KEMPER U S GOVERNMENT SECURITIES FUND
497, 2001-01-10
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Kemper Income Funds

Kemper High Yield Fund
Kemper High Yield Fund II
Kemper High Yield Opportunity Fund
Kemper Income and Capital Preservation Fund
Kemper Short-Term U.S. Government Fund
Kemper Strategic Income Fund
Kemper U.S. Government Securities Fund
Kemper U.S. Mortgage Fund

Supplement to Prospectus Dated January 1, 2001

CLASS I SHARES
--------------------------------------------------------------------------------

The above funds currently offer four classes of shares to provide investors with
different purchasing options. These are Class A, Class B and Class C shares,
which are described in the funds' prospectus, and Class I shares, which are
described in the prospectus as supplemented hereby. When placing purchase
orders, investors must specify whether the order is for Class A, Class B, Class
C or Class I shares.

Class I shares are available for purchase exclusively by the following
categories of institutional investors: (1) tax-exempt retirement plans (Profit
Sharing, 401(k), Money Purchase Pension and Defined Benefit Plans) of Zurich
Scudder Investments, Inc. ("Zurich Scudder") and its affiliates and rollover
accounts from those plans; (2) the following investment advisory clients of
Zurich Scudder and its investment advisory affiliates that invest at least $1
million in a fund: unaffiliated benefit plans, such as qualified retirement
plans (other than individual retirement accounts and self-directed retirement
plans); unaffiliated banks and insurance companies purchasing for their own
accounts; and endowment funds of unaffiliated non-profit organizations; (3)
investment-only accounts for large qualified plans, with at least $50 million in
total plan assets or at least 1000 participants; (4) trust and fiduciary
accounts of trust companies and bank trust departments providing fee-based
advisory services that invest at least $1 million in a fund on behalf of each
trust; (5) policy holders under Zurich-American Insurance Group's collateral
investment program investing at least $200,000 in a fund; and (6) investment
companies managed by Zurich Scudder that invest primarily in other investment
companies.

Class I shares currently are available for purchase only from Kemper
Distributors, Inc. ("KDI"), principal underwriter for the funds, and, in the
case of category 4 above, selected dealers authorized by KDI. Share certificates
are not available for Class I shares.

                                       1
<PAGE>


The following information supplements the indicated sections of the prospectus.

Performance

The following table shows how the funds' Class I Shares' returns over different
periods average out. For context, the table has a broad-based market index
(which, unlike the fund, have no fees or expenses). All figures in this section
assume reinvestment of dividends and distributions. As always, past performance
is no guarantee of future results.

--------------------------------------------------------------------------------
Average Annual Total Returns -- Class I shares
--------------------------------------------------------------------------------
For periods ended                                                     Inception
December 31, 1999              1 Year      5 Years    Life of Class   of Class
--------------------------------------------------------------------------------
Kemper High Yield Fund         2.60%        9.33%        9.35%        12/29/94
--------------------------------------------------------------------------------
Salomon Brothers Long-Term
High Yield Bond Index*         0.27        12.46        12.46**          --
--------------------------------------------------------------------------------

*  The Salomon Brothers Long-Term High Yield Bond Index is on a total return
   basis and is comprised of high yield bonds with a par value of $50 million or
   higher and a remaining maturity of ten years or longer rated BB+ or lower by
   Standard & Poor's Corporation or Ba1 or lower by Moody's Investors Service,
   Inc.

** For the period of 12/31/94 through 12/31/99.

--------------------------------------------------------------------------------
Average Annual Total Returns -- Class I shares
--------------------------------------------------------------------------------
For periods ended                                                     Inception
December 31, 1999              1 Year       Life of Class              of Class
--------------------------------------------------------------------------------
Kemper Income And Capital       2.60%          5.40%                    7/3/95
Preservation Fund
--------------------------------------------------------------------------------
Lehman Brothers                 0.82            6.04**                   --
Aggregate Bond Index*
--------------------------------------------------------------------------------

*  The Lehman Brothers Aggregate Bond Index is an unmanaged index generally
   representative of intermediate-term government bonds, investment grade
   corporate debt securities, and mortgage backed securities.

** For the period of 6/30/95 through 12/31/99.

--------------------------------------------------------------------------------
Average Annual Total Returns -- Class I shares
--------------------------------------------------------------------------------
For periods ended                                                  Inception
December 31, 1999                1 Year       Life of Class         of Class
--------------------------------------------------------------------------------
Kemper U.S. Government            0.57%           5.83%              7/3/95
Securities Fund
--------------------------------------------------------------------------------
Salomon Brothers                  1.99            5.91**               --
30-Year GNMA Index*
--------------------------------------------------------------------------------

*  The Salomon Brothers 30-Year GNMA Index is unmanaged, is on a total-return
   basis with all dividends reinvested and is comprised of GNMA 30-year pass
   throughs of single family and graduated payment mortgages. In order for a
   GNMA coupon to be included in the index, it must have at least $200 million
   of outstanding coupon product.

** For the period of 6/30/95 through 12/31/99.

                                       2

<PAGE>

HOW MUCH INVESTORS PAY

This table  describes the fees and expenses that you may pay if you buy and hold
shares of the fund.

Shareholder fees: Fees paid directly from your investment.

                   Maximum
                   Sales      Maximum      Maximum
                   Charge     Deferred      Sales
                   (Load)       Sales       Charge
                 Imposed on    Charge       (Load)
                  Purchases    (Load)     Imposed on
                 (as a % of  (as a % of   Reinvested
                  offering   redemption   Dividends/  Redemption  Exchange
                   price)     proceeds)  Distributions    Fee        Fee
--------------------------------------------------------------------------------
Kemper High
Yield Fund          None        None         None        None       None
--------------------------------------------------------------------------------
Kemper High
Yield Fund II       None        None         None        None       None
--------------------------------------------------------------------------------
Kemper High
Yield
Opportunity Fund    None        None         None        None       None
--------------------------------------------------------------------------------
Kemper Income
And Capital
Preservation
Fund                None        None         None        None       None
--------------------------------------------------------------------------------
Kemper
Short-Term U.S.
Government Fund     None        None         None        None       None
--------------------------------------------------------------------------------
Kemper
Strategic
Income Fund         None        None         None        None       None
--------------------------------------------------------------------------------
Kemper U.S.
Government
Securities Fund     None        None         None        None       None
--------------------------------------------------------------------------------
Kemper U.S.
Mortgage Fund       None        None         None        None       None
--------------------------------------------------------------------------------

                                       3
<PAGE>


Annual fund operating expenses: Expenses that are deducted from fund assets.

                                                                Total Annual
                                                                    Fund
                         Management   Distribution     Other      Operating
                            Fee       (12b-1) Fees   Expenses*    Expenses*
                            ---       ------------   ---------    ---------
--------------------------------------------------------------------------------
Kemper High Yield Fund        0.53%          None        0.10%        0.63%
--------------------------------------------------------------------------------
Kemper High Yield Fund II     0.65%          None        0.32%        0.97%
--------------------------------------------------------------------------------
Kemper High Yield             0.64%          None        0.67%        1.31%
Opportunity Fund
--------------------------------------------------------------------------------
Kemper Income And             0.53%          None        0.13%        0.66%
Capital Preservation Fund
--------------------------------------------------------------------------------
Kemper Short-Term U.S.        0.55%          None        0.18%        0.73%
Government Fund
--------------------------------------------------------------------------------
Kemper Strategic Income       0.56%          None        0.19%        0.75%
Fund
--------------------------------------------------------------------------------
Kemper U.S. Government        0.42%          None        0.13%        0.55%
Securities Fund
--------------------------------------------------------------------------------
Kemper U.S. Mortgage Fund     0.52%          None        0.15%        0.67%
--------------------------------------------------------------------------------

*  Estimated for Kemper Short-Term U.S. Government Fund, Kemper Strategic Income
   Fund, Kemper High Yield Opportunity Fund, Kemper High Yield Fund II and
   Kemper U.S. Mortgage Fund since no Class I shares were issued as of the
   respective fiscal year ends.


                                       4

<PAGE>


The example shown below is to help you compare the cost of investing in a fund
with the cost of investing in other mutual funds. This example illustrates the
impact of the above fees and expenses on an account with an initial investment
of $10,000, based on the expenses shown above. It assumes a 5% annual return,
the reinvestment of all dividends and distributions and "annual fund operating
expenses" remaining the same each year. The example is hypothetical: actual fund
expenses and return vary from year to year, and may be higher or lower than
those shown.

--------------------------------------------------------------------------------
Example                        1 Year       3 Years      5 Years      10 Years
--------------------------------------------------------------------------------

Fees and expenses if you sold shares after:
--------------------------------------------------------------------------------
Kemper High Yield Fund           $64         $202         $351          $786
--------------------------------------------------------------------------------
Kemper High Yield Fund II        $99         $309         $536        $1,190
--------------------------------------------------------------------------------
Kemper High Yield               $133         $415         $718        $1,579
Opportunity Fund
--------------------------------------------------------------------------------
Kemper Income And Capital        $67         $211         $368          $822
Preservation Fund
--------------------------------------------------------------------------------
Kemper Short-Term U.S.           $75         $233         $406          $906
Government Fund
--------------------------------------------------------------------------------
Kemper Strategic Income          $77         $240         $417          $930
Fund
--------------------------------------------------------------------------------
Kemper U.S. Government           $56         $176         $307          $689
Securities Fund
--------------------------------------------------------------------------------
Kemper U.S. Mortgage Fund        $68         $214         $373          $835
--------------------------------------------------------------------------------

                                       5

<PAGE>


Financial Highlights

No financial information is presented for Class I shares of Kemper Short-Term
U.S. Government Fund, Kemper Strategic Income Fund, Kemper High Yield
Opportunity Fund, Kemper High Yield Fund II and Kemper U.S. Mortgage Fund, since
no Class I shares were issued as of the respective fiscal year ends of the
funds.

Kemper High Yield Fund -- Class I

--------------------------------------------------------------------------------
Year ended September 30,             2000      1999     1998      1997    1996
--------------------------------------------------------------------------------

Per share operating performance
--------------------------------------------------------------------------------
Net asset value, beginning           $7.22     $7.68    $8.50     $8.23   $8.01
of period
                                    --------------------------------------------
--------------------------------------------------------------------------------
Income from investment operations:
--------------------------------------------------------------------------------
  Net investment income             .80(a)    .82(a)   .76(a)       .78     .78
--------------------------------------------------------------------------------
  Net realized and unrealized
  gain (loss) on investment
  transactions                       (.90)     (.48)    (.78)       .31     .23
                                    --------------------------------------------
--------------------------------------------------------------------------------
  Total from investment operations   (.10)       .34    (.02)      1.09    1.01
--------------------------------------------------------------------------------
  Less distributions from:
--------------------------------------------------------------------------------
  Net investment income              (.79)     (.80)    (.80)     (.82)   (.79)
--------------------------------------------------------------------------------
Total distributions                  (.79)     (.80)    (.80)     (.82)   (.79)
                                    --------------------------------------------
--------------------------------------------------------------------------------
Net asset value, end of period       $6.33     $7.22    $7.68     $8.50   $8.23
                                    --------------------------------------------
--------------------------------------------------------------------------------
Total return (%) (b)                (1.60)      4.36    (.66)     13.96   13.32
--------------------------------------------------------------------------------

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of period
($ millions)                            12        15       17        35      31
--------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%)                         .64       .62      .60       .62     .61
--------------------------------------------------------------------------------
Ratio of expenses after expense
reductions (%)                         .63       .62      .60       .62     .61
--------------------------------------------------------------------------------
Ratio of net investment income
(loss) (%)                           11.40     10.49     9.38      9.44    9.72
--------------------------------------------------------------------------------
Portfolio turnover rate (%)             52        67       92        91     102
--------------------------------------------------------------------------------

(a)      Based on monthly average shares outstanding during the period.

(b)      Total return does not reflect the effect of sales charges.


                                       6
<PAGE>


Kemper Income And Capital Preservation Fund -- Class I

--------------------------------------------------------------------------------
Year ended October 31,          2000       1999      1998       1997      1996
--------------------------------------------------------------------------------

Per share operating performance
--------------------------------------------------------------------------------
Net asset value, beginning
of year                        $8.05      $8.67       $8.53     $8.45     $8.61
                            ----------------------------------------------------
--------------------------------------------------------------------------------
Income from investment
operations:
--------------------------------------------------------------------------------
  Net investment income
  (loss)                        .53(a)     .53(a)        .56      .59       .60
--------------------------------------------------------------------------------
  Net realized and
  unrealized gain (loss)
  on investment
  transactions                  (.08)      (.63)         .15       .08     (.15)
                            ----------------------------------------------------
--------------------------------------------------------------------------------
  Total from investment
  operations                     .45      (.10)         .71       .67       .45
--------------------------------------------------------------------------------
  Less distribution from
  net investment income        (.51)      (.52)       (.57)     (.59)     (.61)
--------------------------------------------------------------------------------
Net asset value, end of
year                           $7.99      $8.05       $8.67     $8.53     $8.45
                            ----------------------------------------------------
--------------------------------------------------------------------------------
Total return (%) (b)            5.81     (1.23)        8.62      8.26      5.45
--------------------------------------------------------------------------------

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of period
($ in thousands)               6,163      6,578       7,556     6,534     6,945
--------------------------------------------------------------------------------
Ratio of expenses before
expense reductions (%)           .66        .71         .66       .70       .72
--------------------------------------------------------------------------------
Ratio of expenses after
expense reductions (%)          .66        .71         .66       .70       .72
--------------------------------------------------------------------------------
Ratio of net investment
income (loss) (%)               6.69       6.41        6.52      7.02      7.14
--------------------------------------------------------------------------------
Portfolio turnover rate (%)      234        108         121       164        74
--------------------------------------------------------------------------------

(a)      Based on monthly average shares outstanding during the period.

(b)      Total return does not reflect the effect of sales charge.

                                       7
<PAGE>


Kemper U.S. Government Securities Fund -- Class I

--------------------------------------------------------------------------------
Year ended October 31,          2000       1999      1998       1997      1996
--------------------------------------------------------------------------------

Per share operating performance
--------------------------------------------------------------------------------
Net asset value, beginning
of period                           $8.38    $8.85     $8.81    $8.74    $8.92
                                   ---------------------------------------------
--------------------------------------------------------------------------------
Income from investment operations:
--------------------------------------------------------------------------------
  Net investment income            .56(a)   .55(a)    .59(a)      .66      .64
--------------------------------------------------------------------------------
  Net realized and unrealized
  gain (loss) on investment
  transactions                      (.02)    (.40)       .07      .06    (.17)
                                   ---------------------------------------------
--------------------------------------------------------------------------------
  Total from investment operations    .54      .15       .66      .72      .47
--------------------------------------------------------------------------------
  Less distributions from:
--------------------------------------------------------------------------------
  Net investment income             (.58)    (.62)     (.62)    (.65)    (.65)
--------------------------------------------------------------------------------
Total distributions                 (.58)    (.62)     (.62)    (.65)    (.65)
--------------------------------------------------------------------------------
Net asset value, end of period      $8.34    $8.38     $8.85    $8.81    $8.74
                                   ---------------------------------------------
--------------------------------------------------------------------------------
Total return (%) (b)                 6.78     1.81      7.75     8.60     5.56
--------------------------------------------------------------------------------

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of period
($ in millions)                         4        3         4        6        5
--------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%)                        .55      .60       .57      .60      .59
--------------------------------------------------------------------------------
Ratio of expenses after expense
reductions (%)                        .54      .59       .57      .60      .59
--------------------------------------------------------------------------------
Ratio of net investment income (%)   6.84     6.47      6.73     7.52     7.35
--------------------------------------------------------------------------------
Portfolio turnover rate (%)           193      177       150      261      391
--------------------------------------------------------------------------------

(a)      Based on monthly average shares outstanding during the period.

(b)      Total return does not reflect the effect of any sales charges.

Special Features

Shareholders of a Fund's Class I shares may exchange their shares for (i) shares
of Zurich Money Funds -- Zurich Money Market Fund if the shareholders of Class I
shares have purchased shares because they are participants in tax-exempt
retirement plans of Zurich Scudder and its affiliates and (ii) Class I shares of
any other "Kemper Mutual Fund" listed in the prospectus. Conversely,
shareholders of Zurich Money Funds -- Zurich Money Market Fund who have
purchased shares because they are participants in tax-exempt retirement plans of
Zurich Scudder and its affiliates may exchange their shares for Class I shares
of "Kemper Mutual Funds" to the extent that they are available through their
plan. Exchanges will be made at the relative net asset values of the shares.
Exchanges are subject to the limitations set forth in the prospectus.

As a result of the relatively lower expenses for Class I Shares, the level of
income dividends per share (as a percentage of net asset value) and, therefore,
the overall investment return, typically will be higher for Class I shares than
for Class A, Class B and Class C shares.


                                       8
<PAGE>

January 1, 2001

<PAGE>


                                                               L O N G - T E R M

                                                               I N V E S T I N G

                                                                          I N  A

                                                           S H O R  T -  T E R M

                                                                  W O R L D (SM)

    January 1, 2001

Prospectus

As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.

                                             K E M P E R  I N C O M E  F U N D S

                                                          Kemper High Yield Fund

                                                       Kemper High Yield Fund II

                                              Kemper High Yield Opportunity Fund

                                     Kemper Income And Capital Preservation Fund

                                          Kemper Short-Term U.S. Government Fund

                                                    Kemper Strategic Income Fund

                                          Kemper U.S. Government Securities Fund

                                                       Kemper U.S. Mortgage Fund

                                                                   KEMPER FUNDS
                                                                   [LOGO]
<PAGE>

Contents
--------------------------------------------------------------------------------

   How the Funds Work                         Investing in the Funds

    4  Kemper High Yield Fund                 64  Choosing a Share Class

    8  Kemper High Yield Fund II              69  How to Buy Shares

   12  Kemper High Yield Opportunity          70  How to Exchange or Sell
       Fund                                       Shares

   16  Kemper Income And Capital              71  Policies You Should Know
       Preservation Fund                          About

   20  Kemper Short-Term                      77  Understanding Distributions
       U.S. Government Fund                       and Taxes

   24  Kemper Strategic Income Fund

   28  Kemper U.S. Government
       Securities Fund

   32  Kemper U.S. Mortgage Fund

   36  Other Policies and Risks

   39  Financial Highlights
<PAGE>

How the Funds Work

These funds invest mainly in bonds and other types of debt securities.

Taken as a group, they represent a spectrum of approaches to investing for
income, from a conservative approach that emphasizes preservation of capital to
a more aggressive (and more risky) approach that focuses on higher income and
total return. Each fund has its own objective.

Remember that mutual funds are investments, not bank deposits. They're not
insured or guaranteed by the FDIC or any other government agency, and you could
lose money by investing in them.
<PAGE>

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

                          ticker symbol   KHYAX    KHYBX     KHYCX
                            fund number   008      208       308

Kemper High Yield Fund
--------------------------------------------------------------------------------

The Fund's Investment Strategy

The fund seeks the highest level of current income obtainable from a diversified
portfolio of fixed income securities which the fund's investment manager
considers consistent with reasonable risk. As a secondary objective, the fund
will seek capital gain where consistent with its primary objective.

The fund invests mainly in lower rated, higher yielding corporate bonds, often
called junk bonds. Generally, most are from U.S. issuers, but up to 25% of total
assets could be in bonds from foreign issuers.

In deciding which securities to buy and sell to achieve income and capital
appreciation, the portfolio managers analyze securities to determine which
appear to offer reasonable risk compared to their potential return. To do this,
they rely on extensive independent analysis, favoring the bonds of companies
whose credit is gaining strength or whom they believe are unlikely to default.

Based on their analysis of economic and market trends, the managers may favor
bonds from different segments of the economy at different times, while still
maintaining variety in terms of the types of bonds, companies and industries
represented. For example, the managers typically favor subordinated debt (which
has higher risks and may pay higher returns), but may emphasize senior debt if
they expect an economic slowdown.

The managers may adjust the duration (a measure of sensitivity to interest rate
movements) of the fund's portfolio, depending on their outlook for interest
rates.

--------------------------------------------------------------------------------
CREDIT QUALITY POLICIES This fund normally invests at least 65% of total assets
in junk bonds, which are those rated below the fourth credit grade (i.e., grade
BB/Ba and below). Compared to investment-grade bonds, junk bonds may pay higher
yields and have higher volatility and higher risk of default on payments.


4
<PAGE>

The Main Risks of Investing in the Fund

There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money or make the fund perform less well than other
investments.

For this fund, one of the main factors is the economy. Because the companies
that issue high yield bonds may be in uncertain financial health, the prices of
their bonds can be more vulnerable to bad economic news or even the expectation
of bad news, than investment-grade bonds. This may affect a company, an industry
or the high yield market as a whole. In some cases, bonds may decline in credit
quality or go into default. This risk is higher with foreign bonds. Foreign
markets tend to be more volatile than U.S. markets, for reasons ranging from
political and economic uncertainties to poor regulation to a higher risk that
essential information may be incomplete or wrong.

Another factor is market interest rates. A rise in interest rates generally
means a fall in bond prices -- and, in turn, a fall in the value of your
investment. An increase in the portfolio's duration could make the fund more
sensitive to this risk.

Because the economy has a strong impact on corporate bond performance, the fund
will tend to perform less well than other types of bond funds when the economy
is weak. To the extent that the fund emphasizes bonds from any given industry,
it could be hurt if that industry does not do well.

Other factors that could affect performance include:

o     the managers could be wrong in their analysis of economic trends, issuers,
      industries or other matters

o     some bonds could be paid off earlier than expected, which could hurt the
      fund's performance

o     currency fluctuations could cause foreign investments to lose value

o     at times, it could be hard to value some investments or to get an
      attractive price for them

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.

This fund is designed for investors who can accept risk of loss of principal and
are interested in high current income.


                                                                               5
<PAGE>

The Fund's Performance History

While a fund's past performance isn't necessarily a sign of how it will do in
the future, it can be valuable for an investor to know.

The bar chart shows how the performance figures for the fund's Class A shares
have varied from year to year, which may give some idea of risk. The bar chart
does not reflect sales loads; if it did returns would be lower. The table shows
how the performance for the fund's Class A, B and C shares compare with a
broad-based market index (which, unlike the fund, has no fees or expenses). The
table includes the effect of maximum sales loads. The performance of both the
fund and the index varies over time. All figures on this page assume
reinvestment of dividends and distributions.

The inception date for Class B and C shares is May 31, 1994. Performance figures
before that date are based on the historical performance of the fund's original
share class (Class A), adjusted to reflect the higher gross total annual
operating expenses of Class B or Class C and the current applicable sales
charges of that class.

Kemper High Yield Fund
--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year                 Class A Shares
--------------------------------------------------------------------------------

THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE

BAR CHART DATA:

1990    -12.98
1991     46.84
1992     17.08
1993     20.29
1994     -1.72
1995     17.46
1996     13.49
1997     11.51
1998      1.28
1999      2.39

2000 Total Return as of September 30: -3.91%
Best Quarter: 23.41%, Q1 1991     Worst Quarter -11.77%, Q3 1990

--------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/1999
--------------------------------------------------------------------------------

                   Since        Since      Since       Since
                   12/31/98     12/31/94   12/31/89    1/26/78
                   1 Year       5 Years    10 Years    Life of Fund
--------------------------------------------------------------------------------
Class A            -2.26%       8.03%      10.04%      10.81%
--------------------------------------------------------------------------------
Class B            -1.21        7.94        9.60       10.07
--------------------------------------------------------------------------------
Class C             1.59        8.12        9.65       10.09
--------------------------------------------------------------------------------
Index               0.27       12.46       12.47        N/A*
--------------------------------------------------------------------------------

Index: Salomon Brothers Long-Term High Yield Bond Index, which measures the
total return of high yield bonds with a par value of $50 million or higher and a
remaining maturity of ten years or longer.

*     The Index was not in existence on the fund's inception date.


6
<PAGE>

How Much Investors Pay

This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.

--------------------------------------------------------------------------------
Fee Table                                 Class A   Class B   Class C
--------------------------------------------------------------------------------

Shareholder Fees, paid directly from your investment
--------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed On    4.50%    None      None
Purchases (% of offering price)
--------------------------------------------------------------------------------
Maximum Contingent Deferred Sales
Charge (Load) (% of redemption proceeds)  None*    4.00%     1.00%
--------------------------------------------------------------------------------

Annual Operating Expenses, deducted from fund assets
--------------------------------------------------------------------------------
Management Fee                            0.53%    0.53%     0.53%
--------------------------------------------------------------------------------
Distribution (12b-1) Fee                  None     0.75      0.75
--------------------------------------------------------------------------------
Other Expenses**                          0.40     0.50      0.49
--------------------------------------------------------------------------------
Total Annual Operating Expenses           0.93     1.78      1.77
--------------------------------------------------------------------------------

*     The redemption of shares purchased at net asset value under the Large
      Order NAV Purchase Privilege (see "Policies You Should Know About --
      Policies about transactions") may be subject to a contingent deferred
      sales charge of 1.00% if redeemed within one year of purchase and 0.50% if
      redeemed during the second year following purchase.

**    Includes costs of shareholder servicing, custody and similar expenses,
      which may vary with fund size and other factors.

Based on the figures above, this example is designed to help you compare the
expenses of each share class to those of other mutual funds. The example assumes
operating expenses remain the same and that you invested $10,000, earned 5%
annual returns and reinvested all dividends and distributions. This is only an
example; actual expenses will be different.

--------------------------------------------------------------------------------
Example                 1 Year    3 Years      5 Years  10 Years
--------------------------------------------------------------------------------

Expenses, assuming you sold your shares at the end of each period
--------------------------------------------------------------------------------
Class A shares          $541       $733         $942    $1,542
--------------------------------------------------------------------------------
Class B shares           581        860        1,164     1,664
--------------------------------------------------------------------------------
Class C shares           280        557          959     2,084
--------------------------------------------------------------------------------

Expenses, assuming you kept your shares
--------------------------------------------------------------------------------
Class A shares          $540       $730         $936    $1,530
--------------------------------------------------------------------------------
Class B shares           180        557          959     1,653
--------------------------------------------------------------------------------
Class C shares           179        554          954     2,073
--------------------------------------------------------------------------------


                                                                               7
<PAGE>

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

                          ticker symbol   KHIAX    KHIBX     KHICX
                            fund number   115      215       315

Kemper High Yield Fund II
--------------------------------------------------------------------------------

The Fund's Investment Strategy

The fund seeks the highest level of current income obtainable from a
professionally managed, diversified portfolio of fixed income securities that
the fund's investment manager considers consistent with reasonable risk. As a
secondary objective, the fund will seek capital gain where consistent with its
primary objective.

The fund invests mainly in lower rated, higher yielding corporate bonds, often
called junk bonds. Generally, most are from U.S. issuers, but up to 25% of total
assets could be in bonds from foreign issuers.

In deciding which securities to buy and sell to achieve income and capital
appreciation, the portfolio managers analyze securities to determine which
appear to offer reasonable risk compared to their potential return. To do this,
they rely on extensive independent analysis, favoring the bonds of companies
whose credit is gaining strength or whom they believe are unlikely to default.

Based on their analysis of economic and market trends, the managers may favor
bonds from different segments of the economy at different times, while still
maintaining variety in terms of the types of bonds, companies and industries
represented. For example, the managers typically favor subordinated debt (which
has higher risks and may pay higher returns), but may emphasize senior debt if
they expect an economic slowdown.

The managers may adjust the duration (a measure of sensitivity to interest rate
movements) of the fund's portfolio, depending on their outlook for interest
rates.

--------------------------------------------------------------------------------
CREDIT QUALITY POLICIES This fund normally invests at least 65% of total assets
in junk bonds, which are those rated below the fourth credit grade (i.e., grade
BB/Ba and below). Compared to investment-grade bonds, junk bonds may pay higher
yields and have higher volatility and higher risk of default on payments.


8
<PAGE>

The Main Risks of Investing in the Fund

There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money or make the fund perform less well than other
investments.

For this fund, one of the main factors is the economy. Because the companies
that issue high yield bonds may be in uncertain financial health, the prices of
their bonds can be more vulnerable to bad economic news or even the expectation
of bad news, than investment-grade bonds. This may affect a company, an industry
or the high yield market as a whole. In some cases, bonds may decline in credit
quality or go into default. This risk is higher with foreign bonds. Foreign
markets tend to be more volatile than U.S. markets, for reasons ranging from
political and economic uncertainties to poor regulation to a higher risk that
essential information may be incomplete or wrong.

Another factor is market interest rates. A rise in interest rates generally
means a fall in bond prices -- and, in turn, a fall in the value of your
investment. An increase in the portfolio's duration could make the fund more
sensitive to this risk.

Because the economy has a strong impact on corporate bond performance, the fund
will tend to perform less well than other types of bond funds when the economy
is weak. To the extent that the fund emphasizes bonds from any given industry,
it could be hurt if that industry does not do well.

Other factors that could affect performance include:

o     the managers could be wrong in their analysis of economic trends, issuers,
      industries or other matters

o     some bonds could be paid off earlier than expected, which could hurt the
      fund's performance

o     currency fluctuations could cause foreign investments to lose value

o     at times, it could be hard to value some investments or to get an
      attractive price for them

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.

This fund is designed for investors who can accept risk of loss of principal and
are interested in high current income.


                                                                               9
<PAGE>

The Fund's Performance History

While a fund's past performance isn't necessarily a sign of how it will do in
the future, it can be valuable for an investor to know.

The bar chart shows the performance for the fund's Class A shares for its first
complete calendar year, which may give some idea of risk. The bar chart does not
reflect sales loads; if it did returns would be lower.

The table shows how the performance for the fund's Class A, B and C shares
compare with a broad-based market index (which, unlike the fund, has no fees or
expenses). The performance of both the fund and the index varies over time. All
figures on this page assume reinvestment of dividends and distributions.

Kemper High Yield Fund II
--------------------------------------------------------------------------------
Annual Total Return (%) as of 12/31/1999                 Class A Shares
--------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE

BAR CHART DATA:

1999    3.60

2000 Total Return as of September 30: -3.66%
Best Quarter: 2.90%, Q1 1999      Worst Quarter -1.55%, Q3 1999

--------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/1999)
--------------------------------------------------------------------------------

                           Since               Since
                           12/31/98            11/30/98
                           1 Year              Life of Fund
--------------------------------------------------------------------------------

Class A                    -1.03%              -1.55%
--------------------------------------------------------------------------------
Class B                    -0.19               -0.68
--------------------------------------------------------------------------------
Class C                     2.73                1.98
--------------------------------------------------------------------------------
Index                       0.27                0.90
--------------------------------------------------------------------------------

Index: Salomon Brothers Long-Term High Yield Bond Index, which measures the
total return of high yield bonds with a par value of $50 million or higher and a
remaining maturity of ten years or longer.

The table includes the effects of maximum sales loads.

In the chart, total return for 1999 would have been lower if operating expenses
hadn't been reduced.

In the table, total returns for inception through 1999 would have been lower if
operating expenses hadn't been reduced.


10
<PAGE>

How Much Investors Pay

This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.

--------------------------------------------------------------------------------
Fee Table                                  Class A  Class B  Class C
--------------------------------------------------------------------------------

Shareholder Fees, paid directly from your investment
--------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed On     4.50%    None     None
Purchases (% of offering price)
--------------------------------------------------------------------------------
Maximum Contingent Deferred Sales Charge
(Load) (% of redemption proceeds)          None*    4.00%    1.00%
--------------------------------------------------------------------------------

Annual Operating Expenses, deducted from fund assets
--------------------------------------------------------------------------------
Management Fee                             0.65%    0.65%    0.65%
--------------------------------------------------------------------------------
Distribution (12b-1) Fee                   None     0.75     0.75
--------------------------------------------------------------------------------
Other Expenses**                           0.55     0.56     0.54
--------------------------------------------------------------------------------
Total Annual Operating Expenses            1.20     1.96     1.94
--------------------------------------------------------------------------------

*     The redemption of shares purchased at net asset value under the Large
      Order NAV Purchase Privilege (see "Policies You Should Know About --
      Policies about transactions") may be subject to a contingent deferred
      sales charge of 1.00% if redeemed within one year of purchase and 0.50% if
      redeemed during the second year following purchase.

**    Includes costs of shareholder servicing, custody and similar expenses,
      which may vary with fund size and other factors.

Based on the figures above, this example is designed to help you compare the
expenses of each share class to those of other mutual funds. The example assumes
operating expenses remain the same and that you invested $10,000, earned 5%
annual returns and reinvested all dividends and distributions. This is only an
example; actual expenses will be different.

--------------------------------------------------------------------------------
Example                 1 Year     3 Years   5 Years    10 Years
--------------------------------------------------------------------------------

Expenses, assuming you sold your shares at the end of each period
--------------------------------------------------------------------------------
Class A shares          $567       $814      $1,080     $1,839
--------------------------------------------------------------------------------
Class B shares           599        915       1,257      1,908
--------------------------------------------------------------------------------
Class C shares           297        609       1,047      2,264
--------------------------------------------------------------------------------

Expenses, assuming you kept your shares
--------------------------------------------------------------------------------
Class A shares          $567       $814      $1,080     $1,839
--------------------------------------------------------------------------------
Class B shares           199        615       1,057      1,908
--------------------------------------------------------------------------------
Class C shares           197        609       1,047      2,264
--------------------------------------------------------------------------------


                                                                              11
<PAGE>

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

                          ticker symbol   KHOAX    KHOBX     KHOCX
                            fund number   075      275       375

Kemper High Yield Opportunity Fund
--------------------------------------------------------------------------------

The Fund's Investment Strategy

The fund seeks total return through high current income and capital
appreciation. The fund invests at least 65% of total assets in lower rated,
higher yielding corporate bonds, often called junk bonds. Generally, most are
from U.S. issuers, but up to 25% of total assets could be in bonds of foreign
issuers. To enhance total return, the fund may invest up to 20% of total assets
in common stocks and other equities, including preferred stocks, convertible
securities and real estate investment trusts (REITs).

In deciding which securities to buy and sell, the portfolio managers rely on
extensive independent analysis, favoring the bonds of companies whose credit is
gaining strength or whom they believe are unlikely to default. The managers also
seek to take advantage of special opportunities by investing in stocks of
high-yield issuers, including initial public offerings of stock (IPOs).

Based on their analysis of economic and market trends, the managers may favor
bonds from different segments of the economy at different times, while still
maintaining variety in terms of the companies and industries represented. For
example, the managers typically favor subordinated debt (which has higher risks
and may pay higher returns), but may emphasize senior debt if the managers
expect an economic slowdown.

The managers may adjust the duration (a measure of sensitivity to interest rate
movements) of the fund's portfolio, depending on their outlook for interest
rates.

--------------------------------------------------------------------------------
CREDIT QUALITY POLICIES This fund normally invests primarily in junk bonds,
which are those rated below the fourth credit grade (i.e., grade BB/Ba and
below). Compared to investment-grade bonds, junk bonds may pay higher yields and
have higher volatility and higher risk of default on payments.


12
<PAGE>

The Main Risks of Investing in the Fund

There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money or make the fund perform less well than other
investments.

For this fund, one of the main factors is the economy. Because the companies
that issue high yield bonds may be in uncertain financial health, the prices of
their bonds (and stocks) can be more vulnerable to bad economic news, or even
the expectation of bad news, than investment-grade bonds. This may affect a
company, an industry or the high yield market as a whole. In some cases, bonds
may decline in credit quality or go into default. This risk is higher with
foreign bonds. Foreign markets tend to be more volatile than U.S. markets, for
reasons ranging from political and economic uncertainties to poor regulation to
a higher risk that essential information may be incomplete or wrong.

Another factor is market interest rates. A rise in interest rates generally
means a fall in bond prices -- and, in turn, a fall in the value of your
investment. An increase in the portfolio's duration could make the fund more
sensitive to this risk.

Because the economy affects corporate bond performance, the fund will tend to
perform less well than other types of bond funds when the economy is weak. Also,
to the extent that the fund emphasizes bonds from any given industry, it could
be hurt if that industry does not do well.

Other factors that could affect performance include:

o     the managers could be wrong in their analysis of economic trends, issuers,
      industries or other matters

o     some bonds could be paid off earlier than expected, which could hurt the
      fund's performance

o     currency fluctuations could cause foreign investments to lose value

o     at times, it could be hard to value some investments or to get an
      attractive price for them

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.

This fund is designed for investors who can accept risk of loss of principal and
are interested in high current income.


                                                                              13
<PAGE>

The Fund's Performance History

While a fund's past performance isn't necessarily a sign of how it will do in
the future, it can be valuable for an investor to know.

The bar chart shows how the performance figures for the fund's Class A shares
have varied from year to year, which may give some idea of risk. The bar chart
does not reflect sales loads; if it did returns would be lower.

The table shows how the performance for the fund's Class A, B and C shares
compare with a broad-based market index (which, unlike the fund, has no fees or
expenses). The performance of both the fund and the index varies over time. All
figures on this page assume reinvestment of dividends and distributions.


Kemper High Yield Opportunity Fund
--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year             Class A Shares
--------------------------------------------------------------------------------

THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE

BAR CHART DATA:

1998    2.78
1999    1.72

2000 Total Return as of September 30: -9.53%
Best Quarter: 6.06%, Q1 1998      Worst Quarter -7.88%, Q3 1998

--------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/1999)
--------------------------------------------------------------------------------

                              Since 12/31/98     Since 10/1/97
                              1 Year             Life of Fund
--------------------------------------------------------------------------------
Class A                       -2.89%             1.03%
--------------------------------------------------------------------------------
Class B                       -1.87              1.17
--------------------------------------------------------------------------------
Class C                        1.02              2.37
--------------------------------------------------------------------------------
Index                          0.27              5.67*
--------------------------------------------------------------------------------

Index: Salomon Brothers Long-Term High Yield Bond Index, which measures the
total return of high yield bonds with a par value of $50 million or higher and a
remaining maturity of ten years or longer.

*     Index return for life of fund is as of 12/31/97.

The table includes the effect of maximum sales loads.


14
<PAGE>

How Much Investors Pay

This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.

--------------------------------------------------------------------------------
Fee Table                                 Class A  Class B  Class C
--------------------------------------------------------------------------------

Shareholder Fees, paid directly from your investment
--------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed On    4.50%    None     None
Purchases (% of offering price)
--------------------------------------------------------------------------------
Maximum Contingent Deferred Sales
Charge (Load) (% of redemption proceeds)  None*    4.00%    1.00%
--------------------------------------------------------------------------------

Annual Operating Expenses, deducted from fund assets
--------------------------------------------------------------------------------
Management Fee                            0.65%    0.65%    0.65%
--------------------------------------------------------------------------------
Distribution (12b-1) Fee                  None     0.75     0.75
--------------------------------------------------------------------------------
Other Expenses**                          1.25     1.26     1.21
--------------------------------------------------------------------------------
Total Annual Operating Expenses           1.90     2.66     2.61
--------------------------------------------------------------------------------

*     The redemption of shares purchased at net asset value under the Large
      Order NAV Purchase Privilege (see "Policies You Should Know About --
      Policies about transactions") may be subject to a contingent deferred
      sales charge of 1.00% if redeemed within one year of purchase and 0.50% if
      redeemed during the second year following purchase.

**    Includes costs of shareholder servicing, custody and similar expenses,
      which may vary with fund size and other factors.

Based on the figures above, this example is designed to help you compare the
expenses of each share class to those of other mutual funds. The example assumes
operating expenses remain the same and that you invested $10,000, earned 5%
annual returns and reinvested all dividends and distributions. This is only an
example; actual expenses will be different.

--------------------------------------------------------------------------------
Example                 1 Year     3 Years   5 Years    10 Years
--------------------------------------------------------------------------------

Expenses, assuming you sold your shares at the end of each period
--------------------------------------------------------------------------------
Class A shares          $634       $1,020    $1,430     $2,572
--------------------------------------------------------------------------------
Class B shares           669        1,126     1,610      2,641
--------------------------------------------------------------------------------
Class C shares           364          811     1,385      2,944
--------------------------------------------------------------------------------

Expenses, assuming you kept your shares
--------------------------------------------------------------------------------
Class A shares          $634       $1,020    $1,430     $2,572
--------------------------------------------------------------------------------
Class B shares           269          826     1,410      2,641
--------------------------------------------------------------------------------
Class C shares           264          811     1,385      2,944
--------------------------------------------------------------------------------


                                                                              15
<PAGE>

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

                          ticker symbol   KICAX    KICBX     KICCX
                            fund number   005      205       305

Kemper Income And Capital Preservation Fund
--------------------------------------------------------------------------------

The Fund's Investment Strategy

The fund seeks as high a level of current income as is consistent with
reasonable risk, preservation of capital and ready marketability of its
portfolio by investing primarily in a diversified portfolio of investment-grade
debt securities.

The fund can buy many types of income-producing securities, among them corporate
bonds, U.S. government and agency bonds and mortgage- and asset-backed
securities. Generally, most are from U.S. issuers, but up to 25% of total assets
could be in bonds from foreign issuers.

In deciding which securities to buy and sell, the portfolio manager uses
independent analysis to look for bonds of companies whose fundamental business
prospects and cash flows are expected to improve. The manager also considers
valuation, preferring those bonds that appear attractively priced in comparison
to similar issues.

Based on the analysis of economic and market trends, the manager may favor bonds
from different segments of the economy at different times, while still
maintaining variety in terms of the companies and industries represented.

Although the manager may adjust the duration (a measure of sensitivity to
interest rate movements) of the fund's portfolio, he generally intends to keep
it between four and six years.

--------------------------------------------------------------------------------
CREDIT QUALITY POLICIES This fund normally invests at least 80% of total assets
in investment-grade bonds (those in the top four grades of credit quality). The
fund may invest up to 20% of total assets in junk bonds (i.e., grade BB/Ba and
below). Compared to investment-grade bonds, junk bonds may pay higher yields and
have higher volatility and higher risk of default on payments of interest or
principal.


16
<PAGE>

The Main Risks of Investing in the Fund

There are several factors that could reduce the yield you get from the fund,
cause you to lose money or make the fund perform less well than other
investments.

As with most bond funds, the most important factor is market interest rates. A
rise in interest rates generally means a fall in bond prices -- and, in turn, a
fall in the value of your investment. Changes in interest rates will also affect
the fund's yield: when rates fall, fund yield tends to fall as well.

Because the economy affects corporate bond performance, the fund will tend to
perform less well than other types of bond funds when the economy is weak. Also,
to the extent that the fund emphasizes bonds from any given industry, it could
be hurt if that industry does not do well.

Foreign markets tend to be more volatile than U.S. markets, for reasons ranging
from political and economic uncertainties to poor regulation to a higher risk
that essential information may be incomplete or wrong.

Other factors that could affect performance include:

o     the manager could be wrong in the analysis of economic trends, issuers,
      industries or other matters

o     a bond could decline in credit quality or go into default; this risk is
      greater with lower rated bonds

o     some bonds could be paid off earlier than expected, which could hurt the
      fund's performance

o     currency fluctuations could cause foreign investments to lose value

o     at times, it could be hard to value some investments or to get an
      attractive price for them

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.

This fund is designed for investors interested in exposure to the
intermediate-term corporate bond market through a diversified portfolio that
emphasizes capital appreciation.


                                                                              17
<PAGE>

The Fund's Performance History

While a fund's past performance isn't necessarily a sign of how it will do in
the future, it can be valuable for an investor to know.

The bar chart shows how the performance figures for the fund's Class A shares
have varied from year to year, which may give some idea of risk. The bar chart
does not reflect sales loads; if it did returns would be lower. The table shows
how the performance for the fund's Class A, B and C shares compare with a
broad-based market index (which, unlike the fund, has no fees or expenses). The
table includes the effect of maximum sales loads. The performance of both the
fund and the index varies over time. All figures on this page assume
reinvestment of dividends and distributions.

The inception date for Class B and C shares is May 31, 1994. Performance figures
before that date are based on the historical performance of the fund's original
share class (Class A), adjusted to reflect the higher gross total annual
operating expenses of Class B or Class C and the current applicable sales
charges of that class.

Kemper Income And Capital Preservation Fund
--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year              Class A Shares
--------------------------------------------------------------------------------

THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE

BAR CHART DATA:

1990      6.48
1991     17.91
1992      7.85
1993     11.71
1994     -3.38
1995     21.35
1996      2.02
1997      8.62
1998      7.90
1999     -2.92

2000 Total Return as of September 30: 5.05%
Best Quarter: 7.41%, Q2 1995      Worst Quarter -3.20%, Q1 1994

--------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/1999)
--------------------------------------------------------------------------------

                           Since     Since     Since     Since
                           12/31/98  12/31/94  12/31/89  4/15/74
                           1 Year    5 Years   10 Years  Life of Fund
--------------------------------------------------------------------------------
Class A                    -7.29%    6.11%     7.00%     8.70%
--------------------------------------------------------------------------------
Class B                    -6.58     5.91      6.51      7.94
--------------------------------------------------------------------------------
Class C                    -3.64     6.18      6.56      7.96
--------------------------------------------------------------------------------
Index                      -0.82     7.73      7.70      N/A*
--------------------------------------------------------------------------------

Index: Lehman Brothers Aggregate Bond Index, an unmanaged index generally
representative of intermediate-term government bonds, investment-grade corporate
debt securities and mortgage-backed securities.

*     The Index was not in existence on the fund's inception date.


18
<PAGE>

How Much Investors Pay

This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.

--------------------------------------------------------------------------------
Fee Table                                 Class A  Class B   Class C
--------------------------------------------------------------------------------

Shareholder Fees, paid directly from your investment
--------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed On    4.50%     None     None
Purchases (% of offering price)
--------------------------------------------------------------------------------
Maximum Contingent Deferred Sales
Charge (Load) (% of redemption proceeds)  None*     4.00%    1.00%
--------------------------------------------------------------------------------

Annual Operating Expenses, deducted from fund assets
--------------------------------------------------------------------------------
Management Fee                            0.53%     0.53%    0.53%
--------------------------------------------------------------------------------
Distribution (12b-1) Fee                  None      0.75     0.75
--------------------------------------------------------------------------------
Other Expenses**                          0.51      0.53     0.44
--------------------------------------------------------------------------------
Total Annual Operating Expenses           1.04      1.81     1.72
--------------------------------------------------------------------------------

*     The redemption of shares purchased at net asset value under the Large
      Order NAV Purchase Privilege (see "Policies You Should Know About --
      Policies about transactions") may be subject to a contingent deferred
      sales charge of 1.00% if redeemed within one year of purchase and 0.50% if
      redeemed during the second year following purchase.

**    Includes costs of shareholder servicing, custody and similar expenses,
      which may vary with fund size and other factors.

Based on the figures above, this example is designed to help you compare the
expenses of each share class to those of other mutual funds. The example assumes
operating expenses remain the same and that you invested $10,000, earned 5%
annual returns and reinvested all dividends and distributions. This is only an
example; actual expenses will be different.

--------------------------------------------------------------------------------
Example                 1 Year     3 Years   5 Years    10 Years
--------------------------------------------------------------------------------

Expenses, assuming you sold your shares at the end of each period
--------------------------------------------------------------------------------
Class A shares          $551       $766      $998       $1,664
--------------------------------------------------------------------------------
Class B shares           584        869     1,180        1,739
--------------------------------------------------------------------------------
Class C shares           275        542       933        2,030
--------------------------------------------------------------------------------

Expenses, assuming you kept your shares
--------------------------------------------------------------------------------
Class A shares          $551       $766      $998       $1,664
--------------------------------------------------------------------------------
Class B shares           184        569       980        1,739
--------------------------------------------------------------------------------
Class C shares           175        542       933        2,030
--------------------------------------------------------------------------------


                                                                              19
<PAGE>

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

                          ticker symbol   KSGAX    KSGBX     KSGCX
                            fund number   030      230       330

Kemper Short-Term U.S. Government Fund
--------------------------------------------------------------------------------

The Fund's Investment Strategy

The fund seeks high current income and preservation of capital. The fund invests
mainly in U.S. government securities with an emphasis on mortgage-backed
securities. Other securities in which the fund may invest include other
mortgage-backed securities such as Ginnie Maes, U.S. Treasuries and other
securities issued by the U.S. government, its agencies or instrumentalities. The
fund may also invest in corporate bonds, including asset-backed securities.

In deciding which types of government bonds to buy and sell, the portfolio
managers first consider the relative attractiveness of Treasuries compared to
other U.S. government and agency securities and determine allocations for each.
Their decisions are generally based on a number of factors, including interest
rate outlooks and changes in supply and demand within the bond market.

In choosing corporate bonds, the managers use independent analysis to look for
established companies with histories of dependable dividend payments and stable
or growing prices.

Although the managers may adjust the fund's dollar-weighted average maturity
(the effective maturity of the fund's portfolio), they generally intend to keep
it below three years.

--------------------------------------------------------------------------------
CREDIT QUALITY POLICIES This fund normally invests at least 65% of total assets
in securities issued by the U.S. government, its agencies or instrumentalities
and repurchase agreements of U.S. government securities.

The fund could invest up to 35% of total assets in non-U.S. government
investment-grade bonds, and 10% of total assets in junk bonds (i.e., grade BB/Ba
and below).


20
<PAGE>

The Main Risks of Investing in the Fund

There are several factors that could reduce the yield you get from the fund,
cause you to lose money or make the fund perform less well than other
investments.

As with most bond funds, one of the most important factors is market interest
rates. A rise in interest rates generally means a fall in bond prices -- and, in
turn, a fall in the value of your investment. The fund's relatively short
maturity should reduce the effect of this risk, but won't eliminate it. Changes
in interest rates will also affect the fund's yield: when rates fall, fund yield
tends to fall as well.

Some securities issued by U.S. government agencies or instrumentalities are
supported only by the credit of that agency or instrumentality, while other
securities are supported by the ability to borrow from the Treasury. There is no
guarantee that the U.S. government will provide support to such agencies or
instrumentalities and such securities may involve risk of loss of principal and
interest. The full faith and credit guarantee of the U.S. government doesn't
protect the fund against market-driven declines in the prices or yields of these
securities, nor does it apply to shares of the fund itself.

Mortgage- and asset-backed securities carry additional risks and may be more
volatile than many other types of debt securities. Any unexpected behavior in
interest rates could hurt the performance of these securities. For example, a
large fall in interest rates could cause these securities to be paid off earlier
than expected, causing the fund to reinvest the money at a lower rate. In
addition, if interest rates rise or stay high, these securities could be paid
off later than expected, causing the fund to endure low yields. The result for
the fund could be an increase in the volatility of its share price and yield.

Other factors that could affect performance include:

o     the managers could be wrong in their analysis of economic trends, issuers,
      industries or other matters

o     a bond could decline in credit quality or go into default; this risk is
      greater with junk and foreign bonds

o     at times, it could be hard to value some investments or to get an
      attractive price for them

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.

This fund is designed for investors who can accept some fluctuations in the
value of their principal and are interested in higher income than a money fund.


                                                                              21
<PAGE>

The Fund's Performance History

While a fund's past performance isn't necessarily a sign of how it will do in
the future, it can be valuable for an investor to know. The bar chart shows the
performance figures for the fund's first complete calendar year, which may give
some idea of risk. The bar chart does not reflect sales loads; if it did returns
would be lower. The table shows how the performance for the fund's Class A, B
and C shares compare with two broad-based market indices (which, unlike the
fund, have no fees or expenses). The table includes the effect of maximum sales
loads. The performance of both the fund and the indices varies over time. All
figures on this page assume reinvestment of dividends and distributions.

The inception date for Class B and C shares is May 31, 1994. Performance figures
before that date are based on the historical performance of the fund's original
share class (Class A), adjusted to reflect the higher gross total annual
operating expenses of Class B or Class C and the current applicable sales
charges of that class.

Kemper Short-Term U.S. Government Fund
--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year            Class A Shares
--------------------------------------------------------------------------------

THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE

BAR CHART DATA:

1990      7.19
1991     13.46
1992      6.06
1993      4.91
1994     -0.44
1995      8.51
1996      4.73
1997      5.98
1998      2.96
1999      2.13

2000 Total Return as of September 30: 4.65%
Best Quarter: 6.06%, Q4 1990      Worst Quarter -2.79%, Q1 1990

--------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/1999)
--------------------------------------------------------------------------------

                           Since     Since     Since     Since
                           12/31/98  12/31/94  12/31/89  9/1/87
                           1 Year    5 Years   10 Years  Life of Fund
--------------------------------------------------------------------------------
Class A                    -0.67%    4.25%     5.20%     5.68%
--------------------------------------------------------------------------------
Class B                    -1.65     3.92      4.72      5.28
--------------------------------------------------------------------------------
Class C                     1.33     4.13      4.81      5.37
--------------------------------------------------------------------------------
Index 1                     4.80     5.37      5.27      5.71*
--------------------------------------------------------------------------------
Index 2                     3.15     6.55      6.64      7.11*
--------------------------------------------------------------------------------

Index 1: Salomon Brothers 6-month T-Bill Index, an unmanaged index based on the
average monthly yield of a 6-month Treasury Bill.

Index 2: Lehman Brothers 1-3 Year Government Bond Index, includes U.S.
Government securities, U.S. Treasuries or agencies with maturities of 1 to 3
years.

*     Index returns for life of fund are as of 9/30/87.

Total returns for 1990 through 1994 would have been lower if operating expenses
hadn't been maintained.


22
<PAGE>

How Much Investors Pay

This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.

--------------------------------------------------------------------------------
Fee Table                                    Class A   Class B  Class C
--------------------------------------------------------------------------------

Shareholder Fees, paid directly from your investment
--------------------------------------------------------------------------------
Maximum Sales Charge (Load) On               2.75%     None     None
Purchases (as % of offering price)
--------------------------------------------------------------------------------
Maximum Contingent Deferred Sales
Charge (Load) (as % of redemption proceeds)  None*     4.00%    1.00%
--------------------------------------------------------------------------------

Annual Operating Expenses, deducted from fund assets
--------------------------------------------------------------------------------
Management Fee                               0.55%     0.55%    0.55%
--------------------------------------------------------------------------------
Distribution (12b-1) Fee                     None      0.75     0.75
--------------------------------------------------------------------------------
Other Expenses**                             0.71      0.64     0.65
--------------------------------------------------------------------------------
Total Annual Operating Expenses              1.26      1.94     1.95
--------------------------------------------------------------------------------

*     The redemption of shares purchased at net asset value under the Large
      Order NAV Purchase Privilege (see "Policies You Should Know About --
      Policies about transactions") may be subject to a contingent deferred
      sales charge of 1.00% if redeemed within one year of purchase and 0.50% if
      redeemed during the second year following purchase.

**    Includes costs of shareholder servicing, custody and similar expenses,
      which may vary with fund size and other factors.

Based on the figures above, this example is designed to help you compare the
expenses of each share class to those of other mutual funds. The example assumes
operating expenses remain the same and that you invested $10,000, earned 5%
annual returns and reinvested all dividends and distributions. This is only an
example; actual expenses will be different.

--------------------------------------------------------------------------------
Example                 1 Year     3 Years   5 Years    10 Years
--------------------------------------------------------------------------------

Expenses, assuming you sold your shares at the end of each period
--------------------------------------------------------------------------------
Class A shares          $400       $664       $948      $1,756
--------------------------------------------------------------------------------
Class B shares           597        909      1,247       1,927
--------------------------------------------------------------------------------
Class C shares           298        612      1,052       2,275
--------------------------------------------------------------------------------
Expenses, assuming you kept your shares
--------------------------------------------------------------------------------
Class A shares          $400       $664       $948      $1,756
--------------------------------------------------------------------------------
Class B shares           197        609      1,047       1,927
--------------------------------------------------------------------------------
Class C shares           198        612      1,052       2,275
--------------------------------------------------------------------------------


                                                                              23
<PAGE>

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

                          ticker symbol   KSTAX    KSTBX     KSTCX
                            fund number   010      210       310

Kemper Strategic Income Fund
--------------------------------------------------------------------------------

The Fund's Investment Strategy

The fund seeks a high current return. The fund invests mainly in bonds issued by
U.S. and foreign corporations and governments. The fund may invest up to 50% of
total assets in foreign bonds. The fund may also invest in emerging markets
securities and dividend-paying common stocks.

In deciding which types of securities to buy and sell, the portfolio managers
evaluate each major type of security the fund invests in -- U.S. junk bonds,
investment-grade corporate bonds, emerging markets securities, foreign
government bonds and U.S. government and agency securities. The managers
typically consider a number of factors, including the relative attractiveness of
different types of securities, the potential impact of interest rate movements,
the outlook for various types of foreign bonds (including currency
considerations) and the relative yields and risks of bonds of various
maturities.

The managers may shift the proportions of the fund's holdings, favoring
different types of securities at different times, while still maintaining
variety in terms of the companies and industries represented.

The managers may adjust the duration (a measure of sensitivity to interest rate
movements) of the fund's portfolio, depending on their outlook for interest
rates.

--------------------------------------------------------------------------------
CREDIT QUALITY POLICIES The credit quality of the fund's investments may vary;
the fund may invest up to 100% of total assets in either investment-grade bonds
or in junk bonds, which are those rated below the fourth credit grade (i.e.,
grade BB/Ba and below). Compared to investment-grade bonds, junk bonds may pay
higher yields, have higher volatility and higher risk of default on payments of
interest or principal.


24
<PAGE>

The Main Risks of Investing in the Fund

There are several factors that could reduce the yield you get from the fund,
cause you to lose money, or make the fund perform less well than other
investments.

For this fund, the main risk factor will vary depending on the fund's weighting
of various types of securities. To the extent that it invests in junk bonds, one
of the main risk factors is the economy. Because the companies that issue high
yield bonds may be in uncertain financial health, the prices of their bonds can
be more vulnerable to bad economic news or even the expectation of bad news,
than investment-grade bonds. In some cases, bonds may decline in credit quality
or go into default. Also, negative corporate news may have a significant impact
on individual bond prices.

To the extent that the fund invests in higher quality bonds, it will be more
sensitive to interest rate fluctuations. A rise in interest rates generally
means a fall in bond prices -- and, in turn, a fall in the value of your
investment. An increase in the portfolio's duration could make the fund more
sensitive to this risk.

Foreign securities tend to be more volatile than their U.S. counterparts, for
reasons ranging from political and economic uncertainties to a higher risk that
essential information may be incomplete or wrong. To the extent the fund
emphasizes emerging markets where these risks are greater, it takes on greater
risk.

Other factors that could affect performance include:

o     the managers could be wrong in their analysis of economic trends, issuers,
      industries or other matters

o     currency fluctuations could cause foreign investments to lose value

o     some bonds could be paid off earlier than expected, which could hurt the
      fund's performance

o     at times, it could be hard to value some investments or to get an
      attractive price for them

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.

This fund is designed for investors interested in a bond fund that emphasizes
different types of bonds depending on market and economic outlooks.


                                                                              25
<PAGE>

The Fund's Performance History

While a fund's past performance isn't necessarily a sign of how it will do in
the future, it can be valuable for an investor to know.

The bar chart shows how the performance figures for the fund's Class A shares
have varied from year to year, which may give some idea of risk. The bar chart
does not reflect sales loads; if it did returns would be lower. The table shows
how the performance for the fund's Class A, B and C shares compare with a
broad-based market index (which, unlike the fund, has no fees or expenses). The
table includes the effect of maximum sales loads. The performance of both the
fund and the index varies over time. All figures on this page assume
reinvestment of dividends and distributions.

The inception date for Class B and C shares is May 31, 1994. Performance figures
before that date are based on the historical performance of the fund's original
share class (Class A), adjusted to reflect the higher gross total annual
operating expenses of Class B or Class C and the current applicable sales
charges of that class.

Kemper Strategic Income Fund
--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year                  Class A Shares
--------------------------------------------------------------------------------

THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE

BAR CHART DATA:

1990    -12.60
1991     51.69
1992     17.80
1993     20.88
1994     -3.88
1995     19.67
1996      8.58
1997      8.25
1998      3.79
1999     -0.79

2000 Total Return as of September 30: -3.58%
Best Quarter: 25.07%, Q1 1991     Worst Quarter -13.54%, Q3 1990

--------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/1999)
--------------------------------------------------------------------------------

                           Since     Since     Since     Since
                           12/31/98  12/31/94  12/31/89  6/23/77
                           1 Year    5 Years   10 Years  Life of Fund
--------------------------------------------------------------------------------
Class A                    -5.24%    6.71%     9.67%     9.60%
--------------------------------------------------------------------------------
Class B                    -4.56     6.50      9.04      8.64
--------------------------------------------------------------------------------
Class C                    -1.57     6.81      9.26      8.89
--------------------------------------------------------------------------------
Index                       2.15     7.61      7.65      8.97
--------------------------------------------------------------------------------

Index: Lehman Brothers Government/Corporate Bond Index, an unmanaged index
comprised of intermediate and long-term government and investment-grade
corporate debt securities.

*     Index return for the life of fund is as of 6/30/77.


26
<PAGE>

How Much Investors Pay

This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.

--------------------------------------------------------------------------------
Fee Table                                 Class A  Class B  Class C
--------------------------------------------------------------------------------

Shareholder Fees, paid directly from your investment
--------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed On    4.50%     None     None
Purchases (% of offering price)
--------------------------------------------------------------------------------
Maximum Contingent Deferred Sales
Charge (Load) (% of redemption proceeds)  None*     4.00%    1.00%
--------------------------------------------------------------------------------

Annual Operating Expenses, deducted from fund assets
--------------------------------------------------------------------------------
Management Fee                            0.56%     0.56%    0.56%
--------------------------------------------------------------------------------
Distribution (12b-1) Fee                  None      0.75     0.75
--------------------------------------------------------------------------------
Other Expenses**                          0.54      0.80     0.45
--------------------------------------------------------------------------------
Total Annual Operating Expenses           1.10      2.11     1.76
--------------------------------------------------------------------------------

*     The redemption of shares purchased at net asset value under the Large
      Order NAV Purchase Privilege (see "Policies You Should Know About --
      Policies about transactions") may be subject to a contingent deferred
      sales charge of 1.00% if redeemed within one year of purchase and 0.50% if
      redeemed during the second year following purchase.

**    Includes costs of shareholder servicing, custody and similar expenses,
      which may vary with fund size and other factors.

Based on the figures above, this example is designed to help you compare the
expenses of each share class to those of other mutual funds. The example assumes
operating expenses remain the same and that you invested $10,000, earned 5%
annual returns and reinvested all dividends and distributions. This is only an
example; actual expenses will be different.

--------------------------------------------------------------------------------
Example                 1 Year    3 Years    5 Years    10 years
--------------------------------------------------------------------------------

Expenses, assuming you sold your shares at the end of each period
--------------------------------------------------------------------------------
Class A shares          $557       $784      $1,029     $1,730
--------------------------------------------------------------------------------
Class B shares           614        961       1,334      1,945
--------------------------------------------------------------------------------
Class C shares           279        554         954      2,073
--------------------------------------------------------------------------------

Expenses, assuming you kept your shares
--------------------------------------------------------------------------------
Class A shares          $557       $784      $1,029     $1,730
--------------------------------------------------------------------------------
Class B shares           214        661       1,134      1,945
--------------------------------------------------------------------------------
Class C shares           179        554         954      2,073
--------------------------------------------------------------------------------


                                                                              27
<PAGE>

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

                          ticker symbol   KUSAX    KUSBX     KUSCX
                            fund number   018      218       318

Kemper U.S. Government Securities Fund
--------------------------------------------------------------------------------

The Fund's Investment Strategy

The fund seeks high current income, liquidity and security of principal. The
fund invests principally in U.S. government securities of any maturity, focusing
on Ginnie Maes. The fund may invest in other mortgage-backed securities issued
by government issuers and other U.S. government securities including U.S.
Treasuries and other securities issued by the U.S. government, its agencies or
instrumentalities.

In deciding which types of securities to buy and sell, the portfolio managers
first consider the relative attractiveness of Treasuries compared to other U.S.
government and agency securities and determine allocations for each. Their
decisions are generally based on a number of factors, including interest rate
outlooks and changes in supply and demand within the bond market.

In choosing individual bonds, the managers review each bond's fundamentals,
compare the yields of shorter maturity bonds to those of longer maturity bonds
and use technical analysis to project prepayment rates and other factors that
could affect a bond's attractiveness.

The managers may adjust the duration (a measure of sensitivity to interest rate
movements) of the fund's portfolio, depending on their outlook for interest
rates.

--------------------------------------------------------------------------------
CREDIT QUALITY POLICIES This fund normally invests all of its assets in
securities issued by the U.S. government, its agencies or instrumentalities.
These securities are generally considered to be among the very highest quality
securities.


28
<PAGE>

The Main Risks of Investing in the Fund

There are several factors that could reduce the yield you get from the fund,
cause you to lose money or make the fund perform less well than other
investments.

As with most bond funds, one of the most important factors is market interest
rates. A rise in interest rates generally means a fall in bond prices -- and, in
turn, a fall in the value of your investment. An increase in the portfolio's
duration could make the fund more sensitive to this risk.

Some securities issued by U.S. government agencies or instrumentalities are
supported only by the credit of that agency or instrumentality, while other
securities have an additional line of credit with the U.S. Treasury. There is no
guarantee that the U.S. government will provide support to such agencies or
instrumentalities and such securities may involve risk of loss of principal and
interest. The full faith and credit guarantee of the U.S. government doesn't
protect the fund against market-driven declines in the prices or yields of these
securities, nor does it apply to shares of the fund itself.

Mortgage-backed securities carry additional risks and may be more volatile than
many other types of debt securities. Any unexpected behavior in interest rates
could hurt the performance of these securities. For example, a large fall in
interest rates could cause these securities to be paid off earlier than
expected, causing the fund to reinvest the money at a lower rate. In addition,
if interest rates rise or stay high, these securities could be paid off later
than expected, causing the fund to endure low yields. The result for the fund
could be an increase in the volatility of its share price and yield.

Other factors that could affect performance include:

o     the managers could be wrong in their analysis of economic trends, issuers,
      industries or other matters

o     at times, it could be hard to value some investments or to get an
      attractive price for them

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.

This fund is designed for investors interested in a fund that searches for
attractive yields generated by U.S. government securities.


                                                                              29
<PAGE>

The Fund's Performance History

While a fund's past performance isn't necessarily a sign of how it will do in
the future, it can be valuable for an investor to know.

The bar chart shows how the performance figures for the fund's Class A shares
have varied from year to year, which may give some idea of risk. The bar chart
does not reflect sales loads; if it did returns would be lower. The table shows
how the performance for the fund's Class A, B and C shares compare with a
broad-based market index (which, unlike the fund, has no fees or expenses). The
table includes the effect of maximum sales loads. The performance of both the
fund and the index varies over time. All figures on this page assume
reinvestment of dividends and distributions.

The inception date for Class B and C shares is May 31, 1994. Performance figures
before that date are based on the historical performance of the fund's original
share class (Class A), adjusted to reflect the higher gross total annual
operating expenses of Class B or Class C and the current applicable sales
charges of that class.

Kemper U.S. Government Securities Fund
--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year              Class A Shares
--------------------------------------------------------------------------------

THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE

BAR CHART DATA:

1990      9.68
1991     17.25
1992      4.61
1993      6.31
1994     -3.06
1995     18.37
1996      2.83
1997      9.03
1998      7.03
1999      0.30

2000 Total Return as of September 30: 6.48%
Best Quarter: 6.65%, Q4 1990      Worst Quarter -2.45%, Q1 1994

--------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/1999)
--------------------------------------------------------------------------------

                                                         Since
                           Since     Since     Since     10/1/79
                           12/31/98  12/31/94  12/31/89  Life of
                           1 Year    5 Years   10 Years  Fund
--------------------------------------------------------------------------------

Class A                     4.17%    6.35%     6.55%     8.44%
--------------------------------------------------------------------------------
Class B                    -3.40     6.22      6.03      7.65
--------------------------------------------------------------------------------
Class C                    -0.51     6.40      6.13      7.76
--------------------------------------------------------------------------------
Index                       1.99     8.03      7.92      N/A*
--------------------------------------------------------------------------------

Index: Salomon Brothers 30-Year GNMA Index, an unmanaged index that measures the
total return of GNMA 30-year pass throughs of single family and graduated
payment mortgages.

*     The Index was not in existence on the fund's inception date.


30
<PAGE>

How Much Investors Pay

This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.

--------------------------------------------------------------------------------
Fee Table                                 Class A  Class B  Class C
--------------------------------------------------------------------------------

Shareholder Fees, paid directly from your investment
--------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed       4.50%    None     None
On Purchases (% of offering price)
--------------------------------------------------------------------------------
Maximum Contingent Deferred Sales
Charge (Load) (% of redemption proceeds)  None*    4.00%    1.00%
--------------------------------------------------------------------------------

Annual Operating Expenses, deducted from fund assets
--------------------------------------------------------------------------------
Management Fee                            0.42%    0.42%    0.42%
--------------------------------------------------------------------------------
Distribution (12b-1) Fee                  None     0.75     0.75
--------------------------------------------------------------------------------
Other Expenses**                          0.38     0.53     0.43
--------------------------------------------------------------------------------
Total Annual Operating Expenses           0.80     1.70     1.60
--------------------------------------------------------------------------------

*     The redemption of shares purchased at net asset value under the Large
      Order NAV Purchase Privilege (see "Policies You Should Know About --
      Policies about transactions") may be subject to a contingent deferred
      sales charge of 1.00% if redeemed within one year of purchase and 0.50% if
      redeemed during the second year following purchase.

**    Includes costs of shareholder servicing, custody and similar expenses,
      which may vary with fund size and other factors.

Based on the figures above, this example is designed to help you compare the
expenses of each share class to those of other mutual funds. The example assumes
operating expenses remain the same and that you invested $10,000, earned 5%
annual returns and reinvested all dividends and distributions. This is only an
example; actual expenses will be different.

--------------------------------------------------------------------------------
Example                 1 Year     3 Years    5 Years   10 Years
--------------------------------------------------------------------------------

Expenses, assuming you sold your shares at the end of each period
--------------------------------------------------------------------------------
Class A shares          $528       $694        $874     $1,394
--------------------------------------------------------------------------------
Class B shares           573        836       1,123      1,549
--------------------------------------------------------------------------------
Class C shares           263        505         871      1,900
--------------------------------------------------------------------------------

Expenses, assuming you kept your shares
--------------------------------------------------------------------------------
Class A shares          $528       $694        $874     $1,395
--------------------------------------------------------------------------------
Class B shares           173        536         923      1,549
--------------------------------------------------------------------------------
Class C shares           163        505         871      1,900
--------------------------------------------------------------------------------


                                                                              31
<PAGE>

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

                          ticker symbol   KUMAX    KUMBX     KUMCX
                            fund number   071      271       371

Kemper U.S. Mortgage Fund
--------------------------------------------------------------------------------

The Fund's Investment Strategy

The fund seeks to provide maximum current return from U.S. government
securities. The fund invests primarily in U.S. government securities, mainly
mortgage-backed securities issued by U.S. government agencies. These include
securities issued by Ginnie Mae, Fannie Mae and Freddie Mac. The fund may also
invest in U.S. Treasury securities.

In deciding which types of securities to buy and sell, the portfolio managers
first consider the relative attractiveness of mortgage-backed securities
compared to U.S. Treasuries and decide on allocations for each. Their decisions
are generally based on a number of factors, including changes in supply and
demand within the bond market.

In choosing individual bonds, the managers review each bond's fundamentals,
compare the yields of shorter maturity bonds to those of longer maturity bonds
and use technical analysis to project prepayment rates and other factors that
could affect a bond's attractiveness.

The managers may adjust the duration (a measure of sensitivity to interest rate
movements) of the fund's portfolio, depending on their outlook for interest
rates.

--------------------------------------------------------------------------------
CREDIT QUALITY POLICIES This fund normally invests at least 65% of total assets
in mortgage-backed securities issued by the U.S. government, its agencies or
instrumentalities.

These securities are generally considered to be among the very highest quality
securities.


32
<PAGE>

The Main Risks of Investing in the Fund

There are several factors that could reduce the yield you get from the fund,
cause you to lose money or make the fund perform less well than other
investments.

As with most bond funds, one of the most important factors is market interest
rates. A rise in interest rates generally means a fall in bond prices -- and, in
turn, a fall in the value of your investment. An increase in the portfolio's
duration could make the fund more sensitive to this risk.

Some securities issued by U.S. government agencies or instrumentalities are
supported only by the credit of that agency or instrumentality, while other
securities have an additional line of credit with the U.S. Treasury. There is no
guarantee that the U.S. government will provide support to such agencies or
instrumentalities and such securities may involve risk of loss of principal and
interest. The full faith and credit guarantee of the U.S. government doesn't
protect the fund against market-driven declines in the prices or yields of these
securities, nor does it apply to shares of the fund itself.

Mortgage- and asset-backed securities carry additional risks and may be more
volatile than many other types of debt securities. Any unexpected behavior in
interest rates could hurt the performance of these securities. For example, a
large fall in interest rates could cause these securities to be paid off earlier
than expected, causing the fund to reinvest the money at a lower rate. In
addition, if interest rates rise or stay high, these securities could be paid
off later than expected, causing the fund to endure low yields. The result for
the fund could be an increase in the volatility of its share price and yield.

Other factors that could affect performance include:

o     the managers could be wrong in their analysis of economic trends, issuers,
      industries or other matters

o     at times, it could be hard to value some investments or to get an
      attractive price for them

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.

This fund is designed for investors who want to avoid exposure to significant
credit risk and are interested in high current income .


                                                                              33
<PAGE>

The Fund's Performance History

While a fund's past performance isn't necessarily a sign of how it will do in
the future, it can be valuable for an investor to know.

The bar chart shows how the performance figures for the fund's Class B shares
have varied from year to year, which may give some idea of risk. The bar chart
does not reflect sales loads; if it did returns would be lower.

The table shows how the performance for the fund's Class A, B and C shares
compare with a broad-based market index (which, unlike the fund, has no fees or
expenses). The performance of both the fund and the index varies over time. All
figures on this page assume reinvestment of dividends and distributions.

Kemper U.S. Mortgage Fund
--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year              Class B Shares
--------------------------------------------------------------------------------

THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE

BAR CHART DATA:

1990      7.11
1991     17.02
1992      4.45
1993      4.82
1994     -4.13
1995     16.94
1996      1.76
1997      8.01
1998      5.89
1999     -0.57

2000 Total Return as of September 30: 5.27%
Best Quarter: 6.73%, Q4 1991      Worst Quarter -3.03%, Q3 1992

--------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/1999)
--------------------------------------------------------------------------------

                                 Since    Since                Since
            Since      Since     5/31/94  1/10/92   Since      10/26/84
            12/31/98   12/31/94  Life of  Life of   12/31/89   Life of
            1 Year     5 Years   Class C  Class A   10 Years   Class B
--------------------------------------------------------------------------------
Class A     -4.62%     6.24%     --       4.85%     --         --
--------------------------------------------------------------------------------
Class B      3.41      6.08      --       --        5.94%      6.53%
--------------------------------------------------------------------------------
Class C     -0.42      6.42     5.55%     --        --         --
--------------------------------------------------------------------------------
Index        1.99      8.03     7.38      6.82*     7.92       9.81**
--------------------------------------------------------------------------------

Index: Salomon Brothers 30-Year GNMA Index, an unmanaged index that measures the
total return of GNMA 30-year pass throughs of single family and graduated
payment mortgages.

*     Index return for life of Class A is as of 1/31/92.

**    Index return for life of Class B is as of 10/31/84.

The table includes the effects of maximum sales loads.


34
<PAGE>

How Much Investors Pay

This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.

--------------------------------------------------------------------------------
Fee Table                                   Class A  Class B  Class C
--------------------------------------------------------------------------------

Shareholder Fees, paid directly from your investment
--------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed On      4.50%    None     None
Purchases (% of offering price)
--------------------------------------------------------------------------------
Maximum Contingent Deferred Sales
Charge (Load) (% of redemption proceeds)    None*    4.00%     1.00%
--------------------------------------------------------------------------------

Annual Operating Expenses, deducted from fund assets
--------------------------------------------------------------------------------
Management Fee                              0.52%    0.52%     0.52%
--------------------------------------------------------------------------------
Distribution (12b-1) Fee                    None     0.75      0.75
--------------------------------------------------------------------------------
Other Expenses**                            0.46     0.58      0.35
--------------------------------------------------------------------------------
Total Annual Operating Expenses             0.98     1.85      1.62
--------------------------------------------------------------------------------

*     The redemption of shares purchased at net asset value under the Large
      Order NAV Purchase Privilege (see "Policies You Should Know About --
      Policies about transactions") may be subject to a contingent deferred
      sales charge of 1.00% if redeemed within one year of purchase and 0.50% if
      redeemed during the second year following purchase.

**    Includes costs of shareholder servicing, custody and similar expenses,
      which may vary with fund size and other factors.

Based on the figures above, this example is designed to help you compare the
expenses of each share class to those of other mutual funds. The example assumes
operating expenses remain the same and that you invested $10,000, earned 5%
annual returns and reinvested all dividends and distributions. This is only an
example; actual expenses will be different.

--------------------------------------------------------------------------------
Example                    1 Year    3 years    5 Years     10 Years
--------------------------------------------------------------------------------

Expenses, assuming you sold your shares at the end of each period
--------------------------------------------------------------------------------
Class A shares             $545      $748        $967       $1,597
--------------------------------------------------------------------------------
Class B shares              588       882       1,201        1,732
--------------------------------------------------------------------------------
Class C shares              265       511         881        1,922
--------------------------------------------------------------------------------

Expenses, assuming you kept your shares
--------------------------------------------------------------------------------
Class A shares             $545      $748        $967       $1,597
--------------------------------------------------------------------------------
Class B shares              188       582       1,001        1,732
--------------------------------------------------------------------------------
Class C shares              165       511         881        1,922
--------------------------------------------------------------------------------


                                                                              35
<PAGE>

Other Policies and Risks

While the previous pages describe the main points of each fund's strategy and
risks, there are a few other issues to know about:

o     Although major changes tend to be infrequent, a fund's Board could change
      that fund's investment goal without seeking shareholder approval.

o     These funds may trade more securities than some other bond funds. This
      could raise transaction costs (and lower performance) and could mean
      higher taxable distributions.

o     As a temporary defensive measure, any of these funds could shift up to
      100% of their assets into investments such as money market securities.
      This could prevent losses, but would mean that the funds were not pursuing
      their goals.

o     The advisor establishes a security's credit quality when it buys the
      security, using independent ratings or, for unrated securities, its own
      credit determination. When ratings don't agree, a fund may use the higher
      rating. If a security's credit quality falls, the advisor will determine
      whether selling it would be in the shareholders' best interests.

o     Although the managers are permitted to use various types of derivatives
      (contracts whose value is based on, for example, indices, currencies or
      securities), the managers don't intend to use them as principal
      investments. With derivatives, there is a risk that they could produce
      disproportionate losses.

Keep in mind that there is no assurance that any mutual fund will achieve its
goal.

For more information

This prospectus doesn't tell you about every policy or risk of investing in a
fund. For more information, you may want to request a copy of the SAI (the back
cover has additional information on how to do this).

Euro conversion

Those funds permitted to invest in foreign securities could be affected by
accounting differences, changes in tax treatment or other issues related to the
conversion of certain European currencies into the euro, which is already
underway. The advisor has readiness programs designed to address these problems,
and has researched the readiness of suppliers and business partners as well as
issuers of securities the funds own. Still, there's some risk that one or both
of these problems could materially affect a fund's operations (such as its
ability to calculate net asset value and to handle purchases and redemptions),
its investments or securities markets in general.


36
<PAGE>

Who Manages and Oversees the Funds

The investment advisor

The fund's investment advisor is Zurich Scudder Investments, Inc., 345 Park
Avenue, New York, NY. The advisor has more than 80 years of experience managing
mutual funds, and currently has more than $290 billion in assets under
management.

The advisor's asset management teams include investment professionals,
economists, research analysts, traders and other investment specialists, located
in offices across the United States and around the world.

The investment advisor receives a management fee from each fund. Below are the
actual rates paid by each fund for the 12 months through the most recent fiscal
year end, as a percentage of average daily net assets:

Fund Name                                      Fee Paid
--------------------------------------------------------------------------------
Kemper High Yield Fund                         0.53%
--------------------------------------------------------------------------------
Kemper High Yield Fund II                      0.64%*
--------------------------------------------------------------------------------
Kemper High Yield Opportunity Fund             0.65%
--------------------------------------------------------------------------------
Kemper Income And Capital Preservation Fund    0.53%
--------------------------------------------------------------------------------
Kemper Short-Term U.S. Government Fund         0.55%
--------------------------------------------------------------------------------
Kemper Strategic Income Fund                   0.56%
--------------------------------------------------------------------------------
Kemper U.S. Government Securities Fund         0.42%
--------------------------------------------------------------------------------
Kemper U.S. Mortgage Fund                      0.52%
--------------------------------------------------------------------------------

*     Reflecting the effect of expense limitations and/or fee waivers then in
      effect.


                                                                              37
<PAGE>

The portfolio managers

The following people handle the day-to-day management of the funds.

Kemper High Yield Fund              Kemper Strategic Income Fund

  Harry E. Resis, Jr.                 J. Patrick Beimford
  Lead Portfolio Manager              Co-lead Portfolio Manager
   o Began investment career in        o Began investment career
     1968                                in 1976
   o Joined the advisor in 1988        o Joined the advisor
   o Joined the fund team in 1992        in 1976
                                       o Joined the fund team
  Daniel J. Doyle                        in 1996
   o Began investment career in
     1984                             Jan C. Faller
   o Joined the advisor in 1986       Co-lead Portfolio Manager
   o Joined the fund team in 1999      o Began investment career
                                         in1968
Kemper High Yield Fund II              o Joined the advisor
                                         in 1999
  Harry E. Resis, Jr.                  o Joined the fund team
  Lead Portfolio Manager                 in 2000
   o Began investment career in
     1968                           Kemper U.S. Government
   o Joined the advisor in 1988     Securities Fund
   o Joined the fund team in 1998
                                      Richard L. Vandenberg
  Daniel J. Doyle                     Lead Portfolio Manager
   o Began investment career in        o Began investment career
     1984                                in 1973
   o Joined the advisor in 1986        o Joined the advisor
   o Joined the fund team in 1998        in 1996
                                       o Joined the fund team
Kemper High Yield Opportunity Fund       in 1996

  Harry E. Resis, Jr.                 Scott E. Dolan
  Lead Portfolio Manager               o Began investment career
   o Began investment career in          in 1989
     1968                              o Joined the advisor
   o Joined the advisor in 1988          in 1989
   o Joined the fund team in 1997      o Joined the fund team
                                         in 1998
  Daniel J. Doyle
   o Began investment career in       John E. Dugenske
     1984                              o Began investment career
   o Joined the advisor in 1986          in 1990
   o Joined the fund team in 1997      o Joined the advisor
                                         in 1998
Kemper Income And Capital              o Joined the fund team
Preservation Fund                        in 1998

  Robert S. Cessine                 Kemper U.S. Mortgage Fund
   o Began investment career in
     1982                             Richard L. Vandenberg
   o Joined the advisor in 1993       Lead Portfolio Manager
   o Joined the fund team in 1994      o Began investment career
                                         in 1973
Kemper Short-Term U.S.                 o Joined the advisor
Government Fund                          in 1996
                                       o Joined the fund team
  Richard L. Vandenberg                  in 1996
  Lead Portfolio Manager
   o Began investment career in       Scott E. Dolan
     1973                              o Began investment career
   o Joined the advisor in 1996          in 1989
   o Joined the fund team in 1996      o Joined the advisor
                                         in 1989
  Scott E. Dolan                       o Joined the fund team
   o Began investment career in          in 1998
     1989
   o Joined the advisor in 1989       John E. Dugenske
   o Joined the fund team in 1998      o Began investment career
                                         in 1990
  John E. Dugenske                     o Joined the advisor
   o Began investment career in          in 1998
     1990                              o Joined the fund team
   o Joined the advisor in 1998          in 1998
   o Joined the fund team in 1998


38
<PAGE>

Financial Highlights

These tables are designed to help you understand each fund's financial
performance in recent years. The figures in the first part of each table are for
a single share. The total return figures represent the percentage that an
investor in a particular fund would have earned (or lost), assuming all
dividends and distributions were reinvested. This information has been audited
by Ernst & Young LLP, whose report, along with each fund's financial statements,
is included in that fund's annual report (see "Shareholder reports" on the back
cover).

Kemper High Yield Fund -- Class A

--------------------------------------------------------------------------------
Year ended September 30,             2000      1999      1998     1997     1996
--------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning
of period                           $7.23     $7.68     $8.50    $8.23    $8.01
                                   ---------------------------------------------
Income from investment operations:
  Net investment income               .77(a)   .78(a)     .76(a)   .76      .76
  Net realized and unrealized
  gain (loss) on investment
  transactions                       (.89)    (.46)      (.81)     .31      .23
                                   ---------------------------------------------
  Total from investment operations   (.12)     .32       (.05)    1.07      .99
  Less distributions from:
  Net investment income              (.77)    (.77)      (.77)    (.80)    (.77)
  Total distributions                (.77)    (.77)      (.77)    (.80)    (.77)
                                   ---------------------------------------------
Net asset value, end of period      $6.34    $7.23      $7.68    $8.50    $8.23
                                   =============================================
Total return (%)                    (1.88)    4.11       (.95)   13.69    13.00

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of period           2,277     2,945     3,304    3,463    2,909
($ millions)
Ratio of expenses before expense
reductions (%)                        .93       .96       .89      .88      .88
Ratio of expenses after expense
reductions (%)                        .92       .96       .89      .88      .88
Ratio of net investment income
(loss) (%)                          11.10     10.15      9.09     9.18     9.45
Portfolio turnover rate (%)            52        67        92       91      102

(a)   Based on monthly average shares outstanding during the period.
(b)   Total return does not reflect the effect of sales charges.


                                                                              39
<PAGE>

Kemper High Yield Fund -- Class B

--------------------------------------------------------------------------------
Year ended September 30,           2000      1999      1998      1997     1996
--------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning
of period                         $7.22     $7.67     $8.49     $8.22    $8.00
                                 -----------------------------------------------
Income from investment
operations:
  Net investment income             .71(a)    .71(a)    .68(a)    .69      .69
  Net realized and unrealized
  gain (loss) on investment
  transactions                     (.88)     (.45)     (.80)      .31      .23
                                 -----------------------------------------------
  Total from investment            (.17)      .26      (.12)      1.00      .92
  operations
  Less distributions from:
  Net investment income            (.72)     (.71)     (.70)     (.73)    (.70)
Total distributions                (.72)     (.71)     (.70)     (.73)    (.70)
                                 -----------------------------------------------
Net asset value, end of period    $6.33     $7.22     $7.67     $8.49    $8.22
                                 ===============================================
Total return (%) (b)              (2.68)     3.26     (1.82)    12.72    12.02

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of period           792     1,145     1,292     1,317    1,099
($ millions)
Ratio of expenses before
expense reductions (%)             1.78      1.78      1.76      1.76     1.77
Ratio of expenses after expense
reductions (%)                     1.77      1.78      1.76      1.76     1.77
Ratio of net investment income
(loss) (%)                        10.24      9.33      8.22      8.30     8.56
Portfolio turnover rate (%)          52        67        92        91      102

(a)   Based on monthly average shares outstanding during the period.
(b)   Total return does not reflect the effect of sales charges.


40
<PAGE>

Kemper High Yield Fund -- Class C

--------------------------------------------------------------------------------
Year ended September 30,              2000      1999     1998     1997     1996
--------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning
of period                            $7.24     $7.69    $8.52     $8.24   $8.02
                                    --------------------------------------------
Income from investment operations:
  Net investment income                .72(a)    .72(a)   .69(a)    .70     .69
  Net realized and unrealized
  gain (loss) on investment
  transactions                        (.89)     (.46)    (.82)      .31     .23
                                    --------------------------------------------
  Total from investment operations    (.17)      .26     (.13)     1.01     .92
  Less distributions from:
  Net investment income               (.72)     (.71)    (.70)      .73     .70
Total distributions                   (.72)     (.71)    (.70)    12.72   12.02
                                    --------------------------------------------
Net asset value, end of period       $6.35     $7.24    $7.69     $8.52   $8.24
                                    ============================================
Total return (%) (b)                 (2.66)     3.30    (1.89)    12.88   12.06

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of period              124       176      171       125      58
($ millions)
Ratio of expenses before expense
reductions (%)                        1.77      1.73     1.71      1.71    1.71
Ratio of expenses after expense
reductions (%)                        1.76      1.73     1.71      1.71    1.71
Ratio of net investment income
(loss) (%)                           10.25      9.38     8.27      8.35    8.62
Portfolio turnover rate (%)             52        67       92        91     102

(a)      Based on monthly average shares outstanding during the period.
(b)      Total return does not reflect the effect of sales charges.


                                                                              41
<PAGE>

Kemper High Yield Fund II -- Class A

                                                                For the period
                                                              November 30, 1998
                                               Year ended      (commencement of
                                             September 30,      operations) to
                                                  2000        September 30, 1999
--------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period             $8.76             $9.50
                                            ------------------------------------
Income from investment operations:
  Net investment income (loss) (a)                 .93               .72
  Net realized and unrealized gain (loss)
  on investment transactions                      (.99)             (.70)
                                            ------------------------------------
  Total from investment operations                (.06)              .02
  Less distributions from:
  Net investment income                           (.92)             (.76)
  Total distributions                             (.92)             (.76)
                                            ------------------------------------
Net asset value, end of period                   $7.78             $8.76
                                            ====================================
Total return (%) (b) (c)                          (.98)              .19**

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of period ($ in thousands)      46,704            57,029
Ratio of expenses before expense
reductions (%)                                    1.20              1.59*
Ratio of expenses after expense reductions (%)     .88               .39*
Ratio of net investment income (loss) (%)        10.90             10.24*
Portfolio turnover rate (%)                         66                79*

*  Annualized
** Not annualized
(a)   Based on monthly average shares outstanding during the period.
(b)   Total return does not reflect the effect of any sales charges.
(c)   Total return would have been lower had certain expenses not been reduced.


42
<PAGE>

Kemper High Yield Fund II -- Class B

                                                               For the period
                                                              November 30, 1998
                                              Year ended      (commencement of
                                             September 30,     operations) to
                                                 2000        September 30, 1999
--------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period             $8.77             $9.50
                                           -------------------------------------
Income from investment operations:
  Net investment income (loss) (a)                 .86               .68
  Net realized and unrealized gain (loss)
  on investment transactions                      (.99)             (.71)
                                           -------------------------------------
  Total from investment operations                (.13)              .03
  Less distributions from:
  Net investment income                           (.86)             (.70)
  Total distributions                             (.86)             (.70)
                                           -------------------------------------
Net asset value, end of period                   $7.78             $8.77
                                           =====================================
Total return (%) (b) (c)                         (1.73)             (.43)**

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of period ($ in thousands)      63,211            70,802
Ratio of expenses before expense
reductions (%)                                    1.96              2.19*
Ratio of expenses after expense
reductions (%)                                    1.63              1.00*
Ratio of net investment income (loss) (%)        10.16              9.63*
Portfolio turnover rate (%)                         66                79*

*  Annualized
** Not annualized

(a)   Based on monthly average shares outstanding during the period.
(b)   Total return does not reflect the effect of any sales charges.
(c)   Total return would have been lower had certain expenses not been reduced.


                                                                              43
<PAGE>

Kemper High Yield Fund II -- Class C

                                                                For the period
                                                              November 30, 1998
                                               Year ended      (commencement of
                                             September 30,      operations) to
                                                  2000        September 30, 1999
--------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period              $8.77            $9.50
                                            ------------------------------------
Income from investment operations:
  Net investment income (loss) (a)                  .86              .68
  Net realized and unrealized gain (loss)
  on investment transactions                       (.99)            (.71)
                                            ------------------------------------
  Total from investment operations                 (.13)             .03
  Less distributions from:
  Net investment income                            (.86)            (.70)
  Total distributions                              (.86)            (.70)
                                            ------------------------------------
Net asset value, end of period                    $7.78            $8.77
                                            ====================================
Total return (%) (b) (c)                          (1.73)            (.43)**

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of period ($ in thousands)       18,379           26,179
Ratio of expenses before expense
reductions (%)                                     1.94            2.25*
Ratio of expenses after expense reductions
(%)                                                1.63            1.00*
Ratio of net investment income (loss) (%)         10.13            9.63*
Portfolio turnover rate (%)                          66              79*

*     Annualized
*     Not annualized
(a)   Based on monthly average shares outstanding during the period.
(b)   Total return does not reflect the effect of any sales charges.
(c)   Total return would have been lower had certain expenses not been reduced.


44
<PAGE>

Kemper High Yield Opportunity Fund -- Class A

                                                                  For the period
                                                                 October 1, 1997
                                                                (commencement of
                                   Year ended      Year ended    operations) to
                                  September 30,  September 30,    September 30,
                                      2000            1999            1998
--------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning
of period                             $8.33           $8.89           $9.50
                                 -----------------------------------------------
Income from investment
operations:
  Net investment income (loss)          .81(a)          .88(a)          .70
  Net realized and unrealized
  gain (loss) on investment
  transactions                        (1.33)           (.54)           (.60)
                                 -----------------------------------------------
  Total from investment
  operations                           (.52)            .34             .10
Less distributions from:
  Net investment income                (.87)           (.85)           (.67)
  Net realized gains on
  investment transactions                --            (.05)           (.04)
                                 -----------------------------------------------
  Total distributions                  (.87)           (.90)           (.71)
                                 -----------------------------------------------
Net asset value, end of period        $6.94           $8.33           $8.89
                                 ===============================================
Total return (%) (b)                  (6.91)           3.55             .59**

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of period
($ in thousands)                      9,484          17,223          12,249
Ratio of expenses before
expense reductions (%)                 1.90            1.53            1.27*
Ratio of expenses after expense
reductions (%)                         1.89            1.53            1.27*
Ratio of net investment income
(loss) (%)                            10.35            9.64            8.31*
Portfolio turnover rate (%)              76              98             169*

*     Annualized
**    Not annualized
(a)   Based on monthly average shares outstanding during the period.
(b)   Total return does not reflect the effect of any sales charges.


                                                                              45
<PAGE>

Kemper High Yield Opportunity Fund -- Class B

                                                                  For the period
                                                                 October 1, 1997
                                                                (commencement of
                                   Year ended      Year ended    operations) to
                                  September 30,  September 30,    September 30,
                                      2000            1999            1998
--------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning
of period                              $8.33           $8.89          $9.50
                                 -----------------------------------------------
Income from investment
operations:
  Net investment income (loss)           .76(a)          .80(a)         .63
  Net realized and unrealized
  gain (loss) on investment
  transactions                         (1.35)           (.54)          (.61)
                                 -----------------------------------------------
  Total from investment
  operations                            (.59)            .26            .02
Less distributions from:
  Net investment income                 (.80)           (.77)          (.59)
  Net realized gains on
  investment transactions                 --            (.05)          (.04)
                                 -----------------------------------------------
  Total distributions                   (.80)           (.82)          (.63)
                                 -----------------------------------------------
Net asset value, end of period         $6.94           $8.33          $8.89
Total return (%) (b)                   (7.71)           2.73           (.18)**

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of period
($ in thousands)                      10,945          16,646         12,222
Ratio of expenses before
expense reductions (%)                  2.66            2.40           2.03*
Ratio of expenses after expense
reductions (%)                          2.65            2.40           2.03*
Ratio of net investment income
(loss) (%)                              9.58            8.77           7.55*
Portfolio turnover rate (%)               76              98            169*

*     Annualized
**    Not annualized
(a)   Based on monthly average shares outstanding during the period.
(b)   Total return does not reflect the effect of any sales charges.


46
<PAGE>

Kemper High Yield Opportunity Fund -- Class C

                                                                  For the period
                                                                 October 1, 1997
                                                                (commencement of
                                   Year ended      Year ended    operations) to
                                  September 30,  September 30,    September 30,
                                      2000            1999            1998
--------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning
of period                             $8.34           $8.89           $9.50
                                 -----------------------------------------------
Income from investment
operations:
  Net investment income (loss)          .78(a)          .80(a)          .62
  Net realized and unrealized
  gain (loss) on investment
  transactions                        (1.38)           (.53)           (.60)
                                 -----------------------------------------------
  Total from investment
  operations                           (.60)            .27             .02
Less distributions from:
  Net investment income                (.80)           (.77)           (.59)
  Net realized gains on
  investment transactions                --            (.05)           (.04)
  Total distributions                  (.80)           (.82)           (.63)
                                 -----------------------------------------------
Net asset value, end of period        $6.94           $8.34           $8.89
                                 -----------------------------------------------
Total return (%) (b)                  (7.82)           2.39            (.18)**

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of period
($ in thousands)                      1,958           3,384           2,220
Ratio of expenses before
expense reductions (%)                 2.61            2.38            2.03*
Ratio of expenses after expense
reductions (%)                         2.60            2.38            2.03*
Ratio of net investment income
(loss) (%)                             9.63            8.78            7.55*
Portfolio turnover rate (%)              76              98             169*

*     Annualized
**    Not annualized
(a)   Based on monthly average shares outstanding during the period.
(b)   Total return does not reflect the effect of any sales charges.


                                                                              47
<PAGE>

Kemper Income And Capital Preservation Fund -- Class A

--------------------------------------------------------------------------------
Years ended October 31,         2000       1999       1998      1997      1996
--------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning
of year                         $8.06      $8.67      $8.54     $8.46     $8.62
                             ---------------------------------------------------
Income from investment
operations:
  Net investment income
  (loss)                          .50(a)     .51(a)     .53       .57       .58
  Net realized and
  unrealized gain (loss) on
  investment transactions        (.09)      (.63)       .14       .08      (.15)
                             ---------------------------------------------------
  Total from investment
  operations                      .41       (.12)       .67       .65       .43
  Less distribution from
  net investment income          (.48)      (.49)      (.54)     (.57)     (.59)
                             ---------------------------------------------------
Net asset value, end of year    $7.99      $8.06      $8.67     $8.54     $8.46
                             ===================================================
Total return (%) (b)             5.31      (1.45)      8.13      8.00      5.17

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of period
($ in thousands)              309,040    371,763    563,571   514,558   484,005
Ratio of expenses before
expense reductions (%)           1.04       1.08       1.01       .97       .96
Ratio of expenses after
expense reductions (%)           1.03       1.07       1.01       .97       .96
Ratio of net investment
income (loss) (%)                6.33       6.05       6.17      6.75      6.90
Portfolio turnover rate (%)       234        108        121       164        74

(a)   Based on monthly average shares outstanding during the period.
(b)   Total return does not reflect the effect of sales charge.


48
<PAGE>

Kemper Income And Capital Preservation Fund -- Class B

--------------------------------------------------------------------------------
Years ended October 31,        2000       1999       1998      1997       1996
--------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning
of year                        $8.02      $8.64       $8.51     $8.43     $8.59
                            ----------------------------------------------------
Income from investment
operations:
  Net investment income
  (loss)                         .44(a)     .43(a)      .46       .49       .50
  Net realized and
  unrealized gain (loss)
  on investment
  transactions                  (.08)      (.63)        .14       .08      (.15)
                            ----------------------------------------------------
  Total from investment
  operations                     .36       (.20)        .60       .57       .35
  Less distribution from
  net investment income         (.42)      (.42)       (.47)     (.49)     (.51)
Net asset value, end of
year                           $7.96      $8.02       $8.64     $8.51     $8.43
                            ====================================================
Total return (%) (b)            4.60      (2.37)       7.20      6.99      4.20

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of period
($ in thousands)              77,880     97,975     106,171    83,295    76,437
Ratio of expenses before
expense reductions (%)          1.81       1.93        1.88      1.90      1.93
Ratio of expenses after
expense reductions (%)          1.80       1.92        1.88      1.90      1.93
Ratio of net investment
income (loss) (%)               5.56       5.20        5.30      5.82      5.93
Portfolio turnover rate (%)      234        108         121       164        74

(a)   Based on monthly average shares outstanding during the period.
(b)   Total return does not reflect the effect of sales charge.


                                                                              49
<PAGE>

Kemper Income And Capital Preservation Fund -- Class C

--------------------------------------------------------------------------------
Years ended October 31,         2000       1999        1998      1997      1996
--------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning
of year                        $8.05      $8.66       $8.53     $8.45     $8.61
                            ----------------------------------------------------
Income from investment
operations:
  Net investment income
  (loss)                         .45(a)     .44(a)      .46       .49       .50
  Net realized and
  unrealized gain (loss)
  on investment
  transactions                  (.09)      (.62)        .14       .08      (.15)
                            ----------------------------------------------------
  Total from investment
  operations                     .36       (.18)        .60       .57       .35
  Less distribution from
  net investment income         (.42)      (.43)       (.47)     (.49)     (.51)
Net asset value, end of
year                           $7.99      $8.05       $8.66     $8.53     $8.45
                            ====================================================
Total return (%) (b)            4.68      (2.19)       7.20      7.03      4.23

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of period
($ in thousands)              19,186     19,875      16,759     9,083     5,611
Ratio of expenses before
expense reductions (%)          1.72       1.82        1.86      1.86      1.90
Ratio of expenses after
expense reductions (%)          1.71       1.82        1.86      1.86      1.90
Ratio of net investment
income (loss) (%)               5.63       5.30        5.32      5.86      5.96
Portfolio turnover rate (%)      234        108         121       164        74

(a)   Based on monthly average shares outstanding during the period.
(b)   Total return does not reflect the effect of sales charge.


50
<PAGE>

Kemper Short-Term U.S. Government Fund -- Class A

--------------------------------------------------------------------------------
Year ended August 31,                 2000      1999     1998     1997     1996
--------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning
of period                            $7.99     $8.19    $8.31    $8.22    $8.30
                                    --------------------------------------------
Income from investment operations:
  Net investment income (loss)         .43(b)    .38(b)   .41      .45      .46
  Net realized and unrealized
  gain (loss) on investment
  transactions                        (.03)     (.22)    (.11)     .09     (.09)
                                    --------------------------------------------
  Total from investment operations     .40       .16      .30      .54      .37
  Less distributions from:
  Net investment income               (.42)     (.36)    (.42)    (.45)    (.45)
  Total distributions                 (.42)     (.36)    (.42)    (.45)    (.45)
                                    --------------------------------------------
Net asset value, end of period       $7.97     $7.99    $8.19    $8.31    $8.22
                                    ============================================
Total return (%) (a)                  5.16      1.98     3.68     6.75     4.55

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of period
($ in thousands)                   121,334   142,776   60,856   73,504   86,993
Ratio of expenses before expense
reductions (%)                        1.26      1.24     1.36     1.25     1.15
Ratio of expenses after expense
reductions (%)                        1.25      1.24     1.36     1.25     1.15
Ratio of net investment income
(loss) (%)                            5.34      4.27     4.79     5.50     5.49
Portfolio turnover rate (%)            283       336      149      249      272

(a)   Total return does not reflect the effect of any sales charges.
(b)   Based on monthly average shares outstanding during the period.


                                                                              51
<PAGE>

Kemper Short-Term U.S. Government Fund -- Class B

--------------------------------------------------------------------------------
Year ended August 31,                 2000      1999     1998     1997     1996
--------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning
of period                            $8.01     $8.21    $8.32    $8.23    $8.31
                                    --------------------------------------------
Income from investment operations:
  Net investment income (loss)         .37(b)    .31(b)   .36      .39      .40
  Net realized and unrealized
  gain (loss) on investment
  transactions                        (.02)     (.22)    (.11)      .09    (.09)
                                    --------------------------------------------
  Total from investment operations     .35       .09      .25      .48      .31
  Less distributions from:
  Net investment income               (.36)     (.29)    (.36)    (.39)    (.39)
  Total distributions                 (.36)     (.29)    (.36)    (.39)    (.39)
                                    --------------------------------------------
Net asset value, end of period       $8.00     $8.01    $8.21    $8.32    $8.23
                                    ============================================
Total return (%) (a)                  4.57      1.10     3.06     5.96     3.79

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of period
($ in thousands)                    34,952    50,573    7,108    7,404    6,298
Ratio of expenses before expense
reductions (%)                        1.94      2.08     1.99     1.93     1.89
Ratio of expenses after expense
reductions (%)                        1.93      2.08     1.99     1.93     1.89
Ratio of net investment income
(loss) (%)                            4.66      3.43     4.16     4.82     4.75
Portfolio turnover rate (%)            283       336      149      249      272

(a)   Total return does not reflect the effect of any sales charges.
(b)   Based on monthly average shares outstanding during the period.


52
<PAGE>

Kemper Short-Term U.S. Government Fund -- Class C

--------------------------------------------------------------------------------
Year ended August 31,                 2000      1999     1998     1997     1996
--------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning
of period                            $8.02     $8.22    $8.33    $8.24    $8.32
                                    --------------------------------------------
Income from investment operations:
  Net investment income (loss)         .37(b)    .32(b)   .36      .39      .40
  Net realized and unrealized
  gain (loss) on investment
  transactions                        (.02)     (.22)    (.11)     .09     (.09)
                                    --------------------------------------------
  Total from investment operations     .35       .10      .25      .48      .31
  Less distributions from:
  Net investment income               (.37)     (.30)    (.36)    (.39)    (.39)
  Total distributions                 (.37)     (.30)    (.36)    (.39)    (.39)
                                    --------------------------------------------
Net asset value, end of period       $8.00     $8.02    $8.22    $8.33    $8.24
                                    ============================================
Total return (%) (a)                  4.43      1.24     3.10     5.98     3.82

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of period
($ in thousands)                     7,111     8,065    1,343    1,059    1,186
Ratio of expenses before expense
reductions (%)                        1.95      1.94     1.95     1.88     1.89
Ratio of expenses after expense
reductions (%)                        1.94      1.94     1.95     1.88     1.89
Ratio of net investment income
(loss) (%)                            4.64      3.57     4.20     4.87     4.75
Portfolio turnover rate (%)            283       336      149      249      272

(a)   Total return does not reflect the effect of any sales charges.
(b)   Based on monthly average shares outstanding during the period.


                                                                              53
<PAGE>

Kemper Strategic Income Fund -- Class A

--------------------------------------------------------------------------------
Year ended October 31,                2000     1999      1998     1997     1996
--------------------------------------------------------------------------------
Net asset value, beginning of
period                               $5.26    $5.60     $5.96    $5.99    $5.98
                                    --------------------------------------------
Income from investment operations:
  Net investment income                .48(a)   .49(a)    .44(a)   .46      .46
  Net realized and unrealized gain
  (loss) on investment transactions   (.72)    (.35)     (.35)     .01      .12
                                    --------------------------------------------
  Total from investment operations    (.24)     .14       .09      .47      .58
  Less distributions from:
  Net investment income               (.34)    (.48)     (.45)    (.50)    (.57)
  Tax return of capital               (.11)      --        --       --       --
  Total distributions                 (.45)    (.48)     (.45)    (.50)    (.57)
Net asset value, end of period       $4.57    $5.26     $5.60    $5.96    $5.99
                                    ============================================
Total return (%) (b)                 (4.91)    2.43      1.28     8.13    10.27

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of period
($ millions)                           359      492       550      549      510
Ratio of expenses before expense
reductions (%)                        1.10     1.11      1.04     1.03     1.03
Ratio of expenses after expense
reductions (%)                        1.09     1.10      1.04     1.03     1.03
Ratio of net investment income (%)    9.55     8.80      7.36     7.68     7.72
Portfolio turnover rate (%)             37       92       751      347      310

(a)   Based on monthly average shares outstanding during the period.
(b)   Total return does not reflect the effect of sales charges.


54
<PAGE>

Kemper Strategic Income Fund -- Class B

--------------------------------------------------------------------------------
Year ended October 31,               2000      1999      1998     1997     1996
--------------------------------------------------------------------------------
Net asset value, beginning of
period                              $5.26     $5.59     $5.96    $5.99    $5.98
                                   ---------------------------------------------
Income from investment operations:
  Net investment income               .43(a)    .43(a)    .38(a)   .40      .41
  Net realized and unrealized
  gain (loss) on investment
  transactions                       (.72)     (.34)     (.36)     .01      .12
                                   ---------------------------------------------
  Total from investment operations   (.29)     (.09)      .02      .41      .53
  Less distributions from:
  Net investment income              (.30)     (.42)     (.39)    (.44)    (.52)
  Tax return of capital              (.10)       --        --       --       --
  Total distributions                (.40)     (.42)     (.39)    (.44)    (.52)
Net asset value, end of period      $4.57     $5.26     $5.59    $5.96    $5.99
                                   =============================================
Total return (%) (b)                (5.85)     1.57       .12     7.13     9.23

Ratios to average net assets  and supplemental data
--------------------------------------------------------------------------------
Net assets, end of period
($ millions)                          119       198       271      297      262
Ratio of expenses before expense
reductions (%)                       2.11      2.06      2.01     1.98     1.96
Ratio of expenses after expense
reductions (%)                       2.10      2.05      2.01     1.98     1.96
Ratio of net investment income
(loss) (%)                           8.50      7.85      6.39     6.73     6.79
Portfolio turnover rate (%)            37        92       751      347      310

(a)   Based on monthly average shares outstanding during the period.
(b)   Total return does not reflect the effect of sales charges.


                                                                              55
<PAGE>

Kemper Strategic Income Fund -- Class C

--------------------------------------------------------------------------------
Year ended October 31,                2000     1999      1998     1997     1996
--------------------------------------------------------------------------------
Net asset value, beginning of
period                               $5.29    $5.62     $5.99    $6.01    $6.00
                                    --------------------------------------------
Income from investment operations:
  Net investment income                .45(a)   .45(a)    .39(a)   .42      .41
  Net realized and unrealized
  gain (loss) on investment
  transactions                        (.72)    (.34)     (.36)     .01      .12
                                    --------------------------------------------
  Total from investment operations    (.27)     .11       .03      .43      .53
  Less distributions from:
  Net investment income               (.32)    (.44)     (.40)    (.45)    (.52)
  Tax return of capital               (.10)      --        --       --       --
  Total distributions                 (.42)    (.44)     (.40)    (.45)    (.52)
Net asset value, end of period       $4.60    $5.29     $5.62    $5.99    $6.01
                                    ============================================
Total return (%) (b)                 (5.51)    1.78      0.28     7.37     9.33

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of period
($ millions)                            19       30        30       15        7
Ratio of expenses before expense
reductions (%)                        1.76     1.87      1.84     1.85     1.86
Ratio of expenses after expense
reductions (%)                        1.75     1.85      1.84     1.85     1.86
Ratio of net investment income (%)    8.87     8.05      6.56     6.86     6.89
Portfolio turnover rate (%)             37       92       751      347      310

(a)   Based on monthly average shares outstanding during the period.
(b)   Total return does not reflect the effect of sales charges.


56
<PAGE>

Kemper U.S. Government Securities Fund -- Class A

--------------------------------------------------------------------------------
Year ended October 31,               2000      1999      1998     1997     1996
--------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of
period                              $8.38     $8.86     $8.81    $8.74    $8.92
                                   ---------------------------------------------
Income from investment operations:
  Net investment income               .54(a)    .53(a)    .58(a)   .64      .63
  Net realized and unrealized
  gain (loss) on investment
  transactions                       (.02)     (.41)      .07      .06     (.17)
                                   ---------------------------------------------
  Total from investment operations    .52       .12       .65      .70      .46
  Less distributions from:
  Net investment income              (.56)     (.60)     (.60)    (.63)    (.64)
Total distributions                  (.56)     (.60)     (.60)    (.63)    (.64)
Net asset value, end of period      $8.34     $8.38     $8.86    $8.81    $8.74
                                   =============================================
Total return (%) (b)                 6.44      1.44      7.64     8.41     5.36

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of period
($ in millions)                     2,414     2,807    3,286     3,550    4,080
Ratio of expenses before expense
reductions (%)                        .80       .85       .80      .78      .77
Ratio of expenses after expense
reductions (%)                        .79       .84       .80      .78      .77
Ratio of net investment income (%)   6.58      6.22      6.50     7.34     7.17
Portfolio turnover rate (%)           193       177       150      261      391

(a)   Based on monthly average shares outstanding during the period.
(b)   Total return does not reflect the effect of any sales charges.


                                                                              57
<PAGE>

Kemper U.S. Government Securities Fund -- Class B

--------------------------------------------------------------------------------
Year ended October 31,               2000      1999      1998     1997     1996
--------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning
of period                           $8.37     $8.85     $8.80    $8.73    $8.91
                                   ---------------------------------------------
Income from investment operations:
  Net investment income               .47(a)    .45(a)    .49(a)   .56      .54
  Net realized and unrealized
  gain (loss) on investment
  transactions                       (.03)     (.40)      .08      .06     (.17)
                                   ---------------------------------------------
  Total from investment operations    .44       .05       .57      .62      .37
  Less distributions from:
  Net investment income              (.48)     (.53)     (.52)    (.55)    (.55)
Total distributions                  (.48)     (.53)     (.52)    (.55)    (.55)
Net asset value, end of period      $8.33     $8.37     $8.85    $8.80    $8.73
                                   =============================================
Total return (%) (b)                 5.54       .54      6.67     7.40     4.36

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of period
($ in millions)                       123       138       129       76       70
Ratio of expenses before expense
reductions (%)                       1.70      1.76      1.71     1.73     1.73
Ratio of expenses after expense
reductions (%)                       1.69      1.75      1.71     1.73     1.73
Ratio of net investment income (%)   5.68      5.31      5.59     6.39     6.21
Portfolio turnover rate (%)           193       177       150      261      391

(a)   Based on monthly average shares outstanding during the period.
(b)   Total return does not reflect the effect of any sales charges.


58
<PAGE>

Kemper U.S. Government Securities Fund -- Class C

--------------------------------------------------------------------------------
Year ended October 31,               2000      1999      1998     1997     1996
--------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning
of period                           $8.40     $8.87     $8.82    $8.75    $8.93
                                   ---------------------------------------------
Income from investment operations:
  Net investment income               .48(a)    .46(a)    .49(a)   .56      .55
  Net realized and unrealized
  gain (loss) on investment
  transactions                       (.04)     (.40)      .08      .06     (.17)
                                   ---------------------------------------------
  Total from investment operations    .44       .06       .57      .62      .38
  Less distributions from:
  Net investment income              (.49)     (.53)     (.52)    (.55)    (.56)
Total distributions                  (.49)     (.53)     (.52)    (.55)    (.56)
Net asset value, end of period      $8.35     $8.40     $8.87    $8.82    $8.75
                                   =============================================
Total return (%) (b)                 5.50       .72      6.66     7.42     4.40

Ratios to average net assets
--------------------------------------------------------------------------------
Net assets, end of period
($ in millions)                        36        35        24       10        8
Ratio of expenses before expense
reductions (%)                       1.60      1.66      1.67     1.68     1.70
Ratio of expenses after expense
reductions (%)                       1.59      1.66      1.67     1.68     1.70
Ratio of net investment income
(loss) (%)                           5.79      5.40      5.63     6.44     6.24
Portfolio turnover rate (%)           193       177       150      261      391

(a)   Based on monthly average shares outstanding during the period.
(b)   Total return does not reflect the effect of any sales charges.


                                                                              59
<PAGE>

Kemper U.S. Mortgage Fund -- Class A

--------------------------------------------------------------------------------
Year ended September 30,              2000      1999     1998      1997    1996
--------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning
of period                            $6.75     $7.15    $7.01     $6.91   $7.13
                                    --------------------------------------------
Income from investment operations:
  Net investment income               0.42(a)   0.42(a)  0.44(a)   0.52    0.49
  Net realized and unrealized
  gain (loss) on investment
  transactions                       (0.02)    (0.38)    0.17      0.10  (0.19)
                                    --------------------------------------------
  Total from investment operations    0.40      0.04     0.61      0.62    0.30
  Less distributions from:
  Net investment income              (0.43)    (0.44)   (0.47)    (0.52)  (0.52)
  Total distributions                (0.43)    (0.44)   (0.47)    (0.52)  (0.52)
                                    --------------------------------------------
Net asset value, end of period       $6.72     $6.75    $7.15     $7.01   $6.91
                                    ============================================
Total return (%) (b)                  5.99       .59     8.99      9.26    4.28

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of period
($ millions)                         1,405     1,661    1,812     1,773   1,908
Ratio of expenses before expense
reductions (%)                        0.98      1.02     0.97      0.96    0.97
Ratio of expenses after expense
reductions (%)                        0.97      1.02     0.97      0.96    0.97
Ratio of net investment income (%)    6.35      6.04     6.46      7.23    6.98
Portfolio turnover rate (%)            221       151      172       235     391

(a)   Based on monthly average shares outstanding during the period.
(b)   Total return does not reflect the effect of any sales charges.


60
<PAGE>

Kemper U.S. Mortgage Fund -- Class B

--------------------------------------------------------------------------------
Year ended September 30,              2000     1999      1998     1997     1996
--------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning
of period                            $6.75    $7.14     $7.00    $6.91    $7.12
                                    --------------------------------------------
Income from investment operations:
  Net investment income               0.36(a)  0.34(a)   0.40(a)  0.45      .44
  Net realized and unrealized
  gain (loss)                        (0.02)   (0.37)     0.14     0.10     (.19)
                                    --------------------------------------------
  Total from investment operations    0.34    (0.03)     0.54     0.55      .25
  Less distributions from:
  Net investment income              (0.36)   (0.36)    (0.40)   (0.46)   (0.46)
  Total distributions                (0.36)   (0.36)    (0.40)   (0.46)   (0.46)
                                    --------------------------------------------
Net asset value, end of period       $6.73    $6.75     $7.14    $7.00    $6.91
                                    ============================================
Total return (%) (b)                  5.25    (0.47)     8.00     8.17     3.54

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of period
($ millions)                            64      142       368      722    1,051
Ratio of expenses before expense
reductions (%)                        1.85     2.13      1.91     1.83     1.80
Ratio of expenses after expense
reductions (%)                        1.84     2.13      1.91     1.83     1.80
Ratio of net investment income (%)    5.47     4.93      5.52     6.36     6.15
Portfolio turnover rate (%)            221      151       172      235      391

(a)   Based on monthly average shares outstanding during the period.
(b)   Total return does not reflect the effect of any sales charges.


                                                                              61
<PAGE>

Kemper U.S. Mortgage Fund -- Class C

--------------------------------------------------------------------------------
Years ended September 30,             2000     1999      1998     1997     1996
--------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning
of period                            $6.75    $7.15     $7.00    $6.90    $7.12
                                    --------------------------------------------
Income from investment operations:
  Net investment income               0.38(a)  0.37(a)   0.40(a)  0.46     0.43
  Net realized and unrealized
  gain (loss)                        (0.03)   (0.39)     0.16     0.10    (0.19)
                                    --------------------------------------------
  Total from investment operations    0.35    (0.02)     0.56     0.56     0.24
  Less distributions from:
  Net investment income              (0.38)   (0.38)    (0.41)   (0.46)   (0.46)
  Total distributions                (0.38)   (0.38)    (0.41)   (0.46)   (0.46)
                                    --------------------------------------------
Net asset value, end of period       $7.12    $6.75     $7.15    $7.00    $6.90
                                    ============================================
Total return (%) (b)                  2.10    (0.22)     8.30     8.45     3.47

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of period
($ millions)                             3        3         4        3        2
Ratio of expenses before expense
reductions (%)                        1.62     1.73      1.91     1.71     1.72
Ratio of expenses after expense
reductions (%)                        1.61     1.73      1.91     1.71     1.72
Ratio of net investment income (%)    5.72     5.70      5.52     6.48     6.23
Portfolio turnover rate (%)            221      151       172      235      391

(a)   Based on monthly average shares outstanding during the period.
(b)   Total return does not reflect the effect of any sales charges.


62
<PAGE>

Investing in the Funds

The following pages tell you about many of the services, choices and benefits of
being a Kemper Funds shareholder. You'll also find information on how to check
the status of your account using the method that's most convenient for you.

You can find out more about the topics covered here by speaking with your
financial representative or a representative of your workplace retirement plan
or other investment provider.


                                                                              63
<PAGE>

Choosing a Share Class

Offered in this prospectus are three share classes for each fund. Each fund
offers another class of shares separately. Each class has its own fees and
expenses, offering you a choice of cost structures. Class A, Class B and Class C
shares are intended for investors seeking the advice and assistance of a
financial representative, who may receive compensation for those services
through sales commissions, service fees and/or distribution fees.

Before you invest, take a moment to look over the characteristics of each share
class, so that you can be sure to choose the class that's right for you. You may
want to ask your financial representative to help you with this decision.

We describe each share class in detail on the following pages. But first, you
may want to look at the table below, which gives you a brief comparison of the
main features of each class.

--------------------------------------------------------------------------------
Classes and features                      Points to help you compare
--------------------------------------------------------------------------------
Class A

o Sales charges of up to 4.50%, charged   o Some investors may be able to reduce
  when you buy shares                       or eliminate their sales charges;
                                            see next page
o In most cases, no charges when you
  sell shares                             o Total annual expenses are lower than
                                            those for Class B or Class C
o No distribution fee
--------------------------------------------------------------------------------
Class B

o No charges when you buy shares          o The deferred sales charge rate falls
                                            to zero after six years
o Deferred sales charge of up to 4.00%,
  charged when you sell shares you        o Shares automatically convert to
  bought within the last                    Class A after six years, which means
  six years                                 lower annual expenses going forward

o 0.75% distribution fee
--------------------------------------------------------------------------------
Class C

o No charges when you buy shares          o The deferred sales charge rate is
                                            lower, but your shares never convert
o Deferred sales charge of 1.00%,           to Class A, so annual expenses
  charged when you sell shares you          remain higher
  bought within the last year

o 0.75% distribution fee
--------------------------------------------------------------------------------


64
<PAGE>

Class A shares

Class A shares have a sales charge that varies with the amount you invest:

Kemper High Yield Fund, Kemper High Yield Fund II, Kemper High Yield Opportunity
Fund, Kemper Income And Capital Preservation Fund, Kemper Strategic Income Fund,
Kemper U.S. Government Securities Fund and Kemper U.S. Mortgage Fund

                         Sales charge as a      Sales charge as a
                         percent of offering    percent of your net
Your investment          price                  investment
---------------------------------------------------------------------
Up to $100,000           4.50%                  4.71%
---------------------------------------------------------------------
$100,000-$249,999        3.50                   3.63
---------------------------------------------------------------------
$250,000-$499,999        2.60                   2.67
---------------------------------------------------------------------
$500,000-$999,999        2.00                   2.04
---------------------------------------------------------------------
$1 million or more       0                      0
---------------------------------------------------------------------

Kemper Short-Term U.S. Government Fund

                         Sales charge as a      Sales charge as a
                         percent of offering    percent of your net
Your investment          price                  investment
---------------------------------------------------------------------
Up to $100,000           2.75%                  2.83%
---------------------------------------------------------------------
$100,000-$249,999        2.50                   2.56
---------------------------------------------------------------------
$250,000-$499,999        2.00                   2.04
---------------------------------------------------------------------
$500,000-$999,999        1.50                   1.52
---------------------------------------------------------------------
$1 million or more       0                      0
---------------------------------------------------------------------

The offering price includes the sales charge.

You may be able to lower your Class A sales charges if:

o     you plan to invest at least $100,000 over the next 24 months ("letter of
      intent")

o     the amount of Kemper shares you already own (including shares in certain
      other Kemper funds) plus the amount you're investing now is at least
      $100,000 ("cumulative discount")

o     you are investing a total of $100,000 or more in several Kemper funds at
      once ("combined purchases")

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.

Class A shares may make sense for long-term investors, especially those who are
eligible for reduced or eliminated sales charges.


                                                                              65
<PAGE>

The point of these three features is to let you count investments made at other
times for purposes of calculating your present sales charge. Any time you can
use the privileges to "move" your investment into a lower sales charge category
in the table above, it's generally beneficial for you to do so. You can take
advantage of these methods by filling in the appropriate sections of your
application or by speaking with your financial representative.

You may be able to buy Class A shares without sales charges when you are:

o     reinvesting dividends or distributions

o     investing through certain workplace retirement plans

o     participating in an investment advisory program under which you pay a fee
      to an investment advisor or other firm for portfolio management services

There are a number of additional provisions that apply in order to be eligible
for a sales charge waiver. The fund may waive the sales charges for investors in
other situations as well. Your financial representative or Kemper can answer
your questions and help you determine if you are eligible.

If you're investing $1 million or more, either as a lump sum or through one of
the sales charge reduction features described on the previous page, you may be
eligible to buy Class A shares without sales charges. However, you may be
charged a contingent deferred sales charge (CDSC) of 1.00% on any shares you
sell within the first year of owning them, and a similar charge of 0.50% on
shares you sell within the second year of owning them.


66
<PAGE>

Class B shares

With Class B shares, you pay no up-front sales charges to the fund. Class B
shares do have a 12b-1 plan, under which a distribution fee of 0.75% is deducted
from fund assets each year. This means the annual expenses for Class B shares
are somewhat higher (and their performance correspondingly lower) compared to
Class A shares, which don't have a 12b-1 fee. After six years, Class B shares
automatically convert to Class A, which has the net effect of lowering the
annual expenses from the seventh year on. However, unlike Class A shares, your
entire investment goes to work immediately.

Class B shares have a CDSC. This charge declines over the years you own shares,
and disappears completely after six years of ownership. But for any shares you
sell within those six years, you may be charged as follows:

Year after you bought shares        CDSC on shares you sell
---------------------------------------------------------------------
First year                          4.00%
---------------------------------------------------------------------
Second or third year                3.00
---------------------------------------------------------------------
Fourth or fifth year                2.00
---------------------------------------------------------------------
Sixth year                          1.00
---------------------------------------------------------------------
Seventh year and later              None (automatic conversion to
                                    Class A)
---------------------------------------------------------------------

This CDSC is waived under certain circumstances (see "Policies You Should Know
About"). Your financial representative or Kemper can answer your questions and
help you determine if you're eligible.

While Class B shares don't have any front-end sales charges, their higher annual
expenses (due to 12b-1 fees) mean that over the years you could end up paying
more than the equivalent of the maximum allowable front-end sales charge.

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.

Class B shares can make sense for long-term investors who would prefer to see
all of their investment go to work right away, and can accept somewhat higher
annual expenses.


                                                                              67
<PAGE>

Class C shares

Like Class B shares, Class C shares have no up-front sales charges and have a
12b-1 plan under which a distribution fee of 0.75% is deducted from fund assets
each year. Because of this fee, the annual expenses for Class C shares are
similar to those of Class B shares, but higher than those for Class A shares
(and the performance of Class C shares is correspondingly lower than that of
Class A).

Unlike Class B shares, Class C shares do NOT automatically convert to Class A
after six years, so they continue to have higher annual expenses.

Class C shares have a CDSC, but only on shares you sell within one year of
buying them:

Year after you bought shares        CDSC on shares you sell
---------------------------------------------------------------------
First year                          1.00%
---------------------------------------------------------------------
Second year and later               None
---------------------------------------------------------------------

This CDSC is waived under certain circumstances (see "Policies You Should Know
About"). Your financial representative or Kemper can answer your questions and
help you determine if you're eligible.

While Class C shares don't have any front-end sales charges, their higher annual
expenses (due to 12b-1 fees) mean that over the years you could end up paying
more than the equivalent of the maximum allowable front-end sales charge.

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.

Class C shares may appeal to investors who plan to sell some or all shares
within six years of buying them, or who aren't certain of their investment time
horizon.


68
<PAGE>

How to Buy Shares

Once you've chosen a share class, use these instructions to make investments.
Make out any checks to "Kemper Funds."

--------------------------------------------------------------------------------
First investment                          Additional investments
--------------------------------------------------------------------------------
$1,000 or more for regular accounts       $100 or more for regular accounts
$250 or more for IRAs                     $50 or more for IRAs
$50 or more with an Automatic Investment  $50 or more with an Automatic
Plan                                      Investment Plan
--------------------------------------------------------------------------------
Through a financial representative

o Contact your representative using the   o Contact your representative using
  method that's most convenient for you     the method that's most convenient
                                            for you
--------------------------------------------------------------------------------
By mail or express mail (see below)

o Fill out and sign an application        o Send a check and a Kemper investment
                                            slip to us at the appropriate
o Send it to us at the appropriate          address below
  address, along with an investment
  check                                   o If you don't have an investment
                                            slip, simply include a letter with
                                            your name, account number, the full
                                            name of the fund and the share class
                                            and your investment instructions
--------------------------------------------------------------------------------
By wire

o Call (800) 621-1048 for instructions    o Call (800) 621-1048 for instructions
--------------------------------------------------------------------------------
By phone

--                                        o Call (800) 621-1048 for instructions
--------------------------------------------------------------------------------
With an automatic investment plan

--                                        o To set up regular investments, call
                                            (800) 621-1048
--------------------------------------------------------------------------------
On the Internet

o Follow the instructions at              o Follow the instructions at
  www.kemper.com                            www.kemper.com
--------------------------------------------------------------------------------

Regular mail:
Kemper Funds, PO Box 219153, Kansas City, MO 64121-9153

Express, registered or certified mail:
Kemper Service Company, 811 Main Street, Kansas City, MO 64105-2005

Fax number: (800) 818-7526 (for exchanging and selling only)


                                                                              69
<PAGE>

How to Exchange or Sell Shares

Use these instructions to exchange or sell shares in your account.

--------------------------------------------------------------------------------
Exchanging into another fund              Selling shares
--------------------------------------------------------------------------------
$1,000 or more to open a new account      Some transactions, including most for
$100 or more for exchanges between        over $50,000, can only be ordered in
existing accounts                         writing with a signature guarantee; if
                                          you're in doubt, see page 73
--------------------------------------------------------------------------------
Through a financial representative

o Contact your representative by the      o Contact your representative by the
  method that's most convenient for you     method that's most convenient for
                                            you
--------------------------------------------------------------------------------
By phone or wire

o Call (800) 621-1048 for instructions    o Call (800) 621-1048 for instructions
--------------------------------------------------------------------------------
By mail, express mail or fax
(see previous page)
Write a letter that includes:             Write a letter that includes:

o the fund, class and account number      o the fund, class and account number
  you're exchanging out of                  from which you want to sell shares

o the dollar amount or number of shares   o the dollar amount or number of
  you want to exchange                      shares you want to sell

o the name and class of the fund you      o your name(s), signature(s) and
  want to exchange into                     address, as they appear on your
                                            account
o your name(s), signature(s) and
  address, as they appear on your         o a daytime telephone number
  account

o a daytime telephone number
--------------------------------------------------------------------------------
With a systematic exchange plan           With a systematic withdrawal plan

o To set up regular exchanges from a      o To set up regular cash payments from
  Kemper fund account, call                 a Kemper fund account, call
  (800) 621-1048                            (800) 621-1048
--------------------------------------------------------------------------------
On the Internet

o Follow the instructions at              o Follow the instructions at
  www.kemper.com                            www.kemper.com
--------------------------------------------------------------------------------


70
<PAGE>

Policies You Should Know About

Along with the instructions on the previous pages, the policies below may affect
you as a shareholder.

If you are investing through an investment provider, check the materials you
received from them. As a general rule, you should follow the information in
those materials wherever it contradicts the information given here. Please note
that an investment provider may charge its own fees.

In order to reduce the amount of mail you receive and to help reduce fund
expenses, we generally send a single copy of any shareholder report and
prospectus to each household. If you do not want the mailing of these documents
to be combined with those for other members of your household, please call (800)
621-1048.

Policies about transactions

The funds are open for business each day the New York Stock Exchange is open.
Each fund calculates its share price every business day, as of the close of
regular trading on the Exchange (typically 3 p.m. Central time, but sometimes
earlier, as in the case of scheduled half-day trading or unscheduled suspensions
of trading).

You can place an order to buy or sell shares at any time. Once your order is
received by Kemper Service Company, and they have determined that it is a "good
order," it will be processed at the next share price calculated.

Because orders placed through investment providers must be forwarded to Kemper
Service Company before they can be processed, you'll need to allow extra time. A
representative of your investment provider should be able to tell you when your
order will be processed.

KemperACCESS, the Kemper Automated Information Line, is available 24 hours a day
by calling (800) 972-3060. You can use Kemper ACCESS to get information on
Kemper funds generally and on accounts held directly at Kemper. You can also use
it to make exchanges and sell shares.


                                                                              71
<PAGE>

EXPRESS-Transfer lets you set up a link between a Kemper account and a bank
account. Once this link is in place, you can move money between the two with a
phone call. You'll need to make sure your bank has Automated Clearing House
(ACH) services. Transactions take two to three days to be completed, and there
is a $100 minimum. To set up EXPRESS-Transfer on a new account, see the account
application; to add it to an existing account, call (800) 621-1048.

Share certificates are available on written request. However, we don't recommend
them unless you want them for a specific purpose, because they can only be sold
by mailing them in, and if they're ever lost they're difficult and expensive to
replace.

Since many transactions may be initiated by telephone or electronically, it's
important to understand that as long as we take reasonable steps to ensure that
an order to purchase or redeem shares is genuine, such as recording calls or
requesting personalized security codes or other information, we are not
responsible for any losses that may occur. For transactions conducted over the
Internet, we recommend the use of a secure Internet browser. In addition, you
should verify the accuracy of your confirmation statements immediately after you
receive them.

When you ask us to send or receive a wire, please note that while we don't
charge a fee to send or receive wires, it's possible that your bank may do so.
Wire transactions are completed within 24 hours. The funds can only send or
accept wires of $1,000 or more.

Exchanges are a shareholder privilege, not a right: we may reject any exchange
order, particularly when there appears to be a pattern of "market timing" or
other frequent purchases and sales. We may also reject or limit purchase orders,
for these or other reasons.

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.

The Kemper Web site can be a valuable resource for shareholders with Internet
access. Go to www.kemper.com to get up-to-date information, review balances or
even place orders for exchanges.


72
<PAGE>

When you want to sell more than $50,000 worth of shares, you'll usually need to
place your order in writing and include a signature guarantee. The only
exception is if you want money wired to a bank account that is already on file
with us; in that case, you don't need a signature guarantee. Also, you don't
need a signature guarantee for an exchange, although we may require one in
certain other circumstances.

A signature guarantee is simply a certification of your signature -- a valuable
safeguard against fraud. You can get a signature guarantee from most brokers,
banks, savings institutions and credit unions. Note that you can't get a
signature guarantee from a notary public.

When you sell shares that have a CDSC, we calculate the CDSC as a percentage of
what you paid for the shares or what you are selling them for -- whichever
results in the lowest charge to you. In processing orders to sell shares, we
turn to the shares with the lowest CDSC first. Exchanges from one Kemper fund
into another don't affect CDSCs: for each investment you make, the date you
first bought Kemper shares is the date we use to calculate a CDSC on that
particular investment.

There are certain cases in which you may be exempt from a CDSC. These include:

o     the death or disability of an account owner (including a joint owner)

o     withdrawals made through a systematic withdrawal plan

o     withdrawals related to certain retirement or benefit plans

o     redemptions for certain loan advances, hardship provisions or returns of
      excess contributions from retirement plans

o     for Class A shares purchased through the Large Order NAV Purchase
      Privilege

o     redemption of shares whose dealer of record at the time of the investment
      notifies Kemper Distributors that the dealer waives the applicable
      commission

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.

If you ever have difficulty placing an order by phone or fax, you can always
send us your order in writing.


                                                                              73
<PAGE>

In each of these cases, there are a number of additional provisions that apply
in order to be eligible for a CDSC waiver. Your financial representative or
Kemper can answer your questions and help you determine if you are eligible.

If you sell shares in a Kemper fund and then decide to invest with Kemper again
within six months, you can take advantage of the "reinstatement feature." With
this feature, you can put your money back into the same class of a Kemper fund
at its current NAV and for purposes of sales charges it will be treated as if it
had never left Kemper. You'll be reimbursed (in the form of fund shares) for any
CDSC you paid when you sold. Future CDSC calculations will be based on your
original investment date, rather than your reinstatement date. There is also an
option that lets investors who sold Class B shares buy Class A shares with no
sales charge, although they won't be reimbursed for any CDSC they paid. You can
only use the reinstatement feature once for any given group of shares. To take
advantage of this feature, contact Kemper or your financial representative.

Money from shares you sell is normally sent out within one business day of when
your order is processed (not when it is received), although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: 10 days) or when unusual circumstances prompt the
SEC to allow further delays. Certain expedited redemption processes may also be
delayed when you are selling recently purchased shares.


74
<PAGE>

How the funds calculate share price

For each fund in this prospectus, the price at which you buy shares is as
follows:

Class A shares -- net asset value per share, or NAV, adjusted to allow for any
applicable sales charges (see "Choosing A Share Class")

Class B and Class C shares-- net asset value per share, or NAV

To calculate NAV, each share class of each fund uses the following equation:

 TOTAL ASSETS - TOTAL LIABILITIES
----------------------------------       = NAV
TOTAL NUMBER OF SHARES OUTSTANDING

For each fund and share class in this prospectus, the price at which you sell
shares is also the NAV, although for Class B and Class C investors a contingent
deferred sales charge may be taken out of the proceeds (see "Choosing A Share
Class").

We typically use market prices to value securities. However, when a market price
isn't available, or when we have reason to believe it doesn't represent market
realities, we may use fair value methods approved by a fund's Board. In such a
case, the fund's value for a security is likely to be different from quoted
market prices.


                                                                              75
<PAGE>

Other rights we reserve

For each fund in this prospectus, you should be aware that we may do any of the
following:

o     withhold 31% of your distributions as federal income tax if you have been
      notified by the IRS that you are subject to backup withholding, or if you
      fail to provide us with a correct taxpayer ID number or certification that
      you are exempt from backup withholding

o     charge you $9 each calendar quarter if your account balance is below
      $1,000 for the entire quarter; this policy doesn't apply to most
      retirement accounts or if you have an automatic investment plan

o     reject a new account application if you don't provide a correct Social
      Security or other tax ID number; if the account has already been opened,
      we may give you 30 days' notice to provide the correct number

o     pay you for shares you sell by "redeeming in kind," that is, by giving you
      marketable securities (which typically will involve brokerage costs for
      you to liquidate) rather than cash

o     change, add or withdraw various services, fees and account policies (for
      example, we may change or terminate the exchange privilege at any time)


76
<PAGE>

Understanding Distributions and Taxes

By law, a mutual fund is required to pass through to its shareholders virtually
all of its net earnings. A fund can earn money in two ways: by receiving
interest, dividends or other income from securities it holds, and by selling
securities for more than it paid for them. (A fund's earnings are separate from
any gains or losses stemming from your own purchase of shares.) A fund may not
always pay a distribution for a given period.

The funds have regular schedules for paying out any earnings to shareholders:

o     Income: declared and paid monthly

o     Long-term capital gains: December, or otherwise as needed

The funds may make additional distributions for tax purposes if necessary.

You can choose how to receive your dividends and distributions. You can have
them all automatically reinvested in fund shares (at NAV), all sent to you by
check, have one type reinvested and the other sent to you by check or have them
invested in a different fund. Tell us your preference on your application. If
you don't indicate a preference, your dividends and distributions will all be
reinvested without sales charges. For retirement plans, reinvestment is the only
option.

Buying and selling fund shares will usually have tax consequences for you
(except in an IRA or other tax-advantaged account). Your sales of shares may
result in a capital gain or loss for you; whether long-term or short-term
depends on how long you owned the shares. For tax purposes, an exchange is the
same as a sale.

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.

Because each shareholder's tax situation is unique, it's always a good idea to
ask your tax professional about the tax consequences of your investments,
including any state and local tax consequences.


                                                                              77
<PAGE>

The tax status of the fund earnings you receive, and your own fund transactions,
generally depends on their type:

Generally taxed at ordinary income rates
---------------------------------------------------------------------
o short-term capital gains from selling fund shares
---------------------------------------------------------------------
o taxable income dividends you receive from a fund
---------------------------------------------------------------------
o short-term capital gains distributions received from a fund
---------------------------------------------------------------------

Generally taxed at capital gains rates
---------------------------------------------------------------------
o long-term capital gains from selling fund shares
---------------------------------------------------------------------
o long-term capital gains distributions received from a fund
---------------------------------------------------------------------

You may be able to claim a tax credit or deduction for your share of any foreign
taxes your fund pays.

Your fund will send you detailed tax information every January. These statements
tell you the amount and the tax category of any dividends or distributions you
received. They also have certain details on your purchases and sales of shares.
The tax status of dividends and distributions is the same whether you reinvest
them or not. Dividends or distributions declared in the last quarter of a given
year are taxed in that year, even though you may not receive the money until the
following January.

If you invest right before a fund pays a dividend, you'll be getting some of
your investment back as a taxable dividend. You can avoid this, if you want, by
investing after the fund declares a dividend. In tax-advantaged retirement
accounts you don't need to worry about this.

Corporations may be able to take a dividends-received deduction for a portion of
income dividends they receive.


                                       78
<PAGE>

Notes
--------------------------------------------------------------------------------

<PAGE>

To Get More Information

Shareholder reports -- These include commentary from each fund's management team
about recent market conditions and the effects of a fund's strategies on its
performance. For each fund, they also have detailed performance figures, a list
of everything the fund owns and the fund's financial statements. Shareholders
get these reports automatically. For more copies, call (800) 621-1048.

Statement of Additional Information (SAI) -- This tells you more about each
fund's features and policies, including additional risk information. The SAI is
incorporated by reference into this document (meaning that it's legally part of
this prospectus).

If you'd like to ask for copies of these documents, or if you're a shareholder
and have questions, please contact Kemper or the SEC (see below). Materials you
get from Kemper are free; those from the SEC involve a copying fee. If you like,
you can look over these materials in person at the SEC's Public Reference Room
in Washington, DC or request them electronically at [email protected].

SEC

450 Fifth Street, N.W.
Washington, DC 20549-0102
www.sec.gov
Tel (202) 942-8090

Kemper Funds

222 South Riverside Plaza
Chicago, IL 60606-5808
www.kemper.com
Tel (800) 621-1048

SEC File Numbers

Kemper High Yield Fund                               811-2786
Kemper High Yield Fund II                            811-08983
Kemper High Yield Opportunity Fund                   811-2786
Kemper Income And Capital Preservation Fund          811-2305
Kemper Short-Term U.S. Government Fund               811-5195
Kemper Strategic Income Fund                         811-2743
Kemper U.S. Government Securities Fund               811-2719
Kemper U.S. Mortgage Fund                            811-3440

Principal Underwriter
Kemper Distributors, Inc.
222 South Riverside Plaza Chicago, IL 60606-5808
www.kemper.com E-mail [email protected]
Tel (800) 621-1048

KEMPER FUNDS [LOGO]
Long-term investing in a short-term world (SM)

[RECYCLE LOGO] Printed on recycled paper.   KFIF-1 (1/1/01) 516736

<PAGE>




                 Kemper High Yield Fund (the "High Yield Fund")
              Kemper High Yield Fund II (the "High Yield Fund II")
           Kemper High Yield Opportunity Fund (the "Opportunity Fund")
   Kemper Income and Capital Preservation Fund (the "Income and Capital Fund")
    Kemper Short-Term U.S. Government Fund (the "Short-Term Government Fund")
               Kemper Strategic Income Fund (the "Strategic Fund")
         Kemper U.S. Government Securities Fund (the "Government Fund")
                 Kemper U.S. Mortgage Fund (the "Mortgage Fund")























                       STATEMENT OF ADDITIONAL INFORMATION

                                 January 1, 2001


This Statement of Additional  Information is not a prospectus and should be read
in conjunction  with the prospectus for the Funds, as amended from time to time,
a  copy  of  which  may  be  obtained   without  charge  by  contacting   Kemper
Distributors,   Inc.,  222  South  Riverside  Plaza,  Chicago,  Illinois  60606,
1-800-621-1048,  or from  the firm  from  which  this  Statement  of  Additional
Information was obtained

The  Annual  Report to  Shareholders  of each  Fund,  dated  January  1, 2001 is
incorporated  by reference and is hereby deemed to be part of this  Statement of
Additional Information.

This Statement of Additional  Information is  incorporated by reference into the
combined prospectus.



<PAGE>


                        TABLE OF CONTENTS

                                                               Page

INVESTMENT OBJECTIVES AND POLICIES................................1
ADDITIONAL INFORMATION ABOUT INVESTMENT TECHNIQUES................5
INVESTMENT RESTRICTIONS..........................................25
NET ASSET VALUE..................................................26
PURCHASE AND REDEMPTION OF SHARES................................27
   Purchase of Shares............................................27
   Repurchase and Redemption of Shares...........................32
   Special Features..............................................36
   Additional Transaction Information............................40
   Performance...................................................41
   Capital Structure.............................................49
   Master/feeder structure.......................................51
INVESTMENT MANAGER...............................................51
   Code of Ethics................................................53
   Officers And Trustees.........................................56
PORTFOLIO TRANSACTIONS...........................................72
   Brokerage Commissions.........................................72
   Portfolio Turnover............................................74
FINANCIAL STATEMENTS.............................................74
 APPENDIX -- RATINGS OF INVESTMENTS





                                       i
<PAGE>



               INVESTMENT OBJECTIVES AND POLICIES

There is no assurance that the investment objective of any Fund will be achieved
and  investment  in each  Fund  includes  risks  that  vary in kind  and  degree
depending upon the  investment  policies of that Fund. The returns and net asset
value of each Fund will fluctuate


Strategic Fund. The Strategic Fund seeks high current  return.  The Fund pursues
its   objective  by  investing   primarily  in  fixed  income   securities   and
dividend-paying  common stocks and by writing  options.  Current return includes
interest income, common stock dividends and any net short-term gains. Investment
in fixed income  securities will include  corporate debt  obligations,  U.S. and
Canadian  Government  securities,  obligations  of  U.S.  and  Canadian  banking
institutions,  convertible  securities,  preferred  stocks,  and  cash  and cash
equivalents,  including repurchase  agreements.  Investment in equity securities
will primarily be in  dividend-paying  common  stocks.  The percentage of assets
invested  in fixed  income  and  equity  securities  will vary from time to time
depending upon the judgment of the  investment  manager as to general market and
economic  conditions,  trends in yields and interest rates and changes in fiscal
or  monetary  policies.  The Fund may  invest up to 50% of its  total  assets in
foreign securities that are traded principally in securities markets outside the
United  States.  The Fund may invest  without limit in high yield,  fixed income
securities,  commonly  referred to as "junk bonds," that are in the lower rating
categories and those that are non-rated.  The  characteristics of the securities
in the Fund's  portfolio,  such as the  maturity  and the type of  issuer,  will
affect yields and yield  differentials,  which vary over time.  The actual yield
realized by the investor is subject,  among other things, to the Fund's expenses
and the investor's transaction costs. The Fund may also engage in when-issued or
delayed  delivery  transactions  (commitments may not exceed 25% of the value of
its assets) and lend its portfolio  securities up to 1/3 of total assets.  Under
normal market conditions,  the Fund will invest at least 65% of its total assets
in income producing  investments.  In periods of unusual market conditions,  the
Fund may,  for  defensive  purposes,  temporarily  retain all or any part of its
assets in cash or cash equivalents. The Fund currently does not intend to invest
more  than  20% of its  total  assets  in  collateralized  obligations  that are
collateralized by a pool of credit card or automobile receivables or other types
of assets. In addition,  the Fund does not intend to invest more than 10% of its
total assets in inverse  floaters.  The Fund currently does not intend to invest
more than 20% of its net assets in zero coupon U.S. Government Securities during
the current year. The Fund may engage in short sales  against-the-box,  but only
to the extent that not more than 10% of the Fund's total assets  (determined  at
the time of the  short  sale) is held as  collateral  for such  sales.  The Fund
currently does not intend,  however, to engage in such short sales to the extent
that more than 5% of its net assets will be held as collateral  therefor  during
the current year.

Government  Fund. The Government Fund seeks high current  income,  liquidity and
security of principal by investing in  obligations  issued or  guaranteed by the
U.S.  Government  or its  agencies,  and by  obtaining  rights to  acquire  such
securities. The Fund's yield and net asset value will fluctuate and there can be
no assurance that the Fund will attain its objective. The Fund intends to invest
some or all of its assets in Government National Mortgage  Association  ("GNMA")
Certificates of the modified pass-through type. That portion of monthly payments
received by the Fund which represents  interest and discount will be included in
the Fund's net investment income.  Principal payments on a GNMA Certificate will
be reinvested by the Fund.  The balance of the Fund's  assets,  other than those
invested  in GNMA  Certificates  will  be  invested  in  obligations  issued  or
guaranteed by the United States or by its agencies.  U.S. Government  Securities
may  include  "zero  coupon"  securities  that  have been  stripped  by the U.S.
Government of their unmatured  interest coupons and  collateralized  obligations
issued or guaranteed by a U.S.  Government agency or  instrumentality.  The Fund
will not invest in  Mortgage-Backed  Securities  issued by private issuers.  The
Fund  may  purchase  securities  on a  when-issued  or  delayed  delivery  basis
(commitments  may not exceed 25% of the value of its assets and  delivery not to
exceed 120 days from trade date) and engage in strategic transactions.  The Fund
currently  does not  intend  to  invest  more  than 20% of its  total  assets in
collateralized  obligations that are  collateralized by a pool of credit card or
automobile  receivables or other types of assets. In addition, the Fund does not
intend to invest more than 10% of its total assets in inverse floaters. The Fund
currently  does not  intend  to invest  more than 20% of its net  assets in zero
coupon U.S. Government Securities during the current year.

High Yield Fund. The primary  objective of the High Yield Fund is to achieve the
highest  level of  current  income  obtainable  from a  professionally  managed,
diversified  portfolio of fixed income  securities which the Investment  Manager
considers  consistent with reasonable risk. As a secondary  objective,  the Fund
will seek capital gain where  consistent  with its primary  objective.  The high
yield,  fixed income  securities  (debt and preferred  stock  issues,


<PAGE>

including  convertibles and assignments or participations in loans) in which the
Fund  intends to invest are  commonly  referred to as "junk  bonds" and normally
offer a current yield or yield to maturity that is significantly higher than the
yield available from securities rated in the four highest categories assigned by
S&P or Moody's.  The  characteristics of the securities in the Fund's portfolio,
such as the  maturity  and the type of  issuer,  will  affect  yields  and yield
differentials,  which vary over time.  The actual yield realized by the investor
is subject,  among  other  things,  to the Fund's  expenses  and the  investor's
transaction  costs. The Fund  anticipates that under normal  circumstances 90 to
100% of its  assets  will be  invested  in fixed  income  securities  (debt  and
preferred stock issues, including  convertibles).  The Fund may invest in common
stocks,  rights or other  equity  securities  when  consistent  with the  Fund's
objectives,  but will generally hold such equity investments only as a result of
purchases  of unit  offerings  of fixed  income  securities  which  include such
securities or in connection with an actual or proposed conversion or exchange of
fixed income  securities.  The Fund may invest all or a portion of its assets in
money  market  instruments  such as  obligations  of the  U.S.  Government,  its
agencies or  instrumentalities;  other debt  securities  rated  within the three
highest grades by Moody's or S&P;  commercial paper rated within the two highest
grades by either of such  rating  services;  bank  certificates  of  deposit  or
bankers' acceptances of domestic or Canadian chartered banks having total assets
in  excess  of $1  billion;  and any of the  foregoing  investments  subject  to
short-term  repurchase  agreements.  The  Fund  may  purchase  securities  on  a
when-issued  or delayed  delivery basis  (commitments  may not exceed 25% of the
value of its assets),  may purchase foreign  securities,  including up to 25% of
total assets in foreign  securities  that are traded  principally  in securities
markets  outside the United States,  lend its portfolio  securities up to 1/3 of
total assets and engage in strategic  transactions.  The Fund currently does not
intend to invest more than 20% of its total assets in collateralized obligations
that are  collateralized  by a pool of credit card or automobile  receivables or
other types of assets. In addition, the Fund does not intend to invest more than
10% of its total assets in inverse floaters.  The Fund currently does not intend
to  invest  more  than 20% of its net  assets  in zero  coupon  U.S.  Government
Securities during the current year.

High  Yield  Fund II.  The  primary  objective  of the High  Yield Fund II is to
achieve the highest level of current  income  obtainable  from a  professionally
managed,  diversified  portfolio of fixed income securities which the Investment
Manager considers consistent with reasonable risk. As a secondary objective, the
Fund will seek capital gain where  consistent  with its primary  objective.  The
high yield, fixed income securities (debt and preferred stock issues,  including
convertibles  and  assignments  or  participations  in  loans) in which the Fund
intends to invest are commonly  referred to as "junk bonds" and normally offer a
current yield or yield to maturity that is  significantly  higher than the yield
available from securities rated in the four highest  categories  assigned by S&P
or Moody's. The characteristics of the securities in the Fund's portfolio,  such
as  the  maturity  and  the  type  of  issuer,  will  affect  yields  and  yield
differentials,  which vary over time.  The actual yield realized by the investor
is subject,  among  other  things,  to the Fund's  expenses  and the  investor's
transaction  costs. The Fund  anticipates that under normal  circumstances 90 to
100% of its  assets  will be  invested  in fixed  income  securities  (debt  and
preferred stock issues, including  convertibles).  The Fund may invest in common
stocks,  rights or other  equity  securities  when  consistent  with the  Fund's
objectives,  but will generally hold such equity investments only as a result of
purchases  of unit  offerings  of fixed  income  securities  which  include such
securities or in connection with an actual or proposed conversion or exchange of
fixed income  securities.  The Fund may invest all or a portion of its assets in
money  market  instruments  such as  obligations  of the  U.S.  Government,  its
agencies or  instrumentalities;  other debt  securities  rated  within the three
highest grades by Moody's or S&P;  commercial paper rated within the two highest
grades by either of such  rating  services;  bank  certificates  of  deposit  or
bankers' acceptances of domestic or Canadian chartered banks having total assets
in  excess  of $1  billion;  and any of the  foregoing  investments  subject  to
short-term  repurchase  agreements.  The  Fund may  borrow  money  for  leverage
purposes,  which  can  exaggerate  the  effect  on its net  asset  value for any
increase or decrease in the market value of the Fund's portfolio. Money borrowed
for leveraging will be limited to 20% of the total assets of the Fund, including
the amount borrowed. The Fund anticipates that under normal conditions, the Fund
would keep the leverage portion under 10% of its total assets.  These borrowings
are subject to interest  costs which may or may not be  recovered  by the return
received on the securities purchased. Under certain circumstances,  the interest
costs may exceed the return received on the securities  purchased.  The Fund may
purchase  securities on a when-issued or delayed delivery basis (commitments may
not exceed 25% of the value of its  assets),  may purchase  foreign  securities,
including  up to 25% of total  assets  in  foreign  securities  that are  traded
principally in securities markets outside the United States,  lend its portfolio
securities up to 1/3 of total assets and engage in strategic  transactions.  The
Fund  currently  does not intend to invest more than 20% of its total  assets in
collateralized  obligations that are  collateralized by a pool of credit card or
automobile  receivables or other types of assets. In addition, the Fund does not
intend to invest more than 10% of its total assets in inverse floaters. The Fund
currently  does not  intend  to invest  more than 20% of its net  assets in zero
coupon U.S. Government Securities during the current year.

                                       2
<PAGE>

Income and Capital  Fund.  The Income and Capital  Fund seeks as high a level of
current income as is consistent with prudent investment management, preservation
of capital and ready  marketability of its portfolio by investing primarily in a
diversified  portfolio of investment  grade debt  securities.  Specifically,  at
least 90% of the Fund's assets will be invested in the following categories: (a)
corporate debt  securities  which are rated Aaa, Aa, A or Baa by Moody's or AAA,
AA, A or BBB by S&P; (b)  obligations  of, or guaranteed  by, the United States,
its agencies or instrumentalities; (c) obligations (payable in U.S. Dollars) of,
or guaranteed by, the government of Canada or any  instrumentality  or political
subdivision  thereof;  (d) commercial  paper rated Prime-1 or Prime-2 by Moody's
orA-1 or A-2 by S&P; (e) bank  certificates  of deposit or bankers'  acceptances
issued by domestic or Canadian  chartered  banks having total deposits in excess
of $1 billion;  (f) strategic  transactions;  and (g) cash and cash equivalents.
The Fund may  invest up to 10% of its total  assets in fixed  income  securities
that are rated  below BBB by S&P and Baa by Moody's or are  non-rated.  The Fund
may purchase  securities on a when-issued or delayed delivery basis (commitments
may  not  exceed  25% of the  value  of its  assets),  may  lend  its  portfolio
securities  up to 1/3 of total  assets  and may  invest in  foreign  securities,
including  up to 25% of total  assets  in  foreign  securities  that are  traded
principally in securities  markets outside the United States. The Fund currently
does not intend to invest  more than 20% of its total  assets in  collateralized
obligations  that are  collateralized  by a pool of  credit  card or  automobile
receivables or other types of assets.  In addition,  the Fund does not intend to
invest more than 10% of its total assets in inverse floaters. The Fund currently
does not intend to invest  more than 20% of its net assets in zero  coupon  U.S.
Government   Securities  during  the  current  year.  Subject  to  its  specific
investment objective and policies,  the Income and Capital Fund may invest up to
20% of its assets in high yield (high risk), fixed income securities.

Mortgage Fund.  The Mortgage Fund seeks maximum  current return from a portfolio
of U.S. Government  Securities.  Additionally,  the Fund may engage in strategic
transactions  and may purchase or sell  securities on a  when-issued  or delayed
delivery basis. As a  non-fundamental  policy,  at least 65% of the Fund's total
assets normally will be invested in "Mortgage-Backed  Securities." The Fund will
not invest in Mortgage-Backed Securities issued by private issuers. The Fund may
purchase  securities on a when-issued or delayed delivery basis (commitments may
not exceed 25% of the value of its assets).  The Fund  currently does not intend
to invest more than 20% of its total assets in  collateralized  obligations that
are  collateralized by a pool of credit card or automobile  receivables or other
types of assets.  The fund may and lend its  portfolio  securities  up to 1/3 of
total assets.  In addition,  the Fund does not intend to invest more than 10% of
its total  assets in inverse  floaters.  The Fund  currently  does not intend to
invest more than 20% of its net assets in zero coupon U.S. Government Securities
during the current year. The Fund may engage in short sales against-the-box, but
only to the extent that not more than 10% of the Fund's total assets (determined
at the time of the short sale) is held as  collateral  for such sales.  The Fund
currently does not intend,  however, to engage in such short sales to the extent
that more than 5% of its net assets will be held as collateral  therefor  during
the current year.

Opportunity  Fund. The Opportunity  Fund seeks total return through high current
income and capital appreciation.  The Fund will invest primarily in fixed income
securities and under normal market  conditions,  the Fund will,  invest at least
65% of its  total  assets  in high  yield,  fixed  income  securities.  The Fund
anticipates  that under normal  conditions  approximately 80 to 90% of its total
assets  will be held in high yield,  fixed  income  securities.  The high yield,
fixed income securities (debt and preferred stock issues, including convertibles
and assignments or  participations in loans) in which the Fund intends to invest
are commonly  referred to as "junk bonds" and normally  offer a current yield or
yield to maturity that is  significantly  higher than the yield  available  from
securities rated in the four highest categories assigned by S&P or Moody's.  The
characteristics of the securities in the Fund's portfolio,  such as the maturity
and the type of issuer, will affect yields and yield  differentials,  which vary
over time.  The actual yield  realized by the  investor is subject,  among other
things,  to the Fund's expenses and the investor's  transaction  costs. The Fund
may invest up to a maximum of 20% of its total assets in common  stocks,  rights
or other equity securities;  generally of companies that issue high yield, fixed
income  securities.   The  Fund  anticipates  that  under  normal  circumstances
approximately 10% of its total assets will be in equity securities. The Fund may
borrow money for leverage  purposes,  which can exaggerate the effect on its net
asset  value for any  increase  or  decrease  in the market  value of the Fund's
portfolio.  Money  borrowed for  leveraging  will be limited to 20% of the total
assets of the Fund,  including the amount  borrowed.  The Fund  anticipates that
under normal  conditions,  the Fund would keep the leverage portion under 10% of
its total assets.  These  borrowings  are subject to interest costs which may or
may not be recovered by the return received on the securities  purchased.  Under
certain circumstances,  the interest costs may exceed the return received on the
securities  purchased.  When a defensive position is deemed advisable,  all or a
significant  portion of the Fund's  assets  may be held  temporarily  in cash or
defensive type securities, such as high-grade debt securities, securities of the
U.S.  Government  or its  agencies and


                                       3
<PAGE>

high quality money market instruments, including repurchase agreements. The Fund
may  also  purchase  securities  on a  when-issued  or  delayed  delivery  basis
(commitments  may not  exceed  25% of the  value  of its  assets),  may lend its
portfolio  securities  up to 1/3 of total  assets,  and may  invest  in  foreign
securities,  including up to 25% of total assets in foreign  securities that are
traded  principally in securities  markets  outside the United  States,  and may
engage in strategic  transactions.  The Fund currently does not intend to invest
more  than  20% of its  total  assets  in  collateralized  obligations  that are
collateralized by a pool of credit card or automobile receivables or other types
of assets. In addition,  the Fund does not intend to invest more than 10% of its
total assets in inverse  floaters.  The Fund currently does not intend to invest
more than 20% of its net assets in zero coupon U.S. Government Securities during
the current year.

Short-Term  Government  Fund. The Short-Term  Government Fund seeks,  with equal
emphasis,  high  current  income and  preservation  of capital  from a portfolio
composed  primarily  of short -term U.S.  Government  Securities.  Under  normal
market conditions,  the Fund will, as a fundamental policy,  invest at least 65%
of its total assets in U.S. Government  Securities and repurchase  agreements of
U.S.  Government  Securities.   The  government  guarantee  of  U.S.  Government
Securities  in the Fund does not  guarantee the net asset value of the shares of
the  Fund.   Under  normal   market   conditions,   the  Fund  will  maintain  a
Dollar-weighted  average  portfolio  maturity  of less  than  three  years.  The
maturity of a security  held by the Fund will  generally be considered to be the
time remaining until repayment of the principal amount of such security,  except
that the maturity of a security may be considered to be a shorter  period in the
case of (a)  contractual  rights to dispose of a security,  because  such rights
limit the period  during  which the Fund bears a market risk with respect to the
security, and (b) Mortgage-Backed Securities,  because of possible prepayment of
principal on the mortgages  underlying such  securities.  Short -term securities
generally are more stable and less susceptible to principal  decline than longer
term  securities.  While short -term securities in most cases offer lower yields
than  securities  with longer  maturities,  the Fund will seek to enhance income
through limited investment infixed income securities other than U.S.  Government
Securities.  The  investment  manager  believes  that  investment in short -term
securities  allows the Fund to seek both high current income and preservation of
capital.  There is,  however,  no assurance  that the Fund's  objective  will be
achieved.  The return and net asset value of the Fund will  fluctuate over time.
Up to 35% of the  total  assets  of the Fund  may be  invested  in fixed  income
securities  other  than U.S.  Government  Securities.  Such other  fixed  income
securities include:  (a) corporate debt securities that are rated at the time of
purchase  within the four highest  grades by either Moody's (Aaa, Aa, A, or Baa)
or S&P (AAA, AA, A, or BBB);  (b) commercial  paper that is rated at the time of
purchase within the two highest grades by either Moody's (Prime-1 or Prime-2) or
S&P (A-1 or A-2); (c) bank certificates of deposit  (including term deposits) or
bankers'   acceptances   issued  by  domestic  banks  (including  their  foreign
branches)and  Canadian  chartered  banks  having  total  assets  in excess of $1
billion;  and(d)  repurchase  agreements  with respect to any of the  foregoing.
During  temporary  defensive  periods  when  the  investment  manager  deems  it
appropriate,  the Fund may  invest  all or a  portion  of its  assets in cash or
short-term  high quality money market  instruments,  including  short-term  U.S.
Government Securities and repurchase agreements with respect to such securities.
The  yields  on these  securities  tend to be lower  than the  yields  on others
securities to be purchased by the Fund. The Fund may purchase or sell securities
on a when-issued or delayed  delivery basis  (commitments  may not exceed 25% of
the value of its  assets).  The Fund may  invest in  collateralized  obligations
which,  consistent with the limitations reflected above, may be privately issued
or may be issued or guaranteed by U.S. Government agencies or instrumentalities.
The Fund may also lend its  portfolio  securities  up to 1/3 of total assets and
may engage in  strategic  transactions.  The Fund  currently  does not intend to
invest more than 20% of its total assets in collateralized  obligations that are
collateralized by a pool of credit card or automobile receivables or other types
of assets. In addition,  the Fund does not intend to invest more than 10% of its
total assets in inverse  floaters.  The Fund currently does not intend to invest
more than 20% of its net assets in zero coupon U.S. Government Securities during
the current year. The Fund may engage in short sales  against-the-box,  but only
to the extent that not more than 10% of the Fund's total assets  (determined  at
the time of the  short  sale) is held as  collateral  for such  sales.  The Fund
currently does not intend,  however, to engage in such short sales to the extent
that more than 5% of its net assets will be held as collateral  therefor  during
the current year.


Additional  Investment  Information.  A Fund  will not  normally  engage  in the
trading of securities for the purpose of realizing  short-term profits, but will
adjust  its  portfolio  as  considered   advisable  in  view  of  prevailing  or
anticipated market conditions and its investment objective.  Accordingly, a Fund
may sell fixed income securities in anticipation of a rise in interest rates and
purchase such  securities  for inclusion in its portfolio in  anticipation  of a
decline  in  interest  rates.  Frequency  of  portfolio  turnover  will not be a
limiting  factor should the investment  manager deem it desirable to purchase or
sell securities.



                                       4
<PAGE>

Portfolio Maturity. A Fund (other than the Short-Term  Government Fund) may take
full advantage of the entire range of maturities of fixed income  securities and
may adjust the average  maturity of its portfolio  from time to time,  depending
upon its assessment of relative yields on securities of different maturities and
its expectations of future changes in interest rates. Thus, the average maturity
of a Fund's  portfolio may be relatively  short (under 5 years,  for example) at
some times and  relatively  long (over 10 years,  for  example) at other  times.
Generally, since shorter term debt securities tend to be more stable than longer
term debt  securities,  the  portfolio's  average  maturity will be shorter when
interest  rates are expected to rise and longer when interest rates are expected
to  fall.  The  effective  dollar-weighted  average  portfolio  maturity  of the
Short-Term Government Fund generally will be less than three years.

Trustees' Power to Change Objectives and Policies. Except as specifically stated
to the contrary,  the objectives and policies of the Funds may be changed by the
Trustees without a vote of the shareholders.

       ADDITIONAL INFORMATION ABOUT INVESTMENT TECHNIQUES


The  following  section  includes  disclosure  about  investment  practices  and
techniques  which  may be  utilized  by one or  more  funds  described  in  this
Statement of Additional Information. The name of each fund authorized to utilize
the  technique  precedes  its  discussion.  Specific  limitations  and  policies
regarding the use of these  techniques  may be found in each fund's  "Investment
Objective and Policies" section, as well as in "Investment  Restrictions" below.
Descriptions  in  this  Statement  of  Additional  Information  of a  particular
investment  practice  or  technique  in which a Fund may  engage or a  financial
instrument  which a Fund may  purchase  are meant to  describe  the  spectrum of
investments that Scudder Kemper Investments, Inc. (the "Investment Manager"), in
its  discretion,  might,  but is not  required  to,  use in  managing  a  Fund's
portfolio  assets.  The Investment  Manager may, in its discretion,  at any time
employ such practice,  technique or instrument for one or more funds but not for
all funds  advised by it.  Furthermore,  it is possible  that  certain  types of
financial  instruments  or  investment  techniques  described  herein may not be
available,  permissible,  economically  feasible or effective for their intended
purposes in all markets. Certain practices,  techniques,  or instruments may not
be principal  activities of a Fund but, to the extent employed,  could from time
to time have a material impact on the Fund's performance.


Kemper High Yield Fund
Kemper High Yield Fund II
Kemper High Yield Opportunity Fund
Kemper Income and Capital Preservation Fund
Kemper Short-Term U.S. Government Fund
Kemper Strategic Income Fund
Kemper U.S. Government Securities Fund
Kemper U.S. Mortgage Fund

Adjustable  Rate  Securities.  The interest  rates paid on the  adjustable  rate
securities in which the Fund invests  generally  are  readjusted at intervals of
one year or less to an increment  over some  predetermined  interest rate index.
There are  three  main  categories  of  indices:  those  based on U.S.  Treasury
securities,  those  derived  from a  calculated  measure such as a cost of funds
index and those  based on a moving  average of  mortgage  rates.  Commonly  used
indices  include  the  one-year,  three-year  and  five-year  constant  maturity
Treasury rates,  the three-month  Treasury bill rate, the 180-day  Treasury bill
rate, rates on longer-term Treasury  securities,  the 11th District Federal Home
Loan Bank Cost of Funds,  the  National  Median  Cost of Funds,  the  one-month,
three-month,  six-month or one-year London Interbank Offered Rate ("LIBOR"), the
prime rate of a specific bank or commercial paper rates.  Some indices,  such as
the one-year constant  maturity Treasury rate,  closely mirror changes in market
interest rate levels.  Others,  such as the 11th District Home Loan Bank Cost of
Funds  index,  tend to lag behind  changes in market  rate levels and tend to be
somewhat less volatile.

The  Mortgage-Backed  Securities  either issued or guaranteed by GNMA,  FHLMC or
FNMA  ("Certificates")  are called pass-through  Certificates because a pro rata
share of both regular interest and principal  payments (less GNMA's,  FHLMC's or
FNMA's fees and any  applicable  loan  servicing  fees),  as well as unscheduled
early prepayments on the underlying mortgage pool, are passed through monthly to
the holder of the Certificate  (i.e.,  the Fund).  The principal and interest on
GNMA  securities  are guaranteed by GNMA and backed by the full faith and credit
of the U.S. Government.  FNMA guarantees full and timely payment of all interest
and principal,  while FHLMC  guarantees  timely payment of interest and ultimate
collection of principal.  Mortgage-Backed Securities


                                       5
<PAGE>

from FNMA and FHLMC are not  backed by the full  faith and  credit of the United
States;  however,  they are generally  considered to offer minimal credit risks.
The  yields  provided  by these  Mortgage-Backed  Securities  have  historically
exceeded the yields on other types of U.S. Government Securities with comparable
maturities in large measure due to the prepayment risk discussed below.

If prepayments of principal are made on the underlying  mortgages during periods
of rising  interest  rates,  the Fund  generally  will be able to reinvest  such
amounts in securities  with a higher current rate of return.  However,  the Fund
will not benefit from  increases in interest  rates to the extent that  interest
rates rise to the point where they cause the current  coupon of adjustable  rate
mortgages held as investments by the Fund to exceed the maximum allowable annual
or lifetime reset limits (or "cap rates") for a particular  mortgage.  Also, the
Fund's  net  asset  value  could  vary to the  extent  that  current  yields  on
Mortgage-Backed  Securities  are different  than market  yields  during  interim
periods between coupon reset dates.

During  periods of declining  interest  rates,  of course,  the coupon rates may
readjust downward,  resulting in lower yields to the Fund.  Further,  because of
this feature,  the value of adjustable rate mortgages is unlikely to rise during
periods  of  declining   interest   rates  to  the  same  extent  as  fixed-rate
instruments.  As with other Mortgage-Backed  Securities,  interest rate declines
may result in  accelerated  prepayment of mortgages,  and the proceeds from such
prepayments must be reinvested at lower prevailing interest rates.

One  additional  difference  between  adjustable  rate  mortgages and fixed rate
mortgages is that for certain types of adjustable rate mortgage securities,  the
rate of amortization of principal,  as well as interest  payments,  can and does
change in  accordance  with  movements in a specified,  published  interest rate
index. The amount of interest due to an adjustable rate mortgage security holder
is  calculated  by adding a specified  additional  amount,  the "margin," to the
index, subject to limitations or "caps" on the maximum and minimum interest that
is charged to the  mortgagor  during the life of the  mortgage or to maximum and
minimum changes to that interest rate during a given period.

Kemper High Yield Fund
Kemper High Yield Fund II
Kemper High Yield Opportunity Fund
Kemper Income and Capital Preservation Fund
Kemper Short-Term U.S. Government Fund
Kemper Strategic Income Fund
Kemper U.S. Government Securities Fund
Kemper U.S. Mortgage Fund

Borrowing.  The Fund will borrow only when the Investment  Manager believes that
borrowing will benefit the Fund after taking into account considerations such as
the costs of the  borrowing.  Borrowing  by the Fund will  involve  special risk
considerations.  Although the principal of the Fund's  borrowings will be fixed,
the  Fund's  assets  may  change  in  value  during  the  time  a  borrowing  is
outstanding, proportionately increasing exposure to capital risk.

Kemper High Yield Fund
Kemper High Yield Fund II
Kemper High Yield Opportunity Fund
Kemper Income and Capital Preservation Fund
Kemper Short-Term U.S. Government Fund
Kemper Strategic Income Fund
Kemper U.S. Government Securities Fund
Kemper U.S. Mortgage Fund


Collateralized   Mortgage  Obligations   ("CMOs").   CMOs  are  hybrids  between
mortgage-backed bonds and mortgage pass-through  securities.  Similar to a bond,
interest and prepaid principal are paid, in most cases,  semiannually.  CMOs may
be collateralized by whole mortgage loans but are more typically  collateralized
by portfolios of mortgage pass-through  securities guaranteed by GNMA, FHLMC, or
Fannie Mae, and their income streams.


CMOs are  structured  into  multiple  classes,  each bearing a different  stated
maturity.  Actual  maturity  and average  life will  depend upon the  prepayment
experience  of  the  collateral.  CMOs  provide  for a  modified  form  of  call
protection


                                       6
<PAGE>

through a de facto  breakdown of the underlying  pool of mortgages  according to
how quickly the loans are repaid. Monthly payment of principal received from the
pool of  underlying  mortgages,  including  prepayments,  is first  returned  to
investors  holding the shortest  maturity  class.  Investors  holding the longer
maturity classes receive  principal only after the first class has been retired.
An  investor  is  partially  guarded  against a sooner  than  desired  return of
principal  because of the  sequential  payments.  The  prices of  certain  CMOs,
depending on their structure and the rate of prepayments,  can be volatile. Some
CMOs may also not be as liquid as other securities.


In a typical CMO transaction,  a corporation issues multiple series (e.g., A, B,
C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are used to purchase
mortgages or mortgage pass-through certificates  ("Collateral").  The Collateral
is pledged to a third party  trustee as security  for the Bonds.  Principal  and
interest  payments from the Collateral are used to pay principal on the Bonds in
the order A, B, C, Z. The  Series A, B, and C bonds all bear  current  interest.
Interest  on the  Series Z Bond is  accrued  and added to  principal  and a like
amount is paid as principal on the Series A, B, or C Bond  currently  being paid
off. When the Series A, B, and C Bonds are paid in full,  interest and principal
on the Series Z Bond  begins to be paid  currently.  With some CMOs,  the issuer
serves as a conduit to allow loan originators (primarily builders or savings and
loan associations) to borrow against their loan portfolios.


The principal  risk of CMOs results from the rate of  prepayments  on underlying
mortgages  serving as collateral and from the structure of the deal. An increase
or decrease in prepayment rates will affect the yield, average life and price of
CMOs.

Kemper High Yield Fund
Kemper High Yield Fund II
Kemper High Yield Opportunity Fund
Kemper Income and Capital Preservation Fund
Kemper Strategic Income Fund


Depositary  Receipts.  The Fund may invest in sponsored or unsponsored  American
Depositary  Receipts ("ADRs"),  European  Depositary  Receipts ("EDRs"),  Global
Depositary  Receipts ("GDRs"),  International  Depositary  Receipts ("IDRs") and
other types of Depositary Receipts (which, together with ADRs, GDRs and IDRs are
hereinafter referred to as "Depositary  Receipts").  Depositary receipts provide
indirect  investment  in securities of foreign  issuers.  Prices of  unsponsored
Depositary  Receipts  may be more  volatile  than if they were  sponsored by the
issuer of the underlying securities.  Depositary Receipts may not necessarily be
denominated  in the same currency as the underlying  securities  into which they
may be  converted.  In  addition,  the  issuers  of  the  stock  of  unsponsored
Depositary  Receipts are not obligated to disclose  material  information in the
United  States  and,  therefore,  there may not be a  correlation  between  such
information and the market value of the Depositary Receipts. ADRs are Depositary
Receipts which are bought and sold in the United States and are typically issued
by a  U.S.  bank  or  trust  company  which  evidence  ownership  of  underlying
securities by a foreign  corporation.  GDRs,  IDRs and other types of Depositary
Receipts are typically issued by foreign banks or trust companies, although they
may also be issued by  United  States  banks or trust  companies,  and  evidence
ownership of underlying securities issued by either a foreign or a United States
corporation.  Generally, Depositary Receipts in registered form are designed for
use in the United States  securities  markets and Depositary  Receipts in bearer
form are designed for use in securities  markets outside the United States.  For
purposes of the Fund's investment policies, the Fund's investments in ADRs, GDRs
and other types of Depositary  Receipts will be deemed to be  investments in the
underlying securities.  Depositary Receipts, including those denominated in U.S.
dollars will be subject to foreign  currency  exchange  rate risk.  However,  by
investing  in U.S.  dollar-denominated  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.
However,  certain  Depositary  Receipts  may not be  listed on an  exchange  and
therefore may be illiquid securities.


Kemper High Yield Fund
Kemper High Yield Fund II
Kemper High Yield Opportunity Fund

Equities as a result of workouts.  The Fund may hold equity securities  received
in  an  exchange  or  workout  of  distressed  lower-rated  debt  securities.  A
distressed  security  is a  security  that is in  default or in risk of being in
default.

                                       7
<PAGE>

Kemper High Yield Fund
Kemper High Yield Fund II
Kemper High Yield Opportunity Fund
Kemper Income and Capital Preservation Fund
Kemper Strategic Income Fund

Foreign Fixed Income Securities.  Since most foreign fixed income securities are
not rated, the Fund will invest in foreign fixed income  securities based on the
Investment  Manager's analysis without relying on published ratings.  Since such
investments  will be based upon the Investment  Manager's  analysis  rather than
upon published ratings, achievement of the Fund's goals may depend more upon the
abilities of the Investment Manager than would otherwise be the case.

The value of the foreign fixed income  securities held by the Fund, and thus the
net asset value of the Fund's shares,  generally will fluctuate with (a) changes
in the  perceived  creditworthiness  of the  issuers  of those  securities,  (b)
movements  in  interest  rates,  and (c) changes in the  relative  values of the
currencies  in which the  Fund's  investments  in fixed  income  securities  are
denominated with respect to the U.S. Dollar.  The extent of the fluctuation will
depend  on  various  factors,  such  as  the  average  maturity  of  the  Fund's
investments in foreign fixed income securities, and the extent to which the Fund
hedges its interest  rate,  credit and currency  exchange  rate risks.  A longer
average  maturity  generally is associated  with a higher level of volatility in
the market value of such securities in response to changes in market conditions.

Investments in sovereign  debt,  including  Brady Bonds,  involve special risks.
Brady Bonds are debt securities  issued under a plan implemented to allow debtor
nations to restructure their outstanding  commercial bank indebtedness.  Foreign
governmental  issuers of debt or the  governmental  authorities that control the
repayment  of the debt may be  unable or  unwilling  to repay  principal  or pay
interest  when due.  In the event of  default,  there may be limited or no legal
recourse in that, generally, remedies for defaults must be pursued in the courts
of the defaulting party.  Political conditions,  especially a sovereign entity's
willingness  to  meet  the  terms  of  its  fixed  income  securities,   are  of
considerable  significance.  Also, there can be no assurance that the holders of
commercial bank loans to the same sovereign  entity may not contest  payments to
the holders of sovereign debt in the event of default under commercial bank loan
agreements.  In  addition,  there is no  bankruptcy  proceeding  with respect to
sovereign debt on which a sovereign has defaulted, and the Fund may be unable to
collect  all or any  part  of its  investment  in a  particular  issue.  Foreign
investment  in certain  sovereign  debt is  restricted  or controlled to varying
degrees,  including  requiring  governmental  approval for the  repatriation  of
income, capital or proceed of sales by foreign investors.  These restrictions or
controls may at times limit or preclude foreign  investment in certain sovereign
debt or  increase  the costs and  expenses  of the Fund.  Sovereign  debt may be
issued  as  part  of  debt  restructuring  and  such  debt  is to be  considered
speculative.  There is a history of defaults  with  respect to  commercial  bank
loans by public and private  entities  issuing Brady Bonds.  All or a portion of
the interest payments and/or principal repayment with respect to Brady Bonds may
be uncollateralized.

Kemper High Yield Fund
Kemper High Yield Fund II
Kemper High Yield Opportunity Fund
Kemper Income and Capital Preservation Fund
Kemper Strategic Income Fund

Foreign  Securities.  Investing in foreign  securities  involves certain special
considerations,  including  those  set  forth  below,  which  are not  typically
associated  with  investing  in U.S.  securities  and  which  may  favorably  or
unfavorably  affect  the  Fund's  performance.  As  foreign  companies  are  not
generally  subject to  uniform  accounting,  auditing  and  financial  reporting
standards, practices and requirements comparable to those applicable to domestic
companies,  there may be less  publicly  available  information  about a foreign
company than about a domestic company.  Many foreign securities  markets,  while
growing in volume of trading activity,  have  substantially less volume than the
U.S.  market,  and  securities of some foreign  issuers are less liquid and more
volatile than securities of domestic issuers. Similarly, volume and liquidity in
most foreign bond markets is less than in the U.S. and, at times,  volatility of
price  can be  greater  than in the  U.S.  Fixed  commissions  on  some  foreign
securities  exchanges  and bid to asked  spreads in  foreign  bond  markets  are
generally  higher  than  commissions  or bid to asked  spreads on U.S.  markets,
although the Investment  Manager will endeavor to achieve the most favorable net
results on its  portfolio  transactions.  There is


                                       8
<PAGE>

generally less governmental  supervision and regulation of securities exchanges,
brokers and listed  companies  in foreign  countries  than in the U.S. It may be
more difficult for the Fund's agents to keep currently  informed about corporate
actions  in  foreign   countries  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., thus  increasing the risk of delayed  settlements
of portfolio  transactions  or loss of  certificates  for portfolio  securities.
Payment for  securities  without  delivery  may be  required in certain  foreign
markets.  In addition,  with respect to certain foreign countries,  there is the
possibility  of  expropriation  or  confiscatory  taxation,  political or social
instability,  or diplomatic  developments which could affect U.S. investments in
those countries.  Moreover, individual foreign economies may differ favorably or
unfavorably  from the U.S.  economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment,  resource self-sufficiency and
balance of payments  position.  The management of the Fund seeks to mitigate the
risks   associated  with  the  foregoing   considerations   through   continuous
professional management.

Kemper High Yield Fund
Kemper High Yield Fund II
Kemper High Yield Opportunity Fund
Kemper Income and Capital Preservation Fund
Kemper Strategic Income Fund

High  Yield/High  Risk Bonds.  The Fund may purchase debt  securities  which are
rated below  investment-grade  (commonly referred to as "junk bonds"),  that is,
rated below Baa by Moody's or below BBB by S&P and unrated  securities judged to
be of  equivalent  quality  as  determined  by  the  Investment  Manager.  These
securities  usually entail greater risk (including the possibility of default or
bankruptcy  of the  issuers  of  such  securities),  generally  involve  greater
volatility  of price and risk to principal  and income,  and may be less liquid,
than securities in the higher rating  categories.  The lower the ratings of such
debt  securities,  the more their  risks  render  them like  equity  securities.
Securities  rated D may be in default  with  respect to payment of  principal or
interest.  (See the Appendix to this Statement of Additional  Information  for a
more complete  description of the ratings assigned by ratings  organizations and
their respective characteristics).


Issuers of 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 a  sustained  period of  rising  interest  rates,  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 yield securities because
such  securities  are generally  unsecured and are often  subordinated  to other
creditors  of the  issuer.  Prices  and  yields of high  yield  securities  will
fluctuate over time and, during periods of economic  uncertainty,  volatility of
high yield  securities  may  adversely  affect the  Fund's net asset  value.  In
addition,  investments  in high yield zero coupon or pay-in-kind  bonds,  rather
than  income-bearing  high yield securities,  may be more speculative and may be
subject to greater fluctuations in value due to changes in interest rates.


The Fund may have  difficulty  disposing  of  certain  high  yield  (high  risk)
securities because they may have a thin trading market.  Because not all dealers
maintain  markets in all high yield  securities,  the Fund anticipates that such
securities  could be sold only to a limited  number of dealers or  institutional
investors.  The lack of a liquid  secondary market may have an adverse effect on
the market price and the Fund's ability to dispose of particular  issues and may
also make it more difficult for the Fund to obtain  accurate  market  quotations
for  purposes of valuing the Fund's  assets.  Market  quotations  generally  are
available  on many high yield  issues only from a limited  number of dealers and
may not  necessarily  represent  firm bids of such  dealers or prices for actual
sales.  Adverse  publicity and investor  perceptions may decrease the values and
liquidity of high yield  securities.  These  securities may also involve special
registration   responsibilities,   liabilities  and  costs,  and  liquidity  and
valuation difficulties.

Credit  quality in the  high-yield  securities  market can change  suddenly  and
unexpectedly,  and even recently-issued credit ratings may not fully reflect the
actual risks posed by a particular high-yield security. For these reasons, it is
generally  the  policy of the  Investment  Manager  not to rely  exclusively  on
ratings issued by established  credit rating  agencies,  but to supplement  such
ratings with its own  independent  and on-going  review of credit  quality.  The


                                       9
<PAGE>

achievement of the Fund's investment  objective by investment in such securities
may be more dependent on the Investment  Manager's  credit  analysis than is the
case for higher  quality  bonds.  Should the rating of a  portfolio  security be
downgraded,  the  Investment  Manager will  determine  whether it is in the best
interests of the Fund to retain or dispose of such security.

Prices for below investment-grade  securities may be affected by legislative and
regulatory  developments.  Also,  Congress  has  from  time to  time  considered
legislation  which would  restrict or eliminate  the corporate tax deduction for
interest  payments in these  securities and regulate  corporate  restructurings.
Such legislation may significantly depress the prices of outstanding  securities
of this type.

Kemper High Yield Fund
Kemper High Yield Fund II
Kemper High Yield Opportunity Fund
Kemper Income and Capital Preservation Fund
Kemper Strategic Income Fund

Investing in Emerging Markets.  The Fund's investments in foreign securities may
be in developed  countries or in countries  considered by the Fund's  Investment
Manager to have  developing or "emerging"  markets,  which involves  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 developing or
emerging market country can be considered to be a country that is in the initial
stages of its  industrialization  cycle.  Currently,  emerging markets generally
include every country in the world other than the United States,  Canada, Japan,
Australia,   New  Zealand,  Hong  Kong,  Singapore  and  most  Western  European
countries. Currently, investing in many emerging markets may not be desirable or
feasible  because of the lack of adequate  custody  arrangements  for the Fund's
assets,  overly burdensome  repatriation and similar  restrictions,  the lack of
organized and liquid securities markets,  unacceptable  political risks or other
reasons.  As  opportunities to invest in securities in emerging markets develop,
the Fund may expand and further  broaden the group of emerging  markets in which
it invests. In the past, markets of developing or emerging market countries have
been more  volatile  than the  markets of  developed  countries;  however,  such
markets often have provided higher rates of return to investors.  The Investment
Manager believes that these  characteristics  may be expected to continue in the
future.

Most emerging  securities markets have substantially less volume and are subject
to less governmental  supervision than U.S.  securities  markets.  Securities of
many  issuers in  emerging  markets may be less  liquid and more  volatile  than
securities of comparable domestic issuers. In addition, there is less regulation
of securities  exchanges,  securities dealers, and listed and unlisted companies
in emerging markets than in the U.S.

Emerging markets also have different clearance and settlement procedures, and in
certain markets there have been times when  settlements  have not kept pace with
the volume of  securities  transactions.  Delays in  settlement  could result in
temporary  periods when a portion of the assets of the Fund is uninvested and no
return is earned  thereon.  The inability of the Fund to make intended  security
purchases due to  settlement  problems  could cause the Fund to miss  attractive
investment  opportunities.  Inability to dispose of portfolio  securities due to
settlement  problems could result either in losses to the Fund due to subsequent
declines in value of the  portfolio  security or, if the Fund has entered into a
contract  to sell the  security,  could  result  in  possible  liability  to the
purchaser.   Costs  associated  with  transactions  in  foreign  securities  are
generally  higher than costs  associated with  transactions in U.S.  securities.
Such  transactions  also  involve  additional  costs for the purchase or sale of
foreign currency.

Certain emerging markets require prior  governmental  approval of investments by
foreign  persons,  limit the  amount  of  investment  by  foreign  persons  in a
particular  company,  limit the investment by foreign persons only to a specific
class of securities of a company that may have less advantageous rights than the
classes  available for purchase by  domiciliaries of the countries and/or impose
additional  taxes  on  foreign  investors.  Certain  emerging  markets  may also
restrict  investment  opportunities in issuers in industries deemed important to
national interest.

Certain emerging markets may require governmental  approval for the repatriation
of investment income,  capital or the proceeds of sales of securities by foreign
investors.  In  addition,  if a  deterioration  occurs in an  emerging  market's
balance of payments  or for other  reasons,  a country  could  impose  temporary
restrictions  on  foreign  capital


                                       10
<PAGE>

remittances.  The Fund could be adversely affected by delays in, or a refusal to
grant, any required  governmental  approval for repatriation of capital, as well
as by the application to the Fund of any restrictions on investments.

In the course of investment in emerging markets, the Fund will be exposed to the
direct or indirect consequences of political, social and economic changes in one
or more emerging markets. While the Fund will manage its assets in a manner that
will seek to minimize the exposure to such risks, there can be no assurance that
adverse political,  social or economic changes will not cause the Fund to suffer
a loss of value in respect of the securities in the Fund's portfolio.


The risk  also  exists  that an  emergency  situation  may  arise in one or more
emerging  markets as a result of which trading of securities may cease or may be
substantially curtailed and prices for the Fund's securities in such markets may
not be readily available.  The Fund may suspend redemption of its shares for any
period during which an emergency  exists,  as determined by the  Securities  and
Exchange   Commission.   Accordingly  if  the  Fund  believes  that  appropriate
circumstances  exist,  it will  promptly  apply to the  Securities  and Exchange
Commission for a determination  that an emergency is present.  During the period
commencing  from the Fund's  identification  of such condition until the date of
the  Securities and Exchange  Commission  action,  the Fund's  securities in the
affected  markets  will be valued at fair value  determined  in good faith by or
under the direction of the Fund's Board.


Volume and  liquidity  in most  foreign  markets are less than in the U.S.,  and
securities  of many foreign  companies  are less liquid and more  volatile  than
securities of comparable U.S. companies. Fixed commissions on foreign securities
exchanges are generally  higher than negotiated  commissions on U.S.  exchanges,
although  the Fund  endeavors to achieve the most  favorable  net results on its
portfolio  transactions.  There is generally  less  government  supervision  and
regulation of business and industry practices,  securities  exchanges,  brokers,
dealers and listed  companies than in the U.S. Mail service between the U.S. and
foreign  countries  may be slower or less  reliable  than within the U.S.,  thus
increasing the risk of delayed settlements of portfolio  transactions or loss of
certificates for certificated portfolio securities. In addition, with respect to
certain  emerging  markets,   there  is  the  possibility  of  expropriation  or
confiscatory   taxation,   political  or  social   instability,   or  diplomatic
developments  which  could  affect the Fund's  investments  in those  countries.
Moreover,   individual   emerging  market  economies  may  differ  favorably  or
unfavorably  from the U.S.  economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment,  resource self-sufficiency and
balance of payments position.

The Fund may have limited legal  recourse in the event of a default with respect
to certain debt  obligations it holds. If the issuer of a fixed-income  security
owned by the Fund  defaults,  the Fund may  incur  additional  expenses  to seek
recovery.  Debt obligations issued by emerging market country governments differ
from debt  obligations  of private  entities;  remedies  from  defaults  on debt
obligations issued by emerging market governments, unlike those on private debt,
must be pursued in the courts of the defaulting party itself. The Fund's ability
to enforce its rights  against  private  issuers may be limited.  The ability to
attach assets to enforce a judgment may be limited.  Legal recourse is therefore
somewhat diminished. Bankruptcy, moratorium and other similar laws applicable to
private issuers of debt obligations may be substantially different from those of
other  countries.  The  political  context,  expressed  as  an  emerging  market
governmental issuer's willingness to meet the terms of the debt obligation,  for
example, is of considerable  importance.  In addition, no assurance can be given
that the holders of commercial bank debt may not contest payments to the holders
of  debt  obligations  in the  event  of  default  under  commercial  bank  loan
agreements.

Income from securities held by the Fund could be reduced by a withholding tax at
the source or other taxes imposed by the emerging market  countries in which the
Fund makes its  investments.  The Fund's net asset value may also be affected by
changes  in the  rates  or  methods  of  taxation  applicable  to the Fund or to
entities in which the Fund has invested.  The  Investment  Manager will consider
the  cost  of any  taxes  in  determining  whether  to  acquire  any  particular
investments,  but can provide no assurance that the taxes will not be subject to
change.

Many  emerging  markets  have  experienced  substantial,  and, in some  periods,
extremely  high  rates  of  inflation  for  many  years.   Inflation  and  rapid
fluctuations  in  inflation  rates  have had and may  continue  to have  adverse
effects on the  economies  and  securities  markets of certain  emerging  market
countries. In an attempt to control inflation, wage and price controls have been
imposed in certain  countries.  Of these countries,  some, in recent years, have
begun to control inflation through prudent economic policies.

Emerging market governmental issuers are among the largest debtors to commercial
banks,  foreign  governments,  international  financial  organizations and other
financial  institutions.  Certain emerging market governmental  issuers


                                       11
<PAGE>

have  not  been  able to make  payments  of  interest  on or  principal  of debt
obligations  as those  payments  have come due.  Obligations  arising  from past
restructuring  agreements may affect the economic  performance and political and
social stability of those issuers.

Governments  of many emerging  market  countries  have exercised and continue to
exercise  substantial  influence over many aspects of the private sector through
the ownership or control of many companies, including some of the largest in any
given  country.  As a result,  government  actions  in the  future  could have a
significant  effect on economic  conditions in emerging markets,  which in turn,
may adversely affect companies in the private sector,  general market conditions
and prices and yields of  certain  of the  securities  in the Fund's  portfolio.
Expropriation,  confiscatory taxation,  nationalization,  political, economic or
social instability or other similar  developments have occurred  frequently over
the history of certain  emerging  markets and could adversely  affect the Fund's
assets should these conditions recur.

The  ability of  emerging  market  country  governmental  issuers to make timely
payments  on their  obligations  is  likely  to be  influenced  strongly  by the
issuer's balance of payments,  including export  performance,  and its access to
international  credits and  investments.  An emerging  market whose  exports are
concentrated  in a few  commodities  could be  vulnerable  to a  decline  in the
international   prices   of  one  or  more  of  those   commodities.   Increased
protectionism  on the part of an emerging  market's  trading partners could also
adversely  affect the country's  exports and diminish its trade account surplus,
if any. To the extent that emerging  markets  receive payment for its exports in
currencies other than dollars or non-emerging market currencies,  its ability to
make debt payments  denominated  in dollars or  non-emerging  market  currencies
could be affected.

Another factor bearing on the ability of emerging market countries to repay debt
obligations is the level of international reserves of the country.  Fluctuations
in the level of these  reserves  affect the amount of foreign  exchange  readily
available  for  external  debt  payments  and thus  could  have a bearing on the
capacity  of  emerging   market   countries  to  make  payments  on  these  debt
obligations.

To the extent that an emerging  market country cannot  generate a trade surplus,
it must  depend on  continuing  loans  from  foreign  governments,  multilateral
organizations or private commercial banks, aid payments from foreign governments
and inflows of foreign investment. The access of emerging markets to these forms
of external  funding may not be certain,  and a withdrawal  of external  funding
could  adversely  affect the capacity of emerging  market  country  governmental
issuers  to make  payments  on  their  obligations.  In  addition,  the  cost of
servicing  emerging  market  debt  obligations  can be  affected  by a change in
international  interest  rates  since the  majority of these  obligations  carry
interest rates that are adjusted periodically based upon international rates.

Kemper High Yield Fund
Kemper High Yield Fund II
Kemper High Yield Opportunity Fund
Kemper Income and Capital Preservation Fund
Kemper Short-Term U.S. Government Fund
Kemper Strategic Income Fund
Kemper U.S. Government Securities Fund
Kemper U.S. Mortgage Fund

Interfund Borrowing and Lending Program.  The Fund has received exemptive relief
from the SEC which  permits  the Fund to  participate  in an  interfund  lending
program among certain investment companies advised by the Manager. The interfund
lending  program  allows the  participating  funds to borrow money from and loan
money to each other for temporary or emergency purposes.  The program is subject
to a number of conditions designed to ensure fair and equitable treatment of all
participating  funds,  including  the  following:  (1) no fund may borrow  money
through the program  unless it receives a more  favorable  interest  rate than a
rate  approximating  the  lowest  interest  rate at which  bank  loans  would be
available to any of the participating  funds under a loan agreement;  and (2) no
fund may lend money  through  the program  unless it  receives a more  favorable
return than that available from an investment in repurchase  agreements  and, to
the extent applicable, money market cash sweep arrangements. In addition, a fund
may participate in the program only if and to the extent that such participation
is consistent with the fund's investment  objectives and policies (for instance,
money market  funds would  normally  participate  only as lenders and tax exempt
funds only as borrowers).  Interfund loans and borrowings may extend  overnight,
but could


                                       12
<PAGE>

have a maximum  duration of seven days. Loans may be called on one day's notice.
A fund may have to borrow from a bank at a higher  interest rate if an interfund
loan is called or not  renewed.  Any delay in  repayment to a lending fund could
result in a lost  investment  opportunity  or additional  costs.  The program is
subject to the oversight and periodic review of the Boards of the  participating
funds.  To the extent the Fund is  actually  engaged in  borrowing  through  the
interfund lending program, the Fund, as a matter of non-fundamental  policy, may
not  borrow  for  other  than  temporary  or  emergency  purposes  (and  not for
leveraging),  except that the Fund may engage in reverse  repurchase  agreements
and dollar rolls for any purpose.

Kemper High Yield Fund
Kemper High Yield Fund II
Kemper High Yield Opportunity Fund
Kemper Income and Capital Preservation Fund
Kemper Short-Term U.S. Government Fund
Kemper Strategic Income Fund
Kemper U.S. Government Securities Fund
Kemper U.S. Mortgage Fund

Investment-Grade  Bonds. The Fund may purchase  "investment-grade"  bonds, which
are those rated Aaa,  Aa, A or Baa by Moody's or AAA, AA, A or BBB by S&P or, if
unrated,  judged to be of equivalent  quality as  determined  by the  Investment
Manager.  Moody's  considers bonds it rates Baa to have speculative  elements as
well as investment-grade characteristics. To the extent that the Fund invests in
higher-grade  securities,  the  Fund  will  not  be  able  to  avail  itself  of
opportunities for higher income which may be available at lower grades.

Kemper High Yield Fund
Kemper High Yield Fund II
Kemper High Yield Opportunity Fund
Kemper Income and Capital Preservation Fund
Kemper Short-Term U.S. Government Fund
Kemper Strategic Income Fund
Kemper U.S. Government Securities Fund
Kemper U.S. Mortgage Fund


Investment of  Uninvested  Cash  Balances.  The Fund may have cash balances that
have not been invested in portfolio securities  ("Uninvested Cash").  Uninvested
Cash may result  from a variety of  sources,  including  dividends  or  interest
received from portfolio securities, unsettled securities transactions,  reserves
held for  investment  strategy  purposes,  scheduled  maturity  of  investments,
liquidation  of  investment  securities  to  meet  anticipated  redemptions  and
dividend payments, and new cash received from investors.  Uninvested Cash may be
invested  directly  in  money  market   instruments  or  other  short-term  debt
obligations.  Pursuant to an Exemptive Order issued by the SEC, the Fund may use
Uninvested  Cash to purchase  shares of affiliated  funds including money market
funds,  short-term bond funds and Scudder Cash Management  Investment  Trust, or
one or more future entities for which Scudder Kemper Investments acts as trustee
or investment  advisor that operate as cash management  investment  vehicles and
that are excluded from the definition of investment  company pursuant to section
3(c)(1) or 3(c)(7) of the  Investment  Company  Act of 1940  (collectively,  the
"Central  Funds")  in excess  of the  limitations  of  Section  12(d)(1)  of the
Investment  Company Act.  Investment  by the Fund in shares of the Central Funds
will be in accordance with the Fund's  investment  policies and  restrictions as
set forth in its registration statement.

Certain of the  Central  Funds  comply  with rule 2a-7 under the Act.  The other
Central Funds are or will be short-term  bond funds that invest in  fixed-income
securities  and maintain a dollar  weighted  average  maturity of three years or
less.  Each of the  Central  Funds will be managed  specifically  to  maintain a
highly liquid  portfolio,  and access to them will enhance the Fund's ability to
manage Uninvested Cash.

The Fund will invest  Uninvested  Cash in Central  Funds only to the extent that
the Fund's aggregate  investment in the Central Funds does not exceed 25% of its
total  assets in shares of the Central  Funds.  Purchase  and sales of shares of
Central Funds are made at net asset value.




                                       13
<PAGE>

Kemper High Yield Fund
Kemper High Yield Fund II
Kemper High Yield Opportunity Fund
Kemper Income and Capital Preservation Fund
Kemper Short-Term U.S. Government Fund
Kemper Strategic Income Fund
Kemper U.S. Mortgage Fund

Lending of  Portfolio  Securities.  The Fund may seek to increase  its income by
lending   portfolio   securities.   Such   loans  may  be  made  to   registered
broker/dealers or other financial  institutions,  and are required to be secured
continuously  by  collateral in cash or liquid  assets,  maintained on a current
basis at an amount at least equal to the market  value and  accrued  interest of
the  securities  loaned.  The Fund has the right to call a loan and  obtain  the
securities loaned on five days' notice or, in connection with securities trading
on foreign  markets,  within such longer period of time which coincides with the
normal  settlement  period for  purchases  and sales of such  securities in such
foreign  markets.  During the existence of a loan, the Fund continues to receive
the equivalent of any distributions  paid by the issuer on the securities loaned
and also receives compensation based on investment of the collateral.  The risks
in lending securities,  as with other extensions of secured credit, consist of a
possible  delay in recovery  and a loss of rights in the  collateral  should the
borrower of the  securities  fail  financially.  Loans may be made only to firms
deemed by the  Investment  Manager to be of good  standing  and will not be made
unless,  in the judgment of the  Investment  Manager,  the  consideration  to be
earned from such loans would justify the risk.

Kemper High Yield Fund
Kemper High Yield Fund II
Kemper High Yield Opportunity Fund
Kemper Income and Capital Preservation Fund
Kemper Strategic Income Fund

Privatized Enterprises. Investments in foreign securities may include securities
issued  by  enterprises   that  have  undergone  or  are  currently   undergoing
privatization.  The  governments of certain  foreign  countries have, to varying
degrees,  embarked on privatization  programs  contemplating  the sale of all or
part of their  interests in state  enterprises.  The Fund's  investments  in the
securities  of  privatized   enterprises   may  include   privately   negotiated
investments in a government or  state-owned or controlled  company or enterprise
that has not yet  conducted  an  initial  equity  offering,  investments  in the
initial  offering of equity  securities  of a state  enterprise  or former state
enterprise and investments in the securities of a state enterprise following its
initial equity offering.

In certain jurisdictions,  the ability of foreign entities, such as the Fund, to
participate in privatizations may be limited by local law, or the price or terms
on which the Fund may be able to participate may be less  advantageous  than for
local investors.  Moreover, there can be no assurance that governments that have
embarked on  privatization  programs will continue to divest their  ownership of
state  enterprises,  that  proposed  privatizations  will be  successful or that
governments will not re-nationalize enterprises that have been privatized.

In the case of the enterprises in which the Fund may invest, large blocks of the
stock of those  enterprises may be held by a small group of  stockholders,  even
after  the  initial  equity  offerings  by those  enterprises.  The sale of some
portion or all of those blocks could have an adverse  effect on the price of the
stock of any such enterprise.


Prior to making an initial  equity  offering,  most state  enterprises or former
state  enterprises go through an internal  reorganization  or  management.  Such
reorganizations  are made in an attempt to better  enable these  enterprises  to
compete in the private sector. However,  certain reorganizations could result in
a  management  team  that does not  function  as well as an  enterprise's  prior
management and may have a negative effect on such enterprise.  In addition,  the
privatization  of an  enterprise  by its  government  may occur over a number of
years,  with the  government  continuing to hold a  controlling  position in the
enterprise even after the initial equity offering for the enterprise.


Prior to  privatization,  most of the  state  enterprises  in which the Fund may
invest  enjoy the  protection  of and receive  preferential  treatment  from the
respective  sovereigns that own or control them.  After making an initial equity
offering,  these  enterprises may no longer have such protection or receive such
preferential  treatment and may become subject to market  competition from which
they were  previously  protected.  Some of these  enterprises may


                                       14
<PAGE>

not be able to operate effectively in a competitive market and may suffer losses
or experience bankruptcy due to such competition.

Kemper High Yield Fund
Kemper High Yield Fund II
Kemper High Yield Opportunity Fund
Kemper Income and Capital Preservation Fund
Kemper Short-Term U.S. Government Fund
Kemper Strategic Income Fund
Kemper U.S. Government Securities Fund
Kemper U.S. Mortgage Fund

Repurchase Agreements.  The Fund may invest in repurchase agreements pursuant to
its  investment  guidelines.  In  a  repurchase  agreement,  the  Fund  acquires
ownership of a security and  simultaneously  commits to resell that  security to
the seller, typically a bank or broker/dealer.

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

It is not clear whether a court would consider the  Obligation  purchased by the
Fund  subject to a  repurchase  agreement as being owned by the Fund or as being
collateral  for a  loan  by  the  Fund  to  the  seller.  In  the  event  of the
commencement of bankruptcy or insolvency  proceedings with respect to the seller
of the  Obligation  before  repurchase  of the  Obligation  under  a  repurchase
agreement,  the Fund may  encounter  delay and incur costs  before being able to
sell the  security.  Delays may involve  loss of interest or decline in price of
the  Obligation.  If the court  characterizes  the transaction as a loan and the
Fund has not perfected a security  interest in the  Obligation,  the Fund may be
required to return the  Obligation  to the seller's  estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, the Fund would be at
risk  of  losing  some  or all of  the  principal  and  income  involved  in the
transaction.  As with any unsecured debt Obligation  purchased for the Fund, the
Investment  Manager  seeks  to  reduce  the  risk  of  loss  through  repurchase
agreements by analyzing the  creditworthiness  of the obligor,  in this case the
seller  of the  Obligation.  Apart  from the risk of  bankruptcy  or  insolvency
proceedings,  there is also the risk that the seller may fail to repurchase  the
Obligation,  in which case the Fund may incur a loss if the proceeds to the Fund
of the sale to a third party are less than the repurchase price. However, if the
market value  (including  interest) of the Obligation  subject to the repurchase
agreement becomes less than the repurchase price (including interest),  the Fund
will direct the seller of the  Obligation  to deliver  additional  securities so
that the market  value  (including  interest) of all  securities  subject to the
repurchase agreement will equal or exceed the repurchase price.

Kemper Short-Term U.S. Government Fund
Kemper Strategic Income Fund
Kemper U.S. Mortgage Fund

Short Sales  Against the Box. The Fund may make short sales of common stocks if,
at all  times  when a short  position  is open,  the Fund owns the stock or owns
preferred stocks or debt securities convertible or exchangeable, without payment
of further  consideration,  into the shares of common  stock sold  short.  Short
sales of this  kind are  referred  to as short  sales  "against  the  box."  The
broker/dealer  that executes a short sale generally invests cash proceeds of the
sale  until  they  are  paid to the  Fund.  Arrangements  may be made  with  the
broker/dealer  to obtain a portion of the  interest  earned by the broker on the
investment of short sale  proceeds.  The Fund will segregate the common stock or
convertible  or  exchangeable  preferred  stock or debt  securities in a special
account with the custodian.

                                       15
<PAGE>

Uncertainty regarding the tax effects of short sales of appreciated  investments
may limit the extent to which the Fund may enter into short  sales  against  the
box.

Kemper High Yield Fund
Kemper High Yield Opportunity Fund


Stand-by  Commitments.  A stand-by  commitment is a right  acquired by the Fund,
when it  purchases  a  municipal  obligation  from a  broker,  dealer  or  other
financial  institution  ("seller"),  to sell up to the same principal  amount of
such securities back to the seller,  at the Fund's option, at a specified price.
Stand-by  commitments  are also known as "puts."  The  exercise by the Fund of a
stand-by  commitment is subject to the ability of the other party to fulfill its
contractual commitment.


Stand-by commitments acquired by the Fund will have the following features:  (1)
they will be in writing and will be physically held by the Fund's custodian; (2)
the Fund's right to exercise them will be  unconditional  and  unqualified;  (3)
they will be entered into only with sellers  which in the  Investment  Manager's
opinion  present a minimal risk of default;  (4) although  stand-by  commitments
will  not be  transferable,  municipal  obligations  purchased  subject  to such
commitments may be sold to a third party at any time, even though the commitment
is outstanding;  and (5) their exercise price will be (i) the Fund's acquisition
cost (excluding any accrued interest which the Fund paid on their  acquisition),
less any amortized market premium or plus any amortized  original issue discount
during the period the Fund owned the securities,  plus (ii) all interest accrued
on the securities since the last interest payment date.

The Fund expects that stand-by  commitments  generally will be available without
the payment of any direct or indirect  consideration.  However,  if necessary or
advisable, the Fund will pay for stand-by commitments, either separately in cash
or by paying a higher price for portfolio  securities which are acquired subject
to the commitments.


It is difficult to evaluate the likelihood of use or the potential  benefit of a
stand-by commitment.  Therefore, it is expected that the Investment Manager will
determine  that  stand-by  commitments  ordinarily  have a "fair value" of zero,
regardless of whether any direct or indirect consideration was paid. However, if
the market price of the security subject to the stand-by commitment is less than
the exercise price of the stand-by commitment,  such security will ordinarily be
valued  at  such  exercise  price.  Where  the  Fund  has  paid  for a  stand-by
commitment, its cost will be reflected as unrealized depreciation for the period
during which the commitment is held.


The  Investment  Manager  understands  that the  Internal  Revenue  Service (the
"Service")  has issued a  favorable  revenue  ruling to the effect  that,  under
specified  circumstances,  a registered  investment company will be the owner of
tax-exempt  municipal  obligations acquired subject to a put option. The Service
has also issued private letter rulings to certain  taxpayers (which do not serve
as  precedent  for other  taxpayers)  to the  effect  that  tax-exempt  interest
received by a regulated investment company with respect to such obligations will
be  tax-exempt  in the  hands  of the  company  and  may be  distributed  to its
shareholders  as  exempt-interest   dividends.   The  Service  has  subsequently
announced  that it will not  ordinarily  issue advance  ruling letters as to the
identity of the true owner of property in cases involving the sale of securities
or participation  interests  therein if the purchaser has the right to cause the
security,  or the participation  interest therein, to be purchased by either the
seller or a third party.  The Fund intends to take the position that it owns any
municipal  obligations  acquired  subject  to a  Stand-by  Commitment  and  that
tax-exempt  interest earned with respect to such municipal  obligations  will be
tax-exempt in its hands.  There is no assurance that the Service will agree with
such position in any particular case.

Kemper High Yield Fund
Kemper High Yield Fund II
Kemper High Yield Opportunity Fund
Kemper Income and Capital Preservation Fund
Kemper Short-Term U.S. Government Fund
Kemper Strategic Income Fund
Kemper U.S. Government Securities Fund
Kemper U.S. Mortgage Fund

Strategic Transactions and Derivatives.  Each Fund may, but are not required to,
utilize various other investment  strategies as described below for a variety of
purposes,  such as hedging various market risks, managing the effective


                                       16
<PAGE>

maturity or duration of the fixed-income  securities in each Fund's portfolio or
enhancing  potential gain.  These  strategies may be executed through the use of
derivative contracts.

In the course of pursuing these investment  strategies,  a Fund may purchase and
sell  exchange-listed and  over-the-counter  put and call options on securities,
equity and fixed-income indices and other instruments, purchase and sell futures
contracts and options thereon,  enter into various  transactions  such as swaps,
caps, floors, collars,  currency forward contracts,  currency futures contracts,
currency swaps or options on currencies,  or currency  futures and various other
currency  transactions  (collectively,  all  the  above  are  called  "Strategic
Transactions").  In  addition,  strategic  transactions  may  also  include  new
techniques,  instruments or strategies that are permitted as regulatory  changes
occur.  Strategic  Transactions  may be used without  limit  (subject to certain
limits imposed by the 1940 Act) to attempt to protect against  possible  changes
in the  market  value  of  securities  held in or to be  purchased  for a Fund's
portfolio   resulting  from  securities   markets  or  currency   exchange  rate
fluctuations, to protect a 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 a Fund's  portfolio,  or to
establish a position in the  derivatives  markets as a substitute for purchasing
or selling particular  securities.  Some Strategic Transactions may also be used
to enhance  potential  gain  although no more than 5% of a 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 a Fund to
utilize these Strategic Transactions  successfully will depend on the Investment
Manager's  ability  to  predict  pertinent  market  movements,  which  cannot be
assured.  Each Fund will comply with  applicable  regulatory  requirements  when
implementing   these   strategies,   techniques   and   instruments.   Strategic
Transactions  will  not be used to alter  fundamental  investment  purposes  and
characteristics  of the Fund, and the Fund will segregate assets (or as provided
by applicable regulations, enter into certain offsetting positions) to cover its
obligations under options, futures and swaps to limit leveraging of the Fund.

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 a 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  a Fund can  realize  on its
investments or cause a Fund to hold a security it might  otherwise sell. The use
of currency  transactions can result in a Fund incurring losses as a result of a
number of factors including the imposition of exchange  controls,  suspension of
settlements,  or the inability to deliver or receive a specified  currency.  The
use of  options  and  futures  transactions  entails  certain  other  risks.  In
particular,  the  variable  degree of  correlation  between  price  movements of
futures  contracts and price  movements in the related  portfolio  position of a
Fund  creates  the  possibility  that losses on the  hedging  instrument  may be
greater than gains in the value of a 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, a
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,  a 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 a


                                       17
<PAGE>

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.  A Fund's  purchase of a call  option on a security,  financial
future,  index, currency or other instrument might be intended to protect a 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. Each 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.

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

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

OTC  options  are  purchased  from  or  sold to  securities  dealers,  financial
institutions  or  other  parties  ("Counterparties")  through  direct  bilateral
agreement with the Counterparty.  In contrast to exchange listed options,  which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement,  term, exercise price,
premium,  guarantees and security,  are set by negotiation of the parties.  Each
Fund will only sell OTC  options  (other  than OTC  currency  options)  that are
subject to a buy-back provision permitting a Fund to require the Counterparty to
sell the option back to a Fund at a formula  price within seven days.  Each 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 a Fund or  fails  to make a cash  settlement
payment due in  accordance  with the terms of that option,  a 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.  Each Fund will engage in OTC option
transactions  only with U.S.  government  securities  dealers  recognized by the
Federal  Reserve  Bank  of New  York as  "primary  dealers"  or  broker/dealers,
domestic or foreign banks or other  financial  institutions  which have received
(or the guarantors of the obligation of which have received) a short-term credit
rating of A-1 from S&P or P-1 from  Moody's  or an  equivalent  rating  from any
nationally recognized  statistical rating organization ("NRSRO") or, in the case
of OTC currency transactions,  are determined to be of equivalent credit quality
by the Investment  Manager.  The staff of the Securities and Exchange Commission


                                       18
<PAGE>

(the "SEC")  currently takes the position that OTC options  purchased by a Fund,
and portfolio  securities  "covering" the amount of a 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 each Fund's  limitation  on
investing no more than 15% of its net assets in illiquid securities.

If a 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 a Fund's income. The sale of put options can also provide income.

Each Fund may  purchase  and sell call  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  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 a Fund must be
"covered"  (i.e., a 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 a Fund will  receive  the option
premium to help protect it against loss, a call sold by a Fund exposes that 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 that Fund to hold a security or instrument  which it might otherwise
have sold.

Each  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.  Each Fund will not sell put options if, as a result,  more than 50%
of a Fund's  total  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 a Fund
may be required to buy the underlying security at a disadvantageous  price above
the market price.

General  Characteristics of Futures.  Each Fund may enter into 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,  and for duration
management,  risk  management,  and return  enhancement  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 a Fund, as seller,  to deliver to
the buyer the  specific  type of  instrument  called  for in the  contract  at a
specific  future time for a specified  price (or,  with respect to index futures
and Eurodollar instruments,  the net cash amount).  Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives  the  purchaser  the  right in  return  for the  premium  paid to assume a
position  in a  futures  contract  and  obligates  the  seller to  deliver  such
position.

Each Fund's use of 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
for bona fide hedging,  risk management (including duration management) or other
portfolio and return enhancement management purposes.  Typically,  maintaining a
futures  contract or selling an option thereon requires a 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 a Fund. If
a 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.

Each 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 that 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.

                                       19
<PAGE>

Options on Securities  Indices and Other Financial  Indices.  Each 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.  Each Fund may  engage  in  currency  transactions  with
Counterparties  primarily in order to hedge,  or manage the risk of 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.  Each 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 (except
for OTC currency  options) are determined to be of equivalent  credit quality by
the Investment Manager.

Each  Fund's  dealings  in  forward   currency   contracts  and  other  currency
transactions  such as futures,  options,  options on futures and swaps generally
will be limited to hedging  involving either specific  transactions or portfolio
positions  except as described  below.  Transaction  hedging is entering  into a
currency  transaction  with respect to specific assets or liabilities of a 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.

Each Fund generally 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.

Each 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  that  Fund has or in which  that  Fund
expects to have portfolio exposure.

To reduce  the  effect of  currency  fluctuations  on the value of  existing  or
anticipated holdings of portfolio securities, each Fund may also engage in proxy
hedging.  Proxy  hedging  is  often  used  when the  currency  to which a 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 a 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 that  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"),  a 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 a 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


                                       20
<PAGE>

may not be present or may not be present during the particular  time that a Fund
is  engaging  in  proxy  hedging.  If a  Fund  enters  into a  currency  hedging
transaction,  that 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 a 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. Each 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 a 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
each Fund may enter are interest rate,  currency,  index and other swaps and the
purchase or sale of related caps, floors and collars. Each 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 a Fund  anticipates  purchasing  at a later
date. Each Fund will not sell interest rate caps or floors where it does not own
securities  or  other  instruments  providing  the  income  stream a Fund may be
obligated  to pay.  Interest  rate swaps  involve  the  exchange  by a Fund with
another party of their respective commitments to pay or receive interest,  e.g.,
an exchange of floating  rate payments for fixed rate payments with respect to a
notional  amount of principal.  A currency swap is an agreement to exchange cash
flows on a notional amount of two or more currencies based on the relative value
differential  among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference  indices.  The
purchase  of a cap  entitles  the  purchaser  to receive  payments on a notional
principal  amount from the party selling such cap to the extent that a specified
index exceeds a predetermined  interest rate or amount.  The purchase of a floor
entitles the purchaser to receive  payments on a notional  principal amount from
the party selling such floor to the extent that a specified  index falls below a
predetermined  interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a  predetermined  range of interest
rates or values.

Each 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 a Fund receiving or paying,  as the case may
be, only the net amount of the two payments. Inasmuch as the Fund will segregate
assets (or enter  into  offsetting  positions)  to cover its  obligations  under
swaps,  the  Investment  Manager and the Funds 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.  Each 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.

                                       21
<PAGE>

Eurodollar   Instruments.   Each  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 Funds 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 a 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 Funds segregate cash or liquid
assets with its  custodian  to the extent  that  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 a 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 a Fund will require that 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 a Fund on an index will require that 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 a Fund requires that Fund to segregate  cash or liquid assets
equal to the exercise price.

Except when a 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 a Fund to buy or sell currency will generally
require  that  Fund  to  hold  an  amount  of that  currency  or  liquid  assets
denominated  in that currency  equal to that Fund's  obligations or to segregate
liquid assets equal to the amount of that Fund's obligation.

OTC options  entered into by a 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 a Fund
sells  these  instruments  it will  only  segregate  an amount of cash or liquid
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 a 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 a Fund  sells a call  option  on an  index  at a time  when  the
in-the-money amount exceeds the exercise price, that 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 a Fund other than
those above  generally  settle with  physical  delivery,  or with an election of
either  physical  delivery or cash  settlement  and that Fund will  segregate an
amount of cash or  liquid  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,  a Fund must  deposit
initial  margin and possible daily  variation  margin in addition to segregating
cash or liquid 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 liquid  assets may  consist of cash,  cash
equivalents, liquid debt or equity securities or other acceptable assets.

With respect to swaps, a Fund will accrue the net amount of the excess,  if any,
of its obligations  over its  entitlements  with respect to each swap on a daily
basis and will segregate an amount of cash or liquid  securities  having a value


                                       22
<PAGE>

equal to the accrued excess.  Caps,  floors and collars  require  segregation of
assets with a value equal to a Fund's net obligation, if any.

Strategic  Transactions  may be covered  by other  means  when  consistent  with
applicable  regulatory  policies.  Each  Fund may  also  enter  into  offsetting
transactions so that its combined position,  coupled with any segregated cash or
liquid  assets,  equals its net  outstanding  obligation in related  options and
Strategic  Transactions.  For example, a 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 that Fund. Moreover, instead of segregating assets if a 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, cash or liquid assets equal to any remaining obligation would need
to be segregated.

Kemper High Yield Fund
Kemper High Yield Fund II
Kemper High Yield Opportunity Fund
Kemper Income and Capital Preservation Fund
Kemper Short-Term U.S. Government Fund
Kemper Strategic Income Fund
Kemper U.S. Government Securities Fund
Kemper U.S. Mortgage Fund

U.S.   Government   Securities.   There  are  two  broad   categories   of  U.S.
Government-related  debt  instruments:   (a)  direct  obligations  of  the  U.S.
Treasury, and (b) securities issued or guaranteed by U.S. Government agencies.

Examples of direct  obligations of the U.S. Treasury are Treasury Bills,  Notes,
Bonds and other debt securities issued by the U.S.  Treasury.  These instruments
are backed by the "full  faith and  credit" of the United  States.  They  differ
primarily in interest rates, the length of maturities and the dates of issuance.
Treasury bills have original maturities of one year or less. Treasury notes have
original  maturities  of one to ten  years and  Treasury  bonds  generally  have
original maturities of greater than ten years.

Some  agency  securities  are  backed by the full faith and credit of the United
States (such as Maritime Administration Title XI Ship Financing Bonds and Agency
for  International  Development  Housing Guarantee Program Bonds) and others are
backed only by the rights of the issuer to borrow from the U.S.  Treasury  (such
as  Federal  Home Loan Bank  Bonds and  Federal  National  Mortgage  Association
Bonds),  while still others,  such as the  securities of the Federal Farm Credit
Bank, are supported only by the credit of the issuer. With respect to securities
supported only by the credit of the issuing  agency or by an additional  line of
credit with the U.S.  Treasury,  there is no guarantee that the U.S.  Government
will provide  support to such agencies and such  securities  may involve risk of
loss of principal and interest.

U.S.  Government  Securities may include "zero coupon" securities that have been
stripped  by the  U.S.  Government  of  their  unmatured  interest  coupons  and
collateralized  obligations issued or guaranteed by a U.S.  Government agency or
instrumentality.

Interest rates on U.S. Government obligations may be fixed or variable. Interest
rates on variable rate obligations are adjusted at regular  intervals,  at least
annually,  according to a formula  reflecting  then current  specified  standard
rates, such as 91-day U.S. Treasury bill rates. These adjustments generally tend
to reduce fluctuations in the market value of the securities.

The  government  guarantee  of the  U.S.  Government  Securities  in the  Fund's
portfolio  does not  guarantee  the net asset  value of the  shares of the Fund.
There are market risks  inherent in all  investments in securities and the value
of an investment in the Fund will  fluctuate over time.  Normally,  the value of
investments  in U.S.  Government  Securities  varies  inversely  with changes in
interest rates. For example,  as interest rates rise the value of investments in
U.S. Government  Securities will tend to decline, and as interest rates fall the
value  of the  Fund's  investments  will  tend to  increase.  In  addition,  the
potential for  appreciation  in the event of a decline in interest  rates may be
limited or negated by increased  principal  prepayments  with respect to certain
Mortgage-Backed  Securities,  such as  GNMA  Certificates.  Prepayments  of high
interest  rate  Mortgage-Backed  Securities  during times of declining  interest
rates


                                       23
<PAGE>

will tend to lower the  return of the Fund and may even  result in losses to the
Fund if some securities were acquired at a premium.  Moreover, during periods of
rising interest rates,  prepayments of  Mortgage-Backed  Securities may decline,
resulting  in the  extension  of the Fund's  average  portfolio  maturity.  As a
result, the Fund's portfolio may experience greater volatility during periods of
rising interest rates than under normal market conditions.

Kemper High Yield Fund
Kemper High Yield Fund II
Kemper High Yield Opportunity Fund
Kemper Income and Capital Preservation Fund
Kemper Short-Term U.S. Government Fund
Kemper Strategic Income Fund
Kemper U.S. Government Securities Fund
Kemper U.S. Mortgage Fund


When-Issued Securities.  The Fund may from time to time purchase equity and debt
securities on a "when-issued",  "delayed  delivery" or "forward delivery" basis.
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
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. When the Fund purchases such securities, it immediately assumes the
risks of ownership, including the risk of price fluctuation.  Failure to deliver
a security purchased on this basis may result in a loss or missed opportunity to
make an alternative investment.


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.  While such securities
may be sold prior to the settlement date, the Fund intends to purchase them 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 this basis,  it will record the transaction and reflect the value of
the  security  in  determining  its net asset  value.  The  market  value of the
securities may be more or less than the purchase price.  The Fund will establish
a segregated  account in which it will maintain cash and liquid securities equal
in value to commitments for such securities.

Kemper High Yield Fund
Kemper High Yield Fund II
Kemper High Yield Opportunity Fund
Kemper Income and Capital Preservation Fund
Kemper Short-Term U.S. Government Fund
Kemper Strategic Income Fund
Kemper U.S. Government Securities Fund
Kemper U.S. Mortgage Fund

Zero Coupon Securities.  The Fund may invest in zero coupon securities which pay
no cash  income  and are  sold at  substantial  discounts  from  their  value at
maturity.  When  held to  maturity,  their  entire  income,  which  consists  of
accretion of  discount,  comes from the  difference  between the issue price and
their  value at  maturity.  The effect of owning  instruments  which do not make
current  interest  payments  is that a fixed  yield  is  earned  not only on the
original  investment but also, in effect,  on all discount  accretion during the
life of the obligation.  This implicit reinvestment of earnings at the same rate
eliminates the risk of being unable to reinvest  distributions at a rate as high
as the implicit yield on the zero coupon bond,  but at the same time  eliminates
any  opportunity  to reinvest  earnings at higher rates.  For this reason,  zero
coupon bonds are subject to  substantially  greater  price  fluctuations  during
periods of changing  market  interest rates than those of comparable  securities
that pay  interest  currently,  which  fluctuation  is  greater as the period to
maturity is longer.  Zero coupon  securities  which are convertible  into common
stock  offer the  opportunity  for capital  appreciation  (or  depreciation)  as
increases (or decreases) in market value of such securities  closely follows the
movements  in the market  value of the  underlying  common  stock.  Zero  coupon
convertible  securities  generally  are  expected to be less  volatile  than the
underlying common stocks, as they usually are issued with maturities of 15 years
or less and are issued with options and/or  redemption  features  exercisable by
the holder of the  obligation  entitling the holder to redeem the obligation and
receive a defined cash payment.

                                       24
<PAGE>

                             INVESTMENT RESTRICTIONS

The following restrictions may not be changed with respect to a Fund without the
approval of a majority of the outstanding  voting securities of such Fund which,
under the 1940 Act and the rules  thereunder  and as used in this  Statement  of
Additional  Information,  means the lesser of (i) 67% of the shares of such Fund
present at a meeting if the holders of more than 50% of the  outstanding  shares
of such Fund are  present  in  person or by proxy,  or (ii) more than 50% of the
outstanding shares of such Fund.

Each Fund has elected to be classified  as a diversified  series of an open-end,
management investment company.

In addition, as a matter of fundamental policy, each Fund will not:

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

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

         (3)      purchase  physical  commodities  or  contracts
                  relating to physical commodities;

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

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

         (6)      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; and

         (7)      make loans except as permitted  under the  Investment  Company
                  Act of 1940,  as amended,  and as  interpreted  or modified by
                  regulatory authority having jurisdiction, from time to time.

Each Fund has adopted the following non-fundamental  restrictions,  which may be
changed by the Board without shareholder approval. Each Fund may not:

         (1)      borrow money in an amount  greater than 5% (20% in the case of
                  Kemper  High Yield Fund II and Kemper  High Yield  Opportunity
                  Fund)  of its  total  assets,  except  (i)  for  temporary  or
                  emergency  purposes and (ii) by engaging in reverse repurchase
                  agreements, dollar rolls, or other investments or transactions
                  described in the Fund's  registration  statement  which may be
                  deemed to be borrowings;

         (2)      purchase  securities on margin or make short sales, except (i)
                  short sales against the box, (ii) in connection with arbitrage
                  transactions,  (iii) for margin  deposits in  connection  with
                  futures  contracts,  options or other  permitted  investments,
                  (iv) that  transactions in futures contracts and options shall
                  not be deemed to constitute  selling securities short, and (v)
                  that the Fund may  obtain  such  short-term  credits as may be
                  necessary for the clearance of securities transactions;

         (3)      purchase  options,  unless the aggregate  premiums paid on all
                  such options held by the Fund at any time do not exceed 20% of
                  its total  assets;  or sell put options,  if as a result,  the
                  aggregate value of the obligations underlying such put options
                  would exceed 50% of its total assets;



                                       25
<PAGE>

         (4)      enter into  futures  contracts  or  purchase  options  thereon
                  unless  immediately  after  the  purchase,  the  value  of the
                  aggregate   initial   margin  with  respect  to  such  futures
                  contracts  entered into on behalf of the Fund and the premiums
                  paid for such options on futures  contracts does not exceed 5%
                  of the fair market value of the Fund's total assets;  provided
                  that in the case of an option that is in-the-money at the time
                  of  purchase,  the  in-the-money  amount  may be  excluded  in
                  computing the 5% limit;

         (5)      purchase  warrants if as a result,  such securities,  taken at
                  the lower of cost or market value,  would  represent more than
                  5% of the value of the Fund's total assets (for this  purpose,
                  warrants  acquired in units or attached to securities  will be
                  deemed to have no value);


         (6)      lend portfolio  securities in an amount greater than one third
                  (5% in the case of Kemper U.S. Government  Securities Fund) of
                  its total assets; and


         (7)      invest more than 15% of net assets in illiquid securities.

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

                                 NET ASSET VALUE

The net  asset  value  per  share  of a Fund is the  value of one  share  and is
determined  separately  for each  class by  dividing  the value of a Fund's  net
assets  attributable  to the  class  by the  number  of  shares  of  that  class
outstanding. The per share net asset value of each of Class B and Class C shares
of the Fund will  generally  be lower  than that of the Class A shares of a Fund
because of the higher expenses borne by the Class B and Class C shares.  The net
asset value of shares of a Fund is  computed as of the close of regular  trading
on the Exchange on each day the Exchange is open for trading (the "Value Time").
The  Exchange is scheduled to be closed on the  following  holidays:  New Year's
Day, Dr. Martin Luther King,  Jr. Day,  Presidents'  Day, Good Friday,  Memorial
Day,  Independence  Day,  Labor  Day,  Thanksgiving  and  Christmas,  and on the
preceding  Friday or  subsequent  Monday when one of these  holidays  falls on a
Saturday or Sunday,  respectively.  Net asset value per share is  determined  by
dividing the value of the total assets of the Fund, less all liabilities, by the
total number of shares outstanding.

An  exchange-traded  equity  security is valued at its most recent sale price on
the exchange it is traded as of the Value Time.  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") on such exchange as of the
Value Time.  Lacking a Calculated Mean the security is valued at the most recent
bid quotation on such exchange as of the Value Time. An equity security which is
traded on the National  Association of Securities  Dealers  Automated  Quotation
("Nasdaq") system will be valued at its most recent sale price on such system as
of the Value Time.  Lacking any sales, the security is valued at the most recent
bid quotation as of the Value Time.  The value of an equity  security not quoted
on the Nasdaq System, but traded in another over-the-counter market, is its most
recent  sale price if there are any sales of such  security on such market as of
the Value Time. Lacking any sales, the security is valued at the Calculated Mean
quotation  for such  security as of the Value Time.  Lacking a  Calculated  Mean
quotation  the  security  is valued at the most recent bid  quotation  as of the
Value Time.

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


                                       26
<PAGE>

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  on the
valuation date.

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, 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 a 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.

Fund  Accounting  Agent.  Scudder Fund Accounting  Corporation,  a subsidiary of
Scudder  Kemper,  is responsible  for  determining the daily net asset value per
share of the Funds and  maintaining  all  accounting  records  related  thereto.
Currently,  SFAC  receives no fee for its services to the Funds except from High
Yield  Fund II.  High  Yield Fund II pays SFAC an annual fee equal to 0.0250% of
the first $150  million of average  daily net  assets,  0.0075% of the next $850
million of average  daily net assets and  0.0045% of such assets in excess of $1
billion,  plus holding and transaction charges for this service.  For the period
from November 30, 1998  (commencement  of operations)  until September 30, 1999,
High Yield Fund II paid SFAC $0 for its services to the Fund.

               PURCHASE AND REDEMPTION OF SHARES


Purchase of Shares


Alternative  Purchase  Arrangements.  Class A  shares  of each  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.  Class I shares are
offered at net asset value  without an initial  sales charge and are not subject
to a contingent  deferred  sales charge or a Rule 12b-1  distribution  fee. When
placing purchase orders,  investors must specify which class of shares the order
is for. The primary  distinctions among the classes of each 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.  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 charge of 4.5% of           None            Initial sales charge waived or reduced
                the public offering price (2.75% for                              for certain purchases
                the Short-Term Government Fund)
--------------------------------------------------------------------------------------------------------------------------
Class B         Maximum contingent deferred sales                 0.75%           Shares convert to Class A shares six
                charge of 4% of redemption proceeds;                              years after issuance
                declines to zero after six years
--------------------------------------------------------------------------------------------------------------------------


                                       27
<PAGE>

--------------------------------------------------------------------------------------------------------------------------
                                                               Annual 12b-1 Fees
                                                              (as a % of average
                                 Sales Charge                  daily net assets)                Other Information
                                 ------------                  -----------------                -----------------
--------------------------------------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------------------------------------
Class C         Contingent deferred sales charge of 1%            0.75%           No conversion feature
                of redemption proceeds for redemptions
                made during first year after purchase
--------------------------------------------------------------------------------------------------------------------------
Class I         None                                               None
--------------------------------------------------------------------------------------------------------------------------
</TABLE>


The  minimum  initial  investment  for  each  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 value of 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.

               Kemper Short-Term Government Fund

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

<S>                                                <C>                    <C>                    <C>
Less than $100,000                                 2.75%                  2.83%                  2.25%
$100,000 but less than $250,000                    2.50                   2.56                   2.00
$250,000 but less than $500,000                    2.00                   2.04                   1.75
$500,000 but less than $1 million                  1.50                   1.52                   1.25
$1 million and over                                0.00**                 0.00**                 ***
</TABLE>


*        Rounded to the nearest one-hundredth percent.

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

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

                             Kemper High Yield Fund
                            Kemper High Yield Fund II
                       Kemper High Yield Opportunity Fund
                   Kemper Income and Capital Preservation Fund
                          Kemper Strategic Income Fund
                     Kemper U.S. Government Securities Fund
                            Kemper U.S. Mortgage Fund

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

<S>                                                <C>                    <C>                    <C>
Less than $100,000                                 4.50%                  4.71%                  4.00%


                                       28
<PAGE>

$100,000 but less than $250,000                    3.50                   3.63                   3.00
$250,000 but less than $500,000                    2.60                   2.67                   2.25
$500,000 but less than $1 million                  2.00                   2.04                   1.75
$1 million and over                                0.00**                 0.00**                 ***
</TABLE>

*        Rounded to the nearest one-hundredth percent.

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

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

Each Fund  receives  the entire net asset value of all its Class A shares  sold.
KDI,  the Funds'  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 reallow 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  reallowances  may be based upon attainment of
minimum  sales  levels.  During  periods when 90% or more of the sales charge is
reallowed, such dealers may be deemed to be underwriters as that term is defined
in the Securities Act of 1933.


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


KDI may in its  discretion  compensate  investment  dealers  or other  financial
services  firms in  connection  with the sale of Class A shares of a 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 record keeping system made available
through KSvC. For purposes of determining the appropriate  commission percentage
to be applied to a particular sale under a Fund's foregoing  schedule,  KDI will
consider the  cumulative  amount  invested by the  purchaser in a Fund and other
Kemper Mutual Funds listed under "Special Features -- Class A Shares -- Combined
Purchases," including purchases pursuant to the "Combined Purchases," "Letter of
Intent" and  "Cumulative  Discount"  features  referred  to above and  including
purchases  of  class R  shares  of  certain  Scudder  funds.  The  privilege  of
purchasing Class A shares of a 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 a Fund or any other Kemper  Mutual Fund listed under  "Special
Features -- Class A Shares -- Combined  Purchases" may be purchased at net asset
value in any amount by members of the plaintiff class in the proceeding known as
Howard and Audrey Tabankin,  et al. v. Kemper  Short-Term Global Income Fund, et
al., Case No. 93 C 5231 (N.D. IL). This privilege is generally  non-transferable
and continues  for the lifetime of  individual  class members and for a ten year
period for non-individual  class members.  To make a purchase at net asset value
under this  privilege,  the investor  must,  at the time of  purchase,  submit a
written  request that the  purchase be processed at net asset value  pursuant to
this  privilege  specifically  identifying  the  purchaser  as a  member  of the
"Tabankin  Class." Shares purchased under this privilege will be maintained in a
separate account that includes only shares  purchased under 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 at its  discretion  pay  investment
dealers and other financial


                                       29
<PAGE>

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 a Fund at net asset value under this
privilege is not available if another net asset value  purchase  privilege  also
applies.


Class A shares may be sold at net asset  value in any  amount to: (a)  officers,
trustees, directors, employees (including retirees) and sales representatives of
a Fund, its 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 Funds, for themselves
or their spouses or dependent  children;  (c)  shareholders  who owned shares of
Kemper Value Series,  Inc.  ("KVS") on September 8, 1995, and have  continuously
owned shares of KVS (or a Kemper Fund  acquired by exchange of KVS shares) since
that date, for themselves or members of their families;  (d) any trust, pension,
profit-sharing  or other  benefit  plan for only such  persons;  (e) persons who
purchase  such shares  through bank trust  departments  that process such trades
through an  automated,  integrated  mutual fund clearing  program  provided by a
third party  clearing  firm;  and (f) persons who  purchase  shares of the Funds
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 Funds 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  a  Fund's  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 a 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 a Fund may be sold at net asset value through
certain investment Advisors registered under the Investment Advisors Act of 1940
and other financial services firms that adhere to certain standards  established
by KDI,  including  a  requirement  that such  shares be sold for the benefit of
their clients  participating in an investment  advisory program under which such
clients  pay a fee to  the  investment  advisor  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 Funds.  The Funds may also issue  Class A shares at net asset
value  in  connection  with  the  acquisition  of the  assets  of or  merger  or
consolidation with another investment  company, or to shareholders in connection
with the investment or reinvestment of income and capital gain dividends.


Class A shares of 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 a 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 a 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.

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,


                                       30
<PAGE>

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 "Purchase, Repurchase and Redemption 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 each Fund for services as distributor  and principal  underwriter
for Class B shares. See "Investment Manager and Underwriter."

Class B shares of a Fund  will  automatically  convert  to Class A shares of the
same Fund six years after  issuance on the basis of the relative net asset value
per share. 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 a
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 "Purchase,  Repurchase and Redemption 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 each Fund for services as distributor  and principal
underwriter for Class C shares. See "Investment Manager and Underwriter."

Purchase  of Class I Shares.  Class I shares  are  offered  at net  asset  value
without an initial  sales  charge and are not subject to a  contingent  deferred
sales charge or a Rule 12b-1  distribution fee. Also, there is no administration
services  fee  charged to Class I shares.  As a result of the  relatively  lower
expenses  for Class I shares,  the  level of  income  dividends  per share (as a
percentage of net asset value) and,  therefore,  the overall  investment  value,
will  typically be higher for Class I shares than for Class A, Class B, or Class
C shares.

Class  I  shares  are  available  for  purchase  exclusively  by  the  following
categories of institutional  investors:  (1) tax-exempt retirement plans (Profit
Sharing,  401(k),  Money Purchase  Pension and Defined Benefit Plans) of Scudder
Kemper  Investments,  Inc.  ("Scudder  Kemper") and its  affiliates and rollover
accounts from those plans;  (2) the  following  investment  advisory  clients of
Scudder Kemper and its investment  advisory  affiliates  that invest at least $1
million in a Fund:  unaffiliated  benefit  plans,  such as qualified  retirement
plans (other than individual  retirement  accounts and self-directed  retirement
plans);  unaffiliated  banks and insurance  companies  purchasing  for their own
accounts;  and endowment funds of  unaffiliated  non-profit  organizations;  (3)
investment-only accounts for large qualified plans, with at least $50 million in
total  plan  assets or at least  1000  participants;  (4)  trust  and  fiduciary
accounts  of trust  companies  and bank trust  departments  providing  fee based
advisory  services  that  invest at least $1 million in a Fund on behalf of each
trust; (5) policy holders under  Zurich-American  Insurance  Group's  collateral
investment  program  investing at least  $200,000 in a Fund;  and (6) investment
companies  managed by Scudder Kemper that invest  primarily in other  investment
companies.  Class I shares currently are available for purchase only from Kemper
Distributors,  Inc.  ("KDI"),  principal  underwriter for the Funds, and, in the
case  of  category  (4)  above,   selected  dealers  authorized  by  KDI.  Share
certificates are not available for Class I shares.


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


                                       31
<PAGE>

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 a Fund or Kemper
Mutual  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.  Class I shares  are  available  only to
certain institutional investors.


General.  Shares of a Fund are sold at their public offering price, which is the
net asset value per share 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.  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 a Fund determines that it
has received  payment of the proceeds of the check. The time required for such a
determination will vary and cannot be determined in advance.

Upon  receipt by the  Shareholder  Service  Agent of a request  for  redemption,
shares of a Fund will be  redeemed by a Fund at the  applicable  net asset value
per share of such Fund. The amount received by a shareholder  upon redemption or
repurchase may be more or less than the amount paid for such shares depending on
the market value of a Trust's portfolio securities at the time.

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

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  each  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.  Each 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  Statement of
Additional Information.


 Repurchase and Redemption of Shares


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

The  conversion  of Class B  shares  to Class A  shares  may be  subject  to the
continuing availability of an opinion of counsel, ruling by the Internal Revenue
Service or other  assurance  acceptable  to each Fund 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 a Fund's  dividends  constituting
"preferential  dividends"  under the  Internal  Revenue  Code,  and (b) that the
conversion  of Class B shares to Class A shares  does not  constitute  a taxable
event under the Internal Revenue Code. The conversion of Class B shares to Class
A shares may be suspended if such assurance is not available.  In that event, no
further  conversions of Class B


                                       32
<PAGE>

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.

The  Fund  has  authorized  certain  members  of  the  National  Association  of
Securities  Dealers,  Inc.  ("NASD"),  other  than KDI to  accept  purchase  and
redemption  orders for a Fund's shares.  Those brokers may also designate  other
parties to accept purchase and redemption orders on a Fund's behalf.  Orders for
purchase or redemption  will be deemed to have been received by a Fund when such
brokers or their authorized designees accept the orders. Subject to the terms of
the contract between a Fund and the broker,  ordinarily orders will be priced at
a Fund's net asset value next computed after acceptance by such brokers or their
authorized  designees.  Further,  if purchases or redemptions of a Fund's shares
are arranged and settlement is made at an investor's  election through any other
authorized  NASD member,  that member may, at its  discretion,  charge a fee for
that service. The Board of Trustees or Directors as the case may be ("Board") of
a Fund and KDI each has the right to limit the  amount of  purchases  by, and to
refuse to sell to, any person.  The Board and KDI may suspend or  terminate  the
offering of shares of a Fund at any time for any reason.

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

The redemption  price for shares of a Fund will be the net asset value per share
of that 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 a 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  may be up to 10 days  from  receipt  by a 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,  Repurchase and Redemption of
Shares -- Initial Sales Charge  Alternative -- Class A Shares"),  the redemption
of Class B shares within six years may be subject to a contingent deferred sales
charge (see "Contingent Deferred Sales Charge -- Class B Shares" below), and the
redemption  of Class C shares  within the first year  following  purchase may be
subject to a contingent  deferred sales charge (see  "Contingent  Deferred Sales
Charge -- Class C Shares" below).

Because of the high cost of maintaining  small accounts,  the Funds may assess a
quarterly  fee of $9 on an 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.  A 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 a Fund or its agents
reasonably  believe,  based upon reasonable  verification  procedures,  that the
telephone  instructions are genuine. The shareholder will bear the risk of loss,
including loss resulting from fraudulent or unauthorized  transactions,  as long
as  the  reasonable


                                       33
<PAGE>

verification  procedures  are  followed.  The  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,  guardian and  custodial  account
holders, provided the trustee,  executor,  guardian or custodian is named in the
account  registration.  Other  institutional  account  holders 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 Funds  reserve 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 each 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 applicable 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 a Fund can be redeemed and proceeds sent by federal wire
transfer to a single  previously  designated  account.  Requests received by the
Shareholder  Service  Agent prior to the  determination  of net asset value will
result  in  shares  being  redeemed  that day at the net  asset  value of a 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 a Fund for up to seven days if
the Fund or the  Shareholder  Servicing  Agent deems it  appropriate  under then
current  market  conditions.  Once  authorization  is on file,  the  Shareholder
Service Agent will honor requests by telephone at  1-800-621-1048 or in writing,
subject to the limitations on liability  described under  "General"  above.  The
Funds are not  responsible  for the efficiency of the federal wire system or the
account  holder's  financial  services firm or bank. The Funds  currently do 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 a Fund  were
purchased.  Shares purchased by check or through EXPRESS-Transfer or Bank Direct
Deposit may not be redeemed by wire  transfer  until such shares have been owned
for at least 10 days.  Account  holders  may not use this  privilege  to  redeem
shares held in certificated form. During periods when it is difficult to contact
the  Shareholder  Service  Agent by  telephone,  it may be  difficult to use the
expedited  wire transfer  redemption  privilege.  The Funds reserve the right to
terminate or modify this privilege at any time.

Contingent  Deferred  Sales  Charge -- Large  Order NAV  Purchase  Privilege.  A
contingent  deferred  sales  charge may be imposed  upon  redemption  of Class A
shares  that are  purchased  under the Large  Order NAV  Purchase  Privilege  as
follows:  1% if they are redeemed  within one year of purchase and 0.50% if they
are redeemed during the second year following  purchase.  The charge will not be
imposed upon  redemption  of  reinvested  dividends or share  appreciation.  The
charge is applied  to the value of the shares  redeemed  excluding  amounts  not
subject to the charge.  The  contingent  deferred sales charge will be waived in
the event of: (a)  redemptions by a  participant-


                                       34
<PAGE>

directed  qualified  retirement  plan  described  in Code  Section  401(a)  or a
participant-directed  non-qualified deferred compensation plan described in Code
Section 457 or a  participant-directed  qualified  retirement  plan described in
Code Section  403(b)(7)  which is not sponsored by a K-12 school  district;  (b)
redemptions by employer  sponsored  employee  benefit plans using the subaccount
record keeping system made available through the Shareholder  Service Agent; (c)
redemption of shares of a shareholder  (including a registered  joint owner) who
has died;  (d)  redemption  of shares of a  shareholder  (including a registered
joint owner) who after  purchase of the shares being  redeemed  becomes  totally
disabled  (as  evidenced  by a  determination  by the  federal  Social  Security
Administration);  (e) redemptions under a 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  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) and (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; 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  a  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  in the  event of:  (a)
redemptions by a  participant-directed  qualified  retirement  plan described in
Code   Section   401(a)  or  a   participant-directed   non-qualified   deferred
compensation  plan  described in Code Section 457; (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 a Fund's  Systematic  Withdrawal  Plan at a maximum of 10% per year of the
net asset  value of the  account;  (f) 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; (g) redemption of shares by an employer  sponsored  employee benefit plan
that offers  funds in


                                       35
<PAGE>

addition  to Kemper  Funds and 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;  and (h) redemption of shares
purchased through a  dealer-sponsored  asset allocation program maintained on an
omnibus  record-keeping  system  provided  the  dealer of record  has waived the
advance  of  the  first  year  administrative  services  and  distribution  fees
applicable to such shares and has agreed 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 a 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 under the schedule  above 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.  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 a Fund
or any Kemper  Mutual 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
a Fund or of the listed Kemper Mutual Funds.  A shareholder  of a Fund or Kemper
Mutual  Fund who  redeems  Class A shares  purchased  under the Large  Order NAV
Purchase  Privilege  (see  "Purchase,  Repurchase  and  Redemption  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 Class
A shares,  Class B shares or Class C shares, as the case may be, of a Fund or of
Kemper Mutual Funds.  The amount of any  contingent  deferred  sales charge also
will be reinvested.  These reinvested shares will retain their original cost and
purchase date for purposes of the  contingent  deferred  sales  charge.  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 a Fund or of the Kemper  Mutual Funds  listed  under  "Special
Features  --  Class A Shares  --  Combined  Purchases."  Purchases  through  the
reinvestment  privilege  are  subject  to the  minimum  investment  requirements
applicable to the shares being  purchased and may only be made for Kemper Mutual
Funds available for sale in the shareholder's state of residence as listed under
"Special Features -- Exchange Privilege." The reinvestment privilege can be used
only once as to any specific shares and reinvestment must be effected within six
months of the  redemption.  If a loss is realized on the  redemption of a Funds'
shares,  the  reinvestment  in the same 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. In addition,  upon
a reinvestment,  the shareholder may not be permitted to take into account sales
charges  incurred on the original  purchase of shares in computing their taxable
gain or loss.  The  reinvestment  privilege may be terminated or modified at any
time.


 Special Features

Class A Shares  --  Combined  Purchases.  Each  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 Aggressive Growth Fund, Kemper Asian Growth Fund, Kemper
Blue Chip Fund,  Kemper  California  Tax-Free Income Fund,  Kemper Cash Reserves
Fund,  Kemper  Contrarian  Fund,  Kemper  Emerging  Markets Growth Fund,  Kemper
Florida Tax-Free Income Fund, Kemper Global Blue Chip Fund, Kemper Global Income
Fund,  Kemper  Growth Fund,  Kemper High Yield Fund,  Kemper High Yield Fund II,
Kemper High Yield Opportunity Fund, Kemper Horizon 10+ Portfolio, Kemper Horizon
20+  Portfolio,   Kemper   Horizon  5  Portfolio,   Kemper  Income  and  Capital
Preservation Fund, Kemper Intermediate Municipal Bond Fund, Kemper International
Fund,  Kemper  International  Research  Fund,  Kemper Large Company  Growth Fund
(currently available only to employees of Scudder Kemper Investments,  Inc.; not
available in all states), Kemper Latin


                                       36
<PAGE>

America Fund,  Kemper  Municipal Bond Fund,  Kemper New Europe Fund,  Kemper New
York Tax-Free  Income Fund,  Kemper Ohio Tax-Free  Income Fund,  Kemper Research
Fund (currently available only to employees of Scudder Kemper Investments, Inc.;
not  available  in all  states),  Kemper  Retirement  Fund -- Series II,  Kemper
Retirement  Fund -- Series  III,  Kemper  Retirement  Fund -- Series IV,  Kemper
Retirement  Fund -- Series  V,  Kemper  Retirement  Fund --  Series  VI,  Kemper
Retirement Fund -- Series VII, Kemper S&P 500 Index Fund, Kemper Short-Term U.S.
Government Fund, Kemper Small Cap Value Fund, Kemper Small Cap Value+Growth Fund
(currently available only to employees of Scudder Kemper Investments,  Inc.; not
available  in all  states),  Kemper Small  Capitalization  Equity  Fund,  Kemper
Strategic Income Fund,  Kemper Target 2010 Fund,  Kemper Technology Fund, Kemper
Total Return Fund,  Kemper U.S.  Government  Securities Fund, Kemper U.S. Growth
and Income Fund,  Kemper U.S. Mortgage Fund,  Kemper  Value+Growth  Fund, Kemper
Worldwide 2004 Fund,  Kemper-Dreman Financial Services Fund,  Kemper-Dreman High
Return Equity Fund ("Kemper Mutual 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,  Investors  Municipal  Cash Fund or Investors  Cash Trust ("Money  Market
Funds"), which are not considered "Kemper Mutual Funds" for purposes hereof. For
purposes of the Combined  Purchases  feature  described above as well as for the
Letter of Intent and Cumulative  Discount  features  described  below,  employer
sponsored employee benefit plans using the subaccount record keeping system made
available  through the Shareholder  Service Agent or its affiliates may include:
(a) Money  Market Funds as "Kemper  Mutual  Funds," (b) all classes of shares of
any Kemper Mutual Fund, and (c) the value of any other plan investments, such as
guaranteed   investment  contracts  and  employer  stock,   maintained  on  such
subaccount record keeping system.


Class A Shares -- Letter of Intent.  The same reduced  sales charges for Class A
shares,  as shown in the  applicable  prospectus,  also  apply to the  aggregate
amount of  purchases  of such  Kemper  Mutual  Funds  listed  above  made by any
purchaser  within a 24-month period under a written Letter of Intent  ("Letter")
provided by 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 proceeds
used toward  satisfaction  of the obligation to pay the increased  sales charge.
The Letter for an employer  sponsored  employee  benefit plan  maintained on the
subaccount record keeping system available through the Shareholder Service Agent
may have special  provisions  regarding  payment of any  increased  sales charge
resulting from a failure to complete the intended  purchase under the Letter.  A
shareholder may include the value (at the maximum  offering price) of all shares
of such Kemper Mutual Funds held of record as of the initial purchase date under
the Letter as an "accumulation  credit" toward the completion of the Letter, but
no price  adjustment  will be made on such shares.  Only  investments in Class A
shares of a Fund are included for this privilege.

Class A Shares  --  Cumulative  Discount.  Class A shares  of a Fund may also be
purchased at the rate applicable to the discount  bracket  attained by adding to
the cost of shares of a Fund being purchased, the value of all Class A shares of
the above mentioned  Kemper Mutual Funds (computed at the maximum offering price
at the time of the purchase for which the discount is applicable)  already owned
by the investor.

Class A Shares  --  Availability  of  Quantity  Discounts.  An  investor  or the
investor's  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 Kemper  Mutual
Funds in accordance with the provisions below.

Class A Shares.  Class A shares of the  Kemper  Mutual  Funds and  shares of the
Money Market Funds listed under "Special  Features -- Class A Shares -- Combined
Purchases"  above may be  exchanged  for each other at their  relative net asset
values.  Shares of Money  Market Funds and Kemper Cash  Reserves  Fund that were
acquired by purchase (not including  shares  acquired by dividend  reinvestment)
are subject to the applicable sales charge on exchange.  Series of Kemper Target
Equity Fund are available on exchange  only during the Offering  Period for such
series  as  described  in  the  applicable  prospectus.  Cash  Equivalent  Fund,
Tax-Exempt California Money Market Fund,



                                       37
<PAGE>

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

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

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

General.  Shares of a Kemper  Mutual  Fund with a value in excess of  $1,000,000
(except  Kemper Cash Reserves  Fund)  acquired by exchange  from another  Kemper
Mutual Fund, or from a Money Market Fund, may not be exchanged  thereafter until
they have been owned for 15 days (the "15 Day Hold  Policy").  The Fund reserves
the right to invoke the 15-Day Hold Policy of  exchanges of  $1,000,000  or less
if, in the  Investment  Manager's  judgment,  the exchange  activity may have an
adverse effect on the fund. In particular, a pattern of exchanges that coincides
with a  "market  timing"  strategy  may be  disruptive  to the  Kemper  fund and
therefore may be subject to the 15-Day Hold Policy.  For purposes of determining
whether the 15 Day Hold Policy  applies to a particular  exchange,  the value of
the shares to be exchanged  shall be computed by aggregating the value of shares
being  exchanged for all accounts under common  control,  direction,  or advice,
including without limitation, accounts administered by a financial services firm
offering market timing, asset allocation or similar services. The total value of
shares being exchanged must at least equal the minimum investment requirement of
the Kemper Fund into which they are being exchanged. Exchanges are made based on
relative  dollar  values of the shares  involved  in the  exchange.  There is no
service  fee for an  exchange;  however,  dealers or other  firms may charge for
their services in effecting exchange transactions. Exchanges will be effected by
redemption  of shares of the fund held and purchase of shares of the other fund.
For federal income tax purposes, any such exchange constitutes a sale upon which
a gain or loss may be realized,  depending  upon whether the value of the shares
being  exchanged  is more or less than the  shareholder's  adjusted  cost basis.
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 KSvC,  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  "Purchase,  Repurchase  and
Redemption 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. Except as otherwise permitted by
applicable  regulations,  60 days' prior written  notice of any  termination  or
material  change will be provided.  Exchanges  may only be made for Kemper Funds
that are eligible for sale in the shareholder's  state of residence.  Currently,
Tax-Exempt California Money Market Fund is available for sale only in California
and the portfolios of Investors  Municipal Cash Fund are available for sale only
in certain states.

Systematic Exchange  Privilege.  The owner of $1,000 or more of any class of the
shares of a Fund, a Kemper  Mutual Fund or Money Market Fund may  authorize  the
automatic  exchange  of a  specified  amount  ($100  minimum) of such shares for
shares of the same class of another Kemper Fund. If selected,  exchanges will be
made  automatically  until the privilege is terminated by the shareholder or the
other Kemper Fund.  Exchanges are subject to the terms and conditions  described
above  under  "Exchange  Privilege"  except that the $1,000  minimum


                                       38
<PAGE>

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 a 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 "Purchase, Repurchase and Redemption 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 KSvC,  P.O.  Box 419415,  Kansas City,
Missouri   64141-6415.   Termination  will  become  effective  as  soon  as  the
Shareholder  Service  Agent has had a  reasonable  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 a Fund
through an automatic  investment program.  With the Bank Direct Deposit Purchase
Plan ("Bank Direct Deposit"),  investments are made  automatically  (minimum $50
and 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 KSvC,  P.O.  Box
419415,  Kansas City,  Missouri  64141-6415.  Termination by a shareholder  will
become  effective  within  thirty days after the  Shareholder  Service Agent has
received 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 Funds may terminate or modify this privilege at any time.


Payroll Direct Deposit and Government  Direct Deposit.  A shareholder may invest
in a 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 a 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.)  A 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 a Fund's
shares at the  offering  price (net  asset  value  plus,  in the case of Class A
shares,  the initial  sales charge) may provide for the payment from the owner's
account of any requested  dollar amount up to $50,000 to be paid to the owner or
a designated  payee monthly,  quarterly,  semiannually  or annually.  The $5,000
minimum account size is not applicable to Individual  Retirement  Accounts.  The
minimum  periodic  payment is $100.  The  maximum  annual  rate at which Class B
shares,  Class A shares  purchased under the Large Order NAV Purchase  Privilege
and Class C shares in their first year  following  the  purchase may be redeemed
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, a 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


                                       39
<PAGE>

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 Funds.

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:


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

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

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

Brochures  describing  the above plans as well as model defined  benefit  plans,
target benefit plans, 457 plans, 401(k) plans, SIMPLE 401(k) plans and materials
for  establishing  them are available  from the  Shareholder  Service Agent upon
request.  The brochures for plans with the Funds' custodian describe the current
fees payable for its services as custodian.  Investors should consult with their
own tax advisers before establishing a retirement plan.

Additional Transaction Information


General.  Banks and other  financial  services firms may provide  administrative
services  related to order  placement and payment to facilitate  transactions in
shares of a 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 or other  financial  services  firms may be  subject to
various federal and 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 a Fund.

KDI may, from time to time,  pay or allow to firms a 1% commission on the amount
of shares of a Fund sold by the firm  under the  following  conditions:  (i) the
purchased shares are held in a Kemper IRA account, (ii) the shares are purchased
as a direct  "roll  over" of a  distribution  from a qualified  retirement  plan
account maintained on a participant subaccount record keeping system provided by
Kemper Service Company ("KSvC"), (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, to firms that sell shares of the Funds. In some
instances, such discounts,  commissions or other incentives will be offered only
to certain firms that sell or are expected to sell during specified time periods
certain  minimum  amounts of shares of the Funds or other funds  underwritten by
KDI.

Orders for the  purchase of shares of a Fund will be  confirmed at a price based
on the net asset value of that Fund next determined  after receipt 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 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 Funds  reserve  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."

Investment  dealers  and other  firms  provide  varying  arrangements  for their
clients to purchase  and redeem the Funds'  shares.  Some may  establish  higher
minimum  investment  requirements  than set forth above.  Firms may arrange with


                                       40
<PAGE>

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 Funds'  shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Funds' 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 Funds 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 Funds through the Shareholder  Service Agent for
these  services.  This  Statement of  Additional  Information  should be read in
connection with such firms' material regarding their fees and services.

The Funds  reserve the right to withdraw all or any part of the offering made by
this Statement of Additional  Information and to reject purchase  orders.  Also,
from time to time, each Fund may  temporarily  suspend the offering of shares of
any  Fund or  class  of a Fund  to new  investors.  During  the  period  of such
suspension,  persons who are already  shareholders of a class of a Fund normally
are  permitted to continue to purchase  additional  shares of such class or Fund
and to have dividends reinvested.

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 Statement of Additional Information.

Dividends.  Each Fund normally declares and distributes monthly dividends of net
investment  income  and  distributes  any net  realized  capital  gains at least
annually.

A Fund may at any time vary its foregoing  dividend  practices  and,  therefore,
reserves  the  right  from  time to time to  either  distribute  or  retain  for
reinvestment  such of its net  investment  income  and  its net  short-term  and
long-term  capital  gains  as  the  Board  of  Trustees  of  a  Fund  determines
appropriate  under the then current  circumstances.  In particular,  and without
limiting  the  foregoing,  a  Fund  may  make  additional  distributions  of net
investment  income or capital  gain net income in order to satisfy  the  minimum
distribution requirements contained in the Internal Revenue Code (the "Code").

Dividends  paid by a Fund as 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 dividends and capital gain dividends,  if any, of a Fund will be credited
to shareholder  accounts in full and fractional shares of the same class of that
Fund at net asset value,  except that,  upon written  request to the Shareholder
Service Agent,  a shareholder  may select one of the following  options:  (1) to
receive  income and  short-term  capital 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 a 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 a Fund
invested  in shares of the same  class of another  Kemper  Fund at the net asset
value of such class of such  other  fund.  To use this  privilege  of  investing
dividends of a Fund in shares of another Kemper Fund, shareholders must maintain
a minimum  account value of $1,000 in a Fund  distributing  the  dividends.  The
Funds  reinvest  dividend  checks (and future  dividends) in shares of that same
Fund and class if checks are  returned  as  undeliverable.  Dividends  and other
distributions  in  the  aggregate  amount  of  $10  or  less  are  automatically
reinvested in shares of the same Fund unless the shareholder  requests that such
policy not be applied to the shareholder's account.

PERFORMANCE

A Fund may advertise  several types of  performance  information  for a class of
shares,  including "yield" and "average annual total return" and "total return."
Performance  information  will be computed  separately  for each class.  Each


                                       41
<PAGE>

of these figures is based upon historical  results and is not  representative of
the  future  performance  of any class of a Fund.  A Fund with fees or  expenses
being  waived or  absorbed  by  Scudder  Kemper may also  advertise  performance
information before and after the effect of the fee waiver or expense absorption.

Performance  results  for  Funds  receiving  a waiver of fees or  absorption  of
expenses  may be shown with and  without  the effect of this  waiver and expense
absorption.  Performance  results  not  giving  effect to  waivers  and  expense
absorptions will be lower.

Yield is a measure of the net investment income per share earned over a specific
one month or 30-day  period  expressed as a percentage  of the maximum  offering
price of a Fund's shares at the end of the period.  Average  annual total return
and total return  measure both the net investment  income  generated by, and the
effect of any  realized  or  unrealized  appreciation  or  depreciation  of, the
underlying investments in a Fund's portfolio.

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  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 a 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 such  periods  have  not yet  elapsed,  at the  end of a  shorter  period
corresponding  to the life of a 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.

A Fund's yield is computed in accordance with a standardized  method  prescribed
by rules of the  Securities  and  Exchange  Commission.  Each Fund's yield shown
below is based on the one-month period ended as noted.

<TABLE>
<CAPTION>
Fund (Period Ended)               Class A Shares    Class B Shares    Class C Shares
-------------------               --------------    --------------    --------------


<S>                                  <C>               <C>              <C>
Short-Term Government (8/31/00)       2.22%             1.57%            4.43%
Strategic (10/31/00)                 -9.23%            -8.46%            -5.51%
Government (10/31/00)                 1.71%             2.55%            5.50%
High Yield (9/30/00)                 -6.29%            -5.32%            -2.66%
High Yield II (9/30/00)              -5.40%            -4.39%            -1.73%
Income and Capital (10/31/00)         0.57%             1.62%            4.68%
Mortgage (9/30/00)                    1.19%             2.26%            5.48%
Opportunity Fund (9/30/00)           -11.07%           -10.21%           -7.82%

</TABLE>

Each Fund's  yield is computed by dividing the net  investment  income per share
earned during the  specified one month or 30-day period by the maximum  offering
price per share (which is net asset value for Class B and Class C shares) on the
last day of the period, according to the following formula:



                  YIELD = 2 [ (a-b +1 )6 - 1]
                               ---
                               cd

          Where:    a     =   dividends and interest earned during the period.
                    b     =   expenses accrued for the period (net of
                              reimbursements).
                    c     =   the average  daily  number of shares  outstanding
                              during the period that were entitled to receive
                              dividends.
                    d     =   the maximum  offering  price per share on
                              the last day of the  period  (which  is net
                              asset   value  for  Class  B  and  Class  C
                              shares).

In  computing  the  foregoing  yield,  each Fund  follows  certain  standardized
accounting  practices  specified by Securities  and Exchange  Commission  rules.
These practices are not necessarily consistent with those that each Fund uses to
prepare its annual and interim financial statements in conformity with generally
accepted  accounting  principles.   Each  Fund's  average  annual  total  return
quotation is computed in accordance  with a  standardized  method  prescribed by
rules of the Securities and Exchange Commission. The average annual total return
for a Fund for a specific period is found by first taking a hypothetical  $1,000
investment  ("initial  investment")  in a Fund's  shares on


                                       42
<PAGE>

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
shares  or Class C shares  includes  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 a Fund
have been  reinvested  at net asset value on the  reinvestment  dates during the
period. Average annual total return may also be calculated without deducting the
maximum sales charge.

Calculation of a Fund's total return is not subject to a  standardized  formula,
except when calculated for purposes of a Fund's "Financial  Highlights" table in
the Fund's financial  statements and prospectus.  Total return performance for a
specific  period  is  calculated  by  first  taking  a  hypothetical  investment
("initial investment") in a 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 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 a 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 would be
reduced if such charge were included.

A Fund's  performance  figures  are based upon  historical  results  and are not
representative of future performance. Each Fund's Class A shares are sold at net
asset value plus a maximum sales charge of 4.5% of the offering  price (3.5% for
the Short-Term  Government and  Short-Intermediate  Government Funds).  Class B,
Class C and Class I 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
purchase.  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. Returns and net asset value will fluctuate. Factors
affecting each 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 each Fund are redeemable at the then current net asset value,
which may be more or less than original cost.

A Fund's  performance  may be  compared to that of the  Consumer  Price Index or
various  unmanaged  bond  indexes  including,  but not  limited  to, the Salomon
Brothers High Grade Corporate Bond Index,  the Lehman  Brothers  Adjustable Rate
Index, the Lehman Brothers Aggregate Bond Index, the Lehman Brothers Government/
Corporate  Bond Index,  the Salomon  Brothers  Long-Term  High Yield Index,  the
Salomon  Brothers 30 Year GNMA Index and the Merrill Lynch Market Weighted Index
and may also be compared to the performance of other mutual funds or mutual fund
indexes 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 and other bank products, money market
funds and U.S. Treasury obligations. Bank product performance may be based upon,
among  other  things,  the BANK  RATE  MONITOR  National  Index(TM)  or  various
certificate of deposit indexes. Money market fund performance may be based upon,
among other things,  the  IBC/Donoghue's  Money Fund  Report(TM) or Money Market
Insight(TM),  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. Economic indicators
may include,  without


                                       43
<PAGE>

limitation,  indicators of market rate trends and cost of funds, such as Federal
Home Loan Bank Board 11th District Cost of Funds Index ("COFI").

A Fund may depict the  historical  performance of the securities in which a 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.  A 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 a Fund.

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

The yield or price volatility of a Fund (particularly the Short-Term  Government
Fund) may be compared to various securities, such as U.S. Government Securities,
or indexes, such as the COFI referred to above or the constant Maturity Treasury
Index ("CMT")  published by the Federal Reserve Board. A Fund may include in its
sales   literature   and   shareholder   reports  a  quotation  of  the  current
"distribution  rate" for a Fund.  Distribution  rate is simply a measure  of the
level of dividends  distributed for a specified  period.  It differs from yield,
which is a measure of the income  actually earned by a Fund's  investments,  and
from total return, which is a measure of the income actually earned by, plus the
effect of any realized and  unrealized  appreciation  or  depreciation  of, such
investments during the period.  Distribution rate is, therefore, not intended to
be a complete measure of performance. Distribution rate may sometimes be greater
than yield since, for instance, it may include gains from the sale of options or
other short-term and possibly  long-term gains (which may be non-recurring)  and
may not include the effect of amortization of bond premiums.

Comparative information with respect to certain indices may be included.  Please
note the differences and similarities  between the investments  which a Fund may
purchase and the investments  measured by the applicable  indices.  The Consumer
Price Index is generally  considered  to be a measure of  inflation.  The Lehman
Brothers   Adjustable  Rate  Index  generally   represents  the  performance  of
adjustable rate mortgages during various market conditions.  The Lehman Brothers
Aggregate Bond Index generally  represents the  performance of intermediate  and
long-term  government  bonds and investment  grade corporate debt securities and
mortgage-backed securities during various market conditions. The Lehman Brothers
Government/Corporate   Bond  Index  generally   represents  the  performance  of
intermediate  and long-term  government  and  investment  grade  corporate  debt
securities during various market  conditions.  The Merrill Lynch Market Weighted
Index  generally  represents  the  performance  of short- and  intermediate-term
Treasury and GNMA  securities  during  various  market  conditions.  The Salomon
Brothers High Grade Corporate Bond Index generally represents the performance of
high grade  long-term  corporate  bonds during  various market  conditions.  The
Salomon Brothers Long-Term High Yield Index generally represents the performance
of high yield debt  securities  during  various market  conditions.  The Salomon
Brothers 30 Year GNMA Index generally represents the performance of GNMA 30-year
pass-through  mortgages.  The foregoing bond indices are  unmanaged.  The market
prices and yields of corporate  and  government  bonds will  fluctuate.  The net
asset  values  and  returns  of each  class of  shares  of the  Funds  will also
fluctuate.

KEMPER HIGH YIELD FUND II -- AS OF SEPTEMBER 30, 2000


 Average Annual Total              Class A       Class B        Class C
 Returns                           Shares         Shares         Shares
 -------                           ------         ------         ------

Life of Fund (+)                   -2.91%         -2.54%         -1.73%
One Year                           -5.40%         -4.39%         -1.73%


(+)      Since November 30, 1998



                                       44
<PAGE>

KEMPER HIGH YIELD OPPORTUNITY FUND - AS OF SEPTEMBER 30, 2000


 Average Annual Total         Class A          Class B          Class C
 Returns                      Shares            Shares           Shares
 -------                      ------            ------           ------

Life of Fund (+)              -2.54%            -2.59%           -1.82%
One Year                      -11.07%          -10.21%           -7.82%


(+)      Since 10/01/97

KEMPER HIGH YIELD FUND


Performance  figures for Class B and C shares of the Fund for the period May 31,
1994 to September  30, 2000 reflect the actual  performance  of these classes of
shares.  Returns for Class B and C shares for the period January 26, 1978 to May
31, 1994 are derived from the historical performance of Class A shares, adjusted
to reflect the higher operating expenses applicable to Class B and C shares. The
performance  figures are also  adjusted to reflect  the  maximum  initial  sales
charge of 4.50% for Class A shares and the maximum current  contingent  deferred
sales charge of 4% for Class B shares and 1% for Class C shares.  The adjustment
is calculated by measuring  the actual return  differential  between the Class B
and C  shares  and the  Class A  shares  over a  common  period.  This  relative
performance  comparison is then used to impute B and C share  performance from A
share returns for periods prior to the inception of such B and C shares.

The returns in the chart below assume reinvestment of distributions at net asset
value and  represent  both  actual past  performance  figures for each class and
adjusted  performance  figures for Class B and C shares as described above; they
do not guarantee  future  results.  Investment  return and principal  value will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost.


KEMPER HIGH YIELD FUND-- AS OF SEPTEMBER 30, 2000


 Average Annual            Class A          Class B           Class C
 Total Returns              Shares          Shares*           Shares*
 -------------              ------          -------           -------

Life of Fund (+)             10.24%            9.57%            9.59%
Ten Years                    10.74%           10.28%           10.34%
Five Years                    4.41%           4.36%             4.53%
One Year                     -6.29%           -5.32%           -2.66%


*        Because Class B and C shares were introduced on May 31, 1994, the total
         return  for  Class  B and C  shares  for  the  period  prior  to  their
         introduction  is based upon the  performance of Class A shares from the
         commencement of investment operations, January 26, 1978 through May 31,
         1994. Actual performance of Class B and C shares is shown beginning May
         31, 1994.

(+)      Since January 26, 1978.


KEMPER INCOME AND CAPITAL PRESERVATION FUND


Performance  figures for Class B and C shares of the Fund for the period May 31,
1994 to October 31,  2000  reflect the actual  performance  of these  classes of
shares.  Returns  for Class B and C shares for the period  April 15, 1974 to May
31, 1994 are derived from the historical performance of Class A shares, adjusted
to reflect the operating expenses applicable to Class B and C shares,  which may
be higher or lower than those of Class A shares.  The  performance  figures  are
also  adjusted to reflect the maximum  sales  charge of 4.50% for Class A shares
and the  maximum  current  contingent  deferred  sales  charge of 4% for Class B
shares and 1% for Class C shares.  The adjustment is calculated by measuring the
actual  return  differential  between  the Class B and C shares  and the Class A
shares over a common period. This relative  performance  comparison is then used
to impute B and C share  performance  from A share  returns for periods prior to
the inception of such B and C shares.




                                       45
<PAGE>

The returns in the chart below assume reinvestment of distributions at net asset
value  and  represent  both  actual  past   performance   figures  and  adjusted
performance  figures of the Class A shares of the Fund as described above;  they
do not guarantee  future  results.  Investment  return and principal  value will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost.

KEMPER  INCOME  AND  CAPITAL  PRESERVATION  FUND-- AS OF OCTOBER
31, 2000*


Average Annual              Class A           Class B            Class C
Total Returns               Shares            Shares             Shares
-------------               ------            ------             ------

Ten Years                     7.30%             6.83%             6.89%
Five Years                    4.00%             3.91%             4.13%
One Year                      0.57%             1.62%             4.68%



(+)      Since April 15, 1974 for Class A Shares


*        Because  Class B and C shares were not  introduced  until May 31, 1994,
         respectively,  the total return for Class B and C shares for the period
         prior to their  introduction  is based upon the  performance of Class A
         shares from the commencement of investment  operations,  April 15, 1974
         through May 31,  1994.  Actual  performance  of Class B and C shares is
         shown beginning May 31, 1994.


KEMPER SHORT-TERM U.S. GOVERNMENT FUND


Performance  figures for Class B and C shares of the Fund for the period May 31,
1994 to August 31,  1999  reflect  the actual  performance  of these  classes of
shares. Returns for Class B and C shares for the period September 1, 1987 to May
31, 1994 are derived from the historical performance of Class A shares, adjusted
to reflect the operating expenses applicable to Class B and C shares,  which may
be higher or lower than those of Class A shares.  The  performance  figures  are
also  adjusted to reflect the maximum  sales  charge of 3.50% for Class A shares
and the  maximum  current  contingent  deferred  sales  charge of 4% for Class B
shares and 1% for Class C shares.  The adjustment is calculated by measuring the
actual  return  differential  between  the Class B and C shares  and the Class A
shares over a common period. This relative  performance  comparison is then used
to impute B and C share  performance  from A share  returns for periods prior to
the inception of such B and C shares.


The returns in the chart below assume reinvestment of distributions at net asset
value  and  represent  both  actual  past   performance   figures  and  adjusted
performance  figures of the Class A shares of the Fund as described above;  they
do not guarantee  future  results.  Investment  return and principal  value will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost.

KEMPER SHORT-TERM U.S. GOVERNMENT FUND -- AS OF AUGUST 31, 2000*


 Average Annual            Class A             Class B           Class C
 Total Returns              Shares             Shares             Shares
 -------------              ------             ------             ------

Life of Fund (+)            5.70%               5.24%             5.32%
Ten Years                    5.59%              5.13%             5.20%
Five Years                   3.84%              3.51%             3.70%
One Year                     2.22%              1.57%             4.43%



(+)      Since September 1, 1987 for Class A Shares.


*        Because  Class B and C shares were not  introduced  until May 31, 1994,
         respectively,  the total return for Class B and C shares for the period
         prior to their  introduction  is based upon the  performance of Class A
         shares from the  commencement  of investment  operations,  September 1,
         1987 through May 31, 1994.  Actual  performance of Class B and C shares
         is shown beginning May 31, 1994.


KEMPER STRATEGIC INCOME FUND


                                       46
<PAGE>

Performance  figures for Class B and C shares of the Fund for the period May 31,
1994 to October 31,  2000  reflect the actual  performance  of these  classes of
shares. Returns for Class B and C shares for the period June 23, 1977 to May 31,
1994 are derived from the historical performance of Class A shares,  adjusted to
reflect the operating expenses applicable to Class B and C shares,  which may be
higher or lower than those of Class A shares.  The performance  figures are also
adjusted to reflect the maximum sales charge of 4.50% for Class A shares and the
maximum current contingent deferred sales charge of 4% for Class B shares and 1%
for Class C shares.  The adjustment is calculated by measuring the actual return
differential  between  the Class B and C shares  and the  Class A shares  over a
common period. This relative performance comparison is then used to impute B and
C share  performance  from A share returns for periods prior to the inception of
such B and C shares.


The returns in the chart below assume reinvestment of distributions at net asset
value and represent both actual past performance figures and performance figures
of the  Class A shares of the Fund as  described  above;  they do not  guarantee
future results.  Investment return and principal value will fluctuate so that an
investor's shares, when redeemed,  may be worth more or less than their original
cost.

KEMPER STRATEGIC INCOME FUND-- AS OF OCTOBER 31, 2000*


 Average Annual             Class A          Class B        Class C
 Total Returns               Shares          Shares          Shares
 -------------               ------          ------          ------

Life of Fund(+)               8.94%           8.06%          8.31%
Ten Years                     10.57%          9.98%          10.22%
Five Years                    2.36%           2.16%          2.52%
One Year                     -9.23%          -8.46%          -5.51%



(+)      Since June 23, 1977 for Class A Shares.


*        Because  Class B and C shares were not  introduced  until May 31, 1994,
         respectively,  the total return for Class B and C shares for the period
         prior to their  introduction  is based upon the  performance of Class A
         shares from the  commencement of investment  operations,  June 23, 1977
         through May 31,  1994.  Actual  performance  of Class B and C shares is
         shown beginning May 31, 1994.


KEMPER U.S. GOVERNMENT SECURITIES FUND


Performance  figures for Class B and C shares of the Fund for the period May 31,
1994 to October 31,  2000  reflect the actual  performance  of these  classes of
shares.  Returns for Class B and C shares for the period  October 1, 1979 to May
31, 1994 are derived from the historical performance of Class A shares, adjusted
to reflect the operating expenses applicable to Class B and C shares,  which may
be higher or lower than those of Class A shares.  The  performance  figures  are
also  adjusted to reflect the maximum  sales  charge of 4.50% for Class A shares
and the  maximum  current  contingent  deferred  sales  charge of 4% for Class B
shares and 1% for Class C shares.  The adjustment is calculated by measuring the
actual  return  differential  between  the Class B and C shares  and the Class A
shares over a common period. This relative  performance  comparison is then used
to impute B and C share  performance  from A share  returns for periods prior to
the inception of such B and C shares.


The returns in the chart below assume reinvestment of distributions at net asset
value  and  represent  both  actual  past   performance   figures  and  adjusted
performance  figures of the Class A shares of the Fund as described above;  they
do not guarantee  future  results.  Investment  return and principal  value will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost.

KEMPER  U.S.  GOVERNMENT  SECURITIES  FUND-- AS OF  OCTOBER  31,
2000*


 Average Annual              Class A           Class B           Class C
 Total Returns                Shares            Shares           Shares
 -------------                ------            ------           ------

Life of Fund(+)                8.43%            7.71%             7.82%
Ten Years                      6.82%            6.31%             6.40%
Five Years                     4.86%            4.72%             4.91%


                                       47
<PAGE>

 Average Annual              Class A           Class B           Class C
 Total Returns                Shares            Shares           Shares
 -------------                ------            ------           ------

One Year                       1.71%            2.55%             5.50%



(+)      Since  October 1, 1979 for Class A Shares (when ZKI assumed  investment
         advisory  responsibilities  for the Fund;  prior to that date, the Fund
         was managed by another  investment adviser that was not affiliated with
         ZKI)


*        Because  Class B and C shares were not  introduced  until May 31, 1994,
         respectively,  the total return for Class B and C shares for the period
         prior to their  introduction  is based upon the  performance of Class A
         shares from the commencement of investment operations,  October 1, 1979
         through May 31,  1994.  Actual  performance  of Class B and C shares is
         shown beginning May 31, 1994.


KEMPER U.S. MORTGAGE FUND

Performance  figures for Class A and C shares of the Fund for the period January
10, 1992 and May 31,  1994,  respectively,  to  September  30, 2000  reflect the
actual performance of these classes of shares.  Returns for Class A and C shares
for the  period  October  26,  1984  to  January  10,  1992  and  May 31,  1994,
respectively,  are derived from the  historical  performance  of Class B shares,
adjusted to reflect the operating  expenses  applicable to Class A and C shares,
which may be  higher or lower  than  those of Class B  shares.  The  performance
figures are also adjusted to reflect the maximum sales charge of 4.50% for Class
A shares and the maximum  current  contingent  deferred  sales  charge of 4% for
Class B shares and 1% for Class C shares.

The returns in the chart below assume reinvestment of distributions at net asset
value and represent both actual past performance figures and performance figures
of the  Class B shares of the Fund as  described  above;  they do not  guarantee
future results.  Investment return and principal value will fluctuate so that an
investor's shares, when redeemed,  may be worth more or less than their original
cost.

KEMPER U.S. MORTGAGE FUND -- AS OF SEPTEMBER 30, 2000*


 Average Annual                   Class A           Class B           Class C
 Total Returns                    Shares            Shares            Shares
 -------------                    ------            ------            ------

Life of Fund (+)                   5.11%              --                --
Life of Fund (++)                   --               6.55%             --
Life of Fund (+++)                  --                --               5.75%
Ten Years                           --               6.37%             --
Five Years                         4.79%             4.69%             5.04%
One Year                           1.19%             2.26%             5.48%


(+)      Since January 10, 1992 for Class A Shares.


(++)     Since October 26, 1984 for Class B Shares.

(+++)    Since May 31, 1994 for Class C Shares.

*        Because Class A and C shares were not introduced until October 26, 1984
         and May 31,  1994,  respectively,  the total  return  for Class A and C
         shares for the  period  prior to their  introduction  is based upon the
         performance  of Class B  shares  from the  commencement  of  investment
         operations,  October 26, 1984 through May 31, 1994. Actual  performance
         of Class A and C shares is shown beginning January 10, 1992 and May 31,
         1994, respectively.

There  may  be  quarterly   periods  following  the  periods  reflected  in  the
performance bar chart in the fund's prospectus which may be higher or lower than
those included in the bar chart.

Investors may want to compare the performance of a Fund to that of certificates
of deposit issued by banks and other  depository  institutions.  Certificates of
deposit  represent an alternative  income  producing  product.  Certificates


                                       48
<PAGE>

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. The shares of a Fund are not insured and net asset value as well as
yield will  fluctuate.  Shares of a Fund are redeemable at net asset value which
may be more or less than original  cost. The bonds in which the Funds invest are
generally  of longer  term than most  certificates  of deposit  and may  reflect
longer term market interest rate fluctuations.

Investors  also may want to compare  the  performance  of a Fund to that of U.S.
Treasury bills,  notes or bonds because such instruments  represent  alternative
income  producing  products.   Treasury   obligations  are  issued  in  selected
denominations.  Rates of Treasury  obligations are fixed at the time of issuance
and payment of principal  and interest is backed by the full faith and credit of
the U.S. Treasury. The market value of such instruments will generally fluctuate
inversely  with  interest  rates prior to  maturity  and will equal par value at
maturity.  As noted in the prospectus,  the government guarantee of the bonds in
the Short-Term Government,  Government and Mortgage Funds does not guarantee the
market  value of their  respective  shares.  The net asset  value of a Fund will
fluctuate.  Shares of a Fund are redeemable at net asset value which may be more
or less than original cost. Each Fund's yield will also fluctuate.

From time to time, the Short-Term Government Fund may compare its yield or price
volatility to various  securities,  such as U.S.  Government  Securities,  or to
certain indices including, but not limited to, the J.P. Morgan one-, three-, and
five-year constant maturity Treasury yield indices, which are based on estimated
Treasury security yields adjusted to constant maturity and the Federal Home Loan
Bank Board 11th  District  Cost of Funds  Index  (COFI),  which  represents  the
weighted average cost of funds for savings  institutions in Arizona,  California
and Nevada and is based on the one month annualized  yield of savings  deposits,
Federal Home Loan Advances and other borrowings, such as repurchase agreements.

Capital Structure


The Short-Term Government,  Strategic, Government, Income and Capital Funds, and
High Yield Series are open-end  management  investment  companies,  organized as
separate  business  trusts  under  the  laws of  Massachusetts.  The  Short-Term
Government   Fund  was  organized  as  a  business   trust  under  the  laws  of
Massachusetts  on May 28, 1987. Prior to February 5, 1999, the Fund was known as
"Kemper Adjustable Rate U.S.  Government Fund." Effective February 5, 1999, that
Fund pursuant to a  reorganization  succeeded to the assets and  liabilities  of
Kemper Short-Intermediate  Government Fund, a series, or "Portfolio",  of Kemper
Portfolios.  Prior to January 1,  1992,  the Fund was known as "Kemper  Enhanced
Government  Income Fund." The Strategic  Fund was organized as a business  trust
under the laws of Massachusetts on October 24, 1985.

Prior to  February  5, 1999,  the Fund was known as "Kemper  Diversified  Income
Fund."  Effective  January 31,  1986,  that Fund  pursuant  to a  reorganization
succeeded to the assets and  liabilities  of Kemper Option Income Fund,  Inc., a
Maryland corporation  organized in 1977. Prior to February 1, 1989, the Fund was
known as "Kemper  Option  Income Fund." The  Government  Fund was organized as a
business trust under the laws of  Massachusetts  on October 24, 1985.  Effective
January 31, 1986, that Fund pursuant to a reorganization succeeded to the assets
and  liabilities of Kemper U.S.  Government  Securities  Fund,  Inc., a Maryland
corporation (formerly known as Kemper Fund For Government Guaranteed Securities,
Inc.) organized in 1980 as successor to a Pennsylvania  business trust organized
in  1977.  The  High  Yield  and  Opportunity  Funds  are  separate  series,  or
"Portfolios,"  of Kemper High Yield Series.  The High Yield Series was organized
as a business trust under the laws of  Massachusetts  on October 24, 1985 with a
single  portfolio.  Effective  January  31,  1986,  that  Trust,  pursuant  to a
reorganization  succeeded  to the assets and  liabilities  of Kemper  High Yield
Fund, Inc., a Maryland corporation  organized in 1977. Prior to October 1, 1997,
the Trust was known as Kemper High Yield Fund.  The Income and Capital  Fund was
organized  as a business  trust under the laws of  Massachusetts  on October 24,
1985.  Effective  January  31,  1986,  that Fund  pursuant  to a  reorganization
succeeded  to  the  assets  and   liabilities   of  Kemper  Income  and  Capital
Preservation Fund, Inc., a Maryland corporation  organized in 1972. The Mortgage
Fund is (and the  Short-Intermediate  Government Fund was) a separate series, or
"Portfolio",  of Kemper  Portfolios  ("KP"), an open-end  management  investment
company  organized as a business trust under the laws of Massachusetts on August
9, 1985. Effective November 20, 1987, KP pursuant to a reorganization  succeeded
to the  assets  and  liabilities  of  Investment  Portfolios,  Inc.,  a Maryland
corporation organized on March 26, 1982. After such reorganization, KP was known
as Investment  Portfolios  until February 1, 1991, and thereafter  until May 28,
1994,  as  Kemper  Investment  Portfolios,  when the name of KP  became  "Kemper
Portfolios."  Until  December  1,  1989,  the  Mortgage  Fund  was  known as the
"Government  Plus


                                       49
<PAGE>

Portfolio"  and  prior to May 28,  1994,  the  Mortgage  Fund  was  known as the
"Government Portfolio." High Yield Fund II is a series of Kemper Income Trust, a
business trust  organized  under the laws of  Massachusetts  on August 27, 1998.
Each Fund is a diversified, open-end management investment company.

Each Trust may issue an unlimited number of shares of beneficial interest in one
or more series or "Portfolios," all having no par value, which may be divided by
the Board of  Trustees  into  classes of shares.  The Board of  Trustees of each
Trust may authorize the issuance of additional classes and additional Portfolios
if  deemed  desirable,  each with its own  investment  objective,  policies  and
restrictions. Since the Trusts may offer multiple Portfolios, each is known as a
"series company."

Shares of a Portfolio  have equal  noncumulative  voting rights and equal rights
with respect to  dividends,  assets and  liquidation  of such  Portfolio and are
subject to any preferences, rights or privileges of any classes of shares of the
Portfolio.  Currently,  each Portfolio offers four classes of shares.  These are
Class A,  Class B and Class C  shares,  as well as Class I  shares,  which  have
different expenses, that may affect performance,  and are available for purchase
exclusively by the following investors:

(a) tax-exempt  retirement  plans of Scudder Kemper and its affiliates;  and (b)
the following  investment  advisory clients of Scudder Kemper and its investment
advisory  affiliates  that  invest  at  least $1  million  in a  Portfolio:  (1)
unaffiliated  benefit  plans,  such as  qualified  retirement  plans (other than
individual   retirement  accounts  and  self-directed   retirement  plans);  (2)
unaffiliated  banks and insurance  companies  purchasing for their own accounts;
and (3) endowment funds of unaffiliated non-profit organizations. Shares of each
Portfolio have equal noncumulative voting rights except that Class B and Class C
shares  have  separate  and  exclusive   voting  rights  with  respect  to  each
Portfolio's  Rule 12b-1 Plan.  Shares of each class also have equal  rights with
respect to dividends, assets and liquidation subject to any preferences (such as
resulting from different Rule 12b-1 distribution  fees), rights or privileges of
any classes of shares of a Portfolio.  Shares of each  Portfolio  are fully paid
and nonassessable when issued, are transferable  without restriction and have no
preemptive  or  conversion  rights.  The Trusts are not  required to hold annual
shareholder meetings and do not intend to do so. However, they will hold special
meetings as required or deemed desirable for such purposes as electing trustees,
changing fundamental policies or approving an investment  management  agreement.
Subject to the Agreement and  Declaration  of Trust of each Trust,  shareholders
may  remove  trustees.  If shares of more than one  Portfolio  for any Trust 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 Funds  generally  are not required to hold  meetings of their  shareholders.
Under the  Agreement  and  Declaration  of Trust of each Fund  ("Declaration  of
Trust"),  however,  shareholder  meetings  will be held in  connection  with the
following  matters:  (a) the  election  or removal of  trustees  if a meeting is
called for such purpose;  (b) the adoption of any contract for which shareholder
approval is required by the 1940 Act ("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);
(e) (with respect to the Mortgage and Short-Intermediate  Government Funds only)
as to  whether a court  action,  proceeding  or claim  should  or should  not be
brought or  maintained  derivatively  or as a class on behalf of the Fund or the
shareholders, to the same extent as the stockholders of a Massachusetts business
corporation;  and (f) such  additional  matters as may be required  by law,  the
Declaration of Trust,  the By-laws of the Fund, or any  registration of the Fund
with the Securities and Exchange Commission or any state, or as the trustees may
consider  necessary or desirable.  The shareholders also would vote upon changes
in fundamental investment objectives, policies or restrictions.

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) each  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.

Trustees  may be removed  from  office by a vote of the holders of a majority of
the outstanding shares at a meeting called for that purpose, which meeting shall
be held upon the  written  request  of the  holders  of not less than 10% of


                                       50
<PAGE>

the outstanding shares. Upon the written request of ten or more shareholders who
have been such for at least six months and who hold shares constituting at least
1% of the outstanding  shares of a Fund stating that such  shareholders  wish to
communicate  with the  other  shareholders  for the  purpose  of  obtaining  the
signatures necessary to demand a meeting to consider removal of a trustee,  each
Fund has undertaken to disseminate  appropriate  materials at the expense of the
requesting shareholders.

Each Fund's  Declaration  of Trust  provides  that the presence at a shareholder
meeting in person or by proxy of at least 30% of the shares  entitled to vote on
a matter shall  constitute a quorum.  Thus, a meeting of  shareholders of a Fund
could  take  place  even  if  less  than a  majority  of the  shareholders  were
represented  on its  scheduled  date.  Shareholders  would  in  such  a case  be
permitted to take action which does not require a larger vote than a majority of
a quorum,  such as the election of trustees and ratification of the selection of
auditors.  Some matters  requiring a larger vote under the Declaration of Trust,
such as termination or  reorganization  of a Fund and certain  amendments of the
Declaration of Trust, would not be effected by this provision; nor would matters
which  under the 1940 Act require  the vote of a  "majority  of the  outstanding
voting securities" as defined in the 1940 Act.

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

Under Massachusetts law,  shareholders of a Massachusetts  business trust could,
under certain  circumstances,  be held  personally  liable for  obligations of a
Fund. The Declaration of Trust,  however,  disclaims  shareholder  liability for
acts or obligations of each Fund and requires that notice of such  disclaimer be
given in each agreement, obligation, or instrument entered into or executed by a
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 a Fund and each 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 Scudder Kemper remote
and not material,  since it is limited to circumstances in which a disclaimer is
inoperative and such Fund itself is unable to meet its obligations.

Master/feeder structure

The Board has the discretion to retain the current distribution  arrangement for
each Fund while investing in a master fund in a master/feeder  structure fund as
described below.

A master/feeder fund structure is one in which a fund (a "feeder fund"), instead
of investing  directly in a portfolio of securities,  invests most or 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,  preserving  separate  identities or distribution  channels at the
feeder  fund  level.  Based on the  premise  that  certain  of the  expenses  of
operating an investment  portfolio are  relatively  fixed,  a larger  investment
portfolio may eventually  achieve a lower ratio of operating expenses to average
net assets. 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 realization of a taxable gain or loss, or by contributing
its assets to the master  fund and  avoiding  transaction  costs and,  if proper
procedures are followed, the realization of taxable gain or loss.


                               INVESTMENT MANAGER


Scudder  Kemper  Investments,  Inc. (the  "Investment  Manager"),  an investment
counsel firm, acts as investment  adviser to the Funds. This  organization,  the
predecessor  of which is  Scudder,  Stevens  & Clark,  Inc.,  is one of the most
experienced  investment  counsel  firms  in the U.  S. It was  established  as a
partnership in 1919 and pioneered the practice of providing  investment  counsel
to individual  clients on a fee basis.  In 1928 it introduced  the first no-load
mutual fund to the public.  In 1953 the Investment  Manager  introduced  Scudder
International  Fund, Inc., the first mutual fund available in the U.S. investing
internationally  in  securities  of issuers in several  foreign  countries.  The
predecessor  firm  reorganized  from a partnership  to a corporation on June 28,
1985.  On December 31, 1997,  Zurich  Insurance  Company  ("Zurich")  acquired a
majority  interest in the  Investment  Manager,  and Zurich Kemper  Investments,
Inc., a Zurich subsidiary, became part of the Investment Manager. The Investment
Manager's name changed to Scudder Kemper Investments, Inc. On September 7, 1998,
the businesses of Zurich (including Zurich's


                                       51
<PAGE>

70% interest in Scudder Kemper) and the financial  services  businesses of B.A.T
Industries  p.l.c.  ("B.A.T")  were combined to form a new global  insurance and
financial services company known as Zurich Financial Services Group. By way of a
dual holding  company  structure,  former Zurich  shareholders  initially  owned
approximately 57% of Zurich Financial Services Group, with the balance initially
owned by former B.A.T shareholders.


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.

The principal  source of the Investment  Manager's  income is professional  fees
received  from  providing  continuous  investment  advice.  Today,  it  provides
investment  counsel for many individuals and institutions,  including  insurance
companies,   colleges,  industrial  corporations,   and  financial  and  banking
organizations  as well as  providing  investment  advice  to over  [XX] open and
closed-end mutual funds.

The Investment  Manager  maintains a large research  department,  which conducts
continuous   studies  of  the  factors  that  affect  the  position  of  various
industries, companies and individual securities. The Investment Manager receives
published  reports and statistical  compilations from issuers and other sources,
as  well as  analyses  from  brokers  and  dealers  who  may  execute  portfolio
transactions  for the  Investment  Manager's  clients.  However,  the Investment
Manager regards this  information and material as an adjunct to its own research
activities.  The Investment Manager's  international  investment management team
travels  the  world,   researching  hundreds  of  companies.  In  selecting  the
securities  in which  the Funds  may  invest,  the  conclusions  and  investment
decisions  of the  Investment  Manager  with  respect  to the  Funds  are  based
primarily on the analyses of its own research department.

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

In certain cases, the investments for a fund are managed by the same individuals
who manage one or more other mutual  funds  advised by the  Investment  Manager,
that have similar names,  objectives and investment  styles. You should be aware
that the Funds are likely to differ from these other mutual funds in size,  cash
flow pattern and tax matters.  Accordingly,  the holdings and performance of the
Funds can be expected to vary from those of these other mutual funds.

The investment  management agreements were approved by shareholders at a special
meeting in December 1998.

The current investment  management fee rates are payable monthly,  at the annual
rates shown below.



<TABLE>
<CAPTION>
                                      Short-Term
                                  Government, Income
                                   and Capital and        Strategic and                          High Yield II and
Average Daily Net Assets               Mortgage            High Yield          Government           Opportunity
------------------------               --------            ----------          ----------           -----------

<S>                                      <C>                    <C>                <C>                 <C>
$0-$250 million                          0.55%                  0.58%              0.45%               0.65%
$250 million-$1 billion                  0.52                   0.55               0.43                0.62
$1 billion-$2.5 billion                  0.50                   0.53               0.41                0.60


                                       52
<PAGE>

                                      Short-Term
                                  Government, Income
                                   and Capital and        Strategic and                          High Yield II and
Average Daily Net Assets               Mortgage            High Yield          Government           Opportunity
------------------------               --------            ----------          ----------           -----------

$2.5 billion-$5 billion                  0.48                   0.51               0.40                0.58
$5 billion-$7.5 billion                  0.45                   0.48               0.38                0.55
$7.5 billion-$10 billion                 0.43                   0.46               0.36                0.53
$10 billion-$12.5 billion                0.41                   0.44               0.34                0.51
Over $12.5 billion                       0.40                   0.42               0.32                0.49
</TABLE>


The investment management fees paid by each Fund for its last three fiscal years
are shown in the table below.  (The  Opportunity  Fund  commenced  operations on
October 1, 1997.  The High Yield Fund II  commenced  operations  on November 30,
1998.)


Fund                           2000             1999                1998
----                           ----             ----                ----

Short-Term Government                          $889,000              $415,000
Strategic                                    $4,628,000            $4,986,000
Government                                  $13,436,000           $14,451,000
High Yield                                  $25,773,000           $27,887,000
High Yield II                                       $0*           --
Income and Capital                           $3,432,000            $3,472,000
Mortgage                                    $10,100,000           $11,862,000
Opportunity                                    $245,000              $102,000

*        The Investment  Manager  temporarily agreed to absorb certain operating
         expenses  of High Yield II.  Under  this  arrangement,  the  Investment
         Manager  waived and absorbed  expenses of $998,000 for the period ended
         September 30, 1999.

The Manager may serve as adviser to other funds with  investment  objectives and
policies  similar  to those of the Funds  that may have  different  distribution
arrangements or expenses, which may affect performance.

Code of Ethics

The Funds,  the Investment  Manager and principal  underwriter have each adopted
codes of ethics under rule 17j-1 of the  Investment  Company Act. Board members,
officers of the Funds and  employees  of the  Investment  Manager and  principal
underwriter are permitted to make personal  securities  transactions,  including
transactions in securities  that may be purchased or held by the Funds,  subject
to requirements and restrictions set forth in the applicable Code of Ethics. The
Investment  Manager's  Code  of  Ethics  contains  provisions  and  requirements
designed to identify and address certain  conflicts of interest between personal
investment  activities and the interests of the Funds.  Among other things,  the
Investment  Manager's  Code of Ethics  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  quarterly  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  Investment  Manager's Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.

Administrative Services. Administrative services are provided to each Fund under
an administrative services agreement ("administrative  agreement") with KDI. KDI
bears all its  expenses of  providing  services  pursuant to the  administrative
agreement between KDI and a Fund, including the payment of service fees. For the
services   under   the   administrative   agreement,   each  Fund  pays  KDI  an
administrative  services fee, payable monthly, at the annual rate of up to 0.25%
of average daily net assets of each class of the Fund.

KDI has entered 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 of a Fund. The firms


                                       53
<PAGE>

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  a  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,
normally  payable  quarterly,  at an annual  rate of up to 0.15%  (0.25% for the
Mortgage Fund) of the net assets in Fund accounts that it maintains and services
attributable  to Class A shares acquired prior to October 1, 1993, and (b) up to
0.25%  of  net  assets  of  those   accounts  that  it  maintains  and  services
attributable  to Class A shares  acquired on or after  October 1, 1993,  in each
case commencing with the month after investment.  With respect to Class B shares
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 such shares. For periods after
the first year,  KDI  currently  intends to pay firms a service fee at an annual
rate of up to 0.25% (calculated  monthly and normally paid quarterly) of the net
assets attributable to Class B and Class C shares maintained and serviced by the
firm and the fee continues  until  terminated  by KDI or a Fund.  Firms to which
service fees may be paid include  affiliates of KDI. 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 Trusts.  In addition,  effective  January 1,
2000 with respect to assets for which KDI provides administrative services, each
Fund will pay KDI an administrative services fee of 0.15% of such assets.

Administrative services fees paid by each Fund are set forth below:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------

                                  Administrative Service Fees Paid by Fund
                                  ----------------------------------------

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

                                                                          Total Service Fees  Service Fees Paid by
                                                                               Paid by             KDI to KDI
Fund                           Fiscal   Class A     Class B     Class C      KDI to Firms        Affiliated Firms
----                           ------   -------     -------     -------      ------------        ----------------
                                Year
                                ----

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

---------------------------------------------------------------------------------------------------------------------
<S>                             <C>
Kemper High Yield Fund          2000
---------------------------------------------------------------------------------------------------------------------
Kemper High Yield Fund          1999
---------------------------------------------------------------------------------------------------------------------
Kemper High Yield Fund          1998
---------------------------------------------------------------------------------------------------------------------
Kemper High Yield Fund II       2000
---------------------------------------------------------------------------------------------------------------------
Kemper High Yield Fund II       1999
---------------------------------------------------------------------------------------------------------------------
Kemper High Yield Fund II       1998
---------------------------------------------------------------------------------------------------------------------
Kemper High Yield Opportunity   2000
Fund
---------------------------------------------------------------------------------------------------------------------
Kemper High Yield Opportunity   1999
Fund
---------------------------------------------------------------------------------------------------------------------
Kemper High Yield Opportunity   1998
Fund
---------------------------------------------------------------------------------------------------------------------
Kemper Income and Capital       2000
Preservation Fund
---------------------------------------------------------------------------------------------------------------------
Kemper Income and Capital       1999
Preservation Fund
---------------------------------------------------------------------------------------------------------------------
Kemper Income and Capital       1998
Preservation Fund
---------------------------------------------------------------------------------------------------------------------
Kemper Short-Term U.S.          2000
Government Fund
---------------------------------------------------------------------------------------------------------------------
Kemper Short-Term U.S.          1999
Government Fund
---------------------------------------------------------------------------------------------------------------------
Kemper Short-Term U.S.          1998
Government Fund
---------------------------------------------------------------------------------------------------------------------
Kemper Strategic Income Fund    2000
---------------------------------------------------------------------------------------------------------------------
Kemper Strategic Income Fund    1999
---------------------------------------------------------------------------------------------------------------------


                                       54
<PAGE>

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

                                  Administrative Service Fees Paid by Fund
                                  ----------------------------------------

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

                                                                          Total Service Fees  Service Fees Paid by
                                                                               Paid by             KDI to KDI
Fund                           Fiscal   Class A     Class B     Class C      KDI to Firms        Affiliated Firms
----                           ------   -------     -------     -------      ------------        ----------------
                                Year
                                ----

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

---------------------------------------------------------------------------------------------------------------------
Kemper Strategic Income Fund    1998
---------------------------------------------------------------------------------------------------------------------
Kemper U.S. Mortgage Fund       2000
---------------------------------------------------------------------------------------------------------------------
Kemper U.S. Mortgage Fund       1999
---------------------------------------------------------------------------------------------------------------------
Kemper U.S. Mortgage Fund       1998
---------------------------------------------------------------------------------------------------------------------
</TABLE>

Opportunity  Fund  which  commenced  operations  on October 1, 1997 and the High
Yield Fund II, which commenced operations on November 30, 1998).

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 a  Fund.  Currently,  the
administrative  services  fee  payable to KDI is  payable at the annual  rate of
0.25%  based  upon  Fund  assets  in   accounts   for  which  a  firm   provides
administrative  services  and is payable at the annual  rate of 0.15% based upon
Fund assets in accounts  for which there is no firm (other than KDI) listed on a
Fund's records.  In addition,  effective  January 1, 2000 with respect to assets
for  which  KDI  provides  administrative  services,  each  Fund will pay KDI an
administrative services fee of 0.15% of such assets.

The effective  administrative services fee rate to be charged against all assets
of a Fund while this  procedure is in effect will depend upon the  proportion of
Fund  assets  that  is  in  accounts  for  which  a  firm  of  record   provides
administrative services, as well as (except for the Mortgage Fund), with respect
to Class A shares, the date when shares representing such assets were purchased.
The Board of Trustees of a Fund, in its  discretion,  may approve paying the fee
to KDI at the 0.25% annual rate on all Fund assets in the future.

Certain  trustees  or officers  of the Funds are also  directors  or officers of
Scudder Kemper or KDI as indicated under "Officers and Trustees."


Custodian,  Transfer Agent and Shareholder  Service Agent. State Street Bank and
Trust Company ("SSB"),  225 Franklin  Street,  Boston,  Massachusetts  02110, as
custodian,  has custody of all  securities  and cash of each Fund. It attends to
the  collection  of  principal  and income,  and payment for and  collection  of
proceeds of securities bought and sold by each Fund.


State  Street  Bank and Trust  Company is also each  Fund's  transfer  agent and
dividend-paying agent. Pursuant to a services agreement with SSB, Kemper Service
Company ("KSvC"), an affiliate of Scudder Kemper, serves as "Shareholder Service
Agent" of each Fund and, as such, performs all of SSB's duties as transfer agent
and dividend paying agent.  SSB receives as transfer agent,  and pays to KSvC as
follows: annual account fees of $14.00 ($23.00 for retirement accounts) plus set
up charges,  annual fees  associated  with the contingent  deferred sales charge
(Class B only), an asset-based fee of 0.05% and out-of-pocket reimbursement.

----------------------------------------------------------------------------
Fund                                                Fees SSB Paid to KSvC
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Kemper High Yield Fund
----------------------------------------------------------------------------
Kemper High Yield Fund II
----------------------------------------------------------------------------
Kemper High Yield Opportunity Fund
----------------------------------------------------------------------------
Kemper Income and Capital Preservation Fund
----------------------------------------------------------------------------
Kemper Short-Term U.S. Government Fund
----------------------------------------------------------------------------
Kemper Strategic Income Fund
----------------------------------------------------------------------------
Kemper U.S. Government Securities Fund
----------------------------------------------------------------------------


                                       55
<PAGE>

----------------------------------------------------------------------------
Kemper U.S. Mortgage Fund
----------------------------------------------------------------------------


Independent  Auditors  and  Reports to  Shareholders.  The  Funds'  independent
auditors,  Ernst & Young LLP, 233 South Wacker Drive,  Chicago,  Illinois 60606,
audit and report on the  Funds'  annual  financial  statements,  review  certain
regulatory reports and the Funds' federal income tax returns,  and perform other
professional accounting,  auditing, tax and advisory services when engaged to do
so by the Funds.  Shareholders will receive annual audited financial  statements
and semi-annual unaudited financial statements.

Legal Counsel.  Vedder,  Price,  Kaufman & Kammholz,  222 North LaSalle  Street,
Chicago,  Illinois  60601,  serves as legal counsel to each Fund other than High
Yield Fund II.  Dechert Price & Rhoads,  Ten Post Office  Square South,  Boston,
Massachusetts 02109, serves as legal counsel for High Yield Fund II.

Officers And Trustees

The  officers  and trustees of the Funds,  their birth  dates,  their  principal
occupations and their affiliations, if any, with the Investment Manager and KDI,
are listed  below.  All persons  named as officers  and  trustees  also serve in
similar capacities for other funds advised by the Investment Manager.


JOHN W. BALLANTINE  (2/16/46),  Trustee,  1500 North Lake Shore Drive,  Chicago,
Illinois;  First  Chicago NBD  Corporation/The  First  National Bank of Chicago:
1996-1998 Executive Vice President and Chief Risk Management Officer;  1995-1996
Executive Vice President and Head of International Banking;  1992-1995 Executive
Vice President, Chief Credit and Market Risk Officer.

LEWIS A. BURNHAM  (1/8/33),  Trustee,  16410 Avila  Boulevard,  Tampa,  Florida;
Retired; formerly,  Partner, Business Resources Group; formerly,  Executive Vice
President, Anchor Glass Container Corporation.

DONALD L. DUNAWAY (3/8/37),  Trustee,  7011 Green Tree Drive,  Naples,  Florida;
Retired; formerly, Executive Vice President, A.O. Smith Corporation (diversified
manufacturer).

ROBERT B.  HOFFMAN  (12/11/36),  Trustee,  1530 North  State  Parkway,  Chicago,
Illinois; Chairman, Harnischfeger Industries, Inc. (machinery for the mining and
paper industries); formerly, Vice Chairman and Chief Financial Officer, Monsanto
Company (agricultural,  pharmaceutical and nutritional/food products); formerly,
Vice President, Head of International Operations,  FMC Corporation (manufacturer
of machinery and chemicals).

DONALD R. JONES  (1/17/30),  Trustee,  182 Old Wick Lane,  Inverness,  Illinois;
Retired;  Director,  Motorola,  Inc.  (manufacturer of electronic  equipment and
components);  formerly,  Executive Vice President and Chief  Financial  Officer,
Motorola, Inc.

THOMAS W. LITTAUER  (4/26/55),  Trustee and Vice President*,  Two  International
Place, Boston,  Massachusetts;  Managing Director, Investment Manager; formerly,
Head of Broker Dealer  Division of an  unaffiliated  investment  management firm
during  1997;  prior  thereto,  President  of Client  Management  Services of an
unaffiliated investment management firm from 1991 to 1996.

SHIRLEY D. PETERSON (9/3/41), Trustee, 401 Rosemont Avenue, Frederick, Maryland;
President, Hood College; formerly, Partner, Steptoe & Johnson (attorneys); prior
thereto,  Commissioner,  Internal  Revenue  Service;  prior  thereto,  Assistant
Attorney General (Tax), U.S.  Department of Justice;  Director,  Bethlehem Steel
Corp.

WILLIAM P. SOMMERS  (7/22/33),  Trustee,  24717 Harbour View Drive,  Ponte Vedra
Beach,  Florida;  Consultant  and  Director,  SRI  Consulting;   prior  thereto,
President  and  Chief  Executive  Officer,   SRI  International   (research  and
development);   prior  thereto,  Executive  Vice  President,   Iameter  (medical
information  and  educational  service  provider);  prior  thereto,  Senior Vice
President  and Director,  Booz,  Allen & Hamilton  Inc.  (management  consulting
firm); Director, PSI Inc., Evergreen Solar, Inc. and Litton Industries.

MARK  S.  CASADY  (9/21/60),   President*,   Two  International  Place,  Boston,
Massachusetts;  Managing Director,  Investment Manager; formerly,  Institutional
Sales Manager of an unaffiliated mutual fund distributor.



                                       56
<PAGE>

PHILIP J. COLLORA (11/15/45), Vice President and Secretary*, 222 South Riverside
Plaza,  Chicago,  Illinois;  Senior  Vice  President  and  Assistant  Secretary,
Investment Manager.

ANN M. McCREARY (11/6/56), Vice President*, 345 Park Avenue, New York, New York;
Managing Director, Investment Manager.

KATHRYN L. QUIRK  (12/3/52),  Vice  President*,  345 Park Avenue,  New York, New
York; Managing Director, Investment Manager.

LINDA J. WONDRACK (9/12/64),  Vice President*,  Two International Place, Boston,
Massachusetts; Senior Vice President, Investment Manager.

JOHN  R.  HEBBLE  (6/27/58),   Treasurer*,   Two  International  Place,  Boston,
Massachusetts; Senior Vice President, Investment Manager.

BRENDA LYONS (2/21/63),  Assistant Treasurer*,  Two International Place, Boston,
Massachusetts; Senior Vice President, Investment Manager.

CAROLINE  PEARSON  (4/1/62),  Assistant  Secretary*,  Two  International  Place,
Boston,  Massachusetts;  Senior Vice President,  Investment  Manager;  formerly,
Associate, Dechert Price & Rhoads (law firm) 1989 to 1997.

MAUREEN  E. KANE  (2/14/62),  Assistant  Secretary*,  Two  International  Place,
Boston, Massachusetts;  Vice President,  Investment Manager; formerly, Assistant
Vice President of an unaffiliated  investment  management  firm;  prior thereto,
Associate  Staff  Attorney  of  an  unaffiliated   investment  management  firm;
Associate, Peabody & Arnold (law firm).

Additional Officers for Short-Term Government Fund:

RICHARD L. VANDENBERG  (11/16/49),  Vice President*,  222 South Riverside Plaza,
Chicago, Illinois;  Managing Director,  Investment Manager; formerly,  Executive
Vice  President and Senior  Portfolio  Manager with an  unaffiliated  investment
management firm.

Additional Officers for Strategic Fund:

J. PATRICK BEIMFORD, JR. (5/25/50), Vice President*,  222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Investment Manager

Additional   Officers   for  High  Yield  Fund  and  High  Yield
Opportunity Fund:

MICHAEL A. McNAMARA, see above.*

HARRY E. RESIS, JR., see above*

Additional Officers for High Yield Fund II:

KATHRYN L. QUIRK, Trustee, see above*

MICHAEL A. MCNAMARA, see above*

HARRY E. RESIS, JR., see above*

Additional Officers for Income and Capital Preservation Fund:

ROBERT S. CESSINE (1/5/50), Vice President*, 222 South Riverside Plaza, Chicago,
Illinois;  Managing  Director,  Investment  Manager;  formerly,  Vice President,
Wellington Management Company.

                                       57
<PAGE>

Additional Officers for Mortgage Fund (Kemper Portfolios):

FRANK J. RACHWALSKI,  JR. (3/26/45), Vice President*, 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Investment Manager

RICHARD L. VANDENBERG, see above*

*        Interested persons as defined in the 1940 Act.

The  trustees  and officers who are  "interested  persons" as  designated  above
receive no  compensation  from a Fund.  The table  below shows  amounts  paid or
accrued to those trustees who are not  designated  "interested  persons"  during
each Fund's 1999 fiscal year except that the  information  in the last column is
for calendar year 2000.

TO BE UPDATED

<TABLE>
<CAPTION>
                                                                                                               Total
                                                                                                           Compensation
                      Short-Term                                                                           Kemper Funds
                      Government   Strategic    Government   High Yield     Income &   Income   Kemper       Paid to
Name of Trustee          Fund         Fund         Fund         Series    Capital Fund  Trust   Portfolios+ Trustees**
---------------          ----         ----         ----         ------    ------------  -----   ----------- ----------

<S>                      <C>          <C>          <C>          <C>          <C>         <C>      <C>        <C>
John W. Ballantine(1)

Lewis A. Burnham

Donald L. Dunaway*

Robert B. Hoffman

Donald R. Jones

Shirley D. Peterson

William P. Sommers
</TABLE>

(1)      Appointed to the Board May 18, 1999.

+        Includes    Kemper   Cash    Reserves    Fund,    Mortgage   Fund   and
         Short-Intermediate   Government  Fund.  The  Kemper  Short-Intermediate
         Government  Fund was  reorganized  into  Kemper  Adjustable  Rate  U.S.
         Government Fund on February 5, 1999. The Short-Term Government Fund was
         then renamed Kemper Short-Term U.S. Government Fund.

*        Pursuant to deferred  compensation  agreements  with the Kemper  Funds,
         deferred  amounts accrue interest  monthly at a rate equal to the yield
         of Zurich  Money Funds -- Zurich  Money  Market  Fund.  Total  deferred
         amounts and interest  accrued  through  August 31, 1999,  September 30,
         1999 and October  31,  1999 are  $23,000,  $22,900,  $50,200,  $40,800,
         $20,400 and $52,500 for Mr. Dunaway for the Short-Term Government Fund,
         Strategic Fund,  Government  Fund, High Yield Fund,  Income and Capital
         Fund and Kemper Portfolios, respectively.

                                       58
<PAGE>

**       Includes  compensation  during 1998 for service on 25 funds  managed by
         Scudder Kemper with 43 fund portfolios.  Each trustee  currently serves
         as a  trustee  of 26  funds  managed  by  Scudder  Kemper  with 48 fund
         portfolios.

As of November  30, 1999,  the  officers and trustees of the Funds,  as a group,
owned less than 1% of the then outstanding  shares of each Fund. No person owned
of record 5% or more of the outstanding  shares of any class of any Fund, except
that the following owned of record shares of the following Funds:



<TABLE>
<CAPTION>
------------------------------------------ --------------------------------------- -------------------------------------
NAME                                       CLASS                                   PERCENTAGE
----                                       -----                                   ----------
------------------------------------------ --------------------------------------- -------------------------------------


KEMPER INCOME & CAPITAL PRESERVATION

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

<S>                                                        <C>                                  <C>
National Financial Services Corp.
FBO Margaret Thomas
200 Liberty Street # 4 Floor
New York, NY  10281-1003                                   A                                    5.98


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

National Financial Services Corp.
FBO Albert J. Muth
200 Liberty Street # 4 Floor                                 B                                     8.79
New York, NY  10281-1003

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

Donaldson Lufkin Jenrette
Securities Corporation Inc.
P. O Box 2052                                                B                                   11.43
Jersey City, NJ  07303

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

Merrill Lynch Pierce, F & S Inc.
FBO Rennay L. Fields
4800 Deer Lake Dr. E. Fl 3                                   B                                     7.87
Jacksonville, FL  32246

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

Fiserv Securities, Inc.
Attn: Mutual Funds Dept
One Commerce Square                                          B                                    6.17
2005 Market Street Suite 1200

Philadelphia, PA  19103
------------------------------------------ --------------------------------------- -------------------------------------

National Financial Services Corp
FBO Isabel T. Paxton
200 Liberty Street # 4 Floor
 New York, NY  10281-1003                                   C                                     5.35


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

USB Piper Jaffray Custodian
FBO Leroy Mueller
P. O Box 28                                                 C                                     8.39
Minneapolis, MN  55402

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

Raymond James & Assoc Inc.
FBO Othello Meyers
P. O Box 12749                                              C                                     5.10
St. Petersburg, FL  33733-2749

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

                                       59
<PAGE>
------------------------------------------ --------------------------------------- -------------------------------------

Merrill LynchPierce F&S
FBO Laura R Novak
4800 Deer Lake Dr. E. Fl 3
Jacksonville, FL  32246                                      C                                    13.03


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

Scudder Trust Company
FBO Zurich Kemper Investments
11 Northeastern Blvd.                                        I                                    53.53
Salem, NH  03079-1953


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

Scudder Kemper Investments Inc.
11 Northeastern Blvd.
Salem, NH  03079-1953
                                                             I                                    44.58

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



         KEMPER HIGH YIELD FUND

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

        First Clearing Corporation
FBO Jeanette A. Gilleran &
Jeffrey M Gilleran
10700 Wheat First Drive                                      A
Glen Allen, VA  23060-9243                                                                         6.28


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

National Financial Services Corp
FBO Viviette E Delima
200 Liberty Street # 4 Floor                                 B                                     7.43
New York, NY  10281-1003

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

Donaldson Lufkin Jenrette
Securities Corporation Inc.
P O Box 2052                                                 B                                   10.00
Jersey City, NJ  07303


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

Merrill Lynch Pierce F&S
FBO Sylvia D Brady
4800 Deer Lake Dr East 3rd Fl                                B                                     5.07
Jacksonville,  FL  32246

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

        First Clearing Corporation
FBO Melissa L Johnson &
Lucy L Johnson
10700 Wheat First Drive                                      B                                     8.24
Glen Allen, VA  23060-9243


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

Donaldson Lufkin Jenrette
Securities Corporation Inc.
P O Box 2052                                                 C                                    6.45
Jersey City, NJ  07303


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

Merrill Lynch Pierce F&S
FBO Elizabeth Appelman
4800 Deer Lake Dr East 3rd Fl                                C                                     7.53
Jacksonville,  FL  32246

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

                                       60
<PAGE>
------------------------------------------ --------------------------------------- -------------------------------------

        First Clearing Corporation
FBO Denise Marie Leonhard
10700 Wheat First Drive
Glen Allen, VA  23060-9243                                   C                                     8.17

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

Scudder Trust Company
FBO Zurich Kemper Investments
11 Northeastern Blvd.
Salem, NH  03079-1953                                        I                                    38.87


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

Scudder Kemper Investments Inc.
11 Northeastern Blvd.
Salem, NH  03079-1953                                        I                                    59.36


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


         KEMPER STRATEGIC INCOME
                  FUND

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

National Financial Services Corp
 FBO Neva F Propps
 200 Liberty Street # 4 Floor
 New York, NY  10281-1003                                   B                                    10.64


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

Donaldson Lufkin Jenrette
Securities Corporation Inc.
P O Box 2052                                                B                                    15.25
Jersey City, NJ  07303


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

Merrill Lynch Pierce F&S
FBO Kreatan Painting
4800 Deer Lake Dr East 3rd Fl                               B                                     5.72
Jacksonville,  FL  32246

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

Fiserv Securities, Inc.
Attn: Mutual Funds Dept
One Commerce Square                                         B                                     5.91
2005 Market Street Suite 1200

Philadelphia, PA  19103
------------------------------------------ --------------------------------------- -------------------------------------

        First Clearing Corporation
 FBO Theresa C Holloway
 Michael P Holloway
10700 Wheat First Drive                                     B                                     6.49
Glen Allen, VA  23060-9243

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

National Financial Services Corp
 FBO Lisa S Cohen - Kiraly
 200 Liberty Street # 4 Floor                               C                                    13.26
 New York, NY  10281-1003

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

Donaldson Lufkin Jenrette
Securities Corporation Inc.
P O Box 2052                                                C                                    11.83
Jersey City, NJ  07303

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


                                       61
<PAGE>

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

Merrill Lynch Pierce F&S
FBO Customers
ATTN: Fund Administration                                   C                                    10.31
4800 Deer Lake Dr East 3rd Fl
Jacksonville,  FL  32246

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

        KEMPER HIGH YIELD FUND II



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

National Financial Services Corp
FBO Nancy G. Swiggett
Betty M Swiggett
200 Liberty Street # 4 Floor                                 A                                     9.89
New York, NY  10281-1003


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

Donaldson Lufkin Jenrette
Securities Corporation Inc.
P O Box 2052                                                 A                                     7.17
Jersey City, NJ  07303


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

Fiserv Securities, Inc.
Attn: Mutual Funds Dept
One Commerce Square                                          A
2005 Market Street Suite 1200                                                                      6.03
Philadelphia, PA  19103

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

        First Clearing Corporation
           FBO Thomas Kennedy
 10700 Wheat First Drive
Glen Allen, VA  23060-9243                                   A                                     6.87

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

National Financial Services Corp
FBO Diane M. Boman
200 Liberty Street # 4 Floor
New York, NY  10281-1003                                     B                                     6.41


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

Donaldson Lufkin Jenrette
Securities Corporation Inc.
P O  Box 2052                                               B                                    9.34
Jersey City, NJ  07303


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

Fiserv Securities, Inc.
Attn: Mutual Funds Dept
One Commerce Square                                          B                                    6.53
2005 Market Street Suite 1200

Philadelphia, PA  19103
------------------------------------------ --------------------------------------- -------------------------------------

                                       62
<PAGE>
------------------------------------------ --------------------------------------- -------------------------------------

        First Clearing Corporation
           FBO Stanley Demick
10700 Wheat First Drive                                      B                                    13.74
Glen Allen, VA  23060-9243

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

National Financial Services Corp
FBO Christ Church- Desoto
200 Liberty Street # 4 Floor
New York, NY  10281-1003                                     C                                     8.61


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

        First Clearing Corporation
FBO Edmund Peters
10700 Wheat First Drive
Glen Allen, VA  23060-9243                                   C                                    15.95

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

KEMPER U.S GOVERNMENT SECURITIES FUND

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

National Financial Services Corp
FBO Arshalus Tahan
200 Liberty Street # 4 Floor                                 B                                     6.10
New York, NY  10281-1003


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

Donaldson Lufkin Jenrette
Securities Corporation Inc.
P O  Box 2052
Jersey City, NJ  07303                                       B                                   10.02


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

Merrill Lynch Pierce F&S
FBO Customers
ATTN Fund Administration
4800 Deer Lake Dr East 3rd Fl                                B                                     6.25
Jacksonville,  FL  32246

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

Donaldson Lufkin Jenrette
Securities Corporation Inc.
P O Box 2052
Jersey City, NJ  07303                                       C                                    8.60


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

Merrill Lynch Pierce F&S
FBO Customers
ATTN Fund Administration
4800 Deer Lake Dr East 3rd Fl                                C                                     7.97
Jacksonville,  FL  32246

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

        First Clearing Corporation
FBO Michael A.Vais Jr
10700 Wheat First Drive                                      C                                     8.11
Glen Allen, VA  23060-9243

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

Inde & Co.
FBO Customers
4401 Rockside Rd
Independence, OH 44131                                       C                                     7.20

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



                                       63
<PAGE>

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

Wedbush Morgan Securities
Accounting Department
P. O Box 30014                                            C                                     10.76
Los Angeles, CA  90030-0014

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

Scudder Trust Company
FBO Zurich Kemper Investment
Inc Supplemental P/S PLAN
11 Northeastern Blvd.                                     I                                     16.70
Salem., NH  03179-1953


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

State Street Bank & Trust Co.
C/F The Farmer Mutual Fund Port
Balanced Portfolio
1 Heritage Dr # P2N
Quincy, MA  02171                                         I                                     16.70


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

State Street Bank & Trust Co.
C/F The Farmer Mutual Fund Port
Income W/growth Portfolio
1 Heritage Dr # P2N                                       I                                     7.07
Quincy, MA  02171


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

State Street Bank & Trust Co.
C/F The Farmer Mutual Fund Port
Growth & Income Portfolio
1 Heritage Dr # P2N                                       I
Quincy, MA  02171                                                                               7.11


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

Scudder Kemper Investments Inc.

Profit Sharing Plan

 11 Northeastern Blvd.
Salem, NH  03079-1953                                     I                                     56.35


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

KEMPER U. S MORTGAGE FUND

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

Donaldson Lufkin Jenrette
Securities Corporation Inc.
P. O Box 2052                                             B                                     5.63
Jersey City, NJ  07303

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

Merrill Lynch Pierce, F & S Inc.
FBO Michelle E Jegge                                      B                                     7.99
4800 Deer Lake Dr. E. Fl 3
Jacksonville, FL  32246

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

PaineWebber
PaineWebber CDN
FBO Louis L Parker                                        C                                     11.66
Mutual Fund Department
1000 Harbor Blvd #8 Floor
Weehawken, NJ  07087-6727

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

                                       64
<PAGE>

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

Merrill Lynch Pierce, F & S Inc.
FBO Customers
4800 Deer Lake  Dr. E. Fl 3                              C                                     31.59
Jacksonville, FL   32246

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

Morongo Band of Mission  IN
 Community Service Reserve
 Tribal Asst Controller                                  C                                     17.49
 11581 Potrero Rd
Banning CA  92220

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

KEMPER SHORT-TERM US GOVERNMENT FUND


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

Donaldson Lufkin Jenrette
Securities Corporation Inc.                               B
P. O Box 2052                                                                                   6.64
Jersey City, NJ  07303

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

Merrill Lynch Pierce, F & S Inc.
FBO Customers                                             B                                     8.04
4800 Deer Lake Dr. E. Fl 3
Jacksonville, FL  32246

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

National Financial Services Corp
FBO Edward Rice &
Martha Rice                                               C                                     13.62
200 Liberty Street # 4 Floor
New York, NY  10281-1003

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

Salomon Smith Barney Inc.
Mutual Fund/ Comm Dept
333 W. 34th St Fl 3                                       C                                     5.57
New York, NY  10001-2483

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

Merrill Lynch Pierce, F & S Inc.
FBO Customers                                             C                                     7.66
4800 Deer Lake Dr. E. Fl 3
Jacksonville, FL  32246

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

First Clearing Corporation
FBO Orville Albert Rummelt
10700 Wheat First Drive                                   C                                     11.92
Glen Allen, VA  23060-9243

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

Pacific Piston Ring Co Inc P/S Plan
F. Shannon/F M Shannon/C Davis TTEE
FBO Forest M Shannon                                      C                                     5.93
10410 Ruthven Ln
Los Angeles , CA  90077

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

KEMPER HIGH YIELD OPPORTUNITY FUND

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



                                       65
<PAGE>

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

National Financial Services Corp
FBO Edward Rice                                           A                                     12.91
Martha Rice
200 Liberty Street # 4 Floor
New York, NY  10281-1003

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

Donaldson Lufkin Jenrette
Securities Corporation Inc.                               A
P. O Box 2052                                                                                   10.05
Jersey City, NJ  07303

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

First Clearing Corporation
FBO Jesse L Nickels                                       A                                     11.68
10700 Wheat First Drive
Glen Allen, VA  23060-9243

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

Donaldson Lufkin Jenrette
Securities Corporation Inc.
P. O Box 2052                                             B                                     38.71
Jersey City, NJ  07303


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

National Financial Services Corp
FBO William D Stark                                       C                                     27.69
200 Liberty Street # 4 Floor
New York, NY  10281-1003

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

Donaldson Lufkin Jenrette
Securities Corporation Inc.                               C                                     6.70
P. O Box 2052
Jersey City, NJ  07303

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

Prudential Securities Inc.
FBO Franklin O Bell                                       C                                     10.62
1 New York Plaza
New York, NY  10004-1901

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

Resources Trust Co Trust
FBO Herman Levine                                         C                                     7.24
PO Box 5900
Denver, CO  80217

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

Principal  Underwriter.  Pursuant  to  separate  underwriting  and  distribution
services  agreements  ("distribution  agreements"),   Kemper  Distributors  Inc.
("KDI"),  222 South Riverside Plaza,  Chicago,  Illinois,  60606, a wholly owned
subsidiary of Scudder Kemper,  is the principal  underwriter and distributor for
the  shares  of each  Fund  and acts as  agent  of each  Fund in the  continuous
offering  of its  shares.  KDI  bears all its  expenses  of  providing  services
pursuant  to  the   distribution   agreement,   including  the  payment  of  any
commissions.  Each Fund 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.

Each  distribution  agreement  continues  in effect from year to year so long as
such  continuance  is approved for each class at least annually by a vote of the
Board of Trustees  of a Fund,  including  the  Trustees  who are not  interested
persons of the Fund and who have no direct or indirect financial interest in the
agreement.   Each  agreement  automatically  terminates  in  the  event  of  its
assignment  and may be terminated  for a class at any time without  penalty by a
Fund or by KDI upon 60 days  notice.  Termination  by a Fund with  respect  to a
class may be by vote of a majority  of the Board of  Trustees,  or a majority of
the Trustees who are not  interested  persons of the Fund and who have no direct
or  indirect  financial  interest  in  the  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 a Fund with respect to such class without  approval by a majority of the
outstanding  voting


                                       66
<PAGE>

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.  The  provisions  concerning the
continuation,  amendment and termination of the distribution  agreement are on a
Fund by Fund basis and for each Fund on a class by class basis.

Class A Shares.  KDI  receives  no  compensation  from the  Trusts as  principal
underwriter  for Class A shares and pays all  expenses of  distribution  of each
Fund's Class A shares under the  distribution  agreement not  otherwise  paid by
dealers  or other  financial  services  firms.  As  indicated  under  "Purchase,
Repurchase  and  Redemption  of Shares,"  KDI retains the sales  charge upon the
purchase of shares and pays or allows  concessions or discounts to firms for the
sale of each Fund's shares. The following  information concerns the underwriting
commissions  paid in  connection  with the  distribution  of each Fund's Class A
shares for the fiscal years noted.

                                  TO BE UPDATED

<TABLE>
<CAPTION>
                                                    Commissions        Commissions KDI     Commissions Paid to KDI
       Class A Shares            Fiscal Year      Retained by KDI     Paid to All Firms        Affiliated Firms
       --------------            -----------      ---------------     -----------------        ----------------

<S>                                 <C>              <C>                  <C>                           <C>
Short-Term Government               2000
                                    1999                 $5,000                    0                          0
                                    1998                 $8,000               91,000                          0

Strategic                           2000
                                    1999               $175,000                    0                          0
                                    1998               $151,000            1,236,000                          0

Government                          2000
                                    1999               $222,000                    0                      3,000
                                    1998               $227,000            1,665,000                      8,000

High Yield                          2000
                                    1999               $660,000                    0                     40,000
                                    1998             $1,521,000           12,060,000                    174,000

High Yield II                       2000
                                    1999                $96,000                    0                          0

Income and Capital                  2000
                                    1999                $62,000                    0                          0
                                    1998                $70,000              578,000                          0

Mortgage                            2000
                                    1999                $30,000                    0                          0
                                    1998                $35,000              272,000                          0

Opportunity                         2000
                                    1999                $19,000                    0                          0
                                    1998               $187,000               26,000                          0
</TABLE>

Class B Shares  and  Class C  Shares.  If a Rule  12b-1  Plan  (the  "Plan")  is
terminated  in  accordance  with its  terms,  the  obligation  of a Fund to make
payments to KDI  pursuant to the Plan will cease and a Fund will not be required
to make  any  payments  past  the  termination  date.  Thus,  there  is no legal
obligation for a 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 under the Plan may or may not be sufficient to reimburse KDI
for its expenses incurred.

For its services under the distribution agreement,  KDI receives a fee from each
Fund  pursuant to the Rule 12b-1 Plan,  payable  monthly,  at the annual rate of
0.75% of average daily net assets of each Fund  attributable  to Class B


                                       67
<PAGE>

shares.  This fee is accrued  daily as an  expense  of Class B shares.  KDI also
receives any contingent  deferred sales charges.  See "Purchase,  Repurchase and
Redemption 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%.

For its services under the distribution agreement,  KDI receives a fee from each
Fund  pursuant to the Rule 12b-1 Plan,  payable  monthly,  at the annual rate of
0.75% of average daily net assets of each Fund  attributable  to 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 a Fund.  KDI also receives any  contingent  deferred  sales
charges.  See  "Purchase,  Repurchase  and  Redemption  of Shares --  Contingent
Deferred Sales Charges -- Class C Shares".

Expenses of the Funds and of KDI in connection with the Rule 12b-1 plans for the
Class B and Class C shares are set forth below (The  Opportunity  Fund commenced
operations on October 1, 1997 and the High Yield Fund II commenced operations on
November 30, 1998).  A portion of the  marketing,  sales and operating  expenses
shown below could be considered overhead expense.


<TABLE>
<CAPTION>
                                                                                 Other Distribution Expenses paid by KDI
                                                                                 ---------------------------------------
                                     Contingent
                                      Deferred     Total        Distribution
                        Distribution    Sales    Distribution   Paid by KDI
                         Fees Paid     Charges   Fees Paid         to KDI     Advertising              Marketing    Misc.
    Class B   Fiscal     by Fund        Paid      by KDI to      Affiliated       and      Prospectus  and Sales  Operating Interest
    Shares       Year      To KDI       to KDI     Firms           Firms      Literature    Printing   Expenses   Expenses  Expenses
    ------       ----      ------       ------     -----           -----      ----------    --------   --------   --------  --------


<S>              <C>       <C>          <C>        <C>            <C>         <C>          <C>        <C>        <C>       <C>
Short-Term       2000
                 1999        588,708     184,642          0            0        11,992       1,187      34,800     15,768    86,768


Government       2000
                 1999        $53,000      31,000     78,000            0        10,243         742      20,074     18,228    87,819
                 1998        $51,000      31,000    112,000            0        10,000       1,000      25,000    492,000    36,000

Strategic        2000
                 1999      1,844,585     762,753          0            0       193,285      11,321     481,691     72,363   722,443
                 1998     $2,208,000     502,000  2,939,000            0       359,087      42,027     741,917    131,028   814,441

Government       2000
                 1999      1,023,196     394,450          0            0       175,252      13,036     471,976     68,029   741,630
                 1998       $677,000     186,000  1,288,000            0       105,653      14,079     226,194     45,628   489,426

High Yield       2000
                 1999      9,936,029   3,183,508          0            0     1,156,635     132,290   2,927,997    333,899  4,375,108
                 1998    $10,804,000   2,203,000 18,022,000            0     2,242,157     191,602   4,538,360    682,073  3,001,886

High Yield II    2000
                 1999        284,321      75,193          0            0       215,154      19,186     572,319    103,058    89,337

Income and       2000
Capital          1999        830,424     315,732  1,023,406            0       109,194       7,709     286,200     48,117   495,860
                 1998       $705,000     199,000  1,001,000            0        94,710      11,383     200,587     42,317   441,045

Mortgage         2000
                 1999      1,688,689     348,884          0            0        46,483       5,085     119,311     31,670 -1,589,105


                                       68
<PAGE>


                                                                                 Other Distribution Expenses paid by KDI
                                                                                 ---------------------------------------
                                     Contingent
                                      Deferred     Total        Distribution
                        Distribution    Sales    Distribution   Paid by KDI
                         Fees Paid     Charges   Fees Paid         to KDI     Advertising              Marketing    Misc.
    Class B   Fiscal     by Fund        Paid      by KDI to      Affiliated       and      Prospectus  and Sales  Operating Interest
    Shares       Year      To KDI       to KDI     Firms           Firms      Literature    Printing   Expenses   Expenses  Expenses
    ------       ----      ------       ------     -----           -----      ----------    --------   --------   --------  --------
                 1998     $3,968,000     734,000    542,000            0        78,207       6,758     153,532     46,272  -955,066


Opportunity      2000
                 1999        123,127      38,890          0            0        32,827       3,691      83,403     17,255    76,886
                 1998        $52,000       6,000    487,000            0        46,797       3,897      89,792     38,890    27,289


                                                                                 Other Distribution Expenses paid by KDI
                                                                                 ---------------------------------------
                                     Contingent
                                      Deferred     Total        Distribution
                        Distribution    Sales    Distribution   Paid by KDI
                         Fees Paid     Charges   Fees Paid         to KDI     Advertising              Marketing    Misc.
    Class C   Fiscal     by Fund        Paid      by KDI to      Affiliated       and      Prospectus  and Sales  Operating Interest
    Shares       Year      To KDI       to KDI     Firms           Firms      Literature    Printing   Expenses   Expenses  Expenses
    ------       ----      ------       ------     -----           -----      ----------    --------   --------   --------  --------


Short-Term      2000
Government      1999         73,741       3,627            0            0       13,259       1,243      36,788      8,753     21,403
                1998        $10,000       1,000       14,000            0        5,131         373       9,366     14,033     19,184

Strategic       2000
                1999        242,533      12,325            0            0       53,143       3,338     133,148     29,759     73,790
                1998       $175,000      16,000      225,000            0       66,838       8,554     146,568     32,759     14,435

Government      2000
                1999        235,527      37,883            0            0       75,567       5,597     198,303     32,776     58,038
                1998       $105,000       2,000      149,000            0       26,880       4,121      59,658     19,821     11,029

High Yield      2000
                1999      1,494,792     124,877            0            0      342,750      37,346     891,392    108,574    519,465
                1998     $1,298,000      83,000    1,432,000            0      491,828      41,776   1,002,114    163,164    384,393

High Yield II   2000
                1999         99,330      17,050            0            0       77,848       7,535     226,186     55,855     10,039

Income and      2000
Capital         1999        144,543      10,939            0            0       36,752       2,633      99,890     21,884     46,404
                1998        $93,000       2,000      114,000            0       27,577       3,411      58,411     19,627      9,491

Mortgage        2000
                1999         29,214       1,797            0            0        3,535         403       9,079     12,307     14,384
                1998        $24,000           -       26,000            0        5,808         443      11,282     12,512     11,791

Opportunity     2000
                1999         27,036       3,950            0            0        9,635         985      24,783      9,940      5,080
                1998         $9,000       1,000       19,000            0        7,173         595      15,074     13,590      1,048
</TABLE>

Rule 12b-1 Plans. Each  Trust/Corporation has adopted on behalf of the Funds, in
accordance with Rule 12b-1 under the 1940 Act, separate Rule 12b-1  distribution
plans  pertaining  to each  Fund's  Class B and Class C shares  (each a "Plan").
Under each Plan, the Fund pays KDI a distribution  fee, payable monthly,  at the
annual rate of [0.75%] of the average daily net assets attributable to its Class
B or Class C shares.  Under  each Plan,  KDI may  compensate  various  financial
services firms ("Firms") for sales of Fund shares and may pay other commissions,
fees and  concessions to such Firms.  The  distribution  fee compensates KDI for
expenses incurred in connection with activities  primarily intended to result in
the sale of a Fund's  Class B or  Class C  shares,  including  the  printing  of
prospectuses  and reports for persons other than existing  shareholders  and the
preparation,  printing and  distribution  of sales  literature  and  advertising
materials.



                                       69
<PAGE>

Among other things,  each Plan  provides  that KDI will prepare  reports for the
Board on a quarterly  basis for each class  showing  amounts paid to the various
Firms and such other information as the Board may reasonably request.  Each Plan
will continue in effect indefinitely, provided that such continuance is approved
at least  annually  by vote of a majority  of the Board,  and a majority  of the
Board Members who are not  "interested  persons" (as defined in the 1940 Act) of
the Funds and who have no direct or indirect financial interest in the operation
of the Plan ("Qualified Board Members"), cast at an in-person meeting called for
such  purpose,  or by vote of at  least a  majority  of the  outstanding  voting
securities of the  applicable  class.  Any material  amendment to a Plan must be
approved by vote of a majority of the Board, and of the Qualified Board Members.
An amendment to a Plan to increase  materially the amount to be paid to KDI by a
Fund for  distribution  services  with respect to the  applicable  class must be
approved by a majority of the outstanding voting securities of that class. While
each Plan is in effect,  the selection  and  nomination of Board Members who are
not  "interested  persons"  shall be  committed to the  discretion  of the Board
Members who are not themselves "interested persons". If a Plan is terminated (or
not renewed)  with respect to either  class,  the Plan with respect to the other
class  may  continue  in  effect  unless  it also  has been  terminated  (or not
renewed).

Taxes.  Each Fund  intends to  continue  to qualify  as a  regulated  investment
company under Subchapter M of the Code and, if so qualified,  will not be liable
for federal  income taxes to the extent its earnings are  distributed.  A Fund's
options,  futures and foreign  currency  transactions are subject to special tax
provisions that may accelerate or defer  recognition of certain gains or losses,
change the character of certain gains or losses, or alter the holding periods of
certain of a Fund's securities.

The mark-to-market  rules of the Code may require a Fund to recognize unrealized
gains and losses on certain options and futures held by a Fund at the end of the
fiscal year. Under these provisions,  60% of any capital gain or loss recognized
will generally be treated as long-term and 40% as short-term.  However, although
certain forward contracts on foreign currency are marked-to-market,  the gain or
loss is generally  ordinary  under  Section 988 of the Code.  In  addition,  the
straddle rules of the Code would require  deferral of certain losses realized on
positions  of a  straddle  to the  extent  that a Fund had  unrealized  gains in
offsetting positions at year end.

Gains and losses attributable to fluctuations in the value of foreign currencies
will be  characterized  generally as ordinary  gain or loss under Section 988 of
the Code.  For  example,  if a Fund sold a foreign  bond and part of the gain or
loss on the sale was  attributable  to an increase or decrease in the value of a
foreign  currency,  then the  currency  gain or loss may be treated as  ordinary
income or loss. If such transactions  result in greater net ordinary income, the
dividends paid by a Fund will be increased;  if the result of such  transactions
is lower net ordinary income, a portion of dividends paid could be classified as
a return of capital.

TO BE UPDATED

At  August  31,  2000 the  Short-Term  Government  Fund had an  accumulated  net
realized   capital  loss  for  federal  income  tax  purposes  of  approximately
$9,204,000,  which is available to offset future taxable  capital gains.  If not
applied, the carryover expires during the period 1999 through 2007. In addition,
from November 1, 1997 through August 31, 1999,  the Fund incurred  approximately
$2,820,000 of net realized  losses.  As permitted by tax  regulations,  the Fund
intends to elect to defer  these  losses and treat them as arising in the fiscal
year ending  August 31, 2000.  The Fund does not intend to  distribute  realized
capital gains until the capital loss carryover is exhausted.

At October 31, 2000, the Strategic Fund had an accumulated net realized  capital
loss for federal  income tax  purposes of  approximately  $73,810,000,  which is
available to offset future taxable capital gains. If not applied,  the carryover
expires  during  the  period  2002  through  2007.  The Fund does not  intend to
distribute realized capital gains until the capital loss carryover is exhausted.

At October 31, 2000, the Government Fund had an accumulated net realized capital
loss for federal  income tax purposes of  approximately  $632,822,000,  which is
available to offset future taxable capital gains. If not applied,  the carryover
expires  during  the  period  2002  through  2007.  The Fund does not  intend to
distribute realized capital gains until the capital loss carryover is exhausted.

At October 31, 2000, the Income and Capital Fund had an accumulated net realized
capital loss for federal income tax purposes of approximately $19,357,000, which
is  available to offset  future  taxable  capital  gains.  If not  applied,


                                       70
<PAGE>

the carryover  expires  during the period 2002 through  2007.  The Fund does not
intend to distribute  realized capital gains until the capital loss carryover is
exhausted.

At  September  30,  2000,  the High Yield Fund had an  accumulated  net realized
capital loss for federal income tax purposes of approximately $90,019,000, which
is  available to offset  future  taxable  capital  gains.  If not  applied,  the
carryover  expires during the period 2003 through 2007. The Fund does not intend
to  distribute  realized  capital  gains until the  capital  loss  carryover  is
exhausted.

At September 30, 2000, the Mortgage Fund had an accumulated net realized capital
loss for federal  income tax purposes of  approximately  $604,550,000,  which is
available to offset future taxable capital gains. If not applied,  the carryover
expires  during  the  period  2000  through  2005.  The Fund does not  intend to
distribute realized capital gains until the capital loss carryover is exhausted.

At September 30, 2000,  the  Opportunity  Fund had an  accumulated  net realized
capital loss for federal income tax purposes of approximately $274,000, which is
available to offset future taxable capital gains. If not applied,  the carryover
expires in 2007. In addition,  from November 1, 1998 through September 30, 1999,
the Opportunity Fund, incurred approximately  $1,543,000 of net realized losses.
As permitted by tax regulations, the Fund intends to elect to defer these losses
and treat them as arising in the fiscal year ending September 30, 2000. The Fund
does not intend to  distribute  realized  capital  gains until the capital  loss
carryover is exhausted.

From  October 31,  1999  through  September  30,  2000,  the High Yield Fund II,
incurred  approximately  $1,200,000 of net realized losses.  As permitted by tax
regulations,  the Fund  intends to elect to defer these losses and treat them as
arising in the fiscal year ending  October 31, 2000. The Fund does not intend to
distribute realized capital gains until the capital loss carryover is exhausted.

A 4% excise  tax is imposed on the  excess of the  required  distribution  for a
calendar year over the  distributed  amount for such calendar year. The required
distribution  is the  sum of 98% of a  Fund's  net  investment  income  for  the
calendar  year plus 98% of its capital gain net income for the  one-year  period
ending October 31, plus any  undistributed  net investment income from the prior
calendar year, plus any undistributed  capital gain net income from the one-year
period ended October 31 in the prior calendar year,  minus any  overdistribution
in  the  prior  calendar   year.  For  purposes  of  calculating   the  required
distribution,  foreign  currency gains or losses  occurring after October 31 are
taken into account in the following  calendar year. Each Fund intends to declare
or distribute  dividends during the appropriate  periods of an amount sufficient
to prevent imposition of the 4% excise tax.

A shareholder  who redeems shares of a Fund will recognize  capital gain or loss
for federal income tax purposes measured by the difference  between the value of
the  shares  redeemed  and the  adjusted  cost  basis  of the  shares.  Any loss
recognized  on the  redemption  of Fund  shares  held six months or less will be
treated  as  long-term  capital  loss to the  extent  that the  shareholder  has
received any long-term  capital gain dividends on such shares. A shareholder who
has  redeemed  shares of a Fund (other  than shares of the Kemper Cash  Reserves
Fund not acquired by exchange  from another  Kemper Mutual Fund) or other Kemper
Mutual  Fund  listed  under  "Special  Features  -- Class A Shares  --  Combined
Purchases"  may reinvest  the amount  redeemed at net asset value at the time of
the  reinvestment  in shares of any Fund or in  shares of a Kemper  Mutual  Fund
within six months of the redemption as described in the prospectus.  If redeemed
shares  were  purchased  after  October 3, 1989 and 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  realized a loss on the  redemption  or  exchange  of a Fund's
shares and  reinvests  in shares of the same Fund within 30 days before or after
the  redemption or exchange,  the  transactions  may be subject to the wash sale
rules  resulting in a postponement  of the  recognition of such loss for federal
income tax  purposes.  An exchange of a Fund's shares for shares of another fund
is treated as a redemption and reinvestment for federal income tax purposes upon
which gain or loss may be recognized.

A Fund's investment income derived from foreign  securities and certain American
Depositary  Receipts  may be subject to foreign  income  taxes  withheld  at the
source.  Because the amount of a 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.

Shareholders who are non-resident aliens are subject to U.S.  withholding tax on
ordinary income dividends  (whether received in cash or shares) at a rate of 30%
or such lower rate as prescribed by any applicable tax treaty. Dividends


                                       71
<PAGE>

derived from net investment income and net short-term  capital gains are taxable
to  shareholders  as ordinary  income and long-term  capital gain  dividends are
taxable to  shareholders  as long-term  capital gain  regardless of how long the
shares have been held and whether received in cash or shares.  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 12 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 Strategic, High Yield or Opportunity Funds may qualify for
the dividends received deduction available to corporate  shareholders.  However,
it is anticipated  that only a small  portion,  if any, of the dividends paid by
such Funds will so qualify.  No portion of the dividends  paid by the Short-Term
Government,  Government,  Income and Capital, or Mortgage Funds will qualify for
the dividends received deduction.

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. If the net asset value of
shares were reduced below the shareholder's cost by dividends representing gains
realized on sales of securities,  such dividends would be a return of investment
though taxable as stated above.

Fund  dividends  that are derived from  interest on direct (but not  guaranteed)
obligations   of  the  U.S.   Government   and  certain  of  its   agencies  and
instrumentalities may be exempt from state and local taxes in certain states. In
other  states,  arguments can be made that such  distributions  should be exempt
from state and local taxes based on federal law, 31 U.S.C. Section 3124, and the
U.S.  Supreme Court's  interpretation  of that provision in American 37 Bank and
Trust Co. v. Dallas  County,  463 U.S. 855 (1983).  Shareholders  should consult
their tax advisers  regarding  the  possible  exclusion of such portion of their
dividends for state and local income tax purposes.  Each 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. 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 advisers
regarding the 20% withholding requirement.

After each  transaction,  shareholders  will  receive a  confirmation  statement
giving complete  details of the transaction  except that statements will be sent
quarterly  for  transactions   involving  dividend   reinvestment  and  periodic
investment  and  redemption  programs.  Information  for  income  tax  purposes,
including  information regarding any foreign taxes and credits, 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,  including  information  regarding  any  foreign  taxes and
credits.  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.

                             PORTFOLIO TRANSACTIONS

Brokerage Commissions

Allocation of brokerage is supervised by the Investment Manager.

The  primary  objective  of the  Investment  Manager in  placing  orders for the
purchase and sale of securities  for a Fund is to obtain the most  favorable net
results, taking into account such factors as price, commission where applicable,
size of order,  difficulty  of  execution  and skill  required of the  executing
broker/dealer.   The   Investment   Manager   seeks  to  evaluate   the  overall
reasonableness of brokerage  commissions paid (to the extent applicable) through
the  familiarity  of the  Distributor  with  commissions  charged on  comparable
transactions,  as well as by  comparing


                                       72
<PAGE>

commissions  paid  by a  Fund  to  reported  commissions  paid  by  others.  The
Investment Manager routinely reviews commission rates,  execution and settlement
services performed and makes internal and external comparisons.


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

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


To the maximum extent feasible,  it is expected that the Investment Manager will
place orders for  portfolio  transactions  through the  Distributor,  which is a
corporation  registered as a  broker/dealer  and a subsidiary of the  Investment
Manager;  the  Distributor  will place orders on behalf of a Fund with  issuers,
underwriters or other brokers and dealers.  The Distributor will not receive any
commission, fee or other remuneration from a Fund for this service.

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

The Board reviews, from time to time, whether the recapture for the benefit of a
Fund of some portion of the brokerage commissions or similar fees paid by a Fund
on portfolio transactions is legally permissible and advisable.

<TABLE>
<CAPTION>

                                   Allocated to Firms
                                  Based on Research in
 Fund                                 Fiscal 2000                 Fiscal 1999                 Fiscal 1998
------                                -----------                 -----------                 ----------


<S>                                   <C>                             <C>                         <C>
Short-Term Government                                                      $0                          $4,000
Strategic                                                                  $0                      $5,155,000
Government                                                             $3,678                        $769,000
High Yield                                                            $17,786                     $64,235,000
High Yield II                                                              $0                             N/A
Income and Capital                                                         $0                        $619,000
Mortgage                                                               $2,250                        $679,000
Opportunity                                                            $1,018                        $752,000
</TABLE>

                                       73
<PAGE>


Portfolio Turnover

Portfolio  turnover  rate is  defined  by the SEC as the ratio of the  lesser of
sales or purchases to the monthly average value of such securities  owned during
the year,  excluding all securities  whose  remaining  maturities at the time of
acquisition were one year or less.

Higher levels of activity by a Fund result in higher  transaction  costs and may
also  result  in  taxes on  realized  capital  gains  to be borne by the  Fund's
shareholders.  Purchases  and sales are made for a Fund whenever  necessary,  in
management's opinion, to meet a Fund's objective.

Portfolio  turnover  rates for the  three  most  recent  fiscal  periods  are as
follows:

<TABLE>
<CAPTION>
TO BE UPDATED
Fund                                   Fiscal 2000                 Fiscal 1999                 Fiscal 1998
----                                   -----------                 -----------                 -----------

<S>                                               <C>                       <C>                             <C>
Short-Term Government                             %                         %                               %
Strategic
Government
High Yield
High Yield II
Income and Capital
Mortgage
Opportunity
</TABLE>

                              FINANCIAL STATEMENTS

The financial  statements appearing in each Fund's Annual Report to Shareholders
are incorporated herein by reference. Each Fund's Annual Report accompanies this
Statement of Additional Information.


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<PAGE>

               APPENDIX -- RATINGS OF INVESTMENTS


Standard & Poor's Corporation Bond Ratings

AAA.  Debt  rated AAA had 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 and 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.



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<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.

Fitch Long-Term Debt Ratings


AAA.  Highest credit  quality.  `AAA' ratings  denote the lowest  expectation of
credit risk. They are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments.  This capacity is highly unlikely to be
adversely affected by foreseeable events.

AA. Very high credit  quality.  `AA' ratings  denote a very low  expectation  of
credit risk.  They indicate very strong capacity for timely payment of financial
commitments.  This  capacity  is not  significantly  vulnerable  to  foreseeable
events.

A. High credit quality. `A' ratings denote a low expectation of credit risk. The
capacity for timely payment of financial  commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.

BBB. Good credit quality.  `BBB' ratings  indicate that there is currently a low
expectation  of credit  risk.  The  capacity  for timely  payment  of  financial
commitments is considered adequate,  but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity.  This is the lowest
investment-grade category.

BB.  Speculative.  `BB' ratings  indicate that there is a possibility  of credit
risk  developing,  particularly  as the result of adverse  economic  change over
time;  however,  business or  financial  alternatives  may be available to allow
financial  commitments  to be met.  Securities  rated in this  category  are not
investment grade.

B. Highly  speculative.  `B' ratings  indicate that  significant  credit risk is
present,  but a limited  margin of safety  remains.  Financial  commitments  are
currently being met; however,  capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.

CCC,  CC, C. High  default  risk.  Default is a real  possibility.  Capacity for
meeting  financial  commitments  is solely  reliant  upon  sustained,  favorable
business or economic developments.  A `CC' rating indicates that default of some
kind appears probable. `C' ratings signal imminent default.

DDD, DD, D. Default.  The ratings of  obligations  in this category are based on
their prospects for achieving  partial or full recovery in a  reorganization  or
liquidation  of  the  obligor.   While  expected   recovery  values  are  highly
speculative  and cannot be estimated with any precision,  the following serve as
general  guidelines.  `DDD' obligations have the highest potential for recovery,
around  90%-100% of  outstanding  amounts and accrued  interest.  `DD' indicates
potential  recoveries  in the  range of  50%-90%,  and `D' the  lowest  recovery
potential, i.e., below 50%.

Entities  rated  in  this  category  have  defaulted  on  some  or all of  their
obligations.  Entities  rated `DDD' have the highest  prospect for resumption of
performance  or  continued  operation  with or  without a formal  reorganization
process.  Entities  rated  `DD'  and  `D'  are  generally  undergoing  a  formal
reorganization or liquidation process;  those rated `DD' are likely to satisfy a
higher portion of their outstanding obligations, while entities rated `D' have a
poor prospect for repaying all obligations.




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<PAGE>

Fitch Short-Term Debt Ratings


F1.  Highest credit  quality.  Indicates the Best capacity for timely payment of
financial commitments;  may have an added "+" to denote any exceptionally strong
credit feature.

F2. Good credit quality. A satisfactory capacity for timely payment of financial
commitments,  but the  margin  of  safety  is not as great as in the case of the
higher ratings.

F3.  Fair  credit  quality.   The  capacity  for  timely  payment  of  financial
commitments is adequate;  however,  near-term  adverse changes could result in a
reduction to non-investment grade.

B.  Speculative.  Minimal capacity for timely payment of financial  commitments,
plus  vulnerability  to  near-term  adverse  changes in  financial  and economic
conditions.

C. High  default  risk.  Default is a real  possibility.  Capacity  for  meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.

D. Default. Denotes actual or imminent payment default.

Commercial Paper Ratings


Commercial  paper rated by Standard & Poor's  Ratings  Services  ("S&P") has the
following   characteristics:   Liquidity   ratios  are  adequate  to  meet  cash
requirements.  Long-term  senior  debt is rated "A" or  better.  The  issuer has
access to at least two additional channels of borrowing. Basic earnings and cash
flow  have an  upward  trend  with  allowance  made for  unusual  circumstances.
Typically, the issuer's industry is well established and the issuer has a strong
position  within the industry.  The  reliability  and quality of management  are
unquestioned.  Relative  strength  or weakness  of the above  factors  determine
whether the issuer's commercial paper is rated A-1 or A-2.

The ratings  Prime-1 and Prime-2 are the two highest  commercial  paper  ratings
assigned  by Moody's  Investors  Service,  Inc.  ("Moody's").  Among the factors
considered by it in assigning  ratings are the following:  (1) evaluation of the
management of the issuer;  (2) economic  evaluation of the issuer's  industry or
industries and an appraisal of  speculative-type  risks which may be inherent in
certain  areas;  (3)  evaluation  of  the  issuer's   products  in  relation  to
competition and customer  acceptance;  (4) liquidity;  (5) amount and quality of
long-term debt; (6) trend of earnings over a period of ten years;  (7) financial
strength of a parent company and the relationships  which exist with the issuer;
and (8) recognition by the management of obligations which may be present or may
arise as a result of public  interest  questions and  preparations  to meet such
obligations.  Relative  strength  or weakness  of the above  factors  determines
whether the issuer's commercial paper is rated Prime-1 or 2.

Municipal Notes

Moody's: The highest ratings for state and municipal short-term  obligations are
"MIG 1," "MIG 2," and "MIG 3" (or "VMIG 1," "VMIG 2" and "VMIG 3" in the case of
an issue having a variable rate demand feature). Notes rated "MIG 1" or "VMIG 1"
are judged to be of the "best  quality".  Notes rated "MIG 2" or "VMIG 2" are of
"high  quality," with margins or protection  "ample  although not as large as in
the  preceding  group".  Notes  rated  "MIG  3" or  "VMIG  3" are of  "favorable
quality," with all security  elements  accounted for but lacking the strength of
the preceding grades.

S&P:  The  "SP-1"  rating  reflects  a "very  strong or strong  capacity  to pay
principal and interest". Notes issued with "overwhelming safety characteristics"
will be rated "SP-1+".  The "SP-2" rating reflects a "satisfactory  capacity" to
pay principal and interest.

Fitch:  The highest ratings for state and municipal  short-term  obligations are
"F-1+," "F-1," and "F-2".


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