TOTAL RETURN U S TREASURY FUND INC, 497, 2000-03-06

TOTAL RETURN U S TREASURY FUND INC
497, 2000-03-06

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

Prospectus & Application
March 1, 2000

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

<PAGE>

[LOGO OMITTED]

This mutual fund (the "Fund") seeks to achieve 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 offers shares through securities dealers and financial institutions
that act as shareholder servicing agents. You may also buy shares through the
Fund's Transfer Agent. This Prospectus describes Flag Investors Class A Shares
("Class A Shares") of the Fund.

TABLE OF CONTENTS

Investment Summary .............................................1
Fees and Expenses of the Fund ..................................2
Investment Program .............................................3
The Fund's Net Asset Value .....................................3
How to Buy Shares ..............................................4
How to Redeem Shares ...........................................5
Telephone Transactions .........................................5
Sales Charges ..................................................6
Dividends and Taxes ............................................7
Investment Advisor .............................................8
Administrator ..................................................8
Financial Highlights ...........................................9
Application ..................................................A-1
Flag Investors Funds
P.O. Box 515
Baltimore, MD 21203

<PAGE>
INVESTMENT SUMMARY

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Objectives and Strategies

The Fund seeks to achieve a high level of total return, with relative
stability of principal, and, secondarily, high 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. In selecting investments for the Fund, the Fund's
investment advisor (the "Advisor") may take full advantage of the entire range
of maturities offered by U.S. Treasury Securities. The Advisor will consider
both the security's yield and its potential for capital gains resulting from
changes in interest rates.

Risk Profile

The Fund may be suited for you if you are seeking high total return, but
you also desire the safety of an investment in U.S. Treasury Securities.

The value of an investment in the Fund will vary from day to day based on
the prices of the U.S. Treasury Securities in the Fund's portfolio. The prices
of the U.S. Treasury Securities will respond to economic and market factors,
especially interest rate changes. In general, a change in interest rates will
cause an inverse change in the value of U.S. Treasury Securities.

Interest Rate Risk. The value of the Fund's shares can be expected to
increase during periods of falling interest rates and decrease during periods of
rising interest rates.

Maturity Risk. Longer-term securities are generally more volatile (i.e.,
experience greater price fluctuations), so the average maturity or duration of
these securities affects risk. Therefore, these price fluctuations will
generally be greater at times when the Fund's average maturity is longer.

Style Risk. The success of the Fund's investment approach will depend on
the Advisor's ability to determine which direction interest rates are likely to
move.

Because U.S. Treasury Securities are among the safest fixed income
investments, their yields are generally lower than the yields available from
some other fixed income securities. If you invest in the Fund, you could lose
money. An investment in the Fund is not a bank deposit and is not guaranteed by
the FDIC or any other government agency.

Fund Performance

The following bar chart and table show the performance of the Fund both
year by year and as an average over different periods of time. The different
levels of performance over time provide an indication of the risks of investing
in the Fund. The chart and table provide an historical record, and do not
necessarily indicate how the Fund will perform in the future.

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Class A Shares*
For years ended December 31,

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
25.00%
21.69%
20.00%
16.62%
15.00%
13.71% 10.62% 10.80%
10.00%
6.15%
5.00% 4.38%
-4.01% 0.20% -5.67%
0%---------------------------------------------------------------------------------------

-5.00%

- -10.00%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- ----------------------------------------------------------------------------------------------
</TABLE>

* The bar chart does not reflect sales charges. If it did, returns would be less
than those shown.

During the 10-year period shown in the bar chart, the highest return for a
quarter was 7.78% (quarter ended 6/30/95) and the lowest return for a quarter
was (4.71)% (quarter ended 3/31/96).

1
<PAGE>

Average Annual Total Return (for periods ended December 31, 1999)

<TABLE>
<CAPTION>
Lehman Brothers Lehman Brothers
Intermediate Lehman Brothers Long-Term
Class A Shares(1) Treasury Index(2) Treasury Index(2) Treasury Index(2)
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Past One Year ........... (9.92)% 0.40% (2.53)% (8.74)%
Past Five Years ......... 6.13% 6.91% 11.04% 9.14%
Past Ten Years .......... 6.62% 7.23% 7.56% 8.64%
</TABLE>

- -----------
(1) These figures assume the reinvestment of dividends and capital gains
distributions and include the impact of the maximum sales charges.
(2) The Lehman Brothers Intermediate Treasury Index and the Lehman Brothers
Long-Term Treasury Index reflect the performance of U.S. Treasury Securities
in their respective sectors. The Lehman Brothers Treasury Index is more of a
general index in that it reflects the performance of all public obligations
and does not focus on any one particular segment. These indices are passive
measurements of U.S. Treasury Securities' performance. They do not factor in
the costs of buying, selling and holding securities -- costs that are
reflected in the Fund's results.

FEES AND EXPENSES OF THE FUND

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This table describes the fees and expenses that you may pay if you buy and
hold Class A Shares.

<TABLE>
<S> <C>
Shareholder Transaction Expenses:
(fees paid directly from your investment)

Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) ................................ 4.50%(1)
Maximum Deferred Sales Charge (Load)
(as a percentage of original purchase price or redemption proceeds,
whichever is lower) ................................................ 0.50%(1)
Maximum Sales Charge (Load) Imposed on Reinvested Dividends ......... None
Redemption Fee ...................................................... None
Exchange Fee ........................................................ None

Annual Fund Operating Expenses:
(expenses that are deducted from Fund assets)

Management Fees ..................................................... 0.27%
Distribution and/or Service (12b-1) Fees ............................ 0.25%
Other Expenses ...................................................... 0.29%
-----
Total Annual Fund Operating Expenses ................................ 0.81%
=====
</TABLE>

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(1) You will pay no sales charge on purchases of $1 million or more of Class A
Shares, but unless you are otherwise eligible for a sales charge waiver or
reduction, you may pay a contingent deferred sales charge when you redeem
your Class A Shares. (See "Sales Charges -- Redemption Price.")

<PAGE>

Example:

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

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

1 year 3 years 5 years 10 years
-------- --------- --------- ---------
Class A Shares .......... $529 $697 $879 $1,407

Federal regulations require that the Example reflect the maximum sales
charge. However, you may qualify for reduced sales charges or no sales charge at
all. (Refer to the section on sales charges.) If you hold your shares for a long
time, the combination of the initial sales charge you paid and the recurring
12b-1 fees may exceed the maximum sales charges permitted by the Conduct Rules
of the National Association of Securities Dealers, Inc.

INVESTMENT PROGRAM

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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, high 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. The Advisor 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 selecting investments, the Advisor will consider
both yield and a security's potential for capital gains resulting from possible
changes in interest rates.

When choosing the Fund's investments, the Advisor may take full advantage
of the entire range of maturities offered by U.S. Treasury Securities. At
certain times, the average maturity of the U.S. Treasury Securities held by the
Fund 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). The
portfolio's average maturity will depend on the Advisor's assessment of both the
relative yields available on securities of different maturities and the future
changes in interest rates. In determining which direction interest rates are
likely to move, the Advisor relies on the forecast of its chairman, Edward S.
Hyman. Mr. Hyman has been rated a "first team" economist by the periodical
Institutional Investor in each of the last 20 years. He writes a variety of
international and domestic economic research reports that follow trends that may
determine the direction of interest rates. The Fund also may invest in
repurchase agreements. With a repurchase agreement, the Fund agrees to purchase
U.S. Treasury Securities from a bank or broker-dealer subject to an agreement
that the bank or broker-dealer will repurchase the securities at an established
time and price.

An investment in the Fund entails risk. U.S. Treasury Securities are
subject to interest rate risk. The value of U.S. Treasury Securities changes as
interest rates fluctuate. This is especially true for securities with longer
maturities. The value of the Fund's shares can be expected to increase during
periods of falling interest rates and decrease during periods of rising interest
rates. The magnitude of these fluctuations will generally be greater at times
when the Fund's average maturity is longer. There can be no assurance that the
Advisor's economic analysis will accurately predict interest rate trends or that
the portfolio strategies based on Mr. Hyman's economic analysis will be
effective. The Fund may engage in frequent trading of securities to achieve its
investment objective. Higher portfolio turnover may cause the Fund to incur
additional transaction costs.

THE FUND'S NET ASSET VALUE

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

3
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The net asset value per share of the Fund is determined at the close of
regular trading on the New York Stock Exchange (ordinarily 4:00 p.m. Eastern
Time) on each day the Exchange is open for business. The primary trading markets
for the Fund may close early on the day before a holiday. On such occasions the
Fund also may close early. You may call the Transfer Agent at 1-800-553-8080 to
determine whether the Fund will close early before a particular holiday. The net
asset value per share of a class is calculated by subtracting the liabilities
attributable to a class from its proportionate share of the Fund's assets and
dividing the result by the outstanding shares of the class.

In valuing the Fund's assets, its investments are priced at their market
value. When price quotes for a particular security are not readily available, it
is priced at its "fair value" using procedures approved by the Fund's Board of
Directors.

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

The following sections describe how to buy and redeem Class A Shares.

HOW TO BUY SHARES

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

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

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

Investment Minimums

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

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

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

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

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

Investing Regularly

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

Automatic Investing Plan. You may elect to make a regular monthly or
quarterly investment in Class A Shares. The amount you decide upon will be
withdrawn from your checking account using a pre-authorized check. Upon receipt
by the Transfer Agent, your money will be invested in Class A Shares at that
day's offering price. Either you or the Fund may discontinue your participation
upon 30 days' notice.

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

Systematic Purchase Plan. You also may purchase Class A Shares through a
Systematic Purchase Plan. Contact your securities dealer or servicing agent for
details.

4
<PAGE>

HOW TO REDEEM SHARES

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

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

1) A letter of instructions specifying your account number and the number of
Class A Shares or dollar amount you wish to redeem. All owners of the
shares must sign the letter exactly as their names appear on the account.

2) A guarantee of your signature if you are redeeming shares worth more than
$50,000. You can obtain a signature guarantee from most banks or securities
dealers.

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

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

Other Redemption Information

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

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

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

TELEPH0NE TRANSACTIONS

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If your Class A Shares are in an account with the Transfer Agent, you may
redeem them in any amount up to $50,000 or exchange them for Class A shares in
another Flag Investors fund by calling the Transfer Agent on any Business Day
between the hours of 8:30 a.m. and 7:00 p.m. (Eastern Time). You are
automatically entitled to telephone transaction privileges but you may
specifically request that no telephone redemptions or exchanges be accepted for
your account. You may make this election when you complete the Application Form
or at any time thereafter by completing and returning documentation supplied by
the Transfer Agent.

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

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

5
<PAGE>

SALES CHARGES

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

Purchase Price

The price you pay to buy Class A Shares is the offering price, which is
calculated by adding any applicable sales charges to the Class A Shares' net
asset value per share. The amount of any sales charge included in your purchase
price is based on the following schedule:

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

Although you do not pay an initial sales charge when you invest $1,000,000
or more in Class A Shares, you may pay a sales charge when you redeem your Class
A Shares. Refer to the section on redemption price for details. Your securities
dealer may be paid a commission at the time of your purchase.

The sales charge you pay on your current purchase of Class A Shares may be
reduced under the following circumstances:

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

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

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

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

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

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

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

(i) A qualified retirement plan;

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

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

Purchases by Exchange

You may exchange Class A shares of any other Flag Investors fund for an
equal dollar amount of Class A Shares, without payment of the sales charges
described above or any other charge up to four times a year. You may not
<PAGE>

exchange Class A shares of a Flag Investors money market fund unless you
acquired those shares through a prior exchange. You may enter both your
redemption and purchase orders on the same Business Day or, if you have already
redeemed the shares of the other fund, you may enter

<PAGE>

your purchase order within 90 days of the redemption. The Fund may modify or
terminate these offers of exchange upon 60 days' notice.

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

Redemption Price

You will pay a sales charge when you redeem Class A Shares within 24
months of purchase only if your shares were purchased at net asset value because
they were part of an investment of $1 million or more. The amount of any sales
charge deducted from your redemption price will be determined according to the
following schedule:

Sales Charge as a Percentage of the
Dollar Amount Subject to Charge
Years Since Purchase (as % of Cost or Value)
- ----------------------------------------------------------------
First ................ 0.50%
Second ............... 0.50%
Thereafter ........... None
- ----------------------------------------------------------------

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

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

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

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

4) The sales charge is applied to the lesser of the cost of the shares or
their value at the time of your redemption.

Waiver of Sales Charge. You may redeem Class A Shares within 24 months of
purchase without paying a sales charge under any of the following circumstances:

1) If you are exchanging your Class A Shares for Class A shares of another
Flag Investors fund.

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

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

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

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

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

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

Distribution Plan

The Fund has adopted a plan under Rule 12b-1 that allows it to pay your
securities dealer or shareholder servicing agent distribution and other fees for
the sale of Class A Shares and for shareholder service. Class A Shares pay an
annual distribution fee equal to 0.25% of average daily net assets. Because
these fees are paid out of net assets on an on-going basis, they will, over
time, increase the cost of your investment and may cost you more than paying
other types of sales charges.

DIVIDENDS AND TAXES

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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 and to distribute taxable net capital gains on an annual
basis.

Taxes

The following summary is based on current tax laws, which may change.

The Fund will distribute substantially all of its income and capital
gains. The dividends and distributions you receive are subject to federal, state
and local

7
<PAGE>

taxation, depending on your tax situation. The tax treatment of dividends and
distributions is the same whether or not you reinvest them. The Fund will tell
you annually how to treat dividends and distributions. Each sale or exchange of
the Fund's shares is generally a taxable event.

More information about taxes is in the Statement of Additional
Information. Please contact your tax advisor if you have specific questions
about federal, state and local income taxes.

INVESTMENT ADVISOR

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International Strategy & Investment Inc. ("ISI" or the "Advisor") is the
Fund's investment advisor. ISI is also the investment advisor to Managed
Municipal Fund, Inc., North American Government Bond Fund, Inc. and ISI
Strategy Fund, Inc. These funds, together with the Fund, had approximately $447
million of net assets as of December 31, 1999.

As compensation for its services for the fiscal year ended October 31,
1999, ISI received from the Fund a fee equal to 0.27% of the Fund's average
daily net assets.

Portfolio Managers

Edward S. Hyman, Chairman of ISI and the Fund, and R. Alan Medaugh,
President of ISI and the Fund, have shared direct portfolio management
responsibility for the Fund since its inception. Mr. Hyman and Mr. Medaugh
founded ISI in 1991.

Mr. Hyman is responsible for developing the economic analysis upon which
the Fund's selection of investments is based. (See "Investment Program.") Prior
to starting ISI, Mr. Hyman was a vice chairman and member of the Board of C.J.
Lawrence Inc. and before that, an economic consultant at Data Resources. He
writes a variety of international and domestic economic research reports that
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 a "first team" economist, which is its highest rating, in each of the
last 20 years.

Mr. Medaugh is responsible for day-to-day portfolio management. Prior to
starting ISI, Mr. Medaugh was Managing Director of C.J. Lawrence Fixed Income
Management and before that, 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.

ADMINISTRATOR

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Investment Company Capital Corp. ("ICC") 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. ICC is also the Fund's transfer and dividend
disbursing agent and provides accounting services to the Fund.

8
<PAGE>

FINANCIAL HIGHLIGHTS

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The financial highlights table is intended to help you understand the
Fund's financial performance for the past five fiscal years. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned on an investment in
the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by Deloitte & Touche LLP, whose report, along with
the Fund's financial statements, is included in the Fund's Annual Report, which
is available upon request.

(For a Class A Share outstanding throughout each year)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended October 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of year ......... $ 10.62 $ 10.04 $ 9.83 $ 10.19 $ 9.22
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income ........................ 0.64 0.51 0.55 0.56 0.57
Net realized and unrealized gain/(loss)
on investments ............................. (1.03) 0.71 0.30 (0.23) 1.04
-------- -------- -------- -------- --------
Total from Investment Operations ............. (0.39) 1.22 0.85 0.33 1.61
-------- -------- -------- -------- --------
Less Distributions:
Distributions from net investment
income and short-term gains ................ (0.71) (0.64) (0.55) (0.65) (0.64)
Tax return of capital distribution ........... -- -- (0.08) -- --
Distribution in excess of net investment
income ..................................... -- -- (0.01) (0.04) --
Net realized long-term gains ................. (0.17) -- -- -- --
-------- -------- -------- -------- --------
Total distributions .......................... (0.88) (0.64) (0.64) (0.69) (0.64)
-------- -------- -------- -------- --------
Net asset value at end of year ............... $ 9.35 $ 10.62 $ 10.04 $ 9.83 $ 10.19
======== ======== ======== ======== ========
Total Return(1) ............................... (3.82)% 12.50% 9.00% 3.44% 18.09%
Ratios to Average Daily Net Assets:
Expenses ..................................... 0.81% 0.85% 0.83% 0.81% 0.80%
Net investment income ........................ 4.68% 4.98% 5.62% 5.69% 5.94%
Supplemental Data:
Net assets at end of year (000):
Flag Investors Class A Shares ................ $114,886 $122,785 $122,229 $143,791 $164,206
ISI Class Shares ............................. $151,532 $171,336 $171,074 $193,486 $206,615
Portfolio turnover rate ...................... 77% 179% 92% 199% 194%

</TABLE>

- -----------
(1) Total return excludes the effect of sales charge.

9
<PAGE>

[THIS PAGE INTENTIONALLY LEFT BLANK]

<PAGE>

<TABLE>

FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND CLASS A SHARES
NEW ACCOUNT APPLICATION
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Make check payable to "Flag Investors Total Return U.S. For assistance in completing this Application please call:
Treasury Fund Shares" and mail with this Application to: 1-800-553-8080, Monday through Friday, 8:30 a.m. to 7:00 p.m.
Flag Investors Funds (Eastern Time).
P.O. Box 219663
Kansas City, MO 64121-9663 To open an IRA account, please call 1-800-767-3524 for an IRA
Attn: Flag Investors Total Return U.S. Treasury Fund information kit.
Class A Shares

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.

Your Account Registration (Please Print)

Existing Account No., if any___________________________

Individual or Joint Tenant Gift to Minors

_______________________________________________________ _____________________________________________________________________
First Name Initial Last Name Custodian's Name (only one allowed by law)

_______________________________________________________ _____________________________________________________________________
Social Security Number Minor's Name (only one)

_______________________________________________________ _______________________________ ____________________________________
Joint Tenant Initial Last Name Social Security Number of Minor Minor's Date of Birth (Mo./Day/Yr.)

under the ____________________Uniform Gifts to Minors Act
(State of Residence)
Corporations, Trusts, Partnerships, etc. Mailing Address

_______________________________________________________ _____________________________________________________________________
Name of Corporation, Trust or Partnership Street

_______________________________________________________ _____________________________________________________________________
Tax ID Number Date of Trust City State Zip

_______________________________________________________ ( )____________________________________________________________
Name of Trustees (If to be included in the Registration) Daytime Phone

_______________________________________________________
For the Benefit of

Letter of Intent (Optional)

/ / I intend to invest at least the amount indicated below in Class A Shares of Total Return U.S. Treasury Fund, Inc. I
understand that if I satisfy the conditions described in the attached prospectus, this Letter of Intent entitles me to
the applicable level of reduced sales charges on my purchases.

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

Right of Accumulation (Optional)

List the Account numbers of other Flag Investors Funds that you or your immediate family already own that qualify you for
reduced sales charges.

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

___________________________________________________________________________________________________________________________________

____________________________________________________________________________________________________________________________________

___________________________________________________________________________________________________________________________________

Distribution Options

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

Income Dividends Capital Gains
/ / Reinvested in additional shares / / Reinvested in additional shares
/ / Paid in Cash / / Paid in Cash

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

A-1
<PAGE>

<TABLE>
<CAPTION>
<S> <C> <C>
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 commer-cial banks
only.)

Minimum Initial Investment: $250

Subsequent Investments (check one): / / Monthly ($100 minimum) / / Quarterly ($250 minimum)

Please attach a voided check.

______________________________________________________ ___________________________________________________________________
Bank Name Depositor's Signature Date

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

Systematic Withdrawal Plan (Optional)

/ / Beginning the month of______________, 20__ please send me checks on a monthly or quarterly basis, as indicated below, in
the amount of (complete as applicable) $______________, 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 address of record. If you would prefer redemptions mailed to a
predesignated bank account, please provide the following information:

Bank:__________________________________________ Bank Account No.:_________________________________________________

Address:__________________________________________ Bank Account Name:_________________________________________________

__________________________________________

Signature and Taxpayer Certification

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

By signing this Application, I hereby certify under penalties of perjury that the information on this Application is complete
and correct and that as required by federal law: (Please check applicable boxes)

/ / U.S. Citizen/Taxpayer:

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

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

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

Indicated country of residence for tax purposes:_______________________________________________________________________________

I acknowledge that I am of legal age in the state of my residence. I have received a copy of the Fund's prospectus.

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

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

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

- ----------------------
For Dealer Use Only
- ----------------------

Dealer's Name: _________________________________________________ Dealer Code: _____________________________________________

Dealer's Address:_________________________________________________ Branch Code: _____________________________________________

_________________________________________________

Representative: _________________________________________________ Rep. No.: _____________________________________________

</TABLE>

A-2

<PAGE>

Investment Advisor
INTERNATIONAL STRATEGY & INVESTMENT INC.
535 Madison Avenue
30th Floor
New York, New York 10022

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

Transfer Agent
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202
1-800-553-8080

Custodian
BANKERS TRUST COMPANY
130 Liberty Street
New York, New York 10006

Distributor
ICC DISTRIBUTORS, INC.
Two Portland Square
Portland, Maine 04101

Independent Auditors
DELOITTE & TOUCHE LLP
Princeton Forrestal Village
116-300 Village Boulevard
Princeton, New Jersey 08540

Fund Counsel
MORGAN, LEWIS & BOCKIUS LLP
1701 Market Street
Philadelphia, Pennsylvania 19103

<PAGE>

[GRAPHIC OMITTED]

Flag Investors Funds o P.O. Box 515 o Baltimore, MD 21203 o (800) 767-FLAG
www.flaginvestors.com

- --------------------------------------------------------------------------------
You may obtain the following additional information about the Fund, free of
charge, from your securities dealer or servicing agent or by calling (800)
767-FLAG:

o A statement of additional information (SAI) about the Fund that is
incorporated by reference into the prospectus.

o The Fund's most recent annual and semi-annual reports containing detailed
financial information and, in the case of the annual report, a discussion
of market conditions and investment strategies that significantly affected
the Fund's performance during its last fiscal year.

In addition you may review information about the Fund (including the SAI) at the
Securities and Exchange Commission's Public Reference Room in Washington, D.C.
(Call 1-202-942-8090 to find out about the operation of the Public Reference
Room.) The EDGAR Database on the Commission's Internet site at
http://www.sec.gov has reports and other information about the Fund. Copies of
this information may be obtained, upon payment of a duplicating fee, by
electronic request at the following email address: [email protected], or by
writing the Public Reference Section of the Commission, Washington, D.C.
20549-0102.

For other shareholder inquiries, contact the Transfer Agent at (800) 553-8080.
For Fund information, call (800) 767-FLAG or your securities dealer or servicing
agent.

Investment Company Act File No. 811-5040 TRPRS (3/00)

<PAGE>

ISI TOTAL RETURN U.S. TREASURY FUND SHARES
(A Class of Total Return U.S. Treasury Fund, Inc.)
535 Madison Avenue
30th Floor
New York, New York 10022
For information call (800) 955-7175

This mutual fund (the "Fund") seeks to achieve 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 offers shares through securities dealers and financial
institutions that act as shareholder servicing agents. You may also buy shares
through the Fund's Transfer Agent. (See "How to Buy Shares.") This Prospectus
describes the ISI class (the "Shares") of the Fund.

TABLE OF CONTENTS

Page
----
Investment Summary ................................................... 1
Fees and Expenses of the Fund ........................................ 2
Investment Program ................................................... 3
The Fund's Net Asset Value ........................................... 3
How to Buy Shares .................................................... 4
How to Redeem Shares ................................................. 4
Telephone Transactions ............................................... 5
Sales Charges ........................................................ 5
Dividends and Taxes .................................................. 6
Investment Advisor ................................................... 7
Administrator ........................................................ 7
Financial Highlights ................................................. 8

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

The date of this Prospectus is March 1, 2000
<PAGE>

INVESTMENT SUMMARY

Objectives and Strategies

Risk Profile

The Fund may be suited for you if you are seeking high total return, but
you also desire the safety of an investment in U.S. Treasury Securities.

Interest Rate Risk. The value of the Fund's shares can be expected to
increase during periods of falling interest rates and decrease during periods of
rising interest rates.

Style Risk. The success of the Fund's investment approach will depend on
the Advisor's ability to determine which direction interest rates are likely to
move.

Because U.S. Treasury Securities are among the safest fixed income
investments, their yields are gener-ally lower than the yields available from
some other fixed income securities.

If you invest in the Fund, you could lose money. An investment in the Fund
is not a bank deposit and is not guaranteed by the FDIC or any other government
agency.

Fund Performance

The following bar chart and table show the performance of the Shares both
year by year and as an average over different periods of time. The different
levels of performance over time provide an indication of the risks of investing
in the Fund. The chart and table provide an historical record, and do not
necessarily indicate how the Fund will perform in the future.

<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
ISI Shares*
For years ended December 31,

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
25.00%
21.69%
20.00%
16.62%
15.00%
13.71% 10.62% 10.80%
10.00%
6.15%
5.00%
4.38% 0.20%
0%-----------------------------------------------------------------------------------------
-4.01% -5.67%
-5.00%

- -10.00%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- ------------------------------------------------------------------------------------------------
</TABLE>

* The bar chart does not reflect sales charges. If it did, returns would be
less than those shown.

During the 10-year period shown in the bar chart, the highest return for a
quarter was 7.78% (quarter ended 6/30/95) and the lowest return for a quarter
was (4.71)% (quarter ended 3/31/96).

1
<PAGE>

Average Annual Total Return (for periods ended December 31, 1999)
<TABLE>
<CAPTION>
Lehman Brothers Lehman Brothers
Intermediate Lehman Brothers Long-Term
ISI Shares(1) Treasury Index(2) Treasury Index(2) Treasury Index(2)
------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Past One Year ........... (9.87)% 0.40% (2.53)% (8.74)%
Past Five Years ......... 6.14% 6.91% 11.04% 9.14%
Past Ten Years .......... 6.63% 7.23% 7.56% 8.64%
</TABLE>

- ------------------------
(1) These figures assume the reinvestment of dividends and capital gains
distributions and include the impact of the maximum sales charges.
(2) The Lehman Brothers Intermediate Treasury Index and the Lehman Brothers
Long-Term Treasury Index reflect the performance of U.S. Treasury
Securities in their respective sectors. The Lehman Brothers Treasury Index
is more of a general index in that it reflects the performance of all
public obligations and does not focus on any one particular segment. These
indices are passive measurements of U.S. Treasury Securities' performance.
They do not factor in the costs of buying, selling and holding securities
-- costs that are reflected in the Fund's results.

FEES AND EXPENSES OF THE FUND

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

<TABLE>
<S> <C>
Shareholder Transaction Expenses: (fees paid directly from your investment)

Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) 4.45%
Maximum Sales Charge (Load) Imposed on Reinvested Dividends ......................... None
Maximum Deferred Sales Charge (Load) ................................................ None
Redemption Fee ...................................................................... None
Exchange Fee ........................................................................ None

Annual Fund Operating Expenses: (expenses that are deducted from Fund assets)

Management Fees ..................................................................... 0.27%
Distribution and/or Service (12b-1) Fees ............................................ 0.25%
Other Expenses ...................................................................... 0.29%
----
Total Annual Fund Operating Expenses ................................................ 0.81%
====
</TABLE>

Example:

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

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

1 year 3 years 5 years 10 years
- -------- --------- --------- ---------
$524 $692 $875 $1,402

Federal regulations require that the Example reflect the maximum sales
charge. However, you may qualify for reduced sales charges or no sales charge at
all. (Refer to the section on sales charges.) If you hold Shares for a long
time, the combination of the initial sales charge you paid and the recurring
12b-1 fees may exceed the maximum sales charges permitted by the Conduct Rules
of the National Association of Securities Dealers, Inc.

2
<PAGE>

INVESTMENT PROGRAM

Investment Objective, Policies and
Risk Considerations

THE FUND'S NET ASSET VALUE

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

The net asset value per share of the Fund is determined at the close of
regular trading on the New York Stock Exchange (ordinarily 4:00 p.m. Eastern
Time) on each day the Exchange is open for business. The primary trading markets
for the Fund may close early on the day before a holiday. On such occasions the
Fund also may close early. You may call the Transfer Agent at 1-800-882-8585 to
determine whether the Fund will close early before a particular holiday. The net
asset value per share of a class is calculated by subtracting the liabilities
attributable to a class from its proportionate share of the Fund's assets and
dividing the result by the outstanding shares of the class.

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

The following sections describe how to buy and redeem Shares.

3
<PAGE>

HOW TO BUY SHARES

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

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

Investment Minimums

Your initial investment must be at least $5,000. Subsequent investments
must be at least $250. The following are exceptions to these minimums:

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

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

Investing Regularly

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

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

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

HOW TO REDEEM SHARES

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

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

1) A letter of instructions specifying your account number and the number of
Shares or dollar amount you wish to redeem. All owners of the Shares must
sign the letter exactly as their names appear on the account.

2) A guarantee of your signature if you are redeeming Shares worth more than
$50,000. You can obtain a signature guarantee from most banks or
securities dealers.

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

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

Other Redemption Information

Any dividends payable on Shares you redeem will be paid on the next
dividend payable date. If you have

4
<PAGE>

redeemed all of your Shares by that time, the dividend will be paid to you by
check whether or not that is the payment option you have selected.

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

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

TELEPHONE TRANSACTIONS

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

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

SALES CHARGES

Purchase Price

The price you pay to buy Shares is the offering price, which is calculated
by adding any applicable sales charges to the net asset value per share. The
amount of any sales charge included in your purchase price is based on the
following schedule:
Sales Charge as % of
----------------------
Net
Offering Amount
Amount of Purchase Price Invested
- -------------------------------- ---------- ---------
Less than $ 50,000......... 4.45% 4.66%
$ 50,000 - $ 99,999......... 3.50% 3.63%
$ 100,000 - $ 249,999......... 2.50% 2.56%
$ 250,000 - $ 499,999......... 2.00% 2.04%
$ 500,000 - $ 999,999......... 1.50% 1.52%
$1,000,000 - $1,999,999......... 0.75% 0.76%
$2,000,000 - $2,999,999......... 0.50% 0.50%
$3,000,000 and over............. None None

The sales charge you pay on your current purchase of Shares may be reduced
under the following circumstances:

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

Letter of Intent. If you anticipate making additional purchases of Shares
over the next 13 months, you may combine the value of your current purchase with
the value of your anticipated purchases to determine whether you qualify for a
reduced sales charge. You will be required to sign a letter of intent specifying
the total value of your anticipated purchases and to initially purchase at least
5% of the total. Each time you make a purchase during the period, you will pay
the sales charge applicable to their combined value. If, at the end of the
13-month period, the total value of your purchases is less than the amount you
indicated, you will be required to

5
<PAGE>

pay the difference between the sales charges you paid and the sales charges
applicable to the amount you actually did purchase. Some of the Shares you own
will be redeemed to pay this difference.

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

1) If you are reinvesting some or all of the proceeds of a redemption of
Shares made within the last six months, provided that the amount you are
reinvesting is at least $5,000.

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

3) If you are a current or retired Fund Director, a director, an employee or a
member of the immediate family of an employee of any of the following (or
their respective affiliates): the Fund's administrator, the Advisor or a
broker-dealer authorized to sell Shares.

4) If you purchase Shares in a fiduciary or advisory account with a bank, bank
trust department, registered investment advisory company, financial planner
or securities dealer purchasing Shares on your behalf. To qualify for this
provision you must be paying an account management fee for the fiduciary or
advisory services. Your securities dealer or servicing agent may charge you
an additional fee if you buy Shares in this manner.

5) If you pay for your purchase with the proceeds from a redemption of shares
of any other mutual fund on which you have paid a sales charge, or from a
sale of shares of any closed-end fund. In order to qualify for this
provision, you must purchase your Shares by February 28, 2001 and provide
documentation of your redemption or sale.

Purchases by Exchange

You may exchange shares of any other fund in the ISI family of funds with
the same sales charge structure for an equal dollar amount of Shares without
payment of the sales charges described above or any other charge. In addition,
you may exchange shares of any fund in the ISI family of funds with a lower
sales charge structure, or that were purchased through a special offer, for an
equal dollar amount of Shares if you have owned the shares you are redeeming for
at least 24 months. If you have owned them for less than 24 months, you will be
charged the difference in sales charges. You may enter both your redemption and
purchase orders on the same Business Day or, if you have already redeemed the
shares of the other fund, you may enter your purchase order within six months of
the redemption, provided the amount of the purchase order is at least $5,000.
The Fund may modify or terminate these offers of exchange upon 60 days' notice.

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

Redemption Price

The price you receive when you redeem Shares will be the net asset value
per share.

Distribution Plan

The Fund has adopted a plan under Rule 12b-1 that allows it to pay your
securities dealer or shareholder servicing agent distribution and other fees for
the sale of Shares and for shareholder service. Shares pay an annual
distribution fee equal to 0.25% of average daily net assets. Because these fees
are paid out of net assets on an on-going basis, they will, over time, increase
the cost of your investment and may cost you more than paying other types of
sales charges.

DIVIDENDS AND TAXES

Dividends and Distributions

Taxes

The following summary is based on current tax laws, which may change.

6
<PAGE>

The Fund will distribute substantially all of its income and capital
gains. The dividends and distributions you receive are subject to federal, state
and local taxation, depending on your tax situation. The tax treatment of
dividends and distributions is the same whether or not you reinvest them. The
Fund will tell you annually how to treat dividends and distributions. Each sale
or exchange of the Fund's shares is generally a taxable event.

More information about taxes is in the Statement of Additional
Information. Please contact your tax advisor if you have specific questions
about federal, state and local income taxes.

INVESTMENT ADVISOR

International Strategy & Investment Inc. ("ISI" or the "Advisor") is the
Fund's investment advisor. ISI is also the investment advisor to ISI Strategy
Fund, Inc., Managed Municipal Fund, Inc. and North American Government Bond
Fund, Inc. These funds, together with the Fund, had approximately $447 million
in net assets as of December 31, 1999.

As compensation for its services for the fiscal year ended October 31,
1999, ISI received from the Fund a fee equal to 0.27% of the Fund's average
daily net assets.

Portfolio Managers

ADMINISTRATOR

Investment Company Capital Corp. ("ICC") 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
Shares are distributed and oversight of the relationship between the Fund and
its other service providers. ICC is also the Fund's transfer and dividend
disbursing agent and provides accounting services to the Fund.

7
<PAGE>

FINANCIAL HIGHLIGHTS

(For a Share outstanding throughout each year)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended October 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of year ......... $ 10.62 $ 10.04 $ 9.83 $ 10.19 $ 9.22
------- ------- ------- ------- -------
Income from Investment Operations:
Net investment income ........................ 0.64 0.51 0.55 0.56 0.57
Net realized and unrealized gain/(loss) on
investments ................................ (1.03) 0.71 0.30 (0.23) 1.04
------- ------- ------- ------- -------
Total from Investment Operations ............. (0.39) 1.22 0.85 0.33 1.61
------- ------- ------- ------- -------
Less Distributions:
Distributions from net investment income
and short-term gains ....................... (0.71) (0.64) (0.55) (0.65) (0.64)
Tax return of capital distribution ........... -- -- (0.08) -- --
Distributions in excess of net investment
income ..................................... -- -- (0.01) (0.04) --
Net realized long-term gains ................. (0.17) -- -- -- --
------- ------- ------- ------- -------
Total distributions .......................... (0.88) (0.64) (0.64) (0.69) (0.64)
------- ------- -------- -------- --------
Net asset value at end of year ............... $ 9.35 $ 10.62 $ 10.04 $ 9.83 $ 10.19
======= ======= ======== ======== ========
Total Return(1)................................ (3.82)% 12.50% 9.00% 3.44% 18.09%
Ratios to Average Daily Net Assets:
Expenses ..................................... 0.81% 0.85% 0.83% 0.81% 0.80%
Net investment income ........................ 4.68% 4.98% 5.62% 5.69% 5.94%
Supplemental Data:
Net assets at end of year (000):
ISI Class Shares ........................... $151,532 $171,336 $171,074 $193,486 $206,615
Flag Investors Class A Shares .............. $114,886 $122,785 $122,229 $143,791 $164,206
Portfolio turnover rate .................... 77% 179% 92% 199% 194%

</TABLE>

- -----------
(1) Total return excludes the effect of sales charge.

8
<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:

ISI Mutual Funds
P.O. Box 219426
Kansas City, MO 64121-9426

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.

<S> <C>
Your Account Registration (Please Print)
-------------------------------------
Existing Account No., if any

- -------------------------------------------------------------- -----------------------------------------------------------------
Individual or Joint Tenant Gifts to Minors
- -------------------------------------------------------------- -----------------------------------------------------------------

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

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

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

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

under the __________________ Uniform Gifts to Minors Act
State of Residence

- -------------------------------------------------------------- -----------------------------------------------------------------
Corporations, Trusts, Partnerships, etc. Mailing Address
- -------------------------------------------------------------- -----------------------------------------------------------------

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

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

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

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

</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Statement of Intention (Optional)

<S> <C>
[_] I intend to invest at least the amount indicated below in ISI Shares of Total Return U.S. Treasury Fund, Inc. I understand that
if I satisfy the conditions described in the attached prospectus, this Letter of Intent entitles me to the applicable level of
reduced sales charges on my purchases.

___ $50,000 ___ $100,000 ___ $250,000 ___ $500,000 ___ $1,000,000 ___ $2,000,000 ___ $3,000,000

Right of Accumulation (Optional)

List the Account numbers of other ISI Funds that you or your immediate family already own that qualify for this purchase.

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

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

Distribution Options

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

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

Call (800) 882-8585 for information about reinvesting your dividends in other funds in the ISI Family of Funds.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
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.

<S> <C> <C>
Minimum Initial Investment: $250
Subsequent Investments (check one): [_] Monthly ($100 minimum) [_] Quarterly ($250 minimum)

-----------------------------
Please attach a voided check.
-----------------------------

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

- ------------------------------------------------------- ----------------------------------------------------------------------
Existing ISI Total Return U.S. Treasury Fund Depositor's Signature Date
Account No., if any (if joint acct., both must sign)

Systematic Withdrawal Plan (Optional)

[_] Beginning the month of ____________ , 20____ , 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:
----------------------------------------------- ----------------------------------------------

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

<PAGE>

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

By signing this Application, I hereby certify under penalties of perjury that the information on this Application is
complete and correct and that as required by federal law: (Please check applicable boxes)

[_] U.S. Citizen/Taxpayer:

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

[_] If no Tax ID Number or Social Security Number has been provided above, I have applied, or intend to apply, to
the IRS or the Social Security Administration for a Tax ID Number or a Social Security Number, and I understand that
if I do not provide either number to the Transfer Agent within 60 days of the date of this Application or if I fail
to furnish my correct Social Security Number or Tax ID Number, I may be subject to a penalty and a 31% backup
withholding on distributions and redemption proceeds. (Please provide either number on IRS Form W-9. You may request
such form by calling the Transfer Agent at 800-882-8585.)

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

Indicated country of residence for tax purposes: _________________________________________________________________________

Under penalties of perjury, I certify that I am not a U.S. citizen or resident and I am an exempt foreign person as
defined by the Internal Revenue Service.
- ------------------------------------------------------------------------------------------------------------------------------------
I acknowledge that I am of legal age in the state of my residence. I have received a copy of the Fund's prospectus.
- ------------------------------------------------------------------------------------------------------------------------------------
The Internal Revenue Service does not require your consent to any provision of this document other than the certifications required
to avoid backup withholding.
- ------------------------------------------------------------------------------------------------------------------------------------

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

For Dealer Use Only

Dealer's Name: Dealer Code:
---------------------------------------------- ------------------------------------------------------

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

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

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

</TABLE>

<PAGE>

ISI TOTAL RETURN U.S. TREASURY FUND SHARES

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

Investment Advisor
INTERNATIONAL STRATEGY & INVESTMENT INC.
535 Madison Avenue
30th Floor
New York, New York 10022
1-800-955-7175

Administrator Distributor
INVESTMENT COMPANY CAPITAL CORP. ISI GROUP
One South Street 535 Madison Avenue
Baltimore, Maryland 21202 30th Floor
New York, New York 10022
1-800-955-7175

Transfer Agent Independent Auditors
INVESTMENT COMPANY CAPITAL CORP. DELOITTE & TOUCHE LLP
One South Street Princeton Forrestal Village
Baltimore, Maryland 21202 116-300 Village Boulevard
1-800-882-8585 Princeton, New Jersey 08540

Custodian Fund Counsel
BANKERS TRUST COMPANY MORGAN, LEWIS & BOCKIUS LLP
130 Liberty Street 1701 Market Street
New York, New York 10006 Philadelphia, Pennsylvania 19103

<PAGE>

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

You may obtain the following additional information about the Fund, free
of charge, from your securities dealer or servicing agent or by calling (800)
955-7175:

o A statement of additional information (SAI) about the Fund that is
incorporated by reference into the prospectus.

In addition you may review information about the Fund (including the SAI)
at the Securities and Exchange Commission's Public Reference Room in Washington,
D.C. (Call 1-202-942-8090 to find out about the operation of the Public
Reference Room.) The EDGAR Database on the Commission's Internet site at
http://www.sec.gov has reports and other information about the Fund. Copies of
this information may be obtained, upon payment of a duplicating fee, by
electronic request at the following email address: [email protected], or by
writing the Public Reference Section of the Commission, Washington, D.C.
20549-0102.

For other shareholder inquiries, contact the Transfer Agent at (800)
882-8585. For Fund information, call (800) 955-7175 or your securities dealer or
servicing agent.

Investment Company Act File No. 811-5040

<PAGE>

ISI
INTERNATIONAL STRATEGY & INVESTMENT

ISI
TOTAL RETURN
U.S. TREASURY
FUND SHARES

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

A mutual fund with the investment objective of 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.

March 1, 2000

[GRAPHIC OMITTED]

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

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

TOTAL RETURN U.S. TREASURY FUND, INC.

One South Street

Baltimore, Maryland 21202

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

THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A
PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH A
PROSPECTUS, WHICH MAY BE OBTAINED FROM YOUR SECURITIES
DEALER OR SHAREHOLDER SERVICING AGENT OR BY CALLING THE
FUND AT (800) 767-FLAG (FOR THE FLAG INVESTORS SHARES) OR
(800) 955-7175 (FOR THE ISI SHARES).

The Fund's financial statements for the fiscal year ended
October 31, 1999, and the report of independent auditors
are included in the Fund's annual report and incorporated
by reference into this Statement of Additional
Information.

Statement of Additional Information Dated: March 1, 2000

Relating to the Prospectuses of

ISI Total Return U.S. Treasury Fund Shares

and

Flag Investors Total Return U.S. Treasury Fund Class A Shares

<PAGE>

TABLE OF CONTENTS

Page

GENERAL INFORMATION AND HISTORY................................................3
INVESTMENT OBJECTIVES AND POLICIES.............................................4
VALUATION OF SHARES AND REDEMPTION.............................................6
FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS...........................6
MANAGEMENT OF THE FUND.........................................................9
INVESTMENT ADVISORY AND OTHER SERVICES........................................15
ADMINISTRATION................................................................16
DISTRIBUTION OF FUND SHARES...................................................17
BROKERAGE ............................................................22
CAPITAL SHARES................................................................24
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES.............................24
INDEPENDENT AUDITORS..........................................................25
LEGAL MATTERS.................................................................25
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES...........................25
PERFORMANCE AND YIELD COMPUTATIONS............................................26
FINANCIAL STATEMENTS..........................................................28

<PAGE>

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 information concerning the activities of the company
being considered for investment. The Fund currently offers two classes of
shares:

o Flag Investors Total Return U.S. Treasury Fund Class A Shares, (the "Flag
Investors Class A Shares") and

o ISI Total Return U.S. Treasury Fund Shares (the "ISI Shares").

There are two separate prospectuses for the Fund's shares: one for the
Flag Investors Class A Shares and one for the ISI Shares. Each prospectus
contains important information concerning the class of shares offered thereby
and the Fund, and may be obtained without charge from the Fund's distributors
(the "Distributors") at (800) 767-FLAG (for a prospectus for the Flag Investors
Class A Shares) or (800) 955-7175 (for a prospectus for the ISI Shares), or from
Participating Dealers that offer shares 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 currently
being offered, 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 about the Fund and its
business that is contained in the Registration Statement respecting the Fund and
its Shares filed with the SEC. Copies of the Registration Statement as filed,
including such omitted items, may be obtained from the SEC by paying the charges
prescribed under its rules and regulations.

The Fund was incorporated under the laws of the State of Maryland on
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 "1940 Act") and its Shares under
the Securities Act of 1933, as amended (the "1933 Act"), and began operations on
August 10, 1988.

The Fund no longer offers the following classes of shares: Flag
Investors Total Return U.S. Treasury Fund Class D Shares (which were known at
the time as Flag Investors Total Return U.S. Treasury Fund Class B Shares),
which were offered from November 9, 1992 through February 27, 1994, and Flag
Investors Total Return U.S. Treasury Fund Class B Shares, which were offered
from June 20, 1996 through April 29, 1999.

Under a license agreement dated August 10, 1988 between the Fund and
Alex. Brown & Sons Incorporated (predecessor to DB Alex. Brown LLC (formerly BT
Alex. Brown Incorporated)), Alex. Brown & Sons 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.

INVESTMENT OBJECTIVES AND POLICIES

The Fund's investment objective is to seek to achieve 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'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.

3
<PAGE>

Except as specifically identified under "Investment Restrictions," the
investment policies described in these documents 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"). The Fund's
investment objective is fundamental, however, and may not be changed without
such a vote.

STRIPS

The Fund may purchase STRIPS, which are U.S. Treasury Securities that
do not pay interest currently but which are purchased at a discount and are
payable in full at maturity. As with other debt securities, the value of STRIPS
varies inversely with changes in interest rates. These price fluctuations may be
greater with STRIPS than with other types of debt securities.

Repurchase Agreements

The Fund may agree to purchase U.S.Treasury Securities from creditworthy
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 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 which are judged creditworthy by the Fund's
investment advisor (the "Advisor"). The list of approved banks and
broker-dealers will be monitored regularly by the Advisor. 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

The Fund may make purchases of U.S. Treasury 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
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 the Fund makes the commitment to purchase or
sell securities on a when-issued basis, it will record the transaction and
thereafter reflect the value of such security purchased or, if a sale, the
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. The Fund will ordinarily invest no more than 40% of its net assets
at any time in securities purchased on a when-issued basis.

Investment Restrictions

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

4
<PAGE>

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

2. Invest 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);

3. 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);

4. 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;

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

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

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

8. Issue senior securities;

9. 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;

10. Effect short sales of securities;

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

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

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

14. Invest in shares of any other investment company registered under the 1940
Act;

15. 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 0.5% of the outstanding securities of such issuer and together
they own beneficially more than 5% of the securities of such issuer;

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

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

18. 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 investment restriction 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
including repurchase agreements with remaining maturities in excess of seven
days.

5
<PAGE>

VALUATION OF SHARES AND REDEMPTION

Valuation

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

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

Redemption

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

Under normal circumstances, the Fund will redeem Shares by check 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" 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
1940 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.

FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS

The following is only a summary of certain additional federal income
tax considerations generally affecting the Fund and its shareholders that are
not described in the Fund's Prospectus. No attempt is made to present a detailed
explanation of the 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. 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. Investors are urged to consult with their tax advisor
regarding whether such exemption is available.

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

6
<PAGE>

Qualification as Regulated Investment Company

The Fund intends to qualify and elect to be treated for each taxable
year as a regulated investment company ("RIC") under Subchapter M of the Code.
Accordingly, the Fund must, among other things, (a) derive at least 90% of its
gross income each taxable year from dividends, interest, payments with respect
to securities loans, gains from the sale or other disposition of stock,
securities or foreign currencies, and certain other related income, including,
generally, certain gains from options, futures and forward contracts; and (b)
diversify its holdings so that, at the end of each fiscal quarter of the Fund's
taxable year, (i) at least 50% of the market value of the Fund's total assets is
represented by cash and cash items, United States Government securities,
securities of other RICs, and other securities, with such other securities
limited, in respect to any one issuer, to an amount not greater than 5% of the
value of the Fund's total assets or 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its total assets is
invested in the securities (other than United States Government securities or
securities of other RICs) of any one issuer or two or more issuers that the Fund
controls and which are engaged in the same, similar, or related trades or
business. For purposes of the 90% of gross income requirement described above,
foreign currency gains that are not directly related to the Fund's principal
business of investing in stock or securities (or options or futures with respect
to stock or securities) may be excluded from income that qualifies under the 90%
requirement.

In addition to the requirements described above, in order to qualify as
a RIC, the Fund must distribute at least 90% of its net investment income (that
generally includes dividends, taxable interest, and the excess of net short-term
capital gains over net long-term capital losses less operating expenses) and at
least 90% of its net tax-exempt interest income, for each tax year, if any, to
its shareholders. If the Fund meets all of the RIC requirements, it will not be
subject to federal income tax on any of its net investment income or capital
gains that it distributes to shareholders.

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 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.

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

Fund Distributions

The Fund anticipates that it will distribute substantially all of its
net investment 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 to the extent of the Fund's earnings
and profits.

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 taxable to shareholders that are
individuals at a maximum rate of 20% 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. If any such gains are retained, the Fund will
pay federal income tax thereon, and, if the Fund makes an election, the

7
<PAGE>

shareholders will include such undistributed gains in their income, will
increase their basis in Fund shares by the difference between the amount of such
includable gains and the tax deemed paid by such shareholder and will be able to
claim their share of the tax paid by the Fund as a refundable credit.

In the case of corporate shareholders, Fund distributions (other than
capital gains distributions) generally qualify for the dividends-received
deduction to the extent of the gross amount of qualifying dividends received by
the Fund for the year. Generally, and subject to certain limitations, a dividend
will be treated as a qualifying dividend, if it has been received from a
domestic corporation. Accordingly, it is not expected that any Fund
distributions will qualify for corporate dividends-received deduction.

Ordinarily, investors should include all dividends 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 and paid by the Fund in the year
in which dividends were declared.

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 taxed 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, any gain or loss on the sale of Shares will be a capital
gain or loss, which will be a long-term capital gain or loss if the Shares have
been held for more than twelve months, and otherwise will be a short-term
capital gain or loss. However, 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). This loss disallowance rule will apply to Shares received through the
reinvestment of dividends during the 61-day period.

If the Fund fails to qualify as a regulated investment company for any
taxable year, 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 provide a statement annually to shareholders as to the
federal tax status of distributions paid (or deemed to be paid) by the Fund
during the year.

In certain cases, the Fund will be required to withhold and remit to
the United States Treasury 31% of distributions paid to any shareholder who (1)
has failed to provide a correct tax identification number, (2) is subject to
backup withholding by the Internal Revenue Service for failure to report the
receipt of interest or dividend income properly, or (3) has failed to certify to
the Fund that such shareholder is not subject to backup withholding.

Excise Tax; Miscellaneous Considerations

If the Fund fails to distribute in a calendar year at least 98% of its
ordinary income for the year and 98% of its capital gain net income (the excess
of short and long term capital gains over short and long term capital losses)
for the one-year period ending October 31 of that year (and any retained amount
from the prior calendar year), the Fund will be subject to a nondeductible 4%
Federal excise tax on the undistributed amounts. The Fund intends to make
sufficient distributions to avoid imposition of this tax, or to retain, at most
its net capital gains and pay tax thereon.

8
<PAGE>

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

MANAGEMENT OF THE FUND

Directors and Officers

The Fund's Board of Directors manages its overall business and affairs.
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
executive officers, the Advisor, the Distributors and the Fund's administrator.
A majority of the Directors of the Fund have no affiliation with the Advisor,
the Distributors or the Fund's administrator.

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 executive
officer is 535 Madison Avenue, 30th Floor, New York, New York 10022.

*EDWARD S. HYMAN, Chairman and Director (4/8/45)

Chairman, International Strategy & Investment Inc. (registered
investment advisor), and Chairman and President, International Strategy
& Investment Group Inc. (registered investment advisor and registered
broker-dealer) 1991-Present.

R. ALAN MEDAUGH, President (8/20/43)

President, International Strategy & Investment Inc. (registered
investment advisor) 1991-Present.

JOSEPH R. HARDIMAN, Director (5/27/37)

8 Bowen Mill Road, Baltimore, Maryland 21212. Private Equity Investor
and Capital Markets Consultant; Director, Wit Capital Group (registered
broker-dealer), The Nevis Fund and Flag Investors Family of Funds
(registered investment companies). Formerly, Director, Circon Corp.
(medical instruments), 1998-1999; President and Chief Executive
Officer, The National Association of Securities Dealers, Inc. and The
NASDAQ Stock Market, Inc., 1987-1997; Chief Operating Officer of Alex.
Brown & Sons Incorporated (now DB Alex. Brown LLC), 1985-1987; and
General Partner, Alex. Brown & Sons Incorporated (now DB Alex. Brown
LLC), 1976-1985.

LOUIS E. LEVY, Director (11/16/32)

26 Farmstead Road, Short Hills, New Jersey 07078. Director,
Kimberly-Clark Corporation (personal consumer products), Household
International (banking and finance) and Flag Investors Family of Funds
(registered investment companies). Formerly, Chairman of the Quality
Control Inquiry Committee and American Institute of Certified Public
Accountants, 1992-1998; Trustee, Merrill Lynch Funds for Institutions,
1991-1993; Adjunct Professor, Columbia University-Graduate School of
Business, 1991-1992; and Partner, KPMG Peat Marwick, retired 1990.

CARL W. VOGT, Esq., Director (4/20/36)

Fulbright & Jaworski L.L.P., 801 Pennsylvania Avenue, N.W., Washington,
D.C. 20004-2604. Senior Partner, Fulbright & Jaworski L.L.P. (law);
President (interim), Williams College; President, Flag Investors Family
of Funds (registered investment companies); Director, Yellow
Corporation (trucking) and American Science & Engineering (x-ray
detection equipment). Formerly, Chairman and Member, National
Transportation Safety Board; Director, National Railroad Passenger
Corporation (Amtrak); Member, Aviation System Capacity Advisory
Committee (Federal Aviation Administration) and Director, Flag
Investors Family of Funds (registered investment companies).

8
<PAGE>

NANCY LAZAR, Vice President (8/1/57)

Executive Vice President and Secretary, International Strategy &
Investment Inc. (registered investment advisor) 1991-Present.

CARRIE L. BUTLER, Vice President (5/1/67)

Assistant Vice President, International Strategy & Investment Inc.
(registered investment advisor) 1991-Present.

MARGARET M. BEELER, Assistant Vice President (3/1/67)

Assistant Vice President, International Strategy & Investment Inc.,
1996-Present. Formerly, Marketing Representative, U.S. Healthcare,
Inc., 1995-1996; Sales Manager, Donna Maione, Inc., 1994-1995 and
Deborah Wiley California, 1989-1994.

KEITH C. REILLY, Assistant Vice President (6/2/66)

Assistant Vice President, International Strategy & Investment Inc.,
1996-Present. Formerly, Select Private Banking Officer, Assistant
Manager, Chemical Bank, 1995-1996 and Financial Consultant, Dreyfus
Corporation, 1989-1995.

SUZANNE H. UGHETTA, Assistant Vice President (6/25/59)

Fund Administrator, International Strategy & Investment Inc.,
1999-Present. Formerly, Registered representative, Merrill Lynch &
Company, 1981-1988.

CHARLES A. RIZZO, Treasurer (8/5/57)

One South Street, Baltimore, Maryland 21202. Vice President, Deutsche
Asset Management since 1999; and Vice President, BT Alex. Brown
Incorporated (now DB Alex. Brown LLC), 1998-1999. Formerly, Senior
Manager, PricewaterhouseCoopers LLP, 1993-1998.

AMY M. OLMERT, Assistant Secretary (5/14/63)

One South Street, Baltimore, Maryland 21202. Vice President, Deutsche
Asset Management since 1999; and Vice President, BT Alex. Brown
Incorporated (now DB Alex. Brown LLC), 1997-1999. Formerly, Senior
Manager, PricewaterhouseCoopers LLP, 1992-1997.

DANIEL O. HIRSCH, Assistant Secretary (3/27/54)

One South Street, Baltimore, Maryland 21202. Director, Deutsche Asset
Management since 1999. Principal, BT Alex. Brown Incorporated (now DB
Alex. Brown LLC), 1998-1999. Formerly, Assistant General Counsel,
United States Securities and Exchange Commission, 1993-1998.

* A Director who is an "interested person" as defined in the 1940 Act.

Directors and officers of the Fund are also directors and officers of
some or all of the other investment companies advised by ISI or its affiliates.
There are currently four funds in the ISI fund complex (the "Fund Complex").
Each of the Directors and officers of the Fund serves in the same capacity for
each of the other funds in the Fund Complex. Prior to September 28, 1999, the
Fund Complex included eight funds in the Flag Investors Funds/Deutsche Banc
Alex. Brown Cash Reserve Fund, Inc. fund complex.

10
<PAGE>

Some of the Directors of the Fund are customers of, and have had normal
brokerage transactions with the Fund's administrator or its affiliates 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 the Advisor, the Distributors or the Fund's administrator may be considered
to have received remuneration indirectly. As compensation for his or her
services as director, each Director who is not an "interested person" of the
Fund (as defined in the 1940 Act) (an "Independent Director") receives an
aggregate annual fee (plus reimbursement for reasonable out-of-pocket expenses
incurred in connection with his or her attendance at Board and committee
meetings) from all funds in the Fund Complex for which he or she serves. 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, 1999, Independent Directors' fees attributable to the assets of the
Fund totaled $10,486.

The following table shows aggregate compensation and retirement
benefits payable to each of the Fund's Directors by the Fund, the Fund Complex
and the Flag Investors Funds Family of Funds, and pension or retirement benefits
accrued as part of Fund expenses in the fiscal year ended October 31, 1999. The
Fund and the Fund Complex no longer provide a retirement plan or a deferred
compensation plan for the Directors.

<PAGE>

COMPENSATION TABLE

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

Name of Person, Position Aggregate Compensation Pension or Retirement Total Compensation From the
From the Fund Payable to Benefits Accrued As Fund, Fund Complex and Flag
Directors for the Fiscal Year Part of Fund Expenses Investors Funds Family of Funds
Ended October 31, 1999 Payable to Directors for the Fiscal Year Ended
October 31, 19991
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Edward S. Hyman, Chairman 2 $0 $0 $0

R. Alan Medaugh, President $0 $0 $0

Richard T. Hale, Vice Chairman 3 $0 $0 $0

James J. Cunnane, Director 3 $1,1754 5 $39,000 for service on 12
Boards in the Fund Complex

Joseph R. Hardiman, Director $1,207 $0 $39,000 for service on 12
Boards in the Fund Complex

Louis E. Levy, Director $1,476 5 $49,000 for service on 12
Boards in the Fund Complex

Eugene J. McDonald, Director 3 $1,4764 5 $49,000 for service on 12
Boards in the Fund Complex

Rebecca W. Rimel, Director 3 $1,1854 5 $39,000 for service on 11 6
Boards in the Fund Complex

Carl W. Vogt, Esq., Director $1,1884 5 $39,000 for service on 12
Boards in the Fund Complex
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>

Code of Ethics

The Board of Directors of the Fund has adopted a Code of Ethics
pursuant to Rule 17j-1 under the 1940 Act. The Code of Ethics applies to the
personal investing activities of the directors and officers of the Fund, as well
as to designated officers, directors and employees of the Advisor and the
Distributors. As described below, the Code of Ethics imposes additional
restrictions on the Advisor's investment personnel, including the portfolio
managers and employees who execute or help execute a portfolio manager's
decisions or who obtain contemporaneous information regarding the purchase or
sale of a security by the Fund.

- ----------

(1) Prior to September 28, 1999, the Fund Complex included eight funds in the
Flag Investors Funds Family of Funds.

(2) A Director who is an "interested person" as defined in the 1940 Act.

(3) Resigned effective September 28, 1999.

(4) Of the amounts payable to Messrs. Cunnane, McDonald and Vogt and Ms. Rimel,
$1,175, $1,476, $1,188 , and $1,185, respectively, was deferred pursuant to
a deferred compensation plan.

(5) The Flag Investors Funds Family of Funds has adopted a retirement plan for
eligible Directors. The actuarially computed pension expense allocated to
the Fund for the fiscal year ended October 31, 1999, was approximately
$35,727. The Fund and the Fund Complex no longer provide a retirement plan
or a deferred compensation plan for the Directors.

(6) Ms. Rimel received proportionately higher compensation from each fund for
which she served as Director.

12
<PAGE>

The Code of Ethics requires that any officer, director, or employee of
the Fund, International Strategy & Investment Group, Inc. or the Advisor,
preclear any personal securities investments (with certain exceptions, such as
non-volitional purchases or purchases that are part of an automatic dividend
reinvestment plan). The foregoing would apply to any officer, director or
employee of ICC Distributors, Inc. that is an access person. The preclearance
requirement and associated procedures are designed to identify any substantive
prohibition or limitation applicable to the proposed investment. The substantive
restrictions applicable to investment personnel include a ban on acquiring any
securities in an initial public offering, a prohibition from profiting on
short-term trading in securities and special preclearance of the acquisition of
securities in private placements. Furthermore, the Code of Ethics provides for
trading "blackout periods" that prohibit trading by investment personnel and
certain other employees within periods of trading by the Fund in the same
security. Officers, directors and employees of the Advisor and the Distributors
may comply with codes instituted by those entities so long as they contain
similar requirements and restrictions.

INVESTMENT ADVISORY AND OTHER SERVICES

International Strategy & Investment Inc. ("ISI" or the "Advisor")
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 the investment advisor to Managed Municipal Fund, Inc.,
North American Government Bond Fund, Inc. and ISI Strategy Fund, Inc., open-end
management investment companies which, together with the Fund, had net assets of
approximately $447 million as of December 31, 1999.

Under the Advisory Agreement, ISI: (a) formulates and implements
continuing programs for the purchases and sales of securities, (b) determines
what securities (and in what proportion) shall be 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 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 the policies
and control of the Fund's Board of Directors. The Advisor will 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.

13
<PAGE>

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)
---------------------------------------------
Less than $100,000,000 0.20%
$100,000,001 - $200,000,000 0.18%
$200,000,001 - $300,000,000 0.16%
$300,000,001 - $500,000,000 0.14%
$500,000,001 and over 0.12%

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

The 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
Independent Directors by votes cast in person at a meeting called for such
purpose. The Advisory Agreement was most recently approved by the Fund's Board
of Directors in the foregoing manner on September 28, 1999. The Fund or the
Advisor may terminate the Advisory Agreement on 60 days' written notice without
penalty. The Advisory Agreement will terminate automatically in the event of
assignment. Advisory fees paid by the Fund to ISI for the last three fiscal
years were as follows:

Years Ended October 31,
1999 1998 1997
---- ---- ----
$753,740 $784,379 $ 848,963

ADMINISTRATION

Investment Company Capital Corp. ("ICC"), One South 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.

14
<PAGE>

Prior to June 1, 1999, the Fund compensated ICC by paying it a
percentage of the Fund's average daily net assets which varied as follows:

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

Less than $100,000,000 0.10%
$100,000,000 - $200,000,000 0.09%
$200,000,001 - $300,000,000 0.08%
$300,000,001 - $500,000,000 0.07%
$500,000,001 and over 0.06%

Pursuant to the terms of the Administration Agreement, ICC receives an
annual fee, paid monthly, of a percentage of the average daily net assets of the
Fund Complex which varies as follows:

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

$0 - $75,000,000 0.20%
$75,000,001 - $150,000,000 0.15%
$150,000,001 - $225,000,000 0.10%
$225,000,001 - $500,000,000 0.05%
$500,000,001 and over 0.03%

ICC's fee is allocated among the funds in the Fund Complex according to
their relative net assets.

In addition, the Fund paid ICC 0.50% 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. Administration fees paid by the Fund to ICC
for the last three fiscal years were as follows:

Years Ended October 31,
1999 1998 1997
---- ---- ----
$311,100 $349,575 $ 374,611

ICC also serves as the Fund's transfer and dividend disbursing agent
and provides accounting services to the Fund. An affiliate of ICC serves as the
Fund's custodian. (See "Custodian, Transfer Agent and Accounting Services".) ICC
is an indirect subsidiary of Deutsche Bank AG.

DISTRIBUTION OF FUND SHARES

International Strategy & Investment Group Inc. ("ISI Group") serves as
distributor for the ISI Shares pursuant to a Distribution Agreement effective
April 1, 1997 ("ISI Distribution Agreement"). ICC Distributors Inc. ("ICC
Distributors") serves as distributor for the Flag Investors Class A Shares

15
<PAGE>

pursuant to an agreement effective August 31, 1997 ("Flag Distribution
Agreement"). The Distribution Agreements provide that ICC Distributors (in the
case of the Flag Investors Class A Shares) or ISI Group (in the case of the ISI
Shares) has the exclusive right to distribute the related class of Shares either
directly or through other broker-dealers.

The ISI Distribution Agreement provides that ISI Group on behalf of the
ISI Shares, (i) will solicit and receive orders for the purchase of ISI Shares
(ii) 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 (iii) receive requests for
redemption and transmit such redemption requests to the Fund's transfer agent as
promptly as possible (iv) respond to inquiries from the Fund's shareholders
concerning the status of their accounts with the Fund; (v) provide the Fund's
Board of Directors for their review with quarterly reports required by Rule
12b-1; (vi) maintain such accounts, books and records as may be required by law
or be deemed appropriate by the Fund's Board of Directors; and (vii) take all
actions deemed necessary to carry into effect the distribution of the Shares.

Pursuant to the ISI Distribution Agreement, ISI has not undertaken to
sell any specific number of ISI Shares. The ISI Distribution Agreement further
provides that, in connection with the distribution of Shares, ISI Group will be
responsible for all promotional expenses. The services by ISI Group to the Fund
are not exclusive, and ISI Group shall not be liable to the Fund or its
shareholders for any act or omission by ISI Group or any losses sustained by the
Fund or its shareholders except in the case of willful misfeasance, bad faith,
gross negligence, or reckless disregard of duty.

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

The Distribution Agreements may be terminated at any time upon 60 days'
written notice by the Fund, without penalty, by the vote of a majority of the
Fund's Independent Directors or by a vote of a majority of the Fund's
outstanding Shares of the related class (as defined under "Capital Shares") or
upon 60 days' written notice by the Distributor and shall automatically
terminate in the event of an assignment. The Flag Distribution Agreement has an
initial term of one year from the date of effectiveness. It shall continue in
effect from year to year with respect to the Flag Investors class of the Fund
provided that it is approved at least annually by (i) a vote of a majority of
the outstanding voting securities of the related class of the Fund or (ii) a
vote of a majority of the Fund's Board of Directors including a majority of the
Independent Directors and, with respect to the Flag Investors class of the Fund
for which there is a plan of distribution, so long as such plan of distribution
is approved at least annually by the Independent Directors in person at a
meeting called for the purpose of voting on such approval (see below). The ISI
Distribution Agreement has an initial term of two years and will remain in
effect from year to year provided that it is specifically approved (a) at least
annually by the Fund's Board of Directors and (b) by the affirmative vote of a

16
<PAGE>

majority of the Independent Directors by votes cast in person at a meeting
specifically called for such purpose. Each Distribution Agreement, including the
form of Sub-Distribution Agreement, was most recently approved by the Board of
Directors, including a majority of the Independent Directors, on September 28,
1999.

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

In addition, the Fund may enter into Shareholder Servicing Agreements
with certain financial institutions, including DB Alex. Brown and certain banks,
to act as Shareholder Servicing Agents, pursuant to which ICC Distributors and
ISI Group will allocate a portion of their respective distribution fees as
compensation for such financial institutions' ongoing shareholder services. The
Fund may also enter into Shareholder Servicing Agreements pursuant to which the
Distributors or the Fund's administrator or their respective affiliates will
provide compensation out of their own resources. 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. State securities laws may
require banks and financial institutions to register as dealers.

As compensation for providing distribution and related administrative
services under the Distribution Agreements as described above, the Fund will pay
ICC Distributors for the Flag Investors Class A Shares and ISI Group for the ISI
Shares, on a monthly basis, an annual fee, equal to 0.25% of the average daily
net assets of the respective class of Shares. The Distributors expect to
allocate up to all of their fees to Participating Dealers and Shareholder
Servicing Agents.

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

<TABLE>
<CAPTION>
For the Fiscal Year Ended October 31
------------------------------------
Fee 1999 1998 1997
--- ---- ---- ----
<S> <C> <C> <C>

Flag Investors Class A Shares 12b-1 Fee $305,548(1) $310,766(1) $322,511(2)

Flag Investors Shareholder Servicing
Fee (Class B Shares) Fee $16,157(1,3) $5,079(1) $843(2)

ISI Shares 12b-1 Fee $403,641(4) $423,709(4) $455,938(5)

</TABLE>
- ----------
(1) Fees received by ICC Distributors.

(2) Of this amount, DB Alex. Brown LLC, the distributor prior to August 31,
1997, received $271,010 (for the A Shares) and $541 (for the B Shares) and
ICC Distributors, the distributor effective August 31, 1997, received
$51,501 (for the A Shares) and $302 (for the B Shares).

(3) The B Shares were converted to A Shares on May 14, 1999.

(4) Fees received by ISI Group.

(5) Of this amount, Armata, the distributor prior to April 1, 1997, received
$192,508 and ISI Group, the distributor effective April 1, 1997, received
$253,430.

17
<PAGE>

Pursuant to Rule 12b-1 under the 1940 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 ICC Distributors or ISI Group for distribution and other shareholder
servicing assistance as set forth in the related Distribution Agreement, and ICC
Distributors and ISI Group are authorized to make payments out of their fees to
Participating Dealers and Shareholder Servicing Agents. The Plans will remain in
effect from year to year thereafter as specifically approved (a) at least
annually by the Fund's Board of Directors and (b) by the affirmative vote of a
majority of the Independent Directors, by votes cast in person at a meeting
called for such purpose. The Plans were most recently approved by the Fund's
Board of Directors, including a majority of the Independent Directors on
September 27, 1999.

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 without
penalty, by a vote of a majority of the Fund's Independent Directors or by a
vote of a majority of the outstanding Shares.

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 ICC Distributors or ISI Group pursuant to
the Distribution Agreements, to broker-dealers pursuant to any Sub-Distribution
Agreement and to Shareholder Servicing Agents pursuant to Shareholder Servicing
Agreements. Such reports shall be made by the persons authorized to make such
payments. In addition, during the continuance of the Plans, the selection and
nomination of the Fund's Independent Directors shall be committed to the
discretion of the Independent Directors then in office.

Under the Plans, amounts allocated to Participating Dealers and
Shareholder Servicing Agents may not exceed amounts payable to ICC Distributors
or ISI Group, as appropriate, with respect to shares held by or on behalf of
customers of such entities. Payments under the Plans are made as described above
regardless of the distributor's actual cost of providing distribution services
and may be used to pay such distributor's overhead expenses. If the cost of
providing distribution services to the Fund in connection with the sale of the
Flag Investors Class A Shares or the ISI Shares is less than 0.25% of such
Shares' average daily net assets for any period, the unexpended portion of the
distribution fee may be retained by the distributor. The Plans do not provide
for any charges to the Fund for excess amounts expended by the distributor and,
if a Plan is terminated in accordance with its terms, the obligation of the Fund
to make payments to the distributor pursuant to the Plan will cease and the Fund
will not be required to make any payments past the date the Distribution
Agreement terminates with respect to that class. In return for payments received
pursuant to the Plans in the last three fiscal years, respectively, the Fund's
distributors, as appropriate, paid the distribution-related expenses of the Fund
including one or more of the following: advertising expenses; printing and
mailing of prospectuses to other than current shareholders; compensation to
dealers and sales personnel; and interest, carrying or other financing charges.

18
<PAGE>

For the last three fiscal years, the Flag Investors Class A Shares'
distributor and the ISI Shares' distributor received the following commissions
or contingent deferred sales charges and from such commissions or sales charges,
the distributor retained the following amounts:

Fiscal Year Ended October 31,
-----------------------------
1999 1998 1997
---- ---- ----
Class Received Retained Received Retained Received Retained
----- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Flag Investors Class A
Shares Commissions $ 83,577(1) $0 $ 73,776(1) $0 $ 40,869(2) $ 30,820(3)

ISI Shares Commissions $ 123,761(4) $0 $ 207,28415 $0 $ 177,642(5)

</TABLE>

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 Independent Directors and Independent 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
(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 ISI, ICC, ISI Group or ICC Distributors.

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

(1) By ICC Distributors.

(2) Of this amount, DB Alex. Brown LLC, the distributor prior to August 31,
1997, received $35,148 and ICC Distributors, the distributor effective
August 31, 1997, received $5,721.

(3) Of commissions received, DB Alex. Brown LLC retained $30,820 and ICC
Distributors retained $0, respectively.

(4) By ISI Group.

(5) Of this amount, Armata, the distributor prior to April 1, 1997, received
$97,081 and ISI Group, the distributor effective April 1, 1997 received
$80,561.

19
<PAGE>

BROKERAGE

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 broker-dealers that furnish statistical, research or
other information or services which the Advisor deems to be beneficial to the
Fund's investment program. 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. In over-the-counter
transactions, the Advisor will not pay any commission or other remuneration for
research services. The Advisor's policy is to pay a broker-dealer higher
commissions for particular transactions than might be charged if a different
broker-dealer had been chosen when, in the Advisor's opinion, this policy
furthers the overall objective of obtaining best price and execution. Subject to
periodic review by the Fund's Board of Directors, the Advisor is also authorized
to pay broker-dealers higher commissions on brokerage transactions for the Fund
in order to secure research and investment services described above. The
allocation of orders among broker-dealers and the commission rates paid by the
Fund will be reviewed periodically by the Board. The foregoing policy under
which the Fund may pay higher commissions to certain broker-dealers in the case
of agency transactions, does not apply to transactions effected on a principal
basis.

Subject to the above considerations, the Board of Directors has
authorized the Fund to effect portfolio transactions through ISI Group. At the
time of such authorization, the Board adopted certain policies and procedures
incorporating the standards of Rule 17e-1 under the 1940 Act which requires that
the commissions paid ISI Group must be "reasonable and fair compared to the
commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
during a comparable period of time." Rule 17e-1 also contains requirements for
the review of such transactions by the Board of Directors and requires the
Advisor to furnish reports and to maintain records in connection with such
reviews. The ISI Shares Distribution Agreement does not provide for any
reduction in the distribution fee to be received by ISI Group from the Fund as a
result of profits from brokerage commissions on transactions of the Fund
effected through ISI Group.

The Advisor manages other investment accounts. It is possible that, at
times, identical securities will be acceptable for the Fund and one or more of
such other accounts; however, the position of each account in the securities of
the same issuer may vary and the length of time that each account may choose to
hold its investment in such securities may likewise vary. The timing and amount
of purchase by each account will also be determined by its cash position. If the
purchase or sale of securities consistent with the investment policies of the
Fund or one or more of these accounts is considered at or about the same time,
transactions in such securities will be allocated among the accounts in a manner
deemed equitable by the Advisor. The Advisor may combine such transactions, in
accordance with applicable laws and regulations, in order to obtain the best net
price and most favorable execution. Such simultaneous transactions, however,
could adversely affect the ability of the Fund to obtain or dispose of the full
amount of a security which it seeks to purchase or sell.

20
<PAGE>

For the fiscal years ended October 31, 1999, October 31, 1998 and
October 31, 1997, 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 1940 Act) which the Fund has
acquired during its most recent fiscal year. As of October 31, 1999, the Fund
held the following repurchase agreements issued by "regular brokers or dealers"
of the Fund.

Broker or Dealer Value %
Goldman Sachs & Co. $21,380,000 5.10%
J.P. Morgan Securities Inc. $21,380,000 5.10%
Morgan Stanley & Co. $21,380,000 5.16%

CAPITAL SHARES

Under the Fund's Articles of Incorporation, the Fund may issue up to
115 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 five classes of Shares: Flag Investors Total Return U.S. Treasury
Fund Class A Shares, Flag Investors Total Return U.S. Treasury Fund Class B
Shares, Flag Investors Total Return U.S. Treasury Fund Class C 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 and Class D Shares are no longer being offered. The Flag Investors Total
Return U.S. Treasury Fund Class C Shares have not yet been 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 or class 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 and any
applicable service fees) are prorated between all classes of a series based upon
the relative net assets of each class. Any matters affecting any class
exclusively 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.

21
<PAGE>

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.

CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES

Bankers Trust Company, 130 Liberty Street, New York, New York 10006
("Bankers Trust") has been retained to act as custodian of the Fund's
investments. Bankers Trust receives such compensation from the Fund for its
services as Custodian as may be agreed to from time to time by Bankers Trust and
the Fund. For the fiscal year ended October 31, 1999, the Fund paid Bankers
Trust $56,382 as compensation for providing custody services. Investment Company
Capital Corp., One South Street, Baltimore, Maryland 21202 (telephone:
(800)882-8585) has been retained to act as the Fund's transfer and dividend
disbursing agent. As compensation for these services, ICC receives up to $20.17
per account per year plus reimbursement for out-of-pocket expenses incurred in
connection therewith. For the fiscal year ended October 31, 1999, such fees
totaled $159,452.

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 Daily Net Assets Incremental Fee
- ------------------------ ---------------
0 - $10,000,000 $13,000 (fixed fee)
$10,000,000 - $20,000,000 0.100%
$20,000,000 - $30,000,000 0.080%
$30,000,000 - $40,000,000 0.060%
$40,000,000 - $50,000,000 0.050%
$50,000,000 - $60,000,000 0.040%
$60,000,000 - $70,000,000 0.030%
$70,000,000 - $100,000,000 0.020%
$100,000,000 - $500,000,000 0.015%
$500,000,000 - $1,000,000,000 0.005%
over $1,000,000,000 0.001%

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, 1999, ICC received fees of $82,957.

INDEPENDENT AUDITORS

Deloitte & Touche LLP, Princeton Forrestal Village, 116-300 Village
Boulevard, Princeton, New Jersey 08540, are independent auditors to the Fund.

LEGAL MATTERS

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

22
<PAGE>

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

To Fund management's knowledge, as of January 28, 2000, no shareholder
owned beneficially or of record 5% or more of the outstanding Shares of a class
of the Fund.

In addition, to Fund management's knowledge, as of January 28, 2000,
Directors and officers as a group owned less than 1% of total outstanding Shares
of a class of the Fund.

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 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:

P(1 + T)n = ERV

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

T = average annual total return

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

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

Under the foregoing formula, the time periods used in advertising will
be based on rolling calendar quarters updated to the last day of the most recent
quarter prior to submission of the advertising for publication, and will cover
one-, five- and ten-year periods or a shorter period dating from the
effectiveness of the Fund's registration statement or the date the Fund (or a
series) began operations. In calculating the ending redeemable value for the
Flag Investors Class A Shares and the ISI Shares, the maximum sales load (4.50%
and 4.45%, respectively) 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.

Calculated according to SEC rules, the ending redeemable value and
average annual total return of a hypothetical $1,000 investment for the periods
ended October 31, 1999 were as follows:

23
<PAGE>

One-Year Period Five-Year Period Ten-Year Period
--------------- ---------------- ---------------
Ended October 31, 1999 Ended October 31, 1999 Ended October 31, 1999
---------------------- ---------------------- ----------------------
Ending Average Annual Ending Average Annual Ending Average Annual
------- --------------- ------- --------------- ------- --------------
Class Redeemable Value Total Return Redeemable Value Total Return Redeemable Value Total Return
- ----- ---------------- ------------ ---------------- ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Flag Investors
Class A Shares-
8/10/88* $919 (8.15)% $1,376 6.59% $1,940 6.85%
ISI Shares -
10/31/88* $919 (8.10)% $1,377 6.60% $1,940 6.85%
</TABLE>

* Inception Date

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, 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. 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.

Yield Calculations

The yield based on the 30-day period ended October 31, 1999 was 5.20%
for the Flag Investors Class A Shares and 5.20% 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 Class A Shares and 4.45% for the ISI 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.

24
<PAGE>

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

The Fund's annual portfolio turnover rate may vary from year to year,
as well as within a year, depending on market conditions. The Fund's portfolio
turnover rates in the fiscal years ended October 31, 1999, 1998 and 1997 were
77%, 179% and 92%, respectively. The Fund's portfolio turnover rate for the
fiscal year ended October 31, 1998 increased as a result of changes in
investment strategy.

FINANCIAL STATEMENTS

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

The financial statements for the Fund for the period ended October 31,
1999, are incorporated herein by reference to the Fund's Annual Report dated
October 31, 1999. A copy of the Fund's Annual Report must accompany this
Statement of Additional Information. The Fund's independent auditors audit the
annual financial statements.