NORTH AMERICAN GOVERNMENT BOND FUND INC, 497, 1995-08-03

NORTH AMERICAN GOVERNMENT BOND FUND INC
497, 1995-08-03

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<PAGE>
ISI NORTH AMERICAN
GOVERNMENT BOND FUND SHARES
(A Class of North American
Government Bond Fund, Inc.)
717 Fifth Avenue
New York, New York 10022
For information call (800) 955-7175

North American Government Bond Fund, Inc. (the "Fund") is designed to
provide a high level of current income, consistent with prudent investment
risk, by investing primarily in a portfolio of fixed-income securities issued
or guaranteed by the governments of the United States, Canada and Mexico.

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

This Prospectus sets forth basic information that investors should know
about the Fund prior to investing, and should be retained for future
reference. A Statement of Additional Information dated August 1, 1995 has
been filed with the Securities and Exchange Commission (the "SEC") and is
hereby incorporated by reference. It is available upon request and without
charge by contacting the Fund at the above address and telephone.

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

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

The date of this Prospectus is August 1, 1995.

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1. FEE TABLE

SHAREHOLDER TRANSACTION EXPENSES:
(as a percentage of offering price)

<TABLE>
<CAPTION>
<S> <C>
Maximum Sales Charge Imposed on Purchases ......................................... 3.00%
Maximum Sales Charge Imposed on Reinvested Dividends .............................. None
Deferred Sales Charge ............................................................. None
Annual Fund Operating Expenses (net of fee waivers):
(as a percentage of average net assets)
Management Fees (net of fee waivers) .............................................. .27%*
12b-1 Fees ........................................................................ .40%
Asset Based Sales Charge .15% ...................................................
Service Fee .25% ................................................................
Other Expenses (net of fee waivers) ............................................... .58%*
----------
Total Fund Operating Expenses (net of fee waivers) ................................ 1.25%*

</TABLE>

- -------
*The Advisor and the Administrator have voluntarily agreed to waive
proportionate amounts of their respective fees, to the extent required, so
that the Fund's Total Operating Expenses do not exceed 1.25% of the Fund's
average net assets. Absent fee waivers, Management Fees would be .40%, Other
Expenses (including administration fees) would be .65% and Total Fund Operating
Expenses would be 1.45%, respectively, of the Fund's average net
assets.

Example:

<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
-------- --------- --------- ----------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period:* ......... $42 $69 $99 $186
</TABLE>
- --------
*The example is based on Total Fund Operating Expenses, net of fee waivers.
Absent fee waivers, expenses would be higher.

The Example should not be considered a representation of future expenses.
Actual expenses may be greater or less than those shown.

The purpose of the foregoing table is to describe the various costs and
expenses that an investor in the Fund will bear directly or indirectly. A
person who purchases Shares through a financial institution may be charged
separate fees by the financial institution. The Expenses and Example
appearing in the table above are based on the Fund's expenses for the fiscal
year ended March 31, 1995 which, net of fee waivers, were 1.25% of the Fund's
average net assets. (For more complete descriptions of the various costs and
expenses, see "How to Invest in the Fund -- Offering Price", "Investment
Advisor", "Administrator" and "Distributor.") The rules of the SEC require
that the maximum sales charge (in the Shares' case, 3.00% of the offering
price) be reflected in the above table. However, certain investors may
qualify for reduced sales charges. (See "How to Invest in the Fund --
Offering Price.") Due to the continuous nature of Rule 12b-1 fees, long-term
shareholders of the Fund may pay more in total sales charges than the
equivalent of the maximum front-end sales charges permitted by the Rules of
Fair Practice of the National Association of Securities Dealers, Inc.

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<PAGE>

2. FINANCIAL HIGHLIGHTS

The Fund has offered the Shares since January 15, 1993. The Financial
Highlights included in this table are a part of the Fund's financial
statements for the periods indicated which have been audited by Coopers &
Lybrand L.L.P., independent accountants. The financial statements for the
fiscal year ended March 31, 1995 and the report thereon of Coopers & Lybrand
L.L.P. are included in the Statement of Additional Information. Additional
performance information is contained in the Fund's Annual Report for the
fiscal year ended March 31, 1995, which can be obtained at no charge by
calling the Fund at (800) 955-7175.

(For a Share outstanding throughout each period)

<TABLE>
<CAPTION>
For the Year
Ended For the Period
March 31, January 15, 1993*
----------------------------- through
1995 1994 March 31, 1993
-------------- ------------ ------------------
<S> <C> <C> <C>
Per Share Operating
Performance:
Net asset value at
beginning of period.. $ 9.53 $ 10.14 $ 10.00
------- ------- -------
Income from Investment
Operations:
Net investment income . 0.63 0.89 0.10
Net realized and
unrealized
gain/(loss) on
investments ........ (1.38) (0.58) 0.12
------- ------- -------
Total from Investment
Operations ......... (0.75) 0.31 0.22
Less Distributions:
Dividends from net
investment income
and short-term
gains .............. (0.45) (0.92) (.08)
Return of capital-tax (0.27) -- --
------- ------- --------
Total distributions ... (0.72) (0.92) (0.08)
------- ------- --------
Net asset value at end
of period .......... $ 8.06 $ 9.53 $ 10.14
======= ======= =======
Total Return** .......... (8.31)% 2.77% 2.18%
Ratios to Average Net
Assets:
Expenses .............. 1.25%(2) 1.25%(2) 1.25%(1)(2)
Net investment income . 7.04%(3) 7.04%(3) 7.62%(1)(3)
Supplemental Data:
Net assets at end of
period (000) ....... $66,292 $93,622 $40,937
Portfolio turnover rate 104% 219% 104%
</TABLE>

- ------
* Commencement of Operations.
** Total return represents aggregate total return for the periods indicated
and does not reflect any applicable sales charges.
(1) Annualized.
(2) Without the waiver of advisory and administration fees, the ratio of
expenses to average net assets would have been 1.45%, 1.44% and 2.19%
(annualized) for the years ended March 31, 1995, March 31, 1994, and for
the period ended March 31, 1993, respectively.
(3) Without the waiver of advisory and administration fees, the ratio of net
investment income to average net assets would have been 6.84%, 6.85% and
6.68% (annualized) for the years ended March 31, 1995, March 31, 1994 and
for the period ended March 31, 1993, respectively.

<PAGE>

3. INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS

The investment objective of the Fund is to provide a high level of current
income, consistent with prudent investment risk. This objective is
fundamental and may not be changed without shareholder approval. There is no
assurance that the Fund will be able to achieve its investment objective.

The Fund seeks to achieve its investment objective by investing under normal
circumstances at least 65% of its total assets in the following bonds and
debentures: (i) U.S. Treasury Securities (including Treasury bills, Treasury
notes, Treasury bonds and Separate Trading of Registered Interest and
Principal of Securities ("STRIPS")), which securities are direct obligations
of the United States government (see "United States Government Securities"
below); and (ii) bonds or debentures issued or guaranteed by the Canadian and
Mexican governments or their subdivisions, agencies or instrumentalities
("Government Securities") and denominated either in U.S. dollars or in the
local foreign currency. The Fund will invest no more than 25% of its total
assets in Canadian Government Securities (see "Canadian Government
Securities" below) and no more than 25% of its total assets in Mexican
Government Securities (see "Mexican Government Securities" below).

In addition, the Fund will invest no more than 33% of its total assets in
securities denominated or payable in each of Canadian dollars and Mexican
pesos. Subject to the foregoing currency denomination limits, the Fund may
invest in bankers acceptances and certificates of deposit denominated or
payable in the local foreign currency and issued by one of the five most
highly capitalized banks in Canada or Mexico.

Subject to the foregoing guidelines, International Strategy and Investment
Inc. ("ISI" or the "Advisor") will invest the Fund's assets and allocate
investments from time to time among U.S., Canadian and Mexican Government
Securities, based on its assessment of which fixed-income securities best
enable the Fund to achieve its investment objective of seeking a high level

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<PAGE>

of current income, consistent with prudent investment risk. Subject to the
limitations described above, the percentage of assets invested in a particular
country or denominated in a particular currency, as well as the average maturity
of the securities held in the Fund's portfolio, will vary in accordance with the
Advisor's analysis of market conditions, relative yields, and changes in general
economic and political conditions in the United States, Canada and Mexico, and
the Advisor's expectations regarding interest rate changes and changes in
currency exchange rates among the U.S. dollar, the Canadian dollar and the
Mexican peso. Based on the Advisor's analysis of such factors, it is possible
that, from time to time, none of the Fund's assets will be invested in Canada or
Mexico or denominated or payable in Canadian dollars or Mexican pesos.

Under normal circumstances, the dollar weighted expected average maturity of the
Fund's portfolio will vary depending on the Advisor's assessment of the relative
yields available on securities of different maturities and its expectations of
future changes in interest rates. It is currently anticipated that during
periods of stable interest rates, the Fund's portfolio will have a dollar
weighted expected average maturity of approximately ten years; and during
periods of declining interest rates, the Fund's portfolio will have a dollar
weighted expected average maturity of between fifteen and twenty-five years. ISI
may shorten the dollar weighted average maturity substantially for temporary,
defensive purposes, such as, when ISI believes interest rates are or will be
increasing substantially. There can be no assurance that the Advisor's economic
analyses will accurately predict interest rate movements or that the portfolio
strategies based upon such analyses will be effective.

Under normal circumstances, the Canadian Government Securities held in the
Fund's portfolio will be rated, at the time of purchase, Aa or higher by Moody's
Investors Service, Inc. ("Moody's") or AA or higher by Standard & Poor's Ratings
Group ("S&P") or, if not rated, determined to be of comparable quality by the
Advisor under criteria approved by the Fund's Board of Directors. Except as
provided below, the Mexican Government Securities in which the Fund may invest
will be rated, in the case of long-term securities, Baa or higher by Moody's or
BBB or higher by S&P or, if not rated, determined to be of comparable quality by
the Advisor under criteria approved by the Fund's Board of Directors, or in the
case of short-term securities, Prime-3 or higher by Moody's or A-3 or higher by
S&P, or if unrated, are determined to be of comparable quality by the Advisor
under criteria approved by the Fund's Board of Directors. Where deemed
appropriate by the Advisor, the Fund may invest up to 10% of its total assets
(measured at the time of the investment) in Mexican Government Securities or in
fixed-income securities issued by governments of other countries in Latin
America or elsewhere (and denominated in either U.S. dollars or the local
foreign currency), which securities are rated Ba by Moody's or BB by S&P, or if
not rated, determined to be of comparable quality by the Advisor under criteria
approved by the Fund's Board of Directors. If a fixed-income security held by
the Fund is rated Baa or BBB, in the case of a long-term security, or Prime-3 or
A-3 in the case of a short-term security and is subsequently downgraded by a
rating agency, such securities will be included in the Fund's below investment
grade holdings for purposes of the foregoing 10% limit. In addition, the Fund
will retain such security in its portfolio only until the Advisor determines
that it is practicable to sell the security without undue market or tax
consequences to the Fund. Moreover, in the event that such downgraded securities
constitute 5% or more of the Fund's total assets, the Advisor will seek to sell
immediately sufficient securities to reduce the total to below 5%.

Securities rated either Baa by Moody's or BBB by S&P have speculative
characteristics and, therefore, changes in economic conditions or other
circumstances are more likely to weaken their capacity to make principal and
interest payments than would be the case with investments in securities with
higher credit ratings.

Securities rated Ba or BB are considered to be below investment grade
securities and are known as "junk bonds." They are considered to be
speculative and involve greater risk of default or price changes due to
changes in the issuer's creditworthiness. The future of such below investment
grade securities cannot be considered well assured and the issuer's ability
to make timely payments of principal and interest may be subject to material
contingencies. Investing in higher yield, high risk, lower rated bonds
entails substantially greater risk than investing in investment grade bonds
including not only credit risk, but potentially greater market volatility and
lower liquidity. Yields and market values of these securities will fluctuate
over time, reflecting changing interest rates and the market's perception of
credit quality and the outlook for economic growth. When economic conditions
appear to be deteriorating, lower rated securities may decline in value,
regardless of prevailing interest rates. Accordingly, adverse economic
developments, including a recession or a substantial period of rising
interest rates, may disrupt the high yield securities market, affecting both
the value and liquidity of such securities. The market prices of these
securities may fluctuate more than those of higher rated securities and may
decline significantly in periods of general economic difficulty, which may

4
<PAGE>

follow periods of rising interest rates. An economic downturn could adversely
affect the ability of issuers of such securities to make payments of principal
and interest to a greater extent than issuers of higher rated securities might
be affected. A description of fixed-income security ratings is contained in the
Appendix to the Statement of Additional Information. During the fiscal year
ended March 31, 1995 the Fund held no below investment grade bonds.

The Fund may also invest in repurchase agreements with respect to U.S.
Treasury Securities, Canadian Treasury Securities and Mexican Treasury
Securities and in commercial paper rated Prime-1 by Moody's or A-1 by S&P, or
if not rated, determined to be of comparable quality by the Advisor under
criteria approved by the Fund's Board of Directors. For temporary, defensive
purposes, the Fund may invest up to 100% of its assets in such instruments.
Investment of all or a substantial portion of the Fund's assets in such
instruments may cause a decrease in the Fund's yield.

Although the Fund reserves the right to invest up to 35% of its total assets
in fixed-income securities which are issued or guaranteed by the governments
of countries located in Latin America (other than Mexico) or other foreign
countries, or any of their political subdivisions, agencies,
instrumentalities and authorities, the Fund has no current intention to make
such investments during the coming year. Any investment in such fixed-income
securities would be rated, at the time of purchase, Baa or higher by Moody's
or BBB or higher by S&P, or if not rated, determined to be of comparable
quality by the Advisor under criteria approved by the Fund's Board of
Directors, except that the Fund may invest in such fixed-income securities
rated at the time of purchase, Ba by Moody's or BB by S&P, or determined to
be of comparable quality by the Advisor under criteria approved by the Fund's
Board of Directors, subject to the limitation of 10% of the Fund's total
assets discussed above.

The Fund may also engage in certain other investment practices, including
practices to protect against fluctuations in foreign currencies, which
practices are described more fully under the heading "Other Investment
Policies" below.

UNITED STATES GOVERNMENT SECURITIES

The Fund will invest in U.S. Treasury obligations (including Treasury bills,
Treasury notes, Treasury bonds and STRIPS) which are issued by the U.S.
government and backed by the full faith and credit of the United States and
which differ only in their interest rates, maturities and times of issuance.
STRIPS are U.S. Treasury Securities which trade at a yield to maturity higher
than do comparable maturity U.S. Treasury obligations. STRIPS do not pay
interest currently, but are purchased at a discount and are payable in full
at maturity. However, the value of STRIPS may be subject to greater market
fluctuations including yield, from changing interest rates prior to maturity
than the value of other U.S. Treasury Securities of comparable maturities
that bear interest currently. Because STRIPS do not pay current income, the
Fund will not invest in them to a significant extent.

CANADIAN GOVERNMENT SECURITIES

Canadian Government Securities include securities issued or guaranteed by the
Government of Canada, any of its provinces (Alberta, British Columbia,
Manitoba, New Brunswick, Newfoundland, Nova Scotia, Ontario, Prince Edward
Island, Quebec and Saskatchewan) or by their respective political
subdivisions, agencies and instrumentalities, which securities have been
rated Aa or higher by Moody's or AA or higher by S&P, or if unrated, are
determined to be of comparable quality by the Advisor under criteria approved
by the Fund's Board of Directors. These securities may be denominated or
payable in U.S. dollars or Canadian dollars.

Canadian Government Securities in which the Fund may invest include
Government of Canada bonds and Government of Canada Treasury bills. The Bank
of Canada, acting on behalf of the Canadian federal government, is
responsible for the distribution of Treasury bills and federal bond issues.
Government of Canada Treasury bills are debt obligations with maturities of
less than one year. Government of Canada issues of bonds frequently consist
of several different bonds with various maturity dates representing different
segments of the yield curve with maturities ranging from one to 25 years.

All Canadian provinces have outstanding bond issues and several provinces
also guarantee bond issues of provincial authorities, agencies and provincial
Crown corporations. Each new issue yield is based upon a spread from an
outstanding Government of Canada issue of comparable term and coupon. Spreads
in the marketplace are determined by various factors, including the relative
supply and the rating assigned by the rating agencies. Most provinces also
issue treasury bills.

5
<PAGE>

Many municipalities and municipal financial authorities in Canada raise funds
through the bond market in order to finance capital expenditures. Unlike U.S.
municipal securities, which have special tax status, Canadian municipal
securities have the same tax status as other Canadian Government Securities
and trade similarly to such securities. The Canadian municipal market may be
less liquid than the provincial bond market.

Currently, Government of Canada long-term fixed-income securities denominated
or payable in Canadian dollars have been rated AAA by S&P, and Government of
Canada long-term fixed-income securities denominated or payable in U.S.
dollars have been rated AA+ by S&P.

MEXICAN GOVERNMENT SECURITIES

Mexican Government Securities in which the Fund may invest include those
securities which are issued or guaranteed in full by the Mexican federal
government or its instrumentalities and which securities are rated (i) in the
case of long-term securities, Baa or higher by Moody's or BBB or higher by S&P,
or if unrated, are determined to be of comparable quality by the Advisor under
criteria approved by the Fund's Board of Directors, or (ii) in the case of
short-term securities, Prime-3 or higher by Moody's or A-3 or higher by S&P, or
if unrated, are determined to be of comparable quality by the Advisor under
criteria approved by the Fund's Board of Directors. These securities may be
denominated or payable in Mexican pesos or U.S. dollars.

The debt market in Mexico began to develop rapidly after the promulgation of
the Securities Market Law in 1975. Since 1975, the government has authorized
a range of Mexican government issued debt securities, all of which are traded
on the Mexican Stock Exchange. In addition, a variety of other special
purpose bonds are issued by, and backed by the full faith and credit of, the
Mexican federal government. Government of Mexico securities denominated and
payable in the Mexican peso include: (i) Cetes, book-entry securities sold
directly by the Mexican government on a discount basis and with maturities
ranging from seven to 364 days; (ii) Bondes, long-term development bonds with
a minimum term of 364 days issued directly by the Mexican government; and
(iii) Ajustabonos, adjustable bonds (face amount adjusted quarterly based on
quarterly inflation rate) with a minimum three-year term issued directly by
the Mexican government.

The Fund may also invest up to 10% of its assets in dollar-denominated,
collateralized "Brady Bonds" which are securities created through the
exchange of existing commercial bank loans to the Mexican government for new
bonds under a debt restructuring plan introduced by the former U.S. Secretary
of the Treasury. The Brady Bonds in which the Fund may invest may be fixed
rate or floating rate bonds which are collateralized in full as to principal
by U.S. Treasury zero coupon bonds having the same maturity as the bonds, and
on which the first 18-months of interest coupon payments are collateralized
by funds (cash or securities) held in escrow by an agent for the bondholders.

On March 22, 1995, S&P downgraded the ratings assigned to long-term
fixed-income securities (i.e., bondes and ajustabonos) and short-term debt
securities (i.e., cetes) issued by the Mexican government denominated in Mexican
pesos from A to BBB+ and from A-1 to A-2, respectively. On February 1, 1995,
S&P downgraded the rating assigned to long-term fixed-income securities
issued by the Mexican government denominated in U.S. dollars from BB+ to BB.
Long-term fixed-income securities issued by private sector entities in the
same country may be rated by the rating agency, but no rating will exceed the
rating assigned to similar maturity fixed-income securities issued by the
government of such country.

RISK FACTORS

Currency Risks. A change in the value of a foreign currency relative to the
U.S. dollar will result in a corresponding change in the U.S. dollar value of
the Fund's assets denominated in that currency. Accordingly, the value of the
assets of the Fund as measured in U.S. dollars may be affected favorably or
unfavorably by changes in foreign currency exchange rates and exchange
control regulations. In addition, the Fund may incur costs in connection with
conversions between various currencies. In an attempt to protect against
uncertainty in the level of future foreign exchange rates, the Fund is
authorized to and may occasionally use forward foreign currency exchange
contracts and futures contracts and may purchase and write (sell) options on
foreign currencies. (See "Other Investment Policies -- Forward Foreign
Currency Exchange Contracts.") The Fund may use such forward contracts and
options when, for example, it enters into a contract for the purchase or sale
of a security denominated in a foreign currency, and the Fund desires to
"lock in" the U.S. dollar price of the security. Also, when the Advisor
believes that the currency of a particular foreign country may suffer a
substantial movement against the U.S. dollar, the Fund may enter into forward
contracts and options approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. (See "Other
Investment Policies -- Futures Contracts and Options.")

6
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Risks Of International Investing. Investments in foreign securities will
occasion risks relating to political and economic developments abroad,
including the possibility of expropriations or confiscatory taxation,
limitations on the use or transfer of Fund assets and any effects of foreign
social, economic or political instability. Foreign securities are not subject
to the regulatory requirements applicable to U.S. securities and, therefore,
there may be less publicly available information about such securities.
Moreover, foreign securities are not subject to uniform accounting, auditing
and financial standards and requirements comparable to those applicable to
U.S. securities.

Securities of foreign issuers, including foreign governments, may be less
liquid than comparable securities of U.S. issuers and, therefore, their price
changes may be more volatile. Furthermore, foreign exchanges and broker-
dealers are generally subject to less government and exchange scrutiny and
regulation than their United States counterparts. Brokerage commissions,
dealer concessions and other transaction costs may be higher on foreign
markets, including markets for foreign government securities, than in the
United States. In addition, differences in clearance and settlement
procedures on foreign markets may occasion delays in settlements of Fund
trades effected in such markets. Inability to dispose of portfolio securities
due to settlement delays could result in losses to the Fund due to subsequent
declines in value of such securities and the inability of the Fund to make
intended security purchases due to settlement problems could result in a
failure of the Fund to make potentially advantageous investments.

Canada. The Canadian government debt securities market is significantly
smaller than the U.S. debt securities market. Although continued growth is
anticipated, it is less well developed and less liquid than its U.S.
counterpart. Recently, Canadian real economic growth has picked up after
several years of marginal performance. A return to marginal growth could
affect the Advisor's determination of the appropriate allocation of the
Fund's investments within Canada and among the United States, Canada and
Mexico.

Canadian dollars are fully exchangeable into U.S. dollars without foreign
exchange controls or other legal restriction. Since the major developed
country currencies were permitted to float freely against one another, the
range of fluctuation in the U.S. dollar/Canadian dollar exchange rate has
been narrower than the range of fluctuation between the U.S. dollar and most
other major currencies. For the period from January 15, 1993 (inception of
the Fund) through June 30, 1995, the Canadian dollar decreased in value
compared to the U.S. dollar by approximately 7%. Recently, however, Canada
has experienced a strengthening of its currency and in the year ended June
30, 1995, the Canadian dollar has increased in value compared to the U.S.
dollar by approximately 1%. The range of fluctuation that occurred in the
past is not necessarily indicative of the range of fluctuation that will
occur in the future. Future rates of exchange cannot be predicted.

Mexico. Because the Fund intends to invest in Mexican Government Securities,
investors in the Fund should be aware of certain special considerations
associated with investing in debt obligations of the Mexican government.

The Mexican government has exercised and continues to exercise a significant
influence over many aspects of the private sector in Mexico. Mexican
government actions concerning the economy could have a significant effect on
market conditions and prices and yields of Mexican Government Securities.

The value of the Fund's portfolio investments may be affected by changes in
oil prices, interest rates, taxation and other political or economic
developments in Mexico, including recent political and social problems and
rates of inflation which have exceeded the rates of inflation in the U.S. and
Canada. The Fund can provide no assurance that future developments in the
Mexican economy will not impair its investment flexibility, operations or
ability to achieve its investment objective.

While in recent years the Mexican economy has experienced improvement in a
number of areas, including growth in domestic product and a substantial
reduction in the rate of inflation and in public sector financial deficit,
beginning in 1994, Mexico has experienced an economic crisis that led to the
devaluation of the Mexican peso in December 1994. Much of the past
improvement in the Mexican economy has been attributable to a series of
economic policy initiatives by the Mexican government over the past decade,
which seek to modernize and reform the Mexican economy, control inflation,
reduce the financial deficit, increase public revenues through the reform of
the tax system, establish a competitive and stable currency exchange rate,
liberalize trade restrictions and increase investment and productivity, while

<PAGE>

reducing the government's role in the economy. In this regard, the Mexican
government has been proceeding with a program for privatizing certain state
owned enterprises, developing and modernizing the securities markets, increasing
investment in the private sector and permitting increased levels of foreign
investment. The adoption by Canada, the United States and Mexico of the North
American Free Trade Agreement could also contribute to the growth of the Mexican
economy.

Relative high rates of interest, inflation, unemployment and, most recently,
the economic crisis that led to the devaluation of the Mexican peso beginning
in December 1994 continue to affect the Mexican economy adversely. Mexico is
currently the second largest debtor nation (among developing countries) to
commercial banks and foreign governments. The successful implementation of
the economic policy initiatives and the growth of the Mexican economy involve
significant structural changes to the Mexican economy and will necessitate
continued economic and fiscal discipline. In addition, as a condition to
receiving assistance from the United States, other countries and certain
international agencies to stabilize the Mexican economy, the Mexican
government has agreed to adhere to a program of strict economic reform. An
important aspect of Mexico's economic policy is the ability of the government
to be successful in its continuing efforts to control its financial deficit,
finance its current account deficit, further reduce inflation and stabilize
the Mexican peso. There is no assurance that Mexico's economic policy
initiatives will be successful or that succeeding administrations will
continue these initiatives.

In 1982, Mexico imposed foreign exchange controls and maintained a dual
foreign exchange rate system, with a "controlled" rate and a "free market"
rate. In November, 1991, Mexico abolished the controlled rate and now
maintains only the free exchange rate. Under economic policy initiatives
implemented since December 1987, the Mexican government introduced a schedule
of gradual devaluations of the Mexican peso against the U.S. dollar. These
gradual devaluations continued until December, 1994. On December 22, 1994 the
Mexican government announced that it would permit the Mexican peso to float
against other currencies, resulting in a continued decline against the U.S.
dollar. The Fund's net asset value and its computation and distribution of
income to its shareholders will be adversely affected by continued reductions
in the value of the Mexican peso relative to the U.S. dollar because all Fund
assets must be converted to U.S. dollars prior to any distributions to
shareholders. (See the Statement of Additional Information.)

Non-Diversified Status. The Fund is classified as a non-diversified
investment company under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and as such is not limited by the Investment
Company Act in the proportion of its assets that it may invest in the
obligations of a single issuer. However, the Fund intends to conduct its
operations so as to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
(See "Dividends, Distributions and Taxes.") In order to qualify under
Subchapter M of the Code, among other requirements, the Fund will limit its
investments so that at the close of each quarter of the taxable year, (i) not
more than 25% of the market value of the Fund's total assets will be invested
in the securities of a single issuer (other than U.S. government securities)
and (ii) with respect to 50% of the market value of its total assets not more
than 5% will be invested in the securities of a single issuer (other than
U.S. government securities). To the extent that a relatively high percentage
of the Fund's assets may be invested in the obligations of a limited number
of issuers, the Fund's portfolio securities may be more susceptible to any
single economic, political or regulatory occurrence than the portfolio
securities of a diversified investment company. The limitations described in
this paragraph are not fundamental policies and may be revised to the extent
applicable federal income tax requirements are revised.

Securities issued or guaranteed by foreign governments, their political
subdivisions, agencies and instrumentalities are not treated like U.S.
government securities for purposes of the diversification tests described in
the preceding paragraph, but instead are subject to these tests in the same
manner as the securities of non-governmental issuers. In this regard,
securities issued or guaranteed by a foreign government, its political
subdivisions, agencies or instrumentalities may in certain circumstances not
be treated as issued by a single issuer for purposes of these diversification
tests. Thus, in order to meet the diversification tests and thereby maintain
its status as a regulated investment company, the Fund may be required to

8
<PAGE>

diversify its portfolio of Canadian Government Securities and Mexican Government
Securities in a manner which would not be necessary if the Fund limited its
investments to U.S. government securities.

OTHER INVESTMENT POLICIES AND RISK CONSIDERATIONS

The Fund may also engage in certain other investment practices described more
fully below.

Repurchase Agreements. The Fund may agree to purchase U.S. Treasury
Securities, Canadian Treasury Securities or Mexican Treasury Securities from
financial institutions, such as banks and broker-dealers, subject to the
seller's agreement to repurchase the securities at an established time and
price. Repurchase agreements related to Canadian or Mexican Treasury
Securities will be of a duration of no more than one day. The collateral for
such repurchase agreements will be held by the Fund's custodian or a duly
appointed sub-custodian. The Fund will enter into repurchase agreements only
with banks and broker-dealers that have been determined to be creditworthy by
the Fund's Board of Directors under criteria established with the assistance
of the Advisor. The seller under a repurchase agreement would 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.

There are several additional risks related to repurchase agreements with
respect to treasury securities issued by foreign governments. First, although
the Fund will only enter into repurchase agreements collateralized by
Canadian or Mexican Treasury securities that initially have a value at least
equal to the repurchase price, under certain circumstances it might be
possible that the value of the collateral being held with respect to any such
repurchase agreement would be reduced to such an extent that the agreement
would be undercollateralized. Second, in the event of default or bankruptcy
of the selling institution, enforcement of the Fund's rights would be subject
to additional difficulties and delays due to legal considerations applicable
in such foreign country.

Currency and Interest Rate Hedging Transactions. To hedge against adverse
price movements in the currencies in which securities held in the Fund's
portfolio are denominated (as well as the denominated currencies of the
securities it might wish to purchase) the Fund may engage in transactions in
forward foreign currency contracts, options on currencies, and futures
contracts and options on futures contracts on currencies. (See "Risk Factors
- -- Currency Risks.") The Fund will not engage in any such transactions if the
consummation of such transactions would obligate the Fund to deliver an
amount of foreign currency in excess of the value of the Fund's securities
and other assets denominated in that currency.

Forward Foreign Currency Exchange Contracts. A forward foreign currency
exchange contract ("forward contract") involves an obligation to purchase or
sell a currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the
time of the contract. The Fund may enter into forward contracts as a hedge
against fluctuations in future foreign exchange rates. Currently, only a
limited market exists for hedging transactions relating to the Mexican peso.

If deemed appropriate by the Advisor, the Fund will enter into forward
contracts to "lock in" the price of a security in the denominated foreign
currency. By entering into a forward contract for the purchase or sale, for a
fixed amount of dollars or other currency, of the amount of foreign currency
involved in the underlying security transactions, the Fund will be able to
protect itself against a possible loss resulting from an adverse change in
the relationship between the U.S. dollar or other currency which is being
used for the security purchase and the foreign currency in which the security
is denominated during the period between the date on which the security is
purchased or sold and the date on which payment is made or received. In
addition, the Fund may enter into forward contracts with respect to
currencies in which certain of its portfolio securities are denominated and
on which options have been written. (See "Futures Contracts and Options"
below.)

Futures Contracts and Options. The Fund may purchase and sell futures
contracts on debt securities and indices of debt securities (i.e., interest
rate futures contracts) as a hedge against or to minimize adverse principal
fluctuations resulting from anticipated interest rate changes. The Fund may
also purchase and sell currency futures contracts as a hedge to protect

9
<PAGE>

against anticipated changes in currency rates or as an efficient means to adjust
its exposure to the currency market. The Fund may also write (sell) covered call
options on futures contracts, purchase put and call options on futures contracts
and may enter into closing transactions with respect to such options on futures
contracts purchased or sold. The Fund may also write covered put options on
futures contracts and may enter into closing transactions with respect to such
options on futures contracts. When the Fund purchases a futures contract, or
writes a put option or purchases a call option thereon, an amount of cash and
liquid assets will be deposited in a segregated account with the Fund's
custodian so that the segregated amount, plus the amount of initial margin
deposits held in the account of its broker, equals the market value of the
futures contract, thereby ensuring that the use of the futures contract is
unleveraged. The Fund will not enter into futures contracts for speculation and
will only enter into futures contracts that are traded on a recognized futures
exchange. The Fund will not enter into futures contracts or options thereon if
immediately thereafter the sum of the amounts of initial margin deposits on the
Fund's open futures contracts and premiums paid for unexpired options on futures
contracts would exceed 5% of the value of the Fund's total assets; provided,
however, that in the case of an option that is "in-the-money" the amount may be
excluded in calculating the 5% limitation.

The use of futures contracts by the Fund entails certain risks, including but
not limited to the following: no assurance that futures contracts
transactions can be offset at favorable prices; possible reduction of the
Fund's income due to the use of hedging; possible reduction in value of both
the security or currency hedged and the hedging instrument; possible lack of
liquidity due to daily limits on price fluctuations; imperfect correlation
between the contract and the security or currency being hedged; failure to
qualify as a Regulated Investment Company under Subchapter M of the Code; and
potential losses in excess of the amount initially invested in futures
contracts themselves. If the expectations of the Advisor regarding movements
in securities prices, interest rates or exchange rates are incorrect, the
Fund might have experienced better investment results without hedging. The
use of futures contracts and options on futures contracts requires special
skills in addition to those needed to select portfolio securities.

Purchase of When-Issued Securities. From time to time, in the ordinary course
of business, the Fund may purchase securities, at the current market value of
the securities, on a forward commitment or "when issued" basis. When such
transactions are negotiated, the price is fixed at the time of the
commitment, 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 or other high quality liquid debt
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 liquid debt securities will be added to the account when
necessary. While the Fund will purchase securities on a forward commitment or
"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. The securities so purchased or sold are subject to market
fluctuation and no interest accrues to the purchaser during this period. At
the time of delivery of the securities, their value may be more or less than
the purchase or sale price.

Lending of Portfolio Securities. Consistent with applicable regulatory
requirements, the Fund may lend its portfolio securities to brokers, dealers
and other financial institutions, provided that such loans are at all times
secured by cash or money market instruments, which are maintained in a
segregated account pursuant to applicable regulations and that are at least
equal to the market value, determined daily, of the loaned securities. As
with any extensions of credit, there are risks of delay in recovery and in
some cases even loss of rights in the collateral should the borrower of the
securities fail financially. In determining whether to lend securities to a
particular borrower, the Advisor (subject to review by the Fund's Board of
Directors) will consider all relevant facts and circumstances, including the
creditworthiness of the borrower. The Fund will not lend portfolio securities
in excess of 20% of the value of its total assets. The Board of Directors
will monitor the Fund's lending of portfolio securities.

4. INVESTMENT RESTRICTIONS

The Fund's investment program is subject to a number of restrictions which
reflect both self-imposed standards and federal and state regulatory
limitations. The investment restrictions listed below are matters of
fundamental policy, and as such, may not be changed without the affirmative
vote of a majority of the outstanding shares. The Fund may not:

10
<PAGE>
1) Invest 25% or more of the value of its total assets in securities of
issuers in any one industry (for these purposes, the United States
government, its agencies and instrumentalities are not considered to be an
industry); and

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

The Fund's investment program is subject to other investment restrictions
which are set forth in the Fund's Statement of Additional Information.

5. HOW TO INVEST IN THE FUND

Shares may be purchased from Armata Financial Corp. ("Armata"), P.O. Box 515,
Baltimore, Maryland 21203, through any securities dealer which has entered
into a dealer agreement with Armata ("Participating Dealers") or through any
financial institution which has entered into a shareholder servicing
agreement with the Fund ("Shareholder Servicing Agents"). Shares may also be
purchased directly from the Fund by completing the Application Form attached
to this Prospectus and returning it, together with payment of the purchase
price plus any applicable front-end sales charge, to the Fund at the address
shown on the Application Form.

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

The net asset value per Share is determined once daily as of the close of the
New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time) on each
Business Day. Net asset value per Share is calculated by valuing all assets
held by the Fund, deducting liabilities, and dividing the resulting amount by
the number of then outstanding Shares. Securities are valued on the basis of
their last sale price (or in the absence of recorded sales, at the average of
readily available closing bid and asked prices). Securities or other assets
for which market quotations are not readily available are valued at their
fair value as determined in good faith by the Advisor under procedures
established from time to time and monitored by the Fund's Board of Directors.
Debt obligations with maturities of 60 days or less are valued at amortized
cost, which constitutes fair value as determined by the Fund's Board of
Directors.

OFFERING PRICE

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

<TABLE>
<CAPTION>
Sales
Sales Charge as Dealer
Charge as Percentage Retention
Percentage of Net as Percentage
of Offering Amount of Offering
Amount of Purchase Price Invested Price*
------------------ --------------- -------------- -----------------
<S> <C> <C> <C>
Less than $ 100,000 ..... 3.00% 3.09% 2.75%
$100,000 - $ 249,999 ..... 2.50% 2.56% 2.25%
$250,000 - $ 499,999 ..... 2.00% 2.04% 1.75%
$500,000 - $ 999,999 ..... 1.50% 1.52% 1.25%
$1,000,000 - $1,999,999 ..... 0.75% 0.76% 0.75%
$2,000,000 - $2,999,999 ..... 0.50% 0.50% 0.50%
$3,000,000 and over .............. none none none
</TABLE>
- -----
*Armata may from time to time reallow to Participating Dealers up to 100% of
the sales charge included in the Offering Price of Shares. Participating
Dealers who receive 90% or more of such reallowance may be deemed to be
underwriters under the Securities Act of 1933.

11
<PAGE>

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

An investor may also obtain the reduced sales charges shown above by
executing a written Letter of Intent, which states the investor's intention
to invest not less than $100,000 within a 13-month period in Shares. Each
purchase of Shares under a Letter of Intent will be made at the Offering
Price applicable at the time of such purchase to the full amount indicated on
the Letter of Intent. A Letter of Intent is not a binding obligation upon the
investor to purchase the full amount indicated. The minimum initial
investment under a Letter of Intent is 5% of the full amount. Shares
purchased with the first 5% of the full amount will be held in escrow (while
remaining registered in the name of the investor) to secure payment of the
higher sales charge applicable to the Shares actually purchased if the full
amount indicated is not invested. Such escrowed Shares will be involuntarily
redeemed to pay the additional sales charge, if necessary. When the full
amount indicated has been purchased, the escrowed Shares will be released. An
investor who wishes to enter into a Letter of Intent in conjunction with an
investment in Shares may do so by completing the appropriate section of the
Application Form attached to this Prospectus.

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

PURCHASES BY EXCHANGE

As permitted pursuant to any rule, regulation or order promulgated by the SEC,
shareholders of other mutual funds in the ISI family of funds that have similar
or higher sales charges may exchange their shares of those funds for an equal
dollar amount of Shares. Shares issued pursuant to this offer will not be
subject to the sales charges described above. The net asset value of shares
purchased and redeemed in an exchange request received on a Business Day will be
determined on the same day, provided that the exchange request is received prior
to 4:00 p.m. (Eastern Time). Exchange requests received after 4:00 p.m. (Eastern
Time) will be effected on the next Business Day. The exchange privilege may be
exercised only in those states where the class of shares of such other funds may
legally be sold. Investors should receive and read the applicable prospectus
prior to tendering shares for exchange.

Until February 28, 1996, shareholders of any other mutual fund who have paid
a sales charge on their shares of such fund, and shareholders of any
closed-end fund, may exchange shares of such funds for an equal dollar amount
of Shares by submitting to Armata or a Participating Dealer the proceeds of
the redemption or sale of shares of such funds, together with evidence of the
payment of a sales charge (for mutual funds only) and the source of such
proceeds. Shares issued pursuant to this offer will not be subject to the
sales charges described above or any other charge.

The Fund may modify or terminate these offers of exchange at any time, and
will provide shareholders with 60 days' written notice prior to any such
modification or termination. The exchange privilege with respect to other

12
<PAGE>

ISI funds may also be exercised by telephone. (See "Telephone Transactions"
below.)

PURCHASES THROUGH AUTOMATIC INVESTING PLAN

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

6. HOW TO REDEEM SHARES

Any or all of a shareholder's investments may be redeemed on any Business Day
by transmitting a redemption order through Armata, a Participating Dealer, or
a Shareholder Servicing Agent or by regular or express mail to the Fund's
transfer agent (the "Transfer Agent"). Shareholders may also redeem Shares by
telephone (in amounts up to $50,000). (See "Telephone Transactions" below.) A
redemption order is effected at the net asset value per Share next determined
after receipt of the order (or, if stock certificates have been issued for
the Shares to be redeemed, after the tender of the stock certificates for
redemption). Payment for redeemed Shares will be made by check and will
ordinarily be mailed within seven days after receipt of a duly authorized
telephone redemption request or of a redemption order fully completed and, as
applicable, accompanied by the documents described below:

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

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

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

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

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

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

SYSTEMATIC WITHDRAWAL PLAN

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

7. TELEPHONE TRANSACTIONS

Shareholders may exercise the exchange privilege with respect to other ISI
funds, or redeem shares in amounts up to $50,000, by notifying the Transfer
Agent by telephone at (800) 882-8585 on any Business Day between the hours of

13
<PAGE>

8:30 a.m. and 5:30 p.m. (Eastern Time) or by regular or express mail at its
address listed under "Custodian, Transfer Agent, Accounting Services." Telephone
transaction privileges are automatic. Shareholders may specifically request that
no telephone redemptions or exchanges be accepted for their accounts. This
election may be made on the Application Form or at any time thereafter by
completing and returning appropriate documentation supplied by the Transfer
Agent.

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

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

8. DIVIDENDS AND TAXES

The Fund's policy is to distribute to shareholders substantially all of its
taxable net investment income (including net short-term capital gains) in the
form of monthly dividends but such dividends are not guaranteed. The Fund may
distribute to shareholders any net capital gains (net long-term capital gains
less net short-term capital losses) on an annual basis or, alternatively, may
elect to retain net capital gains and pay tax thereon.

Unless the shareholder elects otherwise, all income dividends (consisting of
dividend and interest income and the excess, if any, of net short-term
capital gains over net long-term capital losses) and net capital gains
distributions, if any, will be reinvested in additional Shares at the then
net asset value per Share on the payment date. Shareholders may elect to have
income dividends or capital gains paid in cash. Shareholders wishing to
change their election must give written notice to the Transfer Agent (see
"Custodian, Transfer Agent, Accounting Services" below) either directly or
through Armata, a Participating Dealer or a Shareholder Servicing Agent at
least five days before the next date on which dividends or distributions will
be paid.

TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS

The following is only a general summary of certain tax considerations
affecting the Fund and the shareholders. No attempt is made to present a
detailed explanation of the tax treatment of the Fund or the shareholders,
and the discussion here is not intended as a substitute for careful tax
planning. The following summary is based on current tax laws and regulations,
which may be changed by legislative, judicial, or administrative action. The
Statement of Additional Information sets forth further information concerning
taxes.

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

Distributions from the Fund out of net capital gains (net long-term capital
gains less net short-term capital losses), if any, are treated by the
shareholders as long-term capital gains, regardless of the length of time the
shareholder has held the Shares. All other income distributions are taxed to
the shareholders as ordinary income, whether received in cash or in
additional Shares. Fund distributions generally will not be eligible for the
corporate dividends received deduction.

Ordinarily, shareholders will include all dividends declared by the Fund as
income in the year of payment. However, dividends declared payable to

14
<PAGE>

shareholders of record in December of one year, but paid in January of the
following year, will be deemed for tax purposes to have been received by the
shareholders and paid by the Fund in the year in which the dividends were
declared.

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

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

9. MANAGEMENT OF THE FUND

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

The Fund's Directors and officers are as follows:

<TABLE>
<CAPTION>
<S> <C>
*Edward S. Hyman Chairman
*Richard T. Hale Vice Chairman
James J. Cunnane Director
N. Bruce Hannay Director
John F. Kroeger Director
Louis E. Levy Director
Eugene J. McDonald Director
*Rebecca W. Rimel Director
Harry Woolf Director
R. Alan Medaugh President
Edward J. Veilleux Vice President
Gary V. Fearnow Vice President
Nancy Lazar Vice President
Brian C. Nelson Vice President and Secretary
Diana M. Ellis Treasurer
Carrie L. Butler Assistant Vice President
Laurie D. DePrine Assistant Secretary
</TABLE>

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

10. INVESTMENT ADVISOR

ISI, a registered investment advisor, serves as investment advisor to the
Fund pursuant to an Investment Advisory Agreement dated as of December 15,
1992 (the "Investment Advisory Agreement"). ISI employs Messrs. Edward S.
Hyman and R. Alan Medaugh. Due to their stock ownership, Messrs. Hyman and
Medaugh may be deemed to be controlling persons of ISI. As of June 30, 1995,
the Advisor had approximately $1 billion in fixed-income securities under
management for clients both within and outside of the United States. The
Advisor also acts as investment advisor to Total Return U.S. Treasury Fund,
Inc. and Managed Municipal Fund, Inc., both of which funds are U.S. open-end
investment companies with approximately $505 million in aggregate net assets
as of June 30, 1995.

Pursuant to the terms of the Investment Advisory Agreement the Advisor is
responsible for decisions to buy and sell securities for the Fund, for
broker-dealer selection, and for negotiation of commission rates under
standards established and periodically reviewed by the Board of Directors. In
general, purchases and sales of securities by the Fund will usually be
principal transactions, and therefore the Fund will not incur substantial
brokerage commission expense. However, the Advisor's primary consideration in
effecting securities transactions will be to obtain best price and execution.

15
<PAGE>

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

The Advisor and the Administrator have agreed, on a voluntary basis, to waive
a proportionate amount of their fees to the extent required so that the
Fund's total operating expenses do not exceed 1.25% of the Fund's average net
assets. (See "Fee Table.") Furthermore, the Advisor has agreed to reduce its
aggregate fees attributable to the Fund or make payments to the Fund, if
necessary, to the extent required to satisfy any expense limitations imposed
by any securities laws or regulations thereunder of any state in which the
Shares are qualified for sale. As compensation for its services for the
fiscal year ended March 31, 1995, the Advisor received from the Fund a fee
(net of fee waivers) equal to .27% of the Fund's average daily net assets.

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

PORTFOLIO MANAGERS

Edward S. Hyman, Chairman of the Fund and ISI, and R. Alan Medaugh, President
of the Fund and ISI, have shared direct portfolio management responsibility
for the Fund since its inception. Mr. Hyman is responsible for developing the
economic analysis upon which the Fund's selection of investments is based.
(See "Investment Objective, Policies and Risk Factors.") Before joining ISI,
Mr. Hyman was a vice chairman and member of the Board of C.J. Lawrence Inc.
and prior thereto, an economic consultant at Data Resources. He writes two
international economic reports: Weekly International Highlights and the
monthly International Economic Review. He also writes three weekly domestic
reports: Weekly Economic Data, Weekly Money Report and Econometric Estimates.
Mr. Hyman also writes a monthly domestic report, The Month's Best Charts. In
addition, he and his staff compile a Daily Economic Fax. These international
and domestic reports are sent to ISI's private institutional clients in the
United States and overseas. The periodical Institutional Investor, which
rates analysts and economists on an annual basis, has rated Mr. Hyman as its
"first team" economist, which is its highest rating, in each of the last
fifteen years.

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

11. ADMINISTRATOR

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

ICC supervises the day to day operations of the Fund, including the
preparation of registration statements, proxy materials, shareholder reports,
compliance with all requirements of securities laws in the states in which
the Shares are distributed and oversight of the relationship between the Fund
and its other service providers.

For its services, ICC is entitled to receive an annual fee, calculated daily
and paid monthly, in an amount equal to .20% of the Fund's average net
assets. ICC and the Advisor have agreed, on a voluntary basis, to waive a
proportionate amount of their fees, to the extent required so that the Fund's
total operating expenses do not exceed 1.25% of the Fund's average net
assets. (See "Fee Table.") For the fiscal year ended March 31, 1995, ICC
received a fee (net of fee waivers) equal to .13% of the Fund's average net
assets. ICC is also the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund. (See "Custodian, Transfer Agent,
Accounting Services.")

12. DISTRIBUTOR

Armata Financial Corp. acts as distributor of the Shares. Armata is a
broker-dealer that was formed in 1983 and is an affiliate of the
Administrator. Pursuant to a Distribution Agreement and a Plan of
Distribution (the "Plan") adopted pursuant to Rule 12b-1 under the Investment
Company Act, for the fiscal year ended March 31, 1995, Armata received a fee
equal to .40% of the average daily net assets invested in Shares. Armata

16
<PAGE>

expects to allocate on a proportional basis most of its annual distribution fee
to its investment representatives or up to all of its fee to Participating
Dealers as compensation for their ongoing shareholder services, including
processing purchase and redemption requests and responding to shareholder
inquiries.

Payments under the Plan are made as described above regardless of Armata's
actual cost of providing distribution services and may be used to pay
Armata's overhead expenses. If the cost of providing distribution services to
the Fund in connection with the sale of the Shares is less than .40% of the
average daily net assets invested in Shares for any period, Armata may retain
the unexpended portion of the distribution fee as profit. Armata or its
associated persons will from time to time and from its own resources pay or
allow additional discounts or promotional incentives in the form of cash or
other compensation (including merchandise and travel) to Participating
Dealers.

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

13. CUSTODIAN, TRANSFER AGENT, ACCOUNTING SERVICES

PNC Bank, National Association ("PNC Bank"), a national banking association
with offices at Airport Business Park, 200 Stevens Drive, Lester,
Pennsylvania 19113, acts as custodian of the Fund's assets. Barclay's
International, 75 Wall Street, New York, New York 10265, has been retained to
serve as the Fund's custodian with respect to its foreign investments.
Investment Company Capital Corp., 135 East Baltimore Street, Baltimore,
Maryland 21202, telephone (800) 882-8585, is the Fund's transfer and dividend
disbursing agent and, effective April 10, 1995, provides accounting services
to the Fund. As compensation for providing accounting services, ICC receives
from the Fund an annual fee equal to $13,000, plus a percentage of the Fund's
average daily net assets in excess of $10 million at a maximum rate of .100%
of net assets and declining at various asset levels to a minimum rate of
.001% on net assets of $1 billion or more. (See the Statement of Additional
Information.) ICC also serves as the Fund's administrator.

14. PERFORMANCE INFORMATION

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

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

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

17
<PAGE>

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

Yield quotations and performance comparisons may be useful as a basis for
comparing the Fund with other investment alternatives. However, shareholders
should realize that the Fund's current yield and any statement of performance
will fluctuate from time to time and are not necessarily representative of
the Fund's future performance. Yield and performance data should also be
considered in light of the risks associated with the Fund's investment
objective and policies.

The Fund's annual portfolio turnover rate (the lesser of the value of the
purchases or sales for the year divided by the average monthly market value
of the portfolio during the year, excluding securities with maturities of one
year or less) may vary from year-to-year, as well as within a year, depending
on market conditions. A high level of portfolio turnover may generate
relatively high transaction costs and may increase the amount of taxes
payable by the Fund's shareholders. For the fiscal years ended March 31, 1995
and March 31, 1994, the Fund's portfolio turnover rate was 104% and 219%,
respectively. However, the Fund paid no brokerage commissions during such
periods.

15. GENERAL INFORMATION

CAPITAL SHARES

The Fund was incorporated under the laws of the State of Maryland on October
20, 1992, and is authorized to issue 25 million shares of capital stock with
a par value of $.001 per share. Shares of the Fund have equal rights with
respect to voting. Voting rights are not cumulative, so the holders of more
than 50% of the outstanding Shares voting together for election of Directors
may elect all the members of the Board of Directors of the Fund. The fiscal
year end of the Fund is March 31. In the event of liquidation or dissolution
of the Fund, each Share is entitled to its portion of the Fund's assets after
all debts and expenses have been paid. The Board of Directors of the Fund is
authorized to establish additional series and classes of shares of capital
stock. Each series would evidence interests in a separate portfolio of
securities, and each class would evidence separate classes of each series of
the Fund. The Board has no present intention of establishing any additional
series or classes of the Fund.

ANNUAL MEETINGS

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

REPORTS

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

SHAREHOLDER INQUIRIES

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

FUND COUNSEL

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

<PAGE>

ISI NORTH AMERICAN GOVERNMENT BOND FUND SHARES
NEW ACCOUNT APPLICATION
- -----------------------------------------------------------------------------

Make check payable to "ISI North American Government Bond Fund Shares" and mail
with this application to:

ISI Mutual Funds
P.O. Box 419426
Kansas City, MO 64141-6426

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

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

YOUR ACCOUNT REGISTRATION (PLEASE PRINT)

__________________________________
Existing Account No., if any:

INDIVIDUAL OR JOINT TENANT

______________________________________________________________________________

First Name Initial Last Name

______________________________________________________________________________
Social Security Number

______________________________________________________________________________
Joint Tenant Initial Last Name

GIFTS TO MINORS

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

______________________________________________________________________________
Minor's Name (only one)

______________________________________________________________________________
Social Security Number of Minor

under the ____________________Uniform Gifts to Minors Act
State of Residence

<PAGE>

CORPORATIONS, TRUSTS, PARTNERSHIPS, ETC.

______________________________________________________________________________
Name of Corporation, Trust or Partnership

______________________________________________________________________________
Tax ID Number

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

MAILING ADDRESS

______________________________________________________________________________
Street

______________________________________________________________________________
City State Zip

( )
______________________________________________________________________________
Daytime Phone

STATEMENT OF INTENTION (OPTIONAL)

[ ] I agree to the Letter of Intent and Escrow Agreement set forth in the
accompanying prospectus. I intend to invest over a 13-month period in shares of
ISI North American Government Bond Fund Shares in an aggregate amount at least
equal to:
[ ]$100,000 [ ]$250,000 [ ]$500,000 [ ]$1,000,000 [ ]$2,000,000 [ ]$3,000,000

RIGHT OF ACCUMULATION (OPTIONAL)

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

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

______________________________________________________________________________

<PAGE>
DISTRIBUTION OPTIONS

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

Income Dividends

[ ] Reinvested in additional shares
[ ] Paid in Cash

Capital Gains

[ ] Reinvested in additional shares
[ ] Paid in Cash

AUTOMATIC INVESTING PLAN (OPTIONAL)

[ ] I authorize you as Agent for Automatic Investing 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: $5,000
Subsequent Investments (check one):

[ ] Monthly ($100 minimum)
[ ] Quarterly ($250 minimum)

______________________________________________________________________________
Bank Name

______________________________________________________________________________
Existing ISI North American Government Bond Fund Account No., if any

Please attach a voided check.

______________________________________________________________________________
Depositor's Signature Date

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

SYSTEMATIC WITHDRAWAL PLAN (OPTIONAL)

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

Frequency (check one):

[ ] Monthly
[ ] Quarterly (January, April, July and October)

<PAGE>

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: ________________________________________________________________________

Address: _____________________________________________________________________

______________________________________________________________________________

Bank Account No: _____________________________________________________________

Bank Account Name: ___________________________________________________________

SIGNATURE AND TAXPAYER CERTIFICATION

I have received a copy of the Fund's prospectus dated August 1, 1995. Under
penalties of perjury, I certify (1) that the number shown on this form is my
correct taxpayer identification number and (2) that I am not subject to backup
withholding as a result of a failure to report all interest or dividends, or the
Internal Revenue Service has notified me that I am no longer subject to backup
withholding. (Strike out the language in (2) if it is not correct.)
If a non-resident alien, please indicate country of residence:_______________

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

______________________________________________________________________________
Signature Date

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

For Dealer Use Only

Dealer's Name:_________________________________ Dealer Code:_________________

Dealer's Address:______________________________ Branch Code:_________________

______________________________

Representative: ______________________________ Rep. No. _________________

<PAGE>
ISI INTERNATIONAL STRATEGY AND INVESTMENT
ISI
NORTH AMERICAN
GOVERNMENT BOND
FUND SHARES
(A Class of North American
Government Bond Fund, Inc.) ISI
NORTH AMERICAN
No person has been authorized to GOVERNMENT BOND
give any information or to make FUND SHARES
representations not contained in (A Class of North American
this Prospectus in connection with Government Bond Fund, Inc.)
any offering made by this Prospectus
and, if given or made, such information
must not be relied upon as having
been authorized by the Fund or Armata. An open-end mutual fund
This Prospectus does not constitute an designed to provide a high level
offering by the Fund or Armata in any of current income, consistent
jurisdiction in which such offering may with prudent investment risk, by
not lawfully be made. investing primarily in a
portfolio consisting of
fixed-income securities issued
TABLE OF CONTENTS or guaranteed by the governments
of the United States, Canada and
Mexico.

August 1, 1995

<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Fee Table .................... 2
2. Financial Highlights ......... 3
3. Investment Objective, Policies
and Risk Factors .............. 3
4. Investment Restrictions ...... 10
5. How to Invest in the Fund .... 11
6. How to Redeem Shares ......... 13
7. Telephone Transactions ....... 13
8. Dividends and Taxes .......... 14
9. Management of the Fund ....... 15
10. Investment Advisor ........... 15
11. Administrator ................ 16
12. Distributor .................. 16
13. Custodian, Transfer Agent,
Accounting Services ........... 17
14. Performance Information ...... 17
15. General Information .......... 18
</TABLE>
PROSPECTUS

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

____________________________

NORTH AMERICAN GOVERNMENT BOND FUND, INC.

717 Fifth Avenue
New York, New York 10022

____________________________

THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT
A PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH
A PROSPECTUS FOR THE APPLICABLE CLASS, WHICH MAY BE
OBTAINED FROM YOUR PARTICIPATING DEALER OR BY WRITING
OR CALLING ARMATA FINANCIAL CORP., P.O. BOX 515, BALTIMORE,
MARYLAND 21203, (410) 727-1700.

Statement of Additional Information Dated: August 1, 1995
Relating to Prospectus Dated: August 1, 1995
of
ISI North American Government Bond Fund Shares

<PAGE>

TABLE OF CONTENTS

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

2. Investment Objective, Policies and
Risk Considerations................................ 1

3. Additional Information About
Canada and Mexico.................................... 7

4. Valuation of Shares and Redemption................... 20

5. Federal Tax Treatment of Dividends and
Distributions...................................... 21

6. Management of the Fund............................... 23

7. Investment Advisory and Other Services............... 27

8. Administration....................................... 29

9. Distribution of Fund Shares.......................... 29

10. Portfolio Transactions.............................. 31

11. Capital Stock........................................ 32

12. Semi-Annual Reports.................................. 33

13. Custodian, Transfer Agent and
Accounting Services................................ 33

14. Independent Accountants.............................. 34

15. Control Persons and Principal Holders of
Securities......................................... 34

16. Performance and Yield Computations................... 34

17. Financial Statements ................................ 36

</TABLE>

APPENDIX - Moody's Investors Service and Standard & Poor's Ratings
Definitions

<PAGE>

1. GENERAL INFORMATION AND HISTORY

North American Government Bond Fund, Inc. (the "Fund") is an open-end,
non-diversified, management investment company. Under the rules and
regulations of the Securities and Exchange Commission (the "SEC"), all mutual
funds are required to furnish prospective investors with certain information
concerning the activities of the company being considered for investment.
The Fund currently has one class of shares: ISI North American Government
Bond Fund Shares. The prospectus for such class of the Fund's shares
contains important information concerning that class of shares and the Fund,
and may be obtained without charge from Armata Financial Corp. ("Armata"),
P.O. Box 515, Baltimore, Maryland 21203, or from Participating Dealers that
offer shares of the Fund (the "Shares") to prospective investors.
Prospectuses may also be obtained from Shareholder Servicing Agents. Some of
the information required to be in this Statement of Additional Information is
also included in the Fund's current Prospectus. To avoid unnecessary
repetition, references are made to related sections of the Prospectus. In
addition, the Prospectus and this Statement of Additional Information omit
certain information concerning the Fund and its business that is contained in
the Registration Statement with respect to 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
October 20, 1992. The Fund filed a registration statement with the SEC
registering itself as an open-end, non-diversified management investment
company under the Investment Company Act of 1940, as amended (the "Investment
Company Act") and its Shares under the Securities Act of 1933 and commenced
operations on January 15, 1993.

2. INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS

Investment Objective, Policies and Risk Considerations of the Fund

The Fund's investment objective and its general investment policies are
described in the Prospectus. Additional investment restrictions are set
forth below. This Statement of Additional Information also describes other
investment practices in which the Fund may engage. These practices include
entering into repurchase agreements and purchasing securities for future
delivery. The Fund may also engage in certain other investment practices as
a means of protecting against fluctuations in foreign currencies, which
practices are described more fully below.

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

Below Investment Grade Bonds

The Fund may purchase bonds including debentures, that are rated BB by
S&P or Ba by Moody's, or that are unrated if such bonds, in the judgment of
the Fund's investment advisor, International Strategy and Investment Inc.
("ISI" or the "Advisor"), meet the quality criteria established by the Board
of Directors. These bonds are generally known as "junk bonds." These
securities may trade at substantial discounts from their face values.
Appendix A to this Statement of Additional Information sets forth a
description of the S&P and Moody's rating categories, which indicate the
rating agency's opinion as to the probability of timely payment of interest
and principal. Generally, securities which are rated lower than BBB by S&P

1
<PAGE>

or Baa by Moody's are described as below investment grade. Securities rated
lower than investment grade are of a predominately speculative character and
their future cannot be considered well-assured. The issuer's ability to make
timely payments of principal and interest may be subject to material
contingencies. Securities in the lowest rating categories may be unable to
make timely interest or principal payments and may be in default and in
arrears in interest and principal payments.

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

Investing in higher yield, high risk, lower rated bonds entails
substantially greater risk than investing in investment grade bonds,
including not only credit risk, but potentially greater market volatility and
lower liquidity. Yields and market values of high yield bonds will fluctuate
over time, reflecting not only changing interest rates but also the bond
market's perception of credit quality and the outlook for economic growth.
When economic conditions appear to be deteriorating, lower rated bonds may
decline in value due to heightened concern over credit quality, regardless of
prevailing interest rates. In addition, in adverse economic conditions, the
liquidity of the secondary market for junk bonds may be significantly
reduced, and there may be significant disparities in the prices quoted for
high yield bonds by various dealers. In addition, adverse economic
developments could disrupt the high yield market, affecting both price and
liquidity, and could also affect the ability of issuers to repay principal
and interest, thereby leading to a default rate higher than has been the case
historically.

Yields and market values of high yield bonds will fluctuate over time,
reflecting not only changing interest rates but the bond market's perception
of credit quality and the outlook for economic growth. When economic
conditions appear to be deteriorating, lower rated bonds may decline in value
due to heightened concern over credit quality, regardless of prevailing
interest rates.

In adverse economic conditions, the liquidity of the secondary market
for high yield bonds may be significantly reduced. Even under normal
conditions, the market for high yield bonds may be less liquid than the
market for investment grade corporate bonds. There are fewer securities
dealers in the high yield market and purchasers of high yield bonds are
concentrated among a smaller group of securities dealers and institutional
investors. In periods of reduced market liquidity, the market for high yield
bonds may become more volatile and there may be significant disparities in
the prices quoted for high yield securities by various dealers. Under
conditions of increased volatility and reduced liquidity, it would become
more difficult for the Fund to value its portfolio securities accurately
because there might be less reliable, objective data available.

Finally, prices for high yield bonds may be affected by legislative and
regulatory developments.

<PAGE>

In addition, from time to time, Congress has considered legislation to
restrict or eliminate the corporate tax deduction for interest payments or to
regulate corporate restructuring such as takeovers, mergers or leveraged buy
outs. Such legislation may significantly depress the prices of outstanding
high yield bonds.

Repurchase Agreements

The Fund may agree to purchase U.S. Treasury securities, Canadian
Treasury securities or Mexican Treasury securities from financial
institutions, such as banks and broker-dealers, subject to the seller's
agreement to repurchase the securities at an established time and price.
Repurchase agreements related to Canadian Treasury securities and Mexican
Treasury securities will be of a duration of no more than one day.
Repurchase agreements related to U.S. Treasury Securities will be of a
duration of no more than seven days from the date of purchase. The
collateral for such repurchase agreements will be held by the Fund's
custodian or a duly appointed sub-custodian. The Fund will enter into
repurchase agreements only with banks and broker-dealers that have been
determined to be creditworthy by the Fund's Board of Directors under criteria
established with the assistance of the Advisor. The seller under a
repurchase agreement would be required to maintain the value of the
securities subject to the repurchase agreement at not less than the
repurchase price. The Fund does not bear the risk of a decline in value of
the underlying securities unless the seller defaults under its repurchase
obligation. 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 obligation. 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. There
are several additional risks related to repurchase agreements with respect to
treasury securities issued by foreign governments. First, although the Fund
will only enter into repurchase agreements collateralized by Canadian or
Mexican Treasury Securities that initially have a value at least equal to the
repurchase price, under certain circumstances, it might be possible that the
value of the collateral being held with respect to any such repurchase
agreement would be reduced to such an extent that the agreement would be
undercollateralized. Second, in the event of default or bankruptcy of the
selling institution, enforcement of the Fund's rights would be subject to
additional difficulties and delays due to legal considerations of the
applicable foreign country.

Currency and Interest Rate Hedging Transactions

To hedge against adverse price movements in the currencies in which
securities held in the Fund's portfolio are denominated (as well as the
denominated currencies of the securities it might wish to purchase) the Fund
may engage in transactions in forward foreign currency contracts, options on
currencies, and futures contracts and options on futures contracts on
currencies. The Fund will not engage in any such transactions in excess of
the value of the securities denominated or payable in the foreign currency
which are then held in the Fund's portfolio.

Currently, only a limited market exists for hedging transactions
relating to the Mexican peso. This may limit the Fund's ability to hedge
effectively its investments in Mexico. Hedging against a decline in the
value of a currency does not eliminate fluctuations in the prices of
portfolio securities or prevent losses if the prices of such securities
decline. Such transactions also limit the opportunity for gain if the value

3
<PAGE>

of the hedge currency should rise. Moreover, it may not be possible for the
Fund to hedge against a devaluation that is so generally anticipated that the
Fund is not able to contract to sell the currency at a price above the
devaluation level it anticipates.

The Fund will enter into forward contracts under various circumstances.
When the Fund enters into a contract for the purchase or sale of a security
denominated in either the Canadian dollar or Mexican peso ("foreign currency"),
it may, for example, desire to "lock in" the price of the security in U.S.
dollars, Canadian dollars or Mexican pesos. By entering into a forward contract
for the purchase or sale, for a fixed amount of dollars or other currency, of
the amount of foreign currency involved in the underlying security transactions,
the Fund will be able to protect itself against a possible loss resulting from
an adverse change in the relationship between the U.S. dollar or other currency
which is being used for the security purchase and the foreign currency in which
the security is denominated during the period between the date on which the
security is purchased or sold and the date on which payment is made or received.

In addition, the Fund may enter into forward contracts with respect to
currencies in which certain of its portfolio securities are denominated and
on which options have been written. (See "Futures Contracts and Options"
below.)

If the currency in which the Fund's portfolio securities (or anticipated
portfolio securities) are denominated rises in value with respect to the
currency which is being purchased (or sold), then the Fund will have realized
fewer gains than had the Fund not entered into the forward contracts.
Moreover, the precise matching of the forward contract amounts and the value
of the securities involved will not generally be possible, because the future
value of such securities in foreign currencies will change as a consequence
of market movements in the value of those securities between the date the
forward contract is entered into and the date it matures. The Fund is not
required to enter into such transactions with regard to its foreign currency-
denominated securities and will not do so unless deemed appropriate by the
Advisor. The Fund generally will not enter into a forward contract with a
term of greater than one year, although it may enter into forward contracts
for periods of up to five years. The Fund may be limited in its ability to
enter into hedging transactions involving forward contracts by the Code
requirements relating to qualifications as a regulated investment company.
(See "Federal Income Tax Treatment of Dividends and Distributions.")

Futures Contracts and Options. The Fund may purchase and sell futures
contracts that are currently traded, or may in the future be traded, on U.S.
and foreign commodity exchanges on such underlying fixed-income securities as
U.S. Treasury bonds, notes, and bills and/or any Canadian or Mexican
currencies ("currency" futures) and on such indexes of U.S. or foreign fixed-
income securities as may exist or come into being, such as the Moody's
Investment Grade Corporate Bond Index ("index" futures). As a futures
contract purchaser, the Fund incurs an obligation to take delivery of a
specified amount of the currency underlying the contract at a specified time
in the future for a specified price. As a seller of a futures contract, the
Fund incurs an obligation to deliver the specified amount of the underlying
currency at a specified time in return for an agreed upon price.

The Fund may purchase and write call and put options on futures
contracts which are traded on an exchange and enter into closing transactions
with respect to such options to terminate an existing position.

While the futures contracts and options transactions to be engaged in by
the Fund for the purpose of hedging the Fund's portfolio securities are not
speculative in nature, there are risks inherent in the use of such
instruments. One such risk is that the Advisor could be incorrect in its
expectations as to the direction or extent of various interest rate or price
movements or the time span within which the movements take place. For
example, if the Fund sold futures contracts for the sale of securities in
4

<PAGE>

anticipation of an increase in interest rates, and then interest rates went
down instead, causing bond prices to rise, the Fund would lose money on the
sale.

Another risk which will arise in employing futures contracts to protect
against the price volatility of portfolio securities is that the prices of
securities, currencies and indexes subject to futures contracts (and thereby
the futures contract prices) may correlate imperfectly with the behavior of
the U.S. dollar cash prices of the Fund's portfolio securities and their
denominated currencies.

Purchase of When-Issued Securities

From time to time, in the ordinary course of business, the Fund may
purchase securities, at the current market value of the securities, on a
forward commitment or "when issued" basis. When such transactions are
negotiated, the price is fixed at the time of the commitment, 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, or other high quality liquid debt 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 liquid
debt securities will be added to the account when necessary. While the Fund
purchases securities on a forward commitment or "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. The securities so
purchased or sold are subject to market fluctuation and no interest accrues
to the purchaser during this period. At the time of delivery of the
securities, their value may be more or less than the purchase or sale price.

Lending of Portfolio Securities

Consistent with applicable regulatory requirements, the Fund may lend
its portfolio securities to brokers, dealers and other financial
institutions, provided that such loans are at all times secured by cash or
money market instruments, which are maintained in a segregated account
pursuant to applicable regulations and that are at least equal to the market
value, determined daily, of the loaned securities. As with any extensions of
credit, there are risks of delay in recovery and in some cases even loss of
rights in the collateral should the borrower of the securities fail
financially. In determining whether to lend securities to a particular
borrower, the Advisor (subject to review by the Fund's Board of Directors)
will consider all relevant facts and circumstances, including the
creditworthiness of the borrower. While securities are on loan, the borrower
will pay the Fund any income earned thereon and the Fund may invest any cash
collateral in portfolio securities, thereby earning additional income. The
Fund will not lend portfolio securities in excess of 20% of the value of its
total assets. The Board of Directors will monitor the Fund's lending of
portfolio securities.

Investment Restrictions

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

1. With respect to 50% of its net assets, invest more than 5% of
its total assets in the securities of any single issuer (the U.S.
Government and its agencies and instrumentalities are not considered an
issuer for this purpose);

5
<PAGE>

2. With respect to 50% of its net assets, 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 (the U.S.
Government and its agencies and instrumentalities are not considered an
issuer for this purpose);

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

4. Purchase or sell commodities or commodities contracts or
futures contracts, except that the Fund may enter into forward foreign
currency exchange contracts, futures contracts and options in accordance
with its investment objective and policies;

5. Act as an underwriter of securities within the meaning of the
federal securities laws;

6. Issue senior securities, except that the Fund may enter into
forward foreign currency contracts and futures contracts in accordance
with its investment objective and policies;

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

8. Effect short sales of securities;

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

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

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

12. Invest in shares of any other investment company registered
under the Investment Company Act. (If shareholders voted to approve
investments in shares of any other investment company, the Fund will
incur sales charges, management fees and other expenses in connection
with any such investment, which charges would be a Fund expense and
accordingly might have some impact on the Fund's net asset value);

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

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

15. Invest in puts or calls, or any combination thereof, except
that the Fund may enter into options, forward foreign currency contracts
and futures contracts, in accordance with its investment objective and
policies; or

<PAGE>

16. 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. For
the purpose of the foregoing calculations, warrants acquired by the Fund
in units or attached to securities will be deemed to be without value
and therefore not included within the preceding limitations.

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

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

2. Invest in real estate limited partnerships; or

3. Invest in oil, gas or mineral leases.

3. ADDITIONAL INFORMATION ABOUT CANADA AND MEXICO

The information in this section is based on material obtained by the
Fund from various Canadian and Mexican governmental and other economic
sources believed to be accurate but has not been independently verified by
the Fund or the Advisor. It is not intended to be a complete description of
Canada or Mexico, the Canadian and Mexican economies, or the consequences of
investing in Mexican and Canadian fixed-income securities.

Additional Information About Canada

Area and Population

Canada is the second largest country in the world in terms of land mass,
with an area of 3.85 million square miles of which approximately 291,580
square miles are covered by fresh water. The developed portion is about one-
third of the total area, the occupied farm land is about 8% and the
productive forest land is about 27% of the total area.

The population as of July 1, 1994 was estimated to be 29,248,100. As of
July 1, 1993, approximately 61% of Canada's population lived in its
metropolitan areas, of which Toronto, Montreal and Vancouver are the largest.

Government

Canada is a constitutional monarchy with Queen Elizabeth II of the
United Kingdom its nominal head of state. The Queen is represented by the
Canadian governor-general, appointed on the recommendation of the Canadian
prime minister. Canada's government has a federal structure, with a federal
government and ten provincial governments. Its Parliament consists of a
House of Commons and a Senate. Members of the House of Commons are elected
by Canadian citizens over 18 years of age. Senators are appointed on a
regional basis by the Prime Minister. The federal government is headed by
the Prime Minister who is chosen from the party that has won the majority of

7
<PAGE>

seats in the House of Commons. The provincial governments each have a
Legislative Assembly and a Premier.

Legislative authority resides in the federal parliament and the ten
provincial legislative assemblies. Provinces have extensive power with
specific areas of jurisdiction. The federal government has defined areas of
jurisdiction and the power to act in areas declared by Parliament to be for
the general advantage of Canada. This general power has been used to justify
federal action in certain areas of provincial jurisdiction. Concurrent
federal and provincial jurisdiction exists in certain matters, including
agriculture, immigration and pensions. The powersharing issue between the
federal government and provincial governments has been contentious and has
proven to be a central issue in the process of constitutional reform.

Politics

Since World War II, the federal government has been formed by either the
Liberal Party or the Progressive Conservative Party. In October 1993, the
Liberal Party under the leadership of Mr. Jean Chretien, won 178 of the 295
seats in the Canadian House of Commons ending nine years of rule by the
Progressive Conservative Party. He remains popular and unless the Liberal
Party calls for an earlier election, the next general election will take
place in October 1998.

Canada has had three major developments regarding unity and
constitutional reform in four years. The first two major developments were
the rejection of the Meech Lake Agreement in 1990 and the Charlottetown
Accord in 1992. Those reforms would have given Quebec constitutional
recognition as a distinct society, transferred powers from the federal to the
provincial governments and reformed the Senate by providing for more equal
representation among the provinces.

The third major development is the possibility of Quebec's independence.
On September 12, 1994, the Quebec separatist party, Parti Quebecois under the
leadership of Jacques Parizeau won 77 seats in the provincial election with
44.7% of the vote. The Liberal Party won 47 seats with 44.3% of the vote.
The Parti Quebecois' agenda includes a call for a referendum, sometime in
1995, supporting independence. On February 6, 1995, the first of 15 regional
commissions started a month of consultations with regard to a draft law
regarding independence. The commissions are expected to produce a joint-
report which will provide the basis for amendments to the draft law. This
would be followed by the referendum campaign and vote. In 1980, Quebec voted
against independence by a margin of 60% to 40%. Polls indicate that there is
not enough support to pass a referendum for independence. Furthermore, on
February 13, 1995, in what had been seen as a preview to the referendum
Liberal Party candidates defeated Parti Quebecois candidates in two
parliamentary by-elections in Quebec.

Mr. Parizeau has also suggested that he might introduce a series of
referendums until separatism wins, instead of one all-encompassing
referendum. The Quebec Government's proposals suggest that Quebec would be
able to keep the Canadian dollar as its currency, share its armed forces with
Canada and be a partner of Canada with regard to international agreements and
alliances. The actual mechanics of separation, if it were to occur, and the
possible effects on Canada's economy are still not clear. Prime Minister
Chretien has stated that the national government would prevail in a vote on
separatism. Still, until the vote on the referendum, and for the foreseeable
future, Quebec's position within Canada will continue to dominate political
debate. Withdrawal of Quebec from the federation could have a material
adverse effect on the Canadian economy and the value of Canadian fixed-income
securities in which the Fund invests.

<PAGE>

Monetary and Banking System

The central bank of Canada is the Bank of Canada. Its main functions
are to advise on the formulation and execution of monetary policy,
supervising commercial banks acting as a fiscal agent to the federal
government, and managing the foreign exchange fund. The currency unit of
Canada is the Canadian dollar. Canada does not impose foreign exchange
controls on capital receipts or payments by residents or non-residents.

Economic Information Regarding Canada

Canada and the United States are each other's largest trading partners
and, thus, the Canadian and U.S. economies are to a significant degree
linked. On January 2, 1988, Canada and the United States signed the Free
Trade Agreement (the "FTA"), which was ratified by the Parliament of Canada
and the United States Senate. The FTA, which was to be phased in over a ten-
year period that began January 1, 1989, was designed to gradually remove
tariffs imposed on Canada-U.S. trade for all industrial and agricultural
products and to create effective procedures for the resolution of trade
disputes. In the summer of 1991, the United States, Mexico and Canada began
negotiating the North American Free Trade Agreement ("NAFTA"). NAFTA was
signed on December 17, 1992. As scheduled, NAFTA became effective at the end
of 1993. On December 30, 1993, after the legislatures in the United States
and Mexico had ratified NAFTA, the Canadian government announced that it had
proclaimed NAFTA into law and had exchanged the written notifications with
the United States and Mexico needed to bring NAFTA into force. As a result,
NAFTA effectively replaced the FTA. When fully implemented, NAFTA is
designed to create a North America Free Trade Area, expand the flow of goods,
services and investment and eventually eliminate tariff barriers, import
quotas and technical barriers among Canada, the United States and Mexico.

Recent Developments

In its first budget, presented in February 1994, the Liberal Party
introduced new spending cuts to reduce Canada's budget deficit. Canada's
budget deficit is one of the largest for any of the OECD members. For the
fiscal year 1994-95, its budget deficit is estimated to be 5.5% of GDP
compared to 2.5% for the United States. The Government has stated its
commitment to reduce the deficit to approximately 4.2% of GDP in the 1995-
1996 fiscal year and to 3% of GDP in the 1996-1997 fiscal year. While the
Government's budget deficit objectives can be achieved with continued
economic growth and lower interest rates, they also indicate a further rise
in the debt-to-GDP ratio which would continue to grow until the 1996-1997
fiscal year.

In addition to the growth of the federal government deficit, provincial
government debt has risen rapidly. Developments, including increased
spending on social services at the provincial level, were responsible for a
significant amount of the growth of public debt from 1990-1992. In response
to the increase in provincial debt, a number of rating agencies downgraded
some provincial debt ratings. All provinces now have plans to balance their
respective budgets. This may prove to be difficult considering the increase
in interest rates and the federal government's plan to reduce certain
transfers to the provinces.

During 1994, despite growing output and low inflation, concern over the
country's deficit and the uncertainty associated with Quebec's status within
Canada has lead to a weakening of its currency and higher interest rates.
These higher interest rates have threatened the federal deficit reduction
target. In December 1994, the Canadian Parliament proposed legislation
increasing taxes by C$1.1 billion and reducing spending by C$8.7 billion over
the next two years. It is still not clear whether these measures, if
enacted, will have the effect of meeting the federal deficit reduction

9
<PAGE>

targets. For the period from January 15, 1993 (inception of the Fund)
through June 30, 1995, the Canadian Dollar decreased in value compared to the
U.S. Dollar by approximately 7%. On January 20, 1995, the Canadian dollar
fell to 70.2, its lowest rate in almost nine years and close to its record
low of 69.2. The Bank of Canada responded by increasing rates on Treasury
bills and selling U.S. dollars. The Canadian dollar has increased in value
compared to the U.S. dollar from 70.2 on January 20, 1995 to 73.8 on July 10,
1995.

The following provides certain statistical and related information
regarding historical rates of exchange between the U.S. Dollar and the
Canadian Dollar, information concerning inflation rates, historical
information regarding the Canadian gross domestic product and information
concerning yields on certain Canadian Government Securities. Historical
figures are not necessarily indicative of future fluctuations.

Currency Exchange Rates

The exchange rate between the U.S. Dollar and the Canadian Dollar is at
any moment related to the supply of and demand for the two currencies, and
changes in the rate result over time from the interaction of many factors
directly or indirectly affecting economic conditions in the United States and
Canada, including economic and political developments in other countries and
government policy and intervention in the money markets.

Despite the recent drop in value of the Canadian dollar, the range of
fluctuation in the U.S. Dollar/Canadian Dollar exchange rate has been
narrower than the range of fluctuation between the U.S. Dollar and most other
major currencies since the major developed country currencies were permitted
to float freely against each other. However, the range that occurred in the
past is not necessarily indicative of fluctuations in that rate that may
occur over time which may be wider or more confined than the range that
occurred over an historic period of comparable length. Future rates of
exchange cannot be predicted, particularly over extended periods of time.

The following table sets forth, for each year indicated, the annual
average of the daily noon buying rates in New York for cable transfers in
U.S. Dollars for one Canadian Dollar as certified by the Federal Reserve Bank
of New York:
U.S.Dollars
-----------

1981 0.83
1982 0.81
1983 0.81
1984 0.77
1985 0.73
1986 0.72
1987 0.75
1988 0.81
1989 0.84
1990 0.86
1991 0.87
1992 0.83
1993 0.78
1994 0.73

Source: Board of Governors of the Federal Reserve System, Federal
Reserve Bulletin.

<PAGE>

Inflation Rate of the Canadian Consumer Price Index

Inflation has remained below 2% since 1991 and the Government and the
Bank of Canada have reaffirmed the target of holding inflation inside a band
of 1-3% for 1995.

The following table sets forth for each year indicated the average
change in the Canadian consumer price index for the twelve months ended
December 31, of such year (1986=100).

National Consumer
Price Index
-----------------
(percent)

1981 12.4
1982 10.9
1983 5.7
1984 4.4
1985 3.9
1986 4.2
1987 4.4
1988 4.0
1989 5.0
1990 4.8
1991 5.6
1992 1.5
1993 1.8

Source: Bank of Canada Review, Winter 1994-1995; Statistics
Canada.

Canadian Gross Domestic Product

The following table sets forth Canada's gross domestic product for the
years 1981 through 1993 at historical and constant prices.

Change from
Gross Domestic Gross Domestic Prior Year at
Product Product at 1986 Prices Constant Prices
-------------- ---------------------- ---------------
(percent)

(millions of Canadian Dollars)

1981. . . . . . . . . .355,994 440,127 3.7
1982. . . . . . . . . .374,442 425,970 (3.2)
1983. . . . . . . . . .405,717 439,448 3.2
1984. . . . . . . . . .444,735 467,167 6.3
1985. . . . . . . . . .477,988 489,437 4.8
1986. . . . . . . . . .505,666 505,666 3.3
1987. . . . . . . . . .551,597 526,730 4.2
1988. . . . . . . . . .605,906 552,958 5.0
1989. . . . . . . . . .650,748 566,486 2.4
1990. . . . . . . . . .669,467 565,155 (0.2)
1991. . . . . . . . . .674,766 554,735 (1.8)
1992. . . . . . . . . .688,391 558,165 0.6
1993. . . . . . . . . .711,658 570,541 2.2

<PAGE>

Source: Bank of Canada Review, Winter 1994-1995; Statistics Canada

Yields on Canadian Government Treasury Bills

The following table sets forth the average monthly yield on 3-month and
6-month government of Canada Treasury bills for 1994.

Treasury Bills
1994 3 Months 6 Months
---- -------- --------
January 3.63% 3.71%
February 3.84 4.17
March 5.47 6.04
April 5.86 6.28
May 6.14 6.55
June 6.38 7.29
July 5.76 6.64
August 5.52 5.79
September 5.20 5.69
October 5.39 6.04
November 5.86 6.52
December 7.14 8.12

Source: BANK OF CANADA REVIEW, Winter 1994-1995; Statistics Canada.

Additional Information About Mexico

Area and Population

The United Mexican States ("Mexico"), a nation formed by 31 states and a
Federal District (Mexico City), is the fourteenth largest nation in the world
and the third largest in Latin America, occupying a territory of 759,529
square miles. To the north, the country shares a border with the United
States of America, and to the south it has borders with Guatemala and Belize.
Its coastline extends over 6,304 miles along both the Gulf of Mexico and the
Pacific Ocean. Mexico is the second most populous nation in Latin America,
with an estimated population of 91.6 million. Mexico's three largest cities
are Mexico City, Guadalajara and Monterrey, with estimated populations in
1990 of 14.9 million, 2.8 million and 2.5 million, respectively.

Government

The present form of government was established by the Constitution,
which took effect on May 1, 1917. The Constitution established Mexico as a
Federal Republic and provides for the separation of the executive,
legislative and judicial branches. The President and the members of Congress
are elected by popular vote of Mexican citizens over 18 years of age.

<PAGE>

Executive authority is vested in the President, who is elected for a
single six-year term. The executive branch consists of 17 Ministries, the
Attorney General, the Federal District Department and the Attorney General of
Mexico City.

Legislative authority is vested in the Congress, which is composed of
the Senate and the Chamber of Deputies. Senators serve a six-year term.
Deputies serve a three-year term, and neither Senators nor Deputies may serve
consecutive terms in the same chamber. The Senate has 128 members, two for
each state and two for the Federal District. The Chamber of Deputies has 500
members, of whom 300 are elected by direct vote from the electoral districts,
and 200 are selected by a system of proportional representation. The
Constitution provides that the President may veto bills and that Congress may
override such vetoes with a two-thirds majority of each Chamber. Judicial
authority is vested in the Supreme Court of Justice, circuit and district
courts. The Supreme Court has 11 members, each of whom holds office for a
maximum period of fifteen years. Its president is elected every four years.

Politics

The Partido Revolucionario Institucional ("PRI") is the dominant
political party in Mexico. Since 1929 the PRI has won all presidential
elections and has held a majority in General Congress. Until 1989 it had
also won all of the state governorships. The oldest opposition party in
Mexico is the Partido Accion Nacional ("PAN"). The third major party in
Mexico is the Partido de la Revolucion Democratica ("PRD").

On August 21, 1994, elections were held to select a new President of
Mexico for a six-year term beginning on December 1, 1994. In addition,
elections were held for three-quarters of the Senate and the entire Chamber
of Deputies. The candidate of the PRI, Ernesto Zedillo Ponce de Leon, won
the Presidential election with 50.2% of the votes, the candidate of the PAN
was second with 26.7% of the votes and the PRD candidate was third with 17.1%
of the votes. With respect to the Congressional elections, the PRI
maintained its majority in both chambers, with 93 seats in the Senate and 300
seats in the Chamber of Deputies. The PAN has the second largest
representation with 25 seats in the Senate and 119 seats in the Chamber of
Deputies and the PRD the third largest representation with 10 seats in the
Senate and 71 seats in the Chamber of Deputies.

In January 1994, an area in the southern State of Chiapas experienced
civil unrest, including armed attacks on several villages. The Mexican
government responded immediately by providing support to the local
authorities, agreeing to accelerate the disbursement of expenditures in
connection with social programs that were provided for in the 1994 budget and
publicly offering to negotiate a peaceful resolution that would address the
underlying concerns of the local population. Despite the Mexican
government's attempt to resolve the situation, the process has been slow and
has not resulted in an agreement.

In addition to the civil unrest in Chiapas, certain national
developments have led to disillusionment among the electorate with the
institutions of government. These events were the assassination of Luis
Donaldo Colosio, the likely successor to former President Salinas and the
murder of Mr. Jose Francisco Ruiz Massieu, a high-ranking PRI official.

Continuing the reform of the political system, and in response to the
civil unrest in Chiapas and the economic turmoil facing Mexico resulting from
the devaluation of the Peso (as described below), the Mexican Government and
leaders of the PRI signed an agreement with the opposition parties on January
17, 1995, to continue to democratize the country's political system. Changes
would include controls on fund-raising and campaign spending, full access to
the media for the opposition parties and the complete independence of the
federal elections agency.

<PAGE>

During 1995, the PRI suffered election defeats in local elections for
Guanajuato and Jalisco against the PAN. Post-electoral problems have arisen
in the elections in Chiapas, Tabasco and Yucatan that were won by the PRI.

Money and Banking

Banco de Mexico, chartered in 1925, is the central bank of Mexico. It
is the Federal Government's primary instrument for the execution of monetary
policy and the regulation of currency and credit. It is authorized by law to
regulate interest rates payable on time deposits, to establish minimum
reserve requirements for credit institutions and to provide discount
facilities for certain types of bank loans. The currency unit of Mexico is
the New Peso. Mexico repealed its exchange control rules in 1991 and now
maintains only a market exchange rate.

A constitutional amendment relating to Banco de Mexico's activities and
role within the Mexican economy became effective on August 23, 1993. The
amendment's purpose was to reinforce the independence of Banco de Mexico,
which may in the future act as a counterbalance to the executive and
legislative branches in fiscal policy matters. The amendment significantly
strengthens Banco de Mexico's authority with respect to monetary policy and
related activities and the regulation of the financial services industry. On
April 1, 1994, a new law governing the activities of Banco de Mexico became
effective. The new law was intended to put into effect the greater degree of
autonomy granted to Banco de Mexico under the constitutional amendment
described above and also established a Foreign Exchange Commission charged
with determining the nation's exchange rate policies. Since the Peso's
devaluation at the end of 1994, when it lost almost 50% of its value, it has
been allowed to float against other currencies. In an effort to provide more
certainty regarding the value of the New Peso, Banco de Mexico approved the
creation of a New Peso futures market on the Chicago Mercantile Exchange.

Trade Reform - NAFTA

Mexico has been a member of the General Agreement on Tariffs and Trade
("GATT") since 1986 and has become a member of the Organization for Economic
Cooperation. Mexico has also entered into NAFTA with the United States and
Canada. In addition, Mexico signed a framework for a free trade agreement in
1992 with Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua and
entered into definitive free trade agreements with Bolivia, Chile, Colombia
and Venezuela. Mexico has also signed tax treaties with Canada, France,
Germany, Ireland, the Netherlands, Spain, Sweden, Switzerland, South Korea,
Singapore, the United Kingdom and the United States.

In connection with the implementation of NAFTA, amendments to several
laws relating to financial services (including the Banking Law and the
Securities Market Law) became effective on January 1, 1994. These measures
permit non-Mexican financial groups and financial intermediaries, through
Mexican subsidiaries, to engage in various activities in the Mexican
financial system, including banking and securities activities. Additional
amendments published in February and May of 1995 permit foreign investors to
(i) acquire a majority position in holding affiliate companies, (ii) directly
hold up to 49% of the capital stock of bank holding companies and full
service banking institutions and up to 30% of the capital stock of brokerage
firms and securities specialists, and (iii) participate in sectors that
previously had been reserved for Mexican Nationals, such as television and
radio broadcasting. However, investment in corporations and partnerships
engaged in certain industries, such as oil, railroad and broadcast television
are exclusively reserved for Mexican citizens and/or government. In
addition, other amendments permit private Mexican companies to participate in
certain industrial activities that were previously reserved for the Mexican
government, such as railroads and the transportation, storage and

<PAGE>

distribution of gas. In such activities, foreign investors may hold up to
49% and 100% respectively, of the capital stock of such Mexican companies.
NAFTA had no direct effect on the Mexican securities being purchased by the
Fund.

Economic Information Regarding Mexico

In February 1990, Mexico became the first Latin American country to
reach an agreement with external creditor banks and multi-national agencies
under the U.S. Treasury's approach to debt reduction known as the "Brady
Plan." As part of the Brady Plan, commercial banks and Mexico agreed to debt
reduction and new financing in a set of agreements comprising the 1989-1992
Financing Package. The implementation of this package resulted in a
substantial reduction in Mexico's foreign debt and debt service obligations.
On June 1, 1992, Mexico achieved a further reduction in its foreign public
debt of $7.17 billion to a total of approximately $73.5 billion. At December
31, 1992, December 31, 1993 and December 31, 1994, the net amount of the debt
was $75.755*/ billion, 78.747*/ billion and $85.436*/ billion, respectively.

The following provides some statistical and related information
regarding historical rates of exchange between the U.S. Dollar and the
Mexican Peso, information concerning inflation rates, historical information
regarding the Mexican gross domestic product and information concerning
interest rates on certain Mexican government securities. Historical figures
are not necessarily indicative of future fluctuations.

Currency Exchange Rates

From late 1982 to November 11, 1991, Mexico maintained, a dual foreign
exchange rate system, with a "controlled" rate and a "free market" rate. The
controlled exchange rate applied to certain imports and exports of goods,
advances and payments of registered foreign debt, and funds used for payments
of royalties and technical assistance under registered agreements requiring
such payments. The free market rate was used for all other transactions not
expressly falling within the category of transactions which permit parties to
have access to U.S. Dollars at the controlled rate. The dual system assisted
in controlling the value of the Mexican Peso, particularly from 1983 to 1985.
In later years the difference between the two rates was not significant.
Mexico has now repealed the controlled rate.

Under economic policy initiatives implemented since December 1987, the
Mexican government introduced a schedule of gradual devaluations of the
Mexican Peso which initially amounted to an average depreciation of the
Mexican Peso against the U.S. Dollar of one Mexican Peso per day. The
extended initiatives include an adjustment in the scheduled devaluation rate
of the Mexican Peso against the U.S. Dollar. On May 28, 1990, the Mexican
Peso began devaluing by an average of .80 Mexican Pesos per day instead of
one Mexican Peso per day. On November 12, 1990 this average was decreased to
.40 Mexican Pesos per day and on November 11, 1991 the daily devaluation rate
was lowered to .20 Mexican Pesos per day.

In 1982, Mexico imposed strict foreign exchange controls which shortly
thereafter were relaxed and were eliminated in 1991. There is no assurance
that future regulatory actions in Mexico would not affect the Fund's ability
to acquire or hold U.S. Dollar denominated securities or otherwise obtain
U.S. Dollars. On October 21, 1992 the maximum rate at which the Mexican Peso
can devalue against the U.S. dollar was accelerated to .40 Mexican Pesos per
day.

- ------------
*/Source: Banco de Mexico.

<PAGE>

In August 1976, the Mexican government established a policy of allowing
the Mexican Peso to float against the U.S. Dollar and other currencies.
Under this policy, the value of Mexican Peso consistently declined against
the U.S. Dollar. On January 1, 1993, the Mexican government introduced a new
currency, the New Peso. Each New Peso was worth 1,000 old Mexican Pesos.
The New Peso is designated by the symbol "N$." The Mexican government has
stated that the New Peso is not a devaluation but a move to simplify the
Mexican currency.

Recent Developments

On December 20, 1994, the Mexican Government announced a new policy that
would allow a more substantial yet still controlled devaluation of the
Mexican Peso. On December 22, 1994 the Mexican Government announced that it
would not continue with the policy announced two days earlier and it would
instead permit the Peso to float against other currencies, resulting in a
continued decline against the U.S. Dollar. On December 23, 1994 the exchange
rate was 4.67 New Pesos to the U.S. Dollar, and on January 4, 1995 it had
fallen further to 5.57 New Pesos to the U.S. Dollar.

On January 12, 1995, President Clinton proposed a plan to help stabilize
the Mexican economy. Under terms of the proposal, the United States would
guarantee $40 billion in new loans to Mexico to be used in the event of a
default on outstanding bonds or loans. In response to President Clinton's
plan, the Peso gained approximately 8% in one day against the U.S. Dollar.
During the next two weeks as it appeared the plan would not be approved by
Congress, the Peso fell again, reaching a new low on January 31, 1995 of 6.35
Pesos to the U.S. Dollar or an effective devaluation of approximately 40%
since December 20, 1994. In February, March, April, May and June, 1995 the
exchange rate of the New Peso to the U.S. Dollar was: 5.83, 6.81, 6.78, 6.17,
and 6.30, respectively, to 1. On July 7, 1995, the exchange rate of the
Mexican New Peso to the U.S. Dollar was 6.17 to 1.

With foreign exchange reserves down from an estimated $30 billion in
February 1994 to $6 billion in December 1994 and $3.5 billion at the end of
January 1995, there existed significant concern about the possibility of a
Mexican government default on the approximately $11 billion in Tesobonos
maturing from February to April 1995. Tesobonos are U.S. dollar-denominated
Mexican Government bonds with a face value of $1,000. The purchase price of
a Tesobono is the Peso equivalent of $1,000 on the day the bond is acquired.
On the date the bond matures, an amount equal to the principal plus interest
will be paid in Pesos at the exchange rate in effect on the date the bond
matures.

During January 1995, with foreign investors estimated to be holding 70%
of outstanding Cetes and 80% of outstanding Tesobonos, it became imperative
that Mexico restore foreign investor confidence. The obligation to repay the
Tesobonos was a significant cause of Mexico's economic turmoil, both because
of the size of the debt and the continuing devaluation of the Peso. On
January 24, 1995, demand for Tesobonos fell dramatically from the previous
week, with interest rates rising to more than 26%. During this same time,
the prices of Mexican Brady Bonds had decreased by approximately 23%.

On January 31, 1995, President Clinton announced a new plan that did not
require Congressional approval in order to be implemented. Under the plan,
the United States guaranteed a line of credit of up to $20 billion to Mexico.
Mexico has an obligation to repay the loan within three to five years.
Moreover, the International Monetary Fund has provided $17.8 billion in five-
year loans, the Federal Reserve has made available to Mexico $6 billion in
short-term loans, and the Bank for International Settlements has provided $10
billion in short-term loans to Mexico. In addition, Canada has pledged $1

16
<PAGE>

billion in loans and several Latin American nations pledged $1 billion in
credit to Mexico. Under the terms of the plan, Mexico has an obligation to
pay fees for the use of the loan guarantees and has pledged oil revenues as
collateral for loan guarantees from the United States.

During the first six months of 1995, Mexico has repaid more than U.S.
$27.5 billion worth of the Tesobonos that have matured. Without the
drawdowns made by the United States and the International Monetary Fund,
Mexico would not have been able to make those repayments.

Statistical and Related Information Concerning Mexico

The following table sets forth the Mexican Peso to U.S. Dollar exchange
rates for each year from 1981 to 1994 and the months of January through June,
1995.

Free Market Rate *Controlled Rate
---------------- ----------------
End of End of
Period Average Period Average
-------- ------- ------ -------
1981 ................. 26 24 N/A N/A
1982 ................. 148 57 96 57
1983 ................. 161 150 143 120
1984 ................. 210 185 192 167
1985 ................. 447 310 371 256
1986 ................. 915 637 923 611
1987 ................. 2.209 1.378 2.198 1.366
1988 ................. 2.281 2.273 2.257 2.250
1989 ................. 2.641 2.483 2.637 2.453
1990 ................. 2.945 2.838 2.939 2.807
1991 ................. 3.075 3.016 3.065 3.007
1992 ................. 3.115 3.094 N/A N/A
1993 ................. 3.105 3.155 N/A N/A
1994 ................. 5.325 5.075 N/A N/A
January 1995 ......... 5.695 ----- N/A N/A
February 1995 ........ 5.837 ----- N/A N/A
March 1995 ........... 6.817 ----- N/A N/A
April 1995 ........... 5.785 ----- N/A N/A
May 1995 ............. 6.177 ----- N/A N/A
June 1995 ............ 6.309 ----- N/A N/A

________
* From late 1982 to November 11, 1991, Mexico maintained a dual foreign
exchange rate system, with a "controlled" rate and a "free market" rate.
Mexico has now repealed the controlled rate.

Source: Banco de Mexico.

Wages and Prices

After relatively long periods of economic growth and stability lasting
until the early 1970s, Mexico's economy suffered the effects of high
inflation. The economy improved in the late 1970s as a result of government
policies and important discoveries of oil reserves. However, between 1977
and 1981 these factors contributed to an increase in inflation to an average

17
<PAGE>

annual rate of 22.4% for that period compared to an average annual rate of
2.4% between 1960 and 1971, and 16.6% between 1972 and 1976.

The economy experienced a setback in 1981 because of the severe drop in
oil prices and high world interest rates which resulted in a substantial
increase in the country's external debt burden. With no new lending to be
obtained from international creditors, the balance of payments equilibrium
could no longer be sustained. The Mexican Peso was devalued and inflation
rose sharply. Through much of the 1980s, the Mexican economy continued to be
affected by high inflation, low growth and excessive domestic and foreign
indebtedness. The inflation rate, as measured by the consumer price index,
rose from 28.7% in December 1981 to 159.2% in December 1987. In December
1987, the Mexican Government agreed with labor and business to curb the
economy's inflationary pressures by freezing the surge in wages and prices.
The Pacto de Solidaridad Economico (Pact for Economic Solidarity, the "PSE")
was announced in December 1987 and included the implementation of restrictive
fiscal and monetary policies, the elimination of trade barriers and the
reduction of import tariffs. The PSE was renamed the Pacto para la
Estabilidad y el Crecimiento Economica (Pact for Stability and Economic
Growth, the "PECE") in November 1988. The PECE has been extended on five
occasions. After substantive increases in public sector prices and utility
rates, price controls were introduced. These policies lowered the consumer
inflation rate from 159.2% in February 1987 to 19.7% in 1989. The inflation
rate rose to 29.9% in 1990 as prices were liberalized. Inflation declined in
1991, falling to 18.8% by year-end. The inflation rate declined in 1992 to
11.9%, to 8.0% in 1993 and to 7.1% in 1994.

Under the PECE, the prices of certain goods and services provided by the
public sector (particularly gasoline, energy for industrial use and utility
services) were increased. The private sector agreed to accept the increases
without increasing private sector prices. Furthermore, the Government
committed itself to implementing measures to reduce agricultural sector
costs.

On October 3, 1993, the 1993-94 PECE went into effect. The purposes of
that PECE, which was effective through December 31, 1994, were essentially
the same as those of its predecessor pacts. The Government promised to
maintain fiscal discipline and a balanced budget. Mexico's foreign exchange
policy remains unchanged. The 1993-94 PECE set an inflation target of 5% for
1994. In addition, the Government agreed to reduce the highest income tax
rate from 35% to 34% and to reduce (for the next two years) the withholding
tax applicable to interest payments on external debt payable to certain
financial institutions and on publicly issued external debt from 15% to 4.9%.
In order to assure industry of stable prices for certain factors of
production, the government has agreed to limit annual increases in the price
of gasoline (except in the border region with the United States) to a maximum
of 5% annually. Commercial and residential electricity rate increases were
also limited to 5%. In connection with efforts to stabilize the Mexican economy,
there has been a gradual reduction in the number of goods and services whose
prices are covered by the original PECE, the 1992-93 PECE and the 1993-94 PECE.

On September 24, 1994, the government, together with the business and
labor sectors, entered into a new agreement that extends the 1993-94 PECE for
1995. That agreement became effective on January 1, 1995. Its main points
are as follows: (i) an inflation target of 4% for 1995; (ii) a 4% GDP (PIB)
growth target for 1995; (iii) an increase in salaries by 4%, together with a
productivity increase, the terms of which are yet to be determined; (iv) the
maintenance of the current foreign exchange policy; (v) the creation of an
investment fund to be financed with the proceeds of privatizations in order
to encourage the participation of the private sector in infrastructure
projects; (vi) gradual increases in the prices of gasoline and electricity,
in amounts not to exceed a 4% increase in 1995; (vii) the creation of tax
benefits for workers receiving certain minimum salaries; and (viii) a
reduction of asset taxes to 1.8% (together with other benefits relating to
asset taxes).

<PAGE>

On January 3, 1995, in response to the economic turmoil following the
devaluation of the Peso, President Zedillo announced an emergency economic
plan. The plan reiterates most of the projections contained in the 1993-94
PECE, but modifies the inflation projection (increased to 20%) and lowers GDP
growth target (to approximately 1%) for 1995. In addition, President Zedillo
reiterated that taxes would not be increased, Government spending would
decrease by approximately 1.3% of GDP, wages would be allowed to increase by
no more than 7% and a Fiscal Advisory Committee would be created to examine
Mexico's fiscal legislation. It is unclear what effect if any, these
policies will have on the Mexican economy. The Programa de Ajuste Economico
was adjusted in March of 1995, as a result of the economic crisis, the
continuing devaluation of the New Peso and rising interest rates. The
adjustments provide for an increase in the Value Added Tax from 10% to 15%, a
reduction in government spending and an increase in PMEX product prices,
including an increase in the price of gasoline by up to 35%.

Prices rose in the first four months of 1995, reaching the highest
level, 8%, on April 11, 1995 and declining to 4.2% in May.

On May 31, 1994, the Plan Nacional de Desarrollo (National Development
Plan) was published in the Official Gazete. This Plan provides a package of
political and economic measures designed to restore stability and economic
vitality to Mexico.

Consumer Price Index

The following table sets forth the changes in the Mexican consumer price
index for each of the twelve years ended December 31, 1994 and for the five
months ended May 31, 1995.

Annual Increases in
National Consumer
Price Index
-------------------
(percent)

1983 ..................................... 80.8
1984 ..................................... 59.2
1985 ..................................... 63.7
1986 ..................................... 105.7
1987 ..................................... 159.2
1988 ..................................... 51.7
1989 ..................................... 19.7
1990 ..................................... 29.9
1991 ..................................... 18.8
1992 ..................................... 11.9
1993 ..................................... 8.0
1994 ..................................... 7.1
May, 1995 ................................ 28.8

Source: Banco de Mexico.

Mexican Gross Domestic Product

The following table sets forth Mexico's gross domestic product for the
years 1983 through 1994 at historical and constant prices.

<PAGE>
<TABLE>
<CAPTION>
Gross Change from Prior
Gross Domestic Product Year at Constant
Domestic Product at 1985 Prices Prices
------------------------------- -------------------------- ----------------
(billions of Mexican Old Pesos) (billions of Mexican Pesos) (percent)

<C> <C> <C> <C>
1983 17,879 44,548 (4.3)
1984 29,472 46,195 3.7
1985 47,392 47,392 2.6
1986 79,191 45,613 (3.8)
1987 193,312 46,460 1.9
1988 390,451 47,039 1.2
1989 507,618 48,613 3.3
1990 686,406 50,774 4.4
1991 865,166 52,615 3.6
1992 1,019,156 54,010 2.8
1993 1,127,584 54,337 0.6
1994 1,272,799 - 3.7

</TABLE>
Source: Banco de Mexico; International Monetary Fund, International
Financial Statistics, Yearbook 1993, March 1994, and June 1995.

Interest Rates

During 1994 the rate on the 28-day Cetes increased from 10.52% in
January to 20.07% in December and further increased to 37.73% in January
1995. During the same time period the rate on the 91-day Cetes increased
from 10.75% in January 1994 to 39.26% in January 1995 and the rate on the
six-month Cetes increased from 10.78% in January 1994 to 35.02% in January
1995. At June 27, 1995 the 28-day Cetes rate stood at 40.75%, the 91-day
Cetes rate stood at 41.48% and the six month Cetes rate stood at 42.24%.

4. VALUATION OF SHARES AND REDEMPTION

Valuation

The net asset value per Share is determined once daily as of 4:00 p.m.
(Eastern Time) each day on which the New York Stock Exchange is open for
business ("Business Day") if there is sufficient trading in Fund portfolio
securities to affect net asset value materially, but may not be determined on
days during which no Shares are tendered for redemption and the Fund receives
no order to sell Shares. The New York Stock Exchange is open for business on
all weekdays except for the following holidays: New Year's Day, Presidents'
Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.

For the purpose of determining the price at which Shares are redeemed,
the net asset value per Share is calculated by valuing all securities held by
the Fund, deducting the Fund's actual and accrued liabilities (including
liability for dividends declared), and dividing the resulting amount by the
number of then outstanding Shares. To determine the net asset value per
Share of any class, the net asset value calculated as described above will be
further adjusted to reflect the pro rata portion of income and expenses
attributable to that class. For this purpose, securities are valued on the
basis of their last sale price (or, in the absence of recorded sales, at the
average of readily available closing bid and asked prices). Securities or
other assets for which market quotations are not readily available are valued
at their fair value as determined in good faith by the Advisor under
procedures established and monitored by the Board of Directors. Debt
obligations with maturities of 60 days or less will be valued at amortized
cost, which constitutes fair value as determined by the Directors. In the
20

<PAGE>

case of such securities that were originally purchased with maturities in
excess of 60 days, such amortization will be based on the market or fair
value of the securities on the 61st day prior to maturity.
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 Investment Company Act pursuant to which the
Fund is obligated to redeem Shares solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Fund during any 90-day period
for any one shareholder. A corporate shareholder requesting a redemption
must have on file with the Fund's Transfer Agent, Armata, a Participating
Dealer or Shareholder Servicing Agent all required resolutions and
certificates, such as resolutions authorizing the redemption and secretary's
certificates.

5. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS

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

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

Qualification as Regulated Investment Company

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

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

<PAGE>

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 investments in order to make
sufficient cash distributions to satisfy the Distribution Requirement.

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

Finally, at the close of each quarter of its taxable year, at least
50% of the value of the Fund's assets must consist of cash and cash items,
U.S. Government securities, securities of other RICs, and securities of other
issuers (as to which the Fund has not invested more than 5% of the value of
its total assets in securities of such issuer and as to which the Fund does
not hold more than 10% of the outstanding voting securities of such issuer),
and no more than 25% of the value of its total assets may be invested in the
securities of any one issuer (other than U.S. Government securities and
securities of other RICs), or two or more issuers which the Fund controls and
which are engaged in the same, similar, or related trades or businesses (the
"Asset Diversification Test"). The Fund may curtail its investment in
certain securities where the application thereto of the Asset Diversification
Test is uncertain.

Fund Distributions

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

The Fund may either retain or distribute to shareholders the excess,
if any, of net long-term capital gains over net short-term capital losses
("net capital gains") for each taxable year. If such gains are distributed
as a capital gains distribution, they are treated by shareholders as long-
term capital gains, regardless of the length of time the shareholder has held
Shares, whether or not such gains were recognized by the Fund prior to the
date on which a shareholder acquired Shares and whether or not the
distribution was paid in cash or reinvested in Shares. The aggregate amount
of distributions designated by the Fund as capital gains distributions may
not exceed the net capital gains of the Fund for any taxable year, determined
by excluding any net capital losses or net long-term capital losses
attributable to transactions occurring after October 31 of such year and by
treating any such losses as if they arose on the first day of the following
taxable year. Conversely, if the Fund elects to retain its net capital
gains, it will be taxed thereon (except to the extent of any available
capital loss carryovers) at the applicable corporate capital gains tax rate
(presently 35%). In such event, it is expected that the Fund also will elect
to have shareholders treated as having received a distribution of such gains,
with the result that they will be required to report such gains on their
returns as long-term capital gains, will receive a tax credit for their
allocable share of capital gains tax paid by the Fund on the gains, and will
increase the tax basis for their Shares by an amount equal to 65 percent of
the deemed distribution.

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

Generally, a gain or loss on the sale of Shares will be a capital gain
or loss, which will be long-term capital gain or loss if the Shares have been
held for more than one year. However, investors should be aware that any
loss realized upon the sale, exchange or redemption of Shares held for six
months or less will be treated as a long-term capital loss to the extent any

<PAGE>

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

If for any taxable year the Fund does not qualify as a RIC, 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 as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits.

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

Excise Tax; Miscellaneous Considerations

The Code imposes a non-deductible 4% federal excise tax on RICs that
do not distribute in each calendar year an amount equal to 98% of their
ordinary income for the calendar year plus 98% of their capital gain net
income for the one-year period ending on October 31 of such calendar year.
The excise tax is imposed on the undistributed part of this required
distribution. In addition, the balance of such income must be distributed
during the next calendar year to avoid liability for the excise tax in that
year. For the foregoing purposes, a company is treated as having distributed
any amount on which it is subject to income tax for any taxable year ending
in such calendar year. Because the Fund intends to distribute all of its
income currently (or to retain, at most, its "net capital gains" and pay tax
thereon), the Fund does not anticipate incurring any liability for this
excise tax. However, investors should note that the Fund may, in certain
circumstances, be required to liquidate portfolio investments in order to
make sufficient distributions to avoid excise tax liability, and, in
addition, that the liquidation of investments in such circumstances may
affect the ability of the Fund to satisfy the Short-Short Gain Test.

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

6. MANAGEMENT OF THE FUND

The overall business affairs of the Fund are the responsibility of the
Board of Directors. The Board approves all significant agreements between
the Fund and persons or companies furnishing services to the Fund, including
the Fund's agreements with its investment advisor, distributor, custodian and
transfer agent. The day-to-day operations of the Fund are delegated to the
Fund's officers, to Investment Company Capital Corp., acting as the Fund's
administrator ("ICC" or the "Administrator"), to Armata acting as the Fund's
distributor, and to ISI, as the Fund's investment advisor. Two directors and
all of the officers of the Fund are directors, officers or employees of ICC,
Armata or ISI. The other directors of the Fund have no affiliation with ICC,
Armata or ISI.

Directors and Officers

The Directors and executive officers of the Fund and their principal
occupations during the last five years are set forth below. Unless otherwise
indicated, the address of each Director and executive officer is 717 Fifth
Avenue, New York, New York 10022.

<PAGE>

*EDWARD S. HYMAN, Chairman and Director
Chairman, International Strategy and Investment Inc., 1991 to Present;
Formerly, Vice Chairman and Member of the Board of Directors, C.J.
Lawrence Inc. (money manager), 1972-1991.

*RICHARD T. HALE, Vice Chairman and Director
135 East Baltimore Street, Baltimore, Maryland 21202. Managing
Director, Alex. Brown & Sons Incorporated.

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

N. BRUCE HANNAY, Director
201 Condon Lane, Port Ludlow, Washington 98365. Formerly, Vice
President, Research and Patents, AT&T Bell Laboratories; Formerly,
Director, Rohm & Haas Company (diversified chemicals) and General
Signal Corp. (control equipment & systems) and Plenum Publishing Corp.

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

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

EUGENE J. McDONALD, Director
Duke Management, Erwin Square, Suite 1000, 2200 W. Main Street,
Durham, North Carolina 27705. President, Duke Management Company
(investments); Executive Vice President, Duke University (education,
research and healthcare).

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

HARRY WOOLF, Director
Institute for Advanced Study, South Olden Lane, Princeton, New Jersey
08540. Professor-at-Large Emeritus, Institute for Advanced Study;
Director, Merrill Lynch Cluster C Funds (registered investment
companies), ATL and Spacelabs Medical Corp. (medical equipment) and
Family Health International (non profit research and education).

R. ALAN MEDAUGH, President
President, International Strategy and Investment Inc.; Formerly,
Managing Director, C.J. Lawrence Fixed Income Management (money
manager).

- -----------------
*/ A Director who is an "interested person" as defined in the
Investment Company Act. Ms. Rimel will be treated by the Fund
as if she could be deemed to be an "interested person."

<PAGE>

EDWARD J. VEILLEUX, Vice President
135 East Baltimore Street, Baltimore, Maryland 21202. Principal,
Alex. Brown & Sons Incorporated; President, Investment Company Capital
Corp. (registered investment advisor); Vice President, Armata
Financial Corp. (registered broker-dealer).

GARY V. FEARNOW, Vice President
135 East Baltimore Street, Baltimore, Maryland 21202. Managing
Director, Alex. Brown & Sons Incorporated; Manager, Special Products
Department, Alex. Brown & Sons Incorporated.

NANCY LAZAR, Vice President
Executive Vice President and Secretary, International Strategy and
Investment Inc., 1991-Present; Formerly, Vice President, C.J. Lawrence
Inc. (money manager), 1981-1991.

BRIAN C. NELSON, Vice President and Secretary,
135 East Baltimore Street, Baltimore, Maryland 21202. Vice President,
Alex. Brown & Sons Incorporated, Investment Company Capital Corp.
(registered investment advisor) and Armata Financial Corp. (registered
broker-dealer).

DIANA M. ELLIS, Treasurer
135 East Baltimore Street, Baltimore, Maryland 21202. Manager,
Portfolio Accounting Department, Investment Company Capital Corp.
(registered investment advisor); Mutual Fund Accounting Department,
Alex. Brown & Sons Incorporated, 1991-Present; Formerly, Accounting
Manager, Downtown Press Inc. (printer), 1987-1991.

CARRIE L. BUTLER, Assistant Vice President
Assistant Vice President, International Strategy and Investment Inc.;
Formerly Mutual Fund Sales Assistant, C.J. Lawrence Fixed Income
Management (money manager), 1989-1991.

LAURIE D. DEPRINE, Assistant Secretary
135 East Baltimore Street, Baltimore, Maryland 21202. Asset
Management Department, Alex. Brown & Sons Incorporated, 1991-Present;
Formerly, Student.

Directors and officers of the Fund are also directors and officers of
some or all of the other investment companies managed, administered, advised
or distributed by Alex. Brown, Armata or ISI or by any of their respective
affiliates. There are currently 12 funds in the Flag Investors/ISI Funds and
Alex. Brown Cash Reserve Fund, Inc. fund complex (the "Fund Complex"). Mr.
Hyman serves as a Director of three funds in the Fund Complex. Mr. Medaugh
serves as Director and President of one fund and as President of two other
funds in the Fund Complex. Mr. Hale serves as President and Director of one
fund, Vice President of one fund and as a Director of 10 other funds in the
Fund Complex. Messrs. Cunnane, Hannay, Kroeger, Levy, McDonald, and Woolf
serve as Directors of each fund in the Fund Complex. Ms. Rimel serves as
Director of five funds in the Fund Complex. Ms. Lazar serves as Vice
President and Ms. Butler serves as an Assistant Vice President of three funds
in the Fund Complex. Mr. Fearnow serves as Vice President of 10 funds in the
Fund Complex. Mr. Veilleux serves as Executive Vice President of one fund
and as Vice President of 11 funds in the Fund Complex. Mr. Nelson serves as
Vice President and Secretary, Ms. Ellis serves as Treasurer and Ms. DePrine
serves as Assistant Secretary of each of the funds in the Fund Complex.

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

Officers of the Fund receive no direct remuneration in such capacity
from the Fund. Officers and Directors of the Fund who are officers or
directors of ICC, Alex. Brown, Armata or ISI may be considered to have
received remuneration indirectly. As compensation for his services as

25
<PAGE>

Director, each Director who is not an "interested person" of the Fund (as
defined in the Investment Company Act) (a "Non-Interested Director") receives
an aggregate annual fee (plus reimbursement for reasonable out-of-pocket
expenses incurred in connection with his attendance at Board and committee
meetings) from all Flag Investors/ISI Funds and Alex. Brown Cash Reserve
Fund, Inc. for which he serves. Payment of such fees and expenses are
allocated among all such funds described above in proportion to their
relative net assets. For the fiscal year ended March 31, 1995, Non-
Interested Directors' fees attributable to the assets of the Fund totalled
approximately $5,000. The following table shows aggregate compensation paid
to each of the Fund's Directors by the Fund and the Fund Complex,
respectively, in the fiscal year ended March 31, 1995.
<TABLE>
<CAPTION>

COMPENSATION TABLE

- ---------------------------------------------------------------------------------------------------------------
Name of Person, Aggregate Compensation From Total Compensation From the Fund
Position the Fund for the Fiscal Year and Fund Complex Paid to Directors for
Ended March 31, 1995 the Fiscal Year Ended March 31, 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
*Edward S. Hyman, Chairman and Director $0 $0

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

James J. Cunnane, Director $171**(1) $9,750 for service on
13 boards **(4)

N. Bruce Hannay, Director $861(2) $39,000 for service on
13 boards(4)

John F. Kroeger, Director $947 $42,900 for service on
13 boards(4)

Louis E. Levy, Director $626*** $29,250 for service on
13 boards ***(4)

Eugene J. McDonald, Director $861(3) $39,000 for service on
13 boards(4)

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

Harry Woolf, Director $861(3) $39,000 for service on
13 boards(4)

</TABLE>
- ------------
* A Director who is an "interested person" as defined in the Investment
Company Act.
** Elected to the Board on December 14, 1994.
*** Elected to the Board on June 17, 1994.
**** Elected to the Board on June 1, 1995.
1 All of this amount has been deferred pursuant to a deferred compensation
plan.
2 $221 of this amount has been deferred pursuant to a deferred
compensation plan.
3 $392 of this amount has been deferred pursuant to a deferred
compensation plan.
4 One of these funds ceased operations on May 17, 1995.

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

26
<PAGE>

benefits, and no such benefits are being accrued for them since they have not
yet retired. The Fund has one Participant, a Director who retired effective
December 31, 1994, who has qualified for the Retirement Plan and who will be
paid a quarterly fee of $4,875 by the Fund Complex for the rest of his life.
Such fee is allocated to each fund in the Fund Complex based upon the
relative net assets of such fund to the Fund Complex.

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

Code of Ethics

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

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

7. INVESTMENT ADVISORY AND OTHER SERVICES

ISI serves as the Fund's investment advisor pursuant to an Investment
Advisory Agreement dated as of January 15, 1993 (the "Investment Advisory
Agreement") that was approved by the Board of Directors of the Fund
(including a majority of the "Non-Interested" Directors) on December 15, 1992
and by the sole shareholder of the Fund on December 15, 1992.

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. Due to their stock ownership, Messrs. Hyman
and Medaugh may be deemed to be controlling persons of ISI. ISI is also
investment advisor to Total Return U.S. Treasury Fund, Inc. and Managed
Municipal Fund, Inc., open-end investment companies with net assets of
approximately $505 million as of June 30, 1995.

To supplement its investment analysis, the Advisor may, from time to
time, subscribe to research services located in Canada and Mexico, which
research services may include information about Canada or Mexico,
respectively, such as: statistical and background information on the
economy, information on political developments and general political
stability forecasts and interpretation with respect to money markets, and
performance information.

<PAGE>

As described in the Fund's Prospectus, the Advisor (a) formulates and
implements continuing programs for the purchases and sales of securities, (b)
determines what securities (and in what proportion) shall be represented in
the Fund's portfolio, (c) provides the Fund's Board of Directors with regular
financial reports and analyses with respect to the Fund's portfolio
investments and operations, and the operations of comparable investment
companies, (d) obtains and evaluates pertinent information about economic,
statistical and financial information pertinent to the Fund, (e) takes, on
behalf of the Fund, all actions which appear to the Advisor necessary to
carry into effect its purchase and sale programs. Any investment program
undertaken by the Advisor will at all times be subject to policies and
control of the Fund's Board of Directors. The Advisor shall not be liable to
the Fund or its shareholders for any act or omission by the Advisor or any
losses sustained by the Fund or its shareholders except in the case of
willful misfeasance, bad faith, gross negligence, or reckless disregard of
duty.

Pursuant to the terms of the Advisory Agreement, as compensation for its
services, the Advisor receives an annual fee, paid monthly, in an amount
equal to .40% of the average daily net assets of the Fund.

The Advisor and the Administrator have agreed to waive, on a voluntary
basis, a proportionate amount of their respective fees or to reimburse the
Fund to the extent required so that the Fund's total operating annual
expenses do not exceed 1.25% of the Fund's average net assets. For the
fiscal years ended March 31, 1995 and March 31, 1994, the Advisor received
fees of $339,170 and $280,472, respectively, and from such fees, waived
$112,435 and $90,031, respectively. For the period from January 15, 1993
(commencement of operations) through March 31, 1993, the Advisor waived all
fees due it ($17,841). In addition, for the period ended March 31, 1993, the
Advisor and the Administrator reimbursed the Fund for other expenses
aggregating $15,378. Absent such waivers and reimbursements for the fiscal
years ended March 31, 1995 and 1994 and for the fiscal period ended March 31,
1993, the Fund's total operating expenses would have been 1.45%, 1.44% and
2.19%, respectively, of the Fund's average daily net assets. The Advisor has
also agreed to reduce its aggregate fees attributable to the Fund on a
monthly basis for any fiscal year, to the extent required, so that the amount
of the ordinary expenses of the Fund (excluding brokerage commissions,
interest, taxes and extraordinary expenses such as legal claims, liabilities,
litigation costs and indemnification related thereto) paid or incurred by the
Fund for such fiscal year does not exceed the expense limitations applicable
to the Fund imposed by the securities laws or regulations of the states in
which the Shares are registered or qualified for sale as such limitations may
be raised or lowered from time to time. Currently, the most restrictive of
such expense limitations requires the Advisor to reduce its fees to the
extent required so that ordinary expenses of the Fund (excluding brokerage
commissions, interest, taxes and extraordinary expenses such as legal claims,
liabilities, litigation costs and indemnification related thereto) do not
exceed 2.5% of the first $30 million of the Fund's average daily net assets,
2.0% of the next $70 million of the Fund's average daily net assets and 1.5%
of the Fund's average daily net assets in excess of $100 million. In
addition, if required to do so by any applicable state securities laws or
regulations, the Advisor will reimburse the Fund to the extent required to
prevent the expense limitations of any state law or regulation from being
exceeded. Expenses incurred pursuant to the Plan (see "Distribution of Fund
Shares" below) would not come within state expense limitation requirements.

The Investment Advisory Agreement will continue in effect from year to
year after its initial two year term as specifically approved (a) at least
annually by the Fund's Board of Directors and (b) by the affirmative vote of
a majority of the Non-Interested Directors by votes cast in person at a
meeting called for such purpose. The Fund or the Advisor may terminate the
Investment Advisory Agreement on sixty days' written notice without penalty.
The Investment Advisory Agreement will terminate automatically in the event
of assignment.

<PAGE>

8. ADMINISTRATION

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

As compensation for such services, ICC is entitled to receive from the
Fund a fee equal to .20% of the Fund's average daily net assets. ICC and the
Advisor have agreed to waive, on a voluntary basis, a proportionate amount of
their respective fees to the extent required so that the Fund's total annual
operating expenses do not exceed 1.25% of the Fund's average net assets. For
the fiscal year ended March 31, 1995 and the fiscal period from January 1,
1994 through March 31, 1994, ICC received a fee of $169,585 and $44,233,
respectively, and from such fee, waived $56,218 and $14,429. ICC also serves
as the Fund's transfer and dividend disbursing agent. (See "Custodian,
Transfer Agent, Accounting Services"). ICC is an affiliate of Armata. The
services of ICC to the Fund are not exclusive and ICC is free to render
similar services to others. ICC also provides accounting services to the
Fund.

Prior to January 1, 1994, Alex. Brown & Sons Incorporated ("Alex.
Brown") provided administration services to the Fund. For the period from
April 1, 1993 through December 31, 1993, Alex. Brown received a fee of
$96,003 and from such fee, waived $30,586. For the period from January 15,
1993 (commencement of operations) through March 31, 1993, Alex. Brown waived
all fees due it ($8,920). In addition, in the fiscal period ended March 31,
1993, the Advisor and Alex. Brown reimbursed the Fund for other expenses
aggregating $15,378. (See "Investment Advisory and Other Services" above.)
Until July 1, 1993, Alex. Brown also provided certain accounting services to
the Fund. (See "Custodian, Transfer Agent and Accounting Services.")

9. DISTRIBUTION OF FUND SHARES

Armata serves as the distributor for the Shares pursuant to a
Distribution Agreement dated January 15, 1993 between Armata and the Fund.
The Distribution Agreement provides that Armata has the exclusive right to
distribute the Shares, either directly or through other broker-dealers.
Armata, a Maryland corporation, is a broker-dealer that was formed in 1983
and is an affiliate of ICC (the Fund's administrator and transfer agent).

The Distribution Agreement further provides that Armata will: solicit
and receive orders for the purchase of Shares; accept or reject such orders
on behalf of the Fund in accordance with the Fund's currently effective
prospectus and transmit such orders as are accepted to the Fund's transfer
agent as promptly as possible; receive requests for redemption and transmit
such redemption requests to the Fund's transfer agent as promptly as
possible; respond to inquiries from the Fund's shareholders concerning the
status of their accounts with the Fund; provide the Fund's Board of Directors
for their review with quarterly reports required by Rule 12b-1; maintain such
accounts, books and records as may be required by law or be deemed
appropriate by the Fund's Board of Directors; and take all actions deemed
necessary to carry into effect the distribution of the Shares. Armata has
not undertaken to sell any specific number of Shares. The Distribution
Agreement further provides that, in connection with the distribution of
Shares, Armata will be responsible for all of its promotional expenses. The
services of Armata to the Fund are not exclusive, and Armata shall not be
liable to the Fund or its shareholders for any act or omission by Armata or
29

<PAGE>

any losses sustained by the Fund or its shareholders except in the case of
willful misfeasance, bad faith, gross negligence or reckless disregard of
duty.

As compensation for providing distribution and related administrative
services as described above, the Fund will pay Armata, on a monthly basis, an
annual fee, equal to .40% of the average daily net assets of the Shares.
Armata expects to allocate on a proportional basis a substantial portion of
its annual fees to its investment representatives or up to all of its fees to
broker-dealers who enter into Sub-Distribution Agreements with Armata under
which such broker-dealers have agreed to process investor purchase and
redemption orders and respond to inquiries from Fund shareholders concerning
the status of their accounts and the operations of the Fund. For
distribution services for the fiscal years ended March 31, 1995 and March 31,
1994, Armata received fees of $339,170 and $280,472, respectively, and paid
from such fees $0 and $0 as compensation to its investment representatives
and $328,556 and $275,095 as compensation to outside broker dealers. No
compensation was paid to financial institutions.

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

The Distribution Agreement, form of Sub-Distribution Agreement and the
Plan were approved by the Fund's Board of Directors, including a majority of
the Non-Interested Directors (who have no direct or indirect financial
interest in the Plan or the Distribution Agreement or any Sub-Distribution
Agreement) on December 15, 1992 and were approved by the sole shareholder of
the Fund on December 15, 1992. The Distribution Agreement and the Plan will
remain in effect from year to year as specifically approved (a) at least
annually by the Fund's Board of Directors and (b) by the affirmative vote of
a majority of the Non-Interested Directors, by votes cast in person at a
meeting called for such purpose.

In approving the Plan, the Directors concluded, in the exercise of
reasonable business judgment, that there was a reasonable likelihood that the
Plan would benefit the Fund and its shareholders. The Plan will be renewed
only if the Directors make a similar determination in each subsequent year.
The Plan may not be amended to increase materially the fee to be paid
pursuant to the Distribution Agreement without the approval of the
shareholders of the Fund. The Plan may be terminated at any time, and the
Distribution Agreement may be terminated at any time upon sixty days' notice,
without penalty, by a vote of a majority of the Fund's Non-Interested
Directors or by a vote of a majority of the outstanding Shares. Any Sub-
Distribution Agreement may be terminated in the same manner at any time. The
Distribution Agreement and any Sub-Distribution Agreement shall automatically
terminate in the event of assignment (as defined in the Investment Company
Act).

During the continuance of the Plan, the Fund's Board of Directors will
be provided for their review, at least quarterly, a written report concerning
the payments made under the Plan to Armata pursuant to the Distribution
Agreement, to Participating Dealers pursuant to Sub-Distribution Agreements
and to Shareholder Servicing Agents pursuant to Shareholder Servicing
Agreements. Such reports shall be made by the persons authorized to make
such payments. In addition, during the continuance of the Plan, the
selection and nomination of the Fund's Non-Interested Directors shall be
committed to the discretion of the Non-Interested Directors then in office.

30
<PAGE>

In addition, the Fund may enter into Shareholder Servicing Agreements
with certain financial institutions, such as banks, to act as Shareholder
Servicing Agents, pursuant to which Armata will allocate a portion of their
respective distribution fees as compensation for such financial institutions'
ongoing shareholder services. Although banking laws and regulations prohibit
banks from distributing shares of open-end investment companies such as the
Fund, according to interpretations by various bank regulatory authorities,
financial institutions are not prohibited from acting in other capacities for
investment companies, such as the shareholder servicing capacities described
above. Should future legislative, judicial or administrative action prohibit
or restrict the activities of the Shareholder Servicing Agents in connection
with the Shareholder Servicing Agreements, the Fund may be required to alter
materially or discontinue its arrangements with the Shareholder Servicing
Agents. Such financial institutions may impose separate fees in connection
with these services and investors should review the applicable Prospectus and
this Statement of Additional Information in conjunction with any such
institution's fee schedule. In addition, state securities laws on this issue
may differ from the interpretations of federal law expressed herein, and
banks and financial institutions may be required to register as dealers
pursuant to state law.

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

10. PORTFOLIO TRANSACTIONS

The Advisor is responsible for decisions to buy and sell securities for
the Fund, selection of broker-dealers and negotiation of commission rates.
In general, purchases and sales of portfolio securities by the Fund will be
primarily principal transactions, and the Fund will incur no substantial
amount of brokerage commission expenses. 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. For the fiscal year ended March 31, 1995,
the Fund paid no brokerage commissions.

31
<PAGE>

The Advisor's primary consideration in effecting security transactions
is to obtain, on an overall basis, the best net price and the most favorable
execution of orders. To the extent that the execution and prices offered by
more than one broker-dealer are comparable, the Advisor may, in its
discretion, effect transactions with dealers that furnish statistical,
research or other information or services which the Advisor deems to be
beneficial to the Fund's investment program. Such research services
supplement the Advisor's own research. Research services may include the
following: statistical and background information on the U.S., Canadian and
Mexican economy, industry groups and individual companies; forecasts and
interpretations with respect to the U.S., Canadian and Mexican money markets;
information on federal, state, local and political developments in the United
States, Canada and Mexico; portfolio management strategies; performance
information on securities, indices and investment accounts; information
concerning prices of securities; the providing of equipment used to
communicate research information; and the providing of access to consultants
who supply research information. Certain research services furnished by
broker-dealers may be useful to the Advisor with clients other than the Fund.
Similarly, any research services received by the Advisor through placement of
portfolio transactions of other clients may be of value to the Advisor in
fulfilling its obligations to the Fund. No specific value can be determined
for research and statistical services furnished without cost to the Advisor
by a broker-dealer. The Advisor is of the opinion that because the material
must be analyzed and reviewed by its staff, its receipt does not tend to
reduce expenses, but may be beneficial in supplementing the Advisor's
research and analysis. Therefore, it may tend to benefit the Fund by
improving the quality of the Advisor's investment advice. For the fiscal
years ended March 31, 1995 and March 31, 1994, respectively, the Advisor
directed no transactions to broker dealers and paid no related commissions
because of research services provided to the Fund.

The Fund is required to identify any securities of its "regular brokers
or dealers" (as such term is defined in the Investment Company Act) which the
Fund has acquired during its most recent fiscal year. As of March 31, 1995,
the Fund held a 6.10% repurchase agreement issued by Goldman Sachs & Co.
valued at $2,942,000.

11. CAPITAL STOCK

Under its Articles of Incorporation, the Fund may issue up to twenty-
five 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 one
class of Shares. All Shares of the Fund regardless of class have equal
rights with respect to voting, except that with respect to any matter
affecting the rights of the holders of a particular series or class, the
holders of each series will vote separately. Any such series will be a
separately managed portfolio and shareholders of each series will have an
undivided interest in the net assets of that series. For tax purposes, the
series will be treated as separate entities. Generally, each class of Shares
issued by a particular series will be identical to every other class and
expenses of the Fund (other than 12b-1 fees) are prorated between all classes
of a series based upon the relative net assets of each class. Any matters
affecting any class exclusively will be voted on by the holders of such
class.

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

The Fund's By-laws provide that any director of the Fund may be removed
by the shareholders by a vote of a majority of the votes entitled to be cast
for the election of Directors. A meeting to consider the removal of any

32
<PAGE>

Director or Directors of the Fund will be called by the Secretary of the Fund
upon the written request of the holders of at least one-tenth of the
outstanding Shares of the Fund entitled to vote at such meeting.

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

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

12. SEMI-ANNUAL REPORTS

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

13. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES

PNC Bank, National Association ("PNC Bank"), Airport Business Park, 200
Stevens Drive, Lester, Pennsylvania 19113, has been retained to act as
custodian of the Fund's investments. Barclays International ("Barclay's"),
75 Wall Street, New York, New York 10265, has been retained to serve as the
Fund's custodian with respect to the Fund's foreign investments. PNC Bank
and Barclay's receive such compensation from the Fund for their services in
such capacities as may be agreed to from time to time by PNC Bank, Barclays,
and the Fund. Investment Company Capital Corp., the Fund's administrator,
135 East Baltimore Street, Baltimore, Maryland 21202 (telephone: (800) 882-
8585) has been retained to act as transfer and dividend disbursing agent. As
compensation for providing these services, the Fund pays ICC up to $15.00
per account plus reimbursement for out-of-pocket expenses incurred in
connection therewith. For such services for the fiscal year ended March 31,
1995, ICC received a fee of $83,596.

ICC also provides accounting services to the Fund, effective April 10,
1995. As compensation for providing accounting services to the Fund, ICC is
entitled to receive an annual fee, calculated daily and paid monthly, as
shown below.

<PAGE>

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

14. INDEPENDENT ACCOUNTANTS

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

15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of July 7, 1995, to Fund management's knowledge, the following
persons held beneficially or of record 5% or more of the Fund's outstanding
shares:

Alex. Brown & Sons Incorporated 14.78%*
135 East Baltimore Street
Baltimore, MD 21202

As of such date, Directors and officers as a group owned less than 1% of
the Fund's total outstanding Shares.
____________________
* As of such date Alex. Brown & Sons, Inc. beneficially owned less than 1%
of such Shares.

16. PERFORMANCE AND YIELD COMPUTATIONS

For purposes of quoting and comparing the performance of the Fund to
that of other open-end non-diversified management investment companies and to
stock or other relevant indices in advertisements or in certain reports to
shareholders, performance generally will be stated both in terms of total
return and in terms of yield. However, the Fund may also from time to time
state the performance of the Fund solely in terms of total return.

34
<PAGE>

Total Return Calculation

The total return quotations, under the rules of the SEC, must be
calculated according to the following formula:
n
P (1 + T) = ERV

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

Under the foregoing formula, the time periods used in advertising will be
based on rolling calendar quarters updated to the last day of the most recent
quarter prior to submission of the advertising for publication, and will cover
one, five and ten year periods or a shorter period dating from the effectiveness
of the Fund's registration statement. During its first year of operation the
Fund may, in lieu of annualizing its total return, use an aggregate total return
calculated in the same manner. In calculating the ending redeemable value, the
maximum sales load is deducted from the initial $1,000 payment and all dividends
and distributions by the Fund are assumed to have been reinvested at net asset
value as described in the prospectus on the reinvestment dates during the
period. "T" in the formula above is calculated by finding the average annual
compounded rate of return over the period that would equate an assumed initial
payment of $1,000 to the ending redeemable value. Any sales loads that might in
the future be made applicable at the time to reinvestment would be included as
would any recurring account charges that might be imposed by the Fund.

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

Calculated according to the SEC rules for the one-year period ended
March 31, 1995, the ending redeemable value of a hypothetical $1,000 payment
for the Fund's Shares was $889 resulting in a total return for such shares
equal to -11.06%. For the period from effectiveness of the Fund's
registration statement on January 15, 1993 to the end of the Fund's most
recent fiscal year on March 31, 1995, the ending redeemable value of a

35
<PAGE>

hypothetical $1,000 payment was $934 resulting in an average annual total
return equal to -3.05%.

Calculated according to the alternative computation which assumes no
sales charges and reinvestment of all distributions for the one-year period
ended March 31, 1995, the ending redeemable value of a hypothetical $10,000
investment in the Fund's Shares was $9,169 resulting in a total return for
such shares equal to -8.31%. For the period from effectiveness of the Fund's
registration statement on January 15, 1993 to the end of the Fund's most
recent fiscal year on March 31, 1995, the ending redeemable value of a
hypothetical $10,000 investment was $9,628 resulting in an average annual
total return equal to -3.72%.

Yield Calculations

The Fund's yield for the 30 day period ended March 31, 1995 was 7.53%
and was computed in the manner described 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 semi-annual 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 3.00% for the Shares.
The Fund's net investment income per Share earned during the period is based
on the average daily number of Shares outstanding during the period entitled
to receive dividends and includes dividends and interest earned during the
period minus expenses accrued for the period, net of reimbursements.

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

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

17. FINANCIAL STATEMENTS.

See next page.
36
<PAGE>

North American Government Bond Fund, Inc.
Statement of Net Assets
March 31, 1995

<TABLE>
<CAPTION>
Interest Maturity Principal Value
Security Rate Date Value(dagger) (Note A)

<S> <C> <C> <C> <C>
CANADIAN SECURITIES--25.58%
Province of British Columbia, Deb. 7.50% 6/09/14 C$ 6,000,000 $ 3,704,190
Government of Canada, Deb. 9.00 12/01/04 9,725,000 7,140,552
Government of Canada, Deb. 9.75 6/01/21 2,000,000 1,572,262
Government of Canada, Deb. 9.25 6/01/22 6,050,000 4,539,610
Total Canadian Securities
(Cost $18,844,808) 16,956,614

MEXICAN SECURITIES(1)--8.65%
Mexican Treasury Cete 12.50* 4/12/95 Ps 5,528,300 799,292
Mexican Treasury Cete 13.48* 5/04/95 2,800,000 389,154
Mexican Treasury Cete 13.61* 5/25/95 5,738,410 780,281
Mexican Treasury Cete 30.33* 7/20/95 12,425,070 1,538,041
Mexican Treasury Cete 11.27* 8/03/95 7,551,880 914,512
Mexican Treasury Cete 28.23* 8/10/95 6,217,330 749,504
Mexican Treasury Cete 11.66* 6/06/96 6,570,000 562,257
Total Mexican Securities
(Cost $10,940,452) 5,733,041

U.S. SECURITIES--59.31%
U.S. Treasury Note 7.500 11/15/01 $ 5,000,000 5,091,407
U.S. Treasury Bond 10.750 5/15/03 6,900,000 8,364,094
U.S. Treasury Note 7.250 5/15/04 3,800,000 3,804,156
U.S. Treasury Bond 10.375 11/15/12 11,400,000 14,041,594
U.S. Treasury Bond 11.750 11/15/14 1,250,000 1,715,820
U.S. Treasury Strip (Principal) 6.590** 5/15/96 6,000,000 5,577,873
U.S. Treasury Strip (Principal) 7.810** 8/15/17 4,000,000 724,566
Total U.S. Securities
(Cost $39,067,036) 39,319,510
</TABLE>
37
<PAGE>

North American Government Bond Fund, Inc.
Statement of Net Assets (concluded)
March 31, 1995

Principal Value
Value(dagger) (Note A)
REPURCHASE AGREEMENTS--4.44%
Goldman Sachs & Co., 6.10%
Dated 3/31/95, to be repurchased on 4/3/95, collateralized
by U.S. Treasury Bonds with a market value of $3,001,338 $2,942,000

Total Repurchase Agreements
(Cost $2,942,000) $ 2,942,000

Total Investment in Securities--97.98%
(Cost $71,794,296)*** 64,951,165

Other Assets in Excess of Liabilities, Net--2.02% 1,341,093

Net Assets Applicable--100.00% $66,292,258

Net Asset Value and Redemption Price Per Share
($66,292,258 divided by 8,225,853 shares outstanding) $8.06

Offering Price Per Share
($8.06 divided by .970) $8.31

* Yields at the date of purchase.
** Yields as of March 31, 1995.
*** Also aggregate cost for federal tax purposes.
1 Cetes are short-term Mexican government debt securities.
(dagger) Principal value is shown in local currency: Canadian dollars (C$),
Mexican pesos (Ps) and U.S. dollars ($).

See accompanying Notes to Financial Statements.
38
<PAGE>

North American Government Bond Fund, Inc.
Statement of Operations
For the year ended March 31, 1995

INVESTMENT INCOME (NOTE A):
Interest $ 7,033,220

EXPENSES:
Investment advisory fee (Note B) 339,170
Distribution fee (Note B) 339,170
Administration fee (Note B) 169,585
Transfer agent fees (Note B) 83,596
Accounting fee 60,796
Custodian fees 60,404
Registration fees 39,000
Audit 39,000
Legal 37,784
Printing and postage 29,999
Miscellaneous 10,626
Organizational expense (Note A) 10,527
Directors' fees 5,000
Insurance 4,132
Total expenses 1,228,789
Less: Fees waived (Note B) (168,653)
Net expenses 1,060,136
Net investment income 5,973,084

REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized loss from security transactions (3,757,134)
Net realized foreign exchange loss (8,270,248)
Change in unrealized appreciation/(depreciation) of
investments (798,039)
Change in unrealized appreciation/(depreciation) on
translation of assets and liabilities denominated
in foreign currencies (63,148)
Net loss on investments (12,888,569)

NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(6,915,485)

See accompanying Notes to Financial Statements.
39
<PAGE>

North American Government Bond Fund, Inc.
Statement of Changes in Net Assets

For the year ended March 31,
1995 1994
INCREASE/(DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 5,973,084 $ 4,948,431
Net realized gain/(loss) from security and
foreign currency transactions (12,027,382) 650,180
Change in unrealized appreciation/(depreciation)
of investments (798,039) (5,825,256)
Change in unrealized appreciation/(depreciation)
on translation of assets and liabilities
denominated in foreign currencies (63,148) (11,794)
Net decrease in net assets resulting
from operations (6,915,485) (238,439)

DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income (3,760,903) (5,056,636)
Net realized short-term gains (621,691) (1,055,545)
Return of capital-tax (2,448,605) --
Total distributions (6,831,199) (6,112,181)

CAPITAL SHARE TRANSACTIONS (NOTE C):
Proceeds from sale of 843,587 and 6,197,568
shares, respectively 7,637,704 63,193,787
Value of 414,693 and 313,525 shares issued in
reinvestment of dividends, respectively 3,689,590 3,201,227
Cost of 2,858,167 and 723,956 shares
repurchased, respectively (24,909,993) (7,359,712)
Total increase/(decrease) in net assets
derived from capital share transactions (13,582,699) 59,035,302
Total increase/(decrease) in net assets (27,329,383) 52,684,682

NET ASSETS:
Beginning of year 93,621,641 40,936,959
End of year $ 66,292,258 $93,621,641

See accompanying Notes to Financial Statements.
40
<PAGE>

North American Government Bond Fund, Inc.
Financial Highlights
(For a share outstanding throughout each period)

<TABLE>
<CAPTION>
For the period
January 15, 1993*
through
For the year ended March 31, March 31, 1993
1995 1994
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning
of period $ 9.53 $ 10.14 $ 10.00
Income from Investment Operations:
Net investment income 0.63 0.89 0.10
Net realized and unrealized
gain/(loss) on investments (1.38) (0.58) 0.12

Total from Investment Operations (0.75) 0.31 0.22

Less Distributions:
Dividends from net investment income
and short-term gains (0.45) (0.92) (0.08)
Return of capital-tax (0.27) -- --

Total distributions (0.72) (0.92) (0.08)
Net asset value at end of period $ 8.06 $ 9.53 $ 10.14

Total Return (8.31)% 2.77% 2.18%

Ratios to Average Net Assets:
Expenses(2) 1.25% 1.25% 1.25%(1)
Net investment income(3) 7.04% 7.04% 7.62%(1)

Supplemental Data:
Net assets at end of period (000) $66,292 $93,622 $40,937
Portfolio turnover rate 104% 219% 104%
</TABLE>

* Commencement of Operations.
(1) Annualized.
(2) Without the waiver of advisory fees (Note B), the ratio of expenses to
average net assets would have been 1.45%, 1.44% and 2.19% (annualized)
for the years ended March 31, 1995, 1994 and for the period ended
March 31, 1993, respectively.
(3) Without the waiver of advisory fees (Note B), the ratio of net investment
income to average net assets would been 6.84%, 6.85% and 6.68% (annualized)
for the years ended March 31, 1995, 1994 and for the period ended
March 31, 1993, respectively.

See accompanying Notes to Financial Statements.
41
<PAGE>

Notes to Financial Statements

A. Significant Accounting Policies--North American Government Bond Fund, Inc.
(the "Fund") was organized as a Maryland Corporation on October 19, 1992 and
commenced operations on January 15, 1993. The Fund is registered under the
Investment Company Act of 1940 as a diversified, open-end management
investment company. Significant accounting policies are as follows:

Security Valuation--Debt securities are generally traded in the
over-the-counter market and are valued at a price deemed best to reflect
fair value as quoted by dealers who make markets in these securities or
by an independent pricing service. Securities or other assets for which
market quotations are not readily available are valued at their fair value
so determined in good faith by the Investment Advisor under procedures
established and monitored by the Board of Directors. Short-term obligations
with maturities of 60 days or less are valued at amortized cost which
approximates market.

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

Foreign Currency Translation--The Fund isolates that portion of its
realized gains resulting from changes in foreign exchange rates on
investments from the fluctuations arising from changes in market prices
of securities held.

Reported net realized foreign exchange gains or losses arise from sales of
portfolio securities, sales and maturities of short-term securities, sales
of foreign currencies, currency gains or losses realized between the trade
and settlement dates on securities transactions, and the difference between
the amount of interest recorded on the Fund's books and the U.S. dollar
equivalent of the amounts actually received or paid.

It is not practical to distinguish that portion of the unrealized
appreciation of the Fund that arises as a result of changes in the
exchange rates from fluctuations in market prices of investments during
the period.

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

Other--Security transactions are accounted for on the trade date and the
cost of investments sold or redeemed is determined by use of the specific
identification method for both financial reporting and income tax purposes.
Interest income is recorded on an accrual basis and includes, when
applicable, the pro rata amortization of premiums and accretion of
discounts. Distributions to shareholders are recorded on the ex-dividend
date. Income and capital gain distributions are determined in accordance
with U.S. federal income tax regulations which may differ from generally
accepted accounting principles.

Costs incurred by the Fund in connection with its organization,
registration, and initial public offering of shares, have been deferred
and are being amortized on the straight-line method over a five-year
period beginning on the date in which the Fund commenced its investment
activities.
42
<PAGE>

Notes to Financial Statements (concluded)

B. Investment Advisory Fees, Transactions with Affiliates and Other Fees--
International Strategy & Investment Inc. ("ISI") serves as the Fund's
investment advisor, and Investment Company Capital Corp. ("ICC") serves
as the Fund's administrator. As compensation for its advisory services,
ISI receives from the Fund an annual fee, calculated daily and paid monthly,
at the annual rate of .40% of the Fund's daily net assets. As compensation
for its administrative services, ICC receives from the Fund an annual fee,
computed daily and paid monthly, at the annual rate of .20% of the Fund's
average daily net assets.

ISI and ICC have voluntarily agreed to reduce their respective annual fees
proportionately, if necessary, so that the Fund's annual expenses do not
exceed 1.25% of the Fund's average daily net assets. For the year ended
March 31, 1995, ISI and ICC waived fees of $112,435 and $56,218,
respectively.

As compensation for its transfer agent services, ICC receives from the
Fund a per account fee, calculated and paid monthly. ICC received $83,596
for transfer agent services for the year ended March 31, 1995.

As compensation for providing distribution services, Armata Financial
Corp., an affiliate of the administrator, receives from the Fund an annual
fee, calculated daily and paid monthly, at an annual rate equal to .40% of
the Fund's average daily net assets. For the year ended March 31, 1995,
distribution fees were $339,170.

C. Capital Share Transactions--The Fund is authorized to issue up to 25
million shares of capital stock, par value $.001 per share, all of which
shares are designated as common stock.

D. Investment Transactions--Purchases and sales of investment securities
other than short-term and U.S. Government obligations aggregated
$13,685,463 and $14,183,162, respectively, for the year ended March 31,
1995. Purchases and sales of U.S. Government obligations aggregated
$47,358,533 and $48,073,125, repectively.

At March 31, 1995 aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $647,932
and aggregate gross unrealized depreciation for all securities in which
there is an excess of tax cost over value was $7,491,063.

E. Forward Currency Exchange Contracts--At March 31, 1995, the Fund was a
party to two forward currency exchange contracts under which it is obligated
to exchange currencies at specified future dates. Risks arise from the
possible inability of counterparties to meet the terms of their contracts
and from movements in currency values. Outstanding contracts at March 31,
1995 are as follows:

Unrealized
Contract to Apprec.
Value Receive Deliver (Deprec.)
Date Amounts in Thousands in US$

4/95 C$15,750 US$11,267 (80)
5/95 C$ 4,754 US$ 3,396 2

Accordingly, net unrealized depreciation of $78,141 on these contracts at
March 31, 1995 is included in the accompanying financial statements.

F. Net Assets--At March 31, 1995, net assets consisted of:

Paid-in-Capital $ 83,769,759

Accumulated net realized loss
from security and foreign
currency transactions (10,557,923)

Unrealized depreciation of
investments (6,843,131)

Unrealized translation loss (76,447)
$ 66,292,258
43
<PAGE>

Report of Independent Accountants

To the Shareholders and Directors of
North American Government Bond Fund, Inc.:

We have audited the accompanying statement of net assets of North American
Government Bond Fund, Inc. as of March 31, 1995, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended and the financial highlights
for each of the respective periods presented. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
investments owned as of March 31, 1995 by correspondence with the custodians.
An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position
of North American Government Bond Fund, Inc. as of March 31, 1995 and the
results of its operations for the year then ended and the changes in its
net assets and its financial highlights for each of the respective periods
presented, in conformity with generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.

Baltimore, Maryland
May 1, 1995

<PAGE>

APPENDIX A

BOND AND COMMERCIAL PAPER RATINGS

Standard & Poor's Bond Ratings

A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. Debt rated
"AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay
interest and repay principal is extremely strong. Debt rated "AA" has a very
strong capacity to pay interest and repay principal and differs from the highest
rated issues only in small degree. Debt rated "A" has a strong capacity to pay
interest and repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher rated categories. Debt rated "BBB" is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions, or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher rated categories.
Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating. Debt rated "B" has a greater
vulnerability to default but currently has the capacity to meet interest
payments and principal repayments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay interest and repay
principal. The "B" rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied "BB" or "BB-" rating. Debt rated
"CCC" has a currently identifiable vulnerability to default, and is dependent
upon favorable business, financial, and economic conditions to meet timely
payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating. The rating "CC" typically is applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating. The rating
"C" typically is applied to debt subordinated to senior debt which is assigned
an actual or implied "CCC-" debt rating. The "C" rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued. The rating "CI" is reserved for income bonds on which no
interest is being paid.

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

The ratings from "AA" to "B" may be modified by the addition of a plus
or minus sign to show relative standing within the major rating categories.

Moody's Bond Ratings

Bonds which are rated Aaa by Moody's are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a large or
by an exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risk appear somewhat larger than
Aaa securities. Bonds rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present which suggest a susceptibility to impairment some time in the
future. Bonds rated Baa are considered as medium grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well. Bonds rated Ba are

A-1

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judged to have speculative elements; their future cannot be considered as
well-assured. Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in this class.
Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small. Bonds rated Caa
are of poor standing. Such issues may be in default or there may be present
elements of danger with respect to principal or interest. Bonds rated Ca
represent obligations which are speculative in a high degree. Such issues
are often in default or have other marked shortcomings. Bonds rated C are
the lowest rated class of bonds, and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment
standing. Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa to B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks at the lower end of its generic
rating category.

Standard & Poor's Commercial Paper Ratings

A is the highest commercial paper rating category utilized by Standard &
Poor's, which uses the numbers 1, 2 and 3 to indicate relative degree of
safety. The designation A-1+ indicates there is an "overwhelming degree" of
safety with regard to the capacity for timely payment. The designation A-1
indicates that the degree of safety regarding timely payment is strong. The
designation A-2 indicates the capacity for timely payment on issues with this
designation is satisfactory. However, the relative degree of safety is not
as high as for issues designated A-1. Issues carrying the A-3 designation
have an adequate capacity for timely payment. They are, however, somewhat
more vulnerable to the adverse effects of changes in circumstances than
obligations carrying the higher designations. Issues rated "B" are regarded
as having only speculative capacity for timely payment. The rating "C" is
assigned to short-term debt obligations with a doubtful capacity for
repayment. An issue rated "D" is in payment default. The "D" rating
category is used when interest payments or principal payments are not made on
the date due, even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period.

Moody's Commercial Paper Ratings

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

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

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

Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level

A-2
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of debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.

Issuers rated Not Prime do not fall within any of the Prime rating
categories.

A-3