TOTAL RETURN U S TREASURY FUND INC, 497, 1996-03-06

TOTAL RETURN U S TREASURY FUND INC
497, 1996-03-06

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<PAGE>

LOGO

FLAG INVESTORS

TOTAL RETURN U.S. TREASURY FUND CLASS A SHARES
(A Class of Total Return U.S. Treasury Fund, Inc.)

Total Return U.S. Treasury Fund, Inc. (the "Fund") is designed to provide:

1) A high level of total return with relative stability of principal.

2) High current income, consistent with investment in securities issued by
the United States Treasury ("U.S. Treasury Securities").

The Fund will invest only in U.S. Treasury Securities and in repurchase
agreements fully collateralized by U.S. Treasury Securities.

Flag Investors Class A Shares of the Fund ("Class A Shares") are available
through Alex. Brown & Sons Incorporated, as well as Participating Dealers and
Shareholder Servicing Agents. (See "How to Invest in the Fund.")

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

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

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

PROSPECTUS

The date of this Prospectus is March 1, 1996

<PAGE>

FLAG INVESTORS

TOTAL RETURN U.S. TREASURY FUND
CLASS A SHARES

(A Class of Total Return U.S. Treasury Fund, Inc.)

135 East Baltimore Street
Baltimore, Maryland 21202

TABLE OF CONTENTS
-----------------

Page
1. Fee Table ........................................ 2
2. Financial Highlights ............................. 3
3. Investment Program ............................... 6
4. Investment Restrictions .......................... 8
5. How to Invest in the Fund ........................ 9
6. How to Redeem Shares ............................. 14
7. Telephone Transactions ........................... 15
8. Dividends and Taxes .............................. 16
9. Management of the Fund ........................... 18
10. Investment Advisor ............................... 18
11. Administrator .................................... 20
12. Distributor ...................................... 20
13. Custodian, Transfer Agent, Accounting Services ... 21
14. Performance Information .......................... 21
15. General Information .............................. 23

- ----------------------------------------------------------------------------
No person has been authorized to give any information or to make
representations not contained in this Prospectus in connection with any
offering made by this Prospectus and, if given or made, such information
must not be relied upon as having been authorized by the Fund or Alex.
Brown. This Prospectus does not constitute an offering by the Fund or Alex.
Brown in any jurisdiction in which such offering may not lawfully be made.
Shares may be offered only to residents of those states in which such
shares are eligible for purchase.

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

1
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- ---------------------------------------------------------------------------
1. FEE TABLE
...........................................................................
SHAREHOLDER TRANSACTION EXPENSES:
(as a percentage of offering price)

- ---------------------------------------------------------------------------
Maximum Sales Charge Imposed on Purchases .............. 4.50%*
Maximum Sales Charge Imposed on Reinvested Dividends ... None
Deferred Sales Charge .................................. None*
- ---------------------------------------------------------------------------

ANNUAL FUND OPERATING EXPENSES:
(as a percentage of average net assets)
- ---------------------------------------------------------------------------

Management Fees ........................................ .27%
12b-1 Fees ............................................. .25%
Other Expenses ......................................... .28%
Total Fund Operating Expenses .......................... .80%
- ---------------------------------------------------------------------------

* Purchases of $1 million or more are not subject to an initial sales charge,
however, a contingent deferred sales charge of .50% may be imposed on such
purchases. (See "How to Invest in the Fund -- Offering Price.")

EXAMPLE:

<TABLE>
<CAPTION>
You would pay the following expenses
on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at
the end of each time period:

1 year 3 years 5 years 10 years
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$53 $70 $88 $144
- ---------------------------------------------------------------------------------
</TABLE>

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

2
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reduced sales charges. (See "How to Invest in the Fund -- Offering Price.")
The Expenses and Example appearing in the table above are based on the Fund's
expenses (.80%) for the fiscal year ended October 31, 1995 and are based on
average daily net assets of approximately $365 million and a gross income
level of 6.74%. Due to the continuous nature of Rule 12b-1 fees, long-term
shareholders may pay more than the equivalent of the maximum front-end sales
charges permitted by the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. The foregoing table has not been audited by Deloitte
& Touche LLP, the Fund's independent auditors.

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2. FINANCIAL HIGHLIGHTS

The Fund was organized as a corporation under the laws of the State of
Maryland on June 3, 1988 and commenced operations on August 10, 1988. The
financial highlights included in this table are a part of the Fund's
financial statements for the periods indicated and have been audited by
Deloitte & Touche LLP, independent auditors. The financial statements and
related notes for the fiscal year ended October 31, 1995 and the independent
auditors' report thereon of Deloitte & Touche LLP are included in the
Statement of Additional Information. Additional performance information is
contained in the Fund's Annual Report for the fiscal year ended October 31,
1995, which can be obtained at no charge by calling the Fund at (800)
767-FLAG.

(For a Class A Share outstanding throughout each period) August 10,
- ------------------------------------------------------------------------------ 1988
(commence-
ment of
operations)
For the Year Ended October 31, through
-------------------------------------------------------------------------- October 31,
1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of
period .......................... $ 9.22 $11.35 $10.47 $10.41 $ 9.76 $10.55 $10.24 $10.00
------ ------ ------ ------ ------ ------ ------ ------
Income from Investment Operations:
Net investment income ............. 0.57 0.51 0.62 0.76 0.70 0.73 0.71 0.10
Net realized and unrealized
gain/(loss) on investments ..... 1.04 (1.16) 1.12 0.05 0.79 (0.60) 0.44 0.21
------ ------ ------ ------ ------ ------ ------ ------
Total from Investment Operations .. 1.61 (0.65) 1.74 0.81 1.49 0.13 1.15 0.31
Less Distributions:
Dividends from net investment
income and short-term gains ....... (0.64) (1.20) (0.79) (0.70) (0.84) (0.92) (0.84) (0.07)
Distributions from net realized
long-term gains ................ -- (0.28) (0.07) (0.05) -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total distributions ............... (0.64) (1.48)(1) (0.86) (0.75) (0.84) (0.92) (0.84) (0.07)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value at end of period .. $10.19 $ 9.22 $11.35 $10.47 $10.41 $ 9.76 $10.55 $10.24
====== ====== ====== ====== ====== ====== ====== ======
Total Return** ...................... 18.09% (6.22)% 17.33% 8.96% 15.89% 1.43% 11.87% 3.10%
Ratios to Average Net Assets:
Expenses .......................... 0.80% 0.77% 0.77% 0.77% 0.87% 0.89% 0.97% 1.12%*
Net investment income ............. 5.94% 4.98% 5.21% 5.65% 6.88% 7.40% 7.51% 5.80%*
Supplemental Data:
Net assets at end of period (000):
Flag Investors Class A Shares ..$164,206 $175,149 $224,790 $250,210 $237,688 $198,556 $135,523 $55,757
ISI Class Shares ...............$206,615 $200,309 $232,103 $207,518 $168,128 $131,872 $89,943 $22,597
Portfolio turnover rate ........... 194% 68% 249% 191% 141% 79% 184% 72%
</TABLE>
- ------
* Annualized.
** Total return represents aggregate total return for the periods indicated
and does not reflect any applicable sales charges.
(1) Distributions to shareholders include $0.05 per share return of capital.

<PAGE>
- ----------------------------------------------------------------------------
3. INVESTMENT PROGRAM
- ----------------------------------------------------------------------------
INVESTMENT OBJECTIVE, POLICIES
AND RISK CONSIDERATIONS
...........................................................................

The Fund's investment objective is to seek a high level of total return,
with relative stability of principal, and, secondarily, to seek a high level
of current income consistent with an investment in U.S. Treasury Securities.
The Fund will invest only in U.S. Treasury Securities and in repurchase
agreements fully collateralized by U.S. Treasury Securities. U.S. Treasury
Securities include Treasury bills, Treasury notes, Treasury bonds and
Separate Trading of Registered Interest and Principal of Securities
("STRIPS"). All such obligations are direct obligations of the United States
Government and are supported by the full faith and credit of the United
States. STRIPS are U.S. Treasury Securities which do not pay interest
currently, but which are purchased at a discount and are payable in full at
maturity. The value of STRIPS may be subject to greater market fluctuations
from changing interest rates prior to maturity than the value of other U.S.
Treasury Securities of comparable maturities that bear interest currently.
The Fund's investment objectives may be changed only by the affirmative vote
of a majority of the outstanding shares of all classes of the Fund. There can
be no assurance that the Fund's investment objective will be met.

The Fund may enter into forward commitments for the purchase of U.S.
Treasury Securities and, as noted, may enter into repurchase agreements
collateralized by U.S. Treasury Securities with commercial banks and
registered broker-dealers. These investment practices, which may involve
certain special risks, are described below.
............................................................................
SELECTION OF INVESTMENTS

6
<PAGE>
securities of different maturities and its expectations of future changes in
interest rates. Thus, at certain times the average maturity of the portfolio
may be relatively short (from under one year to five years, for example) and
at other times may be relatively long (over 10 years, for example). In
determining which direction interest rates are likely to move, the Advisor
relies on the economic analysis made by its chairman, Edward S. Hyman. There
can be no assurance that such economic analysis will accurately predict
interest rate trends or that the portfolio strategies based on Mr. Hyman's
economic analysis will be effective.
............................................................................
SPECIAL RISK CONSIDERATIONS

U.S. Treasury Securities are considered among the safest of fixed-income
investments. Because of this added safety, the yields available from these
securities are generally lower than the yields available from corporate debt
securities. As with other debt securities, the value of U.S. Treasury
Securities changes as interest rates fluctuate. Changes in the value of
portfolio securities will not affect interest income from those securities
but will be reflected in the Fund's net asset value. Thus, a decrease in
interest rates will generally result in an increase in the value of the
Fund's shares. Conversely, during periods of rising interest rates, the value
of the Fund's shares will generally decline. The magnitude of these
fluctuations will generally be greater at times when the Fund's average
maturity is longer.

............................................................................
REPURCHASE AGREEMENTS

The Fund may agree to purchase U.S. Treasury Securities from financial
institutions, such as banks and broker-dealers, subject to the seller's
agreement to repurchase the securities at an established time and price. The
Fund will enter into repurchase agreements only with banks and broker-
dealers that have been determined to be creditworthy by the Fund's Board of
Directors under criteria established with the assistance of the Advisor.
Default by the seller may, however, expose the Fund to possible loss because
of adverse market action or delay in connection with the disposition of the
underlying obligations. In addition, if bankruptcy proceedings are commenced
with respect to the seller of the security, the Fund may be delayed or
limited in its ability to sell the collateral.

............................................................................
PURCHASE OF WHEN-ISSUED SECURITIES

From time to time, in the ordinary course of business, the Fund may make
purchases of U.S. Treasury Securities, at the current market value of

7
<PAGE>

the securities, on a when-issued basis. When such transactions are
negotiated, the yield to maturity is fixed. The coupon interest rate on such
U.S. Treasury Securities is fixed at the next succeeding U.S. Treasury
auction date, thereby determining the price to be paid by the Fund. Delivery
and payment will take place after the date of the auction. A segregated
account of the Fund, consisting of cash, cash equivalents or U.S. Treasury
Securities equal at all times to the amount of the when-issued commitments
will be established and maintained by the Fund at the Fund's custodian.
Additional cash or U.S. Treasury Securities will be added to the account when
necessary. While the Fund will purchase securities on a when-issued basis
only with the intention of acquiring the securities, the Fund may sell the
securities before the settlement date if it is deemed advisable to limit the
effects of adverse market action. The securities so purchased or sold are
subject to market fluctuation and no interest accrues to the purchaser during
this period. At the time of delivery of the securities, their value may be
more or less than the purchase or sale price. The Fund will ordinarily invest
no more than 40% of its net assets at any time in U.S. Treasury Securities
purchased on a when-issued basis.

- ----------------------------------------------------------------------------
4. INVESTMENT RESTRICTIONS

The Fund's investment program is subject to a number of restrictions which
reflect both self-imposed standards and federal and state regulatory
limitations.

1) As a matter of fundamental policy, the Fund will not 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 its total assets are
outstanding, the Fund will not purchase securities for investment. This
restriction may not be changed without the affirmative vote of a majority
of the outstanding shares of the Fund.

2) Additionally, the Fund will not invest more than 10% of the value of its
net assets in repurchase agreements with remaining maturities in excess of
seven days and other illiquid securities. This restriction may be changed
by a majority vote of the Board of Directors.

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

8
<PAGE>

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

5. HOW TO INVEST IN THE FUND

Class A Shares may be purchased from Alex. Brown & Sons Incorporated, 135
East Baltimore Street, Baltimore, Maryland 21202 ("Alex. Brown"), through any
securities dealer which has entered into a dealer agreement with Alex. Brown
("Participating Dealers") or through any financial institution which has
entered into a shareholder servicing agreement with the Fund ("Shareholder
Servicing Agents"). Class A Shares may also be purchased by completing the
Application Form attached to this Prospectus and returning it, together with
payment of the purchase price (including any applicable front-end sales
charge), to the address shown on the Application Form.

The minimum initial investment is $2,000, except that the minimum initial
investment for shareholders of any other Flag Investors fund or class is $500
and the minimum initial investment for participants in the Fund's Automatic
Investing Plan is $250. Each subsequent investment must be at least $100,
except that the minimum subsequent investment under the Fund's Automatic
Investing Plan is $250 for quarterly investments and $100 for monthly
investments. (See "Purchases Through Automatic Investing Plan" below.) There
is no minimum investment requirement for qualified retirement plans (i.e.,
401(k) plans or pension and profit sharing plans). IRA accounts are, however,
subject to the $2,000 minimum initial investment requirement. There is no
minimum investment requirement for spousal IRA accounts.

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

The net asset value per share is determined once daily as of the close of
the New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time), on
each Business Day. Net asset value per share of a class is calculated by
valuing all assets held by the Fund, deducting all liabilities, including

<PAGE>

liabilities attributable to that specific class, and dividing the
resulting amount by the number of then outstanding shares of the class.
Securities are valued on the basis of their last sale price (or in the
absence of recorded sales, at the average of readily available closing bid
and asked prices). Securities or other assets for which market quotations are
not readily available are valued at their fair value as determined in good
faith by the Advisor under procedures established from time to time and
monitored by the Fund's Board of Directors. Debt obligations with maturities
of 60 days or less are valued at amortized cost, which constitutes fair value
as determined by the Directors.

.............................................................................
OFFERING PRICE

Class A Shares may be purchased from Alex. Brown, Participating Dealers or
Shareholder Servicing Agents at the Offering Price, which includes a sales
charge which is calculated as a percentage of the Offering Price and
decreases as the amount of purchase increases, as shown below:

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

- ------
* Purchases of $1 million or more may be subject to a contingent deferred
sales charge. (See below.) The distributor may make payments to dealers in
the amount of .50% of the Offering Price.

A shareholder who purchases additional Class A Shares may obtain reduced
sales charges, as set forth in the table above, through a right of
accumulation. In addition, an investor may obtain reduced sales charges as
set forth above through a right of accumulation of purchases of Class A
Shares and purchases of shares of other Flag Investors funds with the same
sales charge and purchases of shares of Flag Investors Intermediate-Term
Income Fund, Inc. and Flag Investors Maryland Intermediate Tax Free Income
Fund, Inc. (the "Intermediate Funds"). The applicable sales charge will be
determined based on the total of (a) the shareholder's current purchase plus
(b) an amount equal to the then current net asset value or cost, whichever is
higher, of all Class A Shares and of all Flag Investors shares described
above and any Flag Investors Class D shares held by the shareholder. To
obtain the reduced sales charge through a right of accumulation, the
shareholder must provide Alex. Brown, either directly or through a

10
<PAGE>
Participating Dealer or Shareholder Servicing Agent, as applicable, with
sufficient information to verify that the shareholder has such a right. The
Fund may amend or terminate this right of accumulation at any time as to
subsequent purchases.

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

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

No sales charge will be payable at the time of purchase on investments of
$1 million or more of Class A Shares. However, a contingent deferred sales
charge may be imposed on such investments in the event of a redemption
within 24 months following the purchase, at the rate of .50% on the lesser of
the value of the Class A Shares redeemed or the total cost of such shares. No
contingent deferred sales charge will be imposed on purchases of $3 million
or more of Class A Shares redeemed within 24 months of purchase if the
Participating Dealer and Alex. Brown have entered into an agreement under
which the Participating Dealer agrees to return any payments received on the
sale of such shares. In determining whether a contingent deferred sales
charge is payable, and, if so, the amount of the charge, it is assumed that
Class A Shares not subject to such charge are the first redeemed followed by
other Class A Shares held for the longest period of time.

11
<PAGE>

The Fund may sell Class A Shares at net asset value (without sales charge)
to the following: (i) banks, bank trust departments, registered investment
advisory companies, financial planners and broker-dealers purchasing Class A
Shares on behalf of their fiduciary and advisory clients, provided such
clients have paid an account management fee for these services (investors may
be charged a fee if they effect transactions in Fund shares through a broker
or agent); (ii) qualified retirement plans; (iii) participants in a Flag
Investors fund payroll savings plan program; (iv) investors who have redeemed
Class A Shares, or shares of any other mutual fund in the Flag Investors
family of funds with the same sales charges, or who have redeemed shares of
the Intermediate Funds which they had held for at least 24 months prior to
redemption, in an amount that is not more than the total redemption proceeds,
provided that the purchase is within 90 days after the redemption; and (v)
current or retired Directors of the Fund, and directors and employees (and
their immediate families) of Alex. Brown, ISI and Participating Dealers and
their respective affiliates.

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

.............................................................................
PURCHASES BY EXCHANGE

As permitted pursuant to any rule, regulation or order promulgated by the
SEC, shareholders of other Flag Investors funds may exchange their Class A
shares of those funds for an equal dollar amount of Class A Shares. Except as
provided below, Class A Shares issued pursuant to this offer will not be
subject to the sales charges described above or any other charge.
Shareholders of Flag Investors Cash Reserve Prime Class A Shares may exchange
into Class A Shares upon payment of the difference in sales charges, as
applicable.

When a shareholder acquires Class A Shares through an exchange from
another fund in the Flag Investors family of funds, the Fund will combine the
period for which the original shares were held prior to the exchange with the
holding period of the Class A Shares acquired in the exchange for purposes of
determining what, if any, contingent deferred sales charge is applicable upon
a redemption of any such shares. Shareholders of the Intermediate Funds may
exchange into Class A Shares upon payment of the difference in sales charges,
as applicable, except that the exchange will be made at net asset value if
the shares of such funds have been held for more than 24 months.

12
<PAGE>
The net asset value of shares purchased and redeemed in an exchange
request received on a Business Day will be determined on the same day,
provided that the exchange request is received prior to 4:00 p.m. (Eastern
Time). Exchange requests received after 4:00 p.m. (Eastern Time) will be
effected on the next Business Day.

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

The exchange privilege with respect to other Flag Investors funds may also
be exercised by telephone. (See "Telephone Transactions" below.) The exchange
privilege may be exercised only in those states where the class of shares of
such other funds may legally be sold. Investors should receive and read the
applicable prospectus prior to tendering shares for exchange. The Fund may
modify or terminate this offer of exchange at any time upon 60 days' prior
written notice to shareholders.

.............................................................................
PURCHASES THROUGH AUTOMATIC INVESTING PLAN

Shareholders may purchase Class A Shares regularly by means of an
Automatic Investing Plan with a pre-authorized check drawn on their checking
accounts. Under this plan, the shareholder may elect to have a specified
amount invested monthly or quarterly in Class A Shares. The amount specified
will be withdrawn from the shareholder's checking account using the
pre-authorized check and will be invested in Class A Shares at the applicable
Offering Price determined on the date the amount is available for investment.
Participation in the Automatic Investing Plan may be discontinued either by
the Fund or the shareholder upon 30 days' prior written notice to the other
party. A shareholder who wishes to enroll in the Automatic Investing Plan may
do so by completing the appropriate section of the Application Form attached
to this Prospectus.

.............................................................................
DIVIDEND REINVESTMENT PLAN

Shareholders may elect to have their distributions (capital gains and/or
dividend income) paid by check or reinvested in additional Class A Shares. A
shareholder who wishes to enroll in the Dividend Reinvestment Plan should check
the appropriate box on the Application Form or call (800) 553-8080 for
additional information.

13
<PAGE>

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

Reinvestments of distributions will be effected without a sales charge.

- -----------------------------------------------------------------------------
6. HOW TO REDEEM SHARES

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

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

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

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

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

14
<PAGE>
Dividends payable up to the date of the redemption of Class A Shares will
be paid on the next dividend payable date. If all of the Class A Shares in a
shareholder's account have been redeemed on a dividend payable date, the
dividend will be remitted by check to the shareholder.

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

.............................................................................
SYSTEMATIC WITHDRAWAL PLAN

Shareholders who hold Class A Shares having a value of $10,000 or more may
arrange to have a portion of their Class A Shares redeemed monthly or
quarterly under the Fund's Systematic Withdrawal Plan. Such payments are
drawn from income dividends, and to the extent necessary, from share
redemptions (which would be a return of principal and, if reflecting a gain,
would be taxable). If redemptions continue, a shareholder's account may
eventually be exhausted. Because share purchases include a sales charge that
will not be recovered at the time of redemption, a shareholder should not
have a withdrawal plan in effect at the same time he is making recurring
purchases of Class A Shares. A shareholder who wishes to enroll in the
Systematic Withdrawal Plan may do so by completing the appropriate section of
the Application Form attached to this Prospectus.

- ------------------------------------------------------------------------------
7. TELEPHONE TRANSACTIONS

Shareholders may exercise the exchange privilege with respect to other
Flag Investors funds, or redeem Class A Shares in amounts up to $50,000, by
notifying the Transfer Agent by telephone at (800) 553-8080 on any Business
Day between the hours of 8:30 a.m. and 5:30 p.m. (Eastern Time) or by regular
or express mail at its address listed under "Custodian, Transfer Agent,
Accounting Services." Telephone transaction privileges are automatic.
Shareholders may specifically request that no telephone redemptions or
exchanges be accepted for their accounts. This election may be made on the
Application Form or at any time thereafter by completing and returning
appropriate documentation supplied by the Transfer Agent.

A telephone exchange or redemption placed by 4:00 p.m. (Eastern Time) or
the close of the New York Stock Exchange, whichever is earlier, is effective
that day. Telephone orders placed after 4:00 p.m. (Eastern Time) will be
effected at the net asset value (less any applicable contingent deferred
sales charge on redemptions) as determined on the next Business Day.

15
<PAGE>

The Fund and the Transfer Agent will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. These
procedures include requiring the investor to provide certain personal
identification information at the time an account is opened and prior to
effecting each transaction requested by telephone. In addition, all telephone
transaction requests will be recorded and investors may be required to
provide additional telecopied instructions of such transaction requests. The
Fund or the Transfer Agent may be liable for any losses due to unauthorized
or fraudulent telephone instructions if either of them does not employ these
procedures. If these procedures are employed, neither the Fund nor the
Transfer Agent will be responsible for any loss, liability, cost or expense
for following instructions received by telephone that either of them
reasonably believes to be genuine. During periods of extreme economic or
market changes, shareholders may experience difficulty in effecting telephone
transactions. In such event, requests should be made by regular or express
mail. Class A Shares held in certificate form may not be exchanged or
redeemed by telephone. (See "How to Invest in the Fund -- Purchases by
Exchange" and "How to Redeem Shares.")

- -----------------------------------------------------------------------------
8. DIVIDENDS AND TAXES
.............................................................................
DIVIDENDS AND DISTRIBUTIONS

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

Unless the shareholder elects otherwise, all dividends and net capital
gains distributions, if any, will be reinvested in additional Class A Shares
at net asset value. Shareholders may elect to have income dividends or
capital gains distributions paid in cash. Shareholders wishing to change
their election must give written notice to the Transfer Agent (see
"Custodian, Transfer Agent, Accounting Services"), either directly or through
their Participating Dealer or Shareholder Servicing Agent, at least five days
before the next date on which dividends or distributions will be paid.

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

The following is only a general summary of certain federal tax
considerations affecting the Fund and the shareholders. No attempt is made to

16
<PAGE>
present a detailed explanation of the tax treatment of the Fund or the
shareholders, and the discussion here is not intended as a substitute for
careful tax planning.

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

The Fund has been and expects to continue to be taxed as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986,
as amended. As long as the Fund qualifies for this tax treatment, it will be
relieved of federal income tax on amounts distributed to shareholders, but
shareholders, unless otherwise exempt, will generally pay federal income or
capital gains taxes on the amounts so distributed. Reinvested distributions
will be taxed as if they had been distributed on the reinvestment date.

Distributions from the Fund out of net capital gains (the excess of net
long-term capital gains over net short-term capital losses), if any, are
treated by the shareholder as long-term capital gains regardless of the
length of time the shareholder has held the Class A Shares. All other income
distributions are taxed to the shareholders as ordinary income. Fund
distributions generally will not be eligible for the corporate dividends
received deduction. Shareholders will be advised annually as to the federal
income tax status of distributions made during the year.

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

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

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

17
<PAGE>
such distributions are derived from interest on federal obligations.
Shareholders are urged to consult with their tax advisors regarding whether,
and under what conditions such exemption is available.

- ----------------------------------------------------------------------------
9. MANAGEMENT OF THE FUND

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

The Fund's Directors and officers are as follows:

*Edward S. Hyman Chairman
*Richard T. Hale Vice Chairman
*W. James Price Vice Chairman
James J. Cunnane Director
John F. Kroeger Director
Louis E. Levy Director
Eugene J. McDonald Director
Harry Woolf Director
R. Alan Medaugh President
Edward J. Veilleux Vice President
Gary V. Fearnow Vice President
Nancy Lazar Vice President
Brian C. Nelson Vice President and Secretary
Carrie L. Butler Vice President
Joseph A. Finelli Treasurer
Denice De Florio Assistant Vice President
Laurie D. DePrine Assistant Secretary

- ------
*Messrs. Hyman, Hale and Price are "interested persons" of the Fund within
the meaning of Section 2(a)(19) under the Investment Company Act of 1940, as
amended (the "1940 Act").

- ------------------------------------------------------------------------------
10. INVESTMENT ADVISOR

ISI, a registered investment advisor, serves as investment advisor to the
Fund pursuant to an investment advisory agreement dated as of April 1, 1991 (the
"Investment Advisory Agreement"). ISI employs Messrs. Edward S. Hyman and R.
Alan Medaugh. Due to their stock ownership, Messrs. Hyman and Medaugh may be
deemed to be controlling persons of ISI. As of December 31, 1995, the Advisor
had approximately $1 billion under management. The Advisor also acts as
investment advisor to Managed Municipal Fund, Inc. and North American Government
Bond Fund, Inc., open-end management investment companies with approximately
$198 million in aggregate net assets as of December 31, 1995.

18
<PAGE>

Pursuant to the terms of the Investment Advisory Agreement, as
compensation for its services for the fiscal year ended October 31, 1995, the
Advisor received an annual fee equal to .27% of the Fund's average daily net
assets. The Advisor's fee is based in part upon a varying percentage of the
Fund's average daily net assets and in part upon a percentage (1.5%) of the
Fund's gross income.

The address of the Advisor is 717 Fifth Avenue, New York, New York 10022.
............................................................................
PORTFOLIO MANAGERS

Edward S. Hyman, Chairman of the Fund and ISI, and R. Alan Medaugh, President
of the Fund and ISI, have shared direct portfolio management responsibility for
the Fund since its inception. Mr. Hyman is responsible for developing the
economic analysis upon which the Fund's selection of investments is based. (See
"Investment Program.") Before joining ISI, Mr. Hyman was a vice chairman and
member of the Board of C.J. Lawrence Inc. and prior thereto, an economic
consultant at Data Resources. He writes a variety of international and domestic
economic research reports which follow trends that may determine the direction
of interest rates. These international and domestic reports are sent to ISI's
private institutional clients in the United States and overseas. The periodical
Institutional Investor, which rates analysts and economists on an annual basis,
has rated Mr. Hyman as its "first team" economist, which is its highest rating,
in each of the last sixteen years.

Mr. Medaugh is responsible for day to day portfolio management. Prior to
joining ISI, Mr. Medaugh was Managing Director of C.J. Lawrence Fixed Income
Management and prior thereto Senior Vice President and bond portfolio manager
at Fiduciary Trust International. While at Fiduciary Trust International, Mr.
Medaugh led their Fixed-Income Department which managed $5 billion of
international fixed income portfolios for institutional clients. Mr. Medaugh
also had prior experience as a bond portfolio manager at both Putnam
Management Company and Fidelity Management and Research.

19
<PAGE>

- -----------------------------------------------------------------------------
11. ADMINISTRATOR

Investment Company Capital Corp. ("ICC"), 135 East Baltimore Street,
Baltimore, Maryland 21202, a wholly-owned subsidiary of Alex. Brown, provides
administration services to the Fund. ICC supervises the day-to-day operations
of the Fund, including the preparation of registration statements, proxy
materials, shareholder reports, compliance with all requirements of
securities laws in the states in which the Fund's shares are distributed and
oversight of the relationship between the Fund and its other service
providers. As compensation for these services for the fiscal year ended
October 31, 1995, ICC received a fee equal to .12% of the Fund's average
daily net assets. ICC's fee is based in part upon a varying percentage of the
Fund's average daily net assets and in part upon a percentage (.50%) of the
Fund's gross income.

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.")

- -----------------------------------------------------------------------------
12. DISTRIBUTOR

Alex. Brown acts as distributor of the Class A Shares. Alex. Brown is an
investment banking firm which offers a broad range of investment services to
individual, institutional, corporate and municipal clients. It is a
wholly-owned subsidiary of Alex. Brown Incorporated which has engaged
directly and through subsidiaries and affiliates in the investment business
since 1800. Alex. Brown is a member of the New York Stock Exchange and other
leading securities exchanges. Headquartered in Baltimore, Maryland, Alex.
Brown has offices throughout the United States and, through subsidiaries,
maintains offices in London, England, Geneva, Switzerland and Tokyo, Japan.

The Fund has adopted a Distribution Plan for the Class A Shares pursuant
to Rule 12b-1 under the 1940 Act (the "Plan"). As compensation for its
services for the fiscal year ended October 31, 1995, Alex. Brown received a
fee equal to .25% of the Class A Shares' average daily net assets. Alex.
Brown expects to allocate on a proportional basis most of its annual
distribution fee to its investment representatives or up to all of its fee to
Participating Dealers as compensation for their ongoing shareholder services,
including processing purchase and redemption requests and responding to
shareholder inquiries.

20
<PAGE>
In addition, the Fund may enter into Shareholder Servicing Agreements with
certain financial institutions, such as banks, to act as Shareholder
Servicing Agents, pursuant to which Alex. Brown may allocate a portion of its
distribution fee as compensation for such financial institutions' ongoing
shareholder services. Such financial institutions may impose separate fees in
connection with these services and investors should review this Prospectus in
conjunction with any such institution's fee schedule. Amounts allocated to
Participating Dealers and Shareholder Servicing Agents may not exceed amounts
payable to Alex. Brown under the Plan.

Payments under the Plan are made as described above regardless of Alex.
Brown's actual cost of providing distribution services and may be used to pay
Alex. Brown's overhead expenses. If the cost of providing distribution
services to the Fund in connection with the sale of the Class A Shares is
less than .25% of the average daily net assets invested in Class A Shares for
any period, the unexpended portion of the distribution fee may be retained by
Alex. Brown. Alex. Brown will from time to time and from its own resources
pay or allow additional discounts or promotional incentives in the form of
cash or other compensation (including merchandise or travel) to Participating
Dealers.

- -----------------------------------------------------------------------------
13. CUSTODIAN, TRANSFER AGENT, ACCOUNTING SERVICES

PNC Bank, National Association ("PNC Bank"), a national banking
association with offices at Airport Business Park, 200 Stevens Drive, Lester,
Pennsylvania 19113, acts as custodian of the Fund's assets. Investment
Company Capital Corp., 135 East Baltimore Street, Baltimore, Maryland 21202
(telephone: (800) 553-8080) is the Fund's transfer and dividend disbursing
agent and provides accounting services to the Fund. As compensation for
providing accounting services to the Fund for the fiscal year ended October
31, 1995, ICC received a fee equal to .03% of the Fund's average daily net
assets. (See the Statement of Additional Information.) ICC also serves as the
Fund's administrator.

- -----------------------------------------------------------------------------
14. PERFORMANCE INFORMATION

From time to time, the Fund may quote total return and yield data in
advertisements or in reports to shareholders. Both total return and yield
data will be computed according to the standardized calculations required by
the SEC to provide consistency and comparability in investment company
advertising.

21
<PAGE>
The yield of the Fund will be determined by dividing the net investment
income earned by the Fund during a 30 day period by the maximum offering
price per share on the last day of the period and annualizing the result on a
semi-annual basis.

Advertisements or reports citing performance data will show the average
annual total return, net of the Fund's sales charge, over one, five and ten
year periods or, if such periods have not yet elapsed, shorter periods
corresponding to the life of the Fund. Such return quotations will be
computed by finding average annual compounded rates of return over such
periods that would equate an assumed initial investment of $1,000 to the
ending redeemable value, net of all sales loads and other fees, according to
the required standardized calculation. The Fund's total return for a given
period is based upon changes in the Fund's net asset value and the Fund's
yield for the period. If the Fund compares its performance to other funds or
to relevant indices, its performance will be stated in the same terms in
which such comparative data and indices are stated, which is normally total
return rather than yield. For these purposes, the performance of the Fund, as
well as the performance of such investment companies or indices, may not
reflect sales charges, which, if reflected, would reduce performance results.

The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Morningstar
Inc., independent services which monitor the performance of mutual funds. The
performance of the Fund may also be compared to the Lehman Brothers
Government Corporate Bond Index (or any of its sub-indices), the Consumer
Price Index, Ryan U.S. Treasury Index, the return on 90 day U.S. Treasury
bills, the Standard & Poor's 500 Stock Index and the Dow Jones Industrial
Average. The Fund may also use total return performance data as reported in
the following national financial and industry publications that monitor the
performance of mutual funds: Money Magazine, Forbes, Business Week, Barron's,
Investor's Daily, IBC/Donoghue's Money Fund Report and The Wall Street
Journal.

Yield quotations and performance comparisons may be useful as a basis for
comparing the Fund with other investment alternatives. However, shareholders
should realize that the Fund's current yield will fluctuate from time to time
and is not necessarily representative of the Fund's future performance. Yield
and performance data should also be considered in light of the risks
associated with the Fund's investment objective and policies. Any fees charged
by banks with respect to customer accounts through which Class A Shares may
be purchased, although not included in calculations of performance, will reduce
performance results.

22
<PAGE>

of one year or less) may vary from year to year, as well as within a year,
depending on market conditions. For the fiscal years ended October 31, 1995
and October 31, 1994, the Fund's portfolio turnover rate was 194% and 68%,
respectively. In late 1994 the Advisor decided, in light of then current
market conditions, that the maturity of the Fund's portfolio should be
lengthened to take advantage of an ISI forecasted declining interest rate
trend. The Fund's portfolio turnove rate for the fiscal year ended October
31, 1995 increased as a result of this change in investment strategy. A high
level of portfolio turnover may generate relatively high transaction costs
and may increase the amount of taxes payable by the Fund's shareholders. (See
"Dividends and Taxes.")

- ----------------------------------------------------------------------------
15. GENERAL INFORMATION

............................................................................
CAPITAL SHARES

The Fund was incorporated under the laws of the State of Maryland on June
3, 1988, and is authorized to issue 100 million shares of capital stock with
a par value of $.001 per share. Shares of the Fund have equal rights with
respect to voting. Voting rights are not cumulative, so the holders of more
than 50% of the outstanding shares of capital stock voting together for
election of Directors may elect all the members of the Board of Directors of
the Fund. In the event of liquidation or dissolution of the Fund, each share
is entitled to its portion of the Fund's assets after all debts and expenses
have been paid. The fiscal year end of the Fund is October 31.

The Board of Directors of the Fund is authorized to establish additional
"series" of shares of capital stock, each of which would evidence interests
in a separate portfolio of securities, and separate classes of each series of
the Fund. The shares offered by this Prospectus have been designated "Flag
Investors Total Return U.S. Treasury Fund Class A Shares." The Board has no
present intention of establishing any additional series of the Fund but the
Fund does have another class of shares in addition to the shares offered
hereby, "ISI Total Return U.S. Treasury Fund Shares." Shares of that class
are sold through broker-dealers and have similar 12b-1 fees and front-end
sales charges as the Class A Shares. Different classes of the Fund may be
offered to certain investors and holders of such shares may be entitled to
certain exchange privileges not offered to Class A Shares. All classes of the
Fund share a common investment objective, portfolio and advisory fee, but the
classes may have different distribution expenses and sales charges and,
accordingly, performance may differ.

23
<PAGE>
...........................................................................
ANNUAL MEETINGS

The Fund does not expect to hold annual meetings of shareholders but
special meetings of shareholders will be held under certain circumstances.
Shareholders of the Fund reserve the right, under certain circumstances, to
request that a meeting of shareholders be held for the purpose of considering
the removal of a Director from office, and if such a request is made, the
Fund will assist with shareholder communications in connection with the
meeting.

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

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

...........................................................................
FUND COUNSEL

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

...........................................................................
SHAREHOLDER INQUIRIES

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

24
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND CLASS A SHARES
NEW ACCOUNT APPLICATION
- -----------------------------------------------------------------------------

Make check payable to "Flag Investors Total Return U.S. Treasury Fund Class A
Shares" and mail with this application to:
Alex Brown & Sons Incorporated/Flag Investors Funds
P.O. Box 419426
Kansas City, MO 64141-6426
Attn: Flag Investors Total Return U.S. Treasury Fund Class A Shares
For assistance in completing this application please call:
1-800-553-8080 8:30 a.m. to 5:30 p.m., Eastern Time, Monday-Friday.
To open an IRA account, call 1-800-767-3524 to request an IRA
application.
I enclose a check for $______ payable to "Flag Investors Total Return
U.S. Treasury Fund Class A Shares" for the purchase of Flag Investors
Total Return U.S. Treasury Fund Class A Shares.

The minimum initial purchase is $2,000, except that the minimum initial
purchase for shareholders of any other Flag Investors Fund or class is $500
and the minimum initial purchase for participants in the Fund's Automatic
Investing Plan is $250. Each subsequent purchase requires a $100 minimum,
except that the minimum subsequent purchase under the Fund's Automatic
Investing Plan is $250 for quarterly purchases and $100 for monthly
purchases. The Fund reserves the right not to accept checks for more than
$50,000 that are not certified or bank checks.

- -----------------------------------------------------------------------------
YOUR ACCOUNT REGISTRATION (PLEASE PRINT)

Existing Account No., if any: _________________________

INDIVIDUAL OR JOINT TENANT

- -----------------------------------------------------------------------------
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
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 Flag Investors Total Return U.S. Treasury
Fund Class A Shares, as shown below, in an aggregate amount at least equal
to:

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

- -----------------------------------------------------------------------------
RIGHT OF ACCUMULATION (OPTIONAL)

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

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

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

- -----------------------------------------------------------------------------
DISTRIBUTION OPTIONS

Please check appropriate boxes. If none of the options is selected, all
distributions will be reinvested in additional Class A Shares of the Fund at
no sales charge.
Income Dividends
[ ] Reinvested in additional shares
[ ] Paid in Cash

Capital Gains

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

<PAGE>

- -----------------------------------------------------------------------------
AUTOMATIC INVESTING PLAN (OPTIONAL)

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

Minimum Initial Investment: $250
Subsequent Investments (check one):

[ ] Monthly ($100 minimum) Please attach a voided check.
[ ] Quarterly ($250 minimum)

- -----------------------------------------------------------------------------
Bank Name

- -----------------------------------------------------------------------------
Existing Flag Investors Fund Account No., if any

- -----------------------------------------------------------------------------
Depositor's Signature Date

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

- -----------------------------------------------------------------------------
SYSTEMATIC WITHDRAWAL PLAN (OPTIONAL)

[ ] Beginning the month of ______ , 19______ please send me checks on a
monthly or quarterly basis, as indicated below, in the amount of $______,
from Class A Shares that I own, payable to the account registration address
as shown above. (Participation requires minimum account value of $10,000.)
Frequency (check one):
[ ] Monthly
[ ] Quarterly (January, April, July, and October)

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

I understand that I will automatically have telephone redemption privileges
(for amounts up to $50,000) and telephone exchange privileges with respect to
other Flag Investors Funds) unless I mark one or both of the boxes below:
No, I/we do not want
[ ] Telephone redemption privileges
[ ] Telephone exchange privileges

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

Bank:__________________________________ Bank Account No:___________________

Address:_______________________________ Bank Account Name:_________________

________________________________

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

SIGNATURE AND TAXPAYER CERTIFICATION

I have received a copy of the Fund's prospectus dated March 1, 1996. Unless
the box below is checked, I certify under penalties of perjury, (1) that the
number shown on this form is my correct taxpayer identification number and

<PAGE>
(2) that I am not subject to backup withholding as a result of a failure to
report all interest or dividends, or the Internal Revenue Service has
notified me that I am no longer subject to backup withholding. [ ] Check here
if you are subject to backup withholding.
If a non-resident alien, please indicate country of residence:____________
I acknowledge that the telephone redemption and exchange privileges are
automatic and will be effected as described in the Fund's current prospectus
(see "Telephone Transactions"). I also acknowledge that I may bear the risk
of loss in the event of fraudulent use of such privileges. If I do not want
telephone redemption or exchange privileges, I have so indicated on this
Application.

____________________________________________________________________________
Signature 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. ____________________

<PAGE>

ISI TOTAL RETURN U.S. TREASURY FUND SHARES
(A Class of Total Return
U.S. Treasury Fund, Inc.)
717 Fifth Avenue
New York, New York 10022
For information call (800) 955-7175

Total Return U.S. Treasury Fund, Inc. (the "Fund") is designed to provide:

1) A high level of total return with relative stability of principal.

2) High current income, consistent with an investment in securities
issued by the United States Treasury ("U.S. Treasury Securities").

The Fund will invest only in U.S. Treasury Securities and in repurchase
agreements fully collateralized by U.S. Treasury Securities.

Shares of the ISI class of the Fund ("Shares") are available through Armata
Financial Corp. as well as Participating Dealers and Shareholder Servicing
Agents. (See "How to Invest in the Fund.")

This Prospectus sets forth basic information that investors should know about
the Fund prior to investing, and should be retained for future reference. A
Statement of Additional Information dated March 1, 1996, has been filed with the
Securities and Exchange Commission (the "SEC") and is hereby incorporated by
reference. It is available upon request and without charge by contacting the
Fund at the above address or telephone number.

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

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

The date of this Prospectus is March 1, 1996

<PAGE>

1. FEE TABLE

Shareholder Transaction Expenses:
(as a percentage of offering price)

Maximum Sales Charge Imposed on Purchases .............. 4.45%
Maximum Sales Charge Imposed on Reinvested Dividends ... None
Deferred Sales Charge .................................. None

Annual Fund Operating Expenses:
(as a percentage of average net assets)

Management Fees ........................................ .27%
12b-1 Fees ............................................. .25%
Other Expenses ......................................... .28%
---------
Total Fund Operating Expenses .......................... .80%

Example:

<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
-------- --------- --------- ----------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual
return and (2) redemption at the end of
each time period: ...................... $52 $69 $88 $143

</TABLE>

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

The purpose of the foregoing table is to describe the various costs and expenses
that an investor in the Fund will bear directly or indirectly. The Management
Fees paid by the Fund are based in part on the net assets of the Fund and in
part on gross income, which fees are reflected as a percentage of average net
assets. A person who purchases Shares through a financial institution may be
charged separate fees by the financial institution. (For more complete
descriptions of the various costs and expenses, see "How to Invest in the Fund
- -- Offering Price", "Investment Advisor", "Administrator" and "Distributor.")
The rules of the SEC require that the maximum sales charge (in the Shares' case,
4.45% of the offering price) be reflected in the above table. However, certain
investors may qualify for reduced sales charges. (See "How to Invest in the Fund
- -- Offering Price.") The Expenses and Example appearing in the table above are
based on the Fund's expenses (.80%) for the fiscal year ended October 31, 1995,
and are based on average daily net assets of approximately $365 million and a
gross income level of 6.74%. Due to the continuous nature of Rule 12b-1 fees,
long-term shareholders of the Fund may pay more than the equivalent of the
maximum front-end sales charges permitted by the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. The foregoing table has not
been audited by Deloitte & Touche LLP, the Fund's independent auditors.

2. FINANCIAL HIGHLIGHTS

The Fund was organized as a corporation under the laws of the State of Maryland
on June 3, 1988 and commenced operations on August 10, 1988. The financial
highlights included in this table are a part of the Fund's financial statements
for the periods indicated and have been audited by Deloitte & Touche LLP,
independent auditors. The financial statements and related notes for the fiscal
year ended October 31, 1995 and the independent auditors' report thereon of
Deloitte & Touche LLP are included in the Statement of Additional Information.
Additional performance information is contained in the Fund's Annual Report for
the fiscal year ended October 31, 1995, which is available at no cost by calling
the Fund at (800) 955-7175.

2
<PAGE>
(For a Share outstanding throughout each period)

August 10, 1988
For the Year Ended October 31, (commencement of
-------------------------------------------------------------------------------- operations) through
1995 1994 1993 1992 1991 1990 1989 October 31, 1988
---- ---- ---- ---- ---- ---- ---- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value at beginning
of period ................. $ 9.22 $ 11.35 $ 10.47 $ 10.41 $ 9.76 $ 10.55 $ 10.24 $ 10.00
-------- -------- -------- -------- -------- -------- -------- -------
Income from Investment
Operations:
Net investment income .... 0.57 0.51 0.62 0.76 0.70 0.73 0.71 0.10
Net realized and
unrealized gain/(loss)
on investments ........ 1.04 (1.16) 1.12 0.05 0.79 (0.60) 0.44 0.21
-------- -------- -------- -------- -------- -------- -------- -------
Total from Investment
Operations ............ 1.61 (0.65) 1.74 0.81 1.49 0.13 1.15 0.31
Less Distributions:
Dividends from net
investment income and
short-term gains ...... (0.64) (1.20) (0.79) (0.70) (0.84) (0.92) (0.84) (0.07)
Distributions from net
realized long-term
gains ................. -- (0.28) (0.07) (0.05) -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------
Total Distributions ...... (0.64) (1.48)* (0.86) (0.75) (0.84) (0.92) (0.84) (0.07)
-------- -------- -------- -------- -------- -------- -------- -------
Net asset value at end of
period ................ $ 10.19 $ 9.22 $ 11.35 $ 10.47 $ 10.41 $ 9.76 $ 10.55 $ 10.24
======== ======== ======== ======== ======== ======== ======= =======
Total Return** ............. 18.09% (6.22)% 17.33% 8.96% 15.89% 1.43% 11.87% 3.10%
Ratios to Average Net
Assets:
Expenses .................. 0.80% 0.77% 0.77% 0.77% 0.87% 0.89% 0.97% 1.12%(1)
Net investment income ..... 5.94% 4.98% 5.21% 5.65% 6.88% 7.40% 7.51% 5.80%(1)
Supplemental Data:
Net assets at end of
period (000):
ISI Class Shares ......... $206,615 $200,309 $232,103 $207,518 $168,128 $131,872 $89,943 $22,597
Flag Investors Class A
Shares ................. $164,206 $175,149 $224,790 $250,210 $237,688 $198,556 $135,523 $55,757
Portfolio turnover rate ... 194% 68% 249% 191% 141% 79% 184% 72%
</TABLE>

- ------
* Distributions to shareholders include $0.05 per share return of capital.
** Total return represents aggregate total return for the periods indicated
and does not reflect any applicable sales charges.
(1) Annualized.

3
<PAGE>

3. INVESTMENT PROGRAM

INVESTMENT OBJECTIVES, POLICIES AND
RISK CONSIDERATIONS

The Fund's investment objective is to seek a high level of total return, with
relative stability of principal, and, secondarily, to seek a high level of
current income consistent with an investment in U.S. Treasury Securities. The
Fund will invest only in U.S. Treasury Securities and in repurchase agreements
fully collateralized by U.S. Treasury Securities. U.S. Treasury Securities
include Treasury bills, Treasury notes, Treasury bonds and Separate Trading of
Registered Interest and Principal of Securities ("STRIPS"). All such obligations
are direct obligations of the United States Government and are supported by the
full faith and credit of the United States. STRIPS are U.S. Treasury Securities
which do not pay interest currently, but which are purchased at a discount and
are payable in full at maturity. The value of STRIPS may be subject to greater
market fluctuations from changing interest rates prior to maturity than the
value of other U.S. Treasury Securities of comparable maturities that bear
interest currently. The Fund's investment objective may be changed only by the
affirmative vote of a majority of the outstanding shares of all classes of the
Fund. There can be no assurance that the Fund's investment objective will be
met.

The Fund may enter into forward commitments for the purchase of U.S. Treasury
Securities and, as noted, may enter into repurchase agreements collateralized by
U.S. Treasury Securities with commercial banks and registered broker-dealers.
These investment practices, which may involve certain special risks, are
described below.

SELECTION OF INVESTMENTS

The Fund's investment advisor is International Strategy and Investment Inc.
("ISI" or the "Advisor" -- see "Investment Advisor"). ISI buys and sells
securities for the Fund's portfolio with a view toward, first, a high level of
total return with relative stability of principal and, second, high current
income. Therefore, in addition to yield, the potential for capital gains and
appreciation resulting from possible changes in interest rates will be a
consideration in selecting investments. ISI will be free to take full advantage
of the entire range of maturities offered by U.S. Treasury Securities and may
adjust the average maturity of the Fund's portfolio from time to time, depending
on its assessment of the relative yields available on securities of different
maturities and its expectations of future changes in interest rates. Thus, at
certain times the average maturity of the portfolio may be relatively short
(from under one year to five years, for example) and at other times may be
relatively long (over 10 years, for example). In determining which direction
interest rates are likely to move, the Advisor relies on the economic analysis
made by its chairman, Edward S. Hyman. There can be no assurance that such
economic analysis will accurately predict interest rate trends or that the
portfolio strategies based on Mr. Hyman's economic analysis will be effective.

SPECIAL RISK CONSIDERATIONS

U.S. Treasury Securities are considered among the safest of fixed-income
investments. Because of this added safety, the yields available from U.S.
Treasury Securities are generally lower than the yields available from corporate
debt securities. As with other debt securities, the value of U.S. Treasury
Securities changes as interest rates fluctuate. Changes in the value of
portfolio securities will not affect interest income from those securities but
will be reflected in the Fund's net asset value. Thus, a decrease in interest
rates will generally result in an increase in the value of the Shares.
Conversely, during periods of rising interest rates, the value of the Shares
will generally decline. The magnitude of these fluctuations will generally be
greater at times when the Fund's average maturity is longer.

REPURCHASE AGREEMENTS

The Fund may agree to purchase U.S. Treasury Securities from financial
institutions, such as banks and broker-dealers, subject to the seller's
agreement to repurchase the securities at an established time and price. The
Fund will enter into repurchase agreements only with banks and broker-dealers
that have been determined to be creditworthy by the Fund's Board of Directors
under criteria established with the assistance of the Advisor. Default by the
seller may, however, expose the Fund to possible loss because of adverse market
action or delay in connection with the disposition of the underlying
obligations. In addition, if bankruptcy proceedings are commenced with respect
to the seller of the security, the Fund may be delayed or limited in its ability
to sell the collateral.

4
<PAGE>

PURCHASE OF WHEN-ISSUED SECURITIES

From time to time, in the ordinary course of business, the Fund may make
purchases of U.S. Treasury Securities, at the current market value of the
securities, on a when-issued basis. When such transactions are negotiated, the
yield to maturity is fixed. The coupon interest rate on such U.S. Treasury
Securities is fixed at the next succeeding U.S. Treasury auction date thereby
determining the price to be paid by the Fund. Delivery and payment will take
place after the date of the auction. A segregated account of the Fund,
consisting of cash, cash equivalents or U.S. Treasury Securities equal at all
times to the amount of the when-issued commitments will be established and
maintained by the Fund at the Fund's custodian. Additional cash or U.S. Treasury
Securities will be added to the account when necessary. While the Fund will
purchase securities on a when-issued basis only with the intention of acquiring
the securities, the Fund may sell the securities before the settlement date if
it is deemed advisable to limit the effects of adverse market action. The
securities so purchased or sold are subject to market fluctuation and no
interest accrues to the purchaser during this period. At the time of delivery of
the securities, their value may be more or less than the purchase or sale price.
The Fund will invest no more than 40% of its net assets at any time in U.S.
Treasury Securities purchased on a when-issued basis.

4. INVESTMENT RESTRICTIONS

The Fund's investment program is subject to a number of restrictions which
reflect both self-imposed standards and federal and state regulatory
limitations.

1) As a matter of fundamental policy, the Fund will not borrow money except
as a temporary measure for extraordinary or emergency purposes and then
only from banks and in an amount not exceeding 10% of the value of the
total assets of the Fund at the time of such borrowing, provided that,
while borrowings by the Fund equalling 5% or more of the Fund's total
assets are outstanding, the Fund will not purchase securities for
investment. This restriction may not be changed without the affirmative
vote of a majority of the outstanding shares of the Fund.

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

5. HOW TO INVEST IN THE FUND

Shares may be purchased from Armata Financial Corp. ("Armata"), P.O. Box 515,
Baltimore, Maryland 21203, through any securities dealer which has entered into
a dealer agreement with Armata ("Participating Dealers") or through any
financial institution which has entered into a shareholder servicing agreement
with the Fund ("Shareholder Servicing Agents"). Shares may also be purchased by
completing the Application Form attached to this Prospectus and returning it,
together with payment of the purchase price (including any applicable front-end
sales charge), to the address shown on the Application Form. As used herein, the
"Fund" refers to Total Return U.S. Treasury Fund, Inc., whereas references to
the "Shares" shall mean shares of the Fund's ISI Total Return U.S. Treasury Fund
Shares which is a class of shares of the Fund.

The minimum initial investment is $5,000, except that the minimum initial
investment for qualified retirement plans and IRA's is $1,000 and the minimum
initial investment for participants in the Fund's Automatic Investing Plan is
$250. Each subsequent investment must be at least $250, except that the minimum
subsequent investment for participants in the Fund's Automatic Investing Plan is
$100 for monthly investments and $250 for quarterly investments. (See "Purchases
Through Automatic Investing Plan" below.) The Fund reserves the right to suspend
the sale of Shares at any time at the discretion of Armata. Orders for purchases
of Shares are accepted on any day on which the New York Stock Exchange is open
for business ("Business Day"). Purchase orders for Shares will be executed at a
per Share purchase price equal to the net asset value next determined after
receipt of the purchase order plus any applicable front-end sales charge (the
"Offering Price") on the date such net asset value is determined (the "Purchase
Date"). Purchases made by mail must be accompanied by payment of the Offering
Price. Purchases made through Armata or a Participating Dealer or Shareholder
Servicing Agent must be in accordance with such entity's payment procedures.
Armata may, in its sole discretion, refuse to accept any purchase order.

The net asset value per Share is determined once daily as of the close of the
New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time), on each
Business Day. Net asset value per share of a class is calculated by valuing all
assets held by the Fund, deducting all liabilities, including liabilities

<PAGE>

attributable to that specific class, and dividing the resulting amount by the
number of then outstanding shares of the class. Securities are valued on the
basis of their last sale price (or in the absence of recorded sales, at the
average of readily available closing bid and asked prices). Securities or other
assets for which market quotations are not readily available are valued at their
fair value as determined in good faith by the Advisor under procedures
established from time to time and monitored by the Fund's Board of Directors.
Debt obligations with maturities of 60 days or less are valued at amortized
cost, which constitutes fair value as determined by the Directors.

OFFERING PRICE

Shares may be purchased from Armata, Participating Dealers or Shareholder
Servicing Agents at the Offering Price, which includes a sales charge which is
calculated as a percentage of the Offering Price and decreases as the amount of
purchase increases as shown below.

Sales Sales
Charge as Charge as Dealer
Percentage Percentage Retention
of of Net as Percentage
Offering Amount of Offering
Amount of Purchase Price Invested Price*
------------------ ---------- ---------- -------------
Less than $ 50,000 ... 4.45% 4.66% 4.00%
$50,000 - $ 99,999 ... 3.50% 3.63% 3.00%
$100,000 - $ 249,999 ... 2.50% 2.56% 2.00%
$250,000 - $ 499,999 ... 2.00% 2.04% 1.50%
$500,000 - $ 999,999 ... 1.50% 1.52% 1.25%
$1,000,000 - $1,999,999 ... 0.75% 0.76% 0.75%
$2,000,000 - $2,999,999 ... 0.50% 0.50% 0.50%
$3,000,000 and over ...... None None None

- ------
* Armata may from time to time reallow to Participating Dealers up to 100% of
the sales charge included in the Offering Price of Shares. Dealers that
receive a reallowance of 100% of the sales charge may be considered
underwriters for purposes of the federal securities laws.

A shareholder who purchases additional Shares may obtain reduced sales charges
as set forth in the table above through a right of accumulation. In addition, an
investor may obtain reduced sales charges as set forth above through a right of
accumulation of purchases of Shares and purchases of shares of other mutual
funds in the ISI family of funds. The applicable sales charge will be determined
based on the total of (a) the investor's current purchase plus (b) an amount
equal to the then current net asset value or cost, whichever is higher, of all
Shares and of all shares of such other mutual funds in the ISI family of funds
held by the shareholder. To obtain the reduced sales charge through a right of
accumulation, the shareholder must provide Armata, either directly or through a
Participating Dealer or Shareholder Servicing Agent, as applicable, with
sufficient information to verify that the shareholder has such a right. The Fund
may amend or terminate this right of accumulation at any time as to subsequent
purchases. The term "purchase" refers to an individual purchase by a single
purchaser, or to concurrent purchases, which will be aggregated, by a purchaser,
the purchaser's spouse and their children under the age of 21 years purchasing
Shares for their own account.

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

The Fund may sell Shares at net asset value (without sales charge) to the
following: (i) banks, bank trust departments, registered investment advisory
companies, financial planners and broker-dealers purchasing Shares on behalf of
their fiduciary and advisory clients, provided such clients have paid an account
management fee for these services; (ii) investors who have redeemed Shares, or
shares of any other mutual fund in the ISI family of funds that have similar
sales charges, in an amount that is not more than the total redemption proceeds,
provided that the purchase is within six months after the redemption and the
amount of the purchase is at least $5,000; and (iii) current or retired
Directors of the Fund, directors and employees (and their immediate families) of
ISI, the Fund's administrator, and their respective affiliates, and employees

6
<PAGE>

of Participating Dealers. In addition, investors who have redeemed shares of
funds in the ISI family of funds that have lower sales charges may purchase
Shares at net asset value in an amount that is not more than the total
redemption proceeds, provided that they held the shares of such funds for more
than 24 months prior to the redemption, the purchase is within six months after
the redemption and the amount of the purchase is at least $5,000.

PURCHASES BY EXCHANGE

As permitted pursuant to any rule, regulation or order promulgated by the SEC,
shareholders of other mutual funds in the ISI family of funds that have similar
sales charges may exchange their shares of those funds for an equal dollar
amount of Shares. Shares issued pursuant to this offer will not be subject to
the sales charges described above or any other charge. In addition, shareholders
of funds in the ISI family of funds that have lower sales charges may exchange
into other funds in the family upon payment of the difference in sales charges,
except that the exchange will be made at net asset value if the shares have been
held for at least 24 months. The net asset value of shares purchased and
redeemed in an exchange request received on a Business Day will be determined on
the same day, provided that the exchange request is received prior to 4:00 p.m.
(Eastern Time). Exchange requests received after 4:00 p.m. (Eastern Time) will
be effected on the next Business Day.

The exchange privilege may be exercised only in those states where the class of
shares of such other funds may legally be sold. Investors should receive and
read the applicable prospectus prior to tendering shares for exchange.

Until February 28, 1997, shareholders of any other mutual fund who have paid a
sales charge on their shares of such fund, and shareholders of any closed-end
fund, may exchange shares of such funds for an equal dollar amount of Shares by
submitting to Armata or a Participating Dealer, the proceeds of the redemption
or sale of shares of such funds, together with evidence of the payment of a
sales charge (for mutual funds only) and the source of such proceeds. Shares
issued pursuant to this offer will not be subject to the sales charges described
above or any other charge.

The Fund may modify or terminate these offers of exchange at any time and will
provide shareholders with 60 days' written notice prior to any such modification
or termination. The exchange privilege with respect to other ISI funds may also
be exercised by telephone. (See "Telephone Transactions" below.)

PURCHASES THROUGH AUTOMATIC INVESTING PLAN

Shareholders may purchase Shares regularly by means of an Automatic Investing
Plan with a pre-authorized check drawn on their checking accounts. Under this
plan, the shareholder may elect to have a specified amount invested monthly or
quarterly in Shares. The minimum initial investment is $250. Each subsequent
investment must be at least $100 for monthly investments and $250 for quarterly
investments. The amount specified by the shareholder will be withdrawn from the
shareholder's checking account using the pre-authorized check. This amount will
be invested in Shares at the applicable Offering Price determined on the date
the amount is available for investment. Participation in the Automatic Investing
Plan may be discontinued by either the Fund or the shareholder upon 30 days'
prior written notice to the other party. A shareholder who wishes to enroll in
the Automatic Investing Plan may do so by completing the appropriate section of
the Application Form attached to this Prospectus.

DIVIDEND REINVESTMENT PLAN

Shareholders may elect to have their distributions (capital gains and/or
dividend income) paid by check or reinvested in additional Shares. A shareholder
who wishes to enroll in the Dividend Reinvestment Plan should check the
appropriate box on the Application Form or call (800) 882-8585 for additional
information.

Alternately, shareholders may have their distributions invested in shares of
other funds in the ISI family of funds. Shareholders who are interested in this
option should call (800) 882-8585 for additional information.

Reinvestments of distributions will be effected without a sales charge.

6. HOW TO REDEEM SHARES

Shareholders may redeem all or part of their investment on any Business Day by
transmitting a redemption order through Armata, a Participating Dealer, a
Shareholder Servicing Agent or by regular or express mail to the Fund's transfer
agent (the "Transfer Agent"). Shareholders may also redeem Shares by telephone
(in amounts up to $50,000). (See "Telephone Transactions" below.) A redemption
order is effected at the net asset value per Share next determined after receipt
of the order (or, if stock certificates have been issued for the Shares to be

7
<PAGE>
redeemed, after the tender of the stock certificates for redemption). Redemption
orders received after 4:00 p.m. (Eastern Time) will be effected at the net asset
value next determined on the following Business Day. Payment for redeemed Shares
will be made by check and will be mailed within seven days after receipt of a
duly authorized telephone redemption request or of a redemption order fully
completed and, as applicable, accompanied by the documents described below:

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

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

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

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

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

SYSTEMATIC WITHDRAWAL PLAN

Shareholders who hold Shares having a value of $10,000 or more may arrange to
have a portion of their Shares redeemed monthly or quarterly under the Fund's
Systematic Withdrawal Plan. Such payments are drawn from income dividends, and,
to the extent necessary, from Share redemptions (which would be a return of
principal and, if reflecting a gain, would be taxable). If redemptions continue,
a shareholder's account may eventually be exhausted. Because Share purchases
include a sales charge that will not be recovered at the time of redemption, a
shareholder should not have a withdrawal plan in effect at the same time he is
making recurring purchases of Shares. A shareholder who wishes to enroll in the
Systematic Withdrawal Plan may do so by completing the appropriate section of
the Application Form attached to this Prospectus.

7. TELEPHONE TRANSACTIONS

Shareholders may exercise the exchange privilege with respect to other ISI
funds, or redeem Shares (in amounts up to $50,000), by notifying the Transfer
Agent by telephone at (800) 882-8585 on any Business Day between the hours of
8:30 a.m. and 5:30 p.m. (Eastern Time) or by regular or express mail at its
address listed under "Custodian, Transfer Agent, Accounting Services." Telephone
transaction privileges are automatic. Shareholders may specifically request that
no telephone redemptions or exchanges be accepted for their accounts. This
election may be made on the Application Form or at any time thereafter by
completing and returning appropriate documentation supplied by the Transfer
Agent.

A telephone exchange or redemption placed by 4:00 p.m. (Eastern Time) or the
close of the New York Stock Exchange, whichever is earlier, is effective that
day. Telephone orders placed after 4:00 p.m. (Eastern Time) will be effected at
the net asset value as determined on the next Business Day.

The Fund and the Transfer Agent will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. These procedures
include requiring the investor to provide certain personal identification
information at the time an account is opened and prior to effecting each
transaction requested by telephone. In addition, all telephone transaction
requests will be recorded and investors may be required to provide additional
telecopied written instructions of such transaction requests. The Fund or the
Transfer Agent may be liable for any losses due to unauthorized or fraudulent
telephone instructions if either of them does not employ these procedures. If
these procedures are employed, neither the Fund nor the Transfer Agent will be
responsible for any loss, liability, cost or expense for following instructions
received by telephone that either of them reasonably believes to be genuine.
During periods of extreme economic or market changes, shareholders may
experience difficulty in effecting telephone transactions. In such event,

8
<PAGE>

requests should be made by regular or express mail. Shares held in certificate
form may not be exchanged or redeemed by telephone. (See "How to Invest in the
Fund -- Purchases by Exchange" and "How to Redeem Shares.")

8. DIVIDENDS AND TAXES

DIVIDENDS AND DISTRIBUTIONS

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

Unless the shareholder elects otherwise, all dividends and net capital gains
distributions, if any, will be reinvested in additional Shares at net asset
value. Shareholders may elect to have income dividends or capital gains
distributions paid in cash. Shareholders wishing to change their election must
give written notice to the Transfer Agent (see "Custodian, Transfer Agent,
Accounting Services") either directly or through their Participating Dealer or
Shareholder Servicing Agent, at least five days before the next date on which
dividends or distributions will be paid.

TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS

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

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

The Fund has been and expects to continue to be taxed as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended. As
long as the Fund qualifies for this tax treatment, it will be relieved of
federal income tax on amounts distributed to shareholders, but shareholders,
unless otherwise exempt, will generally pay federal income or capital gains
taxes on the amounts so distributed. Reinvested dividends will be taxed as if
they had been distributed on the reinvestment date.

Distributions from the Fund out of net capital gains (the excess of net
long-term capital gains over net short-term capital losses), if any, are treated
by the shareholder as long-term capital gains regardless of the length of time
the shareholder has held the Shares. All other income distributions are taxed to
the shareholder as ordinary income. Fund distributions generally will not be
eligible for the corporate dividends received deduction. Shareholders will be
advised annually as to the federal income tax consequences of distributions made
during the year.

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

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

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

Shareholders are urged to consult with their tax advisors concerning the
application of state and local taxes to investments in the Fund, which may
differ from the federal income tax consequences described above. For example,
under certain specified circumstances, state income tax laws may exempt from
taxation distributions of a regulated investment company to the extent that such
distributions are derived from interest on federal obligations. Shareholders are
urged to consult with their tax advisors regarding whether, and under what
conditions such exemption is available.

9. MANAGEMENT OF THE FUND

9
<PAGE>

its investment advisor, distributor, administrator, custodian and transfer
agent. The day-to-day operations of the Fund are delegated to the Fund's
officers, to Armata as distributor of the Shares, to the Advisor and to the
Fund's administrator. Three directors and all of the officers of the Fund are
officers or employees of Armata, ISI or the Fund's administrator. The other
Directors of the Fund have no affiliation with Armata, ISI or the Fund's
administrator.

The Fund's Directors and officers are as follows:

10. INVESTMENT ADVISOR

ISI, a registered investment advisor, serves as investment advisor to the Fund
pursuant to an investment advisory agreement dated as of April 1, 1991 (the
"Investment Advisory Agreement"). ISI employs Messrs. Edward S. Hyman and R.
Alan Medaugh. Due to their stock ownership, Messrs. Hyman and Medaugh may be
deemed to be controlling persons of ISI. As of December 31, 1995, the Advisor
had approximately $1 billion under management. The Advisor also acts as
investment advisor to Managed Municipal Fund, Inc. and North American Government
Bond Fund, Inc., open-end investment companies with approximately $198 million
in net assets as of December 31, 1995.

Pursuant to the terms of the Investment Advisory Agreement, as compensation for
its services for the fiscal year ended October 31, 1995, the Advisor received an
annual fee equal to .27% of the Fund's average daily net assets. The Advisor's
fee is based in part upon a varying percentage of the Fund's average daily net
assets and in part upon a percentage (1.5%) of the Fund's gross income.

The address of the Advisor is 717 Fifth Avenue, New York, New York 10022,
telephone (800) 955-7175.

PORTFOLIO MANAGERS

Edward S. Hyman, Chairman of the Fund and ISI, and R. Alan Medaugh, President of
the Fund and ISI, have shared direct portfolio management responsibility for the
Fund since its inception. Mr. Hyman is responsible for developing the economic
analysis upon which the Fund's selection of investments is based. (See
"Investment Program.") Before joining ISI, Mr. Hyman was a vice chairman and
member of the Board of C.J. Lawrence Inc. and prior thereto, an economic
consultant at Data Resources. He writes a variety of international and domestic
economic research reports which follow trends that may determine the direction
of interest rates. These international and domestic reports are sent to ISI's
private institutional clients in the United States and overseas. The periodical
Institutional Investor, which rates analysts and economists on an annual basis,
has rated Mr. Hyman as its "first team" economist, which is its highest rating,
in each of the last sixteen years.

Mr. Medaugh is responsible for day-to-day portfolio management. Prior to joining
ISI, Mr. Medaugh was Managing Director of C.J. Lawrence Fixed Income Management
and prior thereto Senior Vice President and bond portfolio manager at Fiduciary
Trust International. While at Fiduciary Trust International. Mr. Medaugh led
their Fixed-Income Department which managed $5 billion of international fixed
income portfolios for institutional clients. Mr. Medaugh also had prior

10
<PAGE>

experience as a bond portfolio manager at both Putnam Management Company and
Fidelity Management and Research.

11. ADMINISTRATOR

Investment Company Capital Corp. ("ICC") 135 East Baltimore Street, Baltimore,
Maryland 21202, provides administration services to the Fund. ICC is a
wholly-owned subsidiary of Alex. Brown and an affiliate of Armata.

ICC supervises the day-to-day operations of the Fund, including the preparation
of registration statements, proxy materials, shareholder reports, compliance
with all requirements of securities laws in the states in which the Shares are
distributed and oversight of the relationship between the Fund and its other
service providers. As compensation for these services for the fiscal year ended
October 31, 1995, ICC received a fee equal to .12% of the Fund's average daily
net assets. ICC's fee is based in part upon a varying percentage of the Fund's
average daily net assets and in part upon a percentage (.50%) of the Fund's
gross income.

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.")

12. DISTRIBUTOR

Armata Financial Corp. acts as distributor of the Shares pursuant to a
Distribution Agreement and related Plan of Distribution (the "Plan") adopted
pursuant to Rule 12b-1 under the 1940 Act. Armata is a broker-dealer that was
formed in 1983 and is an affiliate of ICC. As compensation for its service for
the fiscal year ended October 31, 1995, Armata received a fee equal to .25% of
the Shares' average daily net assets. Armata expects to allocate on a
proportional basis most of its annual distribution fee to its investment
representatives or up to all of its fee to Participating Dealers as compensation
for their ongoing shareholder services, including processing purchase and
redemption requests and responding to shareholder inquiries.

Payments under the Plan are made as described above regardless of Armata's
actual cost of providing distribution services and may be used to pay Armata's
overhead expenses. If the cost of providing distribution services to the Fund in
connection with the sale of the Shares is less than .25% of the average daily
net assets invested in Shares for any period, Armata may retain the unexpended
portion of the distribution fee. Armata or its associated persons will from time
to time and from its own resources pay or allow additional discounts or
promotional incentives in the form of cash or other compensation (including
merchandise or travel) to Participating Dealers.

13. CUSTODIAN, TRANSFER AGENT, ACCOUNTING SERVICES

PNC Bank, National Association ("PNC Bank"), a national banking association with
offices at Airport Business Park, 200 Stevens Drive, Lester, Pennsylvania 19113,
acts as custodian of the Fund's assets. Investment Company Capital Corp., 135
East Baltimore Street, Baltimore, Maryland 21202 (telephone: (800) 882-8585), is
the Fund's transfer and dividend disbursing agent and provides accounting
services to the Fund. As compensation for providing accounting services to the
Fund for the fiscal year ended October 31, 1995, ICC received a fee equal to
.03% of the Fund's average daily net assets. (See the Statement of Additional
Information.) ICC also serves as the Fund's administrator.

14. PERFORMANCE INFORMATION

From time to time, the Fund may quote total return and yield data in
advertisements or in reports to shareholders. Both total return and yield data
will be computed according to the standardized calculations required by the SEC
to provide consistency and comparability in investment company advertising.

The yield of the Fund will be determined by dividing the net investment income
earned by the Fund during a 30 day period by the maximum offering price per
Share on the last day of the period and annualizing the result on a semi-annual
basis.

11
<PAGE>

to the life of the Fund. Such return quotations will be computed by finding
average annual compounded rates of return over such periods that would equate an
assumed initial investment of $1,000 to the ending redeemable value, net of all
sales loads and other fees, according to the required standardized calculation.
The Fund's total return for a given period is based upon changes in the Fund's
net asset value and the Fund's yield for the period. If the Fund compares its
performance to other funds or to relevant indices, its performance will be
stated in the same terms in which such comparative data and indices are stated,
which is normally total return rather than yield. For these purposes, the
performance of the Fund, as well as the performance of such investment companies
or indices, may not reflect sales charges, which, if reflected, would reduce
performance results.

The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Morningstar
Inc., independent services which monitor the performance of mutual funds. The
performance of the Fund may also be compared to the Lehman Brothers Government
Corporate Bond Index (or any of its sub-indices), the Consumer Price Index, Ryan
U.S. Treasury Index, the return on 90 day U.S. Treasury bills, the Standard &
Poor's 500 Stock Index and the Dow Jones Industrial Average. The Fund may also
use total return performance data as reported in the following national
financial and industry publications that monitor the performance of mutual
funds: Money Magazine, Forbes, Business Week, Barron's, Investor's Daily,
IBC/Donoghue's Money Fund Report and The Wall Street Journal.

Yield quotations and performance comparisons may be useful as a basis for
comparing the Fund with other investment alternatives. However, shareholders
should realize that the Fund's current yield will fluctuate from time to time
and is not necessarily representative of the Fund's future performance. Yield
and performance data should also be considered in light of the risks associated
with the Fund's investment objective and policies. Any fees charged by banks
with respect to customer accounts through which shares may be purchased,
although not included in calculations of performance, will reduce performance
results.

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 securities with maturities of one year
or less) may vary from year to year, as well as within a year, depending on
market conditions. For the fiscal years ended October 31, 1995 and October 31,
1994, the Fund's portfolio turnover rate was 194% and 68%, respectively. In late
1994 the Advisor decided, in light of then current market conditions, that the
maturity of the Fund's portfolio should be lengthened to take advantage of an
ISI forecasted declining interest rate trend. The Fund's portfolio turnover rate
for the fiscal year ended October 31, 1995 increased as a result of this change
in investment strategy. A high level of portfolio turnover may generate
relatively high transaction costs and may increase the amount of taxes payable
by the Fund's shareholders. (See "Dividends and Taxes.")

15. GENERAL INFORMATION

CAPITAL SHARES

The Fund was incorporated under the laws of the State of Maryland on June 3,
1988, and is authorized to issue 100 million shares of capital stock with a par
value of $.001 per share. Shares of the Fund have equal rights with respect to
voting. Voting rights are not cumulative, so the holders of more than 50% of the
outstanding shares voting together for election of Directors may elect all the
members of the Board of Directors of the Fund. In the event of liquidation or
dissolution of the Fund, each share is entitled to its portion of the Fund's
assets after all debts and expenses have been paid. The fiscal year end of the
Fund is October 31.

The Board of Directors of the Fund is authorized to establish additional
"series" of shares of capital stock, each of which would evidence interests in a
separate portfolio of securities, and separate classes of each series of the
Fund. The shares offered by this Prospectus have been designated "ISI Total
Return U.S. Treasury Fund Shares." The Board has no present intention of
establishing any additional series of the Fund but the Fund does have another
class of shares in addition to the shares offered hereby, "Flag Investors Total
Return U.S. Treasury Fund Class A Shares." Shares of that class are sold through
broker-dealers and have similar 12b-1 fees and front-end sales charges as the
Shares. Different classes of the Fund may be offered to certain investors and
holders of such shares may be entitled to certain exchange privileges not
offered to Shares. All classes of the Fund share a common investment objective,
portfolio and advisory fee, but the classes may have different distribution
expenses and sales charges and, accordingly, performance may differ.

ANNUAL MEETINGS

The Fund does not expect to hold annual meetings of shareholders but special
meetings of shareholders will be held under certain circumstances. Shareholders

12
<PAGE>
of the Fund reserve the right, under certain circumstances, to request that a
meeting of shareholders be held for the purpose of considering the removal of a
Director from office, and if such a request is made, the Fund will assist with
shareholder communications in connection with the meeting.

REPORTS

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

FUND COUNSEL

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

SHAREHOLDER INQUIRIES

Shareholders with inquiries concerning their Shares should contact the Transfer
Agent at (800) 882-8585, Armata, ISI, a Participating Dealer or Shareholder
Servicing Agent, as appropriate.

13
<PAGE>
ISI TOTAL RETURN U.S. TREASURY FUND SHARES
NEW ACCOUNT APPLICATION
- -----------------------------------------------------------------------------

Make check payable to "ISI Total Return U.S. Treasury Fund Shares" and mail
with this application to:
Armata Financial Corp./ISI Mutual Funds
P.O. Box 419426
Kansas City, MO 64141-6426

For assistance in completing this form, please call the Transfer Agent at
(800) 882-8585.
To open an IRA account, call ISI at (800) 955-7175 to request an application.

The minimum initial purchase is $5,000, except that the minimum initial
purchase for qualified retirement plans or IRA's is $1,000 and the minimum
initial purchase for participants in the Fund's Automatic Investing Plan is
$250. Each subsequent purchase requires a $250 minimum, except that the
minimum subsequent purchase under the Fund's Automatic Investing Plan is $100
for monthly purchases and $250 for quarterly purchases. The Fund reserves the
right not to accept checks for more than $50,000 that are not certified or
bank checks.
- ----------------------------------------------------------------------------
YOUR ACCOUNT REGISTRATION (PLEASE PRINT)

INDIVIDUAL OR JOINT TENANT

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

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

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

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

CORPORATIONS, TRUSTS, PARTNERSHIPS, ETC.

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

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

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

- --------------------------------
Existing Account No., if any

GIFTS TO MINORS

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

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

- -----------------------------------------------------------------------------
Social Security Number of Minor

under the Uniform Gifts to Minors Act
-----------------
State of Residence

MAILING ADDRESS

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

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

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

<PAGE>
- -----------------------------------------------------------------------------
STATEMENT OF INTENTION (OPTIONAL)

[ ] I agree to the Letter of Intent and Escrow Agreement set forth in the
accompanying prospectus. I intend to invest over a 13-month period in shares
of ISI Total Return U.S. Treasury Fund Shares in an aggregate amount at least
equal to:

______$50,000 ______$100,000 ______$250,000 ______$500,000 ______$1,000,000

______$2,000,000 ______$3,000,000

- ------------------------------------------------------------------------------
RIGHT OF ACCUMULATION (OPTIONAL)

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

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

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

<PAGE>
DISTRIBUTION OPTIONS

Please check appropriate boxes. There is no sales charge for reinvested
dividends. If none of the options is selected, all distributions will be
reinvested.

Income Dividends
[ ] Reinvested in additional shares
[ ] Paid in Cash

Capital Gains
[ ] Reinvested in additional shares
[ ] Paid in Cash
Call (800) 882-8585 for information about reinvesting your dividends in other
funds in the ISI Family of Funds.

- ------------------------------------------------------------------------------
AUTOMATIC INVESTING PLAN (OPTIONAL)

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

Minimum Initial Investment: $250
Subsequent Investments (check one):
[ ] Monthly ($100 minimum)
[ ] Quarterly ($250 minimum) Please attach a voided check.

- -----------------------------------------------------------------------------
Bank Name

- -----------------------------------------------------------------------------
Existing ISI Total Return U.S. Treasury Fund Account No., if any

- -----------------------------------------------------------------------------
Depositor's Signature Date

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

- ------------------------------------------------------------------------------
SYSTEMATIC WITHDRAWAL PLAN (OPTIONAL)

[ ] Beginning the month of ______, 19______, please send me checks on a monthly
or quarterly basis, as indicated below, in the amount of $______, from shares
that I own, payable to the account registration address as shown above.
(Participation requires minimum account value of $10,000.)

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

I understand that I will automatically have telephone redemption privileges
(for amounts up to $50,000) and telephone exchange privileges (with respect
to other ISI 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 pre-designated bank account, please
provide the following information:

Bank: Bank Account No:
----------------------------- -----------------

Address: Bank Account Name:
----------------------------- -----------------

<PAGE>
- -----------------------------------------------------------------------------
SIGNATURE AND TAXPAYER CERTIFICATION

I have received a copy of the Fund's prospectus dated March 1, 1996. Under
penalties of perjury, I certify (1) that the number shown on this form is my
correct taxpayer identification number and (2) that I am not subject to backup
withholding as a result of a failure to report all interest or dividends, or the
Internal Revenue Service has notified me that I am no longer subject to backup
withholding. (Strike out the language in (2) if it is not correct.)
If a non-resident alien, please indicate country of residence: ________________

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

- ----------------------------------------------------------------------------
Signature Date

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

- ----------------------------------------------------------------------------
FOR DEALER USE ONLY

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

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

<PAGE>

ISI
TOTAL RETURN
U.S. TREASURY
FUND SHARES

(A Class of Total Return
U.S. Treasury Fund, Inc.)

No person has been authorized to give any information or to make representations
not contained in this Prospectus in connection with any offering made by this
Prospectus and, if given or made, such information must not be relied upon as
having been authorized by the Fund or Armata. This Prospectus does not
constitute an offering by the Fund or Armata in any jurisdiction in which such
offering may not lawfully be made. Shares may be offered only to residents of
those states in which such shares are eligible for purchase.

TABLE OF CONTENTS
PAGE
----

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

<PAGE>

ISI
International Strategy and Investment

ISI
TOTAL RETURN
U.S. TREASURY
FUND SHARES

(A Class of Total Return
U.S. Treasury Fund, Inc.)

An open-end mutual fund seeking a high level of total return, with relative
stability of principal and, secondarily, high current income consistent with an
investment in securities issued by the United States Treasury ("U.S. Treasury
Securities"). The Fund will invest only in U.S. Treasury Securities and in
repurchase agreements fully collateralized by U.S. Treasury Securities.

MARCH 1, 1996

PROSPECTUS

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

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

TOTAL RETURN U.S. TREASURY FUND, INC.

135 East Baltimore Street
Baltimore, Maryland 21202

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

THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A
PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH A
PROSPECTUS FOR THE APPLICABLE CLASS, WHICH MAY BE OBTAINED
FROM YOUR PARTICIPATING DEALER OR BY WRITING OR CALLING
EITHER ALEX. BROWN & SONS INCORPORATED, 135 EAST BALTIMORE
ST., BALTIMORE, MARYLAND 21202, (800) 767-FLAG (FOR THE FLAG
INVESTORS SHARES CLASS) OR ARMATA FINANCIAL CORP., P.O. BOX
515, BALTIMORE, MARYLAND 21203, (410) 727-1700 (FOR THE ISI
SHARES CLASS).

Statement of Additional Information Dated: March 1, 1996
Relating to the Prospectuses Dated: March 1, 1996
of
Flag Investors Total Return U.S. Treasury Fund Class A Shares
and
ISI Total Return U.S. Treasury Fund Shares

<PAGE>

TABLE OF CONTENTS

Page
----
<C> <C>
1. General Information and History......................................................... 1

2. Investment Objectives and Policies...................................................... 1

3. Valuation of Shares and Redemption...................................................... 4

4. Federal Tax Treatment of Dividends and
Distributions......................................................................... 5

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

6. Investment Advisory and Other Services.................................................. 12

7. Administration.......................................................................... 14

8. Distribution of Fund Shares............................................................. 14

9. Portfolio Transactions.................................................................. 17

10. Capital Shares.......................................................................... 18

11. Reports.. .............................................................................. 19

12. Custodian, Transfer Agent and
Accounting Services................................................................... 19

13. Independent Auditors.................................................................... 20

14. Control Persons and Principal Holders of
Securities............................................................................ 20

15. Performance and Yield Computations...................................................... 20

16. Financial Statements ................................................................... 23

</TABLE>

<PAGE>

1. GENERAL INFORMATION AND HISTORY

Total Return U.S. Treasury Fund, Inc. (the "Fund") is an
open-end management investment company. Under the rules and regulations of the
Securities and Exchange Commission (the "SEC"), all mutual funds are required
to furnish prospective investors with certain information concerning the
activities of the company being considered for investment. The Fund currently
offers two classes of shares: Flag Investors Total Return U.S. Treasury Fund
Class A Shares, (the "Flag Investors Shares Class") and ISI Total Return U.S.
Treasury Fund Shares (the "ISI Shares Class"). There are two separate
prospectuses for the Fund's shares: one for the Flag Investors Shares Class
and one for the ISI Shares Class. Each prospectus contains important
information concerning the classes of shares offered thereby and the Fund, and
may be obtained without charge from Alex. Brown & Sons Incorporated ("Alex.
Brown"), 135 East Baltimore Street, Baltimore, Maryland 21202, (800) 767-FLAG
(for a prospectus for the Flag Investors Shares Class) or from Armata
Financial Corp. ("Armata"), P.O. Box 515, Baltimore, Maryland 21203 (for a
prospectus for the ISI Shares Class), or from Participating Dealers that offer
shares of the respective classes of the Fund (the "Shares") to prospective
investors. Prospectuses may also be obtained from Shareholder Servicing
Agents. As used herein the term "Prospectus" describes information common to
the prospectuses of the two classes of the Fund's Shares, unless the term
"Prospectus" is modified by the appropriate class designation. As used herein,
the "Fund" refers to Total Return U.S. Treasury Fund, Inc. and specific
references to any class of the Fund's Shares will be made using the name of
such class. 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 respecting 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 June 3, 1988. 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 August 10, 1988.

For the period from November 9, 1992 through February 27,
1994, the Fund offered another class of shares: Flag Investors Total Return
U.S. Treasury Fund Class B Shares. Shares of that class were renamed the Flag
Investors Total Return U.S. Treasury Fund Class D Shares and are no longer
being offered.

Under a license agreement dated August 10, 1988 between the
Fund and Alex. Brown Incorporated, Alex. Brown Incorporated licenses to the
Fund the "Flag Investors" name and logo, but retains rights to that name and
logo, including the right to permit other investment companies to use them.

-1-
<PAGE>

2. INVESTMENT OBJECTIVES AND POLICIES

Investment Objective and Policies of the Fund

The Fund's investment objective and its general investment
policies are described in the Prospectus. Additional investment restrictions
are set forth below. This Statement of Additional Information also describes
other investment practices in which the Fund may engage. These include
entering into repurchase agreements and purchasing securities for future
delivery.

Except as described below under "Investment Restrictions of
the Fund", the investment policies described in the Prospectus and in this
Statement of Additional Information are not fundamental, and the Directors may
change such policies without an affirmative vote of a majority of the Fund's
outstanding Shares (as defined under "Capital Shares" below). The Fund's
investment objective is fundamental, however, and may not be changed without
such a vote.

Repurchase Agreements

The Fund may agree to purchase securities issued by the
United States Treasury ("U.S. Treasury Securities") from financial
institutions, such as banks and broker-dealers, subject to the seller's
agreement to repurchase the securities at an established time and price. Such
repurchase agreements will be fully collateralized. The Fund's procedures
regarding repurchase agreements are discussed in greater detail in the Fund's
Prospectuses. The collateral for these repurchase agreements will be held by
the Fund's custodian or by a duly appointed sub-custodian. The Fund will enter
into repurchase agreements only with banks and broker-dealers that have been
determined to be creditworthy by the Fund's Board of Directors under criteria
established with the assistance of the Advisor. The list of approved banks and
broker-dealers will be monitored regularly by the Fund's investment advisor,
International Strategy and Investment Inc. ("ISI" or the "Advisor") and
reviewed at least quarterly by the Fund's Board of Directors. The seller under
a repurchase agreement may be required to maintain the value of the securities
subject to the repurchase agreement at not less than the repurchase price.
Default by the seller would, however, expose the Fund to possible loss because
of adverse market action or delay in connection with the disposition of the
underlying obligations. In addition, if bankruptcy proceedings are commenced
with respect to the seller of the security, the Fund may be delayed or limited
in its ability to sell the collateral.

When-Issued Securities

From time to time, in the ordinary course of business, the
Fund may make purchases of U.S. Treasury Securities, at the current market
value of the securities, on a when-issued basis. When such transactions are
negotiated, the yield to maturity is fixed. The coupon interest rate on such
U.S. Treasury Securities is fixed at the time of the U.S. Treasury auction
date therefore determining the price to be paid by the Fund, but delivery and
payment will take place after the date of the commitment. A segregated account
of the Fund, consisting of cash, cash equivalents or U.S. Treasury Securities
equal at all times to the amount of the when-issued commitments will be
established and maintained by the Fund at the Fund's custodian. Additional
cash or U.S. Treasury Securities will be added to the account when necessary.
While the Fund will purchase securities on a forward commitment basis only
with the intention of acquiring the securities, the Fund may sell the
securities before the settlement date if it is deemed advisable to limit the
effects of adverse market action. The securities so purchased or sold are
subject to market fluctuation and no interest accrues to the purchaser during
this period. At the time the Fund makes the commitment to purchase or sell
securities on a forward commitment basis, it will record the transaction and
thereafter reflect the value of such security purchased or, if a sale, the

-2-
<PAGE>

proceeds to be received, in determining its net asset value. At the time of
delivery of the securities, their value may be more or less than the purchase
or sale price.

Investment Restrictions

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

1. Invest 25% or more of the value of its total assets in
any one industry (U.S. Treasury Securities are not considered to
represent an industry);

2. Invest more than 5% of its total assets in the securities
of any single issuer (the U.S. Government is not considered an issuer
for this purpose);

3. Invest in the securities of any single issuer if, as a
result, the Fund would hold more than 10% of the voting securities of
such issuer;

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

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

6. Act as an underwriter of securities within the meaning of
the Federal securities laws;

7. Issue senior securities;

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

9. Effect short sales of securities;

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

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

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

13. Invest in shares of any other investment company
registered under the Investment Company Act;

14. Purchase or retain the securities of any issuer, if to
the knowledge of the Fund, any officer or Director of the Fund or its
Advisor owns beneficially more than .5% of the outstanding securities
of such issuer and together they own beneficially more than 5% of the
securities of such issuer;

-3-
<PAGE>

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

16. Invest in puts or calls or any combination thereof;

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

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

1. Invest more than 10% of the value of its net assets in
illiquid securities (as defined under federal and state securities
laws);

2. Invest in real estate limited partnerships;

3. Invest in oil, gas or mineral leases.

3. VALUATION OF SHARES AND REDEMPTION

Valuation

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

For the purpose of determining the price at which Shares are
redeemed, the net asset value per Share is calculated by valuing all
securities held by the Fund, deducting the Fund's actual and accrued
liabilities (including liability for dividends declared), and dividing the
resulting amount by the number of then outstanding Shares. To determine the
net asset value per Share of any class, the net asset value calculated as
described above will be further adjusted to reflect the pro rata portion of
income and expenses attributable to that class. For this purpose, securities
are valued on the basis of their last sale price (or, in the absence of
recorded sales, at the average of readily available closing bid and asked
prices). Securities or other assets for which market quotations are not
readily available are valued at their fair value as determined in good faith
by the Advisor under procedures established and monitored by the Board of
Directors. Debt obligations with maturities of 60 days or less will be valued
at amortized cost, which constitutes fair value as determined by the
Directors.

Redemption

The Fund may suspend the right of redemption or postpone the
date of payment during any period when (a) trading on the New York Stock
Exchange is restricted by applicable rules and regulations of the SEC; (b) the
New York Stock Exchange is closed for other than customary weekend and holiday
closings; (c) the SEC has by order permitted such suspension; or (d) an

-4-
<PAGE>

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

4. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS

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

Qualification as Regulated Investment Company

The Fund has been and expects to continue to be taxed as a
regulated investment company ("RIC") under Subchapter M of the Code. As a RIC,
the Fund is exempt from federal income tax on its net investment income and
capital gains which it distributes to shareholders, provided that it
distributes at least 90% of its investment company taxable income (net
investment income and the excess of net short-term capital gains over net
long-term capital losses) for the year (the "Distribution Requirement") and
satisfies certain other requirements of the Code that are described below.
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 RIC establishes to
the satisfaction of the Internal Revenue Service that it is unable to satisfy
the Distribution Requirement by reason of distributions previously made for
the purpose of avoiding liability for federal excise tax (discussed below).

The Fund may make investments in securities (such as STRIPS)
that bear "original issue discount" or "acquisition discount" (collectively,
"OID Securities"). The holder of such securities is deemed to have received
interest income even though no cash payments have been received. Accordingly,
OID Securities may not produce sufficient current cash receipts to match the

-5-
<PAGE>

amount of distributable net investment income the Fund must distribute to
satisfy the Distribution Requirement. In some cases, the Fund may have to
borrow money or dispose of other investments in order to make sufficient cash
distributions to satisfy the Distribution Requirement.

In addition to satisfaction of the Distribution Requirement,
in order to qualify as a RIC the Fund must, generally, (1) derive at least 90%
of its gross income from dividends, interest, certain payments with respect to
securities, loans and gains from the sale or other disposition of stock or
securities, or from other income derived with respect to its business of
investing in stock or securities, and (2) derive less than 30% of its gross
income from, among other things, gains on the sale or other disposition of
stock or securities (as defined in section 2(a)(36) of the Investment Company
Act) held for less than three months (the "Short-Short Gain Test").

Finally, at the close of each quarter of its taxable year,
at least 50% of the value of the Fund's 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 two or more issuers which the Fund controls and which are
engaged in the same or similar trades or businesses or related trades or
businesses (the "Asset Diversification Test"). The Fund will not lose its
status as a RIC if it fails to meet the Asset Diversification Test solely as a
result of a fluctuation in value of portfolio assets not attributable to a
purchase. The Fund may curtail its investment in certain securities where the
application thereto of the Asset Diversification Test is uncertain.

Fund Distributions

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

The Fund may either retain or distribute to shareholders the
excess, if any, of net long-term capital gains over net short-term capital
losses ("net capital gains") for each taxable year. If such gains are
distributed as a capital gains distribution, they are treated by shareholders
as long-term capital gains, regardless of the length of time the shareholder
has held Shares, whether or not such gains were recognized by the Fund prior
to the date on which a shareholder acquired Shares and whether or not the
distribution was paid in cash or reinvested in Shares. The aggregate amount of
distributions designated by the Fund as capital gains distributions may not
exceed the net capital gains of the Fund for any taxable year, determined by
excluding any net capital losses and net long-term capital losses attributable
to transactions occurring after October 31 of such year and by treating any
such net capital losses or net long-term capital losses as if they arose on
the first day of the following taxable year. 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 tax
rate. In such 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 they will be required to report such gains on their returns as
long-term capital gains, will receive a refundable tax credit for their

-6-
<PAGE>

allocable share of capital gains tax paid by the Fund on the gains, and will
increase the tax basis for their Shares by an amount equal to 65 percent of
the deemed distribution.

Investors should be careful to consider the tax implications
of buying Shares of the Fund just prior to the ex-dividend date of an ordinary
income dividend or capital gains distribution. The price of Shares purchased
at that time may reflect the amount of the forthcoming ordinary income
dividend or capital gains distribution. Those purchasing just prior to an
ordinary income dividend or capital gains distribution will be taxable on the
entire amount of the dividend or distribution received even though the
dividend or capital gains distribution was earned by the Fund before the
shareholder purchased the Shares.

Generally, gain or loss on the sale of Shares will be
capital gain or loss, which will be long-term capital gain or loss if the
Shares have been held for more than one year and otherwise will be short-term
capital gain or loss. However, investors should be aware that any loss
realized upon the sale, exchange or redemption of Shares held for six months
or less will be treated as a long-term capital loss to the extent any capital
gains distributions have been paid with respect to such Shares (or any
undistributed net capital gains of the Fund with respect to such Shares have
been included in determining the shareholder's long-term capital gains). In
addition, any loss realized on a sale or other disposition of Shares will be
disallowed to the extent an investor repurchases (or enters into a contract or
option to repurchase) Shares within a period of 61 days (beginning 30 days
before and ending 30 days after the disposition of the Shares). Investors
should particularly note that this loss disallowance rule will apply to Shares
received through the reinvestment of dividends during the 61-day period.

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 rates without any deduction for distributions to
shareholders, and such distributions will be taxable to shareholders as
ordinary dividends to the extent of the Fund's current and accumulated
earnings and profits. Such distributions will be eligible for the dividends
received deduction in the case of corporate shareholders.

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

Excise Tax; Miscellaneous Considerations

The Code imposes a non-deductible 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, a 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 purposes of the excise tax, a regulated
investment company must reduce its capital gain net income by the amount of
any net ordinary loss for the calendar year (but only to the extent the
capital gain net income for the one-year period ending on October 31 exceeds
the net capital gains for such period). Because the Fund intends to distribute
all of its income currently (or to retain, at most, its "net capital gains"
and pay tax thereon), the Fund does not anticipate incurring any liability for

-7-
<PAGE>

this excise tax. However, investors should note that the Fund may, in certain
circumstances, be required to liquidate portfolio investments in order to make
sufficient distributions to avoid excise tax liability, and, in addition, that
the liquidation of investments in such circumstances may affect the ability of
the Fund to satisfy the Short-Short Gain Test.

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

5. MANAGEMENT OF THE FUND

The overall business affairs of the Fund are the
responsibility of the 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,
distributors, custodian and transfer agent. The day-to-day operations of the
Fund are delegated to the Fund's officers, to Investment Company Capital Corp.
("ICC"), acting as the Fund's administrator, to Alex. Brown and Armata acting
as the Fund's distributors, and to ISI, as the Fund's Advisor. Three directors
and all of the officers of the Fund are directors, officers or employees of
ICC, Alex. Brown, Armata or ISI. The other directors of the Fund have no
affiliation with ICC, Alex. Brown, Armata or ISI.

Directors and Officers

The Directors and executive officers of the Fund, their
respective dates of birth and their principal occupations during the last five
years are set forth below. Unless otherwise indicated, the address of each
Director and executive officer is 135 East Baltimore Street, Baltimore,
Maryland 21202.

*EDWARD S. HYMAN, Chairman and Director (4/8/45)
International Strategy and Investment Inc., 717 Fifth Avenue, New
York, New York 10022. Chairman, International Strategy and
Investment Inc., 1991-Present; Formerly, Vice Chairman and Member
of the Board of Directors, C.J. Lawrence Inc. (money manager),
1972-1991.

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

*W. JAMES PRICE, Vice Chairman and Director (10/6/24)
6885 North Ocean Boulevard, Apartment #306, Ocean Ridge, Florida
33435-3342. Director, Boca Research, Inc. (computer peripherals).
Managing Director Emeritus, Alex. Brown & Sons Incorporated;
Formerly, Director, CSX Corporation (transportation), and PHH
Corporation (business services).

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

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<PAGE>

JOHN F. KROEGER, Director (8/11/24)
P.O. Box 464, 24875 Swan Road - Martingham, St. Michaels, Maryland
21663. Director/Trustee, AIM Funds (registered investment
companies); Formerly, Consultant, Wendell & Stockel Associates,
Inc. (consulting firm); General Manager, Shell Oil Company.

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

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

R. ALAN MEDAUGH, President (8/20/43)
International Strategy and Investment Inc., 717 Fifth Avenue, New
York, New York 10022. President, International Strategy and
Investment Inc.; Formerly Managing Director, C.J. Lawrence Fixed
Income Management (money manager).

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

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

NANCY LAZAR, Vice President (8/1/57)
International Strategy and Investment Inc., 717 Fifth Avenue, New
York, New York 10022. Executive Vice President and Secretary,
International Strategy and Investment Inc., 1991-Present;
Formerly, Vice President, C.J. Lawrence Inc. (money manager),
1981-1991.

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<PAGE>

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

CARRIE L. BUTLER, Vice President (5/1/67)
International Strategy and Investment Inc., 717 Fifth Avenue, New
York, New York 10022. Vice President, International Strategy and
Investment Inc.; Formerly, Mutual Fund Sales Assistant, C.J.
Lawrence Fixed Income Management (money manager), 1989-1991.

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

DENICE DE FLORIO, Assistant Vice President (4/23/69)
International Strategy and Investment Inc., 717 Fifth Avenue, New
York, New York 10022. Assistant Vice President, International
Strategy and Investment Inc., March 1995-Present; Formerly,
Assistant Portfolio Manager, Smith Barney's Municipal Money Market
Funds and Taxable Money Market Funds, February 1993-February 1995
and Portfolio Administrator, Offitbank, September 1991-February
1995.

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

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

* A Director who is an "interested person" as defined in the Investment
Company Act.

Directors and officers of the Fund are also directors and
officers of some or all of the other investment companies managed,
administered, advised or distributed by Alex. Brown, Armata or ISI or by any
of their respective affiliates. There are currently 12 funds in the Flag
Investors/ISI Funds and Alex. Brown Cash Reserve Fund, Inc. fund complex (the
"Fund Complex"). Mr. Hyman serves as a Director of three funds in the Fund
Complex. Mr. Hale serves as President and Director of one fund, Vice President
of one fund and as a Director of 10 other funds in the Fund Complex. Mr.
Medaugh serves as a Director and President of one fund and as President of two
other funds in the Fund Complex. Mr. Price serves as a Director of seven funds
in the Fund Complex. Messrs. Cunnane, Kroeger, Levy, McDonald and Woolf serve
as Directors of each fund in the Fund Complex. Ms. Lazar and Ms. Butler serve
as Vice Presidents and Ms. De Florio serves as an Assistant Vice President of
three funds in the Fund Complex. Mr. Veilleux serves as Executive Vice
President of one fund and as Vice President of each of the other funds in the
Fund Complex. Mr. Nelson serves as Vice President and Secretary, Mr. Finelli
serves as Treasurer and Ms. DePrine serves as Assistant Secretary,
respectively, for each of the funds in the Fund Complex.

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<PAGE>

Some of the Directors of the Fund are customers of, and have
had normal brokerage transactions with, Alex. Brown or Armata in the ordinary
course of business. All such transactions were made on substantially the same
terms as those prevailing at the time for comparable transactions with
unrelated persons. Additional transactions may be expected to take place in
the future.

Officers of the Fund receive no direct remuneration in such
capacity from the Fund. Officers and Directors of the Fund who are officers or
directors of ICC, Alex. Brown, Armata or ISI may be considered to have
received remuneration indirectly. As compensation for his services as
director, each Director who is not an "interested person" of the Fund (as
defined in the Investment Company Act) (a "Non-Interested Director") receives
an aggregate annual fee (plus reimbursement for reasonable out-of-pocket
expenses incurred in connection with his attendance at Board and committee
meetings) from all Flag Investors/ISI Funds and Alex. Brown Cash Reserve Fund,
Inc. for which he serves. In addition, the Chairman of the Fund Complex's
Audit Committee receives an aggregate annual fee from the Fund Complex.
Payment of such fees and expenses is allocated among all such funds described
above in direct proportion to their relative net assets. For the fiscal year
ended October 31, 1995, Non-Interested Directors' fees attributable to the
assets of the Fund totalled $24,011. The following table shows aggregate
compensation paid to each of the Fund's Directors by the Fund and the Fund
Complex, respectively.

COMPENSATION TABLE

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

<S> <C> <C>
*Edward S. Hyman, Chairman $0 $0

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

*W. James Price, Vice Chairman $0 $0

James J. Cunnane, Director $2,529(1) $29,250 for service on 13
boards in the Fund Complex(2)

N. Bruce Hannay, Director ** $3,475(1) $39,000 for service on 13
boards in the Fund Complex(2)

John F. Kroeger, Director $3,822(1) $42,900 for service on 13
boards in the Fund Complex(2)

Louis E. Levy, Director $3,475(1) $39,000 for service on 13
boards in the Fund Complex(2)

Eugene J. McDonald, Director $3,475(1) $39,000 for service on 13
boards in the Fund Complex(2)

Harry Woolf, Director $3,475(1) $39,000 for service on 13
boards in the Fund Complex(2)
</TABLE>

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

* A Director who is an "interested person" as defined in the Investment
Company Act.

** Retired, effective January 31, 1996.

(1) Of the amounts paid to Messrs. Cunnane, Hannay, Kroeger, Levy, McDonald
and Woolf, $2,529, $2,564, $0, $0, $3,475 and $3,475, respectively, was
deferred pursuant to a deferred compensation plan.

(2) One of these funds ceased operations on May 17, 1995.

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<PAGE>

The Fund Complex has adopted a Retirement Plan (the
"Retirement Plan") for Directors who are not employees of the Fund, the Fund's
Advisor or their respective affiliates (the "Participants"). After completion
of five years of service, each Participant will be entitled to receive an
annual retirement benefit equal to a percentage of the fee earned by him in
his last year of service. Upon retirement, each Participant will receive
annually 10% of such fee for each year that he served after completion of the
first five years, up to a maximum annual benefit of 50% of the fee earned by
him in his last year of service. The fee will be paid quarterly, for life, by
each Fund for which he serves. The Retirement Plan is unfunded and unvested.
Messrs. Kroeger and Woolf have qualified but have not yet received benefits.
The Fund has two Participants, a Director who retired effective December 31,
1994 and a Director who retired effective January 31, 1996, each of whom has
qualified for the Retirement Plan and will be paid a quarterly fee of $4,875
by the Fund Complex for the rest of his life. Such fee is allocated to each
fund in the Fund Complex based upon the relative net assets of such fund to
the Fund Complex.

Beginning in December, 1994, any Director who receives fees
from the Fund is permitted to defer a minimum of 50%, or up to all, of his
annual compensation pursuant to a Deferred Compensation Plan.

Code of Ethics

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

The Code of Ethics requires that all employees of the
Advisor, any director or officer of the Fund's distributors, and all
Non-Interested Directors, preclear any personal securities investments (with
limited exceptions, such as non-volitional purchases or purchases which are
part of an automatic dividend reinvestment plan). The preclearance requirement
and associated procedures are designed to identify any substantive prohibition
or limitation applicable to the proposed investment. The substantive
restrictions applicable to investment personnel include a ban on acquiring any
securities in an initial public offering, a prohibition from profiting on
short-term trading in securities and preclearance of the acquisition of
securities in private placements. Furthermore, the Code of Ethics provides for
trading "blackout periods" that prohibit trading by investment personnel and
certain other employees within periods of trading by the Fund in the same
security.

6. INVESTMENT ADVISORY AND OTHER SERVICES

ISI serves as the Fund's investment advisor pursuant to an
investment advisory agreement dated as of April 1, 1991 (the "Advisory
Agreement"). ISI is a registered investment advisor that was formed in
January, 1991. ISI employs Messrs. Edward S. Hyman, the Fund's Chairman, and
R. Alan Medaugh, the Fund's President. ISI is also investment advisor to
Managed Municipal Fund, Inc. and North American Government Bond Fund, Inc.

As described in the Fund's Prospectus, the Advisor (a)
formulates and implements continuing programs for the purchases and sales of
securities, (b) determines what securities (and in what proportion) shall be

-12-
<PAGE>

represented in the Fund's portfolio, (c) provides the Fund's Board of
Directors with regular financial reports and analyses with respect to the
Fund's portfolio investments and operations, and the operations of comparable
investment companies, (d) obtains and evaluates pertinent information about
economic, statistical and financial information pertinent to the Fund, (e)
takes, on behalf of the Fund, all actions which appear to the Advisor
necessary to carry into effect its purchase and sale programs. Any investment
program undertaken by the Advisor will at all times be subject to policies and
control of the Fund's Board of Directors. The Advisor shall not be liable to
the Fund or its shareholders for any act or omission by the Advisor 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.

Pursuant to the terms of the Advisory Agreement, as
compensation for its services, the Advisor receives an annual fee, paid
monthly, of a percentage of the average daily net assets of the Fund which
varies as follows:

Incremental
Advisory Fee
(as a percentage of
Average Daily Net Assets Average Daily Net Assets)
------------------------ -------------------------

Less than $100,000,000 .20%
$100,000,000 - $200,000,000 .18%
$200,000,001 - $300,000,000 .16%
$300,000,001 - $500,000,000 .14%
$500,000,001 and over .12%

In addition, the Fund pays the Advisor 1.5% of the Fund's
gross income.

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

The Advisor is responsible for decisions to buy and sell
securities for the Fund, for broker-dealer selection, and for negotiation of
commission rates under standards established and periodically reviewed by the
Board of Directors. Because purchases and sales of securities by the Fund will
usually be principal transactions, the Fund will incur little, if any,
brokerage commission expense. The Advisor's primary consideration in effecting

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<PAGE>

securities transactions will be to obtain best price and execution. To the
extent that the execution and prices of more than one dealer are comparable,
the Advisor may, in its discretion, effect transactions with dealers that
furnish statistical research or other information or services that may benefit
the Fund's investment program.

The Investment Advisory Agreement will continue in effect
from year to year after its initial two year term if such continuance is
specifically approved (a) at least annually by the Fund's Board of Directors
or by a vote of a majority of the outstanding Shares and (b) by the
affirmative vote of a majority of the Non-Interested Directors by votes cast
in person at a meeting called for such purpose. The Investment Advisory
Agreement was most recently approved by the Fund's Board of Directors in the
foregoing manner on September 25, 1995. The Fund or the Advisor may terminate
the Investment Advisory Agreement on sixty days' written notice without
penalty. The Investment Advisory Agreement will terminate automatically in the
event of assignment. For the fiscal years ended October 31, 1995, October 31,
1994 and October 31, 1993, the Fund paid fees to ISI of $999,452, $1,056,633
and $1,162,324, respectively.

7. ADMINISTRATION

Investment Company Capital Corp., 135 East Baltimore Street,
Baltimore, Maryland 21202, provides administration services to the Fund. Such
services include: monitoring the Fund's regulatory compliance, supervising all
aspects of the Fund's service providers, arranging, but not paying for, the
printing and mailing of prospectuses, proxy materials and shareholder reports,
preparing and filing all documents required by the securities laws of any
state in which the Shares are sold, establishing the Fund's budgets,
monitoring the Fund's distribution plans, preparing the Fund's financial
information and shareholder reports, calculating dividend and distribution
payments and arranging for the preparation of state and federal tax returns.

The Fund compensates ICC by paying it a percentage of the
Fund's average daily net assets which varies as follows:

Incremental
Administration Fee
(as a percentage of
Average Daily Net Assets Average Daily Net Assets)
------------------------ -------------------------

Less than $100,000,000 .10%
$100,000,000 - $200,000,000 .09%
$200,000,001 - $300,000,000 .08%
$300,000,001 - $500,000,000 .07%
$500,000,001 and over .06%

In addition, the Fund pays ICC .50% of the Fund's annual
gross income.

The services of ICC to the Fund are not exclusive and ICC is
free to render similar services to others. For the fiscal year ended October
31, 1995 and for the period from January 1, 1994 through October 31, 1994, ICC
received administration fees of $438,267 and $386,768. Prior to January 1,
1994, Alex. Brown served as the Fund's administrator. For the period from
November 1, 1993 through December 31, 1993 and for the fiscal year ended
October 31, 1993, Alex. Brown received an administration fee from the Fund of
$82,018 and $513,355, respectively.

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<PAGE>

ICC also serves as the Fund's transfer and dividend
disbursing agent and provides accounting services to the Fund. (See
"Custodian, Transfer Agent and Accounting Services".) ICC is a wholly-owned
subsidiary of Alex. Brown and an affiliate of Armata.

8. DISTRIBUTION OF FUND SHARES

The Flag Investors Total Return U.S. Treasury Fund Class A
Shares Distribution Agreement provides that Alex. Brown has the exclusive
right to distribute the Flag Investors Total Return U.S. Treasury Fund Class A
Shares either directly or through other broker-dealers. The ISI Total Return
U.S. Treasury Fund Shares Distribution Agreement provides that Armata has the
exclusive right to distribute ISI Total Return U.S. Treasury Fund Shares,
either directly or through other broker-dealers. Armata, a Maryland
corporation, is a broker-dealer that was formed in 1983 and is an affiliate of
ICC and Alex. Brown. (The Flag Investors Total Return U.S. Treasury Fund Class
A Shares Distribution Agreement and the ISI Total Return U.S. Treasury Fund
Shares Distribution Agreement are herein collectively called the "Distribution
Agreements.")

The Distribution Agreements further provide that Alex. Brown
or Armata on behalf of the relevant class, will: solicit and receive orders
for the purchase of Shares; accept or reject such orders on behalf of the Fund
in accordance with the Fund's currently effective prospectus and transmit such
orders as are accepted to the Fund's transfer agent as promptly as possible;
receive requests for redemption and transmit such redemption requests to the
Fund's transfer agent as promptly as possible; respond to inquiries from the
Fund's shareholders concerning the status of their accounts with the Fund;
provide the Fund's Board of Directors for their review with quarterly reports
required by Rule 12b-1; maintain such accounts, books and records as may be
required by law or be deemed appropriate by the Fund's Board of Directors; and
take all actions deemed necessary to carry into effect the distribution of the
Shares. Alex. Brown and Armata have not undertaken to sell any specific number
of Shares. The Distribution Agreements further provide that, in connection
with the distribution of Shares, Alex. Brown or Armata will be responsible for
all of their respective promotional expenses. The services by Alex. Brown and
Armata to the Fund are not exclusive, and Alex. Brown and Armata shall not be
liable to the Fund or its shareholders for any act or omission by Alex. Brown
or Armata 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.

As compensation for providing distribution and related
administrative services as described above, the Fund will pay Alex. Brown for
the Flag Investors Shares and Armata for the ISI Class Shares, on a monthly
basis, an annual fee, equal to .25% of the average daily net assets of the
respective class of Shares. Alex. Brown and Armata expect to allocate on a
proportional basis a substantial portion of their respective annual fees to
their investment representatives or up to all of their fees to broker-dealers
who enter into Sub-Distribution Agreements with Alex. Brown or Armata under
which such broker-dealers have agreed to process investor purchase and
redemption orders and respond to inquiries from Fund shareholders concerning
the status of their accounts and the operations of the Fund. For the fiscal
years ended October 31, 1995, October 31, 1994 and October 31, 1993, Alex.
Brown (for services performed for the Flag Investors Shares) received from the
Fund aggregate 12b-1 fees in the amount of $411,117, $485,928 and $582,520,
respectively and paid from such fees approximately $362,959, $410,280 and
$383,983, respectively to its investment representatives as compensation and
$44,701, $40,041, and $49,530, respectively to Participating Dealers as
compensation. In addition, for the fiscal year ended October 31, 1995, Alex.
Brown incurred expenses of $0 for advertising and $12,195 for printing and

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<PAGE>

mailing of prospectuses to prospective investors. For the fiscal years ended
October 31, 1995, October 31, 1994 and October 31, 1993 Armata (for services
performed as distributor for the ISI Class of the Fund's shares) received from
the Fund aggregate 12b-1 fees of $501,139, $544,678 and $549,662, respectively
and paid from such fees $483,565, $517,078 and $546,159, respectively, to
Participating Dealers as compensation. From amounts received from the Fund
during such periods, Armata paid no fees to its investment representatives. In
addition, for the fiscal year ended October 31, 1995, Armata incurred expenses
of $7,020 for advertising and $6,253 for printing and mailing prospectuses to
prospective investors. For the period from November 9, 1992 through February
27, 1994, Alex. Brown was also distributor for the Flag Investors Class D
Shares (known at the time as the Flag Investors Class B Shares) pursuant to
the Plan of Distribution in effect for such class. For distribution services
for such shares for the periods from November 1, 1993 through October 20, 1994
and from November 9, 1992 through October 31, 1993, Alex. Brown received from
the Fund aggregate 12b-1 fees of $9,735 and $6,282, respectively. From amounts
received from the Fund during such periods, Alex. Brown paid no fees to its
investment representatives or to Participating Dealers.

Pursuant to Rule 12b-1 under the Investment Company Act,
which provides that investment companies may pay distribution expenses,
directly or indirectly, only pursuant to a plan adopted by the investment
company's board of directors and approved by its shareholders, the Fund has
adopted a Plan of Distribution for each of its classes of Shares (the
"Plans"). Under the Plans, the Fund pays a fee to Alex. Brown or Armata for
distribution and other shareholder servicing assistance as set forth in the
Distribution Agreements, and Alex. Brown and Armata are authorized to make
payments out of their fees to their investment representatives, to
Participating Dealers and to Shareholder Servicing Agents. Payments to
Participating Dealers and Shareholder Servicing Agents, if applicable, may not
exceed fees payable to the distributor of the respective class of the Fund's
Shares under the Plans.

The Distribution Agreements, forms of Sub-Distribution
Agreements and the Plans were most recently approved by the Fund's Board of
Directors, including a majority of the Non- Interested Directors (who have no
direct or indirect financial interest in the Plans or the Distribution
Agreements or any Sub-Distribution Agreement) on September 25, 1995. The
Distribution Agreements and the Plans will remain in effect from year to year
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 Non-Interested
Directors, by votes cast in person at a meeting called for such purpose.

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 Agreements without the approval of
the shareholders of the respective classes of the Fund. The Plans may be
terminated at any time, and the Distribution Agreements may be terminated at
any time upon 60 days' notice, without penalty, by a vote of a majority of the
Fund's Non-Interested Directors or by a vote of a majority of the outstanding
Shares. Any Sub-Distribution Agreement may be terminated in the same manner at
any time. The Distribution Agreements and any Sub-Distribution Agreement shall
automatically terminate in the event of assignment.

During the continuance of the Plans, the Fund's Board of
Directors will be provided for their review, at least quarterly, a written
report concerning the payments made under the Plans to Alex. Brown and Armata
pursuant to the Distribution Agreements, to Participating Dealers pursuant to

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<PAGE>

Sub-Distribution Agreements and to Shareholder Servicing Agents pursuant to
Shareholder Servicing Agreements. Such reports shall be made by the persons
authorized to make such payments. In addition, during the continuance of the
Plans, the selection and nomination of the Fund's Non-Interested Directors
shall be committed to the discretion of the Non-Interested Directors then in
office.

In addition, the Fund may enter into Shareholder Servicing
Agreements with certain financial institutions, such as banks, to act as
Shareholder Servicing Agents, pursuant to which Alex. Brown and Armata will
allocate a portion of their respective distribution fees as compensation for
such financial institutions' ongoing shareholder services. Although banking
laws and regulations prohibit banks from distributing shares of open-end
investment companies such as the Fund, according to interpretations from
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 applicable 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.

For the fiscal years ended October 31, 1995, October 31,
1994 and October 31, 1993, Alex. Brown received sales commissions on the Flag
Investors Class A Shares of $971,034, $310,376 and $538,275 and from such
amounts retained $177,202, $281,454 and $387,481 in each such year,
respectively. For the fiscal years ended October 31, 1995, October 31, 1994
and October 31, 1993, Armata received sales commissions on the ISI Class
Shares of $635,954, $426,023 and $1,067,706 and from such amounts retained
$53,363, $57,564 and $189,792 in each such year, respectively.

Except as described elsewhere, the Fund pays or causes to be
paid all continuing expenses of the Fund, including, without limitation:
investment advisory, administration 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, if any, 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 corporate 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 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
of the Fund and supplements thereto to the 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
Non-Interested Directors and Non-Interested 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 or independent auditors, in connection with any matter relating
to the Fund; membership dues of industry associations; interest payable on
Fund borrowings; postage; insurance premiums on property or personnel

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<PAGE>

(including officers and Directors) of the Fund which inure to its benefit;
extraordinary expenses (including, but not limited to, legal claims and
liabilities and litigation costs and any indemnification related thereto); and
all other charges and costs of the Fund's operation unless otherwise
explicitly assumed by Alex. Brown, ICC or Armata.

9. PORTFOLIO TRANSACTIONS

The Advisor is responsible for decisions to buy and sell
securities for the Fund, selection of broker-dealers and negotiation of
commission rates. Since purchases and sales of portfolio securities by the
Fund are usually principal transactions, the Fund incurs little or no
brokerage commissions. Portfolio securities are normally purchased directly
from the issuer or from a market maker for the securities. The purchase price
paid to broker-dealers serving as market makers usually includes 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.

The Advisor's primary consideration in effecting security
transactions is to obtain, on an overall basis, the best net price and the
most favorable execution of orders. To the extent that the execution and
prices offered by more than one broker-dealer are comparable, the Advisor may,
in its discretion, effect transactions with dealers that furnish statistical,
research or other information or services which the Advisor deems to be
beneficial to the Fund's investment program. Such research services supplement
the Advisor's own research. Research services may include the following:
statistical and background information on the U.S. economy, industry groups
and individual companies; forecasts and interpretations with respect to the
U.S. money markets; information on federal, state, local and foreign political
developments; portfolio management strategies; performance information on
securities, indices and investment accounts; information concerning prices of
securities; the providing of equipment used to communicate research
information; and the providing of access to consultants who supply research
information. Certain research services furnished by broker-dealers may be
useful to the Advisor with clients other than the Fund. Similarly, any
research services received by the Advisor through placement of portfolio
transactions of other clients may be of value to the Advisor in fulfilling its
obligations to the Fund. No specific value can be determined for research and
statistical services furnished without cost to the Advisor by a broker-dealer.
The Advisor 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 the Advisor's research and analysis. Therefore,
it may tend to benefit the Fund by improving the quality of the Advisor's
investment advice.

For the fiscal years ended October 31, 1995, October 31,
1994 and October 31, 1993, no brokerage commissions were paid by the Fund.

The Fund is required to identify any securities of its
"regular brokers or dealers" (as such term is defined in the Investment
Company Act) which the Fund has acquired during its most recent fiscal year.
As of October 31, 1995, the Fund held a 5.75% repurchase agreement issued by
Goldman Sachs & Co. valued at $25,240,000. Goldman Sachs & Co. is one of the
Fund's "regular brokers or dealers."

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<PAGE>

10. CAPITAL SHARES

Under the Fund's Articles of Incorporation, the Fund may
issue up to 100 million Shares of its capital stock with a par value of $.001
per Share.

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
Total Return U.S. Treasury Fund Class A Shares (formerly known as the Flag
Investors Total Return U.S. Treasury Fund Shares), Flag Investors Total Return
U.S. Treasury Fund Class B Shares, Flag Investors Total Return U.S. Treasury
Fund Class D Shares and ISI Total Return U.S. Treasury Fund Shares. The Flag
Investors Total Return U.S. Treasury Fund Class B Shares and the Flag
Investors Total Return U.S. Treasury Fund Class D Shares are not currently
being offered. All Shares of the Fund regardless of class 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 will vote separately. Any such series will be a separately managed
portfolio and shareholders of each series will have an undivided interest in
the net assets of that series. For tax purposes, the series will be treated as
separate entities. Generally, each class of Shares issued by a particular
series will be identical to every other class and expenses of the Fund (other
than 12b-1 fees) are prorated between all classes of a series based upon the
relative net assets of each class. Any matters affecting any class exclusively
will be voted on by the holders of such class.

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

The Fund's By-laws provide that any director of the Fund may
be removed by the shareholders by a vote of a majority of the votes entitled
to be cast for the election of Directors. A meeting to consider the removal of
any Director or Directors of the Fund will be called by the Secretary of the
Fund upon the written request of the holders of at least one-tenth of the
outstanding Shares of the Fund entitled to vote at such meeting.

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

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

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<PAGE>

11. REPORTS

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

12. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES

PNC Bank, National Association ("PNC Bank"), Airport
Business Park, 200 Stevens Drive, Lester, Pennsylvania 19113, a subsidiary of
PNC Bank Corp., has been retained to act as custodian of the Fund's
investments. PNC Bank receives such compensation from the Fund for its
services as custodian as may be agreed to from time to time by PNC Bank and
the Fund. Investment Company Capital Corp., 135 East Baltimore Street,
Baltimore, Maryland 21202 (telephone: (800) 553-8080 for the Flag Investors
Shares Class and (800) 882-8585 for the ISI Shares Class) has been retained to
act as the Fund's transfer and dividend disbursing agent. As compensation for
these services, ICC receives up to $15.17 per account per year plus
reimbursement for out-of-pocket expenses incurred in connection therewith. For
the fiscal year ended October 31, 1995, such fees totalled $204,806.

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

Average Net Assets Incremental Annual Accounting 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%

In addition, the Fund will reimburse ICC for the following
out-of-pocket expenses incurred in connection with ICC's provision of
accounting services: express delivery service, independent pricing and
storage. As compensation for providing accounting services for the fiscal year
ended October 31, 1995, ICC received fees of $94,737.

ICC also serves as the Fund's administrator.

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<PAGE>

13. INDEPENDENT AUDITORS

The annual financial statements of the Fund are audited by
the Fund's independent auditors, Deloitte & Touche LLP. Deloitte & Touche LLP
has offices at 2 Hilton Court, P.O. Box 319, Parsippany, New Jersey 07054.

14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of February 8, 1996, to Fund management's knowledge, the
following persons owned of record or beneficially 5% or more of the Fund's
outstanding Shares.

Flag Investors Shares

Alex. Brown & Sons Incorporated 73.50%*
135 East Baltimore Street
Baltimore, MD 21202
- ------------
*As of such date, to Fund management's knowledge, Alex. Brown owned beneficially
less than 1% of such shares.

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

15. PERFORMANCE AND YIELD COMPUTATIONS

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 generally will be stated both in terms of total
return and in terms of yield. However, the Fund may also from time to time
state the performance of the Fund solely in terms of total return.

Total Return Calculation

The total return quotations, under the rules of the SEC,
must be calculated according to the following formula:

n
P (1 + T) = ERV

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

T = average annual total return

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

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

Under the foregoing formula, the time periods used in
advertising will be based on rolling calendar quarters updated to the last day
of the most recent quarter prior to submission of the advertising for
publication, and will cover one, five and ten year periods or a shorter period
dating from the effectiveness of the Fund's registration statement or the date

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<PAGE>

the Fund (or a series) commenced operations (provided such date is subsequent
to the date the registration statement became effective). During its first
year of operation the Fund may, in lieu of annualizing its total return, use
an aggregate total return calculated in the same manner. In calculating the
ending redeemable value, the maximum sales load is deducted from the initial
$1,000 payment and all dividends and distributions by the Fund are assumed to
have been reinvested at net asset value as described in the prospectus on the
reinvestment dates during the period. "T" in the formula above is calculated
by finding the average annual compounded rate of return over the period that
would equate an assumed initial payment of $1,000 to the ending redeemable
value. Any sales loads that might in the future be made applicable at the time
to reinvestments would be included as would any recurring account charges that
might be imposed by the Fund.

The 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 in order 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., the Fund calculates its aggregate and average annual total
return for the specified periods of time by assuming the investment of $10,000
in Shares and assuming the reinvestment of each dividend or other distribution
at net asset value on the reinvestment date. For this alternative computation,
the Fund assumes that the $10,000 invested in Shares is net of all sales
charges (as distinguished from the computation required by the SEC where the
$1,000 payment is reduced by sales charges before being invested in Shares).
The Fund will, however, disclose the maximum sales charges and will also
disclose that the performance data do not reflect sales charges and that
inclusion of sales charges would reduce the performance quoted. Such
alternative total return information will be given no greater prominence in
such advertising than the information prescribed under SEC rules, and all
advertisements containing performance data will include a legend disclosing
that such performance data represent past performance and that the investment
return and principal value of an investment will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost.

Calculated according to SEC rules for the one year period
ended September 30, 1995, the ending redeemable value of a hypothetical $1,000
payment for each of the Flag Investors Shares and the ISI Shares was $1,103
and $1,104, respectively, resulting in a total return for such Shares equal to
10.34% and 10.40%, respectively. For the five year period ended September 30,
1995, the ending redeemable value of a hypothetical $1,000 payment for each of
the Flag Investors and the ISI Shares was $1,566 and $1,567, respectively,
resulting in a total return for such Shares equal to 9.39% and 9.40%,
respectively. For the period from August 10, 1988 (commencement of operations)
through the end of the Fund's most recent calendar quarter on September 30,
1995, the ending redeemable value of a hypothetical $1,000 payment for each of
the Flag Investors and the ISI Shares was $1,795 and $1,796, respectively,
resulting in an average annual total return for such Shares equal to 8.54% and
8.56%, respectively.

Calculated according to the alternative computation which
assumes no sales charges and reinvestment of all distributions, for the one
year period ended October 31, 1995, the ending redeemable value of a
hypothetical $10,000 investment in the Flag Investors or ISI Shares was
$11,810 resulting in a total return for such Shares equal to 18.11%. For the
five year period ended October 31, 1995, the ending redeemable value of a

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<PAGE>

hypothetical $10,000 investment in Flag Investors or ISI Shares was $16,410,
resulting in a total return for such Shares equal to 10.4%. For the period
from August 10, 1988 (commencement of operations) through the end of the
Fund's most recent fiscal year on October 31, 1995, the ending redeemable
value of a hypothetical $10,000 investment in the Flag Investors or ISI Shares
was $19,198 resulting in an average annual total return for such Shares equal
to 9.4%.

Yield Calculations

The yield based on the 30 day period ended October 31, 1995
was 5.33% for the Flag Investors Shares and 5.34% for the ISI Shares, computed
in the manner discussed below. The yield of the Fund is calculated by dividing
the net investment income per Share earned by the Fund during a 30-day (or one
month) period by the maximum offering price per share on the last day of the
period and analyzing the result on a semiannual basis by adding one to the
quotient, raising the sum to the power of six, subtracting one from the result
and then doubling the difference. The Fund's yield calculations assume a
maximum sales charge of 4.50% for the Flag Investors Total Return U.S.
Treasury Fund Class A Shares and a maximum sales charge of 4.45% for the ISI
Total Return U.S. Treasury Fund Shares. The Fund's net investment income per
Share earned during the period is based on the average daily number of Shares
outstanding during the period entitled to receive dividends and includes
dividends and interest earned during the period minus expenses accrued for the
period, net of reimbursements.

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

Undeclared earned income will be subtracted from the net
asset value per share. Undeclared earned income is net investment income
which, at the end of the base period, has not been declared as a dividend, but
is reasonably expected to be and is declared as a dividend shortly thereafter.

16. FINANCIAL STATEMENTS.

See next page.

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

Statement of Net Assets October 31, 1995

<TABLE>
<CAPTION>
PAR VALUE
INTEREST RATE MATURITY DATE (000) (NOTE A)
<S> <C> <C> <C>
- -------------------------------------------------------------------------
U.S. TREASURY BONDS - 55.4%
10.375% 11/15/09 $ 12,500 $ 16,099,612
9.250 2/15/16 65,000 85,840,625
7.250 5/15/16 30,000 32,868,750
8.875 2/15/19 45,000 58,099,230
8.500 2/15/20 10,000 12,495,310
-------------
TOTAL U.S. TREASURY BONDS
(Cost $203,503,896)................................... 205,403,527
-------------

U.S. TREASURY NOTES - 35.1%
7.875 7/31/96 46,700 47,458,875
5.750 8/15/03 83,700 82,509,870
-------------
TOTAL U.S. TREASURY NOTES
(Cost $130,668,720)................................... 129,968,745
-------------

ZERO COUPON U.S. TREASURY BONDS (S.T.R.I.P.S.) - 1.3%
S.T.R.I.P.S. (Principal Only)
6.572%* 8/15/17 20,500 4,939,209
-------------
TOTAL U.S. TREASURY STRIPS
(Cost $4,671,341)..................................... 4,939,209
-------------

REPURCHASE AGREEMENTS - 6.8%
GOLDMAN SACHS & CO., 5.75%
Dated 10/31/95, to be repurchased on 11/1/95,
collateralized by U.S. Treasury Bonds with a
market value of $25,745,920
(Cost $25,240,000)........................... 25,240 25,240,000
-------------
</TABLE>

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Statement of Net Assets (CONCLUDED) October 31, 1995

<TABLE>
<CAPTION>
VALUE
(NOTE A)
<S> <C> <C>
- --------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES - 98.6%
(Cost $364,083,957)**...................................................... $ 365,551,481

OTHER ASSETS IN EXCESS OF LIABILITIES, NET - 1.4%............................ 5,269,210
-------------

NET ASSETS - 100.0%.......................................................... $ 370,820,691
-------------
-------------

NET ASSET VALUE AND REDEMPTION PRICE PER:
FLAG INVESTORS CLASS A SHARE
($164,205,925 DIVIDED BY 16,119,600 shares outstanding)................. $10.19
ISI CLASS SHARE
($206,614,766 DIVIDED BY 20,277,563 shares outstanding)................. $10.19

MAXIMUM OFFERING PRICE PER:
FLAG INVESTORS CLASS A SHARE
($10.19 DIVIDED BY .955)................................................ $10.67
ISI CLASS SHARE
($10.19 DIVIDED BY .9555)............................................... $10.66
- --------------------------------------------------------------------------------------------
</TABLE>

*Yield as of October 31, 1995.
**Also aggregate cost for federal tax purposes.
See accompanying Notes to Financial Statements.

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

Statement of Operations For the Year Ended October 31, 1995

<TABLE>
<CAPTION>
<S> <C>
- -----------------------------------------------------------------------------------------------------------
INVESTMENT INCOME (NOTE A):
Interest................................................................................... $ 24,592,183
------------

EXPENSES:
Investment advisory fee (Note B)........................................................... 999,452
Distribution fee (Note B).................................................................. 912,256
Administration fees (Note B)............................................................... 438,267
Transfer agent fees (Note B)............................................................... 204,806
Accounting fee (Note B).................................................................... 94,737
Printing and postage....................................................................... 61,802
Custodian fees............................................................................. 58,167
Legal...................................................................................... 47,433
Directors' fees............................................................................ 24,011
Audit...................................................................................... 23,976
Miscellaneous.............................................................................. 19,007
Insurance.................................................................................. 15,959
Registration fees.......................................................................... 9,815
------------
Total expenses........................................................................... 2,909,688
------------
Net investment income...................................................................... 21,682,495
------------

NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain from security transactions............................................... 2,796,088
Change in unrealized appreciation/(depreciation) of investments............................ 36,191,069
------------
Net gain on investments.................................................................... 38,987,157
------------

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS......................................... $ 60,669,652
------------
------------

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

See accompanying Notes to Financial Statements.

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Statement of Changes in Net Assets

<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCTOBER 31,
-----------------------------------
<S> <C> <C>
1995 1994
- -----------------------------------------------------------------------------------------------------------
INCREASE/(DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income............................................. $ 21,682,495 $ 20,608,620
Net gain from security transactions............................... 2,796,088 2,694,502
Change in unrealized appreciation/(depreciation) of investments... 36,191,069 (50,587,386)
--------------- ------------------
Net increase/(decrease) in net assets resulting from operations... 60,669,652 (27,284,264)
--------------- ------------------

DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income:
Flag Investors Class A Shares................................... (9,785,285) (9,667,725)
Flag Investors Class B Shares................................... -- (69,473)
ISI Class Shares................................................ (11,897,210) (10,871,422)
Net realized short-term gains:
Flag Investors Class A Shares................................... (1,162,209) (3,322,794)
Flag Investors Class B Shares................................... -- (48,182)
ISI Class Shares................................................ (1,385,249) (3,643,272)
Net realized long-term gains:
Flag Investors Class A Shares................................... -- (16,299,585)
Flag Investors Class B Shares................................... -- (138,210)
ISI Class Shares................................................ -- (16,877,555)
--------------- ------------------
Total distributions............................................... (24,229,953) (60,938,218)
--------------- ------------------

CAPITAL SHARE TRANSACTIONS (NOTE C):
Proceeds from sale of shares...................................... 31,613,586 53,031,045
Value of shares issued in reinvestment of dividends............... 15,133,836 39,758,572
Cost of shares repurchased........................................ (87,824,419) (87,607,047)
--------------- ------------------
Increase/(decrease) in net assets derived from
capital share transactions...................................... (41,076,997) 5,182,570
--------------- ------------------
Total decrease in net assets...................................... (4,637,298) (83,039,912)

NET ASSETS:
Beginning of period............................................... 375,457,989 458,497,901
--------------- ------------------
End of period..................................................... $ 370,820,691 $ 375,457,989
--------------- ------------------
--------------- ------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying Notes to Financial Statements.

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

Financial Highlights -- Flag Investors Class A and ISI Class Shares
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)

<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCTOBER 31,
---------------------------------------------------------------
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of year................. $ 9.22 $ 11.35 $ 10.47 $ 10.41 $ 9.76
----------- ----------- ----------- ----------- -----------

INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................ 0.57 0.51 0.62 0.76 0.70
Net realized and unrealized gain/(loss)
on investments..................................... 1.04 (1.16) 1.12 0.05 0.79
----------- ----------- ----------- ----------- -----------
Total from Investment Operations..................... 1.61 (0.65) 1.74 0.81 1.49

LESS DISTRIBUTIONS:
Dividends from net investment income
and short-term gains............................... (0.64) (1.20) (0.79) (0.70) (0.84)
Distributions from net realized
long-term gains.................................... -- (0.28) (0.07) (0.05) --
----------- ----------- ----------- ----------- -----------
Total distributions.................................. (0.64) (1.48)* (0.86) (0.75) (0.84)
----------- ----------- ----------- ----------- -----------
Net asset value at end of year....................... $ 10.19 $ 9.22 $ 11.35 $ 10.47 $ 10.41
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------

TOTAL RETURN........................................... 18.09% (6.22)% 17.33% 8.96% 15.89%

RATIOS TO AVERAGE NET ASSETS:
Expenses............................................. 0.80% 0.77% 0.77% 0.77% 0.87%
Net investment income................................ 5.94% 4.98% 5.21% 5.65% 6.88%

SUPPLEMENTAL DATA:
Net assets at end of year (000):
Flag Investors Class A Shares...................... $164,206 $175,149 $224,790 $250,210 $237,688
ISI Class Shares................................... $206,615 $200,309 $232,103 $207,518 $168,128

Portfolio turnover rate.............................. 194% 68% 249% 191% 141%

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

*Distributions to shareholders include $.05 per share return of capital.

See accompanying Notes to Financial Statements.

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

Notes to Financial Statements

A. SIGNIFICANT ACCOUNTING POLICIES -- Total Return
U.S. Treasury Fund, Inc. (the "Fund") was organized as a Maryland Corporation
on June 3, 1988 and commenced operations on August 10, 1988. The Fund is
registered under the Investment Company Act of 1940 as a diversified,
open-end management investment company. At October 31, 1995, the Fund
consisted of two classes of shares: ISI Total Return U.S. Treasury Fund ("ISI
Class") and Flag Investors Total Return U.S. Treasury Fund Class A Shares
("Flag Investors Class A"). The Flag Investors Class A and the ISI Class
Shares each have different sales loads. As of March 1, 1994, the previously
offered Flag Investors Total Return U.S. Treasury Fund Class B Shares ("Flag
Investors Class B") were no longer offered. All Class B Shares not exchanged
into Class A Shares or previously redeemed were redeemed as of October 20,
1994. Significant accounting policies are as follows:

SECURITY VALUATION -- Portfolio securities that are listed on a national
securities exchange are valued on the basis of their last sale price or, in
the absence of recorded sales, at the average of readily available closing
bid and asked prices. Securities or other assets for which market quotations
are not readily available are valued at their fair value so determined in
good faith by the Investment Advisor under procedures established and
monitored by the Board of Directors. Short-term obligations with maturities
of 60 days or less are valued at amortized cost which approximates market.

REPURCHASE AGREEMENTS -- The Fund may agree to purchase money market
instruments subject to the seller's agreement to repurchase them at an agreed
upon date and price. The seller, under a repurchase agreement, will be
required on a daily basis to maintain the value of the securities subject to
the agreement at not less than the repurchase price. The agreement is
conditioned upon the collateral being deposited under the Federal Reserve
book-entry system.

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

OTHER -- Security transactions are accounted for on the trade date and the
cost of investments sold or redeemed is determined by use of the specific
identification method for both financial reporting and income tax purposes.
Interest income is recorded on an accrual basis and includes, when
applicable, the pro rata amortization of premiums and accretion of discounts.

B. INVESTMENT ADVISORY FEE, TRANSACTIONS WITH
AFFILIATES AND OTHER FEES -- International Strategy & Investment Inc. ("ISI")
serves as the Fund's investment advisor and Investment Company Capital Corp.
("ICC"), a subsidiary of Alex. Brown & Sons Incorporated ("Alex. Brown"),
serves as the Fund's administrator. As compensation for its advisory
services, ISI receives from the Fund an annual fee, calculated daily and paid
monthly, at the annual rate of .20% of the first $100 million of the Fund's
average daily net assets; .18% of the Fund's average daily net assets in
excess of $100 million but not exceeding $200 million; .16% of the Fund's
average daily net assets in excess of $200 million but not exceeding $300
million; .14% of the Fund's average daily net assets in excess of $300
million but not exceeding $500 million; and .12% of the Fund's average daily
net assets in excess of $500 million. In addition, the Fund pays the
investment advisor 1.5% of the Fund's gross income.

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Notes to Financial Statements (CONTINUED)

As compensation for its administrative services, ICC receives from the Fund
an annual fee, calculated daily and paid monthly, at the annual rate of .10%
of the first $100 million of the Fund's average daily net assets; .09% of the
Fund's average daily net assets in excess of $100 million but not exceeding
$200 million; .08% of the Fund's average daily net assets in excess of $200
million but not exceeding $300 million; .07% of the Fund's average daily net
assets in excess of $300 million but not exceeding $500 million; and .06% of
the Fund's average daily net assets in excess of $500 million. In addition,
the Fund pays the administrator .50% of the Fund's gross income.

As compensation for its accounting services, ICC receives from the Fund an
annual fee, calculated daily and paid monthly, based on the Fund's average
daily net assets. ICC received $94,737 for accounting services for the year
ended October 31, 1995.

As compensation for its transfer agent services, ICC receives from the Fund a
per account fee, calculated and paid monthly. ICC received $204,806 for
transfer agent services for the year ended October 31, 1995.

As compensation for providing distribution services, Armata Financial Corp.,
an affiliate of Alex. Brown, receives from the Fund an annual fee, calculated
daily and paid monthly, at an annual rate equal to .25% of the average daily
net assets of the ISI Class Shares. Alex. Brown receives from the Fund an
annual fee, calculated daily and paid monthly, at the annual rate of .25% of
the average daily net assets of the Flag Investors Class A Shares. For the
year ended October 31, 1995, distribution fees aggregated $912,256, of which
$501,139 and $411,117 were allocated to the ISI Class and Flag Investors
Class A Shares, respectively.

C. CAPITAL SHARE TRANSACTIONS -- At October 31,
1995, there were 100 million shares of $.001 par value common stock
authorized. Transactions of the Fund were as follows:
<TABLE>
<CAPTION>
Flag Investors Class A Shares
------------------------------
<S> <C> <C>
For the Year Ended October 31,
------------------------------

<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Shares sold............... 726,425 1,644,765
Shares issued to
shareholders on
reinvestment of
dividends............... 653,526 1,794,890
Shares redeemed........... (4,262,626) (4,249,405)
-------------- --------------
Net decrease in shares
outstanding............. (2,882,675) (809,750)
-------------- --------------
-------------- --------------
Proceeds from sale of
shares.................. $ 7,023,050 $ 16,544,622
Reinvested dividends...... 6,240,023 18,068,172
Net asset value of shares
redeemed................ (40,514,349) (41,772,070)
-------------- --------------
Net decrease from capital
share transactions...... $ (27,251,276) $ (7,159,276)
-------------- --------------
-------------- --------------
</TABLE>

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Notes to Financial Statements (CONCLUDED)
<TABLE>
<CAPTION>
ISI Class Shares
------------------------------
<S> <C> <C>
For the Year Ended October 31,
------------------------------

<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Shares sold................. 2,579,624 3,572,802
Shares issued to
shareholders on
reinvestment of
dividends................. 929,740 2,141,783
Shares redeemed............. (4,961,123) (4,441,121)
-------------- --------------
Net increase/(decrease) in
shares outstanding........ (1,451,759) 1,273,464
-------------- --------------
-------------- --------------
Proceeds from sale of
shares.................... $ 24,590,536 $ 35,603,196
Reinvested dividends........ 8,893,813 21,518,947
Net asset value of shares
redeemed.................. (47,310,070) (43,262,704)
-------------- --------------
Net increase/(decrease) from
capital share
transactions.............. $ (13,825,721) $ 13,859,439
-------------- --------------
-------------- --------------
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
Flag Investors Class B
Shares
---------------------------
<S> <C>
For the Period Nov. 1, 1993
to Oct. 20, 1994*
---------------------------
Shares sold.................... 83,459
Shares issued to shareholders
on reinvestment of
dividends.................... 16,938
Shares redeemed................ (242,301)
-------------
Net decrease in shares
outstanding.................. (141,904)
-------------
-------------
Proceeds from sale of shares... $ 883,227
Reinvested dividends........... 171,453
Net asset value of shares
redeemed..................... (2,572,273)
-------------
Net decrease from capital share
transactions................. $ (1,517,593)
-------------
-------------
- ------------------------------------------------------------
* Final redemption date.
</TABLE>

D. INVESTMENT TRANSACTIONS -- Purchases and sales
of investment securities, other than short-term obligations, aggregated
$658,047,217 and $650,979,192, respectively, for the year ended October 31,
1995.

At October 31, 1995, aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost was
$2,786,291 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over market value was $1,318,767.

E. NET ASSETS -- At October 31, 1995, net assets
consisted of:

<TABLE>
<S> <C>
Paid-in Capital:
Flag Investors
Class A Shares.......... $ 161,528,337
ISI Class Shares.......... 207,576,200
Accumulated net realized
gain from security
transactions.............. 248,630
Unrealized appreciation of
investments............... 1,467,524
-------------
$ 370,820,691
-------------
-------------
</TABLE>

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

Independent Auditors' Report

The Board of Directors and Shareholders,
Total Return U.S. Treasury Fund, Inc.:

We have audited the accompanying statement of net assets of Total Return
U.S. Treasury Fund, Inc. as of October 31, 1995, the related statements of
operations for the year then ended and changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the five-year period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the 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 securities owned at October
31, 1995 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements and financial highlights represent
fairly, in all material respects, the financial position of Total Return U.S.
Treasury Fund, Inc. as of October 31, 1995, the results of its operations, the
changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP
Parsippany, New Jersey
December 6, 1995

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