KEMPER GROWTH & INCOME FUND, N-1A, 1997-12-16

KEMPER GROWTH & INCOME FUND
N-1A, 1997-12-16

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Filed electronically with the Securities and
Exchange Commission on October 3, 1997

File No. _________
File No. _________

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Pre-Effective Amendment No. ____
Post-Effective Amendment No.____

and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

Amendment No. ____

Kemper Growth and Income Fund
-----------------------------
(Exact name of Registrant as Specified in Charter)

120 South LaSalle Street, Chicago, IL 60603
-------------------------------------------
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, including Area Code: (312) 781-1121
---- --- ----

Kathryn L. Quirk
Scudder, Stevens & Clark, Inc.
345 Park Avenue, New York, NY 10154
-----------------------------------
(Name and Address of Agent for Service)

Approximate date of proposed public offering: As soon as practicable after the
effective date of the registration statement.

Pursuant to Rule 24f-2 under the Investment Company Act of 1940, as amended, the
Registrant hereby elects to register an indefinite number of shares of
beneficial interest, $.01 par value.

The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

<PAGE>

KEMPER GROWTH AND INCOME FUND
KEMPER U.S. GROWTH AND INCOME FUND
CROSS-REFERENCE SHEET

Items Required by Form N-1A
---------------------------
PART A
- ------
<TABLE>
<CAPTION>

Item No. Item Caption Prospectus Caption
-------- ------------ ------------------

<S> <C> <C> <C>
1. Cover Page COVER PAGE

2. Synopsis SUMMARY
SUMMARY OF EXPENSES

3. Condensed Financial NOT APPLICABLE
Information

4. General Description of INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
Registrant SUMMARY
CAPITAL STRUCTURE

5. Management of the Fund SUMMARY
INVESTMENT MANAGER AND UNDERWRITER

5A. Management's Discussion of NOT APPLICABLE
Fund Performance

6. Capital Stock and Other SUMMARY
Securities INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
DIVIDENDS, DISTRIBUTIONS AND TAXES
PURCHASE OF SHARES

7. Purchase of Securities Being PURCHASE OF SHARES
Offered SUMMARY
INVESTMENT MANAGER AND UNDERWRITER

8. Redemption or Repurchase SUMMARY
REDEMPTION OR REPURCHASE OF SHARES

9. Pending Legal Proceedings NOT APPLICABLE

Cross Reference-Page 1
<PAGE>

KEMPER U.S. GROWTH AND INCOME FUND
(continued)

PART B
- ------
Caption in Statement of
Item No. Item Caption Additional Information
-------- ------------ ----------------------

10. Cover Page COVER PAGE

11. Table of Contents TABLE OF CONTENTS

12. General Information and History NOT APPLICABLE

13. Investment Objectives and INVESTMENT RESTRICTIONS
Policies INVESTMENT POLICIES AND TECHNIQUES

14. Management of the Fund OFFICERS AND DIRECTORS
REMUNERATION

15. Control Persons and Principal OFFICERS AND DIRECTORS
Holders of Securities

16. Investment Advisory and Other INVESTMENT MANAGER AND UNDERWRITER
Services

17. Brokerage Allocation PORTFOLIO TRANSACTIONS

18. Capital Stock and Other INVESTMENT MANAGER AND UNDERWRITER
Securities

19. Purchase, Redemption and PURCHASE AND REDEMPTION OF SHARES
Pricing of Securities Being
Offered

20. Tax Status DIVIDENDS AND TAXES

21. Underwriters INVESTMENT MANAGER AND UNDERWRITER

22. Calculation of Performance Data PERFORMANCE

23. Financial Statements NOT APPLICABLE

</TABLE>

Cross Reference-Page 2

<PAGE>

Table of Contents

Summary __

Summary of Expenses __

Investment Objective, Policies and
Risk Factors __

Investment Manager and Underwriter __
Dividends, Distributions and Taxes __
Net Asset Value __
Purchase of Shares __

Redemption or Repurchase of Shares __
Special Features __
Performance __
Capital Structure __
------------------------------------------------

This prospectus contains concisely the information about the Kemper U.S. Growth
and Income Fund (the "Fund"), a diversified series of Kemper Growth and Income
Fund (the "Trust"), an open-end management investment company, that a
prospective investor should know before investing and should be retained for
future reference. A Statement of Additional Information, which contains
additional information about the Fund and the Trust, dated December 17, 1997,
has been filed with the Securities and Exchange Commission and is incorporated
herein by reference. It is available upon request without charge from the Fund
at the address or telephone number on this cover or the firm from which this
prospectus was received. It is also available along with other related materials
on the SEC's Internet Web Site (http://www.sec.gov).

The Fund's shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank, nor are they federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other agency. Investment in the
Fund's shares involves risk, including the 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.

[KEMPER FUNDS LOGO]

Kemper
U.S. GROWTH AND INCOME
Fund

PROSPECTUS DATED DECEMBER 17, 1997

KEMPER U.S. GROWTH AND INCOME FUND
222 South Riverside Plaza, Chicago, Illinois 60606
1-800-621-1048
<PAGE>

The investment objective of Kemper U.S. Growth and Income Fund is to provide
long-term growth of capital, current income and growth of income. The Fund
invests primarily in common stocks, preferred stocks and securities convertible
into common stocks of U.S. companies that offer the prospect for growth of
earnings while paying current dividends.

There is no assurance that the Fund's objective will be achieved.

KEMPER U.S. GROWTH AND INCOME FUND
222 South Riverside Plaza, Chicago, Illinois 60606, Telephone 1-800-621-1048

SUMMARY

Investment Objective. Kemper U.S. Growth and Income Fund (the "Fund") is
registered as an open-end, diversified, management investment company. The
Fund's investment objective is to seek long-term growth of capital, current
income and growth of income. There is no assurance that the Fund's objective
will be achieved. The Fund invests primarily in common stocks, preferred stocks
and securities convertible into common stocks of U.S. companies that offer the
prospect for growth of earnings while paying current dividends. Over time,
continued growth of earnings tends to lead to higher dividends and enhancement
of capital value. The Fund allocates its investments among different industries
and companies, and adjusts its portfolio securities for investment
considerations and not for trading purposes. The Fund may also engage in options
and financial futures transactions ("Strategic Transactions") and may lend its
portfolio securities. The Fund may also invest to a limited extent in illiquid
and restricted securities. Further, the Fund's Board of Trustees may determine,
in the future, without prior shareholder approval, that the objectives of the
Fund would be achieved more effectively by investing in a master fund in a
master/feeder fund structure. See "Investment Objective, Policies and Risk
Factors" below.

Risk Factors. The Fund's risks are determined by the nature of the securities
held in the Fund and the portfolio management strategies used by Scudder Kemper
Investments, Inc. (the "Adviser"). The Fund is designed for long-term investors
who can accept moderate stock market risk. In return for accepting stock market
risk, investors may earn a greater return on their investments in the Fund than
from lower risk alternatives such as a money market or an income fund, but may
experience less risk than from a portfolio of more speculative equity
securities. The following are descriptions of certain risks related to the
investments and techniques that the Fund may use from time to time. For a more
complete discussion of risks involved in an investment in the Fund, please see
"Special risk factors."

Securities lending. The risks of lending portfolio securities, as with other
extensions of secured credit, consist of possible delays in receiving additional
collateral or in the recovery of the securities or possible loss of rights in
the collateral should the borrower fail financially. Loans will be made to
registered broker/dealers deemed by the Adviser to be in good standing and will
not be made unless, in the judgment of the Adviser, the consideration to be
earned from such loans would justify the risk.

Illiquid and restricted investments. The absence of a trading market can make it
difficult to ascertain a market value for illiquid and restricted investments.
Disposing of illiquid and restricted investments may involve time-consuming
negotiation and legal expenses, and it may be difficult or impossible for the
Fund to sell them promptly at an acceptable price.

Strategic Transactions and derivatives. Strategic Transactions, including
derivative contracts, have risks associated with them including possible default
by the other party to the transaction, illiquidity and, to the extent the
Adviser's view as to certain market movements is incorrect, the risk that the
use of such Strategic Transactions could result in losses greater than if they
had not been used. Use of put and call options may result in losses to the Fund,
force the sale or purchase of portfolio securities at inopportune times or for
prices higher than (in the case of put options) or lower than (in the case of
call options)

2
<PAGE>

current market values, limit the amount of appreciation the Fund can realize on
its investments or cause the Fund to hold a security it might otherwise sell.
The use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. The Fund's returns and net asset
value will fluctuate. See "Investment Objective, Policies and Risk Factors."

Purchases and Redemptions. The Fund provides investors with the option of
purchasing shares in the following ways:

Class A Shares... Offered at net asset value plus a
maximum sales charge of 5.75% of the
offering price. Reduced sales charges
apply to purchases of $50,000 or more.
Class A shares purchased at net asset
value under the "Large Order NAV
Purchase Privilege" may be subject to a
1% contingent deferred sales charge if
redeemed within one year of purchase and
a 0.50% contingent deferred sales charge
if redeemed within the second year of
purchase.

Class B Shares... Offered at net asset value, subject to a
Rule 12b-1 distribution fee and a
contingent deferred sales charge that
declines from 4% to zero on certain
redemptions made within six years of
purchase. Class B shares automatically
convert into Class A shares (which have
lower ongoing expenses) six years after
purchase.

Class C Shares... Offered at net asset value without an
initial sales charge, but subject to a
Rule 12b-1 distribution fee and a 1%
contingent deferred sales charge on
redemptions made within one year of
purchase. Class C shares do not convert
into any other class.

Each class of shares represents interests in the same portfolio of investments
of the Fund. The minimum initial investment for each class is $1,000 and
investments thereafter must be at least $100. Shares are redeemable at net asset
value, which may be more or less than original cost, subject to any applicable
contingent deferred sales charge. See "Purchase of Shares" and "Redemption or
Repurchase of Shares."

Investment Manager and Underwriter. Scudder Kemper Investments, Inc. (the
"Adviser") serves as the Fund's investment manager. The Fund pays the Adviser an
annual fee of ___% of the Fund's average daily net assets. Zurich Kemper
Distributors, Inc. ("ZKDI"), a [wholly owned] [indirect] subsidiary of [the
Adviser], is principal underwriter and administrator for the Fund. For Class B
and Class C shares, ZKDI receives a Rule 12b-1 distribution fee of ___% of
average daily net assets of each such class. ZKDI also receives the amount of
any contingent deferred sales charges paid on the redemption of shares.
Administrative services are provided to shareholders under an administrative
services agreement with ZKDI. The Fund pays an administrative services fee at an
annual rate of up to ___% of average daily net assets of each of Class A, B and
C shares of the Fund, which ZKDI pays to financial services firms. See
"Investment Manager and Underwriter."

Dividends. The Fund normally distributes quarterly dividends of net investment
income, and any net realized short-term and long-term capital gains at least
annually. Income and capital gain dividends of the Fund are automatically
reinvested in additional shares of the Fund, without a sales charge, unless the
investor makes an election otherwise. See "Dividends and Taxes."

SUMMARY OF EXPENSES

3
<PAGE>

Class A Class B Class C
------- ------- -------

Shareholder Transaction Expenses(1)
Maximum Sales Charge on Purchases (as
a percentage of offering price).......... 5.75%(2) None None

Maximum Sales Charge on Reinvested
Dividends................................ None None None

Redemption Fees.......................... None None None

Exchange Fee............................. None None None

Maximum Deferred Sales Charge (as a
percentage of redemption proceeds)....... None(3) 4%(4) 1%(5)

- ----------

(1) Investment dealers and other firms may independently charge additional
fees for shareholder transactions or for advisory services; please see
their materials for details.

(2) Reduced sales charges apply to purchases of $50,000 or more. See "Purchase
of Shares--Initial Sales Charge Alternative--Class A Shares."

(3) The redemption of Class A shares purchased at net asset value under the
"Large Order NAV Purchase Privilege" may be subject to a contingent
deferred sales charge of 1% the first year and 0.50% the second year. See
"Purchase of Shares--Initial Sales Charge Alternative--Class A Shares."

(4) The maximum Contingent Deferred Sales Charge on Class B Shares applies to
redemptions during the first year. The Charge is 4% during the first year,
3% during the second and third years, 2% during the fourth and fifth
years, and 1% in the sixth year.

(5) The Contingent Deferred Sales Charge on Class C Shares applies to
redemptions during the first year after purchase.

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

Class A Shares
Management Fees*..... __

12b-1 Fees........... None

Other Expenses....... __

Total Fund Operating
Expenses*............ %
==

Class B Shares
Management Fees*..... __

12b-1 Fees(6)........ __%

Other Expenses....... __%

Total Fund Operating
Expenses*............ %
==
* After waiver

- ----------
(6) Long-term Class B shareholders of the Fund may, as a result of the Fund's
Rule 12b-1 fees, pay more than the economic equivalent of the maximum
initial sales charges permitted by the National Association of Securities
Dealers, Inc., although ZKDI believes that it is unlikely because of the
automatic conversion feature described under "Purchase of Shares--Deferred
Sales Charge Alternative--Class B Shares."

4
<PAGE>

Class C Shares
Management Fees*............. .__%

12b-1 Fees(7)................ __%

Other Expenses............... __%

Total Fund Operating Expenses* %
==
* After waiver

- ----------
(7) As a result of the accrual of Rule 12b-1 fees, long-term Class C
shareholders of the Fund may pay more than the economic equivalent of the
maximum initial sales charges permitted by the National Association of
Securities Dealers, Inc.

Example**

1 year 3 years
------ -------
Class A Shares (8)

Based on the estimated level of total
operating expenses listed above, you would
pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time
period: $ $

Class B Shares (9)

You would pay the following expenses on the
same investment, assuming no redemption: $ $

Class C Shares (10)

You would pay the following expenses on the
same investment, assuming no redemption: $ $

- ----------

** Based on Total Fund Operating Expenses net of fee waiver (see "Annual Fund
Operating Expenses" table above).

(8) Assumes deduction of the maximum 5.75% initial sales charge at the time of
purchase and no deduction of a Contingent Deferred Sales Charge at the
time of redemption.

(9) Assumes conversion to Class A shares six years after purchase and was
calculated based upon the assumption that the shareholder was an owner of
the shares on the first day of the first year and the contingent deferred
sales charge was applied as follows: 1 year (3%) and 3 years (2%). See
"Redemption or Repurchase of Shares -- Contingent Deferred Sales Charge --
Class B Shares" for more information regarding the calculation of the
contingent deferred sales charge.

(10) Assumes that the shareholder was the owner on the first day of the first
year and the contingent

5
<PAGE>

deferred sales charge was not applicable for any of the periods shown. See
"Redemption or Repurchase of Shares -- Contingent Deferred Sales Charge --
Class C Shares."

The purpose of the preceding tables is to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. The example assumes reinvestment of all dividends and distributions
and that the percentage amounts under "Total Fund Operating Expenses" remain the
same each year.

The Fund commenced operations on _________, thus "Management Fees" and "Other
Expenses" are estimated for the current fiscal year and expenses are shown for
only the one and three year periods. See "Investment Manager and Underwriter"
for more information.

The Example assumes a 5% annual rate of return pursuant to requirements of the
Securities and Exchange Commission (the "SEC"). This hypothetical rate of return
is not intended to be representative of past or future performance of the Fund.
The Example should not be considered to be a representation of past or future
expenses or return. Actual expenses and return may be greater or lesser than
those shown.

INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS

The following information sets forth the Fund's investment objectives, policies
and risk factors. The Fund's returns and net asset value will fluctuate, and
there is no assurance that the Fund will achieve its objective.

The Fund seeks long-term growth of capital, current income and growth of income.
The Fund seeks this objective by investing primarily in common stocks, preferred
stocks, and securities convertible into common stocks of U.S. companies that
offer the prospect for growth of earnings while paying current dividends. Over
time, continued growth of earnings tends to lead to higher dividends and
enhancement of capital value.

The Fund allocates its investments among different industries and companies, and
adjusts its portfolio securities for investment considerations and not for
trading purposes.

The Fund may also purchase securities of real estate investment trusts
("REITs"), as well as securities that do not pay current dividends but that
offer prospects for growth of capital and future income. Convertible securities
(which may be current coupon or zero coupon securities) are bonds, notes,
debentures, preferred stocks and other securities that may be converted or
exchanged at a stated or determinable exchange ratio into underlying shares of
common stock. The Fund may also invest in nonconvertible preferred stocks
consistent with the Fund's objective. From time to time, for temporary defensive
purposes, when the Adviser feels such a position is advisable in light of
economic or market conditions, the Fund may invest all or a portion of its
assets in cash and cash equivalents, including repurchase agreements. It is
impossible to accurately predict for how long such alternative strategies will
be utilized. The Fund may also invest in repurchase agreements, loan securities
and may engage in strategic transactions. The Fund will not invest in foreign
securities. The Fund may also invest to a limited extent in illiquid and
restricted securities. The Fund's share price fluctuates with changes in
interest rates and market conditions. These fluctuations may cause the value of
shares to be higher or lower than when purchased. More information about
investment techniques is provided under "Additional Investment Information."

The Fund seeks to provide participation in the long-term growth of the economy
through the potential investment returns offered by U.S. common stocks and other
domestic equity securities. It maintains a diversified portfolio consisting
primarily of common stocks, preferred stocks and convertible securities of
companies with long-standing records of earnings growth and higher-than-average
dividend payouts. These companies, many of which are mainstays of the U.S.
economy, offer prospects for future growth of earnings and dividends, and
therefore may offer investors attractive long-term investment opportunities.

6
<PAGE>

The Fund's investment strategy, which emphasizes higher-yielding equity
securities issued by U.S. companies deemed to be underrated by the Adviser, may
be more appropriate for the conservative portion of an investor's equity
portfolio.

The Fund cannot guarantee a gain or eliminate the risk of loss. The net asset
value of the Fund's shares will increase or decrease with changes in the market
prices of the Fund's investments and there is no assurance that the Fund's
objective will be achieved. Except as otherwise indicated, the Fund's investment
objective and policies are not fundamental and may be changed without a vote of
shareholders. If there is a change in investment objective, shareholders should
consider whether the Fund remains an appropriate investment in light of their
then current financial position and needs.

Investment Process

The Adviser applies a disciplined investment approach for selecting holdings for
the Fund. The first stage of this process involves analyzing a selected pool of
dividend-paying equity securities, to identify stocks that have high yields
relative to the yield of the Standard & Poor's 500 Composite Price Index ("S&P
500"), a commonly-accepted benchmark for the U.S. stock market. Also, the
Adviser screens for stocks that have yields at the upper end of their historical
yield range.

In the Adviser's opinion, this subset of higher-yielding stocks identified by
applying these criteria offers the potential for returns over time that are
greater than or equal to the S&P 500, at less risk than this market index. In
the Adviser's opinion, these favorable risk and return characteristics exist
because the higher dividends offered by these stocks may act as a "cushion" when
markets are volatile and because stocks with higher yields tend to sell at more
attractive valuations (e.g., lower price-to-earning ratios and lower
price-to-book ratios).

Once this subset of higher-yielding stocks is identified, the Adviser conducts a
fundamental analysis of each company's financial strength, profitability,
projected earnings, sustainability of dividends, competitive outlook, and
ability of management. The Fund's portfolio may include stocks that are out of
favor in the market, but which, in the opinion of the Adviser, offer compelling
valuations and potential for long-term appreciation in price and dividends. In
order to diversify the Fund's portfolio among different industry sectors, the
Adviser evaluates how each sector reacts to broad economic factors such as
interest rates, inflation, Gross Domestic Product, and consumer spending. The
Fund's portfolio is constructed by attaining a proper balance of stocks in these
sectors based on the Adviser's economic forecasts.

The Adviser applies disciplined criteria for selling stocks in the Fund's
portfolio as well. When the Adviser determines that the relative yield of a
stock has declined excessively below the yield of the S&P 500, or that the yield
is at the lower end of the stock's historic range, the stock generally is sold
from the Fund's portfolio. Similarly, if the Adviser's fundamental analysis
determines that the payment of the stock's dividend is at risk, or that market
expectations for the stock are unreasonably high, the stock is generally
targeted for sale.

In summary, the Adviser applies disciplined buy and sell criteria, fundamental
company and industry analysis, and economic forecasts in managing the Fund to
pursue long-term price appreciation and income with a tendency for lower overall
volatility than the market, as measured by the S&P 500.

MASTER/FEEDER STRUCTURE. The Board of Trustees may determine that the objectives
of the Fund would be achieved more efficiently, while retaining its current
distribution arrangement, by investing in a master fund in a master/feeder fund
structure as described below, and in that case cause the Fund to do so without
prior approval by shareholders.

A master/feeder fund structure is one in which a fund (a "feeder fund"), instead
of investing directly in a portfolio of securities, invests all of its
investment assets in a separate registered investment company (the "master
fund") with substantially the same investment objective and policies as the
feeder fund. Such a

7
<PAGE>

structure permits the pooling of assets of two or more feeder funds in the
master fund in an effort to achieve possible economies of scale and efficiencies
in portfolio management, while preserving separate identities, management or
distribution channels at the feeder fund level. An existing investment company
is able to convert to a feeder fund by selling all of its investments, which
involves brokerage and other transaction costs and the realization of taxable
gain or loss, or by contributing its assets to the master fund and avoiding
transaction costs and the realization of taxable gain or loss.

SPECIAL RISK FACTORS. The Fund's risks are determined by the nature of the
securities held and the portfolio management strategies used by the Adviser. The
following are descriptions of certain risks related to the investments and
techniques that the Fund may use from time to time. The Fund is designed for
long-term investors who can accept moderate stock market risk. In return for
accepting stock market risk, you may earn a greater return on your investment
than from lower risk alternatives such as a money market or an income fund, but
experience less risk than from a portfolio of more speculative equity
securities.

Securities lending. The Fund may lend portfolio securities to registered
broker/dealers as a means of increasing its income. These loans may not exceed
33 1/3% of the Fund's total assets taken at market value. Loans of portfolio
securities will be secured continuously by collateral consisting of U.S.
Government securities or fixed-income obligations that are maintained at all
times in an amount at least equal to the current market value of the loaned
securities. The Fund will earn any interest or dividends paid on the loaned
securities and may share with the borrower some of the income received on the
collateral for the loan or will be paid a premium for the loan. The risks of
lending portfolio securities, as with other extensions of secured credit,
consist of possible delays in receiving additional collateral or in the recovery
of the securities or possible loss of rights in the collateral should the
borrower fail financially. Loans will be made to registered broker/dealers
deemed by the Adviser to be of good standing and will not be made unless, in the
judgment of the Adviser, the consideration to be earned from such loans would
justify the risk.

Repurchase agreements. As a means of earning income for periods as short as
overnight, the Fund may enter into repurchase agreements with selected banks and
broker/dealers. Under a repurchase agreement, the Fund acquires securities,
subject to the seller's agreement to repurchase them at a specified time and
price. If the seller under a repurchase agreement becomes insolvent, the Fund's
right to dispose of the securities may be restricted, or the value of the
securities may decline before the Fund is able to dispose of them. In the event
of the commencement of bankruptcy or insolvency proceedings with respect to the
seller of the securities before repurchase of the securities under a repurchase
agreement, the Fund may encounter delay and incur costs, including a decline in
the value of the securities, before being able to sell the securities.

Convertible securities. The Fund may invest in convertible securities which may
offer higher income than the common stocks into which they are convertible. The
convertible securities in which the Fund may invest include fixed-income or zero
coupon debt securities, which may be converted or exchanged at a stated or
determinable exchange ratio into underlying shares of common stock. Prior to
their conversion, convertible securities may have characteristics similar to
both nonconvertible debt securities and equity securities. While convertible
securities generally offer lower yields than nonconvertible debt securities of
similar quality, their prices may reflect changes in the value of the underlying
common stock. Convertible securities entail less credit risk than the issuer's
common stock.

Real estate investment trusts. The Fund may purchase real estate investment
trusts ("REITs"), which pool investors' funds for investment primarily in
income-producing real estate or real estate-related loans or interests. REITs
can generally be classified as equity REITs, mortgage REITs and hybrid REITs.
Equity REITs, which invest the majority of their assets directly in real
property, derive their income primarily from rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value.
Mortgage REITs, which invest the majority of their assets in real estate
mortgages, derive their

8
<PAGE>

income primarily from interest payments on real estate mortgages in which they
are invested. Hybrid REITs combine the characteristics of both equity REITs and
mortgage REITs. Investment in REITs may subject the Fund to risks similar to
those associated with the direct ownership of real estate (in addition to
securities markets risks). REITs are sensitive to factors such as changes in
real estate values and property taxes, interest rates, cash flow of underlying
real estate assets, supply and demand, and the management skill and
creditworthiness of the issuer. REITs may also be affected by tax and regulatory
requirements.

Zero coupon securities. The Fund may invest in zero coupon securities, which pay
no cash income and are sold at substantial discounts from their maturity value.
When held to maturity, their entire income, which consists of accretion of
discount, comes from the difference between the issue price and their maturity
value. Zero coupon securities are subject to greater market value fluctuations
from changing interest rates than debt obligations of comparable maturities that
make current cash distributions of interest.

Illiquid and restricted securities. The Fund may invest a portion of its assets
in securities for which there is not an active trading market, or which have
resale restrictions. Such securities may have been acquired through private
placements (transactions in which the securities acquired have not been
registered with the SEC). These illiquid securities generally offer a higher
return than more readily marketable securities, but carry the risk that the Fund
may not be able to dispose of them at an advantageous time or price. Some
restricted securities purchased by the Fund, however, may be considered liquid
despite resale restrictions. The absence of a trading market can make it
difficult to ascertain a market value for illiquid securities. Disposing of
illiquid securities may involve time-consuming negotiation and legal expenses,
and it may be difficult or impossible for the Fund to sell them promptly at an
acceptable price.

Strategic Transactions and derivatives. The Fund may, but is not required to,
utilize various other investment strategies as described below to hedge various
market risks (such as interest rates, currency exchange rates, and broad or
specific equity or fixed-income market movements), to manage the effective
maturity or duration of fixed-income securities in the Fund's portfolio or to
enhance potential gain. These strategies may be executed through the use of
derivative contracts. Such strategies are generally accepted as a part of modern
portfolio management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur. In the
course of pursuing these investment strategies, the Fund may purchase and sell
exchange-listed and over-the-counter put and call options on securities, equity
and fixed-income indices and other financial instruments, purchase and sell
financial futures contracts and options thereon, enter into various interest
rate transactions such as swaps, caps, floors or collars, and enter into various
currency transactions such as currency forward contracts, currency futures
contracts, currency swaps or options on currencies or currency futures
(collectively, all the above are called "Strategic Transactions").

Strategic Transactions may be used without limit to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Fund's portfolio resulting from securities markets or currency exchange
rate fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of fixed-income
securities in the Fund's portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities. Some Strategic Transactions may also be used to enhance
potential gain although no more than 5% of the Fund's assets will be committed
to Strategic Transactions entered into for non-hedging purposes. Any or all of
these investment techniques may be used at any time and in any combination, and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of the Fund to utilize these
Strategic Transactions successfully will depend on the Adviser's ability to
predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory

9
<PAGE>

requirements when implementing these strategies, techniques and instruments.
Strategic Transactions involving financial futures and options thereon will be
purchased, sold or entered into only for bona fide hedging, risk management or
portfolio management purposes and not for speculative purposes.

As a result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures contracts and options transactions for hedging should tend to minimize
the risk of loss due to a decline in the value of the hedged position, at the
same time they tend to limit any potential gain which might result from an
increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized. The
Strategic Transactions that the Fund may use and some of their risks are
described more fully in the Fund's Statement of Additional Information. See
"Investment Policies and Techniques" in the Statement of Additional Information.

ADDITIONAL INVESTMENT INFORMATION. It is anticipated that, under normal
circumstances, the portfolio turnover rate for the Fund will not exceed 50%.
Higher portfolio turnover involves correspondingly greater brokerage commissions
or other transaction costs. Higher portfolio turnover may result in the
realization of greater net short-term or long-term capital gains.

The Fund has adopted certain fundamental investment policies, which are
described in the Statement of Additional Information and which cannot be changed
without a vote of shareholders and which are designed to reduce each Fund's
investment risk. Policies of the Fund that are not incorporated into any of the
fundamental investment restrictions referred to above may be changed by the
Board of Trustees of the Fund without shareholder approval.

As a matter of fundamental policy, the Fund may not borrow money except as
permitted under the 1940 Act, and may not make loans except through the lending
of portfolio securities or the purchase of debt instruments or interests in
indebtedness or through repurchase agreements.

A complete description of these and other policies and restrictions is contained
in "Investment Restrictions" in the Fund's Statement of Additional Information.

INVESTMENT MANAGER AND UNDERWRITER

INVESTMENT MANAGER. The Fund retains the investment management firm of Scudder
Kemper Investments, Inc. (the "Adviser"), a Delaware corporation, to manage the
Fund's daily investment and

10
<PAGE>

business affairs subject to the policies established by the Board of Trustees
and pursuant to an Investment Management Agreement dated _______. The Trustees
have overall responsibility for the management of the Fund under Massachusetts
law.

Under the Investment Management Agreement with the Adviser, the Fund is
responsible for all of its expenses, including fees and expenses incurred in
connection with membership in investment company organizations; fees and
expenses of the Fund's accounting agent; brokers' commissions; legal, auditing
and accounting expenses; taxes and governmental fees; the fees and expenses of
the transfer agent; the expenses of and the fees for registering or qualifying
securities for sale; the fees and expenses of Trustees, officers and employees
of the Trust who are not affiliated with the Adviser; the cost of printing and
distributing reports and notices to shareholders; and the fees and disbursements
of custodians.

The Adviser receives an investment management fee for these services. The fee is
payable monthly, provided that the Fund will make such interim payments as may
be requested by the Adviser not to exceed 75% of the amount of the fee then
accrued on the books of the Fund and unpaid. All of the Fund's expenses are paid
out of gross investment income.

The Adviser is located at 345 Park Avenue, New York, New York.

Zurich Insurance Company ("Zurich") has entered into a definitive agreement with
Scudder, Stevens & Clark, Inc. ("Scudder") pursuant to which Zurich will acquire
approximately 70% of Scudder. Upon completion of the transaction, Scudder will
change its name to Scudder Kemper Investments, Inc. ("Scudder Kemper"), and
Zurich Kemper Investments, Inc. ("ZKI") will be operated either as a subsidiary
of Scudder Kemper or as a part of Scudder Kemper. Consummation of the
transaction is subject to a number of contingencies. Because the transaction
would constitute an assignment of the Fund's investment management agreements
with ZKI and, where applicable, Rule 12b-1 agreements under the Investment
Company Act of 1940, it is anticipated that ZKI would seek approval of new
agreements by the Fund's boards and shareholders. If the contingencies are
timely met, the transaction is expected to close in the fourth quarter of 1997.
Zurich will own 69.5% of Scudder Kemper and senior employees of Scudder Kemper
will hold the remaining 30.5%. Scudder Kemper will be headquartered in New York
City and the chief executive officer of Scudder Kemper will be Edmond D.
Villani, Scudder's president and chief executive officer. Mr. Villani will also
join Zurich's Corporate Executive Board. A transition team comprised of
representatives from ZKI, Zurich, and Scudder has been formed to make
recommendations regarding combining the operations of Scudder and ZKI.

A team approach to investing

The Fund is managed by a team of investment professionals who each play an
important role in the Fund's investment process. Team members work together to
develop investment strategies and select securities for the Fund's portfolio.
They are supported by the Adviser's large staff of economists, research
analysts, traders and other investment specialists who work in the Adviser's
offices across the United States and abroad. The Adviser believes its team
approach benefits Fund investors by bringing together many disciplines and
leveraging its extensive resources.

Portfolio Managers to be added.

11
<PAGE>

The Fund pays the Adviser an investment management fee at the annual rates shown
below.

TO BE UPDATED

Annual Management
Average Daily Net Assets of the Fund Fee Rates
------------------------------------ -----------------

$0 - $250 million............ .__%

$250 million - $1 billion.... __

$1 billion - $2.5 billion.... __

$2.5 billion - $5 billion.... __

$5 billion - $7.5 billion.... __

$7.5 billion - $10 billion... __

$10 billion - $12.5 billion.. __

Over $12.5 billion........... __

PRINCIPAL UNDERWRITER. Pursuant to an underwriting and distribution services
agreement ("distribution agreement") with the Fund, Zurich Kemper Distributors,
Inc. ("ZKDI"), 222 South Riverside Plaza, Chicago, Illinois 60606, a [wholly
owned] subsidiary of [the Adviser], is the principal underwriter and distributor
of the Fund's shares and acts as agent of the Fund in the sale of its shares.
ZKDI bears all of its expenses of providing services pursuant to the
distribution agreement, including the payment of any commissions. ZKDI provides
for the preparation of advertising or sales literature and bears the cost of
printing and mailing prospectuses to persons other than shareholders. ZKDI bears
the cost of qualifying and maintaining the qualification of Fund shares for sale
under the securities laws of the various states and the Fund bears the expense
of registering its shares with the SEC. ZKDI may enter into related selling
group agreements with various broker-dealers, including affiliates of ZKDI, that
provide distribution services.

Class A Shares. ZKDI receives no compensation from the Fund as principal
underwriter for Class A shares and pays all expenses of distribution of the
Fund's Class A shares under the distribution agreement not otherwise paid by
dealers or other financial services firms. As indicated under "Purchase of
Shares," ZKDI retains the sales charge upon the purchase of Class A shares and
pays out a portion of this sales charge or allows concessions or discounts to
firms for the sale of Class A Fund shares.

Class B Shares. For its services under the Class B distribution plan, ZKDI
receives a fee from the Fund, payable monthly, at an annual rate of ___% of
average daily net assets of the Fund attributable to its Class B shares. This
fee is accrued daily as an expense of Class B shares. ZKDI also receives any
contingent deferred sales charges received on redemptions of Class B shares. See
"Redemption or Repurchase of Shares--Contingent Deferred Sales Charge--Class B
Shares." ZKDI currently compensates firms for sales of Class B shares at a
commission rate of 3.75%.

Class C Shares. For its services under the Class C distribution plan, ZKDI
receives a fee from the Fund, payable monthly, at an annual rate of ___% of
average daily net assets of the Fund attributable to its Class C shares. This
fee is accrued daily as an expense of Class C shares. ZKDI currently advances to
firms the first year distribution fee at a rate of ___% of the purchase price of
such shares. For periods after the first year, ZKDI currently intends to pay
firms for sales of Class C shares a distribution fee, payable quarterly, at an
annual rate of ___% of net assets attributable to Class C shares maintained and
serviced by the firm and the fee continues until terminated by ZKDI or the Fund.
ZKDI also receives any contingent deferred sales charges received on redemptions
of Class C shares. See "Redemption or Repurchase of Shares--Contingent Deferred
Sales Charge--Class C Shares."

12
<PAGE>

Rule 12b-1 Plans. Since each distribution plan provides for fees payable as an
expense of the Class B shares and the Class C shares that are used by ZKDI to
pay for distribution services for those classes, that agreement is approved and
reviewed separately for the Class B shares and the Class C shares in accordance
with Rule 12b-1 under the 1940 Act, which regulates the manner in which an
investment company may, directly or indirectly, bear the expenses of
distributing its shares.

If the Rule 12b-1 Plan (the "Plan") for a class is terminated in accordance with
its terms, the obligation of the Fund to make payments to ZKDI pursuant to the
Plan will cease and the Fund will not be required to make any payments past the
termination date. Thus, there is no legal obligation for the Fund to pay any
expenses incurred by ZKDI in excess of its fees under the Plan, if for any
reason the Plan is terminated in accordance with its terms. Future fees under
the Plan may or may not be sufficient to reimburse ZKDI for its expenses
incurred.

ADMINISTRATIVE SERVICES. ZKDI also provides information and administrative
services for Fund shareholders pursuant to an administrative services agreement
("administrative agreement"). ZKDI may enter into related arrangements with
various broker-dealer firms and other service or administrative firms ("firms")
that provide services and facilities for their customers or clients who are
investors in the Fund. Such administrative services and assistance may include,
but are not limited to, establishing and maintaining accounts and records,
processing purchase and redemption transactions, answering routine inquiries
regarding the Fund and its special features and such other administrative
services as may be agreed upon from time to time and permitted by applicable
statute, rule or regulation. ZKDI bears all of its expenses of providing
services pursuant to the administrative agreement, including the payment of any
service fees. For services under the administrative agreement, the Fund pays
ZKDI a fee, payable monthly, at an annual rate of up to ____% of average daily
net assets of Class A, B and C shares of the Fund. ZKDI then pays each firm a
service fee at an annual rate of up to 0.25% of net assets attributable to Class
A, B and C shares maintained and serviced by the firm. Firms to which service
fees may be paid include affiliates of ZKDI.

Class A Shares. For Class A shares, a firm becomes eligible for the service fee
based upon assets in the accounts in the month following the month of purchase
and the fee continues until terminated by ZKDI or the Fund. The fees are
calculated monthly and paid quarterly.

Class B and Class C Shares. ZKDI currently advances to firms the first-year
service fee at a rate of up to 0.25% of the purchase price of Class B and Class
C shares. For periods after the first year, ZKDI currently intends to pay firms
a service fee at a rate of up to 0.25% (calculated monthly and paid quarterly)
of the net assets attributable to Class B and Class C shares maintained and
serviced by the firm during such period and the fee continues until terminated
by ZKDI or the Fund.

ZKDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreement not paid to firms to compensate
itself for administrative functions performed for the Fund. Currently, the
administrative services fee payable to ZKDI is based only upon Fund assets in
accounts for which a firm provides administrative services and it is intended
that ZKDI will pay all of the administrative services fee that it receives from
the Fund to firms in the form of service fees. The effective administrative
services fee rate to be charged against all assets of the Fund while this
procedure is in effect will depend upon the proportion of Fund assets that is in
accounts for which a firm provides administrative services. In addition, ZKDI
may, from time to time, from its own resources pay certain firms additional
amounts for ongoing administrative services and assistance provided to their
customers and clients who are shareholders of the Fund.

CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT.
_________________________, as custodian, has custody of all securities and cash
of the Fund. ____________ is also the Fund's transfer agent and dividend-paying
agent. Pursuant to a services agreement with ___________, Zurich Kemper Service
Company, an affiliate of [the Adviser], serves as "Shareholder Service Agent" of
the Fund and as such, performs all of _____________'s duties as transfer

13
<PAGE>

agent and dividend-paying agent. For a description of transfer agent and
shareholder service agent fees payable to ______________ and the Shareholder
Service Agent, see "Investment Manager and Underwriter" in the Statement of
Additional Information.

FUND ACCOUNTING AGENT. Scudder Fund Accounting Corporation, Two International
Place, Boston, Massachusetts, 02110-4103, a subsidiary of the Adviser, computes
net asset value for the Fund. The Fund pays Scudder Fund Accounting Corporation
an annual fee equal to ____% plus holding and transaction charges for this
service.

PORTFOLIO TRANSACTIONS. The Adviser places all orders for purchases and sales of
the Fund's securities. Subject to seeking best execution of orders, it may
consider sales of shares of the Fund and other funds managed by the Adviser as a
factor in selecting broker-dealers. See "Portfolio Transactions" in the
Statement of Additional Information.

DIVIDENDS, DISTRIBUTIONS AND TAXES

DIVIDENDS AND OTHER DISTRIBUTIONS. The Fund normally distributes quarterly
dividends of net investment income and any net realized short-term and long-term
capital gains at least annually. The Fund intends to distribute net realized
capital gains after utilization of capital loss carryforwards, if any, in
November or December to prevent application of a federal excise tax. An
additional distribution may be made at a later date, if necessary.

Dividends paid by the Fund with respect to each class of its shares will be
calculated in the same manner, at the same time and on the same day. The level
of income dividends per share (as a percentage of net asset value) will be lower
for Class B and Class C shares than for Class A shares primarily as a result of
the distribution services fees applicable to each of Class B and Class C shares.
Distributions of capital gains, if any, will be paid in the same amount for each
class.

Income dividends and capital gains dividends, if any, of the Fund will be
credited to shareholder accounts in full and fractional Fund shares of the same
class at net asset value except that, upon written request to the Shareholder
Service Agent, a shareholder may select one of the following options:

(1) To receive income and short-term capital gains dividends in cash and
long-term capital gain dividends in shares of the same class at net asset
value; or

(2) To receive income and capital gain dividends in cash.

Any dividends of the Fund that are reinvested normally will be reinvested in
Fund shares of the same class. However, upon written request to the Shareholder
Service Agent, a shareholder may elect to have dividends of the Fund invested
without sales charge in shares of the same class of another Kemper Fund at the
net asset value of such class of such other fund. See "Special Features--Class A
Shares--Combined Purchases" for a list of such other Kemper Funds. To use this
privilege of investing dividends of the Fund in shares of another Kemper Fund,
shareholders must maintain a minimum account balance of $1,000 in the Fund
distributing the dividends. The Fund reinvests dividend checks (and future
dividends) in shares of that same class of the Fund if checks are returned as
undeliverable. Dividends and other distributions in the aggregate amount of $10
or less are automatically reinvested in shares of the same Fund unless the
shareholder requests that such policy not be applied to the shareholder's
account.

(NOTE "TAXES" SECTION TO BE UPDATED)

TAXES. The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code ("Code") and, if so qualified,
generally will not be liable for federal income taxes to the extent its earnings
are distributed. To so qualify, the Fund must satisfy certain income, asset

14
<PAGE>

diversification and distribution requirements annually. Dividends derived from
net investment income and net short-term capital gains are taxable to
shareholders as ordinary income and properly designated net long-term capital
gain dividends are taxable to shareholders as long-term capital gain regardless
of how long the shares have been held and whether received in cash or shares.
Dividends declared in October, November or December to shareholders of record as
of a date in one of those months and paid during the following January are
treated as paid on December 31 of the calendar year declared. Dividends from
domestic corporations are expected to comprise a substantial part of the Fund's
gross income. To the extent that such dividends constitute a portion of the
Fund's gross income, a portion of the income distributions of the Fund may be
eligible for the deduction for dividends received by corporations.

A dividend received shortly after the purchase of shares reduces the net asset
value of the shares by the amount of the dividend and, although in effect a
return of capital, will be taxable to the shareholder. Thus, investors should
consider the implications of buying shares just prior to a dividend. The price
of shares purchased at that time includes the amount of the forthcoming
dividend, which nevertheless will be taxable to them.

A sale or exchange of shares is a taxable event that may result in gain or loss
that will be a capital gain or loss held by the shareholder as a capital asset,
and may qualify for reduced tax rates applicable to certain capital gains,
depending upon the shareholder's holding period for the shares. Further
information relating to tax consequences in contained in the Statement of
Additional Information. Shareholders of the Fund may be subject to state, local
and foreign taxes on Fund distributions and dispositions of fund shares.
Shareholders should consult their own tax advisers regarding the particular tax
consequences of an investment in the Fund.

The Fund is required by law to withhold 31% of taxable dividends and redemption
proceeds paid to certain shareholders who do not furnish a correct taxpayer
identification number (in the case of individuals, a social security number) and
in certain other circumstances. Any amounts so withheld are not an additional
tax, and may be applied against the affected shareholder's U.S. federal income
tax liability.

After each transaction, shareholders will receive a confirmation statement
giving complete details of the transaction except that statements will be sent
quarterly for transactions involving dividend reinvestment and periodic
investment and redemption programs. Information for income tax purposes will be
provided after the end of the calendar year. Shareholders are encouraged to
retain copies of their account confirmation statements or year-end statements
for tax reporting purposes. However, those who have incomplete records may
obtain historical account transaction information at a reasonable fee.

When more than one shareholder resides at the same address, certain reports and
communications to be delivered to such shareholders may be combined in the same
mailing package, and certain duplicate reports and communications may be
eliminated. Similarly, account statements to be sent to such shareholders may be
combined in the same mailing package or consolidated into a single statement.
However, a shareholder may request that the foregoing policies not be applied to
the shareholder's account.

NET ASSET VALUE

The net asset value per share of the Fund is the value of one share and is
determined separately for each class by dividing the value of the Fund's net
assets attributable to that class by the number of shares of that class
outstanding. The per share net asset value of the Class B and Class C shares of
the Fund will generally be lower than that of the Class A shares of the Fund
because of the higher expenses borne by the Class B and Class C shares. The net
asset value of shares of the Fund is computed as of the close of regular trading
on the New York Stock Exchange (the "Exchange") on each day the Exchange is open
for trading. The Exchange is scheduled to be closed on the following holidays:
New Year's Day, Martin

15
<PAGE>

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

An exchange-traded equity security is valued at its most recent sale price.
Lacking any sales, the security is valued at the calculated mean between the
most recent bid quotation and the most recent asked quotation (the "Calculated
Mean"). Lacking a Calculated Mean, the security is valued at the most recent bid
quotation. An equity security which is traded on The Nasdaq Stock Market
("Nasdaq") is valued at its most recent sale price. Lacking any sales, the
security is valued at the most recent bid quotation. The value of an equity
security not quoted on Nasdaq, but traded in another over-the-counter market, is
its most recent sale price. Lacking any sales, the security is valued at the
Calculated Mean. Lacking a Calculated Mean, the security is valued at the most
recent bid quotation.

Debt securities, other than money market instruments, are valued at prices
supplied by the Fund's pricing agent(s) which reflect broker/dealer supplied
valuations and electronic data processing techniques. Money market instruments
purchased with an original maturity of sixty days or less, maturing at par,
shall be valued at amortized cost, which the Board believes approximates market
value. If it is not possible to value a particular debt security pursuant to
these valuation methods, the value of such security is the most recent bid
quotation supplied by a bona fide marketmaker. If it is not possible to value a
particular debt security pursuant to the above methods, the Adviser may
calculate the price of that debt security, subject to limitations established by
the Board.

An exchange-traded options contract on securities, currencies, futures and other
financial instruments is valued at its most recent sale price on such exchange.
Lacking any sales, the options contract is valued at the Calculated Mean.
Lacking any Calculated Mean, the options contract is valued at the most recent
bid quotation in the case of a purchased options contract, or the most recent
asked quotation in the case of a written options contract. An options contract
on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price.

If a security is traded on more than one exchange, or upon one or more exchanges
and in the over-the-counter market, quotations are taken from the market in
which the security is traded most extensively.

If, in the opinion of the Fund's Valuation Committee, the value of a portfolio
asset as determined in accordance with these procedures does not represent the
fair market value of the portfolio asset, the value of the portfolio asset is
taken to be an amount which, in the opinion of the Valuation Committee,
represents fair market value on the basis of all available information. The
value of other portfolio holdings owned by the Fund is determined in a manner
which, in the discretion of the Valuation Committee most fairly reflects fair
market value of the property on the valuation date.

PURCHASE OF SHARES

ALTERNATIVE PURCHASE ARRANGEMENTS. Class A shares of the Fund are sold to
investors subject to an initial sales charge. Class B shares are sold without an
initial sales charge but are subject to higher ongoing expenses than Class A
shares and a contingent deferred sales charge payable upon certain redemptions.
Class B shares automatically convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales charge but are subject to
higher ongoing expenses than Class A shares, are subject to a contingent
deferred sales charge payable upon certain redemptions within the first year
following purchase, and do not convert into another class. When placing purchase
orders, investors must specify whether the order is for Class A, Class B or
Class C shares.

16
<PAGE>

The primary distinctions among the classes of the Fund's shares lie in their
initial and contingent deferred sales charge structures and in their ongoing
expenses, including asset-based sales charges in the form of Rule 12b-1
distribution fees. These differences are summarized in the table below. See,
also, "Summary of Expenses." Each class has distinct advantages and
disadvantages for different investors, and investors may choose the class that
best suits their circumstances and objectives.

<TABLE>
<CAPTION>
Annual 12b-1 Fees
(as a % of average daily
Sales Charge net assets) Other Information
------------------------------------ ------------------------ ---------------------------------
<S> <C> <C> <C>
Class A Maximum initial sales charge of None Initial sales charge waived or
5.75% of the public offering reduced for certain purchases
price

Class B Maximum contingent deferred sales ___% Shares convert to Class A shares
charge of 4% of redemption six years after issuance
proceeds; declines to zero after
six years

Class C Contingent deferred sales charge ___% No conversion feature
of 1% of redemption proceeds for
redemptions made during first
year after purchase
</TABLE>

The minimum initial investment for each class of the Fund is $1,000 and the
minimum subsequent investment is $100. The minimum initial investment for an
Individual Retirement Account is $250 and the minimum subsequent investment is
$50. Under an automatic investment plan, such as Bank Direct Deposit, Payroll
Direct Deposit or Government Direct Deposit, the minimum initial and subsequent
investment is $50. These minimum amounts may be changed at any time in
management's discretion.

Share certificates will not be issued unless requested in writing and may not be
available for certain types of account registrations. It is recommended that
investors not request share certificates unless needed for a specific purpose.
You cannot redeem shares by telephone or wire transfer or use the telephone
exchange privilege if share certificates have been issued. A lost or destroyed
certificate is difficult to replace and can be expensive to the shareholder (a
bond worth 2% or more of the certificate value is normally required).

INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES. The public offering price of
Class A shares for purchasers choosing the initial sales charge alternative is
the net asset value plus a sales charge, as set forth below.

<TABLE>
<CAPTION>
Sales Charge
------------------------------------------------------------
Allowed to
Dealers as a
As a Percentage As a Percentage Percentage of
of Offering Price of Net Asset Value* Offering Price
----------------- ------------------- --------------

Amount of Purchase

<S> <C> <C> <C>
Less than $50,000................................... 5.75% 6.10% 5.20%

$50,000 but less than $100,000...................... 4.50 4.71 4.00

$100,000 but less than $250,000..................... 3.50 3.63 3.00

$250,000 but less than $500,000..................... 2.60 2.67 2.25

$500,000 but less than $1 million................... 2.00 2.04 1.75

$1 million and over................................. 0.00** 0.00** ***
</TABLE>

- ----------
* Rounded to the nearest one-hundredth percent.

** Redemption of shares may be subject to a contingent deferred sales charge
as discussed below.

*** Commission is payable by ZKDI as discussed below.

The Fund receives the entire net asset value of all its Class A shares sold.
ZKDI, the Fund's principal underwriter, retains the sales charge on sales of
Class A shares from which it allows discounts from the applicable public
offering price to investment dealers, which discounts are uniform for all
dealers in the United States and its territories. The normal discount allowed to
dealers is set forth in the above table.

17
<PAGE>

Upon notice to all dealers with whom it has sales agreements, ZKDI may re-allow
up to the full applicable sales charge, as shown in the above table, during
periods and for transactions specified in such notice and such reallowances may
be based upon attainment of minimum sales levels. During periods when 90% or
more of the sales charge is reallowed, such dealers may be deemed to be
underwriters as that term is defined in the Securities Act of 1933.

Class A shares of the Fund may be purchased at net asset value to the extent
that the amount invested represents the net proceeds from a redemption of shares
of a mutual fund for which the Adviser does not serve as investment manager and
ZKDI does not serve as Distributor ("non-Kemper Fund") provided that: (a) the
investor has previously paid either an initial sales charge in connection with
the purchase of the non-Kemper Fund shares redeemed or a contingent deferred
sales charge in connection with the redemption of the non-Kemper Fund shares,
and (b) the purchase of Fund shares is made within 90 days after the date of
such redemption. To make such a purchase at net asset value, the investor or the
investor's dealer must, at the time of purchase, submit a request that the
purchase be processed at net asset value pursuant to this privilege. The
redemption of the shares of the non-Kemper Fund is, for federal income tax
purposes, a sale upon which a gain or loss may be realized. ZKDI may in its
discretion compensate firms for sales of Class A shares under this privilege at
a commission rate of 0.50% of the amount of Class A shares purchased.

Class A shares of the Fund may be purchased at net asset value by: (a) any
purchaser provided that the amount invested in the Fund or other Kemper Mutual
Funds listed under "Special Features--Class A Shares--Combined Purchases" totals
at least $1,000,000 including purchases of Class A shares pursuant to the
"Combined Purchases," "Letter of Intent" and "Cumulative Discount" features
described under "Special Features"; or (b) a participant-directed qualified
retirement plan described in Code Section 401(a) or a participant-directed non-
qualified deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district provided in each case
that such plan has not less than 200 eligible employees (the "Large Order NAV
Purchase Privilege"). Redemption within two years of shares purchased under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred sales
charge. See "Redemption or Repurchase of Shares--Contingent Deferred Sales
Charge--Large Order NAV Purchase Privilege."

ZKDI may in its discretion compensate investment dealers or other financial
services firms in connection with the sale of Class A shares of the Fund at net
asset value in accordance with the Large Order NAV Purchase Privilege up to the
following amounts: 1.00% of the net asset value of shares sold on amounts up to
$5 million, 0.50% on the next $45 million and 0.25% on amounts over $50 million.
The commission schedule will be reset on a calendar year basis for sales of
shares pursuant to the Large Order NAV Purchase Privilege. For purposes of
determining the appropriate commission percentage to be applied to a particular
sale under the foregoing schedules, ZKDI will consider the cumulative amount
invested by the purchaser in the Fund and other Kemper Mutual Funds listed under
"Special Features--Class A Shares--Combined Purchases," including purchases
pursuant to the "Combined Purchases," "Letter of Intent" and "Cumulative
Discount" features referred to above. The privilege of purchasing Class A shares
of the Fund at net asset value under the Large Order NAV Purchase Privilege is
not available if another net asset value purchase privilege is also applicable.

Class A shares of the Fund or any other Kemper Mutual Fund listed under "Special
Features--Class A Shares--Combined Purchases" may be purchased at net asset
value in any amount by members of the plaintiff class in the proceeding known as
Howard and Audrey Tabankin, et al. v. Kemper Short-Term Global Income Fund, et
al., Case No. 93 C 5231 (N.D. IL). This privilege is generally non-transferable
and continues for the lifetime of individual class members and for a ten year
period for non-individual class members. To make a purchase at net asset value
under this privilege, the investor must, at the time of purchase, submit a
written request that the purchase be processed at net asset value pursuant to
this privilege specifically identifying the purchaser as a member of the
"Tabankin Class." Shares purchased under this privilege will be maintained in a
separate account that includes only shares purchased under

18
<PAGE>

this privilege. For more details concerning this privilege, class members should
refer to the Notice of (1) Proposed Settlement with Defendants; and (2) Hearing
to Determine Fairness of Proposed Settlement, dated August 31, 1995, issued in
connection with the aforementioned court proceeding. For sales of Fund shares at
net asset value pursuant to this privilege, ZKDI may at its discretion pay
investment dealers and other financial services firms a concession, payable
quarterly, at an annual rate of up to 0.25% of net assets attributable to such
shares maintained and serviced by the firm. A firm becomes eligible for the
concession based upon assets in accounts attributable to shares purchased under
this privilege in the month after the month of purchase and the concession
continues until terminated by ZKDI. The privilege of purchasing Class A shares
of the Fund at net asset value under this privilege is not available if another
net asset value purchase privilege also applies.

Class A shares may be sold at net asset value in any amount to: (a) officers,
trustees, directors, employees (including retirees) and sales representatives of
the Fund, its investment manager, its principal underwriter or certain
affiliated companies, for themselves or members of their families: (b)
registered representatives and employees of broker-dealers having selling group
agreements with ZKDI and officers, directors and employees of service agents of
the Fund, for themselves or their spouses or dependent children; (c)
shareholders who owned shares of Kemper Value Fund, Inc. ("KVF") on September 8,
1995, and have continuously owned shares of KVF (or a Kemper Fund acquired by
exchange of KVF shares) since that date, for themselves or members of their
families, (d) any trust or pension, profit-sharing or other benefit plan for
only such persons; (e) persons who purchase such shares through bank trust
departments that process such trades through an automated, integrated mutual
fund clearing program provided by a third party clearing firm; (f) persons who
purchase shares of the Fund through ZKDI as part of an automated billing and
wage deduction program administered by RewardsPlus of America for the benefit of
employees of participating employer groups. Class A shares may be sold at net
asset value in any amount to selected employees (including their spouses and
dependent children) of banks and other financial services firms that provide
administrative services related to order placement and payment to facilitate
transactions in shares of the Fund for their clients pursuant to an agreement
with ZKDI or one of its affiliates. Only those employees of such banks and other
firms who as part of their usual duties provide services related to transactions
in Fund Class A shares may purchase Fund Class A shares at net asset value
hereunder. Class A shares may be sold at net asset value in any amount to unit
investment trusts sponsored by Ranson & Associates, Inc. In addition,
unitholders of unit investment trusts sponsored by Ranson & Associates, Inc. or
its predecessors may purchase the Fund's Class A shares at net asset value
through reinvestment programs described in the prospectuses of such trusts that
have such programs. The Fund's Class A shares may be sold at net asset value
through certain investment advisers registered under the 1940 Act and other
financial services firms that adhere to certain standards established by ZKDI,
including a requirement that such shares be sold for the benefit of their
clients participating in an investment advisory program under which such clients
pay a fee to the investment adviser or other firm for portfolio management and
other services. Such shares are sold for investment purposes and on the
condition that they will not be resold except through redemption or repurchase
by the Fund. The Fund may also issue Class A shares at net asset value in
connection with the acquisition of the assets of or merger or consolidation with
another investment company, or to shareholders in connection with the investment
or reinvestment of income and capital gain dividends.

Class A shares of the Fund may be purchased at net asset value in any amount by
certain professionals who assist in the promotion of Kemper Funds pursuant to
personal services contracts with ZKDI, for themselves or members of their
families. ZKDI in its discretion may compensate financial services firms for
sales of Class A shares under this privilege at a commission rate of 0.50% of
the amount of Class A shares purchased.

The sales charge scale is applicable to purchases made at one time by any
"purchaser" which includes an individual; or an individual, his or her spouse
and children under the age of 21; or a trustee or other fiduciary of a single
trust estate or single fiduciary account; or an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Code; or a pension,
profit-sharing or other employee benefit plan whether or not qualified under
Section 401 of the Code; or other organized group of persons

19
<PAGE>

whether incorporated or not, provided the organization has been in existence for
at least six months and has some purpose other than the purchase of redeemable
securities of a registered investment company at a discount. In order to qualify
for a lower sales charge, all orders from an organized group will have to be
placed through a single investment dealer or other firm and identified as
originating from a qualifying purchaser.

DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES. Investors choosing the
deferred sales charge alternative may purchase Class B shares at net asset value
per share without any sales charge at the time of purchase. Since Class B shares
are being sold without an initial sales charge, the full amount of the
investor's purchase payment will be invested in Class B shares for his or her
account. A contingent deferred sales charge may be imposed upon redemption of
Class B shares. See "Redemption or Repurchase of Shares--Contingent Deferred
Sales Charge--Class B Shares."

ZKDI compensates firms for sales of Class B shares at the time of sale at a
commission rate of up to 3.75% of the amount of Class B shares purchased. ZKDI
is compensated by the Fund for services as distributor and principal underwriter
for Class B shares. See "Investment Manager and Underwriter."

Class B shares of the Fund will automatically convert to Class A shares of the
Fund six years after issuance on the basis of the relative net asset value per
share of the Class B shares. Class B shareholders of the Fund who originally
acquired their shares as Initial Shares of Kemper Portfolios, formerly known as
Kemper Investment Portfolios ("KIP"), hold them subject to the same conversion
period schedule as that of their KIP Portfolio. Class B shares originally
representing Initial Shares of a KIP Portfolio will automatically convert to
Class A shares of the Fund six years after issuance of the Initial Shares for
shares issued on or after February 1, 1991 and seven years after issuance of the
Initial Shares for shares issued before February 1, 1991. The purpose of the
conversion feature is to relieve holders of Class B shares from the distribution
services fee when they have been outstanding long enough for ZKDI to have been
compensated for distribution related expenses. For purposes of conversion to
Class A shares, shares purchased through the reinvestment of dividends and other
distributions paid with respect to Class B shares in a shareholder's Fund
account will be converted to Class A shares on a pro rata basis.

PURCHASE OF CLASS C SHARES. The public offering price of the Class C shares of
the Fund is the next determined net asset value. No initial sales charge is
imposed. Since Class C shares are sold without an initial sales charge, the full
amount of the investor's purchase payment will be invested in Class C shares for
his or her account. A contingent deferred sales charge may be imposed upon the
redemption of Class C shares if they are redeemed within one year of purchase.
See "Redemption or Repurchase of Shares--Contingent Deferred Sales Charge--Class
C Shares." ZKDI currently advances to firms the first year distribution fee at a
rate of 0.75% of the purchase price of such shares. For periods after the first
year, ZKDI currently intends to pay firms for sales of Class C shares a
distribution fee, payable quarterly, at an annual rate of 0.75% of net assets
attributable to Class C shares maintained and serviced by the firm. ZKDI is
compensated by the Fund for services as distributor and principal underwriter
for Class C shares. See "Investment Manager and Underwriter."

WHICH ARRANGEMENT IS BETTER FOR YOU? The decision as to which class of shares
provides a more suitable investment for an investor depends on a number of
factors, including the amount and intended length of the investment. Investors
making investments that qualify for reduced sales charges might consider Class A
shares. Investors who prefer not to pay an initial sales charge and who plan to
hold their investment for more than six years might consider Class B shares.
Investors who prefer not to pay an initial sales charge but who plan to redeem
their shares within six years might consider Class C shares. Orders for Class B
shares or Class C shares for $500,000 or more will be declined. Orders for Class
B shares or Class C shares by employer sponsored employee benefit plans using
the subaccount record keeping system made available through the Shareholder
Service Agent will be invested instead in Class A shares at net asset value
where the combined subaccount value in the Fund or other Kemper Mutual Funds
listed under "Special Features--Class A Shares--Combined Purchases" is in excess
of $5

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<PAGE>

million including purchases pursuant to the "Combined Purchases," "Letter of
Intent" and "Cumulative Discount" features described under "Special Features."
For more information about the three sales arrangements, consult your financial
representative or the Shareholder Service Agent. Financial services firms may
receive different compensation depending upon which class of shares they sell.

GENERAL. Banks and other financial services firms may provide administrative
services related to order placement and payment to facilitate transactions in
shares of the Fund for their clients, and ZKDI may pay them a transaction fee up
to the level of the discount or commission allowable or payable to dealers as
described above. Banks currently are prohibited under the Glass-Steagall Act
from providing certain underwriting or distribution services. Banks or other
financial services firms may be subject to various state laws regarding the
services described above and may be required to register as dealers pursuant to
state law. If banking firms were prohibited from acting in any capacity or
providing any of the described services, management would consider what action,
if any, would be appropriate. ZKDI does not believe that termination of a
relationship with a bank would result in any material adverse consequences to
the Fund.

ZKDI may, from time to time, pay or allow to firms a 1% commission on the amount
of shares of the Fund sold by the firm under the following conditions: (i) the
purchased shares are held in a Kemper IRA account, (ii) the shares are purchased
as a direct "roll over" of a distribution from a qualified retirement plan
account maintained on a participant subaccount record keeping system provided by
Zurich Kemper Service Company, (iii) the registered representative placing the
trade is a member of ProStar, a group of persons designated by ZKDI in
acknowledgment of their dedication to the employee benefit plan area and (iv)
the purchase is not otherwise subject to a commission.

In addition to the discounts or commissions described above, ZKDI will, from
time to time, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash or other compensation, to firms that sell shares
of the Fund. Non-cash compensation includes luxury merchandise and trips to
luxury resorts. In some instances, such discounts, commissions or other
incentives will be offered only to certain firms that sell or are expected to
sell during specified time periods certain minimum amounts of shares of the Fund
or other funds underwritten by ZKDI.

Orders for the purchase or redemption of shares of the Fund will be confirmed at
a price based on the net asset value of the Fund next determined after receipt
in good order by ZKDI of the order accompanied by payment. However, orders
received by dealers or other firms prior to the determination of net asset value
(see "Net Asset Value") and received in good order by ZKDI prior to the close of
its business day will be confirmed at a price based on the net asset value
effective on that day ("trade date"). The Fund reserves the right to determine
the net asset value more frequently than once a day if deemed desirable. Dealers
and other financial services firms are obligated to transmit orders promptly.
Collection may take significantly longer for a check drawn on a foreign bank
than for a check drawn on a domestic bank. Therefore, if an order is accompanied
by a check drawn on a foreign bank, funds must normally be collected before
shares will be purchased. See "Purchase and Redemption of Shares" in the
Statement of Additional Information.

Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem Fund shares. Some may establish higher minimum
investment requirements than set forth above. Firms may arrange with their
clients for other investment or administrative services. Such firms may
independently establish and charge additional amounts to their clients for such
services, which charges would reduce the clients' return. Firms also may hold
Fund shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Fund's transfer agent will have no information
with respect to or control over accounts of specific shareholders. Such
shareholders may obtain access to their accounts and information about their
accounts only from their firm. Certain of these firms may receive compensation
from the Fund through the Shareholder Service Agent for recordkeeping and other
expenses relating to these nominee accounts. In addition, certain privileges
with respect to the purchase

21
<PAGE>

and redemption of shares or the reinvestment of dividends may not be available
through such firms. Some firms may participate in a program allowing them access
to their clients' accounts for servicing including, without limitation,
transfers of registration and dividend payee changes; and may perform functions
such as generation of confirmation statements and disbursement of cash
dividends. Such firms, including affiliates of ZKDI, may receive compensation
from the Fund through the Shareholder Service Agent for these services. This
prospectus should be read in connection with such firms' material regarding
their fees and services.

The Fund reserves the right to withdraw all or any part of the offering made by
this prospectus and to reject purchase orders for any reason. Also, from time to
time, the Fund may temporarily suspend the offering of any class of its shares
to new investors. During the period of such suspension, persons who are already
shareholders of such class of the Fund normally are permitted to continue to
purchase additional shares of such class and to have dividends reinvested.

TAX IDENTIFICATION NUMBER. Be sure to complete the Tax Identification Number
section of the Fund's application when you open an account. Federal tax law
requires the Fund to withhold 31% of taxable dividends, capital gains
distributions and redemption and exchange proceeds from accounts (other than
those of certain exempt payees) without a correct certified Social Security or
tax identification number and certain other certified information or upon
notification from the IRS or a broker that withholding is required. The Fund
reserves the right to reject new account applications without a correct
certified Social Security or tax identification number. The Fund also reserves
the right, following 30 days' notice, to redeem all shares in accounts without a
correct certified Social Security or tax identification number. A shareholder
may avoid involuntary redemption by providing the Fund with a tax identification
number during the 30-day notice period.

Shareholders should direct their inquiries to Zurich Kemper Service Company, 811
Main Street, Kansas City, Missouri 64105-2005 or to the firm from which they
received this prospectus.

REDEMPTION OR REPURCHASE OF SHARES

GENERAL. Any shareholder may require the Fund to redeem his or her shares. When
shares are held for the account of a shareholder by the Fund's transfer agent,
the shareholder may redeem such shares by sending a written request with
signatures guaranteed to Kemper Mutual Funds, Attention: Redemption Department,
P.O. Box 419557, Kansas City, Missouri 64141-6557. When certificates for shares
have been issued, they must be mailed to or deposited with the Shareholder
Service Agent, along with a duly endorsed stock power and accompanied by a
written request for redemption. Redemption requests and a stock power must be
endorsed by the account holder with signatures guaranteed by a commercial bank,
trust company, savings and loan association, federal savings bank, member firm
of a national securities exchange or other eligible financial institution. The
redemption request and stock power must be signed exactly as the account is
registered including any special capacity of the registered owner. Additional
documentation may be requested, and a signature guarantee is normally required,
from institutional and fiduciary account holders, such as corporations,
custodians (e.g., under the Uniform Transfers to Minors Act), executors,
administrators, trustees or guardians.

The redemption price for shares of the Fund will be the net asset value per
share of the Fund next determined following receipt by the Shareholder Service
Agent of a properly executed request with any required documents as described
above. Payment for shares redeemed will be made in cash as promptly as
practicable but in no event later than seven days after receipt of a properly
executed request accompanied by any outstanding share certificates in proper
form for transfer. When the Fund is asked to redeem shares for which it may not
have yet received good payment (i.e., purchases by check, EXPRESS-Transfer or
Bank Direct Deposit), it may delay transmittal of redemption proceeds until it
has determined that collected funds have been received for the purchase of such
shares, which will be up to 10 days from receipt by the Fund of the purchase
amount. The redemption within two years of Class A shares purchased

22
<PAGE>

at net asset value under the Large Order NAV Purchase Privilege may be subject
to a contingent deferred sales charge (see "Purchase of Shares--Initial Sales
Charge Alternative--Class A Shares") and the redemption of Class B shares within
six years may be subject to a contingent deferred sales charge (see "Contingent
Deferred Sales Charge--Class B Shares" below), and the redemption of Class C
shares within the first year following purchase may be subject to a contingent
deferred sales charge (see "Contingent Deferred Sales Charge--Class C Shares"
below).

Because of the high cost of maintaining small accounts, the Fund reserves the
right to redeem an account (and, in the case of Class B shares and Class C
shares, impose any applicable contingent deferred sales charge) that falls below
the minimum investment level, currently $1,000, as a result of redemptions.
Currently, Individual Retirement Accounts (IRAs) and employee benefit plan
accounts are not subject to this procedure. A shareholder will be notified in
writing and will be allowed 60 days to make additional purchases to bring the
account value up to the minimum investment level before the Fund redeems the
shareholder's account. The investment required to reach that level may be made
at net asset value (without any initial sales charge in the case of Class A
shares).

Because of the high cost of maintaining small accounts, the Fund may assess a
quarterly fee of $9 on any account with a balance below $1,000 for the quarter.
The fee will not apply to accounts enrolled in an automatic investment program,
Individual Retirement Accounts or employer sponsored employee benefit plans
using the subaccount record keeping system made available through the
Shareholder Service Agent.

Shareholders can request the following telephone privileges: expedited wire
transfer redemptions and EXPRESS-Transfer transactions (see "Special Features")
and exchange transactions for individual and institutional accounts and
pre-authorized telephone redemption transactions for certain institutional
accounts. Shareholders may choose these privileges on the account application or
by contacting the Shareholder Service Agent for appropriate instructions. Please
note that the telephone exchange privilege is automatic unless the shareholder
refuses it on the account application. The Fund or its agents may be liable for
any losses, expenses or costs arising out of any fraudulent or unauthorized
telephone requests pursuant to these privileges unless the Fund or its agents
reasonably believe, based upon reasonable verification procedures, that the
telephonic instructions are genuine. The shareholder will bear the risk of loss,
including loss resulting from fraudulent or unauthorized transactions, so long
as reasonable verification procedures are followed. Verification procedures
include recording instructions, requiring certain identifying information before
acting upon instructions and sending written confirmations.

TELEPHONE REDEMPTIONS. If the proceeds of the redemption (prior to the
imposition of any contingent deferred sales charge) are $50,000 or less and the
proceeds are payable to the shareholder of record at the address of record,
normally a telephone request or a written request by any one account holder
without a signature guarantee is sufficient for redemptions by individual or
joint account holders, and trust, executor and guardian account holders
(excluding custodial accounts for gifts and transfers to minors), provided the
trustee, executor or guardian is named in the account registration. Other
institutional account holders and guardian account holders of custodial accounts
for gifts and transfers to minors may exercise this special privilege of
redeeming shares by telephone request or written request without a signature
guarantee subject to the same conditions as individual account holders and
subject to the limitations on liability described under "General" above,
provided that this privilege has been pre-authorized by the institutional
account holder or guardian account holder by written instruction to the
Shareholder Service Agent with signatures guaranteed. Telephone requests may be
made by calling 1-800-621-1048. Shares purchased by check or through
EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this privilege
of redeeming shares by telephone request until such shares have been owned for
at least 10 days. This privilege of redeeming shares by telephone request or by
written request without a signature guarantee may not be used to redeem shares
held in certificated form and may not be used if the shareholder's account has
had an address change within 30 days of the redemption request. During periods
when it is difficult to contact the Shareholder Service Agent by telephone, it
may be difficult to use the telephone redemption privilege, although investors
can still redeem by mail. The Fund

23
<PAGE>

reserves the right to terminate or modify this privilege at any time.

REPURCHASES (CONFIRMED REDEMPTIONS). A request for repurchase may be
communicated by a shareholder through a securities dealer or other financial
services firm to ZKDI, which the Fund has authorized to act as its agent. There
is no charge by ZKDI with respect to repurchases; however, dealers or other
firms may charge customary commissions for their services. Dealers and other
financial services firms are obligated to transmit orders promptly. The
repurchase price will be the net asset value next determined after receipt of a
request by ZKDI. However, requests for repurchases received by dealers or other
firms prior to the determination of net asset value (see "Net Asset Value") and
received by ZKDI prior to the close of ZKDI's business day will be confirmed at
the net asset value effective on that day. The offer to repurchase may be
suspended at any time. Requirements as to stock powers, certificates, payments
and delay of payments are the same as for redemptions.

EXPEDITED WIRE TRANSFER REDEMPTIONS. If the account holder has given
authorization for expedited wire redemption to the account holder's brokerage or
bank account, shares of the Fund can be redeemed and proceeds sent by federal
wire transfer to a single previously designated account. Requests received by
the Shareholder Service Agent prior to the determination of net asset value will
result in shares being redeemed that day at the net asset value effective on
that day and normally the proceeds will be sent to the designated account the
following business day. Delivery of the proceeds of a wire redemption request of
$250,000 or more may be delayed by the Fund for up to seven days if the Fund or
the Shareholder Servicing Agent deems it appropriate under then current market
conditions. Once authorization is on file, the Shareholder Service Agent will
honor requests by telephone at 1-800-621-1048 or in writing, subject to the
limitations on liability described under "General" above. The Fund is not
responsible for the efficiency of the federal wire system or the account
holder's financial services firm or bank. The Fund currently does not charge the
account holder for wire transfers. The account holder is responsible for any
charges imposed by the account holder's firm or bank. There is a $1,000 wire
redemption minimum (including any contingent deferred sales charge). To change
the designated account to receive wire redemption proceeds, send a written
request to the Shareholder Service Agent with signatures guaranteed as described
above or contact the firm through which shares of the Fund were purchased.
Shares purchased by check or through EXPRESS-Transfer or Bank Direct Deposit may
not be redeemed by wire transfer until such shares have been owned for at least
10 days. Account holders may not use this privilege to redeem shares held in
certificated form. During periods when it is difficult to contact the
Shareholder Service Agent by telephone, it may be difficult to use the expedited
wire transfer redemption privilege. The Fund reserves the right to terminate or
modify this privilege at any time.

CONTINGENT DEFERRED SALES CHARGE--LARGE ORDER NAV PURCHASE PRIVILEGE. A
contingent deferred sales charge may be imposed upon redemption of Class A
shares that are purchased under the Large Order NAV Purchase Privilege as
follows: 1% if they are redeemed within one year of purchase and 0.50% if they
are redeemed during the second year following purchase. The charge will not be
imposed upon redemption of reinvested dividends or share appreciation. The
charge is applied to the value of the shares redeemed excluding amounts not
subject to the charge. The contingent deferred sales charge will be waived in
the event of: (a) redemptions by a participant-directed qualified retirement
plan described in Code Section 401(a) or a participant-directed non-qualified
deferred compensation plan described in Code Section 457 or a participant-
directed qualified retirement plan described in Code Section 403(b)(7) which is
not sponsored by a K-12 school district; (b) redemptions by employer sponsored
employee benefit plans using the subaccount record keeping system made available
through the Shareholder Service Agent; (c) redemption of shares of a shareholder
(including a registered joint owner) who has died; (d) redemption of shares of a
shareholder (including a registered joint owner) who after purchase of the
shares being redeemed becomes totally disabled (as evidenced by a determination
by the federal Social Security Administration); (e) redemptions under the Fund's
Systematic Withdrawal Plan at a maximum of 10% per year of the net asset value
of the account; and (f) redemptions of shares whose dealer of record at the time
of the investment notifies ZKDI that the dealer waives the commission applicable
to such Large Order NAV Purchase.

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<PAGE>

CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES. A contingent deferred sales
charge may be imposed upon redemption of Class B shares. There is no such charge
upon redemption of any share appreciation or reinvested dividends on Class B
shares. The charge is computed at the following rates applied to the value of
the shares redeemed excluding amounts not subject to the charge.

Contingent
Deferred
Sales
Year of Redemption After Purchase Charge
--------------------------------- ---------

First....................... 4%
Second...................... 3%
Third....................... 3%
Fourth...................... 2%
Fifth....................... 2%
Sixth....................... 1%

The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special
Features--Systematic Withdrawal Plan" below), (d) for redemptions made pursuant
to any IRA systematic withdrawal based on the shareholder's life expectancy
including, but not limited to, substantially equal periodic payments described
in Code Section 72(t)(2)(A)(iv) prior to age 59 1/2 and (e) for redemptions to
satisfy required minimum distributions after age 70 1/2 from an IRA account
(with the maximum amount subject to this waiver being based only upon the
shareholder's Kemper IRA accounts). The contingent deferred sales charge will
also be waived in connection with the following redemptions of shares held by
employer sponsored employee benefit plans maintained on the subaccount record
keeping system made available by the Shareholder Service Agent: (a) redemptions
to satisfy participant loan advances (note that loan repayments constitute new
purchases for purposes of the contingent deferred sales charge and the
conversion privilege), (b) redemptions in connection with retirement
distributions (limited at any one time to 10% of the total value of plan assets
invested in the Fund), (c) redemptions in connection with distributions
qualifying under the hardship provisions of the Code and (d) redemptions
representing returns of excess contributions to such plans.

CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES. A contingent deferred sales
charge of 1% may be imposed upon redemption of Class C shares if they are
redeemed within one year of purchase. The charge will not be imposed upon
redemption of reinvested dividends or share appreciation. The charge is applied
to the value of the shares redeemed excluding amounts not subject to the charge.
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (limited to 10% of the
net asset value of the account during the first year, see "Special
Features--Systematic Withdrawal Plan"), (d) for redemptions made pursuant to any
IRA systematic withdrawal based on the shareholder's life expectancy including,
but not limited to, substantially equal periodic payments described in Internal
Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2, (e) for redemptions to
satisfy required minimum distributions after age 70 1/2 from an IRA account
(with the maximum amount subject to this waiver being based only upon the
shareholder's Kemper Fund IRA accounts); (f) for any participant-directed
redemption of shares held by employer sponsored employee benefit plans
maintained on the subaccount record keeping system made available by the
Shareholder Service Agent; and (g) for redemption of shares by an employer
sponsored employee benefit plan that (i) offers funds in addition to Kemper
Funds (i.e., "multi-manager"), and (ii) whose dealer of record has waived the
advance of the first year administrative service and distribution fees
applicable to such shares and agrees to receive such fees quarterly.

25
<PAGE>

CONTINGENT DEFERRED SALES CHARGE--GENERAL. The following example will illustrate
the operation of the contingent deferred sales charge. Assume that an investor
makes a single purchase of $10,000 of the Fund's Class B shares and that 16
months later the value of the shares has grown by $1,000 through reinvested
dividends and by an additional $1,000 in appreciation to a total of $12,000. If
the investor were then to redeem the entire $12,000 in share value, the
contingent deferred sales charge would be payable only with respect to $10,000
because neither the $1,000 of reinvested dividends nor the $1,000 of share
appreciation is subject to the charge. The charge would be at the rate of 3%
($300) because it was in the second year after the purchase was made.

The rate of the contingent deferred sales charge is determined by the length of
the period of ownership. Investments are tracked on a monthly basis. The period
of ownership for this purpose begins the first day of the month in which the
order for the investment is received. For example, an investment made in
December, 1997 will be eligible for the second year's charge if redeemed on or
after December 1, 1998. In the event no specific order is requested, the
redemption will be made first from shares representing reinvested dividends and
then from the earliest purchase of shares. ZKDI receives any contingent deferred
sales charge directly.

REINVESTMENT PRIVILEGE. A shareholder who has redeemed Class A shares of the
Fund or any other Kemper Mutual Fund listed under "Special Features--Class A
Shares--Combined Purchases" (other than shares of Kemper Cash Reserves Fund
purchased directly at net asset value) may reinvest up to the full amount
redeemed at net asset value at the time of the reinvestment in Class A shares of
the Fund or of the other listed Kemper Mutual Funds. A shareholder of the Fund
or any other Kemper Mutual Fund who redeems Class A shares purchased under the
Large Order NAV Purchase Privilege (see "Purchase of Shares--Initial Sales
Charge Alternative--Class A Shares"), Class B shares or Class C shares and
incurs a contingent deferred sales charge may reinvest up to the full amount
redeemed at net asset value at the time of the reinvestment in the same class of
shares of the Fund or of other Kemper Mutual Funds. The amount of any contingent
deferred sales charge also will be reinvested. These reinvested shares will
retain their original cost and purchase date for purposes of the contingent
deferred sales charge schedule. Also, a holder of Class B shares who has
redeemed shares may reinvest up to the full amount redeemed, less any applicable
contingent deferred sales charge that may have been imposed upon the redemption
of such shares, at net asset value in Class A shares of the Fund or of the other
Kemper Mutual Funds listed under "Special Features--Class A Shares--Combined
Purchases." Purchases through the reinvestment privilege are subject to the
minimum investment requirements applicable to the shares being purchased and may
only be made for Kemper Mutual Funds available for sale in the shareholder's
state of residence as listed under "Special Features--Exchange Privilege." The
reinvestment privilege can be used only once as to any specific shares and
reinvestment must be effected within six months of the redemption. If a loss is
realized on the redemption of Fund shares, the reinvestment in shares of the
Fund may be subject to the "wash sale" rules if made within 30 days of the
redemption, resulting in a postponement of the recognition of such loss for
federal income tax purposes. The reinvestment privilege may be terminated or
modified at any time.

REDEMPTION IN KIND. Although it is the Fund's present policy to redeem in cash,
if the Board of Trustees determines that a material adverse effect would be
experienced by the remaining shareholders if payment were made wholly in cash,
the Fund will satisfy the redemption request in whole or in part by a
distribution of portfolio securities in lieu of cash, in conformity with the
applicable rules of the Securities and Exchange Commission, taking such
securities at the same value used to determine net asset value, and selecting
the securities in such manner as the Board of Trustees may deem fair and
equitable. If such a distribution occurred, shareholders receiving securities
and selling them could receive less than the redemption value of such securities
and in addition would incur certain transaction costs. Such a redemption would
not be as liquid as a redemption entirely in cash.

26
<PAGE>

SPECIAL FEATURES

CLASS A SHARES--COMBINED PURCHASES. The Fund's Class A shares (or the
equivalent) may be purchased at the rate applicable to the discount bracket
attained by combining concurrent investments in Class A shares of any of the
following funds: Kemper U.S. Growth and Income Fund, Kemper Global Blue Chip
Fund, Kemper International Growth and Income Fund, Kemper Emerging Markets
Income Fund, Kemper Emerging Markets Growth Fund, Kemper Latin America Fund,
Kemper Technology Fund, Kemper Total Return Fund, Kemper Growth Fund, Kemper
Small Capitalization Equity Fund, Kemper Income and Capital Preservation Fund,
Kemper Municipal Bond Fund, Kemper Diversified Income Fund, Kemper High Yield
Series, Kemper U.S. Government Securities Fund, Kemper International Fund,
Kemper State Tax-Free Income Series, Kemper Adjustable Rate U.S. Government
Fund, Kemper Blue Chip Fund, Kemper Global Income Fund, Kemper Target Equity
Fund (series are subject to a limited offering period), Kemper Intermediate
Municipal Bond Fund, Kemper Cash Reserves Fund, Kemper U.S. Mortgage Fund,
Kemper Short-Intermediate Government Fund, Kemper Value Fund, Inc., Kemper
Value+Growth Fund, Kemper Quantitative Equity Fund, Kemper Horizon Fund, Kemper
Europe Fund, Kemper Asian Growth Fund and Kemper Aggressive Growth Fund ("Kemper
Mutual Funds"). Except as noted below, there is no combined purchase credit for
direct purchases of shares of Kemper Money Funds, Cash Equivalent Fund,
Tax-Exempt California Money Market Fund, Cash Account Trust, Investor's
Municipal Cash Fund or Investors Cash Trust ("Money Market Funds"), which are
not considered "Kemper Mutual Funds" for purposes hereof. For purposes of the
Combined Purchases feature described above as well as for the Letter of Intent
and Cumulative Discount features described below, employer sponsored employee
benefit plans using the subaccount record keeping system made available through
the Shareholder Service Agent may include: (a) Money Market Funds as "Kemper
Mutual Funds," (b) all classes of shares of any Kemper Mutual Fund and (c) the
value of any other plan investments, such as guaranteed investment contracts and
employer stock, maintained on such subaccount record keeping system.

CLASS A SHARES--LETTER OF INTENT. The same reduced sales charges for Class A
shares, as shown in the applicable prospectus, also apply to the aggregate
amount of purchases of such Kemper Mutual Funds listed above made by any
purchaser within a 24-month period under a written Letter of Intent ("Letter")
provided by ZKDI. The Letter, which imposes no obligation to purchase or sell
additional Class A shares, provides for a price adjustment depending upon the
actual amount purchased within such period. The Letter provides that the first
purchase following execution of the Letter must be at least 5% of the amount of
the intended purchase, and that 5% of the amount of the intended purchase
normally will be held in escrow in the form of shares pending completion of the
intended purchase. If the total investments under the Letter are less than the
intended amount and thereby qualify only for a higher sales charge than actually
paid, the appropriate number of escrowed shares are redeemed and the proceeds
used toward satisfaction of the obligation to pay the increased sales charge.
The Letter for an employer sponsored employee benefit plan maintained on the
subaccount record keeping system available through the Shareholder Service Agent
may have special provisions regarding payment of any increased sales charge
resulting from a failure to complete the intended purchase under the Letter. A
shareholder may include the value (at the maximum offering price) of all shares
of such Kemper Mutual Funds held of record as of the initial purchase date under
the Letter as an "accumulation credit" toward the completion of the Letter, but
no price adjustment will be made on such shares. Only investments in Class A
shares of the Fund are included for this privilege.

CLASS A SHARES--CUMULATIVE DISCOUNT. The Fund's Class A shares also may be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of Fund shares being purchased the value of all Class A shares of the
above mentioned Kemper Mutual Funds (computed at the maximum offering price at
the time of the purchase for which the discount is applicable) already owned by
the investor.

CLASS A SHARES--AVAILABILITY OF QUANTITY DISCOUNTS. An investor or the
investor's

27
<PAGE>

dealer or other financial services firm must notify the Shareholder Service
Agent or ZKDI whenever a quantity discount or reduced sales charge is applicable
to a purchase. Upon such notification, the investor will receive the lowest
applicable sales charge. Quantity discounts described above may be modified or
terminated at any time.

EXCHANGE PRIVILEGE. Shareholders of Class A, Class B and Class C shares may
exchange their shares for shares of the corresponding class of other Kemper
Mutual Funds in accordance with the provisions below.

Class A Shares. Class A shares of the Kemper Mutual Funds and shares of the
Money Market Funds listed under "Special Features--Class A Shares--Combined
Purchases" above may be exchanged for each other at their relative net asset
values. Shares of Money Market Funds and Kemper Cash Reserves Fund that were
acquired by purchase (not including shares acquired by dividend reinvestment)
are subject to the applicable sales charge on exchange. Series of Kemper Target
Equity Fund are available on exchange only during the offering period for such
series as described in the applicable prospectus. Cash Equivalent Fund,
Tax-Exempt California Money Market Fund, Cash Account Trust, Investor's
Municipal Cash Fund and Investors Cash Trust are available on exchange but only
through a financial services firm having a services agreement with ZKDI.

Class A shares of the Fund purchased under the Large Order NAV Purchase
Privilege may be exchanged for Class A shares of another Kemper Mutual Fund or a
Money Market Fund under the exchange privilege described above without paying
any contingent deferred sales charge at the time of exchange. If the Class A
shares received on exchange are redeemed thereafter, a contingent deferred sales
charge may be imposed in accordance with the foregoing requirements provided
that the shares redeemed will retain their original cost and purchase date for
purposes of calculating the contingent deferred sales charge.

Class B Shares. Class B shares of the Fund and Class B shares of any other
Kemper Mutual Fund listed under "Special Features--Class A Shares--Combined
Purchases" may be exchanged for each other at their relative net asset values.
Class B shares may be exchanged without any contingent deferred sales charge
being imposed at the time of exchange. For purposes of calculating the
contingent deferred sales charge that may be imposed upon the redemption of the
Class B shares received on exchange, amounts exchanged retain their original
cost and purchase date.

Class C Shares. Class C shares of the Fund and Class C shares of any other
Kemper Mutual Fund listed under "Special Features--Class A Shares--Combined
Purchases" may be exchanged for each other at their relative net asset values.
Class C shares may be exchanged without a contingent deferred sales charge being
imposed at the time of exchange. For determining whether there is a contingent
deferred sales charge that may be imposed upon the redemption of the Class C
shares received by exchange, the cost and purchase date of the shares that were
originally purchased and exchanged.

General. Shares of a Kemper Mutual Fund with a value in excess of $1,000,000
(except Kemper Cash Reserves Fund) acquired through exchange from another Kemper
Mutual Fund, or from a Money Market Fund, may not be exchanged thereafter until
they have been owned for 15 days (the "15 Day Hold Policy"). For purposes of
determining whether the 15 Day Hold Policy applies to a particular exchange, the
value of the shares to be exchanged shall be computed by aggregating the value
of shares being exchanged for all accounts under common control, direction or
advice, including without limitation, accounts administered by a financial
services firm offering market timing, asset allocation or similar services. The
total value of shares being exchanged must at least equal the minimum investment
requirement of the Kemper Fund into which they are being exchanged. Exchanges
are made based on relative dollar values of the shares involved in the exchange.
There is no service fee for an exchange; however, dealers or other firms may
charge for their services in effecting exchange transactions. Exchanges will be
effected by redemption of shares of the fund held and purchase of shares of the
other fund. For federal income tax purposes, any such exchange constitutes a
sale upon which a gain or loss

28
<PAGE>

may be realized, depending upon whether the value of the shares being exchanged
is more or less than the shareholder's adjusted cost basis of such shares.
Shareholders interested in exercising the exchange privilege may obtain
prospectuses of the other funds from dealers, other firms or ZKDI. Exchanges may
be accomplished by a written request to Zurich Kemper Service Company,
Attention: Exchange Department, P.O. Box 419557, Kansas City, Missouri
64141-6557, or by telephone if the shareholder has given authorization. Once the
authorization is on file, the Shareholder Service Agent will honor requests by
telephone at 1-800-621-1048, subject to the limitations on liability under
"Redemption or Repurchase of Shares--General." Any share certificates must be
deposited prior to any exchange of such shares. During periods when it is
difficult to contact the Shareholder Service Agent by telephone, it may be
difficult to implement the telephone exchange privilege. The exchange privilege
is not a right and may be suspended, terminated or modified at any time.
Exchanges may only be made for Kemper Funds that are eligible for sale in the
shareholder's state of residence. Currently, Tax-Exempt California Money Market
Fund is available for sale only in California and Investor's Municipal Cash Fund
is available for sale only in New York, Connecticut, New Jersey and
Pennsylvania. Except as otherwise permitted by applicable regulations, 60 days'
prior written notice of any termination or material change will be provided.

SYSTEMATIC EXCHANGE PRIVILEGE. The owner of $1,000 or more of any class of the
shares of a Kemper Mutual Fund or Money Market Fund may authorize the automatic
exchange of a specified amount ($100 minimum) of such shares for shares of the
same class of another such Kemper Fund. If selected, exchanges will be made
automatically until the privilege is terminated by the shareholder or the other
Kemper Fund. Exchanges are subject to the terms and conditions described above
under "Exchange Privilege," except that the $1,000 minimum investment
requirement for the Kemper Fund acquired on exchange is not applicable. This
privilege may not be used for the exchange of shares held in certificated form.

EXPRESS-TRANSFER. EXPRESS-Transfer permits the transfer of money via the
Automated Clearing House System (minimum $100 and maximum $50,000) from a
shareholder's bank, savings and loan, or credit union account to purchase shares
in the Fund. Shareholders can also redeem shares (minimum $100 and maximum
$50,000) from their Fund account and transfer the proceeds to their bank,
savings and loan, or credit union checking account. Shares purchased by check or
through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this
privilege until such shares have been owned for at least 10 days. By enrolling
in EXPRESS-Transfer, the shareholder authorizes the Shareholder Service Agent to
rely upon telephone instructions from any person to transfer the specified
amounts between the shareholder's Fund account and the predesignated bank,
savings and loan or credit union account, subject to the limitations on
liability under "Redemption or Repurchase of Shares--General." Once enrolled in
EXPRESS-Transfer, a shareholder can initiate a transaction by calling Kemper
Shareholder Services toll free at 1-800-621-1048, Monday through Friday, 8:00
a.m. to 3:00 p.m. Chicago time. Shareholders may terminate this privilege by
sending written notice to Zurich Kemper Service Company, P.O. Box 419415, Kansas
City, Missouri 64141-6415. Termination will become effective as soon as the
Shareholder Service Agent has had a reasonable amount of time to act upon the
request. EXPRESS-Transfer cannot be used with passbook savings accounts or for
tax-deferred plans such as Individual Retirement Accounts ("IRAs").

BANK DIRECT DEPOSIT. A shareholder may purchase additional Fund shares through
an automatic investment program. With the Bank Direct Deposit Purchase Plan,
investments are made automatically (minimum $50, maximum $50,000) from the
shareholder's account at a bank, savings and loan or credit union into the
shareholder's Fund account. By enrolling in Bank Direct Deposit, the shareholder
authorizes the Fund and its agents to either draw checks or initiate Automated
Clearing House debits against the designated account at a bank or other
financial institution. This privilege may be selected by completing the
appropriate section on the Account Application or by contacting the Shareholder
Service Agent for appropriate forms. A shareholder may terminate his or her Plan
by sending written notice to Zurich Kemper Service Company, P.O. Box 419415,
Kansas City, Missouri 64141-6415. Termination by a shareholder will become
effective within thirty days after the Shareholder Service Agent has received

29
<PAGE>

the request. The Fund may immediately terminate a shareholder's Plan in the
event that any item is unpaid by the shareholder's financial institution. The
Fund may terminate or modify this privilege at any time.

PAYROLL DIRECT DEPOSIT AND GOVERNMENT DIRECT DEPOSIT. A shareholder may invest
in the Fund through Payroll Direct Deposit or Government Direct Deposit. Under
these programs, all or a portion of a shareholder's net pay or government check
is automatically invested in their Fund account each payment period. A
shareholder may terminate participation in these programs by giving written
notice to the shareholder's employer or government agency, as appropriate. (A
reasonable time to act is required.) The Fund is not responsible for the
efficiency of the employer or government agency making the payment or any
financial institutions transmitting payments.

SYSTEMATIC WITHDRAWAL PLAN. The owner of $5,000 or more of a class of the Fund's
shares at the offering price (net asset value plus, in the case of Class A
shares, the initial sales charge) may provide for the payment from the owner's
account of any requested dollar amount up to $50,000 to be paid to the owner or
a designated payee monthly, quarterly, semiannually or annually. The $5,000
minimum account size is not applicable to Individual Retirement Accounts. The
minimum periodic payment is $100. The maximum annual rate at which Class B
shares (and Class A shares purchased under the Large Order NAV Purchase
Privilege and Class C shares in the first year following the purchase) may be
redeemed under a systematic withdrawal plan is 10% of the net asset value of the
account. Any income and capital gain dividends will be automatically reinvested
at net asset value. A sufficient number of full and fractional shares will be
redeemed to make the designated payment. Depending upon the size of the payments
requested and fluctuations in the net asset value of the shares redeemed,
redemptions for the purpose of making such payments may reduce or even exhaust
the account.

The purchase of Class A shares while participating in a systematic withdrawal
plan ordinarily will be disadvantageous to the investor because the investor
will be paying a sales charge on the purchase of shares at the same time that
the investor is redeeming shares upon which a sales charge may already have been
paid. Therefore, the Fund will not knowingly permit additional investments of
less than $2,000 if the investor is at the same time making systematic
withdrawals. ZKDI will waive the contingent deferred sales charge on redemption
of Class A shares purchased under the Large Order NAV Purchase Privilege, Class
B shares and Class C shares made pursuant to a systematic withdrawal plan. The
right is reserved to amend the systematic withdrawal plan on 30 days' notice.
The plan may be terminated at any time by the investor or the Fund.

TAX-SHELTERED RETIREMENT PLANS. The Shareholder Service Agent provides
retirement plan services and documents and ZKDI can establish investor accounts
in any of the following types of retirement plans:

o Individual Retirement Accounts ("IRAs") with __________________ as
custodian. This includes Savings Incentive Match Plan For Employees of
Small Employers ("SIMPLE") IRA accounts and Simplified Employee Pension
Plan ("SEP") IRA accounts and prototype documents.

o 403(b)(7) Custodial Accounts with __________________ as custodian. This
type of plan is available to employees of most non-profit organizations.

o Prototype money purchase pension and profit-sharing plans may be adopted
by employers. The maximum annual contribution per participant is the
lesser of 25% of compensation or $30,000.

Brochures describing the above plans as well as model defined benefit plans,
target benefit plans, 457 plans, 401(k) plans, SIMPLE 401(k) plans and materials
for establishing them are available from the Shareholder Service Agent upon
request. The brochures for plans with __________________ as custodian describe
the current fees payable to __________________ for its services as custodian.
Investors should

30
<PAGE>

consult with their own tax advisers before establishing a retirement plan.

PERFORMANCE

TO BE UPDATED

The Fund may advertise several types of performance information for a class of
shares, including "average annual total return" and "total return." Performance
information will be computed separately for Class A, Class B and Class C shares.
Each of these figures is based upon historical results and is not representative
of the future performance of any class of the Fund. The Adviser has agreed to a
temporary reduction in its investment management fee payable by the Fund to the
extent specified under "Investment Manager and Underwriter." This fee reduction
will improve the performance results of the Fund.

Average annual total return and total return figures measure both the net
investment income generated by, and the effect of any realized and unrealized
appreciation or depreciation of, the underlying investments in the Fund's
portfolio for the period in question, assuming the reinvestment of all
dividends. Thus, these figures reflect the change in the value of an investment
in the Fund during a specified period. Average annual total return will be
quoted for at least the one, five and ten year periods ending on a recent
calendar quarter (or if any such period has not yet elapsed, at the end of a
shorter period corresponding to the life of the Fund for performance purposes).
Average annual total return figures represent the average annual percentage
change over the period in question. Total return figures represent the aggregate
percentage or dollar value change over the period in question.

The Fund's performance may be compared to that of the Consumer Price Index or
various unmanaged equity indices, including, but not limited to, the Dow Jones
Industrial Average, Value Line, and the Standard & Poor's 500 Composite Price
Index. It may also be compared to the performance of other mutual funds or
mutual fund indices as reported by independent mutual fund reporting services
such as Lipper Analytical Services, Inc. ("Lipper"). Lipper performance
calculations are based upon changes in net asset value with all dividends
reinvested and do not include the effect of any sales charges.

Information may be quoted from publications such as Morningstar, Inc., The Wall
Street Journal, Money Magazine, Forbes, Barron's, Fortune, The Chicago Tribune,
USA Today, Institutional Investor and Registered Representative. Also, investors
may want to compare the historical returns of various investments, performance
indices of those investments or economic indicators, including, but not limited
to, stocks, bonds, certificates of deposit, money market funds and U.S. Treasury
obligations. Bank product performance may be based upon, among other things, the
BANK RATE MONITOR National Index(TM) or various certificate of deposit indices.
Money market fund performance may be based upon, among other things, the
IBC/Donoghue's Money Fund Report(R) or Money Market Insight(R), reporting
services on money market funds. Performance of U.S. Treasury obligations may be
based upon, among other things, various U.S. Treasury bill indices. Certain of
these alternative investments may offer fixed rates of return and guaranteed
principal and may be insured.

The Fund may depict the historical performance of the securities in which the
Fund may invest over periods reflecting a variety of market or economic
conditions either alone or in comparison with alternative investments,
performance indices of those investments or economic indicators. The Fund may
also describe its portfolio holdings and depict its size or relative size
compared to other mutual funds, the number and make-up of its shareholder base
and other descriptive factors concerning the Fund.

The Fund's Class A shares are sold at net asset value plus a maximum sales
charge of 5.75% of the offering price. While the maximum sales charge is
normally reflected in a Fund's Class A performance figures, certain total return
calculations may not include such charge and those results would be reduced if
it were included. Class B shares and Class C shares are sold at net asset value.
Redemptions of Class B shares within the first six years after purchase may be
subject to a contingent deferred sales charge that ranges from 4% during the
first year to 0% after six years. Redemption of Class C shares within the first

31
<PAGE>

year after purchase may be subject to a 1% contingent deferred sales charge.
Average annual total return figures do, and total return figures may, include
the effect of the contingent deferred sales charge for the Class B and Class C
shares that may be imposed at the end of the period in question. Performance
figures for the Class B shares and Class C shares not including the effect of
the applicable contingent deferred sales charge would be reduced if it were
included.

The Fund's returns and net asset value will fluctuate and shares of the Fund are
redeemable by an investor at the then current net asset value, which may be more
or less than original cost. Redemption of Class B shares and Class C shares may
be subject to a contingent deferred sales charge as described above. Additional
information concerning the Fund's performance appears in the Statement of
Additional Information. Additional information about the Fund's performance will
also appear in its Annual Report to Shareholders, which will be available
without charge from the Fund.

FUND ORGANIZATION AND CAPITAL STRUCTURE

TO BE UPDATED

The Fund is a diversified series of Kemper Growth and Income Fund (the "Trust"),
an open-end management investment company registered under the 1940 Act. The
Trust was organized as a business trust under the laws of Massachusetts on
October 1, 1997.

The Trust may issue an unlimited number of shares of beneficial interest in one
or more series or "Portfolios," all having a par value of $0.01, which may be
divided by the Board of Trustees into classes of shares. While only shares of a
single Portfolio are presently being offered by the Trust, the Board of Trustees
of the Fund may authorize the issuance of additional classes and additional
Portfolios if deemed desirable, each with its own investment objective, policies
and restrictions. Since the Trust may offer multiple Portfolios, it is known as
a "series company." Currently, the Trust offers three classes of shares of a
single Portfolio. These are Class A, Class B and Class C shares. Shares of a
Portfolio have equal noncumulative voting rights except that Class B and Class C
shares have separate and exclusive voting rights with respect to each such
class' Rule 12b-1 Plan. Shares of each class also have equal rights with respect
to dividends, assets and liquidation of the Fund subject to any preferences
(such as resulting from different Rule 12b-1 distribution fees), rights or
privileges of any classes of shares of the Fund. Shares are fully paid and
nonassessable when issued, are transferable without restriction and have no
preemptive or conversion rights. If shares of more than one Portfolio are
outstanding, shareholders will vote by Portfolio and not in the aggregate or by
class except when voting in the aggregate is required under the 1940 Act, such
as for the election of trustees, or when voting by class is appropriate.

The Fund's activities are supervised by the Trust's Board of Trustees. The Trust
is not required to hold and has no current intention of holding annual
shareholder meetings, although special meetings may be called for purposes such
as electing or removing Trustees, changing fundamental investment policies or
approving an investment management contract. Subject to the Declaration of
Trust, shareholders may remove Trustees. Shareholders will be assisted in
communicating with other shareholders in connection with removing a Trustee as
if Section 16(c) of the 1940 Act were applicable.

<PAGE>

KEMPER U.S. GROWTH AND INCOME FUND

CROSS-REFERENCE SHEET
Between Items Enumerated in Part B
of Form N-1A and Statement of Additional Information

Item Number Location in Statement of
of Form N-1A Additional Information
----------------------

10. Cover Page Cover Page

11. Table of Contents..................... Table of Contents

12. General Information and History....... Inapplicable

13. Investment Objectives and Policies.... Investment Restrictions;
Investment Policies and
Techniques

14. Management of the Fund................ Investment Manager and
Underwriter; Officers and
Trustees

15. Control Persons and Principal Holders
of Securities......................... Officers and Trustees

16. Investment Advisory and Other Services Investment Manager and
Underwriter; Officers and
Trustees

17. Brokerage Allocation and Other
Practices............................. Portfolio Transactions

18. Capital Stock and Other Securities.... Dividends, Distributions and
Taxes; Shareholder Rights

19. Purchase, Redemption and Pricing of
Securities Being Offered.............. Purchase and Redemption of
Shares

20. Tax Status............................ Dividends and Taxes

21. Underwriters.......................... Investment Manager and
Underwriter

22. Calculation of Performance Data....... Performance
<PAGE>

STATEMENT OF ADDITIONAL INFORMATION
December 17, 1997

KEMPER U.S. GROWTH AND INCOME FUND
222 South Riverside Plaza, Chicago, Illinois 60606
1-800-621-1048

This Statement of Additional Information is not a prospectus. It is the
Statement of Additional Information for Kemper U.S. Growth and Income Fund (the
"Fund"), a diversified series of Kemper Growth and Income Trust (the "Trust"),
an open-end management investment company. It should be read in conjunction with
the prospectus of the Fund dated December 17, 1997. The prospectus may be
obtained without charge from the Fund.

----------

TABLE OF CONTENTS

Page
----

Investment Restrictions............. __
Investment Policies and Techniques.. __
Dividends, Distributions and Taxes.. __
Performance......................... __
Investment Manager and Underwriter.. __
Portfolio Transactions.............. __
Purchase and Redemption of Shares... __
Officers and Trustees............... __
Shareholder Rights.................. __

The Statement of Assets and Liabilities as of December 17, 1997 and the Report
of Independent Accountants for the Fund will be filed by amendment.

Scudder Kemper Investments, Inc. (the "Adviser") serves as the Fund's investment
manager.

2
<PAGE>

INVESTMENT RESTRICTIONS

The Fund has adopted certain fundamental investment restrictions which cannot be
changed without approval of a "majority" of its outstanding voting shares. As
defined in the Investment Company Act of 1940, as amended (the "1940 Act"), this
means the lesser of (1) 67% of the Fund's shares present at a meeting where more
than 50% of the outstanding shares are present in person or by proxy; or (2)
more than 50% of the Fund's outstanding shares.

The Fund may not, as a fundamental policy:

1. borrow money, except as permitted under the Investment Company Act of
1940, as amended, and as interpreted or modified by regulatory authority
having jurisdiction, from time to time;

2. issue senior securities, except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;

3. concentrate its investments in a particular industry, as that term is used
in the Investment Company Act of 1940, as amended, and as interpreted or
modified by regulatory authority having jurisdiction, from time to time;

4. engage in the business of underwriting securities issued by others, except
to the extent that the Fund may be deemed to be an underwriter in
connection with the disposition of portfolio securities;

5. purchase or sell real estate, which term does not include securities of
companies which deal in real estate or mortgages or investments secured by
real estate or interests therein, except that the Fund reserves freedom of
action to hold and to sell real estate acquired as a result of the Fund's
ownership of securities;

6. purchase physical commodities or contracts relating to physical
commodities; or

7. make loans to other persons, except (i) loans of portfolio securities, and
(ii) to the extent that entry into repurchase agreements and the purchase
of debt instruments or interests in indebtedness in accordance with the
Fund's investment objective and policies may be deemed to be loans.

If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation.

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INVESTMENT POLICIES AND TECHNIQUES

GENERAL. The objectives of Kemper U.S. Growth and Income Fund are to provide
long-term growth of capital, current income and growth of income. The Fund
invests primarily in common stocks, preferred stocks and securities convertible
into common stocks of U.S. companies which offer the prospect for growth of
earnings while paying current dividends. See "Prospectus Summary" in the Fund's
prospectus, dated December 17, 1997. The Fund may engage in futures, options and
other derivative transactions ("Strategic Transactions and Derivatives") in
accordance with its investment objective and policies. The Fund intends to
engage in such transactions if it appears to the investment manager to be
advantageous for the Fund to do so, in order to pursue its investment objective,
to hedge against the effects of fluctuating interest rates and to stabilize the
value of its assets and not for speculation. The use of futures and options, and
possible benefits and attendant risks, are discussed below, along with
information concerning certain other investment policies and techniques.

CONVERTIBLE SECURITIES. The Fund may invest in convertible securities; that is,
bonds, notes, debentures, preferred stocks and other securities which are
convertible into common stocks. Investments in convertible securities may
provide income through interest and dividend payments and/or an opportunity for
capital appreciation by virtue of their conversion or exchange features.

The convertible securities in which the Fund may invest include fixed-income or
zero coupon debt securities which may be converted or exchanged at a stated or
determinable exchange ratio into underlying shares of common stock. The exchange
ratio for any particular convertible security may be adjusted from time to time
due to stock splits, dividends, spin-offs, other corporate distributions or
scheduled changes in the exchange ratio. Convertible debt securities and
convertible preferred stocks, until converted, have general characteristics
similar to both debt and equity securities. Although to a lesser extent than
with debt securities generally, the market value of convertible securities tends
to decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion or exchange
feature, the market value of convertible securities typically changes as the
market value of the underlying common stocks changes, and, therefore, also tends
to follow movements in the general market for equity securities. A unique
feature of convertible securities is that as the market price of the underlying
common stock declines, convertible securities tend to trade increasingly on a
yield basis and so may not experience market value declines to the same extent
as the underlying common stock. When the market price of the underlying common
stock increases, the prices of the convertible securities tend to rise as a
reflection of the value of the underlying common stock, although typically not
as much as the underlying common stock. While no securities investments are
without risk, investments in convertible securities generally entail less risk
than investments in common stock of the same issuer.

As debt securities, convertible securities are investments which provide for a
stream of income (or in the case of zero coupon securities, accretion of income)
with generally higher yields than common stocks. Of course, like all debt
securities, there can be no assurance of income or principal payments because
the issuers of the convertible securities may default on their obligations.
Convertible securities generally offer lower yields than non-convertible
securities of similar quality because of their conversion or exchange features.

Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar
non-convertible securities.

Convertible securities may be issued as fixed-income obligations that pay
current income or as zero coupon notes and bonds, including Liquid Yield Option
Notes (LYONS). Zero coupon securities pay no cash income and are sold at
substantial discounts from their value at maturity. When held to maturity, their
entire income, which consists of accretion of discount, comes from the
difference between the issue price and their value at maturity. Zero coupon
convertible securities offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely follow the
movements in the market value of the underlying common stock. Zero coupon
convertible securities generally are expected to be less volatile than the
underlying common stocks as they usually are issued with shorter maturities (15
years or less) and are issued with options and/or redemption features
exercisable by the holder of the obligation entitling the holder to redeem the
obligation and receive a defined cash payment.

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<PAGE>

LENDING OF PORTFOLIO SECURITIES. The Fund may seek to increase its income by
lending portfolio securities. Such loans may be made to registered
broker/dealers and are required to be secured continuously by collateral in
cash, U.S. Government Securities and liquid high grade debt obligations
maintained on a current basis at an amount at least equal to the market value
and accrued interest of the securities loaned. The Fund has the right to call a
loan and obtain the securities loaned on no more than five days' notice. During
the existence of a loan, the Fund will continue to receive the equivalent of any
distributions paid by the issuer on the securities loaned and will also receive
compensation based on investment of the collateral. As with other extensions of
credit there are risks of delay in recovery or even loss of rights in the
collateral should the borrower of the securities fail financially. However, the
loans will be made only to firms deemed by the Adviser to be of good standing.
The value of the securities loaned will not exceed 33(1)/(3)% of the value of
the Fund's total assets at the time any loan is made.

REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with any
member bank of the Federal Reserve System and any broker/dealer which is
recognized as a reporting government securities dealer if the creditworthiness
of the bank or broker/dealer has been determined by the Adviser to be at least
as high as that of other obligations the Fund may purchase or to be at least
equal to that of issuers of commercial paper rated within the two highest grades
assigned by Moody's Investor Services, Inc.
("Moody's") or Standard & Poor's Corporation ("S&P").

A repurchase agreement provides a means for the Fund to earn income on funds for
periods as short as overnight. It is an arrangement under which the Fund
acquires a security ("Obligation") and the seller agrees, at the time of sale,
to repurchase the Obligation at a specified time and price. Obligations subject
to a repurchase agreement are held in a segregated account and the value of such
obligations kept at least equal to the repurchase price on a daily basis. The
repurchase price may be higher than the purchase price, the difference being
income to the Fund, or the purchase and repurchase prices may be the same, with
interest at a stated rate due to the Fund together with the repurchase price on
repurchase. In either case, the income to the Fund is unrelated to the interest
rate on the Obligation itself. Obligations will be held by the Fund's custodian
or in the Federal Reserve Book Entry System.

For purposes of the 1940 Act, a repurchase agreement is deemed to be a loan from
the Fund to the seller of the Obligation subject to the repurchase agreement and
is therefore subject to the Fund's investment restrictions applicable to loans.
It is not clear whether a court would consider the Obligation purchased by the
Fund subject to a repurchase agreement as being owned by the Fund or as being
collateral for a loan by the Fund to the seller. In the event of the
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the Obligation before repurchase of the Obligation under a repurchase
agreement, the Fund may encounter delay and incur costs before being able to
sell the security. Delays may result in loss of interest or decline in price of
the Obligation. If the court characterizes the transaction as a loan and the
Fund has not perfected a security interest in the Obligation, the Fund may be
required to return the Obligation to the seller's estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, the Fund would be at
the risk of losing some or all of the principal and income involved in the
transaction. As with any unsecured debt instrument purchased for the Fund, the
Adviser seeks to minimize the risk of loss through repurchase agreements by
analyzing the creditworthiness of the obligor, in this case the seller of the
Obligation. Apart from the risk of bankruptcy or insolvency proceedings, there
is also the risk that the seller may fail to repurchase the Obligation, in which
case the Fund may incur a loss if the proceeds to the Fund of its sale of the
securities underlying the repurchase agreement to a third party are less than
the repurchase price. To protect against such potential loss, if the market
value (including interest) of the Obligation subject to the repurchase agreement
becomes less than the repurchase price (including interest), the Fund will
direct the seller of the Obligation to deliver additional securities so that the
market value (including interest) of all securities subject to the repurchase
agreement will equal or exceed the repurchase price. It is possible that the
Fund will be unsuccessful in seeking to enforce the seller's contractual
obligation to deliver additional securities.

REAL ESTATE INVESTMENT TRUSTS. The Fund may invest in REITs. REITs are sometimes
informally characterized as equity REITs, mortgage REITs and hybrid REITs.
Investment in REITs may subject the Fund to risks associated with the direct
ownership of real estate, such as decreases in real estate values, overbuilding,
increased competition and other risks related to local or general economic
conditions, increases in operating costs and property taxes, changes in zoning
laws, casualty or condemnation losses, possible environmental liabilities,
regulatory limitations on rent and fluctuations in rental income. Equity REITs
generally experience these risks directly through fee or leasehold interests,
whereas mortgage REITs generally experience these risks indirectly through
mortgage interests, unless the mortgage REIT forecloses on the underlying real
estate. Changes in interest rates may also affect the value of the Fund's
investment in REITs. For instance, during periods of declining interest rates,
certain mortgage REITs

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<PAGE>

may hold mortgages that the mortgagors elect to prepay, which prepayment may
diminish the yield on securities issued by those REITs.

Certain REITs have relatively small market capitalization, which may tend to
increase the volatility of the market price of their securities. Furthermore,
REITs are dependent upon specialized management skills, have limited
diversification and are, therefore, subject to risks inherent in operating and
financing a limited number of projects. REITs are also subject to heavy cash
flow dependency, defaults by borrowers and the possibility of failing to qualify
for tax-free pass-through of income under the Internal Revenue Code of 1986, as
amended (the "Code") and to maintain exemption from the registration
requirements of the 1940 Act. By investing in REITs indirectly through the Fund,
a shareholder will bear not only his or her proportionate share of the expenses
of the Fund, but also, indirectly, similar expenses of the REITs. In addition,
REITs depend generally on their ability to generate cash flow to make
distributions to shareholders.

ILLIQUID AND RESTRICTED INVESTMENTS. The Fund may invest a portion of its assets
in securities for which there is not an active trading market including
securities which are subject to restrictions on resale because they have not
been registered under the Securities Act of 1933 or which are otherwise not
readily marketable. The absence of a trading market can make it difficult to
ascertain a market value for illiquid or restricted investments. Disposing of
illiquid or restricted investments may involve time-consuming negotiation and
legal expenses, and it may be difficult or impossible for the Fund to sell them
promptly at an acceptable price. The Fund may have to bear the extra expense of
registering such securities for resale and the risk of substantial delay in
effecting such registration. Also, market quotations are less readily available.
The judgment of the Adviser may at times play a greater role in valuing these
securities than in the case of unrestricted securities.

ZERO COUPON SECURITIES. The Fund may invest in zero coupon securities which pay
no cash income and are sold at substantial discounts from their value at
maturity. When held to maturity, their entire income, which consists of
accretion of discount, comes from the difference between the issue price and
their value at maturity. Zero coupon securities are subject to greater market
value fluctuations from changing interest rates than debt obligations of
comparable maturities which make current distributions of interest (cash). Zero
coupon securities which are convertible into common stock offer the opportunity
for capital appreciation as increases (or decreases) in market value of such
securities closely follows the movements in the market value of the underlying
common stock. Zero coupon convertible securities generally are expected to be
less volatile than the underlying common stocks, as they usually are issued with
maturities of 15 years or less and are issued with options and/or redemption
features exercisable by the holder of the obligation entitling the holder to
redeem the obligation and receive a defined cash payment.

Zero coupon securities include securities issued directly by the U.S. Treasury,
and U.S. Treasury bonds or notes and their unmatured interest coupons and
receipts for their underlying principal ("coupons") which have been separated by
their holder, typically a custodian bank or investment brokerage firm. A holder
will separate the interest coupons from the underlying principal (the "corpus")
of the U.S. Treasury security. A number of securities firms and banks have
stripped the interest coupons and receipts and then resold them in custodial
receipt programs with a number of different names, including "Treasury Income
Growth Receipts" (TIGRS(TM)) and Certificate of Accrual on Treasuries
(CATS(TM)). The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Counsel to the
underwriters of these certificates or other evidences of ownership of the U.S.
Treasury securities have stated that, for federal tax and securities purposes,
in their opinion purchasers of such certificates, such as the Fund, most likely
will be deemed the beneficial holder of the underlying U.S. Government
securities. The Fund understands that the staff of the Division of Investment
Management of the Securities and Exchange Commission (the "SEC") no longer
considers such privately stripped obligations to be U.S. Government securities,
as defined in the 1940 Act; therefore, the Fund intends to adhere to this staff
position and will not treat such privately stripped obligations to be U.S.
Government securities for the purpose of determining if the Global Fund is
"diversified" under the 1940 Act.

The U.S. Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Under the STRIPS program,
the Fund will be able to have its beneficial ownership of zero coupon securities
recorded directly in the book-entry record-keeping system in lieu of having to
hold certificates or other evidences of ownership of the underlying U.S.
Treasury securities.

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<PAGE>

When U.S. Treasury obligations have been stripped of their unmatured interest
coupons by the holder, the principal or corpus is sold at a deep discount
because the buyer receives only the right to receive a future fixed payment on
the security and does not receive any rights to periodic interest (cash)
payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold bundled in such form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells
itself (see "TAXES").

STRATEGIC TRANSACTIONS AND DERIVATIVES. The Fund may, but is not required to,
utilize various other investment strategies as described below to hedge various
market risks (such as interest rates, currency exchange rates and broad or
specific equity or fixed-income market movements), to manage the effective
maturity or duration of the Fund's portfolio or to enhance potential gain. These
strategies may be executed through the use of derivative contracts. Such
strategies are generally accepted as a part of modern portfolio management and
are regularly utilized by many mutual funds and other institutional investors.
Techniques and instruments may change over time as new instruments and
strategies are developed or regulatory changes occur.

In the course of pursuing these investment strategies, the Fund may purchase and
sell exchange-listed and over-the-counter put and call options on securities,
equity and fixed-income indices and other financial instruments, purchase and
sell financial futures contracts and options thereon, enter into various
interest rate transactions such as swaps, caps, floors or collars, and enter
into various currency transactions such as currency forward contracts, currency
futures contracts, currency swaps or options on currencies or currency futures
(collectively, all the above are called "Strategic Transactions"). Strategic
Transactions may be used without limit to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of fixed-income
securities in the Fund's portfolio or to establish a position in the derivatives
markets as a temporary substitute for purchasing or selling particular
securities. Some Strategic Transactions may also be used to enhance potential
gain although no more than 5% of the Fund's assets will be committed to
Strategic Transactions entered into for non-hedging purposes. Any or all of
these investment techniques may be used at any time and in any combination, and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of the Fund to utilize these
Strategic Transactions successfully will depend on the Adviser's ability to
predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions involving
financial futures and options thereon will be purchased, sold or entered into
only for bona fide hedging, risk management or portfolio management purposes and
not for speculative purposes.

Strategic Transactions, including derivative contracts, have risks associated
with them including possible default by the other party to the transaction,
illiquidity and, to the extent the Adviser's view as to certain market movements
is incorrect, the risk that the use of such Strategic Transactions could result
in losses greater than if they had not been used. Use of put and call options
may result in losses to the Fund, force the sale or purchase of portfolio
securities at inopportune times or for prices higher than (in the case of put
options) or lower than (in the case of call options) current market values,
limit the amount of appreciation the Fund can realize on its investments or
cause the Fund to hold a security it might otherwise sell. The use of currency
transactions can result in the Fund incurring losses as a result of a number of
factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.

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<PAGE>

GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."

A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. For
instance, the Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, currency or other instrument might be intended to protect the Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.

With certain exceptions, OCC issued and exchange listed options generally settle
by physical delivery of the underlying security or currency, although in the
future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.

The Fund's ability to close out its position as a purchaser or seller of an OCC
or exchange listed put or call option is dependent, in part, upon the liquidity
of the option market. Among the possible reasons for the absence of a liquid
option market on an exchange are: (i) insufficient trading interest in certain
options; (ii) restrictions on transactions imposed by an exchange; (iii) trading
halts, suspensions or other restrictions imposed with respect to particular
classes or series of options or underlying securities including reaching daily
price limits; (iv) interruption of the normal operations of the OCC or an
exchange; (v) inadequacy of the facilities of an exchange or OCC to handle
current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.

The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.

OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. The
Fund expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.

Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the

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<PAGE>

terms of the OTC option will be satisfied. The Fund will engage in OTC option
transactions only with U.S. government securities dealers recognized by the
Federal Reserve Bank of New York as "primary dealers" or broker/dealers,
domestic or foreign banks or other financial institutions which have received
(or the guarantors of the obligation of which have received) a short-term credit
rating of A-1 from S&P or P-1 from Moody's or an equivalent rating from any
nationally recognized statistical rating organization ("NRSRO") or, in the case
of OTC currency transactions, are determined to be of equivalent credit quality
by the Adviser. The staff of the SEC currently takes the position that OTC
options purchased by the Fund, and portfolio securities "covering" the amount of
the Fund's obligation pursuant to an OTC option sold by it (the cost of the
sell-back plus the in-the-money amount, if any) are illiquid, and are subject to
the Fund's limitation on investing no more than 10% of its assets in illiquid
securities.

If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.

The Fund may purchase and sell call options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets, and on securities indices, currencies and futures
contracts. All calls sold by the Fund must be "covered" (i.e., the Fund must own
the securities or futures contract subject to the call) or must meet the asset
segregation requirements described below as long as the call is outstanding.
Even though the Fund will receive the option premium to help protect it against
loss, a call sold by the Fund exposes the Fund during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the Fund to hold a security or
instrument which it might otherwise have sold.

The Fund may purchase and sell put options on securities including U.S. Treasury
and agency securities, mortgage-backed securities, corporate debt securities,
equity securities (including convertible securities) and Eurodollar instruments
(whether or not it holds the above securities in its portfolio), and on
securities, indices, currencies and futures contracts other than futures on
individual corporate debt and individual equity securities. The Fund will not
sell put options if, as a result, more than 50% of the Fund's assets would be
required to be segregated to cover its potential obligations under such put
options other than those with respect to futures and options thereon. In selling
put options, there is a risk that the Fund may be required to buy the underlying
security at a disadvantageous price above the market price.

GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate, currency or equity market changes, for
duration management and for risk management purposes. Futures are generally
bought and sold on the commodities exchanges where they are listed with payment
of initial and variation margin as described below. The sale of a futures
contract creates a firm obligation by the Fund, as seller, to deliver to the
buyer the specific type of financial instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such
position.

The Fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into only for bona fide hedging, risk management (including duration management)
or other portfolio management purposes. Typically, maintaining a futures
contract or selling an option thereon requires the Fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of an option on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price, nor that delivery will occur.

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<PAGE>

The Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of the Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.

OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.

CURRENCY TRANSACTIONS. The Fund may engage in currency transactions with
Counterparties in order to hedge the value of portfolio holdings denominated in
particular currencies against fluctuations in relative value. Currency
transactions include forward currency contracts, exchange listed currency
futures, exchange listed and OTC options on currencies, and currency swaps. A
forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) a specific 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. A currency swap is
an agreement to exchange cash flows based on the notional difference among two
or more currencies and operates similarly to an interest rate swap, which is
described below. The Fund may enter into currency transactions with
Counterparties which have received (or the guarantors of the obligations which
have received) a credit rating of A-1 or P-1 by S&P or Moody's, respectively, or
that have an equivalent rating from a NRSRO or are determined to be of
equivalent credit quality by the Adviser.

The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Fund, which will generally
arise in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.

The Fund will not enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended wholly or partially to
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to proxy hedging or cross hedging as described below.

The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.

To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the value of the Fund's securities
denominated in correlated currencies. For example, if the Adviser considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
the Fund holds securities denominated in schillings and the Adviser believes
that the value of schillings will decline against the U.S. dollar, the Adviser
may enter into a commitment or option to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar

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<PAGE>

instruments. Currency transactions can result in losses to the Fund if the
currency being hedged fluctuates in value to a degree or in a direction that is
not anticipated. Further, there is the risk that the perceived correlation
between various currencies may not be present or may not be present during the
particular time that the Fund is engaging in proxy hedging. If the Fund enters
into a currency hedging transaction, the Fund will comply with the asset
segregation requirements described below.

RISKS OF CURRENCY TRANSACTIONS. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.

COMBINED TRANSACTIONS. The Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser, it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.

SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into which the
Fund may enter are interest rate, currency and index swaps and the purchase or
sale of related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, to protect against currency fluctuations, as a
duration management technique or to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date. The Fund intends to
use these transactions as hedges and not as speculative investments and will not
sell interest rate caps or floors where it does not own securities or other
instruments providing the income stream the Fund may be obligated to pay.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal. A currency swap is an agreement to exchange cash flows on a notional
amount of two or more currencies based on the relative value differential among
them and an index swap is an agreement to swap cash flows on a notional amount
based on changes in the values of the reference indices. The purchase of a cap
entitles the purchaser to receive payments on a notional principal amount from
the party selling such cap to the extent that a specified index exceeds a
predetermined interest rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from the party
selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.

The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least A by S&P or Moody's or has an equivalent rating
from a NRSRO or is determined to be of equivalent credit quality by the Adviser.
If there is a default by the Counterparty, the Fund may have contractual
remedies pursuant to the agreements related to the transaction. The swap market
has grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.

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<PAGE>

EURODOLLAR INSTRUMENTS. The Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.

RISKS OF STRATEGIC TRANSACTIONS OUTSIDE THE U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.

USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate cash or liquid
assets with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid securities at least equal
to the current amount of the obligation must be segregated with the custodian.
The segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by the Fund will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate cash or liquid
securities sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by the Fund on an index will require the Fund to
own portfolio securities which correlate with the index or to segregate cash or
liquid assets equal to the excess of the index value over the exercise price on
a current basis. A put option written by the Fund requires the Fund to segregate
cash or liquid assets equal to the exercise price.

Except when the Fund enters into a forward contract for the purchase or sale of
a security denominated in a particular currency, which requires no segregation,
a currency contract which obligates the Fund to buy or sell currency will
generally require the Fund to hold an amount of that currency or liquid
securities denominated in that currency equal to the Fund's obligations or to
segregate cash or liquid assets equal to the amount of the Fund's obligation.

OTC options entered into by the Fund, including those on securities, currency,
financial instruments or indices and OCC issued and exchange listed index
options, will generally provide for cash settlement. As a result, when the Fund
sells these instruments it will only segregate an amount of assets equal to its
accrued net obligations, as there is no requirement for payment or delivery of
amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange listed options sold by the Fund other than those
above generally settle with physical delivery, or with an election of either
physical delivery or cash settlement and the Fund will segregate an amount of
assets equal to the full value of the option. OTC options settling with physical
delivery, or with an election of either physical delivery or cash settlement
will be treated the same as other options settling with physical delivery.

In the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
assets sufficient to meet its obligation to purchase or provide securities or
currencies, or to pay the amount owed at the expiration of an index-based
futures contract. Such assets may consist of cash, cash equivalents, liquid debt
or equity securities or other acceptable assets.

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<PAGE>

With respect to swaps, the Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid securities having a
value equal to the accrued excess. Caps, floors and collars require segregation
of assets with a value equal to the Fund's net obligation, if any.

Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Strategic Transactions may also be offset in combinations.
If the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.

The Fund's activities involving Strategic Transactions may be limited by the
requirements of Subchapter M of the Code for qualification as a regulated
investment company. (See "TAXES.")

DIVIDENDS, DISTRIBUTIONS AND TAXES

DIVIDENDS. The Fund intends to follow the practice of distributing substantially
all of its investment company taxable income which includes any excess of net
realized short-term capital gains over net realized long-term capital losses.
The Fund may follow the practice of distributing the entire excess of net
realized long-term capital gains over net realized short-term capital losses.
However, the Fund may retain all or part of such gain for reinvestment, after
paying the related federal taxes for which shareholders may then be able to
claim a credit against their federal tax liability. If the Fund does not
distribute the amount of capital gain and/or net investment income required to
be distributed by an excise tax provision of the Code, the Fund may be subject
to that excise tax. In certain circumstances, the Fund may determine that it is
in the interest of shareholders to distribute less than the required amount.
(See "TAXES.")

The Fund intends to distribute investment company taxable income, exclusive of
net short-term capital gains in excess of net long-term capital losses, in
April, July, October and December each year. Distributions of net capital gains
realized during each fiscal year will be made annually before the end of the
Fund's fiscal year on _____________. Additional distributions, including
distributions of net short-term capital gains in excess of net long-term capital
losses, may be made, if necessary.

The level of income dividends per share (as a percentage of net asset value)
will be lower for Class B and Class C shares than for Class A shares primarily
as a result of the distribution services fee applicable to Class B and Class C
shares. Distributions of capital gains, if any, will be paid in the same amount
for each class.

Dividends will be reinvested in shares of the Fund unless shareholders indicate
in writing that they wish to receive them in cash or in shares of other Kemper
Funds as provided in the prospectus.

TAXES. The Fund intends to qualify as a regulated investment company under
Subchapter M of the Code and, if so qualified, generally will not be liable for
federal income taxes to the extent its earnings are distributed. To so qualify,
the Fund must satisfy certain income and asset diversification requirements, and
must distribute to its shareholders at least 90% of its investment company
taxable income (including net short-term capital gain). Distributions of
investment company taxable income are taxable to shareholders as ordinary
income.

The Fund is subject to a 4% nondeductible excise tax on amounts
required to be but not distributed under a prescribed formula. The formula
requires payment to shareholders during a calendar year of distributions
representing at least 98% of the Fund's ordinary income for the calendar year,
at least 98% of the excess of its capital gains over capital losses (adjusted
for certain ordinary losses) realized during the one-year period ending October
31 during such year, and all ordinary income and capital gains for prior years
that were not previously distributed.

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<PAGE>

Investment company taxable income includes dividends, interest and net
short-term capital gains in excess of net long-term capital losses, less
expenses. Net realized capital gains for a fiscal year are computed by taking
into account any capital loss carryforward of the Fund.

If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by the Fund for reinvestment, requiring
federal income taxes to be paid thereon by the Fund, the Fund intends to elect
to treat such capital gains as having been distributed to shareholders. As a
result, each shareholder will report such capital gains as long-term capital
gains, will be able to claim a relative share of federal income taxes paid by
the Fund on such gains as a credit against personal federal income tax
liability, and will be entitled to increase the adjusted tax basis on Fund
shares by the difference between a pro rata share of such gains owned and the
individual tax credit.

Dividends from domestic corporations are expected to comprise a
substantial part of the Fund's gross income. To the extent that such dividends
constitute a portion of the Fund's gross income, a portion of the income
distributions of the Fund may be eligible for the deduction for dividends
received by corporations. Shareholders will be informed of the portion of
dividends which so qualify. The dividends-received deduction is reduced to the
extent the shares of the Fund with respect to which the dividends are received
are treated as debt-financed under federal income tax law, and is eliminated if
either those shares or the shares of the Fund are deemed to have been held by
the Fund or the shareholder, as the case may be, for less than 46 days during
the 90-day period beginning 45 days before the shares become ex-dividend.

Properly designated, distributions of the excess of net long-term
capital gain over net short-term capital loss, which the Fund designates as
capital gain dividends, are taxable to shareholders as long-term capital gain,
regardless of the length of time the shares of the Fund have been held by such
shareholders. Such distributions are not eligible for the dividends-received
deduction. Any loss realized upon the redemption of shares held at the time of
redemption for six months or less will be treated as a long-term capital loss to
the extent of any amounts treated as distributions of long-term capital gain
during such six-month period.

Distributions of investment company taxable income and net realized
capital gains will be taxable as described above, whether received in shares or
in cash. Shareholders electing to receive distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share on the reinvestment
date.

All distributions of investment company taxable income and net realized
capital gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends and capital gains
distributions declared in October, November or December and payable to
shareholders of record in such a month will be deemed to have been received by
shareholders on December 31 if paid during January of the following year.
Redemptions of shares, including exchanges for shares of another Scudder fund,
may result in tax consequences (gain or loss) to the shareholder and are also
subject to these reporting requirements.

A qualifying individual may make a deductible IRA contribution for any
taxable year only if (i) neither the individual nor his or her spouse (unless
filing separate returns) is an active participant in an employer's retirement
plan, or (ii) the individual (and his or her spouse, if applicable) has an
adjusted gross income below a certain level ($40,050 for married individuals
filing a joint return, with a phase-out of the deduction for adjusted gross
income between $40,050 and $50,000; $25,050 for a single individual, with a
phase-out for adjusted gross income between $25,050 and $35,000). However, an
individual not permitted to make a deductible contribution to an IRA for any
such taxable year may nonetheless make nondeductible contributions up to $2,000
to an IRA (up to $2,000 per individual for married couples if only one spouse
has earned income) for that year. There are special rules for determining how
withdrawals are to be taxed if an IRA contains both deductible and nondeductible
amounts. In general, a proportionate amount of each withdrawal will be deemed to
be made from nondeductible contributions; amounts treated as a return of
nondeductible contributions will not be taxable. Also, annual contributions may
be made to a spousal IRA even if the spouse has earnings in a given year if the
spouse elects to be treated as having no earnings (for IRA contribution
purposes) for the year.

Distributions by a Fund result in a reduction in the net asset value of
the Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as de scribed above even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should consider the tax implications of buying shares just
prior to a distribution. The price of shares purchased at that time includes
the amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the
distribution, which will nevertheless be taxable to them.

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<PAGE>

Alternatively, the Fund may elect to include as income and gain its share of the
ordinary earnings and net capital gain of certain foreign investment companies
in lieu of being taxed in the manner described above.

Equity options (including covered call options on portfolio stock) written or
purchased by the Fund will be subject to tax under Section 1234 of the Code. In
general, no loss is recognized by the Fund upon payment of a premium in
connection with the purchase of a put or call option. The character of any gain
or loss recognized (i.e., long-term or short-term) will generally depend, in the
case of a lapse or sale of the option, on the Fund's holding period for the
option and, in the case of an exercise of the option, on the Fund's holding
period for the underlying security. The purchase of a put option may constitute
a short sale for federal income tax purposes, causing an adjustment in the
holding period of the underlying security or substantially identical security in
the Fund's portfolio. If the Fund writes a call option, no gain is recognized
upon its receipt of a premium. If the option lapses or is closed out, any gain
or loss is treated as a short-term capital gain or loss. If a call option is
exercised, any resulting gain or loss is short-term or long-term capital gain or
loss depending on the holding period of the underlying security. The exercise of
a put option written by the Fund is not a taxable transaction for the Fund.

Many futures and forward contracts entered into by the Fund and all listed
nonequity options written or purchased by the Fund (including covered call
options written on debt securities and options purchased or written on futures
contracts) will be governed by Section 1256 of the Code. Absent a tax election
to the contrary, gain or loss attributable to the lapse, exercise or closing out
of any such position will be treated as 60% long-term and 40% short-term, and on
the last trading day of the Fund's fiscal year (and generally, on October 31 for
purposes of the 4% excise tax), all outstanding Section 1256 positions will be
marked-to-market (i.e., treated as if such positions were closed out at their
closing price on such day), with any resulting gain or loss recognized as 60%
long-term and 40% short-term. Under Section 988 of the Code, discussed below,
foreign currency gain or loss from foreign currency-related forward contracts,
certain futures and options and similar financial instruments entered into or
acquired by the Fund will be treated as ordinary income or loss. Under certain
circumstances, entry into a futures contract to sell a security may constitute a
short sale for federal income tax purposes, causing an adjustment in the holding
period of the underlying security or a substantially identical security in the
Fund's portfolio.

Positions of the Fund consisting of at least one stock and at least one stock
option or other position with respect to a related security which substantially
diminishes the Fund's risk of loss with respect to such stock could be treated
as a "straddle" which is governed by Section 1092 of the Code, the operation of
which may cause deferral of losses, adjustments in the holding periods of stock
or securities and conversion of short-term capital losses into long-term capital
losses. An exception to these straddle rules exists for any "qualified covered
call options" on stock written by the Fund.

Positions of the Fund consisting of at least one position not governed by
Section 1256 and at least one future, forward, or nonequity option contract
which is governed by Section 1256 which substantially diminishes the Fund's risk
of loss with respect to such other position will be treated as a "mixed
straddle." Although mixed straddles are subject to the straddle rules of Section
1092 of the Code, certain tax elections exist for them which reduce or eliminate
the operation of these rules. The Fund will monitor its transactions in options
and futures and may make certain tax elections in connection with these
investments.

Notwithstanding any of the foregoing, recent tax law changes may require the
Fund to recognize gain (but not loss) from a constructive sale of certain
"appreciated financial positions" if the Fund enters into a short sale,
offsetting material principal contract, futures or forward contract transaction
with respect to the appreciated position or substantially identical property.
Appreciated financial positions subject to this constructive sale treatment are
interests including options, futures and forward contracts and short sales in
stock, partnership interests, certain actively traded trust instruments and
certain debt instruments.. Constructive sale treatment of appreciated financial
positions does not apply to certain transactions closed in the 90-day period
ending with the 30th day after the close of the Fund's taxable year, if certain
conditions are met.

Similarly, if the Fund enters into a short sale of property that becomes
substantially worthless, the Fund will be required to recognize gain at that
time as though it had closed the short sale. Future regulations may apply
similar treatment to other strategic transactions with respect to property that
becomes substantially worthless.

Under the Code, gains or losses attributable to fluctuations in exchange rates
which occur between the time the Fund accrues receivables or liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities generally are treated as ordinary income or
ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency, and on disposition of certain futures, forward or options
contracts, gains or losses attributable to fluctuations in the

15
<PAGE>

value of foreign currency between the date of acquisition of the security or
contracts and the date of disposition are also treated as ordinary gain or loss.
These gains or losses, referred to under the Code as "Section 988" gains or
losses, may increase or decrease the amount of the Fund's investment company
taxable income to be distributed to its shareholders as ordinary income.

If the Fund holds zero coupon securities or other securities which are issued at
a discount a portion of the difference between the issue price and the face
value of such securities ("original issue discount") will be treated as income
to the Fund each year, even though the Fund will not receive cash interest
payments from these securities. This original issue discount (imputed income)
will comprise a part of the investment company taxable income of the Fund which
must be distributed to shareholders in order to maintain the qualification of
the Fund as a regulated investment company and to avoid federal income tax at
the Fund level. If the Fund acquires a debt instrument at a market discount, a
portion of the gain recognized (if any) on disposition of such instrument may be
treated as ordinary income.

The Fund will be required to report to the Internal Revenue Service ("IRS") all
distributions of taxable income and capital gains as well as gross proceeds from
the redemption or exchange of Fund shares, except in the case of certain exempt
shareholders. Under the backup withholding provisions of Section 3406 of the
Code, distributions of taxable income and capital gains and proceeds from the
redemption or exchange of the shares of a regulated investment company may be
subject to withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the investment company with their
taxpayer identification numbers and with required certifications regarding their
status under the federal income tax law. Withholding may also be required if the
Fund is notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in additional shares, will be reduced by the amounts required to be
withheld.

A shareholder who redeems shares of the Fund that are held as capital cost will
recognize capital gain or loss for federal income tax purposes measured by the
difference between the value of the shares redeemed and the adjusted cost basis
of the shares. Any loss recognized on the redemption of Fund shares held six
months or less will be treated as long-term capital loss to the extent that the
shareholder has received any long-term capital gain dividends on such shares. A
shareholder who has redeemed shares of the Fund or any other Kemper Mutual Fund
listed in the prospectus under "Special Features--Class A Shares--Combined
Purchases" (other than shares of Kemper Cash Reserves Fund not acquired by
exchange from another Kemper Mutual Fund) may reinvest the amount redeemed at
net asset value at the time of the reinvestment in shares of the Fund or in
shares of the other Kemper Mutual Funds within six months of the redemption as
described in the prospectus under "Redemption or Repurchase of
Shares--Reinvestment Privilege." If redeemed shares were held less than 91 days,
then the lesser of (a) the sales charge waived on the reinvested shares, or (b)
the sales charge incurred on the redeemed shares, is included in the basis of
the reinvested shares and is not included in the basis of the redeemed shares.
If a shareholder realizes a loss on the redemption or exchange of a Fund's
shares and reinvests in shares of the same Fund within 30 days before or after
the redemption or exchange, the transactions may be subject to the wash sale
rules resulting in a postponement of the recognition of such loss for federal
income tax purposes. An exchange of a Fund's shares for shares of another fund
is treated as a redemption and reinvestment for federal income tax purposes upon
which gain or loss may be recognized.

Shareholders of the Fund may be subject to state and local taxes on
distributions received from the Fund and on redemptions of the Fund's shares.

Each distribution is accompanied by a brief explanation of the form and
character of the distribution. In January of each year the Fund issues to each
shareholder a statement of the federal income tax status of all distributions.

The Fund is organized as a Massachusetts business trust and is not liable for
any income or franchise tax in the Commonwealth of Massachusetts, provided that
the Fund continues to be treated as a regulated investment company under
Subchapter M of the Code.

The foregoing discussion of U.S. federal income tax law relates solely to the
application of that law to U.S. persons, i.e., U.S. citizens and residents and
U.S. corporations, partnerships, trusts and estates. Each shareholder who is not
a U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of the Fund, including the possibility that such a shareholder may be
subject to a U.S. withholding tax at a rate of 30% (or at a lower rate under an
applicable income tax treaty) on amounts constituting ordinary income received
by him or her, where such amounts are treated as income from U.S. sources under
the Code.

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<PAGE>

Dividend and interest income received by the Fund from sources outside the U.S.
may be subject to withholding and other taxes imposed by such foreign
jurisdictions. Tax conventions between certain countries and the U.S. may reduce
or eliminate these foreign taxes, however, and foreign countries generally do
not impose taxes on capital gains respecting investments by foreign investors.

Shareholders should consult their tax advisers about the application of the
provisions of tax law in light of their particular tax situations.

PERFORMANCE

(TO BE UPDATED)

As described in the Prospectus, the Fund's historical performance or return for
a class of shares may be shown in the form of "average annual total return" and
"total return" figures. These measures of performance are described below.
Performance information will be computed separately for each class. The Adviser
has agreed to a reduction of its management fee for the Fund to the extent
specified in the prospectus. See "Investment Manager and Underwriter." This fee
reduction will improve the performance results of the Fund.

Average annual total return and total return measure both the net investment
income generated by, and the effect of any realized or unrealized appreciation
or depreciation of, the underlying investments in the Fund's portfolio. The
Fund's average annual total return quotation is computed in accordance with a
standardized method prescribed by rules of the Securities and Exchange
Commission. The average annual total return for each class of the Fund for a
specific period is found by first taking a hypothetical $1,000 investment
("initial investment") in the class' shares on the first day of the period,
adjusting to deduct the maximum sales charge (in the case of Class A shares),
and computing the "redeemable value" of that investment at the end of the
period. Average annual return quotations will be determined to the nearest
1/100th of 1%. The redeemable value in the case of Class B shares or Class C
shares include the effect of the applicable contingent deferred sales charge
that may be imposed at the end of the period. The redeemable value is then
divided by the initial investment, and this quotient is taken to the Nth root (N
representing the number of years in the period) and 1 is subtracted from the
result, which is then expressed as a percentage. Average annual return
calculated in accordance with this formula does not take into account any
required payments for federal of state income taxes. Such quotations for Class B
shares for periods over six years will reflect conversion of such shares to
Class A shares at the end of the sixth year. The calculation assumes that all
income and capital gains dividends paid by the Fund have been reinvested at net
asset value on the reinvestment dates during the period. Average annual total
return may also be calculated in a manner not consistent with the standard
formula described above, without deducting the maximum sales charge or
contingent deferred sales charge.

Calculation of the Fund's total return is not subject to a standardized formula,
except when calculated for the Fund's "Financial Highlights" table in the Fund's
financial statements and prospectus. Total return performance for a specific
period is calculated by first taking a hypothetical investment ("initial
investment") in the Fund's shares on the first day of the period, either
adjusting or not adjusting to deduct the maximum sales charge (in the case of
Class A shares), and computing the "ending value" of that investment at the end
of the period. The total return percentage is then determined by subtracting the
initial investment from the ending value and dividing the remainder by the
initial investment and expressing the result as a percentage. The ending value
in the case of Class B shares or Class C shares may or may not include the
effect of the applicable contingent deferred sales charge that may be imposed at
the end of the period. The calculation assumes that all income and capital gains
dividends paid by the Fund have been reinvested at net asset value on the
reinvestment dates during the period. Total return may also be shown as the
increased dollar value of the hypothetical investment over the period. Total
return calculations that do not include the effect of the sales charge for Class
A shares

17
<PAGE>

or the contingent deferred sales charge for Class B and Class C shares would be
reduced if such charges were included.

The Fund's performance figures are based upon historical results and are not
necessarily representative of future performance. The Fund's Class A shares are
sold at net asset value plus a maximum sales charge of 5.75% of the offering
price. Class B and Class C shares are sold at net asset value. Redemption of
Class B shares may be subject to a contingent deferred sales charge that is 4%
in the first year following the purchase, declines by a specified percentage
each year thereafter and becomes zero after six years. Redemption of Class C
shares may be subject to a 1% contingent deferred sales charge in the first year
following the purchase. Returns and net asset value will fluctuate. Factors
affecting the Fund's performance include general market conditions, operating
expenses and investment management. Any additional fees charged by a dealer or
other financial services firm would reduce returns described in this section.
Shares of the Fund are redeemable at the then current net asset value, which may
be more or less than original cost.

There are differences and similarities between the investments which a Fund may
purchase and the investments measured by the indices which are described herein.
The Consumer Price Index is generally considered to be a measure of inflation.
The Dow Jones Industrial Average and the Standard & Poor's 500 Stock Index are
indices of common stocks which are considered to be generally representative of
the U.S. stock market. The Financial Times/Standard & Poor's Actuaries World
Index-Europe(TM) is a managed index that is generally representative of the
equity securities of European markets. The foregoing indices are unmanaged. The
net asset value and returns of a Fund will fluctuate.

Investors may want to compare the performance of the Fund to certificates of
deposit issued by banks and other depository institutions. Certificates of
deposit may offer fixed or variable interest rates and principal is guaranteed
and may be insured. Withdrawal of deposits prior to maturity will normally be
subject to a penalty. Rates offered by banks and other depository institutions
are subject to change at any time specified by the issuing institution.
Information regarding bank products may be based upon, among other things, the
BANK RATE MONITOR National Index(TM) for certificates of deposit, which is an
unmanaged index and is based on stated rates and the annual effective yields of
certificates of deposit in the ten largest banking markets in the United States,
or the CDA Investment Technologies, Inc. Certificate of Deposit Index, which is
an unmanaged index based on the average monthly yields of certificates of
deposit.

Investors also may want to compare the performance of the Fund to that of U.S.
Treasury bills, notes or bonds. Treasury obligations are issued in selected
denominations. Rates of Treasury obligations are fixed at the time of issuance
and payment of principal and interest is backed by the full faith and credit of
the U.S. Treasury. The market value of such instruments will generally fluctuate
inversely with interest rates prior to maturity and will equal par value at
maturity. Information regarding the performance of Treasury obligations may be
based upon, among other things, the Towers Data Systems U.S. Treasury Bill
index, which is an unmanaged index based on the average monthly yield of
treasury bills maturing in six months. Due to their short maturities, Treasury
bills generally experience very low market value volatility.

Investors may want to compare the performance of the Fund to that of money
market funds. Money market funds seek to maintain a stable net asset value and
yield fluctuates. Information regarding the performance of money market funds
may be based upon, among other things, IBC/Donoghue's Money Fund Averages(R)
(All Taxable). As reported by IBC/Donoghue's, all investment results represent
total return (annualized results for the period net of management fees and
expenses) and one year investment results are effective annual yields assuming
reinvestment of dividends.

INVESTMENT MANAGER AND UNDERWRITER

INVESTMENT MANAGER. Scudder Kemper Investments, Inc. (the "Adviser"), an
investment counsel firm, 345 Park Avenue, New York, New York, is the Fund's
investment manager. This organization is one of the most experienced investment
management firms in the United States. The Adviser is [wholly owned] by ZKI
Holding Corp. ZKI Holding Corp. is a more than 90% owned subsidiary of Zurich
Holding Company of America, Inc., which is a wholly owned subsidiary of Zurich
Insurance Company, an internationally recognized provider of financial services
in property/ casualty and life insurance, reinsurance and asset management.
Pursuant to the investment management agreement, the Adviser acts as the Fund's
investment adviser, manages its investments, administers its business affairs,
furnishes office facilities and equipment, provides clerical, bookkeeping and
administrative services and permits any of its officers or employees to serve
without compensation as trustees or officers of the Fund if elected to such
positions. The investment management agreement provides that the Fund shall pay
the charges and expenses of its operations,

18
<PAGE>

including the fees and expenses of the trustees (except those who are affiliates
of the Adviser), independent auditors, counsel, custodian and transfer agent and
the cost of share certificates, reports and notices to shareholders, brokerage
commissions or transaction costs, costs of calculating net asset value, taxes
and membership dues. The Fund bears the expenses of registration of its shares
with the Securities and Exchange Commission, while Zurich Kemper Distributors,
Inc. ("ZKDI"), as principal underwriter, pays the cost of qualifying and
maintaining the qualification of the Fund's shares for sale under the securities
laws of the various states.

The Adviser maintains a large research department, which conducts ongoing
studies of the factors that affect the position of various industries, companies
and individual securities. In this work, the Adviser utilizes certain reports
and statistics from a wide variety of sources, including brokers and dealers who
may execute portfolio transactions for the Fund and for clients of the Adviser,
but conclusions are based primarily on investigations and critical analyses by
its own research specialists.

Certain investments may be appropriate for the Fund and also for other clients
advised by the Adviser. Investment decisions for the Fund and other clients are
made with a view toward achieving their respective investment objectives and
after consideration of such factors as their current holdings, availability of
cash for investment and the size of their investments generally. Frequently, a
particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same date. In
such event, such transactions will be allocated among the clients in a manner
believed by the Adviser to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by the Fund. Purchase and sale orders for the Fund may be combined with
those of other clients of the Adviser in the interest of achieving the most
favorable net results to the Fund.

The Investment Management Agreement (the "Agreement") between the Trust, on
behalf of the Fund, and the Adviser was approved by the initial Trustee of the
Trust on____________. The Agreement is dated __________ and will continue in
effect until _______ 1999 and from year to year thereafter only if its
continuance is approved annually by the vote of a majority of those Trustees who
are not parties to such Agreement or interested persons of the Adviser or the
Fund, cast in person at a meeting called for the purpose of voting on such
approval, and by a majority vote either of the Fund's Trustees or of the
outstanding voting securities of the Fund. The Agreement may be terminated at
any time without payment of penalty by either party on sixty days' written
notice, and automatically terminates in the event of its assignment.

Under the Agreement, the Adviser provides the Fund with continuing investment
management for the Fund's portfolio consistent with the Fund's investment
objectives, policies and restrictions and determines what securities shall be
purchased for the portfolio of the Fund, what portfolio securities shall be held
or sold by the Fund and what portion of the Fund's assets shall be held
uninvested, subject always to the provisions of the Fund's Declaration of Trust
and By-Laws, the 1940 Act and the Code and to the Fund's investment objectives,
policies and restrictions and subject, further, to such policies and
instructions as the Trustees of the Trust may from time to time establish. The
Adviser also advises and assists the officers of the Trust in taking such steps
as are necessary or appropriate to carry out the decisions of its Trustees and
the appropriate committees of the Trustees regarding the conduct of the business
of the Fund.

The Adviser also renders significant administrative services (not otherwise
provided by third parties) necessary for the Fund's operations as an open-end
investment company including, but not limited to, preparing reports and notices
to the Trustees and shareholders; supervising, negotiating contractual
arrangements with, and monitoring various third-party service providers to the
Fund (such as the Fund's transfer agent, pricing agents, custodian, accountants
and others); preparing and making filings with the SEC and other regulatory
agencies; assisting in the preparation and filing of the Fund's federal, state
and local tax returns; preparing and filing the Fund's federal excise tax
returns; assisting with investor and public relations matters; monitoring the
valuation of securities and the calculation of net asset value; monitoring the
registration of shares of the Fund under applicable federal and state securities
laws; maintaining the Fund's books and records to the extent not otherwise
maintained by a third party; assisting in establishing accounting policies of
the Fund; assisting in the resolution of accounting and legal issues;
establishing and monitoring the Fund's operating budget; processing the payment
of the Fund's bills; assisting the Fund in, and otherwise arranging for, the
payment of distributions and dividends; and otherwise assisting the Fund in the
conduct of its business, subject to the direction and control of the Trustees.

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<PAGE>

The Adviser pays the compensation and expenses (except those for attending Board
and Committee meetings outside New York, New York; Boston, Massachusetts and
Chicago, Illinois) of all Trustees, officers and executive employees of the
Trust affiliated with the Adviser and makes available, without expense to the
Trust, the services of such Trustees, officers and employees of the Adviser as
may duly be elected officers or Trustees of the Trust, subject to their
individual consent to serve and to any limitations imposed by law, and provides
the Trust's office space and facilities.

Under the Agreement the Fund is responsible for all of its other expenses
including organizational costs, fees and expenses incurred in connection with
membership in investment company organizations; brokers' commissions; legal,
auditing and accounting expenses; the calculation of Net Asset Value; taxes and
governmental fees; the fees and expenses of the transfer agent; the cost of
preparing stock certificates and any other expenses including clerical expenses
of issue, redemption or repurchase of shares; the expenses of and the fees for
registering or qualifying securities for sale; the fees and expenses of
Trustees, officers and employees of the Trust who are not affiliated with the
Adviser; the cost of printing and distributing reports and notices to
shareholders; and the fees and disbursements of custodians. The Fund may arrange
to have third parties assume all or part of the expenses of sale, underwriting
and distribution of shares of the Fund. The Fund is also responsible for its
expenses incurred in connection with litigation, proceedings and claims and the
legal obligation it may have to indemnify its officers and Trustees with respect
thereto.

The Agreement expressly provides that the Adviser shall not be required to pay a
pricing agent of the Fund for portfolio pricing services, if any.

In reviewing the terms of the Agreement and in discussions with the Adviser
concerning such Agreement, the Trustees of the Trust who are not "interested
persons" of the Trust have been represented by independent counsel at the Fund's
expense.

The Agreement provides that the Adviser shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with matters to which the Agreement relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of the Adviser in
the performance of its duties or from reckless disregard by the Adviser of its
obligations and duties under the Agreement.

Officers and employees of the Adviser from time to time may have transactions
with various banks, including the Fund's custodian bank. It is the Adviser's
opinion that the terms and conditions of those transactions which have occurred
were not influenced by existing or potential custodial or other Fund
relationships.

None of the officers or Trustees of the Trust may have dealings with the Trust
as principals in the purchase or sale of securities, except as individual
subscribers or holders of shares of the Trust.

Personal Investments by Employees of the Adviser

Employees of the Adviser and certain of its subsidiaries are permitted to make
personal securities transactions, subject to requirements and restrictions set
forth in the Adviser's Code of Ethics. The Code of Ethics contains provisions
and requirements designed to identify and address certain conflicts of interest
between personal investment activities and the interests of investment advisory
clients such as the Fund. Among other things, the Code of Ethics, which
generally complies with standards recommended by the Investment Company
Institute's Advisory Group on Personal Investing, prohibits certain types of
transactions absent prior approval, imposes time periods during which personal
transactions may not be made in certain securities, and requires the submission
of duplicate broker confirmations and monthly reporting of securities
transactions. Additional restrictions apply to portfolio managers, traders,
research analysts and others involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.

PRINCIPAL UNDERWRITER. Pursuant to an underwriting and distribution services
agreement ("distribution agreement"), Zurich Kemper Distributors, Inc. ("ZKDI"),
a [wholly owned] [indirect] subsidiary of the [Adviser], is the principal
underwriter and distributor for the shares of the Fund and acts as agent of the
Fund in the continuous offering of its shares. ZKDI bears all of its expenses of
providing services pursuant to the distribution agreement, including the payment
of any commissions. The Fund pays the cost for the prospectus and shareholder
reports to be set in type and printed for existing shareholders, and ZKDI pays
for the printing and distribution of copies thereof used in connection with the
offering of shares to prospective investors. ZKDI also pays for supplementary
sales literature and advertising costs.

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<PAGE>

The distribution agreement continues in effect from year to year so long as such
continuance is approved for each class at least annually by a vote of the Board
of Trustees of the Fund, including the Trustees who are not interested persons
of the Fund and who have no direct or indirect financial interest in the
agreement. The distribution agreement automatically terminates in the event of
its assignment and may be terminated for a class at any time without penalty by
the Fund or by ZKDI upon 60 days' notice. Termination by the Fund with respect
to a class may be by vote of a majority of the Board of Trustees, or a majority
of the Trustees who are not interested persons of the Fund and who have no
direct or indirect financial interest in the distribution agreement, or a
"majority of the outstanding voting securities" of the class of the Fund, as
defined under the 1940 Act. The distribution agreement may not be amended for a
class to increase the fee to be paid by the Fund with respect to such class
without approval by a majority of the outstanding voting securities of such
class of the Fund and all material amendments must in any event be approved by
the Board of Trustees in the manner described above with respect to the
continuation of the distribution agreement. The provisions concerning the
continuation, amendment and termination of the distribution agreement are on a
class by class basis.

ADMINISTRATIVE SERVICES. Administrative services are provided to the Fund under
an administrative services agreement ("administrative agreement") with ZKDI.
ZKDI bears all its expenses of providing services pursuant to the administrative
agreement between ZKDI and the Fund, including the payment of service fees. For
the services under the administrative agreement, the Fund pays ZKDI an
administrative services fee, payable monthly, at an annual rate of up to ___% of
average daily net assets of Class A, B and C shares of the Fund.

ZKDI enters into related arrangements with various broker-dealer firms and other
service or administrative firms ("firms") that provide services and facilities
for their customers or clients who are investors in the Fund. The firms provide
such office space and equipment, telephone facilities and personnel as is
necessary or beneficial for providing information and services to their clients.
Such services and assistance may include, but are not limited to, establishing
and maintaining accounts and records, processing purchase and redemption
transactions, answering routine inquiries regarding the Fund, assistance to
clients in changing dividend and investment options, account designations and
addresses and such other administrative services as may be agreed upon from time
to time and permitted by applicable statute, rule or regulation. With respect to
Class A shares, ZKDI pays each firm a service fee, payable quarterly, at an
annual rate of up to ___% of the net assets in Fund accounts that it maintains
and services attributable to Class A shares, commencing with the month after
investment. With respect to Class B and Class C shares, ZKDI currently advances
to firms the first-year service fee at a rate of up to ___% of the purchase
price of such shares. For periods after the first year, ZKDI currently intends
to pay firms a service fee at a rate of up to ___% (calculated monthly and paid
quarterly) of the net assets attributable to Class B and Class C shares
maintained and serviced by the firm. After the first year, a firm becomes
eligible for the quarterly service fee and the fee continues until terminated by
ZKDI or the Fund. Firms to which service fees may be paid may include affiliates
of ZKDI.

ZKDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreement not paid to firms to compensate
itself for administrative functions performed for the Fund. Currently, the
administrative services fee payable to ZKDI is based only upon Fund assets in
accounts for which a firm provides administrative services listed on the Fund's
records and it is intended that ZKDI will pay all the administrative services
fee that it receives from the Fund to firms in the form of service fees. The
effective administrative services fee rate to be charged against all assets of
the Fund while this procedure is in effect will depend upon the proportion of
Fund assets that is in accounts for which there is a firm of record. The Board
of Trustees of the Fund, in its discretion, may approve basing the fee to ZKDI
on all Fund assets in the future.

Certain trustees or officers of the Fund are also directors or officers of the
Adviser or ZKDI, as indicated under "Officers and Trustees."

CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT_________________, as
custodian, has custody of all securities and cash of the Fund held outside the
United States. ____________________, as custodian, and __________________, as
sub-custodian, have custody of all securities and cash of the Fund. They attend
to the collection of principal and income, and payment for and collection of
proceeds of securities bought and sold by the Fund. ____ is also the Fund's
transfer agent and dividend-paying agent. Pursuant to a services agreement with
____, Zurich Kemper Service Company ("ZKSC"), an affiliate of _________, serves
as "Shareholder Service Agent" of the Fund, and as such, performs all of ____'s
duties as transfer agent and dividend-paying agent. ____ receives as transfer
agent, and pays to ZKSC, annual account fees of $__ per account plus account set
up, transaction and maintenance charges, annual fees associated with the
contingent deferred sales charge (Class B

21
<PAGE>

shares only) and out-of-pocket expense reimbursement. ____'s fee is reduced by
certain earnings credits in favor of the Fund.

INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS. The Fund's independent
auditors, _____________________________________, audit and report on the Fund's
annual financial statements, review certain regulatory reports and the Fund's
federal income tax return, and perform other professional accounting, auditing,
tax and advisory services when engaged to do so by the Fund. Shareholders will
receive annual audited financial statements and semi-annual unaudited financial
statements.

PORTFOLIO TRANSACTIONS

TO BE UPDATED

Brokerage

The primary objective of the Adviser in placing orders for the purchase and sale
of securities for the Fund's portfolio is to obtain the most favorable net
results taking into account such factors as price, commission (negotiable in the
case of U.S. national securities exchange transactions) where applicable, size
of order, difficulty of execution and skill required of the executing
broker/dealer. The Adviser seeks to evaluate the overall reasonableness of
brokerage commissions paid (to the extent applicable) through familiarity with
commissions charged on comparable transactions, as well as by comparing
commissions paid by the Fund to reported commissions paid by others. The Adviser
reviews on a routine basis commission rates, execution and settlement services
performed, making internal and external comparisons.

The Fund's purchases and sales of fixed-income securities are generally placed
by the Adviser with primary market makers for these securities on a net basis,
without any brokerage commission being paid by the Fund. Trading does, however,
involve transaction costs. Transactions with dealers serving as primary market
makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.

When it can be done consistently with the policy of obtaining the most favorable
net results, it is the Adviser's practice to place such orders with
broker/dealers who supply market quotations to Scudder Fund Accounting
Corporation for appraisal purposes or who supply research, market and
statistical information to the Fund. The term "research, market and statistical
information" includes advice as to the value of securities; the advisability of
investing in, purchasing or selling securities; the availability of securities
or purchasers or sellers of securities; and analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts. The Adviser is not authorized when placing
portfolio transactions for the Fund to pay a brokerage commission in excess of
that which another broker might charge for executing the same transaction solely
on account of the receipt of research, market or statistical information. In
effecting transactions in over-the-counter securities, orders are placed with
the principal market makers for the security being traded unless, after
exercising care, it appears that more favorable results are available elsewhere.

In selecting among firms believed to meet the criteria for handling a particular
transaction, the Adviser may give consideration to those firms that have sold or
are selling shares of the Fund and of other funds managed by the Adviser.

Although certain research, market and statistical information from
broker/dealers may be useful to the Fund and to the Adviser, it is the opinion
of the Adviser that such information only supplements its own research effort
since the information must still be analyzed, weighed and reviewed by the
Adviser's staff. Such information may be useful to the Adviser in providing
services to clients other than the Fund and not all such information is used by
the Adviser in connection with the Fund. Conversely, such information provided
to the Adviser by broker/dealers through whom other clients of the Adviser
effect securities transactions may be useful to the Adviser in providing
services to the Fund.

The Trustees of the Fund review from time to time whether the recapture for the
benefit of the Fund of some portion of the brokerage commissions or similar fees
paid by the Fund on portfolio transactions is legally permissible and advisable.
Within the past three years no such recapture has been effected.

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<PAGE>

The Fund's average portfolio turnover rate is the ratio of the lesser of sales
or purchases to the monthly average value of the portfolio securities owned
during the year, excluding all securities with maturities or expiration dates at
the time of acquisition of one year or less. A higher rate involves greater
brokerage transaction expenses to the Fund and may result in the realization of
net capital gains, which would be taxable to shareholders when distributed.
Purchases and sales are made for the Fund's portfolio whenever necessary, in
management's opinion, to meet the Fund's objective. Under normal investment
conditions, it is anticipated that the portfolio turnover rate in the Fund's
initial fiscal year will not exceed 100%.

PURCHASE AND REDEMPTION OF SHARES

As described in the prospectus, Fund shares are sold at their public offering
price, which is the net asset value next determined after an order is received
in proper form plus, with respect to Class A shares, an initial sales charge.
The minimum initial investment for each class is $1,000 and the minimum
subsequent investment is $100 but such minimum amounts may be changed at any
time. See the prospectus for certain exceptions to these minimums. The Fund may
waive the minimum for purchases by trustees, directors, officers or employees of
the Fund or the Adviser and its affiliates. An order for the purchase of shares
that is accompanied by a check drawn on a foreign bank (other than a check drawn
on a Canadian bank in U.S. Dollars) will not be considered in proper form and
will not be processed unless and until the Fund determines that it has received
payment of the proceeds of the check. The time required for such a determination
will vary and cannot be determined in advance.

Upon receipt by the Shareholder Service Agent of a request for redemption,
shares of the Fund will be redeemed by the Fund at the applicable net asset
value per share of the Fund as described in the Fund's prospectus.

Scheduled variations in or the elimination of the initial sales charge for
purchases of Class A shares or the contingent deferred sales charge for
redemptions of Class B or Class C shares by certain classes of persons or
through certain types of transactions as described in the prospectus are
provided because of anticipated economies of scale in sales and sales-related
efforts.

The Fund may suspend the right of redemption or delay payment more than seven
days (a) during any period when the New York Stock Exchange ("Exchange") is
closed other than customary weekend and holiday closings or during any period in
which trading on the Exchange is restricted, (b) during any period when an
emergency exists as a result of which (i) disposal of the Fund's investments is
not reasonably practicable, or (ii) it is not reasonably practicable for the
Fund to determine the value of its net assets, or (c) for such other periods as
the Securities and Exchange Commission may by order permit for the protection of
the Fund's shareholders.

The net asset value per share of the Fund is determined separately for each
class by dividing the value of the Fund's net assets attributable to that class
by the number of shares of that class outstanding. The per share net asset value
of the Class B and Class C shares of the Fund will generally be lower than that
of the Class A shares of the Fund because of the higher expenses borne by the
Class B and Class C shares. The net asset value of shares of the Fund is
computed as of the close of regular trading on the Exchange on each day the
Exchange is open for trading. The Exchange is scheduled to be closed on the
following holidays: New Year's Day, Martin Luther King Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas.

Although it is the Fund's present policy to redeem in cash, if the Board of
Trustees determines that a material adverse effect would be experienced by the
remaining shareholders if payment were made wholly in cash, the Fund will
satisfy the redemption request in whole or in part by a distribution of
portfolio securities in lieu of cash, in conformity with the applicable rules of
the Securities and Exchange Commission, taking such securities at the same value
used to determine net asset value, and selecting the securities in such manner
as the Board of Trustees may deem fair and equitable. If such a distribution
occurred, shareholders receiving securities and selling them could receive less
than the redemption value of such securities and in addition would incur certain
transaction costs. Such a redemption would not be so liquid as a redemption
entirely in cash.

The conversion of Class B shares to Class A shares may be subject to the
continuing availability of an opinion of counsel, ruling by the Internal Revenue
Service or other assurance acceptable to the Fund to the effect that (a) the
assessment of the distribution services fee with respect to Class B shares and
not Class A shares does not result in the Fund's dividends constituting
"preferential dividends" under the Internal Revenue Code, and (b) that the
conversion of Class B shares to Class A shares does not constitute a taxable
event under the Internal Revenue Code. The conversion of Class B shares to Class
A shares may be suspended if such

23
<PAGE>

assurance is not available. In that event, no further conversions of Class B
shares would occur, and shares might continue to be subject to the distribution
services fee for an indefinite period that may extend beyond the proposed
conversion date as described in the prospectus.

OFFICERS AND TRUSTEES

The officers and trustees of the Trust, their birthdates, their principal
occupations and their affiliations, if any, with the Adviser, and ZKDI, the
principal underwriter, are as follows (the number following each person's title
is the number of investment companies managed by the Adviser for which he or she
holds similar positions and the date following each person's name is his or her
date of birth):

DANIEL PIERCE (xxxxxx), President and Trustee (6), 345 Park Avenue, New York,
New York.*

MARK S. CASADY (xxxxxx), Trustee, Vice President and Treasurer (6).*

KATHRYN L. QUIRK (xxxxxx), Trustee, Vice President and Secretary (6), 345 Park
Avenue, New York, New York.*

* Interested persons of the Trust as defined in the Investment Company Act of
1940.

Compensation of Officers and Trustees

The Independent Trustees receive the following compensation from the Funds: an
annual trustee's fee of $_____; a fee of $____ for attendance at each Board
meeting, audit committee meeting, or other meeting held for the purposes of
considering arrangements between the Funds and the Adviser or any affiliate of
the Adviser; $____ for any other committee meeting (although in some cases the
Independent Trustees have waived committee meeting fees); and reimbursement of
expenses incurred for travel to and from Board Meetings. No additional
compensation is paid to any Independent Trustee for travel time to meetings,
attendance at directors' educational seminars or conferences, service on
industry or association committees, participation as speakers at directors'
conferences, service on special trustee task forces or subcommittees or service
as lead or liaison trustee. Independent Trustees do not receive any employee
benefits such as pension, retirement or health insurance.

The Independent Trustees also serve in the same capacity for other funds managed
by the Adviser. These funds differ broadly in type and complexity and in some
cases have substantially different Trustee fee schedules.

The Trustees and Officers as a group owned less than 1% of the Fund's shares as
of the commencement of operations.

SHAREHOLDER RIGHTS

The Fund is a series of Kemper Growth and Income Fund, a Massachusetts
business trust established under a Declaration of Trust dated October 1, 1997.

The Fund generally is not required to hold meetings of its shareholders. Under
the Agreement and Declaration of Trust of the Fund ("Declaration of Trust"),
however, shareholder meetings will be held in connection with the following
matters: (a) the election or removal of trustees if a meeting is called for such
purpose; (b) the adoption of any contract for which approval by shareholders is
required by the 1940 Act; (c) any termination of the Fund or a class to the
extent and as provided in the Declaration of Trust; (d) any amendment of the
Declaration of Trust (other than amendments changing the name of the Fund,
supplying any omission, curing any ambiguity or curing, correcting or
supplementing any defective or inconsistent provision thereof); and (e) such
additional matters as may be required by law, the Declaration of Trust, the
By-laws of the Fund, or any registration of the Fund with the Securities and
Exchange Commission or any state, or as the trustees may consider necessary or
desirable. The shareholders also would vote upon changes in fundamental policies
or restrictions.

Any matter shall be deemed to have been effectively acted upon with respect to a
Fund if acted upon as provided in Rule 18f-2 under the 1940 Act, or any
successor rule, and in the Trust's Declaration of Trust. As used in the
Prospectuses and in this Statement of Additional Information, the term
"majority", when referring to the approvals to be obtained from shareholders in
connection with general matters affecting the Funds and all additional
portfolios (e.g., election of directors), means the vote of the lesser of (i)
67% of

24
<PAGE>

the Trust's shares represented at a meeting if the holders of more than 50% of
the outstanding shares are present in person or by proxy, or (ii) more than 50%
of the Trust's outstanding shares. The term "majority", when referring to the
approvals to be obtained from shareholders in connection with matters affecting
a single Fund or any other single portfolio (e.g., annual approval of investment
management contracts), means the vote of the lesser of (i) 67% of the shares of
the portfolio represented at a meeting if the holders of more than 50% of the
outstanding shares of the portfolio are present in person or by proxy, or (ii)
more than 50% of the outstanding shares of the portfolio.

Each trustee serves until the next meeting of shareholders, if any, called for
the purpose of electing trustees and until the election and qualification of a
successor or until such trustee sooner dies, resigns, retires or is removed by a
majority vote of the shares entitled to vote (as described below) or a majority
of the trustees. In accordance with the 1940 Act (a) the Fund will hold a
shareholder meeting for the election of trustees at such time as less than a
majority of the trustees have been elected by shareholders, and (b) if, as a
result of a vacancy in the Board of Trustees, less than two-thirds of the
trustees have been elected by the shareholders, that vacancy will be filled only
by a vote of the shareholders.

Any of the Trustees may be removed (provided the aggregate number of Trustees
after such removal shall not be less than one) with cause, by the action of
two-thirds of the remaining Trustees. Any Trustee may be removed at any meeting
of shareholders by vote of two-thirds of the Outstanding Shares. The Trustees
shall promptly call a meeting of the shareholders for the purpose of voting upon
the question of removal of any such Trustee or Trustees when requested in
writing to do so by the holders of not less than ten percent of the Outstanding
Shares, and in that connection, the Trustees will assist shareholder
communications to the extent provided for in Section 16(c) under the 1940 Act.

The Fund's Declaration of Trust specifically authorizes the Board of Trustees to
terminate the Fund or any Portfolio or class by notice to the shareholders
without shareholder approval.

Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for obligations of the
Fund. The Declaration of Trust, however, disclaims shareholder liability for
acts or obligations of the Fund and requires that notice of such disclaimer be
given in each agreement, obligation, or instrument entered into or executed by
the Fund or the Fund's trustees. Moreover, the Declaration of Trust provides for
indemnification out of Fund property for all losses and expenses of any
shareholder held personally liable for the obligations of the Fund and the Fund
will be covered by insurance which the trustees consider adequate to cover
foreseeable tort claims. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is considered by the Adviser remote and
not material, since it is limited to circumstances in which a disclaimer is
inoperative and the Fund itself is unable to meet its obligations.

The assets of the Trust received for the issue or sale of the shares of each
series and all income, earnings, profits and proceeds thereof, subject only to
the rights of creditors, are specifically allocated to such series and
constitute the underlying assets of such series. The underlying assets of each
series are segregated on the books of account and are to be charged with the
liabilities in respect to such series and with a proportionate share of the
general liabilities of the Trust. If a series were unable to meet its
obligations, the assets of all other series may in some circumstances be
available to creditors for that purpose, in which case the assets of such other
series could be used to meet liabilities which are not otherwise properly
chargeable to them. Expenses with respect to any two or more series are to be
allocated in proportion to the asset value of the respective series except where
allocations of direct expenses can otherwise be fairly made. The officers of the
Trust, subject to the general supervision of the Trustees, have the power to
determine which liabilities are allocable to a given series, or which are
general or allocable to two or more series. In the event of the dissolution or
liquidation of the Trust or any series, the holders of the shares of any series
are entitled to receive as a class the underlying assets of such shares
available for distribution to shareholders.

Further, the Fund's Board of Trustees may determine, without prior shareholder
approval, in the future that the objectives of the Fund would be achieved more
effectively by investing in a master fund in a master/feeder fund structure.

ADDITIONAL INFORMATION

25
<PAGE>

Other Information

The CUSIP number of each class is __________.

The Fund has a fiscal year ending ___________.

Many of the investment changes in the Fund will be made at prices different from
those prevailing at the time they may be reflected in a regular report to
shareholders of the Fund. These transactions will reflect investment decisions
made by the Adviser in light of the Fund's investment objectives and policies,
its other portfolio holdings and tax considerations, and should not be construed
as recommendations for similar action by other investors.

Costs of $____________incurred by the Fund, in conjunction with its
organization, are amortized over the five year period beginning _________.

Portfolio securities of the Fund are held separately pursuant to a custodian
agreement, by the Fund's custodian, _________________.

The law firm of _______________ is counsel to the Fund.

The name "Kemper Growth and Income Fund" is the designation of the Trust for the
time being under a Declaration of Trust dated October 2, 1997, as amended from
time to time, and all persons dealing with the Fund must look solely to the
property of the Fund for the enforcement of any claims against the Fund as
neither the Trustees, officers, agents, shareholders nor other series of the
Trust assume any personal liability for obligations entered into on behalf of
the Fund. No other series of the Trust assumes any liabilities for obligations
entered into on behalf of the Fund. Upon the initial purchase of shares, the
shareholder agrees to be bound by the Fund's Declaration of Trust, as amended
from time to time. The Declaration of Trust is on file at the Massachusetts
Secretary of State's Office in Boston, Massachusetts.

The Fund's prospectus and this Statement of Additional Information omit certain
information contained in the Registration Statement and its amendments which the
Fund has filed with the SEC under the Securities Act of 1933 and reference is
hereby made to the Registration Statement for further information with respect
to the Fund and the securities offered hereby. The Registration Statement and
its amendments, are available for inspection by the public at the SEC in
Washington, D.C.

26
<PAGE>
KEMPER GROWTH AND INCOME FUND

PART C. OTHER INFORMATION
<TABLE>
<CAPTION>

Item 24. Financial Statements and Exhibits
- -------- ---------------------------------
<S> <C>
a. Financial Statements

Included in Part A of this Registration Statement:

Financial Highlights to be filed by amendment.

Included in Part B of this Registration Statement:

Statements, schedules and historical information other than
those listed above have been omitted since they are either not
applicable or are not required.

b. Exhibits:

1. Declaration of Trust dated October 1, 1997 is filed herein.

2. By-Laws to be filed by Amendment.

3. Inapplicable.

4. Specimen Share Certificate to be filed by Amendment.

5. Investment Management Agreement to be filed by Amendment.

6. Underwriting Agreement to be filed by Amendment.

7. Inapplicable.

8. (a) Custodian Agreement to be filed by Amendment.

(b) Fee schedule for Exhibit 8(a) to be filed by Amendment.

9. (a)(1) Transfer Agency and Service Agreement to be filed by Amendment.

(a)(2) Fee schedule for Exhibit 9(a)(1) to be filed by Amendment.

(b) Shareholder Services Agreement to be filed by Amendment.

10. Inapplicable.

11. Inapplicable.

12. Inapplicable.

13. Inapplicable.

14. Inapplicable.

15. Inapplicable.

Part C - Page 1
<PAGE>

16. Inapplicable.

17. Inapplicable.

18. Inapplicable.
</TABLE>

Item 25. Persons Controlled by or under Common Control with Registrant
- -------- -------------------------------------------------------------

None

Item 26. Number of Holders of Securities (as of September 30, 1997).
- -------- -----------------------------------------------------------
<TABLE>
<CAPTION>

(1) (2)

Title of Class Number of Shareholders
-------------- ----------------------
<S> <C> <C>
Shares of beneficial interest
($.01 par value)
Kemper U.S. Growth and Income Fund 0
</TABLE>

Item 27. Indemnification.
- -------- ----------------

Article IV, Sections 4.1 - 4.3 of Registrant's Declaration of Trust
provide as follows:

Section 4.1 No Personal Liability of Shareholders, Trustees, Etc. No
Shareholder shall be subject to any personal liability whatsoever to
any Person in connection with Trust Property or the acts, obligations
or affairs of the Trust. No Trustee, officer, employee or agent of the
Trust shall be subject to any personal liability whatsoever to any
Person, other than to the Trust or its Shareholders, in connection with
Trust Property or the affairs of the Trust, save only that arising from
bad faith, willful misfeasance, gross negligence or reckless disregard
of his duties with respect to such Person; and all such Persons shall
look solely to the Trust Property for satisfaction of claims of any
nature arising in connection with the affairs of the Trust. If any
Shareholder, Trustee, officer, employee, or agent, as such, of the
Trust, is made a party to any suit or proceeding to enforce any such
liability of the Trust, he shall not, on account thereof, be held to
any personal liability. The Trust shall indemnify and hold each
Shareholder harmless from and against all claims and liabilities, to
which such Shareholder may become subject by reason of his being or
having been a Shareholder, and shall reimburse such Shareholder for all
legal and other expenses reasonably incurred by him in connection with
any such claim or liability, provided that any such expenses shall be
paid solely out of the funds and property of the series of the Trust
with respect to which such Shareholders Shares are issued. The rights
accruing to a Shareholder under this Section 4.1 shall not exclude any
other right to which such Shareholder may be lawfully entitled, nor
shall anything herein contained restrict the right of the Trust to
indemnify or reimburse a Shareholder in any appropriate situation even
though not specifically provided herein.

Section 4.2 Non-Liability of Trustees, Etc. No Trustee, officer,
employee or agent of the Trust shall be liable to the Trust, its
Shareholders, or to any Shareholder, Trustee, officer, employee, agent
or service provider thereof for any action or failure to act by him (or
her) or any other such Trustee, officer, employee, agent or service
provider (including without limitation the failure to compel in any way
any former or acting Trustee to redress any breach of trust) except for
his own bad faith, willful misfeasance, gross negligence or reckless
disregard of the duties involved in the conduct of his office. The term
"service provider" as used in this Section 4.2, shall include any
investment adviser, principal underwriter or other person with whom the
Trust has an agreement for provision of services.

Part C - Page 2
<PAGE>

Section 4.3 Mandatory Indemnification.

(a) Subject to the exceptions and limitations contained in
paragraph (b) below:

(i) every person who is, or has been, a Trustee or
officer of the Trust shall be indemnified by the Trust to the
fullest extent permitted by law against all liability and
against all expenses reasonably incurred or paid by him in
connection with any claim, action, suit or proceeding in which
he becomes involved as a party or otherwise by virtue of his
being or having been a Trustee or officer and against amounts
paid or incurred by him in the settlement thereof;

(ii) the words "claim," "action," "suit," or
"proceeding" shall apply to all claims, actions, suits or
proceedings (civil, criminal, or other, including appeals),
actual or threatened; and the words "liability" and "expenses"
shall include, without limitation, attorneys' fees, costs,
judgments, amounts paid in settlement, fines, penalties and
other liabilities.

(b) No indemnification shall be provided hereunder to a
Trustee or officer:

(i) against any liability to the Trust or the
Shareholders by reason of a final adjudication by the court or
other body before which the proceeding was brought that he
engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of
his office;

(ii) with respect to any matter as to which he shall
have been finally adjudicated not to have acted in good faith
in the reasonable belief that his action was in the best
interest of the Trust;

(iii) in the event of a settlement or other
disposition not involving a final adjudication as provided in
paragraph (b)(i) resulting in a payment by a Trustee or
officer, unless there has been a determination that such
Trustee or officer did not engage in willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office;

(A) by the court or other body approving the
settlement or other disposition; or

(B) based upon a review of readily available facts
(as opposed to a full trial-type inquiry) by (x) vote of a
majority of the Disinterested Trustees acting on the matter
(provided that a majority of the Disinterested Trustees then
in office act on the matter) or (y) written opinion of
independent legal counsel.

(c) The rights of indemnification herein provided may be
insured against by policies maintained by the Trust, shall be
severable, shall not affect any other rights to which any Trustee or
officer may now or hereafter be entitled, shall continue as to a person
who has ceased to be such Trustee or officer and shall inure to the
benefit of the heirs, executors, administrators and assigns of such a
person. Nothing contained herein shall affect any rights to
indemnification to which personnel of the Trust other than Trustees and
officers may be entitled by contract or otherwise under law.

(d) Expenses of preparation and presentation of a defense to
any claim, action, suit or proceeding of the character described in
paragraph (a) of this Section 4.3 shall be advanced by the Trust prior
to final disposition thereof upon receipt of an undertaking by or on
behalf of the recipient to repay such amount if it is ultimately
determined that he is not entitled to indemnification under this
Section 4.3 provided that either:

(i) such undertaking is secured by a surety bond or
some appropriate security provided by the recipient, or the
Trust shall be insured against losses arising out of any such
advances: or

(ii) a majority of the Disinterested Trustees acting
on the matter (provided that a majority of the Disinterested
Trustees act on the matter) or an independent legal counsel in
a written opinion shall determine, based upon a review of
readily available facts (as opposed to a full trial-type

Part C - Page 3
<PAGE>

inquiry), that there is reason to believe that the recipient
ultimately will be found entitled to indemnification.

As used in this Section 4.3, a "Disinterested
Trustee" is one who is not (i) an "Interested Person" of the
Trust (including anyone who has been exempted from being an
"Interested Person" by any rule, regulation or order of the
Commission), or (ii) involved in the claim, action, suit or
proceeding.

Item 28. Business or Other Connections of Investment Adviser
- -------- ---------------------------------------------------

Business and Other Connections of Board
Name of Directors of Registrant's Adviser
---- ------------------------------------

To be filed by Amendment.

Item 29. Principal Underwriters.
- -------- -----------------------

(a) Zurich Kemper Distributors, Inc. acts as principal underwriter
and distributor of the Registrant's shares.

(b)
<TABLE>
<CAPTION>

(1) (2) (3)

Name and Principal Position and Offices with Positions and
Business Address Underwriter Offices with Registrant
---------------- ----------- -----------------------
<S> <C> <C> <C>
Mark S. Casady None Treasurer, Trustee and
Two International Place Vice President
Boston, MA 02110

Daniel Pierce None President and Trustee
Two International Place
Boston, MA 02110

Kathryn L. Quirk None Trustee, Secretary and
345 Park Avenue Vice President
New York, NY 10154

</TABLE>

(1) (2) (3) (4) (5)
Net Underwriting Compensation on
Name of Principal Discounts and Redemptions Brokerage Other
Underwriter Commissions and Repurchases Commissions Compensation
----------- ----------- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Zurich Kemper Distributors, None None None None
Inc.

</TABLE>

Part C - Page 4
<PAGE>

Item 30. Location of Accounts and Records.
- -------- ---------------------------------

Certain accounts, books and other documents required to be
maintained by Section 31(a) of the 1940 Act and the Rules
promulgated thereunder will be maintained by Scudder Kemper
Investments, Inc., 345 Park Avenue, New York, NY 10154.
Records relating to the duties of the Registrant's custodian
are maintained by _____________________________ .

Item 31. Management Services.
- -------- --------------------

Inapplicable.

Item 32. Undertakings.
- -------- -------------

The Registrant hereby undertakes to file post-effective
amendments, using reasonably current financial statements of
Kemper U.S. Growth and Income Fund, within four to six months
from the effectiveness date of the Registrant's Registration
Statement under the 1933 Act.

The Registrant hereby undertakes to furnish each person to
whom a prospectus is delivered with a copy of a Fund's latest
annual report to shareholders upon request and without change.

The Registrant hereby undertakes to call a meeting of
shareholders for the purpose of voting on the question of
removal of a Trustee or Trustees when requested to do so by
the holders of at least 10% of the Registrant's outstanding
shares and in connection with such meeting to comply with the
provisions of Section 16(c) of the Investment Company Act of
1940 relating to shareholder communications.

The Registrant hereby undertakes, insofar as indemnification
for liability arising under the Securities Act of 1933 may be
permitted to trustees, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a
trustee, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is
asserted by such trustee, officer or controlling person in
connection with the securities being registered, the
registrant will submit unless in the opinion of its counsel
the matter has been settled by controlling precedent, to a
court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the financial adjudication of
such issue.

Part C - Page 5
<PAGE>
SIGNATURES
----------

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this amendment to
its Registration Statement to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Boston and the Commonwealth of
Massachusetts on the 1st day of October, 1997.

KEMPER GROWTH AND INCOME FUND

By /s/Kathryn L. Quirk
-------------------
Kathryn L. Quirk, Secretary

Pursuant to the requirements of the Securities Act of 1933, this
amendment to its Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.

SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/Kathryn L. Quirk
- ---------------------------------------
Kathryn L. Quirk Trustee, Vice President and Secretary October 1, 1997

/s/Mark S. Casady
- ---------------------------------------
Mark S. Casady Trustee, Vice President and Treasurer October 1, 1997
(Principal Financial and Accounting
Officer)

/s/Daniel Pierce
- ---------------------------------------
Daniel Pierce President and Trustee October 1, 1997

</TABLE>
<PAGE>

File No. _________
File No. _________

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

EXHIBITS

FORM N-1A

INITIAL REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

AND

INITIAL REGISTRATION STATEMENT

UNDER

THE INVESTMENT COMPANY ACT OF 1940

KEMPER GROWTH AND INCOME FUND

<PAGE>

KEMPER GROWTH AND INCOME FUND

Exhibit Index

Exhibit 1

KEMPER GROWTH AND INCOME FUND
DECLARATION OF TRUST
DATED OCTOBER 1, 1997

TABLE OF CONTENTS

Page

ARTICLE I 1
SECTION 1.1. NAME. 1
SECTION 1.2. DEFINITIONS. 1

ARTICLE II 3
SECTION 2.1. GENERAL POWERS. 3
SECTION 2.2. INVESTMENTS. 4
SECTION 2.3. LEGAL TITLE. 5
SECTION 2.4. ISSUANCE AND REPURCHASE OF SHARES. 6
SECTION 2.5. DELEGATION; COMMITTEES. 6
SECTION 2.6. COLLECTION AND PAYMENT. 6
SECTION 2.7. EXPENSES. 6
SECTION 2.8. MANNER OF ACTING; BY-LAWS. 6
SECTION 2.9. MISCELLANEOUS POWERS. 7
SECTION 2.10. PRINCIPAL TRANSACTIONS. 7
SECTION 2.11. NUMBER OF TRUSTEES. 8
SECTION 2.12. ELECTION AND TERM. 8
SECTION 2.13. RESIGNATION AND REMOVAL. 8
SECTION 2.14. VACANCIES. 8
SECTION 2.15. DELEGATION OF POWER TO OTHER TRUSTEES. 9
SECTION 2.16. SHAREHOLDER VOTE, ETC. 9

ARTICLE III 9
SECTION 3.1. DISTRIBUTION CONTRACT. 9
SECTION 3.2. ADVISORY OR MANAGEMENT CONTRACT. 10
SECTION 3.3. AFFILIATIONS OF TRUSTEES OR OFFICERS, ETC. 10
SECTION 3.4. COMPLIANCE WITH 1940 ACT. 11

ARTICLE IV 11
SECTION 4.1. NO PERSONAL LIABILITY OF SHAREHOLDERS,
TRUSTEES, ETC. 11
SECTION 4.2. NON-LIABILITY OF TRUSTEES, ETC. 11
SECTION 4.3. MANDATORY INDEMNIFICATION. 12
SECTION 4.4. NO BOND REQUIRED OF TRUSTEES. 13
SECTION 4.5. NO DUTY OF INVESTIGATION; NOTICE IN TRUST
INSTRUMENTS, ETC. 13
SECTION 4.6. RELIANCE ON EXPERTS, ETC. 14

ARTICLE V 14
SECTION 5.1. BENEFICIAL INTEREST. 14

<PAGE>

SECTION 5.2. RIGHTS OF SHAREHOLDERS. 14
SECTION 5.3. TRUST ONLY. 15
SECTION 5.4. ISSUANCE OF SHARES. 15
SECTION 5.5. REGISTER OF SHARES. 15
SECTION 5.6. TRANSFER OF SHARES. 15
SECTION 5.7. NOTICES, REPORTS. 16
SECTION 5.8. TREASURY SHARES. 16
SECTION 5.9. VOTING POWERS. 16
SECTION 5.10. MEETINGS OF SHAREHOLDERS. 17
SECTION 5.11. SERIES DESIGNATION. 17
SECTION 5.12. ASSENT TO DECLARATION OF TRUST. 19
SECTION 5.13. CLASS DESIGNATION. 19

ARTICLE VI 20
SECTION 6.1. REDEMPTION OF SHARES. 20
SECTION 6.2. PRICE. 21
SECTION 6.3. PAYMENT. 21
SECTION 6.4. EFFECT OF SUSPENSION OF DETERMINATION OF NET
ASSET VALUE. 21
SECTION 6.5. REPURCHASE BY AGREEMENT. 21
SECTION 6.6. REDEMPTION OF SHAREHOLDER'S INTEREST. 21
SECTION 6.7. REDEMPTION OF SHARES IN ORDER TO QUALIFY AS
REGULATED INVESTMENT COMPANY; DISCLOSURE OF
HOLDING. 22
SECTION 6.8. REDUCTIONS IN NUMBER OF OUTSTANDING SHARES
PURSUANT TO NET ASSET VALUE FORMULA. 22
SECTION 6.9. SUSPENSION OF RIGHT OF REDEMPTION. 22

ARTICLE VII 23
SECTION 7.1. NET ASSET VALUE. 23
SECTION 7.2. DISTRIBUTIONS TO SHAREHOLDERS. 24
SECTION 7.3. DETERMINATION OF NET INCOME; CONSTANT NET ASSET
VALUE; REDUCTION OF OUTSTANDING SHARES. 24
SECTION 7.4. ALLOCATION BETWEEN PRINCIPAL AND INCOME. 25
SECTION 7.5. POWER TO MODIFY FOREGOING PROCEDURES. 25

ARTICLE VIII 25
SECTION 8.1. DURATION. 25
SECTION 8.2. TERMINATION OF TRUST. 26
SECTION 8.3. AMENDMENT PROCEDURE. 26
SECTION 8.4. MERGER, CONSOLIDATION AND SALE OF ASSETS. 27
SECTION 8.5. INCORPORATION. 27

ARTICLE IX 28

ii
<PAGE>

ARTICLE X 28
SECTION 10.1. FILING. 28
SECTION 10.2. GOVERNING LAW. 29
SECTION 10.3. COUNTERPARTS. 29
SECTION 10.4. RELIANCE BY THIRD PARTIES. 29
SECTION 10.5. PROVISIONS IN CONFLICT WITH LAW OR
REGULATIONS. 29

iii
<PAGE>

DECLARATION OF TRUST
OF
KEMPER GROWTH AND INCOME FUND
DATED OCTOBER 1, 1997

DECLARATION OF TRUST made October 1, 1997 by the Trustees
(together with all other persons from time to time duly elected,
qualified and serving as Trustees in accordance with the
provisions of Article II hereof, the "Trustees").

WHEREAS, the Trustees desire to establish a trust for the
investment and reinvestment of funds contributed thereto; and

WHEREAS, the Trustees desire that the beneficial interest in
the trust assets be divided into transferable shares of
beneficial interest, as hereinafter provided;

NOW, THEREFORE, the Trustees declare that all money and
property contributed to the trust established hereunder shall be
held and managed in trust for the benefit of the holders, from
time to time, of the shares of beneficial interest issued
hereunder and subject to the provisions hereof.

ARTICLE I

NAME AND DEFINITIONS

Section 1.
Section 1.1. Name.

The name of the Trust created hereby is the "Kemper Growth
and Income Fund".

Section 1.2. Definitions.

Wherever they are used herein, the following terms have the
following respective meanings:

a) "By-laws" means the By-laws referred to in Section 2.8
hereof, as from time to time amended.

b) "Class" means the two or more Classes as may be established
and designated from time to time by the Trustees pursuant to
Section 5.13 hereof.

c) The term "Commission" has the meaning given it in the 1940
Act. The term "Interested Person" has the meaning given it in
the 1940 Act, as modified by any applicable order or orders of
the Commission. Except as otherwise defined by the Trustees in
conjunction with the establishment of any series of Shares, the
term "vote of a majority of the Shares outstanding and entitled
to vote" shall have the same meaning as the term "vote of a
majority of the outstanding voting securities" given it in the
<PAGE>

1940 Act.

d) "Custodian" means any Person other than the Trust who has
custody of any Trust Property as required by Section 17(f) of the
1940 Act, but does not include a system for the central handling
of securities described in said Section 17(f).

e) "Declaration" means this Declaration of Trust as further
amended from time to time. Reference in this Declaration of
Trust to "Declaration," "hereof," "herein," and "hereunder" shall
be deemed to refer to this Declaration rather than exclusively to
the article or section in which such words appear.

f) "Distributor" means the party, other than the Trust, to the
contract described in Section 3.1 hereof.

g) "His" shall include the feminine and neuter, as well as the
masculine genders.

h) "Investment Adviser" means the party, other than the Trust, to the
contract described in Section 3.2 hereof.

i) "Municipal Bonds" means obligations issued by or on behalf
of states, territories of the United States and the District of
Columbia and their political subdivisions, agencies and
instrumentalities, or other issuers, the interest from which is
exempt from regular Federal income tax.

j) The "1940 Act" means the Investment Company Act of 1940, as
amended from time to time.

k) "Person" means and includes individuals, corporations,
partnerships, trusts, associations, joint ventures and other
entities, whether or not legal entities, and governments and
agencies and political subdivisions thereof.

l) "Series" individually or collectively means the two or more
Series as may be established and designated from time to time by
the Trustees pursuant to Section 5.11 hereof. Unless the context
otherwise requires, the term "Series" shall include Classes into
which shares of the Trust, or of a Series, may be divided from
time to time.

m) "Shareholder" means a record owner of Outstanding Shares.

n) "Shares" means the equal proportionate units of interest
into which the beneficial interest in the Trust shall be divided
from time to time, including the Shares of any and all Series and
Classes which may be established by the Trustees and includes

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<PAGE>

fractions of Shares as well as whole Shares. "Outstanding
Shares" means those Shares shown as of a time and from time to
time on the books of the Trust or its Transfer Agent as then
issued and outstanding, but shall not include Shares which have
been redeemed or repurchased by the Trust and which are at the
time held in the Treasury of the Trust.

o) "Transfer Agent" means any one or more Persons other than
the Trust who maintains the Shareholder records of the Trust,
such as the list of Shareholders, the number of Shares credited
to each account, and the like.

p) The "Trust" means the Kemper Growth and Income Fund.

q) The "Trust Property" means any and all property, real or
personal, tangible or intangible, which is owned or held by or
for the account of the Trust or the Trustees.

r) The "Trustees" means the person or persons who has or have
signed this Declaration, so long as he or they shall continue in
office in accordance with the terms hereof, and all other persons
who may from time to time be duly qualified and serving as
Trustees in accordance with the provisions of Article II hereof,
and reference herein to a Trustee or the Trustees shall refer to
such person or persons in this capacity or their capacities as
trustees hereunder.

ARTICLE II

TRUSTEES

Section 2.
Section 2.1. General Powers.

The Trustees shall have exclusive and absolute control over
the Trust Property and over the business of the Trust to the same
extent as if the Trustees were the sole owners of the Trust
Property and business in their own right, but with such powers of
delegation as may be permitted by this Declaration. The Trustees
shall have power to conduct the business of the Trust and carry
on its operations in any and all of its branches and maintain
offices both within and without the Commonwealth of
Massachusetts, in any and all states of the United States of
America, in the District of Columbia, and in any and all
commonwealths, territories, dependencies, colonies, possessions,
agencies or instrumentalities of the United States of America and
of foreign governments, and to do all such other things and
execute all such instruments as they deem necessary, proper or
desirable in order to promote the interests of the Trust although
such things are not herein specifically mentioned. Any
determination as to what is in the interests of the Trust made by
the Trustees in good faith shall be conclusive. In construing
the provisions of this Declaration, the presumption shall be in
favor of a grant of power to the Trustees.

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<PAGE>

The enumeration of any specific power herein shall not be
construed as limiting the aforesaid power. Such powers of the
Trustees may be exercised without order of or resort to any
court.

Section 2.2. Investments.

The Trustees shall have the power:

a) To operate as and carry on the business of an investment
company, and exercise all the powers necessary and appropriate to
the conduct of such operations.

b) To invest in, hold for investment, or reinvest in,
securities, including shares of open-end investment companies;
common and preferred stocks; warrants; bonds, debentures, bills,
time notes and all other evidences of indebtedness; negotiable or
non-negotiable instruments; government securities, including
securities of any state, municipality or other political
subdivision thereof, or any governmental or quasi-governmental
agency or instrumentality; and money market instruments including
bank certificates of deposit, finance paper, commercial paper,
bankers acceptances and all kinds of repurchase agreements, of
any corporation, company, trust, association, firm or other
business organization however established, and of any country,
state, municipality or other political subdivision, or any
governmental or quasi-governmental agency or instrumentality.

c) To acquire (by purchase, subscription or otherwise), to
hold, to trade in and deal in, to acquire any rights or options
to purchase or sell, to sell or otherwise dispose of, to lend,
and to pledge any such securities and to enter into repurchase
agreements and forward foreign currency exchange contracts, to
purchase and sell futures contracts on securities, securities
indices and foreign currencies, to purchase or sell options on
such contracts, foreign currency contracts, and foreign
currencies and to engage in all types of hedging and risk
management transactions.

d) To exercise all rights, powers and privileges of ownership
or interest in all securities, repurchase agreements, futures
contracts and options and other assets included in the Trust
Property, including the right to vote thereon and otherwise act
with respect thereto and to do all acts for the preservation,
protection, improvement and enhancement in value of all such
assets.

e) To acquire (by purchase, lease or otherwise) and to hold,
use, maintain, develop and dispose of (by sale or otherwise) any
property, real or personal, including cash, and any interest
therein.

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<PAGE>

f) To borrow money and in this connection issue notes or other
evidence of indebtedness; to secure borrowings by mortgaging,
pledging or otherwise subjecting as security the Trust Property;
to endorse, guarantee, or undertake the performance of any
obligation or engagement of any other Person and to lend Trust
Property.

g) To aid by further investment any corporation, company,
trust, association or firm, any obligation of or interest in
which is included in the Trust Property or in the affairs of
which the Trustees have any direct or indirect interest; to do
all acts and things designed to protect, preserve, improve or
enhance the value of such obligation or interest, and to
guarantee or become surety on any or all of the contracts,
stocks, bonds, notes, debentures and other obligations of any
such corporation, company, trust, association or firm.

h) To enter into a plan of distribution and any related
agreements whereby the Trust may finance directly or indirectly
any activity which is primarily intended to result in the sale of
Shares.

i) To invest, through a transfer of cash, securities and other
assets or otherwise, all or a portion of the Trust Property, or
to sell all or a portion of the Trust Property and invest the
proceeds of such sales, in another investment company that is
registered under the 1940 Act.

j) In general to carry on any other business in connection with
or incidental to any of the foregoing powers, to do everything
necessary, suitable or proper for the accomplishment of any
purpose or the attainment of any object or the furtherance of any
power hereinbefore set forth, either alone or in association with
others, and to do every other act or thing incidental or
appurtenant to or growing out of or connected with the aforesaid
business or purposes, objects or powers.

The foregoing clauses shall be construed both as objects and
powers, and the foregoing enumeration of specific powers shall
not be held to limit or restrict in any manner the general powers
of the Trustees.

The Trustees shall not be limited to investing in
obligations maturing before the possible termination of the
Trust, nor shall the Trustees be limited by any law limiting the
investments which may be made by fiduciaries.

Section 2.3. Legal Title.

Legal title to all the Trust Property, including the
property of any Series of the Trust, shall be vested in the
Trustees as joint tenants except that the Trustees shall have
power to cause legal title to any Trust Property to be held by or
in the name of one or more of the Trustees, or in the name of the
Trust, or in the name of any other Person as nominee, on such
terms as the Trustees may determine, provided that the interest

5
<PAGE>

of the Trust therein is deemed appropriately protected. The
right, title and interest of the Trustees in the Trust Property
and the property of each Series of the Trust shall vest
automatically in each Person who may hereafter become a Trustee.
Upon the termination of the term of office, resignation, removal
or death of a Trustee he shall automatically cease to have any
right, title or interest in any of the Trust Property or the
property of any Series of the Trust, and the right, title and
interest of such Trustee in the Trust Property shall vest
automatically in the remaining Trustees. Such vesting and
cessation of title shall be effective whether or not conveyancing
documents have been executed and delivered.

Section 2.4. Issuance and Repurchase of Shares.

The Trustees shall have the power to issue, sell,
repurchase, redeem, retire, cancel, acquire, hold, resell,
reissue, dispose of, transfer, and otherwise deal in Shares and,
subject to the provisions set forth in Articles VI and VII and
Section 5.11 hereof, to apply to any such repurchase, redemption,
retirement, cancellation or acquisition of Shares any funds or
property of the particular series of the Trust with respect to
which such Shares are issued, whether capital or surplus or
otherwise, to the full extent now or hereafter permitted by the
laws of the Commonwealth of Massachusetts governing business
corporations.

Section 2.5. Delegation; Committees.

The Trustees shall have power to delegate from time to time
to such of their number or to officers, employees or agents of
the Trust the doing of such things and the execution of such
instruments either in the name of the Trust or the names of the
Trustees or otherwise as the Trustees may deem expedient, to the
same extent as such delegation is permitted by the 1940 Act.

Section 2.6. Collection and Payment.

The Trustees shall have power to collect all property due to
the Trust; to pay all claims, including taxes, against the Trust
Property; to prosecute, defend, compromise or abandon any claims
relating to the Trust Property; to foreclose any security
interest securing any obligations, by virtue of which any
property is owed to the Trust; and to enter into releases,
agreements and other instruments.

Section 2.7. Expenses.

The Trustees shall have the power to incur and pay any
expenses which in the opinion of the Trustees are necessary or
incidental to carry out any of the purposes of this Declaration,
and to pay reasonable compensation from the funds of the Trust to
themselves as Trustees. The Trustees shall fix the compensation
of all officers, employees and Trustees.

6
<PAGE>

Section 2.8. Manner of Acting; By-laws.

Except as otherwise provided herein or in the By-laws, any
action to be taken by the Trustees may be taken by a majority of
the Trustees present at a meeting of Trustees (a quorum being
present), including any meeting held by means of a conference
telephone circuit or similar communications equipment by means of
which all persons participating in the meeting can hear each
other, or by written consents of the entire number of Trustees
then in office. The Trustees may adopt By-laws not inconsistent
with this Declaration to provide for the conduct of the business
of the Trust and may amend or repeal such By-laws to the extent
such power is not reserved to the Shareholders.

Notwithstanding the foregoing provisions of this Section 2.8
and in addition to such provisions or any other provision of this
Declaration or of the By-laws, the Trustees may by resolution
appoint a committee consisting of less than the whole number of
Trustees then in office, which committee may be empowered to act
for and bind the Trustees and the Trust, as if the acts of such
committee were the acts of all the Trustees then in office, with
respect to the institution, prosecution, dismissal, settlement,
review or investigation of any action, suit or proceeding which
shall be pending or threatened to be brought before any court,
administrative agency or other adjudicatory body.

Section 2.9. Miscellaneous Powers.

Subject to Section 5.11 hereof, the Trustees shall have the
power to: (a) employ or contract with such Persons as the
Trustees may deem desirable for the transaction of the business
of the Trust; (b) enter into joint ventures, partnerships and any
other combinations or associations; (c) remove Trustees or fill
vacancies in or add to their number, elect and remove such
officers and appoint and terminate such agents or employees as
they consider appropriate, and appoint from their own number, and
terminate, any one or more committees which may exercise some or
all of the power and authority of the Trustees as the Trustees
may determine; (d) purchase, and pay for out of Trust Property,
insurance policies insuring the Shareholders, Trustees, officers,
employees, agents, investment advisers, distributors, selected
dealers or independent contractors of the Trust against all
claims arising by reason of holding any such position or by
reason of any action taken or omitted by any such Person in such
capacity, whether or not constituting negligence, or whether or
not the Trust would have the power to indemnify such Person
against such liability; (e) establish pension, profit-sharing,
share purchase, and other retirement, incentive and benefit plans
for any Trustees, officers, employees and agents of the Trust;
(f) to the extent permitted by law, indemnify any person with
whom the Trust has dealings, including the Investment Adviser,
Distributor, Transfer Agent and selected dealers, to such extent
as the Trustees shall determine; (g) guarantee indebtedness or
contractual obligations of others; (h) determine and change the
fiscal year of the Trust and the method by which its accounts
shall be kept; and (i) adopt a seal for the Trust, but the
absence of such seal shall not impair the validity of any
instrument executed on behalf of the Trust.

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<PAGE>

Section 2.10. Principal Transactions.

Except in transactions not permitted by the 1940 Act or
rules and regulations adopted by the Commission, the Trustees
may, on behalf of the Trust, buy any securities from or sell any
securities to, or lend any assets of the Trust to, any Trustee or
officer of the Trust or any firm of which any such Trustee or
officer is a member acting as principal, or have any such
dealings with the Investment Adviser, Distributor or transfer
agent or with any Interested Person or such Person; and the Trust
may employ any such Person, or firm or company in which such
Person is an Interested Person, as broker, dealer, legal counsel,
registrar, transfer agent, dividend disbursing agent or Custodian
upon customary terms.

Section 2.11. Number of Trustees.

The number of Trustees shall initially be one (1), and
thereafter shall be such number as shall be fixed from time to
time by a written instrument signed by a majority of the
Trustees.

Section 2.12. Election and Term.

Except for the Trustees named herein or appointed to fill
vacancies pursuant to Section 2.14 hereof, the Trustees shall be
elected by the Shareholders owning of record a plurality of the
Shares voting at a meeting of Shareholders. Such a meeting shall
be held on a date fixed by the Trustees. Except in the event of
resignation or removals pursuant to Section 2.13 hereof, each
Trustee shall hold office until such time as less than a majority
of the Trustees holding office have been elected by Shareholders,
and thereafter until the holding of a Shareholders' meeting as
required by the next following sentence. In such event the
Trustees then in office will call a Shareholders' meeting for the
election of Trustees. Except for the foregoing circumstances,
the Trustees shall continue to hold office and may appoint
successor Trustees.

Section 2.13. Resignation and Removal.

Any Trustee may resign his trust (without the need for any
prior or subsequent accounting) by an instrument in writing
signed by him and delivered to the other Trustees and such
resignation shall be effective upon such delivery, or at a later
date according to the terms of the instrument. Any of the
Trustees may be removed (provided the aggregate number of
Trustees after such removal shall not be less than one) with
cause, by the action of two-thirds of the remaining Trustees.
Any Trustee may be removed at any meeting of Shareholders by vote
of two-thirds of the Outstanding Shares. The Trustees shall
promptly call a meeting of the shareholders for the purpose of
voting upon the question of removal of any such Trustee or
Trustees when requested in writing so to do by the holders of not
less than ten percent of the Outstanding Shares and, in that
connection, the Trustees will assist shareholder communications
to the extent provided for in Section 16(c) under the 1940 Act.
Upon the resignation or removal of a Trustee, or his otherwise
ceasing to be a Trustee, he shall execute and deliver such
documents as the remaining Trustees shall require for the purpose
of conveying to the Trust or the remaining Trustees any Trust
Property or property of any series of the Trust held in the name

8
<PAGE>

of the resigning or removed Trustee. Upon the incapacity or
death of any Trustee, his legal representative shall execute and
deliver on his behalf such documents as the remaining Trustees
shall require as provided in the preceding sentence.

Section 2.14. Vacancies.

The term of office of a Trustee shall terminate and a
vacancy shall occur in the event of the death, resignation,
removal, bankruptcy, adjudicated incompetence or other incapacity
to perform the duties of the office of a Trustee. No such
vacancy shall operate to annul the Declaration or to revoke any
existing agency created pursuant to the terms of the Declaration.
In the case of an existing vacancy, including a vacancy existing
by reason of an increase in the number of Trustees, subject to
the provisions of Section 16(a) of the 1940 Act, the remaining
Trustees shall fill such vacancy by the appointment of such other
person as they in their discretion shall see fit, made by a
written instrument signed by a majority of the Trustees then in
office. Any such appointment shall not become effective,
however, until the person named in the written instrument of
appointment shall have accepted in writing such appointment and
agreed in writing to be bound by the terms of the Declaration.
An appointment of a Trustee may be made in anticipation of a
vacancy to occur at a later date by reason of retirement,
resignation or increase in the number of Trustees, provided that
such appointment shall not become effective prior to such
retirement, resignation or increase in the number of Trustees.
Whenever a vacancy in the number of Trustees shall occur, until
such vacancy is filled as provided in this Section 2.14, the
Trustees in office, regardless of their number, shall have all
the powers granted to the Trustees and shall discharge all the
duties imposed upon the Trustees by the Declaration. A written
instrument certifying the existence of such vacancy signed by a
majority of the Trustees in office shall be conclusive evidence
of the existence of such vacancy.

Section 2.15. Delegation of Power to Other Trustees.

Any Trustee may, by power of attorney, delegate his power
for a period not exceeding six (6) months at any one time to any
other Trustee or Trustees; provided that in no case shall less
than two (2) Trustees personally exercise the powers granted to
the Trustees under this Declaration except as herein otherwise
expressly provided.

Section 2.16. Shareholder Vote, etc. Not Required.

Except to the extent specifically provided to the contrary
in this Declaration, the Trustees may exercise each of the powers
granted to them in this Declaration without the vote, approval or
agreement of the Shareholders, unless such a vote, approval or
agreement is required by the 1940 Act or applicable laws of the
Commonwealth of Massachusetts.

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<PAGE>

ARTICLE III

CONTRACTS

Section 3.
Section 3.1. Distribution Contract.

The Trustees may in their discretion from time to time enter
into an exclusive or non-exclusive underwriting contract or
contracts providing for the sale of the Shares at a price based
on the net asset value of a Share, whereby the Trustees may
either agree to sell the Shares to the other party to the
contract or appoint such other party their sales agent for the
Shares, and in either case on such terms and conditions, if any,
as may be prescribed in the By-laws, and such further terms and
conditions as the Trustees may in their discretion determine not
inconsistent with the provisions of this Article III or of the By-
laws; and such contract may also provide for the repurchase of
the Shares by such other party as agent of the Trustees.

Section 3.2. Advisory or Management Contract.

The Trustees may in their discretion from time to time enter
into an investment advisory or management contract or separate
advisory contracts with respect to one or more Series whereby the
other party to such contract shall undertake to furnish to the
Trust such management, investment advisory, statistical and
research facilities and services and such other facilities and
services, if any, and all upon such terms and conditions as the
Trustees may in their discretion determine, including the grant
of authority to such other party to determine what securities
shall be purchased or sold by the Trust and what portion of its
assets shall be uninvested, which authority shall include the
power to make changes in the investments of the Trust or any
Series.

The Trustees may also employ, or authorize the Investment
Adviser to employ, one or more sub-advisers from time to time to
perform such of the acts and services of the Investment Adviser
and upon such terms and conditions as may be agreed upon between
the Investment Adviser and such sub-advisers and approved by the
Trustees. Any reference in this Declaration to the Investment
Adviser shall be deemed to include such sub-advisers unless the
context otherwise requires.

Section 3.3. Affiliations of Trustees or Officers, Etc.

The fact that:

i) any of the Shareholders, Trustees or officers of the Trust
is a shareholder, director, officer, partner, trustee, employee,
manager, adviser or distributor of or for any partnership,
corporation, trust, association or other organization or of or
for any parent or affiliate of any organization, with which a
contract of the character described in Sections 3.1 or 3.2 above
or for services as Custodian, Transfer Agent, accounting agent or
disbursing agent or for related services may have been or may
hereafter be made, or that any such organization, or any parent
or affiliate thereof, is a Shareholder of or has an interest in
the Trust, or that

10
<PAGE>

ii) any partnership, corporation, trust, association or other
organization with which a contract of the character described in
Sections 3.1 or 3.2 above or for services as Custodian, Transfer
Agent, accounting agent or disbursing agent or for related
services may have been or may hereafter be made also has any one
or more of such contracts with one or more other partnerships,
corporations, trusts, associations or other organizations, or has
other business or interests, shall not affect the validity of any
such contract or disqualify any Shareholder, Trustee or officer
of the Trust from voting upon or executing the same or create any
liability or accountability to the Trust or its Shareholders.

Section 3.4. Compliance with 1940 Act.

Any contract entered into pursuant to Sections 3.1 or 3.2
shall be consistent with and subject to the requirements of
Section 15 of the 1940 Act (including any amendment thereof or
other applicable act of Congress hereafter enacted), as modified
by any applicable order or orders of the Commission, with respect
to its continuance in effect, its termination and the method of
authorization and approval of such contract or renewal thereof.

ARTICLE IV

LIMITATIONS OF LIABILITY OF SHAREHOLDERS,
TRUSTEES AND OTHERS

Section 4.
Section 4.1. No Personal Liability of Shareholders, Trustees,
Etc.

No Shareholder shall be subject to any personal liability
whatsoever to any Person in connection with Trust Property or the
acts, obligations or affairs of the Trust. No Trustee, officer,
employee or agent of the Trust shall be subject to any personal
liability whatsoever to any Person, other than to the Trust or
its Shareholders, in connection with Trust Property or the
affairs of the Trust, save only that arising from bad faith,
willful misfeasance, gross negligence or reckless disregard of
his duties with respect to such Person; and all such Persons
shall look solely to the Trust Property for satisfaction of
claims of any nature arising in connection with the affairs of
the Trust. If any Shareholder, Trustee, officer, employee, or
agent, as such, of the Trust, is made a party to any suit or
proceeding to enforce any such liability of the Trust, he shall
not, on account thereof, be held to any personal liability. The
Trust shall indemnify and hold each Shareholder harmless from and
against all claims and liabilities, to which such Shareholder may
become subject by reason for his being or having been a
Shareholder, and shall reimburse such Shareholder for all legal
and other expenses reasonably incurred by him in connection with
any such claim or liability. The indemnification and
reimbursement required by the preceding sentence shall be made

11
<PAGE>

only out of the assets of the one or more Series of which the
Shareholder who is entitled to indemnification or reimbursement
was a Shareholder at the time the act or event occurred which
gave rise to the claim against or liability of said Shareholder.
The rights accruing to a Shareholder under this Section 4.1 shall
not impair any other right to which such Shareholder may be
lawfully entitled, nor shall anything herein contained restrict
the right of the Trust to indemnify or reimburse a Shareholder in
any appropriate situation even though not specifically provided
herein.

Section 4.2. Non-Liability of Trustees, Etc.

No Trustee, officer, employee or agent of the Trust shall be
liable to the Trust, its Shareholders, or to any Shareholder,
Trustee, officer, employee, or agent thereof for any action or
failure to act (including without limitation the failure to
compel in any way any former or acting Trustee to redress any
breach of trust) except for his own bad faith, willful
misfeasance, gross negligence or reckless disregard of the duties
involved in the conduct of his office.

Section 4.3. Mandatory Indemnification.

a) Subject to the exceptions and limitations contained in
paragraph (b) below:

i) every person who is, or has been, a Trustee or officer of
the Trust shall be indemnified by the Trust to the fullest extent
permitted by law against all liability and against all expenses
reasonably incurred or paid by him in connection with any claim,
action, suit or proceeding in which he becomes involved as a
party or otherwise by virtue of his being or having been a
Trustee or officer and against amounts paid or incurred by him in
the settlement thereof;

ii) the words "claim," "action," "suit," or "proceeding" shall
apply to all claims, actions, suits or proceedings (civil,
criminal, administrative or other, including appeals), actual or
threatened; and the words "liability" and "expenses" shall
include, without limitation, attorneys' fees, costs, judgments,
amounts paid in settlement, fines, penalties and other
liabilities.

b) No indemnification shall be provided hereunder to a Trustee
or officer:

i) against any liability to the Trust, a Series thereof, or the
Shareholders by reason of a final adjudication by a court or
other body before which a proceeding was brought that he engaged
in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office;

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<PAGE>

ii) with respect to any matter as to which he shall have been
finally adjudicated not to have acted in good faith in the
reasonable belief that his action was in the best interest of the
Trust;

iii) in the event of a settlement or other disposition not
involving a final adjudication as provided in paragraph (b)(i) or
(b)(ii) resulting in a payment by a Trustee or officer, unless
there has been a determination that such Trustee or officer did
not engage in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his
office:

A) by the court or other body approving the settlement or other
disposition; or

B) based upon a review of readily available facts (as opposed
to a full trial-type inquiry) by (x) vote of a majority of
the Disinterested Trustees acting on the matter (provided
that a majority of the Disinterested Trustees then in office
act on the matter) or (y) written opinion of independent
legal counsel.

c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable,
shall not affect any other rights to which any Trustee or officer
may now or hereafter be entitled, shall continue as to a person
who has ceased to be such Trustee or officer and shall inure to
the benefit of the heirs, executors, administrators and assigns
of such a person. Nothing contained herein shall affect any
rights to indemnification to which personnel of the Trust other
than Trustees and officers may be entitled by contract or
otherwise under law.

d) Expenses of preparation and presentation of a defense to any
claim, action, suit or proceeding of the character described in
paragraph (a) of this Section 4.3 may be advanced by the Trust
prior to final disposition thereof upon receipt of an undertaking
by or on behalf of the recipient to repay such amount if it is
ultimately determined that he is not entitled to indemnification
under this Section 4.3, provided that either:

i) such undertaking is secured by a surety bond or some other
appropriate security provided by the recipient, or the Trust
shall be insured against losses arising out of any such advances;
or

ii) a majority of the Disinterested Trustees acting on the
matter (provided that a majority of the Disinterested Trustees
act on the matter) or an independent legal counsel in a written
opinion shall determine, based upon a review of readily available
facts (as opposed to a full trial-type inquiry), that there is

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reason to believe that the recipient ultimately will be found
entitled to indemnification.

As used in this Section 4.3, a "Disinterested Trustee"
is one who is not (i) an Interested Person of the Trust
(including anyone who has been exempted from being an
Interested Person by any rule, regulation or order of the
Commission), or (ii) involved in the claim, action, suit or
proceeding.

Section 4.4. No Bond Required of Trustees.

No Trustee shall be obligated to give any bond or other
security for the performance of any of his duties hereunder.

Section 4.5. No Duty of Investigation; Notice in Trust
Instruments, Etc.

No purchaser, lender, transfer agent or other Person dealing
with the Trustees or any officer, employee or agent of the Trust
shall be bound to make any inquiry concerning the validity of any
transaction purporting to be made by the Trustees or by said
officer, employee or agent or be liable for the application of
money or property paid, loaned or delivered to or on the order of
the Trustees or of said officer, employee or agent. Every
obligation, contract, instrument, certificate, Share, other
security of the Trust or undertaking, and every other act or
thing whatsoever executed in connection with the Trust shall be
conclusively presumed to have been executed or done by the
executors thereof only in their capacity as Trustees under this
Declaration or in their capacity as officers, employees or agents
of the Trust. Every written obligation, contract, instrument,
certificate, Share, other security of the Trust or undertaking
made or issued by the Trustees may recite that the same is
executed or made by them not individually, but as Trustees under
the Declaration, and that the obligations of the Trust under any
such instrument are not binding upon any of the Trustees or
Shareholders individually, but bind only the trust estate, and
may contain any further recital which they or he may deem
appropriate, but the omission of such recital shall not operate
to bind the Trustees individually. The Trustees shall at all
times maintain insurance for the protection of the Trust
Property, its Shareholders, Trustees, officers, employees and
agents in such amount as the Trustees shall deem adequate to
cover possible tort liability, and such other insurance as the
Trustees in their sole judgment shall deem advisable.

Section 4.6. Reliance on Experts, Etc.

Each Trustee and officer or employee of the Trust shall, in
the performance of his duties, be fully and completely justified
and protected with regard to any act or any failure to act
resulting from reliance in good faith upon the books of account
or other records of the Trust, upon an opinion of counsel, or
upon reports made to the Trust by any of its officers or
employees or by the Investment Adviser, the Distributor, Transfer
Agent, selected dealers, accountants, appraisers or other experts
or consultants selected with reasonable care by the Trustees,
officers or employees of the Trust, regardless of whether such
counsel or expert may also be a Trustee.

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ARTICLE V

SHARES OF BENEFICIAL INTEREST

Section 5.
Section 5.1. Beneficial Interest.

The interest of the beneficiaries hereunder shall be divided
into transferable Shares of beneficial interest, all of one
class, except as provided in Section 5.11 and Section 5.13
hereof, par value $.01 per share. The number of Shares of
beneficial interest authorized hereunder is unlimited. All
Shares issued hereunder including, without limitation, Shares
issued in connection with a dividend in Shares or a split of
Shares, shall be fully paid and non-assessable.

Section 5.2. Rights of Shareholders.

The ownership of the Trust Property and the property of each
Series of the Trust of every description and the right to conduct
any business herein-before described are vested exclusively in
the Trustees, and the Shareholders shall have no interest therein
other than the beneficial interest conferred by their Shares, and
they shall have no right to call for any partition or division of
any property, profits, rights or interests of the Trust nor can
they be called upon to share or assume any losses of the Trust or
suffer an assessment of any kind by virtue of their ownership of
Shares. The Shares shall be personal property giving only the
rights specifically set forth in this Declaration. The Shares
shall not entitle the holder to preference, preemptive,
appraisal, conversion or exchange rights, except as the Trustees
may determine with respect to any Series of Shares.

Section 5.3. Trust Only.

It is the intention of the Trustees to create only the
relationship of Trustee and beneficiary between the Trustees and
each Shareholder from time to time. It is not the intention of
the Trustees to create a general partnership, limited
partnership, joint stock association, corporation, bailment or
any form of legal relationship other than a trust. Nothing in
this Declaration shall be construed to make the Shareholders,
either by themselves or with the Trustees, partners or members of
a joint stock association.

Section 5.4. Issuance of Shares.

The Trustees in their discretion may, from time to time
without vote of the Shareholders, issue Shares, in addition to
the then issued and outstanding Shares and Shares held in the
treasury, to such party or parties and for such amount and type
of consideration, including cash or property, at such time or
times and on such terms as the Trustees may deem best, and may in
such manner acquire other assets (including the acquisition of
assets subject to, and in connection with the assumption of
liabilities) and businesses. In connection with any issuance of
Shares, the Trustees may issue fractional Shares and Shares held
in the treasury. The Trustees may from time to time divide or
combine the Shares into a greater or lesser number without
thereby changing the proportionate beneficial interests in the

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Trust. Contributions to the Trust may be accepted for, and
Shares shall be redeemed as, whole Shares and/or 1/1,000ths of a
Share or integral multiples thereof.

Section 5.5. Register of Shares.

A register shall be kept at the principal office of the
Trust or an office of the Transfer Agent which shall contain the
names and addresses of the Shareholders and the number of Shares
held by them respectively and a record of all transfers thereof.
Such register shall be conclusive as to who are the holders of
the Shares and who shall be entitled to receive dividends or
distributions or otherwise to exercise or enjoy the rights of
Shareholders. No Shareholder shall be entitled to receive
payment of any dividend or distribution, nor to have notice given
to him as herein or in the By-laws provided, until he has given
his address to the Transfer Agent or such other officer or agent
of the Trustees as shall keep the said register for entry
thereon. It is not contemplated that certificates will be issued
for the Shares; however, the Trustees, in their discretion, may
authorize the issuance of share certificates and promulgate
appropriate rules and regulations as to their use.

Section 5.6. Transfer of Shares.

Except as otherwise provided by the Trustees, shares shall
be transferable on the records of the Trust only by the record
holder thereof or by his agent thereunto duly authorized, upon
delivery to the Trustees or the Transfer Agent of a duly executed
instrument of transfer, together with such evidence of the
genuineness of each such execution and authorization and of other
matters as may reasonably be required. Upon such delivery the
transfer shall be recorded on the register of the Trust. Until
such record is made, the Shareholder of record shall be deemed to
be the holder of such Shares for all purposes hereunder and
neither the Trustees nor any transfer agent or registrar nor any
officer, employee or agent of the Trust shall be affected by any
notice of the proposed transfer.

Any person becoming entitled to any Shares in consequence of
the death, bankruptcy, or incompetence of any Shareholder, or
otherwise by operation of law, shall be recorded on the register
of Shares as the holder of such Shares upon production of the
proper evidence thereof to the Trustees or the Transfer Agent,
but until such record is made, the Shareholder of record shall be
deemed to be the holder of such Shares for all purposes hereunder
and neither the Trustees nor any Transfer Agent or registrar nor
any officer or agent of the Trust shall be affected by any notice
of such death, bankruptcy or incompetence, or other operation of
law.

Section 5.7. Notices, Reports.

Any and all notices to which any Shareholder may be entitled
and any and all communications shall be deemed duly served or
given if mailed, postage prepaid, addressed to any Shareholder of
record at his last known address as recorded on the register of
the Trust. A notice of a meeting, an annual report and any other
communication to Shareholders need not be sent to a Shareholder

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(i) if an annual report and a proxy statement for two consecutive
shareholder meetings have been mailed to such Shareholder's
address and have been returned as undeliverable, (ii) if all, and
at least two, checks (if sent by first class mail) in payment of
dividends on Shares during a twelve-month period have been mailed
to such Shareholder's address and have been returned as
undeliverable or (iii) in any other case in which a proxy
statement concerning a meeting of security holders is not
required to be given pursuant to the Commission's proxy rules as
from time to time in effect under the Securities Exchange Act of
1934. However, delivery of such proxy statements, annual reports
and other communications shall resume if and when such
Shareholder delivers or causes to be delivered to the Trust
written notice setting forth such Shareholder's then current
address.

Section 5.8. Treasury Shares.

Shares held in the treasury shall, until reissued pursuant
to Section 5.4, not confer any voting rights on the Trustees, nor
shall such Shares be entitled to any dividends or other
distributions declared with respect to the Shares.

Section 5.9. Voting Powers.

The Shareholders shall have power to vote only (i) for the
election of Trustees as provided in Section 2.12; (ii) for the
removal of Trustees as provided in Section 2.13; (iii) with
respect to any amendment of this Declaration to the extent and as
provided in Section 8.3; (iv) to the same extent as the
stockholders of a Massachusetts business corporation as to
whether or not a court action, proceeding or claim should or
should not be brought or maintained derivatively or as a class
action on behalf of the Trust or any Series or Class thereof or
the Shareholders (provided, however, that a Shareholder of a
particular Series or Class shall not be entitled to bring a
derivative or class action on behalf of any other Series or Class
(or Shareholder of any other Series or Class) of the Trust); and
(v) with respect to such additional matters relating to the Trust
as may be required by this Declaration, the By-laws or any
registration of the Trust as an investment company under the 1940
Act with the Commission (or any successor agency) or as the
Trustees may consider necessary or desirable. Each whole Share
shall be entitled to one vote as to any matter on which it is
entitled to vote and each fractional Share shall be entitled to
bring a proportionate fractional vote, except that the Trustees
may, in conjunction with the establishment of any Series or Class
of Shares, establish or reserve the right to establish conditions
under which the several Series or Classes shall have separate
voting rights or no voting rights. There shall be no cumulative
voting in the election of Trustees. Until Shares are issued, the
Trustees may exercise all rights of Shareholders and may take any
action required by law, this Declaration or the By-laws to be
taken by Shareholders. The By-laws may include further
provisions for Shareholders' votes and meetings and related
matters.

Section 5.10. Meetings of Shareholders.

Meetings of Shareholders may be called at any time by the
President, and shall be called by the President and Secretary at
the request in writing or by resolution, of a majority of

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Trustees, or at the written request of the holder or holders of
ten percent (10%) or more of the total number of Shares then
issued and outstanding of the Trust entitled to vote at such
meeting. Any such request shall state the purpose of the
proposed meeting.

Section 5.11. Series Designation.

The Trustees, in their discretion, may authorize the
division of Shares into two or more Series, and the different
Series shall be established and designated, and the variations in
the relative rights and preferences as between the different
Series shall be fixed and determined, by the Trustees; provided,
that all Shares shall be identical except that there may be
variations so fixed and determined between different Series as to
investment objective, purchase price, allocation of expenses,
right of redemption, special and relative rights as to dividends
and on liquidation, conversion rights, and conditions under which
the several Series shall have separate voting rights. All
references to Shares in this Declaration shall be deemed to be
Shares of any or all Series as the context may require.

a) All provisions herein relating to the Trust shall apply
equally to each Series of the Trust except as the context
requires otherwise.

b) The number of authorized Shares and the number of Shares of
each Series that may be issued shall be unlimited. The Trustees
may classify or reclassify any unissued Shares or any Shares
previously issued and reacquired of any Series into one or more
Series that may be established and designated from time to time.
The Trustees may hold as treasury Shares (of the same or some
other Series), reissue for such consideration and on such terms
as they may determine, or cancel any Shares of any Series
reacquired by the Trust at their discretion from time to time.

c) All consideration received by the Trust for the issue or
sale of Shares of a particular Series, together with all assets
in which such consideration is invested or reinvested, all
income, earnings, profits, and proceeds thereof, including any
proceeds derived from the sale, exchange or liquidation of such
assets, and any funds or payments derived from any reinvestment
of such proceeds in whatever form the same may be, shall
irrevocably belong to that Series for all purposes, subject only
to the rights of creditors of such Series and except as may
otherwise be required by applicable laws, and shall be so
recorded upon the books of account of the Trust. In the event
that there are any assets, income, earnings, profits, and
proceeds thereof, funds, or payments which are not readily
identifiable as belonging to any particular Series, the Trustees
shall allocate them among any one or more of the Series
established and designated from time to time in such manner and
on such basis as they, in their sole discretion, deem fair and
equitable. Each such allocation by the Trustees shall be
conclusive and binding upon the Shareholders of all Series for
all purposes.

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<PAGE>

d) The assets belonging to each particular Series shall be
charged with the liabilities of the Trust in respect of that
Series and with all expenses, costs, charges and reserves
attributable to that Series, and any general liabilities,
expenses, costs, charges or reserves of the Trust which are not
readily identifiable as belonging to any particular Series shall
be allocated and charged by the Trustees to and among any one or
more of the Series established and designated from time to time
in such manner and on such basis as the Trustees in their sole
discretion deem fair and equitable. Each allocation of
liabilities, expenses, costs, charges and reserves by the
Trustees shall be conclusive and binding upon the Shareholders of
all Series for all purposes. The Trustees shall have full
discretion, to the extent not inconsistent with the 1940 Act, to
determine which items are capital; and each such determination
and allocation shall be conclusive and binding upon the
Shareholders. The assets of a particular Series of the Trust
shall, under no circumstances, be charged with liabilities
attributable to any other Series of the Trust. All persons
extending credit to, or contracting with or having any claim
against a particular Series of the Trust shall look only to the
assets of that particular Series for payment of such credit,
contract or claim. No Shareholder or former Shareholder of any
Series shall have any claim on or right to any assets allocated
or belonging to any other Series.

e) Each Share of a Series of the Trust shall represent a
beneficial interest in the net assets of such Series. Each
holder of Shares of a Series shall be entitled to receive his pro
rata share of distributions of income and capital gains made with
respect to such Series, except as provided in Section 5.13
hereof. Upon redemption of his Shares or indemnification for
liabilities incurred by reason of his being or having been a
Shareholder of a Series, such Shareholder shall be paid solely
out of the funds and property of such Series of the Trust. Upon
liquidation or termination of a Series of the Trust, Shareholders
of such Series shall be entitled to receive a pro rata share of
the net assets of such Series, except as provided in Section 5.13
hereof. A Shareholder of a particular Series of the Trust shall
not be entitled to participate in a derivative or class action on
behalf of any other Series or the Shareholders of any other
Series of the Trust.

f) The establishment and designation of any Series of Shares
shall be effective upon the execution by a majority of the then
Trustees of an instrument setting forth such establishment and
designation and the relative rights and preferences of such
Series, or as otherwise provided in such instrument. The
Trustees may by an instrument executed by a majority of their
number abolish any Series and the establishment and designation
thereof. Except as otherwise provided in this Article V, the
Trustees shall have the power to determine the designations,
preferences, privileges, limitations and rights, of each class
and Series of Shares. Each instrument referred to in this
paragraph shall have the status of an amendment to this
Declaration.

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Section 5.12. Assent to Declaration of Trust.

Every Shareholder, by virtue of having become a shareholder,
shall be held to have expressly assented and agreed to the terms
hereof and to have become a party hereto.

Section 5.13. Class Designation.

The Trustees, in their discretion, may authorize the
division of the Shares of the Trust, or, if any Series be
established, the Shares of any Series, into two or more Classes,
and the different Classes shall be established and designated,
and the variations in the relative rights and preferences as
between the different Classes shall be fixed and determined, by
the Trustees; provided, that all Shares of the Trust or of any
Series shall be identical to all other Shares of the Trust or the
same Series, as the case may be, except that there may be
variations between different Classes as to allocation of
expenses, right of redemption, special and relative rights as to
dividends and on liquidation, conversion rights, and conditions
under which the several Classes shall have separate voting
rights. All references to Shares in this Declaration shall be
deemed to be Shares of any or all Classes as the context may
require.

If the Trustees shall divide the Shares of the Trust or any
Series into two or more Classes, the following provisions shall
be applicable:

a) All provisions herein relating to the Trust, or any Series
of the Trust, shall apply equally to each Class of Shares of the
Trust or of any Series of the Trust, except as the context
requires otherwise.

b) The number of Shares of each Class that may be issued shall
be unlimited. The Trustees may classify or reclassify any Shares
or any Series of any Shares into one or more Classes that may be
established and designated from time to time. The Trustees may
hold as treasury Shares (of the same or some other Class),
reissue for such consideration and on such terms as they may
determine, or cancel any Shares of any Class reacquired by the
Trust at their discretion from time to time.

c) Liabilities, expenses, costs, charges and reserves related
to the distribution of, and other identified expenses that should
properly be allocated to, the Shares of a particular Class may be
charged to and borne solely by such Class and the bearing of
expenses solely by a Class of Shares may be appropriately
reflected (in a manner determined by the Trustees) and cause
differences in the net asset value attributable to, and the
dividend, redemption and liquidation rights of, the Shares of
different classes. Each allocation of liabilities, expenses,
costs, charges and reserves by the Trustees shall be conclusive
and binding upon the Shareholders of all Classes for all
purposes.

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<PAGE>

d) The establishment and designation of any Class of Shares
shall be effective upon the execution by a majority of the then
Trustees of an instrument setting forth such establishment and
designation and the relative rights and preferences of such
Class, or as otherwise provided in such instrument. The Trustees
may, by an instrument executed by a majority of their number,
abolish any Class and the establishment and designation thereof.
Each instrument referred to in this paragraph shall have the
status of an amendment to this Declaration.

ARTICLE VI

REDEMPTION AND REPURCHASE OF SHARES

Section 6.
Section 6.1. Redemption of Shares.

All Shares of the Trust shall be redeemable, at the
redemption price determined in the manner set out in this
Declaration. Redeemed or repurchased Shares may be resold by the
Trust.

The Trust shall redeem the Shares upon the appropriately
verified written application of the record holder thereof (or
upon such other form of request as the Trustees may determine) at
such office or agency as may be designated from time to time for
that purpose in the Trust's then effective registration statement
under the Securities Act of 1933. The Trustees may from time to
time specify additional conditions, not inconsistent with the
1940 Act, regarding the redemption of Shares in the Trust's then
effective registration statement under the Securities Act of
1933.

Section 6.2. Price.

Shares shall be redeemed at their net asset value, which may
be reduced by any redemption fee authorized by the Trustees,
determined as set forth in Section 7.1 hereof as of such time as
the Trustees shall have theretofore prescribed by resolution. In
the absence of such resolution, the redemption price of Shares
deposited shall be the net asset value of such Shares next
determined as set forth in Section 7.1 hereof after receipt of
such application.

Section 6.3. Payment.

Payment for such Shares shall be made in cash or in property
out of the assets of the relevant Series of the Trust to the
Shareholder of record at such time and in the manner, not
inconsistent with the 1940 Act or other applicable laws, as may
be specified from time to time in the Trust's then effective
registration statement under the Securities Act of 1933, subject
to the provisions of Section 6.4 hereof.

Section 6.4. Effect of Suspension of Determination of Net Asset
Value.

If, pursuant to Section 6.9 hereof, the Trustees shall
declare a suspension of the determination of net asset value, the
rights of Shareholders (including those who shall have applied

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<PAGE>

for redemption pursuant to Section 6.1 hereof but who shall not
yet have received payment) to have Shares redeemed and paid for
by the Trust shall be suspended until the termination of such
suspension is declared. Any record holder who shall have his
redemption right so suspended may, during the period of such
suspension, by appropriate written notice of revocation at the
office or agency where application was made, revoke any
application for redemption not honored and withdraw any
certificates on deposit. The redemption price of Shares for
which redemption applications have not been revoked shall be the
net asset value of such Shares next determined as set forth in
Section 7.1 after the termination of such suspension, and payment
shall be made within seven (7) days after the date upon which the
application was made plus the period after such application
during which the determination of net asset value was suspended.

Section 6.5. Repurchase by Agreement.

The Trust may repurchase Shares directly, or through the
Distributor or another agent designated for the purpose, by
agreement with the owner thereof at a price not exceeding the net
asset value per Share determined as of the time when the purchase
or contract of purchase is made or the net asset value as of any
time which may be later determined pursuant to Section 7.1
hereof, provided payment is not made for the Shares prior to the
time as of which such net asset value is determined.

Section 6.6. Redemption of Shareholder's Interest.

The Trust shall have the right at any time without prior
notice to the Shareholder to redeem Shares of any Shareholder for
their then current net asset value per Share if

a) at such time the Shareholder owns Shares having an aggregate
net asset value of less than an amount set from time to time by
the Trustees subject to such terms and conditions as the Trustees
may approve, and subject to the Trust's giving general notice to
all Shareholders of its intention to avail itself of such right,
either by publication in the Trust's registration statement, if
any, or by such other means as the Trustees may determine, or

b) The Trustees believe that it is in the best interest of the
Trust to do so because of prior involvement by the Shareholder in
fraudulent acts relating to securities transactions.

Section 6.7. Redemption of Shares in Order to Qualify as
Regulated Investment Company; Disclosure of Holding.

If the Trustees shall, at any time and in good faith, be of
the opinion that direct or indirect ownership of Shares or other
securities of the Trust has or may become concentrated in any
Person to an extent which would disqualify any Series of the
Trust as a regulated investment company under the Internal
Revenue Code, then the Trustees shall have the power by lot or

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<PAGE>

other means deemed equitable by them (i) to call for redemption
by any such Person a number, or principal amount, of Shares or
other securities of the Trust sufficient to maintain or bring the
direct or indirect ownership of Shares or other securities of the
Trust into conformity with the requirements for such
qualification and (ii) to refuse to transfer or issue Shares or
other securities of the Trust to any Person whose acquisition of
the Shares or other securities of the Trust in question would
result in such disqualification. The redemption shall be
effected at the redemption price and in the manner provided in
Section 6.1.

The holders of Shares or other securities of the Trust shall
upon demand disclose to the Trustees in writing such information
with respect to direct and indirect ownership of Shares or other
securities of the Trust as the Trustees deem necessary to comply
with the provisions of the Internal Revenue Code, or to comply
with the requirements of any other taxing authority.

Section 6.8. Reductions in Number of Outstanding Shares
Pursuant to Net Asset Value Formula.

The Trust may also reduce the number of Outstanding Shares
pursuant to the provisions of Section 7.3.

Section 6.9. Suspension of Right of Redemption.

The Trust may declare a suspension of the right of
redemption or postpone the date of payment or redemption for the
whole or any part of any period (i) during which the New York
Stock Exchange is closed other than customary week-end and
holiday closings, (ii) during which trading on the New York Stock
Exchange is restricted, (iii) during which an emergency exists as
a result of which disposal by the Trust of securities owned by it
is not reasonably practicable or it is not reasonably practicable
for the Trust fairly to determine the value of its net assets, or
(iv) during any other period when the Commission may for the
protection of Shareholders of the Trust by order permit
suspension of the right of redemption or postponement of the date
of payment or redemption; provided that applicable rules and
regulations of the Commission shall govern as to whether the
conditions prescribed in (ii), (iii), or (iv) exist. Such
suspension shall take effect at such time as the Trust shall
specify but not later than the close of business on the business
day next following the declaration of suspension, and thereafter
there shall be no right of redemption or payment on redemption
until the Trust shall declare the suspension at an end, except
that the suspension shall terminate in any event on the first day
on which said stock exchange shall have reopened or the period
specified in (ii) or (iii) shall have expired (as to which in the
absence of an official ruling by the Commission, the
determination of the Trust shall be conclusive). In the case of
a suspension of the right of redemption, a Shareholder may either
withdraw his request for redemption or receive payment based on
the net asset value existing after the termination of the
suspension.

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<PAGE>

ARTICLE VII

DETERMINATION OF NET ASSET VALUE,
NET INCOME AND DISTRIBUTIONS

Section 7.
Section 7.1. Net Asset Value.

The value of the assets of the Trust or any Series of the
Trust shall be determined by appraisal of the securities of the
Trust or allocated to such Series, such appraisal to be on the
basis of such method as shall be deemed to reflect the fair value
thereof, determined in good faith by or under the direction of
the Trustees. From the total value of said assets, there shall
be deducted all indebtedness, interest, taxes, payable or
accrued, including estimated taxes on unrealized book profits,
expenses and management charges accrued to the appraisal date,
net income determined and declared as a distribution and all
other items in the nature of liabilities attributable to the
Trust or such Series or Class thereof which shall be deemed
appropriate. The net asset value of a Share shall be determined
by dividing the net asset value of the Class, or, if no Class has
been established, of the Series, or, if no Series has been
established, of the Trust, by the number of Shares of that Class,
or Series, or of the Trust, as applicable, outstanding. The net
asset value of Shares of the Trust or any Class or Series of the
Trust shall be determined pursuant to the procedure and methods
prescribed or approved by the Trustees in their discretion and as
set forth in the most recent Registration Statement of the Trust
as filed with the Securities and Exchange Commission pursuant to
the requirements of the Securities Act of 1933, as amended, the
1940 Act, as amended, and the Rules thereunder. The net asset
value of the Shares shall be determined at least once on each
business day, as of the close of trading on the New York Stock
Exchange or as of such other time or times as the Trustees shall
determine. The power and duty to make the daily calculations may
be delegated by the Trustees to the Investment Adviser, the
Custodian, the Transfer Agent or such other Person as the
Trustees may determine by resolution or by approving a contract
which delegates such duty to another Person. The Trustees may
suspend the daily determination of net asset value to the extent
permitted by the 1940 Act.

Section 7.2. Distributions to Shareholders.

The Trustees shall from time to time distribute ratably
among the Shareholders of the Trust or a Series such proportion
of the net profits, surplus (including paid-in surplus), capital,
or assets of the Trust or such Series held by the Trustees as
they may deem proper. Such distributions may be made in cash or
property (including without limitation any type of obligations of
the Trust or such Series or any assets thereof), and the Trustees
may distribute ratably among the Shareholders additional Shares
of the Trust or such Series issuable hereunder in such manner, at
such times, and on such terms as the Trustees may deem proper.
Such distributions may be among the Shareholders of record at the
time of declaring a distribution or among the Shareholders of
record at such other date or time or dates or times as the
Trustees shall determine. The Trustees may in their discretion
determine that, solely for the purposes of such distributions,
Outstanding Shares shall exclude Shares for which orders have
been placed subsequent to a specified time on the date the
distribution is declared or on the next preceding day if the

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<PAGE>

distribution is declared as of a day on which Boston banks are
not open for business, all as described in the registration
statement under the Securities Act of 1933. The Trustees may
always retain from the net profits such amount as they may deem
necessary to pay the debts or expenses of the Trust or the Series
or to meet obligations of the Trust or the Series, or as they may
deem desirable to use in the conduct of its affairs or to retain
for future requirements or extensions of the business. The
Trustees may adopt and offer to Shareholders such dividend
reinvestment plans, cash dividend payout plans or related plans
as the Trustees shall deem appropriate. The above provisions may
be modified to the extent required by a plan adopted by the
Trustees to establish Classes of Shares of the Trust or of a
Series.

Inasmuch as the computation of net income and gains for
Federal income tax purposes may vary from the computation thereof
on the books, the above provisions shall be interpreted to give
the Trustees the power in their discretion to distribute for any
fiscal year as ordinary dividends and as capital gains
distributions, respectively, additional amounts sufficient to
enable the Trust or the Series to avoid or reduce liability for
taxes.

Section 7.3. Determination of Net Income; Constant Net Asset
Value; Reduction of Outstanding Shares.

Subject to Section 5.11 and Section 5.13 hereof, the net
income of the Trust or any Series shall be determined in such
manner as the Trustees shall provide by resolution. Expenses of
the Trust or a Series, including the advisory or management fee,
shall be accrued each day. Such net income may be determined by
or under the direction of the Trustees as of the close of trading
on the New York Stock Exchange on each day on which such Exchange
is open or as of such other time or times as the Trustees shall
determine, and, except as provided herein, all the net income of
the Trust or any Series, as so determined, may be declared as a
dividend on the Outstanding Shares of the Trust or such Series.
If, for any reason, the net income of the Trust or any Series,
determined at any time is a negative amount, the Trustees shall
have the power with respect to the Trust or such Series (i) to
offset each Shareholder's pro rata share of such negative amount
from the accrued dividend account of such Shareholder, or (ii) to
reduce the number of Outstanding Shares of the Trust or such
Series by reducing the number of Shares in the account of such
Shareholder by that number of full and fractional Shares which
represents the amount of such excess negative net income, or
(iii) to cause to be recorded on the books of the Trust or such
Series an asset account in the amount of such negative net
income, which account may be reduced by the amount, provided that
the same shall thereupon become the property of the Trust or such
Series with respect to the Trust or such Series and shall not be
paid to any Shareholder, of dividends declared thereafter upon
the Outstanding Shares of the Trust or such Series on the day
such negative net income is experienced, until such asset account
is reduced to zero; or (iv) to combine the methods described in
clauses (i) and (ii) and (iii) of this sentence, in order to
cause the net asset value per Share of the Trust or such Series
to remain at a constant amount per Outstanding Share immediately
after each such determination and declaration. The Trustees

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shall also have the power to fail to declare a dividend out of
net income for the purpose of causing the net asset value per
Share to be increased to a constant amount. The Trustees shall
not be required to adopt, but may at any time adopt, discontinue
or amend the practice of maintaining the net asset value per
Share of the Trust or a Series at a constant amount.

Section 7.4. Allocation Between Principal and Income.

The Trustees shall have full discretion to determine whether
any cash or property received shall be treated as income or as
principal and whether any item of expense shall be charged to the
income or the principal amount, and their determination made in
good faith shall be conclusive upon the Shareholders. In the
case of stock dividends received, the Trustees shall have full
discretion to determine, in the light of the particular
circumstances, how much if any of the value thereof shall be
treated as income, the balance, if any, to be treated as
principal.

Section 7.5. Power to Modify Foregoing Procedures.

Notwithstanding any of the foregoing provisions of this
Article VII, the Trustees may prescribe, in their absolute
discretion, such other bases and times for determining the per
Share net asset value or net income, or the declaration and
payment of dividends and distributions as they may deem necessary
or desirable.

ARTICLE VIII

DURATION; TERMINATION OF TRUST;
AMENDMENT; MERGERS, ETC.

Section 8.
Section 8.1. Duration.

The Trust shall continue without limitation of time but
subject to the provisions of this Article VIII.

Section 8.2. Termination of Trust.

a) The Trust or any Series of the Trust may be terminated by an
instrument in writing signed by a majority of the Trustees, or by
the affirmative vote of the holders of a majority of the Shares
of the Trust or Series outstanding and entitled to vote at any
meeting of Shareholders. Upon the termination of the Trust or
any Series,

i) the Trust or any Series shall carry on no business except
for the purpose of winding up its affairs;

ii) the Trustees shall proceed to wind up the affairs of the
Trust or Series and all of the powers of the Trustees under this
Declaration shall continue until the affairs of the Trust or
Series shall have been wound up, including the power to fulfill
or discharge the contracts of the Trust or Series, collect its
assets, sell, convey, assign, exchange, transfer or otherwise

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dispose of all or any part of the remaining Trust Property or
property of the Series to one or more persons at public or
private sale for consideration which may consist in whole or in
part of cash, securities or other property of any kind, discharge
or pay its liabilities, and do all other acts appropriate to
liquidate its business; and

iii) after paying or adequately providing for the payment of all
liabilities, and upon receipt of such releases, indemnities and
refunding agreements as they deem necessary for their protection,
the Trustees may distribute the remaining Trust Property or
property of the Series, in cash or in kind or partly each, among
the Shareholders of the Trust or Series according to their
respective rights.

b) After termination of the Trust or any Series and
distribution to the Shareholders as herein provided, a majority
of the Trustees shall execute and lodge among the records of the
Trust an instrument in writing setting forth the fact of such
termination, and the Trustees shall thereupon be discharged from
all further liabilities and duties hereunder, and the rights and
interests of all Shareholders of the Trust or Series shall
thereupon cease.

Section 8.3. Amendment Procedure.

a) This Declaration may be amended by a vote of the holders of
a majority of the Shares outstanding and entitled to vote.
Amendments shall be effective upon the taking of action as
provided in this section or at such later time as shall be
specified in the applicable vote or instrument. The Trustees may
also amend this Declaration without the vote or consent of
Shareholders if they deem it necessary to conform this
Declaration to the requirements of applicable federal or state
laws or regulations or the requirements of the regulated
investment company provisions of the Internal Revenue Code
(including those provisions of such Code relating to the
retention of the exemption from federal income tax with respect
to dividends paid by the Trust out of interest income received on
Municipal Bonds), but the Trustees shall not be liable for
failing so to do. The Trustees may also amend this Declaration
without the vote or consent of Shareholders if they deem it
necessary or desirable to change the name of the Trust, to supply
any omission, to cure, correct or supplement any ambiguous,
defective or inconsistent provision hereof, or to make any other
changes in the Declaration which do not materially adversely
affect the rights of Shareholders hereunder.

b) No amendment may be made under this Section 8.3 which would
change any rights with respect to any Shares of the Trust or
Series by reducing the amount payable thereon upon liquidation of
the Trust or Series or by diminishing or eliminating any voting
rights pertaining thereto, except with the vote or consent of the
holders of two-thirds of the Shares of the Trust or Series

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outstanding and entitled to vote. Nothing contained in this
Declaration shall permit the amendment of this Declaration to
impair the exemption from personal liability of the Shareholders,
Trustees, officers, employees and agents of the Trust or to
permit assessments upon Shareholders.

c) A certificate signed by a majority of the Trustees setting
forth an amendment and reciting that it was duly adopted by the
Shareholders or by the Trustees as aforesaid or a copy of the
Declaration, as amended, and executed by a majority of the
Trustees, shall be conclusive evidence of such amendment when
lodged among the records of the Trust.

Notwithstanding any other provision hereof, until such time
as a Registration Statement under the Securities Act of 1933, as
amended, covering the first public offering of securities of the
Trust shall have become effective, this Declaration may be
terminated or amended in any respect by the affirmative vote of a
majority of the Trustees or by an instrument signed by a majority
of the Trustees.

Section 8.4. Merger, Consolidation and Sale of Assets.

The Trust or any Series thereof may merge or consolidate
with any other corporation, association, trust or other
organization or may sell, lease or exchange all or substantially
all of the Trust Property or the property of any Series,
including its good will, upon such terms and conditions and for
such consideration when and as authorized by an instrument in
writing signed by a majority of the Trustees.

Section 8.5. Incorporation.

When authorized by an instrument in writing signed by a
majority of the Trustees, the Trustees may cause to be organized
or assist in organizing a corporation or corporations under the
laws of any jurisdiction or any other trust, partnership,
association or other organization to take over all of the Trust
Property or the property of any Series or to carry on any
business in which the Trust or the Series shall directly or
indirectly have any interest, and to sell, convey and transfer
the Trust Property or the property of any Series to any such
corporation, trust, association or organization in exchange for
the Shares or securities thereof or otherwise, and to lend money
to, subscribe for the Shares or securities of, and enter into any
contracts with any such corporation, trust, partnership,
association or organization, or any corporation, partnership,
trust, association or organization in which the Trust or the
Series holds or is about to acquire shares or any other interest.
The Trustees may also cause a merger or consolidation between the
Trust or any Series or any successor thereto and any such
corporation, trust, partnership, association or other
organization if and to the extent permitted by law, as provided
under the law then in effect. Nothing contained herein shall be
construed as requiring approval of Shareholders for the Trustees
to organize or assist in organizing one or more corporations,
trusts, partnerships, associations or other organizations and
selling, conveying or transferring a portion of the Trust
Property to such organization or entities.

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ARTICLE IX

REPORTS TO SHAREHOLDERS

Section 9.
The Trustees shall at least semi-annually submit to the
Shareholders a written financial report, which may be included in
the Trust's prospectus or statement of additional information, of
the transactions of the Trust, including financial statements
which shall at least annually be certified by independent public
accountants.

ARTICLE X

MISCELLANEOUS

Section 10.
Section 10.1. Filing.

This Declaration and any amendment hereto shall be filed in
the office of the Secretary of the Commonwealth of Massachusetts
and in such other places as may be required under the laws of the
Commonwealth of Massachusetts and may also be filed or recorded
in such other places as the Trustees deem appropriate. Unless
the amendment is embodied in an instrument signed by a majority
of the Trustees, each amendment filed shall be accompanied by a
certificate signed and acknowledged by a Trustee stating that
such action was duly taken in a manner provided herein. A
restated Declaration, integrating into a single instrument all of
the provisions of the Declaration which are then in effect and
operative, may be executed from time to time by a majority of the
Trustees and shall, upon filing with the Secretary of the
Commonwealth of Massachusetts, be conclusive evidence of all
amendments contained therein and may hereafter be referred to in
lieu of the original Declaration and the various amendments
thereto. The restated Declaration may include any amendment
which the Trustees are empowered to adopt, whether or not such
amendment has been adopted prior to the execution of the restated
Declaration.

Section 10.2. Governing Law.

This Declaration is executed by the Trustees and delivered
in the Commonwealth of Massachusetts and with reference to the
internal laws thereof, and the rights of all parties and the
validity and construction of every provision hereof shall be
subject to and construed according to the internal laws of said
State without regard to the choice of law rules thereof.

Section 10.3. Counterparts.

This Declaration may be simultaneously executed in several
counterparts, each of which shall be deemed to be an original,
and such counterparts, together, shall constitute one and the
same instrument, which shall be sufficiently evidenced by any
such original counterpart.

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Section 10.4. Reliance by Third Parties.

Any certificate executed by an individual who, according to
the records of the Trust appears to be a Trustee hereunder,
certifying to: (a) the number or identity of Trustees or
Shareholders, (b) the due authorization of the execution of any
instrument or writing, (c) the form of any vote passed at a
meeting of Trustees or Shareholders, (d) the fact that the number
of Trustees or Shareholders present at any meeting or executing
any written instrument satisfies the requirements of this
Declaration, (e) the form of any By-laws adopted by or the
identity of any officers elected by the Trustees, or (f) the
existence of any fact or facts which in any manner relate to the
affairs of the Trust, shall be conclusive evidence as to the
matters so certified in favor of any Person dealing with the
Trustees and their successors.

Section 10.5. Provisions in Conflict with Law or Regulations.

The provisions of this Declaration are severable, and if the
Trustees shall determine, with the advice of counsel, that any of
such provisions is in conflict with the 1940 Act, the regulated
investment company provisions of the Internal Revenue Code or
with other applicable laws and regulations, the conflicting
provision shall be deemed never to have constituted a part of
this Declaration; provided, however, that such determination
shall not affect any of the remaining provisions of this
Declaration or render invalid or improper any action taken or
omitted prior to such determination.

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If any provision of this Declaration shall be held invalid
or unenforceable in any jurisdiction, such invalidity or
unenforceability shall attach only to such provision in such
jurisdiction and shall not in any manner affect such provisions
in any other jurisdiction or any other provision of this
Declaration in any jurisdiction.

IN WITNESS WHEREOF, the undersigned has executed this
instrument this 1st day of October, 1997.

/s/Caroline Pearson
-------------------
Caroline Pearson, as Trustee and
not Individually
Two International Place, 10th floor
Boston, Massachusetts 02110

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THE COMMONWEALTH OF MASSACHUSETTS

County of Suffolk October 1, 1997

Then personally appeared the above-named Caroline Pearson
who acknowledged the foregoing instrument to be his/her free act
and deed.

Before me,

/s/Joan E. Shaughnessy
-------------------
Notary Public

My commission expires: April 8, 1999
--------------