tax situation. The tax
treatment of dividends and distributions is the same whether or not you reinvest
them. Dividends are ordinary income and capital gains distributions are taxed
based on how long the Fund held the assets. The Fund will tell you annually how
to treat dividends and distributions.

If you redeem shares of the Fund, you will be subject to tax on any gains
you earn based on your holding period for the shares. An exchange of shares of
the Fund for shares of another fund is a sale of Fund shares for tax purposes.

8
- --------------------------------------------------------------------------------
<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. These funds, together with the Fund, had approximately $7.8
billion of net assets as of August 31, 1998. ABIM is a registered investment
advisor with approximately $7.0 billion under management as of August 31, 1998.

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

As compensation for its services for the fiscal year ended May 31, 1998,
ICC received from the Fund a fee equal to 0.83% of the Fund's average daily net
assets. ICC compensates ABIM out of its advisory fee.

Portfolio Manager

Lee S. Owen has been responsible for managing the Fund's assets since
inception. Mr. Owen, who has 26 years' investment experience, 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, 1998

ABIM
Equity Accounts** S&P 500***
------------------- -----------
3 Years* .............. 33.4% 30.3%
5 Years* .............. 24.1% 23.1%
10 Years* .............. 21.4% 18.6%

- ------------------------
* 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, 1998, such accounts
totaled $3.3 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. Since 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 had a larger impact on
the results than would have been the case if the results had been 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 were reduced by 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 Internal Revenue Code, which, if
applicable, might have adversely affected the performance of such
accounts.

*** Source: Capital Resource Advisors.

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

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

FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the
Fund's financial performance since it began operations. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned on an investment in
the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by PricewaterhouseCoopers LLP (formerly Coopers &
Lybrand LLP), whose report, along with the Fund's financial statements for the
Class A and Class B Shares, are included in the Statement of Additional
Information, which is available upon request. The Class C Shares were not
offered prior to the date of this Prospectus.

(For a share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Shares
---------------------------------------------------------------
For the
Period
Feb. 13, 1995(1)
For the Year Ended May 31, through
--------------------------------------------- May 31,
1998 1997 1996 1995
------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period ........ $ 16.93 $ 13.09 $ 10.77 $ 10.00
-------- -------- -------- --------
Income from Investment Operations:
Net investment income ......................... 0.05 0.08 0.17 0.12
Net realized and unrealized gain on
investments .................................. 4.60 3.96 2.29 0.65
-------- -------- -------- --------
Total from Investment Operations .............. 4.65 4.04 2.46 0.77
Less Distributions:
Net investment income and short-term gains..... (0.10) (0.13) (0.14) --
Net realized mid-term and long-term gains ..... (0.19) (0.07) -- --
--------- --------- ---------- --------
Total distributions ........................... (0.29) (0.20) (0.14) --
--------- --------- ---------- --------
Net asset value at end of period .............. $ 21.29 $ 16.93 $ 13.09 $ 10.77
========= ========= ========== ========
Total Return ................................... 27.76% 31.17% 23.05% 7.70%
Ratios to Average Daily Net Assets:
Expenses ...................................... 1.24% 1.35%(2) 1.35%(2) 1.35%(2,4)
Net investment income ......................... 0.29% 0.61%(3) 1.52%(3) 3.74%(3,4)
Supplemental Data:
Net assets at end of period (000) ............. $198,387 $113,030 $ 64,230 $38,612
Portfolio turnover rate ....................... 7.94% 17.60% 0.73% --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Class B Shares
----------------------------------------------------------------
For the
Period
Feb. 13, 1995(1)
For the Year Ended May 31, through
--------------------------------------------- May 31,
1998 1997 1996 1995
------------ --------------- -------------- -----------------
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period ........ $ 16.84 $ 13.03 $ 10.75 $ 10.00
-------- -------- ------- --------
Income from Investment Operations:
Net investment income ......................... (0.06) (0.04) 0.07 0.07
Net realized and unrealized gain on
investments .................................. 4.54 3.96 2.31 0.68
-------- -------- ------- --------
Total from Investment Operations .............. 4.48 3.92 2.38 0.75
Less Distributions:
Net investment income and short-term gains..... (0.03) (0.04) (0.10) --
Net realized mid-term and long-term gains ..... (0.19) (0.07) -- --
-------- -------- ------- --------
Total distributions ........................... (0.22) (0.11) (0.10) --
-------- -------- ------- --------
Net asset value at end of period .............. $ 21.10 $ 16.84 $ 13.03 $ 10.75
======== ======== ======= ========
Total Return ................................... 26.81% 30.28% 22.17% 7.50%
Ratios to Average Daily Net Assets:
Expenses ...................................... 1.98% 2.10%(5) 2.10%(5) 2.10%(4,5)
Net investment income ......................... (0.47)% (0.16)%(6) 0.71%(6) 1.97%(4,6)
Supplemental Data:
Net assets at end of period (000) ............. $37,046 $ 15,670 $ 5,302 $ 2,159
Portfolio turnover rate ....................... 7.94% 17.60% 0.73% --
</TABLE>

- --------------------------------------------------------------------------------
(1) Commencement of operations.
(2) 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 the years
ended May 31, 1997, 1996 and the period ended May 31, 1995, respectively.
(3) 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 the years ended May 31, 1997, 1996 and the period ended
May 31, 1995, respectively.
(4) Annualized.
(5) 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 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 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.

10
- --------------------------------------------------------------------------------
<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:

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 $_____________________________
[ ] Class C Shares (1.0% maximum contingent deferred sales charge) in the
amount of $______________________________

Your Account Registration (Please Print)

Existing Account No., if any:_____________________

Individual or Joint Tenant

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

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

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

Corporations, Trusts, Partnerships, etc.

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

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

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

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

Gifts to Minors

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

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

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

under the ________________________ Uniform Gifts to Minors Act
State of Residence

Mailing Address

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

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

( )
- -------------------------------------------------------------------------------
Daytime Phone
<PAGE>

Letter of Intent (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 (Optional)

List the Account numbers of other Flag Investors Funds that you or your
immediate family 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 or $__________
in Class C 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 avoided 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 Account Depositor's Signature (if joint acct.,
No., if any both must sign) Date

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 and/or
$---------- from Class C 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 your
ultimate U.S. tax liability.

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

- ---------------------- ----------------------------------------------------
Signature Date Signature (if joint acct., both must sign) Date
- -------------------------------------------------------------------------------
- --------------------
For Dealer Use Only
- --------------------

Dealer's Name: Dealer Code:
----------------------- ------------------------
Dealer's Address: Branch Code:
----------------------- ------------------------

-----------------------
Representative: Rep. No.:
----------------------- ------------------------

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

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

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

Sub-Advisor Distributor
ALEX. BROWN INVESTMENT ICC DISTRIBUTORS, INC.
MANAGEMENT Two Portland Square
One South Street Portland, Maine 04101
Baltimore, Maryland 21202

Transfer Agent Independent Accountants
INVESTMENT COMPANY CAPITAL CORP. PRICEWATERHOUSECOOPERS LLP
One South Street 250 West Pratt Street
Baltimore, Maryland 21202 Baltimore, Maryland 21201
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>

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

- --------------------------------------------------------------------------------
| You may obtain the following additional information about the Fund, free of |
| charge, from your securities dealer or servicing agent or by calling (800) |
| 767-FLAG: |
| |
| o A statement of additional information (SAI) about the Fund that is |
| incorporated by reference into the prospectus. |
| |
| o The Fund's most recent annual and semi-annual reports containing detailed |
| financial information and, in the case of the annual report, a discussion |
| of market conditions and investment strategies that significantly |
| affected the Fund's performance during its last fiscal year. |
| |
| In addition you may review information about the Fund (including the SAI) |
| at the Securities and Exchange Commission's Public Reference Room in |
| Washington, D.C. (Call 1-800-SEC-0330 to find out about the operation of |
| the Public Reference Room.) The Commission's Internet site at |
| http.//www.sec.gov has reports and other information about the Fund and |
| you may get copies of this information by writing the Public Reference |
| Section of the Commission, Washington, D.C. 20549-5009. You will be |
| charged for duplicating fees. |
| |
| For other shareholder inquiries, contact the Fund at (800) 767-FLAG, the |
| Transfer Agent at (800) 553-8080, or your securities dealer or servicing |
| agent. |
- --------------------------------------------------------------------------------

Investment Company Act File No. 811-8886

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

<PAGE>

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

[GRAPHIC OMITTED]

EQUITY PARTNERS FUND, INC.

(Institutional Shares)

Prospectus & Application -- October 1, 1998

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

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

TABLE OF CONTENTS

Page
-----
Investment Summary .................. 1
Fees and Expenses of the
Institutional Shares ............. 2
Investment Program .................. 2
The Fund's Net Asset Value .......... 3
How To Buy Institutional Shares ..... 3
How To Redeem Institutional
Shares ........................... 4
Telephone Transactions .............. 4
Dividends And Taxes ................. 4
Investment Advisor And
Sub-Advisor ...................... 5
Financial Highlights ................ 6

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

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

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

INVESTMENT SUMMARY

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

Objectives and Strategies

The Fund seeks to achieve long-term growth of capital and, secondarily,
current income by investing primarily in a diversified portfolio of common
stocks and other equity securities. The Fund's investment advisor and
sub-advisor use a "flexible value" approach in choosing securities. With this
approach, they try to find securities that are undervalued in the marketplace.
In evaluating a security's potential, they also consider such factors as current
and expected earnings, dividends, cash flows and asset values. The Advisors'
strategy is distinctive because of their flexibility in selecting portfolio
companies, which include traditional value stocks as well as high growth rate
companies.

Risk Profile

The Fund is best suited for investors who are willing to accept the risks
and uncertainties of the stock markets in the hope of achieving above-average
long-term capital appreciation. The value of an investment in the Fund will vary
from day-to-day based on changes in the prices of the securities the Fund holds.
Those prices, in turn, reflect investor perceptions of the economy, the markets
and the companies represented in the Fund's portfolio. As with any investment
approach, the Advisors' "flexible value" strategy will, at times, perform better
than or worse than other investment styles and the overall market. A risk
associated with the "flexible value" approach is misjudging the value or return
potential of one or more securities and thereby underperforming the general
equity market. An investment in the Fund is not a bank deposit and is not
guaranteed by the FDIC or any government agency.

Fund Performance

The following bar chart and table show the performance of the
Institutional Shares both for the calendar year ended December 31, 1997, and
as an average over different periods of time. The variability of performance
over time provides an indication of the risks of investing in the Fund. This is
an historical record and does not necessarily indicate how the Fund will perform
in the future.

Institutional Shares*
For the year ended December 31, 1997

[GRAPHIC OMITTED]

- ------------------------
* For the period from December 31, 1997 through August 31, 1998, the
year-to-date return for the Institutional Shares was -10.23%.

During the 1-year period shown in the bar chart, the highest return for a
quarter was 14.28% (quarter ended June 30, 1997) and the lowest return for a
quarter was 0.39% (quarter ended December 31, 1997).

Average Annual Total Return (for the period ended December 31, 1997)

Institutional Shares(1) S&P 500(2)
----------------------- ----------
Past One Year ............ 23.43% 33.36%
Since Inception .......... 24.01% (2/12/96) 27.20%(3)

- --------------------------------
1 These figures assume the reinvestment of dividends and capital gains
distributions.

2 The S&P 500 Composite is an unmanaged index that is a widely recognized
benchmark of general market performance.

3 For the period from 1/31/96 through 12/31/97.

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

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

FEES AND EXPENSES OF THE INSTITUTIONAL SHARES

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

<TABLE>

<S> <C>

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

Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
Management Fees ....................................................................... 0.83%
Distribution and/or Service (12b-1) Fees .............................................. None
Other Expenses ........................................................................ 0.15%
----
Total Annual Fund Operating Expenses .................................................. 0.98%
</TABLE>

Example

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

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

1 Year 3 Years 5 Years 10 Years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Institutional Shares .......... $100 $312 $542 $1201
</TABLE>

INVESTMENT PROGRAM

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

Investment Objective, Policies
and Risk Considerations

The Fund seeks to achieve long-term growth of capital and, secondarily,
current income by investing primarily in a diversified portfolio of common
stocks.

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. (Refer to the sections on Investment Advisor and
Sub-Advisor.) In selecting equity investments for the Fund's portfolio, the
Advisors use a "flexible value" approach. With this approach, the Advisors look
for undervalued companies with strong financial characteristics and shareholder-
oriented managements. In evaluating a security's potential, they also consider
such factors as current and expected earnings, dividends, cash flows and asset
values. As a result, the Advisors may select high growth rate stocks as well as
traditional value stocks for the Fund's portfolio. The Advisors consider both
the opportunity for gain and the risk of loss in making investments.

An investment in the Fund involves risk. Over time common stocks have
shown greater potential for growth than other types of securities, but in the
short run stocks can be volatile. Stock prices are sensitive to developments
affecting particular companies and to general economic conditions that affect
particular industry sectors or the securities markets as a whole. No one can
predict how the markets will behave in the future. As with any investment
approach, the Advisors' "flexible value" strategy will, at times, perform better
than or worse than other investment styles and the overall market. A risk
associated with the "flexible value" appproach is misjudging the value or return
potential of one or more securities and thereby underperforming the general
equity market. There can be no guarantee that the Fund will achieve its goals.

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

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

THE FUND'S NET ASSET VALUE

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

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

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

In valuing the Fund's assets, its investments are priced at their market
value.

HOW TO BUY INSTITUTIONAL SHARES

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

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

o An eligible institution (e.g., a financial institution, corporation,
investment counselor, trust, estate or educational, religious or
charitable institution or a qualified retirement plan other than a
defined contribution plan).

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

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

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

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

Investment Minimums

If you are an eligible institution, your initial investment must be at
least $500,000.

The following are exceptions to the $500,000 minimum initial investment:

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

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

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

There are no minimums for subsequent investments.

Purchases by Exchange

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

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

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

HOW TO REDEEM INSTITUTIONAL SHARES

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

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

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

TELEPHONE TRANSACTIONS

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

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

DIVIDENDS AND TAXES

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

Dividends and Distributions

Tax Treatment of Dividends and Distributions

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

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

INVESTMENT ADVISOR AND SUB-ADVISOR

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

Portfolio Manager

Lee S. Owen has been responsible for managing the Fund's assets since
inception. Mr. Owen, who has 26 years of investment experience, 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, 1998

ABIM
Equity Accounts** S&P 500***
------------------- -----------
3 Years* .......... 33.4% 30.3%
5 Years* .......... 24.1% 23.1%
10 Years* ......... 21.4% 18.6%

- ------------------------
* 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, 1998, such
accounts totaled $3.3 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. Since 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 had a
larger impact on the results than would have been the case if the results
had been 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 were reduced by 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 Internal Revenue Code,
which, if applicable, might have adversely affected the performance of
such accounts.

*** Source: Capital Resource Advisors.

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

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

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

FINANCIAL HIGHLIGHTS

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

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

<TABLE>
<CAPTION>
Institutional Shares
-----------------------------------------------
For the Period
For the Year Feb. 12, 1996(1)
Ended May 31, through May 31,
---------------------------- ----------------
1998 1997 1996
----------- -------------- ----------------
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period .................. $ 16.94 $ 13.10 $ 12.72
------- -------- --------

Income from Investment Operations:
Net investment income ................................... 0.10 0.14 0.04
Net realized and unrealized gain on investments ......... 4.59 3.95 0.34
------- -------- --------
Total from Investment Operations ........................ 4.69 4.09 0.38

Less Distributions:
Net investment income and short-term gains .............. ( 0.14) ( 0.18) --
Net realized mid-term and long-term gains ............... ( 0.19) ( 0.07) --
------- --------- ---------
Total distributions ..................................... ( 0.33) ( 0.25) --
------- --------- ---------
Net asset value at end of period ........................ $ 21.32 $ 16.94 $ 13.10
======= ========= =========
Total Return ............................................. 28.14% 31.58% 3.23%
Ratios to Average Daily Net Assets:
Expenses ................................................ 0.98% 1.10%(2) 1.10%(2,4)
Net investment income ................................... 0.54% 0.81%(3) 1.20%(3,4)

Supplemental Data:
Net assets at end of period (000) ....................... $94,354 $ 42,115 $ 4,235
Portfolio turnover rate ................................. 7.94% 17.60% 0.73%
</TABLE>

- --------------------------------------------------------------------------------
1 Commencement of operations.
2 Without the waiver of advisory fees, the ratio of expenses to average daily
net assets would have been 1.23%, 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, 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.

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

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

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Send completed Application by overnight carrier to: For assistance in completing this Application please call:
Flag Investors Funds 1-800-553-8080, Monday through Friday, 8:30 a.m. to 5:30 p.m.
330 West Ninth Street, First Floor (Eastern Time).
Kansas City, MO 64105
Attn: Flag Investors Equity Partners Fund, Inc.
</TABLE>

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

Your Account Registration (Please Print)

Name on Account

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

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

| | Non-Profit or Charitable Organization | | Other_________

Mailing Address

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

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

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

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

If a Trust, please provide the following:

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

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

<PAGE>

Initial Investment

Indicate the amount to be invested and the method of payment:
__A. By Mail: Enclosed is a check in the amount of $________ payable to Flag
Investors 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 Flag Investors Funds
Acct #7528353
ABA #1010-0362-1
Kansas City, Missouri 64105

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

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>

Signature and Taxpayer Certification

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

[ ] U.S. Citizen/Taxpayer:

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

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

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

I have received a copy of the Fund's prospectus.

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

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

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

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

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 ICC DISTRIBUTORS, INC.
MANAGEMENT Two Portland Square
One South Street Portland, Maine 04101
Baltimore, Maryland 21202

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>

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

- --------------------------------------------------------------------------------
| You may obtain the following additional information about the Fund, free of |
| charge, from your securities dealer or servicing agent or by calling (800) |
| 767-FLAG: |
| |
| o A statement of additional information (SAI) about the Fund that is |
| incorporated by reference into the prospectus. |
| |
| o The Fund's most recent annual and semi-annual reports containing |
| detailed financial information and, in the case of the annual report, |
| discussion of market conditions and investment strategies that |
| significantly affected the Fund's performance during its last fiscal |
| year. |
| |
| In addition you may review information about the Fund (including the SAI) |
| at the Securities and Exchange Commission's Public Reference Room in |
| Washington, D.C. (Call 1-800-SEC-0330 to find out about the operation of |
| the Public Reference Room.) The Commission's Internet site at |
| http.//www.sec.gov has reports and other information about the Fund and you |
| may get copies of this information by writing the Public Reference Section |
| of the Commission, Washington, D.C. 20549-5009. You will be charged for |
| duplicating fees. |
| |
| For other shareholder inquiries, contact the Fund at (800) 767-FLAG, the |
| Transfer Agent at (800) 553-8080, or your securities dealer or servicing |
| agent. |
- -------------------------------------------------------------------------------

Investment Company Act File No. 811-8886

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

<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 SECURITIES 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, 1998
relating to Prospectuses Dated
October 1, 1998

<PAGE>

TABLE OF CONTENTS

1. GENERAL INFORMATION AND HISTORY......................................1
2. YEAR 2000............................................................1
3. INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS...............2
4. VALUATION OF SHARES AND REDEMPTION...................................6
5. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS.................7
6. MANAGEMENT OF THE FUND..............................................10
7. INVESTMENT ADVISORY AND OTHER SERVICES..............................15
8. DISTRIBUTION OF FUND SHARES.........................................16
9. BROKERAGE...........................................................20
10. CAPITAL STOCK.......................................................22
11. SEMI-ANNUAL REPORTS.................................................22
12. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES...................22
13. INDEPENDENT ACCOUNTANTS.............................................23
14. LEGAL MATTERS.......................................................23
15. PERFORMANCE INFORMATION.............................................23
16. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.................25
17. FINANCIAL STATEMENTS................................................25
APPENDIX A...........................................................1

<PAGE>

1. GENERAL INFORMATION AND HISTORY

Flag Investors Equity Partners Fund, Inc. (the "Fund") is an open-end
diversified 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 four 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"), Flag Investors Equity Partners Fund Class C
Shares ("Class C 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 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. The Fund has not
offered Class C Shares prior to the date of this Statement of Additional
Information.

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

2. YEAR 2000

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

<PAGE>

3. 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 common
stocks. The Fund may make other equity investments (including preferred stocks,
convertible securities, warrants and other securities convertible into or
exchangeable for common stocks). 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. There can be no assurance that the Fund's
investment objective will be achieved.

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

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

Equity Securities

Equity securities include common stocks, preferred stocks, warrants,
and other securities that may be converted into or exchanged for common stocks.
Common stocks are equity securities that represent an ownership interest in a
corporation, entitling the shareholder to voting rights and receipt of dividends
based on proportionate ownership. 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. 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.

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 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

<PAGE>

speculative and involve greater risk of default or price changes due to changes
in the issuer's creditworthiness. 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.

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 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.

<PAGE>

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

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 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 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, 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.

<PAGE>

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.

Temporary Investments

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.

Rule 144A Securities

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

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 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. 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.

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

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

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

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

7. Issue senior securities;

<PAGE>

8. 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;

9. Effect short sales of securities;

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

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

12. 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].

4. 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. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.

The Fund may enter into agreements that allow a third party, as agent
for the Fund, to accept orders from its customers up until the Fund's close of
business which is ordinarily 4:00 p.m. (Eastern Time). So long as a third party
receives an order prior to the Fund's close of business, the order is deemed to
have been received by the Fund and, accordingly, may receive the net asset value
computed at the close of business that day. These "late day" agreements are
intended to permit shareholders placing orders with third parties to place
orders up to the same time as other shareholders.

Redemption

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

Under normal circumstances, the Fund will redeem shares by check or by
wire transfer of funds, as described in the Prospectuses. However, if the Board
of Directors determines that it would be in the best interests of the remaining
shareholders to make payment of the redemption price in whole or in part by a
distribution in kind of readily marketable securities from the portfolio of the
Fund in lieu of cash, in conformity with applicable rules of the SEC, the Fund
will make such distributions in kind. If Shares are redeemed in kind, the
redeeming shareholder will incur brokerage costs in later converting the assets
into

<PAGE>

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.

5. 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.

Under Subchapter M of the Code, if the Fund fails to so qualify, it
will be subject to 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

<PAGE>

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 at a rate of 20% with respect to shareholders that are
individuals 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 investors will be taxable on the
entire amount of the dividend received, even though the net asset value per
Share on the date of such purchase reflected the amount of such distribution.

Generally, gain or loss on the sale or exchange of a Share will be
capital gain or loss that will be long-term if the Share has been held for more
than twelve months, and otherwise will be short-term capital gain or loss. For
individuals, long-term capital gains are currently taxed at a rate of 20% and
short-term capital gains are currently taxed at ordinary income tax rates.
However, if a shareholder realizes a loss on the sale, exchange or redemption of
a Share held for six months or less and has previously received a capital gains
distribution with respect to the Share (or any undistributed net capital gains
of the Fund with respect to such Share are included in determining the
shareholder's long-term capital gains), the

<PAGE>

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), it
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.

<PAGE>

6. MANAGEMENT OF THE FUND

Directors and Officers

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

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

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

*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)
60 Seagate Drive, Unit P106, Naples, Florida 34103. 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).

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

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

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

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

<PAGE>

Trusts; Director and Executive Vice President, The Glenmede Trust
Company; Formerly, Executive Director, The Pew Charitable Trusts.

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

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

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. (now
PricewaterhouseCoopers LLP), September 1988 - June 1997.

SCOTT J. LIOTTA, Assistant Secretary (3/18/65)

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

- --------------
* Messrs. 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
some or all of the other investment companies managed, advised, or administered
by BT Alex. Brown Incorporated ("BT Alex. Brown") or its affiliates. There are
currently 12 funds in the Flag Investors/ISI Funds and BT Alex. Brown Cash
Reserve Fund, Inc. fund complex (the "Fund Complex"). Mr. Semans serves as
Chairman of five funds and as a Director of five other funds in the Fund
Complex. Mr. Hale serves as Chairman of three funds and as Director of eight
other funds in the Fund Complex. Messrs. Cunnane, Levy and McDonald serve as
Directors of each fund in the Fund Complex. Mr. Hardiman serves as Director of
nine funds in the Fund Complex. Ms. Rimel and Mr. Vogt each serve as a Director
of 10 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 Mr. Liotta 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

<PAGE>

the same terms as those prevailing at the time for comparable transactions with
unrelated persons. Additional transactions may be expected to take place in the
future.

With the exception of the Fund's President, officers of the Fund
receive no direct remuneration in such capacity from the Fund. Officers and
Directors of the Fund who are officers or directors of BT Alex. Brown or the
Advisor may be considered to have received remuneration indirectly. 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) (an "Independent
Director") and Mr. Woolf receives an aggregate annual fee (plus reimbursement
for reasonable out-of-pocket expenses incurred in connection with his or her
attendance at board and committee meetings) from each fund in the Fund Complex
for which he or she serves. In addition, the Chairman of the Fund Complex's
Audit Committee receives an aggregate annual fee from the Fund Complex. Payment
of such fees and expenses are allocated among all such funds described above in
proportion to their relative net assets. For the fiscal year ended May 31, 1998,
Independent Directors' fees attributable to the assets of the Fund totaled
approximately $10,811.

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, 1998.

<PAGE>

COMPENSATION TABLE
<TABLE>
<CAPTION>

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

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, 1998 Payable to Directors
in the Fiscal Year
Ended May 31, 1998
- -------------------------------------------------------------------------------------------------------------------------------
<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 $1,242(3) (4) $39,000 for service on 13(5)
Boards in the Fund Complex

Joseph R. Hardiman, Director(6) N/A N/A N/A

John F. Kroeger, Director(7) $1,560 (4) $49,000 for service on 13(5)
Boards in the Fund Complex

Louis E. Levy, Director $1,242 (4) $39,000 for service on 13(5)
Boards in the Fund Complex

Eugene J. McDonald, Director $1,242(3) (4) $39,000 for service on 13(5)
Boards in the Fund Complex

Rebecca W. Rimel, Director $1,266(3) (4) $39,000 for service on 11(5),(8)
Boards in the Fund Complex

Carl W. Vogt, Esq., Director $1,279(3) (4) $39,000 for service on 115,(8)
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, $1,242, $1,242, $1,279, and $1,266 has been deferred by
Messrs. Cunnane, McDonald and Vogt 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, 1998 was approximately $5,802.
(5) One of these funds ceased operations on July 29, 1998.
(6) Appointed effective October 1, 1998.
(7) Retired effective October 1, 1998.
(8) Ms. Rimel and Mr. Vogt receive proportionately higher compensation
from each fund for which they serve.

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

<PAGE>

quarterly fee of $4,875 by the Fund Complex for the rest of his life. Such fees
are allocated to each fund in the Fund Complex based upon the relative net
assets of such fund to the Fund Complex.

Set forth in the table below are the estimated annual benefits payable
to a Participant upon retirement assuming various years of service and payment
of a percentage of the fee earned by such Participant in his or her last year of
service, as described above. The approximate credited years of service are as
follows: for Mr. Cunnane, 3 years; for Mr. Levy, 3 years; for Mr. McDonald, 5
years; for Ms. Rimel, 2 years; for Mr. Vogt, 2 years; and for Mr. Hardiman,
0 years.
<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, Levy, McDonald, and Vogt and Ms.
Rimel have each executed a Deferred Compensation Agreement. Currently, the
deferring Directors may select from among various Flag Investors Funds, BT Alex.
Brown Cash Reserve Fund, Inc. and BT International Equity Fund in which all or
part of their deferral account shall be deemed to be invested. Distributions
from the deferring Directors' deferral accounts will be paid in cash, in
generally 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 any officer, director, or employee of
the Fund or the Advisors preclear any personal securities investments (with
certain exceptions, such as non-volitional purchases or purchases that are part
of an automatic dividend reinvestment plan). The foregoing would apply to any
officer, director or employee of the Distributor that is an access person. The
preclearance requirement and associated procedures are designed to identify any
substantive prohibition or limitation applicable to the proposed investment. The
substantive restrictions applicable to investment personnel include a ban on
acquiring any securities in an initial public offering, a prohibition from
profiting on short-term trading in securities and special preclearance of the
acquisition of securities in private placements. Furthermore, the Code of Ethics
provides for trading "blackout periods" that prohibit trading by investment
personnel and certain other employees within periods of trading by the Fund in
the same security. Trading by investment personnel and certain other employees
of the Advisor or Sub-Advisor, as appropriate, would be exempt from this
"blackout period" provided that (1) the market capitalization of a particular
security exceeds $2 billion; and (2) orders of such entity do not exceed ten
percent of the daily average trading volume of the

<PAGE>

security for the prior 15 days. 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.

7. INVESTMENT ADVISORY AND OTHER SERVICES

On June 17, 1997 the Board of Directors of the Fund, including a
majority of the Independent Directors, approved an Investment Advisory Agreement
between the Fund and Investment Company Capital Corp. ("ICC" or the "Advisor")
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
Corporation. ICC is also the investment advisor to other Funds in the Flag
Investors family of funds and BT Alex. Brown Cash Reserve Fund, Inc.

ABIM, also the sub-advisor to Flag Investors Communications 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.

<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, 1998 May 31, 1997 May 31, 1996
------------ ------------ ------------
- --------------------------------------------------------------------------------
ICC $2,090,159 $853,103(1) $318,234(2)
- --------------------------------------------------------------------------------
ABIM $1,535,410 $680,636(3) $365,697(3)
- --------------------------------------------------------------------------------
- ----------
1 Net of fee waivers of $141,648.
2 Net of fee waivers of $232,890.
3 Net of fee waivers for the fiscal years ended May 31, 1997 and 1996 of
$49,796 and $55,124.

Each of the Investment Advisory Agreement and the Sub-Advisory
Agreement has an initial term of two years and will continue in effect from year
to year thereafter if such continuance is specifically approved at least
annually by the Fund's Board of Directors, including a majority of the
Independent Directors who have no direct or indirect financial interest in such
agreements, by votes cast in person at a meeting called for such purpose, 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.")

8. 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") effective August 31, 1997.

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

<PAGE>

The Distribution Agreement may be terminated at any time upon 60 days'
written notice by the Fund, without penalty, by the vote of a majority of the
Fund's Independent Directors or by a vote of a majority of the outstanding
Shares of the Fund (as defined under "Capital Stock") or upon 60 days' written
notice by the Distributor and shall automatically terminate in the event of an
assignment. The Distribution Agreement has an initial term of one year from the
date of effectiveness. It shall continue in effect thereafter provided that it
is approved at least annually by (i) a vote of a majority of the outstanding
voting securities of the Fund or (ii) a vote of a majority of the Fund's Board
of Directors including a majority of the Independent Directors and so long as
the Fund's Plan of Distribution is approved at least annually by the Independent
Directors in person at a meeting called for the purpose of voting on such
approval. The Distribution Agreement, including the form of Sub-Distribution
Agreement, was initially approved by the Board of Directors, including a
majority of the Independent Directors, on August 4, 1997 and most recently on
September 29, 1998.

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

In addition, with respect to the Class A, Class B and Class C 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. The Fund may also enter into Shareholder Servicing
Agreements pursuant to which the Advisor, the Distributor, or their respective
affiliates, will provide compensation out of their own resources. 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 0.25% 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
0.75% of the average daily net assets of the Class B Shares. As compensation for
providing distribution services as described above for Class C Shares, ICC
Distributors receives an annual fee, paid monthly, equal to 0.75% of the average
daily net assets of the Class C 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 and Class C Shares, ICC Distributors expects to
retain the entire distribution fee as reimbursement for front-end payments to
Participating Dealers. In addition, with respect to the Class B and Class C
Shares, the Fund will pay ICC Distributors a shareholder servicing fee at an
annual rate of 0.25% of the average daily net assets of the respective class.
ICC Distributors expects to allocate most of its shareholder servicing fee to
Participating Dealers and Shareholder Servicing Agents.

<PAGE>

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

- --------------------------------------------------------------------------------
Fiscal Year Ended May 31,
- --------------------------------------------------------------------------------
Fee 1998 1997 1996
- --------------------------------------------------------------------------------
12b-1 Fee $447,239(1) $206,936(3) $130,140(3)
- --------------------------------------------------------------------------------
Shareholder Servicing Fee $51,052(2) $ 65,473(3) $ 27,369(3)
(Class B Shares)
- --------------------------------------------------------------------------------

- ----------

(1) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $110,677 and ICC Distributors, the Fund's distributor
effective August 31, 1997, received $336,562.

(2) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $11,761 and ICC Distributors, the Fund's distributor
effective August 31, 1997, received $39,291.

(3) Fees received by Alex. Brown, the Fund's distributor for the fiscal years
ended May 31, 1997 and May 31, 1996.

ICC Distributors receives no compensation for distributing the
Institutional Shares.

Pursuant to Rule 12b-1 under the Investment Company Act, which provides
that investment companies may pay distribution expenses, directly or indirectly,
only pursuant to a plan adopted by the investment company's board of directors
and approved by its shareholders, the Fund has adopted two separate Plans of
Distribution, one for the Class A Shares and one for the Class B Shares
(collectively, the "Plans"). Under the Plans, the Fund pays fees as described
above to ICC Distributors for distribution and other shareholder servicing
assistance as set forth in the Distribution Agreement, and ICC Distributors is
authorized to make payments out of its fee to Participating Dealers and
Shareholder Servicing Agents. The 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 Independent
Directors by votes cast in person at a meeting called for such purpose. The
Plans were most recently approved by the Fund's Board of Directors, including a
majority of the Independent Directors, on September [28,] 1998.

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
Independent Directors or by a vote of a majority of the outstanding Shares of
the related class (as defined under "Capital Stock").

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 Independent Directors shall be committed to the
discretion of the Independent Directors then in office.

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' 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 Class A Shares is less than 0.25% of the
Class A Shares average daily net assets invested in the cost

<PAGE>

of providing distribution services to the Class B Shares and Class C Shares is
less than 0.75% of the classes' respective average daily net assets 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

The Fund's distributor received commissions on the sale of Class A
Shares and contingent deferred sales charges on Class B Shares and from such
commissions and sales charges retained the following amounts.

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended May 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Class Received Retained Received Retained Received Retained
- -----------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C> <C>
Class A Commissions $571,016(1) $536,314(3) $404,583(5) $383,114(5) $173,816(5) $163,936(5)
- -----------------------------------------------------------------------------------------------------------------------------------
Class B Contingent
Deferred Sales
Charge $648,704(2) $632,376(4) $318,224(5) $313,208(5) $114,113(5) $114,113(5)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------

(1) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $111,345 and ICC Distributors, the Fund's distributor
effective August 31, 1997 received $459,671.

(2) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $188,711 and ICC Distributors, the Fund's distributor
effective August 31, 1997 received $459,993.

(3) Of commissions received, Alex. Brown retained $106,124 and ICC Distributors
retained $431,090, respectively.

(4) Of sales charges retained, Alex. Brown retained $183,389 and ICC
Distributors retained $448,987, respectively.

(5) By Alex. Brown, the Fund's distributor for the fiscal years ended May 31,
1997 and May 31, 1996.

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

<PAGE>

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.

9. 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
affiliates of the Advisors in any transaction in which affiliates of the
Advisors acts as a principal.

If affiliates of the Advisors 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 for particular transactions than might be
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 affiliates of the Advisors
higher commissions than another broker may have charged on brokerage
transactions for the Fund for brokerage or research services. The allocation of
orders among broker-dealers and the commission rates paid by the Fund will be
reviewed periodically by the Board. 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.

<PAGE>

Subject to the above considerations, the Board of Directors has
authorized the Fund to effect portfolio transactions through affiliates of the
Advisors. 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 affiliates of the Advisors
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, 1998, the Fund paid no brokerage commissions to affiliates of
the Advisors.

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.

ABIM directed transactions to broker-dealers and paid related
commissions because of research services in the following amounts:

- --------------------------------------------------------------------------------
Fiscal Year Ended May 31,
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Transactions Directed $127,658,887 $84,859,723 $25,187,456
- --------------------------------------------------------------------------------
Commissions Paid $249,526 $ 168,045 $ 68,808
- --------------------------------------------------------------------------------

The increasing amounts of commissions reflects the growth of the Fund.

The Fund is required to identify any securities of its "regular brokers
or dealers" (as such term is defined in the Investment Company Act) that the
Fund has acquired during its most recent fiscal year. As of May 31, 1998, the
Fund held a 5.40% repurchase agreement issued by Goldman Sachs & Company valued
at $15,908,000.

<PAGE>

10. CAPITAL STOCK

The Fund is authorized to issue 90 million Shares of common stock, par
value $.001 per share. The Board of Directors may increase or decrease the
number of authorized Shares without shareholder approval.

The Fund's Articles of Incorporation provide for the establishment of
separate series and separate classes of Shares by the Directors at any time
without shareholder approval. The Fund currently has one Series and the Board
has designated four classes of Shares: Flag Investors Equity Partners Fund Class
A Shares, Flag Investors Equity Partners Fund Class B Shares, Flag Investors
Equity Partners Fund Class C 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.

11. 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.

12. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES

Bankers Trust Company ("Bankers Trust"), 130 Liberty Street, New York,
New York 10006, has been retained to act as custodian of the Fund's investments.
Bankers Trust receives such compensation from the Fund for its services as
Custodian as may be agreed to from time to time by Bankers Trust and the Fund.
For the period from September 22, 1997 to May 31, 1998, Bankers Trust was paid
$11,578 as compensation for providing custody services to the Fund. Investment
Company Capital Corp., One South Street, Baltimore, Maryland 21202, has been
retained to act as transfer and dividend disbursing agent.

<PAGE>

As compensation for providing these services, the Fund pays ICC up to $15.67 per
account per year, plus reimbursement for out-of-pocket expenses incurred in
connection therewith. For the fiscal year ended May 31, 1998, ICC received
transfer agency fees of $74,050.

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)
$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 years ended May 31, 1998, 1997, and 1996 ICC received
accounting fees of $77,864, $55,940 and $49,269.

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.

13. INDEPENDENT ACCOUNTANTS

The annual financial statements of the Fund are audited by
PricewaterhouseCoopers LLP (formerly 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. PricewaterhouseCoopers LLP has offices at 250 West
Pratt Street, Baltimore, Maryland 21201.

14. LEGAL MATTERS

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

15. 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

<PAGE>

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) commenced operations.

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, 1998 were as follows:

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
One-Year Period Since Inception*
Ended May 31, 1998
- --------------------------------------------------------------------------------------------------
Class Ending Average Annual Ending Average Annual
Redeemable Total Return Redeemable Total Return
Value Value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A 1,220.07 22.01% 2,120.84 25.65%
- --------------------------------------------------------------------------------------------------
Class B 1,228.11 22.81% 2,139.84 25.99%
- --------------------------------------------------------------------------------------------------
Institutional 1,281.40 28.14% 1,740.60 27.38%
- --------------------------------------------------------------------------------------------------
</TABLE>
- -------------------
*February 13, 1995 for Class A and B Shares; February 14, 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

<PAGE>

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, 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, 1998 the Fund's portfolio turnover rate was 7.94% and in the fiscal year
ended May 31, 1997, the Fund's portfolio turnover rate was 17.60%.

16. 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 July 8, 1998*:

BT Alex. Brown Incorporated 9.88%
FBO 250-10788-16
PO Box 1346
Baltimore, MD 21203-1346

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

* As of such date, BT Alex. Brown Incorporated owned less than 5% of the
Fund's total outstanding Shares.

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

17. FINANCIAL STATEMENTS

See next page.

<PAGE>

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

STATEMENT OF NET ASSETS MAY 31, 1998

Shares Market Value
- --------------------------------------------------------------------------------
COMMON STOCK: 95.5%

BANKING: 3.5%
30,600 Citicorp $ 4,563,225
19,500 Wells Fargo & Company 7,049,250
-----------
11,612,475
-----------
BASIC INDUSTRY: 8.4%
399,000 Airgas, Inc.* 6,059,812
216,000 Georgia Gulf Corp. 5,413,500
144,100 Hercules, Inc. 6,349,406
138,500 Newmont Mining Corp. 3,453,844
146,000 Olin Corp. 6,314,500
-----------
27,591,062
-----------
BUSINESS SERVICES: 1.8%
180,000 First Data Corp. 5,985,000
-----------
CAPITAL GOODS: 2.1%
29,900 Briggs & Stratton Corporation 1,356,713
48,400 Caterpillar, Inc. 2,658,975
32,500 Eaton Corporation 2,918,906
-----------
6,934,594
-----------
CONSUMER DURABLES/NON-DURABLES: 14.6%
405,000 Blyth Industries, Inc.* 12,428,437
240,500 Callaway Golf 4,960,313
250,000 Ford Motor Company 12,968,750
207,500 Philip Morris Companies, Inc. 7,755,312
115,000 Richfood Holdings, Inc. 2,810,313
310,000 Sunbeam Corp. 7,110,625
-----------
48,033,750
-----------
CONSUMER SERVICES: 12.0%
160,000 America Online, Inc.* 13,330,000
150,000 Cendant Corp.* 3,253,125
50,000 Gannett Company, Inc. 3,296,875
611,800 The Learning Company, Inc.* 17,436,300
36,000 Times Mirror Company - Class A 2,304,000
-----------
39,620,300
-----------

26
<PAGE>

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

Shares Market Value
- --------------------------------------------------------------------------------
COMMON STOCK (continued)

DEFENSE/AEROSPACE: 3.0%
67,080 The Boeing Company $ 3,194,685
58,700 Lockheed Martin Corp. 6,589,075
-----------
9,783,760
-----------
ENERGY: 2.1%
100,000 CalEnergy Company, Inc.* 3,025,000
100,500 Noble Affiliates, Inc. 3,925,781
-----------
6,950,781
-----------
FINANCIAL SERVICES: 10.2%
60,200 American Express Company 6,178,025
65,521 Associates First Capital Corp., Class A 4,901,790
108,000 Freddie Mac 4,914,000
175,000 Green Tree Financial Corporation 7,032,812
36,000 Transamerica Corp. 4,140,000
105,000 Travelers Group, Inc. 6,405,000
-----------
33,571,627
-----------
HEALTH CARE: 5.0%
127,000 Amgen, Inc.* 7,683,500
100,000 Columbia/HCA Healthcare Corp. 3,268,750
82,000 Johnson & Johnson 5,663,125
-----------
16,615,375
-----------
HOTELS/GAMING: 1.6%
130,000 Harrah's Entertainment, Inc.* 3,250,000
61,600 Hilton Hotels Corporation 1,936,550
-----------
5,186,550
-----------
HOUSING: 5.1%
327,500 Champion Enterprises, Inc.* 8,822,031
148,300 USG Corporation* 7,878,438
-----------
16,700,469
-----------
INSURANCE: 5.2%
217,000 Conseco Inc. 10,117,625
93,400 Mid Ocean Limited 7,110,075
-----------
17,227,700
-----------

27
<PAGE>

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

STATEMENT OF NET ASSETS (CONCLUDED) MAY 31, 1998

Shares/
Par (000) Market Value
- --------------------------------------------------------------------------------
COMMON STOCK (concluded)

MULTI-INDUSTRY: 5.8%
164,000 American Standard Co., Inc.* $ 7,913,000
57,000 Loews Corporation 5,172,750
60,000 Monsanto Co. 3,322,500
24,200 Tenneco, Inc. 1,007,325
17,800 United Technologies Corp. 1,673,200
------------
19,088,775
------------
RETAIL: 2.5%
425,000 Kmart Corporation* 8,234,375
------------
TECHNOLOGY: 8.6%
120,100 Cognex Corp.* 2,281,900
86,000 International Business Machines Corporation 10,094,250
97,500 Millipore Corporation 3,254,063
490,300 Novell, Inc.* 5,148,150
34,000 Varian Associates, Inc. 1,634,125
59,500 Xerox Corporation 6,113,625
------------
28,526,113
------------
TELECOMMUNICATIONS: 2.3%
140,000 MCI Communications Corporation 7,485,625
------------
TRANSPORTATION: 1.7%
95,800 Canadian National Railway Company 5,664,175
------------
TOTAL COMMON STOCK
(Cost $221,215,964) 314,812,506
------------

REPURCHASE AGREEMENT: 4.8%
$15,908 Goldman Sachs & Co., 5.40%
Dated 05/29/98, to be repurchased on
06/01/98, collateralized by U.S. Treasury
Bonds with a market value of $16,226,929.
(Cost $15,908,000) 15,908,000
------------

28
<PAGE>

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

- --------------------------------------------------------------------------------
TOTAL INVESTMENT IN SECURITIES: 100.3%
(Cost $237,123,964)** $330,720,506
LIABILITIES IN EXCESS OF OTHER ASSETS, NET: (0.3%) (933,806)
------------
NET ASSETS: 100.0% $329,786,700
============
NET ASSET VALUE AND REDEMPTION PRICE PER:
CLASS A SHARE
($198,387,203 / 9,317,787 shares outstanding) $21.29
======
CLASS B SHARE
($37,046,242 / 1,755,771 shares outstanding) $21.10***
======
INSTITUTIONAL SHARE
($94,353,255 / 4,426,600 shares outstanding) $21.32
======
MAXIMUM OFFERING PRICE PER:
CLASS A SHARE
($21.29 / 0.955) $22.29
======
CLASS B SHARE $21.10
======
INSTITUTIONAL SHARE $21.32
======

- -------------
* Non-income producing security.
** Also aggregate cost for federal tax purposes.
*** Redemption value is $20.26 following a 4% maximum contingent deferred sales
charge.

See accompanying Notes to Financial Statements.

29
<PAGE>

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

STATEMENT OF OPERATIONS

For the
Year Ended
May 31,
- --------------------------------------------------------------------------------
1998
Investment Income:
Dividends $ 2,569,469
Interest 1,272,635
-----------
Total income 3,842,104
-----------
Expenses:
Investment advisory fee 2,090,159
Distribution fee 644,257
Registration fees 51,294
Accounting fee 77,864
Transfer agent fee 74,050
Custodian fee 23,692
Directors' fees 10,811
Miscellaneous 156,072
-----------
Total expenses 3,128,199
-----------
Net investment income 713,905
-----------
Realized and unrealized gain on investments:
Net realized gain from security transactions 5,232,557
Change in unrealized appreciation/depreciation of investments 54,454,890
-----------
Net gain on investments 59,687,447
-----------
Net increase in net assets resulting from operations $60,401,352
===========

See accompanying Notes to Financial Statements.

30
<PAGE>

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

STATEMENT OF CHANGES IN NET ASSETS

For the Year Ended May 31,
- --------------------------------------------------------------------------------
1998 1997

Increase in Net Assets:
Operations:
Net investment income $ 713,905 $ 635,029
Net realized gain
from security transactions 5,232,557 2,887,321
Change in unrealized appreciation/
depreciation of investments 54,454,890 27,900,712
------------ ------------
Net increase in net assets resulting
from operations 60,401,352 31,423,062
------------ ------------
Distributions to Shareholders from:
Net investment income and short-term gains:
Class A Shares (752,668) (719,423)
Class B Shares (42,361) (23,259)
Institutional Shares (517,867) (149,154)
Net realized long-term and mid-term gains:
Class A Shares (1,489,329) (392,581)
Class B Shares (268,284) (40,703)
Institutional Shares (755,157) (85,452)
------------ ------------
Total distributions (3,825,666) (1,410,572)
------------ ------------
Capital Share Transactions:
Proceeds from sale of shares 123,536,819 73,706,538
Value of shares issued in reinvestment
of dividends 3,468,071 1,249,106
Cost of shares repurchased (24,608,945) (7,920,314)
------------ ------------
Increase in net assets derived from
capital share transactions 102,395,945 67,035,330
------------ ------------
Total increase in net assets 158,971,631 97,047,820
Net Assets:
Beginning of period 170,815,069 73,767,249
------------ ------------
End of period (including undistributed net
investment income of $55,727 and $257,965,
respectively) $329,786,700 $170,815,069
============ ============

See accompanying Notes to Financial Statements.

31
<PAGE>

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

FINANCIAL HIGHLIGHTS -- CLASS A SHARES
(For a share outstanding throughout each period)

<TABLE>
<CAPTION>
For the Period
Feb. 13, 1995(1)
through
For the Year Ended May 31, May 31,
- ---------------------------------------------------------------------------------------------
1998 1997 1996 1995
<S><C>
Per Share Operating Performance:
Net asset value at beginning of
period $ 16.93 $ 13.09 $ 10.77 $ 10.00
-------- -------- ------- -------
Income from Investment Operations:
Net investment income 0.05 0.08 0.17 0.12
Net realized and unrealized gain
on investments 4.60 3.96 2.29 0.65
-------- -------- ------- -------
Total from Investment Operations 4.65 4.04 2.46 0.77
Less Distributions:
Net investment income and
short-term gains (0.10) (0.13) (0.14) --
Net realized mid-term and
long-term gains (0.19) (0.07) -- --
-------- -------- ------- -------
Total distributions (0.29) (0.20) (0.14) --
-------- -------- ------- -------
Net asset value at end of period $ 21.29 $ 16.93 $ 13.09 $ 10.77
======== ======== ======= =======
Total Return 27.76% 31.17% 23.05% 7.70%

Ratios to Average Daily Net Assets:
Expenses 1.24% 1.35%(2) 1.35%(2) 1.35%(2,4)
Net investment income 0.29% 0.61%(3) 1.52%(3) 3.74%(3,4)

Supplemental Data:
Net assets at end of period (000) $198,387 $113,030 $64,230 $38,612
Portfolio turnover rate 7.94% 17.60% 0.73% --
</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 1.48%, 1.77% and 3.76% (annualized)
for the years ended May 31, 1997, 1996 and the period ended May 31, 1995,
respectively.
(3) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 0.48%, 1.10% and 1.33%
(annualized) for the years ended May 31, 1997, 1996 and the period ended May
31, 1995, respectively.
(4) Annualized.

See accompanying Notes to Financial Statements.

32
<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)
through
For the Year Ended May 31, May 31,
- ---------------------------------------------------------------------------------------------
1998 1997 1996 1995
<S><C>
Per Share Operating Performance:
Net asset value at beginning of
period $ 16.84 $ 13.03 $10.75 $10.00
------- ------- ------ ------
Income from Investment Operations:
Net investment income
(Expenses in excess of income) (0.06) (0.04) 0.07 0.07
Net realized and unrealized gain
on investments 4.54 3.96 2.31 0.68
------- ------- ------ ------
Total from Investment Operations 4.48 3.92 2.38 0.75
Less Distributions:
Net investment income
and short-term gains (0.03) (0.04) (0.10) --
Net realized mid-term and
long-term gains (0.19) (0.07) -- --
------- ------- ------ ------
Total distributions (0.22) (0.11) (0.10) --
------- ------- ------ ------
Net asset value at end of period $ 21.10 $ 16.84 $13.03 $10.75
======= ======= ====== ======
Total Return 26.81% 30.28% 22.17% 7.50%

Ratios to Average Daily Net Assets:
Expenses 1.98% 2.10%(2) 2.10%(2) 2.10%(2,4)
Net investment income
(Expenses in excess of income) (0.47)% (0.16)%(3) 0.71%(3) 1.97%(3,4)

Supplemental Data:
Net assets at end of period (000) $37,046 $15,670 $5,302 $2,159
Portfolio turnover rate 7.94% 17.60% 0.73% --
</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 2.23%, 2.52% and 4.22% (annualized)
for the years ended May 31, 1997, 1996 and the period ended May 31, 1995,
respectively.
(3) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been (0.28)%, 0.29%, and
(0.15%) (annualized) for the years ended May 31, 1997, 1996, and the period
ended May 31, 1995, respectively.
(4) Annualized.

See accompanying Notes to Financial Statements.

33
<PAGE>

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

FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SHARES
(For a share outstanding throughout each period)

<TABLE>
<CAPTION>
For the Period
Feb. 12, 1996(1)
For the Year through
Ended May 31, May 31,
- -----------------------------------------------------------------------------------------
1998 1997 1996
<S><C>
Per Share Operating Performance:
Net asset value at beginning of period $ 16.94 $ 13.10 $12.72
------- ------- ------
Income from Investment Operations:
Net investment income 0.10 0.14 0.04
Net realized and unrealized gain
on investments 4.59 3.95 0.34
------- ------- ------
Total from Investment Operations 4.69 4.09 0.38

Less Distributions:
Net investment income and short-term gains (0.14) (0.18) --
Net realized mid-term and long-term gains (0.19) (0.07) --
------- ------- ------
Total distributions (0.33) (0.25) --
------- ------- ------
Net asset value at end of period $ 21.32 $ 16.94 $13.10
======= ======= ======
Total Return 28.14% 31.58% 3.23%

Ratios to Average Daily Net Assets:
Expenses 0.98% 1.10%(2) 1.10%(2,4)
Net investment income 0.54% 0.81%(3) 1.20%(3,4)

Supplemental Data:
Net assets at end of period (000) $94,354 $42,115 $4,235
Portfolio turnover rate 7.94% 17.60% 0.73%
</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.

See accompanying Notes to Financial Statements.

34
<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 front-end sales charge and the Class B Shares have a
contingent deferred sales charge. In addition each class has a different
distribution fee. The Institutional Shares do not have a front-end sales charge,
a contingent deferred sales charge or a distribution fee.

When preparing the Fund's financial statements, management makes estimates
and assumptions to comply with generally accepted accounting principles. These
estimates affect 1) the assets and liabilities that we report at the date of
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 than 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 not readily
available, the Investment Advisor, under the direction of the Board of
Directors determines a fair value using policy and 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.

35
<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 is recorded on an accrual basis and
includes the pro rata scientific method for amortization of
premiums and accretion of discounts when appropriate. Expenses
are recorded as incurred. 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.

36
<PAGE>

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

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

Investment Company Capital Corp. ("ICC"), an indirect subsidiary of Bankers
Trust Corporation, 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. This fee is based on the Fund's
average daily net assets and 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. At May 31, 1998, the amount owed under the advisory agreement amounted
to $226,672.

As compensation for its subadvisory services, ICC pays ABIM a fee from its
advisory fee. This fee is based on the Fund's average daily net assets and is
calculated daily and paid monthly at the following annual rates: 0.75% 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 reduce its aggregate fees so that ordinary Fund 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. No fees were reduced for the
year ended May 31, 1998.

As compensation for its accounting services, the Fund pays ICC an annual
fee that is calculated daily and paid monthly from the Fund's average daily net
assets.

As compensation for its transfer agent services, the Fund pays ICC a per
account fee that is calculated and paid monthly.

Effective September 22, 1997, Bankers Trust Company became the Fund's
custodian. Prior to September 22, 1997 PNC Bank served as the Fund's custodian.
From September 22, 1997 to May 31, 1998, the Fund paid $11,578 in custody
expenses.

As compensation for providing distribution services, the Fund pays ICC
Distributors, Inc. ("ICC Distributors") 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, 1998 distribution fees aggregated $378,730 and $265,527 for

37
<PAGE>

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

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 2 -- concluded

distribution services for the Class A shares and Class B shares respectively.
The Fund did not pay BT Alex. Brown any commissions for the year ended May 31,
1998. Prior to September 1, 1997 Alex. Brown & Sons, Inc. served as the Fund's
distributor for the same rate of compensation and on substantially the same
terms as ICC Distributors and earned or were paid $77,151 for Class A Shares
and $48,223 for Class B Shares.

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, 1998 was $5,802, and accrued liability was $7,276.

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, 1998 May 31, 1997
------------ ------------

Shares sold 3,375,853 2,175,983
Shares issued to shareholders on
reinvestment of dividends 117,061 71,468
Shares redeemed (852,542) (477,782)
------------ -----------
Net increase in shares outstanding 2,640,372 1,769,669
============ ===========

Proceeds from sale of shares $ 66,318,519 $32,665,187
Value of reinvested dividends 2,136,952 1,040,589
Cost of shares redeemed (16,794,448) (7,100,783)
------------ -----------
$ 51,661,023 $26,604,993
============ ===========

38
<PAGE>

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

NOTE 3 -- concluded

Class B Shares
-----------------------------
For the For the
Year Ended Year Ended
May 31, 1998 May 31, 1997
------------ ------------

Shares sold 860,902 545,380
Shares issued to shareholders on
reinvestment of dividends 16,617 3,986
Shares redeemed (52,451) (25,717)
----------- ----------
Net increase in shares outstanding 825,068 523,649
=========== ==========

Proceeds from sale of shares $16,336,267 $8,263,270
Value of reinvested dividends 302,586 60,224
Cost of shares redeemed (1,036,796) (375,286)
----------- ----------
$15,602,057 $7,948,208
=========== ==========

Institutional Shares
-----------------------------
For the For the
Year Ended Year Ended
May 31, 1998 May 31, 1997
------------ ------------

Shares sold 2,238,106 2,182,989
Shares issued to shareholders on
reinvestment of dividends 56,263 9,854
Shares redeemed (353,873) (30,115)
----------- -----------
Net increase in shares outstanding 1,940,496 2,162,728
=========== ===========

Proceeds from sale of shares $40,882,033 $32,778,081
Value of reinvested dividends 1,028,533 148,292
Cost of shares redeemed (6,777,701) (444,244)
----------- -----------
$35,132,865 $32,482,129
=========== ===========

At May 31, 1998, the amounts payable for fund shares redeemed amounted to
$1,189,301, of which $1,002,179 were attributable to the Class A Shares and
$187,122 were attributable to the Class B Shares.

39
<PAGE>

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

NOTES TO FINANCIAL STATEMENTS (CONCLUDED)

NOTE 4 -- Investment Transactions

At May 31, 1998, the amount owed for securities purchased were $635,714.
Excluding short-term obligations, purchases of investment securities aggregated
$127,606,561 and sales of investment securities aggregated $18,039,365 for the
year ended May 31, 1998.

On May 31, 1998, aggregate gross unrealized appreciation for all securities
in which there is an excess of value over tax cost was $100,101,326 and
aggregate gross unrealized depreciation of all securities in which there is an
excess of tax cost over value was $6,504,784.

NOTE 5 -- Net Assets

On May 31, 1998, net assets consisted of:

Paid-in capital:
Class A Shares $131,887,170
Class B Shares 28,044,712
Institutional Shares 71,757,339
Accumulated net realized gain from security transactions 4,445,210
Unrealized appreciation of investments 93,596,542
Undistributed net investment income 55,727
------------
$329,786,700
============

NOTE 6 -- Shareholder Meeting

Alex. Brown Incorporated, which was the parent corporation of the Fund's
investment advisor, merged into a subsidiary of Bankers Trust Corporation on
September 1, 1997. Due to the change in control of Alex. Brown Incorporated, the
Flag Investors Equity Partners Fund held a special meeting for its shareholders
on August 14, 1997. During the meeting, shareholders approved a new Investment
Advisory between the Fund and ICC and a new SubAdvisory Agreement among the
Fund, ICC and ABIM. The new agreements are substantially the same as the former
agreements.

NOTE 7 -- Federal Tax Information (unaudited)

100% of the net investment income dividends paid by the Fund during the tax
year ended May 31, 1998 qualified for the Dividends Received Deduction. The Fund
paid a long-term capital gain dividend of $0.19 during the tax year ended May
31, 1998. Eighty percent of this dividend was classified as 28% capital gain and
twenty percent was classified as 20% capital gain.

40
<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, 1998 and the related statement of
operations for the year then ended, the statements 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, 1998 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, 1998, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended 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 19, 1998

<PAGE>

APPENDIX A

DESCRIPTION OF CORPORATE BOND RATINGS

Moody's Investors Services, Inc.'s corporate bond ratings:

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

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

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

Baa - 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 - 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 characterizes bonds in
this class.

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 - Of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal or interest.

Ca - Obligations which are speculative in a high degree. Such
issues are often in default or have other marked shortcomings.

C - 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.

Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a rating in the lower end of
that generic rating category.

A-1

<PAGE>

Standard & Poor's Corporation's corporate bond ratings:

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

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

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

BBB - Regarded as having an adequate capacity to pay interest and
repay principal. Normally exhibit adequate protection parameters, but adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for bonds in this category
than in higher rated categories.

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

The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.

Debt rated D is in payment default. The D rating category is used
when payments on an obligation 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 of the taking of a similar action if payments on
a obligation are jeopardized.

A-2

<PAGE>

APPENDIX

DESCRIPTION OF COMMERCIAL PAPER RATINGS

Moody's Investor Services, Inc.'s commercial paper ratings:

PRIME-1 - Issues rated Prime-1 (or supporting institutions) have
a superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:

- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate
reliance on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
- Well-established access to a range of financial markets
and assured sources of alternate liquidity.

PRIME-2 - Issuers rated Prime-2 (or supporting institutions) have
a strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.

PRIME-3 - Issuers rated Prime-3 (or supporting institutions) have
an acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.

Standard & Poor's Corporation's commercial paper ratings:

A-1 - This is the highest category and indicates that the degree
of safety regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.

A-2 - Capacity for timely payment is satisfactory. The obligation
is somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than obligations in higher rating categories.

A-3 - Adequate capacity for timely payment. More vulnerable to
the adverse effects of changes in circumstances than obligations carrying the
higher designations.

B - Regarded as having significant speculative characteristics
for timely payment.

C - Currently vulnerable to nonpayment.

D - In payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless

A-3

<PAGE>

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 or the taking
of a similar action if payments on an obligation are jeopardized.

A-4