KEMPER EQUITY TRUST, 497, 1998-03-13

KEMPER EQUITY TRUST
497, 1998-03-13

Previous: DSET CORP, 424B1, 1998-03-13

Next: COMMAND SYSTEMS INC, 424B4, 1998-03-13

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
----------------------------
Fund Organization and
Capital Structure
----------------------------

This prospectus contains concisely the information about Kemper-Dreman Financial
Services Fund (the "Fund"), a diversified series of Kemper Equity Trust ("KET"),
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 KET, dated March 9, 1998, has been filed with the Securities and Exchange
Commission (the "SEC") 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.

[KEMPER FUND LOGO]

Kemper-Dreman
Financial Services Fund

PROSPECTUS DATED March 9, 1998

KEMPER EQUITY TRUST
222 South Riverside Plaza, Chicago, Illinois 60606
1-800-621-1048

The investment objective of Kemper-Dreman Financial Services Fund is to provide
long-term capital appreciation.

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.
<PAGE>

SUMMARY

INVESTMENT OBJECTIVE. The Kemper-Dreman Financial Services Fund (the "Fund"), a
diversified series of Kemper Equity Trust ("KET"), an open-end management
investment company, seeks long-term capital appreciation by investing primarily
in common stocks and other equity securities of companies in the financial
services industry believed by the Fund's investment manager to be undervalued.

RISK FACTORS. The Fund's risks are determined by the nature of the securities
held and the portfolio management strategies used by the investment manager. 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, see "Special Risk
Factors."

There is no assurance that the investment objective of the Fund will be
achieved. The return and net asset value of the Fund will fluctuate.
Concentration by the Fund in investments in the financial services industry
creates greater risk than investment across various industries since the
financial, economic, and business developments affecting issuers in such
industry may have a greater effect on the Fund than if it had not concentrated
its assets in the financial services industry. Foreign investments by the Fund
involve risk and opportunity considerations not typically associated with
investing in U.S. companies. The U.S. Dollar value of a foreign security tends
to decrease when the value of the U.S. Dollar rises against the foreign currency
in which the security is denominated and tends to increase when the value of the
U.S. Dollar falls against such currency. Thus, the U.S. Dollar value of foreign
securities in the Fund's portfolio, and the Fund's net asset value, may change
in response to changes in currency exchange rates even though the value of the
foreign securities in local currency terms may not have changed. While the
Fund's investments in foreign securities will principally be in developed
countries, the Fund may invest a small portion of its assets in developing or
"emerging" markets, which involve exposure to economic structures that are
generally less diverse and mature than in the United States, and to political
systems that may be less stable. A small portion of the assets of the Fund may
be invested in lower rated or unrated high yield bonds, which entail greater
risk of loss of principal and interest than higher rated fixed-income
securities. There are special risks associated with options, financial futures
and foreign currency transactions and other derivatives and there is no
assurance that use of those investment techniques will be successful. 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
applied to the value of shares redeemed within six years of
purchase. The contingent deferred sales charge is computed at
the folllowing rates:

Contingent Deferred
Year of Redemption After Purchase Sales Charge

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

2
<PAGE>

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 for 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 investment manager for the Fund. The Adviser is paid
monthly an investment management fee by the Fund based upon average daily net
assets of the Fund at an annual rate ranging from 0.75% to 0.62%. Dreman Value
Management, L.L.C. (the "Sub-Adviser") serves as sub-adviser for the Fund. The
Sub-Adviser is paid by the Adviser an investment management fee based upon the
average daily net assets of the Fund at an annual rate ranging from 0.24% to
0.198%. Kemper Distributors, Inc. ("KDI") is principal underwriter and
administrator for the Fund. For each of Class B shares and Class C shares of the
Fund, KDI receives a Rule 12b-1 distribution fee of 0.75% of average daily net
assets of each such class. KDI 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
KDI. The Fund pays an administrative services fee at an annual rate of up to
0.25% of average daily net assets of each of Class A, B and C shares of the
Fund, which KDI pays to financial services firms. See "Investment Manager and
Underwriter."

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

3
<PAGE>

SUMMARY OF EXPENSES

Shareholder Transaction Expenses(1) Class A Class B Class C
------- ------- -------

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 Contingent 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. The table does not include the $9.00
quarterly small account fee. See "Redemption or Repurchase of Shares."

(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% during the first year and 0.50% during 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% during 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 Class B Class C
Shares Shares Shares

Management Fees*
(after waiver) 0.60% 0.60% 0.60%

12b-1 Fees (6)(7) None 0.75% 0.75%

Other Expenses 0.76% 0.89% 0.86%
---- ---- ----

Total Fund Operating
Expenses*(after waiver) 1.36% 2.24% 2.21%
==== ==== ====

- ----------

*For a one year period, the Adviser has agreed to waive a portion of its
management fee amounting to 0.15% of average daily net assets for the Fund. If
the Adviser had not agreed to waive a portion of its management fee, the
annualized expenses of the Fund would be: management fee 0.75% for each class
and total fund operating expenses 1.51%, 2.39% and 2.36% for Class A shares,
Class B shares and Class C shares, respectively.

(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 KDI believes that this is unlikely because of the
automatic conversion feature described
<PAGE>

under "Purchase of Shares - Deferred Sales Charge Alternative - Class B
Shares."

(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

The following example assumes reinvestment of all dividends and distributions
and that the percentage amounts under "Total Fund Operating Expenses" remain the
same each year.

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 a 5% annual
return and redemption at the end of
each time period: $71 $98

Class B Shares (9)

Based on the estimated level of total
operating expenses listed above, you would
pay the following expenses on a $1,000
investment, assuming a 5% annual return
and redemption at the end of each time
period: $63 $100

You would pay the following expenses on
the same investment, assuming no redemption: $23 $70

Class C Shares (10)

Based on the estimated level of total
operating expenses listed above, you would
pay the following expenses on a $1,000
investment, assuming a 5% annual return and
redemption at the end of each time period: $32 $69

You would pay the following expenses on the
same investment, assuming no redemption: $22 $69
- ----------

(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.

5
<PAGE>

(9) Assumes that the shareholder was an owner of shares on the first day of
the first year and the contingent deferred sales charge was applied as
follows: 1 year (4%) and 3 years (3%).

(10) Assumes that the shareholder was the owner on the first day of the first
year and the contingent deferred sales charge of 1.00 % was applied during
the first year.

The purpose of the preceding table is to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. See "Investment Manager and Underwriter" for more information. The
Fund commenced operations on March 9, 1998. "Management Fees" and "Other
Expenses" are estimates for the initial fiscal year of operations, and expenses
are shown for only the one- and three- year periods.

Each Example assumes a 5% annual rate of return pursuant to requirements of the
SEC. This hypothetical rate of return is not intended to be representative of
past or future performance of the Fund. The Examples should not be considered to
be a representation of past or future expenses. Actual expenses may be greater
or less than those shown.

6
<PAGE>

INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS

The following information sets forth the Fund's investment objective and
policies. The Fund's returns and net asset value will fluctuate, and there is no
assurance that the Fund will meet its objective. 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 the Fund's
investment objective, shareholders should consider whether the Fund remains an
appropriate investment in light of their then current financial position and
needs.

Kemper-Dreman Financial Services Fund (the "Fund"), a diversified series of
Kemper Equity Trust ("KET"), seeks long-term capital appreciation. The Fund
pursues its investment objective by investing primarily in common stocks and
other equity securities of companies in the financial services industry believed
by the investment manager to be undervalued. Securities of a company may be
undervalued as a result of overreaction by investors to unfavorable news about a
company, industry or the stock markets in general or as a result of a market
decline, poor economic conditions, tax-loss selling or actual or anticipated
unfavorable developments affecting a company.

The Fund will concentrate its investments in securities of financial services
companies, including commercial banks, insurance companies, thrifts, consumer
finance companies, commercial finance companies, leasing companies, securities
brokerage firms, asset management firms, and government-sponsored financial
enterprises. The Fund will invest primarily in common stocks of larger, listed
companies with a record of earnings and dividends, low price-earnings ratios,
reasonable returns on equity and sound finances which, in the opinion of the
investment manager, have intrinsic value. The Fund may, however, from time to
time, invest in stocks that pay no dividends. It is anticipated that most stocks
purchased will be listed on the New York Stock Exchange, but the Fund may also
purchase securities listed on other securities exchanges and in the
over-the-counter market.

In the opinion of the Fund's investment manager, the Fund offers investors the
opportunity to participate in the substantial long-term appreciation potential
of companies in the financial services sector. Concentration by the Fund in
investments in the financial services industry creates greater risk than
investment across various industries since the financial, economic, business and
developments affecting issuers in such industry may have a greater effect on the
Fund than if it had not concentrated its assets in the financial services
industry. In addition, an investment in the Fund may involve significantly
greater risks and greater volatility than a diversified equity mutual fund that
is invested in issuers in various industries. The Fund is subject to the risk
that a particular group of related stocks will decline in price due to
industry-specific developments. As a result, the Fund should only be considered
a long-term investment and part of a well-diversified portfolio.

INVESTMENTS. Under normal circumstances, the Fund will invest at least 65% of
its assets in equity securities of companies in the financial services industry.
The Fund will invest primarily in equity securities of U.S. companies, but may
invest up to 30% of its assets in foreign companies and in U.S.
Dollar-denominated American Depository Receipts ("ADRs"), which are bought and
sold in the United States. For purposes of the foregoing, a company will be
considered within the financial services industry if at least 50% of its assets,
revenues or net income are related to or derived from the financial services
industry. While the Fund invests predominantly in common stocks, the Fund may
purchase other types of equity securities, including preferred stock,
convertible or non-convertible securities, equity investments in partnerships,
joint ventures and other forms of non-corporate investment and rights and
warrants. Securities may be listed on national exchanges or traded
over-the-counter. The Fund may invest up to 35% of its assets in corporate debt
securities, including up to 5% of its assets in securities rated below
investment-grade, i.e., rated below BBB by Standard & Poor's Corporation ("S&P")
and below Baa by Moody's Investor Services, Inc. ("Moody's"), or if unrated
determined to be of equivalent quality by the Fund's investment manager, or in
U.S. Treasury securities, agency and instrumentality obligations and zero coupon
securities. In addition, the Fund may enter into repurchase agreements, loan
portfolio securities, purchase securities on a when-issued basis and, further,
may engage in strategic transactions to attempt to increase stock market
participation or for hedging purposes, to enhance liquidity and manage
transaction costs.

SELECTION OF INVESTMENTS. In order to determine whether a security is
"undervalued," the principal factor considered by the investment manager is the
price-earnings, or P/E, ratio of the security. The investment manager believes
that the risk in owning stocks can be reduced by investing in companies with
sound finances

7
<PAGE>

whose current market prices are low in relation to earnings. In determining
whether a company's finances are sound, the investment manager considers among
other things, its cash position and current ratio (current assets compared to
current liabilities).

The investment manager applies quantitative analysis to its research process,
and begins by screening a large number of stocks. Typically, most companies
selected for inclusion in the Fund's portfolio will have market capitalizations
well in excess of $1 billion. In selecting among stocks with low P/E ratios, the
investment manager also considers factors such as the following about the
issuer:

o Financial strength,
o Book-to-market value,
o Five- and ten-year earnings growth rates,
o Five- and ten-year dividend growth rates,
o Five- and ten-year return on equity,
o Size of institutional ownership, and
o Earnings estimates for the next 12 months.

Fundamental analysis is used on companies that initially look promising.
Earnings and cash flow analyses as well as a company's conventional dividend
payout ratio are important to this process. Typically, the Fund will consist of
approximately 25 to 50 stocks. While it is anticipated that under normal
circumstances the Fund will be fully invested, in order to conserve assets
during temporary defensive periods when the investment manager deems it
appropriate, the Fund may invest up to 100% of its assets in cash or
defensive-type securities, such as high-grade debt securities (those rated BBB
or above by S&P, or Baa or above by Moody's), securities of the U.S. Government
or its agencies and high quality money market instruments, including repurchase
agreements. Investments in such interest bearing securities will be for
temporary defensive purposes only. It is impossible to predict for how long such
alternative strategies may be utilized.

The Fund's policy of investing in securities that may be out of favor differs
from the investment approach followed by many other mutual funds. Companies
reporting poor earnings, whose businesses are cyclically down, whose prices have
declined sharply or that are not widely followed are not typically held by most
investment companies. It is the investment manager's belief, however, that the
securities of sound, well-managed companies that may be temporarily out of favor
due to earnings declines or other adverse developments are likely to provide a
greater total investment return than securities whose prices appear to reflect
anticipated favorable developments.

ADDITIONAL INVESTMENT INFORMATION. It is anticipated that, under normal
circumstances, the portfolio turnover rate for the Fund will not exceed 100%.
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 will
usually hold stocks acquired for the long-term and will sell stocks when the
investment manager believes that anticipated price appreciation is no longer
probable, alternative investments offer superior appreciation prospects, or the
risk of decline in market prices is greater than the potential for gain.
Portfolio turnover will tend to rise during periods of economic turbulence and
decline during periods of stable growth. The use of options and futures
contracts will tend to increase the portfolio turnover rate of the Fund. To the
extent the investment policies of the Fund result in a relatively high portfolio
turnover rate, it will incur greater expenses and brokerage fees.

SPECIAL RISK FACTORS. The Fund's risks are determined by the nature of the
securities held and the portfolio management strategies used by the investment
manager. The following are descriptions of certain risks related to the
investments and techniques that the Fund may use from time to time.

Repurchase Agreements. The Fund may invest in repurchase agreements, under which
it acquires ownership of a security and the broker-dealer or bank agrees to
repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the Fund's holding period. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Fund
might have expenses in enforcing its rights, and could experience losses,
including a decline in the value of the underlying securities and loss of
income. The securities underlying a repurchase agreement will be
marked-to-market every business day so that the value of such securities is at
least

8
<PAGE>

equal to the investment value of the repurchase agreement, including any accrued
interest thereon. In addition, the Fund must take physical possession of the
security or receive written confirmation of the purchase and a custodial or
safekeeping receipt from a third party or be recorded as the owner of the
security through the Federal Reserve Book-Entry System. Repurchase agreements
will be limited to transactions with financial institutions believed by the
investment manager to present minimal credit risk. The investment manager will
monitor on an on-going basis the creditworthiness of the broker-dealers and
banks with which the Fund may engage in repurchase agreements. Repurchase
agreements maturing in more than seven days will be considered as illiquid for
purposes of the Fund's limitations on illiquid securities.

Debt Securities. The Fund may invest in debt securities with varying degrees of
credit quality. High quality bonds (rated AAA or AA by S&P or Aaa or Aa by
Moody's) characteristically have a strong capacity to pay interest and repay
principal. Medium investment-grade bonds (rated A or BBB by S&P or A or Baa by
Moody's) are defined as having adequate capacity to pay interest and repay
principal. In addition, certain medium investment-grade bonds are considered to
have speculative characteristics. The Fund may invest up to 5% of its assets in
debt securities which are rated below investment-grade (hereinafter referred to
as "low-rated securities") or which are unrated, but deemed equivalent to those
rated below investment-grade by the investment manager. These are commonly
referred to as "junk bonds." The lower the ratings of such debt securities, the
greater their risks render them like equity securities. For a more complete
description of the risks of such high yield/high risk securities, please refer
to the Fund's Statement of Additional Information.

Illiquid Securities. The Fund may not invest more than 15% of the value of its
net assets in illiquid securities which may include 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 since they
can be sold to other qualified institutional buyers under a rule of the SEC
(Rule 144A). Upon approval from KET's Board of Trustees, the Adviser may
determine which Rule 144A securities will be considered liquid. 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.

Common Stocks. Common stock is issued by companies to raise cash for business
purposes and represents a proportionate interest in the issuing companies.
Therefore, the Fund participates in the success or failure of any company in
which it holds stock. The market values of common stock can fluctuate
significantly, reflecting the business performance of the issuing company,
investor perception and general economic or financial market movements. Smaller
companies are especially sensitive to these factors and may even become
valueless. Despite the risk of price volatility, however, common stock also
offers the greatest potential for long-term gain on investment, compared to
other classes of financial assets such as bonds or cash equivalents.

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. The Fund may
invest in bonds, notes, debentures and preferred stocks 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
generally entail less credit risk than the issuer's common stock. The Fund may
be required to permit the issuer of a convertible security to redeem the
security, convert it into the underlying common stock or sell it to a third
party. Thus, the Fund may not be able to control whether the issuer of a
convertible security chooses to convert that security. If the issuer chooses to
do so, this action could have an adverse effect on this Fund's ability to
achieve its investment objective.

Foreign Securities. Investments in foreign securities involve special
considerations, due to more limited information, higher brokerage costs,
different accounting standards, thinner trading markets and the likely impact

9
<PAGE>

of foreign taxes on the yield from debt securities. They may also entail certain
other risks, such as the possibility of one or more of the following: imposition
of dividend or interest withholding or confiscatory taxes; currency blockages or
transfer restrictions; expropriation, nationalization, military coups or other
adverse political or economic developments; less governmental supervision and
regulation of securities exchanges, brokers and listed companies and banks; and
the difficulty of enforcing obligations in other countries. Further, it may be
more difficult for the Fund's agents to keep currently informed about corporate
actions which may affect the prices of portfolio securities. Communications
between the U.S. and foreign countries may be less reliable than within the
U.S., increasing the risk of delayed settlements of portfolio transactions or
loss of certificates for portfolio securities. Certain markets may require
payment for securities before delivery. The Fund's ability and decisions to
purchase and sell portfolio securities may be affected by laws or regulations
relating to the convertibility of currencies and repatriation of assets. Some
countries restrict the extent to which foreigners may invest in their securities
markets.

Changes in the value of these currencies against the U.S. dollar will result in
corresponding changes in the U.S. dollar value of the Fund's assets denominated
in those currencies. Many of the risks described above relating to foreign
securities generally will be greater for emerging markets than for developed
countries.

Some foreign countries also may have managed currencies, which are not free
floating against the U.S. dollar. In addition, there is risk that certain
foreign countries may restrict the free conversion of their currencies into
other currencies. Further, it generally will not be possible to eliminate the
Fund's foreign currency risk through hedging. Any devaluations in the currencies
in which the Fund's portfolio securities are denominated may have a detrimental
impact on the Fund's net asset value.

Depository Receipts. For many foreign securities, there are U.S.
Dollar-denominated ADRs, which are bought and sold in the United States and are
issued by domestic banks. ADRs represent the right to receive securities of
foreign issuers deposited in the domestic bank or a correspondent bank. ADRs do
not eliminate all of the risk inherent in investing in the securities of foreign
issuers, such as changes in foreign currency exchange rates. However, by
investing in ADRs rather than directly in foreign issuers' stock, the Fund
avoids currency risks during the settlement period. In general, there is a
large, liquid market in the United States for most ADRs.

Securities Loans. The Fund is authorized to lend its portfolio securities to
qualified brokers, dealers, banks and other financial institutions for the
purpose of realizing additional investment income. The Fund does not intend to
loan securities if as a result more than 5% of its net assets would be on loan.

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.

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.

10
<PAGE>

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 investment manager'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 leveraging 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 investment manager'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's 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 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.

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

As a matter of fundamental policy, the Fund may not borrow money except as
permitted under Federal law. In addition, as a matter of fundamental policy, the
Fund may not make loans except through the lending of portfolio securities, the
purchase of debt instruments or interests in indebtedness or through repurchase
agreements. Further, as a matter of non-fundamental policy, the Fund may not
borrow money in an amount greater than 5% of total assets, except for temporary
or emergency purposes, although the Fund may engage up to 5% of total assets in
reverse repurchase agreements or dollar rolls.

A complete description of these and other policies and restrictions is contained
under "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., a Delaware corporation, to manage the Fund's daily
investment and business affairs subject to the policies established by KET's
Board of Trustees and pursuant to an Investment Management Agreement dated

11
<PAGE>

March 2, 1998. The Trustees have overall responsibility for the management of
the Fund under Massachusetts law.

Scudder Kemper Investments, Inc., an investment counsel firm, acts as investment
manager to the Fund. This organization, which resulted from the combination of
the businesses of Scudder, Stevens & Clark, Inc. ("Scudder") and Zurich Kemper
Investments, Inc., ("Kemper"), is one of the largest and most experienced
investment counsel firms in the United States. Scudder was established as a
partnership in 1919 and reorganized into a corporation in 1985. Since launching
its first fund in 1948, Kemper had grown into one of the industry's leading
mutual fund companies. On December 31, 1997, Kemper's parent company, Zurich
Insurance Company ("Zurich"), acquired a majority interest in Scudder and
combined the businesses of the two organizations to create a single global
money-management firm, Scudder Kemper Investments, Inc., which has more than
$200 billion under management.

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 KET 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 pays the Adviser an investment management fee at the annual rate of
0.75% of the first $250 million of the Fund's average daily net assets, 0.72% of
the average daily net assets between $250 million and $1 billion, 0.70% of
average daily net assets between $1 billion and $2.5 billion, 0.68% of average
daily net assets between $2.5 billion and $5 billion, 0.65% of average daily net
assets between $5 billion and $7.5 billion, 0.64% of average daily net assets
between $7.5 billion and $10 billion, 0.63% of average daily net assets between
$10 billion and $12.5 billion and 0.62% of the Fund's average daily net assets
over $12.5 billion. 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. To the extent that
the management fee paid to the Adviser is at least 0.75%, it is higher than that
paid by most other mutual funds. The expenses of the Fund, and of other
investment companies investing in foreign securities, can be expected to be
higher than for investment companies investing primarily in domestic securities
since the costs of operation are higher, including custody and transaction costs
for foreign securities and investment management fees.

Founded in 1872, Zurich is a multinational, public corporation organized under
the laws of Switzerland. Its home office is located at Mythenquai 2, 8002
Zurich, Switzerland. Historically, Zurich's earnings have resulted from its
operations as an insurer as well as from its ownership of its subsidiaries and
affiliated companies (the "Zurich Insurance Group"). Zurich and the Zurich
Insurance Group provide an extensive range of insurance products and services
and have branch offices and subsidiaries in more than 40 countries throughout
the world.

Many computers currently are unable to correctly process date-related
information which spans the 21st century. The inability to successfully address
this issue could result in interruptions in the Fund's business and have a
material adverse effect on the Fund's operations. The Adviser and its affiliates
have commenced a review of their computer-based systems, as well as those of
third party service providers, with a view toward assessing whether or not the
transition to the 21st century will have any material impact on the ability of
the Adviser to conduct its business. The process involves identifying the
systems affected, monitoring the process of system upgrades, as appropriate,
against planned time lines, and developing contingency plans in order to meet
identified material risks.

Dreman Value Management, L.L.C. (the "Sub-Adviser"), Three Harding Road, Red
Bank, New Jersey 07701, is the sub-adviser for the Fund.

Under the terms of the sub-advisory agreement between the Adviser and the
Sub-Adviser, the Sub-Adviser manages the investment and reinvestment of the
Fund's assets in accordance with the investment objective, policies and
limitations of the Fund and subject to the supervision of the Adviser and the
Board of Trustees. The Sub-Adviser was formed in April 1997 and is controlled by
David N. Dreman. The Adviser pays the Sub-Adviser for its

12
<PAGE>

services a sub-advisory fee, payable monthly, at the annual rate of .24% of the
first $250 million of the Fund's average daily net assets, .23% of the average
daily net assets between $250 million and $1 billion, .224% of average daily net
assets between $1 billion and $2.5 billion, .218% of average daily net assets
between $2.5 billion and $5 billion, .208% of average daily net assets between
$5 billion and $7.5 billion, .205% of average daily net assets between $7.5
billion and $10 billion, .202% of average daily net assets between $10 billion
and $12.5 billion and .198% of the Fund's average daily net assets over $12.5
billion.

David N. Dreman is the Fund's portfolio manager. He is the Chairman of the
Sub-Adviser. Mr. Dreman is a pioneer of the philosophy of contrarian investing
(buying what is out of favor) and a leading proponent of the low P/E investment
style. He is a columnist for Forbes and the author of several books on the value
style of investing. He received a Bachelor of Commerce degree from the
University of Manitoba, Winnipeg, Manitoba, Canada.

PRINCIPAL UNDERWRITER. Pursuant to an underwriting and distribution services
agreement ("distribution agreement") with the Fund, Kemper Distributors, Inc.
("KDI"), 222 South Riverside Plaza, Chicago, Illinois, 60606, a 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. KDI bears all of its
expenses of providing services pursuant to the distribution agreement, including
the payment of any commissions. KDI provides for the preparation of advertising
or sales literature and bears the cost of printing and mailing prospectuses to
persons other than shareholders. KDI 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. KDI may enter into related selling group agreements with various
broker-dealers, including affiliates of KDI, that provide distribution services
to investors. KDI also may provide some of the distribution services.

CLASS A SHARES. KDI 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 agreements not otherwise paid by
dealers or other financial services firms. As indicated under "Purchase of
Shares," KDI 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 the Fund's Class A shares.

CLASS B SHARES. For its services under the distribution agreement, KDI receives
a fee from the Fund, payable monthly, at the annual rate of 0.75% 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. KDI 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." KDI currently compensates firms for sales of Class B shares at a
commission rate of 3.75%.

CLASS C SHARES. For its services under the distribution agreement, KDI receives
a fee from the Fund, payable monthly, at the annual rate of 0.75% 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. KDI currently advances to firms
the first year distribution fee at a rate of 0.75% of the purchase price of
Class C shares. For periods after the first year, KDI currently pays 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 and the fee continues until terminated by KDI or the Fund. KDI also
receives any contingent deferred sales charges. See "Redemption or Repurchase of
Shares--Contingent Deferred Sales Charges--Class C Shares."

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

If a 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 KDI pursuant to such
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 KDI in excess of its fees under a Plan, if for any reason
the Plan is terminated in accordance with its terms. Future fees

13
<PAGE>

under a Plan may or may not be sufficient to reimburse KDI for its expenses
incurred. (See "Principal Underwriter" for more information.)

ADMINISTRATIVE SERVICES. KDI also provides information and administrative
services for shareholders of the Fund pursuant to an administrative services
agreement ("administrative agreement"). KDI may enter into related arrangements
with 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 shareholder 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. KDI 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 KDI a fee, payable monthly, at the annual rate of up to 0.25% of
average daily net assets of each of Class A, B and C shares of such Fund. KDI
then pays each firm a service fee, normally payable quarterly, at an annual rate
of up to 0.25% of net assets of each of Class A, B and C shares maintained and
serviced by the firm. Firms to which service fees may be paid include affiliates
of KDI.

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

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

KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreements not paid to firms to compensate
itself for administrative functions performed for the Fund. Currently, the
administrative services fee payable to KDI is based only upon Fund assets in
accounts for which a firm provides administrative services and it is intended
that KDI 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 as well as, with
respect to Class A shares, the date when shares representing such assets were
purchased. In addition, KDI 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. State Street Bank and
Trust Company, 225 Franklin Street, Boston, Massachusetts 02110, as custodian,
has custody of all securities and cash of the Fund. Kemper Service Company
("Shareholder Service Agent"), an affiliate of the Adviser, serves as transfer
agent and dividend-paying agent of the Fund. For a description of the transfer
agency fees payable to Kemper Service Company, see "Investment Manager and
Underwriter" in the Statement of Additional Information.

PORTFOLIO TRANSACTIONS. The Sub-Adviser places all orders for purchases and
sales of the Fund's securities. Subject to seeking the most favorable net
results, the Sub-Adviser may consider sales of shares of the Fund and other
Funds managed by the Adviser or its affiliates as a factor in selecting
broker-dealers. See "Portfolio Transactions" in the Statement of Additional
Information.

14
<PAGE>

DIVIDENDS, DISTRIBUTIONS AND TAXES

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

Any dividends or capital gains distributions declared in October, November or
December with a record date in such a month and paid during the following
January will be treated by shareholders for federal income tax purposes as if
received on December 31 of the calendar year declared. According to preference,
shareholders may receive distributions in cash or have them reinvested in
additional shares of the same class of shares of the Fund. If an investment is
in the form of a retirement plan, all dividends and capital gains distributions
must be reinvested in the shareholder's account.

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 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.

Income and capital gain dividends, if any, of the Fund will be credited to
shareholder accounts in full and fractional shares of the same class of the Fund
at net asset value on the reinvestment date, 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 gain 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
shares of the same class of that same Fund. However, upon written request to the
Shareholder Service Agent, a shareholder may elect to have dividends of the Fund
invested 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 value of $1,000 in the Fund
distributing the dividends. The Fund will reinvest dividend checks (and future
dividends) in shares of that same Fund and class if checks are returned as
undeliverable. Dividends and other distributions of the Fund in the aggregate
amount of $10 or less are automatically reinvested in shares of the Fund unless
the shareholder requests that such policy not be applied to the shareholder's
account.

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, asset 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
individual shareholders regardless of how long the shares have been held and
whether received in cash or shares. Long-term capital gain dividends received by
individual shareholders are taxed at a maximum rate of 20% on gains realized by
a Fund from securities held more than 18 months and at a maximum rate of 28% on
gains realized by a Fund from securities held more than 12 months but not more
than 18 months. 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. A portion of the dividends paid by the Fund may qualify for the
dividends received deduction available to corporate shareholders.

15
<PAGE>

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 tax 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 if 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 is 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 advisors 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. Trustees of qualified retirement plans and 403(b)(7) accounts are
required by law to withhold 20% of the taxable portion of any distribution that
is eligible to be "rolled over." The 20% withholding requirement does not apply
to distributions from Individual Retirement Accounts ("IRAs") or any part of a
distribution that is transferred directly to another qualified retirement plan,
403(b)(7) account, or IRA. Shareholders should consult with their tax advisors
regarding the 20% withholding requirement.

The Fund's investment income derived from foreign securities may be subject to
foreign income taxes withheld at the source. Because the amount of the Fund's
investments in various countries will change from time to time, it is not
possible to determine the effective rate of such taxes in advance.

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 reinvestment of dividends 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 Luther King Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving and Christmas. Portfolio
securities for which market quotations are readily available are generally
valued at market value. All other securities may be valued at fair value as
determined in good faith by or under the direction of the Board of Trustees.

16
<PAGE>

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.

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
Sales Charge daily net assets) Other Information
------------ ----------------- -----------------

<S> <C> <C> <C>
Class A Maximum initial sales None Initial sales charge
charge of waived or reduced for
5.75% of the public certain purchases
offering price

Class B Maximum contingent deferred 0.75% Shares convert to Class A
sales charge of 4% of shares six years after
redemption proceeds; issuance
declines to zero after six
years

Class C Contingent deferred sales 0.75% No conversion feature
charge of 1% of redemption
proceeds for redemptions
made during first year
after purchase
</TABLE>

- ----------

(1) 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.

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.

17
<PAGE>

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

<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 .................. .00** .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 KDI as discussed below.

The Fund receives the entire net asset value of all its shares sold. KDI, 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. Upon notice to all dealers with whom it has sales
agreements, KDI may re-allow to dealers up to the full applicable sales charge,
as shown in the above table, during periods and for transactions specified in
such notice and such re-allowances may be based upon attainment of minimum sales
levels. During periods when 90% or more of the sales charge is re-allowed, 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 investment manager does not serve as investment
manager and KDI 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. KDI 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. 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.

Class A shares of the Fund may be purchased at net asset value by: (a) any
purchaser, provided that the amount invested in such Fund or other Kemper Fund
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), 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 the purchase 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."

KDI may at 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 to employer-sponsored
employee benefit plans using the subaccount recordkeeping system made available
through Kemper Service Company. For purposes of determining the appropriate
commission percentage to be applied to a particular sale, KDI will consider the
cumulative amount invested by the purchaser in the Fund and other Kemper Fund
listed under "Special Features--Class A Shares--Combined Purchases," including
purchases pursuant to the "Combined

18
<PAGE>

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 also applies.

Class A shares of the Fund or of any other Kemper 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 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, KDI may in 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 KDI. 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 of a Fund may be purchased at net asset value by 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.

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 KDI, for themselves or members of their
families. KDI 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.

Class A shares of a Fund may be purchased at net asset value by persons who
purchase shares of the Fund through KDI 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: (a) officers,
trustees, 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 KDI and officers, directors and employees of service agents of the Fund,
for themselves or their spouses or dependent children; (c) any trust, pension,
profit-sharing or other benefit plan for only such persons; (d) 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; and (e) persons who purchase shares of the Fund
through KDI 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 KDI 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 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.
Class A shares of the Fund 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 KDI, including a
requirement that such shares be sold for the benefit

19
<PAGE>

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.

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 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."

KDI 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. KDI 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. 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 KDI 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." KDI 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, KDI 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. KDI 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

20
<PAGE>

other Kemper Funds listed under "Special Features--Class A Shares--Combined
Purchases" is in excess of $5 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 KDI may pay them a transaction fee up
to the level of the discount or commission allowable or payable to dealers, as
described above. Banks are currently 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. KDI does not believe that termination of a
relationship with a bank would result in any material adverse consequences to
the Fund.

KDI may, from time to time, pay or allow to firms a 1% commission on the amount
of shares of the Fund sold 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 Kemper
Service Company, (iii) the registered representative placing the trade is a
member of ProStar, a group of persons designated by KDI 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, KDI 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 during specified time
periods certain minimum amounts of shares of the Fund, or other Fund
underwritten by KDI.

Orders for the purchase 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 KDI of the order accompanied by payment. However, orders received by dealers
or other financial services firms prior to the determination of net asset value
(see "Net Asset Value") and received in good order by KDI 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 the Fund's 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
the Fund's 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 the 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 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 KDI, may
receive compensation from the Fund through the Shareholder Service Agent for

21
<PAGE>

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 such Fund normally are permitted to continue to
purchase additional shares of such class and to have dividends reinvested.

SPECIAL PROMOTION. From March 9, 1998 until May 29, 1998 ("Special Offering
Period"), KDI, the principal underwriter for the Fund, intends to re-allow to
dealers the full applicable sales charge with respect to Class A shares of the
Fund purchased during the Special Offering Period (not including shares
purchased at net asset value). KDI also intends to pay to firms an additional
commission of .50% with respect to Class B shares of the Fund purchased during
the Special Offering Period, not including exchanges or other transactions for
which commissions are not paid.

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 applicable Fund with a tax
identification number during the 30-day notice period.

Shareholders should direct their inquiries to 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 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 a class of the Fund will be the net asset
value per share of that class 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
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"), the redemption of Class B shares within
six years may be subject to a contingent

22
<PAGE>

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 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 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 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 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 KDI, which the Fund has authorized to act as its agent. There
is no charge by KDI 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 of the Fund next determined after receipt of a
request by KDI. 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 KDI prior to the close of KDI'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

23
<PAGE>

day at the net asset value of the Fund 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 of $250,000 or more may be delayed
by the Fund for up to seven days if the Fund or the Shareholder Service 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,
although investors can still redeem by mail. 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 after 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), 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 KDI that the dealer
waives the discretionary commission applicable to such Large Order NAV Purchase.

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
Year of Redemption After Purchase Sales 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

24
<PAGE>

payments described in Internal Revenue 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
Internal Revenue 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 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.

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 of share 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 March
1998 will be eligible for the second year's charge if redeemed on or after March
1, 1999. In the event no specific order is requested when redeeming shares
subject to a contingent deferred sales charge, the redemption will be made first
from shares representing reinvested dividends and then from the earliest
purchase of shares. KDI receives any contingent deferred sales charge directly.

REINVESTMENT PRIVILEGE. A shareholder who has redeemed Class A shares of the
Fund or any other Kemper Fund listed under "Special Features--Class A
Shares--Combined Purchases" (other than shares of the 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 Funds. A shareholder of the Fund or other
Kemper Funds who redeems Class A shares purchased under the Large Order NAV
Purchase Privilege (see "Purchase of Shares--Initial Sales Charge
Alternative--Class A Shares") or 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 as
the case may be, of the Fund or of

25
<PAGE>

other Kemper 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 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 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 shares of
the Fund, 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.

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 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 Value
Fund, Inc., 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+ Growth Fund, Kemper Quantitative Equity Fund, Kemper Horizon Fund,
Kemper Europe Fund, Kemper Asian Growth Fund, Kemper Global/International
Series, Inc., Kemper Equity Trust, Kemper Securities Trust and Kemper Aggressive
Growth Fund ("Kemper Funds"). Except as noted below, there is no combined
purchase credit for direct purchases of shares of Zurich 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 a "Kemper Fund" 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 Funds", (b) all classes of shares of any Kemper Fund and (c) the value
of any other plan investment, 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 Funds listed above made by any purchaser
within a 24-month period under a written Letter of Intent ("Letter") provided by
KDI. 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

26
<PAGE>

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 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 are included for this privilege.

CLASS A SHARES--CUMULATIVE DISCOUNT. Class A shares of the Fund may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of shares of the Fund being purchased, the value of all Class A shares
of the above mentioned Kemper 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 dealer or other financial services firm must notify the Shareholder
Service Agent or KDI 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
Funds in accordance with the provisions below.

CLASS A SHARES. Class A shares of the Kemper 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 the 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, Investors Municipal Cash Fund
and Investors Cash Trust are available on exchange but only through a financial
services firm having a services agreement with KDI.

Class A shares of the Fund purchased under the Large Order NAV Purchase
Privilege may be exchanged for Class A shares of another Kemper 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 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 a 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 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 purposes of determining whether there is a
contingent deferred sales charge that may be imposed upon the redemption of the
Class C shares received by exchange, they retain the cost and purchase date of
the shares that were originally purchased and exchanged.

GENERAL. Shares of a Kemper Fund with a value in excess of $1,000,000 (except
Kemper Cash Reserves Fund) acquired by exchange through another Kemper 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

27
<PAGE>

by aggregating the value of shares being exchanged for all accounts under common
control, discretion 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 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 KDI. Exchanges may be accomplished by a
written request to 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 use 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 Funds that are available for sale in
the shareholder's state of residence. Currently, Tax-Exempt California Money
Market Fund is available for sale only in California and Investors Municipal
Cash Fund is available for sale only in certain states. 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 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 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 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 shares of the Fund
through an automatic investment program. With the Bank Direct Deposit Purchase
Plan ("Bank Direct Deposit"), investments are made automatically (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 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

28
<PAGE>

Agent has received the request. A 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 the 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 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 may be redeemed
(and Class A shares purchased under the Large Order NAV Purchase Privilege and
Class C shares in their first year following the purchase) under a systematic
withdrawal plan is 10% of the net asset value of the account. Shares are
redeemed so that the payee will receive payment approximately the first of the
month. 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 will ordinarily 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 have already 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. KDI will waive the contingent deferred sales charge on redemptions
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 KDI can establish investor accounts
in any of the following types of retirement plans:

o Traditional, Roth and Education Individual Retirement Accounts ("IRAs").
This includes Savings Incentive Match Plan for Employees of Small
Employers ("SIMPLE"), Simplified Employee Pension Plan ("SEP") IRA
accounts and prototype documents.

o 403(b)(7) Custodial Accounts. 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. Investors should consult with their own tax advisors before
establishing a retirement plan.

PERFORMANCE

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 each of 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.

29
<PAGE>

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 a particular
class of the Fund's portfolio for the period referenced, 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 indices including, but not limited to, the Dow Jones
Industrial Average, the Standard & Poor's Financial Services Index, the Standard
& Poor's 500 Composite Stock Price Index, the Russell 1000(R) Index, the Russell
1000(R) Growth Index, the Wilshire Large Company Growth Index, the Wilshire 750
Mid Cap Company Growth Index, the Standard & Poor's/Barra Value Index, the
Standard & Poor's/Barra Growth Index, the Russell 1000(R) Value Index, the
Europe/Australia/Far East Index, International Finance Corporation's Latin
America Investable Return Index, the Morgan Stanley Capital International World
Index, the J.P. Morgan Global Traded Bond Index, and the Salomon Brothers World
Government Bond Index. The performance of the Fund may also be compared to the
performance of other mutual funds or mutual fund indices with similar objectives
and policies 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
indexes of those investments or economic indicators, including but not limited
to stocks, bonds, certificates of deposit, money market fund 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 indexes.
Money market fund performance may be based upon, among other things, the IBC
Financial Data Inc.'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 indexes. 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 indexes 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 relative performance of
growth stocks versus value stocks may also be discussed.

Because some of the Fund's investments are denominated in foreign currencies,
the strength or weakness of the U.S. dollar as against these currencies may
account for part of the Fund's investment performance. Historical information on
the value of the dollar versus foreign currencies may be used from time to time
in advertisements concerning the Fund. Such historical information is not
indicative of future fluctuations in the value of the U.S. dollar against these
currencies. In addition, marketing materials may cite country and economic
statistics and historical stock market performance for any of the countries in
which the Fund invests, including, but not limited to, the following: population
growth, gross domestic product, inflation rate, average stock market
price-earnings ratios and the total value of stock markets. Sources for such
statistics may include official publications of various foreign governments and
exchanges.

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 the 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

30
<PAGE>

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 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
shares 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. Shares of a class of the
Fund are redeemable by an investor at the then current net asset value of the
class, 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 also appears in its Annual Report to Shareholders, which
is available without charge from the Fund.

FUND ORGANIZATION AND CAPITAL STRUCTURE

The Fund is a series of KET, an open-end management investment company
registered under the 1940 Act. KET was organized as a Massachusetts business
trust on January 6, 1998.

KET may issue an indefinite number of shares of beneficial interest in one or
more series or "Portfolios," all having $.01 par value, which may be divided by
the Board of Trustees into classes of shares. An indefinite number of shares of
beneficial interest have been duly authorized by the Board of Trustees of KET.
Currently, the Fund offers three classes of shares. These are Class A, Class B
and Class C shares. The Board of Trustees may authorize the issuance of
additional classes and additional series or Portfolios if deemed desirable, each
with its own investment objectives, policies and restrictions. Since KET may
offer multiple Portfolios, each is known as a "series company." 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 such 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 of the Fund 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 KET's Board of Trustees. KET 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.

31
<PAGE>

Kemper Distributors, Inc.
222 South Riverside Plaza
Chicago, Illinois 60606-5808
KEF-1 12/96 (Recycled Logo) printed on recycled paper

Kemper-Dreman
Financial Services Fund

March 9, 1998

KEMPER FUNDS LOGO

KEMPER-DREMAN FINANCIAL SERVICES FUND
STATEMENT OF ADDITIONAL INFORMATION

March 9, 1998

KEMPER-DREMAN FINANCIAL SERVICES 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-Dreman Financial Services Fund
(the "Fund"), a diversified series of Kemper Equity Trust ("KET"). It should be
read in conjunction with the Fund's prospectus dated March 9, 1998. The
prospectus may be obtained without charge from the Fund at the address or
telephone number on this cover or the firm from which this Statement of
Additional Information was received.

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

TABLE OF CONTENTS

Page
----
Investment Restrictions............................................
Investment Policies and Techniques.................................
Portfolio Transactions.............................................
Investment Manager and Underwriter.................................
Purchase and Redemption of Shares..................................
Dividends, Distributions and Taxes.................................
Performance........................................................
Officers and Trustees..............................................
Shareholder Rights.................................................
Net Asset Value....................................................
Additional Information.............................................
Report of Independent Auditors (February 25, 1998).................
Statement of Net Assets (February 25, 1998)........................
Appendix--Ratings of Fixed Income Investments......................

Scudder Kemper Investments, Inc. acts as the Fund's investment manager and
Dreman Value Management, L.L.C. acts as the Fund's sub-adviser.

DRE-13 (11/97)
(LOGO) printed on recycled paper
<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 the vote of (a) 67% of the shares of the Fund present at a
meeting where more than 50% of the outstanding shares are present in person or
by proxy or (b) more than 50% of the outstanding shares of the Fund.

As a matter of fundamental policy, the Fund has elected to be classified
as a diversified series of a registered open-end management investment company.

The Fund may not, as a fundamental policy:

(a) borrow money, except as permitted under the 1940 Act and as
interpreted or modified by regulatory authority having jurisdiction
from time to time;

(b) issue senior securities, except as permitted under the 1940 Act and
as interpreted or modified by regulatory authority having
jurisdiction, from time to time;

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

(e) 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;

(f) 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; or

(g) concentrate its investments in a particular industry, as that term
is used in the 1940 Act, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time, except
that the Fund will concentrate its investments in the financial
services industry.

With regard to Item (e) above, to the extent the Fund holds real estate acquired
as a result of the Fund's ownership of securities such holdings would be subject
to the Fund's non-fundamental investment restriction on illiquid securities.

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.

The Fund may not, as a non-fundamental policy which may be changed by the
Trustees without a vote of shareholders:

(1) invest for the purpose of exercising control over management of any
company;

(2) invest its assets in securities of any investment company, except by
open market purchases, including an ordinary broker's commission, or
in connection with a merger, acquisition of assets, consolidation or
reorganization, and any investments in the securities of other
investment companies will be in compliance with the Investment
Company Act of 1940

2
<PAGE>

and except that all or substantially all of the assets of the Fund
may be invested in another registered investment company having the
same investment objective and substantially similar investment
policies as the Fund; or

(3) invest more than 15% of the value of its net assets in illiquid
securities.

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

INVESTMENT POLICIES AND TECHNIQUES

General. The Fund may engage in options and financial futures and other
derivatives transactions 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 to do so in order to pursue its investment
objective and also to hedge against the effects of market risks but not to
create leveraged exposure in the Fund. The use of futures and options, and the
possible benefits and attendant risks, are discussed below along with
information concerning other investment policies and techniques.

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 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 the 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 investment manager'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 to create leveraged exposure.

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 investment manager'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's 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

3
<PAGE>

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.

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.

4
<PAGE>

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 of 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 investment manager 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
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 Standard & Poor's Corporation ("S&P") or P-1 from Moody's
Investor Services, Inc. ("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
investment manager. The staff of the Securities and Exchange Commission (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 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, foreign sovereign
debt, 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. None of the Funds will 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

5
<PAGE>

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.

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 investment manager.

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.

6
<PAGE>

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 investment manager
considers that the Austrian schilling is correlated to the German deutschemark
(the "D-mark"), the Fund holds securities denominated in schillings and the
investment manager believes that the value of schillings will decline against
the U.S. dollar, the investment manager 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 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 investment manager, 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 investment manager'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

7
<PAGE>

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
investment manager 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
investment manager. 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.

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 assets 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
assets 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.

8
<PAGE>

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.

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 assets 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.

Other Considerations. As reflected in the prospectus, the Fund may invest a
portion of its assets in fixed income securities that are in the lower rating
categories of recognized rating agencies or are non-rated, commonly referred to
as "junk bonds." These lower rated or non-rated fixed income securities are
considered, on balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the obligation
and generally will involve more credit risk than securities in the higher rating
categories.

The market values of such securities tend to reflect individual corporate
developments to a greater extent than do those of higher rated securities, which
react primarily to fluctuations in the general level of interest rates. Such
lower rated securities also tend to be more sensitive to economic conditions
than are higher rated securities. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, regarding lower rated bonds may
depress the prices for such securities. These and other factors adversely
affecting the market value of high yield securities will adversely affect the
Fund's net asset value. Although some risk is inherent in all securities
ownership, holders of fixed income securities have a claim on the assets of the
issuer prior to the holders of common stock. Therefore, an investment in fixed
income securities generally entails less risk than an investment in common stock
of the same issuer.

9
<PAGE>

High yield securities frequently are issued by corporations in the growth stage
of their development. They may also be issued in connection with a corporate
reorganization or a corporate takeover. Companies that issue such high yielding
securities often are highly leveraged and may not have available to them more
traditional methods of financing. Therefore, the risk associated with acquiring
the securities of such issuers generally is greater than is the case with higher
rated securities. For example, during an economic downturn or recession, highly
leveraged issuers of high yield securities may experience financial stress.
During such periods, such issuers may not have sufficient revenues to meet their
interest payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific corporate developments,
or the issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss from default by the
issuer is significantly greater for the holders of high yielding securities
because such securities are generally unsecured and are often subordinated to
other creditors of the issuer.

Zero coupon securities and pay-in-kind bonds involve additional special
considerations. Zero coupon securities are debt obligations that do not entitle
the holder to any periodic payments of interest prior to maturity or a specified
cash payment date when the securities begin paying current interest (the "cash
payment date") and therefore are issued and traded at a discount from their face
amount or par value. The market prices of zero coupon securities are generally
more volatile than the market prices of securities that pay interest
periodically and are likely to respond to changes in interest rates to a greater
degree than do securities paying interest currently with similar maturities and
credit quality. Zero coupon, pay-in-kind or deferred interest bonds carry
additional risk in that unlike bonds that pay interest throughout the period to
maturity, the Fund will realize no cash until the cash payment date unless a
portion of such securities is sold and, if the issuer defaults, the Fund may
obtain no return at all on its investment.

The Fund may from time to time purchase securities on a "when-issued" or
"forward delivery" basis for payment and delivery at a later date. The price of
such securities, which may be expressed in yield terms, is fixed at the time the
commitment to purchase is made, but delivery and payment for the when-issued or
forward delivery securities takes place at a later date. During the period
between purchase and settlement, no payment is made by the Fund to the issuer
and no interest accrues to the Fund. To the extent that assets of the Fund are
held in cash pending the settlement of a purchase of securities, the Fund would
earn no income; however, it is the Fund's intention to be fully invested to the
extent practicable and subject to the policies stated above. While when-issued
or forward delivery securities may be sold prior to the settlement date, the
Fund intends to purchase such securities with the purpose of actually acquiring
them unless a sale appears desirable for investment reasons. At the time the
Fund makes the commitment to purchase a security on a when-issued or forward
delivery basis, it will record the transaction and reflect the value of the
security in determining its net asset value. At the time of settlement, the
market value of the when-issued or forward delivery securities may be more or
less than the purchase price. The Fund does not believe that its net asset value
or income will be adversely affected by its purchase of securities on a
when-issued or forward delivery basis.

Additional information concerning high yield securities appears under
"Appendix--Ratings of Fixed Income Investments."

PORTFOLIO TRANSACTIONS

Under the sub-advisory agreement between Scudder Kemper Investments, Inc. (the
"Adviser") and Dreman Value Management, L.L.C. (the "Sub-Adviser"), the
Sub-Adviser places all orders for purchases and sales of the Fund's securities.
At times investment decisions may be made to purchase or sell the same
investment securities of the Fund and for one or more of the other clients
managed by the Sub-Adviser. When two or more such clients are simultaneously
engaged in the purchase or sale of the same security through the same trading
facility, the transactions are allocated as to amount and price in a manner
considered equitable to each. Position limits imposed by national securities
exchanges may restrict the number of options the Fund will be able to write on a
particular security.

The above mentioned factors may have a detrimental effect on the quantities or
prices of securities, options or future contracts available to the Fund. On the
other hand, the ability of the Fund to participate in volume transactions may
produce better executions for the Fund in some cases. The Board of Trustees
believes that the benefits of the Sub-Adviser's organization outweigh any
limitations that may arise from simultaneous transactions or position
limitations.

10
<PAGE>

The Sub-Adviser in effecting purchases and sale of portfolio securities for the
account of the Fund, will implement the Fund's policy of seeking best execution
of orders. The Sub-Adviser may be permitted to pay higher brokerage commissions
for research services as described below. Consistent with this policy, orders
for portfolio transactions are placed with broker-dealer firms giving
consideration to the quality, quantity and nature of each firm's professional
services, which include execution, financial responsibility, responsiveness,
clearance procedures, wire service quotations and statistical and other research
information provide to the Fund and the Sub-Adviser. Subject to seeking best
execution of an order, brokerage is allocated on the basis of all service
provided. Any research benefits derived are available for all clients of the
Sub-Adviser. In selecting among firms believed to meet the criteria for handling
a particular transaction, the Sub-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 and its affiliates, as well as to those firms that provide market,
statistical and other research information to the Fund and the Sub-Adviser,
although the Sub-Adviser is not authorized to pay higher commissions to firms
that provide such services, except as described below.

The Sub-Adviser may in certain instances be permitted to pay higher brokerage
commissions solely for receipt of market, statistical and other research
services as defined in Section 28(e) of the Securities Exchange Act of 1934 and
interpretations thereunder. Such services may include among other things:
economic, industry or company research reports or investment recommendations;
computerized databases; quotation and execution equipment and software; and
research or analytical computer software and services. Where products or
services have a "mixed use," a good faith effort is made to make a reasonable
allocation of the cost of products or services in accordance with the
anticipated research and non research uses and the cost attributable to
non-research use is paid by the Sub-Adviser in cash. Subject to Section 28(e)
and procedures adopted by the Board of Trustees of KET, the Fund could pay a
firm that provides research services commissions for effecting a securities
transactions for the Fund in excess of the amount other firms would have charged
for the transaction if the Sub-Adviser determines in good faith that the greater
commission is reasonable in relation to the value of the brokerage and research
services provided by the executing firm viewed in terms either of a particular
transaction or the Sub-Adviser's overall responsibilities to the Fund and other
clients. Not all of such research services may be useful or of value in advising
the Fund. Research benefits will be available for all clients of the
Sub-Adviser. The sub-advisory fee paid by the Adviser to the Sub-Adviser is not
reduced because these research services are received.

The Trustees for 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.

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%.

11
<PAGE>

INVESTMENT MANAGER AND UNDERWRITER

INVESTMENT MANAGER. Scudder Kemper Investments, Inc., 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. It was established as a partnership in 1919 and pioneered the
practice of providing investment counsel to individual clients on a fee basis.
The predecessor firm reorganized from a partnership to a corporation on June 28,
1985. On June 26, 1997, the Adviser's predecessor, Scudder Stevens & Clark, Inc.
("Scudder") entered into an agreement with Zurich Insurance Company ("Zurich")
pursuant to which Scudder and Zurich agreed to form an alliance.

On December 31, 1997, Zurich acquired a majority interest in Scudder, and Zurich
made the business of its subsidiary, Zurich Kemper Investments, Inc., a part of
Scudder. Scudder's name has been changed to Scudder Kemper Investments, Inc.
Founded in 1872, Zurich is a multinational, public corporation organized under
the laws of Switzerland. Its home office is located at Mythenquai 2, 8002
Zurich, Switzerland. Historically, Zurich's earnings have resulted from its
operations as an insurer as well as from its ownership of its subsidiaries and
affiliated companies (the "Zurich Insurance Group"). Zurich and the Zurich
Insurance Group provide an extensive range of insurance products and services
and have branch offices and subsidiaries in more than 40 countries throughout
the world.

Pursuant to an investment management agreement (the "Agreement"), the Adviser
acts as the investment adviser of the Fund, 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
KET if elected to such positions. The investment management agreement provides
that the Fund pays the charges and expenses of its operations, including the
fees and expenses of the trustees (except those who are affiliates of the
Adviser or its affiliates), 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 and maintaining all accounting records therefor, taxes and
membership dues. KET bears the expenses of registration of its shares with the
SEC, while Kemper Distributors, Inc., 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 Fund's investment management agreement (the "Agreement") between the Trust,
on behalf of the Fund, and the Adviser was approved by the Trustees on January
21, 1998. The Agreement is dated March 2, 1998 and will continue initially in
effect through August 31, 1999 and continues in effect from year to year so long
as its continuation is approved at least annually by (a) a majority of the
trustees who are not parties to such agreement or interested persons of any such
party except in their capacity as trustees of KET, and (b) by the shareholders
or the Board of Trustees of KET. The Agreement may be terminated at any time
upon 60 days notice by either party, or by a majority vote of the outstanding
shares of the Fund, and will terminate automatically upon 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 which securities shall be
purchased for the portfolio of the Fund, which 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 Trust's Declaration of Trust
and By-Laws, the 1940 Act and the Internal Revenue Code of 1986, as amended (the
"Code") and to the Fund's investment objectives, policies and restrictions and
subject, further, to such policies and instructions as the Trustees may from
time to time establish. The Adviser also advises and assists the officers of the
Fund 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 a series of 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

12
<PAGE>

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.

The Adviser pays the compensation and expenses of all Trustees, officers and
executive employees of KET affiliated with the Adviser and makes available,
without expense to KET, the services of such Trustees, officers and employees of
the Adviser as may duly be elected officers or Trustees of KET, subject to their
individual consent to serve and to any limitations imposed by law, and provides
KET'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 fees and expenses of Trustees,
officers and employees of KET 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 KET who are not "interested persons"
of KET have been represented by Vedder, Price, Kaufman & Kammholz, as
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 enter into
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 KET may have dealings with KET as principals
in the purchase or sale of securities, except as individual subscribers or
holders of shares of the Fund.

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 those of 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.

The current investment management fee rate paid by the Fund is in the prospectus
under "Investment Manager and Underwriter."

13
<PAGE>

SUB-ADVISER. Dreman Value Management, L.L.C. (the "Sub-Adviser"), Three Harding
Road, Red Bank, New Jersey 07701, is the sub-adviser for the Fund. The
Sub-Adviser is controlled by David N. Dreman. The Sub-Adviser serves as
sub-adviser pursuant to the terms of a sub-advisory agreement between it and the
Adviser.

Under the terms of the Sub-Advisory Agreement, the Sub-Adviser manages the
investment and reinvestment of the Fund's portfolio and will provide such
investment advice, research and assistance as the Adviser may, from time to
time, reasonably request. The current sub-advisory fee rates paid by the Adviser
to the Sub-Adviser are in the prospectus under "Investment Manager and
Underwriter."

The Sub-Advisory Agreement provides that the Sub-Adviser will 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 Sub-Advisory Agreement relates, except a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of the Sub-Adviser in the performance of its duties or from reckless
disregard by the Sub-Adviser of its obligations and duties under the
Sub-Advisory Agreement.

The Sub-Advisory Agreement dated March 2, 1998 was approved by the Trustees on
January 21, 1998 and remains in effect until February 1, 2003 unless sooner
terminated or not annually approved as described below. Notwithstanding the
foregoing, the Sub-Advisory Agreement shall continue in effect through February
1, 2003 and year to year thereafter, but only as long as such continuance is
specifically approved at least annually (a) by a majority of the trustees who
are not parties to such agreement or interested persons of any such party except
in their capacity as trustees of KET, and (b) by the shareholders of the Fund or
the Board of Trustees of KET. The Sub-Advisory Agreement may be terminated at
any time upon 60 days' notice by the Adviser or by the Board of Trustees of the
Fund or by majority vote of the outstanding shares of the Fund, and will
terminate automatically upon assignment or upon termination of the Fund's
investment management agreement. The Sub-Adviser may not terminate the
Sub-Advisory Agreement prior to February 1, 2003. Thereafter, the Sub-Adviser
may terminate the Sub-Advisory Agreement upon 90 days' notice to the Adviser.

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

The distribution agreement dated March 2, 1998 was initially approved by the
Trustees on January 21, 1998 and 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 KET, including the Trustees who are not interested
persons of KET and who have no direct or indirect financial interest in the
agreement. The agreement automatically terminates in the event of its assignment
and may be terminated for a class at any time without penalty by the Fund for
that Fund or by KDI 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 KET and who have no direct or
indirect financial interest in the agreement, or a "majority of the outstanding
voting securities" of the class of the Fund, as defined under the 1940 Act. The
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 agreement.

ADMINISTRATIVE SERVICES. Administrative services are provided to KET under an
administrative services agreement ("administrative agreement") with KDI. KDI
bears all of its expenses of providing services pursuant to the administrative
agreement between KDI and KET, including the payment of service fees. KET pays
KDI an administrative services fee, payable monthly, at an annual rate of up to
.25% of average daily net assets of each of the Class A, B and C shares of the
Fund.

14
<PAGE>

KDI 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 KET. 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, KDI pays each firm a service fee, payable quarterly, at an
annual rate of up to .25% of the net assets in the Fund's 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, KDI currently
advances to firms the first-year service fee at a rate of up to .25% of the
purchase price of such shares. For periods after the first year, KDI currently
intends to pay firms a service fee at a rate of up to .25% (calculated monthly
and normally paid quarterly) of the net assets attributable to Class B and 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
KDI or KET. Firms to which service fees may be paid may include affiliates of
KDI.

KDI 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 KDI is based only upon Fund assets in
accounts for which a firm provides administrative services and it is intended
that KDI will pay all the administrative services fee that it receives from KET
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 the Fund's assets that is in accounts
for which a firm of record provides administrative services.

Certain trustees or officers of KET are also directors or officers of the
Adviser or KDI as indicated under "Officers and Trustees."

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 of 0.025% on the first $150 million of average net assets on an
annual basis, 0.0075% on the next $850 million, and 0.0045% over $1 billion
pursuant to the fund accounting agreement.

CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT. State Street Bank and
Trust Company, 225 Franklin Street, Boston, Massachusetts, as custodian has
custody of all securities and cash of the Fund. It attends to the collection of
principal and income, and payment for and collection of proceeds of securities
bought and sold by KET. Kemper Service Company ("KSvC"), an affiliate of the
Adviser, serves as transfer agent and dividend-paying agent and "Shareholder
Service Agent" of the Fund. KSvC receives as transfer agent annual account fees
of $6 per account plus account set up, transaction and maintenance charges,
annual fees associated with the contingent deferred sales charge (Class B shares
only) and out-of-pocket expense reimbursement.

INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS. KET's independent auditors,
Ernst & Young, LLP, 223 South Wacker Drive, Chicago, Illinois, audit and report
on KET annual financial statements, review certain regulatory reports and KET's
federal income tax returns, and perform other professional accounting, auditing,
tax and advisory services when engaged to do so by KET. Shareholders will
receive annual audited financial statements and semi-annual unaudited financial
statements.

PURCHASE AND REDEMPTION OF SHARES

As described in the Fund's prospectus, shares of the Fund are sold at their
public offering price, which is the net asset value per share of each class of
the Fund 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 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. 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 KET 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.

15
<PAGE>

Upon receipt by the Shareholder Service Agent of a request for redemption,
shares of the Fund will be redeemed by KET at the applicable net asset value per
share of such 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 shares 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.

KET may suspend the right of redemption or delay payment more than seven days
(a) during any period when the New York Stock Exchange (the "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 KET to
determine the value of the Fund's net assets, or (c) for such other periods as
the Securities and Exchange Commission may by order permit for the protection of
KET's shareholders.

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 SEC, 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.

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

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 each of 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 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 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 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

16
<PAGE>

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 investment manager
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. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate.

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 Valuation Committee of the Board of Trustees, 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.

Following the valuations of securities or other portfolio assets in terms of the
currency in which the market quotation used is expressed ("Local Currency"), the
value of these portfolio assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rate on the valuation date.

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 normally distributes semi-annually dividends of net investment income.
The Fund distributes 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. Distributions of net capital gains
realized during each fiscal year will be made at least annually in December.
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.

17
<PAGE>

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.

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 capital gains taxable to
individuals at a maximum 20% or 28% capital gains rate (depending on the Fund's
holding period for the assets giving rise to the gain), 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 individual shareholders at a maximum 20% or 28%
capital gains rate (depending on the Fund's holding period for the assets giving
rise to the 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 Kemper Fund,
may result in tax consequences (gain or loss) to the shareholder and are also
subject to these reporting requirements.

Distributions by the 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 described 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

18
<PAGE>

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.

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 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. Under Section 988
of the Code, discussed below, foreign currency gain or loss from foreign
currency-related forward contracts, certain futures and similar financial
instruments entered into by the Fund will be treated as ordinary income or loss.

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 notional 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.

19
<PAGE>

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 option
contracts, gains or losses attributable to fluctuations in the value of a
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 invests in stock of certain foreign investment companies, the Fund
may be subject to U.S. federal income taxation on a portion of any "excess
distribution" with respect to, or gain from the disposition of, such stock. The
tax would be determined by allocating such distribution or gain ratably to each
day of the Fund's holding period for the stock. The distribution or gain so
allocated to any taxable year of the Fund, other than the taxable year of the
excess distribution or disposition, would be taxed to the Fund at the highest
ordinary income rate in effect for such year, and the tax would be further
increased by an interest change to reflect the value of the tax deferral deemed
to have resulted from the ownership if the foreign company's stock. Any amount
of distribution or gain allocated to the taxable year of the distribution or
disposition would be included in the Fund's investment company taxable income
and, accordingly, would not be taxable to the Fund to the extent distributed by
the Fund as a dividend to its shareholders.

The Fund may make an election to mark to market its shares of these foreign
investment companies in lieu of being subject to U..S. federal income taxation.
At the end of each taxable year to which the election applies, the Fund would
report as ordinary income the amount by which the fair market value of the
foreign investment company's stock exceeds the Fund's adjusted basis in these
shares; any mark to market losses and any loss from an actual disposition of
stock would be deductible as ordinary losses to the extent of any net mark to
market gains included in income in prior years. The effect of the election would
be to treat excess distributions and gain on dispositions as ordinary income
which is not subject to a fund level tax when distributed to shareholders as a
dividend. 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.

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. In addition if the Fund invests in certain high yield original
issue discount obligations issued by corporations, a portion of the original
issue discount accruing on the obligation may be eligible for the deductions for
dividends received by corporations. In such an event, dividends of investment
company taxable income received from the Fund by its corporate shareholders to
the extent attributable to such portion of accrued original issue discount may
be eligible for this deduction for dividends received by a corporation if so
designated by the Fund in a written notice to shareholders. 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 a capital asset
will recognize capital gain or loss for federal income

20
<PAGE>

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 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 the 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 the 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.

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.

21
<PAGE>

PERFORMANCE

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 various measures of performance are described
below. Performance information will be computed separately for each class.

The Fund's average annual total return quotation is computed in accordance with
a standardized method prescribed by rules of the SEC. The average annual total
return for the Fund for a specific period is found by first taking a
hypothetical $1,000 investment ("initial investment") in the Fund's 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. The redeemable value in the case of Class B
and 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 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. 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
without adjusting to deduct the maximum sales charge.

Calculation of the Fund's total return is not subject to a standardized formula,
except when calculated for purposes of the "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 and 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 or the contingent deferred sales charge for Class B shares and Class C
shares would be reduced if such charge were included.

The Fund's performance figures are based upon historical results and are not
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
shares and Class C shares are sold at net asset value. Redemptions 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 the 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.

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

22
<PAGE>

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 Financial Data Inc.'s Money Fund
Report (All Taxable). As reported by IBC, 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.

OFFICERS AND TRUSTEES

The officers and trustees of KET, their birthdates, their principal occupations
and their affiliations, if any, with the Adviser or KDI, or their affiliates 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):

*DANIEL PIERCE, Trustee (3/18/34) Chairman of the Board and Trustee (35), Two
International Place, Boston, Massachusetts. Managing Director, Scudder
Kemper Investments, Inc.

*MARK S. CASADY, Trustee (9/21/60) Trustee (14) and Vice President, Two
International Place, Boston, Massachusetts. Managing Director, Scudder
Kemper Investments, Inc.

JAMES E. AKINS (10/15/26) Trustee (14), 2904 Garfield Terrace, N.W., Washington,
D.C.; Consultant on International, Political and Economic Affairs;
formerly, a career United States Foreign Service Officer, Energy Adviser
for the White House and United States Ambassador to Saudi Arabia, 1973-76.

ARTHUR R. GOTTSCHALK (2/13/25) Trustee (14), 10642 Brookridge Drive, Frankfort,
Illinois, Retired; formerly, President, Illinois Manufacturers
Association; Trustee, Illinois Masonic Medical Center; Member, Board of
Governors, Heartland Institute/Illinois; formerly, Member, Illinois State
Senate; formerly, Vice President, The Reuben H. Donnelly Corp.

FREDERICK T. KELSEY (4/25/27) Trustee (14), 4010 Arbor Lane, Unit 102,
Northfield, Illinois; Retired; formerly, consultant to Goldman, Sachs &
Co.; formerly, President, Treasurer and Trustee of Institutional Liquid
Assets and its affiliated mutual funds; Trustee of Benchmark Funds;
formerly, Trustee of the Pilot Funds.

FRED B. RENWICK (2/1/30) Trustee (14), 3 Hanover Square, New York, New York;
Professor of Finance, New York University, Stern School of Business;
Director, TIFF Industrial Program, Inc.; Director, the Wartburg Home
Foundation; Chairman, Investment Committee of Morehouse College Board of
Trustees; Chairman, American Bible Society Investment Committee; formerly,
member of the Investment Committee of Atlanta University Board of
Trustees; formerly, Director of Board of Pensions, Evangelical Lutheran
Church of America.

JOHN B. TINGLEFF (5/4/35) Trustee (14), 2015 South Lake Shore Drive, Harbor
Springs, Michigan; Retired, formerly, President, Tingleff & Associates
(management consulting firm); formerly, Senior Vice President, Continental
Illinois National Bank & Trust Company.

JOHN G. WEITHERS (8/8/33) Trustee (14), 311 Spring Lake, Hinsdale Illinois;
Retired; formerly, Chairman of the Board and Chief Executive Officer,
Chicago Stock Exchange; Director, Federal Life Insurance Company;
President of the Members of the Corporation and Trustee, DePaul
University.

*PHILIP J. COLLORA (11/15/45) Vice President, Treasurer and Secretary, 222 South
Riverside Plaza, Chicago, Illinois; Attorney, Scudder Kemper Investments,
Inc.

23
<PAGE>

*KATHRYN L. QUIRK (12/3/52), Trustee (34), Vice President and Secretary, 345
Park Avenue, New York, New York. Managing Director, Scudder Kemper
Investments, Inc.

*LINDA J. WONDRACK (9/12/64) Vice President. Two International Place, Boston,
Massachusetts; Senior Vice President, Scudder Kemper Investments, Inc.

*JOHN R. HEBBLE (6/27/58) Assistant Treasurer. Two International Place, Boston,
Massachusetts; Senior Vice President, Scudder Kemper Investments, Inc.

*CAROLINE PEARSON (4/1/62) Assistant Secretary. Two International Place, Boston,
Massachusetts; Vice President, Scudder Kemper Investments, Inc.

*MAUREEN E. KANE (2/14/62) Assistant Secretary. Two International Place, Boston,
Massachusetts; Vice President, Scudder Kemper Investments, Inc.

*ELIZABETH C. WERTH (10/1/47) Assistant Secretary, 222 South Riverside Plaza,
Chicago, Illinois; Vice President, Scudder Kemper Investments, Inc.; Vice
President, Kemper Distributors, Inc.

*Trustee who is considered to be an "interested person" as defined in the
Investment Company Act of 1940.

The trustees and officers who are "interested persons" as designated above
receive no compensation from KET. The table below shows amounts paid or accrued
to those trustees of KET who are not designated "interested persons." Each
independent Trustee of the Fund receives $200 per Board meeting and $100 per
Committee meeting attended. The Trustees serve as Board members for other Kemper
Funds and normally meet in joint sessions. The minimum aggregate meeting fee in
connection with such meetings is $1,000 per Board meeting and $500 per Committee
meeting. The independent Trustees are entitled to receive an annual retainer of
$55,000 in the aggregate from the Kemper Funds for which they serve as a Board
member, which is allocated among such Kemper Funds. For the 1998 fiscal year, no
amount of the retainer is allocable to the Fund. The information in the last
column is for the 1997 calendar year.

Estimated Total Compensation
Aggregate from Kemper Fund
Compensation Complex Paid to
Name of Board Members From KET Board Members(2)

James E. Akins........................ $1,200 $149,100

Arthur R. Gottschalk(1)............... $1,200 $161,200

Frederick T. Kelsey(1)................ $1,200 $150,300

Fred B. Renwick....................... $1,200 $149,200

John B. Tingleff...................... $1,200 $149,200

John G. Weithers...................... $1,200 $149,200

- ----------

24
<PAGE>

(1) Includes deferred fees and interest thereon pursuant to deferred
compensation agreements with certain Kemper funds. Deferred amounts accrue
interest monthly at a rate equal to the yield of Zurich Money Funds -
Zurich Money Market Fund.

(2) Includes compensation for service on the boards of 13 Kemper funds with 39
fund portfolios. Each board member currently serves as a board member of
14 Kemper funds with 44 fund portfolios.

As of March 9, 1998, the officers and trustees of KET as a group owned less than
1% of the Fund and the Adviser owned of record all of the outstanding shares of
the Fund.

SHAREHOLDER RIGHTS

The Fund is a series of Kemper Equity Trust, a Massachusetts business trust
established under an Agreement and Declaration of Trust of the Trust (the
"Declaration of Trust") dated January 6, 1998.

The Fund generally is not required to hold meetings of its shareholders. Under
the 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 KET, or any registration of the Fund with
the SEC 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
the 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
Prospectus 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 Fund and all additional portfolios (e.g.,
election of trustees), means the vote of the lesser of (i) 67% of 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
only the 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. A
majority of the Trustees shall be present in person at any regular or special
meeting of the Trustees in order to constitute a quorum for the transaction of
business at such meeting and, except as otherwise required by law, the act of a
majority of the Trustees present at any such meetings, at which a quorum is
present, shall be the act of the Trustees.

The Trust's Declaration of Trust specifically authorizes the Board of Trustees
to terminate the Fund or any class by notice to the

25
<PAGE>

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.

MASTER/FEEDER STRUCTURE. The Board of Trustees may determine, without further
shareholder approval, in the future that the objective of the Fund would be
achieved more effectively by investing in a master fund in a master/feeder
structure. A master/feeder 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 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.

ADDITIONAL INFORMATION

Other Information

The CUSIP number of the Class A shares of the Fund is 487917 10 6.
The CUSIP number of the Class B shares of the Fund is 487917 20 5.
The CUSIP number of the Class C shares of the Fund is 487917 30 4.

The Fund has a fiscal year ending November 30.

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 Sub-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 $11,000 incurred by the Fund, in conjunction with its organization, are
amortized over the five year period beginning March 9, 1998.

26
<PAGE>

Portfolio securities of the Fund are held separately pursuant to a custodian
agreement, by the Fund's custodian, State Street Bank and Trust Company.

The law firm of Dechert Price & Rhoads is counsel to the Fund.

The name "Kemper Equity Trust" is the designation of the Trust for the time
being under a Declaration of Trust dated January 6, 1998, 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 Trust'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.

FINANCIAL STATEMENTS

The Statement of Net Assets as of February 25, 1998 and the Report of
Independent Auditors is filed herein.

27
<PAGE>

APPENDIX--RATINGS OF FIXED INCOME INVESTMENTS

Standard & Poor's Corporation Bond Ratings

AAA. Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.

AA. Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.

A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.

BBB. Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.

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

CI. The rating CI is reserved for income bonds on which no interest is being
paid.

D. Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.

Moody's Investors Service, Inc. Bond Ratings

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

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

A. Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.

Baa. Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

Ba. Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

28
<PAGE>

B. Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

Caa. Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.

Ca. Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.

C. Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

29
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Trustees and Shareholder
Kemper-Dreman Financial Services Fund

We have audited the accompanying statement of net assets of Kemper-Dreman
Financial Services Fund as of February 25, 1998. This statement of net assets is
the responsibility of the Fund's management. Our responsibility is to express an
opinion on this statement of net assets based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of net assets is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement of net assets. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall statement of net assets
presentation. We believe that our audit of the statement of net assets provides
a reasonable basis for our opinion.

In our opinion, the statement of net assets referred to above presents fairly,
in all material respects, the financial position of Kemper-Dreman Financial
Services Fund at February 25, 1998 in conformity with generally accepted
accounting principles.

Ernst & Young LLP

Chicago, Illinois
February 25, 1998